[Federal Register Volume 62, Number 45 (Friday, March 7, 1997)]
[Rules and Regulations]
[Pages 10434-10441]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5567]


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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 5


Revised Procedures for Commission Review and Approval of 
Applications for Contract Market Designation and of Exchange Rules 
Relating to Contract Terms and Conditions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: On November 22, 1996, the Commodity Futures Trading Commission 
(``Commission'') proposed rules amending its procedures relating to the 
review and approval of applications for contract market designation and 
proposed exchange rule amendments relating to contract terms and 
conditions. Based upon its consideration of the comments received in 
response to its Notice of Proposed Rulemaking, 61 FR 59386 (November 
22, 1996), and upon its independent analysis, the Commission is 
promulgating new rule 5.1.
    Rule 5.1 establishes fast-track procedures for Commission review of 
exchange applications for contract market designation as an alternative 
to the current review procedures. Under these alternative procedures, 
applications for designation of cash-settled and other specified 
futures and option contracts will be deemed to be approved ten days--
and all others, forty-five days--after receipt, unless the exchange is 
notified otherwise. The final rules have been modified, in response to 
public comment, by including within the ten-day category proposed 
option contracts based upon futures contracts that are already 
designated and by confirming explicitly within the rule that exchanges 
may modify applications nonsubstantively under the fast-track review 
procedures.
    The Commission also is amending rule 1.41, as proposed, to provide 
an alternative fast-track review of proposed amendments to contract 
terms or conditions. These procedures are similar to those for contract 
market designations and include both ten-day and forty-five-day review 
periods. These review periods can be extended for one thirty-day period 
in appropriate instances. In a companion notice published separately in 
the Federal Register, the Commission also is adopting fast-track 
procedures relating to the review of proposed exchange rules which do 
not relate to contract terms or conditions.

EFFECTIVE DATE: April 7, 1997.

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel, 
Division of Economic Analysis, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, 
(202) 418-5260, or electronically, [PA<a href="/cdn-cgi/l/email-protection#8af8e9e2e3fef0efe6cae9ecfee9a4ede5fc"><span class="__cf_email__" data-cfemail="3f4d5c57564b455a537f5c594b5c11585049">[email protected]</span></a>].

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Requirements for Commission Designation of 
Proposed Contract Markets

    The requirement that boards of trade meet specified conditions in 
order to be designated as contract markets has been a fundamental tool 
of federal regulation of commodity futures exchanges for the past 
seventy-five years.<SUP>1 Prior to the 1974 amendments to the Commodity 
Exchange Act, 7 U.S.C. 1 et seq. (``Act''), however, the statutory 
scheme did not require the Commodity Exchange Authority (``CEA''), the 
Commission's predecessor agency, to approve in advance the trading of 
all new futures contracts,<SUP>2 nor did it require agency approval of 
exchange rules before they became effective. Rather, exchange rules 
amending the terms and conditions of futures contracts were subject 
only to disapproval after becoming effective. See, Pub. L. 90-258, sec. 
23, 82 Stat. 33 (1968).
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    \1\ See, Futures Trading Act of 1921, Pub. L. 67-66, 42 Stat. 
187 (1921). Designation as a contract market under the 1921 Act was 
contingent upon a board of trade's meeting specified statutory 
criteria, including providing for the prevention of manipulative 
activity. Although the constitutionality of this Act was 
successfully challenged as an improper use of the Congressional 
taxing power in Hill v. Wallace, 259 U.S. 44 (1922), all subsequent 
legislation regulating the futures industry followed this pattern.
    \2\ Prior to 1974, the Act defined ``commodity'' by specific 
enumeration. Accordingly, new contracts that were not so enumerated 
were unregulated. The definition of commodity periodically would be 
updated to include additional commodities in which trading had 
commenced on those exchanges which traded other regulated contracts. 
For example, livestock and livestock products were added to the 
Act's definition of ``commodity'' as part of the 1968 amendments to 
the Act, after such contracts had already begun trading on the 
Chicago Mercantile Exchange. Pub. L. 90-258 section 1(a), 49 Stat. 
1491 (1968).
    Other futures exchanges, including the Commodity Exchange, Inc. 
and the former Coffee and Sugar and Cocoa exchanges, operated wholly 
outside of the regulatory scheme.
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    The 1974 amendments to the Act rejected that approach. Instead, as 
part of Congress' overall intent to strengthen federal regulatory 
oversight of the futures industry, the 1974 amendments provided for a 
meaningful government review of all new futures contracts before 
trading could begin and of proposed amendments to the terms or 
conditions of existing contracts. See, H. Rep. No. 93-975, 93d Cong., 
2d Sess. at 78, 82 (1974).
    Subsequently, Congress reinforced this determination by enhancing 
the opportunity for public participation in the Commission's review 
procedures. As part of the 1978 amendments to the Act, Congress added 
the provision requiring a public comment period for economically 
significant proposed exchange rules. That amendment to section 
5a(a)(12) of the Act was offered from the floor during debate in the 
House of Representatives. In offering this amendment, Representative 
AuCoin reasoned that

[m]any of the notifications [of changes to exchange rules] approved 
by this Commission are technical and rather noncontroversial.
    However, there are a number of proposed rule changes that are 
controversial because of their expected impact on the way a 
particular commodity is traded or on the broader effects that a 
change may bring about in the production and distribution of that 
commodity.

124 Cong. Rec. H7312 (July 26, 1978).

    Over the years, the Commission has demonstrated flexibility in 
implementing its regulatory mandate to review and approve new contracts 
and amendments to existing contracts. Based upon its administrative 
experience, the Commission periodically has revised and updated its 
procedures to provide exchanges with more specific criteria for meeting 
the contract market designation requirements; to reflect new 
developments in futures trading--such as the introduction of financial 
futures, futures on aggregates or indices of securities and cash 
settlement as a substitute for physical delivery; and, where 
appropriate, to lessen the burden on applicants by reducing the 
information required and streamlining the form of application.
    In this regard, Guideline No. 1, 17 CFR part 5, appendix A, which 
provides guidance on the information to be included in designation 
applications and on the criteria for meeting the statutory designation 
requirements, was last amended in January 1992. The 1992 amendment 
substantially reduced and streamlined the guideline's

[[Page 10435]]

requirements. Indeed, much of the application for option contracts has 
been reduced to the form of a checklist. Moreover, under the 1992 
amendments, applications for designation of futures contracts need not 
duplicate any of the analysis or justification of contract terms which 
have been previously approved, reducing greatly the length of the 
justification or analysis required in a typical application for 
designation.
    Despite the progress already made in reducing the paperwork 
requirements associated with designation applications, the Commission, 
in proposing these fast-track review rules, gave notice of its 
intention broadly to reexamine the form and content requirements of 
Guideline No. 1. This would include consideration of the possible 
applicability of an option-style checklist to applications for 
designation of proposed futures contracts. 61 FR 5991.<SUP>3 
Implementation of fast-track review and approval procedures, separately 
and together with the planned revision of the format and content 
requirements for designation applications, should result in 
significantly streamlining the procedures and regulatory requirements 
associated with the current contract designation process.<SUP>4
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    \3\ Several commenters questioned the Commission's commitment to 
undertake this review expeditiously, citing the Commission's 
determination to propose these fast-track review rules separately. 
Rather than indicating a lack of commitment to its expressed 
intention, this statement accurately assessed the relative 
complexity of the undertaking and demonstrated an intention to put 
improvements to its review and approval procedures in place as soon 
as possible.
    \4\ The Commission has also modified many of its internal 
procedures to expedite further the review and approval of new 
contracts and proposed amendments to existing contracts. In 1992, 
the Commission established a policy to notify the public of the 
availability of proposed contract terms for comment by publication 
in the Federal Register within one week of receipt of an 
application. In addition, under these procedures, substantive issues 
are identified and communicated informally to the exchange very 
shortly after receipt, permitting a prompt resolution.
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II. The Proposed Rules

    The Commission proposed rules streamlining the procedures for the 
review of applications for contract market designation and of proposed 
exchange rule amendments relating to the terms and conditions of 
existing contracts. The thirty-day comment period ended on December 23, 
1996, but was extended at the request of several exchanges until 
January 16, 1997, 61 FR 68175 (December 27, 1996).<SUP>5
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    \5\ By Petition dated December 17, 1996, the New York Mercantile 
Exchange, joined by the Chicago Board of Trade and the Chicago 
Mercantile Exchange, requested that the thirty-day comment period on 
fast-track designation procedures be extended.
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    Although the Commission proposed rules whereby the overall time to 
review and act on exchange submissions could be significantly 
shortened, the proposed rules did not alter the underlying legal 
requirement that these rules be subject to Commission review and prior 
approval before becoming effective. The Commission reasoned that prior 
Commission approval of proposed contracts remains in the public 
interest because,

[i]n the absence of properly designed contract terms, damage to 
hedgers or industry pricing may result before corrections to the 
contract can be made. The impact of a market manipulation or other 
disruption in a newly introduced futures contract potentially could 
be far wider than the futures market itself, adversely affecting the 
underlying cash market, as well. Correcting this type of problem 
after trading has already begun may require extraordinary measures 
such as emergency action. At a minimum, such an occurrence would 
probably result in diminished credibility for futures trading in 
that contract, and possibly for futures trading, generally.

61 FR 59386 (footnote deleted).

    Specifically, the Commission proposed a new rule 5.1 providing for 
a ten-day review period, after which--absent any contrary action by the 
Commission--the contracts would be automatically deemed to be approved. 
The Commission proposed that this procedure be applicable to all cash-
settled futures and option contracts, except those for the domestic 
agricultural commodities enumerated in section 1a(3) of the Act or 
subject to the special procedures of the Johnson-Shad jurisdictional 
accord, <SUP>6 and to all futures and option contracts on foreign 
currency. This is the same time period as provided under the Commission 
Part 36 exemptive rules. See, Commission rule 36.4, 17 CFR 36.4 (1996).
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    \6\ See, section 2(a)(1)(B) of the Act. Proposed contracts 
subject to this provision of the Act are not eligible for fast-track 
treatment generally, under either the ten-day review provision or 
the forty-five day review period discussed below.
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    For all other contracts, the Commission proposed to reduce by half 
the average time now required for contract market designation. These 
applications for contract market designation would be deemed to be 
approved by the Commission forty-five days after receipt. As proposed, 
both the ten-day and forty-five-day review periods could be extended 
for one thirty-day period, in appropriate instances. The fast-track 
review periods would be available only for applications for designation 
that are complete and not substantively amended after filing, except as 
requested by the Commission. The Commission would continue to publish 
for public comment notice of the availability of the terms of those 
applications for designation subject to the forty-five-day review 
period, but proposed to reduce the public comment period for such fast-
track applications from thirty days, as currently provided under 
appendix D to part 5, to fifteen days.
    The Commission proposed to amend its procedures for reviewing 
proposed exchange rule amendments to the terms and conditions of 
existing contracts consistent with the proposed changes to its review 
of applications for new designations. <SUP>7 Thus, in light of the 
existing provisions for ten-day review of many categories of such 
proposed exchange rule amendments, the Commission proposed to add to 
Commission rule 1.41(b) a fast-track review procedure consistent with 
the proposed forty-five-day fast-track review for designation 
applications.
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    \7\ In general, only contract terms and conditions, with the 
exception of rules setting margin, are required to be submitted for 
Commission review and approval. See, section 5a(a)(12)(A) of the 
Act. Changes to contract specifications, which can modify a contract 
significantly, are given the same type of review they would receive 
if submitted as part of an application for a new designation.
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    With regard to publication for public comment, the Commission 
proposed to reduce the comment period to fifteen days for those rules 
published as a matter of discretion based upon a finding that 
``publication * * * is in the public interest and will assist the 
Commission in considering the views of interested persons.'' Commission 
rule 140.96(b), 17 CFR 140.96(b). The Commission determined to maintain 
a thirty-day comment period for those rules that are published because 
they are determined to be of major economic significance. See, section 
5a(a)(12)(A) of the Act.

III. Comments Received and Final Rules

    The Commission received seven comment letters from eight 
commenters. The commenters included four futures exchanges, a 
securities exchange, an industry association, and two academics. All 
but two of the commenters advanced the position that the proposed 
rulemaking, although well-intentioned, did not go far enough to relieve 
the exchanges from the perceived competitive burden which they argued 
the approval process entails. These commenters argued that only through 
amendment of the Act can the exchanges' competitiveness be restored. 
Those comments are best

[[Page 10436]]

addressed by Congress. Nevertheless, it may be instructive to respond 
to those comments here, particularly insofar as they are likely based 
upon assumptions and premises common to those comments which respond to 
the proposed rules.

a. Competitiveness as the Impetus for Fundamental Restructuring of the 
Process for Contract and Rule Amendment Approval

    The Commission, from its inception, has always been careful to 
consider the effect of its actions on competition in, and the 
competitiveness of, the U.S. futures industry. It routinely strives to 
impose the least restrictive regulatory approach necessary to 
accomplish the goals and objectives of the Act. <SUP>8 After carefully 
considering the comments, the Commission believes that streamlining the 
current procedures, while maintaining the current prior approval 
standards, offers the best balance between protection of the public and 
cost reduction, as well as best conserving both Commission and exchange 
staff resources.
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    \8\ See, section 15 of the Act.
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    In this regard, the Commission carefully and fully analyzed the 
nature of global competition in the futures industry in a major 1994 
study mandated by Congress as part of the 1992 amendments to the Act. 
That study analyzed the growth of futures trading in non-U.S. markets 
and the relative decline in the global market share of U.S. exchanges 
and concluded that U.S. exchanges remain leaders in innovation and 
generally have reached the global market first with new products.
    The Commission is supportive, in general, of initiatives of U.S. 
exchanges to become more competitive. <SUP>9 However, fundamentally 
restructuring the process for listing new products as advocated by many 
of the commenters will not address the real factors which explain the 
growth of foreign markets. Foreign exchanges, by and large, have 
succeeded by developing products similar to those offered on U.S. 
exchanges but tailored to their home markets. <SUP>10 A second strength 
enjoyed by foreign competitors arises from time-zone advantages, 
whereby foreign futures exchanges are open for trading at the same time 
as important centers for trading in the underlying cash market.
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    \9\ The Commission has encouraged industry-wide innovation and 
modernization in trading systems. In this regard, for example, the 
Commission sponsored a round-table on October 16, 1996, to highlight 
issues relating to electronic order routing and trading systems.
    \10\ For example, many foreign exchanges trade interest-rate 
contracts based upon the sovereign debt of the nation in which they 
are located.
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    The Commission found no evidence, however, that disparities in the 
regulatory frameworks of various jurisdictions, and of the procedures 
for listing new contracts in particular, were a major factor explaining 
the success of various exchanges in the global market. Moreover, in 
general, the trend among foreign authorities has been to strengthen 
their regulatory regimes, rather than to weaken them. This is a process 
supported and advanced by the Commission. <SUP>11 Thus, the 
appropriateness of the Commission's proposed rules for fast-track 
review should be analyzed solely on their own merit, and not measured 
against a vague notion that restructuring the approval process will 
address the competitive challenges faced by the exchanges.
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    \11\ The Commission has been a world-leader in promoting the 
strengthening of regulatory oversight as futures trading becomes 
more global in nature. This process has accelerated in light of 
developments in connection with the Barings, Plc. and Sumitomo Corp. 
situations. See, Windsor Declaration issued May 17, 1995, and London 
Communique on Supervision of Commodity Futures Markets (November 26, 
1996).
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b. The General Role of Self-Regulation in the Rule Approval Process

    In addition to their arguments based on competitiveness, several 
exchanges also reject the fast-track approach on general philosophical 
grounds concerning the appropriate scope of government oversight of 
self-regulatory organizations (``SROs''). The Chicago Board of Trade 
(``CBT''), for example, argues that the Act's current preapproval 
framework is premised upon the erroneous presumption that ``exchanges 
are either incapable of acting or cannot be trusted to act as 
responsible SROs in compliance with (their) obligations under the 
CEA.'' The CBT therefore advocates a fundamental legislative 
restructuring of the Act's review provisions.
    The CBT maintains that Commission oversight can, and should, be 
relaxed because market incentives, such as avoidance of damage to its 
valuable reputation, will guide exchanges to take appropriate self-
regulatory actions. The CBT, in its view, already provides sufficient 
opportunity for public input into its design of contracts and rule 
changes as a matter of business self-interest; public participation at 
a later stage of review under the aegis of government oversight is 
unnecessary because ``business judgment tells * * * (the CBT) (to) be 
careful and diligent in the exercise of (its) regulatory judgment * * * 
. `` CBT Comment Letter dated January 16, 1997, at 9 (emphasis in 
original).
    The Commission agrees that market incentives, enlightened business 
judgment and the desire to protect reputation are strong motivations 
which can lead to a high degree of self-regulation. Far from having a 
presumption that exchanges are either incapable of acting responsibly 
or not to be trusted, the Commission presumes that the exchanges will, 
in fact, act responsibly. Nevertheless, experience demonstrates that 
there have been instances when government oversight and action have 
been required to address particular instances where business judgments 
by the exchange membership did not appear to offer sufficient guidance 
to inform fully an SRO's regulatory judgment. <SUP>12
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    \12\ Often, the Commission receives few or no public comments on 
contract market designations or on exchange rule changes. This is to 
be expected. It indicates that the exchange has indeed received and 
considered input from interested outside sources in connection with 
a proposal. However, there are more than a few designation 
applications or proposed exchange rule changes every year that 
elicit a significant number of comments, casting doubt upon the 
exchange's theory that its business self-interest will reliably 
inform all of its regulatory judgements. See e.g., Notification to 
the CBT to Amend Delivery Specifications, 61 FR 68175 (December 12, 
1995).
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    The exchanges also argue that replacing prior approval with post-
introduction intervention in troubled markets is a superior approach to 
these issues. For example, although the CBT agrees that ``[n]o one 
questions that contract design flaws could make a contract susceptible 
to manipulation,'' it disagrees with the Commission's assessment that 
review of contracts before they begin to trade is one of the most 
effective market surveillance tools. The CBT states that, based on its 
experience, the exchange's ``comprehensive market surveillance program 
is the most effective way to protect our markets.''
    The Commission advocates careful preapproval review in order to 
reduce the need to intervene in markets which are trading. The 
Commission agrees that futures exchanges generally have adequate 
programs of market surveillance, as is required by the current 
provisions of the Act and Commission rules. Where contract terms are 
appropriately set, however, market forces will respond to factors of 
supply and demand, without the need for regulatory intervention--by 
either the SRO or the government. Thus, the hand of regulation may be 
heaviest where preapproval review is lessened in favor of the more 
drastic forms of intervention necessary to address problems after

[[Page 10437]]

trading begins. Accordingly, the Commission remains convinced that the 
current structure of the Act best serves the public interest.
    In addition to opposition to the rulemaking in favor of legislative 
action, certain exchanges raised objections to specific provisions of 
the proposed rules. For example, the New York Mercantile Exchange 
(``NYMEX'') opined that the ten-day review provision should be applied 
more broadly, stating that, ``if Commission staff can review (cash-
settled) contracts within ten days, the same time frame also should 
apply to contracts involving physical delivery.'' As explained in the 
Notice of Proposed Rulemaking, the Commission afforded ten-day 
treatment to foreign currency and cash-settled contracts based on its 
many years of administrative experience reviewing applications for 
designation from all of the nation's futures exchanges. In the 
Commission's experience, contracts for foreign currency and (with the 
exception of those agricultural commodities which are enumerated in 
section 1a(3) of the Act) contracts providing for cash-settlement for 
the most part raise fewer issues requiring careful analysis than do 
contracts for physical delivery. This is especially true where the 
cash-settlement price is determined by a reputable third-party for 
commercial purposes other than solely for settlement of the futures 
contract.<SUP>13
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    \13\ Many of the exchange commenters complain, as does the CBT, 
that cash-settled contracts raise issues which are not inherently 
more or less complicated than those raised by contracts for physical 
delivery. The Commission agrees that some cash-settled contracts do 
raise issues which would require more than ten days to analyze. That 
is why it proposed to maintain a degree of flexibility in the 
process by permitting the Commission to extend the ten-day review 
period for those cash-settled contracts that raise novel or complex 
issues. In this way, the Commission has sought to balance the need 
for speedy, yet meaningful contract review.
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    NYMEX also questions why the ten-day review period is available 
only to options on those foreign currency and cash-settled futures 
contracts eligible for ten-day review. Although options on physicals 
may raise issues regarding delivery and deliverable supplies, options 
on futures contracts generally raise few issues independent of the 
underlying futures contracts. Accordingly, as NYMEX's question 
suggests, options on futures typically could be included under the ten-
day review period.
    However, applications for designation of new futures contracts and 
options on those futures contracts generally are submitted 
together.<SUP>14 Because such an option is exercised into the futures 
contract, the underlying futures contract must be approved for trading 
as well. See, rule 33.41(a)(1)(ii). Accordingly, both the futures 
contract and its associated option should be assigned the same review 
period, notwithstanding the fact that an option on a futures contract 
raises few independent issues. Nevertheless, there have been rare 
instances where an option has been proposed to trade subsequent to 
designation of its underlying futures contract. In those instances, a 
ten-day review period is appropriate. The final rules reflect this 
modification.
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    \14\ The fees associated with applications for contract market 
designation recognize the efficiency of reviewing and designating an 
option and its underlying futures contract together and are set at a 
lower rate than are fees for a futures contract and a related option 
contract that are submitted separately.
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    In addition, all of the exchanges question inclusion in the fast-
track procedures of any extension of time, even for novel or complex 
contracts. The Chicago Mercantile Exchange (CME) complains that the 
Commission could extend the time because a contract is novel or complex 
without ``any necessary nexus between the nature of such issues and the 
provisions of the Act and regulations.''
    This proposed provision was not intended by the Commission to be a 
means of enlarging the time for review routinely or merely because a 
contract is novel. The Commission has a laudable record of encouraging 
innovation and of removing regulatory hurdles to novel contract 
proposals. However, where more time is needed to determine whether an 
application meets the requirements for designation because there are 
questions remaining on complex or novel issues, it would be ill-advised 
not to provide for a short extension.
    Of course, the Commission agrees that extensions of the review 
period should not be frivolous or unwarranted. Accordingly, it proposed 
to notify exchanges of such extensions, specifying the particular 
``issues for which additional time for review is required.'' Such a 
requirement is intended to assure against unnecessary extensions of 
time for review. If after actual experience with this rule, however, 
the exchanges believe that it has been abused, they can petition the 
Commission to amend it. Such flexibility is a primary benefit of an 
agency's establishing such procedures by rule, rather than through 
congressional statutory amendment.
    Several exchanges also commented negatively on including as a 
proposed ground for terminating fast-track review an application's 
failure to comply with the applicable form or content requirements. The 
CME argues that Guideline No. 1 asks for a great deal of information, 
``much of which may not be relevant to the ultimate question of whether 
the contract should be disapproved for violating a statutory or 
regulatory condition of designation.'' The CBT argues that, ``given the 
level and extent of detail required by Guideline No. 1, coupled with 
the open-ended obligation Guideline No. 1 imposes * * * the 
determination of whether an application is `complete upon submission' 
is highly subjective and open to misuse.'' CBT Comment Letter at 11.
    The facts, however, do not justify such fears. The informational 
requirements of Guideline No. 1 are in fact related to whether the 
terms of a proposed contract violate a provision of the Act or 
Commission rules. The vast majority of the information required to be 
provided under Guideline No. 1 relates to consistency of the delivery 
terms of the proposed contract to the underlying cash market, based 
upon the statutory requirements that delivery terms be set so that 
contracts are not readily susceptible to manipulation. Compare, Part 5, 
Appendix A(a)(2)(i)-(v) and (3) to sections 5 and 5a of the Act. 
Moreover, the number of times that proposed contracts are formally 
deemed to be materially incomplete are relatively few.<SUP>15
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    \15\ The Commission rarely deems a contract application to be 
incomplete on the basis that additional information is needed. 
Rather, the typical practice is for staff to make targeted requests 
to exchanges for additional information which is necessary to make 
clear whether particular terms or conditions violate or may violate 
a provision of the Act or Commission rules. Generally, applications 
for designation are found to be ``materially incomplete'' only when 
actual modifications to the specific terms that have been submitted 
for review are required to bring the proposed contract into 
compliance with the Act or Commission regulations.
    Similarly, few proposed amendments to contract terms are 
remitted for failure to comply with the applicable form or content 
requirements. No such rule amendments have been remitted in the 
current fiscal year or in fiscal year 1996.
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    The CME concedes that it ``can sympathize with the CFTC's position 
that it should not be required to give expedited review to an 
application that contains material deficiencies.'' It suggests that 
where such deficiencies exist, rather than the proposed contract's 
becoming ineligible for fast-track review, the exchange

should be afforded an opportunity to correct the deficiency and then 
resume the fast-track

[[Page 10438]]

review process. The statement in the CFTC proposal that an amendment 
or supplement to an exchange's application renders the application 
ineligible for fast-track review seems overly harsh. At worst, an 
amendment or supplement to the application should cause the clock 
for the fast-track process to be reset.

CME Comment Letter, dated January 16, 1997, at 7.

    A careful reading of the proposed rules reveals that the 
Commission, under proposed rule 5.1(a)(ii)(6), did indeed leave open 
the possibility that in appropriate circumstances the Commission could 
request that exchanges substantively amend the terms of a proposed 
contract under the fast-track procedures. The Commission anticipates 
that such requests would be made to exchanges where a term or condition 
of a proposed contract appears to violate a provision of the Act or 
Commission rules, but could be cured readily within the time 
remaining.<SUP>16
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    \16\ For example, where a contract for foreign currency called 
for delivery in a manner contrary to the law of the issuing 
sovereign, but the delivery provisions could be modified to make 
delivery legal, the Commission could request that the modification 
be made, provided that there were sufficient time in the ten-day 
review period for the exchange to comply.
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    In this regard, the thirty-day extension available for certain 
novel or complex applications should not be viewed by the exchanges as 
an additional period within which to cure defects in otherwise 
straightforward applications. Nor is the Commission modifying the 
proposed rule to provide that in such instances the time for fast-track 
review be reset. This would add an unnecessary level of complexity to 
the fast-track review procedures, particularly in light of the 
relatively prompt review and approval of submissions under current 
procedures.<SUP>17 Where Commission staff identify serious defects in 
the contract terms that cannot be cured within the time remaining for 
fast-track review and which would result in a recommendation that the 
Commission disapprove a proposal, the Commission will terminate fast-
track review. Because disapproving applications for designation or 
proposed exchange amendments requires significant staff resources, this 
termination provision is intended to offer exchanges the opportunity to 
supplement an incomplete record or cure a defect in a proposed 
application for contract designation or amendment of a contract term 
without engaging in a disapproval proceeding.
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    \17\ Of course, where an exchange wishes to cure a defect in a 
proposed contract after submission, it is free to withdraw the 
original submission and submit a new, amended application for fast-
track review. This, in essence, is a mechanism within the contours 
of the rules as proposed by which an exchange can ``reset'' the 
review period simply, without adding undue complexity to these 
rules.
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    Although the Commission would prefer to permit exchanges an 
opportunity to supplement an incomplete record or to cure a potential 
defect and then to move forward toward approval of the application, 
rather than to initiate disapproval proceedings, the final 
determination in such instances of whether disapproval proceedings 
should be initiated will rest with the exchange. As the Commission 
explained in the Notice of Proposed Rulemaking, an exchange may require 
the Commission to decide either to approve or to initiate disapproval 
of a contract or proposed exchange rule at the time that fast-track 
review is terminated. It stated that,

[w]here a proposed contract originally filed for fast-track review 
appears to violate a statutory or regulatory requirement, the 
Commission presumes that the exchange would prefer to convert the 
application to one for review under current procedures * * *. 
However, when exchanges prefer that the Commission render a decision 
whether to disapprove the application as filed, the Commission will 
institute a formal disapproval proceeding upon notification that the 
exchange views its application as complete and final as submitted.

61 FR 59389 (footnote omitted).

    Finally, several of the exchanges complained that not permitting 
them substantively to revise their applications or rule submissions 
penalized them for trying to improve the proposed contract or 
rule.<SUP>18 This argument is somewhat at odds with the exchanges' 
other arguments that, because they expend such great resources in 
perfecting their proposed contracts, Commission review is unnecessary 
and wasteful. The CME argues, somewhat more consistently, that 
substantive revisions are made to proposed contracts during the review 
period, but only because exchanges ``currently have an incentive to 
rush new contract applications in as soon as possible to `start the 
clock.' ''
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    \18\ Both NYMEX and the Coffee, Sugar and Cocoa Exchange noted 
that, although the preamble stated that exchanges would be permitted 
to make non-substantive amendments to their submissions, such as 
correcting typographical errors, the proposed rule did not 
explicitly include such a provision. The final rule has been 
modified so to provide.
---------------------------------------------------------------------------

    The exchanges have maintained that, as a consequence of business 
incentives, new contracts are thoroughly analyzed by the exchanges. If 
so, one would expect new contract applications to be complete when 
submitted. Moreover, to the extent that the time period for review at 
the outset is known to be brief, the incentive to submit incomplete 
applications for review prematurely should be diminished. In either 
case, these fast-track procedures will realign the contract approval 
process along the lines advocated by the exchanges. Complete, well-
thought-out proposed contracts, even novel or complex ones, should 
speed through the review process, validating the quality of the 
exchanges' proposals and conserving scarce Commission resources.
    One commenter, the Futures Industry Association (``FIA''), 
supported the Commission's proposed fast-track rules as ``an essential 
next step in the evolution of the Commission's rule review 
procedures.'' The FIA ``estimates that its members effect more than 
eighty percent of all customer transactions executed on United States 
contract markets.'' It notes that ``although exchanges have the 
obligation to act in the public interest and may be expected to do so, 
the determination with respect to whether a particular contract or rule 
is in the public interest is properly vested in the Commission.''
    Moreover, the FIA agrees with the Commission's concern that the 
procedures applicable to contract market designation and approval of 
rules retain a measure of flexibility, stating:

The vast majority of exchange rule submissions, whether in the form 
of an initial application for designation as a contract market or a 
subsequent amendment have been approved without controversy, and 
such rules will benefit from the expedited review procedures. 
However, * * * from time to time certain exchange rules relating to 
the terms and conditions of contracts have raised significant 
concerns for FIA members as well as other market participants. 
Moreover, the impact of a particular rule has not always been 
evident on its face, either to the Commission, industry participants 
or, in some cases, the submitting exchange. It is essential, 
therefore, that the Commission retain the flexibility inherent in 
the proposed rules to assure the opportunity for thoughtful analysis 
and comment in appropriate circumstances.

FIA Comment Letter, dated January 21, 1997 at 3.<SUP>19

    \19\ An additional commenter, the New York Stock Exchange, while 
not commenting on the fast-track review procedures, noted its 
interest in preserving the public's ability to comment on particular 
rule amendments. The NYSE requested that the Commission publish all 
proposals to amend circuit breakers. It is the Commission's current 
policy, which it will continue, to publish for public comment all 
proposed amendments affecting circuit breakers coordinated among 
markets. See, e.g., 61 FR 68722 (December 30, 1996).

    In addition, the FIA notes that membership organizations, and the 
exchanges themselves, will have difficulty in responding within the 
time frames provided under these rules.

[[Page 10439]]

Indeed, several exchanges requested an extension of the comment period 
in this very proposed rulemaking.<SUP>20 Accordingly, the FIA requests 
that the Commission consider taking steps in addition to publication in 
the Federal Register to disseminate more quickly information regarding 
matters pending under these fast-track procedures. It suggests, in 
particular, that the Commission use its internet web site to do so.
---------------------------------------------------------------------------

    \20\ As noted above, the thirty-day comment period on these 
proposed rules was extended pursuant to a petition for extension by 
NYMEX, joined by several of the exchanges.
---------------------------------------------------------------------------

    The Commission agrees with the FIA's assessment that all interested 
parties--the Commission, the exchanges, industry member associations 
and other interested membership organizations or individuals--will have 
difficulty meeting the shortened time frames of these fast-track 
procedures and will endeavor to find ways to ease this burden on 
interested parties. The Commission intends to implement FIA's 
suggestion and will post notice on the internet of the filing of all 
proposed designation applications and amendments to contract terms, 
including the dates when the review period terminates. The Commission 
also encourages the use of electronic filing of comments and other 
submissions in order to reduce the time burdens imposed by these rules.

IV. Implementation

    These rules constitute a necessary first step in a potentially 
profound restructuring of the relationship between the Commission and 
the exchanges with respect to the Commission's oversight and review and 
approval of contract market applications and proposed rule amendments. 
Applications for contract market designation that have been submitted 
in advance of the effective date of these rules may not have been 
prepared by the exchanges with this new relationship and timetable in 
mind, with the expectation that adjustments to the pending submissions 
would be made during the review process.
    The Commission, in implementing these rules will offer the 
exchanges the maximum regulatory relief and flexibility possible. 
Accordingly, when these rules become effective, the Commission will 
treat all pending contracts and proposed rule amendments as having been 
submitted under the fast-track procedures as of the rules' effective 
date, unless instructed otherwise by the exchange. However, where 
approval of pending contract applications or proposed rule amendments 
would be accelerated by using existing procedures, the Commission will 
continue to process those designation applications or proposed rule 
amendments under those existing procedures.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C 601 et seq., 
requires that agencies, in promulgating rules, consider the impact of 
these rules on small entities. The Commission has previously determined 
that contract markets are not ``small entities'' for purposes of the 
RFA, 5 U.S.C. 601 et seq. 47 FR 18618 (April 30, 1982). These 
amendments establish alternative streamlined procedures for Commission 
review and approval of applications by contract markets for additional 
designations and of amendments to contract terms and conditions. 
Accordingly, the Chairperson, on behalf of the Commission, hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein 
will not have a significant economic impact on a substantial number of 
small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') of 1980 (Act), 44 U.S.C. 501 
et. seq., imposes certain requirements on federal agencies (including 
the Commission) in connection with their conducting or sponsoring any 
collection of information as defined by the PRA. While this rulemaking 
imposes no burden, the group of rules (3038-0022) of which these are a 
part has the following burden:

    Average burden hours per response--3,546,26.
    Number of respondents--10,971.
    Frequency of response--on occasion.

    Copies of the OMB-approved information collection package 
associated with this rule may be obtained from Gerald P. Smith, 
Clearance Officer, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581. 
Telephone: (202) 418-5160.

List of Subjects

17 CFR Part 1

    Commodity exchanges, Contract market rules, Rule review procedures.

17 CFR Part 5

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

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

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

    2. In Sec. 1.41(b), the introductory text, paragraphs (b)(1), 
(b)(2), (b)(3), (b)(4), (b)(5) and the concluding text are redesignated 
as (b)(1)(i), (b)(1)(i)(A), (b)(1)(i)(B), (b)(1)(i)(C), (b)(1)(i)(D), 
(b)(1)(i)(E), and (b)(1)(ii), respectively; the first sentence of newly 
redesignated paragraph (b)(1)(i) and newly redesignated paragraph 
(b)(1)(ii) are revised; and paragraphs (b)(2) through (b)(4) are added, 
to read as follows:


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

* * * * *
    (b) Rules that relate to terms and conditions. (1)(i) Except as 
provided herein and in paragraph (f) of this section, all proposed 
contract market rules that relate to terms and conditions must be 
submitted to the Commission for approval pursuant to section 
5a(a)(12)(A) of the Act prior to their proposed effective dates. * * *
    (ii) The Commission may remit to the contract market, with an 
appropriate explanation where practicable, and not accept for review 
any rule submission that does not comply with the form and content 
requirements of paragraphs (b)(1)(i) (A) through (E) of this section.
    (2) All proposed contract market rules that relate to terms and 
conditions submitted for review under paragraph (b)(1) shall be deemed 
approved by the Commission under section 5a(a)(12)(A) of the Act, 
forty-five days after receipt by the Commission, unless notified 
otherwise within that period, if:
    (i) The contract market labels the submission as being submitted 
pursuant to Commission rule 1.41(b)--Fast Track Review;
    (ii) The submission complies with the requirements of paragraphs 
(b)(1)(i) (A) through (E), of this section or for dormant contracts, 
the requirements of Sec. 5.2 of this chapter;
    (iii) The contract market does not amend the proposed rule or 
supplement

[[Page 10440]]

the submission, except as requested by the Commission, during the 
pendency of the review period; and
    (iv) The contract market has not instructed the Commission in 
writing during the review period to review the proposed rule under the 
usual procedures under section 5a(a)(12)(A) of the Act and paragraph 
(b)(1) of this section.
    (3) The Commission, within forty-five days after receipt of a 
submission filed pursuant to paragraph (b)(2) of this section, may 
notify the contract market making the submission that the review period 
has been extended for a period of thirty days where the proposed rule 
raises novel or complex issues which require additional time for 
review. This notification will briefly specify the nature of the 
specific issues for which additional time for review is required. Upon 
such notification, the period for fast-track review of paragraph (b)(2) 
of this section shall be extended for a period of thirty days.
    (4) During the forty-five day period for fast-track review, or the 
thirty-day extension when the period has been enlarged under paragraph 
(b)(3) of this section, the Commission shall notify the contract market 
that the Commission is terminating fast-track review procedures and 
will review the proposed rule under the usual procedures of section 
5a(a)(12)(A) of the Act and paragraph (b)(1) of this section, if it 
appears that the proposed rule may violate a specific provision of the 
Act, regulation, or form or content requirement of this section. This 
termination notification will briefly specify the nature of the issues 
raised and the specific provision of the Act, regulation, or form or 
content requirement of this section that the proposed rule appears to 
violate. Within ten days of receipt of this termination notification, 
the contract market may request that the Commission render a decision 
whether to approve the proposed rule or to institute a proceeding to 
disapprove the proposed rule under the procedures specified in section 
5a(a)(12)(A) of the Act by notifying the Commission that the contract 
market views its submission as complete and final as submitted.
* * * * *
    3. Section 1.41b is amended by revising paragraph (b) to read as 
follows:


Sec. 1.41b.  Delegation of authority to the Director of the Division of 
Trading and Markets and Director of the Division of Economic Analysis.

* * * * *
    (b) The Commission hereby delegates, until the Commission orders 
otherwise: (1) To the Director of the Division of Economic Analysis, 
with the concurrence of the General Counsel or the General Counsel's 
delegatee, to be exercised by such Director or by such other employee 
or employees of the Commission under the supervision of such Director 
as may be designated from time to time by the Director, the authority 
to approve, pursuant to section 5a(a)(12)(A) of the Act and 
Sec. 1.41(b), contract market proposals, submitted pursuant to 
Sec. 5.2, to list additional trading months or expiration for, or to 
otherwise recommence trading in, a contract that is dormant within the 
meaning of Sec. 5.2; and
    (2) To the Director of the Division of Economic Analysis, and to 
the Director of the Division of Trading and Markets, with the 
concurrence of the General Counsel or the General Counsel's delegatee, 
to be exercised by such Director or by such other employee or employees 
of the Commission under the supervision of such Director as may be 
designated from time to time by the Director, authority to request 
under Sec. 1.41(b)(2)(iii) that the contract market amend the proposed 
rule or supplement the submission, to notify a contract market under 
Sec. 1.41(b)(3) that the time for review of a proposed contract term 
submitted under that section for fast-track review has been extended, 
and to notify the contract market under Sec. 1.41(b)(4) that fast-track 
procedures are being terminated.

PART 5--DESIGNATION OF AND CONTINUING COMPLIANCE BY CONTRACT 
MARKETS

    3. The authority citation for Part 5 is revised it to read as 
follows:

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

    4. Part 5 is amended by adding a new Sec. 5.1, and in Appendix D, 
by revising the second sentence, to read as follows:


Sec. 5.1  Fast-track designation review.

    (a) Cash-settled contracts. Boards of trade seeking designation as 
a contract market under sections 4c, 5, 5a, and 6 of the Act, and 
regulations thereunder, shall be deemed to be designated as a contract 
market under section 6 of the Act ten days after receipt by the 
Commission of the application for designation, unless notified 
otherwise within that period, if:
    (1) The board of trade labels the submission as being submitted 
pursuant to Commission rule 5.1--Fast Track Ten-Day Review;
    (2)(i) The application for designation is for a futures contract 
providing for cash settlement or for delivery of a foreign currency for 
which there is no legal impediment to delivery and for which there 
exists a liquid cash market; or
    (ii) For an option contract that is itself cash-settled, is for 
delivery of a foreign currency which meets the requirements of 
paragraph (a)(2)(i) of this section or is to be exercised into a 
futures contract which has already been designated as a contract 
market;
    (3) The application for designation is for a commodity other than 
those enumerated in section 1a(3) of the Act or subject to the 
procedures of section 2(a)(1)(B) of the Act;
    (4) The board of trade currently is designated as a contract market 
for at least one contract which is not dormant within the meaning of 
this part;
    (5) The submission complies with the requirements of Appendix A of 
this part--Guideline No. 1 and Sec. 1.61 of this chapter;
    (6) The board of trade does not amend the terms or conditions of 
the proposed contract or supplement the application for designation, 
except as requested by the Commission or for correction of 
typographical errors, renumbering or other such nonsubstantive 
revisions, during that period; and
    (7) The board of trade has not instructed the Commission in writing 
during the review period to review the application for designation 
under the usual procedures under section 6 of the Act.
    (b) Contracts for physical delivery. Boards of trade seeking 
designation as a contract market under sections 4c, 5, 5a, and 6 of the 
Act, and regulations thereunder, shall be deemed to be designated as a 
contract market under section 6 of the Act forty-five days after 
receipt by the Commission of the application for designation, unless 
notified otherwise within that period, if:
    (1) The board of trade labels the submission as being submitted 
pursuant to Commission rule 5.1--Fast Track Forty-Five Day Review;
    (2) The application for designation is for a commodity other than 
those subject to the procedures of section 2(a)(1)(B) of the Act;
    (3) The board of trade currently is designated as a contract market 
for at least one contract which is not dormant within the meaning of 
this part;
    (4) The submission complies with the requirements of Appendix A of 
this part--Guideline No. 1 and Sec. 1.61 of this chapter;
    (5) The board of trade does not amend the terms or conditions of 
the proposed contract or supplement the application for designation, 
except as requested by the Commission or for correction of 
typographical errors, renumbering or

[[Page 10441]]

other such nonsubstantive revisions, during that period; and
    (6) The board of trade has not instructed the Commission in writing 
during the forty-five day review period to review the application for 
designation under the usual procedures under section 6 of the Act.
    (c) Notification of extension of time. The Commission, within ten 
days after receipt of a submission filed under paragraph (a) of this 
section, or forty-five days after receipt of a submission filed under 
paragraph (b) of this section, may notify the board of trade making the 
submission that the review period has been extended for a period of 
thirty days where the designation application raises novel or complex 
issues which require additional time for review. This notification will 
briefly specify the nature of the specific issues for which additional 
time for review is required. Upon such notification, the period for 
fast-track review of paragraphs (a) and (b) of this section shall be 
extended for a period of thirty days.
    (d) Notification of termination of fast-track procedures. During 
the fast-track review period provided under paragraphs (a) or (b) of 
this section, or of the thirty-day extension when the period has been 
enlarged under paragraph (c) of this section, the Commission shall 
notify the board of trade that the Commission is terminating fast-track 
review procedures and will review the proposed rule under the usual 
procedures of section 6 of the Act, if it appears that the proposed 
contract may violate a specific provision of the Act, regulation, or 
form or content requirement of Appendix A of this part. This 
termination notification will briefly specify the nature of the issues 
raised and the specific provision of the Act, regulation, or form or 
content requirement of Appendix A of this part that the proposed 
contract appears to violate. Within ten days of receipt of this 
termination notification, the board of trade may request that the 
Commission render a decision whether to approve the designation or to 
institute a proceeding to disapprove the proposed application for 
designation under the procedures specified in section 6 of the Act by 
notifying the Commission that the exchange views its application as 
complete and final as submitted.
    (e) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Economic 
Analysis or to the Director's delegatee, with the concurrence of the 
General Counsel or the General Counsel's delegatee, authority to 
request under paragraphs (a)(6) and (b)(5) of this section that the 
contract market amend the proposed contract or supplement the 
application, to notify a board of trade under paragraph (c) of this 
section that the time for review of a proposed contract term submitted 
for review under paragraphs (a) or (b) of this section has been 
extended, and to notify the contract market under paragraph (d) of this 
section that the fast-track procedures of this section are being 
terminated.
    (2) The Director of the Division of Economic Analysis may submit to 
the Commission for its consideration any matter which has been 
delegated in paragraph (e)(1) of this section.
    (3) Nothing in the paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in paragraph (e)(1) 
of this section.

Appendix D--Internal Procedure Regarding Period for Public Comment

    * * * Generally, the Commission will provide for a public 
comment period of thirty days on such applications for designation; 
provided, however, that the public comment period will be fifteen 
days for those applications submitted for review under the fast-
track procedures of Sec. 5.1(b) of this part.
* * * * *
    Issued in Washington, D.C., this 27th day of February, 1997, by 
the Commodity Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-5567 Filed 3-6-97; 8:45 am]
BILLING CODE 6351-01-P


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