Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38537

1 Designation as a contract market under the 1921

Act was contingent upon a board of trade’s

providing for the prevention of manipulative

activity and the prevention of dissemination of false

information, upon providing for certain types of

recordkeeping and for admission into exchange

membership of cooperative producer associations,

and upon location of the contract market at a

terminal cash market. See, §§ 5(a), (b), (c), (d) and

(e) of the Futures Trading Act of 1921. 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 was patterned after this statutory scheme.

2The Act further requires, as a condition for

contract market designation that the contract

market, inter alia: be located at a terminal cash

market or provide for terms and conditions as

approved by the Commission (Section 5(1) of the

Act); provide for various forms of recordkeeping

(Sections 5(2) and 5a(a)(2) of the Act); permit the

membership of cooperative associations (Section

5(5) of the Act); provide for compliance with

Commission orders (Section 5(6) of the Act); submit

its rules to the Commission (Sections 5a(a)(1) and

5a(a)(12) of the Act); provide that the terms of the

contracts conform to United States commodity

standards or those adopted by the Commission

(Section 5a(a)(6) of the Act); accept warehouse

receipts issued under United States law (Section

5a(a)(3) of the Act); and enforce exchange rules

(Section 5a(a)(8) of the Act).

3 Generally, the burden of demonstrating

compliance rests with the contract market. Section

6 of the Act provides, in part, that:

Any board of trade desiring to be designated a

‘‘contract market’’ shall make application to the

Commission for such designation and accompany

the same with a showing that it complies with the

above conditions, and with a sufficient assurance

that it will continue to comply with the above

requirements.

Issued by the Commission this 13th day of

July, 1998, in Washington, D.C.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98–19114 Filed 7–16–98; 8:45 am]

BILLING CODE 6351–01–M

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 5

Economic and Public Interest

Requirements for Contract Market

Designation

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed rulemaking.

SUMMARY: Commodity Futures Trading

Commission (‘‘Commission’’) is

proposing revisions to its Guideline on

Economic and Public Interest

Requirements for Contract Market

Designation, 17 CFR Part 5, Appendix A

(‘‘Guideline No. 1’’). Guideline No. 1

details the information that an

application for contract market

designation should include in order to

demonstrate that the contract market

meets the economic requirements for

designation. The Commission recently

promulgated fast-track review

procedures to reduce the time for

Commission review of such

applications. In furtherance of these

streamlining efforts, the Commission is

proposing that Guideline No. 1 itself be

revised to reduce any unnecessary

burdens associated with the designation

application.

Specifically, the Commission is

proposing to reorganize Guideline No. 1

into several specific application forms,

making use to the extent possible of a

checklist or chart format. Moreover, the

Commission is clarifying that a portion

of the application may make use of

third-party generated materials. In

addition, the Commission is clarifying

the review standards for several of the

designation requirements. The

Commission is also proposing that a

new appendix be added to Part 5 that

would specify the information that

should be included by a foreign board

of trade seeking no-action relief to offer

and to sell in the United States a futures

contract on a securities index traded on

that exchange.

DATES: Comments must be received by

September 15, 1998.

ADDRESSES: Comments should be sent to

the Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581, attention: Office of the

Secretariat. Comments may be sent by

facsimile transmission to (202) 418–

5521 or, by e-mail to secretary@cftc.gov.

Reference should be made to ‘‘Revisions

to Guideline No. 1.’’

FOR FURTHER INFORMATION CONTACT:

Paul M. Architzel, Chief Counsel,

Division of Economic Analysis, Richard

A. Shilts, Director, Market Analysis

Section or Kimberly A. Browning,

Attorney/Advisor, Division of Economic

analysis, Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581. Telephone: (202) 418–5260.

E-mail: [PArchitzel@cftc.gov],

[RShilts@cftc,gov] or

[KBrowning@cftc.gov].

SUPPLEMENTARY INFORMATION:

I. Background

The requirement that boards of trade

demonstrate that they meet specified

conditions in order to be designated as

a contract market has been a

fundamental tool of federal regulation of

commodity futures exchanges since the

Futures Trading Act of 1921, Pub. L. No.

67–66, 42 Stat. 187 (1921).1 Currently,

the statutory requirements for

designation are found in Sections 5 and

5a of the Commodity Exchange Act

(Act) and, additionally, for indexes of

securities, in Section 2(a)(1)(B) of the

Act. Designated contract markets must

provide for the prevention of

dissemination of false information

(Section 5(3) of the Act); must provide

for the prevention of price manipulation

(Section 5(4) of the Act); must provide

for delivery periods which will prevent

market congestion (Section 5A(a)(4) of

the Act); and must permit delivery on

the contract of such grades, at such

points and at such quality and

locational differentials as will tend to

prevent or to diminish market

manipulation (Section 5a(a)(10) of the

Act).2 Included among these provisions

is the general requirement of Section

5(7) of the Act that trading in a

proposed contract not be contrary to the

public interest. The contract market

must meet these requirements both

initially and on a continuing basis.3

The Commission, as an aid to the

exchanges, has provided guidance in

meeting these statutory requirements. In

1975 the newly formed Commission, in

one of its earliest actions, issued its

Guideline on Economic and Public

Interest Requirements for Contract

Market Designation, 40 FR 25849 (1975)

(‘‘Guideline No. 1’’).

Subsequently, the Commission

revised this guideline, publishing it as

Appendix A to Part 5 of the Code of

Federal Regulations. 47 FR 49832

(November 3, 1982). As revised in 1982,

Guideline No. 1 was updated to address

proposed innovations in the trading of

futures contracts, including in

particular, futures contracts on financial

instruments and on various indexes and

cash-settled futures contracts.

Experience has demonstrated that the

guideline has been adaptable and

flexible, facilitating the designation of a

wide range of innovative products.

Guideline No. 1 was again revised in

1992. 57 FR 3518 (January 30, 1992).

The 1992 revisions streamlined the

designation application for both futures

and option contract markets. Under the

1992 revisions, the standard of review

for specified terms and conditions of

proposed contract market designations

under Sections 5 and 5a of the Act was

clarified. Moreover, the 1992 revisions

eliminated unnecessary and redundant

materials by requiring that an

application for designation of a futures

contract include a cash-market

description only when the proposed

contract differs from a currently

designated contract and that it need

justify only individual contract terms

that are different from terms which
38538 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

4 In conjunction with these revisions to the

application for contract market designation, the

Commission also modified many of its internal

procedures to expedite the review and approval of

new contracts and proposed amendments to

existing contracts. These include, for example, 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. The review and approval of new

contracts usually is completed shortly after the

Federal Register public comment period ends or as

soon as the exchange makes the modifications

necessary to address a proposed contract’s

deficiencies. With these changes, the total review

time for new contracts declined significantly.

5An additional 10 contracts were approved under

non-fast-track review procedures. These included

five equity index contracts, which were not eligible

for fast-track approval because of the statutory

requirement of review by the U.S. Securities and

Exchange Commission (SEC), one contract that was

approved under regular procedures before the end

of the fast-track period, and four contracts that were

processed under regular procedures at the request

of the submitting exchange.

6 Guideline No. 1 applies only to the economic

requirements that must be met in order to be

designated as a contract market. Additional

requirements are found in the Commission’s

Guideline No. 2, 1 Comm. Fut. L. Rep (CCH) ¶6430.

These relate to the contract market’s program for

compliance with its self-regulatory responsibilities.

Generally, the review of these issues is most

significant in connection with the first application

for contract designation from a particular board of

trade.

7For example, some exchanges have submitted

background studies on proposed contracts that were

prepared by outside consultants.

previously have been approved by the

Commission. 57 FR 3521.4

In addition, the 1992 revisions

introduced the use of a new checkliststyle format for applications for

designation of option contracts. The

checklist application for option

contracts has reduced the required filing

of redundant or otherwise unnecessary

information, resulting in designation

applications which are clearer and more

concise. Presumably, the exchanges

have thereby realized savings in both

the time and costs associated with filing

an application. Moreover, the uniform

format has enabled the Commission to

review such checklist applications in a

more timely and efficient manner.

Applications for designation of options

on futures contracts, however, are

uniquely amenable to such a checklist

format because option contract terms

tend to be highly uniform and the

majority of issues arise in connection

with the designation of the underlying

futures contract.

In April 1997, new Commission Rule

5.1 establishing fast-track procedures for

Commission review and approval of

applications for contract market

designation became effective. 62 FR

10434 (March 7, 1997). That rule creates

a streamlined and speedy alternative

review process for Commission

consideration of designation

applications, reducing unnecessary

regulatory burdens on exchanges while

also preserving the opportunity for

public participation where needed and

fulfillment of the Commission’s

oversight responsibilities. Under the

fast-track review procedures,

applications for designation of certain

cash-settled futures and option contracts

are deemed to be approved ten days

after receipt, unless the exchange is

notified otherwise. Certain other

applications are deemed approved 45

days after receipt absent contrary

notification. Since implementing fasttrack review procedures in April 1997,

45 contracts have been approved by the

Commission under this rule, 18 under

the 10-day procedure and 27 under the

45-day procedure.5

The Commission, in promulgating the

fast-track review rules, indicated its

intent broadly to reexamine the form

and content requirements of Guideline

No. 1, including consideration of the

possible applicability of an option-style

checklist to applications for designation

of proposed futures contracts.6 The

Commission has noted that

‘‘[i]mplementation 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,’’ 62 FR 10435, and

that these initiatives should permit the

exchanges greater flexibility to compete

with foreign exchange-traded products

and with both foreign and domestic

over-the-counter transactions while

maintaining the basic protection

embedded in the Act. 61 FR 59390

(November 22, 1996).

II. Proposed Revisions to Guideline

A. Proposed Changes to the Guideline’s

Format

Based upon its experience in

administering the current guideline and

the new fast-track procedures, the

Commission is proposing to revise

Guideline No. 1 in several important

respects. First, the Commission is

proposing to streamline Guideline No. 1

by further reducing the required

paperwork and by further clarifying the

information required to be included. In

this regard, as discussed above, the

Commission has observed the success of

the checklist application for option

contracts implemented in 1992 and

believes that a similar, but modified,

framework using a chart rather than a

checklist can be used for applications

for designation of futures contracts.

Specifically, the Commission is

proposing to reorganize the contents of

the current guideline to address

applications for four different types of

contracts: (1) physical delivery futures;

(2) cash-settled futures; (3) options on

futures; and (4) options on physicals.

Except for options on physicals, the

requirements for each separate

application are self-contained and

include the information relevant to

demonstrating compliance with the

designation standards for that type of

contract. The information required is

largely the same as under the current

guideline, but is presented in a clearer,

more focussed format which includes

the use of charts. Information for option

contracts will continue to be provided

by checklist. Moreover, the Commission

is proposing to clarify certain standards

for review which have envolved based

upon administrative experience and to

clarify that exchanges may fulfill the

required cash-market description with

information developed by third parties.

The Commission intends to make this

format available to the exchanges

electronically and to encourage

exchanges to file electronically to

reduce further the paperwork burden

associated with the application process.

These proposed revisions are discussed

in greater detail below.

1. Cash Market Overview

Currently, exchanges are required to

include a cash market description in

their designation application. 17 CFR

Part 5, Appendix A(a)(1). The

Commission is not proposing to amend

this requirement—each application

(except for options on futures) would

still require the inclusion of such an

overview. However, the Commission is

proposing to amend Guideline No. 1 to

recognize explicitly the acceptability of

a variety of materials in fulfillment of

this requirement. Under current

practices, exchanges typically produce

their own specific cash-market

descriptions. The Commission notes,

however, that the exchanges presently

are not precluded from doing otherwise

and that exchanges have on occasion

submitted cash market descriptions

which included third-party materials.7

To reduce the burden on the

exchanges in satisfying the guideline’s

cash-market overview standards, the

Commission is proposing to clarify that

exchanges need not submit staffprepared documents and that they may
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38539

8Obviously, only product meeting the specified

quality standards (e.g., the grade, age, purity,

weight, etc. for tangible commodities or the issue,

maturity, rating, etc. for financial instruments) is

eligible for delivery on a futures contract and

should be considered as part of the deliverable

supply.

submit cash-market descriptions based

not only on materials generated by their

staffs, but also on materials obtained

from other sources. Such materials may

be developed for an exchange by outside

sources during a feasibility study of a

proposed contract, as part of the

exchange’s development and

consideration of a proposal or as part of

its new product marketing effort. In this

regard, as proposed to be revised,

Guideline No. 1 explicitly would state

that a cash-market description may

include:

Existing studies by industry trade groups,

academics, governmental bodies or other

entities; reports of consultations; or other

materials which provide a description of the

underlying cash market. These materials may

be submitted in addition to, or in lieu of,

information developed by the board of trade.

2. Charts Relating to Individual Contract

Terms and Conditions

The current guideline requires

exchanges to explain how each major

term of a proposed contract, except for

those identical to terms already

approved by the Commission, is

consistent with cash market practices or

to justify the reason why the contract

term appropriately is inconsistent with

such practices. Exchanges submit this

explanation or justification in narrative

form. To further streamline the

application process, the Commission is

proposing that, in lieu of such a

narrative description, an exchange may

complete a chart to provide the required

information. The proposed chart format

will reduce the amount of verbiage and

the overall length of designation

applications.

The proposed chart is a template

enumerating the significant contract

terms and conditions typically

contained in most contracts. In view of

the diverse nature of commodities for

which futures contracts may be

developed, however, the template may

be modified as necessary to reflect the

nature of the particular commodity or

the contract’s specific terms and

conditions. Also, to the extent that a

proposed contract includes additional

terms and conditions defining the

economic characteristics of the

underlying commodity, the board of

trade may modify the form as

appropriate. For example, if a contract

provides for more than one quality

specification under commodity

characteristics (e.g., a grade standard as

well as a weight specification), the

board of trade may add a separate line

item to address each commodity

characteristic separately. For line items

in the chart that are not applicable to

the proposed contract, the board of trade

should simply indicate ‘‘N.A.’’

The proposed chart would require

that an exchange include a brief

description of the contract’s major terms

and conditions. Where the term is

consistent with prevailing cash market

practices, column 4 may be completed

by providing a very brief statement as to

how the term or condition comports

with cash practices. However, where the

term or condition does not comport

with cash market practices, a more

extensive discussion is required

showing why the provision is necessary

or appropriate for the hedging or pricing

utility of the contract and the overall

effect of the provision on deliverable

supplies. Consistent with current

requirements, no such justification of an

individual term or condition would be

required when that term or condition is

the same as one already approved by the

Commission. For such contract terms,

the board of trade should reference in

column 2 of the chart the rule number

or other description of the original

approved provision.

In keeping with current requirements,

the application also requires an

exchange to specify and to justify

speculative position limits as required

under the criteria of Commission rule

1.61, 17 CFR 1.61. The Commission is

proposing that this requirement also be

fulfilled by completion of a chart.

However, the Commission is reviewing

generally its speculative position limit

policies and may propose further

revisions to this section of Guideline

No. 1 if it becomes appropriate in light

of subsequent revisions to its

speculative position limit policies.

3. Clarification of Review Standards

Central to an application for

designation is an exchange’s

demonstration that the proposed

contract will not be susceptible to price

manipulation or distortion. For physical

delivery contracts, this requires a

demonstration that the deliverable

supplies provided under the contract’s

terms are adequate, and for cash-settled

contracts, this requires that the cash

price series to be used for settlement is

reliable. In light of the importance of

these issues to a designation

application, the Commission is

proposing clarification of these

requirements in the guideline.

i. Adequacy of deliverable supply.

Exchanges are required to demonstrate

that proposed contracts provide for

deliverable supplies that will not be

conducive to price manipulation or

distortion. A requirement that an

exchange include in its designation

application an analysis of the adequacy

of deliverable supply including an

estimate of the deliverable supplies for

the delivery months specified in the

proposed contract is implicit under the

current guideline. The Commission is

proposing to clarify this requirement by

requiring explicitly designation

applications include an estimate of

deliverable supplies for the specified

delivery months of a proposed contract.

Specifically, the Commission is

proposing that applications for

designation of physical delivery futures

contracts include within a separate

chart of quantitative estimate of

expected deliverable supplies and a

description of the methodology used to

derive the estimate. For commodities

with seasonal supply or demand

characteristics, the deliverable supply

analysis should be based on the delivery

month(s) when potential supplies

typically are at their lowest levels. The

estimate should be based on statistical

data when reasonably available covering

an historical period that is

representative of actual patterns of

production and consumption of the

commodity. If data are taken from

publicly available sources, the board of

trade should reference the source

material used. If the estimates are

derived independently by the board of

trade based on information not readily

verifiable or on trade interviews, the

Commission may request that the board

of trade provide the workpapers or other

source materials used in the analysis.

This estimate would be required to be

made taking into consideration the

terms and conditions specified for the

deliverable product and the economic

realities of the cash market underlying

the futures contract.8 For a physicaldelivery futures contract, therefore, this

estimate represents product which is in

store at the delivery point(s) specified in

the futures contract or economically can

be moved into or through such points

within a short period of time after a

request for delivery and which is

available for sale on a spot basis within

the marketing channels that normally

are tributary to the delivery point(s).

For financial instrument contracts,

deliverable supply consists of available

supplies of the instrument meeting the

contract’s delivery standards that are

available, at prevailing cash market

values, to traders wishing to make

future delivery. For example, significant

quantities of off-the-run notes and
38540 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

9The Commission believes that spot-month

speculative position limits are not an ideal

substitute for deliverable supplies. In this respect,

the fact that an exchange may specify a spot-month

speculative position limit that equals or is less than

the ‘‘rule-of-thumb’’ standard of one-fourth of a low

deliverable supply estimate does not mean that

deliverable supplies are at adequate levels. The

Commission has approved new futures contracts or

amended existing futures contracts with low

deliverable supplies only after an exchange has

exhausted potential sources of deliverable supplies

and, if necessary, adopted low spot-month

speculative limits to give it the ability to limit

potential delivery demand. The preferred approach

under the Act if deliverable supplies are inadequate

is for the exchange to modify the delivery

specifications to enhance deliverable supplies. See,

section 5a(a)(10) of the Act.

10Section 2(a)(1)(A), 7 U.S.C. 2 (1982); 120 Cong.

Rec. 34497 (1974) (Statement of Senator Talmadge)

(the terms ‘‘any other board of trade, exchange, or

market’’ in Section 2(a)(1)(A) make clear the

Commission’s exclusive jurisdiction includes

futures contracts executed on a foreign board of

trade, exchange or market).

11These three criteria are contained in Section

2(a)(1)(B)(ii). They are:

(1) The contract must provide for cash settlement;

(2) The proposed contract will not be readily

susceptible to manipulation or to being used to

manipulate any underlying security; and

(3) The index is predominately composed of the

securities of unaffiliated issuers and reflects the

market for all publicly traded securities or a

substantial segment thereof.

12A no-action letter is a written statement that

staff of a specific division will not recommend

enforcement action to the Commission if a proposed

transaction is undertaken or a proposed activity is

conducted. A no-action letter represents the

position of only the division issuing it and is

binding upon that division and not on the

Commission or other divisions. Further, a no-action

letter is only effective with respect to the person or

persons to whom it was issued and has no

precedential effect.

13These 15 foreign boards of trade include: (1)

Osaka Securities Exchange; (2) Tokyo Stock

Exchange; (3) Hong Kong Futures Exchange; (4)

Singapore International Monetary Exchange, Ltd.;

(5) Toronto Futures Exchange; (6) International

Futures Exchange (Bermuda), Ltd.; (7) London

International Financial Futures Exchange Limited;

(8) Marche a Terme International de France; (9)

Sydney Futures Exchange Limited; (10) Meff

Sociedad Rectora de Productos Financieros

Derivados de Renta Variable, S.A. (Spain); (11)

Deutsche Terminborse; (12) Italian Stock Exchange;

(13) The Amsterdam Exchanges; (14) OMLX, The

London Securities and Derivatives Exchange, Ltd;

and (15) OM Stockholm AB.

bonds typically may be held by the

Federal Reserve System and long-term

investment portfolios (e.g., pension

funds) and would not be readily

available for delivery on proposed

futures contracts on U.S. government

debt instruments except at distorted

prices. Recognizing this and based on

the opinions of knowledgeable industry

participants, Commission staff

historically has used a rule-of-thumb

that only 50 percent of the on-the-run

U.S. Treasury bond and 10 percent of

each of the next two off-the-run bonds

are economically available for delivery.

The spot-month speculative position

limits should be set in relation to this

deliverable supply estimate. Such spotmonth speculative position limits

should be no greater than one-quarter of

the deliverable supply estimate for that

month.9

ii. Justification of cash settlement

price. The adequacy of the procedures

for determining the cash settlement

price is central to the Commission’s

review of proposed cash-settled

contracts. Applications for such

proposed futures contracts would

continue to be required to demonstrate

that those procedures will result in a

cash settlement price which reflects the

underlying cash market and is not

subject to manipulation or distortion. In

order to provide additional guidance to

exchanges in meeting this requirement,

the Commission is clarifying two of the

criteria which it has identified through

past experience for meeting these

requirements. In this regard, any cash

settlement price which is determined by

an exchange through a survey method to

elicit price quotes should include a

number of polled entities which is

representative of the underlying cash

market. In no event, however, may the

polling sample include fewer than four

unrelated entities that do not take

positions for their own account in the

futures, option or underlying cash

markets. Where the entities to be polled

may trade in such markets for their own

accounts, a minimum of eight unrelated

entities would be required. These ruleof-thumb criteria have been included in

the relevant chart.

B. Effect on Pending Applications

The proposed revision to Guideline

No. 1 streamline the application process

for designation of contract markets and

clarify existing requirements and

Commission practice. Because the

Commission is not proposing any new

substantive requirements, however, the

Commission is permitting exchanges

immediately to begin filing applications

consistent with the proposed format.

Moreover, because the Commission is

permitting exchanges to continue

providing the required information in a

narrative format if they prefer, no

application filed or already under

development and nearing completion

which complies with the existing

guideline would have to be revised.

C. Foreign Futures Markets

The offer or sale in the United States

of futures contracts traded on or subject

to the rules of a foreign exchange is

subject to the Commission’s exclusive

jurisdiction.10 Although Section

2(a)(1)(B)(ii) of the Act provides that the

Commission shall not designate a board

of trade as a contract market in a futures

on a securities index unless the

Commission finds that the board of

trade meets three enumerated criteria,11

Congress understood that a foreign

exchange might lawfully offer futures

contracts on stock indexes absent

designation. Thus, the House Committee

on Agriculture suggested that a foreign

board of trade could apply for

‘‘certification’’ that its stock index

contract meets all applicable

Commission requirements. H.R. Rep.

No. 565, Part 1, 97th Cong., 2d Sess. 85

(1982). That Committee further

explained that a foreign exchange

seeking to offer in the United States a

futures contract based upon an index of

United States securities must

demonstrate that the proposed futures

contract meets the requirements set

forth in Section 2(a)(1)(B)(ii). Id. With

regard to a foreign stock index contract

based on ‘‘foreign securities,’’ the House

Committee suggested that the

Commission use such criteria as it

deems appropriate.

The Commission has not promulgated

procedures for the filing of requests by

foreign boards of trade for

‘‘certification’’ to offer or to sell such

contracts, but instead has issued

through its Office of the General

Counsel, several ‘‘ no-action’’ letters 12

regarding foreign stock index contracts

based on foreign securities using the

criteria set forth in Section 2(a)(1)(B)(ii)

of the Act. As of June 4, 1998, such

action has been taken for 24 stock index

contracts for offer or sale in the United

States that were submitted by 15 foreign

boards of trade.13

Generally, the staff has analyzed such

requests for a ‘‘no-action’’ opinion

under the requirements of Section

2(a)(1)(B)(ii) of the Act. Accordingly, the

staff has requested that the foreign board

of trade file information which they

deem relevant to those criteria. 57 FR

3518. To facilitate the staff’s review of

such requests by foreign boards of trade,

the Commission is proposing that a

separate appendix be added to Part 5

that would enumerate the information

that foreign boards of trade should file

with the Commission to assist in the

staff’s analysis of such requests. This

information is the same as that

previously requested to be filed. Id.

Some of the data which should be

included are: the terms and conditions

of the contract and all other relevant

rules of the exchange; information on

information sharing arrangements or

any legal obstacles to such sharing of

information; and specific information

related to the composition and

computation of the index. All
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38541

information should be submitted in

English, including any supplemental

material such as explanatory notes,

appended tables or charts. It should be

noted that the Commission consults

with the SEC regarding these

procedures. When such consultation

occurs, additional information may be

requested by the SEC.

III. 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 propose to establish

alternative streamlined procedures for

Commission review and approval of

applications by contract markets for

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.

However, the Commission invites

comments from any firms or other

persons which believe that the

promulgation of these rules might have

a significant impact upon their

activities.

B. Paperwork Reduction Act

When publishing proposed rules, the

Paperwork Reduction Act (‘‘PRA’’) of

1995 {Pub. L. 104–13 (May 1, 1995)}

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. In

compliance with the Act, the

Commission, through this rule proposal,

solicits comments to:

(1) Evaluate whether the proposed

collection of information is necessary

for the proper performance of the

functions of the agency, including the

validity of the methodology and

assumptions used; (2) evaluate the

accuracy of the agency’s estimate of the

burden of the proposed collection of

information including the validity of the

methodology and assumptions used; (3)

enhance the quality, utility, and clarity

of the information to be collected; and

minimize the burden of the collection of

the information on those who are to

respond, including through the use of

appropriate automated, electronic,

mechanical, or other technological

collection techniques or other forms of

information technology, e.g., permitting

electronic submission of responses.

The Commission has submitted this

proposed rule and its associated

information collection requirements to

the Office of Management and Budget.

The burden associated with this entire

collection (3038–0022), including this

proposed rule, is as follows:

Average burden hours per response:

3,609

Number of Respondents: 15,693

Frequency of response: On Occasion

The burden associated with this

specific proposed rule is as follows:

Average burden hours per response: 58

Number of Respondents: 11

Frequency of response: On Occasion

Persons wishing to comment on the

information which would be required

by this proposed rule should contact the

Desk Officer, CFTC, Office of

Management and Budget, Room 10202,

NEOB, Washington, DC 20503, (202)

395–7340. Copies of the information

collection submission to OMB are

available from the CFTC Clearance

Officer, 1155 21st Street, NW,

Washington, DC 20581, (202) 418–5160.

Copies of the OMB-approved

information collection package

associated with this rulemaking may be

obtained from the Desk Officer,

Commodity Futures Trading

Commission, Office of Management and

Budget, Room 10202, NEOB

Washington, D.C. 20503, (202) 395–

7340.

List of Subjects in 17 CFR Part 5

Commodity futures, Contract markets,

Designation application, Reporting and

recordkeeping requirements.

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,

7 U.S.C. 6c, 7, 7a, 8, and 12a, the

Commission hereby proposes to amend

Chapter I of Title 17 of the Code of

Federal Regulations by amending Part 5

as follows:

PART 5—DESIGNATON OF AND

CONTINUING COMPLIANCE BY

CONTRACT MARKET

1. The authority citation for Part 5

continues to read as follows:

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

2. In part 5, Appendix A is proposed

to be revised to read as follows:

Appendix A to Part 5—Guideline No. 1;

Interpretative Statement Regarding

Economic and Public Interest Requirements

for Contract Market Designation

(a) Application for Designation of Physical

Delivery Futures Contracts

A board of trade shall submit:

(1) The rules setting forth the terms and

conditions of the proposed futures contract.

(2) A description of the cash market for the

commodity on which the contract is based.

(i) The description may include, in

addition to or in lieu of materials prepared

by the board of trade, existing studies by

industry trade groups, academics,

governmental bodies or other entities, reports

of consultants, or other materials which

provide a description of the underlying cash

market.

(ii) Where the same, or a closely related

commodity, is already designated as a

contract market which is not dormant, the

cash market description can be confined to

those aspects relevant to particular term(s) or

conditions(s) which differ from such existing

contract.

(3) A demonstration that the terms and

conditions, as a whole, will result in a

deliverable supply such that the contract will

not be conducive to price manipulation or

distortion and that the deliverable supply

reasonably can be expected to be available to

short traders and salable by long traders at its

market value in normal cash marketing

channels.

For purposes of this demonstration,

provide the following information in chart or

narrative form.
38542 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

CONTRACT TERMS AND CONDITIONS

Term or condition Exchange proposal

Rule number of

identical approved provision,

if any*

Explanation as to consistency

with, or reason for variance from,

cash market practice

1. Commodity characteristics (e.g., grade, quality, weight, class,

growth, issuer, origin, maturity, source, rating, etc.).

2. Any quality differentials for nonpar deliveries, or lack thereof, consistent with the Commission’s Policy on Price Differentials.

3. Delivery Points/Region.

4. Any locational differentials for nonpar deliveries, or lack thereof,

consistent with the Commission’s Policy on Price Differentials.

5. Delivery facilities (type, number, capacity, ownership).

6. Contract size and/or trading unit.

7. Delivery pack or composition of delivery units.

8. Delivery instrument (e.g., warehouse receipt, shipping certificate,

bill of lading).

9. Transportation terms (e.g., FOB, CIF, prepay frieght to destination).

10. Delivery procedures.

11. Delivery months.

12. Delivery period and last trading day.

13. Inspection/certification procedures (verification of delivery eligibility, any discounts applied for age).

14. Minimum price change (tick) equal to or less than cash market

minimum price increment.

15. Daily price limit provisions (note relationship to cash market price

movements).

*If an identical provision has been approved for a nondormant contract in the same commodity, there is no need to provide an explanation in

the next column.

Deliverable Supplies

Estimate of Deliverable Supplies for Trading Month(s) With Lowest Supplies

Estimation Methodology:

Speculative Limits

Speculative limit Standard Level (exchange rule)

1. Spot month ................................................... No greater than one-fourth of estimated deliverable supply

2. Nonspot individual month and all months

combined (financial and energy contracts)

5,000 contracts

3. Nonspot individual month and all months

combined (tangible commodity contracts)

1,000 contracts

4. Reporting level .............................................. Equal to or less than levels specified in CFTC

rule 15.03

5. Aggregation rule ........................................... Same as CFTC rule 150.5(g) or previously approved language

(4) As specifically requested, such

additional evidence, information or data

relating to whether the contract meets,

initially or on a continuing basis, any of the

specific requirements of the Act, including

the public interest standard contained in

Section 5(7) of the Act, and whether the

contract reasonably can be expected to be, or

has been, used for hedging and/or price

basing on more than an occasional basis, or

any other requirement for designation under

the Act or Commission rules and policies.

(b) Application for Cash Settled Futures

Contracts

A board of trade shall submit:

(1) The rules setting forth the terms and

conditions of the proposed futures contract.

(b) A description of the cash market for the

commodity on which the contract is based.

(i) The description may include, in

addition to or in lieu of materials prepared

by the board of trade, existing studies by

industry trade groups, academics,

governmental bodies or other entities, reports

of consultants, or other materials which

provide a description of the underlying cash

market.

(ii) Where the same, or a closely related

commodity, is already designated as a

contract market which is not dormant, the

cash market description can be confined to

those aspects relevant to particular term(s) or

conditions(s) which differ from such existing

contract.

(3) A demonstration that cash settlement of

the contract is at a price relfecting the

underlying cash market, will not be subject

to manipulation or distortion, and is based

on a cash price series that is reliable,

acceptable, publicly available and timely.

For purposes of this demonstration,

provide the following information in chart or

narrative form.
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38543

CONTRACT TERMS

Term or condition Proposal

Rule number of

identical approved provision,

if any*

Explanation as to consistency

with, or reason for variance from,

cash market practice

1. Commodity characterisics (e.g., grade, quality, weight, class,

growth, issuer, maturity, source, rating, etc.).

2. Delivery months, noting any cyclical variations in trading activity

that may affect the potential for manipulating the cash settlement

price.

3. Last trading day.

4. Contract size.

5. Minimum price change (tick).

6. Daily price limit provisions, relative to cash market price movements.

*If an identical provision has been approved for a nondormant contract in the same commodity, there is no need to provide an explanation in

the next column.

CASH SETTLEMENT PRICE SERIES

Requirement

Rule number of

identical approved

provision

Explanation or justification

1. Where an independent third party calculates the cash settlement price series,

evidence that the third party does not object to its use and provides safeguards against its susceptibility to manipulation.

2. Where board of trade generates cash settlement price series, specification of

calculation procedure and safeguards in cash settlement process to protect

against susceptibility to manipulation (e.g., if self-generated survey, polling

sample representative of cash market, but with a minimum of 4 nontrading

entities or 8 entities that trade for own account).

3. Procedure for, and timeliness of, dissemination to public.

4. Evidence that price is reliable indicator of cash market values and is acceptable for hedging.

SPECULATIVE LIMITS

Speculative limit Standard Level (exchange rule)

1. Spot month ................................................... Needed to minimize potential for manipulation

if underlying cash market is small or trading

is not highly liquid.

2. Nonspot individual month and all months

combined (financial and energy contracts).

5,000 contracts

3. Nonspot individual month and all months

combined (tangible commodity contracts).

1,000 contracts

4. Reporting level .............................................. Equal to or less than levels specified in CFTC

rule 15.03.

5. Aggregation rule ........................................... Same as CFTC rule 150.5(g) or previously approved language.

(4) As specifically requested, such

additional evidence, information or data

relating to whether the contract meets,

initially or on a continuing basis, any of the

specific requirements of the Act, including

the public interest standard contained in

Section 5(7) of the Act, and whether the

contract reasonably can be expected to be, or

has been, used for hedging and/or price

basing on more than an occasional basis, or

any other requirement for designation under

the Act or Commission rules and policies.

(c) Application for Option Contracts

A board of trade shall submit:

(1) The rules setting forth the terms and

conditions of the proposed option contract.

(2)(i) For options on future contracts, the

terms and conditions of the proposed or

existing underlying futures contract.

(2)(ii) For options on physical

commodities:

(A) A description of the cash market for the

commodity on which the contract is based.

(1) The description may include, in

addition to or in lieu of materials prepared

by the board of trade: existing studies by

industry trade groups, academics,

governmental bodies or other entities;

promotional or marketing materials prepared

by or for the board of trade; reports of

consultants; or other materials which provide

a description of the underlying cash market.

(2) Where the same, or a closely related

commodity, is already designated and is not

dormant, the cash market description can be

confined to those aspects relevant to

particular term(s) or conditions(s) which

differ from such existing contract.

(B) Depending on the method of settling

the option, the relevant chart for either a

physical delivery or cash settled futures

contract.

(3) The following completed chart.
38544 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

Criterion

Applicable

CFTC rule (17

CFR)

Standard

Met by

exchange

rule number

Justification for

not meeting

standard, or rule

number of identical approved

rule

Speculative limits .............................. 150.5 ................ Combined net position in futures and options on a futures-equivalent basis at the futures position levels,

with inter-month spread exemptions that are consistent with those of the futures contract.

2. Aggregation rule ........................... 150.4 ................ Same as Rule 150.5(g) or previously approved language.

3. Reporting level ............................. 15.00(b)(2) ........ 50 contracts or fewer.

4. Strike prices (number listed & increments).33.4(b)(1) .......... Procedures for listing strikes are specified and automatic.

5. Option expiration & last trading

day.

33.4(d)(1) .......... Except for options on cash-settled futures contracts,

expiration is not less than one business day before

the earlier of the last trading day or the first notice

day of the underlying future.

6. Minimum tick ................................ 33.4(d) .............. Equal to, or less than, the underlying futures tick.

7. Daily price limit, if specified .......... 33.4(d) .............. Equal to, or greater than, the underlying futures price

limit.

(4) As specifically requested, such

additional evidence, information or data

relating to whether the contract meets,

initially or on a continuing basis, any of the

specific requirements of the Act, including

the public interest standard contained in

Section 5(7) of the Act or any other

requirement for designation under the Act or

Commission rules and policies.

3. Part 5 is proposed to be amended

by adding new Appendix E to read as

follows:

Appendix E—Information That a Foreign

Board of Trade Should Submit When

Seeking No-Action Relief To Offer and Sell

in the United States a Futures Contract on

a Foreign Securities Index Traded on That

Exchange

A foreign board of trade seeking no-action

relief to offer and to sell in the United States

a futures contract on a foreign securities

index traded on that exchange should submit

the following information in English:

(1) The terms and conditions of the

contract and all other relevant rules of the

exchange and, if applicable, of the exchange

on which the underlying securities are

traded, which have an effect on the overall

trading of the contract, including circuit

breakers, price limits, position limits or other

controls on trading;

(2) Surveillance agreements between the

foreign boards of trade and the exchange(s)

on which the underlying securities are

traded;

(3) Information sharing agreements

between the host regulator and the

Commission or assurances of ability and

willingness to share and assurances from the

foreign exchange of its ability and

willingness to share information with the

Commission.

(4) When applicable, information regarding

foreign blocking statutes and their impact on

the ability of United States government

agencies to obtain information concerning

the trading of such contracts; and

(5) Information and data, denoted in U.S.

dollars, relating to:

(i) The method of computation,

availability, and timeliness of the index;

(ii) The total capitalization, number of

stocks (including the number of unafiliated

issuers if different from the number of

stocks), and weighting of the stocks by

capitalization and if applicable by price, in

the index;

(iii) Breakdown of the index by industry

segment including the capitalization and

weight of each industry segment;

(iv) Procedures and criteria for selection of

individual securities for inclusion in, or

removal from, the index, how often the index

is regularly reviewed, and any procedures for

changes in the index between regularly

scheduled reviews;

(v) Method of calculation of the cashsettlement price and the timing of its public

release; and

(vi) Average daily volume of trading by

calendar month, measured by share turnover

and dollar value, in each of the underlying

securities for a six-month period of time and,

separately, the daily volume in each

underlying security for six expirations (cashsettlement dates) or for the six days of that

period on which cash-settlement would have

occurred had each month of the period been

an expiration month.

Issued in Washington, D.C. this 13th day

of July, 1998 by the Commodity Futures

Trading Commission.

Jean Webb,

Secretary of the Commission.

[FR Doc. 98–19113 Filed 7–16–98; 8:45 am]

BILLING CODE 6351–01–M

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 63

[FRL–6123–5]

Delegation of National Emission

Standards for Hazardous Air Pollutants

for Source Categories; State of

Arizona; Arizona Department of

Environmental Quality

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: Pursuant to section 112(l) of

the 1990 Clean Air Act (CAA), the

Arizona Department of Environmental

Quality (ADEQ) requested delegation of

specific national emission standards for

hazardous air pollutants (NESHAPs). In

the Rules section of this Federal

Register, EPA is granting ADEQ the

authority to implement and enforce

specified NESHAPs. The direct final

rule also explains the procedure for

future delegation of NESHAPs to ADEQ.

EPA is taking direct final action without

prior proposal because the Agency

views this as a noncontroversial action

and anticipates no adverse comments. A

detailed rationale for this approval is set

forth in the direct final rule. If no

relevant adverse comments are received

in response to the direct final rule, no

further activity is contemplated in

relation to this proposed rule. If EPA

receives relevant adverse comments, the

direct final rule will not take effect and

all public comments received will be

addressed in a subsequent final rule

based on this proposed rule. The EPA