[Federal Register Volume 63, Number 137 (Friday, July 17, 1998)]
[Proposed Rules]
[Pages 38537-38544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19113]


-----------------------------------------------------------------------

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 
<a href="/cdn-cgi/l/email-protection#bdced8decfd8c9dccfc4fddedbc9de93dad2cb"><span class="__cf_email__" data-cfemail="295a4c4a5b4c5d485b50694a4f5d4a074e465f">[email protected]</span></a>. 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: 
[PA<a href="/cdn-cgi/l/email-protection#a2d0c1cacbd6d8c7cee2c1c4d6c18cc5cdd4"><span class="__cf_email__" data-cfemail="5b293833322f213e371b383d2f38753c342d">[email protected]</span></a>], [<a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="d88a8bb0b1b4acab98bbbeacbb">[email protected]</a>,gov] or [KB<a href="/cdn-cgi/l/email-protection#13617c647d7a7d7453707567703d747c65"><span class="__cf_email__" data-cfemail="21534e564f484f4661424755420f464e57">[email protected]</span></a>].

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\
---------------------------------------------------------------------------

    \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, Secs. 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.
    \2\ The 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.
---------------------------------------------------------------------------

    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

[[Page 38538]]

previously have been approved by the Commission. 57 FR 3521.\4\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    In addition, the 1992 revisions introduced the use of a new 
checklist-style 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 fast-track 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\
---------------------------------------------------------------------------

    \5\ An 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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \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) para.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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \7\ For example, some exchanges have submitted background 
studies on proposed contracts that were prepared by outside 
consultants.
---------------------------------------------------------------------------

    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 staff-prepared documents and that they 
may

[[Page 38539]]

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 physical-delivery 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).
---------------------------------------------------------------------------

    \8\ Obviously, 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.
---------------------------------------------------------------------------

    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

[[Page 38540]]

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 spot-month 
speculative position limits should be no greater than one-quarter of 
the deliverable supply estimate for that month.\9\
---------------------------------------------------------------------------

    \9\ The 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.
---------------------------------------------------------------------------

    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 rule-of-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.
---------------------------------------------------------------------------

    \10\ Section 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).
    \11\ These 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \12\ A 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.
    \13\ These 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.
---------------------------------------------------------------------------

    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

[[Page 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.

[[Page 38542]]



                                          Contract Terms and Conditions                                         
----------------------------------------------------------------------------------------------------------------
                                                                                            Explanation as to   
                                                                      Rule number of      consistency with, or  
              Term or condition                Exchange proposal    identical approved     reason for variance  
                                                                    provision, if any*      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                                
------------------------------------------------------------------------
EstimationMethodology:                                                  
------------------------------------------------------------------------


                           Speculative Limits                           
------------------------------------------------------------------------
                                                       Level (exchange  
      Speculative limit             Standard                rule)       
------------------------------------------------------------------------
1. Spot month...............  No greater than one-                      
                               fourth of estimated                      
                               deliverable supply                       
2. Nonspot individual month   5,000 contracts                           
 and all months combined                                                
 (financial and energy                                                  
 contracts)                                                             
3. Nonspot individual month   1,000 contracts                           
 and all months combined                                                
 (tangible commodity                                                    
 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.

[[Page 38543]]



                                                                                                                
                                                 Contract Terms                                                 
----------------------------------------------------------------------------------------------------------------
                                                                                            Explanation as to   
                                                                      Rule number of      consistency with, or  
              Term or condition                     Proposal        identical approved     reason for variance  
                                                                    provision, if any*      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                                          
----------------------------------------------------------------------------------------------------------------
                                                      Rule number of identical                                  
                    Requirement                          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                           
------------------------------------------------------------------------
                                                       Level (exchange  
      Speculative limit             Standard                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   5,000 contracts                           
 and all months combined                                                
 (financial and energy                                                  
 contracts).                                                            
3. Nonspot individual month   1,000 contracts                           
 and all months combined                                                
 (tangible commodity                                                    
 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.

[[Page 38544]]



----------------------------------------------------------------------------------------------------------------
                                                                                                  Justification 
                                                                                        Met by   for not meeting
                                Applicable CFTC rule                                   exchange    standard, or 
          Criterion                   (17 CFR)                   Standard                rule     rule number of
                                                                                        number      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       33.4(b)(1)...........  Procedures for listing strikes                            
 listed & increments).                                 are specified and automatic.                             
5. Option expiration & last    33.4(d)(1)...........  Except for options on cash-                               
 trading day.                                          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       33.4(d)..............  Equal to, or greater than, the                            
 specified.                                            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 cash-settlement 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 (cash-
settlement 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


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>