10434 Federal Register / Vol. 62, No. 45 / Friday, March 7, 1997 / Rules and Regulations

1See, 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.

2Prior 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.

hundred and eighty day review

procedures set forth in section

5a(a)(12)(A) of the Act.

* * * * *

Issued in Washington, D.C. on February 27,

1997, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97–5568 Filed 3–6–97; 8:45 am]

BILLING CODE 6351–01–P

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.

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 cashsettled 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,

[PArchitzel@cftc.gov].

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.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,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).

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
Federal Register / Vol. 62, No. 45 / Friday, March 7, 1997 / Rules and Regulations 10435

3Several 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.

4The 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.

5By 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.

6See, 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.

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.

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

5991.3 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.4

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).5

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 cashsettled 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, 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).

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. 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.

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
10436 Federal Register / Vol. 62, No. 45 / Friday, March 7, 1997 / Rules and Regulations

8See, section 15 of the Act.

9The 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.

10For example, many foreign exchanges trade

interest-rate contracts based upon the sovereign

debt of the nation in which they are located.

11The 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).

12Often, 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).

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. 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.

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. 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. 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.

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. 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.

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 selfinterest; 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 selfregulation. 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. 12

The exchanges also argue that

replacing prior approval with postintroduction 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
Federal Register / Vol. 62, No. 45 / Friday, March 7, 1997 / Rules and Regulations 10437

13Many 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.

14The 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.

15The 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.

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.13

NYMEX also questions why the tenday 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.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.

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 illadvised 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 openended 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.15

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 fasttrack review, the exchange

should be afforded an opportunity to correct

the deficiency and then resume the fast-track
10438 Federal Register / Vol. 62, No. 45 / Friday, March 7, 1997 / Rules and Regulations

16For 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.

17Of 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.

18Both NYMEX and the Coffee, Sugar and Cocoa

Exchange noted that, although the preamble stated

that exchanges would be permitted to make nonsubstantive 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.

19An 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).

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.16

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.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.

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.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.’ ’’

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 3.19

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.
Federal Register / Vol. 62, No. 45 / Friday, March 7, 1997 / Rules and Regulations 10439

20As 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.

Indeed, several exchanges requested an

extension of the comment period in this

very proposed rulemaking.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.

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 § 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:

§ 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

§ 5.2 of this chapter;

(iii) The contract market does not

amend the proposed rule or supplement
10440 Federal Register / Vol. 62, No. 45 / Friday, March 7, 1997 / Rules and Regulations

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:

§ 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

§ 1.41(b), contract market proposals,

submitted pursuant to § 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 § 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

§ 1.41(b)(2)(iii) that the contract market

amend the proposed rule or supplement

the submission, to notify a contract

market under § 1.41(b)(3) that the time

for review of a proposed contract term

submitted under that section for fasttrack review has been extended, and to

notify the contract market under

§ 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

§ 5.1, and in Appendix D, by revising

the second sentence, to read as follows:

§ 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 § 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 § 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
Federal Register / Vol. 62, No. 45 / Friday, March 7, 1997 / Rules and Regulations 10441

1Commission Rule 1.10(h) permits registrants

that are also registered as securities broker-dealers

with the Securities and Exchange Commission to

file a copy of their Financial and Operational

Combined Uniform Single Report (‘‘FOCUS’’) with

the Commission in lieu of Form 1–FR. The

amendments discussed herein are intended to apply

equally to registrants who file Form 1–FR or FOCUS

with the Commission.

2The Commission currently is involved in

discussions with the Chicago Mercantile Exchange

(‘‘CME’’) to obtain the electronic filing software codeveloped by CME and the Chicago Board of Trade

(‘‘CBT’’) and used by CME, CBT and their members.

3 61 FR 55235.

4Approximately two-thirds of introducing

brokers enter into a guarantee agreement with an

FCM and thus are not required to raise their own

regulatory capital or file financial reports.

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 fortyfive 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 fasttrack 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 § 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

17 CFR Parts 1 and 31

Financial Reports of Futures

Commission Merchants, Introducing

Brokers and Leverage Transaction

Merchants

AGENCY: Commodity Futures Trading

Commission.

ACTION: Final Rules.

SUMMARY: The Commodity Futures

Trading Commission (‘‘CFTC’’ or

‘‘Commission’’) is amending its Rule

1.10(d)(4), which requires that each

Form 1–FR filed with the Commission

contain an oath or affirmation attesting

that, to the best knowledge and belief of

the individual making such oath or

affirmation, the information contained

therein is true and correct. The

amended rule provides that, for the

purposes of making this attestation

when filing a financial report with the

Commission electronically, the use of a

personal identification number (‘‘PIN’’)

will be deemed to be the equivalent of

a manual signature.1 The Commission

also is amending Rule 1.10(c) to account

for the possibility that registrants may

choose to file certain financial reports

electronically using a Commission

issued PIN rather than filing such

reports in paper form with the regional

office of the Commission nearest the

principal place of business of the

registrant. Rule 1.10(c) will permit

electronic filing of financial reports that

are not required to be certified by an

independent public accountant

provided that the Commission obtains

the means to read and process the

electronically transmitted data.2 The

Commission also is adding Rule

1.10(b)(2)(iii) to clarify that certified

financial reports may not be filed

electronically.

In addition, the Commission is

amending Rules 1.10(g) and 31.13(m) to

clarify that certain portions of the

financial reports will be deemed public

and other portions nonpublic, and to

eliminate the requirement that firms

filing financial reports need to

separately bind portions of such reports

generally treated as nonpublic in order

for such portions of the reports to be

accorded nonpublic treatment.

EFFECTIVE DATE: April 7, 1997.

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief

Counsel, or Lawrence T. Eckert,

Attorney Adviser, Division of Trading

and Markets, Commodity Futures

Trading Commission, 1155 21st Street,

N.W., Washington D.C. 20581.

Telephone (202) 418–5450.

SUPPLEMENTARY INFORMATION:

I. Background

On October 25, 1996, the Commission

published for comment proposed

amendments to Rule 1.10 (the

‘‘Proposals’’),3 which sets forth the

financial reporting requirements for

futures commission merchants

(‘‘FCMs’’) and independent introducing

brokers (‘‘IBIs’’).4 Rule 1.10 requires