Vol. 77 Tuesday, 

No. 118 June 19, 2012 

Part II 

Commodity Futures Trading Commission 

17 CFR Parts 1, 16, and 38 

Core Principles and Other Requirements for Designated Contract Markets; 

Final Rule 


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36612 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 16, and 38 

RIN 3038–AD09 

Core Principles and Other 

Requirements for Designated Contract 

Markets 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting new and amended 

rules, guidance, and acceptable 

practices to implement certain statutory 

provisions enacted by Title VII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (‘‘Dodd-Frank 

Act’’). The final rules, guidance and 

acceptable practices, which apply to the 

designation and operation of contract 

markets, implement the Dodd-Frank 

Act’s new statutory framework that, 

among other things, amends section 5 of 

the Commodity Exchange Act (‘‘the 

Act’’ or ‘‘CEA’’) concerning designation 

and operation of contract markets, and 

adds a new CEA section 2(h)(8) to 

mandate the listing, trading and 

execution of certain swaps on 

designated contract markets (‘‘DCMs’’). 

DATES: Effective date: The rules will 

become effective August 20, 2012. 

Compliance date: The compliance date 

for contract markets that have obtained 

designation on, or prior to, the date of 

publication of this release: Designated 

contract markets must comply with the 

rules adopted in this release (except 

§ 38.151(a)) by October 17, 2012; and 

must comply with § 38.151(a) in 

accordance with the timeline described 

in SUPPLEMENTARY INFORMATION. 

FOR FURTHER INFORMATION CONTACT: 

Nancy Markowitz, Deputy Director, 

202–418–5453, nmarkowitz@cftc.gov, 

Nadia Zakir, Special Counsel, 202–418– 

5720, nzakir@cftc.gov, or Aaron 

Brodsky, Attorney-Advisor, 202–418– 

5349, abrodsky@cftc.gov, Division of 

Market Oversight, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Title VII of the Dodd-Frank Act 

B. The Dodd-Frank Act Amendments 

Applicable to Designated Contract 

Markets 

II. Final Rules 

A. Repeal of Designation Criteria 

B. Adoption of Rules and Revised 

Guidance and Acceptable Practices 

C. General Regulations (Subpart A) 

1. § 38.1–Scope 

2. § 38.2–Exempt Provisions 

3. § 38.3—Procedures for Designation 

4. § 38.4—Procedures for Listing Products 

and Implementing Designated Contract 

Market Rules 

5. § 38.5—Information Relating to Contract 

Market Compliance 

6. § 38.7—Prohibited Use of Data Collected 

for Regulatory Purposes 

7. § 38.8—Listing of Swaps on a Designated 

Contract Market 

8. § 38.9—Boards of Trade Operating Both 

a Designated Contract Market and a 

Swap Execution Facility 

9. § 38.10—Reporting of Swaps Traded on 

a Designated Contract Market 

D. Core Principles 

1. Subpart B—Designation as Contract 

Market 

2. Subpart C—Compliance With Rules 

i. § 38.150—Core Principle 2 

ii. § 38.151—Access Requirements 

iii. § 38.152—Abusive Trading Practices 

Prohibited 

iv. § 38.153—Capacity to Detect and 

Investigate Rule Violations 

v. § 38.154—Regulatory Services Provided 

by a Third Party 

vi. § 38.155—Compliance Staff and 

Resources 

vii. § 38.156—Automated Trade 

Surveillance System 

viii. § 38.157—Real-Time Market 

Monitoring 

ix. § 38.158—Investigations and 

Investigation Reports 

x. § 38.159—Ability to Obtain Information 

xi. § 38.160—Additional Sources for 

Compliance 

3. Subpart D—Contracts Not Readily 

Subject to Manipulation 

4. Subpart E—Prevention of Market 

Disruption 

i. § 38.251—General Requirements 

ii. § 38.252—Additional Requirements for 

Physical-Delivery Contracts 

iii. § 38.253—Additional Requirements for 

Cash-Settled Contracts 

iv. § 38.254—Ability to Obtain Information 

v. § 38.255—Risk Controls for Trading 

vi. § 38.256—Trade Reconstruction 

vii. § 38.257—Regulatory Service Provider 

viii. § 38.258—Additional Sources for 

Compliance 

5. Subpart F—Position Limitations or 

Accountability 

6. Subpart G—Emergency Authority 

7. Subpart H—Availability of General 

Information 

i. § 38.401(a)—General 

ii. § 38.401(b)—Accuracy Requirement 

iii. § 38.401(c)—Notice of Regulatory 

Submissions 

iv. § 38.401(d)—Rulebook 

8. Subpart I—Daily Publication of Trading 

Information 

9. Subpart J—Execution of Transactions 

10. Subpart K—Trade Information 

i. § 38.551—Audit Trail Required 

ii. § 38.552—Elements of an Acceptable 

Audit Trail Program 

iii. § 38.553—Enforcement of Audit Trail 

Requirements 

11. Subpart L—Financial Integrity of 

Transactions 

i. § 38.601—Mandatory Clearing 

ii. § 38.602—General Financial Integrity 

iii. § 38.603—Protection of Customer 

Funds 

iv. § 38.604—Financial Surveillance 

v. § 38.605—Requirements for Financial 

Surveillance Program 

vi. § 38.606—Financial Regulatory Services 

Provided by a Third Party 

vii. § 38.607—Direct Access 

12. Subpart M—Protection of Markets and 

Market Participants 

i. § 38.651—Additional Sources for 

Compliance 

13. Subpart N—Disciplinary Procedures 

i. § 38.701—Enforcement Staff 

ii. § 38.702—Disciplinary Panels 

iii. § 38.703—Review of Investigation 

Report 

iv. § 38.704—Notice of Charges 

v. § 38.705—Right to Representation 

vi. § 38.706—Answer to Charges 

vii. § 38.707—Admission or Failure To 

Deny Charges 

viii. § 38.708—Denial of Charges and Right 

to Hearing 

ix. § 38.709—Settlement Offers 

x. § 38.710—Hearings 

xi. § 38.711—Decisions 

xii. § 38.712—Right To Appeal 

xiii. § 38.713—Final Decisions 

xiv. § 38.714—Disciplinary Sanctions 

xv. § 38.715—Summary Fines 

xvi. § 38.716—Emergency Disciplinary 

Actions 

14. Subpart O—Dispute Resolution 

15. Subpart P—Governance Fitness 

Standards 

16. Subpart Q—Conflicts of Interest 

17. Subpart R—Composition of Governing 

Boards of Contract Markets 

18. Subpart S—Recordkeeping 

i. § 38.951—Additional Sources for 

Compliance 

19. Subpart T—Antitrust Considerations 

20. Subpart U—System Safeguards 

i. § 38.1051—General Requirements 

21. Subpart V—Financial Resources 

i. § 38.1100(a)—Core Principle 21, and 

§ 38.1101(a) and (c)—General Rule and 

Computation of Financial Resources 

Requirement 

ii. § 38.1101(b)—Types of Financial 

Resources 

iii. § 38.1101(d)—Valuation of Financial 

Resources 

iv. § 38.1101(e)—Liquidity of Financial 

Resources 

v. § 38.1101(f)—Reporting Requirements 

22. Subpart W—Diversity of Boards of 

Directors 

23. Subpart X—Securities and Exchange 

Commission 

i. § 38.1200 (Core Principle 23), § 38.1201 

(Additional Sources for Compliance), 

and Guidance in Appendix B. 

III. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost Benefit Considerations 

IV. Text of Final Rules 

I. Background 

A. Title VII of the Dodd-Frank Act 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 


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Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 36613 

1See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010) (‘‘Dodd-Frank Act’’). 

2Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

3 7 U.S.C. 1 et seq. (amended 2010). 

4New Core Principle 13 is verbatim of former 

Designation Criterion 6. 

5The Commission proposed rules governing the 

registration and operation of SEFs in a separate, 

rulemaking titled ‘‘Core Principles and Other 

Requirements for Swap Execution Facilities.’’ 76 FR 

1214, Jan. 7, 2011. The core principles applicable 

to DCMs pursuant to section 5 of the Act and the 

core principles applicable to swap execution 

facilities pursuant to section 5h of the Act include, 

in a number of instances, similar or identical 

language. Although the Commission’s interpretation 

of specific language in section 5 of the Act may 

inform its interpretation of similar or identical 

language in section 5h of the Act, and vice versa, 

the Commission may interpret the core principles 

applicable to each category of registered entity in 

light of that category’s unique market characteristics 

and regulatory functions and responsibilities. 

6See section 723(a) of the Dodd-Frank Act. The 

Commission separately proposed rules 

implementing the ‘‘made available to trade’’ 

mandate. See 76 FR 77728, Dec. 14, 2011. 

7 75 FR 80572, Dec. 22, 2010 (‘‘DCM NPRM’’). 

The DCM NPRM also proposed revisions to related 

regulations under parts 1 and 16. 

8See 76 FR 14825, Mar. 18, 2011; see also 76 FR 

25274, May 4, 2011. 

9The Commission received comment letters from 

numerous parties, including the following: ACM 

Capital Management; Alice Corporation; Alternative 

Investment Management Association; American 

Bankers Association and ABA Securities 

Association; American Gas Association; Argus 

Media, Inc. (‘‘Argus’’); Better Markets, Inc. (‘‘Better 

Markets’’); BJ D’Milli; BlackRock, Inc. 

(‘‘BlackRock’’); Bloomberg; CBOE Futures 

Exchanges (‘‘CFE’’); CME Group Inc. (‘‘CME’’) 

(CME’s comments were submitted on behalf of its 

four DCMs: the Chicago Mercantile Exchange, Inc., 

the Board of Trade of the City of Chicago, Inc., the 

New York Mercantile Exchange, Inc., and the 

Commodity Exchange, Inc.); Citadel; Committee on 

Capital Markets Regulation; Committee on Futures 

and Derivatives Regulation of the New York City 

Bar Association; DC Energy; The Depository Trust 

& Clearing Corporation; East Coast Petroleum; ELX 

Futures, L.P. (‘‘ELX’’); Eris Exchange, LLC (‘‘Eris’’); 

Electric Trade Association; FIA/FSR/IIB/IRI/ISDA/ 

SIFMA/US Chamber of Commercial (jointly); Green 

Exchange LLC (‘‘GreenX’’); ICAP; 

IntercontinentalExchange, Inc. (‘‘ICE’’) (ICE’s 

comments were submitted on behalf of its four 

regulated futures exchanges: ICE Future US, 

Chicago Climate Futures Exchange, ICE Futures 

Europe, and ICE Futures Canada); International 

Swaps and Derivatives Association (‘‘ISDA’’); 

Kansas City Board of Trade (‘‘KCBT’’); Markit; 

MarkitSERV; Minneapolis Grain Exchange, Inc. 

(‘‘MGEX’’); Noble Energy; NYSE Liffe US LLC 

(‘‘NYSE Liffe’’); Nodal Exchange, LLC (‘‘Nodal’’); 

Todd Petzel; OneChicago LLC Futures Exchange 

(‘‘OCX’’); Swaps and Derivatives Market 

Association; Tradeweb; Trading Technologies 

International, Inc. (‘‘Trading Technologies’’); 

Wholesale Markets Brokers’ Association; Working 

Group of Commercial Energy Firms (Hunton and 

Williams); and joint letter from CME, NYSE Liffe, 

GreenX, Eris Exchange, CBOE Futures Exchange, 

KCBT and MGEX (‘‘CME Joint Comment Letter’’). A 

number of comment letters solely addressed the 

implementation phasing for Dodd-Frank 

rulemakings. Those comments are outside the scope 

of this rulemaking and are more appropriate to the 

recent rulemaking pertaining to ‘‘Swap Transaction 

Compliance and Implementation Schedule: 

Clearing and Trade Execution Requirements under 

section 2(h) of the CEA.’’ See 76 FR 58186, Sep. 20, 

2011. 

10 7 U.S.C. 19. 

Reform and Consumer Protection Act.1

Title VII of the Dodd-Frank Act 2

amended the CEA3 to establish a 

comprehensive, new regulatory 

framework for swaps and security-based 

swaps. The legislation was enacted to 

reduce risk, increase transparency, and 

promote market integrity within the 

financial system by, among other things: 

(1) Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; (2) 

imposing clearing and trade execution 

requirements on standardized derivative 

products; (3) creating robust 

recordkeeping and real-time reporting 

regimes; and (4) enhancing the 

Commission’s rulemaking and 

enforcement authorities with respect to, 

among others, all registered entities and 

intermediaries subject to the 

Commission’s oversight. 

B. The Dodd-Frank Act Amendments 

Applicable to Designated Contract 

Markets 

In this final rulemaking, the 

Commission is establishing the 

regulatory obligations that each DCM 

must meet in order to comply with 

section 5 of the CEA, as amended by the 

Dodd-Frank Act, initially upon 

designation and thereafter on an 

ongoing basis. 

Section 735 of the Dodd-Frank Act 

amended section 5 of the CEA 

pertaining to the designation and 

operation of contract markets, by: (i) 

Eliminating the eight criteria that must 

be met for designation as a contract 

market, contained in former section 5(b) 

of the CEA; (ii) amending most of the 

core principles, including incorporating 

most of the substantive elements of the 

former designation criteria, and 

requiring that all DCMs demonstrate 

compliance with each of the core 

principles as a condition of obtaining 

and maintaining designation as a 

contract market; and (iii) adding five 

new core principles, including Core 

Principle 13 (Disciplinary Procedures), 

Core Principle 20 (System Safeguards), 

Core Principle 21 (Financial Resources), 

Core Principle 22 (Diversity of Boards of 

Directors), and Core Principle 23 

(Securities and Exchange Commission).4

In addition, section 723(a)(3) of the 

Dodd-Frank Act added section 2(h)(8) of 

the CEA to require, among other things, 

that swaps that are required to be 

cleared must be executed either on a 

DCM or on a Swap Execution Facility 

(‘‘SEF’’),5 unless no DCM or SEF makes 

the swap ‘‘available to trade.’’ 6 Section 

5h(a)(1) of the CEA, as amended by the 

Dodd-Frank Act, also prohibits any 

person from operating a facility for the 

trading and processing of swaps unless 

the facility is registered as a SEF or a 

DCM. Accordingly, unless otherwise 

specified in this release, each of the 23 

core principles and the final 

implementing regulations, guidance and 

acceptable practices, apply to all 

‘‘contracts’’ listed on a DCM, which will 

include swaps, futures and options 

contracts. The rules adopted in this 

release also implement relevant 

provisions related to the trading and 

execution of swaps on DCMs. 

On December 22, 2010, the 

Commission published proposed 

regulations to implement the statutory 

provisions of the Dodd-Frank Act 

relevant to the designation and 

operation of DCMs (‘‘DCM NPRM’’), 

under part 38 of the Commission’s 

regulations.7

The proposed rulemaking was subject 

to an initial 60-day comment period, 

which closed on February 22, 2011. The 

comment period was subsequently 

reopened on two separate occasions, 

each time for an additional 30 days.8

The Commission received numerous 

written comments from members of the 

public, and Commission staff 

participated in several meetings with 

market participants, including 

representatives of both currentlydesignated and prospective contract 

markets.9

In this notice of final rulemaking, the 

Commission is adopting many of the 

proposed rules, guidance, and 

acceptable practices. However, as a 

result of the written comments received 

and dialogue with market participants, 

the Commission has revised and/or 

eliminated a number of regulations that 

were proposed in the DCM NPRM, and 

in a number of instances, has codified 

guidance and/or acceptable practices in 

lieu of the proposed rules. 

The Commission also received a 

number of comments pertaining to the 

costs and/or benefits of certain proposed 

regulations. The Commission has 

undertaken an extensive review of the 

costs and benefits of the regulations 

being adopted in this release pursuant 

to section 15(a) of the CEA,10 as is 

further discussed in the cost benefit 

consideration section of this final 

rulemaking. As discussed in that 

section, the Commission has determined 

that the final rules appropriately 

balance the costs and benefits associated 

with oversight of DCMs pursuant to the 


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36614 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

11As proposed in the DCM NPRM, appendix A 

to part 38 will contain the application form for 

contract market designation. 

12Former Core Principle 1 stated, among other 

things, that boards of trade ‘‘shall have reasonable 

discretion in establishing the manner in which they 

comply with the core principles.’’ This ‘‘reasonable 

discretion’’ provision underpinned the 

Commission’s use of core principle guidance and 

acceptable practices. Section 735 of the Dodd-Frank 

Act amended this provision to include the proviso 

that ‘‘[u]nless otherwise determined by the 

Commission by rule or regulation * * *,’’ boards of 

trade shall have reasonable discretion in 

establishing the manner in which they comply with 

the core principles. See 7 U.S.C. 7(d)(1)(amended 

2010). 

13 Guidance provides DCMs and DCM applicants 

with contextual information regarding the core 

principles, including important concerns which the 

Commission believes should be taken into account 

in complying with specific core principles. In 

contrast, the acceptable practices are more specific 

than guidance and provide examples of how DCMs 

may satisfy particular requirements of the core 

principles; they do not, however, establish 

mandatory means of compliance. Acceptable 

practices are intended to assist DCMs by 

establishing non-exclusive safe harbors. The safe 

harbors apply only to compliance with specific 

aspects of the core principle, and do not protect the 

contract market with respect to charges of violations 

of other sections of the CEA or other aspects of the 

core principle. 

14CME Comment Letter at 3–4 (Feb. 22, 2011); 

Eris Comment Letter at 1–2 (Feb. 22, 2011); GreenX 

Comment Letter at 1 (Feb. 22, 2011); ICE Comment 

Letter at 3 (Feb. 22, 2011); KCBT Comment Letter 

at 1, 9 (Feb. 22, 2011). 

15CME Comment Letter at 3 (Feb. 22, 2011); ICE 

Comment Letter at 2 (Feb. 22, 2011); KCBT 

Comment Letter at 9 (Feb. 22, 2011); Eris Comment 

Letter at 3 (June 3, 2011). 

16CME Comment Letter at 3 (Feb. 22, 2011); 

GreenX Comment Letter at 2 (Feb. 2, 2011); MGEX 

Comment Letter at 2 (Feb. 22, 2011). 

17CME Comment Letter at 3 (Feb. 22, 2011); 

GreenX Comment Letter at 2, 11 (Feb. 22, 2011). 

18As noted in the DCM NPRM, the RERs are the 

cornerstone of the Commission’s oversight program, 

CEA, as amended by the Dodd-Frank 

Act. 

The Commission is hereby adopting 

final regulations to implement section 5 

of the CEA, as well as the requirements 

of sections 2(h)(8) and 5h(a)(1) of the 

CEA, as amended by the Dodd-Frank 

Act, as applicable to DCMs. The final 

regulations will eliminate the guidance 

on compliance with the designation 

criteria for DCMs, implement new and 

revised regulations for the core 

principles, and codify certain 

requirements and practices that have 

evolved over the years and are 

commonly accepted in the industry. 

The final regulations adopted herein 

will become effective 60 days after 

publication in the Federal Register. 

Contract markets that have obtained 

designation prior to or at the time of the 

publication of this release must comply 

with the new and revised rules adopted 

in this release, except § 38.151(a), 

within 60 days of the effective date of 

this release; and must comply with 

§ 38.151(a) in accordance with the 

timeline described in the discussion of 

that rule below. 

II. Final Rules 

A. Repeal of Designation Criteria 

Section 735 of the Dodd-Frank Act 

eliminated the eight DCM designation 

criteria in former CEA section 5(b), and 

largely incorporated the substance of 

those criteria into the core principles. 

Accordingly, the Commission is 

eliminating the guidance on compliance 

with the designation criteria for DCMs 

contained in appendix A to part 38.11

B. Adoption of Rules and Revised 

Guidance and Acceptable Practices 

To implement section 735 of the 

Dodd-Frank Act, the Commission 

proposed a number of new and revised 

rules, guidance, and acceptable 

practices to implement the new and 

revised core principles. As described in 

the DCM NPRM, the Commission 

evaluated the preexisting regulatory 

framework for overseeing DCMs, which 

consisted largely of guidance and 

acceptable practices, in order to update 

those provisions and to determine 

which core principles would benefit 

from having new or revised derivative 

regulations. Based on that review, and 

in view of the Dodd-Frank Act’s 

amendments to section 5(d)(1) of the 

CEA,12 which specifically provides the 

Commission with discretion to 

determine, by rule or regulation, the 

manner in which boards of trade 

comply with the core principles, the 

Commission proposed revised guidance 

and acceptable practices for some core 

principles and, for several core 

principles, proposed to codify rules in 

lieu of guidance and acceptable 

practices.13

Summary of Comments 

The Commission received a number 

of comments generally pertaining to the 

proposed codification of rules in lieu of 

guidance and/or acceptable practices. 

Several commenters contended that the 

principles-based regime has permitted 

the U.S. futures markets to prosper and 

keep pace with rapidly changing 

technology and market needs, and that 

a rules-based regime will stifle growth, 

innovation, and competition.14 Others 

noted that the futures markets’ 

resilience throughout the financial crisis 

is evidence in support of the 

effectiveness of a principles-based 

regime.15 Commenters also argued that 

the prescriptive nature of the rules will 

result in increased costs for DCMs and 

for the Commission 16 and that current 

industry best practices are subject to 

change and are only able to evolve 

through continuous improvement and 

innovation, which is only possible 

under a flexible regime.17 Several 

commenters provided comments on the 

codification of specific rules in lieu of 

guidance and/or acceptable practices, 

which are addressed below, in the 

discussion of the respective rules. 

Discussion 

This final rulemaking largely adopts 

the framework of rules, guidance and 

acceptable practices that was proposed 

in the DCM NPRM, with certain 

substantive revisions to the regulations, 

as described in this release. For several 

core principles, the Commission is 

maintaining the rules, guidance and 

acceptable practices, as proposed, with 

appropriate revisions arising from the 

Commission’s consideration of 

comments. In several instances, this 

final rulemaking converts proposed 

rules to guidance and/or acceptable 

practices for various DCM compliance 

practices. 

In determining whether to codify a 

compliance practice in the form of a 

rule or guidance/acceptable practice, the 

Commission was guided by whether the 

practice consisted of a commonlyaccepted industry practice. Where there 

is a standard industry practice that the 

Commission has determined to be an 

acceptable compliance practice, the 

Commission believes that the 

promulgation of clear-cut regulations 

will provide greater legal certainty and 

transparency to DCMs in determining 

their compliance obligations, and to 

market participants in determining their 

obligations as DCM members, and will 

facilitate the enforcement of such 

provisions. Several of the rules adopted 

in this notice of final rulemaking largely 

codify practices that are commonly 

accepted in the industry and are 

currently being undertaken by most, if 

not all, DCMs. 

In the context of each individual rule, 

the Commission also was guided by 

comments that provided a basis for 

greater flexibility or, in some instances, 

for greater specificity, in respect to the 

stated compliance obligation. 

In addition, the Commission’s 

determination to codify certain 

compliance practices as rules, rather 

than as guidance/acceptable practices, is 

based on its long experience in 

regulating DCMs. In numerous 

instances, the rules codify practices that 

have evolved from the Division of 

Market Oversight’s (‘‘DMO’’) 

recommendations in the context of Rule 

Enforcement Reviews (‘‘RERs’’).18


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serving as a key tool for monitoring a DCM’s 

compliance with the core principles, and also as a 

primary means for identifying industry trends and 

DCM best practices for self-regulation. See DCM 

NPRM at 80574–75 for a more detailed discussion 

of RERs. 

19See e.g., CME Comment Letters (Feb. 22, 2011, 

Apr. 18, 2011, Jun. 3, 2011 and Aug. 3, 2011); 

MGEX Comment Letter (Jun. 3, 2011); GreenX 

Comment Letter (Feb. 22, 2011). 

20 7 U.S.C. 7(d)(1)(amended 2010). 

21The DCM NPRM did not propose any revisions 

to § 38.6 of the Commission’s regulations. 

22Each of these subparts begins with a regulation 

containing the language of the core principle. 

23 7 U.S.C. 8(a). 

24Form DCM would also be used by applicants 

amending a pending application and existing DCMs 

applying for an amendment to their order of 

designation. 

25The proposed electronic filing requirements 

would specifically apply to DCM applications, 

reinstatements, requests for transfer of designations, 

requests for withdrawal of application for 

designation, and vacation of designations. As 

explained in the DCM NPRM, the proposed 

revisions would make the DCM application filing 

process consistent with the electronic process used 

for filing rule and product submissions under parts 

39 and 40 of the Commission’s regulations. See 17 

CFR parts 39 and 40. In addition to these 

substantive revisions, many of the proposed 

revisions to § 38.3 were non-substantive and were 

intended to clarify the rule. 

26Nodal Comment Letter at 5 (Feb. 22, 2011). 

Some commenters claimed that the 

Commission’s approach was overly 

prescriptive and inconsistent with the 

core principle framework.19 While 

maintaining the core principle 

framework as part of the Dodd-Frank 

Act, Congress revised DCM Core 

Principle 1 to specifically provide the 

Commission with discretion to 

determine, by rule or regulation, the 

manner in which boards of trade are to 

comply with the core principles.20

Accordingly, in circumstances where a 

standard industry practice has 

developed, the Commission is adopting 

rules in order to provide greater legal 

certainty and transparency to DCMs and 

market participants. In other 

circumstances, the Commission is 

maintaining the guidance and 

acceptable practices framework, 

particularly where the Commission 

experienced that a standard compliance 

approach has not evolved within the 

industry over the years. In those 

instances, the final regulations maintain 

the flexibility for DCMs to determine the 

specific manner in which they choose to 

satisfy their compliance obligations. 

Several commenters claimed that the 

codification of additional rules will 

increase the Commission’s costs of 

regulating DCMs. The Commission 

believes that a regulatory framework 

consisting of a higher proportion of 

rules, in addition to guidance and 

acceptable practices, may in fact be less 

costly to administer, as DCMs will have 

a clear understanding of what is 

required in order to demonstrate 

compliance with the core principles. 

The costs and benefits of this final 

rulemaking are described further in the 

Cost Benefit Consideration discussion of 

this release. 

C. General Regulations (Subpart A) 

The regulations in this final 

rulemaking are codified in a series of 

subparts under part 38. The general 

regulations consisting of §§ 38.1 through 

38.10 21 are codified in subpart A, and 

the regulations applicable to each of the 

23 core principles are codified in 

subparts B through X, respectively.22

1. § 38.1—Scope 

The Commission proposed nonsubstantive revisions to § 38.1 that 

corrected cross-references to other 

sections of the Commission’s 

regulations. Section 38.1 is adopted as 

proposed. 

2. § 38.2—Applicable Provisions 

Proposed § 38.2 specified the 

Commission regulations that are 

applicable to DCMs. In addition to 

revising the heading, the proposed 

revisions to § 38.2 updated the list of 

Commission regulations that are 

applicable to DCMs, including the 

relevant regulations that have been 

codified, or are proposed to be codified, 

upon the Commission’s finalization of 

the relevant rulemakings that 

culminated upon enactment of the 

Dodd-Frank Act. These included 

regulations relating to real-time 

reporting of swaps and the 

determination of appropriate block size 

for swaps under part 43, requirements 

for swap data recordkeeping and 

reporting under part 45, designation 

requirements for swap data repositories 

under part 49, and position limits under 

part 150 and/or part 151, as applicable. 

Discussion 

The Commission is revising § 38.2 to 

specify the Commission regulations 

from which DCMs will be exempt. The 

original intent of § 38.2 was to exempt 

DCMs from various Commission 

regulations under Title 17 that were 

codified prior to the CFMA. Proposed 

§ 38.2 listed the specific regulations 

with which DCMs were required to 

comply, with the understanding that the 

DCM was exempt from those not listed. 

In this final rulemaking, to add clarity, 

the Commission is revising the title of 

the rule to ‘‘Exempt Provisions’’ and is 

modifying § 38.2 to reflect the list of 

regulations from which DCMs are 

exempt. Those regulations include: 

§ 1.35(e)–(j), § 1.39(b), § 1.44, § 1.53, 

§ 1.54, § 1.59(b) and (c), § 1.62, § 1.63(a) 

and (b) and (d) and(f), § 1.64, § 1.69, part 

8, § 100.1, § 155.2, and part 156. While 

§ 38.2 likely will be amended if and 

when the referenced rules are 

eliminated from the regulations or 

modified, this revised approach will 

eliminate the need for the Commission 

to continually update § 38.2 when new 

regulations with which DCMs must 

comply are codified. 

3. § 38.3—Procedures for Designation 

§ 38.3(a)—Application Procedures 

Among the proposed revisions to 

§ 38.3, which contains the application 

and designation procedures for DCM 

applicants, the Commission proposed to 

eliminate the 90-day expedited review 

procedures for DCM applications, which 

currently are codified in § 38.3(a)(2). 

The proposed modification would result 

in all DCM applications being subject to 

the statutory 180-day review procedures 

provided under section 6(a) of the CEA 

and § 38.3(a)(1) of the Commission’s 

regulations.23

As noted above, the Dodd-Frank Act 

eliminated the standalone DCM 

designation criteria. Accordingly, the 

Commission proposed re-designating 

appendix A to include a new DCM 

application form (‘‘Form DCM’’) that 

contains comprehensive instructions 

and a list of necessary information and 

documentation required to initiate a 

DCM designation proceeding. All new 

applicants seeking designation would 

submit to the Commission a completed 

form, including the information 

required in each exhibit.24

The DCM NPRM also proposed 

certain revisions to § 38.3 that would 

require DCM applications and certain 

related DCM filings to be filed with the 

Secretary of the Commission in an 

electronic format, via the Internet, 

email, or other means of direct 

electronic submission as approved by 

the Commission.25

Summary of Comments 

Two commenters discussed the 

proposed elimination of the 90-day 

expedited review process for DCM 

applications in § 38.3(a)(1). Nodal 

expressed support for the proposed 

elimination of the 90-day review 

procedures.26 Eris opposed the 

proposed elimination and commented, 

among other things, that Form DCM 

should result in a streamlined and 

standardized review process and that 

eliminating the 90-day accelerated 

review process would place new entities 

at a competitive disadvantage because it 


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27Eris Comment Letter at 4 (Feb. 22, 2011). 

28Section 6(a) of the Act provides that ‘‘the 

Commission shall approve or deny an application 

for designation or registration as a contract market 

* * * within 180 days of the filing of the 

application.’’ 7 U.S.C. 8(a). 

29CME Comment Letter at 11 (Feb. 22, 2011). 

30 Id. 

31 Id. 

32 Id. 

would delay their time to market, which 

is critical for new entrants.27

Discussion 

The Commission is adopting 

proposed § 38.3(a) with one 

modification. 

As described in the DCM NPRM, the 

Commission proposed eliminating the 

90-day accelerated review process based 

on its experience in processing DCM 

applications. Specifically, the 

Commission has found that in the 

interest of meeting the expedited 

approval timeline, applicants seeking 

expedited review often filed incomplete 

or draft applications without adequate 

supporting materials. Accordingly, the 

90-day review process required the 

expenditure of significant Commission 

resources as well as the applicant’s 

resources, and often resulted in placing 

the DCM designation requests on the 

180-day review track. It is the 

Commission’s view that the 180-day 

review period is a more reasonable 

timeframe for the review of designation 

requests and will result in more efficient 

use of the applicant’s and the 

Commission’s resources. 

In regards to Eris’ specific claim that 

elimination of the 90-day accelerated 

review process would place new entities 

at a competitive disadvantage by 

delaying their time to market, the 

Commission notes that eliminating the 

90-day review process will not prevent 

Commission staff from reviewing and/or 

rendering a determination on a DCM 

application before the 180-day period 

ends, particularly in instances where a 

DCM application is substantially 

complete, does not raise novel issues, 

and/or where a DCM applicant timely 

provides supplemental or follow-up 

responses or documentation necessary 

for a designation determination.28

Similarly, while the Commission 

recognizes that Form DCM will provide 

the added benefit of a more streamlined 

and standardized procedure for 

submitting and reviewing DCM 

applications, such benefits will not 

necessarily result in an expedited 

Commission determination. Rather, the 

completeness of the application and 

timely response to Commission staff’s 

requests will determine the timeframe 

within which the Commission reviews a 

DCM application. 

To account for potential changes in 

the Commission’s prospective 

technological capabilities, the 

Commission is slightly modifying the 

proposed text of § 38.3(a) to clarify that 

a board of trade must file Form DCM 

electronically ‘‘in a format and manner 

specified by the Secretary of the 

Commission.’’ 

The Commission is also making 

several minor non-substantive and 

organizational revisions to Form DCM. 

Additionally, the Commission is 

clarifying that the exhibits submitted in 

connection with Form DCM should 

include a description of how the 

applicant meets the definition of ‘‘board 

of trade’’ (as defined in section 1a(2) of 

the CEA). Applicants must submit all 

applicable exhibits simultaneous with 

the submission of completed Form 

DCM. Form DCM and all exhibits must 

be substantially complete prior to 

submission. 

Sec. 38.3(b)—Reinstatement of Dormant 

Designation 

Proposed § 38.3(b) required that a 

dormant DCM, prior to listing or 

relisting products for trading, must 

reinstate its designation under the 

procedures of paragraphs (a)(1) and (2) 

of § 38.3. The proposed rule provided 

that applications for reinstatement of 

designation may rely upon previouslysubmitted materials that pertain to, and 

accurately describe, current conditions. 

The Commission did not receive any 

comments on § 38.3(b) and is adopting 

this provision as proposed. 

Sec. 38.3(c)—Delegation of Authority 

Proposed § 38.3(c) delegated authority 

to the Director of the Division of Market 

Oversight (or such other employees as 

the Director may designate) to notify an 

applicant seeking designation in the 

event that the application is materially 

incomplete and that the 180-day review 

period is stayed. The Commission did 

not receive any comments on § 38.3(c) 

and is adopting this provision as 

proposed. 

Sec. 38.3(d)—Request for Transfer of 

Designation 

The Commission proposed new 

§ 38.3(d) to formalize the procedures 

that a DCM must follow when 

requesting the transfer of its DCM 

designation and positions comprising 

open interest, in anticipation of a 

corporate event (e.g., a merger, corporate 

reorganization, or change in corporate 

domicile) which results in the transfer 

of all or substantially all of the DCM’s 

assets to another legal entity. Proposed 

§ 38.3(d)(2) required a DCM to submit to 

the Commission a request for transfer of 

designation no later than three months 

prior to the anticipated corporate 

change. If a DCM did not know or could 

not reasonably have known of the 

anticipated change three months prior 

to the change, it was required to 

immediately file the request as soon as 

it did know of such change. The 

proposed rule required, that in either 

case, the request must include a series 

of submissions, including, among other 

things, the underlying agreement that 

governs the corporate change, a 

narrative description of the corporate 

change that includes the reason for the 

change and its impact on the DCM, a 

discussion of the transferee’s ability to 

comply with the CEA and the 

Commission’s regulations, the governing 

documents of the transferee, and a list 

of contracts, agreements, transactions or 

swaps for which the DCM requests 

transfer of open interest. 

Proposed § 38.3(d) also required, as a 

condition of approval, that the DCM 

submit a representation that it is in 

compliance with the CEA, including the 

DCM core principles, and the 

Commission’s regulations. In addition, 

the proposed rule required a DCM to 

submit various representations by the 

transferee, including, but not limited to, 

a representation that the transferee will 

assume responsibility for complying 

with all applicable provisions of the 

CEA and the Commission’s regulations 

and that none of the proposed rule 

changes will affect the rights and 

obligations of any participant to which 

open positions are transferred. 

Summary of Comments 

CME contended that the proposed 

rule is overly prescriptive because it 

applies a ‘‘one-size-fits-all approach’’ 

even though the circumstances of each 

transfer are likely to be unique.29 While 

CME did not oppose the three-month 

advance notification requirement, it did 

oppose what it believed to be the broad 

scope of the additional documentation 

required to be submitted simultaneously 

with such notification.30 CME stated 

that the required information is 

unnecessary and is likely to result in 

later notification to the Commission.31

As an alternative, CME recommended 

that the Commission tailor the 

information it requires based on the 

nature of the requested transfer.32

CME also contended that if a DCM 

could not have reasonably known of an 

anticipated change three months in 

advance, then it cannot ‘‘immediately’’ 

file both the request and all of the 

required submissions once it does 

know, because preparing the 


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33 Id. 

34Nodal Comment Letter at 4 (Feb. 22, 2011). 

35CFE Comment Letter at 6–7 (Feb. 22, 2011). 

36 GreenX Comment Letter at 21 (Feb. 22, 2011). 

37MGEX Comment Letter at 2 (Feb. 22, 2011), and 

at 1 (June 3, 2011). 

38NYSE Liffe Comment Letter at 14 (Feb. 22, 

2011). 

39 KCBT Comment Letter at 2 (Feb. 22, 2011). 40 GreenX Comment Letter at 21 (Feb. 22, 2011). 41 KCBT Comment Letter at 2 (Feb. 22, 2011). 42Nodal Comment Letter at 4 (Feb. 22, 2011). 43NYSE Liffe Comment Letter at 14 (Feb. 22, 

2011). 

44 Id. 

45CME Comment Letter at 12 (Feb. 22, 2011). 

46 Id. 

submissions takes time. CME suggested 

that the rule be amended to require that 

the documentation be filed ‘‘promptly’’ 

as soon as the DCM knows of the 

change, rather than ‘‘immediately.’’ 33

Discussion 

In response to CME’s contention that 

each transfer is likely to be unique, and 

its opposition to some of the 

documentation required by the rule, the 

Commission notes that the specific 

information requirements contained in 

the proposed rule are necessary to 

enable the Commission to determine 

that the transfer is in compliance with 

the CEA. The required documents, such 

as the transfer agreement, governing 

documents, list of contracts to be 

transferred, and compliance 

representations, are relevant to the 

Commission’s determination of the 

DCM’s ongoing compliance with the 

CEA. Such documentation is also 

relatively standard in transfer 

transactions. The Commission 

recognizes, however, that there may be 

some variations in the form of 

governance documents or underlying 

agreements for each transfer. 

Accordingly, DCMs may provide the 

substance of the required information in 

the form available to them. 

In response to CME’s suggestion that 

the rule be amended to require that the 

documentation be filed ‘‘promptly’’ as 

soon as the DCM knows of the change, 

rather than ‘‘immediately,’’ the 

Commission notes that the proposed 

rule specifically stated that in situations 

where a DCM could not have reasonably 

known of an anticipated change three 

months in advance, the DCM must 

immediately file the request as soon as 

it knows of such change, with an 

explanation as to the timing of the 

request. The Commission believes that 

in the context of this rule, use of the 

term ‘‘promptly’’ rather than 

‘‘immediately’’ would not provide a 

meaningful distinction, as the rule 

simply requires DCMs to provide the 

documentation as soon as they know of 

the change. 

As described in connection with 

§ 38.3(a), the Commission is slightly 

modifying the proposed text to clarify 

that a DCM must file a request for 

transfer of designation electronically ‘‘in 

a format and manner specified by the 

Secretary of the Commission.’’ The 

Commission is adopting the remainder 

of the rule as proposed. 

Sec. 38.3(e)—Request for Withdrawal of 

Application for Designation 

Proposed § 38.3(e) specified the 

procedures that a DCM must follow for 

withdrawing an application for 

designation. The Commission did not 

receive any comments on this provision. 

The Commission is slightly modifying 

the proposed text to clarify that an 

applicant must file a request for 

withdrawal of application for 

designation electronically ‘‘in a format 

and manner specified by the Secretary 

of the Commission.’’ The Commission is 

adopting the remainder of the rule as 

proposed. 

Sec. 38.3(f)—Request for Vacation of 

Designation 

Proposed § 38.3(f) specified the 

procedures that a DCM must follow for 

vacating its designation. The 

Commission did not receive any 

comments on this provision. The 

Commission is adopting it as proposed, 

with a slight modification to the 

proposed text to clarify that a DCM must 

file a request for vacation of designation 

electronically ‘‘in a format and manner 

specified by the Secretary of the 

Commission.’’ 

Sec. 38.3(g)—Requirements for Existing 

Designated Contract Markets 

Proposed § 38.3(g) required that each 

existing DCM provide the Commission 

with a signed certification of its 

compliance with each of the 23 core 

principles and the Commission’s 

regulations under part 38, within 60 

days of the effective date of the 

publication of the final rules proposed 

in the DCM NPRM. The failure of any 

existing DCM to provide such 

certification would be grounds for 

revocation of the DCM’s designation 

status. The Commission requested 

comments on whether the 60 day period 

is sufficient, and if not, what period of 

time may be more appropriate, and why. 

Summary of Comments 

Multiple commenters opposed the 

proposed 60-day timeframe for existing 

DCMs to certify compliance with the 

core principles and associated 

regulations. Commenters suggested 

several alternative timeframes, 

including 90 days,34 120 days,35 180 

days,36 12 months,37 and 18 months.38

KCBT argued that the proposed effective 

date is unreasonable and would be 

burdensome for DCMs, and suggested 

that the Commission work with each 

DCM to create a reasonable compliance 

timeframe.39

Commenters stated that a 60-day 

timeframe would be unreasonable given 

the expenditure of resources and 

detailed analysis required as a result of 

significant changes to existing core 

principles and the addition of new core 

principles. GreenX stated that Core 

Principle 21 (Financial Resources) may 

require DCMs to obtain new investment 

or financing arrangements.40 KCBT 

stated that it will take DCMs time to 

convert programs and processes from 

current acceptable practices to 

adherence to what it sees as prescriptive 

objectives and deadlines.41 Nodal, 

which is currently operating as an 

exempt commercial market (‘‘ECM’’), 

stated that 60 days is an unnecessarily 

harsh timeframe for an existing business 

to transform its operations and demand 

changes from its support providers.42

Finally, NYSE Liffe claimed that even 

90 or 120 days would be insufficient 

because certain proposals, such as Core 

Principles 2 (Compliance with Rules), 4 

(Prevention of Market Disruption), and 

20 (System Safeguards), will require the 

implementation of automated systems 

that require significant time to 

implement coding and conduct 

testing.43 NYSE Liffe further claimed 

that the DCM’s management and boards 

will have to review and approve rule 

changes before they can be 

implemented, and that the DCM will 

also have to negotiate and execute 

changes to contracts with third-party 

service providers.44 CME disagreed with 

the assertion that the proposed new 

regulations simply codify practices that 

are commonly accepted in the industry, 

and argued that the rules will 

necessitate strategic, operational, 

system, and rule changes.45 CME 

claimed that it would need a minimum 

of 180 days just to assess the impact of 

the new regulations and to identify, 

design, and plan the projects necessary 

to implement them.46

MGEX stated that a ‘‘catch all’’ 

certification is of limited value given 

that DCMs spend ‘‘countless hours and 

dollars’’ demonstrating that they are in 

compliance with core principles 

through RERs and responding to other 


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47MGEX Comment Letter at 2 (Feb. 22, 2011). 

48 Id. 

49 Id. 

50MGEX Comment Letter at 1 (June 3, 2011). 

51Nodal Comment Letter at 4 (Feb. 22, 2011). 

52See 75 FR 56513, Sept. 16, 2010; see also 76 

FR 42508, Jul. 14, 2011. 

53Section 40.3 was amended to require additional 

information to be provided by registered entities 

submitting new products for the Commission’s 

review and approval. Section 40.5(b) codified a new 

standard for the review of new rules or rule 

amendments as established under the Dodd-Frank 

Act. 75 FR 44776, Jul. 27, 2011. 

54 Id. 

55 Id. 

56CME Comment Letter at 10, 13 (Feb. 22, 2011). 

57 Id. 

58CFE Comment Letter at 7 (Feb. 22, 2011). 

59 Id. 

60 75 FR 44776, July 27, 2011. 

61 Id. 

Commission inquiries.47 MGEX also 

questioned whether it can conclude 

with any certainty that it is in 

compliance with the new and revised 

core principles and regulations.48

MGEX requested that the certification 

requirement be stricken, or if the 

requirement is deemed necessary, that 

the process be limited to providing a 

signed letter attesting to compliance 

(and that all application forms and 

documentation that are required with a 

formal application should be waived for 

existing DCMs).49 MGEX also requested 

that current DCMs that are already 

compliant with the existing core 

principles should be grandfathered.50

Nodal stated that the proposed rules 

do not address how a DCM applicant 

that is operating as an ECM pursuant to 

a grandfathering order can comply with 

the DCM requirements, and suggested 

that the Commission stagger certain 

compliance timeframes to accommodate 

entities that are operating pursuant to 

grandfather relief and that may 

potentially seek to operate as a DCM.51

Discussion 

The Commission acknowledges 

commenters’ concerns regarding the 60- 

day time frame for existing DCMs to 

certify compliance with the core 

principles and is eliminating this 

requirement from the final rules. In 

addition, the Commission has 

determined that existing DCMs may 

need additional time to comply with the 

rules being adopted in this release, and 

is therefore allowing DCMs an 

additional 60 days after the effective 

date of this release to comply with all 

of the new and revised final rules, 

except for § 38.151(a), as described in 

this release. All DCMs are expected to 

be in compliance with the final rules by 

that date. Albeit, the new and revised 

core principles, as amended by the 

Dodd-Frank Act, took effect on July 16, 

2011, and all DCMs were required to be 

in compliance with each of the new and 

revised core principles as of that date. 

The Commission further notes that all 

DCMs will continue to be subject to 

compliance reviews by the Commission, 

including RERs. 

With respect to Nodal’s comments 

regarding the impact of the effective 

date of the DCM and SEF rules on 

ECMs, the Commission issued orders 

whereby entities operating as exempt 

commercial markets pursuant to section 

2(h)(3)–(7) of the CEA, or as exempt 

boards of trade pursuant to section 5d 

of the CEA, could receive grandfather 

relief to continue to operate in 

accordance with those provisions 

notwithstanding their deletion from the 

CEA effective July 15, 2011, by the 

Dodd-Frank Act.52 The continued 

operation and compliance timeframes 

for exempt boards of trade and exempt 

commercial markets are addressed by 

those orders, and accordingly, are 

outside the scope of this rulemaking. 

4. § 38.4—Procedures for Listing 

Products and Implementing Designated 

Contract Market Rules 

The proposed amendments to § 38.4 

were largely intended to conform the 

rule to §§ 40.3 (Voluntary submission of 

new products for Commission review 

and approval) and 40.5(b) (Voluntary 

submission of rules for Commission 

review and approval).53 Those rules 

were recently revised in the separate 

release pertaining to ‘‘Provisions 

Common to Registered Entities.’’ 54

Summary of Comments 

In comments submitted both in 

connection with this rulemaking and 

with the proposed rulemaking for 

‘‘Provisions Common to Registered 

Entities,’’ 55 CME stated that the 

proposed procedures for listing 

products would increase the burdens 

associated with new product 

submissions and rule changes and 

would create new and costly 

bureaucratic inefficiencies, competitive 

disadvantages in the global marketplace, 

and impediments to innovation.56 CME 

stated that there has been no showing 

that the current streamlined process 

undermines market integrity, and that 

the process in fact has facilitated growth 

and innovation.57

CFE stated that a number of the 

regulations proposed in the DCM NPRM 

require DCMs to provide notification 

and reports to the Commission, but that 

the proposed regulations do not specify 

the manner in which the required 

notifications and reports should be 

submitted to the Commission.58 CFE 

requested that the Commission 

designate a single email address for the 

submission of all DCM notifications and 

reports.59

Discussion 

The Commission is adopting the rule 

as proposed. The rule conforms to 

revisions to part 40 that were made in 

a separate rulemaking for ‘‘Provisions 

Common to Registered Entities.’’ 60 In 

that rulemaking, the Commission, 

among other things, revised and 

eliminated several proposed 

documentation provisions in order to 

respond to comments that the 

submission of documentation in 

connection with new rules and rule 

amendments would be burdensome. 

The Commission also noted that the 

final rules will conserve both 

Commission and registered entity 

resources and will be less burdensome 

than existing practice. CME’s comments 

on these provisions were addressed in 

the part 40 rulemaking, and are outside 

the scope of this rulemaking.’’ 61

In response to CFE’s comment, the 

Commission notes that all filings 

submitted pursuant to part 38 should be 

filed electronically with the Secretary of 

the Commission, in a format and 

manner determined by the Secretary, at 

submissions@cftc.gov and the Division 

of Market Oversight at 

DMOSubmissions@cftc.gov. 

5. § 38.5—Information Relating to 

Contract Market Compliance 

Sec. 38.5(a)—Requests for Information; 

§ 38.5(b)—Demonstration of 

Compliance; and, Sec. 38.5(d)— 

Delegation of Authority 

The provisions in § 38.5 address 

requirements for DCMs to provide 

information relating to contract market 

compliance. Proposed § 38.5(a) required 

that a DCM must file with the 

Commission information related to its 

business as a DCM, including 

information relating to data entry and 

trade details, upon Commission request. 

Proposed § 38.5(b) required that a DCM 

must file with the Commission a written 

demonstration that the DCM is in 

compliance the core principles, upon 

Commission request. Proposed § 38.5(d) 

delegates the Commission’s authority to 

seek information as set forth in 

paragraph § 38.5(b) to the Director of the 

Division of Market Oversight, or such 

other employees as the Director may 

designate. As noted in the DCM NPRM, 

except for technical revisions, the 

aforementioned proposed rules were not 

substantively modified from their 

current versions. The Commission did 


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62See generally, DCM NPRM for an explanation 

of the proposed 10 percent threshold. 

63The Commission proposed redesignating 

§ 38.5(d) as § 38.5(c). 

64CME Comment Letter at 13 (Feb. 22, 2011) 

(noting that associated changes to relevant 

corporate documents are unlikely to be finalized 

until closer to the transfer date); NYSE Liffe 

Comment Letter at 13 (Feb. 22, 2011) (noting that 

the information will have to be collected and 

formatted). 

65NYSE Liffe Comment Letter at 14 (Feb. 22, 

2011). 

66 Id. 

67CME Comment Letter at 13 (Feb. 22, 2011). 

68MGEX Comment Letter at 2 (Feb. 22, 2011). 

69 Id. at 3. 

70 Id. 

not receive any comments on these rules 

and adopts them as proposed. 

Sec. 38.5(c)—Equity Interest Transfers 

Proposed § 38.5(c) required DCMs to 

file with the Commission a notice of the 

transfer of ten percent or more of its 

equity, no later than the business day 

following the date on which the DCM 

enters into a firm obligation to transfer 

the equity interest.62 The proposed rule 

required that the notification include 

several submissions, including any 

relevant agreements (including 

preliminary agreements), changes to 

relevant corporate documents, a chart 

outlining any new ownership or 

corporate or organizational structure, a 

brief description of the purpose and any 

impact of the equity interest transfer, 

and a representation from the DCM that 

it meets all of the requirements of 

section 5(d) of the Act and Commission 

regulations thereunder. The proposed 

rule also required that DCMs notify the 

Commission of the consummation of the 

transaction on the day in which it 

occurs. Proposed § 38.5(c)(3) 63 required 

that when there is a change in 

ownership, the DCM must certify, no 

later than two business days following 

the date on which the change in 

ownership occurs, that the DCM meets 

all of the requirements of section 5(d) of 

the CEA, as amended by the Dodd-Frank 

Act, and the provisions of part 38 of the 

Commission’s regulations. The 

proposed rule also required that the 

DCM include, as part of its certification, 

an explanation of whether any aspects 

of the DCM’s operations will change as 

a result of the change in ownership and, 

if so, that the DCM must provide a 

description of the changes. 

Summary of Comments 

Two commenters stated that they do 

not object to the general notification 

requirement, but contended that the 

submissions required to be 

simultaneously filed with the initial 

notification do not lend themselves to 

preparation within the 24-hour time 

frame proposed in the rules.64 NYSE 

Liffe proposed that a period of ten 

business days to provide the additional 

information would allow more time for 

the DCM to provide accurate and 

meaningful information.65 NYSE Liffe 

also requested clarification that the 

requirement to provide ‘‘preliminary 

agreements’’ only pertains to agreements 

that have been executed, and not to 

drafts that may have been exchanged for 

purposes of discussion.66

CME stated that a representation from 

a DCM that it meets all of the 

requirements of section 5(d) of the CEA 

is more appropriate as a requirement 

upon consummation of the equity 

interest transfer, rather than with the 

initial notification.67

MGEX stated that as a mutual 

association with a membership-based 

ownership structure, it frequently 

experiences changes in membership and 

ownership.68 MGEX stated that notice to 

the Commission seems reasonable for 

single event situations where a new 

party obtains a ten percent or more 

interest at one time, but disagreed with 

the rationale for the requirement to 

recertify again as part of such event.69

Instead, MGEX suggested that the 

Commission should inquire only if there 

is a concern over such an event.70

Discussion 

The Commission is adopting the 

proposed rule with certain revisions. 

The Commission is revising the rule 

to provide that the DCM must submit to 

the Commission a notification of each 

transaction involving the transfer of ten 

percent or more of the equity interest in 

the designated contract market, and that 

such notification must be provided at 

the earliest possible time but in no event 

later than ten business days following 

the date upon which the designated 

contract market enters into a legally 

binding obligation to transfer the equity 

interest. 

The Commission acknowledges NYSE 

Liffe and CME’s concerns regarding the 

timing of the submission filing 

requirement and therefore has extended 

the time period to up to ten business 

days for a DCM to file notification with 

the Commission upon entering into an 

agreement to transfer an equity interest 

of ten percent or more. While DCMs 

may take up to ten business days to 

submit a notification, the DCM must 

provide Commission staff with 

sufficient time, prior to consummating 

the equity interest transfer, to review 

and consider the implications of the 

change in ownership, including whether 

the change in ownership will adversely 

impact the operations of the DCM or the 

DCM’s ability to comply with the core 

principles and the Commission’s 

regulations thereunder. The rule further 

reminds DCMs that any aspect of an 

equity interest transfer described that 

necessitates the filing of a rule as 

defined in part 40 of the Commission 

regulations must comply with the rule 

submission requirements, including 

timing of filing, of section 5c(c) of the 

CEA and part 40, and all other 

applicable Commission regulations. 

In response to CME’s comment that 

the representation from a DCM that it 

meets all of the requirements of section 

5(d) of the CEA is more appropriate as 

a requirement upon consummation of 

the equity interest transfer, and NYSE 

Liffe’s comment that the Commission 

clarify that ‘‘preliminary agreements’’ 

do not include draft documents, the 

Commission is revising the rule to 

eliminate references to the specific 

documents that must be provided with 

the notification. Rather, the Commission 

may upon receiving a notification of the 

equity interest transfer, where 

necessary, request appropriate 

documentation pursuant to its authority 

under § 38.5 of the Commission’s 

regulations. Such documentation may 

include: (i) Relevant agreement(s), 

including any preliminary agreements 

(not including draft documents); (ii) 

associated changes to relevant corporate 

documents; (iii) chart outlining any new 

ownership or corporate or 

organizational structure, if available; (iv) 

a brief description of the purpose and 

any impact of the equity interest 

transfer; and, (v) a certification, upon 

consummation of the equity interest 

transfer that the designated contract 

market continues to meet all of the 

requirements of section 5(d) of the Act 

and Commission regulations adopted 

thereunder. 

The Commission acknowledges 

MGEX’s comment but believes that the 

rule is necessary. The Commission must 

oversee and ensure the continued 

compliance of all DCMs with the core 

principles and the Commission’s 

regulations. In order to fulfill its 

oversight obligations, and to ensure that 

DCMs maintain compliance with their 

self-regulatory obligations, the 

Commission must undertake an 

effective due diligence review of the 

impact of ownership transfers. 

Accordingly, the Commission adopts 

the proposed rule, with the 

aforementioned modifications. 


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71The DCM NPRM did not propose any revisions 

to current § 38.6 (Enforceability), and this provision 

remains unchanged. 72CME Comment Letter at 13–14 (Feb. 22, 2011). 73 Id. 74 Id. 75MGEX Comment Letter at 3 (Feb. 22, 2011). 76ELX Comment Letter at 3 (Feb. 22, 2011). 77 Id. 

78 Id. 

79 Id. 

80 Id. 

81See 75 FR 80572, 80577, note 37, Dec. 22, 2010. 

82See ‘‘Swap Data Recordkeeping and Reporting 

Requirements,’’ Proposed Rule, 75 FR 76573, Dec. 

8, 2010. 

83CFE Comment Letter at 1 (Feb. 22, 2011). 

84 Id. at 2. 

85ELX Comment Letter at 4 (Feb. 22, 2011). 

86 Id. at 5. 

87See CEA section 2(h)(8), 7 U.S.C. 2(h)(8). See 

also 17 CFR 38.9 (‘‘A board of trade that operates 

a designated contract market and that intends to 

6. § 38.7—Prohibited Use of Data 

Collected for Regulatory Purposes 

Proposed § 38.7 71 prohibited DCMs 

from using proprietary data or personal 

information submitted by any person to 

the DCM for regulatory purposes, for 

business or marketing purposes. In the 

DCM NPRM, the Commission noted that 

nothing in the proposed provision 

should be viewed as prohibiting a DCM 

from sharing such information with 

another DCM or SEF for regulatory 

purposes, where necessary. 

Summary of Comments 

Several commenters argued that the 

restriction on the use of proprietary or 

personal information is too broad. CME 

stated that the proposed rules should 

distinguish between proprietary and 

personal information that is provided to 

a DCM exclusively for regulatory 

purposes and information that is 

provided to a DCM for both regulatory 

and non-regulatory purposes.72 CME 

claimed that a DCM should be permitted 

to use the latter type of information for 

business or marketing purposes, 

provided that the DCM has transparent 

rules and policies which disclose what 

information collected by the DCM will 

be used exclusively for the furtherance 

of its self-regulatory obligations and 

how such confidential information will 

be protected.73 CME also contended that 

a DCM should not be precluded from 

using proprietary or personal 

information that is provided for 

regulatory purposes for business or 

marketing purposes where the market 

participant has specifically agreed to 

such use.74 MGEX agreed with the 

underlying purpose of the proposed rule 

but suggested allowing market 

participants to opt-out of having their 

information used for business or 

marketing purposes.75

ELX stated that the standard should 

rest on whether the use and manner of 

use of the information violates the 

reasonable expectation of 

confidentiality on the part of the 

disclosing firm.76 For example, ELX 

stated that senior officers of the 

exchange should have access to such 

data to understand the markets they are 

responsible for overseeing even if they 

don’t have a ‘‘compliance’’ moniker in 

their title.77 ELX also stated that an 

exchange should be able to consolidate 

proprietary data in an anonymous 

fashion to explain its markets without 

running afoul of the proposed rule.78

ELX also claimed that a DCM should be 

able to use its discretion to convey 

proprietary information for business or 

marketing purposes back to employees 

of the firm that supplied the data.79 For 

example, ELX stated that a DCM should 

be permitted to explain to a trading desk 

how the activities of its firm have 

changed or could be conducted more 

cost-effectively.80

Discussion 

The Commission has considered the 

comments and is amending proposed 

§ 38.7 to allow DCMs to use proprietary 

or personal information for business or 

marketing purposes if the person from 

whom they collect or receive such 

information clearly consents to the use 

of its information in such a manner. In 

response to CME and ELX’s comments, 

the Commission notes that a DCM could 

use information that it receives for both 

regulatory and non-regulatory purposes 

for business or marketing purposes (or 

could convey proprietary information 

back to employees of the firm that 

supplied the data) if the source of the 

information clearly consents to the use 

in such a manner. The Commission is 

also amending the proposed rule to 

prohibit a DCM from conditioning 

access to its trading facility based upon 

such consent. 

Finally, as stated in the preamble to 

the proposed rule and amplified above, 

the Commission notes that § 38.7 is 

intended to protect regulatory 

information provided by market 

participants to DCMs from unauthorized 

commercial use.81 The Commission 

notes consistent with the requirements 

of the final rule, DCMs should have 

rules to safeguard regulatory 

information from misuse. The 

Commission would expect such rules, 

among other things, to restrict access to 

such information within the DCM to 

avoid improper use of such information 

for commercial purposes. 

7. § 38.8—Listing of Swaps on a 

Designated Contract Market 

Proposed § 38.8(a) required a DCM to 

notify the Commission, prior to or upon 

listing its first swap contract, of the 

manner in which it will fulfill each of 

the requirements under the amended 

CEA and part 38 with respect to the 

listing, trading, execution and reporting 

of swap transactions. 

Proposed § 38.8(b) required a DCM, 

before it lists swaps, to request from the 

Commission a unique, alphanumeric 

code for the purpose of identifying the 

DCM. The rule required a DCM to do so 

pursuant to the swap recordkeeping and 

reporting requirements under thenproposed part 45 of the Commission’s 

regulations. Proposed § 38.8(b) also 

codified the obligations of DCMs to 

comply with the provisions of part 45, 

which set forth the recordkeeping and 

reporting requirements for DCMs with 

respect to swaps.82

Summary of Comments 

CFE argued that a DCM should be 

allowed to offer trading in swaps in the 

same manner that a SEF is permitted to 

do so, and that it would be costly and 

unnecessary to require a DCM to create 

a separate SEF in order to offer trading 

in swaps instead of just permitting the 

DCM to adopt separate rules that permit 

the trading of swaps on the DCM 

consistent with the SEF requirements.83

CFE argued that a DCM should not have 

to create a separate entity, board, board 

committees, membership application 

and approval process, and rule set in 

order to offer trading in swaps in the 

same manner that a SEF can do when 

it already has all of those components 

in place and can simply add any 

required components for SEFs.84

ELX stated that the DCM NPRM did 

not make clear what criteria will be 

used to distinguish between a swap 

contract and a futures contract, and 

claimed that this ambiguity will cause 

uncertainty and redundant costs for 

boards of trade that would prefer to 

follow a DCM model without having to 

adopt a parallel set of rules and 

procedures.85 ELX cited compliance 

with section 727 of the Dodd-Frank Act 

and § 38.10 as one area where clarity is 

needed.86

Discussion 

The Commission is adopting the rule 

as proposed, with one clarification. 

CFE’s comments take issue with 

provisions in the Dodd-Frank Act that 

are not within the Commission’s 

discretion to revise. Swaps are 

permitted to be traded on a SEF or a 

DCM, pursuant to rules promulgated for 

each entity.87 Accordingly, swaps 


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also operate a swap execution facility must 

separately register...and on an ongoing basis, 

comply with the core principles under Section 5h 

of the Act, and the swap execution facility rules 

under part 37 of this chapter’’). 

88 76 FR 42508, Jul. 14, 2011. 

89 Id. at 42,518, n. 131. On July 27, 2011, DMO 

staff sent a notification letter to all existing DCMs 

stating that if the DCM intends to list swaps prior 

to the effective date of the final rules implementing 

part 38, it must include with its initial submission 

of the terms and conditions of a swap contract 

(pursuant to section 5c(c) of the CEA, as amended 

by the Dodd-Frank Act) any amendments to its 

rules that are necessary to provide for the trading 

of swaps, including a concise explanation and 

analysis of any systems and oversight procedures 

that the DCM proposes to revise in order to 

accommodate the trading of swaps. The information 

requested in the July 27 letter is separate from the 

request in proposed section 38.8(a); however, 

information provided in response to the July 27 

letter may support, in part, the requirement under 

section 38.8(a) to provide a written demonstration 

detailing how the DCM is addressing its selfregulatory obligations with respect to swap 

transactions. 

90 76 FR 29818, May 23, 2011. 

91 77 FR 2136, Jan. 13, 2012. 

92The Commission will establish a formal process 

by which DCMs can obtain a USI identifier. 

93 77 FR 2136, Jan. 13, 2012. 

94See notice of proposed rulemaking pertaining 

to ‘‘Core Principles and Other Requirements for 

Swap Execution Facilities.’’ 76 FR 1214, Jan. 7, 

2011. 

95Section 5h(c) of the CEA, as amended by the 

Dodd-Frank Act, provides: 

IDENTIFICATION OF FACILITY USED TO 

TRADE SWAPS BY CONTRACT MARKETS.—A 

board of trade that operates a contract market shall, 

to the extent that the board of trade also operates 

a swap execution facility and uses the same 

electronic trade execution system for listing and 

executing trades of swaps on or through the 

contract market and the swap execution facility, 

identify whether the electronic trading of such 

swaps is taking place on or through the contract 

market or the swap execution facility. 

96CME Comment Letter at 14 (Feb. 22, 2011). 

97 ICE Comment Letter at 10 (Feb. 22, 2011). 

98 Id. 

99 Id. 

100Alice Corporation Comment Letter at 3 (May 

31, 2011). 

101 Id. 

102 Id. 

traded on a DCM must be traded 

pursuant to DCM rules. As noted in the 

Final Exemptive Order issued July 14, 

2011,88 DCMs may list and trade swaps 

after July 16, 2011 without further 

exemptive relief. In that Order, the 

Commission noted that if a DCM 

intends to trade swaps pursuant to the 

rules, processes, and procedures 

currently regulating trading on its DCM, 

the DCM may need to amend or 

otherwise update its rules, processes, 

and procedures in order to address the 

trading of swaps.89 In response to ELX, 

the determining factors in 

distinguishing between swaps and 

futures are outside of the scope of this 

proceeding. The CEA provided a 

definition for swaps under section 

1a(47), and the Commission published 

proposed rules and interpretive 

guidance to further define the term on 

May 23, 2011.90

The Commission is modifying 

§ 38.8(b), consistent with the 

Commission’s final Swap Data 

Recordkeeping and Reporting 

Requirements Rule,91 to require DCMs 

to generate and assign a unique swap 

identifier at, or as soon as 

technologically practicable following, 

the time of execution of the swap. The 

unique swap identifier (‘‘USI’’) must 

have two alphanumeric components. 

The first component is the unique 

alphanumeric code assigned to the DCM 

by the Commission for the purpose of 

identifying the DCM with respect to USI 

creation. DCMs must obtain this first 

alphanumeric component from the 

Commission prior to executing any 

swap on its facility.92 The second 

component is an alphanumeric code 

generated and assigned to that swap by 

the automated systems of the DCM, 

which shall be unique to that swap and 

different with respect to all such codes 

generated and assigned by that DCM to 

all other swaps. Each DCM must 

generate and assign a USI at, or as soon 

as technologically practicable, following 

the time of execution of the swap. The 

DCM is required to transmit the USI to 

the SDR, each swap counterparty, and 

the registered derivative clearing 

organization (‘‘DCO’’) (if the swap is 

cleared). The DCM, similar to all 

registered entities and counterparties, is 

required to use the USI to identify the 

swap in ‘‘all recordkeeping and all swap 

data reporting pursuant to [part 45].’’ 

This clarification is based upon the final 

rulemaking that implements swap data 

recordkeeping and reporting 

requirements under part 45 of the 

Commission’s regulations.93

8. § 38.9—Boards of Trade Operating 

Both a Designated Contract Market and 

a Swap Execution Facility 

Proposed § 38.9(a) codified the 

requirement that a board of trade that 

operates a DCM and that intends to 

operate a SEF must separately register 

pursuant to the SEF registration 

requirements and, on an ongoing basis, 

must separately comply with the SEF 

core principles under section 5h of the 

CEA, as amended by the Dodd-Frank 

Act, and the applicable Commission 

regulations to be codified under part 37 

of the Commission regulations.94

Proposed § 38.9(b) codified the 

statutory requirement that any board of 

trade that is a DCM and intends to 

operate as an independent SEF may use 

the same electronic trade execution 

system for listing and executing swaps, 

provided that the board of trade makes 

it clear to market participants whether 

the electronic trading of such swaps is 

taking place on or through the DCM or 

the SEF.95

Summary of Comments 

CME requested clarification as to 

whether the regulation is intended to 

create a more substantive obligation on 

the part of DCMs and SEFs given that 

market participants typically interface 

with electronic platforms through 

proprietary or third-party front end 

systems that are not controlled by the 

DCM.96

ICE noted that while the proposed 

rule prescribed how a DCM can list 

swaps, it did not describe how the core 

principles, written for futures contracts, 

apply to a DCM listing swaps. ICE 

requested clarification that a swap can 

be executed on a DCM using the same 

execution methods as on a SEF, such as 

a request for quote (‘‘RFQ’’) 

mechanism.97 Finally, ICE stated that, 

like a SEF, a DCM should be able to 

allow the bilateral execution of swaps 

where there is no clearing mandate.98

ICE claimed that without these 

clarifications, there will be a bias away 

from the trading of swaps on DCMs in 

favor of SEFs, and that the rulemaking 

would frustrate Congress’ intention of 

also having swaps trade on DCMs.99

Alice Corporation states that 

organizations that choose to operate 

both a SEF and DCM should be able to 

meet the requirements of both entities 

with a single organization.100 Alice 

Corporation also stated that it offers the 

ability to fill a large size order with 

multiple contracts on an all-or-nothing 

basis, as customers with large orders 

sometimes wish to execute with a single 

contracts.101 Alice stated that this 

design would enable automatic 

execution of block size trades, and 

questioned whether an impartially 

offered price discount for volume would 

be acceptable to the Commission.102

Discussion 

The Commission is adopting the rule 

as proposed. In response to CME’s 

comment, the Commission notes that it 

would not be sufficient for a board of 

trade that operates both a DCM and a 

SEF to simply have DCM rules that 

might identify whether a transaction is 

being executed on a DCM or a SEF. 

Instead, a consolidated DCM/SEF 

trading screen must identify whether 

the execution is occurring on the DCM 

or the SEF, irrespective of how 

proprietary or third-party front end 


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103 ICE Comment Letter at 2–3 (Feb. 22, 2011); 

Alice Corporation Comment Letter at 3 (May 31, 

2011). 

104Section 723 of the Dodd-Frank Act provides 

that the execution of swaps subject to the clearing 

requirement of section 2(h)(1) of the CEA must 

occur either on a DCM or on a SEF, unless no DCM 

or SEF makes the swap available to trade. 

105Core Principle 9 provides, in relevant part, 

that ‘‘[t]he rules of the board of trade may authorize, 

for bona fide business purposes: 

(i) Transfer trades or office trades; 

(ii) An exchange of— 

(I) Futures in connection with a cash commodity 

transaction; 

(II) Futures for cash commodities; or 

(III) Futures for swaps; or 

(iii) A futures commission merchant, acting as 

principal or agent, to enter into or confirm the 

execution of a contract for the purchase or sale of 

a commodity for future delivery if the contract is 

reported, recorded, or cleared in accordance with 

the rules of the contract market or a derivatives 

clearing organization. 7 U.S.C. 5(d)(9). 

106The Commission further notes that pursuant to 

Core Principle 21, all contracts traded on a DCM 

must be cleared through a registered DCO, 

irrespective of the clearing mandate. 

107The CEA requires that DCMs must be boards 

of trade, as defined under the CEA. See, e.g., 7 

U.S.C. 7(a) (stating the a board of trade may apply 

for designation as a contract market); see also 7 

U.S.C. 7(d) (core principles apply to board of trade). 

108As defined in section 1a(37) of the CEA, the 

term ‘‘organized exchange’’ means a trading facility 

that: (A) Permits trading: (i) By or on behalf of a 

person that is not an eligible contract participant; 

or (ii) by persons other than on a principal-toprincipal basis; or (B) has adopted (directly or 

through another nongovernmental entity) rules that: 

(i) Govern the conduct of participants, other than 

rules that govern the submission of orders or 

execution of transactions on the trading facility; and 

(ii) include disciplinary sanctions other than the 

exclusion of participants from trading. 

109As defined in section 1a(51) (A) of the CEA, 

the term ‘‘trading facility’’ means a person or group 

of persons that constitutes, maintains, or provides 

a physical or electronic facility or system in which 

multiple participants have the ability to execute or 

trade agreements, contracts, or transactions—(i) by 

accepting bids or offers made by other participants 

that are open to multiple participants in the facility 

or system; or (ii) through the interaction of multiple 

bids or multiple offers within a system with a predetermined nondiscretionary automated trade 

matching and execution algorithm. See section 

1a(51)(B) and (C) for exclusions and special rules 

application to trading facility. 

110See ‘‘Real Time Public Reporting of Swap 

Transaction Data,’’ Proposed Rule, 75 FR 76139, 

Dec. 7, 2010. 

111See ‘‘Swap Data Recordkeeping and Reporting 

Requirements,’’ Proposed Rule, 75 FR 76573, Dec. 

8, 2010. 

112CME Comment Letter at 14 (Feb. 22, 2011). 

113 75 FR 76140, Dec. 7, 2010; 75 FR 76574, Dec. 

8, 2010. 

114As noted in the DCM NPRM, in two instances 

the language of the core principle, as codified, was 

slightly revised to add references to the CEA where 

systems eventually present that data to 

market participants. Section 5h(c) of the 

CEA, as amended by the Dodd-Frank 

Act, clearly requires that a board of 

trade that operates both a DCM and SEF 

identify to market participants whether 

each swap is being executed on the 

DCM or the SEF. 

With respect to comments requesting 

clarification that a swap can be executed 

on a DCM using execution methods 

other than a central limit order book 103

the Commission notes that swaps 

executed on a DCM are subject to all 

rules and requirements applicable to 

futures and options traded on DCMs.104

In particular, all swaps traded on a DCM 

must be executed through the DCM’s 

trading facility, except as otherwise 

expressly permitted by Core Principle 

9,105 and are subject to the 

Commission’s rules pertaining to DCMs. 

Only certain Commission rules, for 

example, those relating to the real-time 

and regulatory reporting of swaps, will 

be different for swaps in relation to 

futures. In response to ICE’s comment 

that a DCM, like a SEF, should be able 

to allow the bilateral execution of swaps 

where there is no clearing mandate, the 

Commission notes that ICE’s position is 

based on the proposed SEF rules, which 

are not yet finalized.106 Moreover, the 

Commission further notes that under the 

CEA, a DCM must be a board of trade, 

which is defined under section 1a(2) of 

the CEA, 7 U.S.C. 1a(2), as an organized 

exchange or other trading facility.107 As 

defined under the CEA, both an 

organized exchange,108 and other 

trading facility 109 require, among other 

things, multiple participants to execute 

or trade contracts or transactions, by 

accepting bids or offers made by other 

participants that are open to multiple 

participants in the facility or system, or 

through the interaction of multiple bids 

or offers within a system with a predetermined nondiscretionary automated 

trade matching and execution algorithm. 

The Commission has considered Alice 

Corporation’s comments, and notes that 

while a board of trade that is a single 

corporate entity may operate both a 

DCM and a SEF, DCMs and SEFs have 

separate core principles and 

requirements, and any entity that 

operates both must separately meet the 

statutory and regulatory requirements of 

each facility. In response to Alice 

Corporation’s further comment that 

counterparties on a DCM should be able 

to offer volume-based quotes, it is 

unclear whether Alice Corporation’s 

comment is being offered in the context 

of acceptable methods of trading on a 

DCM’s central marketplace or in the 

context of off-exchange transactions. If 

the former, the Commission reiterates 

that the acceptable methods of trading 

on a DCM’s central marketplace are 

specifically determined under the CEA, 

which requires at a minimum that 

DCMs must be ‘‘trading facilities,’’ 

though even in that context the 

Commission has accepted trading 

systems beyond pure price-and-time 

algorithms. If Alice Corporation’s 

reference to volume-based quotes is 

some sort of off-exchange trading 

methodology, the Commission reiterates 

that its analysis of such a proposal 

would be conducted under Core 

Principle 9. The comment does not offer 

sufficient information to analyze the 

suggestion at this time. 

9. § 38.10—Reporting of Swaps Traded 

on a Designated Contract Market 

Proposed § 38.10 codified the 

compliance obligations of DCMs with 

respect to real-time reporting of swap 

transactions and swap data 

recordkeeping and reporting obligations, 

as was required under then-proposed 

parts 43 110 and 45 111 of the 

Commission’s regulations, respectively. 

Summary of Comments and Discussion 

CME referred the Commission to 

comments it submitted on February 7, 

2011 with respect to proposed 

rulemakings under part 43 (real-time 

public reporting of swap transaction 

data) and part 45 (swap data 

recordkeeping and reporting 

requirements).112

Rule 38.10 references the reporting 

requirements contained under parts 43 

and 45, but does not contain the 

substantive obligations associated with 

the requirements. Accordingly, CME’s 

comments were considered in 

connection with the final rulemakings 

under parts 43 and 45. 

The Commission is adopting this 

provision as proposed, with certain 

clarifications to conform the rule to the 

regulations under parts 43 and 45. 

Specifically, proposed § 38.10 required 

that each DCM, with respect to swaps 

traded on or through the DCM, report 

specified swap data to an SDR. The 

Commission is modifying § 38.10 to 

clarify that DCMs must maintain and 

report specified swap data for swaps 

traded ‘‘on or pursuant’’ to the rules of 

the DCM. The clarification is consistent 

with the rulemakings that implement 

real-time reporting of swap transaction 

data and swap data recordkeeping and 

reporting requirements under parts 43 

and 45 of the Commission’s 

regulations.113

D. Core Principles 

As noted above, this release 

reorganizes part 38 to include subparts 

A through X. Each of subparts B through 

X includes relevant regulations 

applicable to the 23 core principles. 

This final rulemaking codifies within 

each subpart the statutory language of 

the respective core principle.114


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the statutory language simply cited to the CEA 

section without citing to the statute. These nonsubstantive edits were made to sections 38.100 and 

38.1200. 

115Section 735 of the Dodd-Frank Act amended 

Core Principle 1 by adding that compliance with 

the core principles, and any other rule or regulation 

that the Commission may impose under section 

8a(5) of the CEA, is a necessary condition to obtain 

and maintain designation as a contract market, and 

by adding the condition that ‘‘unless otherwise 

determined by the Commission by rule or 

regulation,’’ DCMs have reasonable discretion in 

establishing the manner in which they comply with 

the core principles. 7 U.S.C. 7(d)(1). 

116Section 735 of the Dodd-Frank Act amended 

section 5 of the CEA to eliminate DCM designation 

criteria and amends several core principles, 

including Core Principle 2. Core Principle 2 was 

amended to include language formerly found in 

Designation Criterion 8—Ability to Obtain 

Information, and to specifically require that a DCM 

have the ability to detect, investigate, and sanction 

rule violations. 

117CME Comment Letter at 15 (Feb. 22, 2011). 

118 KCBT Comment Letter at 3 (Feb. 22, 2011). 

119Section 5(d)(2)(C) of the CEA, as amended by 

the Dodd-Frank Act, states that ‘‘[t]he rules of the 

contract market shall provide the board of trade 

with the ability and authority to obtain any 

necessary information to perform any function 

described in this subsection, including the capacity 

to carry out such international information sharing 

agreements as the Commission may require.’’ 7 

U.S.C. 7(d)(2). 

120CFE Comment Letter at 2 (Feb. 22, 2011). 

121 Id. 

122 Id. 

123CME Comment Letter at 17 (Feb. 22, 2011). 

124 Id. at 16. 

125 Id. 

126 Id. 

127 Id. 

128 ICE Comment Letter at 12–13 (Feb. 22, 2011). 

129 Id. at 15. 

130 KCBT Comment Letter at 2 (Feb. 22, 2011). 

131 Id. 

132NYSE Liffe Comment Letter at 11 (Feb. 22, 

2011). 

133 Id. 

1. Subpart B—Designation as Contract 

Market 

In the DCM NPRM, the Commission 

proposed to codify the statutory text of 

Core Principle 1 in § 38.100.115 The 

Commission is adopting § 38.100 as 

proposed. 

2. Subpart C—Compliance With Rules 

Section 5(d)(2) of the CEA, as 

amended by the Dodd-Frank Act, 

requires that a DCM establish, monitor, 

and enforce compliance with its rules, 

including rules regarding access 

requirements and the terms and 

conditions of any contract to be traded 

on the contract market, and rules 

prohibiting abusive trade practices.116 A 

DCM must also have the capacity to 

detect and investigate potential rule 

violations and to sanction any person 

that violates its rules. In addition, a 

DCM’s rules must provide it with the 

ability and authority to perform the 

obligations and responsibilities required 

under Core Principle 2, including the 

capacity to carry out such international 

information sharing agreements that the 

Commission may require. 

The Commission proposed several 

rules implementing amended Core 

Principle 2, as further described below. 

i. § 38.150—Core Principle 2 

Proposed § 38.150 codified the text of 

section 5(d)(2) of the CEA. 

CME commented that a DCM cannot 

be expected to carry out international or 

other informational sharing agreements 

to which it is not a party, and should 

not be compelled by regulation to enter 

into such agreements.117 KCBT opposed 

the requirement that a DCM establish 

rules and enter into informationalsharing agreements, particularly when 

such agreements contain specific 

requirements that are unsuitable to a 

DCM or conditions with which the DCM 

is unable to comply.118

Discussion 

The Commission is adopting § 38.150 

as proposed. Section 38.150 simply 

codifies the statutory language of the 

core principle. The Commission, 

therefore, does not have discretion to 

amend the requirements or obligations 

imposed by the statute.119

ii. § 38.151—Access Requirements 

Sec. 38.151(a)—Jurisdiction 

Proposed § 38.151(a) required that 

prior to granting a member or market 

participant access to its markets, the 

DCM must require the member or 

market participant to consent to its 

jurisdiction. 

Summary of Comments 

CFE stated that the term ‘‘market 

participant’’ used in the proposed rule 

should be limited to non-members of a 

DCM that have the ability to enter 

orders directly into a DCM’s trade 

matching system for execution, and that 

the term should not include nonmembers that do not have this ability.120

CFE further commented that the 

proposed rule should not apply to 

customers whose orders pass through a 

member’s system before receipt by a 

DCM because, according to CFE, in that 

instance the customer order is being 

received by the DCM from the 

member.121 CFE also asserted that 

customers that submit orders through a 

member do not have the privilege of 

trading on a DCM and thus the proposed 

rule should not apply to them.122

CME recommended that the 

Commission withdraw the proposed 

rule.123 It contended that requiring 

clearing firms to obtain every customer’s 

consent to the regulatory jurisdiction of 

each DCM would be costly.124

Moreover, CME commented that even if 

such consent were obtained, the 

proposed rule would be entirely 

ineffective in achieving the 

Commission’s desired outcome.125 CME 

explained that if a non-member who 

had consented to the exchange’s 

jurisdiction under the proposed rule 

committed a rule violation and 

subsequently elected not to cooperate in 

the investigation or disciplinary 

process, the exchange’s only recourse 

would be to deny the non-member 

access and, if appropriate, refer the 

matter to the Commission.126 CME 

further explained that a DCM’s 

enforcement options, and the regulatory 

outcomes, do not change based on 

whether or not there is a record of the 

non-member consenting to jurisdiction, 

but rather depend on whether the nonmember chooses to participate in the 

DCM’s investigative and disciplinary 

processes.127

ICE contended that the proposed rule 

should distinguish between directaccess and intermediated market 

participants.128 Furthermore, ICE stated 

that a trader should be specifically 

subject to the jurisdiction and the 

disciplinary process of the DCM only 

when the privilege of trading on a DCM 

is specifically granted by the DCM.129

Likewise, KCBT explained that even if 

a non-member consents to KCBT 

jurisdiction, but later fails to abide by 

such consent, KCBT’s only recourse 

would be to revoke such participant’s 

market access.130 Therefore, KCBT 

questioned the benefit of implementing 

the proposed rule.131

NYSE Liffe sought clarification 

regarding the type of market participant 

covered by the proposed rule.132 NYSE 

Liffe requested that the Commission 

confirm that, unless NYSE Liffe permits 

market participants direct access to its 

trading platform, it would not consider 

a DCM to be ‘‘granting’’ market 

participants access to its markets, thus 

necessitating that it require market 

participants to consent to the DCM’s 

jurisdiction.133

Discussion 

The Commission is adopting 

§ 38.151(a) as proposed. While 

acknowledging the comments described 

above, the Commission believes that 

§ 38.151(a) codifies jurisdictional 

requirements necessary to effectuate the 

statutory mandate of Core Principle 2 

that a board of trade ‘‘shall have the 

capacity to detect, investigate, and 

apply appropriate sanctions to any 

person that violates any rule of the 


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134See DCM NPRM at 80579. As an example, the 

preamble further stated that ‘‘if a certain category 

required greater information technology or 

administrative expenses on the part of the DCM, 

then a DCM may recoup those costs in establishing 

fees for that category or member or market 

participant.’’ Id. 

135Barnard Comment Letter at 2 (Feb. 22, 2011). 

136CFE Comment Letter at 3 (Feb. 22, 2011). 

137 Id. 

138 Id. 

139CME Comment Letter at 8–9 (Feb. 22, 2011). 

140 Id. 

141ELX Comment Letter at 3 (Feb. 22, 2011). 

142 Id. at 4. 

143 Id. 

144 ICE Comment Letter at 15 (Feb. 22, 2011). 

145 Id. at 15. 

146 Id. 

147 KCBT Comment Letter at 3 (Feb. 22, 2011). 

148 Id. 

149MGEX Comment Letter at 3 (Feb. 22, 2011). 

150 Id. 

151Trading Technologies Comment Letter at 4 

(Jun. 3, 2011). The Commission recently addressed 

co-location fees in a separate proposed rulemaking 

for ‘‘Co-location/Proximity Hosting Services.’’ See 

notice of proposed rulemaking, 75 FR 33198, Jun. 

11, 2010. 

contract market.’’ In the Commission’s 

view, settled jurisdiction—established 

by a DCM prior to granting members 

and market participants access to its 

markets—is necessary to effectively 

investigate and sanction persons that 

violate DCM rules. In particular, a DCM 

should not be in the position of asking 

market participants to voluntarily 

submit to jurisdiction and cooperate in 

investigatory proceedings after a 

potential rule violation has been found. 

Similarly, market participants should be 

clear that their trading practices are 

subject to the rules of a DCM, including 

rules that require cooperation in 

investigatory and disciplinary 

processes. For the avoidance of doubt, 

the Commission notes that the scope of 

§ 38.151(a) is not limited to market 

participants with direct market access, 

or limited as otherwise suggested by 

CFE, ICE and NYSE Liffe. To the 

contrary, persons whose trades are 

intermediated, persons who are 

customers of member firms, and persons 

whose access to the exchange is granted 

by or through member firms are within 

the scope of § 38.151(a). 

The Commission notes commenters’ 

suggestion that a DCM’s ultimate 

recourse against non-members who fail 

to cooperate in investigations or 

disciplinary proceedings is to deny such 

non-members access to the exchange 

and, if appropriate, refer them to the 

Commission. The Commission confirms 

that denial of access and referral to the 

Commission are the appropriate steps 

for a DCM to take when a market 

participant fails to cooperate in an 

investigation or disciplinary 

proceedings. The Commission expects 

that DCMs will in fact follow these 

steps. However, the Commission does 

not agree that this absolves DCMs from 

their responsibility to establish 

jurisdiction over members and market 

participants as an initial condition of 

trading. Finally, the Commission 

recognizes that DCMs may need 

additional time to secure existing 

market participants’ agreements to 

jurisdiction. Accordingly, the 

Commission is granting DCMs up to 180 

days following the applicable effective 

date of the rules being adopted in this 

release to comply with the requirements 

of § 38.151(a) with respect to existing 

members and market participants. Each 

DCM may determine for itself how it 

will secure such agreements. For 

example, a DCM could utilize its 

clearing firms to secure the agreement. 

With respect to new members and 

market participants, DCMs will be 

subject to § 38.151(a) on the effective 

date of the rules being adopted in this 

release. 

Sec. 38.151(b)—Impartial Access by 

Members, Market Participants and 

Independent Software Vendors 

Proposed § 38.151(b) required that a 

DCM provide its members, market 

participants and independent software 

vendors (‘‘ISVs’’) with impartial access 

to its markets and services, including: 

(1) access criteria that are impartial, 

transparent, and applied in a nondiscriminatory manner, and (2) 

comparable fee structures for members, 

market participants and ISVs, receiving 

equal access to, or services from, the 

DCM. In regards to the proposed rule’s 

comparable fee structure requirement, 

the DCM NPRM preamble discussion of 

proposed § 38.151(b) stated that ‘‘[f]ee 

structures may differ among categories if 

such fee structures are reasonably 

related to the cost of providing access or 

services to a particular category.’’134

Summary of Comments 

Chris Barnard supported this 

requirement, stating that the only reason 

for charging different fee structure 

would relate to differing costs of 

providing access or service to a 

particular category.135 CFE commented 

that the Commission’s application of the 

requirement to have comparable fee 

structures is too narrow.136 CFE stated 

that it is in a DCM’s best interest to set 

fees at levels that encourage 

participation on the DCM (rather than to 

exclude participants) because having 

greater participation leads to greater 

contract volume and thus more 

transaction revenue for the DCM.137 CFE 

agreed that a DCM should be able to 

have fee structures that differ among 

categories and did not believe that the 

only permitted differentiation should be 

based on cost.138

CME stated that the fee restrictions 

imposed by the proposed rule exceed 

the Commission’s authority under the 

Dodd-Frank Act, and questioned the 

basis for the proposed rule.139 In 

particular, CME argued that the agency 

lacks authority to set or limit fees 

charged by DCMs.140

ELX stated that exchanges must have 

some flexibility in implementing fees in 

order to allow new markets to 

effectively build a customer base.141

According to ELX, not all customers 

‘‘receive the same commission’’ from 

their FCM, IB or executing broker, and 

it is artificial to require exchanges to 

forego their flexibility in pricing to 

build a marketplace.142 ELX further 

stated that competition should not be 

rigidly regulated at the exchange level 

while other regulated entities doing 

business with customers are permitted 

to use competitive pricing.143

ICE noted that the discriminatory 

conduct prohibited by the proposed rule 

would be subject to review by the 

Commission as an ‘‘access denial’’ issue 

under part 9 of the Commission’s 

regulations.144 Moreover, ICE asserted 

that in its view, there has been no 

pattern of DCMs denying access to their 

markets that warrants the proposed 

rule.145 ICE added that the proposed 

rule should not require access 

requirements for traders who do not 

apply for, and are not granted access to, 

the trading platform by the DCM.146

KCBT objected to the Commission’s 

mandate of access and fee equality, 

stating that the mandate may not take 

into consideration all aspects of an 

exchange’s varying fee or access 

structures, including beneficial rate 

structures for high-volume traders or 

market maker programs.147

Consequently, KCBT urged the 

Commission to withdraw from its 

attempt to impose fee restrictions on 

DCMs.148

MGEX stated that in general, it is in 

the best interest of the DCM to have 

open and available markets and 

services.149 Therefore, MGEX argued 

that the proposed rule is unnecessary 

and infringes on the business judgment 

of the DCM.150

Trading Technologies stated that the 

Commission should modify its proposed 

impartial access rules to require that 

DCM co-location service fees be 

reasonably related to the cost of 

providing such services.151


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152See CEA section 5(d)(1)(A)(ii) (Core Principle 

1), 7 U.S.C. 7(d)(1). 

153CEA section 5(d)(2)(A)(i) (Core Principle 2), 7 

U.S.C. 7(d)(2). 

154CFE Comment Letter at 2 (Feb. 22, 2011); ICE 

Comment Letter at 14 (Feb. 22, 2011); NYSE Liffe 

Comment Letter at 11 (Feb. 22, 2011). 

155Section 747 of the Dodd-Frank Act amended 

section 4c(a) of the CEA, 7 U.S.C. 6c(a), by adding 

three disruptive practices which make it: unlawful 

for any person to engage in any trading, practice, 

or conduct on or subject to the rules of a registered 

entity that— 

(A) Violate bids or offers; 

(B) Demonstrates intentional or reckless disregard 

for the orderly execution of transactions during the 

closing period; or 

(C) Is, is of the character of, or is commonly 

known as the trade as ‘spoofing’ (bidding or offering 

with the intent to cancel the bid or offer before 

execution). 

156CME Comment Letter at 17 (Feb. 22, 2011) 

(CME also argued that the proposed regulation was 

superfluous given that Core Principle 12 already 

requires a DCM to establish and enforce rules to 

protect markets and market participants from 

abusive practices); MGEX Comment Letter at 3 (Feb. 

22, 2011). 

157CME Comment Letter at 17 (Feb. 22, 2011). 

158 Id. at 17–18. 

Discussion 

The Commission is adopting the rule 

as proposed, with the modifications and 

clarifications described below. 

The Commission believes that the 

proposed rule falls within the 

Commission’s authority under the 

Dodd-Frank Act. As an initial matter, 

Congress, under the Dodd-Frank Act, 

expressly authorized the Commission to 

promulgate rules implementing 

requirements for DCMs, including 

access requirements.152 Moreover, the 

statutory language of Core Principle 2 

expressly requires that DCMs ‘‘establish, 

monitor and enforce compliance with 

the rules of the contract market, 

including: (1) Access 

requirements[.]’’ 153 Though the CEA 

does not specify that DCMs provide 

‘‘impartial’’ access, the Commission 

believes that a reasonable reading of the 

CEA is that it permits rules that would 

promote impartial access. 

The Commission has considered 

comments that claimed that the rule is 

unnecessary, and believes that impartial 

access rules are necessary in order to 

prevent the use of discriminatory access 

requirements as a competitive tool 

against certain participants. In 

particular, access to a DCM should be 

based on the financial and operational 

soundness of a participant, not on 

factors that could bar access and result 

in discriminatory access or act as a 

barrier to entry. Any participant should 

be able to demonstrate financial 

soundness by showing either that it is 

a clearing member of a DCO that clears 

products traded on that DCM, or that it 

has clearing arrangements in place with 

such a clearing member. Furthermore, 

granting impartial access to participants 

that satisfy a DCM’s access requirements 

will likely enhance the DCM’s liquidity 

and the overall transparency of the 

swaps and futures markets. 

In regards to comments pertaining to 

the proposed rule’s treatment of fees, 

the Commission believes that 

commenters have misinterpreted the 

proposed requirement for comparable 

fee structures for categories of market 

participants receiving equal access to 

the DCM. The requirement in proposed 

§ 38.151(b) neither sets nor limits fees 

charged by DCMs. Rather, it states only 

that the DCM set non-discriminatory fee 

classes for those receiving access to the 

DCM as a way to implement the 

requirement of impartial access to 

DCMs. DCMs may establish different 

categories of market participants, but 

may not discriminate within a particular 

category. Accordingly, contrary to 

CME’s comment claiming that the fee 

restrictions imposed by the proposed 

rule exceed the Commission’s authority 

under the Dodd-Frank Act, the rule does 

not set or impose fees on DCMs. 

To clarify the DCM NPRM preamble 

discussion of the proposed rule’s fee 

requirement, and in response to CFE 

and KCBT’s comment that a DCM 

should be able to differentiate among 

categories by using factors other than 

cost, the Commission notes that when a 

DCM determines its fee structure, it may 

consider other factors in addition to the 

cost of providing a member, market 

participant or ISV with access. The 

proposed requirement that DCMs have a 

comparable fee structure for categories 

of market participants was not designed 

to be a rigid requirement that fails to 

take into account legitimate business 

justifications for offering different fees 

to different categories of entities seeking 

access. The Commission recognizes that 

DCMs may also consider services they 

receive from members, market 

participants or ISVs (in addition to 

costs) when determining their fee 

structure. Market making is an example 

of one type of service that could merit 

a fee discount. 

To address comments submitted in 

connection with proposed § 38.151(a) 

pertaining to the uncertainty of the term 

‘‘market participant,’’ the Commission is 

replacing the term ‘‘market participant’’ 

in proposed § 38.151(b) with the phrase 

‘‘persons with trading privileges.’’ 

The Commission is adopting the 

remainder of the rule as proposed. 

Sec. 38.151(c)—Limitations on Access 

Proposed § 38.151(c) required a DCM 

to establish and impartially enforce 

rules governing any decision by the 

DCM to deny, suspend, or permanently 

bar a member’s or market participant’s 

access to the contract market. Any 

decision by a DCM to deny, suspend, or 

permanently bar a member’s or market 

participant’s access to the DCM must be 

impartial and applied in a nondiscriminatory manner. 

Summary of Comments 

CFE, ICE, and NYSE Liffe commented 

on the uncertainty of the term ‘‘market 

participant’’ as used in paragraphs (a), 

(b), and (c) of proposed § 38.151.154

Discussion 

To address comments pertaining to 

the uncertainty of the term ‘‘market 

participant,’’ the Commission is 

replacing the term ‘‘market participant’’ 

in proposed § 38.151(c) with the phrase 

‘‘persons with trading privileges.’’ 

iii. § 38.152—Abusive Trading Practices 

Prohibited 

As proposed, § 38.152 required a DCM 

to prohibit the following abusive trading 

practices: front-running, wash trading, 

pre-arranged trading, fraudulent trading, 

money passes, and any other trading 

practices that the DCM deems to be 

abusive. Additionally, a DCM 

permitting intermediation would be 

required to prohibit additional trading 

practices, including trading ahead of 

customer orders, trading against 

customer orders, accommodation 

trading, and improper cross-trading. The 

proposal also required a DCM to 

prohibit any other manipulative or 

disruptive trading practices prohibited 

by the Act or by the Commission 

pursuant to regulation.155

Summary of Comments 

CME and MGEX stated that the 

proposed rule is too vague because it 

does not specifically define the 

enumerated prohibited trade 

practices.156 CME also stated that DCMs 

should have reasonable discretion to 

establish rules appropriate to their 

markets that are consistent with the 

CEA and that satisfy the core 

principles.157 CME additionally 

commented that prearranged trading, 

which is identified in the proposed rule 

as a prohibited trade practice, may be 

permissible at DCMs that allow for 

block trading, exchange for related 

position transactions, and pre-execution 

communications, subject to specified 

conditions.158

Chris Barnard commented that the 

proposed rule refers to the prohibition 

of ‘‘any other manipulative or disruptive 

trading practices prohibited by the Act 


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159Barnard Comment Letter at 3 (May 20, 2011). 

160Better Markets Comment Letter at 5 (Feb. 22, 

2011). 

161 Id. at 5–8. 

162See e.g., CME Rule 534 (Wash Trades 

Prohibited), and MGEX Rule 743.00 

(Accommodation or Wash Trades Forbidden). 

163As noted in the DCM NPRM, proposed 

regulation 38.153 was based on the former 

application guidance for Core Principle 2. 

164CFE Comment Letter at 2 (Feb. 2, 2011). 

165 Id. 

166CME Comment Letter at 18 (Feb. 22, 2011). 

167 Id. 

168 Id. at 80580. 

169 75 FR 80572, 80612, Dec. 22, 2010. 

or by the Commission,’’ which is 

important in order to cover new 

disruptive practices as they emerge, 

including spoofing.159 Better Markets 

commented that it is unclear whether 

any of the practices associated with high 

frequency trading will be prohibited by 

the Commission.160 Better Markets 

recommended that the Commission 

expand its list of prohibited trade 

practices to include exploiting a large 

quantity or block trade, price spraying, 

rebate harvesting, and layering the 

market, as all four of those practices 

involve fraudulent trading.161

Discussion 

The Commission is adopting § 38.152 

as proposed, subject to the modification 

described below. 

In response to CME and MGEX’s 

concerns regarding the perceived 

vagueness of the enumerated trading 

practices, the Commission notes that the 

definitions of the respective abusive 

trading practices are commonly known 

within the industry. Moreover, the 

enumerated practices in the proposed 

rule are commonly prohibited within 

the industry and are typically already 

prohibited in DCM rulebooks.162

Although the Commission believes, as 

noted by CME, that a DCM should have 

reasonable discretion to establish rules 

for their markets, the Commission 

believes that, at a minimum, a DCM 

must prohibit the abusive trading 

practices identified in the rule. Indeed, 

in the RERs conducted by Commission 

staff to examine DCMs’ core principle 

compliance, Commission staff has found 

that it is essential for a DCM to be able 

to demonstrate the capacity to detect, 

investigate, and enforce the trading 

violations prohibited under the rule. 

Consistent with CME’s comments on 

this issue, the Commission clarifies that 

in certain limited circumstances, as 

provided under the CEA and the 

Commission regulations, pre-arranged 

trading, including block trading and 

exchange for related position 

transactions, are permissible at DCMs. 

Accordingly, the Commission is 

amending proposed § 38.152 to clarify 

that a DCM must prohibit pre-arranged 

trading except as otherwise permitted in 

part 38 of this chapter. The Commission 

confirms that pre-execution 

communications are permissible if 

allowed by a DCM’s rules that have been 

certified to or approved by the 

Commission. 

In response to Chris Barnard’s 

comment about the inclusion of 

‘‘spoofing’’ as a prohibited trade 

practice, the Commission notes that 

section 747 of the Dodd-Frank Act 

amended section 4c(a) of the CEA and 

includes spoofing as a disruptive 

trading practice. In the final rule, DCMs 

are required to prohibit any other 

manipulative or disruptive trading 

practices prohibited by the Act. 

Additionally, the Commission notes that 

Better Markets’ comments regarding 

Core Principle 2 and high frequency 

trading are addressed in the context of 

Core Principle 4. 

iv. § 38.153—Capacity To Detect and 

Investigate Rule Violations 

Proposed § 38.153 required that a 

DCM have arrangements and resources 

for effective rule enforcement.163 This 

included the authority to collect 

information and examine books and 

records of members and market 

participants. Additionally, the proposed 

rule required a DCM to have, in addition 

to appropriate resources for trade 

practice surveillance programs, 

appropriate resources to enforce all of 

its rules. 

Summary of Comments 

CFE requested that the Commission 

clarify the term ‘‘market participant.’’ 164

CFE claimed that if the term ‘‘market 

participant’’ were to be interpreted to 

apply to all customers and not just those 

customers with direct electronic access 

to the DCM, then the rule would greatly 

expand a DCM’s regulatory 

responsibilities over participants with 

whom it has no direct relationship or 

connection.165 CFE further asserted that 

the rule would greatly increase costs for 

the DCM and that it would be very 

difficult for a DCM to undertake the 

same examination responsibilities for 

customers that do not have a direct 

relationship with the DCM that are 

applicable to a DCM member. 

CME stated that the proposed rule 

appears to imply that the entire class of 

non-member, non-registered market 

participants will be subject to the 

panoply of recordkeeping requirements 

currently applicable only to members, 

registrants, and direct access clients of 

CME.166 Additionally, CME commented 

that the proposed rule does not detail 

which books, records and information 

the DCM must be able to obtain from 

non-member market participants.167

Discussion 

The Commission is adopting this 

provision as proposed, subject to the 

modification described below. 

The Commission is cognizant that a 

broad interpretation of the term ‘‘market 

participant’’ could significantly increase 

the regulatory responsibilities for DCMs. 

As noted above, the use of ‘‘market 

participant’’ may be interpreted to 

capture a wider range of persons than 

the Commission intended. Therefore, in 

response to the commenters’ concerns, 

the Commission is replacing the term 

‘‘market participant’’ with ‘‘persons 

under investigation’’ in the final rule. 

Thus, a DCM must have the authority to 

collect books and records from its 

members, and from any persons under 

investigation, for effective enforcement 

of its rules. The books and records 

collected by the DCM should encompass 

all information and documents that are 

necessary to detect and prosecute rule 

violations. 

v. § 38.154—Regulatory Services 

Provided by a Third Party 

As the Commission stated in the DCM 

NPRM, the CEA ‘‘provides that a DCM 

may comply with applicable core 

principles by delegating relevant 

functions to a registered futures 

association or another registered entity’’ 

(collectively, a ‘‘regulatory service 

provider’’).168 Proposed § 38.154(a) 

required that a DCM that contracts with 

a regulatory service provider ensure that 

its regulatory service provider has 

sufficient capacity and resources to 

provide timely and effective regulatory 

services. The proposed rule also made 

clear that a DCM ‘‘will at all times 

remain responsible for the performance 

of any regulatory services received, for 

compliance with the [DCM’s] 

obligations under the CEA and 

Commission regulations, and for the 

regulatory service provider’s 

performance on its behalf.’’ 169

Proposed § 38.154(b) required that a 

DCM maintain adequate compliance 

staff to supervise any services 

performed by a regulatory service 

provider. The proposed rule also 

required that the DCM hold regular 

meetings with its regulatory service 

provider to discuss current work and 

other matters of regulatory concern. The 

DCM must also conduct periodic 

reviews of the adequacy and 


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170MGEX Comment Letter at 3 (Feb. 22, 2011); 

KCBT Comment Letter at 3 (Feb. 22, 2011); CME 

Comment Letter at 19 (Feb. 22, 2011). 

171MGEX Comment Letter at 3 (Feb. 22, 2011). 

172 KCBT Comment Letter at 3 (Feb. 22, 2011). 

173 Id. 

174CME Comment Letter at 18–19 (Feb. 22, 2011). 

175 Id. 

176CME Comment Letter at 19 (Feb. 22, 2011). 

177 Id. 

178 Id. 

179CME Comment Letter at 19 (Feb. 22, 2011); 

KCBT Comment Letter at 3 (Feb. 22, 2011). 

180 Id. 

181NYSE Liffe Comment Letter at 9 (Feb. 22, 

2011). 

182 Id. 

183 Id. 

184 Id. 

185 Id. at 10. 186See 66 FR 42256, 42266, Aug. 10, 2001. 

effectiveness of services provided on its 

behalf. 

Proposed § 38.154(c) required a DCM 

that utilizes a regulatory service 

provider to retain exclusive authority 

over certain areas, including the 

cancellation of trades, issuance of 

disciplinary charges against members or 

market participants, and denials of 

access to the trading platform for 

disciplinary reasons. While the 

proposed rule permitted a DCM to retain 

exclusive authority in other areas of its 

choosing, it required that the decision to 

open an investigation into a possible 

rule violation reside with the regulatory 

service provider. 

Summary of Comments 

MGEX, KCBT and CME asserted that 

the proposed rule was overly 

burdensome or unnecessary.170 MGEX 

expressed general opposition to 

proposed § 38.154, stating that if a 

service has been delegated to another 

registered entity pursuant to a 

Commission-approved agreement, then 

this ‘‘should be sufficient and no other 

formal agreement is necessary.’’ 171

KCBT contended that proposed § 38.154 

is overly burdensome and duplicative, 

particularly when a DCM contracts with 

a regulatory service provider that is also 

a DCM required to comply with the 

same core principles.172 KCBT noted 

that it currently is a party to a services 

agreement with another DCM and that it 

will be costly and unnecessary to 

perform periodic reviews and hold 

regular meetings with this regulatory 

service provider.173

Similarly, CME contended that the 

proposed rule was overly prescriptive 

and suggested that the rules would 

better serve as guidance and acceptable 

practices.174 In particular, CME pointed 

to the requirements that a DCM conduct 

periodic reviews of the services 

provided and hold regular meetings 

with the regulatory service provider to 

discuss ongoing investigations, trading 

patterns, market participants, and any 

other matters of regulatory concern.175

CME stated that ‘‘[w]hile it may well be 

that it is constructive for the DCM to 

hold regular meetings with its service 

provider and ‘discuss market 

participants,’ the core principle should 

stand on its own and the DCM should 

have the flexibility to determine how 

best to demonstrate compliance with the 

core principle.’’ 176

CME further objected to the 

requirement that exclusive authority to 

open investigations remain with the 

regulatory service provider.177 While it 

argued that the regulatory service 

provider ‘‘should have the 

independence to open an investigation 

at its discretion, [CME] sees no reason 

why the DCM cannot also direct the 

regulatory service provider to open an 

investigation.’’ 178 Additionally, CME 

and KCBT both objected to the 

requirement in proposed § 38.154(c) that 

all decisions concerning the 

cancellation of trades remain within the 

exclusive authority of the DCM.179 CME 

and KCBT argued that a DCM may be 

better served by granting such authority 

to a regulatory service provider.180

NYSE Liffe expressed support for the 

idea that a DCM will remain ultimately 

responsible for meeting its regulatory 

obligations even when it contracts with 

a regulatory service provider.181

However, NYSE Liffe requested 

clarification regarding what authority 

must be maintained by a DCM when it 

uses a third-party regulatory service 

provider.182 NYSE Liffe pointed to the 

requirement in proposed § 38.154(c) that 

a DCM must retain ‘‘exclusive 

authority’’ in certain areas and 

requested further clarification as to the 

definition of ‘‘exclusive authority.’’ 183

In particular, NYSE Liffe requested 

guidance as to whether a DCM retains 

‘‘exclusive authority’’ if its regulatory 

service provider prepares and presents 

an investigation report to a DCM’s 

review panel, or assists DCM staff in 

presenting the matter, as long as the 

ultimate decision to bring a disciplinary 

action remains with the DCM’s review 

panel.184 Additionally, NYSE Liffe 

sought guidance as to whether a 

regulatory service provider would be 

permitted to ‘‘prosecute a disciplinary 

proceeding * * * so long as the 

ultimate decision to impose a penalty 

on a respondent, including a possible 

denial of access to the trading platform, 

resides with a hearing panel formed 

pursuant to the DCM’s rules?’’ 185

Discussion 

The Commission is adopting 

§ 38.154(a) and (b), as proposed, and is 

adopting § 38.154(c) with certain 

modifications. 

In the past, the Commission has 

described acceptable ‘‘contracting’’ and 

‘‘delegating’’ arrangements for the 

performance of core principle functions 

by third-parties.186 The Commission 

proposed § 38.154 to clarify its previous 

guidance on such arrangements. In 

particular, the Commission does not 

draw substantive distinctions between 

‘‘contracting’’ and ‘‘delegating’’ 

arrangements as they pertain to core 

principle compliance functions. 

Regardless of the term by which a DCM 

may refer to its utilization of a thirdparty, the Commission believes that the 

same regulatory requirements are 

applicable for purposes of part 38. For 

purposes of part 38, the Commission 

refers to such arrangements as 

‘‘delegation.’’ The Commission also 

notes that DCMs must remain 

responsible for carrying out any 

function delegated to a third party, and 

that DCMs must ensure that the services 

received will enable the DCM to remain 

in compliance with the CEA’s 

requirements. The Commission believes 

that proposed § 38.154 effectively 

establishes a system for administering 

regulatory services provided to DCMs by 

third party regulatory service providers. 

The Commission is of the view that the 

rule generally provides an appropriate 

balance between flexibility and ensuring 

that a DCM properly oversees the 

actions of its regulatory service provider 

to ensure accountability and effective 

performance. 

The Commission acknowledges 

comments asserting that the rule is 

overly burdensome or unnecessary but 

believes that a DCM that elects to use a 

regulatory service provider must 

properly supervise the quality and 

effectiveness of the regulatory services 

provided on its behalf. The Commission 

believes that proper supervision will 

require that a DCM have complete and 

timely knowledge of relevant work 

performed by the DCM’s regulatory 

service provider on its behalf. The 

Commission also believes that such 

knowledge can only be acquired 

through the periodic reviews and 

regular meetings required under 

proposed § 38.154. 

Additionally, the Commission 

acknowledges CME and KCBT’s 

comments regarding the cancellation of 

trades but believes that the potential 

economic consequences of trade 


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187 DCM NPRM at 80580. 

188NYSE Liffe Comment Letter at 10 (Feb. 22, 

2011). See also DCM NPRM at 80612. 

189NYSE Comment Letter at 10 (Feb. 22, 2011). 

190 Id. 

191Barnard Comment Letter at 3 (May 20, 2011). 

192CME Comment Letter at 20 (Feb. 22, 2011). 

193 Id. 

194 Id. 

cancellations on a DCM’s members and 

market participants are such that a DCM 

should retain exclusive authority over 

the cancellation of trades. 

The Commission has considered 

CME’s comment regarding the 

importance of allowing a DCM to open 

investigations into possible rule 

violations. The Commission believes 

that a DCM should have the ability to 

request that its regulatory service 

provider conduct an investigation on a 

market participant or to conduct such 

an investigation on its own. 

Consequently, the Commission is 

modifying § 38.154(c) by removing the 

requirement that the decision to open an 

investigation into possible rule 

violations reside exclusively with the 

regulatory service provider. 

Lastly, in response to the request by 

NYSE Liffe for additional guidance 

regarding whether certain regulatory 

decisions must be retained by a DCM, 

the Commission believes that a DCM 

would retain ‘‘exclusive authority’’ 

under § 38.154(c) if it permits a 

regulatory service provider to present, 

or assist DCM staff to present, an 

investigation report or evidence to a 

disciplinary panel as long as the 

decisions to bring a disciplinary action 

and impose a disciplinary penalty on a 

respondent, including the decision to 

deny access, remains with the DCM or 

the DCM’s disciplinary bodies. 

vi. § 38.155—Compliance Staff and 

Resources 

In proposed § 38.155(a), the 

Commission required that a DCM 

establish and maintain sufficient 

compliance staff and resources to 

conduct a number of enumerated tasks, 

such as audit trail reviews, trade 

practice surveillance, market 

surveillance, and real time market 

monitoring. The proposed rule also 

required that the DCM have sufficient 

compliance staff to address unusual 

market or trading events and to conduct 

and complete any investigations in a 

timely manner. 

In proposed § 38.155(b), the 

Commission required a DCM to monitor 

the size and workload of its compliance 

staff annually to ensure that staff and 

resources are adequate. In the preamble 

to the proposed rule, the Commission 

clarified that it was not proposing that 

compliance staff size be determined 

based on a specific formula. Rather, the 

Commission intended ‘‘to leave to the 

discretion of each individual DCM to 

determine the size of the staff it needs 

to effectively perform its self-regulatory 

responsibilities.’’ 187 In making this 

determination, the proposed rule also 

set forth certain factors that should be 

considered in determining the 

appropriate level of compliance 

resources and staff. 

Summary of Comments 

NYSE Liffe noted that in proposed 

§ 38.154(b), ‘‘a DCM that contracts with 

a regulatory service provider must still 

maintain sufficient compliance 

staff.’’ 188 NYSE Liffe suggested that 

§ 38.155 take into consideration whether 

a DCM has contracted with a regulatory 

service provider in determining the 

appropriate level of compliance staff 

and resources.189 NYSE Liffe also 

requested that the Commission ‘‘make 

clear that a DCM meets its requirement 

to have sufficient compliance staff to 

address unusual market or trading 

events where its regulatory services 

provider has sufficient resources for 

addressing these unusual events.’’ 190

Chris Barnard requested that the 

Commission amend § 38.155 to require 

DCMs to have a chief compliance officer 

‘‘working within a job description, 

structures, rules and procedures that act 

to maintain its independence.’’ 191

Discussion 

The Commission believes that 

proposed § 38.155 effectively sets forth 

the requirement that DCMs must 

establish and maintain sufficient 

compliance staff to enforce compliance 

with its rules as required under Core 

Principle 2, and accordingly, the 

Commission is adopting § 38.155 as 

proposed. 

The Commission is of the view that 

having adequate staff to perform a 

DCM’s compliance and enforcement 

responsibilities is essential to the 

effectiveness of its self-regulatory 

programs, including market 

surveillance, audit trail, trade practice 

surveillance, and disciplinary programs. 

The Commission believes (as noted by 

NYSE Liffe) that the staff of a regulatory 

service provider may be taken into 

consideration when determining 

whether a DCM has sufficient 

compliance staff. However, the 

Commission notes that pursuant to 

§ 38.154(b), each DCM must still retain 

sufficient compliance staff to supervise 

the quality and effectiveness of any 

services provided by a regulatory 

service provider on its behalf. 

The Commission acknowledges Chris 

Barnard’s comment that a DCM should 

be required to designate a chief 

compliance officer but notes that the 

Dodd-Frank Act mandates that certain 

regulated entities, such as SEFs, swap 

data repositories, and derivatives 

clearing organizations, designate chief 

compliance officers. There is no explicit 

statutory requirement for DCMs. 

Therefore, the Commission does not 

believe it is appropriate to require DCMs 

to appoint a chief compliance officer. 

However, it is current industry practice 

for DCMs to designate an individual as 

chief regulatory officer, and it will be 

difficult for a DCM to meet the 

requirements of § 38.155 without a chief 

regulatory officer or similar individual 

to supervise its regulatory program, 

including any services rendered to the 

DCM by a regulatory service provider. 

vii. § 38.156—Automated Trade 

Surveillance System 

Proposed § 38.156 required a DCM to 

maintain an automated trade 

surveillance system capable of detecting 

and investigating potential trade 

practice violations. The automated trade 

surveillance would be required to 

maintain all data reflecting the details of 

each order entered into the trading 

system, including order modifications 

and cancellations, and data reflecting 

transactions executed on the DCM. The 

proposed rule required the automated 

surveillance system to process this data 

on a trade date plus one day basis (‘‘T+1 

basis’’). Additionally, according to the 

rule, the automated trade surveillance 

system would be required to provide 

users with the ability to compute, retain 

and compare trading statistics; compute 

profit and loss; and reconstruct the 

sequence of trading activity. 

Summary of Comments 

CME commented that an exchange 

does not capture order details, 

modifications or cancellations for openoutcry orders in an automated manner 

unless such orders are transmitted to the 

floor via the exchange’s order routing 

system, or with respect to privately 

negotiated transactions.192 CME asserted 

that it has been unable to design a 

system that automates the actual 

investigation of potential trade practice 

violations, and that it would not be able 

to do so within 60 days of the final rules 

taking effect.193 CME further argued that 

it is unclear whether the regulation 

applies to electronic trading or open 

outcry trading.194 CME challenged the 

use of what it deems as ‘‘broad and 

ambiguous’’ terms to describe 


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195 Id. 

196 Id. 

197MGEX Comment Letter at 4 (Feb. 22, 2011). 

198 Id. 

199NYSE Liffe Comment Letter at 14 (Feb. 22, 

2011). 

200Better Markets Comment Letter at 9 (Feb. 22, 

2011). 

201See DCM NPRM at 80581. 

202CME Comment Letter at 20–21 (Feb. 22, 2011). 

203 Id. 

204CME Comment Letter at 20–21 (Feb. 22, 2011) 

(citing DCM NPRM at 80613, with emphasis added 

by CME). 

205Better Markets Comment Letter at 9 (Feb. 22, 

2011). 

206 Id. 

capabilities that a DCM’s automated 

trade surveillance system is required to 

have, including the capability to detect 

and flag specific trade execution 

patterns and anomalies; compute, retain 

and compare trading statistics; and 

compute trade gains, losses, and futuresequivalent positions.195 CME 

recommended that the Commission 

reconsider the requirements of this 

regulation and consider a more flexible, 

core principles-based approach.196

MGEX agreed with the proposed 

requirement that a DCM’s automated 

surveillance system must maintain all 

trade data and order data on a T+1 basis, 

but opposed the proposed requirement 

that a DCM compute, retain and 

compare trading statistics.197 MGEX 

contended that this information is not a 

trade data item and requested that this 

requirement be removed from the final 

rule.198

NYSE Liffe commented that it would 

take significant time to determine the 

types of changes to existing automated 

systems required to implement the 

proposed rules, including § 38.156, and 

recommended that the Commission 

provide existing DCMs with at least 18 

months from the effective date of the 

rule to certify compliance with the final 

regulations.199

Better Markets commented that an 

automated trade surveillance system, 

which records orders, modifications of 

orders, and cancellations, must allow 

for such data to be time-stamped at 

intervals consistent with the capabilities 

of high frequency traders that use the 

DCM’s systems to transact.200

Discussion 

The Commission is adopting 

proposed § 38.156, with one 

modification. 

The requirement that an automated 

trade surveillance system maintain all 

data reflecting the details of each order 

entered into the trading system is being 

moved to § 38.552 (Elements of an 

acceptable audit trail program). 

Specifically, the Commission believes 

that § 38.552(b) is the more logical place 

in the Commission’s rules to address 

this aspect of a DCM’s automated 

surveillance system because paragraph 

(b) specifies the requirements for a 

DCM’s audit trail program, including a 

history of all orders and trades. 

In response to CME’s comment 

regarding a system that automates the 

actual investigation, the Commission 

notes that CME has misinterpreted the 

proposed rule, as § 38.156 applies to a 

DCM’s automated surveillance system 

and not to the actual investigation 

which the Commission expects would 

be carried out by a DCM’s compliance 

staff with the assistance of automated 

surveillance tools. The Commission 

confirms that the speed and timing of 

capturing information through an 

automated trade surveillance system is 

different for open-outcry than for 

electronic trading, as CME stated in its 

comments; this is addressed in the 

discussion concerning § 38.552. 

In regards to CME’s comment 

pertaining to the breadth of the rule, 

while the Commission acknowledges 

that computing, retaining, and 

comparing trading statistics may not 

specifically be a trade data item, the 

Commission believes that these 

analytical tools are a necessary 

component of an effective trade 

surveillance system. The Commission 

notes that timing concerns raised by 

NYSE Liffe regarding compliance with 

the final rules are addressed above in 

the § 38.3 discussion. Additionally, the 

Commission notes that Better Markets’ 

comments regarding Core Principle 2 

and high frequency trading are 

addressed in the context of Core 

Principle 4. 

viii. § 38.157—Real-Time Market 

Monitoring 

Proposed § 38.157 codified existing 

practices at DCMs for real-time 

monitoring of electronic trading, and 

reflected the growth of electronic 

trading in the U.S. futures markets, as 

well as the Commission’s experience in 

designating new contract markets since 

passage of the CFMA.201 Proposed 

§ 38.157 required a DCM to conduct 

real-time market monitoring of all 

trading activity on its electronic trading 

platform to ensure orderly trading and 

identify market or system anomalies. 

The proposed rule further required a 

DCM to have the authority to cancel 

trades and adjust trade prices when 

necessary, and that any price 

adjustments or trade cancellations must 

be transparent to the market and subject 

to clear, fair and publicly-available 

standards. 

Summary of Comments 

In its comments, CME reiterated its 

belief that the proposed rules are overly 

prescriptive.202 CME argued that the 

standards set in the proposed rule are 

unreasonably high.203 CME pointed to 

the requirement that a DCM ‘‘conduct 

real-time market monitoring of all 

trading activity on its electronic trading 

platform(s) to ensure orderly trading 

and identify any market or system 

anomalies’’ and argued that it is not 

clear whether any DCM could comply 

with these standards.204

Better Markets stated that when 

conducting real-time market monitoring, 

DCMs should have the capability to 

monitor high frequency trading.205

Better Markets argued that this process 

should include ‘‘monitoring of orders 

and cancellations, each time-stamped at 

intervals consistent with the capabilities 

of [high frequency traders].’’ 206

Discussion 

The Commission is adopting § 38.157, 

as proposed, subject to the modification 

described below. 

In regard to the CME’s comment, the 

Commission believes that § 38.157, as 

proposed, enables a DCM to effectively 

monitor its electronic markets and 

grants a DCM the flexibility to 

determine the best way to conduct realtime market monitoring. The 

Commission also believes that the 

proposed rule correctly mandates that a 

DCM conduct real-time market 

monitoring of all trading activity that 

occurs on its electronic trading 

platform(s) in order to detect disorderly 

trading and market or system anomalies, 

and take appropriate regulatory action. 

The Commission recognizes that realtime market monitoring cannot ensure 

orderly trading at all times, but it should 

be able to identify disorderly trading 

when it occurs. Therefore, the 

Commission is modifying the first 

sentence of proposed § 38.157 to remove 

the requirement to ‘‘ensure orderly 

trading’’ and instead state that ‘‘a 

designated contract market must 

conduct real-time market monitoring of 

all trading activity on its electronic 

trading platform(s) to identify disorderly 

trading and any market or system 

anomalies.’’ In response to Better 

Markets’ comments, the Commission 

believes that § 38.157 is sufficient to 

establish a DCM’s obligations with 

respect to real-time market monitoring 

of all trading on a DCM’s electronic 

trading platform, including high 

frequency trading. The Commission will 

continue to assess the impact of high 


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207CME Comment Letter at 21 (Feb. 22, 2011). 

208 Id. 

209 Id. 

210 Id. 

211 Id. at 22. 

212 Id. 

213 Id. 

214CME Comment Letter at 21–22 (Feb. 22, 2011); 

ICE Comment Letter at 15 (Feb. 22, 2011). 

215CME Comment Letter at 35 (Feb. 22, 2011). 

216 Id. 

217 ICE Comment Letter at 15 (Feb. 22, 2011). 

frequency trading on the markets 

regulated by the Commission. 

The Commission believes that 

§ 38.157 effectively establishes a DCM’s 

obligations with respect to real-time 

market monitoring of trading activity on 

its electronic trading platforms. 

Accordingly, the Commission is 

adopting § 38.157 as modified above. 

ix. § 38.158—Investigations and 

Investigation Reports 

Sec. 38.158(a)—Procedures 

Proposed paragraph (a) of § 38.158 

required that a DCM have procedures to 

conduct investigations of possible rule 

violations. The proposed rule required 

that an investigation must be 

commenced upon Commission staff’s 

request or upon discovery of 

information by the DCM indicating a 

possible basis for finding that a 

violation has occurred or will occur. 

Summary of Comments 

CME argued that the proposed rule 

diminishes any discretion on behalf of 

DCMs to determine the matters that 

warrant a formal investigation, because 

at the time of discovery or upon receipt 

of information, and before a review 

occurs, there always may be a possible 

basis that a violation has occurred or 

will occur.207 CME agreed that written 

referrals from the Commission, law 

enforcement authorities, other 

regulatory agencies, or other SROs 

should result in a formal investigation 

in every instance.208 However, CME 

contended that the DCM should have 

reasonable discretion to determine how 

it responds to complaints and other 

referrals, including the discretion to 

follow-up with a less formal inquiry in 

certain situations.209

Discussion 

The Commission is adopting 

§ 38.158(a) as proposed, subject to a 

minor modification. The Commission 

confirms that in certain circumstances a 

DCM should have reasonable discretion 

regarding whether or not to open an 

investigation, as noted by CME. 

Consequently, the Commission is 

revising paragraph (a) of § 38.158 to 

reflect that an investigation must be 

commenced upon receipt of a request 

from Commission staff or upon the 

discovery or receipt of information by 

the DCM that indicates a ‘‘reasonable 

basis’’ for finding that a violation ‘‘may 

have’’ occurred or will occur. 

Sec. 38.158(b)—Timeliness 

Proposed § 38.158(b) required that an 

investigation be completed in a timely 

manner, which is defined in the 

proposed rule as 12 months after an 

investigation is opened, absent 

mitigating factors. The mitigating factors 

identified in the proposed rule included 

the complexity of the investigation, the 

number of firms or individuals involved 

as potential wrongdoers, the number of 

potential violations to be investigated, 

and the volume of documents and data 

to be examined by compliance staff. 

Summary of Comments 

CME expressed general support for 

the proposed rule, but recommended 

that the list of possible mitigating 

circumstances also include the domicile 

of the subjects and cooperative 

enforcement matters with the 

Commission, since the DCM may not 

have independent control over the pace 

of the investigation.210 CME also 

requested that the Commission make 

clear that the time period necessary to 

prosecute an investigation once it is 

referred for enforcement action is 

independent of the 12-month period 

referenced in the regulation.211

Discussion 

The Commission is adopting the rule 

as proposed. 

The Commission believes that a 

12-month period to complete an 

investigation is appropriate and timely. 

Although the Commission believes, as 

noted by CME, that additional 

mitigating factors could justifiably 

contribute to a delay in completing an 

investigation within a 12-month period 

the Commission notes that the factors 

included in the proposed rule were not 

intended to be an exhaustive list of 

mitigating circumstances. In the 

Commission’s view, the factors listed in 

the proposed rule represent some of the 

more common examples that could 

delay completing an investigation 

within the 12-month period. The 

Commission also confirms that § 38.158 

only applies to the investigation phase 

of a matter. 

Sec. 38.158(c)—Investigation Reports 

When a Reasonable Basis Exists for 

Finding a Violation 

Proposed § 38.158(c) sets forth the 

elements and information that must be 

included in an investigation report 

when there is a reasonable basis for 

finding a rule violation, including: (i) 

The reason for the investigation; (ii) a 

summary of the complaint, if any; (iii) 

the relevant facts; (iv) compliance staff’s 

analysis and conclusions; (v) a 

recommendation as to whether 

disciplinary action should be pursued; 

and (vi) the member or market 

participant’s disciplinary history. 

Summary of Comments 

CME commented that rule violations 

can range from very minor to egregious 

and not every rule violation merits 

formal disciplinary action.212 CME 

argued that minor transgressions can 

effectively be addressed by the issuance 

of a warning letter by CME compliance 

staff, and that the Commission should 

amend the rule accordingly to account 

for this possibility.213

CME and ICE opposed the 

requirement that a DCM include a 

respondent’s disciplinary history in the 

investigative report that is submitted to 

a review panel.214 CME commented that 

a respondent’s disciplinary history is 

not relevant to the consideration of 

whether that respondent has committed 

a further violation of the DCM’s rules.215

However, CME noted that an exception 

would be where the prior disciplinary 

offense is an element of proof for the 

rule violations for which compliance 

staff is asking the review panel to issue 

charges, such as a violation of a 

previously issued ‘‘cease and desist’’ 

order.216 ICE stated that unless the rule 

violations that are the subject of the 

investigative report involve pervasive 

recordkeeping violations, only 

substantive violations in the 

respondent’s history would be relevant 

to the review panel’s deliberations.217

Discussion 

The Commission is adopting the rule 

as proposed, subject to one modification 

to address the comments from CME and 

ICE. 

The Commission confirms, as CME 

noted, that ‘‘minor transgressions’’ can 

be addressed by a DCM’s compliance 

staff with the issuance of warning letters 

and this is discussed below in 

§ 38.158(e). However, as further 

discussed below in §§ 38.158(d) and (e), 

no more than one warning letter may be 

issued to the same person or entity 

found to have committed the same rule 

violation within a rolling 12-month 

period. 

The Commission also agrees with 

CME and ICE that a respondent’s 

disciplinary history is not always 


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218CME Comment Letter at 22 (Feb. 22, 2011). 

219CME Comment Letter at 22–23 (Feb. 22, 2011); 

MGEX Comment Letter at 4 (Feb. 22, 2011). 

220CME Comment Letter at 22 (Feb. 22, 2011). 

221 Id. 

222MGEX Comment Letter at 4 (Feb. 22, 2011). 

223 Id. 

224 Id. 

225For purposes of this rule, the Commission 

does not consider a ‘‘reminder letter’’ or such other 

similar letter to be any different than a warning 

letter. 

226See DCM NPRM at 80581. 

227See id. at 80581. 

228See 1998 Rule Enforcement Review of Kansas 

City Board of Trade; and Rule Enforcement Review 

of the Minneapolis Grain Exchange (Aug. 27, 2009). 

relevant to the consideration of whether 

a respondent has committed a further 

violation of a DCM’s rules. As a result, 

this requirement is being eliminated 

from the final rule. The Commission 

notes, however, that all disciplinary 

sanctions, including sanctions imposed 

pursuant to an accepted settlement 

offer, must take into account the 

respondent’s disciplinary history. 

Sec. 38.158(d)—Investigation Reports 

When No Reasonable Basis Exists for 

Finding a Violation 

Proposed § 38.158(d) sets forth the 

elements and information that must be 

included in an investigation report 

when it has been determined that no 

reasonable basis exists for finding a rule 

violation, including: (i) The reason the 

investigation was initiated; (ii) a 

summary of the complaint, if any; (iii) 

the relevant facts; and (iv) compliance 

staff’s analysis and conclusions. The 

proposed rule also required that if a 

DCM’s compliance staff recommends 

that a warning letter be issued, the 

investigation report must also include 

the potential wrongdoer’s disciplinary 

history. 

Summary of Comments 

CME recommended that the 

Commission amend the proposed rule to 

account for a DCM’s ability to close a 

case administratively and still issue a 

warning letter without disciplinary 

committee approval, as the CME Market 

Regulation Department currently has 

such authority.218

Discussion 

The Commission is adopting 

§ 38.158(d) as proposed, subject to one 

modification. 

The Commission is eliminating the 

provision in paragraph (d) that 

discussed the concept of warning letters 

because the Commission does not 

believe that a DCM would need to limit 

the number of warning letters that can 

be issued when a rule violation has not 

been found. For example, Commission 

staff has found in its RERs that some 

DCMs issue warning letters as 

reminders or for educational purposes. 

The Commission notes, however, that 

this modification does not impact the 

limitation on the number of warning 

letters that may be issued—by a 

disciplinary panel or by compliance 

staff—to the same person for the same 

violation in a rolling 12-month period 

when a rule violation is found to have 

been committed. 

Sec. 38.158(e)—Warning Letters 

Proposed § 38.158(e) provided that a 

DCM may authorize its compliance staff 

to issue a warning letter or to 

recommend that a disciplinary 

committee issue a warning letter. The 

proposed rule also provided that no 

more than one warning letter for the 

same potential violation may be issued 

to the same person or entity during a 

rolling 12-month period. 

Summary of Comments 

CME and MGEX opposed the 

requirement that a DCM may only issue 

one warning letter to the same person 

for the same rule violation in a rolling 

12-month period.219 CME stated that the 

rule is unduly prescriptive and fails to 

take into consideration important 

factors that are relevant to a DCM when 

evaluating potential sanctions in a 

disciplinary matter.220 CME stated that 

the DCM should have discretion to 

determine the appropriate sanctions in 

all cases.221 MGEX contended that the 

requirement will effectively prohibit a 

DCM from using warning letters as an 

educational tool or reminder.222

According to MGEX, the proposed rule 

forces DCMs to adopt summary fines 

and prevents them from pursuing minor 

infractions, which may lead to 

additional unintended consequences 

outside of the purpose of the DoddFrank Act.223 MGEX recommended that 

the Commission remove this 

requirement and provide the DCM more 

flexibility in determining the proper 

methodology for enforcing rules, 

regulations, and procedures.224

Discussion 

The Commission is adopting 

§ 38.158(e) with certain modifications, 

including to convert a portion of the 

rule to guidance. 

The Commission acknowledges the 

comments from CME and MGEX 

concerning the issuance of warning 

letters but believes that in order to 

ensure that warning letters serve as 

effective deterrents, and to preserve the 

value of disciplinary sanctions, the 

Commission believes that no more than 

one warning letter may be issued to the 

same person or entity found to have 

committed the same rule violation 

within a rolling 12-month period.225 As 

discussed in the DCM NPRM, while a 

warning letter may be appropriate for a 

first-time violation, the Commission 

does not believe that more than one 

warning letter in a rolling 12-month 

period for the same violation is ever 

appropriate.226 This provision will 

remain as a rule. A policy of issuing 

repeated warning letters, rather than 

issuing meaningful sanctions, to 

members and market participants who 

repeatedly violate the same or similar 

rules denigrates the effectiveness of a 

DCM’s rule enforcement program.227

Furthermore, the section of the 

proposed rule governing warning letters 

is consistent with what Commission 

staff has advised DCM applicants in the 

past and with recommendations made 

in prior RERs.228

The Commission notes that the final 

rule does not include the reference that 

a warning letter issued in accordance 

with this section is not a penalty or an 

indication that a finding of a violation 

has been made because paragraph (e) 

only addresses warning letters that are 

issued for a finding of a violation. Also, 

the provision requiring a copy of a 

warning letter issued by compliance 

staff to be included in the investigation 

report is being eliminated from the final 

rule because the Commission has 

determined that such a requirement is 

unnecessary. 

As noted above, the Commission 

believes that minor transgressions can 

be addressed by the issuance of a 

warning letter by a DCM’s compliance 

staff. Accordingly, in order to provide a 

DCM with flexibility in this regard, the 

Commission is moving this provision of 

the rule to the guidance section of Core 

Principle 2. The text of the guidance 

provides that the rules of a DCM may 

authorize compliance staff to issue a 

warning letter to a person or entity 

under investigation or to recommend 

that a disciplinary panel take such 

action. 

x. § 38.159—Ability To Obtain 

Information 

Proposed § 38.159 required a DCM to 

have the ability and authority to obtain 

any necessary information to perform 

any function required under proposed 

subpart C (Compliance with rules) of the 

Commission’s regulations. This would 

include the capacity to carry out any 

international information sharing 

agreements required by the 


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229 DCM NPRM at 80614. 

230CME Comment Letter at 15 (Feb. 22, 2011); 

KCBT Comment Letter at 3 (Feb. 22, 2012). 

231As noted in the DCM NPRM, this proposed 

language is virtually identical to the language found 

in the guidance for former Designation Criterion 8. 

232CME Comment Letter at 38 (Feb. 22, 2011). 

Proposed paragraph (b)(1)(i)(A) of appendix C 

provided guidance on how to estimate the 

deliverable supply of a commodity that underlies a 

futures contract. The estimated deliverable supply 

should reflect the amount of that commodity that 

can reasonably be expected to be readily available 

to long traders to take delivery and short traders to 

make delivery at the expiration of a futures 

contract. This information is used by Commission 

staff when considering a contract’s terms and 

conditions in determining whether a contract is 

readily susceptible to manipulation. DCM NPRM at 

80631. 

233CME Comment Letter at 38 (Feb. 22, 2011). 

234See proposed paragraph (b)(1)(i)(A), appendix 

C. DCM NPRM at 80631. 

Commission. Proposed § 38.159 also 

provided ‘‘that information sharing 

agreements can be established with 

other designated contract markets and 

swap execution facilities, or the 

Commission can act in conjunction with 

a DCM to carry out such information 

sharing.’’ 229

Summary of Comments 

CME and KCBT stated that a DCM 

should not be mandated to carry out 

international or other informational 

sharing agreements to which it is not a 

party and should not be compelled by 

Commission regulation to enter into 

agreements, particularly when such 

agreements contain terms determined by 

other parties, which conceivably could 

include terms or conditions unsuitable 

to a DCM or conditions that a DCM is 

unable to comply with.230

Discussion 

The Commission is adopting § 38.159 

as proposed. In response to CME and 

KCBT’s comments, § 38.159 clarifies 

and codifies the Core Principle 2 

requirement that a DCM have the ability 

and authority to obtain necessary 

information to perform its rule 

enforcement obligations. The core 

principle specifically requires that the 

rules of the DCM provide it with the 

ability and authority to perform any 

function described in the core principle, 

including capacity to carry out such 

international information sharing 

agreements, as the Commission may 

require. The rule provides that 

information sharing agreements can be 

established with other DCMs or SEFs, or 

that the Commission can act in 

conjunction with a DCM to carry out 

such information sharing.231 The 

Commission notes that the language of 

§ 38.159, including the language to 

which CME objects, is substantially 

similar to the language of Core Principle 

2. The Commission also notes that while 

the rule requires DCMs to have the 

capacity to carry out such information 

sharing agreements, as is required by the 

statute, the rule does not mandate or 

prescribe the specific terms of such 

agreements, and thus, DCMs would 

have the ability to collaborate on the 

terms of such agreements. The 

Commission believes that § 38.159 

appropriately implements the 

requirements of section 5(d)(2)(C) of the 

CEA and is adopting § 38.159 as 

proposed. 

xi. § 38.160—Additional Rules Required 

Proposed § 38.160 required a DCM to 

adopt and enforce any additional rules 

that it believes are necessary to comply 

with the requirements of this subpart C. 

The Commission has determined to 

codify proposed § 38.160 as guidance 

for Core Principle 2 in appendix B, 

rather than a rule, in order to provide 

DCMs with added flexibility in adopting 

rules that they believe are necessary to 

comply with this core principle. 

Consistent with this determination, the 

Commission is replacing proposed 

§ 38.160 with new § 38.160 (titled 

‘‘Additional sources for compliance’’) 

that simply permits DCMs to rely upon 

the guidance in appendix B of this part 

to demonstrate to the Commission 

compliance with § 38.150 of this part. 

3. Subpart D—Contracts Not Readily 

Subject To Manipulation 

The Dodd-Frank Act did not revise 

the statutory text of Core Principle 3 

(Contracts Not Readily Subject to 

Manipulation). DCMs historically have 

complied with the requirements of Core 

Principle 3 through the guidance 

provided in Guideline No. 1, which was 

codified in former appendix A to part 

40, which is now superseded by 

appendix C under part 38 of this final 

rulemaking. In the DCM NPRM, the 

Commission proposed to maintain the 

guidance under former Guideline No. 1 

in new appendix C, but with certain 

proposed revisions, as the central mode 

of compliance for DCMs under Core 

Principle 3. In addition to the guidance, 

the DCM NPRM proposed two rules 

under Core Principle 3. Proposed 

§ 38.200 codified the statutory language 

of Core Principle 3, and proposed 

§ 38.201 referred applicants and DCMs 

to the guidance in appendix C to part 38 

for purposes of demonstrating to the 

Commission their compliance with the 

requirements of § 38.200. 

In the DCM NPRM, the Commission 

proposed certain revisions to former 

Guideline No. 1, including: (1) 

Codifying the provision in appendix C 

of part 38, and eliminating it from part 

40; (2) re-titling the guidance as 

‘‘Demonstration of Compliance That a 

Contract is not Readily Susceptible to 

Manipulation;’’ and (3) amending and 

updating the guidance to expand the 

provision to include swap transactions. 

Proposed appendix C to part 38 was 

intended to act as a source for new and 

existing DCMs to reference for best 

practices when developing products to 

list for trading. The amended guidance 

provided greater detail to DCMs 

regarding the relevant considerations in 

demonstrating compliance with Core 

Principle 3 when designing a contract 

and submitting supporting 

documentation and data to the 

Commission at the time the DCM 

submits: (1) The terms and conditions of 

a new contract under §§ 40.2 or 40.3, or 

(2) amendments to terms and conditions 

under §§ 40.5 or 40.6. Specifically, 

proposed appendix C to part 38 

provided guidance regarding: (1) The 

forms of supporting information a new 

contract submission should include; (2) 

how to estimate deliverable supplies; (3) 

the contract terms and conditions that 

should be specified for physically 

delivered contracts; (4) how to 

demonstrate that a cash-settled contract 

is reflective of the underlying cash 

market, is not readily subject to 

manipulation or distortion, and is based 

on a cash price series that is reliable, 

acceptable, publicly available and 

timely; (5) the contract terms and 

conditions that should be specified for 

cash-settled contracts; (6) the 

requirements for options on futures 

contracts; (7) the terms and conditions 

for non-price based futures contracts; 

and (8) the terms and conditions for 

swap contracts. 

Estimating Deliverable Supply 

Summary of Comments 

CME commented on the proposed 

guidance pertaining to estimating 

deliverable supply in paragraph 

(b)(1)(i)(A) of proposed appendix C.232

CME contended that the proposed 

definition of deliverable supply is 

restrictive and inconsistent with longstanding industry practice.233

Specifically, CME objected to the 

proposed provision that states that ‘‘an 

appropriate estimate of deliverable 

supply excludes supplies that are 

committed to some commercial use.’’ 234

CME stated that DCMs have historically 

estimated deliverable supplies by 

including in their calculations all 

supplies that are stored in the delivery 

territory or that move through the 


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235CME Comment Letter at 38 (Feb. 22, 2011). 

236 Id. 

237 Id. 

238 Id. 

239 In adding this language, the Commission is 

responding to CME’s March 28, 2011 comment 

letter which stated that the Commission should 

define what it understands as ‘‘long-term 

agreement,’’ stating that requiring DCMs to consult 

with market participants to estimate deliverable 

supply on a monthly basis would be a substantial 

burden. 

240CME Comment Letter at 38–39 (Feb. 22, 2011). 

Proposed paragraphs (c)(3)(ii) and (g)(ii) of 

appendix C addressed calculation procedures for 

safeguarding against potential attempts to 

artificially influence a cash settlement price for 

futures contracts settled by cash settlement. The 

guidance provided that if the cash price is 

determined by a survey of cash market sources, the 

survey should include either: (1) at least four 

independent entities (if such sources do not take a 

position); or (2) eight entities (if such sources trade 

for their own accounts). 

241CME Comment Letter at 38 (Feb. 22, 2011). 

Proposed c(3)(ii) and (g)(ii) of appendix C provided 

that: ‘‘Where a designated contract market itself 

generates the cash settlement price series, the 

designated contract market should establish 

calculation procedures that safeguard against 

potential attempts to artificially influence the price. 

For example, if the cash settlement price is derived 

by the designated contract market based on a survey 

of cash market sources, the designated contract 

market should maintain a list of such entities which 

all should be reputable sources with knowledge of 

the cash market. In addition, the sample of sources 

polled should be representative of the cash market, 

and the poll should be conducted at a time when 

trading in the cash market is active. The cashsettlement survey should include a minimum of 

four independent entities if such sources do not 

take positions in the commodity (e.g., if the survey 

list is comprised exclusively of brokers) or at least 

eight independent entities if such sources trade for 

their own accounts (e.g., if the survey list is 

comprised of dealers or merchants).’’ 

242Argus Comment Letter at 4 (Feb. 22, 2011). 

243 Id. 

244 Id. at 4–6. 

245 Id. 

246 Id. 

247 Id. 

248 Id. 

delivery territory, including a 

determination of amounts committed to 

commercial use.235 CME asserted that 

the proposed rulemaking does not 

identify any problems with continuing 

to use the current methodology in these 

markets, and claimed that if the 

proposed standard is adopted, it will 

impose additional costs on exchanges 

and market participants, including 

requiring exchanges to survey market 

participants annually with no defined 

benefit.236

Moreover, CME argued that the 

requirement that DCMs submit monthly 

deliverable supply estimates ‘‘for at 

least the most recent five years for 

which data sources permit’’ to be used 

by the Commission to review a DCM’s 

certification or approval request for a 

new contract or related rule amendment 

is onerous for DCMs.237 Instead, CME 

suggested that the Commission require 

monthly estimates of deliverable supply 

for the most recent three years.238

Discussion 

The Commission acknowledges 

CME’s comments regarding the 

proposed guidance for estimating 

deliverable supply but notes that a DCM 

has historically been required to 

estimate deliverable supplies, which has 

required that a DCM consult with 

market participants on a regular basis. 

In that regard, contrary to CME’s claim, 

the proposed guidance stating that 

exchanges should survey market 

participants should not impose 

additional costs on exchanges. As noted 

above, Commission staff will continue 

to work with exchange staff to 

determine how the deliverable supply 

for a certain commodity should be 

estimated. Moreover, the Commission 

confirms, as noted by CME, that the 

term ‘‘commercial use’’ may not be 

appropriate and could cause confusion. 

Accordingly, the Commission is 

eliminating the sentence in proposed 

paragraph (b)(1)(i)(A) that references the 

term ‘‘commercial use,’’ and is replacing 

it with the term ‘‘long-term agreement.’’ 

Specifically, the Commission will 

clarify in paragraph (b)(1)(i)(A) that an 

estimate of deliverable supply would 

not include supply that is committed for 

long-term agreements (i.e., the amount 

of supply that would not be available to 

fulfill the delivery obligations arising 

from current trading). 

The Commission is further clarifying 

in paragraph (b)(1)(i)(A) of the guidance 

that an exchange may include all or a 

portion of the supply that is committed 

for long-term agreements if it can 

demonstrate that those supplies are 

consistently and regularly made 

available to the spot market for traders 

to acquire at prevailing economic 

values. Specifically, the Commission is 

adding language to paragraph 

(b)(1)(i)(A) to provide that if the 

estimated deliverable supply that is 

committed for long-term agreements, or 

a significant portion thereof, can be 

demonstrated by the exchange to be 

consistently and regularly made 

available to the spot market for short 

traders to acquire at prevailing 

economic values, then those ‘‘available’’ 

supplies committed for long-term 

contracts may be included in the 

exchange’s estimate of deliverable 

supply for that commodity.239

Similarly, in paragraph (b)(1)(i)(C) of 

the guidance, the Commission is 

eliminating the term ‘‘commercial use’’ 

and replacing it with the term 

‘‘committed for long-term agreements.’’ 

The Commission further agrees with 

CME that three years of monthly 

estimates of deliverable supply is 

sufficient for the Commission to use to 

determine whether or not a contract is 

readily susceptible to manipulation or 

distortion. In this regard, the 

Commission is amending paragraphs 

(a)(2), (b)(1)(i)(A), (b)(1)(i)(B), and 

(b)(1)(i)(C) to reflect a three year 

obligation. 

Calculation of Price Indices 

Summary of Comments 

CME commented on the proposed 

guidance for calculating price indices in 

paragraphs (c)(3)(ii) and (g)(ii) of 

appendix C.240 CME stated that the 

guidance may not be applicable for 

some markets where there may not be 

eight independent entities in the entire 

industry, and that in those situations, 

the cash settlement survey should 

include transactions representing at 

least 51 percent of the total production 

of the commodity in question.241

Argus stated that it is important that 

the examination of a referenced index 

price should recognize the differences 

in markets and instrument types, and 

that the methodologies used to 

determine an index price may vary 

depending on the characteristics of the 

market in question.242 Accordingly, 

Argus recommended that any review of 

the integrity of a price index should be 

flexible enough to account for 

differences in markets and instrument 

types.243 Argus also requested that the 

Commission clarify that the proposed 

guidance for calculation of prices is 

applicable only to DCMs or SEFs, and 

does not apply to independent price 

data providers of price indices.244 Argus 

stated that as a market data price 

provider it obtains price data that is 

voluntarily provided to it by market 

participants, and that it has no means of 

requiring participants to provide that 

data.245 In that regard, Argus contended 

that for less liquid markets, there may 

only be a few market participants 

willing to provide data to Argus to use 

to determine a price series for a 

commodity.246 Argus noted that, in 

contrast, a DCM or SEF has the ability 

to use market transactions traded on its 

platform, or to survey market 

participants that trade on its platform, to 

determine a cash settlement price.247

Thus, Argus stated that the guidance in 

paragraph (c)(3)(ii) should not apply to 

market data price providers.248

Discussion 

In light of the concerns raised in the 

comments above, the Commission is 


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249See discussion of NYSE circuit breakers, 

available at: http://usequities.nyx.com/markets/ 

nyse-equities/circuit-breakers. 

250See supra discussion of section 38.255. 251 7 U.S.C. 7(d)(4). 

252CME Comment Letter at 24 (Feb. 22, 2011). 

253 Id. 

254 Id. 

255MGEX Comment Letter at 4 (Feb. 22, 2011). 

MGEX also stated that the Commission should 

adopt a more flexible core principle approach. See 

MGEX Comment Letter at 2 (June 3, 2011). 

256 KCBT Comment Letter at 4 (Feb. 22, 2011). 

257 ICE Comment Letter at 11 (Feb. 22, 2011). 

258 Id. 

259 KCBT Comment Letter at 4 (Feb. 22, 2011); 

MGEX Comment Letter at 4 (Feb. 22, 2011); CME 

Comment Letter at 24–25 (Feb. 22, 2011). 

eliminating the last sentence of 

paragraphs (c)(3)(ii) and (g)(ii), which 

provides that ‘‘[t]he cash-settlement 

survey should include a minimum of 

four independent entities if such 

sources do not take positions in the 

commodity (e.g., if the survey list is 

comprised exclusively of brokers) or at 

least eight independent entities if such 

sources trade for their own accounts 

(e.g., if the survey list is comprised of 

dealers or merchants).’’ The 

Commission notes that the guidance in 

appendix C to part 38 is not a restrictive 

list of acceptable methodologies. The 

Commission will continue to review a 

contract’s susceptibility to manipulation 

on a contract-by-contract basis, 

including taking into account the 

characteristics of the underlying market 

with respect to the price methodology 

used by independent price data 

providers. 

The Commission is also making 

several clarifying amendments to 

appendix C to part 38. The Commission 

is amending the guidance in paragraph 

(c)(2) pertaining to a DCM’s evaluation 

of the susceptibility of a cash-settled 

contract to manipulation. Specifically, 

the Commission is adding the phrase 

‘‘[i]n a manner that follows the 

determination of deliverable supply as 

noted above in b(1)’’ to the first sentence 

in paragraph (c)(2). This will clarify that 

for cash-settled contracts based on 

physical commodities, an exchange 

should analyze the size and liquidity of 

the cash market that underlies the listed 

contract as it would if the contract were 

settled through physical delivery. 

The Commission also is amending 

paragraph (c)(4)(i)(E) regarding 

Maximum Price Fluctuations Limits for 

cash-settled contracts, to clarify that for 

broad-based stock index futures 

contracts, rules should be adopted to 

coordinate with New York Stock 

Exchange (‘‘NYSE’’) declared Circuit 

Breaker Trading Halts.249 However, 

because there are proposals for 

alternative market coordination 

currently being considered (other than 

the Circuit Breaker Trading Halt), the 

guidance will be amended to add the 

proviso ‘‘or other market coordinated 

Circuit Breaker mechanism.’’ 250

Finally, the Commission is amending 

paragraph (e)(1), regarding Security 

Futures Contracts, to eliminate the 

sentence that states ‘‘[a] designated 

contract market should follow the 

appropriate guidance regarding 

physically delivered security futures 

products that are settled through 

physical delivery or cash settlement.’’ 

The sentence was included in the 

guidance and is being eliminated 

because part 41 Security Futures 

Products governs trading in those 

contracts including the minimum 

requirements that an underlying 

security or security index must have 

and maintain to be listed for trading on 

a DCM. 

4. Subpart E—Prevention of Market 

Disruption 

The Dodd-Frank Act amended current 

Core Principle 4 by: (i) Changing the 

title of the core principle from 

‘‘Monitoring of Trading’’ to ‘‘Prevention 

of Market Disruption;’’ and (ii) 

specifying the methods and procedures 

DCMs must employ in discharging their 

obligations under Core Principle 4. The 

amendments to Core Principle 4 

emphasize that DCMs must take an 

active role not only in monitoring 

trading activities within their markets, 

but in preventing market disruptions. 

The rules proposed for this core 

principle largely codified the relevant 

provisions of the existing Application 

Guidance and Acceptable Practices for 

Core Principle 4, as contained in 

appendix B to part 38, and included 

new requirements that clarified and 

strengthened certain DCM obligations 

arising under the amended core 

principle. 

i. § 38.251—General Requirements 

Core Principle 4 requires DCMs to 

conduct real-time monitoring of trading 

and have the ability to comprehensively 

and accurately reconstruct trading.251

Accordingly, these requirements are set 

forth in proposed § 38.251. Further, the 

proposed rule required that intraday 

trade monitoring must include the 

capacity to detect abnormal price 

movements, unusual trading volumes, 

impairments to market liquidity, and 

position-limit violations. Proposed 

§ 38.251 also required that, where the 

DCM cannot reasonably demonstrate 

that its manual processes are effective in 

detecting and preventing abuses, the 

DCM must implement automated 

trading alerts to detect potential 

problems. 

The Commission invited comment on 

whether DCMs should be required to 

monitor the extent of high frequency 

trading, and whether automated trading 

systems should include the ability to 

detect and flag high frequency trading 

anomalies. 

Summary of Comments 

Several commenters asserted that 

their current regulatory systems do not 

allow for effective real-time monitoring 

of position limits. CME opined that 

requiring real-time monitoring 

capabilities across every instrument for 

vague terms such as ‘‘abnormal price 

movements,’’ ‘‘unusual trading 

volumes,’’ and ‘‘impairments to market 

liquidity’’ does not provide DCMs with 

sufficient clarity with respect to what 

specific capabilities satisfy the 

standard.252 CME specifically stated that 

the Commission should clarify and 

appreciate the unique aspects of 

different types of trading venues and 

distinguish where requirements are 

different.253 CME also stated that the 

regulations should distinguish between 

trading conducted on an electronic 

venue and trading conducted in an 

open-outcry venue.254 MGEX stated that 

the automated trading alert requirement 

of proposed § 38.251 ‘‘seems to add 

more burden and cost than potentially 

providing any real value.’’ 255 KCBT 

requested that the Commission remove 

this requirement and stated that 

customer reportable positions are 

received once daily on a T+1 basis and 

that it is impractical to require DCMs to 

monitor for intraday compliance with 

position limits.256

ICE stated that it has previously made 

the Commission aware of the difficulties 

inherent in trying to monitor positions 

on a real-time basis, and that the only 

way to accurately determine whether an 

intraday position limit violation has 

occurred is on the basis of information 

available on a T+1 basis.257 ICE also 

requested that the Commission delete 

the phrase ‘‘impairments to market 

liquidity’’ from the rule, arguing that the 

wording is vague and has ‘‘no 

foundation’’ in the core principle.258

With respect to the monitoring of high 

frequency trading, several commenters 

stated that such monitoring would be 

problematic.259 MGEX and CME raised 

concerns over the absence of a 

definition for high frequency trading, 

which CME claimed can include many 


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260MGEX Comment Letter at 4 (Feb. 22, 2011); 

CME Comment Letter at 24–25 (Feb. 22, 2011). 

261CME Comment Letter at 25 (Feb. 22, 2011). 

262 Id. 

263 Id. 

264 Id. 

265 Id. 

266Better Markets Comment Letter at 7 (Jun. 3, 

2011). 

267 Id. 

268See, e.g., reports associated with the TAC 

available at http://www.cftc.gov/ucm/groups/

public/@swaps/documents/dfsubmission/

tacpresentation030111_ptfs2.pdf. 

269See ‘‘The Future of Computer Trading in 

Financial Markets’’ available at http://

www.bis.gov.uk/foresight/our-work/projects/

current-projects/computer-trading. 

270CME Comment Letter at 25 (Feb. 22, 2011); 

MGEX Comment Letter at 5 (Feb. 22, 2011); KCBT 

Comment Letter at 4–5 (Feb. 22, 2011). 

271 Id. 

272 ICE Comment Letter at 12 (Feb. 22, 2011). 

different trading strategies.260 CME 

questioned whether the Commission 

had unique concerns about high 

frequency traders, and further remarked 

that the Commission has not articulated 

what purpose would be served by 

singling out high frequency trading for 

special monitoring.261 CME further 

stated that empirical studies have 

consistently demonstrated that high 

frequency trading fosters tighter 

markets, greater liquidity and enhanced 

market efficiency.262

CME stated that ‘‘[a]s a practical 

matter, however, CME Group, and we 

imagine other DCMs, certainly have the 

capability to monitor the messaging 

frequency of participants in their 

markets and can quickly and easily 

identify which participants generate 

high messaging traffic.’’ 263 CME also 

stated that it requires registered users 

who predominantly enter orders via an 

automated trading system to be 

identified as automated traders and that 

their orders are identified in the audit 

trail as originating from automated 

systems.264 Finally, CME noted that its 

systems were designed to identify 

anomalies or transaction patterns that 

violate their rules or might otherwise be 

indicative of some other risk to the 

orderly functioning of the markets.265

Better Markets opined that the DoddFrank Act provides the Commission 

with an opportunity to get ahead of high 

frequency and algorithmic trading and 

that, while hedgers undoubtedly need 

market liquidity, high frequency traders 

generate volume that does not reliably 

generate liquidity for market 

participants.266 In addition, Better 

Markets commented that many widely 

used tactics of high frequency traders 

are specifically designed to influence 

pricing decisions by providing false 

signals of market price levels and depth, 

and, as a result, the Commission must 

take an expressly restrictive approach to 

high frequency trading.267

Discussion 

The Commission is adopting 

proposed § 38.251, with certain 

modifications, including converting 

portions of the rule to guidance. 

The Commission is modifying 

§ 38.251 to eliminate the obligation to 

monitor, on an intraday basis, for 

‘‘impairments to market liquidity.’’ The 

Commission is also revising the rule to 

clarify what must be included in realtime monitoring as compared to 

monitoring of intraday trading that may 

not need to be done in real time. 

Monitoring of market conditions, price 

movements and trading volumes in 

order to detect and attempt to resolve 

abnormalities must be accomplished in 

real time in order to achieve, as much 

as is possible, the statute’s new 

emphasis on preventive actions. It is 

acceptable, however, to have a program 

that detects, on a T+1 basis, trading 

abuses and position-limit violations that 

occur intraday. 

In addition, the rule is now being 

supplemented with guidance and 

acceptable practices in appendix B to 

part 38. The Commission believes that 

monitoring for market anomalies is a 

key part of a DCM’s ability to 

demonstrate its ‘‘capacity and 

responsibility to prevent manipulation, 

price distortion, and disruptions of the 

delivery or cash-settlement process,’’ as 

required by the statute. Moreover, given 

the number of listed contracts and the 

volumes of trading on any particular 

DCM, the Commission believes that 

automated trading alerts, preferably in 

real time, are the most effective means 

of detecting market anomalies. While 

having an effective automated alerts 

regime will be set forth as a method of 

monitoring in guidance, a DCM will 

maintain flexibility in meeting the 

requirement of the rule by, for example, 

demonstrating the effectiveness of an 

alternate method of monitoring. 

With respect to position-limit 

monitoring, the DCM NPRM did not 

require that such limits necessarily be 

monitored in real time. However, DCMs 

must have the ability to monitor such 

limits, including for intraday violations, 

at a minimum on a T+1 basis. Therefore, 

the requirement to monitor for positionlimit violations is clarified in the rule 

and further described in the guidance 

and acceptable practices in appendix B, 

giving the DCM some flexibility in 

meeting the requirement. 

As for the Commission’s inquiry 

about requiring additional monitoring of 

high-frequency trading, the Commission 

recognizes that DCMs should be capable 

of monitoring for the types of trading 

that may be characterized as ‘‘high 

frequency,’’ but has decided not to 

implement, in this rulemaking, further 

rules pertaining to the monitoring of 

high frequency trading. The 

Commission is encouraged that there are 

efforts underway, both within and 

outside the Commission, to define and 

develop approaches for better 

monitoring of high-frequency and 

algorithmic trading. This is particularly 

evident from recent work done at the 

behest of the Commission’s Technology 

Advisory Committee (TAC).268 Further, 

the United Kingdom government’s 

Foresight Project also commissioned a 

recently released report on the future of 

computer trading in financial markets, 

which aims to assess the risks and 

benefits of automated buying and 

selling. This project may assist the 

Commission’s further development of a 

regulatory framework for high frequency 

trading activities.269

ii. § 38.252—Additional Requirements 

for Physical-Delivery Contracts 

Proposed § 38.252 required, among 

other things, that for physical-delivery 

contracts, DCMs must monitor each 

contract’s terms and conditions as to 

whether there is convergence of the 

futures price to the cash price of the 

underlying commodity and must take 

meaningful corrective action, including 

addressing conditions that interfere 

with convergence, or if appropriate, 

change contract terms and conditions, 

when lack of convergence impacts the 

ability to use the markets for making 

hedging decisions and for price 

discovery. 

The Commission requested comments 

on what other factors, in addition to the 

delivery mechanism, a DCM should be 

required to consider in determining 

whether convergence is occurring. 

Summary of Comments 

CME, MGEX and KCBT all opposed 

what they deemed to be a prescriptive 

rule, and noted that most of the 

requirements in proposed § 38.252 are 

currently acceptable practices under 

appendix B for the monitoring of 

trading.270 These commenters 

contended that the requirements in 

proposed § 38.252 should remain as 

acceptable practices.271

ICE also noted that for certain 

products it is inherently more difficult 

to statistically determine convergence of 

futures to cash market prices.272

Discussion 

The Commission is adopting § 38.252, 

with certain modifications, including 


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273Argus Comment Letter at 6 (Feb. 22, 2011). 

274CME Comment Letter at 26 (Feb. 22, 2011). 

275 Id. 

276 Id. 

277 Id. 

278 Id. 

279 Id. 

280Nodal Comment Letter at 5 (Feb. 22, 2011). 

281The pre-existing acceptable practice for Core 

Principle 4 provides that DCMs, at a minimum, 

should have routine access to the positions and 

trading of their market participants. 

converting a portion of the rule to 

acceptable practices. 

The Commission is retaining as a rule 

the general obligation that DCMs 

monitor physical-delivery contracts 

with respect to their terms and 

conditions as they relate to the 

underlying market and monitor the 

adequacy of deliverable supplies to 

meet futures delivery requirements. The 

DCM must also make a good-faith effort 

to resolve conditions that threaten 

reasonable convergence or the adequacy 

of deliverable supplies. While the 

Commission acknowledges ICE’s 

comment that for certain products it 

may be more difficult to ascertain 

convergence because of the absence of 

reliable cash prices, the Commission is 

of the view that a DCM must monitor 

the performance of its contracts to 

ensure they continue to perform their 

economic functions. 

In order to provide DCMs with 

additional flexibility in meeting their 

monitoring obligations associated with 

physical-delivery contracts, the specific 

elements of such monitoring that were 

initially included in the proposed rule 

are now included in acceptable 

practices under appendix B of part 38, 

rather than in the rule. 

iii. § 38.253—Additional Requirements 

for Cash-Settled Contracts 

In addition to requirements that 

DCMs monitor the pricing and 

methodologies for settling cash-settled 

contracts, proposed § 38.253 required 

that, where a DCM contract is settled by 

reference to the price of a contract or 

instrument traded in another venue, 

including a price or index derived from 

prices on another exchange, the DCM 

must have rules that require the traders 

on the DCM’s market to provide the 

DCM with their positions in the 

reference market as the traders’ 

contracts approach settlement. In the 

alternative, § 38.253 provided that the 

DCM may have an information sharing 

agreement with the other venue or 

designated contract market. 

Summary of Comments 

Argus commented that it is 

inappropriate to require DCMs to 

monitor the ‘‘availability and pricing of 

the commodity making up the index to 

which the contract will be settled’’ 

where the index price is generated 

based upon transactions that are 

executed off the DCM’s market.273

CME disagreed with what it 

contended was the prescriptive nature 

of the proposed rule, and noted that 

many of the requirements in proposed 

§ 38.253 are currently acceptable 

practices for trade monitoring.274 CME 

suggested that the requirements in 

§ 38.253 remain as acceptable 

practices.275 CME further stated that the 

Commission is uniquely situated to add 

regulatory value to the industry by 

reviewing for potential cross-venue rule 

violations, and noted that the 

Commission is the central repository for 

position information delivered to it on 

a daily basis and in a common format, 

across all venues.276 CME also asserted 

that the Commission would be imposing 

an onerous burden on DCMs and their 

customers by requiring the reporting of 

information that the Commission 

already receives or will be receiving.277

CME also stated that the alternative 

proposal, that the DCM enter into an 

information-sharing agreement with the 

other venue, also will result in 

additional costs to both entities, and 

that it may not be practical or prudent 

for a DCM to enter into such an 

agreement with the other venue.278 CME 

noted that its rules already allow it to 

request such information from market 

participants on an as-needed basis.279

Nodal stated that DCMs that are a 

party to an industry agreement (such as 

the International Information Sharing 

Memorandum of Understanding & 

Agreement) should satisfy the 

information sharing requirement in this 

rule by virtue of such agreement.280

Discussion 

The Commission is codifying 

proposed § 38.253, with certain 

modifications, including to convert a 

portion of the rule to acceptable 

practices. The Commission removed 

from the rule the requirement that 

DCMs monitor the availability and 

pricing of the commodity making up the 

index to which the contract will be 

settled. Section 38.253(a) requires that 

DCMs monitor the pricing of the index 

to which the contract is settled, and that 

DCMs monitor the continued 

appropriateness of the index to which 

the contract is settled and take steps to 

resolve conditions, including amending 

contract terms where necessary, where 

there is a threat of manipulation, 

disruptions, or distortions. For cashsettled contracts, the Commission 

believes that a DCM must have the 

ability to determine whether a trader in 

its market is manipulating the 

instrument or index to which the DCM 

contract settles. 

In regards to § 38.253(b), as the CME 

noted, the Commission does obtain 

certain position information in the 

large-trader reporting systems for 

futures and swaps. However, the 

Commission may not routinely obtain 

such position information, including 

where a DCM contract settles to the 

price of a non-U.S. futures contract or a 

cash index. Notwithstanding the 

continued importance of a DCM’s 

obligation to monitor across other 

venues in such circumstances, the 

Commission believes that the rule need 

not set forth the specific methods to 

accomplish such monitoring. 

Accordingly, the Commission sets forth 

the specific methods of accomplishing 

the cross-venue monitoring under 

acceptable practices. Specifically, the 

rule requires that the monitoring of 

cash-settled contracts must include 

access to information on the activities of 

its traders’ in the reference market. The 

acceptable practices for this rule 

provides that a DCM, at a minimum, 

gather such information, either directly 

or through information sharing 

agreements, to traders’ position and 

transactions in the reference market for 

traders of a significant size in the DCM 

contract, near the settlement of the 

contract. 

iv. § 38.254—Ability To Obtain 

Information 

To ensure that DCMs have the ability 

to properly assess the potential for price 

manipulation, price distortions, and the 

disruption of the delivery or cashsettlement process, proposed § 38.254 

provided that each DCM require that 

traders in their market keep records, 

including records of their activity in the 

underlying commodity and related 

derivative markets and contracts, and 

make such records available, upon 

request, to the designated contract 

market.281 The proposed rule further 

required that DCMs with participants 

trading through intermediaries must 

either use a comprehensive large-trader 

reporting system or be able to 

demonstrate that it can obtain position 

data from other sources in order to 

conduct an effective surveillance 

program. 

Summary of Comments 

CME opposed the proposed rule and 

recommended that the types of records 

that the DCM should require traders to 

keep should be covered in acceptable 


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282CME Comment Letter at 26 (Feb. 22, 2011). 

283 KCBT Comment Letter at 5 (Feb. 22, 2011). 

284MGEX Comment Letter at 5 (Feb. 22, 2011). 

285CME Comment Letter at 26 (Feb. 22, 2011); 

KCBT Comment Letter at 5 (Feb. 22, 2011); ICE 

Comment Letter at 11–12 (Feb. 22, 2011); CFE 

Comment Letter at 4 (Feb. 22, 2011); NYSE Liffe 

Comment Letter at 11 (Feb. 22, 2011); ELX 

Comment Letter at 4 (Feb. 22, 2011); MGEX 

Comment Letter at 5 (Feb. 22, 2011); ICE Comment 

Letter at 12 (Feb. 22, 2011); Barnard Comment 

Letter at 3 (Feb. 22, 2011). 

286CME Comment Letter at 27 (Feb. 22, 2011). 

287 Id. 

288NYSE Liffe Comment Letter at 11 (Feb. 22, 

2011). 

289MGEX Comment Letter at 5 (Feb. 22, 2011). 

290 ICE Comment Letter at 12 (Feb. 22, 2011). 

291 Id. 

292Better Markets Comment Letter at 9 (Feb. 22, 

2011). 

293 Id. 

practices.282 KCBT contended that it is 

unnecessary and burdensome for a DCM 

to require traders to keep such 

records.283 Similarly, MGEX raised 

concerns about the burden that will be 

placed on its traders as a result of the 

proposed record-keeping obligation, and 

noted that, for contracts not traded on 

the DCM, it is unclear what records a 

DCM must tell its trader to keep.284

Discussion 

The Commission is adopting § 38.254 

as proposed, but is allowing, as an 

acceptable practice in appendix B, that 

DCMs limit the requirement of 

§ 38.254(b) to those transactions or 

positions that are reportable under the 

DCM’s large-trader reporting system or 

where the market participant otherwise 

holds substantial positions. 

The Commission has considered the 

comments, but does not believe that this 

rule is unnecessary or that the 

requirements should instead be codified 

as acceptable practices. The 

Commission notes that a trader’s burden 

to keep such records is sound 

commercial practice, and that a trader of 

a reportable size is already required, 

under Commission’s regulations § 18.05 

for futures and options and § 20.6 for 

swaps, to keep records of such activity 

and to make them available to the 

Commission upon request. In addition, 

the Commission has found trader 

records to be an invaluable tool in its 

surveillance efforts, and believes that 

the DCM, as a self-regulatory 

organization, should have direct access 

to such information in order to 

discharge its obligations under the DCM 

core principles, and in particular Core 

Principle 4. 

v. § 38.255—Risk Controls for Trading 

Proposed § 38.255 required DCMs to 

have in place effective risk controls 

including, but not limited to, pauses 

and/or halts to trading in the event of 

extraordinary price movements that may 

result in distorted prices or trigger 

market disruptions. Additionally, the 

rule provided that where a DCM’s 

contract is linked to, or a substitute for, 

other contracts on the DCM or on other 

trading venues, including where a 

contract is based on the price of an 

equity security or the level of an equity 

index, risk controls should, to the extent 

possible, be coordinated with those 

other contracts or trading venues. In the 

preamble of the DCM NPRM, the 

Commission requested comments on 

what types of pauses and halts are 

necessary and appropriate for particular 

market conditions. The preamble of the 

DCM NPRM also recognized that pauses 

and halts comprise only one category of 

risk controls, and that additional 

controls may be necessary to reduce the 

potential for market disruptions. The 

preamble specifically listed several risk 

controls that the Commission had in 

mind, including price collars or bands, 

maximum order size limits, stop-loss 

order protections, kill buttons, and any 

others that may be suggested by 

commenters. The Commission invited 

comments on the appropriateness of the 

listed risk controls, and posed the 

following questions: What other DCM 

risk controls are appropriate or 

necessary to reduce the risk of market 

disruptions? Which risk controls should 

be mandated, and how? 

Summary of Comments 

Several commenters asserted that 

DCMs should have discretion to 

determine the specific risk controls that 

should be implemented within their 

markets.285 CME commented that the 

marketplace would benefit from some 

standardization of the types of pre-trade 

risk controls employed by DCMs and 

other trading venues, and expressed 

support for an acceptable practice 

framework that includes pre-trade 

quantity limits, price banding, and 

messaging throttles, but argued that the 

specific parameters of such controls 

should be determined by the DCMs.286

Various commenters also stated that 

there are effective ways to prevent 

market disruptions other than pauses 

and halts, and that the appropriate 

controls may depend on a number of 

factors, such as the product, number of 

market participants, and the market’s 

liquidity. CME contended that the 

Commission should not impose rules 

that mandate coordination of such risk 

controls.287 NYSE Liffe argued that a 

DCM should be able to take into account 

other controls, but should not be 

required to adopt identical controls.288

MGEX stated that forcing market 

coordination of trading pauses and halts 

is unnecessary, and that if market 

instability moves from one contract 

market to another, the next market 

should be able to pause or halt trading 

as it determines necessary.289 ICE stated 

that a temporary price floor or ceiling 

can work better than a pause or halt 

since trading can continue 

uninterrupted, thereby offering the 

earliest opportunity for price reversal 

should the market deem a sudden large 

move to be an overreaction or error.290

ICE also stated that pauses and halts are 

not the only effective way to prevent 

market disruption, and that by being 

prescriptive, the Commission is freezing 

innovation in preventing market 

disruptions.291

Finally, Better Markets asserted that 

the proposed rules are extremely useful, 

but incomplete.292 Better Markets stated 

that there should be a ‘‘speed limit’’ to 

serve as a buffer against the potential for 

an uncontrolled spiral of disruption 

fueled by HFTs, and that the rule should 

require that bids be kept open for 

minimum durations and that positions 

be held for minimum durations.293

Discussion 

The Commission is adopting 

proposed § 38.255, with certain 

modifications, including converting a 

portion of the rule to acceptable 

practices. As stated in the DCM NPRM, 

the Commission believes that pauses 

and halts are effective risk management 

tools that must be implemented by 

DCMs to facilitate orderly markets. As 

the Commission noted in the DCM 

NPRM, risk controls such as trading 

pauses and halts, among other things, 

can allow time for participants to 

analyze the market impact of new 

information that may have caused a 

sudden market move, allow new orders 

to come into a market that has moved 

dramatically, and allow traders to assess 

and secure their capital needs in the 

face of potential margin calls. 

Automated risk control mechanisms, 

including pauses and halts, have proven 

to be effective and necessary in 

preventing market disruptions and, 

therefore, will remain as part of the rule. 

The Commission notes that the pauses 

and halts are intended to apply in the 

event of extraordinary price movements 

that may trigger or propagate systemic 

disruptions. Accordingly, in response to 

ICE and other commenters that question 

the necessity of pauses and halts over 

other forms of risk controls, the 

Commission notes that a DCM’s ability 

to pause or halt trading in extraordinary 


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36638 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

294 ‘‘Recommendations on Pre-Trade practices for 

Trading Firms, Clearing Firms and Exchanges 

involved in Direct Market Access,’’ March 1, 2011, 

available at http://www.cftc.gov/ucm/groups/

public/@swaps/documents/dfsubmission/

tacpresentation030111_ptfs2.pdf. 

295The DCM NPRM specifically mentioned 

position limits that must be monitored for intraday 

violations, daily price limits, trading pauses, 

reasonability tests for order price and size, stop 

logic functionality, and trade-cancellation policies 

in the form of ‘‘no-bust’’ ranges. 

296See ‘‘Pre-Trade Functionality Subcommittee of 

the CFTC Technology Advisory Committee report, 

‘‘Recommendations on Pre-Trade Practices for 

Trading Firms, Clearing Firms, and Exchanges 

Involved in Direct Market Access,’’ at 4–5 (March 

1, 2011), accepted by the TAC and available at: 

http://www.cftc.gov/ucm/groups/public/@swaps/ 

documents/dfsubmission/ 

tacpresentation030111_ptfs2.pdf. 

297 Id. at 4. 

298The DCM NPRM did not specifically address 

whether DCMs should require market participants 

to certify that their electronic systems were 

adequately tested before trading on a DCM, nor did 

it specifically address pre-trade, post trade or 

emergency controls and supervision of electronic 

systems. The Commission may address electronic 

system testing, controls, and supervision-related 

issues in a subsequent proceeding. 

299The Joint CFTC–SEC Advisory Committee on 

Emerging Regulatory Issues was established a few 

days after the dramatic securities market events of 

May 6, 2010, called by some the ‘‘Flash Crash.’’ The 

Committee is charged with addressing regulatory 

issues of mutual concern to the CFTC and SEC. See 

‘‘Recommendations Regarding Regulatory 

Responses to the Market Events of May 6, 2010,’’ 

(Feb. 18, 2011) available at http://www.cftc.gov/ 

MarketReports/StaffReportonMay6MarketEvents/ 

index.htm. 

300CME Comment Letter at 27 (Feb. 22, 2011). 

301 Id. 

302Barnard Comment Letter at 2 (May 20, 2011). 

circumstances and, importantly, to restart trading through the appropriate reopening procedures, will allow DCMs to 

mitigate the propagation of shocks that 

are of a systemic nature and to facilitate 

orderly markets. Furthermore, DCMs 

must ensure that such pauses and halts 

are effective for their specific orderrouting and trading environment and 

are adapted to the specific types of 

products traded. 

Following the DCM NPRM’s 

publication, the Pre-Trade Functionality 

Subcommittee of the CFTC Technology 

Advisory Committee (‘‘TAC’’) issued a 

report that recommended the 

implementation of several trade risk 

controls at the exchange level.294 The 

controls recommended in the 

Subcommittee report were consistent, in 

large part, with the trade controls 

referenced in the preamble to the DCM 

NPRM, and which are being adopted in 

this final rulemaking.295 The TAC 

accepted the Subcommittee report, 

which specifically recommended that 

exchanges implement pre-trade limits 

on order size, price collars around the 

current price, intraday position limits 

(of a type that represent financial risk to 

the clearing member), message throttles, 

and clear error-trade and ordercancellation policies.296 The 

Subcommittee report noted that ‘‘[s]ome 

measure of standardization of pre-trade 

risk controls at the exchange level is the 

cheapest, most effective and most robust 

path to addressing the Commission’s 

concern [for preserving market 

integrity].’’ 297

The Commission believes that the 

implementation of the specific 

automated trade risk controls listed in 

the DCM NPRM is generally desirable, 

but also recognizes that such controls 

should be adapted to the unique 

characteristics of the markets to which 

they apply. Indeed, any controls should 

consider the delicate balance between 

avoiding a market disruption while not 

impeding a market’s price discovery 

function. Controls that unduly restrict a 

market’s ability to respond to legitimate 

market events will interfere with price 

discovery. 

Accordingly, consistent with many of 

the comments on this subject, the 

Commission is enumerating specific 

types of automated risk controls, in 

addition to pauses and halts, that may 

be implemented by DCMs in the 

acceptable practices rather than in the 

rule, in order to give DCMs greater 

discretion to select among the 

enumerated risk controls, or to create 

new risk controls that may be more 

appropriate or necessary for their 

markets. DCMs also will have discretion 

in determining the parameters for the 

selected controls. Specifically, the 

acceptable practices for Core Principle 4 

provide that DCMs should have 

appropriate trade risk controls adapted 

to the unique characteristics of the 

markets to which they apply that are 

designed to prevent market disruptions 

without unduly interfering with that 

market’s price discovery function. The 

acceptable practices also enumerate 

several of the pre-trade controls cited by 

the Joint CFTC/Securities and Exchange 

Commission (‘‘SEC’’) Advisory 

Committee, specifically: Pre-trade limits 

on order size, price collars or bands 

around the current price, message 

throttles, and daily price limits.298

Additionally, in response to 

commenters’ concerns, the Commission 

is moving the language in the proposed 

rule concerning the coordination of risk 

controls among other markets or 

exchanges to the acceptable practices. 

Specifically, a DCM with a contract that 

is linked to, or is a substitute for, other 

contracts, either on its market or on 

other trading venues, must, to the extent 

practicable, coordinate its risk controls 

with any similar controls placed on 

those other contracts. If a contract is 

based on the price of an equity security 

or the level of an equity index, such risk 

controls must, to the extent practicable, 

be coordinated with any similar controls 

placed on national security exchanges. 

Independent of this rulemaking, the 

Joint CFTC/SEC Advisory Committee 

recommended that the SEC and CFTC 

require that the pause rules of the 

exchanges and FINRA be expanded to 

cover all but the most inactively traded 

and listed equity securities, ETFs, and 

options and single stock futures on 

those securities.299

vi. § 38.256—Trade Reconstruction 

The Dodd-Frank Act added language 

to Core Principle 4 providing that a 

DCM must have the ability to 

comprehensively and accurately 

reconstruct all trading on its trading 

facility. These audit-trail data and 

reconstructions must also be made 

available to the Commission in a form, 

manner, and time as determined by the 

Commission. Proposed § 38.256 codified 

these requirements. 

Summary of Comments 

CME argued that audit trial data is 

extremely detailed and voluminous and 

that the DCMs should be given adequate 

time to prepare the trading data before 

it is supplied to the Commission.300

CME suggested that the wording ‘‘in a 

form, manner, and time as determined 

by the Commission’’ be replaced with 

‘‘such reasonable time as determined by 

the Commission.301

Chris Barnard expressed support for 

the trade reconstruction requirement but 

requested that the rule be clarified to 

ensure that the trade reconstruction 

requirement includes all trading events, 

including the entry of bids and offers in 

the order of their occurrence, as well as 

executed trades in order.302

Discussion 

The Commission is clarifying the rule 

slightly so that the audit trail data must 

be available to the Commission ‘‘in a 

form, manner, and time that is 

acceptable to the Commission.’’ The 

revised wording is consistent with 

§ 38.950(a), which requires that DCMs 

maintain records in a form and manner 

that is acceptable to the Commission. 

The Commission believes that the 

DCM audit-trail requirements contained 

in § 38.551 and § 38.552 clarify the 

DCM’s obligation for reconstruction of 

trading and are sufficient to meet Mr. 

Barnard’s concerns. 


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303See ‘‘Position Limits for Futures and Swaps,’’ 

76 FR 71626, Nov. 18, 2011. 

304 Id. at 71632. 

305CME Comment Letter at 27 (Feb. 22, 2011). 

306 76 FR 71626, Nov. 18, 2011. 

307 In situations where a swap is traded on more 

than one platform, emergency action to liquidate or 

transfer open interest must be directed, or agreed 

to, by the Commission or Commission staff. 

308 KCBT Comment Letter at 6 (Feb. 22, 2011); see 

also 76 FR 69334, Nov. 8, 2011. 

309CME Comment Letter at 28 (Feb. 22, 2011). 

vii. § 38.257—Regulatory Service 

Provider 

Proposed § 38.257 provided that a 

DCM must comply with the regulations 

in subpart E through a dedicated 

regulatory department, or by delegation 

of that function to a regulatory service 

provider over which the DCM has 

supervisory authority. 

Discussion 

The Commission did not receive any 

comments on the proposed rule, and is 

adopting the rule as proposed. 

viii. § 38.258—Additional Rules 

Required 

Proposed § 38.258 required a DCM to 

adopt and enforce any additional rules 

that it believed were necessary to 

comply with the requirements of 

subpart E. 

Discussion 

Though the Commission did not 

receive any comments on the proposed 

rule, the Commission is of the view that 

the obligations in the proposed rule are 

more appropriate in the guidance. 

Accordingly, the proposed rule is 

moved to guidance. Consistent with this 

determination, the Commission is 

replacing proposed § 38.258 with new 

§ 38.258 (titled ‘‘Additional sources for 

compliance’’) that simply permits DCMs 

to rely upon the guidance and 

acceptable practices in appendix B of 

this part to demonstrate to the 

Commission compliance with Core 

Principle 4. 

5. Subpart F—Position Limitations or 

Accountability 

Core Principle 5 under section 5(d)(5) 

of the CEA requires that DCMs adopt for 

each contract, as is necessary and 

appropriate, position limitations or 

position accountability. The DoddFrank Act amended Core Principle 5 by 

adding that for any contract that is 

subject to a position limitation 

established by the Commission pursuant 

to section 4a(a) of the CEA, the DCM 

shall set the position limitation of the 

board of trade at a level not higher than 

the position limitation established by 

the Commission. At the time of the 

publication of the DCM NPRM, the 

federal position limits established by 

the Commission were codified in part 

150 of the Commission’s regulations, 

and the Commission had proposed rules 

to replace part 150 with new 

requirements in part 151, consistent 

with the requirements of the DoddFrank Act. The Commission published 

the final rules for ‘‘Position Limits for 

Futures and Swaps’’ on November 18, 

2011.303 That final rulemaking requires 

DCMs to comply with part 150 (Limits 

on Positions) until such time that the 

Commission replaces part 150 with the 

new part 151 (Limits on Positions).304 In 

that final release, the Commission 

requires that exchanges adopt their own 

position limits for 28 physical 

commodity contracts subject to federal 

limits, and provides acceptable 

practices for establishing position limits 

in other commodity contracts. The 

Commission also established alternative 

acceptable practices of adopting 

position accountability rules in lieu of 

position limits for non-spot months in 

those other commodity contracts. 

Proposed § 38.301 required that each 

DCM must comply with the 

requirements of part 151 as a condition 

of its compliance with Core Principle 5. 

Summary of Comments 

CME stated that the proposed position 

limits in the part 151 rulemaking may 

affect the price discovery mechanism of 

the U.S. futures markets and asked that 

the Commission give careful 

consideration to the comments it 

submitted in the part 151 rulemaking.305

Discussion 

The Commission is adopting the rule, 

with one modification. The rule is being 

revised to add an additional clause that 

requires DCMs to continue to meet the 

requirements of part 150 of the 

Commission’s regulations—the current 

position limit regulations—until such 

time that compliance is required under 

part 151. This clarification will ensure 

that DCMs are in compliance with the 

Commission’s regulations under part 

150 in the interim period—until the 

compliance date for the new position 

limits regulations takes effect. CME’s 

comments were more appropriate to the 

Position Limit rulemaking proceeding, 

and they were addressed in that 

rulemaking.306

6. Subpart G—Emergency Authority 

The Dodd-Frank Act made minor, 

non-substantive changes to Core 

Principle 6 under section 5(d)(6) of the 

CEA. In implementing the core 

principles, the Commission proposed to 

retain most of the former Application 

Guidance associated with Core Principle 

6 (found in appendix B to part 38 of the 

Commission’s regulations) with some 

revisions and additions. 

Proposed § 38.350 codified the 

statutory text of the core principle. 

Proposed § 38.351 referred applicants 

and DCMs to the guidance and 

acceptable practices in appendix B to 

part 38 for purposes of demonstrating to 

the Commission their compliance with 

the requirements of subpart G. The 

proposed guidance provided that a DCM 

should have the authority to intervene 

as necessary to maintain fair and orderly 

trading and to prevent or address 

manipulation or disruptive trading 

practices, whether the need for 

intervention arises exclusively from the 

DCM’s own market or as part of a 

coordinated, cross-market intervention. 

The proposed guidance also provided 

that the DCM rules should include 

procedures and guidelines to avoid 

conflicts of interest in accordance with 

new provisions proposed in § 40.9 and 

to include alternate lines of 

communication and approval 

procedures in order to be able to 

address, in real time, emergencies that 

may arise. The proposed guidance also 

clarified that the DCM must have rules 

that allow it to take such market actions 

as may be directed by the Commission. 

The proposed rulemaking also 

proposed certain acceptable practices, 

including that the DCM have: (i) 

Procedures and guidelines for decisionmaking and implementation of 

emergency intervention in the market, 

and (ii) the authority to: Liquidate or 

transfer open positions in the market,307

suspend or curtail trading in any 

contract, require market participants in 

any contract to meet special margin 

requirements, and allow it to take such 

market actions as the Commission may 

direct. 

Summary of Comments 

KCBT contended that liquidation of 

positions and special margin 

requirements are more appropriately 

addressed in the rules and procedures 

relevant to Derivatives Clearing 

Organizations.308 CME commented that 

the Commission should revise the 

proposed guidance to make clear that 

DCMs have the flexibility and 

independence necessary to address 

market emergencies.309

Discussion 

The Commission adopts proposed 

§§ 38.350 and 38.351, without 

modification. 

In response to the comments 

pertaining to the proposed guidance, the 


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310This requirement, while new to the text of 

Core Principle 7, was previously required as part of 

former Designation Criteria 4. 

311The Commission is revising § 38.401(a) to 

clarify several internal references. 

312NYSE Liffe Comment Letter at 12 (Feb. 22, 

2011). 

313 Id. 

314 Id. 

315 Id. 

316 Id. at 13. 

317 Id. 

318This is especially relevant when the 

Commission determines to stay the certification of 

a DCM submission, as provided by the Dodd-Frank 

Commission is making slight revisions 

to the guidance to clarify that DCMs 

retain the authority to independently 

respond to emergencies in an effective 

and timely manner consistent with the 

nature of the emergency, as long as all 

such actions taken by the DCM are made 

in good faith to protect the integrity of 

the markets. 

In response to KCBT’s comments, the 

Commission notes that the statute 

requires DCMs, in consultation and 

cooperation with the Commission, to 

adopt rules permitting them to liquidate 

open positions and impose special 

margin requirements under their 

emergency authority. 

7. Subpart H—Availability of General 

Information 

Core Principle 7 requires that DCMs 

make available to the public accurate 

information concerning the contract 

market’s rules and regulations, contracts 

and operations. The Dodd-Frank Act 

amended Core Principle 7 by adding a 

provision requiring the board of trade to 

make public the rules and specifications 

describing the operation of the DCM’s 

electronic matching platform or trade 

execution facility.310 Since passage of 

the CFMA, the types of information and 

the various practices for providing 

information have become standardized 

across the industry as DCMs have 

adopted practices that comply with the 

current guidance and acceptable 

practices for Core Principle 7. 

Accordingly, proposed § 38.401 in 

subpart H codified these practices. In 

addition, the Commission proposed 

several additional provisions to ensure 

that pertinent information is available to 

the Commission, market participants 

and the public, as described below. 

The Commission also proposed to 

codify the statutory text of the core 

principle in § 38.400, and is adopting 

the rule, as proposed. 

i. § 38.401(a)—General 

Proposed § 38.401(a) required DCMs 

to have in place procedures, 

arrangements and resources for 

disclosing to market authorities, market 

participants, and the public accurate 

and relevant information pertaining to: 

(i) Contract terms and conditions, (ii) 

rules and regulations applicable to the 

trading mechanism; and (iii) rules and 

specifications pertaining to the 

operation of the electronic matching 

platform or trade execution facility. 

Under the proposed rule, DCMs are 

required to ensure that market 

authorities, market participants, and the 

public have available all material 

information pertaining to new product 

listings, new or amended governance, 

trading and product rules, or other 

changes to information previously 

disclosed by the DCM, within the time 

period prescribed in proposed 

§ 38.401(c). Section 38.401(a) of the 

proposed regulation required that DCMs 

provide the required information to 

market participants and the public by 

posting such information on their Web 

site, as set forth in proposed § 38.401(c). 

Discussion 

The Commission did not receive 

comments on the proposed rule, and is 

adopting the proposed rule with minor, 

non-substantive modifications.311

ii. § 38.401(b)—Accuracy Requirement 

Proposed § 38.401(b) required that 

each DCM have procedures in place to 

ensure that any information or 

communication with the Commission is 

accurate and complete, and further that 

no false or misleading information is 

submitted and that no material 

information is omitted. Similarly, the 

proposed rule required that each DCM 

have procedures in place to ensure the 

accuracy and completeness of any 

information made available to market 

participants and the public, including 

information that is made available on its 

Web site. 

Summary of Comments 

NYSE Liffe expressed concern that the 

requirement to provide ‘‘accurate and 

complete’’ information in ‘‘any 

communication’’ with the Commission 

would chill dialogue between DCMs 

and Commission staff.312 NYSE Liffe 

argued that in addition to submitting 

formal filings with the Commission, 

DCM staff frequently interact with 

Commission staff on a more informal 

basis, and in some cases DCM staff may 

speak without complete information.313

NYSE Liffe asserted that a DCM may 

feel constrained from directly 

responding to Commission inquiries or 

from reaching out to Commission staff if 

it is concerned that the information it 

provides to the Commission may later 

prove to be inaccurate or incomplete.314

Accordingly, NYSE Liffe requested 

clarification that the proposed rule will 

only apply to formal filings made with 

the Commission.315 NYSE Liffe also 

noted that while it makes every effort to 

accurately post information required to 

be made public, for several data 

elements, it must rely on data sent to it 

by clearing service providers and 

member firms.316 NYSE Liffe argued 

that it would be inappropriate to set a 

strict liability standard over aggregated 

data that part 16 of the Commission’s 

rules requires the DCM to make public 

when it does not entirely control the 

generation of component parts of that 

data.317

Discussion 

The Commission is adopting 

proposed § 38.401(b), with certain 

revisions. While DCMs must provide the 

Commission with accurate and 

complete information, the Commission 

recognizes that the proposed rule text 

may raise concerns with DCMs in freely 

communicating with Commission staff 

in certain instances. Accordingly, the 

Commission is revising the rule to 

clarify that a DCM must ‘‘provide 

information that it believes, to the best 

of its knowledge, is accurate and 

complete, and must not omit material 

information’’ with respect to any 

communication with the Commission, 

and any information required to be 

transmitted or made available to market 

participants and the public, including 

on its Web site or otherwise. The 

requirements of § 38.401(b) are intended 

to be, and should be interpreted as 

being, consistent with the false 

reporting provision under section 9(a)(3) 

of the CEA, 7 U.S.C. 13. The amended 

rule accommodates the possibility that 

DCMs may not exercise complete 

control over all of the information that 

they receive from third-parties and later 

make public. 

iii. § 38.401(c)—Notice of Regulatory 

Submissions 

The Commission historically has 

required DCMs to update their 

rulebooks upon the effectiveness of a 

rule amendment, product listing or rule 

certification that has been filed with the 

Commission. While proposed 

§ 38.401(c) maintained the general 

requirement for posting rules in the 

DCM rulebook upon their effectiveness, 

the Commission believed that market 

participants and the public would 

benefit from notifications of proposed 

rule amendments, product listing (or delistings) and rule certifications in 

advance of their taking effect.318


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Act, for a 90-day review period, thereby triggering 

a public comment period. 

319The DCM NPRM noted, for example, that a 

DCM’s Web site may contain a separate web page 

for ‘‘regulatory filings’’ or ‘‘rule certifications’’ for 

posting submissions or certifications pertaining to 

new product listings, new rules, rule amendments 

or changes to previously-disclosed information. 

DCM NPRM at 80586. 

320CME Comment Letter 28–29 (Feb. 22, 2011); 

KCBT Comment Letter at 6 (Feb. 22, 2011). 

321CME Comment Letter at 29 (Feb. 22, 2011); 

KCBT Comment Letter at 6 (Feb. 22, 2011). 

322CME Comment Letter at 29 (Feb. 22, 2011). 

323 Id. 324See former acceptable practices to Core 

Principle 7. 17 CFR part 38, appendix B (2010). 325See 76 FR 44776, 44794, July 27, 2011. 326 Id. 327As noted above, the requirement to maintain 

an accurate and updated rulebook does not relieve 

DCMs of their obligations under proposed 

paragraph (c) to post on their Web sites all rule 

filings and submissions submitted to the 

Commission. 

328The term commodity also includes ‘‘excluded 

commodities.’’ 

Accordingly, proposed § 38.401(c) 

required each DCM to post on its Web 

site all rule filings and submissions that 

it makes to the Secretary of the 

Commission. The proposed rule 

required that this information be posted 

on the DCM’s Web site simultaneous 

with the filing of such information with 

the Commission. The DCM NPRM stated 

that, where applicable, the DCM Web 

site should make clear that the posted 

submissions are pending before the 

Commission.319 This requirement was 

designed to provide market participants 

with advance notice of rule 

amendments and certifications, 

consistent with the goal of Core 

Principle 7 to make pertinent 

information available to market 

participants and the public. This 

proposed posting requirement was in 

addition to the obligation of DCMs to 

update their rulebooks upon the 

effectiveness of a rule submission or 

certification. 

To the extent that a DCM requests 

confidential treatment of certain 

information filed or submitted to the 

Commission, the proposed rule required 

the DCM to post the public portions of 

the filing or submission on its Web site. 

Summary of Comments 

CME and KCBT both contended that 

the requirement that DCMs post 

regulatory submissions on their Web 

site simultaneously with their filing 

with the Commission is duplicative, as 

the Commission already posts these 

submissions on the CFTC Web site.320

CME and KCBT further argued that they 

use other methods to communicate 

regulatory changes to the public, 

including bulletins, email notifications, 

and press releases.321 CME requested 

that if the Commission does choose to 

retain this requirement, that a DCM be 

given a minimum of one business day 

to post such filings, rather than having 

to post ‘‘simultaneously’’ with the 

Commission filing.322 CME noted that 

even a one-day standard would be a 

significantly higher standard than the 

Commission holds itself to with respect 

to posting the filings it receives from 

DCMs today.323

Discussion 

The Commission is adopting the 

proposed rule, with certain 

modifications. The Commission believes 

it is important for market participants 

and the public to have advance notice 

of rule amendments and certifications 

prior to their taking effect, consistent 

with the goal of Core Principle 7 to 

make pertinent information available to 

market participants and the public. 

Where applicable, the DCM Web site 

should make clear that the posted 

submissions have been submitted to the 

Commission, but are not yet in effect. 

For example, a DCM could post its 

submissions or information filed with 

the Commission on a separate web page 

that is designated as ‘‘regulatory filings’’ 

or ‘‘proposed rulebook amendments.’’ 

The Commission notes that the 

requirement to make information 

available to the public necessitates that 

such information can be accessed by 

visitors to the Web site without the need 

to register, log in, provide a user name 

or obtain a password, as is the current 

practice under Commission 

regulations.324 In response to CME, the 

Commission notes that it adopted a 

similar requirement in the final 

rulemaking pertaining to Provisions 

Common to Registered Entities.325 In 

that final rulemaking, the Commission 

codified in § 40.5(a)(6) the requirement 

that a registered entity submitting a 

voluntary rule submission post such 

submission on its Web site concurrent 

with the filing of such submission with 

the Commission.326 Consistent with 

§ 40.5, the Commission is revising the 

posting requirement in the proposed 

rule from ‘‘simultaneous’’ to 

‘‘concurrently’’ with the filing of the 

information with the Commission. The 

proposed rule is also being revised to 

clarify that the posting requirement 

applies to any information or 

‘‘submission’’ provided to the 

Commission. 

iv. § 38.401(d)—Rulebook 

Proposed § 38.401(d) codified the preexisting DCM practices pertaining to 

updating DCM rulebooks.327 The 

proposed rule required that DCMs post 

and routinely update, their rulebooks, 

which appear on their Web sites. The 

proposed rule required that each DCM 

update its rulebook the day that a new 

product is listed or a new or amended 

rule takes effect. The proposed rule 

further required that DCM Web sites be 

readily accessible to the public, and that 

the information posted therein be 

available to visitors to the Web site 

without requiring registration, log-in, or 

user name or password. 

Discussion 

The Commission did not receive 

comments regarding this proposed rule 

and is adopting the rule as proposed. As 

noted in the DCM NPRM, the vast 

majority of DCMs maintain Web sites 

that comply with the requirements in 

the rule. 

8. Subpart I—Daily Publication of 

Trading Information 

Core Principle 8 requires that DCMs 

make available to the public accurate 

information on settlement prices, 

volume, open interest, and opening and 

closing ranges for actively traded 

contracts on the contract market. The 

Dodd-Frank Act did not amend Core 

Principle 8. Accordingly, proposed 

§ 38.451 codified the pre-existing 

acceptable practices, which largely 

required that DCMs comply with § 16.01 

(Trading volume, open contracts, prices 

and critical dates) of the Commission’s 

regulations. 

In addition, the Commission proposed 

certain revisions to § 16.01, consistent 

with the Dodd-Frank Act amendments 

to the CEA, including revisions 

regarding the information a reporting 

market must record and publish on 

futures, swap, and options contracts on 

a commodity.328 Specifically, the 

proposed amendments to part 16 

specified the type of information that 

DCMs or SEFs must publish daily 

regarding the swaps contracts traded. 

The proposed rule required that DCMs 

and SEFs publish specified information 

for each trading day, for each swap, 

class of swaps, option on a swap, or 

class of options on a swap, as 

appropriate. For swap contracts that are 

standard-sized contracts (i.e., contracts 

that have a set contract size for all 

contracts), the proposed rule required 

the reporting of volume and open 

interest for swaps and options on swaps 

in terms of number of contracts traded, 

similar to how futures contracts 

currently are reported. For swap 

contracts that are non-standard-sized 

(i.e., contracts whose contract size can 


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329Eris Comment Letter at 4 (Feb. 22, 2011). 

330 Id. at 4–5. 

331 Id. 

332Better Markets Comment Letter at 9 (Feb. 22, 

2011). 

333 Id. 

334CME Comment Letter at 29 (Feb. 22, 2011). 

335 Id. 

336See e.g., former acceptable practices to Core 

Principle 7 (imposing similar requirement with 

respect to rulebooks). 17 CFR part 38, appendix B 

(2010). 

337 7 U.S.C. 7(d)(9). The language that provides 

that off-exchange transactions are permitted for 

bona fide business purposes if authorized by the 

board of trade’s rules was formerly contained in 

Designation Criteria 3. 

338Former Core Principle 9 provided as follows: 

‘‘[T]he board of trade shall provide a competitive, 

open and efficient market and mechanism for 

executing transactions.’’ 

339As described in the DCM NPRM, regulation 

1.38 (Execution of Transactions) of the 

Commission’s regulations requires, among other 

things, that all purchases and sales of a commodity 

for future delivery or a commodity option on or 

subject to the rules of a DCM be executed by open 

and competitive methods, with certain exceptions 

for transactions that are executed noncompetitively 

pursuant to a DCM’s rules. See DCM NPRM, 75 FR 

at 80588 (discussing regulation 1.38). 

vary for each transaction), the proposed 

rule required that the volume and open 

interest be reported in terms of total 

notional value traded for that trading 

day. 

The Commission also proposed to 

amend § 16.01(b) to require each DCM 

or SEF to publish for each trading day, 

by commodity and contract month or by 

tenor of the swap, the opening price, 

high price, low price and settlement 

price of the swap or option on swap 

contract. 

The Commission requested comments 

on end-of-day price reporting for swaps. 

Specifically, the Commission requested 

comments on the following issues: 

• For interest rate swaps, because the 

tenor on an interest rate swap can be 

one of thousands of possible periods, 

what would be an appropriate manner 

to display end-of-day prices for each 

interest rate swap? 

• Would certain end-of-day swap 

price reporting be more meaningful than 

others? If so, which methods of price 

reporting would be more meaningful 

and why? 

• Would certain end-of-day swap 

price reporting be misleading? If so, 

which methods of price reporting would 

be misleading and why? 

The Commission also proposed to 

revise § 16.01 to require reporting 

markets to report directly to the 

Commission pursuant to the 

requirements of 16.01(d), information 

pertaining to the total volume of block 

trades that are included in the total 

volume of trading. 

Finally, the Commission also 

proposed to codify the statutory text of 

the core principle in § 38.450, and is 

adopting the rule, as proposed. 

Summary of Comments 

Several commenters discussed the 

revised reporting requirements that 

were proposed in § 16.01. Eris stated 

that DCMs and SEFs should be held to 

the same reporting standards for interest 

rate swaps.329 In particular, Eris 

commented that a DCM or SEF should 

report real-time, intraday prices for par 

swaps at standard maturities, publish 

open interest grouped in maturity 

buckets based on the remaining tenor of 

each instrument, and publish at the end 

of day the settlement curve from the 

clearinghouse as well as the specific 

settlement values applied to each 

cleared swap.330 Specifically, Eris 

recommended: (1) That daily open 

interest should be published publicly in 

a summary fashion with open interest 

grouped in maturity buckets based on 

the remaining tenor of each instrument, 

(2) that end of day pricing should be 

based upon a market-driven curve 

where the clearinghouse’s methodology 

to generate the daily settlement curve, 

as well as all of the inputs and 

components of the settlement curve, are 

made transparent to the full trading 

community, and (3) the clearinghouse 

should publish the specific daily 

settlement values applied to each 

cleared swap, without revealing open 

interest at a granular level.331

Better Markets recommended that 

proposed § 16.01 also require the daily 

publication of the number of orders and 

order cancellations separately for 

futures, options and swaps.332

According to Better Markets, that data 

would indicate the levels of high 

frequency trading activity within market 

segments.333

CME stated that while it does not 

object to reporting block trades that are 

included in the daily volume of trading, 

this new requirement will require it to 

ascertain what systems changes will be 

necessary and how long such changes 

will take to implement.334 CME also 

stated that the end of day price 

reporting of interest rate swaps should 

be addressed as a separate initiative 

outside of the DCM and SEF 

rulemakings given the state of change in 

the swaps markets and how the market 

is expected to evolve as a result of 

regulatory reforms underway.335

Discussion 

The Commission is codifying § 16.01 

as proposed, with a technical revision to 

renumber paragraph (a). 

The Commission recognizes that the 

end-of-day reporting for interest rate 

swaps by each DCM and SEF may 

require a more flexible reporting scheme 

to take into account the venue in which 

the interest-rate swap is cleared. In this 

respect, the daily settlement curve (the 

yield curve for particular interest rate 

(e.g., LIBOR, TIBOR, Euribor, etc.)) at 

each clearinghouse may differ based on 

the assumptions of the curve. The 

Commission has considered the 

proposed reporting standard put forth 

by Eris, however, in light of the novelty 

of swaps trading on DCMs, the 

Commission believes that the more 

detailed reporting obligations under 

§ 16.01 are warranted at this time. The 

Commission did not receive any 

objections to the additional reporting of 

block trades or to the swaps reporting 

standards. The Commission further 

clarifies that in making information 

available to the general public, as 

required in 16.01(e), DCMs should 

ensure that such information can be 

accessed by visitors to the Web site 

without the need to register, log in, 

provide a user name or obtain a 

password.336

Better Markets’ comments pertaining 

to high frequency trading are addressed 

under the general discussion in Core 

Principle 4 pertaining to HFTs. 

9. Subpart J—Execution of Transactions 

The Dodd-Frank Act revised Core 

Principle 9 to read as follows: 

The board of trade shall provide a 

competitive, open and efficient market and 

mechanism for executing transactions that 

protects the price discovery process of 

trading in the centralized market of the board 

of trade. * * * The rules of the board of trade 

may authorize, for bona fide business 

purposes: 

(a) Transfer trades or office trades; 

(b) An exchange of: 

(1) Futures in connection with a cash 

commodity transaction; 

(2) Futures for cash commodities; or 

(3) Future for swaps; or 

(c) A futures commission merchant, acting 

as principal or agent, to enter into or confirm 

the execution of a contract for the purchase 

or sale of a commodity for future delivery if 

the contract is reported, recorded, or cleared 

in accordance with the rules of the contract 

market or a derivatives clearing 

organization.337

In view of Congress’ revisions to Core 

Principle 9, and the Commission’s own 

experience over the past decade in 

overseeing compliance with former Core 

Principle 9 338 and related regulation 

1.38,339 the Commission proposed a 

number of new and revised rules, 

guidance and acceptable practices in 

order to implement the revised core 

principle, which requires DCMs to 


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340The Commission is finalizing regulation 

38.500 in this release. 

341See, e.g., CME Comment Letter at 4–8, 29–30 

(Feb. 22, 2011); CME Comment Letter at 2–6 (April 

18, 2011); CME Joint Comment Letter at 2–6 (June 

3, 2011); CME Comment Letter (Aug. 3, 2011); 

BlackRock Comment Letter at 2–3 (Feb. 22, 2011); 

ICE Comment Letter at 3–6 (Feb. 22, 2011); CFE 

Comment Letter at 4–7 (Feb. 22, 2011); CFE 

Comment Letter (June 3, 2011); OCX Comment 

Letter at 2–5 (Feb. 22, 2011); Eris Comment Letter 

at 1–3 (Feb. 22, 2011); Eris Comment Letter at 3 

(June 3, 2011); GreenX Comment Letter at 8–11 

(Feb. 22, 2011); GreenX Comment Letter at 4 (April 

18, 2011); and, GreenX Comment Letter (June 3, 

2011). 

342See, e.g., ICE Comment Letter at 7 (Feb. 22, 

2011); CME Comment Letter at 31 (Feb. 22, 2011); 

ELX Comment Letter at 3 (Feb. 22, 2011); and, 

KCBT Comment Letter at 6 (Feb. 22, 2011). 

343The Commission previously expressed the 

regulatory requirements of former Core Principle 10 

through its application guidance for that core 

principle. See 17 CFR part 38, app. B, Application 

Guidance and Acceptable Practices for Core 

Principle 10. It also provided additional insight 

regarding the core principle through detailed 

acceptable practices that all DCMs could use to 

demonstrate compliance with former Core Principle 

10. The acceptable practices explained that ‘‘the 

goal of an audit trail is to detect and deter customer 

and market abuse.’’ Id. at (b)(1). It also outlined the 

elements of an effective audit trail. Those elements 

included original source documents, which help to 

establish the accuracy and authenticity of an audit 

trail. Also included is a transaction history database 

and electronic analysis capability, which allow a 

DCM to more easily access and review audit trail 

data to identify possible trading abuses and rule 

violations. Finally, the acceptable practices pointed 

to a DCM’s safe storage capability, emphasizing that 

audit trail data must be stored in a manner that 

protects it from unauthorized alteration, accidental 

erasure, or other loss. 

344 17 CFR part 38, app. B, Core Principle 10, 

Application Guidance and Acceptable Practices. 

345 75 FR 80572, 80617–80618, Dec. 22, 2010. 

346CME Comment Letter at 33–34 (Feb. 22, 2011); 

and MGEX Comment Letter at 7 (Feb. 22, 2011). 

347CME Comment Letter at 34 (Feb. 22, 2011). 

348MGEX Comment Letter at 7 (Feb. 22, 2011). 

349Barnard Comment Letter at 2 (May 20, 2011). 

provide a competitive, open and 

efficient market and mechanism for 

executing transactions that protects the 

price discovery process of trading in the 

centralized market of the board of trade. 

Proposed § 38.500 codified the 

statutory text of Core Principle 9.340

Proposed § 38.501 specified the manner 

in which transactions on the DCM’s 

centralized market must be executed, 

and set forth the requirements 

applicable to transactions that are 

executed off of the DCM’s centralized 

market, and incorporated certain 

clarifications pertaining to the allowable 

types of off-exchange transactions. 

Proposed § 38.502 implemented the core 

principle’s requirement that DCMs 

provide a market and mechanism for 

executing transactions that protects the 

price discovery process of trading in its 

centralized market. The rule proposed a 

centralized market trading requirement 

for all contracts listed on a DCM. 

Proposed § 38.503 set forth revised 

rules and related guidance pertaining to 

block transactions in futures contracts, 

including the appropriate size, price 

and reporting of block trades; proposed 

§ 38.504 set forth rules pertaining to 

block transactions in swap contracts. 

Finally, the DCM NPRM proposed new 

and revised rules under Core Principle 

9 that clarified other off-exchange 

transactions, referred to collectively as 

‘‘exchanges of derivatives for related 

positions’’ and office trades and transfer 

trades. 

Summary of Comments and Discussion 

The Commission received a 

significant number of comments on all 

aspects of the proposed rules under 

Core Principle 9, comprising both 

general and specific comments 

pertaining to the Commission’s 

interpretation of Core Principle 9 and 

various other aspects of the proposed 

rules. 

In particular, commenters raised 

numerous questions pertaining to the 

centralized market trading requirement 

rule’s delisting requirement for noncompliant contracts and the available 

alternatives for trading such 

contracts.341 Commenters also raised 

questions pertaining to certain aspects 

of the proposed rules for block 

transactions and exchanges of 

derivatives for related position 

transactions.342 The Commission has 

considered these comments, along with 

comments pertaining to other aspects of 

the proposed rules under Core Principle 

9, and believes that additional time is 

appropriate before finalizing the 

proposed rules for Core Principle 9. In 

particular, the Commission plans and 

expects to take up the proposed rules 

under Core Principle 9 when it 

considers the final SEF rulemaking. The 

additional time will allow the 

Commission to consider the available 

alternatives for contracts that may not 

comply with the proposed centralized 

market trading requirement (including 

listing contracts on a SEF), as well as 

the related implications of the rules for 

off-exchange transactions, including 

block transactions and exchange of 

derivatives for relates position 

transactions (‘‘EDRPs’’). At that time, 

the Commission will address the 

comments received in connection with 

proposed §§ 38.501–38.506. 

10. Subpart K—Trade Information 

Section 5(d)(10) of the CEA (Core 

Principle 10), as amended by the DoddFrank Act, requires DCMs to capture, 

verify, and retain detailed trade 

information (i.e., audit trail data) for all 

transactions in their markets. The core 

principle requires DCMs to maintain 

rules and procedures that provide for 

the recording and safe storage of all 

identifying trade information in a 

manner that enables the DCM to assist 

in the prevention of customer and 

market abuses and to provide evidence 

of any rule violations. The Dodd-Frank 

Act did not substantively revise Core 

Principle 10, and therefore, the 

application guidance and acceptable 

practices for former Core Principle 10 

provided the basis for the Commission’s 

proposed audit trail regulations in 

subpart K.343 In addition, the 

Commission also looked to the issues 

that arose in the context of RERs 

pertaining to Core Principle 10. 

The Commission proposed to codify 

the statutory text of Core Principle 10 in 

proposed § 38.550, and is adopting that 

rule as proposed. 

i. § 38.551—Audit Trail Required 

Proposed § 38.551 is based on the 

application guidance and acceptable 

practices for former Core Principle 

10.344 Proposed § 38.551 established the 

overarching requirement that a DCM’s 

audit trail program must help to ensure 

that the DCM can appropriately monitor 

and investigate any potential customer 

and market abuse. The proposed rule 

also provided that the audit trail data 

captured by a DCM must be sufficient to 

reconstruct all transactions within a 

reasonable period of time, and to 

provide evidence of any rule violations 

that may have occurred. The proposed 

rule further provided that audit trails 

must be sufficient to track customer 

orders from the time of receipt through 

fill, allocation, or other disposition. 

Proposed § 38.551 applied equally to 

open-outcry and electronic trading.345

Summary of Comments 

Two commenters stated that the 

proposed rule is too prescriptive.346

CME argued that the proposals were a 

departure from a principles-based 

regulatory regime and would stifle 

growth and innovation.347 Similarly, 

MGEX argued that prescriptive rules 

would impose additional burdens and 

costs upon DCMs.348

Chris Barnard agreed with the 

proposed requirement that all DCMs 

have the ability to reconstruct all 

trading.349 Mr. Barnard suggested that 

the requirement that an exchange be 

able to reconstruct trading should 

include ‘‘all trading events, including 

the entry of bids and offers in the order 

of their occurrence, as well as executed 

trades * * *’’ in order to permit 


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350 Id. 

351 DCM NPRM at 80617–18. 

352CME Comment Letter at 33 (Feb. 22, 2011). 

353 Id. 

354Better Markets Comment Letter at 9 (Feb. 22, 

2011). 

355 Id. at 10. 

356The text added to regulation 38.552(c) is 

language originally proposed in regulation 38.156 

and has now been deleted from regulation 38.156. 

exchanges to fully reconstruct and 

verify all trading activities.350

Discussion 

The Commission is adopting § 38.551 

as proposed. While the Commission 

acknowledges CME and MGEX’s 

comments, the Commission does not 

believe that requiring an exchange to 

capture and retain all audit trail data— 

to ensure that the exchange can 

reconstruct all transactions on its 

markets—places an undue burden on 

exchanges or stifles innovation. As 

noted above, the requirement that DCMs 

capture and retain all audit trail data is 

central to ensuring that the DCM can 

appropriately monitor and investigate 

any potential customer and market 

abuse, as required by the core principle. 

The Commission is not persuaded that 

this requirement would unduly burden 

DCMs, as these requirements are the 

same as the responsibilities currently 

outlined in the Acceptable Practices and 

Application Guidance for Core Principle 

10. In addition, exchanges are free to 

decide the manner and the technology 

they use to capture and retain audit trail 

data. The Commission is not prescribing 

how this should be done and therefore 

does not believe that this requirement 

will stifle innovation. 

The Commission also notes that the 

text of § 38.551 defines certain 

regulatory outcomes that exchanges 

must achieve, but does not prescribe a 

specific means by which exchanges 

must achieve those outcomes. 

Accordingly, the rule is not prescriptive 

as it permits an exchange to achieve the 

required outcome in a number of ways. 

Proposed § 38.551 required that a 

DCM ‘‘must capture and retain all audit 

trail data necessary to detect, 

investigate, and prevent customer and 

market abuses.’’ 351 The creation and 

retention of a comprehensive audit trail 

enables exchanges to properly 

reconstruct any and all trading events 

and to conduct a thorough forensic 

review of all trade information. The 

Commission believes that the ability to 

reconstruct trading is a fundamental 

element of a DCM’s surveillance and 

rule enforcement programs. 

ii. § 38.552—Elements of an Acceptable 

Audit Trail Program 

Proposed § 38.552 established the four 

elements of an acceptable audit trail 

program. First, proposed § 38.552(a) 

required a DCM’s audit trail to include 

original source documents, defined to 

include unalterable, sequentiallyidentified records on which trade 

execution information is originally 

recorded, whether manually or 

electronically. Additionally, the 

proposal required that customer order 

records indicate the terms of the order, 

the account identifier that relates to the 

account owner, and the time of the 

order entry. Finally, proposed 

§ 38.552(a) required that, for openoutcry trades, the time of report of order 

execution also be captured in the audit 

trail. 

Second, proposed § 38.552(b) required 

that a DCM’s audit trail program must 

include a transaction history database. 

Proposed § 38.552(b) specified the trade 

information required to be included in 

a transaction history database, including 

a history of all orders and trades; all 

data input in the trade matching system 

for clearing; the categories of 

participants for which trades were 

executed (i.e., customer type indicator 

or ‘‘CTI’’ codes); timing and sequencing 

data sufficient to reconstruct trading; 

and identification of each account to 

which fills were allocated. 

Third, proposed § 38.552(c) required 

that a DCM’s audit trail program have 

electronic analysis capability for all data 

in its transaction history database, and 

that such electronic analysis capability 

allow the exchange to reconstruct trades 

in order to identify possible rule 

violations. 

Finally, proposed § 38.552(d) required 

that a DCM’s audit trail program include 

the ability to safely store all audit trail 

data, and to retain data in accordance 

with the recordkeeping requirements of 

DCM Core Principle 18 and associated 

regulations. Safe storage capability 

required a DCM to protect its audit trail 

data from unauthorized alteration, 

accidental erasure, or other loss. 

Summary of Comments 

In addition to submitting general 

comments asserting that the proposed 

rules are overly prescriptive, CME stated 

that while it currently maintains a 

database that includes a history of all 

orders and trades for electronic trading, 

the open outcry trading venue ‘‘does not 

support an electronic transaction history 

database that captures the history of all 

orders, including orders that may be 

cancelled prior to execution.’’ 352 CME 

requested that, in the event that openoutcry orders are not entered into an 

electronic order routing system, the 

Commission clarify the requirements to 

take into account the distinctions 

between electronic and open-outcry 

trading.353

Better Markets requested that the 

Commission consider the impact that 

high-frequency traders may have on 

creation and maintenance of an 

exchange’s audit trail data.354

Specifically, Better Markets commented 

that each of the elements of an 

exchange’s audit trail, including all 

customer orders, should be ‘‘timestamped at intervals consistent with the 

capabilities of [high-frequency traders] 

* * *’’ 355

Discussion 

The Commission is adopting § 38.552 

as proposed, with certain revisions in 

response to comments received, and 

additional clarifications as explained 

below. 

First, in response to CME’s comment 

that the Commission’s audit trail rules 

should recognize the distinctions 

between electronic trading and open 

outcry trading, the Commission is 

revising § 38.552(b) to specify that a 

transaction history database must 

include a history of all trades, whether 

executed electronically or via openoutcry. However, order information 

must be included in the database only 

to the extent that such orders are 

entered into an electronic trading 

system. In addition, § 38.552(b) also 

clarifies that order data includes 

modifications and cancellations of such 

orders. This reflects a regulatory 

requirement previously proposed as part 

of § 38.156, but moved to § 38.552(b) in 

the final rules. The final rules further 

revise § 38.552(b)(2) by replacing the 

customer type indicators listed in the 

proposed rule with the term ‘‘customer 

type indicator code.’’ 

The final rules also revise § 38.552(c) 

to include the requirement that an 

exchange’s electronic analysis capability 

must provide it with the ability to 

reconstruct trading and identify possible 

trading violations.356

The Commission acknowledges Better 

Markets’ comments regarding audit trail 

data with respect to high-frequency 

trading. However, the Commission 

believes that the audit trail rules 

adopted herein, particularly the 

requirements that an exchange retain 

and maintain all data necessary to 

permit it to reconstruct trading, will 

help ensure that information and trades 

entered into an electronic trading 

system by high-frequency traders will be 

collected and retained as any other 


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357CME Comment Letter (Feb. 22, 2011); NYSE 

Liffe Comment Letter (Feb. 22, 2011); MGEX 

Comment Letter (Feb. 22, 2011). 

358MGEX Comment Letter at 7 (Feb. 22, 2011); 

NYSE Liffe Comment Letter at 12 (Feb. 22, 2011). 

359CME Comment Letter at 33(Feb. 22, 2011). 

360MGEX Comment Letter at 7 (Feb. 22, 2011). 

361 Id. 

362 Id. 

363 Id. 

audit trail data would be collected and 

retained. 

The Commission believes that the 

four elements set forth in § 38.552 are 

necessary to ensure that a DCM can 

capture and retain sufficient traderelated information, can reconstruct 

trading promptly, and has the necessary 

tools to detect and deter potential 

customer and market abuses through its 

audit trail. Specifically, original source 

documents must include all necessary 

trade information to reconstruct trading 

on the DCM. The transaction history 

database facilitates rapid access and 

analysis of all original source 

documents, thereby aiding DCMs in 

monitoring for customer and market 

abuses, while electronic analysis 

capability helps ensure effective use of 

audit trail data by requiring appropriate 

tools to use in conjunction with a 

DCM’s transaction history database. Safe 

storage capability enables a DCM to 

properly preserve and protect the audit 

trail data so that it is readily available 

for the DCM to use in any future 

investigation or inquiry into possible 

violations of DCM rules. 

With the clarifications and revisions 

discussed above, the Commission 

adopts § 38.552 as the elements required 

of an acceptable audit trail program. 

iii. § 38.553—Enforcement of Audit 

Trail Requirements 

Proposed § 38.553 established the 

elements of an effective audit trail 

enforcement program. The proposed 

rule was organized in two parts. First, 

proposed § 38.553(a) required a DCM to 

develop an effective audit trail 

enforcement program. The proposed 

rule provided that an effective 

enforcement program must, at a 

minimum, review all members and 

market participants annually to verify 

their compliance with all applicable 

audit trail requirements. 

Proposed § 38.553(a) was further 

divided into two paragraphs. Paragraph 

(a)(1) set forth minimum review criteria 

for an electronic trading audit trail, 

including annual examinations by 

DCMs of randomly selected samples of 

front-end audit trail data from order 

routing systems to ensure the presence 

and accuracy of required audit trail 

data. In addition, paragraph (a)(1) 

required that exchanges: Review the 

processes used by members and market 

participants to assign and maintain 

exchange user identifications; review 

usage patterns associated with user 

identifications; and review account 

numbers and CTI codes in trade records 

to test for accuracy and improper usage. 

Paragraph (a)(2) of proposed § 38.553 

established minimum review criteria for 

open-outcry trading, requiring DCMs to 

conduct annual reviews of all members 

and market participants to verify their 

compliance with their trade timing, 

order ticket, and trading card 

requirements. 

Second, proposed § 38.553(b) required 

DCMs to develop programs to ensure 

effective enforcement of their audit trail 

and recordkeeping requirements. This 

requirement applied equally to both 

open-outcry and electronic trading. 

Proposed § 38.553(b) required 

exchanges’ enforcement programs to 

identify members and market 

participants that routinely failed to 

comply with the requirements of Core 

Principle 10 and to levy meaningful 

sanctions when deficiencies were 

found. Such sanctions could not include 

more than one warning letter or other 

non-financial penalty for the same 

violation within a rolling 12 month 

period. 

Summary of Comments 

As noted above with respect to other 

rules, several commenters requested 

clarification of the term ‘‘market 

participant’’ in § 38.553(a) and 

§ 38.553(b), including questioning who 

qualifies as a ‘‘market participant.’’ 357

Specifically, MGEX and NYSE Liffe 

suggested that the term ‘‘market 

participant’’ should be limited to only 

those participants who have direct 

access to the trading platform.358 CME 

commented that the Commission should 

limit the requirement for annual audit 

trail reviews to the ‘‘clearing firm level 

rather than the market participant level’’ 

because conducting an annual audit 

trail and recordkeeping review of ‘‘every 

participant who enters an order into [a 

trading system would be] exceptionally 

onerous, costly and unproductive.’’ 359

Additionally, MGEX argued that 

exchanges should be permitted to 

conduct annual reviews by testing a 

sample of market participants in order 

to make the annual reviews of audit trail 

and recordkeeping requirements ‘‘more 

efficient, adequate and less 

burdensome.’’ 360

In response to the proposed 

§ 38.553(b)’s requirement for sufficient 

sanctions for violations of audit trail 

and recordkeeping requirements, MGEX 

argued that such a requirement is 

‘‘arbitrary and counterproductive.’’ 361

MGEX proposed that the Commission 

should simply require exchanges to 

have an adequate audit trail program, 

including adequate enforcement of the 

audit trail requirements.362 MGEX 

argued that such an approach would 

allow an exchange to develop ‘‘what 

works best for their business while 

meeting intended audit trail 

requirements.’’ 363

Discussion 

The Commission adopts proposed 

§ 38.553, with certain amendments. 

The Commission has considered the 

comments pertaining to this rule and 

believes that the term ‘‘market 

participants,’’ as used in §§ 38.553(a) 

and 38.553(b), requires clarification. 

Accordingly, ‘‘market participants’’ is 

amended to instead state ‘‘persons and 

firms subject to designated contract 

market recordkeeping rules’’ throughout 

§ 38.553. The Commission recognizes 

that the term ‘‘market participants’’ may 

be viewed to capture a wider range of 

persons than the Commission intended 

to subject to the proposed regulation. 

Therefore, this amendment to § 38.553 

clarifies that its requirements apply to 

those individuals and firms that are 

subject to DCM recordkeeping rules. 

The Commission does not believe that 

sampling-based reviews of audit trail 

and recordkeeping requirements are 

adequate to reasonably ensure 

compliance with audit trail rules. 

Sections 38.553(a) and 38.553(b) require 

audit trail enforcement programs that 

will yield some certainty with respect to 

exchanges’ accurate and consistent 

access to all data necessary to 

reconstruct all transactions in their 

markets and provide evidence of 

customer and market abuses. Absent 

reliable audit trail data, an exchange’s 

ability to detect or investigate customer 

or market abuses may be severely 

diminished. 

The Commission does not believe that 

requiring exchanges to issue no more 

than one warning letter for the same 

violation within a rolling 12-month time 

period is arbitrary and 

counterproductive. The proposed 

requirement to limit DCMs to no more 

than one warning letter for the same 

violation within a rolling 12-month time 

period helps ensure that exchanges levy 

meaningful fines and sanctions to deter 

recidivist behavior. However, the 

Commission is amending § 38.553(b) to 

clarify that its requirements with respect 

to warning letters only apply where 

exchange compliance staff finds an 

actual rule violation, rather than just the 

suspicion of a violation. 


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36646 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

364See Rule Enforcement Review of the 

Minneapolis Grain Exchange (August 27, 2009), and 

Rule Enforcement Review of ICE Futures U.S. (Feb. 

2, 2010). 

365Former Designation Criterion 5 stated that 

‘‘the board of trade shall establish and enforce rules 

and procedures for ensuring the financial integrity 

of transactions entered into by or through the 

facilities of the contract market, including the 

clearance and settlement of the transactions with a 

derivatives clearing organization.’’ 17 CFR Part 38, 

app. A (2010). 

366The Commission received five comment 

letters that discussed proposed regulations 38.600 

through 38.607. The comments were received from 

ICE Comment Letter (Feb. 22, 2011), ELX Comment 

Letter (Feb. 22, 2011), MGEX Comment Letter (Feb. 

22, 2011), KCBT Comment Letter (Feb. 22, 2011), 

and CME Comment Letter (Feb. 22, 2011). 

367CME Comment Letter at 34 (Feb. 22, 2011). 

368 Id. 

369Although the DCM and SEF Financial Integrity 

Core Principles are similar, the SEF core principle 

contains the language ‘‘including the clearance and 

settlement of the swaps pursuant to section 

2(h)(1).’’ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b– 

2(f)(7), as added by section 733(f) of the Dodd-Frank 

Act. The DCM core principle states ‘‘including the 

clearance and settlement of the transactions with a 

derivatives clearing organization.’’ The Commission 

reads section 2(h)(1) as a limitation on the clearing 

obligation for SEFs, and as a result, proposed 

regulation 37.701 requires all transactions executed 

on a SEF to be cleared unless the transaction is 

exempted from clearing under section 2(h)(7) of the 

CEA or the Commission determines that the 

clearing requirement under section 2(h)(1) of the 

CEA is inapplicable. Since Congress did not 

provide for a limitation on the clearing obligation 

in the DCM core principle, all transactions executed 

on or through a DCM must be cleared through a 

Commission-registered DCO. 

370 15 U.S.C. 78a et seq. (2010) 

371 ICE Comment Letter at 12 (Feb. 22, 2011). 

372 Id. at 13. 

373 Id. 

374 Id. 

375The Commission notes that this requirement 

does not speak to DCO requirements under, for 

example, Core Principle D (Risk Management) for 

its clearing members. 

The Commission notes that § 38.553 

reflects staff’s findings and 

recommendations in recent RERs 

regarding DCMs’ audit trail enforcement 

programs, including recommendations 

regarding more frequent audit trail 

reviews and larger sanctions for audit 

trail violations. The proposed rule also 

reflects the Commission’s directive to 

DCMs in recent RERs to develop audit 

trail programs for electronic trading that 

are comparable in rigor and scope to 

their audit trail programs for openoutcry trading.364 Accordingly, the 

Commission is adopting § 38.553 with 

the aforementioned modifications. 

11. Subpart L—Financial Integrity of 

Transactions 

The Dodd-Frank Act amended the text 

of Core Principle 11 largely to 

incorporate the language from former 

Designation Criteria 5.365

This core principle requires that a 

DCM establish and enforce rules and 

procedures for ensuring the financial 

integrity of transactions entered into, 

on, or through the facilities of the 

contract market, including the clearing 

and settlement of the transactions with 

a DCO. Core Principle 11 also requires 

that a DCM establish and enforce rules 

to ensure: (i) The financial integrity of 

any futures commission merchant 

(‘‘FCM’’) and introducing broker (‘‘IB’’); 

and (ii) the protection of customer 

funds. Because the substance of this 

core principle is unchanged, the 

Commission interpreted the statutory 

provisions in the same manner as they 

are currently interpreted. The 

Commission proposed to codify current 

practices carried out by the industry, as 

well as practices listed in the 

application guidance for Core Principle 

11 and former Designation Criterion 5. 

In addition, based upon its experience, 

the Commission proposed some new 

practices and requirements for DCMs in 

implementing Core Principle 11.366

Among other rules, the Commission 

proposed to codify the statutory text of 

Core Principle 11 in § 38.600, and is 

adopting the rule as proposed. 

i. § 38.601—Mandatory Clearing 

Proposed § 38.601 provided that all 

transactions executed on or through a 

DCM, other than transactions in security 

futures products, be cleared through a 

Commission-registered DCO. 

Summary of Comments 

CME commented that the mandatory 

clearing requirement should not apply 

to swaps traded on a DCM because not 

all swap contracts will be required to be 

cleared, such as foreign exchange swaps 

and swaps for end users.367 CME further 

stated that this requirement would put 

a DCM at a competitive disadvantage to 

a SEF without justification, and 

recommended that the Commission 

revise proposed § 38.601 to exclude 

swaps from the clearing rule.368

Discussion 

The Commission is adopting the 

proposed rule, with certain 

amendments. The Commission believes 

that the language of the core principle 

specifically imposes a clearing 

obligation for all transactions executed 

on a DCM (as is the current practice) 

and has therefore not revised the rule to 

exclude swaps.369

However, the Commission has revised 

the rule to make clear that transactions 

in security futures products that are 

executed on or through a DCM are also 

subject to the mandatory clearing 

requirement. Such products may be 

cleared either through a DCO or through 

a clearing agency registered pursuant to 

section 17A of the Securities Exchange 

Act of 1934.370

ii. § 38.602—General Financial Integrity 

Proposed § 38.602 provided that 

DCMs must adopt rules establishing 

minimum financial standards for both 

member FCMs and IBs and nonintermediated market participants. 

Summary of Comments 

ICE contended that the Commission 

has expanded the standard in Core 

Principle 11 by requiring DCMs to 

establish minimum financial standards 

for all of their members and nonintermediated market participants.371

ICE further stated that many DCMs 

eliminated specific financial standards 

for their non-FCM members and instead 

require that non-FCM member 

transactions be guaranteed by a clearing 

member.372 As a result, ICE requested 

confirmation that a DCM rule requiring 

such clearing arrangements to be in 

place would satisfy proposed 

§ 38.602.373 ICE also requested 

confirmation that a DCM rule requiring 

an FCM to maintain capital in 

accordance with applicable Commission 

regulations would satisfy the DCM’s 

duty to set financial requirements for its 

FCM members.374

Discussion 

The Commission is adopting the rule 

as proposed. In response to ICE’s 

comments, the Commission confirms 

that a DCM rule requiring that 

transactions by a non-FCM member be 

guaranteed by a clearing member will 

satisfy § 38.602.375

However, a DCM rule requiring an 

FCM to maintain capital in accordance 

with applicable Commission regulations 

will not, in itself, satisfy the DCM’s duty 

to set minimum financial standards for 

its FCM members. The term ‘‘minimum 

financial standards’’ used in § 38.602 is 

not intended to cover only capital 

requirements. Rather, § 38.602 should 

be read in conjunction with § 38.604, 

which requires surveillance by a DCM 

of financial and related information 

from each of its members. The 

Commission notes that a DCM’s duty to 

set financial standards for its FCM 

members involves setting capital 

requirements, conducting surveillance 

of the potential future exposure of each 

FCM as compared to its capital, and 

taking appropriate action in light of the 

results of such surveillance. 


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376 KCBT Comment Letter at 7 (Feb. 22, 2011). 

377 Id. 

378An FCM that is a clearing member will also 

have additional obligations to the DCO as a result 

of its clearing membership. 379See KCBT Comment Letter at 7 (Feb. 22, 2011). 380 Id. 

381 Id. 

382See 73 FR 52832, Sept. 11, 2008 (requesting 

comments prior to the Commission’s approval of 

the most recent Joint Audit Committee agreement, 

which approval was granted March 18, 2009). See 

also, DCM NPRM, 75 FR at 80596. 

iii. § 38.603—Protection of Customer 

Funds 

Proposed § 38.603 provided that 

DCMs must adopt rules for the 

protection of customer funds, including 

the segregation of customer and 

proprietary funds, the custody of 

customer funds, the investment 

standards for customer funds, 

intermediary default procedures and 

related recordkeeping. 

Summary of Comments 

KCBT stated that because its rules 

incorporate by reference the 

requirements of the CEA, the 

requirement to implement exchange 

rules that mirror Commission 

regulations is duplicative, unnecessary 

and burdensome.376 In addition, KCBT 

noted that its clearing corporation 

already has rules in place to address 

intermediary default procedures.377

Discussion 

The Commission is adopting the rule 

as proposed. In response to the 

comments, the Commission confirms 

that DCMs must adopt rules as required 

under § 38.603. Establishing such rules 

is important because it will provide 

evidence: (i) that each DCM has focused 

attention on the specific regulations 

promulgated under the CEA; and (ii) 

that such regulations are appropriately 

implemented. Section 38.603 does not 

specify the exact rules to be 

implemented by each DCM, but sets 

forth the substance of what the rules of 

each DCM must address. 

In response to KCBT’s comment that 

its clearing corporation already has 

rules in place to address intermediary 

default procedures, the Commission 

notes that DCO rules protect the DCO, 

not fellow customers. Nonetheless, the 

performance of the functions required 

by § 38.603 may be allocated between a 

DCO and DCM pursuant to appropriate 

written agreements. Such agreements 

would have to include an arrangement 

between the DCO and DCM that the 

DCO would undertake the responsibility 

to protect the individual customers of 

the DCM. 

iv. § 38.604—Financial Surveillance 

Proposed § 38.604 required that a 

DCM must routinely receive and 

promptly review financial and related 

information from its members, and 

conduct ongoing financial surveillance 

of the risk created by the positions taken 

by an FCM’s customers. To meet this 

requirement, the DCM must have rules 

pertaining to minimum financial 

standards of intermediaries that include, 

among other things, rules prescribing 

minimum capital requirements for 

member FCMs and IBs.378 The DCM 

must also have rules pertaining to the 

protection of customer funds that must 

include, among other things, that each 

DCM must continually survey the 

obligations of each FCM created by its 

customers’ positions and, as 

appropriate, compare those obligations 

to the financial resources of the FCM. If 

the obligations of a member FCM appear 

excessive as compared to the FCM’s 

capital, a DCM should take appropriate 

action, including contacting the FCM or 

the FCM’s designated self-regulatory 

organization (‘‘DSRO’’). 

Summary of Comments 

KCBT commented that it already 

reviews on a daily basis the open 

positions and percentage of open 

interest held by each clearing member, 

and ‘‘pay/collect information’’ based 

upon open positions and reportable 

positions.379 KCBT is concerned that the 

use of the terms ‘‘continually’’ and 

‘‘excessive’’ in the proposed regulation 

is vague.380 In addition, KCBT noted 

that the DSRO should continue to 

review the obligations of each firm for 

which it is the DSRO because the DSRO 

has access to all customer positions 

being carried by the FCM in all markets 

and thus is in a better position to ensure 

that the FCM has sufficient capital for 

the overall positions being carried by 

the FCM.381

Discussion 

The Commission is adopting the rule 

as proposed and notes that the rule 

codifies existing industry practice. In 

response to comments raised by KCBT, 

the Commission notes that the term 

‘‘continually’’ in the proposed rule 

requires that a DCM survey the 

obligations of each FCM created by the 

positions of its customers throughout 

the trading day, not just based upon 

end-of-day positions. Financial risk can 

shift dramatically throughout the day as 

a result of the combination of price 

move and new trades, making it difficult 

for a DCM to fulfill its obligations to 

establish and enforce rules to ensure: (i) 

the financial integrity of FCMs and IBs 

and (ii) the protection of customer funds 

pursuant to Core Principle 11, if such 

DCM limited its monitoring to daily. 

FCMs and IBs could be exposed to 

excessive risk if they are taking on risky 

positions during the day with the 

expectation that those risks will be 

offset prior to the daily review period 

set by the DCM. The Commission also 

notes that an arrangement between a 

DCO and a DCM, whereby the DCO is 

responsible to a DCM for the 

performance of certain functions, 

including the monitoring required 

pursuant to § 38.604, will continue to be 

permitted by the Commission. 

In response to KCBT’s comment 

regarding the vagueness of the word 

‘‘excessive,’’ the Commission expects a 

DCM to exercise professional judgment 

in monitoring the risks of its FCMs as 

compared to their available capital, and 

to take follow-up action to inquire into 

and address any exceptional situations. 

This monitoring should occur in 

addition to any DSRO review. 

v. § 38.605—Requirements for Financial 

Surveillance Program 

Proposed § 38.605 required DCMs, as 

self-regulatory organizations (‘‘SROs’’), 

to comply with the standards of 

amended § 1.52 to ensure the financial 

integrity of intermediaries by 

establishing and carrying out an SRO 

program for the examination and 

financial supervision of intermediaries. 

Section 1.52, as proposed to be 

amended, sets forth the required 

elements of SRO supervisory programs 

and permits one or more SROs to 

establish, subject to Commission 

approval, a joint audit plan to provide 

for the SRO supervision of members of 

more than one SRO. As noted in the 

DCM NPRM, proposed amendments to 

§ 1.52 included references to existing 

guidance to SROs contained in the 

Financial and Segregation Interpretation 

No. 4–1 (Advisory Interpretation for 

Self-Regulatory Organization 

Surveillance Over Members’ 

Compliance with Minimum Financial, 

Segregation, Reporting, and Related 

Recordkeeping Requirements), and 

Addendums A and B to Financial and 

Segregation Interpretation No. 4–1, and 

Financial and Segregation Interpretation 

No. 4–2 (Risk-Based Auditing), which 

guided the practices of members of the 

Joint Audit Committee (‘‘JAC’’) 

operating a joint audit plan that had 

been approved by the Commission.382

Discussion 

No comments were received 

pertaining to the proposed rules, and 

the Commission is adopting proposed 


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383MGEX Comment Letter at 8 (Feb. 22, 2011). 

384 Id. 

385CME Comment Letter at 34 (Feb. 22, 2011). 

386 Id. 

387ELX Comment Letter at 5 (Feb. 22, 2011). 

388MGEX Comment Letter at 8 (Feb. 22, 2011). 

389The efficacy of these controls also hinge, in 

part, on the proper functioning of the electronic 

systems of DCMs, FCMs and direct access market 

participants, and thus, necessitates that such 

electronic systems are routinely tested and 

monitored. Accordingly, the Commission may 

address additional electronic system testing and 

supervision-related issues in the future. 

390See Pre-Trade Functionality Subcommittee of 

the CFTC Technology Advisory Committee report, 

‘‘Recommendations on Pre-Trade Practices for 

Trading Firms, Clearing Firms, and Exchanges 

Involved in Direct Market Access’’ (March 1, 2011), 

accepted by the TAC and available at: http:// 

www.cftc.gov/ucm/groups/public/@swaps/ 

documents/dfsubmission/ 

tacpresentation030111_ptfs2.pdf. The DMA Report 

recommends specific controls that should be 

adopted by each FCM and DCM and notes that ‘‘the 

exchanges are the point furthest downstream, so 

coordination at this level has the greatest leverage 

to impact the industry as a whole.’’ DMA Report at 

p. 4. The controls provided by the DCM serve as 

the backstop, in the event that an FCM’s controls 

are insufficient. The DMA Report notes that, 

although the recommendations may seem 

redundant, it ‘‘strongly believes that an approach of 

multiple, redundant checks across the supply chain 

offers the most robust protection to markets.’’ Id. at 

p. 5. 

§ 38.605 and § 1.52 without 

modification. 

The Commission notes that the staff 

guidance contained in Division of 

Trading and Markets Financial and 

Segregation Interpretations 4–1 and 4–2, 

and related Addendums A and B to 

Financial and Segregation 

Interpretations 4–1, remains effective. 

Accordingly, while the revised 

§ 1.52(b)(4) provides that an SRO’s 

financial surveillance program must 

include the onsite examination of each 

member FCM no less frequently than 

once every 18 months, Financial and 

Segregation Interpretation No. 4–2 

provides that FCMs should generally be 

subject to an onsite examination at least 

once every 9 to 18 months, with 

examination cycles exceeding 15 

months only for registrants with a 

demonstrated history of strong 

compliance and risk management in 

order to provide flexibility for 

unexpected events or to vary 

examination dates. 

While § 1.52 now codifies long 

established staff positions, and SRO 

practice, with respect to the manner in 

which SROs execute their financial 

surveillance and supervisory programs 

with respect to member intermediaries, 

the Commission will continue to 

evaluate options to further enhance the 

manner in which intermediaries are 

supervised and to strengthen the 

protection of customer funds. 

vi. § 38.606—Financial Regulatory 

Services Provided by a Third Party 

Proposed § 38.606 provided that 

DCMs may satisfy their financial 

surveillance responsibilities under 

proposed §§ 38.604 and 38.605 by 

outsourcing such responsibilities to a 

registered futures association or other 

regulated entity, including, for example, 

a DCO. Proposed § 38.606 provided that 

a DCM must ensure that the regulatory 

service provider has the capacity and 

resources to conduct the necessary 

financial surveillance and, 

notwithstanding the use of a regulatory 

service provider, the DCM remains 

responsible for compliance with its 

financial surveillance obligations. 

Summary of Comments 

MGEX commented that the proposed 

requirements seem reasonable, and 

stated that the requirements could be 

satisfied under the current delegation 

and information sharing agreements 

such as the Commission-approved JAC 

Agreement for Services.383 MGEX also 

commented that DCMs should not be 

required to audit third party regulatory 

providers because that would frustrate 

the purpose, efficiency, and economic 

value of outsourcing to a third party.384

Discussion 

The Commission is adopting the 

proposed rule without modification. In 

response to MGEX’s comments, the 

Commission notes that § 38.606 would 

not be satisfied solely by relying on a 

DCM’s JAC Agreement. The current JAC 

Agreement does not cover the type of 

financial surveillance specified in 

§ 38.604, nor does it, by its terms, serve 

as an outsourcing regulatory services 

agreement for the type of outsourcing 

contemplated under § 38.606. 

Accordingly, in order to satisfy the 

requirements of both §§ 38.604 and 

38.605, a regulatory services agreement 

must specifically include the following: 

(i) the regulatory services to be 

performed, which to satisfy § 38.604 

must include intraday monitoring of 

FCM obligations and positions; (ii) to 

whom and for whom such services are 

to be provided; and (iii) a statement or 

representation that the provider of the 

services has the capacity and resources 

to perform the identified services. 

vii. § 38.607—Direct Access 

Proposed § 38.607 required a DCM 

that allows customers direct access to its 

contract market to implement certain 

direct access controls and procedures in 

order to provide member FCMs with 

tools to manage their financial risk. The 

proposed rule contemplated that an 

FCM would continue to have primary 

responsibility for overall risk 

management, but that the DCM would 

be required to establish an automated 

risk management system permitting an 

FCM to set appropriate risk limits for 

each customer with direct access to the 

contract market. 

Summary of Comments 

CME supports risk controls at both the 

DCM and DCO levels, and also at 

clearing firm and direct access client 

levels.385 CME supports the discretion 

that the proposed rules provide a DCM 

in terms of the control model for access, 

and recommended a level of 

standardization with respect to the 

types of DCM pre-trade controls in the 

form of acceptable practices.386 ELX 

recommended that the Commission 

consider allowing an FCM to bypass use 

of DCM-provided controls if an FCM has 

its own controls that a DCM tests and 

deems to be sufficient.387 MGEX 

commented that the Commission should 

not mandate that a DCM provide the 

technology as a prescriptive rule, and 

further claimed that such tools are the 

FCM’s responsibility and DCMs should 

not be required to assume these 

responsibilities.388

Discussion 

After reviewing the comments 

discussed above, the Commission is 

adopting the proposed rule without 

modification and believes that risk 

controls are appropriate at the FCM, 

DCO and DCM levels. The Commission 

notes that it is impossible for an FCM 

to protect itself without the aid of the 

DCM when a customer has direct access 

to a DCM and thus completes trades that 

are the financial responsibility of such 

customer’s FCM before the FCM’s 

systems have an opportunity to prevent 

the execution of such trades. As a result, 

DCMs allowing customers direct access 

to their markets must implement certain 

controls and procedures to allow FCMs 

to manage their risk. As stated in the 

proposed rule, these controls would not 

be required for a DCM that permits only 

intermediated transactions and does not 

permit direct access. 

The responsibility to utilize these 

controls and procedures remains with 

the FCM. Each FCM permitting direct 

access must use DCM-provided controls, 

regardless of the purported efficacy of 

an FCM’s controls.389 This principle is 

supported by CME’s comment letter, the 

Commission’s Technology Advisory 

Committee report (the ‘‘DMA 

Report’’),390 and the FIA Report on 

Market Access Risk Management 


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391See FIA report on ‘‘Market Access Risk 

Management Recommendations’’ (April 2010), 

available at: http://www.futuresindustry.org/ 

downloads/Market_Access-6.pdf. (‘‘FIA Report’’). 

392 IOSCO, Final Report of the IOSCO Technical 

Committee, ‘‘Principles for Direct Electronic Access 

to Markets,’’ at 20, IOSCO Doc. FR08/10 (August 12, 

2010), available at http://www.iosco.org/library/ 

pubdocs/pdf/IOSCOPD332.pdf. 

393 Id. 

394 Id. at p. 22. 

395 Id. 

396See e.g., FIA Report. 

397See Leslie Sutphen, ‘‘Exchange Survey Finds 

Wide Range of Risk Controls in Place’’ (January 

2011), at 28, available at: http:// 

www.futuresindustry.org/downloads/RC-survey.pdf. 

398See DMA Report at p. 4. 

399Better Markets Comment Letter at 10 (Feb. 22, 

2011) and Barnard Comment Letter at 4 (May 20, 

2011) (citing DCM NPRM at 80597). 

400 Id. 

401See, Notice of proposed rulemaking, 75 FR 

33198, Jun. 11, 2010. 

402Compare former CEA section 5(b)(6) and 

section 5(d)(2) with CEA section 5(d)(13) as 

amended by the Dodd-Frank Act. Prior to the 

Continued 

Recommendations (the ‘‘FIA 

Report’’).391

As discussed in the DCM NPRM, the 

Technical Committee of the 

International Organization of Security 

Commissions (‘‘IOSCO’’) published a 

final report on principles for direct 

electronic access in August of 2010 (the 

‘‘IOSCO DEA Report’’) stating that, in an 

automated trading environment, the 

only controls that can effectively 

enforce limitations on risk are 

automated controls.392 Further, the 

IOSCO DEA Report noted that a market 

should not permit direct electronic 

access unless effective systems and 

controls are in place to enable risk 

management, including automated pretrade controls enabling intermediaries to 

implement appropriate trading limits.393

The IOSCO DEA Report stated that 

‘‘[t]here is no convincing rationale for 

not using automated credit limit system 

filters * * * it will be critical for 

intermediaries, third party vendors and 

markets to cooperate in putting into 

place appropriate systems and 

controls.’’ 394 One example provided in 

the report was that a market could 

provide and operate an automated 

system (i.e., software and hardware) that 

would be used by the intermediary and 

clearing firm.395

Further, the FIA’s working group, 

consisting of DCMs, clearing firms, and 

trading firms, recommended that pretrade controls be set at the exchange 

level, and that the controls be 

mandatory to ensure that there are no 

latency disadvantages.396 In a 

publication in January 2011, the FIA 

reported that the majority of exchanges 

have policies and tools in place that 

comply with those recommendations.397

The DMA Report also discussed the 

latency for an FCM that elects to use a 

DCM’s controls as compared to an FCM 

that does not.398 This disadvantage is 

eliminated if each DCM requires all 

FCMs to use the DCM-provided 

protections. 

12. Subpart M—Protection of Markets 

and Market Participants 

Core Principle 12, as amended by the 

Dodd-Frank Act, requires that DCMs 

establish and enforce rules to protect 

markets and market participants from 

abusive practices committed by any 

party, including abusive practices 

committed by a party acting as an agent 

for a participant, and promote fair and 

equitable trading on the contract market. 

The Commission proposed to codify 

the statutory text of the core principle 

in § 38.650, and is adopting the rule as 

proposed. 

i. § 38.651—Additional Sources for 

Compliance 

Proposed § 38.651 required that a 

DCM have and enforce rules that are 

designed to promote fair and equitable 

trading and to protect the market and 

market participants from abusive 

practices including fraudulent, 

noncompetitive or unfair actions, 

committed by any party. The rule also 

required that DCMs must have methods 

and resources appropriate to the nature 

of the trading system and the structure 

of the market to detect trade practice 

and market abuses and to discipline 

such behavior, in accordance with Core 

Principles 2 and 4, and the associated 

regulations in subparts C and E of this 

part, respectively. The proposed rule 

required that DCMs also must provide a 

competitive, open and efficient market 

and mechanism for executing 

transactions in accordance with Core 

Principle 9 and the associated 

regulations under subpart J of this part. 

Summary of Comments 

Chris Barnard and Better Markets 

referenced a discussion from the DCM 

NPRM preamble that provided that a 

DCM must establish rules that require 

the fair, equitable, and timely provision 

of information regarding prices, bids, 

and offers to market participants.399 Mr. 

Barnard requested that the Commission 

amend the wording of proposed 

§§ 38.650 and 38.651 to include this 

language and Better Markets requested 

that the proposed rules prohibit 

privileged access to data feeds, arguing 

that the practice is disruptive of fair and 

equitable trading.400

Discussion 

The Commission is adopting the rule 

with a technical modification to revise 

the heading of the rule from ‘‘Additional 

sources for compliance’’ to the more 

appropriate ‘‘Protection of markets and 

market participants.’’ All other aspects 

of the proposed rule will remain 

unchanged. 

The Commission believes that Mr. 

Barnard’s concerns are adequately 

addressed by the rules adopted in this 

release. As an initial matter, § 38.650 

simply codifies the language of Core 

Principle 12 and thus cannot be 

amended by the Commission. 

Additionally, the broad requirement to 

promote ‘‘fair and equitable trading’’ 

contained in §§ 38.650 and 38.651, as 

well as the Core Principle 9 requirement 

to provide a ‘‘competitive, open, and 

efficient market and mechanism for 

executing transactions,’’ are sufficient to 

capture the obligation to provide fair, 

equitable, and timely information 

regarding prices, bids, and offers. With 

respect to Better Markets’ comment, the 

Commission notes that the language 

from the DCM NPRM cited by Better 

Markets was not intended to preclude 

co-location. Instead, the DCM NPRM 

provides that a market should be fair 

and equitable in its information 

distribution, meaning all participants in 

co-location agreements should pay the 

same price for a given level of service 

and access. This does not mean that 

everyone in the market is required to get 

information at the same time, but rather 

that every member of a connection or 

access type class must be treated equally 

in terms of service and cost. The faster 

access to price, bid, and offer 

information afforded by co-location is 

no different than the faster access to 

information afforded to traders in the 

pits prior to the markets becoming 

electronic. The Commission believes 

that prohibiting co-location, or requiring 

that co-location services be throttled to 

a point that all participants are able to 

consume information or access the 

matching engine at the same speed, 

would not be practical or reasonable. 

The Commission also notes that it 

recently addressed co-location fees in a 

separate proposed rulemaking for ‘‘Colocation/Proximity Hosting 

Services.’’ 401

13. Subpart N—Disciplinary Procedures 

Core Principle 13 is a new core 

principle, created by section 735 of the 

Dodd-Frank Act. The core principle 

incorporates the concepts from former 

Designation Criterion 6 (Disciplinary 

Procedures) and former DCM Core 

Principle 2.402 The core principle 


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passage of the Dodd-Frank Act, the standards for 

DCMs’ disciplinary practices were found in 

Designation Criterion 6 and the statutory language, 

guidance, and acceptable practices for former Core 

Principle 2. Designation Criterion 6 required that a 

DCM establish and enforce disciplinary procedures 

that authorized it to discipline, suspend, or expel 

members or market participants that violated the 

rules of the DCM, or similar methods for performing 

the same functions, including delegation of the 

functions to third parties. Paragraph (a)(2) of the 

application guidance for former Core Principle 2 

required DCMs to have the ‘‘arrangements, 

resources, and authority [necessary] for effective 

rule enforcement,’’ and the ‘‘authority and ability to 

discipline and limit, or suspend the activities of a 

member or market participant pursuant to clear and 

fair standards.’’ 17 CFR part 38, app. B, Application 

Guidance for Core Principle 2 at (a)(2) (2010). In 

addition, paragraph (b)(4) of the former core 

principle’s acceptable practices required any DCM 

that wished to take advantage of the acceptable 

practice’s safe harbor to have ‘‘prompt and effective 

disciplinary action for any violation * * * found to 

have been committed.’’ 17 CFR part 38, app. B, 

Acceptable Practices for Core Principle 2 at (b)(4) 

(2010). Paragraph (b)(4) also referenced part 8 of the 

Commission’s regulations as an example that DCMs 

could follow to comply with Core Principle 2. 17 

CFR 8.01 et seq. In its experience, the Commission 

has found that many DCMs’ disciplinary programs 

do in fact model the disciplinary structures and 

processes in part 8. While the acceptable practices 

for former Core Principle 2 offered the disciplinary 

procedures in part 8 as an example of appropriate 

disciplinary procedures, DCMs were exempt from 

part 8 pursuant to regulation 38.2. The disciplinary 

procedures proposed herein do not re-subject DCMs 

to part 8 of the Commission’s regulations, but rather 

propose new disciplinary procedures for inclusion 

in part 38. 

403MGEX Comment Letter at 8 (Feb. 22, 2011). 

404See Rule Enforcement Review of the 

Minneapolis Grain Exchange (Aug. 27, 2009), Rule 

Enforcement Review of ICE Futures U.S. (Feb. 2, 

2010), Rule Enforcement Review of the Chicago 

Board of Trade and the Chicago Mercantile 

Exchange (Sep. 13, 2010), and Rule Enforcement 

Review of New York Mercantile Exchange and 

Commodity Exchange (August 30, 2011) for 

findings and recommendations pertaining to the 

adequate size of DCM compliance and enforcement 

staffs. 

405Section 40.9(c)(3)(ii), as proposed in the 

separate release titled ‘‘Requirements for 

Derivatives Clearing Organizations, Designated 

Contract Markets, and Swap Execution Facilities 

Regarding the Mitigation of Conflicts of Interest’’, 

provided that ‘‘Each Disciplinary Panel shall 

include at least one person who would not be 

disqualified from serving as a Public Director by 

regulation 1.3(ccc)(1)(i)–(vi) and (2) of this chapter 

(a ‘‘Public Participant’’). Such Public Participant 

shall chair each Disciplinary Panel. In addition, any 

specifically requires that DCMs 

establish and enforce disciplinary 

procedures that authorize the DCM to 

discipline, suspend or expel market 

participants and members that violate 

the DCM’s rules, or delegate the 

function to third parties. 

Summary of Comments 

Several commenters submitted letters 

discussing the disciplinary procedures 

contained in subpart N. While the 

comments were generally supportive of 

the Commission’s objectives, 

commenters expressed a general desire 

for the Commission to rely on a more 

principles-based approach, and argued 

that the proposed rules were overly 

prescriptive. Some commenters also 

articulated specific concerns regarding 

several rules that they believed would 

adversely impact DCMs. 

Discussion 

The Commission thoroughly reviewed 

and considered all comments received 

and, where appropriate, made 

modifications to the proposed rules, 

including converting some proposed 

rules into guidance. These 

modifications, explained further below, 

have resulted in changes to the 

numbering of the proposed regulations 

and in a reduction in the number of 

separately-enumerated rules, from 16 

proposed rules to 12 final rules. 

The Commission proposed to codify 

the statutory text of the core principle 

in proposed § 38.700, and adopts the 

rule as proposed. The Commission is 

also adding § 38.712 to refer applicants 

and DCMs to the guidance in appendix 

B to part 38. 

i. § 38.701—Enforcement Staff 

Proposed § 38.701 required that a 

DCM establish and maintain sufficient 

enforcement staff and resources to 

effectively and promptly prosecute 

possible rule violations within the 

jurisdiction of the contract market. The 

proposed rule also required a DCM to 

monitor the size and workload of its 

enforcement staff annually and increase 

its resources and staff as appropriate. 

The Commission recognized that at 

some DCMs, compliance staff also 

serves as enforcement staff. That is, they 

both investigate cases and present them 

before disciplinary panels. These 

proposed rules were not intended to 

prohibit that practice. 

The Commission believes that 

adequate staff and resources are 

essential to the effective performance of 

a DCM’s disciplinary program. This has 

repeatedly been reflected in 

Commission staff’s findings and 

recommendations in recent RERs, in 

which DMO staff recommended that 

DCMs increase their compliance and/or 

enforcement staff levels and monitor the 

size of their staff and increase the 

number of staff appropriately as trading 

volume increases, new responsibilities 

are assigned to staff, or internal reviews 

demonstrate that work is not completed 

in an effective or timely manner. 

Proposed § 38.701 also provided that 

a DCM’s enforcement staff may not 

include members of the exchange or 

persons whose interests conflict with 

their enforcement duties. Moreover, the 

proposed rule prohibited a member of 

the enforcement staff from operating 

under the direction or control of any 

person or persons with trading 

privileges at the contract market. These 

provisions sought to ensure the 

independence of enforcement staff, and 

help promote disciplinary procedures 

that are free of potential conflicts of 

interest. 

Summary of Comments 

MGEX noted that, as a combined 

DCM/DCO, it interprets the rule to allow 

staff to serve as enforcement and review 

staff for both the DCM and DCO 

divisions of MGEX, and any other 

entities that become a combined DCM/ 

DCO.403

Discussion 

The Commission is adopting the rule 

as proposed. The Commission believes 

that adequate staff and resources are 

essential to the effective performance of 

a DCM’s disciplinary program. This has 

repeatedly been reflected in 

Commission staff’s findings and 

recommendations in recent RERs, in 

which Commission staff recommended 

that DCMs increase their compliance 

and/or enforcement staff levels and 

monitor the size of their staff and 

increase the number of staff 

appropriately as trading volume 

increases, new responsibilities are 

assigned to staff, or internal reviews 

demonstrate that work is not completed 

in an effective or timely manner.404

The Commission notes that MGEX’s 

interpretation regarding the sharing of 

compliance staff across a combined 

DCM/DCO is acceptable, provided that 

the combined DCM/DCO has sufficient 

staff to meet the DCM’s regulatory 

compliance needs in an effective and 

timely manner. In addition, with respect 

to DCM matters, staff must be 

accountable to the DCM and its 

Regulatory Oversight Committee. The 

Commission also notes, however, that 

its a priori acceptance of integrated 

compliance staff is limited to the unique 

circumstances of a fully integrated 

exchange and clearing house. 

ii. § 38.702—Disciplinary Panels 

Proposed § 38.702 required a DCM to 

establish one or more Review Panels 

and one or more hearing panels 

(together, ‘‘disciplinary panels’’) to 

fulfill its obligations under this section. 

The composition of both panels was 

required to meet the composition 

requirements of proposed 

§ 40.9(c)(3)(ii) 405 and could not include 


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registered entity specified in paragraph (c)(3)(i) of 

this section shall adopt rules that would, at a 

minimum: (A) Further preclude any group or class 

of participants from dominating or exercising 

disproportionate influence on a Disciplinary Panel 

and (B) Prohibit any member of a Disciplinary Panel 

from participating in deliberations or voting on any 

matter in which the member has a financial 

interest.’’ See 75 FR 63732, Oct. 18, 2010. 

406CME Comment Letter at 35 (Feb. 22, 2011). 

407 Id. 

408ELX Comment letter at 5 (Feb. 22, 2011). 

409 Id. 

410MGEX Comment Letter at 9 (Feb. 22, 2011). 

411 Id. 

412CME Comment Letter at 35 (Feb. 22, 2011). 

413 Id. While the Commission largely agrees with 

CME’s comment, the Commission directs interested 

parties to regulation 38.158 for a further discussion 

of the required components of investigation reports. 

any members of the DCM’s compliance 

staff, or any person involved in 

adjudicating any other stage of the same 

proceeding. Paragraph (b) of the 

proposed rule provided that a Review 

Panel must be responsible for 

determining whether a reasonable basis 

exists for finding a violation of contract 

market rules, and for authorizing the 

issuance of a notice of charges against 

persons alleged to have violated 

exchange rules. If a notice of charges is 

issued, then paragraph (c) of the 

proposed rule helped to ensure an 

impartial hearing by requiring a separate 

hearing panel to adjudicate the matter 

and issue sanctions. While proposed 

§ 38.702 required DCMs to empanel 

distinct bodies to issue charges and to 

adjudicate charges in a particular 

matter, the rule permitted DCMs to 

determine for themselves whether their 

review and hearing panels are separate 

standing panels or ad hoc bodies whose 

members are chosen from a larger 

‘‘disciplinary committee’’ to serve in 

one capacity or the other for a particular 

disciplinary matter. 

Summary of Comments 

A number of commenters opposed the 

two-panel approach described in 

proposed § 38.702. CME stated that the 

Commission should rely on core 

principles, rather than what it sees as a 

prescriptive approach, as DCMs may 

have an established structure or may 

develop new structures that clearly 

satisfy the objective of the core 

principle, but that may not precisely 

comply with the language.406 CME 

illustrated two practices it believed may 

be precluded by the text of proposed 

§ 38.702: (1) CME’s Market Regulation 

staff determines whether certain nonegregious rule violations merit referral 

to a Review Panel and they issue 

warning letters on an administrative 

basis; and (2) CME’s hearing panel 

adjudicates a disciplinary case prior to 

the issuance of charges pursuant to a 

supported settlement agreement.407

ELX contended that the proposed rule 

would impose the need to create 

processes and procedures for certain 

functions already carried out by its 

Compliance Director, who is supervised 

by the Regulatory Oversight 

Committee.408 ELX suggested that a 

DCM should be able to obtain a waiver 

from the two-panel requirement if it 

already has been designated as a 

contract market and currently operates 

under an alternative structure with 

respect to disciplinary procedures that 

have sufficient controls.409

MGEX argued that the rule is overly 

prescriptive, that there is no reasonable 

basis for the distinction between the two 

panels, and that one panel would 

maximize resources and streamline the 

process for all involved.410 MGEX 

argued that staff is able to differentiate 

between the roles, and that the 

Commission should simply have the 

right to inquire if it has a question 

surrounding disciplinary panels or 

processes.411

Discussion 

The Commission is adopting the 

proposed rule with certain 

modifications to address comments. The 

Commission considered commenters’ 

views and believes that the proposed 

rule can be modified to address 

concerns without diminishing the 

purpose of the proposed rule. 

Accordingly, the final rule will require 

DCMs to have one or more disciplinary 

panels, without imposing a specific 

requirement for DCMs to maintain a 

‘‘review panel’’ and a ‘‘hearing panel.’’ 

The final rules replace specific panel 

names (i.e. ‘‘review panel’’ and ‘‘hearing 

panel’’) with a generic reference to the 

‘‘disciplinary panel’’ throughout part 38. 

However, even under a single-panel 

approach, individuals who determine to 

issue charges in a particular disciplinary 

matter may not also adjudicate the 

matter. The final text of § 38.702 permits 

flexibility in the structure of DCMs’ 

disciplinary bodies, but not in the basic 

prohibition against vesting the same 

individuals with the authority to both 

issue and adjudicate charges in the same 

matter. The modifications reflected in 

the final text of § 38.702, together with 

the revisions made to the final text of 

§ 38.703, permit DCMs to rely on their 

senior-most compliance officer (i.e., a 

DCM’s Chief Regulatory Officer), rather 

than on a disciplinary panel, to issue 

disciplinary charges, as suggested by 

ELX. However, the Commission notes 

that the adjudication of charges must 

still be performed by a disciplinary 

panel. Finally, the composition and 

conflicts requirements for disciplinary 

panels will be adopted with one 

modification, by replacing the reference 

to § 40.9(c)(3)(ii) with a reference to the 

more general ‘‘part 40.’’ 

iii. § 38.703—Review of Investigation 

Report 

The introductory paragraph of 

proposed § 38.703 required a Review 

Panel to promptly review an 

investigation report received pursuant 

to proposed § 38.158(c), and to take 

action on any investigation report 

received within 30 days of such receipt. 

Under paragraph (a) of the proposed 

rule, after receipt of the investigation 

report, if a Review Panel determined 

that additional investigation or evidence 

was needed, it would be required to 

promptly direct the compliance staff to 

conduct further investigation. In the 

alternative, under paragraph (b) of the 

proposed rule, if a Review Panel 

determined that no reasonable basis 

existed for finding a violation, or that 

prosecution was unwarranted, it would 

be permitted to direct that no further 

action be taken, and that a written 

statement be provided setting forth the 

facts and analysis supporting the 

decision. 

Finally, under paragraph (c) of the 

proposed rule, if a Review Panel 

determined that a reasonable basis 

existed for finding a violation and 

adjudication was warranted, it was 

required to direct that the person or 

entity alleged to have committed the 

violation be served with a notice of 

charges. 

Summary of Comments 

While CME agreed that an 

investigation report should include the 

subject’s disciplinary history, CME 

disagreed with the requirement in 

proposed § 38.158 that the disciplinary 

history be included in the version of the 

investigation report sent to the Review 

Panel.412 CME believed that the 

disciplinary history should not be 

considered by the Review Panel at all 

when determining whether to issue 

formal charges, arguing that a market 

participant’s disciplinary history is not 

relevant to the consideration of whether 

it committed a further violation of DCM 

rules.413

Discussion 

Consistent with revisions to proposed 

§ 38.702, the Commission is modifying 

proposed § 38.703 to provide greater 

flexibility to market participants in 

determining an approach to disciplinary 

panels. The Commission is eliminating 


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414CME Comment Letter at 35 (Feb. 22, 2011). 

415See generally, CME Comment Letter (Feb. 22, 

2011); and MGEX Comment Letter (Feb. 22, 2011). 

all but paragraph (c) of the proposed 

rule, and is moving paragraph (c) to 

§ 38.704 (Notice of charges), which the 

Commission is renumbering as § 38.703. 

The revisions to proposed rules § 38.702 

and § 38.703 will provide DCMs with 

the flexibility to follow a single-panel 

approach, provided that a single panel 

does not perform the function of issuing 

and adjudicating the same charges. In 

addition, a DCM will have the flexibility 

to allow its senior-most regulatory 

officer, such as its Chief Regulatory 

Officer, to review an investigation report 

and determine whether a notice of 

charges should be issued in a particular 

matter. 

iv. § 38.704—Notice of Charges 

Proposed § 38.704 described the 

minimally acceptable contents of a 

notice of charges (‘‘notice’’) issued by a 

Review Panel. The rule required that the 

notice adequately state the acts, 

conduct, or practices in which the 

respondent is alleged to have engaged; 

state the rule, or rules, alleged to have 

been violated; and prescribe the period 

within which a hearing on the charges 

may be requested. Further, the proposed 

rule also required that the notice advise 

the respondent charged that he is 

entitled, upon request, to a hearing on 

the charges. Paragraphs (a) and (b) of the 

proposed rule provided that a DCM may 

adopt rules providing that: (1) The 

failure to request a hearing within the 

time prescribed in the notice, except for 

good cause, may be deemed a waiver of 

the right to a hearing; and (2) the failure 

to answer or expressly deny a charge 

may be deemed to be an admission of 

such charge. 

Discussion 

No comments were received regarding 

proposed § 38.704, and the Commission 

is adopting the proposed rule with 

certain modifications. 

Given that paragraphs (a) and (b) of 

proposed § 38.704 allowed, but did not 

require, a DCM to issue rules regarding 

failures to request a hearing and 

expressly answer or deny a charge, the 

Commission believes that the language 

in these paragraphs is better suited as 

guidance rather than a rule. The 

Commission will adopt this language as 

guidance in appendix B to part 38. 

In addition to the aforementioned 

revisions, and as described above, the 

Commission is moving paragraph (c) of 

proposed § 38.703 to proposed § 38.704, 

and is renumbering proposed § 38.704 

as § 38.703. 

v. § 38.705—Right to Representation 

Proposed § 38.705 required that, upon 

being served with a notice of charges, a 

respondent must have the right to be 

represented by counsel or any other 

representative of his or her choosing in 

all succeeding stages of the disciplinary 

process. Together with proposed 

§§ 38.704 (requiring an adequate notice 

of charges to the respondent), 38.708 

(conferring the right to hearing), and 

38.710 (hearing procedures), § 38.705 

helped ensure basic fairness for 

respondents in disciplinary 

proceedings. 

Summary of Comments 

CME commented that the language of 

this rule should be limited to avoid 

conflicts in representation and, 

accordingly, requested that the rule be 

revised to clarify that a respondent may 

not be represented by: (1) A member of 

the DCM’s disciplinary committees; (2) 

a member of the DCM’s Board of 

Directors; (3) an employee of the DCM; 

and (4) a person substantially related to 

the underlying investigation, such as a 

material witness or other respondent.414

Discussion 

The Commission is adopting the 

proposed rule with certain 

modifications. The Commission 

acknowledges CME’s concern and is 

amending the proposed rule to 

incorporate CME’s suggestion to clarify 

that a respondent must have the right to 

be represented by legal counsel or any 

other representative of its choosing in 

all succeeding stages of the disciplinary 

process, except any member of the 

designated contract market’s board of 

directors or disciplinary panel, any 

employee of the designated contract 

market, or any person substantially 

related to the underlying investigations, 

such as material witness or respondent. 

Additionally, as a result of the rule 

deletions and modifications discussed 

above, proposed § 38.705 as modified is 

being adopted as § 38.704. 

vi. § 38.706—Answer to Charges 

Proposed § 38.706 provided that a 

respondent must be given a reasonable 

period of time to file an answer to a 

charge. In general, paragraphs (a) 

through (c) of the proposed rule 

provided that the rules of the DCM may 

require that: (1) The answer must be in 

writing and include a statement that the 

respondent admits, denies or does not 

have and is unable to obtain sufficient 

information to admit or deny each 

allegation; (2) failure to file an answer 

on a timely basis shall be deemed an 

admission of all allegations in the notice 

of charges; and (3) failure in an answer 

to deny expressly a charge shall be 

deemed to be an admission of such 

charge. 

Discussion 

Although no specific comments were 

received on proposed § 38.706, 

commenters generally requested greater 

flexibility to establish their own 

disciplinary procedures.415 The 

Commission believes that proposed 

§ 38.706 is a rule where greater 

flexibility can reasonably be accorded. 

Accordingly, the Commission is 

maintaining as a rule the requirement 

that a respondent must be given a 

reasonable period of time to file an 

answer to a notice of charges, and is 

condensing the remainder of the 

proposed rule by replacing 

subparagraphs (a), (b), and (c) with a 

requirement that any rules adopted by a 

DCM governing the requirements and 

timeliness of a respondent’s answer to 

charges must be ‘‘fair, equitable, and 

publicly available.’’ Finally, as a result 

of the rule deletions and modifications 

discussed above, proposed § 38.706 as 

modified is being adopted as § 38.705. 

vii. § 38.707—Admission or Failure To 

Deny Charges 

Proposed § 38.707 provided that, if a 

respondent admits or fails to deny any 

of the violations alleged in a notice of 

charges, then a hearing panel may find 

that the violations admitted or not 

denied have in fact been committed. If 

a DCM adopted a rule concerning the 

admission or failure to deny charges, 

then paragraphs (a) through (c) of the 

proposed rule provided that: (1) The 

hearing panel must impose a sanction 

for each violation found to have been 

committed; (2) the DCM must promptly 

notify the respondent in writing of any 

sanction to be imposed and advise the 

respondent that they may request a 

hearing on such sanction within the 

period of time stated in the notice; and 

(3) the rules of the DCM may provide 

that if the respondent fails to request a 

hearing within the period of time stated 

in the notice, then the respondent will 

be deemed to have accepted the 

sanction. 

Discussion 

Although the Commission did not 

receive specific comments pertaining to 

the proposed rule, the Commission is 

moving the entire rule, with certain 

modifications, to the guidance in 

appendix B. Given that proposed 

§ 38.707 allowed, but did not require, a 

DCM to issue rules regarding a 

respondent’s admission or failure to 


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416CFE Comment Letter at 5 (Feb. 22, 2011). 

417 Id. 

418 Id. 

419CME Comment Letter at 36 (Feb. 22, 2011). 

deny charges, the Commission believes 

that the proposed rule is better suited as 

guidance in appendix B to part 38 rather 

than a rule. The Commission believes 

adopting the proposed rule as guidance, 

rather than a rule, will grant DCMs 

greater flexibility in administering their 

obligations, consistent with the general 

comments seeking the same. 

Furthermore, the text that will now be 

included as guidance is being modified 

to reflect the single-panel approach 

adopted in § 38.702, replacing specific 

panel names with a generic reference to 

the ‘‘disciplinary panel.’’ 

viii. § 38.708—Denial of Charges and 

Right to Hearing 

Proposed § 38.708 provided that in 

every instance where a respondent has 

requested a hearing on a charge that he 

or she denies, or on a sanction set by the 

hearing panel pursuant to proposed 

§ 38.707, the respondent must be given 

the opportunity for a hearing in 

accordance with the requirements of 

proposed § 38.710. The DCM’s rules 

were permitted to provide that, except 

for good cause, the hearing must be 

concerned only with those charges 

denied or sanctions set by the hearing 

panel under proposed § 38.707 for 

which a hearing has been requested. 

Discussion 

The Commission did not receive 

comments pertaining to this rule, but is 

adopting the proposed rule with 

modifications. 

The Commission is revising the 

proposed rule to reflect the single-panel 

approach adopted in § 38.702, replacing 

specific panel names with a generic 

reference to the ‘‘disciplinary panel.’’ In 

order to provide DCMs with greater 

flexibility in establishing disciplinary 

procedures, the Commission also is 

removing the section of the proposed 

rule which was optional—allowing a 

DCM’s rules to provide that, except for 

good cause, a hearing must be 

concerned only with those charges 

denied or sanctions set by the panel for 

which a hearing has been requested. 

Finally, as a result of the withdrawal of 

certain preceding rules discussed above, 

proposed § 38.708 as modified is being 

adopted as § 38.706. 

ix. § 38.709—Settlement Offers 

Proposed § 38.709 provided the 

procedures a DCM must follow if it 

permits the use of settlements to resolve 

disciplinary cases. Paragraph (a) of the 

proposed rule stated that the rules of a 

DCM may permit a respondent to 

submit a written offer of settlement any 

time after an investigation report is 

completed. The proposed rule permitted 

the disciplinary panel presiding over 

the matter to accept the offer of 

settlement, but prohibited the panel 

from altering the terms of the offer 

unless the respondent agreed. In 

addition, paragraph (b) of the proposed 

rule provided that the rules of the DCM 

may allow a disciplinary panel to 

permit the respondent to accept a 

sanction without admitting or denying 

the rule violations upon which the 

sanction is based. 

Paragraph (c) of proposed § 38.709 

stated that a disciplinary panel 

accepting a settlement offer must issue 

a written decision specifying the rule 

violations it has reason to believe were 

committed, and any sanction imposed, 

including any order of restitution where 

customer harm has been demonstrated. 

Importantly, paragraph (c) also provided 

that if an offer of settlement is accepted 

without the agreement of a DCM’s 

enforcement staff, the decision must 

carefully explain the disciplinary 

panel’s acceptance of the settlement. 

Finally, paragraph (d) of proposed 

§ 38.709 allowed a respondent to 

withdraw his or her offer of settlement 

at any time before final acceptance by a 

disciplinary panel. If an offer is 

withdrawn after submission, or is 

rejected by a disciplinary panel, the 

respondent must not be deemed to have 

made any admissions by reason of the 

offer of settlement and must not be 

otherwise prejudiced by having 

submitted the offer of settlement. 

Discussion 

Although no specific comments were 

received in regards to this proposed 

rule, the Commission is adopting the 

provisions of the proposed rule as 

guidance in appendix B. The 

Commission believes that adopting the 

proposed rule as guidance rather than a 

rule will grant DCMs greater flexibility 

in administering their obligations, 

consistent with the general comments 

seeking the same. Furthermore, the 

Commission is revising the guidance 

text to make it consistent with its 

modifications regarding the single-panel 

approach adopted in § 38.702 and the 

customer restitution revisions adopted 

below with respect to proposed 

§ 38.714. 

x. § 38.710—Hearings 

Proposed § 38.710 required a DCM to 

adopt rules that provide certain 

minimum requirements for any hearing 

conducted pursuant to a notice of 

charges. In general, sections (a)(1) 

through (a)(7) of the proposed rule 

required the following: (1) A fair 

hearing; (2) authority for a respondent to 

examine evidence relied on by 

enforcement staff in presenting the 

charges contained in the notice of 

charges; (3) the DCM’s enforcement and 

compliance staffs must be parties to the 

hearing and the enforcement staff must 

present its case on those charges and 

sanctions that are the subject of the 

hearing; (4) the respondent must be 

entitled to appear personally at the 

hearing, have the authority to crossexamine persons appearing as witnesses 

at the hearing, and call witnesses and 

present evidence as may be relevant to 

the charges; (5) the DCM must require 

persons within its jurisdiction who are 

called as witnesses to participate in the 

hearing and produce evidence; (6) a 

copy of the hearing must be made and 

become a record of the proceeding if the 

respondent has requested a hearing; and 

(7) the rules of the DCM may provide 

that the cost of transcribing the record 

must be borne by a respondent who 

requests a transcript. Additionally, 

proposed paragraph (b) specified that 

the rules of the DCM may provide that 

a sanction be summarily imposed upon 

any person within its jurisdiction whose 

actions impede the progress of a 

hearing. 

Summary of Comments 

Two commenters requested that the 

Commission revise proposed 

§ 38.710(a)(2). CFE commented that 

proposed § 38.710(a)(2) should limit a 

respondent’s access only to evidence a 

DCM plans to introduce at a hearing.416

CFE further requested the exclusion of 

evidence covered under attorney-client 

privilege, attorney work product 

privilege, or other confidential reports 

and methodologies, including the 

disclosure of the name of a confidential 

complainant.417 CFE also argued that 

investigation and examination materials 

prepared by a DCM should be protected 

from disclosure as internal work 

product unless the DCM intends to 

introduce them at the hearing.418

CME similarly argued that proposed 

§ 38.710(a)(2) should be revised so that 

a respondent may not access protected 

attorney work product, attorney-client 

communications, and investigative work 

product (such as investigation and 

exception reports).419

Discussion 

The Commission is adopting 

paragraph (a) of the proposed rule with 

certain modifications, and is converting 

paragraph (b) of the proposed rule to 

guidance in appendix B. 


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420Proposed regulation 38.158(c), which was 

proposed with respect to Core Principle 2, required 

that a copy of a member or market participant’s 

disciplinary history be included in the compliance 

staff’s investigation report. 

421CFE Comment Letter at 6 (Feb. 22, 2011). 

422 Id. 

423Barnard Comment Letter at 2, 4 (May 20, 2011) 

(Barnard stated that under a properly functioning 

sanctions regime, sanctions must be: (1) 

Significantly greater than potential benefits derived 

from a breach of rules; (2) targeted at those parties 

who stand to gain from a breach of rules, whether 

natural or legal persons; and (3) include a public 

reprimand and/or be published). 

The Commission has considered CFE 

and CME’s comments, and believes that 

a DCM should be permitted to withhold 

certain documents from a respondent in 

certain circumstances, and thus, is 

revising proposed § 38.710(a)(2) (now 

§ 38.707(a)(2)) accordingly. Because 

proposed § 38.710(b) (which provided 

that the DCMs’ rules may provide that 

a sanction may be summarily imposed 

upon any person whose actions impede 

the progress of a hearing) was an 

optional requirement for DCMs, the 

Commission is adopting this language as 

guidance in appendix B to part 38. 

Furthermore, the Commission is 

eliminating proposed § 38.710(a)(7), an 

optional rule that in certain cases 

allowed for the cost of transcribing the 

record of the hearing to be borne by the 

respondent. The Commission also is 

revising the rule text to make it 

consistent with its modifications 

regarding the single-panel approach 

adopted in § 38.702 and its 

modifications to proposed § 38.712 

discussed below. Finally, as a result of 

the withdrawal and renumbering of the 

rules discussed above, proposed 

§ 38.710 as modified is being adopted as 

§ 38.707. 

xi. § 38.711—Decisions 

Proposed § 38.711 detailed the 

procedures that a hearing panel must 

follow in rendering disciplinary 

decisions. The proposed rule required 

that all decisions include: (1) A notice 

of charges or a summary of the charges; 

(2) the answer, if any, or a summary of 

the answer; (3) a summary of the 

evidence produced at the hearing or, 

where appropriate, incorporation by 

reference in the investigation report; (4) 

a statement of findings and conclusions 

with respect to each charge, and a 

careful explanation of the evidentiary 

and other basis for such findings and 

conclusions with respect to each charge; 

(5) an indication of each specific rule 

with which the respondent was found to 

have violated; and (6) a declaration of 

any penalty imposed against the 

respondent, including the basis for such 

sanctions and the effective date of such 

sanctions. 

Discussion 

No comments were received on 

proposed § 38.711. The Commission is 

adopting § 38.711 as proposed with 

minor modifications to reflect the 

single-panel approach adopted in 

§ 38.702, and replacing specific panel 

names with a generic reference to the 

‘‘disciplinary panel.’’ In addition, as a 

result of the withdrawal and 

renumbering of preceding rules 

discussed above, proposed § 38.711 as 

modified is being adopted as § 38.708. 

xii. § 38.712—Right To Appeal 

Proposed § 38.712 provided the 

procedures that a DCM must follow in 

the event that the DCM’s rules authorize 

an appeal of adverse decisions in all or 

in certain classes of cases. Notably, the 

proposed rule required a DCM that 

permits appeals by disciplinary 

respondents to also permit appeals by 

its enforcement staff. For DCMs that 

permit appeals, the language in 

paragraphs (a) through (d) of proposed 

§ 38.712 generally required the DCM to: 

(1) Establish an appellate panel that is 

authorized to hear appeals; (2) ensure 

that the appellate panel composition is 

consistent with § 40.9(c)(iv) of the 

Commission’s regulations and does not 

include any members of the DCM’s 

compliance staff, or any person 

involved in adjudicating any other stage 

of the same proceeding; (3) except for 

good cause shown, conduct the appeal 

or review solely on the record before the 

hearing panel, the written exceptions 

filed by the parties, and the oral or 

written arguments of the parties; and (4) 

issue a written decision of the appellate 

panel and provide a copy to the 

respondent promptly following the 

appeal or review proceeding. 

Discussion 

Although no specific comments were 

received on proposed § 38.712, the 

Commission is converting the proposed 

rule to guidance in appendix B. Given 

that proposed § 38.712 allowed, but did 

not require, a DCM to issue rules 

regarding a respondent’s right to appeal, 

the Commission is moving this 

provision to guidance in appendix B to 

part 38. The Commission believes that 

adopting the proposed rule as guidance 

rather than a rule, will grant DCMs 

greater flexibility in administering their 

obligations, consistent with the general 

comments seeking the same. 

The Commission notes that the 

reference to § 40.9(c)(iv) in the proposed 

rule was a technical error. Instead, 

proposed § 38.712 should have 

referenced the composition 

requirements of an appellate panel 

outlined in § 40.9(c)(3)(iii). Accordingly, 

the Commission is replacing the 

reference to § 40.9(c)(iv) with a 

reference to the more general ‘‘part 40’’ 

in the guidance text. Furthermore, the 

Commission is revising the guidance 

text to reflect the single-panel approach 

now adopted in § 38.702, replacing 

specific panel names with a generic 

reference to the ‘‘disciplinary panel.’’ 

xiii. § 38.713—Final Decisions 

Proposed § 38.713 required that each 

DCM establish rules setting forth when 

a decision rendered under this subpart 

N will become the final decision of the 

DCM. 

Discussion 

No comments were received in 

regards to the proposed rule, and the 

Commission is adopting the proposal 

without modification. However, as a 

result of the renumbering of certain 

preceding rules discussed above, 

proposed § 38.713 is being adopted as 

§ 38.709. 

xiv. § 38.714—Disciplinary Sanctions 

Proposed § 38.714 required that every 

disciplinary sanction imposed by a 

DCM must be commensurate with the 

violations committed and must be 

clearly sufficient to deter recidivism or 

similar violations by other market 

participants. Additionally, the proposed 

rule required that, in the event of 

demonstrated customer harm, any 

disciplinary sanction must include full 

customer restitution. In evaluating 

appropriate sanctions, the proposed rule 

required the DCM to take into account 

a respondent’s disciplinary history.420

Summary of Comments 

CFE supported the goal articulated in 

proposed § 38.714, but argued that in 

certain situations, the requirement for 

customer restitution should not apply 

where it may not be possible for a DCM 

to determine the amount of customer 

harm, which parties may have been 

harmed, and/or how the harm was 

allocated among potentially aggrieved 

parties.421 CFE requested that the 

Commission clarify that the requirement 

to include customer restitution in a 

disciplinary sanction does not apply to 

the extent that a DCM is unable to 

determine with reasonable certainty 

what the restitution should be, to whom 

to provide restitution, and/or how to 

allocate restitution.422

Chris Barnard argued that sanctions 

should include a public reprimand and/ 

or be published.423


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424CME Comment Letter at 36 (Feb. 22, 2011). 

425 17 CFR part 38, app. B. 

426See ‘‘Governance Requirements for Derivatives 

Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities; Additional 

Requirements Regarding the Mitigation of Conflicts 

of Interest,’’ Notice of Proposed Rulemaking, 76 FR 

722, January 6, 2011. CME submitted a comment 

letter discussing proposed regulation 38.801 in 

connection with 76 FR 722. 

427The Commission is also adding regulation 

38.801 to simply permit DCMs to continue to rely 

Continued 

Discussion 

The Commission is adopting the 

proposed rule with certain 

modifications. The Commission has 

considered CFE’s comment, and is 

revising the proposed rule so that it 

does not require customer restitution if 

the amount of restitution, or the 

recipient, cannot be reasonably 

determined. Furthermore, the 

Commission is revising the proposed 

rule to clarify that a respondent’s 

disciplinary history should be taken 

into account in all sanction 

determinations, including sanctions 

imposed pursuant to an accepted 

settlement offer. The Commission also 

notes that final disciplinary actions 

taken against registered persons and 

entities are recorded in the National 

Futures Association’s Background 

Affiliation Status Information Center 

(‘‘BASIC’’) database, which is available 

to the public online. Finally, as a result 

of the renumbering of preceding rules 

discussed above, the Commission is 

renumbering the proposed rule as 

§ 38.710. 

xv. § 38.715—Summary Fines for 

Violations of Rules Regarding Timely 

Submission of Records, Decorum, or 

Other Similar Activities 

Proposed § 38.715 permitted a DCM to 

adopt a summary fine schedule for 

violations of rules relating to timely 

submission of accurate records required 

for clearing or verifying each day’s 

transactions, decorum, attire, or other 

similar activities. Under the proposed 

rule, a DCM may authorize its 

compliance staff to summarily impose 

minor sanctions against persons within 

the DCM’s jurisdiction for violating 

such rules. The proposed rule made 

clear that a DCM should issue no more 

than one warning letter in a rolling 12- 

month period for the same violation 

before sanctions are imposed. 

Additionally, the proposed rule 

specified that a summary fine schedule 

must provide for progressively larger 

fines for recurring violations. 

Summary of Comments 

CME objected to the restriction of one 

letter of warning per rolling 12-month 

period.424

Discussion 

The Commission is partially adopting 

the proposed rule, and is converting the 

remaining portion of the rule to 

guidance in appendix B. 

The Commission is maintaining as a 

rule the provision in the proposed rule 

that prohibits a DCM from issuing more 

than one warning letter per rolling 12- 

month period for the same violation. 

Commission staff has consistently 

recommended in RERs that DCMs must 

engage in progressive discipline in order 

to deter recidivism. 

The Commission is converting the 

remainder of proposed § 38.715 to 

guidance in appendix B because the 

proposed rule allowed, but did not 

require, a DCM to adopt a summary fine 

schedule. 

Finally, the proposed rule is being 

renumbered in its adopted form from 

§ 38.715 to § 38.711, and is retitled as 

‘‘Warning letters.’’ 

xvi. § 38.716—Emergency Disciplinary 

Actions 

Proposed § 38.716 provided that a 

DCM may impose a sanction, including 

a suspension, or take other summary 

action against a person or entity subject 

to its jurisdiction upon a reasonable 

belief that such immediate action is 

necessary to protect the best interest of 

the marketplace. The proposed rule also 

provided that any emergency action 

taken by the DCM must be in 

accordance with certain procedural 

safeguards that protect the respondent, 

including the right to be served with 

notice before the action is taken or 

otherwise at the earliest possible 

opportunity after action has been taken; 

the right to be represented by legal 

counsel in any proceeding subsequent 

to the emergency disciplinary action; 

the right to a hearing as soon as 

reasonably practical; and the right to 

receive a written decision on the 

summary action taken by the DCM. 

Discussion 

No comments were received on 

proposed § 38.716. Given that proposed 

§ 38.716 allowed, but did not require, a 

DCM to adopt rules regarding 

emergency disciplinary actions, the 

Commission is moving the text of 

proposed § 38.716 to guidance in 

appendix B to part 38. 

Due to the renumbering described 

above, the Commission is also replacing 

proposed § 38.712 with new § 38.712 

(titled ‘‘Additional sources for 

compliance’’) that simply permits DCMs 

to rely upon the guidance in appendix 

B of this part to demonstrate to the 

Commission compliance with the 

requirements of § 38.700 of this part. 

14. Subpart O—Dispute Resolution 

The Dodd-Frank Act re-designated 

former Core Principle 13 as Core 

Principle 14. Aside from renumbering 

the core principle, the language of the 

core principle remained substantively 

unchanged. The core principle governs 

the obligations of DCMs to implement 

and enforce a dispute resolution 

program for their market participants 

and market intermediaries.425

In addition to proposing to codify the 

statutory text of the core principle in 

proposed § 38.750, the Commission 

proposed to maintain the guidance and 

acceptable practices. 

Discussion 

No comments were received on 

proposed § 38.750, § 38.751, or the 

proposed guidance under Core Principle 

14. The Commission is adopting the 

rules and guidance as proposed. 

15. Subpart P—Governance Fitness 

Standards 

Other than to re-designate former Core 

Principle 14 as Core Principle 15, the 

Dodd-Frank Act did not revise the text 

of this core principle. Core Principle 15 

requires DCMs to establish and enforce 

appropriate fitness standards for 

directors, members of any disciplinary 

committee, members of the contract 

market, and any other persons with 

direct access to the facility (including 

any parties affiliated with any of the 

persons described in this core 

principle). In the DCM NPRM, the 

Commission proposed to codify the 

statutory text of the core principle in 

§ 38.800. The Commission did not 

receive comments pertaining to 

proposed § 38.800, and is adopting the 

rule as proposed. 

As noted in the DCM NPRM, the 

substantive regulations implementing 

Core Principle 15 were proposed in a 

separate rulemaking that also would 

implement Core Principles 16 (Conflicts 

of Interest), 17 (Composition of 

Governing Boards of Contract Markets) 

and 22 (Diversity of Boards of 

Directors).426 Until such time as the 

Commission may adopt the substantive 

rules implementing Core Principle 15, 

the Commission is maintaining the 

current Guidance under part 38 

applicable to Governance Fitness 

Standards (formerly Core Principle 14). 

Accordingly, the existing Guidance from 

appendix B of Part 38 applicable to Core 

Principle 15 is being codified under the 

revised appendix B adopted in this final 

rulemaking.427 At such time as the 


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upon the guidance in appendix B to demonstrate to 

the Commission compliance with regulation 38.800. 

428See ‘‘Governance Requirements for Derivatives 

Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities; Additional 

Requirements Regarding the Mitigation of Conflicts 

of Interest,’’ Notice of Proposed Rulemaking, 76 FR 

722, January 6, 2011; and ‘‘Requirements for 

Derivatives Clearing Organizations, Designated 

Contract Markets, and Swap Execution Facilities 

Regarding the Mitigation of Conflicts of Interest,’’ 

75 FR 63732, Oct. 18, 2010. 

429The Commission is also adding regulation 

38.851 to simply permit DCMs to continue to rely 

upon the guidance in appendix B to demonstrate to 

the Commission compliance with section 38.850. 

430 7 U.S.C. 7(d)(17). 

431See ‘‘Governance Requirements for Derivatives 

Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities; Additional 

Requirements Regarding the Mitigation of Conflicts 

of Interest,’’ Notice of Proposed Rulemaking, 76 FR 

722, January 6, 2011. CME submitted a comment 

letter discussing proposed regulation 38.801 in 

connection with 76 FR 722. 

432See section 5(d)(18) of the CEA, 7 U.S.C. 

7(d)(18). 

433See DCM NPRM at 80622. 

434 Id. 

435 Id. 

436 Id. at 80601. 

437 Id. at 80622. 

438See proposed regulation 38.951. At the time of 

the DCM NPRM, the part 45 rules were proposed. 

See 75 FR 80622, Dec. 22, 2010. The part 45 rules 

were recently codified. See 77 FR 2136, Jan. 13, 

2012. 

439MGEX Comment Letters at 9 (Feb. 22, 2011) 

and at 3 (June 3, 2011). 

440 Id. (requesting a limit on the length of time a 

DCM should be required to hold data). 

441 Id. 

442 Id. 

443Barnard Comment Letter at 4 (Feb. 22, 2011). 

Commission may adopt the final rules 

implementing Core Principle 15, 

appendix B will be amended 

accordingly. 

CME submitted a comment letter 

discussing proposed § 38.801 in 

connection with the separate proposed 

rulemaking implementing Core 

Principle 15. CME’s comments will be 

considered in connection with that 

rulemaking. 

16. Subpart Q—Conflicts of Interest 

The Dodd-Frank Act re-designated 

current Core Principle 15 (Conflicts of 

Interest) as Core Principle 16, and in all 

other respects, did not substantively 

amend the core principle. The 

Commission proposed to codify the 

statutory text of the core principle in 

proposed § 38.850, and is codifying the 

statutory text of Core Principle 16 in 

§ 38.850 as proposed. 

As noted in the DCM NPRM, the 

substantive regulations implementing 

Core Principle 16 were proposed in two 

separate rulemakings that also would 

implement Core Principles 15 

(Governance Fitness Standards), 17 

(Composition of Governing Boards of 

Contract Markets) and 22 (Diversity of 

Boards of Directors).428 Until such time 

as the Commission may adopt the 

substantive rules implementing Core 

Principle 16, the Commission is 

maintaining the current guidance and 

acceptable practices under Part 38 

applicable to Conflicts of Interest 

(formerly Core Principle 15). 

Accordingly, the existing Guidance and 

Acceptable Practices from appendix B of 

part 38 applicable to Core Principle 16 

are being codified in the revised 

appendix B adopted in this final 

rulemaking.429 At such time as the 

Commission may adopt the final rules 

implementing Core Principle 16, 

appendix B will be amended 

accordingly. 

CME submitted a comment letter that 

referenced comments it submitted in 

connection with the separate 

rulemakings implementing Core 

Principle 16. CME’s comments will be 

considered in connection with those 

rulemakings. 

17. Subpart R—Composition of 

Governing Boards of Contract Markets 

The Dodd-Frank Act re-designated 

former Core Principle 16 (Composition 

of Governing Boards of Mutually Owned 

Contract Markets) as Core Principle 17, 

and revised the title of the core 

principle to ‘‘Composition of Governing 

Boards of Contract Markets.’’ In 

addition, while the core principle 

formerly applied only to mutually 

owned DCMs, and required such DCMs 

to ensure that the composition of their 

governing boards included market 

participants, the amended core 

principle was amended to require the 

governance arrangements of all DCM to 

be designed to permit the consideration 

of the views of market participants.430

The Commission proposed to codify the 

statutory text of the core principle in 

proposed § 38.900, and is adopting the 

rule as proposed. 

As noted in the DCM NPRM, the 

substantive regulations implementing 

Core Principle 17 were proposed in a 

separate rulemaking that also would 

implement Core Principles 15 

(Governance Fitness Standards), 16 

(Conflicts of Interest), and 22 (Diversity 

of Boards of Directors).431 The rules 

implementing Core Principle 17 will be 

adopted in that separate rulemaking. 

18. Subpart S—Recordkeeping 

Core Principle 18, as amended by 

section 735 of the Dodd-Frank Act, 

requires all DCMs to maintain records of 

all activities related to their business as 

contract markets, in a form and manner 

acceptable to the Commission, for at 

least five years.432

The Commission proposed to codify 

the statutory text of the core principle 

in § 38.950, and is adopting the rule as 

proposed. 

i. § 38.951—Additional Sources for 

Compliance 

Proposed § 38.951 required all DCMs 

to maintain records, including trade 

records and investigatory and 

disciplinary files, in accordance with 

Commission regulation § 1.31, and in 

accordance with proposed Commission 

regulation § 45.1 with respect to swap 

transactions.433 The proposed rule 

reiterated DCMs’ obligation to comply 

with § 1.31(a), which requires that DCM 

books and records be readily accessible 

for the first two years of the minimum 

five-year statutory period, and be open 

to inspection by any representatives of 

the Commission or the United States 

Department of Justice.434 Section 1.31(a) 

also requires DCMs to promptly provide 

either copies or original books and 

records upon request of a Commission 

representative.435 As noted in the 

preamble, the proposed rule also 

incorporated by reference § 1.31(b)’s 

description of the acceptable methods of 

storing books and records.436 Finally, 

proposed § 38.951 also incorporated by 

reference the requirements set forth in 

§ 1.31(c) regarding electronic storage 

systems, and the requirements in 

§ 1.31(d) regarding retention of trading 

cards and of other trade, order, and 

financial reports.437 Separately, 

proposed § 38.951 also required DCMs 

to comply with the recordkeeping 

requirements in § 45.1 with respect to 

swaps transactions.438

Summary of Comments 

MGEX argued that the proposed rule 

is too prescriptive in requiring that all 

records and data must be indexed and 

duplicated.439 MGEX also commented 

that the requirement to retain records 

for ‘‘at least 5 years’’ created uncertainty 

and requested clarification on how long 

records must be kept.440 MGEX 

questioned the rationale for obligating 

DCMs to keep Commission-required 

data separate from other data.441

Further, MGEX stated that ‘‘DCMs 

should not be substitute storage 

facilities for Commission data, nor 

should they be required to relocate and 

resubmit data that has already been 

submitted to the Commission.’’ 442 Chris 

Barnard recommended that records 

should be required to be kept 

indefinitely rather than for at least five 

years.443


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444See 17 CFR part 38, app. B, Application 

Guidance and Acceptable Practices for Core 

Principle 17. 

445 77 FR 2136, Jan. 13, 2012. 

446See preamble to proposed regulation 38.950. 

75 FR 80601, Dec. 22, 2010. 

447See proposed regulation 38.950(a). 75 FR 

80622, Dec. 22, 2010. 

Discussion 

The Commission is adopting the 

proposed rules under Core Principle 18 

with the modification described below. 

The Commission acknowledges 

MGEX’s comment but notes that 

§ 38.951 incorporates recordkeeping 

requirements to which DCMs are 

already subject by direct operation of 

§ 1.31. Even if the Commission were to 

amend § 38.951 as requested, many of 

the concerns expressed by MGEX would 

remain, including the obligation to keep 

certain data separately. In this regard, 

the Commission notes that the 

Acceptable Practices for former Core 

Principle 17 stated that § 1.31 ‘‘governs 

recordkeeping requirements under the 

Act.’’ 444 Upon adopting §§ 38.950 and 

38.951, § 1.31 will still govern 

significant elements of recordkeeping 

under the Act. Accordingly, the 

Commission is largely adopting § 38.951 

as proposed. The Commission is making 

one modification to the proposed rule, 

however, by replacing the reference to 

§ 45.1 with a reference to the more 

general ‘‘part 45.’’ 

In response to MGEX’s request for 

clarification regarding the requirement 

to retain records for ‘‘at least 5 years,’’ 

the Commission notes that the 

recordkeeping requirement for swaps is 

governed by rules that were recently 

codified in part 45, which requires 

DCMs to maintain all requisite records 

from the date of the creation of the swap 

through the life of the swap and for a 

period of at least five years from the 

final termination of the swap.445 With 

respect to all other records, DCMs can 

satisfy their recordkeeping requirement 

pursuant to § 38.950 by retaining such 

records for five years, unless the 

Commission determines prior to the 

expiration of the five-year term that the 

records must be retained for a longer 

period of time. The Commission also 

notes that the ‘‘at least 5 years’’ 

obligation is required under statute. 

Specifically, as noted in the preamble of 

the proposed rule, one notable 

difference between the former Core 

Principle 18, and the current amended 

version, is that while records were 

previously required to be maintained 

‘‘for a period of 5 years,’’ Core Principle 

18 now requires that records must be 

retained for ‘‘at least 5 years.’’ 446

Accordingly, the proposed rule required 

a DCM maintain records of all activities 

related to its business as a DCM in a 

form and manner acceptable to the 

Commission for at least five years.447

Similarly, in response to Chris Barnard’s 

recommendation that the records be 

held indefinitely, the Commission 

believes that the current statutory 

requirement to maintain records for at 

least 5 years is sufficient at this time, 

but notes that it may extend the time 

period if it determines that an extended 

recordkeeping time is necessary. 

19. Subpart T—Antitrust Considerations 

The Dodd-Frank Act renumbered 

former Core Principle 18 as Core 

Principle 19, and in all other respects, 

maintained the statutory text of the core 

principle. As noted in the DCM NPRM, 

the Commission believed that the 

existing guidance to this Core Principle 

remained appropriate. Accordingly, 

other than to codify the statutory text of 

Core Principle 19 into proposed 

§ 38.1000, the Commission did not 

propose any amendments to the preexisting guidance under part 38. 

Proposed § 38.1001 referred 

applicants and DCMs to the guidance in 

appendix B to part 38 for purposes of 

demonstrating to the Commission their 

compliance with the requirements of 

proposed § 38.1000. 

Discussion 

No comments were received in 

regards to the proposed rule and 

guidance, and the Commission is 

adopting the rule and guidance as 

proposed. 

20. Subpart U—System Safeguards 

Core Principle 20 is a new core 

principle created by the Dodd-Frank 

Act, and pertains to the establishment of 

system safeguards by all DCMs. Core 

Principle 20 specifically requires DCMs 

to: (1) Establish and maintain a program 

of risk oversight to identify and 

minimize sources of operational risk 

through the development of appropriate 

controls and procedures and the 

development of automated systems that 

are reliable, secure, and have adequate 

scalable capacity; (2) establish and 

maintain emergency procedures, backup 

facilities, and a plan for disaster 

recovery that allow for the timely 

recovery and resumption of operations 

and the fulfillment of the 

responsibilities and obligations of the 

DCM; and (3) periodically conduct tests 

to verify that backup resources are 

sufficient to ensure continued order 

processing and trade matching, price 

reporting, market surveillance, and 

maintenance of a comprehensive and 

accurate audit trail. The rules proposed 

under subpart U implement these 

requirements. The Commission 

proposed to codify the statutory text of 

the core principle in proposed 

§ 38.1050, and adopts the rule as 

proposed. 

i. § 38.1051—General Requirements 

The rules proposed under § 38.1051 

(a) and (b) would require a DCM’s 

program of risk analysis and oversight to 

address six categories of risk analysis 

and oversight, including information 

security; business continuity-disaster 

recovery (‘‘BC–DR’’) planning and 

resources; capacity and performance 

planning; systems operations; systems 

development and quality assurance; and 

physical security and environmental 

controls. 

The proposed rule in § 38.1051(c) 

specifically would require each DCM to 

maintain a BC–DR plan and BC–DR 

resources sufficient to enable 

resumption of trading and of all of the 

responsibilities and obligations of the 

DCM during the next business day 

following any disruption of its 

operations, either through sufficient 

infrastructure and personnel resources 

of its own or through sufficient 

contractual arrangements with other 

DCMs or disaster recovery service 

providers. 

The proposed rule also would require 

each DCM to notify Commission staff of 

various system security-related events, 

including prompt notice of all electronic 

trading halts and systems malfunctions 

in § 38.1051(e)(1), timely advance notice 

of all planned changes to automated 

systems that may impact the reliability, 

security, or adequate scalable capacity 

of such systems in § 38.1051(f)(1), and 

timely advance notice of all planned 

changes to programs of risk analysis and 

oversight in § 38.1051(f)(2). The 

proposed rule also required DCMs to 

provide relevant documents to the 

Commission in § 38.1051(g) and to 

conduct regular, periodic, objective 

testing and review of its automated 

systems in § 38.1051(h). Moreover, 

proposed § 38.1051(i) would require 

each DCM, to the extent practicable, to 

coordinate its BC–DR plan with those of 

the members and market participants 

upon whom it depends to provide 

liquidity, to initiate coordinated testing 

of such plans, and to take into account 

in its own BC–DR plan, the BC–DR 

plans of relevant telecommunications, 

power, water, and other essential 

service providers. 

Summary of Comments 

CME commented that recovery time 

objectives (‘‘RTOs’’) in each catastrophic 


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36658 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

448CME Comment Letter at 36 (Feb. 22, 2011). 449 Id. at 37. 450 Id. 451 Id. 452 Id. 453See 75 CFR 80572, 80601–80602, Dec., 22, 

2010. 

454See 76 FR 69334, Nov. 8, 2011. Commission 

regulation 39.11 establishes requirements that a 

DCO will have to meet in order to comply with 

DCO Core Principle B (Financial Resources), as 

amended by the Dodd-Frank Act. Amended Core 

Principle B requires a DCO to possess financial 

resources that, at a minimum, exceed the total 

amount that would enable the DCO to meet its 

financial obligations to its clearing members 

notwithstanding a default by the clearing member 

creating the largest financial exposure for the DCO 

in extreme but plausible conditions; and enable the 

DCO to cover its operating costs for a period of 1 

year, as calculated on a rolling basis. 

455OCX Comment Letter at 5 (Feb. 22, 2011). 

456 GreenX Comment Letter at 19 (Feb. 22, 2011). 

457Barnard Comment Letter at 5 (May 20, 2011). 

458 Id. 

459 KCBT Comment Letter at 8 (Feb. 22, 2011). 

460 Id. 

461 Id. 

462The Commission anticipates that a corporate 

entity that operates more than one registered entity 

may share certain costs, and may allocate those 

costs among the registered entities as determined by 

the Commission on a case by case basis. 

situation should consider the impact on 

all market participants and independent 

technology services providers in the 

context of determining a proper RTO.448

CME also objected to what it considers 

to be an overly broad requirement in 

§ 38.1051(e)(1) to notify Commission 

staff promptly of all electronic trading 

halts and systems malfunctions.449 CME 

argued that required reporting should be 

limited to any material system failures. 

Further, CME criticized § 38.1051(f)(1), 

arguing that the mandate that DCMs 

provide the Commission with timely 

advance notice of all planned changes to 

automated systems that may impact the 

reliability, security, or adequate scalable 

capacity of such systems is overly 

burdensome, and not cost effective.450

Additionally, CME argued that the 

§ 38.1051(f)(2) requirement that DCMs 

provide timely advance notice of all 

planned changes to their program of risk 

analysis and oversight is too broad and 

generally unnecessary.451 Finally, CME 

noted that it does not control, or 

generally have access to, the details of 

the disaster recovery plans of its major 

vendors.452

Discussion 

The Commission is adopting the 

proposed rule, with the modifications 

described below. As noted in the DCM 

NPRM, automated systems play a 

central and critical role in today’s 

electronic financial market 

environment, and the oversight of core 

principle compliance by DCMs with 

respect to automated systems is an 

essential part of effective oversight of 

both futures and swaps markets. 

Advanced computer systems are 

fundamental to a DCM’s ability to meet 

its obligations and responsibilities.453

The Commission has considered 

CME’s comment, and believes that 

timely advance notice of all planned 

changes to address system malfunctions 

is not necessary and is revising the rule 

to provide that DCMs only need to 

promptly advise the Commission of all 

significant system malfunctions. With 

respect to planned changes to 

automated systems or risk analysis and 

oversight programs, the revised rule will 

require timely advance notification of 

material changes to automated systems 

or risk analysis and oversight programs. 

Finally, the rule does not require DCMs 

to control or have access to the details 

of the disaster recovery plans of its 

major vendors. Rather, the rule suggests 

coordination to the extent possible. 

21. Subpart V—Financial Resources 

New Core Principle 21 requires DCMs 

to have adequate financial resources to 

discharge their responsibilities, and 

specifically requires that DCMs 

maintain financial resources sufficient 

to cover operating costs for a period of 

at least one year, calculated on a rolling 

basis. 

i. § 38.1100—Core Principle 21, and 

§ 38.1101(a) and (c) General Rule and 

Computation of Financial Resources 

Requirement 

Proposed § 38.1100 codifies the 

statutory text of the core principle and 

is being adopted as proposed. 

Proposed § 38.1101(a)(1) and (3) 

required DCMs to maintain sufficient 

financial resources to cover operating 

costs for at least one year, calculated on 

a rolling basis, at all times. Proposed 

§ 38.1101(a)(2) would require any entity 

operating as both a DCM and a DCO to 

comply with both the DCM financial 

resources requirements, and also the 

DCO financial resources requirements in 

§ 39.11.454 Proposed § 38.1101(c) 

required a DCM to make a reasonable 

calculation of the financial resources it 

needs to meet the requirements of 

proposed § 38.1101(a) at the end of each 

fiscal quarter. 

Summary of Comments 

OCX requested that the Commission 

define whether ‘‘operating costs’’ are 

gross or net.455 GreenX recommended 

that the Commission expressly state that 

‘‘operating costs’’ should be determined 

from a cash flow statement 

perspective.456

Chris Barnard recommended that each 

DCM calculate and regularly publish its 

solvency ratio, defined as the DCM’s 

available financial resources divided by 

the DCM’s financial resources 

requirement.457 Chris Barnard stated 

that the Commission should be notified 

when this ratio falls below 105 

percent.458

KCBT stated that the proposed 

requirements would result in 

duplication for entities that operate both 

a DCM and a DCO, because proposed 

§ 39.11 imposed similar requirements 

on DCOs.459 KCBT stated that its DCO 

was established as its wholly-owned 

subsidiary corporation for purposes of 

limiting liability and that as a 

‘‘privately-owned, for-profit 

corporation, it should be able to 

determine its own levels of capital 

resources and deployment.’’ 460 KCBT 

referenced this rationale in response to 

proposed § 38.1101(a)(3), (b), (e), and 

(f).461

Discussion 

The Commission is adopting 

proposed § 38.1101 (a) and (c) with the 

modification described below. The 

Commission notes that specifically 

defining ‘‘operating costs’’ could result 

in unintended restrictions on DCMs. 

The Commission will maintain the 

flexibility of the proposed rule by not 

further defining ‘‘operating costs’’ and 

instead permitting each DCM to have 

reasonable discretion in determining the 

methodology it will use to make the 

calculation. For these reasons, the 

Commission also declines to incorporate 

a solvency ratio requirement to the final 

rules. 

Finally, the Commission has revised 

the text of § 38.1101(a)(2) (redesignated 

as paragraph (a)(3)) to clarify that a DCM 

that is also registered with the 

Commission as a DCO must demonstrate 

that it has sufficient resources to operate 

the combined entity as both a DCM and 

DCO,462 and further, that such 

combined entity need only file single 

quarterly financial resources reports in 

accordance with § 39.11(f). The 

Commission is not requiring a duallyregistered entity to file two separate 

reports because the operating resource 

requirements for a DCM and DCO are 

the same, and the combined DCM/DCO 

is required to have sufficient financial 

resources to cover its operating costs as 

a combined entity. The DCO financial 

resource requirements in § 39.11 differ 

from those in § 38.1101 only insofar as 

they add a requirement for default 

resources, which is applicable only to a 


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463OCX Comment Letter at 5 (Feb. 22, 2011). 

464 Id. 

465CME Comment Letter at 37 (Feb. 22, 2011). 

466 Id. 

467 GreenX Comment Letter at 19 (Feb. 22, 2011). 

468 Id. 

469 Id. at 18. 

470 GreenX Comment Letter at 14 (Feb. 22, 2011). 

471 Id. at 17. 

472 Id. GreenX recommended striking the words 

in proposed regulation 38.1101(e) ‘‘to meet the 

requirements of paragraph (a) of this section’’ and 

‘‘If any portion of such financial resources is not 

sufficiently liquid.’’ 

473 Id. at 14–15. 

474 Id. at 17–18. 

475 GreenX discussed the significantly different 

roles played by DCMs and DCOs (i.e., DCMs do not 

guarantee or novate trades and their capital is not 

at risk in the event of a default) and further states 

that the ‘‘Commission should not adopt a one-sizefits-all approach and should not treat DCOs and 

DCMs in the same manner where different 

circumstances and different purposes support 

differential treatment.’’ GreenX notes that ‘‘the role 

of financial resources (and letters of credit) in the 

DCM context is to ensure that DCMs can continue 

to operate in the ordinary course of business and 

make payments as they become due, which does 

not have the same time sensitivity that it does in 

the DCO context.’’ See GreenX Comment Letter at 

17 (Feb. 22, 2001). 

DCM/DCO acting in its capacity as a 

DCO. 

ii. § 38.1101(b)—Types of Financial 

Resources 

Under proposed § 38.1101(b), 

financial resources available to DCMs to 

satisfy the applicable financial 

requirements would include the DCM’s 

own capital (assets in excess of 

liabilities) and any other financial 

resource deemed acceptable by the 

Commission. A DCM would be able to 

request an informal interpretation from 

Commission staff on whether a 

particular financial resource would be 

acceptable. 

Summary of Comments 

OCX stated that the proposed rule 

may encourage DCMs to cut services in 

order to reduce their operational need 

for cash.463

Several commenters recommended 

that the Commission include specific 

examples of financial resources that 

might satisfy the requirement. OCX 

inquired whether firm commitments 

from owners to honor capital calls 

would be acceptable under the proposed 

rule.464 CME contended that the intent 

of Congress was to construe the terms 

‘‘financial resources’’ broadly and 

include anything of value at the DCM’s 

disposal, including operating 

revenues.465 CME stated that if Congress 

wanted to exclude operating revenues 

from what would be considered 

financial resources, Congress could have 

incorporated an ‘‘equity concept.’’ 466

GreenX contended that the 

Commission should continue to permit 

flexibility for DCMs, but also requested 

that the Commission provide specific 

examples of which assets can be 

included in the calculation of ‘‘financial 

resources.’’ 467 GreenX requested 

confirmation that accounts receivable 

and other assets that are reasonably 

expected to result in payments to the 

DCM, as well as subordinated loans, are 

acceptable financial resources.468

GreenX also stated that committed lines 

of credit and similar facilities should be 

considered ‘‘good’’ financial resources, 

and that such interpretation is standard 

in the ordinary business world.469

GreenX stated that the proposed 

increase in the amount of financial 

resources needed by DCMs, and the 

restrictions on the use of debt financing, 

would impede the ability of start-ups to 

become and remain DCMs.470

GreenX proposed language to replace 

proposed § 38.1101(a)(3), (b), and (e) 

that would provide that a DCM ‘‘be 

required to maintain sufficient financial 

resources to cover its projected 

operating costs for a period of at least 

one year, including unencumbered, 

liquid assets equal to at least six months 

of such projected operating costs, and 

that committed lines of credit or various 

debt instruments may be included in 

calculating those financial resources, as 

long as the DCM is not incurring 

indebtedness secured by its assets and 

counting both those assets and the 

indebtedness as part of its financial 

resources.’’ 471 GreenX further 

contended that if the Commission is 

unwilling to accept this language, the 

Commission should: (i) clearly specify 

that the ‘‘financial resources’’ 

requirement in proposed § 38.1101(a)(3) 

is a separate requirement from the 

liquidity requirement in proposed 

§ 38.1101(e), and (ii) delete the language 

in the proposed liquidity requirement 

suggesting that proposed § 38.1101(e) is 

part of the proposed one year’s required 

operating costs coverage.472 Absent 

revision, GreenX stated that the current 

proposal could result in a requirement 

of up to 18 months of financial 

resources if a DCM used a line of credit 

to satisfy the liquidity requirement.473

Moreover, if this provision is not 

changed, GreenX recommended that the 

Commission undertake a cost-benefit 

analysis of requiring DCMs to maintain 

financial resources in excess of one 

year’s operating costs.474 GreenX also 

stated that the Commission should not 

adopt a ‘‘one-size-fits-all approach’’ to 

the financial resources requirements as 

between DCOs and DCMs, since 

different circumstances and different 

purposes support differential 

treatment.475

Discussion 

The Commission is adopting the 

proposed rule with one modification. 

The provision in § 38.1101(b) stating 

that acceptable financial resources 

include a DCM’s own capital and ‘‘any 

other financial resource deemed 

acceptable by the Commission’’ was 

meant to capture other types of 

resources on a case-by-case basis and 

provide flexibility to both DCMs and the 

Commission. Accordingly, the 

Commission notes that a DCM’s own 

capital means its assets minus its 

liabilities calculated in accordance with 

the Generally Accepted Accounting 

Principles (‘‘GAAP’’). The Commission 

believes that if a certain financial 

resource is deemed to be an asset under 

GAAP, it is appropriate for inclusion in 

the calculation for this rule, and the rule 

has been revised accordingly. To the 

extent a certain financial resource is not 

considered an asset under GAAP, but 

based upon the facts and circumstances 

a DCM believes that the particular asset 

should be so considered, Commission 

staff will work with the DCM to 

determine whether such resource is 

acceptable. In response to comments 

pertaining to the acceptable forms of 

financial resources, the Commission 

may consider projected revenues as an 

acceptable financial resource for 

established DCMs that can demonstrate 

a historical record of revenue; but not 

for DCM applicants, relatively new 

DCMs or DCMs with no such record. 

The Commission believes that GreenX 

misinterprets the relationship of 

§ 38.1101(a)(3) and § 38.1101(e). The 

Commission clarifies that the one-year 

financial resources requirements in 

§ 38.1101(a)(3) and the six month 

liquidity requirement in § 38.1101(e) 

could be met by using the same 

financial resources. GreenX is correct 

that if a sufficient portion of the 

financial resources used for the one-year 

financial resources requirement in 

§ 38.1101(a)(3) are illiquid, it is possible 

that an entity could be required to have 

18 months of financial resources to meet 

the requirements of these two sections. 

However, the Commission is requiring 

only one-year of financial resources, six 

months of which must be liquid 

financial resources. Each DCM may 

exercise discretion in determining how 

to meet this requirement (e.g., six 

months of liquid financial resources 

combined with six months of illiquid 

ones, 12 months of liquid financial 

resources, or 12 months of illiquid 

financial resources with a line of credit 


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476See 76 FR 69334, Nov. 8, 2011. 

477A ‘‘haircut’’ is a deduction taken from the 

value of an asset to reserve for potential future 

adverse price movements in such asset. 478 GreenX Comment Letter at 19 (Feb. 22, 2011). 

479CME Comment Letter at 37 (Feb. 22, 2011). 

480 GreenX Comment Letter at 18 (Feb. 22, 2011). 

481 Id. 

482 Id. 

483 Id. 

484 Id. 

485 Id. 

covering six months of financial 

resources). Indeed, the Commission 

notes that most, if not all, DCMs have 

considerably more financial resources 

than the minimum one-year required by 

this rule. In addition, if a DCM does not 

have this liquidity, it is not achieving 

the goal of the core principle, as it will 

be unable to pay its creditors. Further, 

the language of the core principle does 

not limit the resource requirement to 

one year, as it specifically states that a 

DCM’s financial resources are adequate 

if the value of such resources exceeds 

one year of operating costs. Also in 

response to GreenX, the costs and 

benefits associated with all of the rules 

being adopted in this release, including 

§ 38.1101, are discussed in the cost 

benefit section of the release. 

In response to GreenX’s comment 

regarding the financial resources 

requirements of DCOs and DCMs, the 

Commission notes that the financial 

resources requirements in § 38.1101, for 

DCMs, and in § 39.11, for DCOs, are 

different. In addition to the requirement 

to maintain financial resources 

sufficient to cover operating costs for 

one year, § 39.11 also requires DCOs to 

possess a certain level of default 

resources.476 As GreenX correctly notes, 

DCMs do not guarantee or novate trades 

and a ‘‘one-size-fits-all’’ approach is not 

being applied here. 

iii. § 38.1101(d)—Valuation of Financial 

Resources 

Proposed § 38.1101(d) required DCMs 

to calculate the current market value of 

each financial resource used to meet 

their obligations under these proposed 

rules, no less frequently than at the end 

of each fiscal quarter. The proposed rule 

required DCMs to perform the valuation 

at other times as appropriate. As the 

Commission noted in the DCM NPRM, 

the proposed rule is designed to address 

the need to update valuations in 

circumstances where there may have 

been material fluctuations in market 

value that could impact a DCM’s ability 

to meet its obligations on a rolling basis 

as required by proposed § 38.1101(a). 

The proposed rule requires that when 

valuing a financial resource, the DCM 

reduce the value, as appropriate, to 

reflect any market or credit risk specific 

to that particular resource, i.e., apply a 

haircut.477 Under the proposed rule, 

DCMs would be permitted to exercise 

discretion in determining the applicable 

haircuts, although such haircuts would 

be subject to Commission review and 

acceptance. 

Summary of Comments 

GreenX recommended an explicit 

statement that the use of GAAP 

principles in calculating the market 

value of each financial resource in 

meeting obligations under the rules 

would satisfy the requirements of this 

subsection, without limiting other 

potential methods of complying.478

Discussion 

The Commission is adopting the 

proposed rule without modification. In 

response to GreenX’s comment, the 

Commission notes that GAAP does not 

include haircuts, but valuation under 

GAAP does take into account current 

market values. The Commission expects 

each DCM to monitor the value of its 

resources to be certain that the 

calculation of the value of its assets 

reflects current market conditions in 

accordance with GAAP. A haircut is not 

intended to be applied in the ordinary 

course, but to be used in those unusual 

market circumstances that require an 

accounting intervention. As stated in 

the DCM NPRM, the Commission will 

permit DCMs discretion to, in the first 

instance, choose an appropriate haircut 

methodology. The Commission will 

evaluate the appropriateness of such 

methodology on a case-by-case basis. 

iv. § 38.1101(e)—Liquidity of Financial 

Resources 

Proposed § 38.1101(e) required that 

DCMs maintain unencumbered liquid 

financial assets, such as cash or highly 

liquid securities, equal to at least six 

months’ operating costs. As noted in the 

DCM NPRM, the Commission believes 

the requirement to have six months’ 

worth of unencumbered liquid financial 

assets would give a DCM time to 

liquidate the remaining financial assets 

it needs to continue operating for the 

last six months of the required one-year 

period. A DCM would be permitted to 

use a committed line of credit or similar 

facility to satisfy the requirement, in the 

event that the DCM does not have six 

months’ worth of unencumbered liquid 

financial assets. 

The Commission notes that a DCM 

may only use a committed line of credit 

or similar facility to meet the liquidity 

requirements set forth in proposed 

§ 38.1101(e). Accordingly, a committed 

line of credit or similar facility is not 

listed in proposed § 38.1101(b) as a 

financial resource available to a DCM to 

satisfy the requirements of proposed 

§ 38.1101(a). 

Summary of Comments 

CME stated that the liquidity 

measurement is only relevant in the 

context of winding-down, and claims 

that a three month period, rather than 

six months, is a more accurate 

assessment of how long it would take 

for a DCM to wind down.479

GreenX requested clarification of the 

terms ‘‘unencumbered’’ and 

‘‘committed.’’ 480 GreenX suggested that 

assets should be considered 

unencumbered even if they are ‘‘subject 

to security interests or adverse claims, 

as long as the DCM can use and expend 

those assets in the ordinary course 

without requiring consent of lenders or 

claimants.’’ 481 GreenX also requested 

that the Commission clarify whether 

‘‘committed’’ is intended to mean 

anything other than a line of credit or 

similar facility that has been extended 

pursuant to a legally binding 

agreement.482 Finally, GreenX 

recommended that the Commission 

expressly state that lines of credit and 

similar facilities incurred from banks 

and other commercial financial 

institutions on market standard terms 

will presumptively qualify as good 

‘‘committed lines of credits and similar 

facilities’’ for purposes of proposed 

§ 38.1101.483 GreenX requested that any 

requirements applicable for lines of 

credit be specified in the final 

regulations.484

Discussion 

The Commission is adopting the 

proposed rule without modification. 

The Commission believes that a six 

month period is appropriate for a wind 

down period and notes that commenters 

did not provide any support for the 

claim that a wind down would take only 

three months. 

In response to GreenX’s request for 

clarification, the Commission notes that 

it is using ‘‘unencumbered’’ in the 

‘‘normal commercial sense’’ to ‘‘refer to 

assets that are not subject to a security 

interest or other adverse claims.’’ 485 By 

‘‘committed line of credit or similar 

facility,’’ the Commission means a 

committed, irrevocable contractual 

obligation to provide funds on demand 

with preconditions limited to the 

execution of appropriate agreements. In 

other words, a facility with a material 

adverse financial condition restriction 

would not be acceptable. The purpose of 


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486This filing deadline is consistent with the 

deadline imposed on FCMs for the filing of monthly 

financial reports. See 17 CFR regulation 1.10(b). 

487CFE Comment Letter at 6 (Feb. 22, 2011). 

488CME Comment Letter at 38 (Feb. 22, 2011). 

489 GreenX Comment Letter at 20 (Feb. 22, 2011) 

(GreenX also stated that normal year-end 

adjustments typically require much more than 17 

business days to complete). 

490 Id. 

491 KCBT Comment Letter at 8 (Feb. 22. 2011). 

492CFE Comment Letter at 6 (Feb. 22, 2011); CME 

Comment Letter at 37–38 (Feb. 22, 2011). 

493CME Comment Letter at 37–38 (Feb. 22, 2011). 

494See 17 CFR 249.308a. 

495See 17 CFR 249.310. 

496 5 U.S.C. 552 et seq. (2010). 

497 17 CFR 145.9 (2010). 

this requirement is for a DCM to have 

no impediments to accessing its line of 

credit at the time it needs liquidity. 

Further, DCMs are encouraged to 

periodically check their line of credit 

arrangements to confirm that no 

operational difficulties are present. 

v. § 38.1101(f)—Reporting Requirements 

Proposed § 38.1101(f) required DCMs, 

at the end of each fiscal quarter, or at 

any time upon Commission request, to 

report to the Commission: (i) the 

amount of financial resources necessary 

to meet the requirements set forth in the 

regulation; and (ii) the value of each 

financial resource available to meet 

those requirements. The proposed rule 

also required a DCM to provide the 

Commission with a financial statement, 

including the balance sheet, income 

statement, and statement of cash flows, 

of the DCM or of its parent company (if 

the DCM does not have an independent 

financial statement and the parent 

company’s financial statement is 

prepared on a consolidated basis). 

Under the proposed rule, a DCM was 

required to provide the Commission 

with sufficient documentation 

explaining the methodology it used to 

calculate its financial requirements, and 

the basis for its valuation and liquidity 

determinations. The proposed rule also 

required the DCM to provide copies of 

any agreements establishing or 

amending a credit facility, insurance 

coverage, or any similar arrangement 

that evidences or otherwise supports its 

conclusions. The Commission, in its 

sole discretion, would determine the 

sufficiency of the documentation 

provided. According to the proposed 

rule, the DCM would have 17 business 

days 486 from the end of the fiscal 

quarter to file the report, unless it 

requests an extension of time from the 

Commission. 

Summary of Comments 

Three commenters requested an 

extended deadline for filing the 

financial reports required as a result of 

the proposed rule. CFE stated that for 

DCMs that are public, or have financial 

statements consolidated with those of a 

public company, the filing deadlines 

should be the same as those required by 

the SEC for Forms 10–Q and 10–K.487

CME provided a similar comment 

stating that the proposed 17 day filing 

deadline is not feasible and that instead, 

the requirement should be consistent 

with the SEC’s reporting 

requirements.488 Similarly, GreenX 

stated that it has procedures in place to 

comply with the SEC’s requirements 

and that the proposed requirements in 

this rule would require new 

programming and resources.489 GreenX 

recommended extending the reporting 

deadline to 30 calendar days, noting 

that this is still more burdensome than 

the requirements imposed by the SEC 

on national securities exchanges.490

Rather than recommending an extended 

deadline, KCBT objected to the 

proposed quarterly filings and stated 

that the annual submissions that it 

provides to the Commission should 

suffice.491

In addition to the comments received 

regarding the reporting deadline, two 

commenters requested clarification as to 

the confidentiality of any filings made 

pursuant to proposed § 38.1101(f).492

Further, CME requested clarification 

that consolidated financial statements 

covering multiple DCMs, and DCOs 

where relevant, comply with the 

proposed rule.493

Discussion 

The Commission is adopting the 

proposed rule with certain amendments. 

The Commission is persuaded that the 

proposed 17 business day filing 

deadline may be overly burdensome. 

The SEC requires its quarterly reports 

on Form 10–Q to be filed with the SEC 

40 calendar days after the end of the 

fiscal quarter for accelerated filers and 

45 calendar days after the end of the 

fiscal quarter for all other SEC-registered 

entities.494 The SEC requires annual 

reports on Form 10–K to be filed with 

the SEC 60 calendar days after the end 

of the fiscal year for large accelerated 

filers, 75 calendar days for other 

accelerated filers and 90 calendar days 

for non-accelerated filers.495 The 

Commission has extended the 17 

business day proposed filing deadline to 

40 calendar days for the required reports 

for the first three quarters. This revision 

to the rule will harmonize the 

Commission’s financial resource filing 

requirement with the SEC’s 

requirements for its Form 10–Q. 

Similarly, the Commission has extended 

the filing deadline for the fourth quarter 

report to 60 days in order to harmonize 

the requirement with the SEC’s filing 

deadline for the Form 10–K. However, 

to the extent that a DCM is also 

registered as a DCO, the DCM must file 

its quarterly financial reports in 

accordance with the requirement of 

§ 39.11 (which requires that reports be 

filed within 17 business days after the 

end of each fiscal quarter). The shorter 

time frame for submission of a dual 

registrant’s quarterly financial reports is 

based on the heightened significance of 

financial oversight for the 

clearinghouse, which serves as the 

central counterparty for all cleared 

transactions. 

The Commission has considered 

KCBT’s comments, but does not believe 

that annual submissions are sufficient. 

The Commission believes that prudent 

financial management requires DCMs to 

prepare and review financial reports 

more frequently than annually, and 

expects that DCMs currently are 

reviewing their finances on at least a 

quarterly basis. 

In response to the comments 

requesting clarification on the 

confidentiality of the filings made 

pursuant to the financial resources 

regulations, the Commission does not 

plan to make such reports public. 

However, where such information is, in 

fact, confidential, the Commission 

encourages DCMs to submit a written 

request for confidential treatment of 

such filings under the Freedom of 

Information Act (‘‘FOIA’’),496 pursuant 

to the procedures established in § 145.9 

of the Commission’s regulations.497 The 

determination of whether to disclose or 

exempt such information in the context 

of a FOIA proceeding would be 

governed by the provisions of part 145, 

and any other relevant provision. 

In response to the request for 

clarification in regard to consolidated 

financial statements, the Commission 

clarifies that consolidated financial 

statements would comply with the rule. 

Section 38.1101(g) delegates authority 

to perform certain functions that are 

reserved to the Commission under 

§ 38.1101 to the Director of the Division 

of Market Oversight. 

22. Subpart W—Diversity of Boards of 

Directors 

Core Principle 22 is a new core 

principle that was added by the DoddFrank Act. The core principle requires 

that publicly traded DCMs must 

endeavor to recruit individuals to serve 

on their board of directors from among 


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36662 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

498See ‘‘Governance Requirements for Derivatives 

Clearing Organizations, Designated Contract 

Markets, and Swap Execution Facilities; Additional 

Requirements Regarding the Mitigation of Conflicts 

of Interest,’’ Notice of Proposed Rulemaking, 76 FR 

722, January 6, 2011. CME submitted a comment 

letter discussing proposed regulation 38.801 in 

connection with 76 FR 722. 

499 7 U.S.C. 7; see also section 5(d)(23) of the 

CEA, as amended by the Dodd-Frank Act. 

500CME Comment Letter at 38 (Feb. 22, 2011). 

501See 76 FR 10982, Feb. 28, 2011, (Proposed 

regulation 818(b) requires security-based swap 

execution facilities to keep books and records ‘‘for 

a period of not less than five years,’’ the first two 

years in an easily accessible place). Rule 17a–1(b) 

(240.17a–1(b) requires national securities 

exchanges, among others, to keep books and records 

for a period of not less than five years, the first two 

years in an easily accessible place, subject to a 

destruction and disposition provisions, which 

allows exchanges to destroy physical documents 

pursuant to an effective and approved plan 

regarding such destruction and transferring/ 

indexing of such documents onto some recording 

medium.). 

502 5 U.S.C. 601 et seq. (2010). 

503 47 FR 18618–21, Apr. 30 1982. 

504 Id. 

505 44 U.S.C. 3501 et seq. 

506See 75 FR 80572, 80603, Dec. 22, 2010 . 

507 7 U.S.C. 12. 

a broad and culturally diverse pool of 

qualified candidates. 

In the DCM NPRM, the Commission 

proposed to codify the statutory text of 

the core principle in proposed 

§ 38.1150, and is adopting § 38.1150 as 

proposed. 

As noted in the DCM NPRM, the 

substantive regulations implementing 

Core Principle 22 were proposed in a 

separate rulemaking that also would 

implement Core Principles 15 

(Governance Fitness Standards), 16 

(Conflicts of Interest), and 17 

(Composition of Governing Boards of 

Contract Markets).498 The rules 

implementing Core Principle 22 will be 

adopted in that separate rulemaking. 

CME submitted a comment letter 

responding to the DCM NPRM that 

referenced comments it submitted in 

connection with that rulemaking. CME’s 

comments will be considered in 

connection with that rulemaking. 

23. Subpart X—Securities and Exchange 

Commission 

The Dodd-Frank Act added new Core 

Principle 23, requiring that DCMs keep 

any records relating to swaps defined in 

CEA section 1a(47)(A)(v), as amended 

by the Dodd-Frank Act, open to 

inspection and examination by the 

SEC.499 Consistent with the text of this 

core principle, the Commission 

proposed guidance under part 38 that 

provided that each DCM should have 

arrangements and resources for 

collecting and maintaining accurate 

records pertaining to any swap 

agreements defined in section 

1a(47)(A)(v) of the amended CEA. 

i. § 38.1200—Core Principle 23, 

§ 38.1201 (Additional Sources for 

Compliance), and Guidance in 

Appendix B 

The Commission proposed a 

combination of rules and guidance to 

implement the core principle. Proposed 

§ 38.1200 codified the statutory text of 

the core principle. Proposed § 38.1201 

referred applicants and DCMs to the 

guidance in appendix B to part 38 for 

purposes of demonstrating to the 

Commission their compliance with the 

requirements of the core principle. The 

proposed guidance stated that DCMs 

should have arrangements and resources 

for collecting and maintaining accurate 

records pertaining to any swaps 

agreements defined in section 

1a(47)(A)(v) of the Act. 

Summary of Comments 

CME requested guidance on what 

records need to be retained and for how 

long they must be retained.500

Discussion 

The Commission is adopting the 

proposed rules and guidance, with the 

modifications described below. 

In response to CME’s comment, the 

Commission notes that the guidance 

provides that DCMs should retain ‘‘any’’ 

records relevant to swaps defined under 

CEA section 1a(47)(a)(v), and that the 

DCM should leave such records open to 

inspection and examination, for a 

period of five years. Commission staff 

consulted with representatives from the 

SEC, who confirmed that SEC’s relevant 

recordkeeping requirements typically 

extend for a period of five years.501 The 

five year requirement is also consistent 

with the recordkeeping requirement 

under Core Principle 18 and § 1.31 of 

the Commission’s regulations. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 502 requires federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small entities. 

The rules adopted herein will affect 

designated contract markets (‘‘DCMs’’). 

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.503 The Commission previously 

determined that DCMs are not small 

entities for the purpose of the RFA.504

The Commission received no comments 

on the impact of the rules contained 

herein on small entities. Therefore, the 

Chairman, on behalf of the Commission 

and pursuant to 5 U.S.C. 605(b), certifies 

that the rules will not have a significant 

economic impact on a substantial 

number of small entities. 

B. Paperwork Reduction Act 

This final rulemaking contains 

information collection requirements. 

The Paperwork Reduction Act 

(‘‘PRA’’) 505 imposes certain 

requirements on federal agencies in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA. An 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a currently valid control 

number. The Commission proposed to 

amend collection 3038–0052 to allow 

for an increase in response hours for the 

proposed rulemaking amending part 38, 

which included the increase in burden 

hours that will result from the 

amendments to rules 1.52 and 16.01 that 

are also part of this rulemaking.506

Notably, most of the collection burdens 

associated with part 38 are covered by 

a currently approved collection of 

information for part 38, or by other 

existing or pending collections of 

information. Thus, only those burdens 

that are not covered elsewhere are 

included in the Commission’s proposed 

amendment. 

The title of the collection will 

continue to be ‘‘Part 38—Designated 

Contract Markets.’’ The Commission 

submitted the amended collection to the 

Office of Management and Budget 

(‘‘OMB’’) for its review and approval in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11. Pursuant to a notice of 

action from OMB in March 2011, 

approval of the amended collection is 

pending a resubmission of the proposed 

information collection that includes a 

description of the comments received 

on the collection and the Commission’s 

responses thereto, which will be made 

available by OMB at www.reginfo.gov. 

Responses to this collection of 

information will be mandatory. The 

Commission will protect proprietary 

information gathered according to the 

FOIA and 17 CFR part 145, 

‘‘Commission Records and 

Information.’’ In addition, section 

8(a)(1) of the CEA strictly prohibits the 

Commission, unless specifically 

authorized by the CEA, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ 507 The Commission is also 

required to protect certain information 


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508 5 U.S.C. 552a. 

509 66 FR 42256, 42268, Aug. 10, 2001. 

510Public Law 106–554, 114 Stat. 2763 (2000). 

511The number of designated contract markets 

increased from 13 to 17 since the last amendment 

to Collection 3038–0052 and from 17 to 18 since the 

DCM NPRM was published in the Federal Register. 

512As noted above, the Commission is not 

finalizing proposed regulations 38.501—38.506 at 

this time, and expects and plans to do so when it 

considers the final SEF rulemaking, The 

Commission will consider all comments related to 

these provisions at such time. 

513Eris Comment Letter at 4 (Feb. 22, 2011). 

514See, e.g., GreenX Comment Letter at 21 (Feb. 

22, 2011); KCBT Comment Letter at 2 (Feb. 22, 

2011); Nodal Comment Letter at 4 (Feb. 22, 2011); 

NYSE Liffe Comment Letter at 14 (Feb. 22, 2011); 

CME Comment Letter at 12 (Feb. 22, 2011); and CFE 

Comment Letter at 7 (Feb. 22, 2011). 

515CME Comment Letter at 16 (Feb. 22, 2011). 

516CME Comment Letter at 10 (Feb. 22, 2011). 

517See 75 FR 67282, 67290, Nov. 2, 2010. 

518See Collection 3038–0093. 

519CME Comment Letter at 30–31 (Feb. 22, 2011). 

520See ‘‘Real Time Public Reporting of Swap 

Transaction Data,’’ 77 FR 2909, Jan. 20, 2012. 

521MGEX Comment Letter at 9 (Feb. 22, 2011). 

522See ‘‘Swap Data Recordkeeping and Reporting 

Requirements,’’ 77 FR 2136, Jan. 13, 2012. 

contained in a government system of 

records according to the Privacy Act of 

1974.508

Proposed Collection 

In its existing collection of 

information for part 38, the Commission 

estimated 300 hours average response 

time from each respondent for the 

collection of designation and 

compliance information.509 Based on its 

experience with administering 

registered entities’ submission 

requirements since implementation of 

the Commodity Futures Modernization 

Act of 2000,510 the Commission 

estimated in the DCM NPRM that the 

response time for the designation and 

compliance collections in the proposed 

rule would generally increase the 

information collection burden by 10 

percent. This increase is due to the 

introduction of swaps trading on DCMs 

permitted under section 723(a)(3) of the 

Dodd-Frank Act and the addition of new 

core principles with which DCMs must 

comply, excepting Core Principle 21 

(Financial Resources), for which a 

separate burden estimate is discussed 

below, and the burdens associated with 

any information collection requirements 

that are being accounted for in other 

existing or pending collections. With 

respect to all but financial resources 

compliance, the Commission estimated 

in the DCM NPRM that it would collect 

information from 17 respondents.511

Accordingly, a 10 percent estimated 

increase would result in 30 additional 

hours per respondent and 510 

additional hours annually for all 

respondents for designation and 

compliance. 

With respect to Core Principle 21, the 

Commission estimated in the DCM 

NPRM that each of the 17 anticipated 

respondents may expend up to 10 hours 

quarterly for filings required under the 

proposed regulations, totaling 40 hours 

annually for each respondent and 680 

hours across all respondents with 

respect to compliance with Core 

Principle 21. 

Commission staff estimated that 

respondents could expend up to an 

additional $3,640 annually based on an 

hourly wage rate of $52 (30 hours + 40 

hours × $52) to comply with the 

proposed rules. This would result in an 

aggregated additional cost of $61,880 

per annum (17 respondents × $3,640). 

Summary of Comments and Discussion 

Estimated Burden Hours for Compliance 

for Part 38 Amendments 

The Commission received several 

comments regarding the estimated hours 

of burden for compliance with the 

proposal to amend part 38.512

In particular, the Commission 

confirms that that the new DCM 

application form, Form DCM, provides 

a roadmap of required documentation, 

balances the needs of the Commission 

with the needs of the marketplace, and 

should result in a streamlined and 

standardized review process, as was 

noted by Eris.513

Other commenters suggested that the 

60 days proposed in § 38.3(g) for 

existing DCMs to certify compliance 

with the core principles and the rules 

implementing them would be unduly 

burdensome.514 As discussed in the 

preamble, the Commission is 

eliminating this provision from the final 

rules. 

CME stated that it would be costly to 

comply with the proposed § 38.151(a) 

requirement that clearing firms obtain 

every customer’s consent to the 

regulatory jurisdiction of each DCM.515

The Commission believes that 

§ 38.151(a) codifies requirements 

necessary to effectuate Core Principle 

2’s statutory mandate; a DCM must have 

an agreement in place prior to granting 

members and market participants access 

to its markets in order to ensure that the 

DCM has the capacity to detect, 

investigate, and apply appropriate 

sanctions to persons that violate DCM 

rules. Any incremental costs associated 

with this rule are covered by the 10 

percent increase contained in the 

Commission’s amended information 

collection. 

CME stated that an increased 

documentation burden associated with 

the submission process would greatly 

increase the cost and timing for DCMs 

to list products, without providing any 

corresponding benefit to the 

marketplace.516 CME stated that the 

Commission indicated that the proposed 

rules for Provisions Common to 

Registered Entities will increase the 

overall collection burden on registered 

entities by approximately 8,300 hours 

per year.517 The referenced burden was 

accounted for in the Commission’s 

information collection for the part 40 

rules that were adopted in July, 2011, 

however, and therefore the burden 

associated with that collection is not 

duplicated here.518 Notwithstanding 

this, the Commission believes that any 

DCM must have an agreement with its 

customers such that the customer agrees 

to cooperate with the DCM, where 

necessary, in order for the DCM to 

perform its statutory functions. 

Similarly, CME commented on the 

burdens associated with rules 

implementing Core Principles 8 and 18, 

in particular, the requirement to 

separately identify block trading in 

daily volume reports.519 The burden 

associated with block trading is 

accounted for in the information 

collection associated with the 

Commission’s Real-Time Public 

Reporting of Swap Transaction Data 

rulemaking.520 To avoid doublecounting, no adjustment is being made 

to the amendment to this part 38 

collection. 

In addition, MGEX commented on the 

rules implementing the general 

recordkeeping requirements of Core 

Principle 18.521 Core Principle 18 

incorporates by reference § 1.31 of the 

Commission regulations and the 

recordkeeping requirements in the 

Commission’s Swap Data, 

Recordkeeping, and Reporting 

Requirements rulemaking.522 The § 1.31 

requirements are already covered by the 

existing information collection for part 

38, with the incremental costs 

associated with the introduction of 

swap trading, if a DCM elects to do so, 

covered by the 10 percent increase 

contained in the Commission’s 

amended information collection. The 

recordkeeping requirements in the 

proposed Swap Data, Recordkeeping, 

and Reporting Requirements rulemaking 

are accounted for in the information 

collection request that was developed 

for that rulemaking. To avoid doublecounting, no adjustment is being made 

to the amendment to the part 38 

information collection in response to 

the comment. 

With respect to the information 

collection in rules implementing Core 


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523CME Comment Letter at 33 (Feb. 22, 2011) and 

MGEX Comment Letter at 7 (Feb. 22, 2011). 

524CME Comment Letter at 36–37 (Feb. 22, 2011). 

525MGEX Comment Letter at 9–10 (Feb. 22, 

2011). 

526See section 735(b) of the Dodd-Frank Act. 

527 KCBT Comment Letter at 7–9 (Feb. 22, 2011). 

528CFE Comment Letter (Feb. 22, 2011), GreenX 

Comment Letter (Feb. 22, 2011), KCBT Comment 

Letter (Feb. 22, 2011). 

529 GreenX Comment Letter at 19–20 (Feb. 22, 

2011). 530 KCBT Comment Letter at 8–9 (Feb. 22, 2011). 

Principle 10, CME and MGEX 

commented that establishing specific 

audit trail requirements would be 

burdensome, costly, and 

unnecessary.523 DCM compliance with 

Core Principle 10 should predate the 

enactment of the Dodd-Frank Act, 

however, and the information 

collections associated with Core 

Principle 10 are covered by the 

Commission’s existing part 38 

information collection. Any burden 

increase associated with the 

maintenance of additional records 

resulting from the introduction of swap 

trading, if a DCM elects to do so, has 

been accounted for in the 10 percent 

increase in designation and compliance 

costs discussed above. 

CME submitted a comment regarding 

the information collection burdens 

associated with rules that were 

proposed to implement new Core 

Principle 20, which requires each DCM 

to maintain a business continuitydisaster recovery plan and to report 

system security-related events and all 

planned changes to automated systems 

that may impact the reliability, security, 

or scalability of the systems.524 In 

response to CME’s concerns that the 

rule would require reporting of 

insignificant system events, the 

Commission is adopting final rules that 

require reporting only of significant 

system malfunctions and advance 

notification only of material system 

changes. The resulting burden reduction 

eliminates the need to increase the 

proposed part 38 information collection 

amendment. 

Finally, MGEX commented that the 

hours estimated for designation and 

compliance and the additional new 

annual cost of compliance with the 

proposed rules were extremely low, and 

claimed that due to the vast number of 

additional requirements, the total 

burden is becoming ‘‘unwieldy and 

excessive.’’ 525 MGEX did not provide 

any estimate of what costs would be 

more accurate for purposes of the part 

38 information collection, and thus the 

Commission could not evaluate 

alternative estimates to determine 

whether they would be more 

appropriate than what was proposed, 

which was based on past Commission 

experience with existing collections of 

information and which accounts only 

for those collections of information that 

are not now or will not be covered by 

other collections of information. 

Estimated Burden Hours for Core 

Principle 21 

In addition to the general increase 

proposed for the existing part 38 

collection discussed above, the DoddFrank Act established new Core 

Principle 21 (Financial Resources) that 

requires respondents to have adequate 

financial, operational and managerial 

resources.526 In order to demonstrate 

compliance with Core Principle 21, each 

respondent will need to file specific 

reports with the Commission on a 

quarterly basis, which would result in 

four quarterly responses per respondent 

per year. In the proposed rulemaking, 

the Commission estimated that each 

respondent would expend 10 hours to 

prepare each filing required under the 

proposed regulations, and the 

Commission estimated that it would 

receive filings from 17 respondents. 

The Commission received several 

comments on the proposed financial 

resources collection. KCBT stated that 

the financial resources rules, as 

proposed, would result in duplicative 

reporting for entities that operate as 

both a DCM and DCO.527 In response to 

this comment, the Commission is now 

finalizing the rules with revisions that 

clarify that a DCM that also is registered 

with the Commission as a DCO is 

obligated only to file its financial 

resources reports under the DCO rules, 

though it nonetheless must maintain the 

financial resources necessary to satisfy 

the operating cost requirements of the 

DCM and the DCO separately. 

CFE, GreenX, and KCBT requested 

that the Commission extend the 

proposed deadline for filing of financial 

resources reports from 17 days after the 

end of each quarter, in particular to 

accommodate DCMs that are public 

companies, or that have financial 

statements that are consolidated with 

those of a public company, so that the 

filing requirements would be aligned 

with the requirements for SEC forms 

10–Q and 10–K, which are longer.528

GreenX stated that failing to extend the 

time for filing to align with the SEC 

filing requirements, for which it and 

other public companies already have 

procedures and controls in place, would 

result in unnecessary new programming 

and staff resources.529 KCBT objected to 

the quarterly filing requirement and 

suggested that annual reporting would 

be sufficient.530

The Commission is not persuaded 

that an annual reporting requirement 

would be sufficient in terms of financial 

management on the part of the DCM or 

regulatory oversight on the part of the 

Commission. With respect to regulatory 

oversight, the adoption of an annual 

reporting requirement alone would 

result in a need for periodic checks by 

the Commission on financial resources 

compliance by DCMs between annual 

reports. The multiple unscheduled 

checks that would be necessary each 

year, in the form of calls for a 

demonstration of compliance by a DCM, 

as well as more formal rule enforcement 

reviews, would burden the 

Commission’s examination resources. If 

DCMs are required to report on a 

quarterly basis, DCMs may be able to 

demonstrate risks toward which the 

Commission’s resources should be 

directed. Moreover, unscheduled checks 

would most likely be more burdensome 

for DCMs than quarterly reporting. 

Thus, the Commission is adopting both 

quarterly and annual reporting 

requirements in these final rules. 

However, in response to the 

comments, the Commission is adopting 

final rules that would mitigate the 

burden that would result from the 

adoption of filing deadlines that do not 

align with SEC filing requirements. 

Accordingly, the final rules establish a 

deadline for the filing of financial 

resources reports of 40 calendar days 

after the end of the quarter for the first 

three quarters of a DCM’s fiscal year, 

and 60 calendar days after the end of the 

DCM’s fourth quarter. 

Final Burden Estimate 

The final rules require each 

respondent to file information with the 

Commission. Information collections are 

included in several of the general 

provisions being adopted in Subpart A, 

as well as in certain regulations 

implementing Core Principles 5, 7, 8, 

10, 11, 13, 18, 20, and 21. The 

Commission has carefully evaluated the 

comments discussed above and 

determined that the 10 percent general 

increase by which the Commission 

seeks to amend its part 38 collection of 

information is appropriate. The 10 

percent increase is intended to cover 

only the burdens associated with 

collections of information that are not 

already covered in the existing part 38 

information collection, or in other 

existing collections or collections that 

are being established with other 

rulemakings. 


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531The DCM NPRM referenced 17 respondents. 

The number of respondents was revised to 18 to 

include Eris, which was designated on October 28, 

2011. 

532The Dodd-Frank Act amended Core Principle 

1 to clarify that boards of trade have reasonable 

discretion in establishing the manner in which they 

comply with the core principles, ‘‘[u]nless 

otherwise determined by the Commission by rule or 

regulation.’’ 7 U.S.C. 7(d)(1). 

533 7 U.S.C. 19(a). 

534 75 FR at 80605, Dec. 22, 2010. 

535CME Comment Letter (Aug. 3, 2011). As 

discussed above, the Commission will consider all 

comments related to the proposed rules 

implementing Core Principle 9 when it finalizes 

those rules. The Commission expects and plans to 

finalize the rules implementing Core Principle 9 

when it finalizes the SEF rulemaking. 

536See, e.g., comment letters from CME (Feb. 22, 

2011, Apr. 18, 2011, Jun. 3, 2011 and Aug. 3, 2011), 

MGEX (Feb. 22, 2011 and Jun. 3, 2011), and GreenX 

(Feb. 22, 2011). 

537Moreover, for each core principle, the first 

section of the regulation is a codification of the 

statutory language of the core principle as a rule— 

and accordingly, the Commission did not consider 

the costs and benefits of these rules because they 

do not reflect the exercise of discretion by the 

Commission. Where the Commission includes 

additional regulations for a core principle, the 

Commission considered the costs and benefits. 

The 10 percent increase tracks the 

already approved part 38 information 

collection, which accounted for the 

many one-time or infrequent 

information collections contained in 

part 38 over the assumed life of a DCM. 

As a general rule, the information 

collections in this rulemaking that are 

not already covered have the same 

characteristics: The required filing of 

one-time certifications and 

demonstrations of compliance by 

existing DCMs; the filing of occasional 

exemptive requests; reporting of 

material events that are expected to 

occur infrequently; the expansion of a 

DCM’s existing audit trail program to 

cover swap transactions, if the DCM 

determines to list swaps; and the onetime or infrequent system changes 

needed to report transactions, such as 

EDRPs, that are not covered in the 

information collection requests of other 

rulemakings. 

The changes sought by the 

commenters that are being adopted 

would only marginally reduce the 

overall information collection burden. 

Thus the Commission has determined 

not to reduce its burden estimates. 

Accordingly, the Commission expects 

that with respect to all but financial 

resources compliance, a 10 percent 

estimated increase would result in 30 

additional hours per respondent and 

540 additional hours annually for all 

respondents for designation and 

compliance. 

With respect to Core Principle 21, the 

Commission expects that each of the 18 

anticipated respondents may expend up 

to 10 hours quarterly for filings required 

under the regulations, totaling 40 hours 

annually for each respondent and 720 

hours across all respondents with 

respect to compliance with Core 

Principle 21. 

Aggregate Information Burden 

In conclusion, amended collection 

3038–0052 will result in respondents 

expending up to an additional $3,640 

annually based on an hourly wage rate 

of $52 (30 hours + 40 hours × $52) to 

comply with the proposed rules. This 

would result in an aggregated additional 

cost of $65,520 per annum (18 

respondents × $3,640). This final burden 

estimate accounts for the 18 

respondents that the Commission 

believes will be affected by the final 

rule, rather than the 17 initially 

proposed.531 Otherwise, there is no 

change from the rule as proposed. 

C. Cost Benefit Considerations 

Background on Designated Contract 

Markets 

Designated contract markets 

(‘‘DCMs’’) were established by the 

Commodity Futures Modernization Act 

of 2000 (‘‘CFMA’’) as one of two forms 

of Commission-regulated markets for the 

trading of futures and options contracts 

based on an underlying commodity, 

index, or instrument. Specifically, the 

CFMA established, under section 5 of 

the CEA, eight designation criteria and 

18 core principles governing the 

designation and operation of DCMs. To 

implement the CFMA, the Commission 

codified regulations under part 38 

consisting largely of guidance and 

acceptable practices which were 

illustrative of the types of matters an 

applicant or DCM may address and at 

times provided a safe harbor for 

demonstrating compliance, but did not 

necessarily mandate the principle 

means of compliance. 

Section 735 of the Dodd-Frank Act 

amended section 5 of the CEA by: (1) 

Eliminating the eight designation 

criteria contained in former section 5(b) 

of the CEA; (2) revising the existing core 

principles, including the incorporation 

of many of the substantive elements of 

the former designation criteria; and (3) 

adding five new core principles, thereby 

requiring applicants and DCMs to 

comply with a total of 23 core principles 

as a condition of obtaining and 

maintaining designation as a contract 

market. 

The Dodd-Frank Act also amended 

Core Principle 1 to provide that in its 

discretion, the Commission may 

determine by rule or regulation the 

manner in which DCMs comply with 

the Core Principles.532 Accordingly, in 

proposing this rulemaking, the 

Commission undertook a 

comprehensive evaluation of its existing 

DCM rules, guidance, and acceptable 

practices associated with each core 

principle in order to update those 

provisions and determine which core 

principles would benefit from new or 

revised regulations. As described in this 

notice of final rulemaking, in addition 

to codifying new rules for several core 

principles, the Commission also is 

maintaining the guidance and 

acceptable practices, with necessary 

modifications, in many instances. The 

Commission believes that the 

promulgation of bright-line 

requirements in those instances where 

an industry best practice has developed 

will better serve the goals of the DoddFrank Act, and will provide the industry 

and market participants with greater 

specificity and regulatory transparency, 

and will improve the Commission’s 

ability to effectively enforce its 

regulations. 

The Commission’s Cost Benefit 

Consideration 

Section 15(a) of the CEA requires the 

Commission to ‘‘consider the costs and 

benefits’’ of its actions in light of five 

broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations.533

To further the Commission’s 

consideration of the costs and benefits 

imposed by its regulations, the 

Commission requested in the DCM 

NPRM that commenters provide data 

and any other information or statistics 

on which they relied to reach any 

conclusions regarding the costs and 

benefits of the proposed rules.534 The 

Commission received one comment that 

provided quantitative information 

pertaining to the costs relevant to the 

Commission’s proposed rules for Core 

Principle 9.535 A number of commenters 

did, however, express the general view 

that there would be significant costs 

associated with implementing and 

complying with the proposed rules, 

with some commenters generally stating 

their belief that the costs would 

outweigh any potential benefits.536

Given the lack of quantitative data 

provided in the comments or publicly 

available, the Commission has provided 

a qualitative description of the costs that 

would be incurred by DCMs.537 In a 


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538The costs and benefits of Core Principles 15, 

16, 17, and 22 are discussed in connection with 

separate rulemakings for ‘‘Governance 

Requirements for Derivatives Clearing 

Organizations, Designated Contract Markets, and 

Swap Execution Facilities; Additional 

Requirements Regarding the Mitigation of Conflicts 

of Interest,’’ 76 FR 722, Jan. 6, 2011, and 

‘‘Requirements for Derivatives Clearing 

Organizations, Designated Contract Markets, and 

Swap Execution Facilities Regarding the Mitigation 

of Conflicts of Interest,’’ 75 FR 63732, Oct. 18, 2010. 

The substantive regulations implementing Core 

Principles 15, 16, 17, and 22 were proposed in 

those separate rulemakings. Until such time as the 

Commission may adopt the final substantive rules 

implementing these core principles, the 

Commission is maintaining the current guidance 

and acceptable practices under part 38 relevant to 

Core Principles 15 and 16. Accordingly, the existing 

guidance and acceptable practices from appendix B 

to part 38 relevant to these core principles is being 

codified in the revised appendix B adopted in this 

final rulemaking. This will not result in additional 

costs because the Commission is simply codifying 

existing Guidance and Acceptable Practices. At 

such time as the Commission may adopt the final 

rules implementing these core principles, appendix 

B will be amended accordingly. 

539 44 U.S.C. 3501 et seq. 

540See CME Comment Letters (Feb. 22, 2011, Apr. 

18, 2011, Jun. 3, 2011 and Aug. 3, 2011); MGEX 

Comment Letter (Jun. 3, 2011); GreenX Comment 

Letter (Feb. 22, 2011); KCBT Comment Letter at 9 

(Feb. 22, 2011). 

541CME Comment Letter at 3 (Feb. 22, 2011). 

542CME Comment Letter at 8 (Feb. 22, 2011). 

543OCX Comment Letter at 1–2 (Feb. 22, 2011); 

CME Comment Letter at 2–3 (Feb. 22, 2011). 

544See e.g., ICE Comment Letter at 1–2 (Feb. 22, 

2011), Eris Comment Letter at 2 (Feb. 22, 2011), 

CME Comment Letter at 3–4 (Feb. 22, 2011), GreenX 

Comment Letter at 1 (Feb. 22, 2011). 

number of instances, the Commission is 

adopting rules that codify existing 

norms and best practices of DCMs (often 

reflected in existing guidance and 

acceptable practices and 

recommendations made in recent Rule 

Enforcement Reviews (‘‘RERs’’). In those 

cases, the existing norms or best 

practices serve as the baseline—that is, 

the point from which the Commission 

considers the incremental costs and 

benefits of the regulations adopted in 

this release. In other cases, however, 

there is no existing baseline either 

because the requirements arise under 

the new or revised core principles, or 

because the Commission determined to 

revise existing requirements or 

practices. 

To assist the Commission and the 

public in assessing and understanding 

the economic costs and benefits of the 

final rule, the Commission has analyzed 

the costs of those regulations adopted in 

this rulemaking that impose additional 

requirements on DCMs above and 

beyond the baseline described above. In 

most instances, quantification of costs is 

not reasonably feasible because costs 

depend on the size and structure of 

DCMs, which vary markedly, or because 

quantification required information or 

data in the possession of the DCMs to 

which the Commission does not have 

access, and which was not provided in 

response to the NPRM. The Commission 

notes that to the extent that the 

regulations adopted in this rulemaking 

result in additional costs, those costs 

will be realized by DCMs in order to 

protect market participants and the 

public. In adopting these final 

regulations, the Commission attempted 

to take the least-prescriptive means 

necessary to promote the interests of the 

Dodd-Frank Act without impacting 

innovation and flexibility. 

The following costs and benefits are 

organized, for the most part, by core 

principle. For each DCM core 

principle,538 the Commission 

summarizes the final regulations, 

describes and responds to comments 

discussing the costs and benefits of the 

proposed regulations, and considers the 

costs and benefits of the associated 

regulations, followed by a consideration 

of those costs and benefits in light of the 

five factors set out in § 15(a) of the CEA. 

In addition, the Commission considers 

the costs and benefits associated with 

the codification of rules in place of 

guidance and acceptable practices. The 

Commission notes that many of its 

regulations refer to requirements that 

are contained in other rulemakings, 

some of which have been finalized and 

others which are still before the 

Commission. The costs and benefits of 

these regulations are discussed in 

connection with those other 

rulemakings. 

The Commission further notes that 

certain final rules, including §§ 38.3(b), 

(c), (e), and (f), 38.5(a) and (b) and 

38.256, 38.257, and 38.258 are 

essentially unchanged from existing 

rules applicable to DCMs and are not 

discussed further in this section, since 

they do not impose new costs and 

benefits as a result of the Commission’s 

rulemaking. 

Finally, the Commission is obligated 

to estimate the burden of, and provide 

supporting statements for, any 

collections of information it seeks to 

establish under considerations 

contained in the Paperwork Reduction 

Act,539 and to seek approval of those 

requirements from the Office of 

Management and Budget. Therefore, the 

estimated burden and support for the 

collections of information in this 

rulemaking, as well as the consideration 

of comments thereto, are discussed in 

the Paperwork Reduction Act section of 

this rulemaking as required by that 

statute. 

(1) Rules in Lieu of Guidance and 

Acceptable Practices 

Appendices A and B to part 38 of the 

Commission’s regulations provide 

guidance and acceptable practices for 

DCMs to comply with the CFMA DCM 

core principles and designation criteria. 

In this release, the Commission is 

codifying as rules certain of these 

obligations of DCMs. The rules codify 

certain DCM practices that Commission 

staff has historically recommended in 

RERs as appropriate under the guidance 

and acceptable practices, which are 

already followed by DCMs. In certain 

cases, the rules are less prescriptive 

than the existing guidance and 

acceptable practices they replace, and 

the rules therefore maintain the 

flexibility for DCMs to determine many 

aspects of their compliance programs. 

Summary of Comments 

As described in this release, the 

Commission received a number of 

comments opposing the codification of 

rules in lieu of guidance and acceptable 

practices. In response to commenters’ 

concerns, the Commission is converting 

some of the proposed rules, in whole or 

in part, to guidance or acceptable 

practices. 

CME, GreenX, MGEX, and KCBT 

expressed concern with the costs 

imposed by the conversion of guidance 

and acceptable practices to rules, stating 

that rules are more costly and 

burdensome to DCMs and will increase 

costs to the Commission 540 and endusers of derivatives.541 CME claimed 

that there is no public policy benefit to 

what it described as ‘‘one-size fits all 

rules.’’ 542 OCX and CME questioned the 

benefit of what they viewed as the 

prescriptive tone of the proposed 

rules.543 Commenters also asserted that 

converting guidance and acceptable 

practices to rules may hinder or deter 

innovation for DCMs.544

Discussion 

As explained throughout this release, 

in several instances the Commission has 

converted compliance obligations that 

were previously proposed as rules to 

guidance and acceptable practices (in 

whole or in part) in order to 

accommodate certain comments raised 

by market participants. In determining 

whether to codify a compliance practice 

in the form of a rule or guidance and 

acceptable practices, the Commission 

was guided by: (i) The comment letters 

that provided a basis for greater 

flexibility or, in some instances, for 

greater specificity, with respect to the 

stated compliance obligation; (ii) 

whether the practice consisted of a 

widely-accepted industry practice; and 


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545CME Comment Letter at 2–4 (Feb. 22, 2011). 

546See e.g., CME Comment Letter at 3 (Feb. 22, 

2011), Eris Comment Letter at 3 (Jun. 3, 2011), ICE 

Comment Letter at 10–11 (Feb. 22, 2011). 

547 76 FR 41587, July 14, 2011. 

548See e.g., ICE Comment Letter at 1–2 (Feb. 22, 

2011), Eris Comment Letter at 2 (Feb. 22, 2011), 

CME Comment Letter at 3 (Feb. 22, 2011), GreenX 

Comment Letter at 1 (Feb. 22, 2011). 

(iii) whether the proposed rules were of 

a discretionary nature, and thus, were 

more appropriate as guidance and/or 

acceptable practices. In other 

circumstances, the Commission believes 

that maintaining certain regulations as 

rules will better serve market 

participants and the public by providing 

greater transparency and specificity and 

by improving the ability of the 

Commission to effectively enforce its 

regulations. 

While CME claimed that the 

codification of rules is more costly to 

the Commission,545 the Commission 

does not believe that rules are 

necessarily more costly to administer 

than guidance and acceptable practices. 

To the contrary, guidance and 

acceptable practices may be more costly 

to the Commission than rules because of 

the potential need to review individual 

exchange actions that do not meet the 

provisions of guidance and acceptable 

practices to determine if they comply 

with the underlying core principle. The 

Commission also notes that many of the 

rules are general in nature, allow for 

innovation and flexibility, and are not 

intended to be ‘‘one size fits all.’’ In 

response to the comment that rules will 

be more costly for end-users, the 

Commission notes that these regulations 

apply to DCMs, not to end-users, and 

are intended to protect market 

participants. 

Commenters have suggested that as 

markets evolve or DCMs innovate, rules 

may become outdated and may no 

longer be consistent with evolving 

industry practice.546 The Commission 

notes that in such instances, DCMs 

could petition the Commission for 

exemptive orders in order to implement 

new methods of compliance or request 

that the Commission propose revisions 

to its rules. The Commission notes that 

in accordance with Executive Order 

13579, it will periodically review its 

existing significant regulations to 

determine whether any such regulations 

should be modified, streamlined, 

expanded, or repealed so as to make the 

agency’s regulatory program more 

effective or less burdensome in 

achieving the regulatory objectives.547

Commenters also stated that 

converting guidance and acceptable 

practices to rules may hinder or deter 

innovation for DCMs.548 The 

Commission notes, in response to 

comments received, that many of the 

rules that commenters interpret as 

possibly having an effect on innovation, 

such as those that relate to technology 

(including certain rules under Core 

Principle 4, Prevention of Market 

Disruption), have been moved to 

guidance and acceptable practices in the 

final rule in order to provide DCMs with 

greater flexibility. 

Costs 

Costs to DCMs 

As noted above, the rules finalized in 

this release generally are designed to 

codify existing industry practice, and 

implement new or revised core 

principles. However, the Commission is 

cognizant of the possibility that less 

established DCMs may require more 

significant modifications to their 

existing programs to comply with these 

rules if they do not currently follow 

industry practices. Nevertheless, it is 

likely less costly for DCMs to 

demonstrate compliance with rules than 

to demonstrate compliance with 

guidance and acceptable practices, 

which may require significantly more 

communications and exchange of 

documents with Commission staff. 

Accordingly, the primary cost imposed 

on DCMs as a result of converting 

guidance and acceptable practices to 

rules is the potential inability of DCMs 

to choose a different method of 

complying with the core principles as 

DCMs innovate or industry standards 

evolve. This cost may be present in each 

instance throughout this document 

where the Commission is replacing 

guidance or acceptable practices with 

rules. However, the Commission has 

made every attempt to provide sufficient 

flexibility to allow DCMs to continue to 

pursue the most efficient methods of 

compliance, within the rules, guidance 

and acceptable practice structure 

adopted in this release. 

It also is possible that certain DCMs 

are currently engaged in practices that 

they consider to be in compliance with 

core principles, but which do not 

precisely follow existing guidance or 

acceptable practices (perhaps because 

the DCM considers a somewhat different 

method of complying with the core 

principle to be more efficient given the 

nature of the DCM). In such an instance, 

a DCM would now need to change those 

practices to be in full compliance with 

the rule. The Commission is not aware 

of any specific examples of DCMs that 

consider themselves to be in compliance 

with core principles, while not 

following the Commission’s guidance or 

acceptable practices. Therefore, the 

Commission is unable to quantify the 

cost associated with this potential 

scenario. However, all DCMs should be 

in compliance with existing guidance 

and acceptable practices, and the 

Commission does not believe that DCMs 

employing variant practices can object 

to the cost of complying with existing 

guidance and acceptable practices. 

As discussed above, the Commission 

notes that many of the rules that could 

affect innovation, such as those that 

relate to technology, have been moved 

to guidance and acceptable practices in 

the final rule in order to provide DCMs 

with added flexibility. However, even 

with guidance and acceptable practices 

in place of rules, innovation costs may 

still exist to a degree since the 

Commission may need to modify 

guidance and acceptable practices as 

industry practices evolve. Furthermore, 

as is the case under current guidance 

and acceptable practices, a DCM that 

devises a new method of complying 

with a core principle may incur certain 

costs to demonstrate such compliance to 

the Commission. It is not feasible to 

quantify these costs since the 

Commission has no way to predict how 

industry practices will evolve or what 

rule adjustments will be needed. 

Costs to Market Participants and the 

Public 

If converting guidance and acceptable 

practices to rules hinders or deters 

innovation for DCMs, commenters have 

asserted that DCMs may decline to 

innovate to the same extent that they 

innovate at present, potentially 

depriving market participants and the 

public of important advancements. 

However, costs to market participants as 

a result of converting some of the 

guidance and acceptable practices to 

rules should be minimal since existing 

requirements, including guidance and 

acceptable practices, would also need to 

be adjusted as important advancements 

occur, and commenters provided no 

specific examples of how converting the 

guidance and acceptable practices to 

rules would deter innovation. It is not 

feasible to quantify these costs since the 

Commission has no way to predict how 

DCMs will innovate or industry 

practices will evolve. 

Benefits 

Benefits to DCMs, Market Participants, 

and the Public 

The codification of rules in lieu of 

guidance and acceptable practices 

provides specificity and transparency to 

DCMs, market participants, and the 

public. It also increases the likelihood of 

prompt compliance with the core 


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36668 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

549Proposed regulations 38.1 and 38.2 are not 

discussed because they impose no requirements on 

market participants. Regulation 38.1 updates 

internal references within part 38 and regulation 

38.2 specifies the regulations from which DCMs 

will be exempt. Proposed regulations 38.3(b), (c), 

(e), and (f) are essentially unchanged from existing 

rules and impose no new costs or benefits. 

Additionally, regulation 38.6 is not being revised by 

this release. 

550 7 U.S.C. 8(a). 

551Eris Comment Letter at 4 (Feb. 22, 2011). Eris 

was designated as a contract market on October 28, 

2011. 

552The three applicants that were designated 

within the shortened timeframe included NYSE 

Liffe, Chicago Climate Futures Exchange (‘‘CCFE’’), 

and GreenX. The remaining applications that were 

not approved during the expedited timeframe 

included: Inet Futures Exchange, OneChicago, 

CBOE Futures Exchange, U.S. Futures Exchange, 

ELX Futures, The Trend Exchange, NQLX Futures 

Exchange, and Cantor Futures. The Commission 

notes that while NYSE Liffe, CCFE, and GreenX 

became designated within 90 days, they each 

submitted multiple draft DCM applications that 

were processed and reviewed by Commission staff 

for significantly longer than 90 days. 

553For example, while NYSE Liffe, GreenX, and 

CCFE became designated 79, 88, and 60 days, 

respectively, after they submitted their applications, 

they each submitted several versions of draft 

applications that required numerous follow-up 

conversations with Commission staff. While GreenX 

technically became designated within 88 days, the 

Commission actually processed GreenX’s 

application in draft form for nearly a year. 

principles because DCMs will have a 

clear understanding of what is required 

in order to demonstrate compliance 

with the applicable core principle. In 

turn, a DCM’s ability to achieve prompt 

compliance with the rules instills 

confidence in market participants and 

the public who utilize the markets to 

offset risk and who utilize prices 

derived from the price discovery 

process of trading in centralized DCM 

markets. Specific enforceable standards 

also promote more efficient and 

effective enforcement by the 

Commission. 

The costs and benefits of each of the 

rules, including rules that replace 

guidance or acceptable practices, are set 

out below in the cost-benefit discussion 

for the general compliance regulations 

under part 38 and for each core 

principle. 

(2) General Compliance Regulations 

Under Part 38 549

Sec. 38.3(a) (Application procedures) 

Rule § 38.3 sets forth the application 

and approval procedures for new DCM 

applicants. Rule § 38.3(a) specifies the 

application process, including the new 

requirement that the board of trade file 

the DCM Application Form (‘‘Form 

DCM’’) electronically. Rule § 38.3(a) also 

eliminates the 90-day expedited 

approval procedures for DCM 

applications. Accordingly, all DCM 

applications will be reviewed within the 

180-day period governed by procedures 

specified in CEA section 6(a).550

Summary of Comments and Discussion 

The Commission did not receive 

comments on the costs associated with 

filling out Form DCM. 

Eris contended that eliminating the 

90-day accelerated review process 

would place new entities at a 

competitive disadvantage because it 

would delay their time to market, which 

they believe is critical for new 

entrants.551

The Commission has found that, in 

the interest of meeting the expedited 

approval timeline, applicants seeking 

expedited review often file incomplete 

or draft applications without adequate 

supporting materials. This has resulted 

in the expenditure of significant 

amounts of staff time reviewing 

incomplete or draft applications, 

necessitating numerous follow-up 

conversations with applicants, and 

usually resulting in the removal of 

applications from the expedited review 

timeline. Additionally, some 

applications raise new or unique issues 

that require additional time for the 

Commission to review. Notably, since 

the passage of the CFMA, eleven DCM 

applicants have requested expedited 

treatment, but, for some of the reasons 

noted above, only three were designated 

within the shortened timeframe.552

Moreover, eliminating the accelerated 

90-day review process will not prevent 

DCMs from coming to market in an 

expeditious manner because the rule 

does not prevent the Commission from 

continuing to review applications 

within a shorter timeframe if DCM 

applicants submit substantially 

complete applications. 

Costs 

Form DCM is designed to elicit a 

demonstration that an applicant can 

satisfy each of the DCM core principles. 

Toward this end, Form DCM requires 

submission of information about an 

applicant’s intended operations. Much 

of this information has been required of 

applicants under previous regulations. 

Accordingly, the use of Form DCM does 

not represent a substantive departure 

from the Commission’s practices over 

the past decade. With respect to new 

core principles, Form DCM captures 

information that tracks statutory 

requirements and applicable 

Commission implementing regulations. 

In fact, by providing greater specificity 

and transparency as to what is expected 

from an applicant and by reducing the 

need for Commission staff to request, 

and the applicant to provide, 

supplementary information, Form DCM 

should reduce costs for applicants by 

minimizing the flow of documentation 

and discussions between DCM 

applicants and Commission staff needed 

for applicants to submit a complete 

application. 

As noted above, eliminating the 90- 

day expedited review period is unlikely 

to impose additional costs on DCMs or 

to result in competitive disadvantage 

because it does not prevent the 

Commission from continuing to review 

applications within a shorter timeframe 

if DCM applicants submit substantially 

complete applications. 

Benefits 

The new application form has several 

benefits for DCM applicants. The new 

form is designed to ensure that 

applicants are in compliance with the 

DCM Core Principles—as required by 

the statute. The form improves upon 

existing practice by standardizing the 

information that a DCM must provide. 

The form includes comprehensive 

instructions that will guide DCM 

applicants and specify lists of 

documents and information that must 

be provided as exhibits. The 

Commission anticipates that the new 

application form will streamline the 

DCM designation process, both for DCM 

applicants and the Commission. The 

form will provide applicants with 

greater specificity and transparency 

regarding the type of information that is 

required. The use of the standardized 

form is expected to reduce the amount 

of time Commission staff will need to 

review applications, which should 

enable qualified DCMs to begin 

operating sooner. Other than the 

specific requirements necessitated by 

the new and revised core principles, 

and applicable regulations, the majority 

of information required under the new 

form consists of information that the 

Commission historically has required. 

With respect to the elimination of the 

expedited review period, the 

Commission determined in the proposal 

that the 90-day accelerated review 

process was inefficient and 

impracticable. Applicants seeking 

expedited review often filed incomplete 

or draft applications, without adequate 

supporting materials, in the interest of 

meeting the expedited approval 

timeline.553 This required Commission 

staff to expend significant amounts of 

time reviewing incomplete or draft 

applications and usually resulted in 

removal of the application from the 

expedited review timeline. Eliminating 

the expedited process is consistent with 


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554This rule is consistent with the Commission’s 

elimination of the 90-day expedited review 

procedures for derivatives clearing organization 

applications under part 39. See ‘‘Derivatives 

Clearing Organization General Provisions and Core 

Principles,’’ 76 FR 69334, 69337, Nov. 8, 2011. 

555The provisions in regulation 38.5 regarding 

requests for information and demonstrations of 

compliance (paragraphs (a) and (b) in the final 

rules) were largely unchanged after Dodd-Frank and 

will not be discussed in this rulemaking because 

they do not result in any incremental costs or 

benefits. 

the statutory 180-day review period, and 

should result in a better use of 

Commission resources. During the 180- 

day review period, applicants will have 

adequate time to respond to 

Commission staff requests for additional 

information, resulting in a more 

efficient process for applicants and for 

the Commission.554

Section 15(a) Factors 

1. Protection of market participants 

and the public. Given the critical role 

that DCMs play in the financial markets, 

a role that now includes providing a 

marketplace for the trading of swaps as 

well as futures and options, it is 

essential that the Commission conduct a 

comprehensive and thorough review of 

all DCM applications. Such review is 

essential for the protection of market 

participants and the public insofar as it 

serves to limit the performance of DCM 

functions to only those entities that 

have provided adequate demonstration 

that they are capable of satisfying the 

core principles. The new Form DCM 

and the elimination of the 90-day 

application review period will enable 

the Commission to more efficiently and 

accurately determine whether it is 

appropriate to designate a DCM 

applicant as a contract market. 

2. Efficiency, competitiveness, and 

financial integrity. The Commission 

expects that the use of Form DCM will 

promote efficiency, competitiveness, 

and financial integrity by requiring at 

the outset all information the 

Commission deems necessary to 

consider an application for designation 

as a contract market. As discussed 

above, the Commission’s experience 

with lengthy reviews of draft 

applications and other materially 

incomplete submissions highlights the 

need for a streamlined and formalized 

process. By replacing a series of 

provisions under current § 38.3(a) with 

a streamlined Form DCM, and by 

eliminating the 90-day expedited 

application review period, the 

Commission is promoting increased 

efficiency by providing specific 

guidance to applicants and DCMs before 

they undertake the application process, 

and by facilitating the submission of a 

materially complete final application. 

This also will reduce the need for the 

submission of supplemental materials 

and repeated consultation between 

applicants and Commission staff. The 

result will be a more cost effective and 

expeditious review and approval of 

applications. This will benefit potential 

and existing DCMs as well as free 

Commission staff to handle other 

regulatory matters. 

In addition, the use of Form DCM will 

make available to the public the 

Commission’s informational 

requirements so that all prospective 

applicants have a heightened 

understanding of what is involved in 

the preparation and processing of an 

application. Form DCM will promote 

greater transparency in the process and 

will enhance competition among DCMs 

by making it easier for qualified 

applicants to undertake and navigate the 

application process in a timely manner. 

Form DCM is designed to address an 

applicant or a DCM’s ability to comply 

with the core principles, which form the 

bedrock of the Commission’s oversight, 

and which Congress determined are 

essential to ensure the financial 

integrity of transactions and derivatives 

markets, generally. In particular, the 

required information in the Form DCM 

(Exhibits I–J—Financial Information and 

M and T—Compliance) elicit important 

information supporting the applicant or 

DCM’s ability to operate a financially 

sound DCM and appropriately manage 

the risks associated with its role in the 

financial markets. 

3. Price discovery. The Commission 

does not anticipate that use of Form 

DCM or the elimination of the 90-day 

review period will impact the price 

discovery process. 

4. Sound risk management policies. 

The Commission expects that the use of 

Form DCM will promote sound risk 

management practices by requiring 

applicants and DCMs to examine their 

proposed risk management program 

through a series of detailed exhibits and 

submissions. The submission of exhibits 

relating to risk management, including 

exhibits I–J (Financial Information) and 

M, O, and T (Compliance) aid 

Commission staff’s analysis and 

evaluation of an applicant’s ability to 

comply with the core principles. 

5. Other public interest 

considerations. The standardization and 

streamlining of the DCM application 

process benefits the public in terms of 

more efficient use of Commission 

resources and more cost-effective and 

transparent requirements for applicants 

and DCMs. DCMs play a key role in the 

financial markets, and this role takes on 

even greater significance now that 

swaps may be traded on DCMs. A 

coherent and comprehensive approach 

to DCM designation is needed to ensure 

that only qualified applicants will be 

approved and that they are capable of 

satisfying the requirements of the core 

principles and Commission regulations. 

Sec. 38.3(d) (Request for transfer of 

designation) and § 38.5 (Information 

relating to contract market compliance) 

Rule § 38.3(d) is a new rule that 

formalizes the procedures under which 

a DCM may request the transfer of its 

designation to a new legal entity as a 

result of a corporate event such as a 

merger or corporate reorganization. Rule 

§ 38.5(c) 555 is a new rule that requires 

that the DCM must submit to the 

Commission a notification of each 

transaction involving the transfer of ten 

percent or more of the equity interest in 

the designated contract market, and that 

such notification must be provided at 

the earliest possible time but in no event 

later than ten business days following 

the date upon which the designated 

contract market enters into a legally 

binding obligation to transfer the equity 

interest. As described in the preamble, 

upon receiving a notification of an 

equity interest transfer, the Commission 

may request, where necessary, 

additional information and specific 

documentation from the DCM pursuant 

to its authority under § 38.5, although 

such documentation is no longer 

required with the initial notification. 

The Commission did not receive any 

comments discussing the costs or 

benefits of proposed §§ 38.3(d) or 

38.5(c). 

Costs 

Under § 38.3(d), only DCMs that wish 

to request the transfer of their 

designation will incur the one-time cost 

associated with filing the request with 

the Commission and preparing the 

underlying documents and 

representations that must be included 

with the request. The Commission notes 

that it has historically requested that 

DCMs file similar information in the 

event of a transfer of designation. The 

Commission is reducing the burden 

associated with the proposed 

regulations by clarifying that DCMs 

have the flexibility to determine the 

appropriate form of the documents they 

are required to submit. The Commission 

estimates that the submissions and 

notifications required under § 38.3(d) 

will take around two hours to compile 

at a cost of approximately $104. 

The Commission is also reducing the 

burden associated with proposed 


srobinson on DSK4SPTVN1PROD with RULES2
36670 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

556 ‘‘Provisions Common to Registered Entities,’’ 

76 FR 44776, Jul. 27, 2011. 

557The Commission notes that the requirements 

of regulation 38.7 are in line with similar rules 

intended to provide privacy protections to certain 

consumer information finalized in a separate 

rulemaking implementing regulations under the 

Fair Credit Reporting Act. See 76 FR 43879, Jul. 22, 

2011. 

§ 38.5(c) by eliminating the requirement 

that DCMs must provide a series of 

documents and a representation along 

with the notification of an equity 

interest transfer. DCMs that enter into 

agreements that could result in equity 

interest transfers of 10 percent or more 

will incur one-time costs associated 

with preparing and submitting the 

required notification for each event. The 

Commission estimates that the initial 

notification required under § 38.5(c) 

will take around one hour to compile at 

a cost of approximately $52. 

Benefits 

Section 38.3(d) formalizes the 

procedures that a DCM must follow 

when requesting the transfer of its DCM 

designation and positions comprising 

open interest in anticipation of a 

corporate event. The provision requiring 

three months advance notice of an 

anticipated corporate change will 

provide the Commission with sufficient 

time to evaluate the anticipated change 

and determine the likely impact of the 

change on the DCM’s governance and 

obligations, as well as the impact of the 

change on the rights and obligations of 

market participants holding open 

positions. The rule will permit the 

Commission to evaluate the transferee’s 

ability to comply with the applicable 

laws and regulations. The rule also 

requires DCMs to submit a 

representation that they are in 

compliance with the applicable laws 

and regulations. This requirement 

provides regulatory specificity to DCMs 

regarding their obligations. 

Section 38.5 provides Commission 

staff with an opportunity to determine 

whether a change in ownership at a 

DCM resulting from an equity interest 

transfer will adversely impact the 

operations of the DCM, or the DCM’s 

ability to comply with the Core 

Principles and the Commission’s 

regulations. Section 38.5 ensures that 

DCMs remain mindful of their selfregulatory responsibilities when 

negotiating the terms of significant 

equity interest transfers. 

Section 15(a) Factors (§§ 38.3(d) and 

38.5(c)) 

1. Protection of market participants 

and the public. Given the critical role 

that DCMs play in the financial markets, 

a role that now includes providing a 

marketplace for the trading of swaps as 

well as futures and options, it is 

essential that the Commission conduct a 

comprehensive and thorough review of 

all requests for transfer of designation 

and notifications of equity interest 

transfers. Such review is essential for 

the protection of market participants 

and the public insofar as it serves to 

limit the performance of DCM functions 

to only those entities that have provided 

adequate demonstration that they are 

capable of satisfying the core principles. 

The new formalized procedures for 

transfers of designation and equity 

interest transfers will provide the 

Commission with the opportunity to 

determine the impact those transfers are 

likely to have on a DCM’s ability to 

comply with the core principles and on 

the market. 

2. Efficiency, competitiveness, and 

financial integrity. The Commission 

expects that the formalized procedures 

for requesting a transfer of designation 

and for notifying the Commission of an 

equity interest transfer will promote 

efficiency, competitiveness, and 

financial integrity by providing the 

Commission with the opportunity to 

obtain the information the Commission 

deems necessary to consider such 

requests. The result will be more cost 

effective review and approval of 

requests for transfer of designation and 

equity interest. This will benefit DCMs. 

Financial integrity is also promoted as 

the transferee’s ability to meet core 

principles will be examined. 

3. Price discovery. The Commission 

does not anticipate that the formalized 

process for requesting a transfer of 

designation or notifying the 

Commission of an equity interest 

transfer will impact the price discovery 

process. 

4. Sound risk management policies. 

The Commission expects that the 

formalized processes for transfers of 

designation and equity interests will 

promote sound risk management 

practices by requiring DCMs to examine 

their proposed risk management 

program through a series of submissions 

that aid Commission staff’s analysis and 

evaluation of a DCM’s ability to comply 

with the core principles. 

5. Other public interest 

considerations. The standardization and 

streamlining of the transfer of 

designation and equity interest transfer 

process benefits the public by 

permitting more efficient use of 

Commission resources and more costeffective requirements for DCMs. A 

coherent and comprehensive approach 

to transfers of designations and equity 

interests is needed to ensure that all 

DCMs continue to satisfy the 

requirements of the core principles and 

Commission regulations. 

Sec. 38.3(g) (Requirements for existing 

designated contract markets) 

Proposed rule § 38.3(g) required 

existing DCMs to certify compliance 

with each of the core principles within 

60 days of the effective date of the final 

rules. In response to comments, the 

Commission has eliminated this 

requirement from the final rules. The 

Commission believes that the removal of 

this provision will decrease costs for 

DCMs. 

Sec. 38.4 (Procedures for Listing 

Products) 

Section 38.4 conforms the prior 

regulation to that of new rules in part 40 

of the Commission’s regulations.556

There are no costs imposed by the 

conforming changes beyond those 

discussed in connection with that 

rulemaking. 

Sec. 38.7 (Prohibited use of data 

collected for regulatory purposes) 

Rule § 38.7 is a new rule that 

prohibits a DCM from using for business 

or marketing purposes proprietary or 

personal information that it collects 

from market participants unless the 

market participant clearly consents to 

the use of its information in such a 

manner.557

Costs 

The Commission notes that in 

response to general comments that did 

not discuss costs or benefits, it has 

amended this provision to allow DCMs 

to use this information for business or 

marketing purposes if the market 

participant clearly consents to the use of 

its information in such a manner. The 

costs imposed by this provision are 

limited to the cost a DCM might incur 

in obtaining a market participant’s 

consent to use its information for the 

purposes described above. The 

Commission does not prescribe the 

method by which a DCM must obtain 

such consent and believes that the 

burden of doing so would be minimal 

and would likely involve sending an 

email or a letter. 

Benefits 

This rule protects market participants’ 

information provided to a DCM for 

regulatory purposes from being used to 

advance the commercial interests of the 

DCM. The rule eliminates incentives on 

the part of DCMs to use market 

participants’ proprietary or personal 

information for their own commercial 

gain. The rule does, however, afford 

market participants the flexibility to 


srobinson on DSK4SPTVN1PROD with RULES2
Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 36671 

558ELX Comment Letter at 4 (Feb. 22, 2011). 

559 76 FR 42508, Jul. 14, 2011. 

560 Id. at 42518, n. 131. 

561See 77 FR 2136, Jan. 13, 2012. 

562 ‘‘Real-Time Public Reporting of Swap 

Transaction Data,’’ 77 FR 1182, Jan. 9, 2012; ‘‘Swap 

Data Recordkeeping and Reporting Requirements,’’ 

77 FR 2136, Jan. 13, 2012. 

consent to a DCM’s use of their personal 

information for commercial purposes if 

they so desire. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. This rule protects 

market participants and the public by 

ensuring that information they provide 

to DCMs for regulatory purposes it not 

used inappropriately to advance the 

commercial interests of the DCM 

without their consent. 

2. Efficiency, competitiveness, and 

financial integrity. This rule encourages 

greater participation in the markets by 

ensuring market participants that their 

proprietary and personal information 

will not be used by DCMs without their 

consent. Increased participation by 

market participants will foster greater 

liquidity, tighter spreads, and more 

competitive markets. The rule also 

promotes efficient and competitive 

markets by ensuring that DCMs do not 

use access to their market participants’ 

data (without their consent) as a source 

of competitive advantage. 

3. Price discovery. Fostering a 

competitive environment, as mentioned 

above, aids in the compilation of 

information traded in markets to further 

price discovery. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

Sec. 38.8 (Listing of Swaps on a 

Designated Contract Market) 

Section 38.8(a) provides that a DCM 

that lists a swap contract for trading on 

its contract market for the first time 

must file with the Commission a written 

demonstration detailing how the DCM is 

addressing its self-regulatory obligations 

with respect to swap transactions. 

Section 38.8(b) provides that prior to 

listing swaps for trading on or through 

the DCM, each DCM must request an 

alphanumeric code from the 

Commission for purposes of identifying 

the DCM pursuant to part 45. 

Summary of Comments and Discussion 

ELX argued that the DCM NPRM did 

not make clear what criteria will be 

used to distinguish between a swap 

contract and a futures contract and 

argued that this ambiguity will cause 

uncertainty and redundant costs for 

boards of trade that would prefer to 

follow a DCM model without having to 

adopt a parallel set of rules and 

procedures.558

As noted in the Final Exemptive 

Order issued July 14, 2011,559 a DCM 

may list and trade swaps after July 16, 

2011 under the DCM’s rules related to 

futures contracts, without further 

exemptive relief. In the Order, the 

Commission noted that if a DCM 

intends to trade swaps pursuant to the 

rules, processes, and procedures 

currently regulating trading on its DCM, 

the DCM may need to amend or 

otherwise update its rules, processes, 

and procedures in order to address the 

trading of swaps.560

Costs and Benefits 

In order to comply with new § 38.8(a), 

DCMs listing swaps for the first time 

will incur costs associated with filing 

the required demonstration detailing 

how the DCM is addressing its selfregulatory obligations and fulfilling its 

statutory and regulatory obligations 

with respect to swap transactions. The 

Commission estimates that this filing 

will take two hours to complete at a cost 

of about $104. 

With respect to § 38.8(b), the 

comments, costs, and benefits of this 

provision will be discussed in the 

rulemaking that implement swap data 

recordkeeping and reporting 

requirements under part 45 of the 

Commission’s regulations.561

Sec. 38.9 (Boards of Trade Operating 

Both a Designated Contract Market and 

Swap Execution Facility) 

Section 38.9 provides that a board of 

trade that operates a DCM also may 

operate a SEF, provided that the board 

of trade separately register as a SEF 

pursuant to the requirements set forth in 

part 37. The rule also requires such 

boards of trade to comply with the core 

principles under section 5h of the Act 

and the SEF rules under part 37, on an 

ongoing basis. 

Additionally, the rule codifies the 

requirement contained in section 5h(c) 

of the CEA, which provides that a board 

of trade that operates both a DCM and 

a SEF, and that uses the same electronic 

trade execution system for executing 

and trading swaps that it uses in its 

capacity as a DCM, must clearly identify 

to market participants for each swap 

whether the execution or trading is 

taking place on the DCM or the SEF. 

The Commission did not receive any 

comments on the costs or benefits of 

this provision and is adopting the rule 

as proposed. 

Costs and Benefits 

The obligations imposed by § 38.9 are 

codifications of the new statutory 

requirement placed on DCMs. The 

obligations imposed by the CEA are not 

within the Commission’s discretion to 

change. However, the Commission 

believes there are several benefits to 

restating the statutory requirements in 

the regulations. Codification of statutory 

requirements in the regulations will 

improve the Commission’s ability to 

enforce the statutory language and will 

provide market participants with a more 

unified regulatory picture and with 

greater context and specificity regarding 

the congressional intent underlying the 

regulations. 

Sec. 38.10 (Reporting of Swaps Traded 

on a Designated Contract Market) 

Section 38.10 provides that each DCM 

that trades swaps must report specified 

swap data as provided under parts 43 

and 45.562 This provision is consistent 

with the statute’s reporting 

requirements as reflected in sections 

2(a)(13)–(14) and 21(b) of the CEA. The 

costs and benefits of these rules are 

discussed in connection with those 

rulemakings. 

(3) Core Principle 2: Compliance With 

Rules 

For the most part, the regulations 

adopted under Core Principle 2 codify: 

(1) Language found in the guidance and 

acceptable practices issued under 

former Core Principle 2 and former 

Designation Criterion 8; (2) existing 

DCM compliance practices that the 

Commission believes constitute best 

practices; and (3) recommendations 

made over the past several years by the 

Commission in RERs, and which are 

currently largely followed. The 

Commission also incorporated into the 

rules for Core Principle 2 certain 

concepts contained in part 8 of its 

regulations—Exchange Procedures for 

Disciplinary, Summary, and 

Membership Denial Actions. Most 

DCMs’ compliance and enforcement 

practices relating to Core Principle 2 

obligations historically have been 

consistent with the rules contained in 

part 8. The Commission is also adopting 

some requirements that are new for 

DCMs. The costs and benefits of each of 

these requirements are discussed below. 


srobinson on DSK4SPTVN1PROD with RULES2
36672 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

563CME Comment Letter at 16 (Feb. 22, 2011). 

564 KCBT Comment Letter at 2 (Feb. 22, 2011). 

565MGEX Comment Letter at 3 (Feb. 22, 2011). 

566CME Comment Letter at 8–9 (Feb. 22, 2011). 

Sec. 38.151(a) (Jurisdiction), § 38.151(b) 

(Impartial access by members, persons 

with trading privileges, and 

independent software vendors) and 

§ 38.151(c) (Limitations on access) 

Section 38.151(a) requires that prior 

to granting a member or market 

participant access to its markets, the 

DCM must require the member or 

market participant to consent to its 

jurisdiction. Section 38.151(b)(1) 

requires a DCM to provide its members, 

persons with trading privileges, and 

independent software vendors (‘‘ISVs’’) 

with impartial access to its markets and 

services, including access criteria that 

are impartial, transparent, and applied 

in a non-discriminatory manner. Section 

38.151(b)(2) requires that the DCM 

provide comparable fee structures for 

members, persons with trading 

privileges, and ISVs receiving equal 

access to, or services from, the DCM. 

Section 38.151(c) (Limitations on 

Access) requires a DCM to establish and 

impartially enforce rules governing any 

decision by the DCM to deny, suspend, 

or permanently bar a member’s or a 

person with trading privileges access to 

the contract market. Accordingly, any 

decision by a DCM to deny, suspend, or 

permanently bar a member’s or person 

with trading privileges access to the 

DCM must be impartial and applied in 

a non-discriminatory manner. Section 

38.151(a) derives from the statutory 

language of Core Principle 2. While 

§§ 38.151(b) and (c) are new rules, they 

codify existing industry practice and 

current Commission requirements. 

Summary of Comments 

CME stated that it would be costly to 

comply with the proposed § 38.151(a) 

requirement that clearing firms obtain 

every customer’s consent to the 

regulatory jurisdiction of each DCM.563

KCBT questioned the benefit of 

implementing the proposed rule.564

With respect to 38.151(b)(1), MGEX 

stated that it is generally in the best 

interest of the DCM to have open and 

available markets and services. 

Therefore, MGEX argued that the 

proposed rule was unnecessary and 

infringed on the business judgment of 

the DCM.565

With respect to 38.151(b)(2), CME 

argued that the Commission does not 

have the authority to set or limit fees 

charged by DCMs, likening the 

requirement for comparable fee 

structures to an industry-wide fee cap 

that has the effect of a tax.566

Discussion 

The Commission believes that 

§ 38.151(a) codifies jurisdictional 

requirements necessary to effectuate 

Core Principle 2’s statutory mandate 

that a board of trade ‘‘shall have the 

capacity to detect, investigate, and 

apply appropriate sanctions to any 

person that violates any rules of the 

contract market.’’ In the Commission’s 

view, a DCM must establish jurisdiction 

prior to granting members and market 

participants access to its markets in 

order to effectively investigate and 

sanction persons that violate DCM rules. 

A DCM should not be in the position of 

asking market participants to 

voluntarily submit to jurisdiction after a 

potential rule violation has been found. 

In response to CME’s comment, the 

Commission clarifies that each DCM 

may determine for itself how it will 

secure such agreements. For example, a 

DCM could utilize its clearing firms to 

secure the agreement. The Commission 

recognizes that DCMs may need 

additional time to secure market 

participants’ agreements to jurisdiction. 

Accordingly, in order to reduce the 

burden associated with this rule, the 

Commission is granting DCMs up to 180 

additional days following the applicable 

effective date for existing members and 

market participants to comply with the 

requirements of § 38.151(a). 

With respect to § 38.151(b), and as 

discussed in further detail in the 

preamble, the Commission has 

considered the arguments asserted by 

commenters and determined that the 

rule is necessary in order to prevent the 

use of discriminatory access 

requirements as a competitive tool 

against certain participants. The 

Commission has, however, listened to 

commenters’ concerns about the costs 

associated with the regulation and 

believes the rules strike an appropriate 

balance. 

Any comment implying that the 

Commission is attempting to set or limit 

fees charged by DCMs is misplaced. The 

requirement in § 38.151(b)(2) neither 

sets nor limits fees charged by DCMs. 

Rather, the rule states only that the DCM 

set non-discriminatory fee classes for 

those receiving access to the DCM as a 

way to implement the requirement of 

impartial access to DCMs. Accordingly, 

DCMs may establish different categories 

of market participants, but may not 

discriminate within a particular 

category. As the Commission noted in 

the preamble, when a DCM determines 

its fee structure, it may consider other 

factors in addition to the cost of 

providing access. The fee structure was 

not designed to be a rigid requirement 

that fails to take account of legitimate 

business justifications for offering 

different fees to different categories of 

entities seeking access. The Commission 

recognizes that DCMs may also consider 

services they receive (in addition to 

costs) when determining their fee 

structure. Accordingly, the comment 

suggesting that the Commission does 

not have authority to set fees is 

misplaced as the rule neither sets nor 

limits fees charged by DCMs. 

Costs 

The costs associated with § 38.151(a) 

derive from the statute and are likely to 

be limited to the cost of obtaining 

customers’ consent to the DCM’s 

jurisdiction. In response to comments 

received, the Commission is not 

mandating the method for obtaining 

consent; this may afford cost savings to 

DCMs. The Commission believes that 

most DCMs are generally already in 

compliance with the requirements of 

§ 38.151(b), which require that DCMs 

provide comparable fee structures for 

members, persons with trading 

privileges, and ISVs receiving equal 

access to, or services from, the DCM. In 

addition, the Commission believes that 

most DCMs currently have rules that 

comply with the requirements of 

§ 38.151(c), which states that DCMs 

must establish and enforce rules 

governing any decisions to deny, 

suspend, or permanently bar a member’s 

or market participant’s access to the 

contract market. Accordingly, the 

Commission believes that the final rule 

is unlikely to impose additional costs on 

DCMs. 

Benefits 

The requirements of § 38.151(a) 

ensure that DCMs can effectively 

investigate and sanction persons that 

violate DCM rules, as required by Core 

Principle 2. A DCM should not be in the 

position of asking market participants to 

voluntarily submit to jurisdiction after a 

potential rule violation has been found. 

This requirement also ensures that 

market participants are clear that their 

trading practices are subject to the rules 

of a DCM. 

As noted above, the impartial access 

requirements of § 38.151(b) prevent 

DCMs from using discriminatory access 

fee requirements as a competitive tool 

against certain participants. Access (and 

decisions to limit access) to a DCM 

should be based on the financial and 

operational soundness of a participant, 

rather than discriminatory or other 

improper motives. Impartial access 

benefits the market by ensuring that all 

participants that meet the requirements 

are able to trade on the DCM, thus 


srobinson on DSK4SPTVN1PROD with RULES2
Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 36673 

567CME commented that the rule is overly 

prescriptive. CME Comment Letter at 17–18 (Feb. 

22, 2011). The Commission considered this 

comment in preparing this release and discusses the 

costs and benefits of the codification of rules in lieu 

of guidance and acceptable practices in further 

detail in section C(1) above. 

potentially increasing liquidity in the 

marketplace. The preamble’s discussion 

that any participant should be able to 

demonstrate financial soundness either 

by showing that it is a clearing member 

of a DCO that clears products traded on 

that DCM or by showing that it has 

clearing arrangements in place with 

such a clearing member specifies that 

access will be neutral and nondiscriminatory. Granting such impartial 

access to participants will likely 

improve competition within the market 

by ensuring access criteria do not 

inappropriately deter market 

participants from participating in the 

market. 

The benefits described above also 

apply to the requirement that DCM 

decisions to deny, suspend, or 

permanently bar a member or person 

with trading privileges’ access to the 

DCM should be impartial and applied in 

a non-discriminatory manner. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. The final rules protect 

market participants by ensuring that 

DCMs can effectively investigate and 

sanction persons that violate DCM rules, 

and by ensuring that similarly situated 

market participants receive similar 

access criteria and comparable fee 

structures, consistent with the statute. 

Accordingly, the rules protect market 

participants from the potential that 

DCMs may employ unfair or 

discriminatory practices in rendering 

access determinations. In addition, the 

rules will provide market participants 

with greater specificity regarding DCMs 

procedures for denials and suspensions. 

This will benefit the market by ensuring 

that market participants know what 

behavior will lead to denials and 

suspensions and that denials and 

suspensions are being imposed in a fair 

and non-discriminatory manner. 

2. Efficiency, competitiveness, and 

financial integrity. The rules prevent 

DCMs from employing discriminatory or 

preferential criteria in granting 

members, persons with trading 

privileges, and ISVs access to their 

market. Accordingly, the rules will 

likely promote participation and 

competition within the marketplace by 

ensuring access criteria do not 

inappropriately deter market 

participants from participating in the 

market. Efficiency is promoted by 

defining clear rules governing the denial 

or suspension of a member’s or person 

with trading privileges access to the 

contract market. The final rules may 

also promote financial integrity in the 

derivatives markets because sound, nondiscriminatory access criteria and fee 

structures are less likely to deter the 

financial integrity of members and 

market participants. 

3. Price discovery. As noted above, the 

rules are likely to increase competition 

within the market by optimizing market 

participation. Increased participation is 

likely to enhance the DCM’s liquidity, 

leading to enhanced price discovery. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices other than 

the effects related to the factors above, 

especially with respect to financial 

integrity. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

Sec. 38.152 (Abusive Trading Practices 

Prohibited) 

Section 38.152 requires a DCM to 

prohibit abusive trading practices, 

including front-running, wash trading, 

fraudulent trading, and money passes, 

as well as any other trading practices 

that the DCM deems to be abusive. The 

Commission did not receive any 

comments discussing the costs or 

benefits of this provision.567

Costs 

DCMs generally already have rules in 

place that prohibit the conduct 

enumerated in the CEA and the final 

rule. They also have the systems and 

staff necessary to detect, investigate, and 

prosecute possible rule violations. 

Accordingly, the Commission believes 

that the final rule is unlikely to impose 

additional costs on most DCMs. 

Benefits 

The rule ensures that DCMs prohibit 

the specific trading practices identified 

in the rule, as well as any manipulative 

or disruptive trading practices 

prohibited by the CEA or by 

Commission regulation. Market 

participants and the public are likely to 

have greater confidence in markets that 

are protected from abusive trade 

practices, and therefore will be more 

willing to participate in the market, 

which may enhance liquidity, 

competition, and price discovery. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. Congress determined in 

Core Principle 2 that market 

participants must be protected from 

abusive trade practices. Market 

participants rely on properly 

functioning futures markets in order to 

hedge risk and must have confidence in 

the integrity of the markets in order to 

actively participate. Rule 38.152 

requires DCMs to prohibit conduct that 

could result in harm to market 

participants, as well as members of the 

public who rely on the prices derived 

from the market. The rule protects 

market participants and the public from 

possible wrongdoing on the part of firms 

and commodity professionals with 

whom they deal. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

The rule promotes efficiency, 

competitiveness, and financial integrity 

in the DCM market because markets that 

are protected from abusive trade 

practices will likely attract greater 

market participation, and increase 

public confidence in the market, and 

thereby will likely increase competition 

and liquidity. 

3. Price discovery. The rule similarly 

promotes price discovery because 

markets protected from the trading 

abuses prohibited by the rule are likely 

to operate more efficiently and more 

accurately and to attract greater market 

participation and competition; such 

markets better reflect the forces of 

supply and demand, leading to greater 

price discovery. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices, other than 

the effects related to the factors above. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

Sec. 38.153 (Capacity To Detect and 

Investigate Rule Violations), § 38.155 

(Compliance Staff and Resources), 

§ 38.156 (Automated Trade Surveillance 

System), and § 38.157 (Real Time 

Market Monitoring) 

Sec. 38.153 (Capacity To Detect and 

Investigate Rule Violations) 

Section 38.153 requires that a DCM 

have arrangements and appropriate 

resources for the effective enforcement 

of all of its rules, including the authority 

to collect information and examine 

books and records of members and 

persons under investigation, and 

adequate resources for trade and 

surveillance programs. While the 

proposed rule required DCMs to have 

the authority to collect information and 


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36674 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

568CFE Comment Letter at 2 (Feb. 22, 2011). 

569CME Comment Letter at 18 (Feb. 22, 2011). 

570 Id. 

571Commission staff has recommended these 

practices through RERs. 

572 In its comment letter, CME stated this rule is 

overly prescriptive. See CME Comment Letter at 20 

(Feb. 22, 2011). The Commission considered this 

comment in preparing this release and discusses the 

costs and benefits of the codification of rules in lieu 

of guidance and acceptable practices in further 

detail in section C(1) above. 

examine books and records for 

‘‘members’’ and ‘‘market participants,’’ 

the final rule imposes a lesser burden on 

DCMs by replacing the term ‘‘market 

participants’’ with ‘‘persons under 

investigation.’’ 

Summary of Comments and Discussion 

CFE requested that the Commission 

clarify the term ‘‘market participant,’’ 

arguing that if the term ‘‘market 

participant’’ were to be interpreted to 

apply to all customers—and not just 

those customers with direct electronic 

access to the DCM—a DCM’s regulatory 

responsibilities would greatly expand 

over participants with whom it has no 

direct relationship or connection, 

greatly increasing costs for the DCM.568

Similarly, CME stated that the 

proposed rule implied that the entire 

class of non-member, non-registered 

market participants would be subject to 

the panoply of recordkeeping 

requirements currently applicable only 

to members, registrants, and direct 

access clients of CME.569 CME stated 

that there has been no showing that 

such a requirement will further the 

DCM’s ability to effectively carry out its 

self-regulatory responsibilities and that 

it would be imprudent to impose these 

costs and burdens on market 

participants.570

The Commission notes that Core 

Principle 2 requires a DCM to have, in 

addition to appropriate resources for 

trade practice surveillance programs, 

appropriate resources to enforce all of 

its rules. Further, the Commission is 

cognizant that a broad interpretation of 

the term ‘‘market participant’’ could 

significantly increase the regulatory 

responsibilities for DCMs. In response to 

the commenters’ concerns, the 

Commission is replacing the term 

‘‘market participant’’ in the proposed 

rule with ‘‘persons under investigation’’ 

in the final rule, which will reduce the 

costs of compliance. 

Costs 

The requirements of this rule are not 

new for DCMs. Prior to the Dodd-Frank 

Act, the Commission expected a DCM to 

have adequate capacity and resources 

for effective rule enforcement.571 The 

existing costs associated with § 38.153 

include the initial and recurring costs 

associated with a DCM investing in the 

resources and staff necessary to provide 

effective rule enforcement. A DCM must 

have sufficient staff and resources, 

including the resources to collect 

information and examine books and 

records of members and persons under 

investigation and to analyze data to 

determine whether a rule violation 

occurred. Other costs include automated 

systems to assist the compliance staff in 

carrying out self-regulatory 

responsibilities for the DCM. The 

Commission believes that existing 

DCMs generally already have the 

systems necessary for effective rule 

enforcement. Further, replacing the term 

‘‘market participant’’ with ‘‘persons 

under investigation’’ in the final rule 

will reduce the costs by narrowing the 

scope of the requirement. 

Benefits 

The rule ensures that a DCM has 

arrangements and resources for effective 

rule enforcement. A DCM can best 

administer its compliance and rule 

enforcement obligations when it has the 

ability to access and examine the books 

and records of its members and persons 

under investigation. 

Sec. 38.155 (Compliance staff and 

resources) 

Section 38.155 requires that a DCM 

establish and maintain sufficient 

compliance staff and resources to 

conduct a number of enumerated tasks, 

such as audit trail reviews, trade 

practice surveillance, market 

surveillance, real-time market 

monitoring, and the ability to address 

unusual market or trading events and to 

complete any investigations in a timely 

manner. The Commission did not 

receive any comments discussing the 

costs or benefits of this provision. 

Costs 

The Commission notes that it 

currently requires DCMs to have 

sufficient compliance staff and 

resources to perform the noted 

regulatory functions and that most 

DCMs have already expended the costs 

necessary to comply with the 

requirements under § 38.155. Any DCM 

not currently in compliance with the 

rule will incur the cost of hiring and 

maintaining sufficient staff and 

resources (e.g. electronic systems) to 

conduct effective audit trail reviews, 

trade practice surveillance, market 

surveillance, and real-time market 

monitoring, to address unusual market 

or trading events, and to complete any 

investigations in a timely manner. 

However, this requirement is consistent 

with existing practice at many DCMs 

and reflects staff recommendations 

made in RERs from time to time. DCMs 

will also incur the cost of the annual 

monitoring of the size and workload of 

compliance staff and resources, which 

will require oversight time for 

compliance staff, management and the 

regulatory oversight committee. Any 

costs associated with § 38.155 will vary 

depending upon a DCM’s trading 

volumes, the number of products 

offered for trading, and the complexity 

of conducting surveillance on the 

particular products offered by the DCM. 

In addition, changes in market 

characteristics such as volatility, the 

presence or absence of intermediaries, 

and the nature and sophistication of 

market participants may also impact the 

costs associated with § 38.155. 

Benefits 

This rule ensures that DCMs have 

adequate compliance staff and resources 

to conduct effective audit trail reviews, 

trade practice surveillance, market 

surveillance, and real-time market 

monitoring in order to help detect rule 

violations and abusive trading practices. 

DCMs must also have adequate 

resources necessary to address unusual 

market or trading events in order to help 

stabilize market conditions if necessary 

and to complete any investigations in a 

timely manner. To this end, the rule 

promotes market integrity, customer 

protection, and the effectiveness of 

DCMs as self-regulatory organizations. 

Sec. 38.156 (Automated trade 

surveillance system) 

Section 38.156 requires a DCM to 

maintain an automated trade 

surveillance system capable of detecting 

and investigating potential trade 

practice violations and able to process 

this data on a trade date plus one (‘‘T+1 

basis’’). The Commission did not receive 

any comments discussing the costs or 

benefits of this provision.572

Costs 

Costs associated with § 38.156 include 

the costs of developing and maintaining 

an automated system capable of 

conducting trade practice surveillance, 

as well as requiring a DCM to have 

adequate compliance staff to administer 

the trade surveillance system. Adequate 

staff resources are necessary to 

administer, maintain, and periodically 

upgrade the system. For existing DCMs, 

the costs associated with § 38.156 

should not be new, as the regulation 

generally reflects current industry 

practices and Commission 


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Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 36675 

573 In its comment letter, CME stated that this rule 

is overly prescriptive. CME Comment Letter at 20– 

21 (Feb. 22, 2011). The Commission considered this 

comment in preparing this release and discusses the 

costs and benefits of the codification of rules in lieu 

of guidance and acceptable practices in further 

detail in section C(1) above. The Commission did 

not receive any other comments discussing the 

costs or benefits of this provision. 

requirements. Further, any costs will 

vary according to the complexity and 

analytical power of the trade 

surveillance system it builds, as well as 

the amount of compliance staff 

necessary to administer, maintain, and 

upgrade the system given the DCM’s 

product and participant profiles. 

Moreover, the Commission has found, 

through RERs, that a DCM’s automated 

surveillance system typically satisfies 

the requirements set forth in the final 

rule (e.g., the ability to compute, retain, 

and compare trading statistics). 

Therefore, the Commission believes that 

it will be unnecessary for most DCMs to 

incur costs to significantly upgrade their 

automated surveillance systems to 

comply with the final rule. 

Benefits 

The rule ensures that a DCM has an 

adequate automated trade practice 

surveillance system. These systems play 

a critical role in ensuring that a DCM 

can effectively conduct investigations 

and detect and prosecute possible 

trading abuses, including the abusive 

trading practices enumerated in 

§ 38.152. Such systems improve DCM 

compliance staff’s ability to sort and 

query voluminous amounts of data in 

order to better detect potential rule 

violations and abusive trading practices 

that could harm market participants. 

Sec. 38.157 (Real-Time Market 

Monitoring) 

Section 38.157 requires a DCM to 

conduct real-time market monitoring of 

all trading activity on its electronic 

trading platform(s) to identify disorderly 

trading and any market or system 

anomalies and to have the authority to 

cancel trades and adjust trade prices 

when necessary.573

Costs 

Costs associated with § 38.157 include 

the costs of developing and maintaining 

electronic systems to facilitate real-time 

monitoring of all trading activity on a 

DCM’s electronic trading platform(s). 

DCMs will also bear the cost of 

maintaining sufficient staff to conduct 

real-time market monitoring and to 

administer any interventions in the 

market that may be required, including 

the cancellation of trades, suspension 

and resumption of trading, and 

responses to any disorderly market 

conditions requiring human 

intervention. 

The Commission notes, however, that 

existing DCMs already have market 

monitoring capabilities, either directly 

or through a regulatory service provider. 

In addition, existing DCMs also have 

rules and procedures in place regarding 

items such as the cancellation of trades. 

As such, many of the costs associated 

with § 38.157 are likely to have been 

previously expended by existing DCMs. 

The Commission also notes that the 

change in the final rule that replaces the 

requirement to ‘‘ensure orderly trading’’ 

with a requirement to ‘‘identify 

disorderly trading’’ will likely reduce 

the overall burden of the rule. Moreover, 

any costs associated with § 38.157 will 

vary widely according to a DCM’s 

trading volumes, the number of 

products offered for trading, and the 

complexity of conducting real-time 

market monitoring on the particular 

products offered by the DCM. In 

addition, changes in market 

characteristics such as volatility, the 

presence or absence of intermediaries, 

and the nature and sophistication of 

market participants may also impact the 

costs associated with § 38.157 due to 

their correlation to system and staff 

requirements. 

Benefits 

The real-time monitoring 

requirements imposed by the rule will 

promote orderly trading and will ensure 

that DCMs have the capability to 

promptly identify and correct market or 

system anomalies. Prompt responses to 

these anomalies will likely mitigate the 

effects of these anomalies and may help 

prevent them from generating systemic 

risk or other severe problems. The 

requirement that any price adjustments 

or trade cancellations be transparent to 

the market and subject to clear, fair, and 

publicly-available standards ensures 

that market participants are not subject 

to arbitrary or opaque processes in the 

event that their trades are involuntarily 

cancelled. 

Section 15(a) Factors (§ 38.153 and 

§§ 38.155–38.157) 

1. Protection of market participants 

and the public. The rules protect market 

participants and the public by requiring 

that a DCM has the capacity to detect 

and investigate rule violations, 

including adequate compliance staff and 

resources, automated trade surveillance 

and real time monitoring capability. 

These rules will help ensure fair and 

equitable markets that are protected 

from abusive trading practices or 

manipulative market conditions. Under 

the rules, market users are protected 

from possible wrongdoing on the parts 

of firms and commodity professionals 

with whom they deal to access the 

marketplace. In addition, the rules are 

likely to protect the public from the 

potential of price distortion. 

Additionally, the requirement in 

§ 38.157 that any price adjustments or 

trade cancellations are transparent to 

the market and subject to clear, fair and 

publicly-available standards protects 

market participants from opaque rules 

related to price adjustments and trade 

cancellations. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

The requirement that DCMs have the 

capability to monitor and detect rule 

and trade practice violations and market 

anomalies improves market efficiency, 

promotes financial integrity, and helps 

to ensure fair and equitable markets by 

ensuring that violations and market 

anomalies are promptly addressed and 

do not generate systemic risk or other 

severe problems. It also helps to ensure 

that market prices are not distorted by 

prohibited activities. The rules also 

enhance the competitiveness of the 

market by increasing participant 

confidence in the integrity of the market 

and by requiring DCMs to maintain and 

establish resources for effective rule 

enforcement through the collection of 

relevant information and examination of 

relevant books and records. 

3. Price discovery. Requiring DCMs to 

conduct effective monitoring and 

surveillance of their markets and to 

have the capacity to detect rule 

violations will help ensure that 

legitimate trades with fundamental 

supply and demand information are 

accurately portrayed in market prices. 

Mitigating rule violations, which deter 

from the price discovery process in 

DCM markets, helps provide confidence 

in the prices market participants use to 

hedge risk and to provide confidence in 

the price discovery process. 

4. Sound risk management practices. 

The rules promote sound risk 

management practices as they would 

allow DCMs to better evaluate and be 

aware of risks posed by trading practices 

or member activities. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

Sec. 38.154 (Regulatory Services 

Provided by a Third Party) 

Section 38.154(a) requires that a DCM 

that contracts with a registered futures 

association or another registered entity 

(collectively, a ‘‘regulatory service 

provider’’) ensures that its regulatory 


srobinson on DSK4SPTVN1PROD with RULES2
36676 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

574See 66 FR 42256, 42266, Aug. 10, 2001. 

575MGEX Comment Letter at 3 (Feb. 22, 2011); 

KCBT Comment Letter at 3 (Feb. 22, 2011); CME 

Comment Letter at 18–19 (Feb. 22, 2011). 

576MGEX Comment Letter at 3 (Feb. 22, 2011). 

577 KCBT Comment Letter at 3 (Feb. 22, 2011). 

578 Id. 

579CME Comment Letter at 18–19 (Feb. 22, 2011). 

service provider has sufficient capacity 

and resources to provide timely and 

effective regulatory services. 

Section 38.154(b) requires that a DCM 

maintain adequate compliance staff to 

supervise and periodically review any 

services performed by a regulatory 

service provider. 

Section 38.154(c) requires a DCM that 

utilizes a regulatory service provider to 

retain exclusive authority over certain 

decisions. While the proposed rule 

permitted a DCM to retain exclusive 

authority in other areas of its choosing, 

it required the decision to open an 

investigation into a possible rule 

violation to reside exclusively with the 

regulatory service provider. As 

discussed in the preamble, this 

requirement has been removed from the 

final rule. These regulations update and 

clarify the last general public guidance 

issued approximately 10 years ago by 

the Commission in this area.574

Summary of Comments 

MGEX, KCBT, and CME stated that 

the proposed rule is either overly 

burdensome or unnecessary.575 MGEX 

expressed its general opposition to 

proposed § 38.154 by stating that if a 

service has been delegated to another 

registered entity pursuant to a 

Commission-approved agreement, then 

this ‘‘should be sufficient and no other 

formal agreement is necessary.’’ 576

KCBT contended that proposed § 38.154 

is overly burdensome and duplicative, 

particularly when a DCM contracts with 

a regulatory service provider that is also 

a DCM required to comply with the 

same core principles.577 KCBT noted 

that it is currently party to a services 

agreement with another DCM and 

argued that it will be costly and 

unnecessary to perform periodic 

reviews and hold regular meetings with 

this regulatory service provider.578 CME 

contended that the proposed rule is 

overly prescriptive and suggested that 

the rule would be better served as 

guidance and acceptable practices.579

Discussion 

The Commission has determined that, 

on the whole, § 38.154 strikes the 

appropriate balance between flexibility 

and ensuring that a DCM properly 

oversees the actions of its regulatory 

service provider to ensure 

accountability and effective 

performance. The Commission believes 

that it is necessary to require a DCM to 

conduct periodic reviews and to hold 

regular meetings with its regulatory 

service provider. A DCM that elects to 

use a regulatory service provider must 

properly supervise the quality and 

effectiveness of the services provided on 

its behalf, and can only do so by 

acquiring detailed knowledge during 

periodic reviews and regular meetings 

required under § 38.154. 

Costs 

The costs associated with § 38.154 

will include the cost of initially 

determining whether a regulatory 

service provider has the capacity and 

resources necessary to provide timely 

and effective regulatory services. An 

existing DCM replacing a current 

regulatory service provider with a new 

one will have a similar cost. For existing 

DCMs with a regulatory service 

provider, this should not be a new cost 

as DCMs are currently required to 

conduct such due diligence when 

entering into an agreement for 

regulatory services from a third-party 

provider, in line with existing industry 

practices. 

The costs associated with § 38.154 

will also include the cost of hiring and 

maintaining sufficient compliance staff 

at the exchange to effectively supervise 

the quality and effectiveness of the 

services provided by a regulatory 

service provider, including the cost of 

holding regular meetings with their 

regulatory service provider and the cost 

of periodic reviews of the adequacy and 

effectiveness of services provided. 

These costs will vary widely depending 

upon a DCM’s trading volumes, the 

number of products offered for trading, 

and the complexity of conducting 

surveillance on the particular products 

offered by the DCM. Changes in market 

characteristics such as volatility, the 

presence or absence of intermediaries, 

and the nature and sophistication of 

market participants may also impact the 

costs associated with § 38.154. DCMs 

will also bear the cost of documenting 

any instances where their actions 

differed from those recommended by 

their regulatory service provider. 

Commenters did not, however, provide 

any specific costs to the Commission. 

The Commission notes that prior to 

the Dodd-Frank Act, many of the 

requirements under § 38.154 (and many 

of the associated costs summarized 

above), were already required under 

Commission policy with respect to 

compliance with Core Principle 2. 

Section 38.154 communicates the 

Commission’s expectations with respect 

to supervision of third-party regulatory 

service providers in a more consistent 

and explicit manner. 

Benefits 

The rule ensures that all regulatory 

service providers have the capacity to 

provide the services they contract to 

perform, and that DCMs are aware of the 

quality and outputs of the services 

provided on their behalf. Additionally, 

the rule ensures that all DCMs have the 

staff to adequately supervise their 

regulatory service providers and that 

these regulatory service providers 

effectively perform the services they are 

engaged to perform. By requiring that 

DCMs oversee the services provided by 

the regulatory service provider, and 

thereby ensuring that the service 

provider is meeting the expected 

standards for compliance, the rule will 

likely result in cost savings to the DCM, 

as the failure of a service provider to 

adequately fulfill its duties may result 

in costs to DCMs for not meeting 

compliance obligations. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. The final rule promotes 

the protection of market participants 

and the public because it ensures that 

regulatory service providers that are 

utilized by DCMs are properly 

supervised and have the capacity to 

perform the services they are engaged to 

provide, including conducting market 

surveillance for rule violations and 

performing other market regulatory 

activities that protect market 

participants and the public. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

Markets that have effective oversight, 

surveillance, and monitoring are likely 

to function more efficiently as rule 

violations and market abuses would be 

detected more quickly. Proper 

supervision of a regulatory service 

provider that provides these functions 

will ensure the provider has the ability 

to perform these activities and will in 

turn promote confidence in the market 

and likely increase competition. 

3. Price discovery. The Commission 

has not identified any effects that this 

rule will have on price discovery. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices, other than 

those enumerated with regard to the 

factors above. 

5. Other public interest 

considerations. Section 38.154 is 

particularly important in promoting the 

public interest as regulatory service 

providers that help DCMs comply with 

their obligations are effectively standing 


srobinson on DSK4SPTVN1PROD with RULES2
Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 36677 

580 In its comment letter, CME stated that this rule 

is overly prescriptive. CME Comment Letter at 21– 

22 (Feb. 22, 2011). The Commission considered this 

comment in preparing this release and discusses the 

costs and benefits of the codification of rules in lieu 

of guidance and acceptable practices in further 

detail in section C(1) above. The Commission did 

not receive any other comments discussing the 

costs or benefits of these provisions. 

in place of their DCM clients in 

providing elements of front-line selfregulation. 

Sec. 38.158 (Investigations and 

Investigation Reports) 

Section 38.158(a) requires that a DCM 

have procedures in place to conduct 

investigations of possible rule 

violations, and requires an investigation 

to be commenced upon the request of 

Commission staff, or upon the discovery 

by a DCM of information indicating a 

reasonable basis for a finding that a 

violation may have occurred or will 

occur. The final rule reduces the burden 

imposed by the proposed rule by now 

requiring that an investigation must be 

commenced upon receipt of a request 

from Commission staff or upon the 

discovery or receipt of information by 

the DCM that indicates a ‘‘reasonable 

basis’’ for finding that a violation ‘‘may 

have’’ occurred or will occur. Section 

38.158(b) requires that an investigation 

be completed within 12 months after an 

investigation is opened, absent 

mitigating factors as specified in the 

rule. Sections 38.158(c) and (d) set forth 

the elements and information that must 

be included in an investigation report 

when there is or is not a reasonable 

basis for finding a rule violation. 

Section 38.158(e) provides that no more 

than one warning letter for the same 

violation may be issued to the same 

person or entity during a rolling 12- 

month period.580

Costs 

Section 38.158(a) codifies the current 

practice at DCMs because every DCM 

already has investigation procedures, 

guidelines, and compliance staff. 

Therefore, the Commission does not 

believe the final rule creates any new 

resource requirements. Unlike the 

proposed rule, which may have 

imposed certain costs not currently 

incurred by DCMs, the final rule limits 

the situations under which a DCM must 

conduct an investigation and keeps the 

final rule in line with current practices. 

Under section 38.158(b), a DCM may 

have to periodically adjust its 

compliance staff resources to ensure 

that investigations are completed within 

the time period specified in the final 

rule. However, the Commission notes 

that this is not a new cost for DCMs. The 

Commission, through RERs, has already 

communicated to DCMs that it expects 

a DCM to complete investigations in a 

timely manner. 

Sections 38.158 (c) and (d) require a 

DCM to have sufficient compliance staff 

to conduct investigations and to prepare 

investigation reports. The Commission 

notes that this is not a new cost for 

DCMs. The Commission, through RERs, 

has already communicated to DCMs that 

it expects a DCM to have adequate staff 

to perform these responsibilities. The 

Commission has also reduced the cost 

associated with proposed § 38.158(c) by 

eliminating the requirement that an 

investigation report include the member 

or market participant’s disciplinary 

history at the DCM. 

Under § 38.158(e), a DCM will be 

required to maintain sufficient 

compliance staff to conduct 

investigations and to determine whether 

a warning letter should be issued for 

exchange rule violations. The 

Commission notes that this is not a new 

cost for DCMs. The Commission, 

through RERs, has already 

communicated to DCMs that it expects 

a DCM to have adequate staff to perform 

its self-regulatory responsibilities and to 

issue warning letters when appropriate. 

Benefits 

Section 38.158(a) provides that a DCM 

must establish and maintain procedures 

that require its compliance staff to 

conduct investigations of possible rule 

violations. Investigations that examine 

potential rule violations help to ensure 

that rule violations are appropriately 

examined and prosecuted. 

The Commission has determined that 

the completion of investigations in a 

timely manner, as required by 

§ 38.158(b), increases the effectiveness 

of a DCM’s rule enforcement program 

because prompt resolution of 

investigations is essential to 

discouraging further violations of a 

DCM’s rules and addressing violations 

before they escalate. Timely 

investigations also assist the 

Commission in appropriately and 

quickly removing bad actors from 

markets. By ensuring that DCMs are 

effectively overseeing potential rule 

violations on a regular and timely basis, 

the rule helps DCMs to determine and 

address violations before they escalate, 

and serves as a beneficial deterrent 

against misconduct. 

The required elements and 

information that must be included in an 

investigation report under §§ 38.158 (c) 

and (d) will assist disciplinary panels in 

determining whether there is a 

reasonable basis for finding that a 

violation of exchange rules warrants the 

issuance of charges. The investigation 

reports that must be provided to the 

Commission will also assist in 

reviewing the adequacy of a DCM’s 

trade practice and disciplinary 

programs. 

Section 38.158(e) will ensure that 

warning letters serve as effective 

deterrents and will protect the public 

and market participants against 

individuals engaging in recidivist 

activity. A policy of issuing repeated 

warning letters rather than issuing 

meaningful sanctions to members and 

market participants who repeatedly 

violate the same or similar rules 

denigrates the effectiveness of a DCM’s 

rule enforcement program. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. The final rule protects 

market participants and the public by 

requiring DCMs to flag potential rule 

violations, providing a framework for 

which an investigation is conducted, 

and protecting against individuals who 

attempt to engage in violative recidivist 

activity. By ensuring that investigations 

are adequately performed, the rule 

protects market participants and the 

public by ensuring that remedial action 

is taken as appropriate. Moreover, 

timely investigation of rule violations 

will help to promote fair and equitable 

markets free of abusive trading practices 

or manipulative market conditions, and 

will provide market users assurance that 

the overseers of the markets in which 

they trade have the capacity to 

effectively investigate wrongdoing. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

For the reasons noted above, the final 

rule also promotes efficiency, 

competitiveness, and financial integrity 

in the derivatives markets by requiring 

that a DCM have adequate resources to 

commence an investigation upon the 

discovery or receipt of information 

indicating that there is a reasonable 

basis for finding that a violation may 

have occurred or will occur, and to 

conduct this investigation in a timely 

manner. 

3. Price discovery. The requirement 

that DCMs conduct investigations in a 

timely manner helps to ensure that the 

market is protected from disruptive and 

manipulative practices. This rule will 

help protect the price discovery process 

of markets from these violations, and 

thus help provide confidence in the 

prices market participants use to hedge 

risk. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices other than 


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581CME Comment Letter at 38 (Feb. 22, 2011). 582CME Comment Letter at 9 (Mar. 28, 2011). 

those enumerated with regard to the 

factors above. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

Sec. 38.159 (Ability To Obtain 

Information) 

Section 38.159 implements the Core 

Principle 2 requirement that a DCM 

have the ability and authority to obtain 

necessary information to perform its 

rule enforcement obligations, including 

information sharing agreements. The 

Commission did not receive any 

comments discussing the costs or 

benefits of this provision. 

Costs and Benefits 

This rule codifies and implements the 

requirements of Core Principle 2 that 

DCM must have the ability and 

authority to obtain any necessary 

information to perform any required 

function, including the capacity to carry 

out such international informationsharing agreements, as the Commission 

may require. To the extent that a DCM 

determines it is necessary for it to enter 

into an information sharing agreement 

with other DCMs or SEFs, the rule 

makes it clear that this is permitted. In 

so doing, DCMs may face additional 

costs. However, these costs are unlikely 

to be significant and will only be 

incurred should a DCM determine that 

it is necessary to enter into an 

information sharing agreement with 

another DCM or with a SEF. 

Additionally, some DCMs are already 

parties to such agreements. The 

Commission is unable to quantify the 

cost of entering into such agreements as 

the costs will vary depending on several 

factors, including the nature of the 

agreement, the size of the DCM, and 

whether the DCM is negotiating a new 

agreement or signing-on to an existing 

agreement. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. The final rule protects 

market participants and the public by 

providing a mechanism for which DCMs 

can obtain necessary information to 

carry out their duties. A DCM’s ability 

and authority to obtain information in 

order to perform its rule enforcement 

obligations is imperative in order to 

identify rule violations and ensure that 

remedial action is taken as appropriate. 

Moreover, this requirement will help to 

promote fair and equitable markets free 

of abusive trading practices or 

manipulative market conditions, and 

will provide market users assurance that 

the overseers of the markets in which 

they trade have the capacity to 

effectively investigate wrongdoing. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

For the reasons noted above, the final 

rule also promotes efficiency, 

competitiveness, and financial integrity 

in the derivatives markets by requiring 

that a DCM have an adequate means to 

obtain information to enforce its rules. 

3. Price discovery. The requirement 

that DCMs have a mechanism to obtain 

appropriate information about traders in 

its markets helps to ensure that the 

market is protected from disruptive and 

manipulative practices. This rule will 

help protect the price discovery process 

of markets from these violations, and 

thus help provide confidence in the 

prices market participants use to hedge 

risk. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices other than 

those enumerated with regard to the 

factors above. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

(4) Core Principle 3: Contracts Not 

Readily Susceptible to Manipulation 

Sec. 38.201 (Additional Sources for 

Compliance and Appendix C) 

Section 38.201 refers applicants and 

DCMs to the guidance in appendix C to 

part 38 (Demonstration of Compliance 

That a Contract is Not Readily 

Susceptible to Manipulation), for 

purposes of demonstrating their 

compliance with the requirements of 

§ 38.200, which codifies Core Principle 

3. The guidance under appendix C to 

part 38 amends and replaces Guideline 

No. 1 under appendix A to part 40. 

Summary of Comments and Discussion 

CME commented that the proposed 

rulemaking did not identify any 

problems with continuing to use the 

current methodology to estimate 

deliverable supply, and claimed that if 

the proposed standard is adopted, it will 

impose additional costs on exchanges 

and market participants with no defined 

benefit, including requiring exchanges 

to survey market participants 

annually.581 CME also commented on 

the provision that DCMs submit 

monthly deliverable supply estimates, 

stating that this requirement is onerous 

for DCMs and suggesting that the 

Commission should only require 

monthly estimates of deliverable supply 

for the most recent three years.582

The Commission notes that the 

proposed guidance regarding estimating 

deliverable supply is not a departure 

from existing and longstanding practice. 

Estimating deliverable supply has 

historically required that a DCM consult 

with market participants on a regular, if 

not monthly, basis. In that regard, the 

burden of maintaining contacts with 

market participants should not be any 

more or less than it has been. In 

response to CME’s second comment, the 

Commission has made amendments to 

its proposed appendix C by requiring 

DCMs to submit monthly estimates of 

deliverable supply for the most recent 

three years rather than for five years. 

Costs 

In order to comply with this 

regulation, DCMs would have to incur 

the cost of supplying supporting 

information and documentation to 

justify the contract specifications of a 

new product or substantial rule 

amendment. However, the Commission 

believes there will likely be no 

additional costs attributed to the rule 

because under existing practices, DCMs 

conduct market analysis for new 

products before deciding whether or not 

it makes business sense to list a new 

product for trading, including 

interviewing market participants. 

Additionally, DCMs also conduct 

market analysis before adopting 

amendments to existing contract terms 

and conditions. 

Benefits 

The guidance outlined in appendix C 

to part 38 provides a reference for 

existing and new regulated markets for 

information that should be provided to 

the Commission for new products and 

rule amendments based on best 

practices developed over the past three 

decades by the Commission and other 

regulators. This guidance will likely 

reduce the time and costs that regulated 

markets will incur in providing the 

appropriate information. The guidance 

also reduces the amount of time it takes 

Commission staff to analyze whether a 

new product or rule amendment is in 

compliance with the CEA. Some DCMs 

regularly provide the information 

outlined in appendix C, but others do 

not include enough information for 

Commission staff to determine whether 

the contract is in compliance with the 

CEA. Having all of the supporting 

information included in a new product 

submission or rule amendment reduces 

the resources Commission staff must 


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583CME Comment Letter at 24–25 (Feb. 22, 2011), 

MGEX Comment Letter at 4 (Feb. 22, 2011), KCBT 

Comment Letter at 4 (Feb. 22, 2011), and ICE 

Comment Letter at 4 (Feb. 22, 2011). 

584MGEX Comment Letter at 4 (Feb. 22, 2011). 

585The Commission received comments from 

CME, MGEX, and KCBT stating that this rule is 

overly prescriptive. CME Comment Letter at 25 

(Feb. 22, 2011), MGEX Comment Letter at 4–5 (Feb. 

22, 2011), KCBT Comment Letter at 4 (Feb. 22, 

2011). The Commission considered these comments 

in preparing this release and discusses the costs and 

benefits of the codification of rules in lieu of 

guidance and acceptable practices in further detail 

in section C(1) above. 

expend to request such information 

from the exchange or to find 

independently. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. The information 

recommended in appendix C for 

inclusion in the new product or rule 

amendment submission provides insight 

and evidence of the DCM’s research into 

the underlying cash market of the 

DCM’s product. This should allow for a 

timely review by Commission staff of 

the DCM’s supporting analysis and data 

to determine whether the contract is not 

readily susceptible to manipulation. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. By 

providing guidance based on best 

practices regarding what a DCM should 

consider when developing a futures 

contract or amending the rules of an 

existing contract, the contracts listed by 

DCMs, as a whole, should be more 

reflective of the underlying cash market 

by promoting efficient pricing through 

convergence. 

3. Price discovery. The guidance 

provides the information a DCM should 

analyze to determine if its contract is 

designed in such a way to promote 

convergence at expiration, and thus 

promote the price discovery mechanism 

of the centralized market. 

4. Sound risk management practices. 

By following the best practices outlined 

in the guidance in appendix C, a DCM 

can minimize the susceptibility of a 

contract to manipulation or price 

distortion while it is developing the 

contract terms and conditions for its 

futures contract. As a result, the risks to 

the DCM’s clearing house and market 

participants would also be minimized. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

(5) Core Principle 4: Prevention of 

Market Disruption 

Sec. 38.251 (General Requirements) 

Section 38.251 requires that DCMs 

collect and evaluate data on individual 

traders’ market activity on an ongoing 

basis, monitor and evaluate general 

market data, have the ability to conduct 

real-time monitoring of trading and 

comprehensive and accurate trade 

reconstructions, and monitor for 

violations of exchange-set position 

limits. Based upon comments, the 

Commission removed what were 

perceived as prescriptive elements from 

the proposed rule (including a 

requirement that DCMs have manual 

processes or automated alerts effective 

in detecting and preventing trading 

abuses) and included them in the 

guidance and acceptable practices in 

appendix B. 

Summary of Comments and Discussion 

Several commenters asserted that 

their current regulatory systems do not 

allow for effective real-time monitoring 

of position limits and that this 

regulation would impose additional 

costs.583 Additionally, MGEX stated that 

the automated trading alert requirement 

of proposed § 38.251 did not provide 

any real value and only imposed more 

burden and cost.584

The Commission notes that while 

§ 38.251 requires that DCMs monitor for 

intraday position-limit violations it does 

not require that position limits 

necessarily be monitored in real-time. 

Instead, the rule requires that DCMs 

demonstrate the ability to 

comprehensively and accurately 

reconstruct daily trading activity for the 

purposes of detecting trading abuses 

and violations of exchange-set position 

limits, including those that may have 

occurred intraday. The acceptable 

practices under appendix B explains 

that while real-time monitoring is the 

most effective method, an acceptable 

program may monitor for intraday 

violations on a T + 1 basis. The 

flexibility afforded by the guidance 

should limit the cost of compliance 

given that T+1 monitoring is likely less 

costly than real-time monitoring. 

In order to provide greater specificity 

to market participants, reduce costs, and 

maximize flexibility, the Commission is 

also converting the requirement that a 

DCM have an effective automated alerts 

regime to detect trading abuses from a 

rule to an acceptable practice so that a 

DCM will have added flexibility in 

meeting this requirement, as the 

Commission believes that automated 

trading alerts, though not necessarily in 

real time, are the most effective means 

of detecting market anomalies. The 

Commission is also removing provisions 

from the proposal dealing with the realtime monitoring of impairments to 

market liquidity and clarifying in the 

guidance and acceptable practices what 

must be included in real-time 

monitoring as compared to what may 

not need to be monitored in real-time. 

Costs 

While some DCMs already have the 

ability to monitor for intraday trading 

abuses and market activity, including 

position-limit violations as required in 

§ 38.251, other DCMs may need to hire 

additional staff (even if the monitoring 

is done on a T+1 basis) and may need 

to install and maintain new or advanced 

systems with improved capabilities. 

Additional costs will vary based on the 

number of products a DCM offers and its 

trading volumes. However, the 

Commission notes that a DCM may be 

able to reduce the costs associated with 

this rule by using a unified monitoring 

system to jointly satisfy the 

requirements of § 38.251 and § 38.157 

(Real-time market monitoring). 

Notwithstanding any related costs, 

§ 38.251 brings DCMs into compliance 

with the statutory language of the DoddFrank Act, which requires that DCMs 

conduct real-time monitoring of trading 

activities and be able to reconstruct 

trading. The regulation does so by 

minimizing costs while abiding by the 

Dodd-Frank Act. 

Benefits 

The Dodd-Frank Act amended Core 

Principle 4 to emphasize that DCMs 

must take an active role not only in 

monitoring trading activities within 

their markets, but in preventing market 

disruptions. Rule 38.251 requires that 

DCMs have the proper tools to prevent 

manipulation or other disruptions. By 

requiring DCMs to prevent 

manipulation or other disruptions, the 

Commission is able to help ensure that 

market participants are able to execute 

trades at prices that are not subject to 

preventable market disruptions. 

Moreover, to help reduce the cost of 

compliance, the Commission is 

providing DCMs with flexibility in 

meeting the rule’s requirements as set 

forth in guidance and acceptable 

practices. 

Sec. 38.252 (Additional Requirements 

for Physical-Delivery Contracts) 

Section 38.252 requires that DCMs 

monitor physical-delivery contracts’ 

terms and conditions as they relate to 

the underlying commodity market and 

to the convergence between the contract 

price and the price of the underlying 

commodity, address conditions that 

interfere with convergence, and monitor 

the supply of the commodity used to 

satisfy the delivery requirements.585


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586See, e.g., ‘‘Statement of the Agricultural 

Advisory Committee,’’ October 29, 2009, available 

at: http://www.cftc.gov/ucm/groups/public/ 

@aboutcftc/documents/file/aac102909_bruns.pdf. 

587CME Comment Letter at 25–26 (Feb. 22, 2011). 

588 Id. at 26. 

589 Id. 

590 Id. 

591Argus Comment Letter at 6–7 (Feb. 22, 2011). 

592 KCBT Comment Letter at 5 (Feb. 22, 2011). 

593MGEX Comment Letter at 5 (Feb. 22, 2011). 

Costs and Benefits 

The Commission has a long history of 

monitoring for convergence and 

addressing issues of nonconvergence.586 The Commission notes 

that this surveillance requirement is 

currently in place and that DCMs are 

unlikely to incur any additional costs as 

a result of this codification of an 

existing practice. The rules adopted in 

this release ensure that market 

participants are better able to hedge 

their risk and that price discovery is 

enhanced by helping to detect 

disconnects between futures and 

underlying physical market prices. 

Close monitoring of physical-delivery 

contracts helps prevent the 

manipulation of prices, and the public 

benefits from futures prices that reflect 

actual market conditions because those 

prices often form the basis for 

transactions taking place in the physical 

market. 

Sec. 38.253 (Additional Requirements 

for Cash-Settled Contracts) 

Section 38.253 requires that for cashsettled contracts, a DCM must monitor 

the pricing of the index to which the 

contract will be settled and also monitor 

the continued appropriateness of the 

methodology for deriving the index. If a 

DCM’s contract is settled by reference to 

the price of a contract or commodity 

traded in another venue, the DCM must 

have access to information on the 

activities of its traders in the reference 

market. 

Summary of Comments and Discussion 

CME commented that the Commission 

is uniquely situated to add regulatory 

value to the industry by reviewing for 

potential cross-venue rule violations, 

noting that the Commission is the 

central repository for position 

information delivered to it on a daily 

basis in a common format across all 

venues.587 CME asserted that the 

Commission would be imposing an 

onerous burden on DCMs and their 

customers by requiring the reporting of 

information that the Commission 

already receives or will be receiving.588

CME also stated that the alternative 

proposal, that the DCM enter into an 

information-sharing agreement with the 

other venue, also will result in 

additional costs to both entities, and 

that it may not be practical or prudent 

for a DCM to enter into such an 

agreement with the other venue.589 CME 

noted that its rules already allow it to 

request such information from market 

participants on an as-needed basis.590

Argus stated that the cost of monitoring 

the ‘‘availability and pricing’’ of the 

commodity making up a third-party 

index to which a contract is settled 

would be prohibitive.591

The Commission believes that a DCM 

must have the ability to determine 

whether a trader in its market is 

manipulating the instrument or index to 

which the DCM contract cash-settles. A 

DCM must be able to obtain information 

on its traders’ activities in the 

underlying instrument or index. 

Nonetheless, the Commission believes 

the rule need not prescribe the specific 

methods to accomplish this, for 

example, by information-sharing 

agreements or by placing a reporting 

burden on traders who carry a position 

near contract settlement. Accordingly, 

the description of the methods for 

obtaining these data on traders’ activity 

in an underlying index or instrument 

are set forth in the acceptable practices, 

rather than included in the rule. Also, 

the specific requirement that DCMs 

monitor the availability and pricing of 

the commodity making up the index has 

been removed from the rule. 

Costs 

DCMs have, as a part of the contract 

market designation process, long been 

required to perform this type of 

surveillance on cash-settled contracts, 

and thus are unlikely to incur 

substantial additional costs on these 

contracts. DCMs may, however, incur 

significant additional costs for 

collecting information on traders’ 

activities in the underlying instrument 

or index. These costs cannot be 

quantified because they will vary 

according to the particular instrument 

or index. Moreover, no DCM provided 

the Commission with any quantification 

of the costs of compliance. In 

consideration of the comment received 

from CME, the Commission has 

attempted to minimize the costs that 

will be incurred by giving DCMs some 

flexibility in determining the size of 

positions and the dates for which 

position data is collected. This will 

sharply reduce the costs for DCMs that 

routinely have few traders that hold 

substantial positions near contract 

expirations. 

Benefits 

In certain markets, the settlement 

price is linked to prices established in 

another market. Linked markets are 

becoming more and more prevalent, and 

the interconnected nature of these 

markets may create incentives for 

traders to disrupt or manipulate prices 

in the reference market in order to 

influence the prices in the linked 

market. Detecting and preventing this 

sort of manipulation requires 

information on traders’ activities in the 

cash-settled contract and in, or related 

to, the index to which it is settled. This 

rule ensures that DCMs have the 

information and tools they need to 

accomplish their statutory duty to 

prevent manipulation and disruptions 

to the cash-settlement process and 

enhances the confidence of market 

participants and the public that these 

contracts are free of manipulation. 

Sec. 38.254 (Ability To Obtain 

Information) 

Section 38.254 requires DCMs to 

require that traders in their markets 

keep records, including records of their 

activity in the underlying commodity 

and related derivative markets and 

contracts. If its market has 

intermediaries, the DCM must either use 

a comprehensive large-trader reporting 

system or obtain position data from 

other sources in order to conduct an 

effective surveillance program. 

Summary of Comments and Discussion 

KCBT contended that it is 

unnecessary and burdensome for a DCM 

to require traders to keep such 

records.592 Similarly, MGEX discussed 

the burden that the proposed rule would 

place on its traders as a result of the 

proposed record-keeping obligation, and 

noted that, for contracts not traded on 

the DCM, it is unclear what records a 

DCM must tell its traders to keep.593

The Commission notes that a trader’s 

burden to keep such records is sound 

commercial practice, and that a trader of 

a reportable size is already required, 

under § 18.05 of the Commission’s 

regulations, to keep records of such 

trades and to make them available to the 

Commission upon request. In addition, 

the Commission has found trader 

records to be an invaluable tool in its 

market surveillance effort, and believes 

that the DCM, as an SRO, should have 

direct access to such information in 

order to fulfill its obligations under the 

DCM core principles, and in particular, 

Core Principle 4. The Commission is, 

however, providing in appendix B an 


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594CME opposed the rule as proposed and 

recommended that the types of records the DCM 

should require traders to keep should be covered in 

acceptable practices. CME Comment Letter at 26 

(Feb. 22, 2011). 

595The Commission received several comments 

stating that rule § 38.255 should not be prescriptive. 

See, e.g., CME Comment Letter at 26–27 (Feb. 22, 

2011), KCBT Comment Letter at 5 (Feb. 22, 2011), 

ICE Comment Letter at 12 (Feb. 22, 2011), CFE 

Comment Letter at 3–4 (Feb. 22, 2011), NYSE Liffe 

Comment Letter at 11 (Feb. 22, 2011), ELX 

Comment Letter at 4 (Feb. 22, 2011), and MGEX 

Comment Letter at 5–6 (Feb. 22, 2011). The 

Commission considered these comments in 

preparing this release and discusses the costs and 

benefits of the codification of rules in lieu of 

guidance and acceptable practices in further detail 

in section C(1) above. 

597 ICE Comment Letter at 12 (Feb. 22, 2011). 

598 Id. 

599An FIA working group survey revealed that 66 

percent of exchanges surveyed currently offer pretrade risk controls at the exchange levels and that 

an additional 27 percent of respondents are 

planning to add such controls in the future. See 

http://www.futuresindustry.org/downloads/RCsurvey.pdf at 27. 

600See ‘‘Recommendations on Pre-Trade Practices 

for Trading Firms, Clearing Firms and Exchanges 

involved in Direct Market Access,’’ Pre-Trade 

Functionality Subcommittee of the CFTC 

Technology Advisory Committee (‘‘TAC 

Subcommittee Recommendations’’), (March 1, 

2011) at 4, available at http://www.cftc.gov/ucm/ 

groups/public/@swaps/documents/dfsubmission/ 

tacpresentation030111_ptfs2.pdf. The Commission 

notes that the subcommittee report was submitted 

to the Technology Advisory Committee and made 

available for public comment, but no final action 

has been taken by the full committee. 

acceptable practice for meeting the 

requirements of § 38.254(b) that allows 

the DCM to limit the duration and scope 

of the trader’s obligations. For instance, 

in the acceptable practices, the 

Commission permits a DCM to restrict 

the record-keeping requirement to 

traders who are reportable to the DCM 

in its large-trader reporting system or 

who otherwise hold a substantial 

position. As an acceptable practice, the 

reportable level of a trader is at the 

discretion of the DCM, as long as the 

reportable level is consistent with an 

effective oversight program. 

Costs 

A trader’s cost to keep such records 

should be minimal if, as expected, it is 

part of their normal business practice. 

Moreover, the Commission already 

imposes a similar requirement on large 

traders under its rule 18.05 

(Maintenance of books and records). As 

a result, a trader’s additional cost to 

provide records to the DCM, and the 

DCM’s cost to request and process the 

records, will be low if, based upon the 

Commission’s experience, such requests 

are infrequent and targeted to specific 

and significant market situations.594

Benefits 

This rule ensures that DCMs have 

sufficient information in order to assess 

the potential for price manipulation, 

price distortions, and the disruption of 

the delivery or cash-settlement process 

as required by Core Principle 4. 

Detecting and preventing manipulation 

requires information on large traders’ 

positions in the relevant contracts and 

their activities in the underlying 

markets. Access to this information is 

vital to an effective surveillance 

program. Absent this information, the 

DCM may fail in its statutory duty to 

prevent manipulation and disruptions 

to the cash-settlement process. 

Sec. 38.255 (Risk controls for trading) 

Section 38.255 requires that DCMs 

establish and maintain risk control 

mechanisms to prevent or reduce the 

potential risk of price distortions and 

market disruptions, including, but not 

limited to, market restrictions that 

automatically pause or halt trading in 

market conditions prescribed by the 

DCM.595 While the rule requires pauses 

and halts, the acceptable practices 

enumerate other additional types of risk 

controls that would also be permitted, 

giving wide discretion to the DCM to 

select among the listed controls, to 

create new ones that are most 

appropriate for their markets, and to 

choose the parameters for those 

selected. If equity products are traded 

on the DCM, then the acceptable 

practices for this rule include, to the 

extent practicable, coordination of such 

controls with those placed by national 

security exchanges.596

Summary of Comments and Discussion 

ICE stated that a temporary price floor 

or ceiling can work better than a pause 

or halt since trading can continue 

uninterrupted, thereby offering the 

earliest opportunity for price reversal 

should the market deem a sudden large 

move to be an overreaction or error.597

ICE also stated that pauses and halts are 

not the only effective way to prevent 

market disruption, and that by being 

prescriptive, the Commission is freezing 

innovation in preventing market 

disruptions.598

In response to ICE and other 

commenters that question the necessity 

of pauses and halts over other forms of 

risk controls, the Commission notes that 

pauses and halts to trading have been 

effective in the past. The ability of 

DCMs to pause or halt trading in 

extraordinary circumstances and, 

importantly, to re-start trading through 

the appropriate re-opening procedures, 

will allow DCMs to mitigate the 

propagation of shocks that are of a 

systemic nature and to facilitate orderly 

markets. Furthermore, DCMs must 

ensure that such pauses and halts are 

effective for their specific order-routing 

and trading environment and are 

adapted to the specific types of products 

traded. 

With respect to ICE’s comment 

regarding innovation, the Commission 

notes that DCMs are not prohibited from 

implementing additional risk controls, 

such as temporary price floors or 

ceilings as ICE suggests, or any other 

appropriate risk control, including those 

not enumerated in the acceptable 

practices. 

Costs 

Although pauses and halts are not 

currently required by Commission 

regulation, many DCMs already have the 

types of risk controls that are required 

by § 38.255, as well as others that have 

been moved to acceptable practices.599

There may be certain one-time costs of 

programming such controls where they 

are not already present as well as ongoing costs to maintain and adjust such 

controls across time. Some DCMs have 

pauses and halts only for stock index 

futures, while utilizing other risk 

controls for other contracts. For those 

DCMs, the costs of adding pause and 

halt functionality to the other contracts 

should be minimal since much of that 

technology would already exist. DCMs 

that do not currently utilize pauses and 

halts should be able to implement them 

with existing software, so that the cost 

should be relatively modest. As noted in 

the Pre-Trade Functionality 

Subcommittee of the CFTC Technology 

Advisory Committee report, the costs 

would largely be borne by the exchanges 

and would center around intellectual 

property, as many exchanges develop, 

own, and manage their own 

technology.600 However, the exact costs 

associated with implementing risk 

controls were not described in verifiable 

detail in the Pre-Trade Functionality 

Subcommittee report and can vary 

greatly from one DCM to another. 

Additionally, the costs will depend on 

which specific risk controls will be 

implemented and the trading platform 

being used by the DCM. The 

Commission received no comments 

indicating that risk controls cannot be 

implemented in a cost-effective manner 

using commercially available 

technology. 

As further noted in the Pre-Trade 

Functionality Subcommittee of the 

CFTC Technology Advisory Committee 

report, ‘‘[s]ome measure of 

standardization of pre-trade risk 

controls at the exchange level is the 


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36682 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

601See TAC Recommendations at 4, available at 

http://www.cftc.gov/ucm/groups/public/@swaps/ 

documents/dfsubmission/ 

tacpresentation030111_ptfs2.pd. 

602 75 FR 80572, 80584, Dec. 22, 2010. 

cheapest, most effective and most robust 

path to addressing the Commission’s 

concern [for preserving market 

integrity].’’ 601 Congress specifically 

modified DCM Core Principle 4 to 

substitute the title ‘‘prevention of 

market disruptions’’ for the previous 

title of ‘‘monitoring of trading.’’ The 

new rules on risk controls, which are 

designed to prevent market disruptions 

before they occur, bring the rules in line 

with the amended statute. 

Benefits 

The Commission anticipates that the 

benefits of this rule will be substantial. 

As noted in the DCM NPRM, risk 

controls such as automated trading 

pauses and halts can, among other 

things, allow time for participants to 

analyze the market impact of new 

information that may have caused a 

sudden market move, allow new orders 

to come into a market that has moved 

dramatically, and allow traders to assess 

and secure their capital needs in the 

face of potential margin calls.602

Moreover, the Commission notes that 

pauses and halts are particularly 

intended to apply in the event of 

extraordinary price movements that may 

trigger or propagate systemic 

disruptions. Accordingly, the 

Commission notes that a DCM’s ability 

to pause or halt trading in certain 

circumstances and, importantly, to restart trading through the appropriate reopening procedures will allow DCMs to 

mitigate the propagation of shocks that 

are of a systemic nature and to facilitate 

orderly markets. For these reasons, the 

Commission believes that pauses and 

halts are the most effective risk 

management tools to carry out this 

purpose and will facilitate orderly 

markets and prevent systemic 

disruptions. While the Commission is 

requiring pauses and halts in the rule, 

the Commission is enumerating other 

types of automated risk controls that 

may be implemented by DCMs in the 

acceptable practices in order to give 

DCMs greater discretion to select among 

the enumerated risk controls or to create 

new risk controls. The Commission 

believes that this combination of rules 

and acceptable practices will facilitate 

orderly markets and mitigate systemic 

disruptions while maintaining a flexible 

environment that facilitates innovation. 

Sec. 38.256 (Trade Reconstruction), 

§ 38.257 (Regulatory Service Provider), 

and Sec. 38.258 (Additional Sources for 

Compliance) 

Section 38.256 requires a DCM to 

have the ability to comprehensively and 

accurately reconstruct all trading on its 

trading facility. The requirement to have 

the ability to comprehensively and 

accurately reconstruct trading appears 

in the statute itself and has long been a 

part of the DCM requirements under 

former Core Principle 10. 

Section 38.257 requires a DCM to 

comply with the regulations in this 

subpart through a dedicated regulatory 

department, or by delegation of that 

function to a regulatory service 

provider. 

The Commission eliminated proposed 

rule 38.258 (which required a DCM to 

adopt and enforce additional rules that 

are necessary to comply with this core 

principle), and replaced it with new 

§ 38.258, which allows a DCM to refer 

to the guidance and acceptable practices 

in appendix B in order to demonstrate 

compliance with Core Principle 4. 

The Commission received no 

comments discussing the costs or 

benefits of §§ 38.256, 35.257, and 38.258 

and is adopting § 38.256 with a minor 

modification, § 35.257 as proposed, and 

§ 38.258 as noted above. In addition, 

these rules do not contain any 

significant changes from existing DCM 

requirements, and thus it is unlikely 

that additional costs will be incurred. 

Section 15(a) Factors (§§ 38.251–38.258) 

1. Protection of market participants 

and the public. These rules 

implementing Core Principle 4 reduce 

the likelihood that markets will be 

subject to manipulation or other 

disruptions and ensure that market 

participants are better able to hedge 

their risk by requiring that: DCMs 

properly monitor their markets; market 

participants keep adequate records; 

DCMs are able to adequately collect 

information on market activity, 

including special considerations for 

physical-delivery contracts and cashsettled contracts; and reasonable pretrade risk controls are in place that 

facilitate orderly markets and prevent 

systemic disruptions that could harm 

market participants and the public. 

Close monitoring of physical-delivery 

contracts helps prevent the 

manipulation of prices, and the public 

benefits from futures prices that reflect 

actual market conditions because those 

prices often form the basis for 

transactions taking place in the physical 

market. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

The rules for market monitoring and 

implementation of risk controls, 

including pauses and halts, help to 

facilitate orderly, efficient markets by 

requiring DCMs to establish and 

maintain risk control mechanisms that 

would be able to prevent or reduce the 

risks associated with a variety of market 

disruptions. By protecting against 

disruptions and market manipulation, 

the rules enhance competitiveness and 

promote the efficiency and financial 

integrity of DCM markets. Market 

mispricing that is due to disruptions or 

manipulation interferes with a market’s 

efficiency by limiting its ability to 

reflect the value of the underlying 

commodity. Markets that are prone to 

disruption or manipulation have a 

severe competitive disadvantage to 

those without such problems. These 

rules are designed to address and 

mitigate such problems. Further, the 

rules are designed to prevent or mitigate 

extreme volatility or other market 

disruptions that can lead to 

unwarranted margin calls and losses of 

capital, which could otherwise impair 

the financial integrity of the market and 

its participants. 

3. Price discovery. Manipulation or 

other market disruptions interfere with 

the discovery of a commodity’s value in 

normal market circumstances. These 

rules are designed to detect and, where 

possible, prevent such market 

mispricing and to detect disconnects 

between futures and underlying 

physical market prices. In physicaldelivery markets, such disconnects 

usually relate to market convergence. In 

cash-settled markets, such disconnects 

usually relate to the integrity of the 

index used to settle the futures contract. 

Under the new rules, DCMs will need to 

monitor contract terms and resolve 

conditions that are interfering with the 

price discovery process. 

4. Sound risk management practices. 

Sound risk management relies upon 

execution of hedge strategies at market 

prices that are free of manipulation or 

other preventable disruptions. These 

rules are designed to facilitate hedging 

at prices free of distortions that may be 

preventable by adequate controls. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

(6) Core Principle 5: Position 

Limitations or Accountability 

Core Principle 5 requires that DCMs, 

for each contract and as necessary and 

appropriate, adopt position limitation or 

position accountability, and that, for 

any contract that is subject to a position 


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603See ‘‘Position Limits for Futures and Swaps,’’ 

76 FR 71626, Nov. 18, 2011. 

604 Id. 

limitation established by the 

Commission in part 151 of the 

Commission’s regulations,603 DCMs 

must set the position limit at a level not 

higher than the position limitation 

established by the Commission. 

Summary of Comments and Discussion 

The Commission received several 

comments pertaining to the 

Commission’s codification of part 151 of 

its regulations. These comments were 

appropriately addressed in the relevant 

rulemaking for Position Limits for 

Futures and Swaps.604

(7) Core Principle 6: Emergency 

Authority 

Sec. 38.351 (Additional Sources for 

Compliance and Appendix B) 

Rule 38.351 refers applicants and 

DCMs to appendix B to part 38— 

‘‘Guidance on, and Acceptable Practices 

in, Compliance With Core Principles’’ 

for purposes of demonstrating 

compliance with the requirements of 

Core Principle 6. The guidance for Core 

Principle 6 tracks the former guidance 

to previous Core Principle 6. As such, 

the costs and benefits of administering 

emergency procedures pursuant to 

current Core Principle 6 should be no 

different than the costs and benefits of 

administering emergency procedures 

prior to the Dodd-Frank Act. The 

Commission did not receive any 

comments discussing the costs or 

benefits of these provisions. 

(8) Core Principle 7: Availability of 

General Information 

Sec. 38.401 (General Requirements) 

Section 38.401(a) requires DCMs to 

have in place procedures for disclosing 

to market authorities, market 

participants, and the public accurate 

and relevant information pertaining to 

rules and regulations, contract terms 

and conditions, and operations. Section 

38.401(b) requires that each DCM have 

procedures in place to ensure that, to 

the best of its knowledge, any 

information or communication with the 

Commission is accurate and complete. 

Section 38.401(c) requires DCMs to post 

such information on their Web sites 

concurrent with the filing of such 

information with the Commission. 

Section 38.401(d) requires DCMs to 

update their rulebooks upon the 

effectiveness of a rule submission or 

certification. 

Costs 

The few requirements in § 38.401 that 

do not simply replicate the statutory 

language were derived from previous 

guidance and acceptable practices that 

reflect existing industry practices, and 

thus should impose no new costs on 

DCMs or market participants. For 

example, the accuracy requirement is 

unlikely to impose additional costs on 

market participants because the statute 

already contains an accuracy 

requirement; the rule simply adds 

additional context to the requirement. 

The requirements for a DCM to place 

information on its web site on the same 

business day as the filing of such 

information with the Commission and 

to post new or amended rules on the 

date of implementation are unlikely to 

result in additional costs to DCMs 

because similar requirements existed in 

the guidance and acceptable practices 

under the original Core Principle 7. No 

DCM commented on the costs imposed 

by this rule. 

Benefits 

Market authorities, market 

participants, and the public all benefit 

from access to accurate, relevant, and 

timely information pertaining to 

contract terms and conditions, new 

product listings, new or amended 

governance, trading and product rules, 

and other changes to information 

previously disclosed by the DCM. The 

disclosure of accurate information to the 

Commission will assist the 

Commission’s oversight of the markets 

by enabling the Commission to evaluate 

a DCM’s compliance with the core 

principles and to take prompt action to 

ensure transparent, fair, and orderly 

markets. 

Prompt posting of information 

pertaining to new product listings, new 

rules, and rule amendments on the 

DCM’s Web site will ensure that market 

participants and the public have 

sufficient notice and time to analyze 

proposed rule amendments, product 

listings/de-listings, and rule 

certifications in advance of their taking 

effect and to be able to plan their actions 

accordingly. Advance notice of rule 

amendments and certifications is 

consistent with the goal of Core 

Principle 7 to make pertinent 

information available to market 

participants and the public. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. To protect market 

participants and the public, the 

Commission has comprehensive 

regulatory, surveillance, investigative, 

and enforcement programs. To support 

these programs, the Commission must 

have access to accurate, relevant, and 

timely information regarding contract 

terms and conditions, new product 

listings, new or amended governance, 

trading and product rules, and other 

changes to information previously 

disclosed by the DCM. Additionally, 

prompt posting of information 

pertaining to new product listings, new 

rules, and rule amendments on the 

DCM’s Web site will ensure that market 

participants and the public have 

sufficient notice and time to analyze 

these changes and report any problems 

to the Commission in advance of the 

changes taking effect. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. In 

order to promote efficient, competitive, 

and financially stable markets, the 

Commission must have access to 

accurate, relevant, and timely 

information regarding contract terms 

and conditions, new product listings, 

new or amended governance, trading 

and product rules, and other changes to 

information previously disclosed by the 

DCM. The Commission must have 

notice of these changes in order to 

analyze their likely impact on the 

efficiency, competitiveness, and 

financial integrity of the futures markets 

and to take action as necessary. 

3. Price discovery. The disclosure of 

accurate information to the Commission 

will assist the Commission’s oversight 

of the markets and protect market 

participants by enabling the 

Commission to evaluate a DCM’s 

compliance with the core principles. 

4. Sound risk management practices. 

The disclosure of accurate information 

to the Commission will assist the 

Commission’s oversight of the markets 

and protect market participants by 

enabling the Commission to evaluate a 

DCM’s compliance with the core 

principles, including Core Principle 11 

(Financial Integrity of Transactions). A 

detailed discussion of Core Principle 11 

in light of the section 15(a) factors 

appears later in this release. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

(9) Core Principle 8: Daily Publication of 

Trading Information 

Sec. 38.451 (Reporting of Trade 

Information) 

Core Principle 8 requires that a board 

of trade make public daily information 

on settlement prices, volume, open 

interest, and opening and closing ranges 


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605CME Comment Letter at 29 (Feb. 22, 2011). 

606CME Comment Letter at 33–34 (Feb. 22, 2011), 

MGEX Comment Letter at 7 (Feb. 22, 2011). 

607MGEX Comment Letter at 7 (Feb. 22, 2011). 

for actively traded contracts on the 

contract market. Section 38.451 refers a 

DCM to part 16 of the Commission’s 

regulations in order to meet the 

compliance requirements of Core 

Principle 8. This rulemaking also 

revises § 16.01 with regards to the 

information a reporting market must 

record and publish by adding swaps and 

options on swaps. Also, § 16.01 is 

revised to add the requirement that 

reporting markets also report to the 

Commission information pertaining to 

‘‘the total volume of block trades that 

are included in the total volume of 

trading.’’ 

Summary of Comments and Discussion 

CME did not object to reporting block 

trades that are included in the daily 

volume of trading, but noted that this 

new requirement will require it to 

ascertain what systems changes will be 

necessary and how long such changes 

will take to implement.605 CME did not 

provide any cost or time estimates. 

The Commission believes that it is 

necessary for DCMs to report trade 

information; the regulation provides the 

reporting markets flexibility to make the 

necessary and appropriate changes to 

their systems in a cost-effective manner 

while providing transparency to the 

markets by means of basic summary 

trading information of that day’s trading 

session. 

Costs 

The cost of reporting volume for 

swaps should be similar to the cost of 

reporting volume for futures and 

options. The Commission did not 

receive any comments that provide 

otherwise. Further, the Commission 

does not anticipate that DCMs that 

choose to list swaps will need to make 

any changes to systems beyond those 

needed to report prices and volume for 

any new contract. The requirement to 

publish the total volume of block 

trading at the end of the day will be an 

added cost for the DCM. This provision 

may require some changes to DCMs’ 

current systems. However, because 

DCMs already have or will have to have 

systems in place to provide daily 

trading volumes under § 16.01, any 

costs to now include the reporting of 

blocks should be minimal. It is not 

feasible to quantify the costs of 

necessary system changes, largely 

because it is unclear what system 

changes will be adopted by DCMs. The 

Commission did not receive any 

comments stating that the regulation 

imposes an unnecessary burden. 

Benefits 

The Commission allows DCMs 

significant flexibility in complying with 

this rule. As such, DCMs are free to 

design a system that provides the 

transparency required by part 16 in the 

most cost effective manner. This rule 

complies with the statute and provides 

transparency to the markets by requiring 

DCMs to publish end of day price and 

volume summary information to the 

public and to the Commission. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. The rule complies with 

Core Principle 8 by ensuring that 

volume and price information is 

publicly available on a daily basis. 

Market participants and the public will 

be able to make economic decisions 

based on accurate futures and swaps 

prices that are reported on a timely 

basis. 

2. Efficiency, competitiveness, and 

financial integrity of futures markets. 

The rule will promote the efficiency and 

competitiveness of futures markets by 

ensuring that volume and price data for 

futures, options, and swaps traded at all 

DCMs are publicly available. 

Competitiveness may be enhanced to 

the extent that market participants are 

able to compare prices of similar 

contracts at different DCMs. 

3. Price discovery. The rule promotes 

price discovery by ensuring that end of 

day trading data, including volume and 

prices, are disseminated to the public. 

An important benefit of price discovery 

is the availability of prices to market 

participants and the public who may 

use this information to inform their 

economic decisions. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices. 

5. Other public interest 

considerations. The rule provides posttrade transparency to the markets by 

requiring DCMs and SEFs to publish 

end of day trading data including 

volume and prices to show the activity 

that occurred during that day’s trading 

session. 

(10) Core Principle 9: Execution of 

Transactions 

Sec. 38.501–38.506 

The Commission received a number 

of comments pertaining to the costs 

and/or benefits of proposed §§ 38.501– 

38.506. As noted above, the Commission 

is not finalizing these provisions at this 

time, and expects and plans to take up 

the proposed rules under Core Principle 

9 when it considers the final SEF 

rulemaking. Comments pertaining to 

these proposed rules, including those 

relative to costs and/or benefits, will be 

considered in such future rulemaking. 

(11) Core Principle 10: Trade 

Information 

Sec. 38.551 (Audit Trail Required), Sec. 

38.552 (Elements of an Acceptable 

Audit Trail Program), and Sec. 38.553 

(Enforcement of Audit Trail 

Requirements) 

Section 38.551 establishes the 

requirements of an acceptable audit trail 

program to help ensure that DCMs can 

monitor and investigate any customer or 

market abuses. 

Section 38.552 sets forth the four 

program areas that a DCM must address 

as part of an acceptable audit trail 

program, including original source 

documents, transaction history 

database, electronic analysis capability, 

and safe storage of all audit trail data. 

Section 38.553(a) establishes the 

elements of an effective audit trail 

enforcement program. Additionally, 

§ 38.553(b) requires that an effective 

audit trail enforcement program must 

enable the DCM to identify entities that 

are routinely non-compliant with the 

regulations under Core Principle 10 and 

to levy meaningful sanctions when such 

deficiencies are identified. The 

regulation prohibits DCMs from issuing 

more than one warning letter for the 

same violation within a rolling 12- 

month time period. 

Summary of Comments 

CME and MGEX argued that the 

requirement for enforcement of an audit 

trail program to annually audit all 

market participants would essentially 

require the exchange to review every 

participant who enters an order into the 

trading system, which would be 

onerous, costly, and unproductive.606

MGEX suggested that DCMs should only 

be required to review a sample of 

market participants.607

Discussion 

In response to comments that 

requiring exchanges to conduct annual 

audits of all members and market 

participants would be onerous and 

costly, the Commission is revising 

proposed § 38.553 to apply only to 

‘‘members and persons and firms 

subject to designated contract market 

recordkeeping rules.’’ With this change, 

the Commission limits the universe of 

entities that a DCM must audit for 

compliance with Core Principle 10. This 


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revision addresses commenters’ 

concerns by making the annual audit 

requirement less burdensome. 

Additionally, this revision also 

responds to MGEX’s comments that the 

Commission should allow DCMs to test 

for audit trail compliance by auditing 

only a sample of market participants. 

While the number of persons and 

entities subject to audit has been 

reduced in the final rule, the remaining 

population must still be audited 

annually to ensure compliance. As 

explained above, this revision will 

decrease the burden on DCMs. 

The Commission believes it is 

essential for DCMs to have complete 

and accurate access to trade information 

to facilitate trade reconstructions and 

thereby detect customer and market 

abuses. The Commission believes it is 

essential for DCMs to have complete 

and accurate access to trade information 

to facilitate trade reconstructions and 

thereby detect customer and market 

abuses. The Commission has 

determined that the audit trail 

requirements and the annual audits of 

members and entities subject to 

Commission or DCM recordkeeping 

rules are the best way to achieve its 

policy objectives, while providing 

DCMs with flexibility to achieve these 

objectives. The Commission has 

considered the comments raised related 

to the cost of ensuring that customer 

and market abuses can be detected, 

prosecuted, and ultimately discouraged, 

and believes that the benefits of the rule 

as finalized are substantial. 

Costs 

The costs associated with Core 

Principle 10 include the cost of 

developing and maintaining an 

electronic history transaction database 

to maintain a history of all orders and 

transactions entered into the trading 

system and electronic analysis 

capability to permit the exchange to 

reconstruct orders and trades. DCMs 

will also bear the cost of developing and 

implementing a program to collect and 

maintain original source documents for 

trades entered both manually and 

electronically into the trading system. 

Core Principle 10 compliance also 

imposes costs for developing and 

maintaining a safe storage system for all 

the trade data collected and ensuring 

that such data is readily accessible to 

exchange compliance staff. The 

Commission notes, however, that almost 

all exchanges currently operating are in 

compliance with these regulations. 

Therefore, existing DCMs should have 

already established these programs and, 

as such, should have already borne the 

costs necessary to comply with these 

requirements. 

These requirements were previously 

explained in the guidance and 

acceptable practices for Core Principle 

10—Trade Information. The 

Commission’s RERs have frequently 

highlighted compliance with the 

guidance and acceptable practices in the 

discussion of an exchange’s audit trail 

program. Specifically, past RERs have 

discussed exchanges’ practices 

regarding use of an electronic history 

transaction database, electronic analysis 

capability, and safe storage systems. As 

such, the Commission is simply 

codifying these existing practices and 

regulations as rules. 

DCMs will incur costs to ensure they 

employ appropriate resources to enforce 

Core Principle 10’s requirements, 

including the ability to conduct annual 

compliance audits by hiring sufficient 

staff to review the information and 

having in place adequate technology to 

retrieve and store the information. It is 

not feasible to quantify the costs for 

appropriate resources for audit trail and 

Core Principle 10 enforcement because 

the factors necessary to determine what 

resources are ‘‘appropriate’’ vary widely 

from exchange to exchange, and the 

costs for each variable depend upon the 

particular circumstances of each 

exchange. For example, the number of 

participants who trade on a particular 

exchange varies widely and the number 

of participants who are members and 

persons and firms subject to 

Commission or DCM recordkeeping 

rules directly corresponds to the 

number of annual compliance audits a 

particular DCM will conduct to 

determine compliance with all audit 

trail requirements. 

While the Commission is imposing 

new requirements that specify certain 

components that must be incorporated 

in audit trail reviews, the Commission 

notes that most exchanges already have 

such resources in place and conduct 

audit trail reviews in such a manner to 

comply with these new regulations due 

to the RER process and recent 

recommendations. What constitutes 

‘‘appropriate resources’’ to oversee and 

enforce the audit trail requirements is 

addressed on an individualized basis in 

the specific RERs for each exchange. 

Importantly, no DCM provided the 

Commission with information related to 

the current cost of compliance and the 

estimated increase related to 

codification of existing practices. 

Benefits 

Core Principle 10 and the associated 

regulations promote the reliability, 

completeness, accuracy, and security of 

exchange order and trade data. The 

ability of DCMs to recover, review, and 

reconstruct trading transactions is 

imperative to monitor for potential 

customer and market abuses. The 

requirements of Core Principle 10 

ensure the ability of DCMs to prosecute 

rule violations supported by evidence 

from audit trail data and order and trade 

information. This furthers the protection 

of market participants by requiring 

exchanges to have the ability to 

adequately conduct market surveillance 

and prosecute rule violations. 

The requirement that exchanges issue 

no more than one warning letter for the 

same violation within a rolling twelvemonth time period will ensure that 

instead of simply sending multiple 

warning letters, exchanges levy 

meaningful fines and sanctions to deter 

recidivist behavior and prevent future 

rule violations. 

Section 15(a) Factors (§§ 38.551–38.553) 

1. Protection of market participants 

and the public. Sections 38.551–38.553 

benefit the protection of market 

participants and the public by requiring 

that DCMs maintain all order and trade 

information so that rule violations that 

could harm market participants and the 

public may be detected, reconstructed, 

investigated, and prosecuted. A DCM 

cannot complete its surveillance and 

enforcement practices without such 

audit trail data collection and 

requirements. The absence of these 

regulations would result in an increased 

potential for violations to go undetected. 

Such requirements strengthen DCMs’ 

market oversight capabilities and result 

in stronger protection of market 

participants and the general public from 

rule violations and market abuses. 

2. Efficiency, competitiveness, and 

financial integrity of futures markets. 

The regulations under Core Principle 10 

implemented in §§ 38.551–38.553 

promote efficiency and competitiveness 

by ensuring that DCMs can adequately 

monitor their markets for rule violations 

and effectively prosecute and deter such 

rule violations. These regulations 

strengthen market confidence by 

deterring such rule violations, thereby 

promoting efficient pricing and a 

competitive trading atmosphere. 

3. Price discovery. Sections 38.551– 

38.553 benefit the price discovery 

process of markets by allowing DCMs to 

detect and prosecute rule violations that 

impede market prices from accurately 

reflecting information pertaining to 

underlying fundamentals. Having a 

process by which to detect, reconstruct, 

investigate, and prosecute rule 

violations deters market participants 


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36686 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

608 KCBT Comment Letter at 7 (Feb. 22, 2011). 

from engaging in activities which harm 

the market’s price discovery process. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

(12) Core Principle 11: Financial 

Integrity of Transactions 

Sec. 38.601–38.606 

Section 38.601 provides that all 

transactions executed on or through a 

DCM, other than transactions in security 

futures products, must be cleared 

through a Commission-registered DCO. 

Section 38.602 provides that DCMs 

must adopt rules establishing minimum 

financial standards for both member 

FCMs and IBs and non-intermediated 

market participants. Section 38.603 

provides that DCMs must adopt rules for 

the protection of customer funds. 

Section 38.604 requires that a DCM 

must routinely receive and promptly 

review financial and related information 

from its members, and conduct ongoing 

financial surveillance of the risk created 

by the positions taken by an FCM’s 

customers. Section 38.605 requires 

DCMs, as self-regulatory organizations, 

to comply with the standards of 

amended § 1.52 to ensure the financial 

integrity of intermediaries by 

establishing and carrying out an SRO 

program for the examination and 

financial supervision of intermediaries. 

Section 38.606 provides that DCMs may 

satisfy their financial surveillance 

responsibilities under §§ 38.604 and 

38.605 by outsourcing such 

responsibilities to a regulatory service 

provider if certain requirements are met. 

Summary of Comments and Discussion 

KCBT commented that because its 

rules incorporate by reference the 

requirements of the CEA, the 

requirement to implement exchange 

rules that mirror Commission 

regulations is duplicative, unnecessary 

and burdensome.608

The Commission believes the 

establishment of independent financial 

integrity rules is important because it 

will provide evidence that: (i) Each 

DCM has focused attention on the 

specific regulations promulgated under 

the CEA; and (ii) such regulations are 

appropriately implemented. Section 

38.603 does not specify the exact rules 

to be implemented by each DCM, but 

sets forth the substance of what the 

rules of each DCM must address; 

therefore, a DCM would be unable to 

meet the requirements of the rule by 

incorporating the CEA requirements by 

reference. 

Costs 

Section 38.601 imposes no new costs 

on DCMs, as all transactions on a DCM 

are currently subject to mandatory 

clearing; this was required by the former 

core principle, before it was amended 

by the Dodd-Frank Act. 

Section 38.602 imposes no new costs 

as all DCMs are currently required to 

have rules establishing minimum 

financial standards for member FCMs 

and IBs pursuant to Core Principle 11. 

The Commission will continue to 

review the financial standards that each 

DCM has established to be certain that 

the DCM is in compliance with the rule. 

The requirements of § 38.603 relating to 

the protection of customer funds are all 

existing requirements pursuant to 

former Designation Criterion 5(b) and 

have been found to be effective in 

monitoring and mitigating financial risk. 

By incorporating the substantive 

standards from former designation 

criteria that have already been 

implemented by registered DCMs, the 

Commission aims to minimize 

implementation costs. However, the 

explicit requirement that DCMs adopt 

rules, as opposed to solely incorporating 

the requirements of the CEA by 

reference, will involve administrative 

costs on the part of DCMs, such as 

enacting the appropriate rules and 

building the understanding within its 

staff of those rules. 

The requirements of § 38.604 also 

reflect requirements pursuant to former 

Designation Criterion 5(a). However, the 

rule does build on the foundation of 

historical compliance by DCMs by 

explicitly requiring intraday financial 

surveillance. The Commission believes 

that intraday surveillance is necessary 

to account for possible intraday risk 

build-up and to meet the requirements 

of the financial integrity core principle. 

Because DCOs currently conduct 

intraday monitoring, DCMs should 

already meet this requirement through 

the DCO(s) that provides their clearing 

services. As the Commission notes in 

the preamble, an arrangement between a 

DCO and a DCM, whereby the DCO is 

responsible to a DCM for the 

performance of certain functions, 

including this monitoring, will continue 

to be permitted by the Commission. 

Therefore, intraday financial 

surveillance should not impose new 

costs on DCMs. 

DCMs will not need to expend 

significant additional resources to 

comply with § 38.605 as all DCMs have 

existing SRO programs in place and 

currently are in compliance with section 

1.52, as well as the guidance that has 

now been incorporated into section 1.52 

from Division of Trading and Markets 

Financial and Segregation 

Interpretations 4–1 and 4–2. Further, the 

JAC Agreement, as discussed above, is 

already in place and operating 

effectively. 

Section 38.606 provides DCMs with 

the option of outsourcing their financial 

surveillance responsibilities if they 

would prefer not to do such surveillance 

in house. Although §§ 38.604 and 

38.605 impose the actual surveillance 

requirements, those DCMs electing to 

outsource such surveillance 

responsibilities will incur costs related 

to conducting due diligence of the 

regulatory service provider and making 

sure the DCM has adequate staff to 

monitor the provider. The Commission 

is unable to quantify such costs because 

the rule does not require a certain 

method of due diligence, and therefore 

the costs would vary based on the 

practices and choices of each DCM. 

Benefits 

Section 38.601 is a codification of the 

statutory requirement in Core Principle 

11. Section 38.602 requires a DCM to 

establish and maintain minimum 

financial standards for market 

participants, which is essential to 

mitigating systemic risk. Implementing 

the requirements of the core principle, 

which requires that each DCM has rules 

to ensure the financial integrity of FCMs 

and IBs, achieves the Commission’s 

regulatory objectives by ensuring the 

financial integrity of the transactions 

entered into by or through the facilities 

of the contract market, while also 

providing flexibility as to how to meet 

the requirements of the core principle. 

Rule 38.603 implements the 

requirement of the core principle that 

DCMs establish and enforce rules to 

ensure the protection of customer funds. 

DCMs, as SROs, are well-positioned to 

undertake the responsibility of 

establishing such rules and ensuring the 

compliance of intermediaries with those 

rules. As a result, the requirements of 

§ 38.603 enhance the protection of 

customers (who are both market 

participants and members of the public) 

from the losses incurred by fellow 

customers. This directly enhances the 

protection of market participants and 

the public, and promotes sound risk 

management. Moreover, by mitigating 

the loss of customer funds, which loss 

in turn would damage all customers’ 

confidence in the safety of the funds 

they post as collateral for cleared 


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609See FIA report on ‘‘Market Access Risk 

Management Recommendations’’ (April 2010), 

available at: http://www.futuresindustry.org/

downloads/Market_Access-6.pdf. 

610CME and MGEX stated that a number of the 

rules implementing Core Principle 13 are overly 

prescriptive. See CME Comment Letter at 35–36 

(Feb. 22, 2011) and MGEX Comment Letter at 9 

(Feb. 22, 2011). The Commission considered these 

comments in preparing this release and discusses 

Continued 

positions, these requirements mitigate 

systemic risk. 

The intraday surveillance requirement 

in § 38.604 requires that a DCM 

continually survey each FCM’s 

obligations created by its customers. 

Satisfaction of this requirement is 

necessary for a DCM to meet the 

requirements of the core principle to 

have rules ensuring the financial 

integrity of market participants, as well 

as the protection of customer funds. By 

conducting intraday surveillance and 

acting on the results of the surveillance, 

DCMs will be able to address intraday 

risks before they grow larger and 

therefore avoid losses to DCOs carrying 

FCMs or customers. 

For section 38.605, existing benefits 

include avoiding duplicative review of 

members, as well as ensuring the 

financial integrity of FCMs and IBs, 

protecting customer funds and 

contributing to market confidence. In 

addition, because § 38.606 provides a 

DCM with options, it is more efficient 

and cost-effective as DCMs can choose 

whether to allocate their own resources 

to this surveillance or to use a 

regulatory service provider. 

Section 15(a) Factors (§§ 38.601–38.606) 

1. Protection of market participants 

and the public. The rules protect market 

participants and the public by ensuring 

the financial integrity of DCM 

transactions via clearing of all 

transactions on a DCM, financial 

surveillance of members and minimum 

standards for members. The protection 

of customer funds rules protect 

customers from the losses incurred by 

either other market participants or 

fellow customers, thereby strengthening 

the financial integrity of the markets 

and decreasing potential systemic risks. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

Since most of these rules codify preexisting requirements, DCMs are already 

in compliance. As a result, the rules do 

not require significant changes (i.e., 

costs), and therefore have minimal effect 

on the competitiveness of futures 

markets. The addition of rules requiring 

intraday financial surveillance will 

benefit the financial integrity of the 

markets by requiring DCMs to have 

procedures that will foster DCMs 

addressing intraday risks before they 

grow larger, thereby avoiding losses to 

DCOs carrying FCMs or customers. 

3. Price discovery. The Commission 

has not identified any effects that this 

rule will have on price discovery. 

4. Sound risk management practices. 

The rules requiring the establishment of 

minimum financial standards for DCM 

market participants promote sound risk 

management practices by ensuring that 

market participants have a certain level 

of sophistication and resources, which 

in turn, mitigates systemic risk. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

Sec. 38.607 (Direct Access) 

Section 38.607 requires a DCM that 

allows customers direct access to its 

contract market to implement certain 

direct access controls and procedures 

(such as automated pre-trade controls) 

in order to provide member FCMs with 

tools to manage their financial risk. 

Costs 

As discussed in the preamble, a recent 

Futures Industry Association (‘‘FIA’’) 

report stated that the majority of 

exchanges have policies and tools in 

place that comply with the 

recommendation that mandatory pretrade controls be set at the exchange 

level.609 As a result, these requirements 

will not impose significant costs on a 

majority of DCMs. Those DCMs that do 

not have controls and procedures in 

place, but do allow customers direct 

access to the contract market, will incur 

costs in implementing these controls 

and procedures, and FCMs will incur 

costs in utilizing the controls and 

procedures. The Commission is unable 

to quantify such costs because the rule 

does not require a certain set of controls 

and procedures, and therefore the costs 

would vary based on the controls 

adopted by the individual DCM. In 

addition, such costs would also vary 

depending on the DCM’s existing 

infrastructure, which varies markedly 

across exchanges. Moreover, 

commenters did not discuss the costs of 

this provision. 

Benefits 

The requirements of this rule will 

enable an FCM to protect itself when a 

customer has direct access to a DCM 

and completes a trade before an FCM’s 

systems have an opportunity to prevent 

the execution of such trade, thereby 

avoiding losses that could extend to 

customers or the DCO from trades that 

would exceed the parameters set by the 

FCM on the DCM. Further, as discussed 

in the preamble, the benefits of risk 

controls at the FCM, DCO and DCM 

level, discussed above, have been 

recognized both domestically and 

internationally. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. The final rule promotes 

the protection of market participants 

and the public because it enables an 

FCM to protect itself from its customers 

with direct access to the DCM, thereby 

preventing customers from undertaking 

risks that could bankrupt an FCM. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

Automated controls will permit an FCM 

to enforce limitations on its customers’ 

trading via direct access, which will 

serve to protect all market participants, 

which will also promote the efficient, 

competitive, and financial integrity of 

futures markets. 

3. Price discovery. The Commission 

has not identified any effects that this 

rule will have on price discovery. 

4. Sound risk management practices. 

Without the aid of controls at the DCMlevel, an FCM will be unable to protect 

itself from its customers with direct 

access to the DCM. Therefore, the final 

rule serves sound risk management 

practices by enabling FCMs to manage 

risk. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

(13) Core Principle 12: Protection of 

Markets and Market Participants 

Section 38.651 provides that a DCM 

must have and enforce rules that are 

designed to promote fair and equitable 

trading and to protect the market and 

market participants from abusive 

practices including fraudulent, 

noncompetitive or unfair actions, 

committed by any party. 

Costs and Benefits 

Section § 38.651 specifies DCMs’ 

obligations under Core Principle 12 

relating to their compliance with Core 

Principles 2, 4 and 9, and the associated 

regulations. Accordingly, § 38.651 does 

not impose any additional costs beyond 

those discussed under each of the 

respective Core Principles 2, 4 and 9. 

(14) Core Principle 13: Disciplinary 

Procedures 

Core Principle 13 consists of a series 

of rules that, among other things, seek 

to ensure a fair, prompt, and effective 

disciplinary program.610 A more 


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36688 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

the costs and benefits of the codification of rules in 

lieu of guidance and acceptable practices in further 

detail in section C(1) above. 

611See Rule Enforcement Review of the 

Minneapolis Grain Exchange (Aug. 27, 2009), Rule 

Enforcement Review of ICE Futures U.S. (Feb. 2, 

2010), and Rule Enforcement Review of the Chicago 

Board of Trade and the Chicago Mercantile 

Exchange (Sept. 13, 2010) for findings and 

recommendations pertaining to the adequate staff 

size of DCM compliance departments. 

detailed description of the Core 

Principle 13 rules themselves is 

contained in the preamble. 

Sec. 38.701 (Enforcement Staff) 

Rule 38.701 requires that a DCM must 

establish and maintain sufficient 

enforcement staff and resources to 

effectively and promptly prosecute 

possible rule violations. 

Costs 

The obligations imposed by § 38.701 

are not new; rather, the requirements for 

DCMs to ensure adequate staff and 

resources stem from recent RERs, in 

which Commission staff recommended 

that DCMs increase their compliance 

staff levels and monitor the size of their 

staff and increase the number of staff as 

appropriate.611 Accordingly, the 

Commission does not anticipate that 

this provision will impose additional 

costs on DCMs. 

Benefits 

The Commission believes that 

adequate enforcement staff and 

resources are essential to the effective 

performance of a DCM’s disciplinary 

program. Without an effective 

disciplinary program, a DCM will be 

unable to effectively and promptly 

investigate and adjudicate potential rule 

violations and deter future violations. 

Rule 38.701 ensures that DCMs monitor 

the size of their staff and increase the 

number of staff appropriately as trading 

volume increases, new responsibilities 

are assigned to compliance staff, or 

internal reviews demonstrate that work 

is not completed in an effective or 

timely manner. Rule 38.701 also ensures 

the independence of enforcement staff 

and promotes disciplinary procedures 

that are free of potential conflicts of 

interest by providing that a DCM’s 

enforcement staff may not include 

members of the exchange or persons 

whose interests conflict with their 

enforcement duties. 

Sec. 38.702 (Disciplinary Panels) 

Rule 38.702 requires DCMs to have 

one or more ‘‘review panels, without 

imposing a specific requirement for 

DCMs to maintain a ‘‘review panel’’ and 

a ‘‘hearing panel.’’ 

Costs 

The requirement in the rule to 

establish disciplinary panels reflects 

industry practices that have already 

been adopted by most DCMs. 

Accordingly, the Commission 

anticipates that § 38.702 will not impose 

additional cost burdens on most DCMs. 

To the extent that the rule does impose 

costs on DCMs, the Commission notes 

that since disciplinary panel members 

are typically unpaid, any potential costs 

associated with § 38.702 would be 

limited to administrative costs 

associated with establishing the 

disciplinary panel, which are likely to 

vary by DCM. Finally, as described 

above, in response to concerns raised by 

commenters, the Commission has 

removed the proposed requirement to 

maintain distinct hearing panels and 

review panels, thereby reducing the 

burden associated with the proposed 

rule. 

Benefits 

Rule 38.702 requires DCMs to 

establish one or more disciplinary 

panels authorized to fulfill their 

obligations under the part 38 rules, 

including, among other things, to issue 

notices of charges, conduct hearings, 

render written decisions, and impose 

disciplinary sanctions. These functions 

are critical components of a DCM’s 

disciplinary program and will deter 

violations of DCM rules, prevent 

recidivist behavior, protect respondents 

by requiring procedural safeguards to 

ensure fairness for all respondents in 

disciplinary actions, and protect 

customers by requiring full customer 

restitution in any disciplinary matter 

where customer harm is demonstrated. 

In addition to providing these 

numerous benefits, § 38.702 permits 

flexibility in the structure of DCMs’ 

disciplinary bodies but protects against 

conflicts of interest by ensuring that the 

same individual is not invested with the 

authority to both issue and adjudicate 

charges in the same manner. 

Sec. 38.703–38.711 and Guidance 

Rules 38.703–38.711, and the 

accompanying guidance, seek to ensure 

a fair, prompt, and effective disciplinary 

program by, among other things, 

requiring a notice of charges and 

providing respondents with a right to 

representation, a reasonable period of 

time to file an answer to charges, and 

the right to a fair hearing. The rules also 

outline procedures for rendering 

disciplinary decisions and issuing 

disciplinary sanctions and warning 

letters. In response to comments 

requesting greater flexibility, the 

Commission is also converting several 

proposed rules into guidance in order to 

reduce potential incremental costs 

resulting from the final rules. This 

guidance will cover notices of charges, 

the admission or failure to deny charges, 

settlement offers, hearings, rights to 

appeal, summary fines, and emergency 

disciplinary sanctions. 

Summary of Comments and Discussion 

The Commission did not receive any 

specific comments discussing costs or 

benefits of proposed §§ 38.703–38.716. 

However, several commenters made 

general requests for greater flexibility 

across all core principles. Accordingly, 

the Commission has modified certain 

aspects of the proposed rules under 

Core Principle 13 where it believes that 

flexibility can reasonably be afforded. 

To that end, the Commission is 

converting the following proposed rules, 

in their entirety, to guidance: proposed 

§ 38.707 (Admission or failure to deny 

charges); proposed § 38.709 (Settlement 

offers); proposed § 38.712 (Right to 

appeal); and proposed § 38.716 

(Emergency disciplinary actions). In 

addition, the Commission is moving the 

following specific requirements to 

guidance: the requirements under 

paragraphs (a) and (b) of proposed 

§ 38.704, which allowed, but did not 

require, a DCM to issue rules regarding 

failures to request a hearing and 

expressly answer or deny a charge; the 

provision under paragraph (b) of 

proposed § 38.710, which provided that 

the DCM’s rules may provide that a 

sanction may be summarily imposed 

upon any person whose actions impede 

the progress of a hearing; and the 

provisions under proposed § 38.715 that 

permitted, but did not require, a DCM 

to adopt a summary fine schedule. 

The Commission is also removing the 

following proposed provisions from the 

final rules: paragraphs (a) and (b) under 

proposed § 38.703 regarding the review 

of investigation reports when additional 

evidence is needed or no reasonable 

basis exists for finding a violation; the 

section of proposed § 38.708 which was 

optional, allowing a DCM’s rule to 

provide that, except for good cause, a 

hearing must be concerned only with 

those charges denied or sanctions set by 

the panel for which a hearing has been 

requested; and the optional rule under 

proposed § 38.710(a)(7) which, in 

certain cases, allowed for the cost of 

transcribing the record of the hearing to 

be borne by the respondent. 

Costs (§ 38.703–38.712 and Guidance) 

While § 38.701 and § 38.702 impose 

specific requirements on DCMs to have 

sufficient enforcement staff and 


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Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 36689 

612Exchange Procedures for Disciplinary, 

Summary, and Membership Denial Actions. 

613For example, the requirements in regulation 

38.708 (Decisions) and regulation 38.710 

(Disciplinary Sanctions) are based on findings and 

recommendations in recent RERs. 

resources and to establish disciplinary 

panels, the remainder of the Core 

Principle 13 regulations simply outline 

the policies and procedures that a 

DCM’s disciplinary program must 

follow. The Commission notes that 

these Core Principle 13 regulations 

merely reflect disciplinary concepts 

formerly found in Designation Criterion 

6, part 8 of the Commission’s 

regulations,612 and the guidance and 

acceptable practices for former Core 

Principle 2. Accordingly, existing 

exchanges generally have already 

established disciplinary programs and, 

as such, have already expended the fees 

and costs necessary to comply with the 

requirements under §§ 38.703–38.712. 

As discussed in the preamble, many 

of the new requirements applicable to 

DCMs with respect to their disciplinary 

procedures were derived from findings 

and recommendations made by 

Commission staff through RERs.613

These recommendations represent what 

the Commission staff believes are best 

practices and are typically adopted by 

DCMs as the standard form of 

compliance. Therefore, while the 

codification of certain disciplinary 

requirements may be new, Commission 

staff has already expressed these 

expectations to the industry through 

RERs. 

The exact incremental costs incurred 

by DCMs to comply with the specific 

requirements of final rules under Core 

Principle 13 cannot be ascertained since 

they will vary depending on the DCM’s 

current disciplinary program. To ensure 

the effectiveness of their disciplinary 

programs and provide procedural 

safeguards to potential respondents, 

most DCMs already have disciplinary 

rules and procedures that are similar to 

those required by the rules, even though 

they were not previously required to do 

so by Commission regulation. Therefore, 

as a practical matter, the rules may 

likely require DCMs to amend existing 

disciplinary rules and procedures rather 

than creating them anew. Accordingly, 

costs would likely be limited to the 

resources allocated to amending existing 

rules and procedures to ensure 

compliance with the final rules. 

As described above, in response to 

commenters’ request for greater 

flexibility, the Commission has sought 

to reduce any incremental costs 

imposed by the final rules by modifying 

certain rules where it believes that 

flexibility can reasonably be afforded 

and the overall burden on DCMs can be 

reduced. As described above, the 

Commission is moving numerous 

proposed regulations from rules to 

guidance, as well as removing certain 

provisions in their entirety. Finally, the 

Commission expects the following 

additional modifications to the 

proposed rules to also reduce the costs 

imposed by the rules on market 

participants: (1) The rules regarding a 

respondent’s answer to a notice of 

charges, outlined in paragraphs (a), (b), 

and (c) of proposed § 38.706, are being 

replaced with a requirement that any 

rules adopted pursuant to this rule be 

‘‘fair, equitable, and publically 

available;’’ (2) Proposed § 38.714 is 

being modified so that it does not 

require customer restitution if the 

amount of restitution, or the recipient, 

cannot be reasonably determined. 

Benefits 

The regulations under Core Principle 

13 protect market participants and the 

public by ensuring that exchanges will 

discipline, suspend or terminate the 

activities of members or market 

participants found to have committed 

rule violations. To that end, the rules 

will ensure that DCMs maintain fair, 

prompt, and effective disciplinary 

programs. The rules will deter 

violations of DCM rules by requiring 

disciplinary sanctions sufficient to deter 

recidivism under§ 38.710 and by 

restricting repeat warning letters in 

§ 38.711. The rules protect respondents 

by requiring procedural safeguards to 

ensure fairness for respondents. These 

include an adequate notice of charges 

under § 38.703, the right to 

representation in § 38.704, a reasonable 

period of time to file an answer to 

charges under § 38.705, right to a 

hearing under § 38.707, and a prompt 

written decision under § 38.708, among 

others. Finally, the rules protect 

customers by requiring restitution 

where customer harm is demonstrated 

in § 38.710. 

The guidance provisions regarding 

settlement offers and § 38.708 

(Decisions) were based on the 

Commission’s recommendation that 

DCM disciplinary committees improve 

the documentation of their disciplinary 

decisions. As discussed in the DCM 

NPRM, the Commission believes that 

improved written documentation yields 

the following benefits: (1) Disciplinary 

panels will be required to focus their 

analysis more carefully in order to 

articulate the rationale for their 

decisions; (2) DCM enforcement staff 

will gain a better understanding of the 

evidentiary expectations to which 

different disciplinary panels adhere; (3) 

DCM enforcement staff and respondents 

will both have an improved record to 

base any appeals they may wish to file; 

and (4) Improved review of the DCMs’ 

disciplinary program by the 

Commission. 

Section § 38.710 (Disciplinary 

Sanctions), which provides that all 

disciplinary penalties imposed by a 

DCM or its disciplinary panels must be 

commensurate with the violations 

committed, and be sufficient to deter 

recidivist activity, and § 38.711 

(Warning Letters), which prohibits a 

DCM from issuing more than one 

warning letter in a rolling 12 month 

period, are also examples of 

recommendations made by the 

Commission in RERs. As discussed in 

the DCM NPRM, these reflected DMO 

staff’s concern regarding the adequacy 

of sanctions. 

Section 15(a) Factors (§ 38.701–38.712 

and Guidance) 

1. Protection of market participants 

and the public. The regulations and 

guidance under Core Principle 13 

benefit the protection of market 

participants and the public by ensuring 

that exchanges maintain sufficient 

enforcement staff and resources through 

§ 38.701 and will discipline, suspend or 

terminate the activities of members or 

market participants found to have 

committed rule violations. The 

regulations require that DCMs maintain 

fair, prompt, and effective disciplinary 

programs to ensure fairness for all 

respondents in disciplinary actions. 

Additionally, by requiring that DCMs 

levy meaningful sanctions against 

persons and entities that violate DCM 

rules under §§ 38.710 and 38.711, the 

regulations seek to promote the 

effectiveness of disciplinary sanctions 

and deter recidivist behavior. Finally, to 

compensate customers who suffer harm, 

the rules require full customer 

restitution in any disciplinary matter 

where customer harm was demonstrated 

and where the amount of restitution and 

the recipient can be reasonably 

determined under § 38.710. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

The regulations under Core Principle 13 

promote the financial integrity of the 

futures markets by ensuring that 

individuals and entities that violate the 

rules of a DCM are appropriately 

sanctioned, such sanctions are effective 

and discourage recidivist activity, and 

customers who are harmed received full 

restitution under §§ 38.710 and 38.711. 

3. Price discovery. The Commission 

has not identified any effects that these 

rules will have on price discovery other 

than those identified above. 


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36690 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

614CME Comment Letter at 36–37 (Feb. 22, 2011). 

615 Id. 

616 Id. 

617 Id. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that these rules will have on 

sound risk management practices, other 

than those identified above. 

5. Other public interest 

considerations. The regulations under 

Core Principle 13 promote public 

interest considerations, such as market 

integrity and customer protection, by 

establishing an enforcement program 

through which DCMs can effectively 

prosecute members and market 

participants who engage in abusive 

trading practices or violate other DCM 

rules. 

(15) Core Principle 14: Dispute 

Resolution 

The new guidance for Core Principle 

14 is essentially identical to the prior 

guidance to former Core Principle 13. 

No comments were provided related to 

the costs of Core Principle 14. 

Therefore, the costs and benefits should 

be no different than the costs and 

benefits of administering a dispute 

resolution program under former Core 

Principle 13 prior to enactment of the 

Dodd-Frank Act. 

(16) Core Principle 18: Recordkeeping 

Sec. 38.951 (Additional Sources for 

Compliance) 

Section 38.951 requires DCMs to 

maintain records, including trade 

records and investigatory and 

disciplinary files, in accordance with 

Commission regulations, § 1.31, and in 

accordance with part 45 of the 

Commission’s regulations with respect 

to swap transactions. 

Costs 

The Commission did not receive any 

comments related to the costs of this 

core principle. Although § 38.951 

incorporates by reference the 

requirements of existing § 1.31 and part 

45, it does not impose any additional 

burden or costs to which DCMs are not 

already subject under current 

regulations. Regulation 38.951 merely 

references recordkeeping obligations to 

which DCMs have always been subject 

under § 1.31 and to which DCMs are 

required to comply with respect to swap 

transactions under part 45. Accordingly, 

DCMs will not bear any new costs solely 

due to § 38.951. 

Benefits 

Section § 38.951 enables the 

Commission to obtain the books and 

records of DCMs, which is essential to 

carrying out the Commission’s 

regulatory functions, including trade 

practice and market surveillance, 

regulatory examinations, and 

enforcement examinations. 

Furthermore, such books and records 

assist the Commission in prosecuting 

violations of the CEA and Commission 

regulations. 

(17) Core Principle 19: Antitrust 

Considerations 

The guidance for Core Principle 19 is 

nearly identical to the guidance for 

former Core Principle 18 and therefore 

the costs and benefits of requiring DCMs 

to operate according to accepted 

antitrust law should be no different than 

the costs and benefits associated with 

the pre-existing guidance, prior to the 

enactment of the Dodd-Frank Act. 

(18) Core Principle 20: System 

Safeguards 

Sec. 38.1051 (General Requirements) 

Section 38.1051 establishes system 

safeguards requirements for all DCMs, 

pursuant to new Core Principle 20 

added under the Dodd-Frank Act. The 

rules under § 38.1051(a) and (b) require 

a DCM’s program of risk analysis and 

oversight to address six categories of 

risk analysis and oversight and to follow 

generally accepted standards and best 

practices with respect to the 

development, operation, reliability, 

security, and capacity of automated 

systems. Section 38.1051(c) specifically 

requires each DCM to maintain a 

business continuity-disaster recovery 

(‘‘BC–DR’’) plan and BC–DR resources 

sufficient to enable resumption of 

trading and of all of the responsibilities 

and obligations of the DCM during the 

next business day following any 

disruption of its operations. Section 

38.1051(d) specifies the requirement to 

be able to resume trading and clearing 

during the next business day following 

a disruption for DCMs that are not 

determined to be a critical financial 

market. The rules also require each 

DCM to notify Commission staff of 

various system security-related events 

under § 38.1051(e) and (f), to provide 

relevant documents to the Commission 

in § 38.1051(g), and to conduct regular, 

periodic, objective testing and review of 

automated systems under § 38.1051(h). 

Finally, the rules under § 38.1051(i) 

require each DCM to coordinate its BC– 

DR plan with its members and market 

participants. 

Summary of Comments 

CME stated that the requirement for 

notice of all systems malfunctions is 

overly broad and would require onerous 

reporting of mundane and trivial 

incidents, and that the Commission 

should limit required reporting only to 

material system failures.614 CME also 

stated that the requirement that DCMs 

provide the Commission with timely 

advance notice of all planned changes to 

automated systems that may impact the 

reliability, security, or adequate scalable 

capacity of such systems is an 

‘‘extremely onerous burden for DCMs’’ 

and that the requirement adds 

‘‘significant costs that are not at all 

commensurate with any value 

created.’’ 615 CME claimed that any 

change to a system could conceivably 

impact the operation of the system, and 

that it would be inefficient and 

unproductive to report every planned 

change to their automated systems.616

Finally, CME stated that the 

requirement that DCMs provide timely 

advance notice of all planned changes to 

the DCM’s program of risk analysis and 

oversight is overly broad and is neither 

necessary nor productive.617

Discussion 

In response to CME’s concerns that 

the rule would require reporting of 

insignificant system events, the 

Commission is adopting final rules that 

require reporting only of significant 

system malfunctions and advance 

notification only of material system 

changes. 

Costs 

Sec. 38.1051(a) and (b) 

The Commission believes that DCMs 

generally will not incur significant 

additional costs to achieve compliance 

with the requirements described in 

§ 38.1051(a) and (b) because from the 

time Core Principle 20 went into effect, 

all DCMs would need to have a program 

addressing all six categories of risk 

analysis and oversight. Former Core 

Principle 9 and Designation Criteria 4 

provided for essentially the same 

requirements which reflect activities 

that would normally be conducted by 

the DCM in the course of following 

industry standards, guidelines, and best 

practices for the management and 

operation of automated systems. 

Additionally, the requirement to 

maintain a program of risk analysis and 

oversight appears in Core Principle 20 

itself and was not the product of 

Commission discretion. 

Sec. 38.1051(c) 

The Commission believes that DCMs 

generally will not incur significant 

additional costs to achieve compliance 

with the requirements described in 


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§ 38.1051(c). The requirement to 

maintain a business continuity-disaster 

recovery plan, business continuity 

disaster recovery resources, emergency 

procedures, and backup facilities 

appears in the core principle itself and 

was not the product of Commission 

discretion. Additionally, the 

requirements in § 38.1051(c) reflect 

industry best practices; an exchange 

without the ability to resume operations 

shortly after a disastrous event, which 

by definition implies that they will not 

in that timeframe be able to operate out 

of their production environment, cannot 

expect to retain its customer base. In the 

event that an existing DCM is 

determined by the Commission to be a 

‘‘critical financial market,’’ substantial 

additional initial and ongoing costs 

could be incurred due to the more 

stringent requirements in this regard, set 

forth in § 40.9. The Commission expects 

to notify a DCM of its consideration of 

the DCM’s status as a critical financial 

market sufficiently in advance of any 

formal designation as such; further, the 

Commission believes that any DCM 

subject to this designation would be 

generating sufficient volume to 

reasonably support additional costs 

incurred. 

Sec. 38.1051(d) 

The Commission does not believe that 

any additional material costs will be 

incurred by DCMs in complying with 

the requirements listed in § 38.1051(d), 

as DCMs covered by this provision are 

already in compliance with its 

requirements. 

Sec. 38.1051(e) 

The Commission does not believe that 

any material costs will be incurred by 

DCMs in complying with the 

notification requirements listed in 

§ 38.1051(e). Given the general 

operating stability of the automated 

systems at existing DCMs, notification 

to Commission staff, either via email or 

telephone, would be fairly infrequent 

and could easily be combined with 

notifications distributed to market 

participants. Several DCMs have 

automated notification systems; adding 

an email address to these systems would 

not impose additional costs on DCMs. 

Minimal additional cost due to DCM 

staff time could be incurred in followup activities, including completing a 

systems outage notification template 

developed by Commission staff. 

However, this template closely follows 

standard technical post-mortem 

reporting procedures, and is not 

expected to require more than one hour 

to complete, at a cost of about $52. 

Additionally, the Commission notes that 

it is reducing the burden of this 

provision by revising the proposed rule 

to provide that DCMs must only 

promptly advise the Commission of all 

significant system malfunctions, rather 

than all system malfunctions. 

Sec. 39.1051(f) 

The Commission does not believe that 

any significant material costs will be 

incurred by existing DCMs or applicants 

in complying with the notification 

requirements listed in § 38.1051(f). 

Commission staff has developed 

notification templates for the notice 

requirements contained in both (f)(1) 

and (2); these templates have been 

designed to minimize additional work 

for DCM staff. As the templates largely 

follow guidelines for best practices in 

automated systems management and 

capacity planning, Commission staff 

believes that each notification will 

require no more than two hours of DCM 

staff time (at a cost of about $104). 

Commission notification of planned 

changes to a DCM’s program of risk 

analysis and oversight should also not 

impose additional costs on DCMs, as 

copies of documents developed by DCM 

staff for change planning purposes are 

expected to be sufficient in meeting this 

requirement. Additionally, the 

Commission notes that it is reducing the 

burden of this provision on DCMs by 

revising the proposed rule to provide 

that, with respect to planned changes to 

automated systems or risk analysis and 

oversight programs, a DCM must only 

provide timely advance notification of 

material changes, rather than of all 

changes. 

Sec. 38.1051(g) 

The Commission does not believe that 

any significant costs will be incurred by 

existing DCMs or applicants in 

complying with the requirements listed 

in § 38.1051(g), as these documents and 

procedures can be provided 

electronically with minimal additional 

DCM staff effort, and would be 

produced by the DCM in the course of 

following industry standards, guidelines 

and best practices for the management 

and operation of automated systems. If 

the documents are available 

electronically, the request can likely be 

met in under 15 minutes. Hardcopy 

responses would likely require no more 

than 30 minutes of DCM staff time. 

Sec. 38.1051(h) 

The Commission does not believe that 

any significant costs will be incurred by 

existing DCMs in complying with the 

requirements listed in § 38.1051(h), as 

all DCMs should currently be 

performing this testing and review in 

the course of following industry 

standards, guidelines and best practices 

for the management and operation of 

automated systems. 

Sec. 38.1051(i) 

The Commission does not believe that 

any significant costs will be incurred by 

existing DCMs in complying with the 

requirements listed in § 38.1051(i), as all 

DCMs should meet the requirements of 

this provision in the course of following 

industry standards (including industrywide tests conducted at least annually 

and sponsored by the Futures Industry 

Association (‘‘FIA’’)), guidelines and 

best practices for the management and 

operation of automated systems. 

Further, compliance with sections (1) 

and (3) would generally result from the 

development of contingency and 

disaster recovery plans following 

generally accepted best practices and 

standards. Finally, industry-wide testing 

currently conducted on an annual basis 

would result in substantial compliance 

with part (2) of this section. 

Benefits 

Sophisticated computer systems are 

crucial to a DCM’s ability to meet its 

obligations and responsibilities. 

Safeguarding the reliability, security, 

and capacity of such systems is essential 

to mitigate systemic risk for the nation’s 

financial sector as a whole. The ability 

of DCMs to recover and resume trading 

promptly in the event of a disruption of 

their operations is highly important to 

the U.S. economy. Ensuring the 

resilience of the automated systems of 

DCMs is a vitally important part of the 

Commission’s mission and will be 

crucial to the robust and transparent 

systemic risk management framework 

established by the Dodd- Frank Act. 

DCM compliance with generally 

accepted standards and best practices 

with respect to the development, 

operation, reliability, security, and 

capacity of automated systems can 

reduce the frequency and severity of 

automated system security breaches or 

functional failures, thereby augmenting 

efforts to mitigate systemic risk. Notice 

to the Commission concerning systems 

malfunctions, systems security 

incidents, or any events leading to the 

activation of a DCM’s business 

continuity-disaster recovery (‘‘BC–DR’’) 

plan will assist the Commission’s 

oversight and its ability to assess 

systemic risk levels. It would present 

unacceptable risks to the U.S. financial 

system if futures and swaps markets that 

comprise critical components of the 

world financial system were to become 

unavailable for an extended period of 

time for any reason. Adequate system 


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618 GreenX Comment Letter at 14–15 (Feb. 22, 

2011). 

619 Id. at 17–18. 

620 Id. at 16. 

621CME Comment Letter at 38 (Feb. 22, 2011). 

622 GreenX Comment Letter at 20 (Feb. 22, 2011). 

623 Id. 

safeguards are crucial to mitigate such 

risks and this regulation will ensure 

such safeguards are in place. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. Because automated 

systems play a central and critical role 

in today’s electronic financial market 

environment, oversight of core principle 

compliance by DCMs with respect to 

automated systems is an essential part 

of effective oversight of both futures and 

swaps markets. Timely reporting to the 

Commission of material system 

malfunctions, planned changes to 

automated systems, and planned 

changes to programs of risk analysis and 

oversight will facilitate the 

Commission’s oversight of futures and 

swaps markets, augment the 

Commission’s efforts to monitor 

systemic risk, and will further the 

protection of market participants and 

the public by helping to ensure that 

automated systems are available, 

reliable, secure, have adequate scalable 

capacity, and are effectively overseen. 

2. Efficiency, competitiveness, and 

financial integrity of futures markets. 

Sophisticated computer systems are 

crucial to a DCM’s ability to meet its 

obligations and responsibilities. 

Safeguarding the reliability, security, 

and capacity of such systems is also 

essential to mitigation of system risk for 

the nation’s financial sector as a whole. 

This is particularly true in light of the 

fact that the over-the-counter swaps 

market is estimated to have in excess of 

$600 trillion in outstanding contracts. 

The ability of DCMs to recover and 

resume trading promptly in the event of 

a disruption of their operations is highly 

important to the U.S. economy. 

Ensuring the resilience of the automated 

systems of DCMs is a critical part of the 

Commission’s mission, and will be 

crucial to the robust and transparent 

systemic risk management framework 

established by the Dodd-Frank Act. 

Notice to the Commission concerning 

systems malfunctions, systems security 

incidents, or any events leading to the 

activation of a DCM’s business 

continuity-disaster recovery plan will 

assist the Commission’s oversight and 

its ability to assess systemic risk levels. 

It would present unacceptable risks to 

the U.S. financial system if futures and 

swaps markets that comprise critical 

components of the world financial 

system were to become unavailable for 

an extended period of time for any 

reason, and adequate system safeguards 

and timely notice to the Commission 

regarding the status of those safeguards 

are crucial to mitigation of such risks. 

3. Price discovery. The reliable 

function of sophisticated computer 

systems and networks is vital to the 

fulfillment of a DCM’s duties and 

obligations, a crucial ingredient of 

adequate regulatory oversight, and 

central to the robust, conservative, and 

transparent risk management framework 

promulgated by the Dodd-Frank Act. 

Following generally accepted standards 

and best practices with respect to the 

development, operation, reliability, 

security, and capacity of automated 

systems will reduce the incidence and 

severity of automated system security 

breaches and functional failures, 

thereby providing reliable and available 

venues for price discovery. 

4. Sound risk management practices. 

Reliably functioning computer systems 

and networks are crucial to 

comprehensive risk management, and 

prompt notice to the Commission 

concerning systems malfunctions, 

systems security incidents, or any 

events leading to the activation of a 

DCM’s business continuity-disaster 

recovery plan will assist the 

Commission in its oversight role, and 

will bolster its ability to assess systemic 

risk levels. Adequate system safeguards 

and timely notice to the Commission 

regarding the status of those safeguards 

are crucial to mitigation of potential 

systemic risks. 

5. Other public interest 

considerations. The American economy 

and the American public depend upon 

the availability of reliable and secure 

markets for price discovery, hedging, 

and speculation. Ensuring the adequate 

safeguarding and the reliability, 

security, and capacity of the systems 

supporting these market functions is a 

core focus in the Commission’s role in 

monitoring and assessing the level of 

systemic risk, and is central to its 

fulfillment of responsibilities given to it 

by the Dodd-Frank Act. 

(19) Core Principle 21: Financial 

Resources 

Sec. 38.1101 (Financial Resources) 

Section 38.1101(a) requires DCMs to 

maintain and calculate sufficient 

financial resources to cover operating 

costs for at least one year, calculated on 

a rolling basis, at all times, and requires 

any entity operating as both a DCM and 

a DCO to comply with both the DCM 

and DCO financial resources 

requirements. 

Under section 38.1101(b), financial 

resources available to DCMs to satisfy 

the applicable financial resources 

requirements would include the DCM’s 

own capital (assets in excess of 

liabilities) and any other financial 

resource deemed acceptable by the 

Commission. 

Sections 38.1101(c), (d), and (f) 

require each DCM, no less frequently 

than at the end of each fiscal quarter, to 

calculate the financial resources it needs 

to meet the requirements of § 38.1101(a) 

and the current market value of each 

financial resource and report this 

information to the Commission within a 

specified timeframe. Section 38.1101(e) 

requires DCMs to maintain 

unencumbered liquid financial assets, 

such as cash or highly liquid securities, 

equal to at least six months’ operating 

costs, or a committed line of credit or 

similar facility. 

Summary of Comments 

GreenX stated that the proposed rules 

implementing Core Principle 21 could 

effectively require DCMs to maintain 

financial resources in excess of one 

year’s operating costs.618 GreenX 

suggested modifying the rule so that the 

proposed six month liquidity 

requirement be explicitly included in 

the financial resources required to cover 

a DCM’s operating costs for at least one 

year, or alternatively, requested that the 

Commission perform a cost benefit 

analysis of the proposed rule as 

written.619

GreenX also stated that revising the 

proposed rule to permit DCMs to 

include committed lines of credit as an 

acceptable financial resource would 

permit a DCM to reduce its operating 

costs by avoiding the need to incur 

unnecessary interest charges, while still 

ensuring that it has adequate funds 

available to pay its operating 

expenses.620

Several commenters requested an 

extended deadline for filing the 

financial reports required as a result of 

§ 38.1101(f). CME stated that the 

proposed 17 day filing deadline is not 

feasible and that instead, the 

requirement should be consistent with 

the SEC’s reporting requirements.621

Similarly, GreenX stated that it has 

procedures in place to comply with the 

SEC’s requirements and that the 

proposed requirements in this rule 

would require new programming and 

resources.622 GreenX recommended 

extending the reporting deadline to 30 

calendar days, noting that this is still 

more burdensome than the requirements 

imposed by the SEC on national 

securities exchanges.623 The 


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Commission received no comments 

discussing the costs and benefits of 

§§ 38.1101(b) and 38.1101(d). 

Discussion 

As discussed in the preamble, the rule 

does not require each DCM to maintain 

eighteen months of financial resources, 

but, rather, requires each DCM to have 

at least twelve months of financial 

resources, including six months of 

liquid financial resources. Each DCM 

has the discretion to determine how to 

meet this requirement (e.g., six months 

of illiquid financial resources combined 

with six months of liquid ones, twelve 

months of illiquid financial resources 

with a line of credit covering six 

months’ worth of financial resources, or 

twelve months of illiquid financial 

resources and six months of liquid 

ones). There are similar proposed 

financial resources rules in the 

rulemakings for each type of registered 

entity (i.e., SEFs, SDRs, and DCOs). 

The provision in the rule text stating 

that acceptable financial resources 

include a DCM’s own capital and ‘‘any 

other financial resource deemed 

acceptable by the Commission’’ was 

meant to capture other types of 

resources on a case-by-case basis and 

provide flexibility to both DCMs and the 

Commission. Accordingly, the 

Commission has revised the rule text to 

state that a DCM’s own capital means its 

assets minus its liabilities calculated in 

accordance with GAAP. The 

Commission believes that if a certain 

financial resource is deemed to be an 

asset under GAAP, it is appropriate for 

inclusion in the calculation for this rule. 

To the extent a certain financial 

resource is not considered an asset 

under GAAP, but based upon the facts 

and circumstances a DCM believes that 

the particular asset should be so 

considered, Commission staff will work 

with the DCM to determine whether 

such resource is acceptable. 

The Commission is persuaded that the 

proposed 17 business day filing 

deadline may be overly burdensome. 

The SEC requires its quarterly reports 

on Form 10–Q to be filed with the SEC 

40 calendar days after the end of the 

fiscal quarter for accelerated filers and 

45 calendar days after the end of the 

fiscal quarter for all other SEC-registered 

entities. The SEC requires annual 

reports on Form 10–K to be filed with 

the SEC 60 calendar days after the end 

of the fiscal year for large accelerated 

filers, 75 calendar days for other 

accelerated filers and 90 calendar days 

for non-accelerated filers. Accordingly, 

the Commission is extending the 17 

business day proposed filing deadline to 

40 calendar days for the required reports 

for the first three quarters. This will 

harmonize the Commission’s 

regulations with the SEC’s requirements 

for its Form 10–Q. Similarly, the 

Commission has extended the filing 

deadline to 60 days for the fourth 

quarter report to harmonize with the 

SEC deadlines for the Form 10–K. The 

Commission does not believe that 

annual submissions are sufficient. The 

Commission believes that prudent 

financial management requires DCMs to 

prepare and review financial reports 

more frequently than annually, and 

expects that DCMs currently are 

reviewing their finances on at least a 

quarterly basis. 

Costs 

This is a new core principle for 

DCMs, so the requirement to maintain 

and calculate the financial resources 

necessary to meet the requirements of 

this rule may require an outlay of 

resources to achieve compliance. 

However, the Commission has required 

recent DCM registrants pursuant to their 

designation order to calculate and 

maintain a certain level of financial 

resources and therefore some DCMs are 

already generally in compliance with 

this requirement. 

The Commission expects that most, if 

not all, DCMs already calculate and 

prepare financial statements quarterly. 

Accordingly, the Commission does not 

believe that the calculation of the 

financial resources required to meet the 

requirements of this core principle 

imposes a significant burden on DCMs. 

Extrapolation from the prepared 

financial statements should be relatively 

straightforward, but will require some 

resources on the part of DCMs, 

potentially including staff and 

technology resources to calculate, 

monitor, and report financial resources. 

Given the staffing and operational 

differences among DCMs, the 

Commission is unable to accurately 

estimate or quantify the additional costs 

DCMs may incur to comply with the 

new financial resource rules, and no 

information was provided in the 

comments in response to the NPRM. 

The proposed regulation imposes 

additional costs on the Commission as 

staff will be required to review the 

filings received from DCMs. However, 

once the first couple of filings have been 

received and reviewed, Commission 

staff will be familiarized with the 

financial resources of each DCM and the 

Commission expects that the review 

will become increasingly more efficient. 

Benefits 

A DCM is obligated to ensure that 

trading occurs in a liquid, fair, and 

financially secure trading facility. In 

order to fulfill its responsibilities, a 

DCM must have appropriate minimum 

financial resources on hand and on an 

ongoing basis to sustain operations for 

a reasonable period of time. This 

includes a DCM having sufficient 

resources to allow it to close out trading 

in a manner not disruptive to the 

market, if necessary. The Commission 

believes that the benefits of the rule 

requiring six months’ worth of 

unencumbered liquid financial assets 

are substantial. Specifically, this 

provision would give a DCM time to 

liquidate the remaining financial assets 

it would need to continue operating for 

the last six months of the required one 

year period. If a DCM does not have six 

months’ worth of unencumbered liquid 

financial assets, it would be allowed to 

use a committed line of credit or similar 

facility to satisfy the requirement. If a 

DCM does not have the liquidity 

required under § 38.1101(e), it is not 

achieving the goal of the core principle, 

as it will be unable to pay its creditors. 

Liquidity is implicit in the core 

principle requirement that the financial 

resources be adequate. Additionally, the 

rules ensure that the Commission can be 

certain that DCMs are in compliance 

with the core principle as required by 

the Dodd-Frank Act. In addition, the 

reporting requirements will facilitate the 

Commission’s oversight role of ensuring 

DCMs maintain sufficient financial 

resources, as required by the core 

principle. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. As discussed herein, 

these rules implement the requirements 

of new Core Principle 21 pursuant to the 

Dodd-Frank Act. These requirements 

will enable a DCM to fulfill its 

responsibilities of ensuring that trading 

occurs in a liquid, fair, and financially 

secure trading facility by maintaining 

appropriate minimum financial 

resources on hand and on an ongoing 

basis to sustain operations for a 

reasonable period of time. As discussed, 

as a result of these requirements, DCMs 

will also have the financial resources 

necessary to close out trading in a 

manner not disruptive to the market. By 

establishing uniform standards that 

further the goals of avoiding market 

disruptions, financial losses, and 

systemic problems that could arise from 

a DCM’s failure to maintain adequate 

financial resources, these rules will 

protect market participants and the 

public. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

The rules also promote the financial 


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integrity of the futures markets by 

requiring DCMs to have adequate 

operating resources (i.e., operating 

resources sufficient to fund both current 

operations and ensure operations of 

sufficient length in the future), and 

preventing those DCMs that lack these 

resources from expanding in ways that 

may ultimately harm the broader 

financial market (i.e., confining the 

operations of DCMs to levels their 

financial resources can support). 

3. Price discovery. The Commission 

has not identified any effects that this 

rule will have on price discovery. 

4. Sound risk management practices. 

By setting specific standards with 

respect to how DCMs should assess and 

monitor the adequacy of their financial 

resources, the rules promote sound risk 

management practices and further the 

goal of minimizing systemic risk. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

(20) Core Principle 23: Securities and 

Exchange Commission 

The Dodd-Frank Act added new Core 

Principle 23, requiring that DCMs keep 

any records relating to swaps defined in 

CEA section 1a(47)(A)(v), as amended 

by the Dodd-Frank Act, open to 

inspection and examination by the SEC. 

Consistent with the text of the core 

principle, the Commission is adopting 

guidance that provides that each DCM 

should have arrangements and resources 

for collecting and maintaining accurate 

records pertaining to any swap 

agreements defined in section 

1a(47)(A)(v) of the amended CEA, and 

should leave them open to inspection 

and examination for a period of five 

years. The Commission did not receive 

any comments discussing the costs or 

benefits of this provision. 

Costs 

Core Principle 23 requires DCMs to 

keep records relating only to securitybased swaps open to inspection and 

examination by the SEC. The 

accompanying guidance simply tracks 

the language of the Core Principle and 

does not impose any additional 

substantive requirements on DCMs. The 

five-year period is unlikely to impose 

significant costs on market participants 

because the core principle already 

requires DCMs to keep records relating 

to certain swaps open to inspection and 

examination by the SEC; the guidance 

simply provides additional information 

with respect to the duration of the 

obligation imposed by the core 

principle. The Commission believes the 

five-year retention period is reasonable 

and reflects industry standards; the 

recordkeeping requirement under Core 

Principle 18 extends for a period of five 

years and the SEC’s relevant 

recordkeeping requirements typically 

extend for a period of five years as well. 

Additionally, the requirement only 

applies to security-based swaps. 

Benefits 

The Dodd-Frank Act was intended to 

establish a comprehensive, new 

regulatory framework for swaps and 

security-based swaps. The legislation 

was enacted to reduce risk, increase 

transparency, and promote market 

integrity within the financial system. In 

order to perform effective oversight and 

ensure the goals of Dodd-Frank are 

realized, the regulatory agencies charged 

with overseeing the swaps market must 

have access to accurate information 

regarding swap transactions. The SEC 

shares jurisdiction over the regulation of 

the swaps markets with the Commission 

and must have access to accurate 

records relating to swaps in order to 

effectively oversee those markets. 

Section 15(a) Factors 

1. Protection of market participants 

and the public. To protect market 

participants and the public, the SEC has 

comprehensive regulatory, surveillance, 

investigative, and enforcement 

programs. To support these programs, 

the SEC must have access to accurate 

information regarding swap agreements. 

Section 38.1201 and the accompanying 

guidance ensure that DCMs keep 

accurate records relating to certain 

swaps open to inspection and 

examination by the SEC for a sufficient 

period of time of five years. 

2. Efficiency, competitiveness and 

financial integrity of futures markets. 

The SEC has comprehensive regulatory 

programs designed to promote efficient, 

competitive, and financially stable 

markets. In order to support these 

programs, the SEC must have access to 

accurate information regarding swap 

agreements. Section 38.1201 and the 

accompanying guidance ensure that 

DCMs keep accurate records relating to 

certain swaps open to inspection and 

examination by the SEC for a sufficient 

period of time of five years. 

3. Price discovery. The Commission 

has not identified any effects that this 

rule will have on price discovery. 

4. Sound risk management practices. 

The Commission has not identified any 

effects that this rule will have on sound 

risk management practices. 

5. Other public interest 

considerations. The Commission has not 

identified any effects that this rule will 

have on other public interest 

considerations. 

IV. Text of Final Rules 

List of Subjects 

17 CFR Part 1 

Commodity futures, Designated 

contract markets, Minimum financial 

requirements for intermediaries, 

Reporting and recordkeeping 

requirements. 

17 CFR Part 16 

Commodity futures, Reporting and 

recordkeeping requirements 

17 CFR Part 38 

Block transaction, Commodity 

futures, Designated contract markets, 

Reporting and recordkeeping 

requirements, Transactions off the 

centralized market. 

For the reasons stated in the 

preamble, and under the authority of 7 

U.S.C. 1, et seq., the Commodity Futures 

Trading Commission amends 17 CFR 

parts 1, 16, and 38 as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. Revise the authority citation for part 

1 to read as follows: 

Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 

6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 

6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 

12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, 

and 24, as amended by Title VII of the DoddFrank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 

1376 (2010). 

■ 2. Revise § 1.52 to read as follows: 

§ 1.52 Self-regulatory organization 

adoption and surveillance of minimum 

financial requirements. 

(a) Each self-regulatory organization 

must adopt rules prescribing minimum 

financial and related reporting 

requirements for members who are 

registered futures commission 

merchants, registered retail foreign 

exchange dealers, or registered 

introducing brokers. The self-regulatory 

minimum financial and related 

reporting requirements must be the 

same as, or more stringent than, the 

requirements contained in §§ 1.10 and 

1.17 of this chapter, for futures 

commission merchants and introducing 

brokers, and §§ 5.7 and 5.12 of this 

chapter for retail foreign exchange 

dealers; provided, however, a selfregulatory organization may permit its 

member registrants that are registered 

with the Securities and Exchange 

Commission as securities brokers or 


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dealers to file (in accordance with 

§ 1.10(h) of this chapter) a copy of their 

Financial and Operational Combined 

Uniform Single Report under the 

Securities Exchange Act of 1934, Part II, 

Part IIA, or Part II CSE, in lieu of Form 

1–FR. The definition of adjusted net 

capital must be the same as that 

prescribed in § 1.17(c) of this chapter for 

futures commission merchants and 

introducing brokers, and § 5.7(b)(2) of 

this chapter for futures commission 

merchants offering or engaging in retail 

forex transactions and for retail foreign 

exchange dealers. (b) Each selfregulatory organization must establish 

and operate a supervisory program for 

the purpose of assessing whether each 

member registrant is in compliance with 

the applicable self-regulatory 

organization and Commission rules and 

regulations governing minimum net 

capital and related financial 

requirements, the obligation to segregate 

customer funds, financial reporting 

requirements, recordkeeping 

requirements, and sales practice and 

other compliance requirements. The 

supervisory program also must address 

the following elements: 

(1) Adequate levels and independence 

of audit staff. A self-regulatory 

organization must maintain staff of an 

adequate size, training, and experience 

to effectively implement a supervisory 

program. Staff of the self-regulatory 

organization, including officers, 

directors and supervising committee 

members, must maintain independent 

judgment and its actions must not 

impair its independence nor appear to 

impair its independence in matters 

related to the supervisory program. The 

self-regulatory organization must 

provide annual ethics training to all 

staff with responsibilities for the 

supervisory program. 

(2) Ongoing surveillance. A selfregulatory organization’s ongoing 

surveillance of member registrants must 

include the review and analysis of 

financial reports and regulatory notices 

filed by member registrants with the 

designated self-regulatory organization. 

(3) High-risk firms. A self-regulatory 

organization’s supervisory program 

must include procedures for identifying 

member registrants that are determined 

to pose a high degree of potential 

financial risk, including the potential 

risk of loss of customer funds. High-risk 

member registrants must include firms 

experiencing financial or operational 

difficulties, failing to meet segregation 

or net capital requirements, failing to 

maintain current books and records, or 

experiencing material inadequacies in 

internal controls. Enhanced monitoring 

for high risk firms should include, as 

appropriate, daily review of net capital, 

segregation, and secured calculations, to 

assess compliance with self-regulatory 

and Commission requirements. 

(4) On-site examinations. (i) A selfregulatory organization must conduct 

routine periodic on-site examinations of 

member registrants. Member futures 

commission merchants and retail 

foreign exchange dealers must be 

subject to on-site examinations no less 

frequently than once every eighteen 

months. A self-regulatory organization 

may establish a risk-based method of 

establishing the scope of each on-site 

examination, provided however, that 

the scope of each on-site examination of 

a futures commission merchant or retail 

foreign exchange dealer must include an 

assessment of whether the registrant is 

in compliance with applicable 

Commission and self-regulatory 

organization minimum capital and 

customer fund protection requirements, 

recordkeeping, and reporting 

requirements. 

(ii) A self-regulatory organization 

must establish the frequency of on-site 

examinations of member introducing 

brokers that do not operate pursuant to 

guarantee agreements with futures 

commission merchants or retail foreign 

exchange dealers using a risk-based 

approach, provided however, that each 

introducing broker is subject to an onsite examination no less frequently than 

once every three years. 

(iii) A self-regulatory organization 

must conduct on-site examinations of 

member registrants in accordance with 

uniform audit programs and procedures 

that have been submitted to the 

Commission. 

(5) Adequate documentation. A selfregulatory organization must adequately 

document all aspects of the operation of 

the supervisory program, including the 

conduct of risk-based scope setting and 

the risk-based surveillance of high-risk 

member registrants, and the imposition 

of remedial and punitive action(s) for 

material violations. 

(c) Any two or more self-regulatory 

organizations may file with the 

Commission a plan for delegating to a 

designated self-regulatory organization, 

for any registered futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker that is a 

member of more than one such selfregulatory organization, the 

responsibility of: 

(1) Monitoring and auditing for 

compliance with the minimum financial 

and related reporting requirements 

adopted by such self-regulatory 

organizations and the Commission in 

accordance with paragraphs (a) and (b) 

of this section; and 

(2) Receiving the financial reports 

necessitated by such minimum financial 

and related reporting requirements. 

(d) Any plan filed under this section 

may contain provisions for the 

allocation of expenses reasonably 

incurred by the designated selfregulatory organization among the selfregulatory organizations participating in 

such a plan. 

(e) A plan’s designated self-regulatory 

organization must report to: 

(1) That plan’s other self-regulatory 

organizations any violation of such 

other self-regulatory organizations’ rules 

and regulations for which the 

responsibility to monitor, audit or 

examine has been delegated to such 

designated self-regulatory organization 

under this section; and 

(2) The Commission any violation of 

a self-regulatory organization’s rules and 

regulations or any violation of the 

Commission’s regulations for which the 

responsibility to monitor, audit or 

examine has been delegated to such 

designated self-regulatory organization 

under this section. 

(f) The self-regulatory organizations 

may, among themselves, establish 

programs to provide access to any 

necessary financial or related 

information. 

(g) After appropriate notice and 

opportunity for comment, the 

Commission may, by written notice, 

approve such a plan, or any part of the 

plan, if it finds that the plan, or any part 

of it: 

(1) Is necessary or appropriate to serve 

the public interest; 

(2) Is for the protection and in the 

interest of customers; 

(3) Reduces multiple monitoring and 

multiple auditing for compliance with 

the minimum financial rules of the selfregulatory organizations submitting the 

plan of any futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker that is a 

member of more than one self-regulatory 

organization; 

(4) Reduces multiple reporting of the 

financial information necessitated by 

such minimum financial and related 

reporting requirements by any futures 

commission merchant, retail foreign 

exchange dealer, or introducing broker 

that is a member of more than one selfregulatory organization; 

(5) Fosters cooperation and 

coordination among the self-regulatory 

organizations; and 

(6) Does not hinder the development 

of a registered futures association under 

section 17 of the Act. 

(h) After the Commission has 

approved a plan, or part thereof, under 

§ 1.52(g), a self-regulatory organization 


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relieved of responsibility must notify 

each of its members that are subject to 

such a plan: 

(1) Of the limited nature of its 

responsibility for such a member’s 

compliance with its minimum financial 

and related reporting requirements; and 

(2) Of the identity of the designated 

self-regulatory organization that has 

been delegated responsibility for such a 

member. 

(i) The Commission may at any time, 

after appropriate notice and opportunity 

for hearing, withdraw its approval of 

any plan, or part thereof, established 

under this section, if such plan, or part 

thereof, ceases to adequately effectuate 

the purposes of section 4f(b) of the Act 

or of this section. 

(j) Whenever a registered futures 

commission merchant, a registered retail 

foreign exchange dealer, or a registered 

introducing broker holding membership 

in a self-regulatory organization ceases 

to be a member in good standing of that 

self-regulatory organization, such selfregulatory organization must, on the 

same day that event takes place, give 

electronic notice of that event to the 

Commission at its Washington, DC, 

headquarters and send a copy of that 

notification to such futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker. 

(k) Nothing in this section shall 

preclude the Commission from 

examining any futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker for 

compliance with the minimum financial 

and related reporting requirements to 

which such futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker is subject. 

(l) In the event a plan is not filed and/ 

or approved for each registered futures 

commission merchant, retail foreign 

exchange dealer, or introducing broker 

that is a member of more than one selfregulatory organization, the Commission 

may design and, after notice and 

opportunity for comment, approve a 

plan for those futures commission 

merchants, retail foreign exchange 

dealers, or introducing brokers that are 

not the subject of an approved plan 

(under paragraph (g) of this section), 

delegating to a designated selfregulatory organization the 

responsibilities described in paragraph 

(c) of this section. 

PART 16—REPORTS BY CONTRACT 

MARKETS AND SWAP EXECUTION 

FACILITIES 

■ 3. The authority citation for part 16 is 

revised to read as follows: 

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

and 7b–3, as amended by Pub. L. 111–203, 

124 Stat. 1376. 

■ 4. The heading for part 16 is revised 

to read as set forth above. 

■ 5. Revise § 16.01 to read as follows: 

§ 16.01 Publication of market data on 

futures, swaps and options thereon: trading 

volume, open contracts, prices, and critical 

dates. 

(a) Trading volume and open 

contracts. (1) Each reporting market, as 

defined in part 15 of this chapter, must 

separately record for each business day 

the information prescribed in 

paragraphs (a)(2)(i) through (vi) of this 

section for each of the following 

contract categories: 

(i) For futures, by commodity and by 

futures expiration date; 

(ii) For options, by underlying futures 

contracts for options on futures 

contracts or by underlying physical for 

options on physicals, and by put, by 

call, by expiration date and by strike 

price; 

(iii) For swaps or class of swaps, by 

product type and by term life of the 

swap; and 

(iv) For options on swaps or classes of 

options on swaps, by underlying swap 

contracts for options on swap contracts 

or by underlying physical for options on 

swaps on physicals, and by put, by call, 

by expiration date and by strike price. 

(2) Each reporting market must record 

for each trading session the following 

trading volume and open interest 

summary data: 

(i) The option delta, where a delta 

system is used; 

(ii) The total gross open contracts for 

futures, excluding those contracts 

against which delivery notices have 

been stopped; 

(iii) For futures products that specify 

delivery, open contracts against which 

delivery notices have been issued on 

that business day; 

(iv) The total volume of trading, 

excluding transfer trades or office 

trades: 

(A) For swaps and options on swaps, 

trading volume shall be reported in 

terms of the number of contracts traded 

for standard-sized contracts (i.e., 

contracts with a set contract size for all 

transactions) or in terms of notional 

value for non-standard-sized contracts 

(i.e., contracts whose contract size is not 

set and can vary for each transaction). 

(v) The total volume of futures/ 

options/swaps/swaptions exchanged for 

commodities or for derivatives positions 

that are included in the total volume of 

trading; and 

(vi) The total volume of block trades 

included in the total volume of trading. 

(b) Prices. (1) Each reporting market 

must record the following contract types 

separately 

(i) For futures, by commodity and by 

futures expiration; 

(ii) For options, by underlying futures 

contracts for options on futures 

contracts or by underlying physical for 

options on physicals, and by put, by 

call, by expiration date and by strike 

price; 

(iii) For swaps, by product type and 

contract month or term life of the swap; 

and 

(iv) For options on swaps or classes of 

options on swaps, by underlying swap 

contracts for options on swap contracts 

or by underlying physical for options on 

swaps on physicals, and by put, by call, 

by expiration date and by strike price. 

(2) Each reporting market must record 

for the trading session and for the 

opening and closing periods of trading 

as determined by each reporting market: 

(i) The opening and closing prices of 

each futures, option, swap or swaption; 

(ii) The price that is used for 

settlement purposes, if different from 

the closing price; and 

(iii) The lowest price of a sale or offer, 

whichever is lower, and the highest 

price of a sale or bid, whichever is 

higher, that the reporting market 

reasonably determines accurately 

reflects market conditions. Bids and 

offers vacated or withdrawn shall not be 

used in making this determination. A 

bid is vacated if followed by a higher 

bid or price and an offer is vacated if 

followed by a lower offer or price. 

(3) If there are no transactions, bids, 

or offers during the opening or closing 

periods, the reporting market may 

record as appropriate: 

(i) The first price (in lieu of opening 

price data) or the last price (in lieu of 

closing price data) occurring during the 

trading session, clearly indicating that 

such prices are the first and last prices; 

or 

(ii) Nominal opening or nominal 

closing prices that the reporting market 

reasonably determines to accurately 

reflect market conditions, clearly 

indicating that such prices are nominal. 

(4) Additional information. Each 

reporting market must record the 

following information with respect to 

transactions in commodity futures, 

commodity options, swaps or options 

on swaps on that reporting market: 

(i) The method used by the reporting 

market in determining nominal prices 

and settlement prices; and 

(ii) If discretion is used by the 

reporting market in determining the 

opening and/or closing ranges or the 

settlement prices, an explanation that 

certain discretion may be employed by 


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the reporting market and a description 

of the manner in which that discretion 

may be employed. Discretionary 

authority must be noted explicitly in 

each case in which it is applied (for 

example, by use of an asterisk or 

footnote). 

(c) Critical dates. Each reporting 

market must report to the Commission, 

for each futures contract, the first notice 

date and the last trading date, and for 

each option contract, the expiration date 

in accordance with paragraph (d) of this 

section. 

(d) Form, manner and time of filing 

reports. Unless otherwise approved by 

the Commission or its designee, 

reporting markets must submit to the 

Commission the information specified 

in paragraphs (a), (b), and (c) of this 

section as follows: 

(1) Using the format, coding structure 

and electronic data transmission 

procedures approved in writing by the 

Commission or its designee; provided 

however, that the information must be 

made available to the Commission or its 

designee in hard copy upon request; 

(2) When each such form of the data 

is first available, but not later than 7:00 

a.m. on the business day following the 

day to which the information pertains 

for the delta factor and settlement price 

and not later than 12:00 p.m. for the 

remainder of the information. Unless 

otherwise specified by the Commission 

or its designee, the stated time is U.S. 

eastern standard time for information 

concerning markets located in that time 

zone, and U.S. central time for 

information concerning all other 

markets; and 

(3) For information on reports to the 

Commission for swap or options on 

swap contracts, refer to part 20 of this 

chapter. 

(e) Publication of recorded 

information. (1) Reporting markets must 

make the information in paragraph (a) of 

this section readily available to the 

news media and the general public 

without charge, in a format that readily 

enables the consideration of such data, 

no later than the business day following 

the day to which the information 

pertains. The information in paragraphs 

(a)(2)(iv) through (vi) of this section 

shall be made readily available in a 

format that presents the information 

together. 

(2) Reporting markets must make the 

information in paragraphs (b)(2) and (3) 

of this section readily available to the 

news media and the general public, and 

the information in paragraph (b)(4)(ii) of 

this section readily available to the 

general public, in a format that readily 

enables the consideration of such data, 

no later than the business day following 

the day to which the information 

pertains. Information in paragraph 

(b)(4)(i) of this section must be made 

available in the registered entity’s 

rulebook, which is publicly accessible 

on its Web site. 

PART 38—DESIGNATED CONTRACT 

MARKETS 

■ 6. The authority citation for part 38 is 

revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 

6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b– 

1, 7b–3, 8, 9, 15, and 21, as amended by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (2010). 

■ 7. Designate existing §§ 38.1 through 

38.6 as subpart A under the following 

subpart heading: 

Subpart A—General Provisions 

* * * * * 

§ 38.1 [Amended] 

■ 8. Amend § 38.1 by removing the 

reference ‘‘Parts 36 or 37 of this 

chapter’’ and adding in its place the 

reference ‘‘parts 37 or 49 of this 

chapter’’. 

■ 9. Revise § 38.2 to read as follows: 

§ 38.2 Exempt provisions. 

A designated contract market, the 

designated contract market’s operator 

and transactions traded on or through a 

designated contract market under 

section 5 of the Act shall comply with 

all applicable regulations under Title 17 

of the Code of Federal Regulations, 

except for the requirements of § 1.35(e) 

through (j), § 1.39(b), § 1.44, § 1.53, 

§ 1.54, § 1.59(b) and (c), § 1.62, § 1.63(a) 

and (b) and (d) through (f), § 1.64, § 1.69, 

part 8, § 100.1, § 155.2, and part 156. 

■ 10. Revise § 38.3 to read as follows: 

§ 38.3 Procedures for designation. 

(a) Application procedures. (1) A 

board of trade seeking designation as a 

contract market must file electronically, 

in a format and manner specified by the 

Secretary of the Commission, the Form 

DCM provided in appendix A of this 

part, with the Secretary of the 

Commission at its Washington, DC 

headquarters at submissions@cftc.gov 

and the Division of Market Oversight at 

DMOSubmissions@cftc.gov. The 

Commission will review the application 

for designation as a contract market 

pursuant to the 180-day timeframe and 

procedures specified in section 6(a) of 

the Act. The Commission shall approve 

or deny the application or, if deemed 

appropriate, designate the applicant as a 

contract market subject to conditions. 

(2) The application must include 

information sufficient to demonstrate 

compliance with the core principles 

specified in section 5(d) of the Act. 

Form DCM consists of instructions, 

general questions and a list of exhibits 

(documents, information and evidence) 

required by the Commission in order to 

determine whether an applicant is able 

to comply with the core principles. An 

application will not be considered to be 

materially complete unless the 

applicant has submitted, at a minimum, 

the exhibits required in Form DCM. If 

the application is not materially 

complete, the Commission shall notify 

the applicant that the application will 

not be deemed to have been submitted 

for purposes of starting the 180-day 

review period set forth in paragraph 

(a)(1) of this section. 

(3) The applicant must identify with 

particularity any information in the 

application that will be subject to a 

request for confidential treatment 

pursuant to § 145.9 of this chapter. 

(4) Section 40.8 of this chapter sets 

forth those sections of the application 

that will be made publicly available, 

notwithstanding a request for 

confidential treatment pursuant to 

§ 145.9 of this chapter. 

(5) If any information contained in the 

application or in any exhibit is or 

becomes inaccurate for any reason, an 

amendment to the application or a 

submission filed under part 40 of this 

chapter must be filed promptly 

correcting such information. 

(b) Reinstatement of dormant 

designation. Before listing or relisting 

products for trading, a dormant 

designated contract market as defined in 

§ 40.1 of this chapter must reinstate its 

designation under the procedures of 

paragraphs (a)(1) and (2) of this section; 

provided, however, that an application 

for reinstatement may rely upon 

previously submitted materials that still 

pertain to, and accurately describe, 

current conditions. 

(c) Delegation of authority. (1) The 

Commission hereby delegates, until it 

orders otherwise, to the Director of the 

Division of Market Oversight or such 

other employee or employees as the 

Director may designate from time to 

time, upon consultation with the 

General Counsel or the General 

Counsel’s designee, authority to notify 

the applicant seeking designation under 

section 6(a) of the Act that the 

application is materially incomplete and 

the running of the 180-day period is 

stayed. 

(2) The Director may submit to the 

Commission for its consideration any 

matter that has been delegated in this 

paragraph. 


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(3) Nothing in this paragraph 

prohibits the Commission, at its 

election, from exercising the authority 

delegated in paragraph (c)(1) of this 

section. 

(d) Request for transfer of designation. 

(1) Request for transfer of designation, 

listed contracts and open interest. A 

designated contract market that wants to 

request the transfer of its designation 

from its current legal entity to a new 

legal entity, as a result of a corporate 

reorganization or otherwise, must file a 

request with the Commission for 

approval to transfer the designation, 

listed contracts and positions 

comprising all associated open interest. 

Such request must be filed 

electronically, in a format and manner 

specified by the Secretary of the 

Commission, with the Secretary of the 

Commission at its Washington, DC 

headquarters at submissions@cftc.gov 

and the Division of Market Oversight at 

DMOSubmissions@cftc.gov. 

(2) Timing of submission. The request 

must be filed no later than three months 

prior to the anticipated corporate 

change; provided that the designated 

contract market may file a request with 

the Commission later than three months 

prior to the anticipated corporate 

change if the designated contract market 

does not know and reasonably could not 

have known of the anticipated change 

three months prior to the anticipated 

corporate change. In such event, the 

designated contract market shall be 

required to immediately file the request 

with the Commission as soon as it 

knows of such change, with an 

explanation as to the timing of the 

request. 

(3) Required information. The request 

shall include the following: 

(i) The underlying agreement that 

governs the corporate change; 

(ii) A narrative description of the 

corporate change, including the reason 

for the change and its impact on the 

designated contract market, including 

its governance and operations, and its 

impact on the rights and obligations of 

market participants holding the open 

interest positions; 

(iii) A discussion of the transferee’s 

ability to comply with the Act, 

including the core principles applicable 

to designated contract markets, and the 

Commission’s regulations thereunder; 

(iv) The governing documents of the 

transferee including, but not limited to, 

articles of incorporation and bylaws; 

(v) The transferee’s rules marked to 

show changes from the current rules of 

the designated contract market; 

(vi) A list of contracts, agreements, 

transactions or swaps for which the 

designated contract market requests 

transfer of open interest; 

(vii) A representation by the 

transferee that it: 

(A) Will be the surviving legal entity 

and successor-in-interest to the 

transferor designated contract market 

and will retain and assume, without 

limitation, all the assets and liabilities 

of the transferor; 

(B) Will assume responsibility for 

complying with all applicable 

provisions of the Act and the 

Commission’s regulations thereunder, 

including part 38 and Appendices 

thereto; 

(C) Will assume, maintain and enforce 

all rules implementing and complying 

with these core principles, including the 

adoption of the transferor’s rulebook, as 

amended in the request, and that any 

such amendments will be submitted to 

the Commission pursuant to section 

5c(c) of the Act and part 40 of the 

Commission’s regulations; and 

(D) Will comply with all selfregulatory responsibilities except if 

otherwise indicated in the request, and 

will maintain and enforce all selfregulatory programs. 

(viii) A representation by the 

transferee that upon the transfer: 

(A) All open interest in all contracts 

listed on the transferor will be 

transferred to and represent equivalent 

open interest in all such contracts listed 

on the transferee; 

(B) It will assume responsibility for 

and maintain compliance with the core 

principles for all contracts previously 

listed for trading through the transferor, 

whether by certification or approval; 

and 

(C) That none of the proposed rule 

changes will affect the rights and 

obligations of any market participant 

with open positions transferred to it and 

that the proposed rule changes do not 

modify the manner in which such 

contracts are settled or cleared. 

(ix) A representation by the transferee 

that market participants will be notified 

of all changes to the transferor’s 

rulebook prior to the transfer and will 

be further notified of the concurrent 

transfer of the contract market 

designation, and the related transfer of 

all listed contracts and all associated 

open interest, to the transferee upon 

Commission approval and issuance of 

an order permitting this transfer. 

(4) Commission determination. The 

Commission will review a request as 

soon as practicable and such request 

will be approved or denied pursuant to 

a Commission order and based on the 

Commission’s determination as to the 

transferee’s ability to continue to 

operate the designated contract market 

in compliance with the Act and the 

Commission’s regulations thereunder. 

(e) Request for withdrawal of 

application for designation. An 

applicant for designation may withdraw 

its application submitted pursuant to 

paragraphs (a)(1) and (2) of this section 

by filing such a request with the 

Commission. Such request must be filed 

electronically, in a format and manner 

specified by the Secretary of the 

Commission, with the Secretary of the 

Commission at its Washington, DC 

headquarters, at submissions@cftc.gov, 

and the Division of Market Oversight, at 

DMOSubmissions@cftc.gov. Withdrawal 

of an application for designation 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 application for designation 

was pending with the Commission. 

(f) Request for vacation of 

designation. A designated contract 

market may vacate its designation under 

section 7 of the Act by filing a request 

electronically, in a format and manner 

specified by the Secretary of the 

Commission, with the Secretary of the 

Commission at its Washington, DC 

headquarters at submissions@cftc.gov 

and the Division of Market Oversight at 

DMOSubmissions@cftc.gov. Vacation of 

designation 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 designated by the 

Commission. 

■ 11. In § 38.4, revise paragraphs (a) and 

(b) to read as follows: 

§ 38.4 Procedures for listing products and 

implementing designated contract market 

rules. 

(a) Request for Commission approval 

of rules and products. (1) An applicant 

for designation, or a designated contract 

market, may request that the 

Commission approve under section 

5c(c) of the Act, any or all of its rules 

and contract terms and conditions, and 

subsequent amendments thereto, prior 

to their implementation or, 

notwithstanding the provisions of 

section 5c(c)(4) of the Act, at any time 

thereafter, under the procedures of 

§ 40.3 or § 40.5 of this chapter, as 

applicable. A designated contract 

market may label a future, swap or 

options product in its rules as ‘‘Listed 

for trading pursuant to Commission 

approval,’’ if the future, swap or options 

product and its terms or conditions have 

been approved by the Commission, and 

it may label as ‘‘Approved by the 

Commission’’ only those rules that have 

been so approved. 


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(2) Notwithstanding the timeline 

under §§ 40.3(c) and 40.5(c) of this 

chapter, the operating rules, and terms 

and conditions of futures, swaps and 

option products that have been 

submitted for Commission approval at 

the same time as an application for 

contract market designation or an 

application under § 38.3(b) of this part 

to reinstate the designation of a dormant 

designated contract market, as defined 

in § 40.1 of this chapter, or while one of 

the foregoing is pending, will be 

deemed approved by the Commission 

no earlier than when the facility is 

deemed to be designated or reinstated. 

(b) Self-certification of rules and 

products. Rules of a designated contract 

market and subsequent amendments 

thereto, including both operational rules 

and the terms or conditions of futures, 

swaps and option products listed for 

trading on the facility, not voluntarily 

submitted for prior Commission 

approval pursuant to paragraph (a) of 

this section, must be submitted to the 

Commission with a certification that the 

rule, rule amendment or futures, swap 

or options product complies with the 

Act or rules thereunder pursuant to the 

procedures of § 40.6 of this chapter, as 

applicable. Provided, however, any rule 

or rule amendment that would, for a 

delivery month having open interest, 

materially change a term or condition of 

a swap or a contract for future delivery 

in an agricultural commodity 

enumerated in section 1a(9) of the Act, 

or of an option on such contract or 

commodity, must be submitted to the 

Commission prior to its implementation 

for review and approval under § 40.4 of 

this chapter. 

* * * * * 

■ 12. Revise § 38.5 to read as follows: 

§ 38.5 Information relating to contract 

market compliance. 

(a) Requests for information. Upon 

request by the Commission, a 

designated contract market must file 

with the Commission information 

related to its business as a designated 

contract market, including information 

relating to data entry and trade details, 

in the form and manner and within the 

time specified by the Commission in its 

request. 

(b) Demonstration of compliance. 

Upon request by the Commission, a 

designated contract market must file 

with the Commission a written 

demonstration, containing supporting 

data, information and documents, in the 

form and manner and within the time 

specified by the Commission, that the 

designated contract market is in 

compliance with one or more core 

principles as specified in the request, or 

that is requested by the Commission to 

show that the designated contract 

market satisfies its obligations under the 

Act. 

(c) Equity interest transfers. (1) Equity 

interest transfer notification. A 

designated contract market shall file 

with the Commission a notification of 

each transaction that the designated 

contract market enters into involving 

the transfer of ten percent or more of the 

equity interest in the designated 

contract market. 

(2) Timing of Notification. The equity 

transfer notice described in paragraph 

(1) shall be filed electronically with the 

Secretary of the Commission at its 

Washington, DC headquarters at 

submissions@cftc.gov and the Division 

of Market Oversight at 

DMOSubmissions@cftc.gov, at the 

earliest possible time but in no event 

later than the open of business ten 

business days following the date upon 

which the designated contract market 

enters into a firm obligation to transfer 

the equity interest. 

(3) Rule filing. Notwithstanding the 

foregoing, any aspect of an equity 

interest transfer described in paragraph 

(c)(1) of this section that necessitates the 

filing of a rule as defined in part 40 of 

this chapter shall comply with the 

requirements of 5c(c) of the Act and part 

40 of this chapter, and all other 

applicable Commission regulations. 

(d) Delegation of authority. The 

Commission hereby delegates, until it 

orders otherwise, the authority set forth 

in paragraph (b) of this section to the 

Director of the Division of Market 

Oversight or such other employee or 

employees as the Director may designate 

from time to time. The Director 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. 

■ 13. Add § 38.7 to subpart A to read as 

follows: 

§ 38.7 Prohibited use of data collected for 

regulatory purposes. 

A designated contract market may not 

use for business or marketing purposes 

any proprietary data or personal 

information it collects or receives, from 

or on behalf of any person, for the 

purpose of fulfilling its regulatory 

obligations; provided however, that a 

designated contract market may use 

such data or information for business or 

marketing purposes if the person from 

whom it collects or receives such data 

or information clearly consents to the 

designated contract market’s use of such 

data or information in such manner. A 

designated contract market, where 

necessary, for regulatory purposes, may 

share such data or information with one 

or more designated contract markets or 

swap execution facilities registered with 

the Commission. A designated contract 

market may not condition access to its 

trading facility on a market participant’s 

consent to the use of proprietary data or 

personal information for business or 

marketing purposes. 

■ 14. Add § 38.8 to subpart A to read as 

follows: 

§ 38.8 Listing of swaps on a designated 

contract market. 

(a) A designated contract market that 

lists for the first time a swap contract for 

trading on its contract market must, 

either prior to or at the time of such 

listing, file with the Commission a 

written demonstration detailing how the 

designated contract market is addressing 

its self-regulatory obligations and is 

fulfilling its statutory and regulatory 

obligations with respect to swap 

transactions. 

(b)(1) Prior to listing swaps for trading 

on or through a designated contract 

market, each designated contract market 

must obtain from the Commission a 

unique, alphanumeric code assigned to 

the designated contract market by the 

Commission for the purpose of 

identifying the designated contract 

market with respect to unique swap 

identifier creation. (2) Each designated 

contract market must generate and 

assign a unique swap identifier at, or as 

soon as technologically practicable 

following, the time of execution of the 

swap, in a manner consistent with the 

requirements of part 45. 

■ 15. Add § 38.9 to subpart A to read as 

follows: 

§ 38.9 Boards of trade operating both a 

designated contract market and a swap 

execution facility. 

(a) A board of trade that operates a 

designated contract market and that 

intends to also operate a swap execution 

facility must separately register, 

pursuant to the swap execution facility 

registration requirements set forth in 

part 37 of this chapter, and on an 

ongoing basis, comply with the core 

principles under section 5h of the Act, 

and the swap execution facility rules 

under part 37 of this chapter. 

(b) A board of trade that operates both 

a designated contract market and a swap 

execution facility, and that uses the 

same electronic trade execution system 

for executing and trading swaps that it 

uses in its capacity as a designated 

contract market, must clearly identify to 

market participants for each swap 


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whether the execution or trading of such 

swap is taking place on the designated 

contract market or on the swap 

execution facility. 

■ 16. Add § 38.10 to subpart A to read 

as follows: 

§ 38.10 Reporting of swaps traded on a 

designated contract market. 

With respect to swaps traded on and/ 

or pursuant to the rules of a designated 

contract market, each designated 

contract market must maintain and 

report specified swap data as provided 

under parts 43 and 45 of this chapter. 

■ 17. Add subparts B through X to read 

as follows: 

Subpart B—Designation as Contract Market 

Sec. 

38.100 Core Principle 1. 

Subpart C—Compliance With Rules 

38.150 Core Principle 2. 

38.151 Access requirements. 

38.152 Abusive trading practices 

prohibited. 

38.153 Capacity to detect and investigate 

rule violations. 

38.154 Regulatory services provided by a 

third party. 

38.155 Compliance staff and resources. 

38.156 Automated trade surveillance 

system. 

38.157 Real-time market monitoring. 

38.158 Investigations and investigation 

reports. 

38.159 Ability to obtain information. 

38.160 Additional sources for compliance. 

Subpart D—Contracts Not Readily Subject 

to Manipulation 

38.200 Core Principle 3. 

38.201 Additional sources for compliance. 

Subpart E—Prevention of Market Disruption 

38.250 Core Principle 4. 

38.251 General requirements. 

38.252 Additional requirements for 

physical-delivery contracts. 

38.253 Additional requirements for cashsettled contracts. 

38.254 Ability to obtain information. 

38.255 Risk controls for trading. 

38.256 Trade reconstruction. 

38.257 Regulatory service provider. 

38.258 Additional sources for compliance. 

Subpart F—Position Limitations or 

Accountability 

38.300 Core Principle 5. 

38.301 Position limitations and 

accountability. 

Subpart G—Emergency Authority 

38.350 Core Principle 6. 

38. 351 Additional sources for compliance. 

Subpart H—Availability of General 

Information 

38.400 Core Principle 7. 

38.401 General requirements. 

Subpart I—Daily Publication of Trading 

Information 

38.450 Core Principle 8. 

38.451 Reporting of trade information. 

Subpart J—Execution of Transactions 

38.500 Core Principle 9. 

Subpart K—Trade Information 

38.550 Core Principle 10. 

38.551 Audit trail required. 

38.552 Elements of an acceptable audit trail 

program. 

38.553 Enforcement of audit trail 

requirements. 

Subpart L—Financial Integrity of 

Transactions 

38.600 Core Principle 11. 

38.601 Mandatory clearing. 

38.602 General financial integrity. 

38.603 Protection of customer funds. 

38.604 Financial surveillance. 

38.605 Requirements for financial 

surveillance program. 

38.606 Financial regulatory services 

provided by a third party. 

38.607 Direct access. 

Subpart M—Protection of Markets and 

Market Participants 

38.650 Core Principle 12. 

38.651 Protection of Markets and Market 

Participants. 

Subpart N—Disciplinary Procedures 

38.700 Core Principle 13. 

38.701 Enforcement staff. 

38.702 Disciplinary panels. 

38.703 Notice of charges. 

38.704 Right to representation. 

38.705 Answer to charges. 

38.706 Denial of charges and right to 

hearing. 

38.707 Hearings. 

38.708 Decisions. 

38.709 Final decisions. 

38.710 Disciplinary sanctions. 

38.711 Warning letters. 

38.712 Additional sources for compliance. 

Subpart O—Dispute Resolution 

38.750 Core Principle 14. 

38.751 Additional sources for compliance. 

Subpart P—Governance Fitness Standards 

38.800 Core Principle 15. 

38.801 Additional sources for compliance. 

Subpart Q—Conflicts of Interest 

38.850 Core Principle 16. 

38.851 Additional sources for compliance. 

Subpart R—Composition of Governing 

Boards of Contract Markets 

38.900 Core Principle 17. 

Subpart S—Recordkeeping 

38.950 Core Principle 18. 

38.951 Additional sources for compliance. 

Subpart T—Antitrust Considerations 

38.1000 Core Principle 19. 

38.1001 Additional sources for compliance. 

Subpart U—System Safeguards 

38.1050 Core Principle 20. 

38.1051 General requirements. 

Subpart V—Financial Resources 

38.1100 Core Principle 21. 

38.1101 General requirements. 

Subpart W—Diversity of Boards of 

Directors 

38.1150 Core Principle 22. 

Subpart X—Securities and Exchange 

Commission 

38.1200 Core Principle 23. 

38.1201 Additional sources for compliance. 

Subpart B—Designation as Contract 

Market 

§ 38.100 Core Principle 1. 

(a) In general. To be designated, and 

maintain a designation, as a contract 

market, a board of trade shall comply 

with: 

(1) Any core principle described in 

section 5(d) of the Act, and 

(2) Any requirement that the 

Commission may impose by rule or 

regulation pursuant to section 8a(5) of 

the Act. 

(b) Reasonable discretion of the 

contract market. Unless otherwise 

determined by the Commission by rule 

or regulation, a board of trade described 

in paragraph (a) of this section shall 

have reasonable discretion in 

establishing the manner in which the 

board of trade complies with the core 

principles described in this subsection. 

Subpart C—Compliance With Rules 

§ 38.150 Core Principle 2. 

(a) In general. The board of trade shall 

establish, monitor, and enforce 

compliance with the rules of the 

contract market, including: 

(1) Access requirements; 

(2) The terms and conditions of any 

contracts to be traded on the contract 

market; and 

(3) Rules prohibiting abusive trade 

practices on the contract market. 

(b) Capacity of contract market. The 

board of trade shall have the capacity to 

detect, investigate, and apply 

appropriate sanctions to any person that 

violates any rule of the contract market. 

(c) Requirement of rules. The rules of 

the contract market shall provide the 

board of trade with the ability and 

authority to obtain any necessary 

information to perform any function 

described in this section, including the 

capacity to carry out such international 

information-sharing agreements, as the 

Commission may require. 

§ 38.151 Access requirements. 

(a) Jurisdiction. Prior to granting any 

member or market participant access to 

its markets, a designated contract 

market must require that the member or 

market participant consent to its 

jurisdiction. 


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(b) Impartial access by members, 

persons with trading privileges and 

independent software vendors. A 

designated contract market must 

provide its members, persons with 

trading privileges, and independent 

software vendors with impartial access 

to its markets and services, including: 

(1) Access criteria that are impartial, 

transparent, and applied in a nondiscriminatory manner; and 

(2) Comparable fee structures for 

members, persons with trading 

privileges and independent software 

vendors receiving equal access to, or 

services from, the designated contract 

market. 

(c) Limitations on access. A 

designated contract market must 

establish and impartially enforce rules 

governing denials, suspensions, and 

revocations of a member’s and a person 

with trading privileges’ access privileges 

to the designated contract market, 

including when such actions are part of 

a disciplinary or emergency action by 

the designated contract market. 

§ 38.152 Abusive trading practices 

prohibited. 

A designated contract market must 

prohibit abusive trading practices on its 

markets by members and market 

participants. Designated contract 

markets that permit intermediation must 

prohibit customer-related abuses 

including, but not limited to, trading 

ahead of customer orders, trading 

against customer orders, 

accommodation trading, and improper 

cross trading. Specific trading practices 

that must be prohibited by all 

designated contract markets include 

front-running, wash trading, prearranged trading (except for certain 

transactions specifically permitted 

under part 38 of this chapter), 

fraudulent trading, money passes, and 

any other trading practices that a 

designated contract market deems to be 

abusive. In addition, a designated 

contract market also must prohibit any 

other manipulative or disruptive trading 

practices prohibited by the Act or by the 

Commission pursuant to Commission 

regulation. 

§ 38.153 Capacity to detect and investigate 

rule violations. 

A designated contract market must 

have arrangements and resources for 

effective enforcement of its rules. Such 

arrangements must include the 

authority to collect information and 

documents on both a routine and nonroutine basis, including the authority to 

examine books and records kept by the 

designated contract market’s members 

and by persons under investigation. A 

designated contract market’s 

arrangements and resources must also 

facilitate the direct supervision of the 

market and the analysis of data 

collected to determine whether a rule 

violation occurred. 

§ 38.154 Regulatory services provided by 

a third party. 

(a) Use of third-party provider 

permitted. A designated contract market 

may choose to utilize a registered 

futures association or another registered 

entity, as such terms are defined under 

the Act, (collectively, ‘‘regulatory 

service provider’’), for the provision of 

services to assist in complying with the 

core principles, as approved by the 

Commission. Any designated contract 

market that chooses to utilize a 

regulatory service provider must ensure 

that its regulatory service provider has 

the capacity and resources necessary to 

provide timely and effective regulatory 

services, including adequate staff and 

automated surveillance systems. A 

designated contract market will at all 

times remain responsible for the 

performance of any regulatory services 

received, for compliance with the 

designated contract market’s obligations 

under the Act and Commission 

regulations, and for the regulatory 

service provider’s performance on its 

behalf. 

(b) Duty to supervise third party. A 

designated contract market that elects to 

utilize a regulatory service provider 

must retain sufficient compliance staff 

to supervise the quality and 

effectiveness of the services provided on 

its behalf. Compliance staff of the 

designated contract market must hold 

regular meetings with the regulatory 

service provider to discuss ongoing 

investigations, trading patterns, market 

participants, and any other matters of 

regulatory concern. A designated 

contract market also must conduct 

periodic reviews of the adequacy and 

effectiveness of services provided on its 

behalf. Such reviews must be 

documented carefully and made 

available to the Commission upon 

request. 

(c) Regulatory decisions required from 

the designated contract market. A 

designated contract market that elects to 

utilize a regulatory service provider 

must retain exclusive authority in 

decisions involving the cancellation of 

trades, the issuance of disciplinary 

charges against members or market 

participants, and the denials of access to 

the trading platform for disciplinary 

reasons. A designated contract market 

may also retain exclusive authority in 

other areas of its choosing. A designated 

contract market must document any 

instances where its actions differ from 

those recommended by its regulatory 

service provider, including the reasons 

for the course of action recommended 

by the regulatory service provider and 

the reasons why the designated contract 

market chose a different course of 

action. 

§ 38.155 Compliance staff and resources. 

(a) Sufficient compliance staff. A 

designated contract market must 

establish and maintain sufficient 

compliance department resources and 

staff to ensure that it can conduct 

effective audit trail reviews, trade 

practice surveillance, market 

surveillance, and real-time market 

monitoring. The designated contract 

market’s compliance staff also must be 

sufficient to address unusual market or 

trading events as they arise, and to 

conduct and complete investigations in 

a timely manner, as set forth in 

§ 38.158(b) of this part. 

(b) Ongoing monitoring of compliance 

staff resources. A designated contract 

market must monitor the size and 

workload of its compliance staff 

annually, and ensure that its 

compliance resources and staff are at 

appropriate levels. In determining the 

appropriate level of compliance 

resources and staff, the designated 

contract market should consider trading 

volume increases, the number of new 

products or contracts to be listed for 

trading, any new responsibilities to be 

assigned to compliance staff, the results 

of any internal review demonstrating 

that work is not completed in an 

effective or timely manner, and any 

other factors suggesting the need for 

increased resources and staff. 

§ 38.156 Automated trade surveillance 

system. 

A designated contract market must 

maintain an automated trade 

surveillance system capable of detecting 

and investigating potential trade 

practice violations. The automated 

system must load and process daily 

orders and trades no later than 24 hours 

after the completion of the trading day. 

In addition, the automated trade 

surveillance system must have the 

capability to detect and flag specific 

trade execution patterns and trade 

anomalies; compute, retain, and 

compare trading statistics; compute 

trade gains, losses, and futuresequivalent positions; reconstruct the 

sequence of market activity; perform 

market analyses; and support system 

users to perform in-depth analyses and 

ad hoc queries of trade-related data. 


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§ 38.157 Real-time market monitoring. 

A designated contract market must 

conduct real-time market monitoring of 

all trading activity on its electronic 

trading platform(s) to identify disorderly 

trading and any market or system 

anomalies. A designated contract market 

must have the authority to adjust trade 

prices or cancel trades when necessary 

to mitigate market disrupting events 

caused by malfunctions in its electronic 

trading platform(s) or errors in orders 

submitted by members and market 

participants. Any trade price 

adjustments or trade cancellations must 

be transparent to the market and subject 

to standards that are clear, fair, and 

publicly available. 

§ 38.158 Investigations and investigation 

reports. 

(a) Procedures. A designated contract 

market must establish and maintain 

procedures that require its compliance 

staff to conduct investigations of 

possible rule violations. An 

investigation must be commenced upon 

the receipt of a request from 

Commission staff or upon the discovery 

or receipt of information by the 

designated contract market that 

indicates a reasonable basis for finding 

that a violation may have occurred or 

will occur. 

(b) Timeliness. Each compliance staff 

investigation must be completed in a 

timely manner. Absent mitigating 

factors, a timely manner is no later than 

12 months after the date that an 

investigation is opened. Mitigating 

factors that may reasonably justify an 

investigation taking longer than 12 

months to complete include the 

complexity of the investigation, the 

number of firms or individuals involved 

as potential wrongdoers, the number of 

potential violations to be investigated, 

and the volume of documents and data 

to be examined and analyzed by 

compliance staff. 

(c) Investigation reports when a 

reasonable basis exists for finding a 

violation. Compliance staff must submit 

a written investigation report for 

disciplinary action in every instance in 

which compliance staff determines from 

surveillance or from an investigation 

that a reasonable basis exists for finding 

a rule violation. The investigation report 

must include the reason the 

investigation was initiated; a summary 

of the complaint, if any; the relevant 

facts; compliance staff’s analysis and 

conclusions; and a recommendation as 

to whether disciplinary action should be 

pursued. 

(d) Investigation reports when no 

reasonable basis exists for finding a 

violation. If after conducting an 

investigation, compliance staff 

determines that no reasonable basis 

exists for finding a violation, it must 

prepare a written report including the 

reason(s) the investigation was initiated; 

a summary of the complaint, if any; the 

relevant facts; and compliance staff’s 

analysis and conclusions. 

(e) Warning letters. No more than one 

warning letter may be issued to the 

same person or entity found to have 

committed the same rule violation 

within a rolling twelve month period. 

§ 38.159 Ability to obtain information. 

A designated contract market must 

have the ability and authority to obtain 

any necessary information to perform 

any function required under this 

subpart C of the Commission’s 

regulations, including the capacity to 

carry out international informationsharing agreements as the Commission 

may require. Appropriate informationsharing agreements can be established 

with other designated contract markets 

and swap execution facilities, or the 

Commission can act in conjunction with 

the designated contract market to carry 

out such information sharing. 

§ 38.160 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance in 

appendix B of this part to demonstrate 

to the Commission compliance with the 

requirements of § 38.150 of this part. 

Subpart D—Contracts Not Readily 

Subject to Manipulation 

§ 38.200 Core Principle 3. 

The board of trade shall list on the 

contract market only contracts that are 

not readily susceptible to manipulation. 

§ 38.201 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance in 

appendix C of this part to demonstrate 

to the Commission compliance with the 

requirements of § 38.200 of this part. 

Subpart E—Prevention of Market 

Disruption 

§ 38.250 Core Principle 4. 

The board of trade shall have the 

capacity and responsibility to prevent 

manipulation, price distortion, and 

disruptions of the delivery or cashsettlement process through market 

surveillance, compliance, and 

enforcement practices and procedures, 

including: 

(a) Methods for conducting real-time 

monitoring of trading; and 

(b) Comprehensive and accurate trade 

reconstructions. 

§ 38.251 General requirements. 

A designated contract market must: 

(a) Collect and evaluate data on 

individual traders’ market activity on an 

ongoing basis in order to detect and 

prevent manipulation, price distortions 

and, where possible, disruptions of the 

physical-delivery or cash-settlement 

process; 

(b) Monitor and evaluate general 

market data in order to detect and 

prevent manipulative activity that 

would result in the failure of the market 

price to reflect the normal forces of 

supply and demand; 

(c) Demonstrate an effective program 

for conducting real-time monitoring of 

market conditions, price movements 

and volumes, in order to detect 

abnormalities and, when necessary, 

make a good-faith effort to resolve 

conditions that are, or threaten to be, 

disruptive to the market; and 

(d) Demonstrate the ability to 

comprehensively and accurately 

reconstruct daily trading activity for the 

purposes of detecting trading abuses 

and violations of exchange-set position 

limits, including those that may have 

occurred intraday. 

§ 38.252 Additional requirements for 

physical-delivery contracts. 

For physical-delivery contracts, the 

designated contract market must 

demonstrate that it: 

(a) Monitors a contract’s terms and 

conditions as they relate to the 

underlying commodity market and to 

the convergence between the contract 

price and the price of the underlying 

commodity and show a good-faith effort 

to resolve conditions that are interfering 

with convergence; and 

(b) Monitors the supply of the 

commodity and its adequacy to satisfy 

the delivery requirements and make a 

good-faith effort to resolve conditions 

that threaten the adequacy of supplies 

or the delivery process. 

§ 38.253 Additional requirements for cashsettled contracts. 

(a) For cash-settled contracts, the 

designated contract market must 

demonstrate that it: 

(1) Monitors the pricing of the index 

to which the contract will be settled; 

and 

(2) Monitors the continued 

appropriateness of the methodology for 

deriving the index and makes a goodfaith effort to resolve conditions, 

including amending contract terms 

where necessary, where there is a threat 

of market manipulation, disruptions, or 

distortions. 

(b) If a contract listed on a designated 

contract market is settled by reference to 


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the price of a contract or commodity 

traded in another venue, including a 

price or index derived from prices on 

another designated contract market, the 

designated contract market must have 

rules or agreements that allow the 

designated contract market access to 

information on the activities of its 

traders in the reference market. 

§ 38.254 Ability to obtain information. 

(a) The designated contract market 

must have rules that require traders in 

its contracts to keep records of their 

trading, including records of their 

activity in the underlying commodity 

and related derivatives markets, and 

make such records available, upon 

request, to the designated contract 

market. 

(b) A designated contract market with 

participants trading through 

intermediaries must either use a 

comprehensive large-trader reporting 

system (LTRS) or be able to demonstrate 

that it can obtain position data from 

other sources in order to conduct an 

effective surveillance program. 

§ 38.255 Risk controls for trading. 

The designated contract market must 

establish and maintain risk control 

mechanisms to prevent and reduce the 

potential risk of price distortions and 

market disruptions, including, but not 

limited to, market restrictions that pause 

or halt trading in market conditions 

prescribed by the designated contract 

market. 

§ 38.256 Trade reconstruction. 

The designated contract market must 

have the ability to comprehensively and 

accurately reconstruct all trading on its 

trading facility. All audit-trail data and 

reconstructions must be made available 

to the Commission in a form, manner, 

and time that is acceptable to the 

Commission. 

§ 38.257 Regulatory service provider. 

A designated contract market must 

comply with the regulations in this 

subpart through a dedicated regulatory 

department, or by delegation of that 

function to a registered futures 

association or a registered entity 

(collectively, ‘‘regulatory service 

provider’’), as such terms are defined in 

the Act and over which the designated 

contract market has supervisory 

authority. 

§ 38.258 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance and 

acceptable practices in appendix B of 

this part to demonstrate to the 

Commission compliance with the 

requirements of § 38.250 of this part. 

Subpart F—Position Limitations or 

Accountability 

§ 38.300 Core Principle 5. 

To reduce the potential threat of 

market manipulation or congestion 

(especially during trading in the 

delivery month), the board of trade shall 

adopt for each contract of the board of 

trade, as is necessary and appropriate, 

position limitations or position 

accountability for speculators. For any 

contract that is subject to a position 

limitation established by the 

Commission, pursuant to section 4a(a), 

the board of trade shall set the position 

limitation of the board of trade at a level 

not higher than the position limitation 

established by the Commission. 

§ 38.301 Position limitations and 

accountability. 

A designated contract market must 

meet the requirements of parts 150 and 

151 of this chapter, as applicable. 

Subpart G—Emergency Authority 

§ 38.350 Core Principle 6. 

The board of trade, in consultation or 

cooperation with the Commission, shall 

adopt rules to provide for the exercise 

of emergency authority, as is necessary 

and appropriate, including the 

authority: 

(a) To liquidate or transfer open 

positions in any contract; 

(b) To suspend or curtail trading in 

any contract; and 

(c) To require market participants in 

any contract to meet special margin 

requirements. 

§ 38.351 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance and/ 

or acceptable practices in appendix B of 

this part to demonstrate to the 

Commission compliance with the 

requirements of § 38.350. 

Subpart H—Availability of General 

Information 

§ 38.400 Core Principle 7. 

The board of trade shall make 

available to market authorities, market 

participants, and the public accurate 

information concerning: 

(a) The terms and conditions of the 

contracts of the contract market; and 

(b)(1) The rules, regulations and 

mechanisms for executing transactions 

on or through the facilities of the 

contract market, and 

(2) The rules and specifications 

describing the operation of the contract 

market’s: 

(i) Electronic matching platform, or 

(ii) Trade execution facility. 

§ 38.401 General requirements. 

(a) General. (1) A designated contract 

market must have procedures, 

arrangements and resources for 

disclosing to the Commission, market 

participants and the public accurate 

information pertaining to: 

(i) Contract terms and conditions; 

(ii) Rules and regulations pertaining 

to the trading mechanisms; and 

(iii) Rules and specifications 

pertaining to operation of the electronic 

matching platform or trade execution 

facility. 

(2) Through the procedures, 

arrangements and resources required in 

paragraph (a) of this section, the 

designated contract market must ensure 

public dissemination of information 

pertaining to new product listings, new 

rules, rule amendments or other changes 

to previously-disclosed information, in 

accordance with the timeline provided 

in paragraph (c) of this section. 

(3) A designated contract market shall 

meet the requirements of this paragraph 

(a), by placing the information described 

in this paragraph (a) on the designated 

contract market’s Web site within the 

time prescribed in paragraph (c) of this 

section. 

(b) Accuracy requirement. With 

respect to any communication with the 

Commission, and any information 

required to be transmitted or made 

available to market participants and the 

public, including on its Web site or 

otherwise, a designated contract market 

must provide information that it 

believes, to the best of its knowledge, is 

accurate and complete, and must not 

omit material information. 

(c) Notice of regulatory submissions. 

(1) A designated contract market, in 

making available on its Web site 

information pertaining to new product 

listings, new rules, rule amendments or 

other changes to previously-disclosed 

information, must place such 

information and submissions on its Web 

site concurrent with the filing of such 

information or submissions with the 

Secretary of the Commission. 

(2) To the extent that a designated 

contract market requests confidential 

treatment of any information filed with 

the Secretary of the Commission, the 

designated contract market must post on 

its Web site the public version of such 

filing or submission. 

(d) Rulebook. A designated contract 

market must ensure that the rulebook 

posted on its Web site is accurate, 


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complete, current and readily accessible 

to the public. A designated contract 

market must publish or post in its 

rulebook all new or amended rules, both 

substantive and non-substantive, on the 

date of implementation of such new or 

amended rule, on the date a new 

product is listed, or on the date any 

changes to previously-disclosed 

information take effect. 

Subpart I—Daily Publication of Trading 

Information 

§ 38.450 Core Principle 8. 

The board of trade shall make public 

daily information on settlement prices, 

volume, open interest, and opening and 

closing ranges for actively traded 

contracts on the contract market. 

§ 38.451 Reporting of trade information. 

A designated contract market must 

meet the reporting requirements set 

forth in part 16 of this chapter. 

Subpart J—Execution of Transactions 

§ 38.500 Core Principle 9. 

The board of trade shall provide a 

competitive, open, and efficient market 

and mechanism for executing 

transactions that protects the price 

discovery process of trading in the 

centralized market of the board of trade. 

The rules of the board of trade may 

authorize, for bona fide business 

purposes: 

(a) Transfer trades or office trades; 

(b) An exchange of: 

(1) Futures in connection with a cash 

commodity transaction; 

(2) Futures for cash commodities; or 

(3) Futures for swaps; or 

(c) A futures commission merchant, 

acting as principal or agent, to enter into 

or confirm the execution of a contract 

for the purchase or sale of a commodity 

for future delivery if the contract is 

reported, recorded, or cleared in 

accordance with the rules of the 

contract market or a derivatives clearing 

organization. 

Subpart K—Trade Information 

§ 38.550 Core Principle 10. 

The board of trade shall maintain 

rules and procedures to provide for the 

recording and safe storage of all 

identifying trade information in a 

manner that enables the contract market 

to use the information: 

(a) To assist in the prevention of 

customer and market abuses; and 

(b) To provide evidence of any 

violations of the rules of the contract 

market. 

§ 38.551 Audit trail required. 

A designated contract market must 

capture and retain all audit trail data 

necessary to detect, investigate, and 

prevent customer and market abuses. 

Such data must be sufficient to 

reconstruct all transactions within a 

reasonable period of time and to provide 

evidence of any violations of the rules 

of the designated contract market. An 

acceptable audit trail must also permit 

the designated contract market to track 

a customer order from the time of 

receipt through fill, allocation, or other 

disposition, and must include both 

order and trade data. 

§ 38.552 Elements of an acceptable audit 

trail program. 

(a) Original source documents. A 

designated contract market’s audit trail 

must include original source 

documents. Original source documents 

include unalterable, sequentially 

identified records on which trade 

execution information is originally 

recorded, whether recorded manually or 

electronically. Records for customer 

orders (whether filled, unfilled, or 

cancelled, each of which shall be 

retained or electronically captured) 

must 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 open-outcry trades, the 

time of report of execution of the order 

shall also be captured. 

(b) Transaction history database. A 

designated contract market’s audit trail 

program must include an electronic 

transaction history database. An 

adequate transaction history database 

includes a history of all trades executed 

via open outcry or via entry into an 

electronic trading system, and all orders 

entered into an electronic trading 

system, including all order 

modifications and cancellations. An 

adequate transaction history database 

also includes: 

(1) All data that are input into the 

trade entry or matching system for the 

transaction to match and clear; 

(2) The customer type indicator code; 

(3) Timing and sequencing data 

adequate to reconstruct trading; and 

(4) Identification of each account to 

which fills are allocated. 

(c) Electronic analysis capability. A 

designated contract market’s audit trail 

program must include electronic 

analysis capability with respect to all 

audit trail data in the transaction history 

database. Such electronic analysis 

capability must ensure that the 

designated contract market has the 

ability to reconstruct trading and 

identify possible trading violations with 

respect to both customer and market 

abuse. 

(d) Safe storage capability. A 

designated contract market’s audit trail 

program must include the capability to 

safely store all audit trail data retained 

in its transaction history database. Such 

safe storage capability must include the 

capability to store all data in the 

database in a manner that protects it 

from unauthorized alteration, as well as 

from accidental erasure or other loss. 

Data must be retained in accordance 

with the recordkeeping requirements of 

Core Principle 18 and the associated 

regulations in subpart S of this part. 

§ 38.553 Enforcement of audit trail 

requirements. 

(a) Annual audit trail and 

recordkeeping reviews. A designated 

contract market must enforce its audit 

trail and recordkeeping requirements 

through at least annual reviews of all 

members and persons and firms subject 

to designated contract market 

recordkeeping rules to verify their 

compliance with the contract market’s 

audit trail and recordkeeping 

requirements. Such reviews must 

include, but are not limited to, the 

following: 

(1) For electronic trading, audit trail 

and recordkeeping reviews must 

include reviews of randomly selected 

samples of front-end audit trail data for 

order routing systems; a review of the 

process by which user identifications 

are assigned and user identification 

records are maintained; a review of 

usage patterns associated with user 

identifications to monitor for violations 

of user identification rules; and reviews 

of account numbers and customer type 

indicator codes in trade records to test 

for accuracy and improper use. 

(2) For open outcry trading, audit trail 

and recordkeeping reviews must 

include reviews of members’ and market 

participants’ compliance with the 

designated contract market’s trade 

timing, order ticket, and trading card 

requirements. 

(b) Enforcement program required. A 

designated contract market must 

establish a program for effective 

enforcement of its audit trail and 

recordkeeping requirements for both 

electronic and open-outcry trading, as 

applicable. An effective program must 

identify members and persons and firms 

subject to designated contract market 

recordkeeping rules that have failed to 

maintain high levels of compliance with 

such requirements, and levy meaningful 

sanctions when deficiencies are found. 

Sanctions must be sufficient to deter 

recidivist behavior. No more than one 

warning letter may be issued to the 


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same person or entity found to have 

committed the same rule violation 

within a rolling twelve month period. 

Subpart L—Financial Integrity of 

Transactions 

§ 38.600 Core Principle 11. 

The board of trade shall establish and 

enforce: 

(a) Rules and procedures for ensuring 

the financial integrity of transactions 

entered into on or through the facilities 

of the contract market (including the 

clearance and settlement of the 

transactions with a derivatives clearing 

organization); and 

(b) Rules to ensure: 

(1) The financial integrity of any: 

(i) Futures commission merchant, and 

(ii) Introducing broker; and 

(2) The protection of customer funds. 

§ 38.601 Mandatory clearing. 

(a) Transactions executed on or 

through the designated contract market 

must be cleared through a Commissionregistered derivatives clearing 

organization, in accordance with the 

provisions of part 39 of this chapter. 

Notwithstanding the foregoing, 

transactions in security futures products 

executed on or through the designated 

contract market may alternatively be 

cleared through a clearing agency, 

registered pursuant to section 17A of the 

Securities Exchange Act of 1934. 

(b) [Reserved] 

§ 38.602 General financial integrity. 

A designated contract market must 

provide for the financial integrity of its 

transactions by establishing and 

maintaining appropriate minimum 

financial standards for its members and 

non-intermediated market participants. 

§ 38.603 Protection of customer funds. 

A designated contract market must 

have rules concerning the protection of 

customer funds. These rules shall 

address appropriate minimum financial 

standards for intermediaries, the 

segregation of customer and proprietary 

funds, the custody of customer funds, 

the investment standards for customer 

funds, intermediary default procedures 

and related recordkeeping. A designated 

contract market must review the default 

rules and procedures of the derivatives 

clearing organization that clears for such 

designated contract market to wind 

down operations, transfer customers, or 

otherwise protect customers in the event 

of a default of a clearing member or the 

derivatives clearing organization. 

§ 38.604 Financial surveillance. 

A designated contract market must 

monitor members’ compliance with the 

designated contract market’s minimum 

financial standards and, therefore, must 

routinely receive and promptly review 

financial and related information from 

its members, as well as continuously 

monitor the positions of members and 

their customers. A designated contract 

market must have rules that prescribe 

minimum capital requirements for 

member futures commission merchants 

and introducing brokers. A designated 

contract market must: 

(a) Continually survey the obligations 

of each futures commission merchant 

created by the positions of its 

customers; 

(b) As appropriate, compare those 

obligations to the financial resources of 

the futures commission merchant; and 

(c) Take appropriate steps to use this 

information to protect customer funds. 

§ 38.605 Requirements for financial 

surveillance program. 

A designated contract market’s 

financial surveillance program for 

futures commission merchants, retail 

foreign exchange dealers, and 

introducing brokers must comply with 

the requirements of § 1.52 of this 

chapter to assess the compliance of such 

entities with applicable contract market 

rules and Commission regulations. 

§ 38.606 Financial regulatory services 

provided by a third party. 

A designated contract market may 

comply with the requirements of 

§ 38.604 (Financial Surveillance) and 

§ 38.605 (Requirements for Financial 

Surveillance Program) of this part 

through the regulatory services of a 

registered futures association or a 

registered entity (collectively, 

‘‘regulatory service provider’’), as such 

terms are defined under the Act. A 

designated contract market must ensure 

that its regulatory service provider has 

the capacity and resources necessary to 

provide timely and effective regulatory 

services, including adequate staff and 

appropriate surveillance systems. A 

designated contract market will at all 

times remain responsible for 

compliance with its obligations under 

the Act and Commission regulations, 

and for the regulatory service provider’s 

performance on its behalf. Regulatory 

services must be provided under a 

written agreement with a regulatory 

services provider that shall specifically 

document the services to be performed 

as well as the capacity and resources of 

the regulatory service provider with 

respect to the services to be performed. 

§ 38.607 Direct access. 

A designated contract market that 

permits direct electronic access by 

customers (i.e., allowing customers of 

futures commission merchants to enter 

orders directly into a designated 

contract market’s trade matching system 

for execution) must have in place 

effective systems and controls 

reasonably designed to facilitate the 

FCM’s management of financial risk, 

such as automated pre-trade controls 

that enable member futures commission 

merchants to implement appropriate 

financial risk limits. A designated 

contract market must implement and 

enforce rules requiring the member 

futures commission merchants to use 

the provided systems and controls. 

Subpart M—Protection of Markets and 

Market Participants 

§ 38.650 Core Principle 12. 

The board of trade shall establish and 

enforce rules: 

(a) To protect markets and market 

participants from abusive practices 

committed by any party, including 

abusive practices committed by a party 

acting as an agent for a participant; and 

(b) To promote fair and equitable 

trading on the contract market. 

§ 38.651 Protection of markets and market 

participants. 

A designated contract market must 

have and enforce rules that are designed 

to promote fair and equitable trading 

and to protect the market and market 

participants from abusive practices 

including fraudulent, noncompetitive or 

unfair actions, committed by any party. 

The designated contract market must 

have methods and resources appropriate 

to the nature of the trading system and 

the structure of the market to detect 

trade practice and market abuses and to 

discipline such behavior, in accordance 

with Core Principles 2 and 4, and the 

associated regulations in subparts C and 

E of this part, respectively. The 

designated contract market also must 

provide a competitive, open and 

efficient market and mechanism for 

executing transactions in accordance 

with Core Principle 9 and the associated 

regulations under subpart J of this part. 

Subpart N—Disciplinary Procedures 

§ 38.700 Core Principle 13. 

The board of trade shall establish and 

enforce disciplinary procedures that 

authorize the board of trade to 

discipline, suspend, or expel members 

or market participants that violate the 

rules of the board of trade, or similar 

methods for performing the same 

functions, including delegation of the 

functions to third parties. 


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§ 38.701 Enforcement staff. 

A designated contract market must 

establish and maintain sufficient 

enforcement staff and resources to 

effectively and promptly prosecute 

possible rule violations within the 

disciplinary jurisdiction of the contract 

market. A designated contract market 

must also monitor the size and 

workload of its enforcement staff 

annually, and ensure that its 

enforcement resources and staff are at 

appropriate levels. The enforcement 

staff may not include either members of 

the designated contract market or 

persons whose interests conflict with 

their enforcement duties. A member of 

the enforcement staff may not operate 

under the direction or control of any 

person or persons with trading 

privileges at the contract market. A 

designated contract market’s 

enforcement staff may operate as part of 

the designated contract market’s 

compliance department. 

§ 38.702 Disciplinary panels. 

A designated contract market must 

establish one or more disciplinary 

panels that are authorized to fulfill their 

obligations under the rules of this 

subpart. Disciplinary panels must meet 

the composition requirements of part 40 

of this chapter, and must not include 

any members of the designated contract 

market’s compliance staff or any person 

involved in adjudicating any other stage 

of the same proceeding. 

§ 38.703 Notice of charges. 

If compliance staff authorized by a 

designated contract market or a 

designated contract market disciplinary 

panel determines that a reasonable basis 

exists for finding a violation and that 

adjudication is warranted, it must direct 

that the person or entity alleged to have 

committed the violation be served with 

a notice of charges and must proceed in 

accordance with the rules of this 

section. A notice of charges must 

adequately state the acts, conduct, or 

practices in which the respondent is 

alleged to have engaged; state the rule, 

or rules, alleged to have been violated 

(or about to be violated); and prescribe 

the period within which a hearing on 

the charges may be requested. The 

notice must also advise that the charged 

respondent is entitled, upon request, to 

a hearing on the charges. 

§ 38.704 Right to representation. 

Upon being served with a notice of 

charges, a respondent must have the 

right to be represented by legal counsel 

or any other representative of its 

choosing in all succeeding stages of the 

disciplinary process, except any 

member of the designated contract 

market’s board of directors or 

disciplinary panel, any employee of the 

designated contract market, or any 

person substantially related to the 

underlying investigations, such as 

material witness or respondent. 

§ 38.705 Answer to charges. 

A respondent must be given a 

reasonable period of time to file an 

answer to a notice of charges. The rules 

of a designated contract market 

governing the requirements and 

timeliness of a respondent’s answer to 

charges must be fair, equitable, and 

publicly available. 

§ 38.706 Denial of charges and right to 

hearing. 

In every instance where a respondent 

has requested a hearing on a charge that 

is denied, or on a sanction set by the 

disciplinary panel, the respondent must 

be given an opportunity for a hearing in 

accordance with the requirements of 

§ 38.707 of this part. 

§ 38.707 Hearings. 

(a) A designated contract market must 

adopt rules that provide for the 

following minimum requirements for 

any hearing conducted pursuant to a 

notice of charges: 

(1) The hearing must be fair, must be 

conducted before members of the 

disciplinary panel, and must be 

promptly convened after reasonable 

notice to the respondent. The formal 

rules of evidence need not apply; 

nevertheless, the procedures for the 

hearing may not be so informal as to 

deny a fair hearing. No member of the 

disciplinary panel for the matter may 

have a financial, personal, or other 

direct interest in the matter under 

consideration. 

(2) In advance of the hearing, the 

respondent must be entitled to examine 

all books, documents, or other evidence 

in the possession or under the control 

of the designated contract market. The 

designated contract market may 

withhold documents that are privileged 

or constitute attorney work product, 

documents that were prepared by an 

employee of the designated contract 

market but will not be offered in 

evidence in the disciplinary 

proceedings, documents that may 

disclose a technique or guideline used 

in examinations, investigations, or 

enforcements proceedings, and 

documents that disclose the identity of 

a confidential source. 

(3) The designated contract market’s 

enforcement and compliance staffs must 

be parties to the hearing, and the 

enforcement staff must present their 

case on those charges and sanctions that 

are the subject of the hearing. 

(4) The respondent must be entitled to 

appear personally at the hearing, must 

be entitled to cross-examine any persons 

appearing as witnesses at the hearing, 

and must be entitled to call witnesses 

and to present such evidence as may be 

relevant to the charges. 

(5) The designated contract market 

must require persons within its 

jurisdiction who are called as witnesses 

to participate in the hearing and to 

produce evidence. It must make 

reasonable efforts to secure the presence 

of all other persons called as witnesses 

whose testimony would be relevant. 

(6) If the respondent has requested a 

hearing, a copy of the hearing must be 

made and must become a part of the 

record of the proceeding. The record 

must be one that is capable of being 

accurately transcribed; however, it need 

not be transcribed unless the transcript 

is requested by Commission staff or the 

respondent, the decision is appealed 

pursuant to the rules of the designated 

contract market, or is reviewed by the 

Commission pursuant to section 8c of 

the Act or part 9 of this chapter. In all 

other instances a summary record of a 

hearing is permitted. 

(b) [Reserved] 

§ 38.708 Decisions. 

Promptly following a hearing 

conducted in accordance with § 38.707 

of this part, the disciplinary panel must 

render a written decision based upon 

the weight of the evidence contained in 

the record of the proceeding and must 

provide a copy to the respondent. The 

decision must include: 

(a) The notice of charges or a 

summary of the charges; 

(b) The answer, if any, or a summary 

of the answer; 

(c) A summary of the evidence 

produced at the hearing or, where 

appropriate, incorporation by reference 

of the investigation report; 

(d) A statement of findings and 

conclusions with respect to each charge, 

and a complete explanation of the 

evidentiary and other basis for such 

findings and conclusions with respect to 

each charge; 

(e) An indication of each specific rule 

that the respondent was found to have 

violated; and 

(f) A declaration of all sanctions 

imposed against the respondent, 

including the basis for such sanctions 

and the effective date of such sanctions. 

§ 38.709 Final decisions. 

Each designated contract market must 

establish rules setting forth when a 

decision rendered pursuant to this 


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section will become the final decision of 

such designated contract market. 

§ 38.710 Disciplinary sanctions. 

All disciplinary sanctions imposed by 

a designated contract market or its 

disciplinary panels must be 

commensurate with the violations 

committed and must be clearly 

sufficient to deter recidivism or similar 

violations by other market participants. 

All disciplinary sanctions, including 

sanctions imposed pursuant to an 

accepted settlement offer, must take into 

account the respondent’s disciplinary 

history. In the event of demonstrated 

customer harm, any disciplinary 

sanction must also include full 

customer restitution, except where the 

amount of restitution, or to whom it 

should be provided, cannot be 

reasonably determined. 

§ 38.711 Warning letters. 

Where a rule violation is found to 

have occurred, no more than one 

warning letter may be issued per rolling 

12-month period for the same violation. 

§ 38.712 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance in 

appendix B of this part to demonstrate 

to the Commission compliance with the 

requirements of § 38.700 of this part. 

Subpart O—Dispute Resolution 

§ 38.750 Core Principle 14. 

The board of trade shall establish and 

enforce rules regarding, and provide 

facilities for alternative dispute 

resolution as appropriate for, market 

participants and any market 

intermediaries. 

§ 38.751 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance and 

acceptable practices in appendix B of 

this part to demonstrate to the 

Commission compliance with the 

requirements of § 38.750 of this part. 

Subpart P—Governance Fitness 

Standards 

§ 38.800 Core Principle 15. 

The board of trade shall establish and 

enforce appropriate fitness standards for 

directors, members of any disciplinary 

committee, members of the contract 

market, and any other person with 

direct access to the facility (including 

any party affiliated with any person 

described in this paragraph). 

§ 38.801 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance in 

appendix B of this part to demonstrate 

to the Commission compliance with the 

requirements of § 38.800 of this part. 

Subpart Q—Conflicts of Interest 

§ 38.850 Core Principle 16. 

The board of trade shall establish and 

enforce rules: 

(a) To minimize conflicts of interest in 

the decision-making process of the 

contract market; and 

(b) To establish a process for resolving 

conflicts of interest described in 

paragraph (a) of this section. 

§ 38.851 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance and/ 

or acceptable practices in appendix B of 

this part to demonstrate to the 

Commission compliance with the 

requirements of § 38.850 of this part. 

Subpart R—Composition of Governing 

Boards of Contract Markets 

§ 38.900 Core Principle 17. 

The governance arrangements of the 

board of trade shall be designed to 

permit consideration of the views of 

market participants. 

Subpart S—Recordkeeping 

§ 38.950 Core Principle 18. 

The board of trade shall maintain 

records of all activities relating to the 

business of the contract market: 

(a) In a form and manner that is 

acceptable to the Commission; and 

(b) For a period of at least 5 years. 

§ 38.951 Additional sources for 

compliance. 

A designated contract market must 

maintain such records, including trade 

records and investigatory and 

disciplinary files, in accordance with 

the requirements of § 1.31 of this 

chapter, and in accordance with part 45 

of this chapter, if applicable. 

Subpart T—Antitrust Considerations 

§ 38.1000 Core Principle 19. 

Unless necessary or appropriate to 

achieve the purposes of this Act, the 

board of trade shall not: 

(a) Adopt any rule or taking any 

action that results in any unreasonable 

restraint of trade; or 

(b) Impose any material 

anticompetitive burden on trading on 

the contract market. 

§ 38.1001 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance and 

acceptable practices in appendix B of 

this part to demonstrate to the 

Commission compliance with the 

requirements of § 38.1000 of this part. 

Subpart U—System Safeguards 

§ 38.1050 Core Principle 20. 

Each designated contract market shall: 

(a) Establish and maintain a program 

of risk analysis and oversight to identify 

and minimize sources of operational 

risk, through the development of 

appropriate controls and procedures, 

and the development of automated 

systems, that are reliable, secure, and 

have adequate scalable capacity; 

(b) Establish and maintain emergency 

procedures, backup facilities, and a plan 

for disaster recovery that allow for the 

timely recovery and resumption of 

operations and the fulfillment of the 

responsibilities and obligations of the 

board of trade; and 

(c) Periodically conduct tests to verify 

that backup resources are sufficient to 

ensure continued order processing and 

trade matching, transmission of 

matched orders to a designated clearing 

organization for clearing, price 

reporting, market surveillance, and 

maintenance of a comprehensive and 

accurate audit trail. 

§ 38.1051 General requirements. 

(a) A designated contract market’s 

program of risk analysis and oversight 

with respect to its operations and 

automated systems must address each of 

the following categories of risk analysis 

and oversight: 

(1) Information security; 

(2) Business continuity-disaster 

recovery planning and resources; 

(3) Capacity and performance 

planning; 

(4) Systems operations; 

(5) Systems development and quality 

assurance; and 

(6) Physical security and 

environmental controls. 

(b) In addressing the categories of risk 

analysis and oversight required under 

paragraph (a) of this section, a 

designated contract market should 

follow generally accepted standards and 

best practices with respect to the 

development, operation, reliability, 

security, and capacity of automated 

systems. 

(c) A designated contract market must 

maintain a business continuity-disaster 

recovery plan and business continuitydisaster recovery resources, emergency 

procedures, and backup facilities 


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sufficient to enable timely recovery and 

resumption of its operations and 

resumption of its ongoing fulfillment of 

its responsibilities and obligations as a 

designated contract market following 

any disruption of its operations. Such 

responsibilities and obligations include, 

without limitation, order processing and 

trade matching; transmission of 

matched orders to a designated clearing 

organization for clearing; price 

reporting; market surveillance; and 

maintenance of a comprehensive audit 

trail. The designated contract market’s 

business continuity-disaster recovery 

plan and resources generally should 

enable resumption of trading and 

clearing of the designated contract 

market’s products during the next 

business day following the disruption. 

Designated contract markets determined 

by the Commission to be critical 

financial markets are subject to more 

stringent requirements in this regard, set 

forth in § 40.9 of this chapter. Electronic 

trading is an acceptable backup for open 

outcry trading in the event of a 

disruption. 

(d) A designated contract market that 

is not determined by the Commission to 

be a critical financial market satisfies 

the requirement to be able to resume 

trading and clearing during the next 

business day following a disruption by 

maintaining either: 

(1) Infrastructure and personnel 

resources of its own that are sufficient 

to ensure timely recovery and 

resumption of its operations and 

resumption of its ongoing fulfillment of 

its responsibilities and obligations as a 

designated contract market following 

any disruption of its operations; or 

(2) Contractual arrangements with 

other designated contract markets or 

disaster recovery service providers, as 

appropriate, that are sufficient to ensure 

continued trading and clearing of the 

designated contract market’s products, 

and ongoing fulfillment of all of the 

designated contract market’s 

responsibilities and obligations with 

respect to those products, in the event 

that a disruption renders the designated 

contract market temporarily or 

permanently unable to satisfy this 

requirement on its own behalf. 

(e) A designated contract market must 

notify Commission staff promptly of all: 

(1) Electronic trading halts and 

significant systems malfunctions; 

(2) Cyber security incidents or 

targeted threats that actually or 

potentially jeopardize automated system 

operation, reliability, security, or 

capacity; and 

(3) Activation of the designated 

contract market’s business continuitydisaster recovery plan. 

(f) A designated contract market must 

give Commission staff timely advance 

notice of all material: 

(1) Planned changes to automated 

systems that may impact the reliability, 

security, or adequate scalable capacity 

of such systems; and 

(2) Planned changes to the designated 

contract market’s program of risk 

analysis and oversight. 

(g) A designated contract market must 

provide to the Commission upon 

request current copies of its business 

continuity-disaster recovery plan and 

other emergency procedures, its 

assessments of its operational risks, and 

other documents requested by 

Commission staff for the purpose of 

maintaining a current profile of the 

designated contract market’s automated 

systems. 

(h) A designated contract market must 

conduct regular, periodic, objective 

testing and review of its automated 

systems to ensure that they are reliable, 

secure, and have adequate scalable 

capacity. It must also conduct regular, 

periodic testing and review of its 

business continuity-disaster recovery 

capabilities. Both types of testing should 

be conducted by qualified, independent 

professionals. Such qualified 

independent professionals may be 

independent contractors or employees 

of the designated contract market, but 

should not be persons responsible for 

development or operation of the systems 

or capabilities being tested. Pursuant to 

Core Principle 18 (Recordkeeping) and 

§§ 38.950 and 38.951 of this part, the 

designated contract market must keep 

records of all such tests, and make all 

test results available to the Commission 

upon request. 

(i) To the extent practicable, a 

designated contract market should: 

(1) Coordinate its business continuitydisaster recovery plan with those of the 

members and other market participants 

upon whom it depends to provide 

liquidity, in a manner adequate to 

enable effective resumption of activity 

in its markets following a disruption 

causing activation of the designated 

contract market’s business continuitydisaster recovery plan; 

(2) Initiate and coordinate periodic, 

synchronized testing of its business 

continuity-disaster recovery plan and 

the business continuity-disaster 

recovery plans of the members and 

other market participants upon whom it 

depends to provide liquidity; and 

(3) Ensure that its business 

continuity-disaster recovery plan takes 

into account the business continuitydisaster recovery plans of its 

telecommunications, power, water, and 

other essential service providers. 

(j) Part 46 of this chapter governs the 

obligations of those registered entities 

that the Commission has determined to 

be critical financial markets, with 

respect to maintenance and geographic 

dispersal of disaster recovery resources 

sufficient to meet a same-day recovery 

time objective in the event of a widescale disruption. Section 40.9 of this 

chapter establishes the requirements for 

core principle compliance in that 

respect. 

Subpart V—Financial Resources 

§ 38.1100 Core Principle 21. 

(a) In General. The board of trade 

shall have adequate financial, 

operational, and managerial resources to 

discharge each responsibility of the 

board of trade. 

(b) Determination of adequacy. The 

financial resources of the board of trade 

shall be considered to be adequate if the 

value of the financial resources exceeds 

the total amount that would enable the 

contract market to cover the operating 

costs of the contract market for a 1-year 

period, as calculated on a rolling basis. 

§ 38.1101 General requirements. 

(a) General rule. (1) A designated 

contract market must maintain financial 

resources sufficient to enable it to 

perform its functions in compliance 

with the core principles set forth in 

section 5 of the Act and regulations 

thereunder. 

(2) Financial resources shall be 

considered sufficient if their value is at 

least equal to a total amount that would 

enable the designated contract market, 

or applicant for designation as such, to 

cover its operating costs for a period of 

at least one year, calculated on a rolling 

basis. 

(3) An entity that is registered with 

the Commission as both a designated 

contract market and a derivatives 

clearing organization also shall comply 

with the financial resource requirements 

of § 39.11 of this chapter, demonstrating 

that it has sufficient financial resources 

to operate the single, combined entity as 

both a designated contract market and a 

derivatives clearing organization. In lieu 

of filing separate quarterly reports under 

paragraph (a)(2) of this section and 

§ 39.11(f) of this chapter, such entity 

shall file single quarterly reports in 

accordance with § 39.11. 

(b) Types of financial resources. 

Financial resources available to satisfy 

the requirements of paragraph (a) of this 

section may include: 

(1) The designated contract market’s 

own capital, calculated in accordance 

with U.S. generally accepted accounting 

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(2) Any other financial resource 

deemed acceptable by the Commission. 

(c) Computation of financial resource 

requirement. A designated contract 

market must, on a quarterly basis, based 

upon its fiscal year, make a reasonable 

calculation of its projected operating 

costs over a 12-month period in order to 

determine the amount needed to meet 

the requirements of paragraph (a) of this 

section. The designated contract market 

shall have reasonable discretion in 

determining the methodology used to 

compute such projected operating costs. 

The Commission may review the 

methodology and require changes as 

appropriate. 

(d) Valuation of financial resources. 

At appropriate intervals, but not less 

than quarterly, a designated contract 

market must compute the current 

market value of each financial resource 

used to meet its obligations under 

paragraph (a) of this section. Reductions 

in value to reflect market and credit risk 

(‘‘haircuts’’) must be applied as 

appropriate. 

(e) Liquidity of financial resources. 

The financial resources allocated by the 

designated contract market to meet the 

requirements of paragraph (a) of this 

section must include unencumbered, 

liquid financial assets (i.e., cash and/or 

highly liquid securities) equal to at least 

six months’ operating costs. If any 

portion of such financial resources is 

not sufficiently liquid, the designated 

contract market may take into account a 

committed line of credit or similar 

facility for the purpose of meeting this 

requirement. 

(f) Reporting requirements. (1) Each 

fiscal quarter, or at any time upon 

Commission request, a designated 

contract market must: 

(i) Report to the Commission: 

(A) The amount of financial resources 

necessary to meet the requirements of 

paragraph (a) of this section; and 

(B) The value of each financial 

resource available, computed in 

accordance with the requirements of 

paragraph (d) of this section; and 

(ii) Provide the Commission with a 

financial statement, including the 

balance sheet, income statement, and 

statement of cash flows of the 

designated contract market or of its 

parent company. 

(2) The calculations required by this 

paragraph shall be made as of the last 

business day of the designated contract 

market’s fiscal quarter. 

(3) The designated contract market 

must provide the Commission with: 

(i) Sufficient documentation 

explaining the methodology used to 

compute its financial requirements 

under paragraph (a) of this section; 

(ii) Sufficient documentation 

explaining the basis for its 

determinations regarding the valuation 

and liquidity requirements set forth in 

paragraphs (d) and (e) of this section; 

and 

(iii) Copies of any agreements 

establishing or amending a credit 

facility, insurance coverage, or other 

arrangement evidencing or otherwise 

supporting the designated contract 

market’s conclusions. 

(4) The reports shall be filed not later 

than 40 calendar days after the end of 

the designated contract market’s first 

three fiscal quarters, and not later than 

60 calendar days after the end of the 

designated contract market’s fourth 

fiscal quarter, or at such later time as the 

Commission may permit, in its 

discretion, upon request by the 

designated contract market. 

(g) Delegation of authority. (1) The 

Commission hereby delegates, until it 

orders otherwise, the authority to the 

Director of the Division of Market 

Oversight or such other employee or 

employees as the Director may designate 

from time to time, to: 

(i) Determine whether a particular 

financial resource under paragraph 

(b)(2) may be used to satisfy the 

requirements of paragraph (a)(1) and (2) 

of this section; 

(ii) Review and make changes to the 

methodology used to compute the 

requirements of paragraph (c) of this 

section; 

(iii) Request financial reporting from 

a designated contract market (in 

addition to quarterly reports) under 

paragraph (f)(1) of this section; and 

(iv) Grant an extension of time for a 

designated contract market to file its 

quarterly financial report under 

paragraph (f)(4) of this section. 

(2) The Director 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. 

Subpart W—Diversity of Board of 

Directors 

§ 38.1150 Core Principle 22. 

The board of trade, if a publicly 

traded company, shall endeavor to 

recruit individuals to serve on the board 

of directors and the other decisionmaking bodies (as determined by the 

Commission) of the board of trade from 

among, and to have the composition of 

the bodies reflect, a broad and culturally 

diverse pool of qualified candidates. 

Subpart X—Securities and Exchange 

Commission 

§ 38.1200 Core Principle 23. 

The board of trade shall keep any 

such records relating to swaps defined 

in section 1a(47)(A)(v) of the Act open 

to inspection and examination by the 

Securities and Exchange Commission. 

§ 38.1201 Additional sources for 

compliance. 

Applicants and designated contract 

markets may refer to the guidance and/ 

or acceptable practices in appendix B of 

this part to demonstrate to the 

Commission compliance with the 

requirements of § 38.1200 of this part. 

■ 18. Revise appendix A to part 38 to 

read as follows: 

BILLING CODE 6351–01–P 


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BILLING CODE 6351–01–C 

■ 19. Revise appendix B to part 38 to 

read as follows: 

Appendix B to Part 38—Guidance on, 

and Acceptable Practices in, 

Compliance With Core Principles 

1. This appendix provides guidance on 

complying with core principles, both initially 

and on an ongoing basis, to obtain and 

maintain designation under section 5(d) of 

the Act and this part 38. Where provided, 

guidance is set forth in paragraph (a) 

following the relevant heading and can be 

used to demonstrate to the Commission 

compliance with the selected requirements of 

a core principle, under §§ 38.3 and 38.5 of 

this part. The guidance for the core principle 

is illustrative only of the types of matters a 

designated contract market may address, as 

applicable, and is not intended to be used as 

a mandatory checklist. Addressing the issues 

set forth in this appendix would help the 

Commission in its consideration of whether 

the designated contract market is in 

compliance with the selected requirements of 

a core principle; provided however, that the 

guidance is not intended to diminish or 

replace, in any event, the obligations and 

requirements of applicants and designated 

contract markets to comply with the 

regulations provided under this part. 

2. Where provided, acceptable practices 

meeting selected requirements of core 

principles are set forth in paragraph (b) 

following guidance. Designated contract 

markets that follow specific practices 

outlined in the acceptable practices for a core 

principle in this appendix will meet the 

selected requirements of the applicable core 

principle; provided however, that the 

acceptable practice is not intended to 

diminish or replace, in any event, the 

obligations and requirements of applicants 

and designated contract markets to comply 

with the regulations provided under this part 

38. The acceptable practices are for 

illustrative purposes only and do not state 

the exclusive means for satisfying a core 

principle. 

Core Principle 1 of section 5(d) of the Act: 

DESIGNATION AS CONTRACT MARKET.— 

(A) IN GENERAL.—To be designated, and 

maintain a designation, as a contract market, 

a board of trade shall comply with— 

(i) Any core principle described in this 

subsection; and 

(ii) Any requirement that the Commission 

may impose by rule or regulation pursuant to 

section 8a(5). 

(B) REASONABLE DISCRETION OF 

CONTRACT MARKET.—Unless otherwise 

determined by the Commission by rule or 

regulation, a board of trade described in 

subparagraph (A) shall have reasonable 

discretion in establishing the manner in 

which the board of trade complies with the 

core principles described in this subsection. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 2 of section 5(d) of the Act: 

COMPLIANCE WITH RULES—(A) IN 

GENERAL.—The board of trade shall 

establish, monitor, and enforce compliance 

with the rules of the contract market, 

including— 

(i) Access requirements; 

(ii) The terms and conditions of any 

contracts to be traded on the contract market; 

and 

(iii) Rules prohibiting abusive trade 

practices on the contract market. 

(B) CAPACITY OF CONTRACT 

MARKET.—The board of trade shall have the 

capacity to detect, investigate, and apply 

appropriate sanctions to any person that 

violates any rule of the contract market. 

(C) REQUIREMENT OF RULES.—The rules 

of the contract market shall provide the board 

of trade with the ability and authority to 

obtain any necessary information to perform 

any function described in this subsection, 

including the capacity to carry out such 

international information-sharing agreements 

as the Commission may require. 

(a) Guidance. (1) Investigations and 

investigation reports—Warning letters. The 

rules of a designated contract market may 

authorize compliance staff to issue a warning 

letter to a person or entity under 

investigation or to recommend that a 

disciplinary panel take such an action. 

(2) Additional rules required. A designated 

contract market should adopt and enforce 

any additional rules that it believes are 

necessary to comply with the requirements of 

subpart C of this chapter 

(b) Acceptable Practices. [Reserved.] 

Core Principle 3 of section 5(d) of the Act: 

CONTRACTS NOT READILY SUBJECT TO 

MANIPULATION.—The board of trade shall 

list on the contract market only contracts that 

are not readily susceptible to manipulation. 

(a) Guidance. (1) Designated contract 

markets may list new products for trading by 

self-certification under § 40.2 of this chapter 

or may submit products for Commission 

approval under § 40.3 of this chapter. 

(2) Guidance in appendix C to this part 

may be used as guidance in meeting this core 

principle for both new products listings and 

existing listed contracts. 

(b) Acceptable Practices. [Reserved.] 

Core Principle 4 of section 5(d) of the Act: 

PREVENTION OF MARKET DISRUPTION.— 

The board of trade shall have the capacity 

and responsibility to prevent manipulation, 

price distortion, and disruptions of the 

delivery or cash-settlement process through 

market surveillance, compliance, and 

enforcement practices and procedures, 

including— 

(A) Methods for conducting real-time 

monitoring of trading; and 

(B) Comprehensive and accurate trade 

reconstructions. 

(a) Guidance. The detection and 

prevention of market manipulation, 

disruptions, and distortions should be 

incorporated into the design of programs for 

monitoring trading activity. Monitoring of 

intraday trading should include the capacity 

to detect developing market anomalies, 

including abnormal price movements and 

unusual trading volumes, and position-limit 

violations. The designated contract market 

should have rules in place that allow it broad 

powers to intervene to prevent or reduce 

market disruptions. Once a threatened or 

actual disruption is detected, the designated 

contract market should take steps to prevent 

the disruption or reduce its severity. 

(2) Additional rules required. A designated 

contract market should adopt and enforce 

any additional rules that it believes are 

necessary to comply with the requirements of 

subpart E of this part. 

(b) Acceptable Practices. (1) General 

Requirements. Real-time monitoring for 

market anomalies and position-limit 

violations are the most effective, but the 

designated contract market may also 

demonstrate that it has an acceptable 

program if some of the monitoring is 

accomplished on a T+1 basis. An acceptable 


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program must include automated trading 

alerts to detect market anomalies and 

position-limit violations as they develop and 

before market disruptions occur or become 

more serious. In some cases, a designated 

contract market may demonstrate that its 

manual processes are effective. 

(2) Physical-delivery contracts. For 

physical-delivery contracts, the designated 

contract market must demonstrate that it is 

monitoring the adequacy and availability of 

the deliverable supply, which, if such 

information is available, includes the size 

and ownership of those supplies and whether 

such supplies are likely to be available to 

short traders and saleable by long traders at 

the market value of those supplies under 

normal cash marketing conditions. Further, 

for physical-delivery contracts, the 

designated contract market must continually 

monitor the appropriateness of a contract’s 

terms and conditions, including the delivery 

instrument, the delivery locations and 

location differentials, and the commodity 

characteristics and related differentials. The 

designated contract market must demonstrate 

that it is making a good-faith effort to resolve 

conditions that are interfering with 

convergence of its physical-delivery contract 

to the price of the underlying commodity or 

causing price distortions or market 

disruptions, including, when appropriate, 

changes to contract terms. 

(3) Cash-settled contracts. At a minimum, 

an acceptable program for monitoring cashsettled contracts must include access, either 

directly or through an information-sharing 

agreement, to traders’ positions and 

transactions in the reference market for 

traders of a significant size in the designated 

contract market near the settlement of the 

contract. 

(4) Ability to obtain information. With 

respect to the designated contract market’s 

ability to obtain information, a designated 

contract market may limit the application of 

the requirement to keep and provide such 

records only to those that are reportable 

under its large-trader reporting system or 

otherwise hold substantial positions. 

(5) Risk controls for trading. An acceptable 

program for preventing market disruptions 

must demonstrate appropriate trade risk 

controls, in addition to pauses and halts. 

Such controls must be adapted to the unique 

characteristics of the markets to which they 

apply and must be designed to avoid market 

disruptions without unduly interfering with 

that market’s price discovery function. The 

designated contract market may choose from 

among controls that include: pre-trade limits 

on order size, price collars or bands around 

the current price, message throttles, and daily 

price limits, or design other types of controls. 

Within the specific array of controls that are 

selected, the designated contract market also 

must set the parameters for those controls, so 

long as the types of controls and their 

specific parameters are reasonably likely to 

serve the purpose of preventing market 

disruptions and price distortions. If a 

contract is linked to, or is a substitute for, 

other contracts, either listed on its market or 

on other trading venues, the designated 

contract market must, to the extent 

practicable, coordinate its risk controls with 

any similar controls placed on those other 

contracts. If a contract is based on the price 

of an equity security or the level of an equity 

index, such risk controls must, to the extent 

practicable, be coordinated with any similar 

controls placed on national security 

exchanges. 

Core Principle 5 of section 5(d) of the Act: 

POSITION LIMITATIONS OR 

ACCOUNTABILITY—(A) IN GENERAL.—To 

reduce the potential threat of market 

manipulation or congestion (especially 

during trading in the delivery month), the 

board of trade shall adopt for each contract 

of the board of trade, as is necessary and 

appropriate, position limitations or position 

accountability for speculators. 

(B) MAXIMUM ALLOWABLE POSITION 

LIMITATION.—For any contract that is 

subject to a position limitation established by 

the Commission pursuant to section 4a(a), 

the board of trade shall set the position 

limitation of the board of trade at a level not 

higher than the position limitation 

established by the Commission. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 6 of section 5(d) of the Act: 

EMERGENCY AUTHORITY—The board of 

trade, in consultation or cooperation with the 

Commission, shall adopt rules to provide for 

the exercise of emergency authority, as is 

necessary and appropriate, including the 

authority— 

(A) To liquidate or transfer open positions 

in any contract; 

(B) To suspend or curtail trading in any 

contract; and 

(C) To require market participants in any 

contract to meet special margin requirements. 

(a) Guidance. In consultation and 

cooperation with the Commission, a 

designated contract market should have the 

authority to intervene as necessary to 

maintain markets with fair and orderly 

trading and to prevent or address 

manipulation or disruptive trading practices, 

whether the need for intervention arises 

exclusively from the DCM’s market or as part 

of a coordinated, cross-market intervention. 

DCM rules should include procedures and 

guidelines to avoid conflicts of interest in 

accordance with the provisions of § 40.9 of 

this chapter, and include alternate lines of 

communication and approval procedures to 

address emergencies associated with realtime events. To address perceived market 

threats, the designated contract market 

should have rules that allow it to take certain 

actions in the event of an emergency, as 

defined in § 40.1(h) of this chapter, 

including: imposing or modifying position 

limits, price limits, and intraday market 

restrictions; imposing special margin 

requirements; ordering the liquidation or 

transfer of open positions in any contract; 

ordering the fixing of a settlement price; 

extending or shortening the expiration date 

or the trading hours; suspending or curtailing 

trading in any contract; transferring customer 

contracts and the margin or altering any 

contract’s settlement terms or conditions; 

and, where applicable, providing for the 

carrying out of such actions through its 

agreements with its third-party provider of 

clearing or regulatory services. In situations 

where a contract is fungible with a contract 

on another platform, emergency action to 

liquidate or transfer open interest must be as 

directed, or agreed to, by the Commission or 

the Commission’s staff. The DCM has the 

authority to independently respond to 

emergencies in an effective and timely 

manner consistent with the nature of the 

emergency, as long as all such actions taken 

by the DCM are made in good faith to protect 

the integrity of the markets. The Commission 

should be notified promptly of the DCM’s 

exercise of emergency action, explaining how 

conflicts of interest were minimized, 

including the extent to which the DCM 

considered the effect of its emergency action 

on the underlying markets and on markets 

that are linked or referenced to the contract 

market and similar markets on other trading 

venues. Information on all regulatory actions 

carried out pursuant to a DCM’s emergency 

authority should be included in a timely 

submission of a certified rule pursuant to 

part 40 of this chapter. 

(b) Acceptable Practices. A designated 

contract market must have procedures and 

guidelines for decision-making and 

implementation of emergency intervention in 

the market. At a minimum, the DCM must 

have the authority to liquidate or transfer 

open positions in the market, suspend or 

curtail trading in any contract, and require 

market participants in any contract to meet 

special margin requirements. In situations 

where a contract is fungible with a contract 

on another platform, emergency action to 

liquidate or transfer open interest must be 

directed, or agreed to, by the Commission or 

the Commission’s staff. The DCM must 

promptly notify the Commission of the 

exercise of its emergency authority, 

documenting its decision-making process, 

including how conflicts of interest were 

minimized, and the reasons for using its 

emergency authority. The DCM must also 

have rules that allow it to take such market 

actions as may be directed by the 

Commission. 

Core Principle 7 of section 5(d) of the Act: 

AVAILABILITY OF GENERAL 

INFORMATION.—The board of trade shall 

make available to market authorities, market 

participants, and the public accurate 

information concerning— 

(A) The terms and conditions of the 

contracts of the contract market; and 

(B)(i) The rules, regulations, and 

mechanisms for executing transactions on or 

through the facilities of the contract market; 

and 

(ii) The rules and specifications describing 

the operation of the contract market’s— 

(I) Electronic matching platform; or 

(II) Trade execution facility. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 8 of section 5(d) of the Act: 

DAILY PUBLICATION OF TRADING 

INFORMATION.—The board of trade shall 

make public daily information on settlement 

prices, volume, open interest, and opening 

and closing ranges for actively traded 

contracts on the contract market. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 9 of section 5(d) of the Act: 

EXECUTION OF TRANSACTIONS.—‘‘(A) IN 


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GENERAL.—The board of trade shall provide 

a competitive, open, and efficient market and 

mechanism for executing transactions that 

protects the price discovery process of 

trading in the centralized market of the board 

of trade. 

(B) RULES.—The rules of the board of 

trade may authorize, for bona fide business 

purposes— 

(i) Transfer trades or office trades; 

(ii) An exchange of— 

(I) Futures in connection with a cash 

commodity transaction; 

(II) Futures for cash commodities; or 

(III) Futures for swaps; or 

(iii) A futures commission merchant, acting 

as principal or agent, to enter into or confirm 

the execution of a contract for the purchase 

or sale of a commodity for future delivery if 

the contract is reported, recorded, or cleared 

in accordance with the rules of the contract 

market or a derivatives clearing organization. 

(a) Guidance. [Reserved] 

(b) Acceptable Practices. [Reserved] 

Core Principle 10 of section 5(d) of the Act: 

TRADE INFORMATION.—The board of trade 

shall maintain rules and procedures to 

provide for the recording and safe storage of 

all identifying trade information in a manner 

that enables the contract market to use the 

information— 

(A) To assist in the prevention of customer 

and market abuses; and 

(B) To provide evidence of any violations 

of the rules of the contract market. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 11 of section 5(d) of the Act: 

FINANCIAL INTEGRITY OF 

TRANSACTIONS.—The board of trade shall 

establish and enforce— 

(A) Rules and procedures for ensuring the 

financial integrity of transactions entered 

into on or through the facilities of the 

contract market (including the clearance and 

settlement of the transactions with a 

derivatives clearing organization); and 

(B) Rules to ensure— 

(i) The financial integrity of any— 

(I) Futures commission merchant; and 

(II) Introducing broker; and 

(ii) The protection of customer funds. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 12 of section 5(d) of the Act: 

PROTECTION OF MARKETS AND MARKET 

PARTICIPANTS—The board of trade shall 

establish and enforce rules— 

(A) To protect markets and market 

participants from abusive practices 

committed by any party, including abusive 

practices committed by a party acting as an 

agent for a participant; and 

(B) To promote fair and equitable trading 

on the contract market. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 13 of section 5(d) of the Act: 

DISCIPLINARY PROCEDURES.—The board 

of trade shall establish and enforce 

disciplinary procedures that authorize the 

board of trade to discipline, suspend, or 

expel members or market participants that 

violate the rules of the board of trade, or 

similar methods for performing the same 

functions, including delegation of the 

functions to third parties. 

(a) Guidance. (1) Notice of charges. If the 

rules of the designated contract market so 

provide, a notice may also advise: (i) That 

failure to request a hearing within the period 

prescribed in the notice, except for good 

cause, may be deemed a waiver of the right 

to a hearing; and (ii) That failure to answer 

or to deny expressly a charge may be deemed 

to be an admission of such charge. 

(2) Admission or failure to deny charges. 

The rules of a designated contract market 

may provide that if a respondent admits or 

fails to deny any of the charges, a 

disciplinary panel may find that the 

violations alleged in the notice of charges for 

which the respondent admitted or failed to 

deny any of the charges have been 

committed. If the designated contract 

market’s rules so provide, then: 

(i) The disciplinary panel should impose a 

sanction for each violation found to have 

been committed; 

(ii) The disciplinary panel should 

promptly notify the respondent in writing of 

any sanction to be imposed pursuant to 

paragraph (2)(i) of this section and shall 

advise the respondent that it may request a 

hearing on such sanction within the period 

of time, which shall be stated in the notice; 

(iii) The rules of a designated contract 

market may provide that if a respondent fails 

to request a hearing within the period of time 

stated in the notice, the respondent will be 

deemed to have accepted the sanction. 

(3) Settlement offers. (i) The rules of a 

designated contract market may permit a 

respondent to submit a written offer of 

settlement at any time after an investigation 

report is completed. The disciplinary panel 

presiding over the matter may accept the 

offer of settlement, but may not alter the 

terms of a settlement offer unless the 

respondent agrees. 

(ii) The rules of a designated contract 

market may provide that, in its discretion, a 

disciplinary panel may permit the 

respondent to accept a sanction without 

either admitting or denying the rule 

violations upon which the sanction is based. 

(iii) If an offer of settlement is accepted, the 

panel accepting the offer should issue a 

written decision specifying the rule 

violations it has reason to believe were 

committed, including the basis or reasons for 

the panel’s conclusions, and any sanction to 

be imposed, which should include full 

customer restitution where customer harm is 

demonstrated, except where the amount of 

restitution and to whom it should be 

provided cannot be reasonably determined. If 

an offer of settlement is accepted without the 

agreement of the enforcement staff, the 

decision should adequately support the 

disciplinary panel’s acceptance of the 

settlement. Where applicable, the decision 

should also include a statement that the 

respondent has accepted the sanctions 

imposed without either admitting or denying 

the rule violations. 

(iv) The respondent may withdraw his or 

her offer of settlement at any time before final 

acceptance by a disciplinary panel. If an offer 

is withdrawn after submission, or is rejected 

by a disciplinary panel, the respondent 

should not be deemed to have made any 

admissions by reason of the offer of 

settlement and should not be otherwise 

prejudiced by having submitted the offer of 

settlement. 

(4) Hearings. The rules of a designated 

contract market may provide that a sanction 

may be summarily imposed upon any person 

within its jurisdiction whose actions impede 

the progress of a hearing. 

(5) Right to appeal. The rules of a 

designated contract market may permit the 

parties to a proceeding to appeal promptly an 

adverse decision of a disciplinary panel in all 

or in certain classes of cases. Such rules may 

require a party’s notice of appeal to be in 

writing and to specify the findings, 

conclusions, or sanctions to which objection 

are taken. If the rules of a designated contract 

market permit appeals, then both the 

respondent and the enforcement staff should 

have the opportunity to appeal and the 

designated contract market should provide 

for the following: 

(i) The designated contract market should 

establish an appellate panel that should be 

authorized to hear appeals of respondents. In 

addition, the rules of a designated contract 

market may provide that the appellate panel 

may, on its own initiative, order review of a 

decision by a disciplinary panel within a 

reasonable period of time after the decision 

has been rendered. 

(ii) The composition of the appellate panel 

should be consistent with the requirements 

set forth in part 40 of this chapter and 

paragraph (4) of the acceptable practices for 

Core Principle 16, and should not include 

any members of the designated contract 

market’s compliance staff, or any person 

involved in adjudicating any other stage of 

the same proceeding. The rules of a 

designated contract market should provide 

for the appeal proceeding to be conducted 

before all of the members of the appellate 

panel or a panel thereof. 

(iii) Except for good cause shown, the 

appeal or review should be conducted solely 

on the record before the disciplinary panel, 

the written exceptions filed by the parties, 

and the oral or written arguments of the 

parties. 

(iv) Promptly following the appeal or 

review proceeding, the appellate panel 

should issue a written decision and should 

provide a copy to the respondent. The 

decision issued by the appellate panel should 

adhere to all the requirements of § 38.708 of 

this part, to the extent that a different 

conclusion is reached from that issued by the 

disciplinary panel. 

(6) Summary fines for violations of rules 

regarding timely submission of records, 

decorum, or other similar activities. A 

designated contract market may adopt a 

summary fine schedule for violations of rules 

relating to the timely submission of accurate 

records required for clearing or verifying 

each day’s transactions, decorum, attire, or 

other similar activities. A designated contract 

market may permit its compliance staff, or a 

designated panel of contract market officials, 

to summarily impose minor sanctions against 

persons within the designated contract 

market’s jurisdiction for violating such rules. 

A designated contract market’s summary fine 

schedule may allow for warning letters to be 

issued for first-time violations or violators. If 


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36720 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

adopted, a summary fine schedule should 

provide for progressively larger fines for 

recurring violations. 

(7) Emergency disciplinary actions. (i) A 

designated contract market may impose a 

sanction, including suspension, or take other 

summary action against a person or entity 

subject to its jurisdiction upon a reasonable 

belief that such immediate action is 

necessary to protect the best interest of the 

marketplace. 

(ii) Any emergency disciplinary action 

should be taken in accordance with a 

designated contract market’s procedures that 

provide for the following: 

(A) If practicable, a respondent should be 

served with a notice before the action is 

taken, or otherwise at the earliest possible 

opportunity. The notice should state the 

action, briefly state the reasons for the action, 

and state the effective time and date, and the 

duration of the action. 

(B) The respondent should have the right 

to be represented by legal counsel or any 

other representative of its choosing in all 

proceedings subsequent to the emergency 

action taken. The respondent should be given 

the opportunity for a hearing as soon as 

reasonably practicable and the hearing 

should be conducted before the disciplinary 

panel pursuant to the requirements of 

§ 38.707 of this part. 

(C) Promptly following the hearing 

provided for in this rule, the designated 

contract market should render a written 

decision based upon the weight of the 

evidence contained in the record of the 

proceeding and should provide a copy to the 

respondent. The decision should include a 

description of the summary action taken; the 

reasons for the summary action; a summary 

of the evidence produced at the hearing; a 

statement of findings and conclusions; a 

determination that the summary action 

should be affirmed, modified, or reversed; 

and a declaration of any action to be taken 

pursuant to the determination, and the 

effective date and duration of such action. 

(b) Acceptable Practices. [Reserved.] 

Core Principle 14 of section 5(d) of the Act: 

DISPUTE RESOLUTION.—The board of trade 

shall establish and enforce rules regarding, 

and provide facilities for alternative dispute 

resolution as appropriate for, market 

participants and any market intermediaries. 

(a) Guidance. A designated contract market 

should provide customer dispute resolution 

procedures that are: appropriate to the nature 

of the market; fair and equitable; and 

available on a voluntary basis, either directly 

or through another self-regulatory 

organization, to customers that are noneligible contract participants. 

(b) Acceptable Practices. 

(1) Fair and equitable procedure. Every 

contract market shall provide customer 

dispute resolution procedures that are fair 

and equitable. An acceptable customer 

dispute resolution mechanism would: 

(i) Provide the customer with an 

opportunity to have his or her claim decided 

by an objective and impartial decisionmaker; 

(ii) Provide each party with the right to be 

represented by counsel at the commencement 

of the procedure, at the party’s own expense; 

(iii) Provide each party with adequate 

notice of the claims presented against such 

party, an opportunity to be heard on all 

claims, defenses and permitted 

counterclaims, and an opportunity for a 

prompt hearing; 

(iv) Authorize prompt, written, final 

settlement awards that are not subject to 

appeal within the designated contract 

market; and 

(v) Notify the parties of the fees and costs 

that may be assessed. 

(2) Voluntary Procedures. The use of 

dispute settlement procedures shall be 

voluntary for customers other than eligible 

contract participants as defined in section 

1a(18) of the Dodd-Frank Act, and may 

permit counterclaims as provided in § 166.5 

of this chapter. 

(3) Member-to-Member Procedures. If the 

designated contract market also provides 

procedures for the resolution of disputes that 

do not involve customers (i.e., member-tomember disputes), the procedures for 

resolving such disputes must be independent 

of and shall not interfere with or delay the 

resolution of customers’ claims or grievances. 

(4) Delegation. A designated contract 

market may delegate to another selfregulatory organization or to a registered 

futures association its responsibility to 

provide for customer dispute resolution 

mechanisms, provided, however, that in the 

event of such delegation, the designated 

contract market shall in all respects treat any 

decision issued by such other organization or 

association with respect to such dispute as if 

the decision were its own, including 

providing for the appropriate enforcement of 

any award issued against a delinquent 

member. 

Core Principle 15 of section 5(d) of the Act: 

GOVERNANCE FITNESS STANDARDS.— 

The board of trade shall establish and enforce 

appropriate fitness standards for directors, 

members of any disciplinary committee, 

members of the contract market, and any 

other person with direct access to the facility 

(including any party affiliated with any 

person described in this paragraph). 

(a) Guidance. (1) A designated contract 

market should have appropriate eligibility 

criteria for the categories of persons set forth 

in the Core Principle that should include 

standards for fitness and for the collection 

and verification of information supporting 

compliance with such standards. Minimum 

standards of fitness for persons who have 

member voting privileges, governing 

obligations or responsibilities, or who 

exercise disciplinary authority are those 

bases for refusal to register a person under 

section 8a(2) of the Act. In addition, persons 

who have governing obligations or 

responsibilities, or who exercise disciplinary 

authority, should not have a significant 

history of serious disciplinary offenses, such 

as those that would be disqualifying under 

§ 1.63 of this chapter. Members with trading 

privileges but having no, or only nominal, 

equity, in the facility and non-member 

market participants who are not 

intermediated and do not have these 

privileges, obligations, responsibilities or 

disciplinary authority could satisfy minimum 

fitness standards by meeting the standards 

that they must meet to qualify as a ‘‘market 

participant.’’ Natural persons who directly or 

indirectly have greater than a ten percent 

ownership interest in a designated contract 

market should meet the fitness standards 

applicable to members with voting rights. 

(2) The Commission believes that such 

standards should include providing the 

Commission with fitness information for 

such persons, whether registration 

information, certification to the fitness of 

such persons, an affidavit of such persons’ 

fitness by the contract market’s counsel or 

other information substantiating the fitness of 

such persons. If a contract market provides 

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 his 

or her position. 

(b) Applicable Practices. [Reserved.] 

Core Principle 16 of section 5(d) of the Act: 

CONFLICTS OF INTEREST.—The board of 

trade shall establish and enforce rules— 

(A) to minimize conflicts of interest in the 

decisionmaking process of the contract 

market; and 

(B) to establish a process for resolving 

conflicts of interest described in 

subparagraph (A). 

(a) Guidance. The means to address 

conflicts of interest in decisionmaking of a 

contract market should include methods to 

ascertain the presence of conflicts of interest 

and to make decisions in the event of such 

a conflict. In addition, the Commission 

believes that the contract market should 

provide for appropriate limitations on the use 

or disclosure of material non-public 

information gained through the performance 

of official duties by board members, 

committee members and contract market 

employees or gained through an ownership 

interest in the contract market. 

(b) Acceptable Practices. All designated 

contract markets (‘‘DCMs’’ or ‘‘contract 

markets’’) bear special responsibility to 

regulate effectively, impartially, and with 

due consideration of the public interest, as 

provided for in section 3 of the Act. Under 

Core Principle 15, they are also required to 

minimize conflicts of interest in their 

decisionmaking processes. To comply with 

this Core Principle, contract markets should 

be particularly vigilant for such conflicts 

between and among any of their selfregulatory responsibilities, their commercial 

interests, and the several interests of their 

management, members, owners, customers 

and market participants, other industry 

participants, and other constituencies. 

Acceptable practices for minimizing conflicts 

of interest shall include the following 

elements: 

(1) Board composition for contract markets 

(i) At least thirty-five percent of the 

directors on a contract market’s board of 

directors shall be public directors; and 

(ii) The executive committees (or similarly 

empowered bodies) shall be at least thirtyfive percent public. 

(2) Public director 

(i) To qualify as a public director of a 

contract market, an individual must first be 

found, by the board of directors, on the 

record, to have no material relationship with 

the contract market. A ‘‘material 

relationship’’ is one that reasonably could 


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affect the independent judgment or 

decisionmaking of the director. 

(ii) In addition, a director shall be 

considered to have a ‘‘material relationship’’ 

with the contract market if any of the 

following circumstances exist: 

(A) The director is an officer or employee 

of the contract market or an officer or 

employee of its affiliate. In this context, 

‘‘affiliate’’ includes parents or subsidiaries of 

the contract market or entities that share a 

common parent with the contract market; 

(B) The director is a member of the contract 

market, or an officer or director of a member. 

‘‘Member’’ is defined according to section 

1a(34) of the Commodity Exchange Act and 

Commission Regulation 1.3(q); 

(C) The director, or a firm with which the 

director is an officer, director, or partner, 

receives more than $100,000 in combined 

annual payments from the contract market, or 

any affiliate of the contract market (as 

defined in subsection (2)(ii)(A)), for legal, 

accounting, or consulting services. 

Compensation for services as a director of the 

contract market or as a director of an affiliate 

of the contract market does not count toward 

the $100,000 payment limit, nor does 

deferred compensation for services prior to 

becoming a director, so long as such 

compensation is in no way contingent, 

conditioned, or revocable; 

(D) Any of the relationships above apply to 

a member of the director’s ‘‘immediate 

family,’’ i.e., spouse, parents, children and 

siblings. 

(iii) All of the disqualifying circumstances 

described in subsection (2)(ii) shall be subject 

to a one-year look back. 

(iv) A contract market’s public directors 

may also serve as directors of the contract 

market’s affiliate (as defined in subsection 

(2)(ii)(A)) if they otherwise meet the 

definition of public director in this section 

(2). 

(v) A contract market shall disclose to the 

Commission which members of its board are 

public directors, and the basis for those 

determinations. 

(3) Regulatory oversight committee 

(i) A board of directors of any contract 

market shall establish a Regulatory Oversight 

Committee (‘‘ROC’’) as a standing committee, 

consisting of only public directors as defined 

in section (2), to assist it in minimizing 

actual and potential conflicts of interest. The 

ROC shall oversee the contract market’s 

regulatory program on behalf of the board. 

The board shall delegate sufficient authority, 

dedicate sufficient resources, and allow 

sufficient time for the ROC to fulfill its 

mandate. 

(ii) The ROC shall: 

(A) Monitor the contract market’s 

regulatory program for sufficiency, 

effectiveness, and independence; 

(B) Oversee all facets of the program, 

including trade practice and market 

surveillance; audits, examinations, and other 

regulatory responsibilities with respect to 

member firms (including ensuring 

compliance with financial integrity, financial 

reporting, sales practice, recordkeeping, and 

other requirements); and the conduct of 

investigations; 

(C) Review the size and allocation of the 

regulatory budget and resources; and the 

number, hiring and termination, and 

compensation of regulatory personnel; 

(D) Supervise the contract market’s chief 

regulatory officer, who will report directly to 

the ROC; 

(E) Prepare an annual report assessing the 

contract market’s self-regulatory program for 

the board of directors and the Commission, 

which sets forth the regulatory program’s 

expenses, describes its staffing and structure, 

catalogues disciplinary actions taken during 

the year, and reviews the performance of 

disciplinary committees and panels; 

(F) Recommend changes that would ensure 

fair, vigorous, and effective regulation; and 

(G) Review regulatory proposals and advise 

the board as to whether and how such 

changes may impact regulation. 

(4) Disciplinary panels 

All contract markets shall minimize 

conflicts of interest in their disciplinary 

processes through disciplinary panel 

composition rules that preclude any group or 

class of industry participants from 

dominating or exercising disproportionate 

influence on such panels. Contract markets 

can further minimize conflicts of interest by 

including in all disciplinary panels at least 

one person who would qualify as a public 

director, as defined in subsections (2)(ii) and 

(2)(iii) above, except in cases limited to 

decorum, attire, or the timely submission of 

accurate records required for clearing or 

verifying each day’s transactions. If contract 

market rules provide for appeal to the board 

of directors, or to a committee of the board, 

then that appellate body shall also include at 

least one person who would qualify as a 

public director as defined in subsections 

(2)(ii) and (2)(iii) above. 

Core Principle 17 of section 5(d) of the Act: 

COMPOSITION OF GOVERNING BOARDS 

OF CONTRACT MARKETS.—The 

governance arrangements of the board of 

trade shall be designed to permit 

consideration of the views of market 

participants. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 18 of section 5(d) of the Act: 

RECORDKEEPING.—The board of trade shall 

maintain records of all activities relating to 

the business of the contract market— 

(A) In a form and manner that is acceptable 

to the Commission; and 

(B) For a period of at least 5 years. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 19 of section 5(d) of the Act: 

ANTITRUST CONSIDERATIONS.—Unless 

necessary or appropriate to achieve the 

purposes of this Act, the board of trade shall 

not— 

(A) Adopt any rule or taking any action 

that results in any unreasonable restraint of 

trade; or 

(B) Impose any material anticompetitive 

burden on trading on the contract market. 

(a) Guidance. An entity seeking 

designation as a contract market may request 

that the Commission consider under the 

provisions of section 15(b) 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 designation 

or thereafter. The Commission intends to 

apply section 15(b) of the Act to its 

consideration of issues under this core 

principle in a manner consistent with that 

previously applied to contract markets. 

(b) Acceptable Practices. [Reserved.] 

Core Principle 20 of section 5(d) of the Act: 

SYSTEM SAFEGUARDS.—The board of 

trade shall— 

(A) Establish and maintain a program of 

risk analysis and oversight to identify and 

minimize sources of operational risk, through 

the development of appropriate controls and 

procedures, and the development of 

automated systems, that are reliable, secure, 

and have adequate scalable capacity; 

(B) Establish and maintain emergency 

procedures, backup facilities, and a plan for 

disaster recovery that allow for the timely 

recovery and resumption of operations and 

the fulfillment of the responsibilities and 

obligations of the board of trade; and 

(C) Periodically conduct tests to verify that 

backup resources are sufficient to ensure 

continued order processing and trade 

matching, price reporting, market 

surveillance, and maintenance of a 

comprehensive and accurate audit trail. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 21 of section 5(d) of the Act: 

FINANCIAL RESOURCES.— 

(A) IN GENERAL.—The board of trade 

shall have adequate financial, operational, 

and managerial resources to discharge each 

responsibility of the board of trade. 

(B) DETERMINATION OF ADEQUACY.— 

The financial resources of the board of trade 

shall be considered to be adequate if the 

value of the financial resources exceeds the 

total amount that would enable the contract 

market to cover the operating costs of the 

contract market for a 1-year period, as 

calculated on a rolling basis. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 22 of section 5(d) of the Act: 

DIVERSITY OF BOARD OF DIRECTORS.— 

The board of trade, if a publicly traded 

company, shall endeavor to recruit 

individuals to serve on the board of directors 

and the other decision-making bodies (as 

determined by the Commission) of the board 

of trade from among, and to have the 

composition of the bodies reflect, a broad and 

culturally diverse pool of qualified 

candidates. 

(a) Guidance. [Reserved.] 

(b) Acceptable Practices. [Reserved.] 

Core Principle 23 of section 5(d) of the Act: 

SECURITIES AND EXCHANGE 

COMMISSION.—The board of trade shall 

keep any such records relating to swaps 

defined in section 1a(47)(A)(v) open to 

inspection and examination by the Securities 

and Exchange Commission. 

(a) Guidance. A designated contract market 

should have arrangements and resources for 

collecting and maintaining accurate records 

pertaining to any swaps agreements defined 

in section 1a(47)(A)(v) of the Act, and should 

leave them open to inspection and 

examination for a period of five years. 

(b) Acceptable Practices. [Reserved.] 


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36722 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

Appendix C—Demonstration of 

Compliance That a Contract Is Not 

Readily Susceptible to Manipulation 

(a) Futures Contracts—General 

Information. When a designated contract 

market certifies or submits for approval 

contract terms and conditions for a new 

futures contract, that submission should 

include the following information: 

(1) A narrative describing the contract, 

including data and information to support 

the contract’s terms and conditions, as set by 

the designated contract market. When 

designing a futures contract, the designated 

contract market should conduct market 

research so that the contract design meets the 

risk management needs of prospective users 

and promotes price discovery of the 

underlying commodity. The designated 

contract market should consult with market 

users to obtain their views and opinions 

during the contract design process to ensure 

the contract’s term and conditions reflect the 

underlying cash market and that the futures 

contract will perform the intended risk 

management and/or price discovery 

functions. A designated contract market 

should provide a statement indicating that it 

took such steps to ensure the usefulness of 

the submitted contract. 

(2) A detailed cash market description for 

physical and cash-settled contracts. Such 

descriptions should be based on government 

and/or other publicly-available data 

whenever possible and be formulated for 

both the national and regional/local market 

relevant to the underlying commodity. For 

tangible commodities, the cash market 

descriptions for the relevant market (i.e., 

national and regional/local) should 

incorporate at least three full years of data 

that may include, among other factors, 

production, consumption, stocks, imports, 

exports, and prices. Each of those cash 

market variables should be fully defined and 

the data sources should be fully specified 

and documented to permit Commission staff 

to replicate the estimates of deliverable 

supply (defined in paragraph (b)(1)(A) of this 

appendix C). Whenever possible, the 

Commission requests that monthly or daily 

prices (depending on the contract) 

underlying the cash settlement index be 

submitted for the most recent three full 

calendar years and for as many of the current 

year’s months for which data are available. 

For contracts that are cash settled to an 

index, the index’s methodology should be 

provided along with supporting information 

showing how the index is reflective of the 

underlying cash market, is not readily subject 

to manipulation or distortion, and is based 

on a cash price series that is reliable, 

acceptable, publicly available and timely 

(defined in paragraphs (c)(2) and (c)(3) of this 

appendix C). The Commission recognizes 

that the data necessary for accurate and 

cogent cash market analyses for an 

underlying commodity vary with the nature 

of the underlying commodity. The 

Commission may require that the designated 

contract market submit a detailed report on 

commodity definitions and uses. 

(b) Futures Contracts Settled by Physical 

Delivery. (1) For listed contracts that are 

settled by physical delivery, the terms and 

conditions of the contract should conform to 

the most common commercial practices and 

conditions in the cash market for the 

commodity underlying the futures contract. 

The terms and conditions should be designed 

to avoid any impediments to the delivery of 

the commodity so as to promote convergence 

between the price of the futures contract and 

the cash market value of the commodity at 

the expiration of a futures contract. 

(i) Estimating Deliverable Supplies. 

(A) General definition. The specified terms 

and conditions, considered as a whole, 

should result in a ‘‘deliverable supply’’ that 

is sufficient to ensure that the contract is not 

susceptible to price manipulation or 

distortion. In general, the term ‘‘deliverable 

supply’’ means the quantity of the 

commodity meeting the contract’s delivery 

specifications that reasonably can be 

expected to be readily available to short 

traders and salable by long traders at its 

market value in normal cash marketing 

channels at the contract’s delivery points 

during the specified delivery period, barring 

abnormal movement in interstate commerce. 

Typically, deliverable supply reflects the 

quantity of the commodity that potentially 

could be made available for sale on a spot 

basis at current prices at the contract’s 

delivery points. For a non-financial physicaldelivery commodity contract, this estimate 

might represent product which is in storage 

at the delivery point(s) specified in the 

futures contract or can be moved 

economically into or through such points 

consistent with the delivery procedures set 

forth in the contract and which is available 

for sale on a spot basis within the marketing 

channels that normally are tributary to the 

delivery point(s). Furthermore, an estimate of 

deliverable supply would not include supply 

that is committed for long-term agreements 

(i.e., the amount of deliverable supply that 

would not be available to fulfill the delivery 

obligations arising from current trading). The 

size of commodity supplies that are 

committed to long-term agreements may be 

estimated by consulting with market 

participants. However, if the estimated 

deliverable supply that is committed for 

long-term agreements, or significant portion 

thereof, can be demonstrated by the 

designated contract market to be consistently 

and regularly made available to the spot 

market for shorts to acquire at prevailing 

economic values, then those ‘‘available’’ 

supplies committed for long-term contracts 

may be included in the designated contract 

market’s estimate of deliverable supply for 

that commodity. An adequate measure of 

deliverable supply would be an amount of 

the commodity that would meet the normal 

or expected range of delivery demand 

without causing futures prices to become 

distorted relative to cash market prices. 

Given the availability of acceptable data, 

deliverable supply should be estimated on a 

monthly basis for at least the most recent 

three years for which data are available. To 

the extent possible and that data resources 

permit, deliverable supply estimates should 

be constructed such that the data reflect, as 

close as possible, the market defined by the 

contract’s terms and conditions, and should 

be formulated, whenever possible, with 

government or publicly available data. All 

deliverable supply estimates should be fully 

defined, have all underlying assumptions 

explicitly stated, and have documentation of 

all data/information sources in order to 

permit estimate replication by Commission 

staff. 

(B) Accounting for variations in deliverable 

supplies. To assure the availability of 

adequate deliverable supplies and acceptable 

levels of commercial risk management utility, 

contract terms and conditions should 

account for variations in the patterns of 

production, consumption and supply over a 

period of years of sufficient length to assess 

adequately the potential range of deliverable 

supplies. This assessment also should 

consider seasonality, growth, and market 

concentration in the production/ 

consumption of the underlying cash 

commodity. Deliverable supply implications 

of seasonal effects are more straightforwardly 

delineated when deliverable supply 

estimates are calculated on a monthly basis 

and when such monthly estimates are 

provided for at least the most recent three 

years for which data resources permit. In 

addition, consideration should be given to 

the relative roles of producers, merchants, 

and consumers in the production, 

distribution, and consumption of the cash 

commodity and whether the underlying 

commodity exhibits a domestic or 

international export focus. Careful 

consideration also should be given to the 

quality of the cash commodity and to the 

movement or flow of the cash commodity in 

normal commercial channels and whether 

there exist external factors or regulatory 

controls that could affect the price or supply 

of the cash commodity. 

(C) Calculation of deliverable supplies. 

Designated contract markets should derive a 

quantitative estimate of the deliverable 

supplies for the delivery period specified in 

the proposed contract. For commodities with 

seasonal supply or demand characteristics, 

the deliverable supply analysis should 

include that period when potential supplies 

typically are at their lowest levels. The 

estimate should be based on statistical data, 

when reasonably available, covering a period 

of time that is representative of the 

underlying commodity’s actual patterns of 

production, patterns of consumption, and 

patterns of seasonal effects (if relevant). 

Often, such a relevant time period should 

include at least three years of monthly 

deliverable supply estimates permitted by 

available data resources. Deliverable supply 

estimates should also exclude the amount of 

the commodity that would not be otherwise 

deliverable on the futures contract. For 

example, deliverable supplies should 

exclude quantities that at current price levels 

are not economically obtainable or 

deliverable or were previously committed for 

long-term agreements. 

(2) Contract terms and conditions 

requirements for futures contracts settled by 

physical delivery. 

(i) For physical delivery contracts, an 

acceptable specification of terms and 

conditions would include, but may not be 

limited to, rules that address, as appropriate, 


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the following criteria and comply with the 

associated standards: 

(A) Quality Standards. The terms and 

conditions of a commodity contract should 

describe or define all of the economically 

significant characteristics or attributes of the 

commodity underlying the contract. In 

particular, the quality standards should be 

described or defined so that such standards 

reflect those used in transactions in the 

commodity in normal cash marketing 

channels. Documentation establishing that 

the quality standards of the contract’s 

underlying commodity comply with those 

accepted/established by the industry, by 

government regulations, and/or by relevant 

laws should also be submitted. For any 

particular commodity contract, the specific 

attributes that should be enumerated depend 

upon the individual characteristics of the 

underlying commodity. These may include, 

for example, the following items: grade, 

quality, purity, weight, class, origin, growth, 

issuer, originator, maturity window, coupon 

rate, source, hours of trading, etc. If the terms 

of the contract provide for the delivery of 

multiple qualities of a specific attribute of the 

commodity having different cash market 

values, then a ‘‘par’’ quality should be 

specified with price differentials applicable 

to the ‘‘non-par’’ qualities that reflect 

discounts or premiums commonly observed 

or expected to occur in the cash market for 

that commodity. 

(B) Delivery Points and Facilities. Delivery 

point/area specifications should provide for 

futures delivery at a single location or at 

multiple locations where the underlying cash 

commodity is normally transacted or stored 

and where there exists a viable cash 

market(s). If multiple delivery points are 

specified and the value of the commodity 

differs between these locations, contract 

terms should include price differentials that 

reflect usual differences in value between the 

different delivery locations. If the price 

relationships among the delivery points are 

unstable and a designated contract market 

chooses to adopt fixed locational price 

differentials, such differentials should fall 

within the range of commonly observed or 

expected commercial price differences. In 

this regard, any price differentials should be 

supported with cash price data for the 

delivery location(s). The terms and 

conditions of the contracts also should 

specify, as appropriate, any conditions the 

delivery facilities and/or delivery facility 

operators should meet in order to be eligible 

for delivery. Specification of any 

requirements for delivery facilities also 

should consider the extent to which 

ownership of such facilities is concentrated 

and whether the level of concentration would 

be susceptible to manipulation of the futures 

contract’s prices. Commodity contracts also 

should specify appropriately detailed 

delivery procedures that describe the 

responsibilities of deliverers, receivers and 

any required third parties in carrying out the 

delivery process. Such responsibilities could 

include allocation between buyer and seller 

of all associated costs such as load-out, 

document preparation, sampling, grading, 

weighing, storage, taxes, duties, fees, drayage, 

stevedoring, demurrage, dispatch, etc. 

Required accreditation for third-parties also 

should be detailed. These procedures should 

seek to minimize or eliminate any 

impediments to making or taking delivery by 

both deliverers and takers of delivery to help 

ensure convergence of cash and futures at the 

expiration of a futures delivery month. 

(C) Delivery Period and Last Trading Day. 

An acceptable specification of the delivery 

period would allow for sufficient time for 

deliverers to acquire the deliverable 

commodity and make it available for 

delivery, considering any restrictions or 

requirements imposed by the designated 

contract market. Specification of the last 

trading day for expiring contracts should 

consider whether adequate time remains after 

the last trading day to allow for delivery on 

the contract. 

(D) Contract Size and Trading Unit. An 

acceptable specification of the delivery unit 

and/or trading unit would be a contract size 

that is consistent with customary 

transactions, transportation or storage 

amounts in the cash market (e.g., the contract 

size may be reflective of the amount of the 

commodity that represents a pipeline, 

truckload or railcar shipment). For purposes 

of increasing market liquidity, a designated 

contract market may elect to specify a 

contract size that is smaller than the typical 

commercial transaction size, storage unit or 

transportation size. In such cases, the 

commodity contract should include 

procedures that allow futures traders to 

easily take or make delivery on such a 

contract with a smaller size, or, alternatively, 

the designated contract market may adopt 

special provisions requiring that delivery be 

made only in multiple contracts to 

accommodate reselling the commodity in the 

cash market. If the latter provision is 

adopted, contract terms should be adopted to 

minimize the potential for default in the 

delivery process by ensuring that all 

contracts remaining open at the close of 

trading in expiring delivery months can be 

combined to meet the required delivery unit 

size. Generally, contract sizes and trading 

units should be determined after a careful 

analysis of relevant cash market trading 

practices, conditions and deliverable supply 

estimates, so as to ensure that the underlying 

market commodity market and available 

supply sources are able to support the 

contract sizes and trading units at all times. 

(E) Delivery Pack. The term ‘‘delivery 

pack’’ refers to the packaging standards (e.g., 

product may be delivered in burlap or 

polyethylene bags stacked on wooden 

pallets) or non-quality related standards 

regarding the composition of commodity 

within a delivery unit (e.g., product must all 

be imported from the same country or origin). 

An acceptable specification of the delivery 

pack or composition of a contract’s delivery 

unit should reflect, to the extent possible, 

specifications commonly applied to the 

commodity traded or transacted in the cash 

market. 

(F) Delivery Instrument. An acceptable 

specification of the delivery instrument (e.g., 

warehouse receipt, depository certificate or 

receipt, shipping certificate, bill of lading, inline transfer, book transfer of securities, etc.) 

would provide for its conversion into the 

cash commodity at a commerciallyreasonable cost. Transportation terms (e.g., 

FOB, CIF, freight prepaid to destination) as 

well as any limits on storage or certificate 

daily premium fees should be specified. 

These terms should reflect cash market 

practices and the customary provision for 

allocating delivery costs between buyer and 

seller. 

(G) Inspection Provisions. Any inspection/ 

certification procedures for verifying 

compliance with quality requirements or any 

other related delivery requirements (e.g., 

discounts relating to the age of the 

commodity, etc.) should be specified in the 

contract rules. An acceptable specification of 

inspection procedures would include the 

establishment of formal procedures that are 

consistent with procedures used in the cash 

market. To the extent that formal inspection 

procedures are not used in the cash market, 

an acceptable specification would contain 

provisions that assure accuracy in assessing 

the commodity, that are available at a low 

cost, that do not pose an obstacle to delivery 

on the contract and that are performed by a 

reputable, disinterested third party or by 

qualified designated contract market 

employees. Inspection terms also should 

detail which party pays for the service, 

particularly in light of the possibility of 

varying inspection results. 

(H) Delivery (Trading) Months. Delivery 

months should be established based on the 

risk management needs of commercial 

entities as well as the availability of 

deliverable supplies in the specified months. 

(I) Minimum Price Fluctuation (Minimum 

Tick). The minimum price increment (tick) 

should be set at a level that is equal to, or 

less than, the minimum price increment 

commonly observed in cash market 

transactions for the underlying commodity. 

Specifying a futures’ minimum tick that is 

greater than the minimum price increment in 

the cash market can undermine the risk 

management utility of the futures contract by 

preventing hedgers from efficiently 

establishing and liquidating futures positions 

that are used to hedge anticipated cash 

market transactions or cash market positions. 

(J) Maximum Price Fluctuation Limits. 

Designated contract markets may adopt price 

limits to: (1) Reduce or constrain price 

movements in a trading day that may not be 

reflective of true market conditions but might 

be caused by traders overreacting to news; (2) 

Allow additional time for the collection of 

margins in times of large price movements; 

and (3) Provide a ‘‘cooling-off’’ period for 

futures market participants to respond to 

bona fide changes in market supply and 

demand fundamentals that would lead to 

large cash and futures price changes. If price 

limit provisions are adopted, the limits 

should be set at levels that are not overly 

restrictive in relation to price movements in 

the cash market for the commodity 

underlying the futures contract. 

(K) Speculative Limits. Specific 

information regarding the establishment of 

speculative position limits are set forth in 

part 150, and/or part 151, as applicable, of 

the Commission’s regulations. 

(L) Reportable Levels. Refer to § 15.03 of 

the Commission’s regulations. 


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36724 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

(M) Trading Hours. Should be set by the 

designated contract market to delineate each 

trading day. 

(c) Futures Contracts Settled by Cash 

Settlement. (1) Cash settlement is a method 

of settling certain futures or option contracts 

whereby, at contract expiration, the contract 

is settled by cash payment in lieu of physical 

delivery of the commodity or instrument 

underlying the contract. An acceptable 

specification of the cash settlement price for 

commodity futures and option contracts 

would include rules that fully describe the 

essential economic characteristics of the 

underlying commodity (e.g., grade, quality, 

weight, class, growth, issuer, maturity, 

source, rating, description of the underlying 

index and index’s calculation methodology, 

etc.), as well as how the final settlement price 

is calculated. In addition, the rules should 

clearly specify the trading months and hours 

of trading, the last trading day, contract size, 

minimum price change (tick size) and any 

limitations on price movements (e.g., price 

limits or trading halts). 

(2) Cash settled contracts may be 

susceptible to manipulation or price 

distortion. In evaluating the susceptibility of 

a cash-settled contract to manipulation, a 

designated contract market should consider 

the size and liquidity of the cash market that 

underlies the listed contract in a manner that 

follows the determination of deliverable 

supply as noted above in (b)(1). In particular, 

situations susceptible to manipulation 

include those in which the volume of cash 

market transactions and/or the number of 

participants contacted in determining the 

cash-settlement price are very low. Cashsettled contracts may create an incentive to 

manipulate or artificially influence the data 

from which the cash-settlement price is 

derived or to exert undue influence on the 

cash-settlement price’s computation in order 

to profit on a futures position in that 

commodity. The utility of a cash-settled 

contract for risk management and price 

discovery would be significantly impaired if 

the cash settlement price is not a reliable or 

robust indicator of the value of the 

underlying commodity or instrument. 

Accordingly, careful consideration should be 

given to the potential for manipulation or 

distortion of the cash settlement price, as 

well as the reliability of that price as an 

indicator of cash market values. Appropriate 

consideration also should be given to the 

commercial acceptability, public availability, 

and timeliness of the price series that is used 

to calculate the cash settlement price. 

Documentation demonstrating that the 

settlement price index is a reliable indicator 

of market values and conditions and is 

commonly used as a reference index by 

industry/market agents should be provided. 

Such documentation may take on various 

forms, including carefully documented 

interview results with knowledgeable agents. 

(3) Where an independent, private-sector 

third party calculates the cash settlement 

price series, a designated contract market 

should consider the need for a licensing 

agreement that will ensure the designated 

contract market’s rights to the use of the price 

series to settle the listed contract. 

(i) Where an independent, private-sector 

third party calculates the cash settlement 

price series, the designated contract market 

should verify that the third party utilizes 

business practices that minimize the 

opportunity or incentive to manipulate the 

cash-settlement price series. Such safeguards 

may include lock-downs, prohibitions 

against derivatives trading by employees, or 

public dissemination of the names of sources 

and the price quotes they provide. Because 

a cash-settled contract may create an 

incentive to manipulate or artificially 

influence the underlying market from which 

the cash-settlement price is derived or to 

exert undue influence on the cash-settlement 

computation in order to profit on a futures 

position in that commodity, a designated 

contract market should, whenever 

practicable, enter into an information-sharing 

agreement with the third-party provider 

which would enable the designated contract 

market to better detect and prevent 

manipulative behavior. 

(ii) Where a designated contract market 

itself generates the cash settlement price 

series, the designated contract market should 

establish calculation procedures that 

safeguard against potential attempts to 

artificially influence the price. For example, 

if the cash settlement price is derived by the 

designated contract market based on a survey 

of cash market sources, the designated 

contract market should maintain a list of 

such entities which all should be reputable 

sources with knowledge of the cash market. 

In addition, the sample of sources polled 

should be representative of the cash market, 

and the poll should be conducted at a time 

when trading in the cash market is active. 

(iii) The cash-settlement calculation should 

involve computational procedures that 

eliminate or reduce the impact of potentially 

unrepresentative data. 

(iv) The cash settlement price should be an 

accurate and reliable indicator of prices in 

the underlying cash market. The cash 

settlement price also should be acceptable to 

commercial users of the commodity contract. 

The registered entity should fully document 

that the settlement price is accurate, reliable, 

highly regarded by industry/market agents, 

and fully reflects the economic and 

commercial conditions of the relevant 

designated contract market. 

(v) To the extent possible, the cash 

settlement price should be based on cash 

price series that are publicly available and 

available on a timely basis for purposes of 

calculating the cash settlement price at the 

expiration of a commodity contract. A 

designated contract market should make the 

final cash settlement price and any other 

supporting information that is appropriate for 

release to the public, available to the public 

when cash settlement is accomplished by the 

derivatives clearing organization. If the cash 

settlement price is based on cash prices that 

are obtained from non-public sources (e.g., 

cash market surveys conducted by the 

designated contract market or by third parties 

on behalf of the designated contract market), 

a designated contract market should make 

available to the public as soon as possible 

after a contract month’s expiration the final 

cash settlement price as well as any other 

supporting information that is appropriate or 

feasible to make available to the public. 

(4) Contract terms and conditions 

requirements for futures contracts settled by 

cash settlement. 

(i) An acceptable specification of the terms 

and conditions of a cash-settled commodity 

contract will also set forth the trading 

months, last trading day, contract size, 

minimum price change (tick size) and daily 

price limits, if any. 

(A) Commodity Characteristics: The terms 

and conditions of a commodity contract 

should describe the commodity underlying 

the contract. 

(B) Contract Size and Trading Unit: An 

acceptable specification of the trading unit 

would be a contract size that is consistent 

with customary transactions in the cash 

market. A designated contract market may 

opt to set the contract size smaller than that 

of standard cash market transactions. 

(C) Cash Settlement Procedure: The cash 

settlement price should be reliable, 

acceptable, publicly available, and reported 

in a timely manner as described in 

paragraphs (c)(3)(iv) and (c)(3)(v) of this 

appendix C. 

(D) Pricing Basis and Minimum Price 

Fluctuation (Minimum Tick): The minimum 

price increment (tick) should be set a level 

that is equal to, or less than, the minimum 

price increment commonly observed in cash 

market transactions for the underlying 

commodity. Specifying a futures’ minimum 

tick that is greater than the minimum price 

increment in the cash market can undermine 

the risk management utility of the futures 

contract by preventing hedgers from 

efficiently establishing and liquidating 

futures positions that are used to hedge 

anticipated cash market transactions or cash 

market positions. 

(E) Maximum Price Fluctuation Limits: 

Designated contract markets may adopt price 

limits to: (1) Reduce or constrain price 

movements in a trading day that may not be 

reflective of true market conditions but might 

be caused by traders overreacting to news; (2) 

Allow additional time for the collection of 

margins in times of large price movements; 

and (3) Provide a ‘‘cooling-off’’ period for 

futures market participants to respond to 

bona fide changes in market supply and 

demand fundamentals that would lead to 

large cash and futures price changes. If pricelimit provisions are adopted, the limits 

should be set at levels that are not overly 

restrictive in relation to price movements in 

the cash market for the commodity 

underlying the futures contract. For broadbased stock index futures contracts, rules 

should be adopted that coordinate with New 

York Stock Exchange (‘‘NYSE’’) declared 

Circuit Breaker Trading Halts (or other 

market coordinated Circuit Breaker 

mechanism) and would recommence trading 

in the futures contract only after trading in 

the majority of the stocks underlying the 

index has recommenced. 

(F) Last Trading Day: Specification of the 

last trading day for expiring contracts should 

be established such that it occurs before 

publication of the underlying third-party 

price index or determination of the final 

settlement price. If the designated contract 

market chooses to allow trading to occur 

through the determination of the final 


srobinson on DSK4SPTVN1PROD with RULES2
Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 36725 

settlement price, then the designated contract 

market should show that futures trading 

would not distort the final settlement price 

calculation. 

(G) Trading Months: Trading months 

should be established based on the risk 

management needs of commercial entities as 

well as the availability of price and other 

data needed to calculate the cash settlement 

price in the specified months. Specification 

of the last trading day should take into 

consideration whether the volume of 

transactions underlying the cash settlement 

price would be unduly limited by occurrence 

of holidays or traditional holiday periods in 

the cash market. Moreover, a contract should 

not be listed past the date for which the 

designated contract market has access to use 

a proprietary price index for cash settlement. 

(H) Speculative Limits: Specific rules and 

policies for speculative position limits are set 

forth in part 150 and/or part 151, as 

applicable, of the Commission’s regulations. 

(I) Reportable Levels: Refer to § 15.03 of the 

Commission’s regulations. 

(J) Trading Hours: Should be set by the 

designated contract market to delineate each 

trading day. 

(d) Options on a Futures Contract. (1) The 

Commission’s experience with the oversight 

of trading in futures option contracts 

indicates that most of the terms and 

conditions associated with such trading do 

not raise any regulatory concerns or issues. 

The Commission has found that the 

following terms do not affect an option 

contract’s susceptible to manipulation or its 

utility for risk management. Thus, the 

Commission believes that, in most cases, any 

specification of the following terms would be 

acceptable; the only requirement is that such 

terms be specified in an automatic and 

objective manner in the option contract’s 

rules: 

Æ Exercise method; 

Æ Exercise procedure (if positions in the 

underlying futures contract are established 

via book entry); 

Æ Strike price listing provisions, including 

provisions for listing strike prices on a 

discretionary basis; 

Æ Strike price intervals; 

Æ Automatic exercise provisions; 

Æ Contract size (unless not set equal to the 

size of the underlying futures contract); and 

Æ Option minimum tick should be equal to 

or smaller than that of the underlying futures 

contract. 

(2) Option Expiration & Last Trading Day. 

For options on futures contracts, 

specification of expiration dates should 

consider the relationship of the option 

expiration date to the delivery period for the 

underlying futures contract. In particular, an 

assessment should be made of liquidity in 

the underlying futures market to assure that 

any futures contracts acquired through 

exercise can be liquidated without adversely 

affecting the orderly liquidation of futures 

positions or increasing the underlying futures 

contract’s susceptibility to manipulation. 

When the underlying futures contract 

exhibits a very low trading activity during an 

expiring delivery month’s final trading days 

or has a greater risk of price manipulation 

than other contracts, the last trading day and 

expiration day of the option should occur 

prior to the delivery period or the settlement 

date of the underlying future. For example, 

the last trading day and option expiration 

day might appropriately be established prior 

to first delivery notice day for option 

contracts with underlying futures contracts 

that have very limited deliverable supplies. 

Similarly, if the futures contract underlying 

an option contract is cash settled using cash 

prices from a very limited number of 

underlying cash market transactions, the last 

trading and option expiration days for the 

option contract might appropriately be 

established prior to the last trading day for 

the futures contract. 

(3) Speculative Limits. In cases where the 

terms of an underlying futures contract 

specify a spot-month speculative position 

limit and the option contract expires during, 

or at the close of, the futures contract’s 

delivery period, the option contract should 

include a spot-month speculative position 

limit provision that requires traders to 

combine their futures and option position 

and be subject to the limit established for the 

futures contract. Specific rules and policies 

for speculative position limits are set forth in 

part 150 and/or part 151, as applicable, of the 

Commission’s regulations. 

(4) Options on Physicals Contracts. 

(i) Under the Commission’s regulations, the 

term ‘‘option on physicals’’ refers to option 

contracts that do not provide for exercise into 

an underlying futures contract. Upon 

exercise, options on physicals can be settled 

via physical delivery of the underlying 

commodity or by a cash payment. Thus, 

options on physicals raise many of the same 

issues associated with trading in futures 

contracts regarding adequacy of deliverable 

supplies or acceptability of the cash 

settlement price series. In this regard, an 

option that is cash settled based on the 

settlement price of a futures contract would 

be considered an ‘‘option on physicals’’ and 

the futures settlement price would be 

considered the cash price series. 

(ii) In view of the above, acceptable 

practices for the terms and conditions of 

options on physicals contracts include, as 

appropriate, those practices set forth above 

for physical-delivery or cash-settled futures 

contracts plus the practices set forth for 

options on futures contracts. 

(e) Security Futures Products. The listing of 

security futures products are governed by the 

special requirements of part 41 of the 

Commission’s regulations. 

(f) Non-Price Based Futures Contracts. (1) 

Non-price based contracts are typically 

construed as binary options, but also may be 

designed to function similar to traditional 

futures or option contracts. 

(2) Where the contract is settled to a third 

party cash-settlement series, the designated 

contract market should consider the nature 

and sources of the data comprising the cashsettlement calculation, the computational 

procedures, and the mechanisms in place to 

ensure the accuracy and reliability of the 

index value. The evaluation also considers 

the extent to which the third party has, or 

will adopt, safeguards against unauthorized 

or premature release of the index value itself 

or any key data used in deriving the index 

value. 

(3) The designated contract market should 

follow the guidance in paragraph (c)(4) 

(Contract Terms and Conditions 

Requirements for Futures Contracts Settled 

by Cash Settlement) of this appendix C to 

meet compliance. 

(g) Swap Contracts. (1) In general, swap 

contracts are an agreement to exchange a 

series of cash flows over a period of time 

based on reference price indices. When 

listing a swap for trading, a swap execution 

facility or designated contract market should 

determine that the reference price indices 

used for its contracts are not readily 

susceptible to manipulation. Accordingly, 

careful consideration should be given to the 

potential for manipulation or distortion of 

the cash settlement price, as well as the 

reliability of that price as an indicator of cash 

market values. Appropriate consideration 

also should be given to the commercial 

acceptability, public availability, and 

timeliness of the price series that is used to 

calculate the cash settlement price. 

Documentation demonstrating that the 

settlement price index is a reliable indicator 

of market values and conditions and is highly 

regarded by industry/market agents should 

be provided. Such documentation may take 

on various forms, including carefully 

documented interviews with principal 

market trading agents, pricing experts, 

marketing agents, etc. Appropriate 

consideration also should be given to the 

commercial acceptability, public availability, 

and timeliness of the price series that is used 

to calculate the cash flows of the swap. 

(i) Where an independent, private-sector 

third party calculates the referenced price 

index, the designated contract market should 

verify that the third party utilizes business 

practices that minimize the opportunity or 

incentive to manipulate the cash-settlement 

price series. Such safeguards may include 

lock-downs, prohibitions against derivatives 

trading by employees, or public 

dissemination of the names of sources and 

the price quotes they provide. Because a 

cash-settled contract may create an incentive 

to manipulate or artificially influence the 

underlying market from which the cashsettlement price is derived or to exert undue 

influence on the cash-settlement 

computation in order to profit on a futures 

position in that commodity, a designated 

contract market should, whenever 

practicable, enter into an information-sharing 

agreement with the third-party provider 

which would enable the designated contract 

market to better detect and prevent 

manipulative behavior. 

(ii) Where a designated contract market 

itself generates the cash settlement price 

series, the designated contract market should 

establish calculation procedures that 

safeguard against potential attempts to 

artificially influence the price. For example, 

if the cash settlement price is derived by the 

designated contract market based on a survey 

of cash market sources, the designated 

contract market should maintain a list of 

such entities which all should be reputable 

sources with knowledge of the cash market. 

In addition, the sample of sources polled 

should be representative of the cash market, 

and the poll should be conducted at a time 

when trading in the cash market is active. 


srobinson on DSK4SPTVN1PROD with RULES2
36726 Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules and Regulations 

(iii) The cash-settlement calculation should 

involve appropriate computational 

procedures that eliminate or reduce the 

impact of potentially unrepresentative data. 

(2) Speculative Limits: Specific rules and 

policies for speculative position limits are set 

forth in part 151 and/or part 151, as 

applicable, of the Commission’s regulations. 

(3) Intraday Market Restrictions: 

Designated contract markets or swap 

execution facilities should have in place 

intraday market restrictions that pause or halt 

trading in the event of extraordinary price 

moves that may result in distorted prices. 

Such restrictions need to be coordinated with 

other markets that may be a proxy or a 

substitute for the contracts traded on their 

facility. For example, coordination with 

NYSE rule 80.B Circuit Breaker Trading 

Halts. The designated contract market or 

swap execution facility should adopt rules to 

specifically address who is authorized to 

declare an emergency; how the designated 

contract market or swap execution facility 

will notify the Commission of its decision 

that an emergency exists; how it will address 

conflicts of interest in the exercise of 

emergency authority; and how it will 

coordinate trading halts with markets that 

trade the underlying price reference index or 

product. 

(4) Settlement Method. The designated 

contract market or swap execution facility 

should follow the guidance in paragraph 

(c)(4) (Contract Terms and Conditions 

Requirements for Futures Contracts Settled 

by Cash Settlement) of this appendix C to 

meet compliance, or paragraph (b)(2) 

(Contract Terms and Conditions 

Requirements for Futures Contracts Settled 

by Physical Delivery) of this appendix C, as 

appropriate. 

Issued in Washington, DC, on May 10, 

2012, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Core Principles and 

Other Requirements for Designated 

Contract Markets—Commission Voting 

Summary and Statements of 

Commissioners 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rulemaking on 

designated contract markets DCMs, which 

includes rules, guidance and acceptable 

practices. It advances important Dodd-Frank 

transparency reforms. The Dodd-Frank Act 

squarely addresses the historically opaque 

swaps market though its strong transparency 

provisions. A critical element is pre-trade 

transparency—requiring standardized swaps 

between financial firms—those that are 

cleared, made available for trading and not 

blocks—to be traded on exchanges, such as 

DCMs, swap execution facilities (SEFs) or 

foreign boards of trade (FBOTs). When 

markets are open and transparent, prices are 

more competitive, markets are more efficient 

and liquid, and costs are lowered for 

companies and their customers. 

DCMs have long demonstrated the value of 

open and competitive trading. DCMs, for the 

first time, will be able to list and trade swaps, 

helping to bring the benefit of pre-trade 

transparency to the swaps marketplace. 

In addition, the Dodd-Frank Act 

incorporated the previously existing eight 

statutory designation criteria for DCMs into 

the DCM core principles and expanded the 

principles from 18 to 23. The final 

rulemaking the Commission will consider 

today conforms to the Dodd-Frank 

transparency reforms. 

The final rulemaking benefits from 

extensive public comment and provides 

exchanges rules, guidance and acceptable 

practices on complying with Dodd-Frank’s 23 

core principles. In many instances, we’re 

codifying industry practices that the 

Commission has observed and found 

appropriate to comply with these core 

principles. While preserving a principlesbased regime, these regulations will provide 

greater legal certainty and transparency to 

DCMs in determining their compliance 

obligations, and to market participants in 

determining their obligations as DCM 

members, and will facilitate the enforcement 

of such provisions. 

The final rulemaking is consistent with the 

core principles-based regime of the 

Commodity Exchange Act. It provides each 

DCM with the flexibility to employ 

additional measures to address core principle 

requirements. 

As an example, the final rulemaking 

requires DCMs to put in place effective pretrade risk filters, including pauses and/or 

trading halts to address extraordinary price 

movements that may result in distorted 

prices or trigger market disruptions. The 

rulemaking, though, also recognizes that 

pauses and halts comprise only one category 

of risk controls, and that additional controls 

may be necessary to be put in place by 

exchanges to reduce the potential for market 

disruptions. The final guidance included in 

today’s rulemaking lists that exchanges may 

possibly implement price collars or bands, 

maximum order size limits, and message 

throttles. 

This rulemaking does not yet finalize the 

Commission’s proposal relating to core 

principle 9—which requires DCMs to provide 

an open, competitive and efficient market 

and mechanism for transactions that protects 

the price discovery process of the DCM’s 

central marketplace. I expect the Commission 

to consider a final rule on this matter when 

it takes up the SEF rule this summer. The 

additional time will allow the Commission to 

more fully analyze the many public 

comments on these provisions, including 

comments on the implications of exchange of 

futures for swap transactions, or so-called 

‘‘EFS transactions,’’ in relation to the 

transparency reforms of Dodd-Frank, as well 

as the requirement for non-discriminatory 

open access to clearing. 

[FR Doc. 2012–12746 Filed 6–18–12; 8:45 am] 

BILLING CODE 6351–01–P 


srobinson on DSK4SPTVN1PROD with RULES2