[Federal Register Volume 74, Number 54 (Monday, March 23, 2009)]
[Rules and Regulations]
[Pages 12178-12203]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-6044]



[[Page 12177]]

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Part II





 Commodity Futures Trading Commission





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17 CFR Parts 15, 16, 17 et al.



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Significant Price Discovery Contracts on Exempt Commercial Markets; 
Final Rule

Federal Register / Vol. 74, No. 54 / Monday, March 23, 2009 / Rules 
and Regulations

[[Page 12178]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 15, 16, 17, 18, 19, 21, 36, 40

RIN 3038-AC76


Significant Price Discovery Contracts on Exempt Commercial 
Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Final Rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is promulgating final rules to implement those 
provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization 
Act'') \1\ relating to exempt commercial markets (``ECMs'') on which 
significant price discovery contracts (``SPDCs'') are traded or 
executed. In addition to promulgating regulations mandated by the 
Reauthorization Act, the Commission also is amending existing 
regulations applicable to registered entities in order to clarify that 
such regulations are now applicable to ECMs with SPDCs.
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    \1\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18, 
2008).

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DATES: Effective Date: April 22, 2009.

FOR FURTHER INFORMATION CONTACT: Susan Nathan, Senior Special Counsel, 
Division of Market Oversight, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5133. E-mail: <a href="/cdn-cgi/l/email-protection#72011c13061a131c32111406115c151d04"><span class="__cf_email__" data-cfemail="f3809d92879b929db390958790dd949c85">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Background

A. Overview

    The Commodity Futures Modernization Act of 2000 (``CFMA'') amended 
the Commodity Exchange Act (``CEA'' or the ``Act'') \2\ to replace the 
Act's ``one-size-fits-all'' supervisory framework for futures trading 
with a multi-tiered approach to oversight of derivatives markets. The 
CFMA applies different levels of oversight to markets based primarily 
on the nature of the underlying commodity being traded, the 
participants who are trading, and the manner in which trading is 
conducted. In general, the more sophisticated the traders or commercial 
participants, or the less susceptible a commodity is to manipulation or 
other market or trading abuses, the less regulatory oversight is 
required under the CFMA. In addition to creating three new categories 
of trading facility,\3\ the CFMA created a number of exemptions and 
exclusions from regulation for certain swaps and other derivative 
products traded either bilaterally or on electronic trading facilities-
including an exemption for transactions in exempt commodities traded on 
electronic trading facilities, also known as exempt commercial markets 
(``ECMs'').\4\
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    \2\ 7 U.S.C. 1 et seq.
    \3\ Designated Contract Markets (``DCMs'') are open to all 
participants and may offer all types of commodities; Derivatives 
Transaction Execution Facilities (``DTEFs'') generally are open only 
to sophisticated participants and are limited as to the types of 
commodities that may be traded; and Exempt Boards of Trade 
(``EBOTs'') may trade only excluded commodities and are open only to 
eligible contract participants and are subject to no regulatory 
oversight, exempt from most provisions of the CEA and not registered 
with or designated by the CFTC.
    \4\ The CFMA established the ECM exemption in section 2(h)(3) of 
the CEA, 7 U.S.C. 2(h)(3).
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    Since the adoption of the CFMA, ECMs have evolved such that some no 
longer are simple trading platforms with low trading volumes relative 
to DCMs. Also over time, these facilities began to offer ``look-alike'' 
contracts that are linked to the settlement prices of their exchange-
traded counterparts, and in at least one case these look-alike 
contracts began to garner significant volumes. More recently, several 
active ECMs began to offer the option of centralized clearing for their 
contracts--an option which became widely utilized by their customers to 
manage counterparty risk. This evolution, particularly the linkage of 
ECM contract settlement prices to DCM futures contract settlement 
prices, began to raise questions about whether ECM trading activity 
could impact trading on DCMs and whether the CFTC had adequate 
authority to address that impact and protect markets from manipulation 
and abuse.
    The Commission responded to these changing markets in a variety of 
ways. Its Office of the Chief Economist (``OCE'') conducted a study of 
the relationship between the natural gas contracts that trade on the 
New York Mercantile Exchange (``NYMEX''), a DCM, and the 
InterContinental Exchange (``ICE''), an ECM. Concurrently, the 
Commission's Division of Market Oversight issued a series of special 
calls \5\ for information related to ICE's cleared natural gas swap 
contracts that are cash-settled based on the settlement price of the 
NYMEX physical delivery natural gas contract. Following the OCE study 
and the special calls, the Commission held a public hearing in 
September 2007 to further explore a number of issues, including the 
adequacy of the CFMA's regulatory approach; the similarities and 
differences between ECMs and DCMs; the associated regulatory risks of 
each market category; the types of regulatory changes that might be 
appropriate to address identified risks; and the impact that regulatory 
or legislative changes might have on the U.S. futures industry and the 
global competitiveness of the U.S. financial industry. Based on 
information developed as a result of these efforts, the Commission 
published its October 2007 ``Report on the Oversight of Trading on 
Regulated Futures Exchanges and Exempt Commercial Markets'' (``ECM 
Report''). The ECM Report, which was provided to the Commission's 
Congressional oversight committees, recommended, among other things, 
that the CEA be amended to grant the CFTC additional authority over ECM 
contracts serving a significant price discovery function and that 
certain self-regulatory responsibilities be assigned to ECMs offering 
such contracts.
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    \5\ Section 2(h)(5)(B)(iii) of the Act, 7 U.S.C. 
2(h)(5)(B)(iii), requires that an ECM relying on the exemption 
provided in section 2(h)(3) must, upon a special call by the 
Commission, provide such information related to its business as the 
Commission may determine appropriate to enforce the antifraud 
provisions of the Act, to evaluate a systemic market event, or to 
obtain information requested by a Federal financial regulatory 
authority in connection with its regulatory or supervisory 
responsibilities.
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    The Reauthorization Act's provisions regarding ECMs were based 
largely on the Commission's recommendations for improving oversight of 
ECMs whose contracts perform a significant price discovery function. 
The legislation significantly expanded the CFTC's regulatory authority 
over ECMs by adding a new section 2(h)(7) to the CEA establishing 
criteria for the Commission to consider in determining whether a 
particular ECM contract performs a significant price discovery function 
and providing for greater regulation of SPDCs traded on ECMs. In 
addition to extending the CFTC's regulatory oversight to the trading of 
SPDCs, the Reauthorization Act requires ECMs to adopt position limit 
and accountability level provisions for SPDCs; authorizes the 
Commission to require the reporting of large trader positions in SPDCs; 
and establishes core principles governing ECMs with SPDCs. The core 
principles applicable to ECMs with SPDCs are derived from selected DCM 
core principles and designation criteria set forth in the CEA, and 
Congress intended that they be construed in a like manner.\6\
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    \6\ Joint Explanatory Statement of the Committee of Conference, 
H.R. Rep. No. 110-627, 110 Cong., 2d Sess. at 985 (2008) 
(``Conference Committee Report''). The core principles and 
designation criteria for DCMs are contained in section 5 of the CEA, 
7 U.S.C. 7.

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[[Page 12179]]

    The legislation directed the Commission to issue rules implementing 
the provisions of new section 2(h)(7) and to include in such rules the 
conditions under which an ECM will have the responsibility to notify 
the Commission that an agreement, contract or transaction conducted in 
reliance on section 2(h)(3) of the Act may perform a significant price 
discovery function. The Reauthorization Act mandated that the 
``significant price discovery standards'' rules be proposed not later 
than 180 days after the date of enactment of the Reauthorization Act, 
and that the Commission issue final rules not later than 270 days after 
the date of implementation of that Act.\7\
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    \7\ Public Law 110-246, sec. 13204(b)(1).
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    Consistent with Congress' directive, the Commission on December 12, 
2008 issued a notice of proposed rulemaking (``NPRM'' or ``proposing 
release'') to substantially amend rule 36.3 \8\ of the Commission's 
rules applicable to ECMs to implement the broadened regulatory 
authority conferred by section 2(h)(7) of the CEA over ECMs with SPDCs. 
In addition, the proposed rules implicated parts 16 through 21 (market, 
transaction and large trader reporting rules) and part 40 (provisions 
common to contract markets, derivatives transaction execution 
facilities and derivatives clearing organizations). In promulgating 
these final rules, the Commission recognizes that these are rapidly 
evolving markets. We are mindful that, as we carry out Congressional 
directives in the present context, we continue to maintain careful 
scrutiny of the marketplace with regard to new products and trading 
platforms in the future. As markets evolve, we acknowledge our 
obligation to continue to adapt our regulatory oversight to protect 
consumers and ensure the integrity of the core risk management and 
price discovery functions of our markets.
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    \8\ Part 36 of the Commission's rules contains the provisions 
that apply to exempt markets regardless of whether the markets are a 
significant source for price discovery. Rule 36.3 imposes a number 
of requirements on ECMs, including required notification of intent 
to rely on the exemption in section 2(h)(3) of the Act; initial and 
ongoing information submission requirements; prohibited 
representations; required price discovery notification; and price 
dissemination requirements.
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B. The Proposed Rules

1. Part 36: Exempt Markets--Rules Applicable to ECMs
    The Commission proposed to amend rule 36.3(b) to: (1) Specify the 
information submission requirements, both initially and on an ongoing 
basis, for all ECMs and also for ECMs with respect to agreements, 
contracts or transactions that have not been determined to perform a 
significant price discovery function; and (2) to enumerate separately 
the enhanced information submission obligations for ECMs with SPDCs. 
Consistent with the Reauthorization Act's directive that the 
Commission's rulemaking address specific statutory criteria for 
identifying a SPDC and the conditions under which an ECM will be 
responsible for notifying the Commission of a possible SPDC, proposed 
rule 36.3(c) addressed (1) The criteria on which the Commission will 
rely in making a determination that an agreement, contract or 
transaction performs a significant price discovery function; (2) the 
factors that will trigger an ECM's obligation to notify the Commission 
of a possible SPDC; (3) the procedures the Commission will follow in 
reaching its determination whether a contract is a SPDC; and (4) the 
procedures, standards and timetables by which an ECM with a SPDC must 
demonstrate compliance with the core principles. Because the criteria 
mandated by Congress for determining the existence of a SPDC do not 
lend themselves to bright-line rules or formulas, proposed Appendix A 
to Part 36 explains how the Commission anticipates applying the 
criteria, on a case-by-case basis, to the facts and circumstances under 
consideration.
    Consistent with the Reauthorization Act, the CFTC's proposed rules 
required ECMs with SPDCs to establish a self-regulatory regime with 
respect to those contracts. Those responsibilities generally are set 
forth in nine core principles, largely derived from counterpart 
provisions for DCMs, including core principles that require the ECM to 
implement an acceptable trade monitoring program; to develop an audit 
trail in order to detect and deter market abuses; to adopt position 
limitations or position accountability levels for speculators in SPDCs; 
to develop and implement procedures for the exercise of emergency 
authority; to make public daily trading information; to develop a 
program to monitor compliance with the ECM's rules; to establish rules 
to minimize conflicts of interest in the decision-making process of the 
ECM; and to avoid taking any actions or adopting any rules that result 
in any unreasonable restraints of trade or impose any material 
anticompetitive burden on trading on the ECM. Proposed Appendix B to 
Part 36 offers guidance and non-exclusive safe harbors for compliance 
with the core principles. In proposing this guidance, the Commission 
made every effort to construe the ECM core principles in a like manner 
as it construes the DCM core principles.
Parts 15-21: Market, Transaction and Large Trader Reporting Rules
    Collectively, the Commission's market, transaction, and large 
trader reporting rules (``reporting rules'') effectuate the 
Commission's market and financial surveillance programs. The market 
surveillance program analyzes market data to detect and prevent market 
manipulation and disruptions and to enforce speculative position 
limits. The financial surveillance program uses market data to measure 
the financial and systemic risks that large contract positions may pose 
to Commission registrants and clearing organizations. The 
Reauthorization Act authorized the Commission to establish a 
comprehensive transaction and position reporting system for SPDCs when 
it defined ECMs with SPDCs as registered entities and made certain 
provisions of the Act directly applicable to SPDCs.\9\ In addition to 
proposing technical and conforming amendments to parts 15 through 21 of 
its rules, the Commission sought in the proposed rules to extend to 
SPDCs the reporting rules that currently apply to DCMs and DTEFs by 
defining clearing member and clearing organization and amending the 
definition of reporting market in Commission rule 15.00 to apply to 
positions in, and the trading and clearing of, SPDCs.\10\
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    \9\ Specifically, section 4a of the CEA permits the Commission 
to set, approve exchange-set, and enforce speculative position 
limits. 7 U.S.C. 6a. Section 4c(b) of the Act, 7 U.S.C. 6c(b), gives 
the Commission plenary authority to establish rules pursuant to 
which the terms and conditions on which commodity options 
transactions may be conducted and provides the basis for the 
Commission's authority to establish a large trader reporting system 
for transactions on ECMs that involve commodity options. Section 4g 
of the Act imposes reporting and recordkeeping obligations on 
registered persons and requires them to file reports on positions 
executed on any board of trade and in any SPDC traded or executed on 
an ECM. 7 U.S.C. 6g. Finally, section 4i of the Act requires the 
filing of such reports as the Commission may require when positions 
made or obtained on DCMs, DTEFs or ECMs with respect to SPDCs equal 
or exceed Commission-set levels. 7 U.S.C. 6i.
    \10\ Consistent with ECM Core Principle IV's directive that ECMs 
take into account contracts that are treated by DCOs as fungible 
with a SPDC when establishing position limits or accountability 
levels for SPDCs, in this section the term SPDC will include any 
contracts that are fungible and cleared by DCOs together with SPDCs.
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    Specifically, the NPRM proposed that ECMs be required to provide 
clearing member reports for SPDCs pursuant to rule16.00. Under proposed 
rule 16.01, ECMs, like DCMs, would be required to

[[Page 12180]]

submit to the Commission and publicly disseminate option deltas and 
aggregated trading data on a daily basis.\11\ ECM clearing members that 
clear SPDCs would, regardless of their registration status with the 
Commission or their status as domestic or foreign persons, be required 
to file reports for large SPDC positions when the positions meet or 
exceed the contract reporting levels of Commission rule 15.03(b). In 
addition, the NPRM proposed to require clearing members to identify the 
owners of reportable SPDC positions on Form 102.\12\ Under the proposed 
rules, SPDC traders likewise would be subject to the special call 
provisions of the Commission's part 18 rules for reportable positions. 
Furthermore, the Commission proposed that clearing members clearing 
SPDCs, SPDC traders, and ECMs listing SPDCs would each be subject to 
the special call provisions of the part 21 rules.\13\
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    \11\ The NPRM also proposed to uniformly apply the public 
dissemination requirement of Commission rule 16.01(e) to DCMs, 
DTEFs, and ECMs with SPDCs.
    \12\ The Commission's Division of Market Oversight (``DMO'') 
increasingly has been charged with administering the procedural 
requirements of the reporting rules. Accordingly, the Commission 
proposed to shift the delegation of the Commission's authority to 
determine the format of reports and the manner of reporting under 
parts 15 to 21 of the Commission's rules from the Executive Director 
to the Director of DMO.
    \13\ Part 21 of the Commission's rules establishes the 
Commission's ability to request information on persons that exercise 
trading control over commodity futures and options accounts along 
with additional account-related information for positions that may 
or may not be reportable under Commission rule 15.03(b). The final 
rules amend paragraphs (i)(1) and (i)(2) of rule 21.02 to ensure 
that any special call to an intermediary for information that 
classifies a trader as commercial or noncommercial, and the 
positions of the trader as speculative, spread positions, or 
positions held to hedge commercial risks, can be made with respect 
to both commodity futures and commodity options contracts. 17 CFR 
21.02)(i).
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    In order to communicate effectively with foreign clearing members 
and foreign traders and to properly administer the proposed special 
call provisions of parts 17, 18 and 21 of the Commission's rules, the 
Commission also proposed to amend the designation of agent provisions 
of rule 15.05 to require ECMs that list SPDCs to act as the agent of 
foreign clearing members and foreign traders for the purpose of 
accepting service or delivery of any communication, including special 
calls, issued by the Commission to a foreign clearing member or trader. 
The Commission also proposed new rule 16.02 to require all reporting 
markets, including ECMs listing SPDCs, to report on a daily basis trade 
data and related order information for each transaction that is 
executed on the market,\14\ and to specify the information to be 
included in such reports.\15\ In this regard, while the Commission 
proposed amendments to its part 17 rules dealing with reportable 
positions, it did not extend those proposals to SPDC transactions that 
are not cleared for the simple reason that no clearing members are 
involved in clearing such transactions. For purposes of enforcing SPDC 
position limits and monitoring large SPDC positions, the Commission 
anticipated using proposed rule 16.02 to access transaction information 
and trader identification to enforce position limits and monitor large 
positions for market and financial surveillance purposes.
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    \14\ For some time, DCMs consistently have provided transaction 
level data on request by the Commission pursuant to rule 38.5(a). 
Proposed rule 16.02 would make such submissions mandatory.
    \15\ Such reports would include time and sales data, reference 
files and other information as the Commission or its designee may 
request; upon request, this information could be accompanied by data 
that identifies or facilitates the identification of each trader for 
each transaction or order included in a submitted report. The 
Commission noted in the NPRM that recent acquisitions of technology 
have enabled the agency to more effectively integrate trade data and 
related orders into its trade practice, market, and financial 
surveillance programs. Accordingly, new rule 16.02 would make the 
submission of such information mandatory.
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Part 40: Provisions Common to Registered Entities
    The Reauthorization Act amended the definition of ``registered 
entity'' in section 1a(29) of the CEA to include ECMs with SPDCs. 
Because certain provisions in part 40 of the Commission's rules apply 
to registered entities--and, accordingly, to ECMs with SPDCs--the 
Commission proposed to amend part 40 to specify the provisions which 
would be applicable to all registered entities.\16\ The Commission 
emphasized in its NPRM that although not all provisions of part 40 will 
be applicable to ECMs with SPDCs, even sections that are not being 
amended in this rulemaking may be de facto amended by virtue of the 
fact that the term ``registered entity'' now includes ECMs with SPDCs.
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    \16\ In particular, the proposed amendments to part 40 made 
rules 40.1, 40.2 and 40.5-40.8 and Appendix D specifically 
applicable to ECMs with SPDCs.
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C. Overview of Comments Received \17\

    General. The Commission received a total of eleven comments from a 
range of commenters, including a government agency,\18\ several trade 
associations,\19\ two ECMs,\20\ an interdealer broker in over-the-
counter (``OTC'') energy markets,\21\ and a DCM.\22\ Most commenters 
expressed support for the proposed rules and several particularly 
commended the Commission's adherence to the letter and spirit of the 
Reauthorization Act. Several commenters offered specific 
recommendations for clarification or modification of certain 
provisions. These comments will be addressed more fully below. The 
Commission notes that some commenters requested that particular rules 
and core principle guidance proposed for ECMs be modified to mirror 
analogous provisions for DCMs. In this regard, the Commission reminds 
interested parties that the Reauthorization Act did not mandate 
identical rules for ECMs and DCMs, and the Commission has attempted to 
craft rules tailored to the special concerns raised by SPDCs. In that 
same vein, interested parties should bear in mind that Commission 
acceptable practices for all core principles do not denote requirements 
under the Act; rather, they offer safe harbors. Registered entities 
always have the option of crafting alternate means of complying with 
core principles than those set forth in the Commission's acceptable 
practices.
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    \17\ In this NPRM, comment letters (``CL'') are referenced by 
the letter's author and/or file number and page. These letters are 
available through the Commission's Internet Web site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2008/08-012.html.
    \18\ The Federal Energy Regulatory Commission (``FERC'') (CL 05) 
responded to the CFTC's request for comments but did not comment on 
the particulars of the proposed rules.
    \19\ American Feed Industry Association (``AFIA'') (CL 04) 
(representing animal feed interests); International Swaps and 
Derivatives Association, Inc. (``ISDA'') (CL 06) (representing 
participants in the privately negotiated derivatives industry); 
American Public Gas Association (``APGA'') (CL 07) (the national 
association for publicly-owned natural gas distribution systems); 
Society of Independent Gasoline Marketers of America (``SIGMA'') (CL 
08) (a national trade association representing independent chain 
retailers and marketers of motor fuel); Air Transport Association of 
America, Inc. (``ATA'') (CL 09) (airline trade association); Managed 
Funds Association (``MFA'') (CL 10) (representing the global 
alternative investment community).
    \20\ HoustonStreet Exchange (CL 01); InterContinental Exchange, 
Inc. (``ICE'') (CL 03).
    \21\ OTC Global Holdings, Inc. (CL 11) OTC Global Holdings has 
submitted notification to the Commission of its intent to operate a 
market pursuant to the exemption found in section 2(h)(3) of the 
Act.
    \22\ CME Group (CL 02).
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    Core Principle IV. Several commenters expressed substantive 
concerns with respect to the Commission's proposed guidance and 
acceptable practices for compliance with Core Principle IV (Position 
Limitations or Accountability). Specifically, these commenters objected 
to the Commission's proposal that ECM market surveillance programs 
account

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for uncleared transactions through volume accountability levels (based 
on a measure of net uncleared trading calculated by netting each 
trader's long and short uncleared transactions against the same 
counterparty). As more fully discussed below, the Commission believes 
the issues and recommendations raised by these commenters merit further 
attention and study. The Commission is mindful, however, that the time 
constraints imposed by the Reauthorization Act for issuing final rules 
implementing section 2(h)(7) do not permit the level of study necessary 
to properly address and resolve these issues.\23\ Moreover, even if the 
Commission was prepared immediately to adopt some or all of the 
suggested changes, they reflect a substantial departure from the 
proposed guidance that might warrant re-proposal under the 
Administrative Procedure Act.\24\
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    \23\ Congress has directed that the Commission issue proposed 
rules implementing section 2(h)(7) of the CEA not later than 180 
days after the date of enactment of the Reauthorization Act (June 
18, 2008), and that the Commission issue final rules no later than 
270 days after the date of enactment. Public Law 110-246 at section 
13204.
    \24\ 5 U.S.C. 553.
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    For these reasons, the Commission, in an abundance of caution, has 
determined not to make final its Core Principle IV proposed guidance 
and acceptable practices relating to uncleared trades pending a full 
and complete evaluation of the issues raised in these comments. 
Accordingly, upon publication of this notice of final rulemaking, the 
Commission intends to immediately examine these issues and to issue a 
notice of proposed rulemaking that specifically addresses appropriate 
guidance and acceptable practices for uncleared trades on ECMs.
    Like all core principles, Core Principle IV is statutory, and the 
Commission's decision not to provide particular guidance or safe 
harbors with respect to ECM uncleared trades at this time does not 
diminish an ECM's obligation to comply with the core principle itself. 
In that regard, the Commission reminds interested parties that section 
2(h)(7)(C)(ii) of the CEA gives an electronic trading facility explicit 
discretion to take into account differences between cleared and 
uncleared SPDCs in applying the position limits and accountability core 
principle.\25\ Likewise, the Commission will take these differences 
into account when reviewing an ECM's implementation of a core 
principle, as directed by section 2(h)(7)(D)(i).
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    \25\ See also Conference Committee Report at 985-86.
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II. The Final Rules

A. Part 36--Exempt Markets

    Part 36 of the Commission's rules governs both exempt boards of 
trade and ECMs, regardless of whether any individual contract traded 
thereon is a significant source for price discovery. As described 
infra, Rule 36.3 more particularly imposes a number of requirements and 
restrictions on ECMs, including notification of the ECM's intent to 
rely on the section 2(h)(3) exemption; initial and ongoing information 
submission requirements; prohibited representations; price discovery 
notification; and price dissemination requirements. The Commission is 
adopting as proposed the provisions of Rule 36.3(b) that separately 
specify the information submission requirements, both initially and on 
an ongoing basis, for all ECMs and for ECMs with respect to agreements, 
contracts or transactions that have not been determined to perform a 
significant price discovery function.
    The Commission is adopting as proposed the substance of that 
provision's enhanced reporting requirements for ECMs with SPDCs. 
However, the final rules will correct an error in numbering in rule 
36.3(b)(2). As proposed, rule 36.3(b)(2)(i) provided that ECMs, with 
respect to contracts that have not been determined to be SPDCs, must 
identify to the CFTC those contracts that averaged five trades per day 
or more over the most recent calendar quarter, and for each such 
contract, either: pursuant to subparagraph (A), submit a weekly report 
to the CFTC showing specific information; or, pursuant to subparagraph 
(B)(1), provide the Commission with electronic access sufficient to 
allow it to compile the same information. The rule then also required 
in subparagraph (B)(2) through (B)(4) that the ECM maintain and provide 
the CFTC with other records.\26\ These last three requirements were 
incorrectly numbered. Because they apply regardless of whether the ECM 
has elected the weekly reporting path of rule 36.3(b)(2)(i)(A) or to 
provide access to the CFTC pursuant to rule 36.3(b)(2)(i)(B), these 
requirements properly are numbered as 36.3(b)(2)(ii)-(iv) rather than 
as 36.3(b)(2)(i)(B)(2)-(4).\27\
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    \26\ Subparagraph (B)(2) required that the ECM maintain a record 
of allegations and complaints; subparagraph (B)(3) direct the ECM to 
provide the CFTC with a copy of the record of each complaint 
relating to violations of the CEA; pursuant to subparagraph (B)(4) 
the ECM must provide the Commission with a quarterly list of 
transactions executed in reliance on the section 2(h)(3) exemption 
and indicate the terms and conditions, average daily trading volume, 
and most recent open interest figures for each such transaction.
    \27\ To complete this technical correction, proposed rule 
36.3(b)(2)(i)(B)(1) is properly numbered as 36.3(b)(2)(i)(B) in the 
final rules.
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    Proposed rule 36.3(c) and Appendix A to Part 36 set forth the 
procedures and guidance, respectively, which the Commission will use in 
determining whether an ECM agreement, contract or transaction is a 
SPDC. The Commission is adopting, substantially as proposed, Appendix A 
and its general guidance as to how the Commission expects flexibly to 
apply the four criteria specified in section 2(h)(7) of the CEA for 
determining a SPDC--price linkage, arbitrage, material price reference 
and material liquidity. Although much of rule 36.3(c) and its SPDC-
determination procedures are being adopted as proposed, some provisions 
have been modified in response to comments and some have been modified 
to reflect technical and clarifying changes.
    The Commission has made a technical correction to proposed new rule 
36.3(c)(1)(i). This rule is intended to track the statutory language 
added to the CEA by the Reauthorization Act as section 2(h)(7)(B)(i), 
which provides that in determining a SPDC, the Commission shall 
consider, as appropriate,

    PRICE LINKAGE--The extent to which the agreement, contract, or 
transaction uses or otherwise relies on a daily or final settlement 
price, or other major price parameter, of a contract or contracts 
listed for trading on or subject to the rules of a designated 
contract market or a derivatives transaction execution facility, or 
a significant price discovery contract traded on an electronic 
trading facility, to value a position, transfer or convert a 
position, cash or financially settle a position, or close out a 
position.

    As proposed, section 36.3(c)(1)(i) inadvertently dropped a portion 
of the statutory language. The final rules have been corrected to 
reflect the complete statutory provision.
    As proposed, rule 36.3(c)(3) provides that the Commission will 
issue an order determining whether a contract is a SPDC after 
consideration of all relevant information, including any ``data, views 
and arguments'' submitted to the Commission in response to Federal 
Register notification of the Commission's intent to so evaluate the 
contract. The proposed rule did not include a timeframe for issuance of 
such an order. CME Group suggests that the public interests underlying 
the regulatory oversight requirements for

[[Page 12182]]

SPDCs dictate that such determinations be issued within a reasonable 
timeframe following the close of the comment period for the Federal 
Register notification.\28\ The Commission is committed to the prompt 
and thorough processing of SPDC determinations and agrees, as CME Group 
suggests, that absent special circumstances, its order generally should 
issue within 60 days of the closing of the comment period. We are 
aware, however, that the term ``special circumstances'' may take its 
meaning from the particular context, including but not limited to the 
volume of work before the agency and the complexity of the submission 
under review, and we are reluctant to define those circumstances by 
rule. The Commission instead has modified rule 36.3(c)(3) to specify 
that the Commission shall promptly consider relevant information and 
shall issue an order explaining its determination within a reasonable 
period of time after the close of the comment period.\29\
---------------------------------------------------------------------------

    \28\ CME Group CL 02 at 7-8.
    \29\ The ATA urged the Commission to revise proposed rule 
36.3(c)(3) ``to provide 14 calendar days notice, not 30, of its 
intention to designate a contract as an SPDC.'' CL 09 at 5. The 
Commission wishes to clarify that rule 36.3(c)(3) establishes a 30-
day notice and comment period following the Commission's notice of 
its intention to undertake a determination whether a particular 
contract is a SPDC. ATA further urges the Commission to specify that 
it will issue a final determination no later than 14 days from the 
end of the comment period. As discussed supra, while the Commission 
is committed to reviewing potential SPDCs as expeditiously as 
possible, in our view 14 days is inadequate to review and issue a 
determination on any SPDC and in most cases would preclude an 
adequate evaluation of complex matters.
---------------------------------------------------------------------------

    Proposed rule 36.3(c)(4) established the timetables for compliance 
with the core principles by ECMs that have been determined to have a 
SPDC, providing a 90-day grace period for an ECM's initial SPDC and a 
15-day grace period for subsequently-identified SPDCs traded on the 
same ECM. CME Group suggests that the passage of the Reauthorization 
Act put ECMs on notice that one or more of their contracts may become a 
SPDC at some future date; in its view, a 45-day grace period should be 
sufficient for all ECMs. ATA also views a 90-day grace period as 
excessive in light of ECMs' sophistication and suggests that ECMs can 
demonstrate compliance with the core principles in 60 days. With due 
regard for the market integrity interests associated with the core 
principles, we disagree that all ECMs will be able, in every 
circumstance, to demonstrate compliance with all the core principles 
within 45 or 60 days. While larger, established ECMs may be prepared to 
develop core principle compliance strategies in anticipation of a SPDC 
determination, the grace period must also permit ECMs that are less 
well-established sufficient time to develop and implement programs 
responsive to the core principles. Accordingly, the Commission has 
adopted as final the 90-day grace period for initial compliance with 
the core principles.
    Although ISDA found the 90-day time frame reasonable, noting that 
it allows market participants to make necessary changes to their 
trading system to ensure compliance with the core principles,\30\ it 
objected to the 15-day grace period for subsequently-identified SPDCs 
and urged the Commission to extend the timeframe in recognition of the 
additional obligations compliance imposes and the likely system changes 
required of ECMs.\31\ ICE noted that both the 90-day and 15-day grace 
periods generally allow sufficient time for an ECM to comply with the 
core principles, but warned that 15 calendar days may not be sufficient 
time for clearing firms that outsource large trader reporting to meet 
the reporting requirements. The Commission has considered these 
suggestions and believes that 30 calendar days should be sufficient to 
ensure that clearing firms can meet the reporting requirements and 
avoid market disruptions. Rule 36.3(c)(4) has been modified accordingly 
to grant a 30-day period for ECMs to come into core principle 
compliance for their subsequent SPDCs. In addition to this change, the 
Commission has determined to clarify rule 36.3(c)(4) by changing the 
second sentence of this provision \32\ to read ``* * * one of the 
electronic trading facility's agreements, contracts or transactions 
performs a significant price discovery function* * *''
---------------------------------------------------------------------------

    \30\ ISDA CL 06 at 3.
    \31\ Id. ISDA's comment did not recommend a specific time 
period.
    \32\ As proposed, the relevant phrase reads as follows: ``* * * 
the electronic trading facility's agreement, contract or transaction 
performs a significant price discovery function* * *'' See 73 FR 
75888 at 75911.
---------------------------------------------------------------------------

    In order to clarify its intent and eliminate a redundancy in 
paragraph (B)(4) of Appendix A, the Commission is amending Appendix A 
to part 36 as follows: Paragraph (B)(4) is deleted in its entirety as 
repetitive of paragraph (B)(3). In paragraph (B)(3), the language 
beginning with ``In combination with this volume level'' will become 
new paragraph (B)(4).

B. Substantive Compliance With Core Principle IV: Guidance and 
Acceptable Practices

    Although comments addressing the nine ECM SPDC core principles 
generally expressed satisfaction with the Commission's proposed 
guidance and acceptable practices, the Commission's guidance for 
substantive compliance with Core Principle IV--particularly with 
respect to speculative position limits and the treatment of uncleared 
contracts--was a cause for concern among several commenters. Their 
comments are summarized below.
    1. The Commission's authority with respect to uncleared trades. In 
its comment letter, ISDA questioned the Commission's authority under 
the Reauthorization Act to address limits for uncleared SPDC 
transactions in its Core Principle IV acceptable practices.\33\ In 
support, ISDA cites Core Principle IV's direction that ECMs take into 
account positions in other ``agreements, contracts, and transactions 
that are treated by a derivatives clearing organization, whether 
registered or not registered, as fungible'' with a SPDC when 
determining appropriate position limitations or accountability for the 
SPDC.\34\ The Commission believes that Congress did not so limit the 
Commission's authority with respect to uncleared SPDC transactions; on 
the contrary, both the statutory language and the legislative history 
make plain that Congress intended for new CEA section 2(h)(7) to apply 
to all SPDCs, whether cleared or uncleared. The Conference Committee 
report emphasizes that the legislation gives electronic trading 
facilities ``the explicit discretion to take into account differences 
between cleared and uncleared SPDCs in applying the position limits or 
accountability core principle.'' \35\ And CEA section 2(h)(7)(D) 
directs the Commission to ``take into consideration the differences'' 
between cleared and uncleared trades in reviewing an ECM's 
implementation of the core principles. Under principles of statutory 
construction, Congress must be presumed to have said what it meant.\36\ 
The Commission believes that the ECM SPDC Core Principle IV clause 
cited by ISDA in support of its argument stands for a different 
proposition altogether. Specifically, the clause pertains to

[[Page 12183]]

transactions in ``other agreements, contracts and transactions.'' 
Accordingly, Congress directed ECMs to include certain non-SPDC 
transactions when applying position limitations and/or accountability 
levels to a SPDC. So, for example, if another non-SPDC ECM contract or 
even a contract executed off of a trading facility pursuant to CEA 
Section 2(h)(1) is fungible and cleared together with a SPDC, the 
subject ECM should take those non-SPDC positions ``into account'' when 
administering the SPDC's position limit or accountability regime.
---------------------------------------------------------------------------

    \33\ ISDA CL 06 at 2.
    \34\ Id.
    \35\ Conference Committee Report at 985-86; Public Law 110-246 
at 13201.
    \36\ Where the plain language of a statute is clear, courts 
generally will presume that Congress meant precisely what it said 
absent a showing that ``as a matter of historical fact, Congress did 
not mean what it appears to have said, or that, as a matter of logic 
and statutory structure, it almost surely could not have meant it.'' 
Engine Mfrs. Ass'n v. EPA, 88 F.3d 1075, 1089 (D.C. Cir. 1996), 
quoted in National Public Radio, Inc. et al. v. FCC, 254 F.3d 226, 
230 (D.C. Cir. 2001).
---------------------------------------------------------------------------

    2. Grace period for open positions. As proposed, the acceptable 
practices for Core Principle IV permitted a grace period of 90 calendar 
days from the ECM's implementation of speculative position limit rules 
for traders to comply with those rules unless a hedge exemption is 
granted by the ECM. MFA has recommended that the Commission, rather 
than creating a new grace period applicable only to SPDCs, should rely 
on the existing standards of section 4a(b)(2) of the CEA\37\ and the 
standards applied to exchange-set speculative position limits under 
rule 150.5(f).\38\ The Commission believes that this recommendation is 
premised on a misunderstanding of the statutory and regulatory 
structures governing exchange-set speculative position limits. As MFA 
notes, section 4a(b)(2) applies to Commission-set speculation limits, 
not exchange-set limits.\39\
---------------------------------------------------------------------------

    \37\ 7 U.S.C. 6a(b)(2).
    \38\ MFA CL 10 at 6.
    \39\ Id.
---------------------------------------------------------------------------

    Furthermore, Rule 150.5(f) no longer has direct application to DCM-
set position limits. The statutory authority governing DCM-set limits 
is found in CEA section 5(d)(5)-- DCM Core Principle 5.\40\ That core 
principle does not contain any aspect of the exemptive language found 
in either CEA section 4a or Rule 150.5(f). Moreover, it should be noted 
that the part 38 rules explicitly exempt agreements, contracts or 
transactions traded on a DCM from all Commission rules other than those 
specifically referenced in Rule 38.2. That provision did not retain 
Rule 150.5(f).\41\ Further, although the acceptable practices for Core 
Principle 5 (which are found in Appendix B to part 38) contain many of 
rule 150.5's provisions, they do not specify the rule 150.5(f) good 
faith exemption. Accordingly, the part 150 rules essentially constitute 
guidance for DCMs administering position limit regimes, Commission 
staff in overseeing such regimes has not required that position limits 
include an exemption for positions acquired in good faith.
---------------------------------------------------------------------------

    \40\ ``(5) Position Limitations or Accountability.--To reduce 
the potential threat of market manipulation or congestion, 
especially during trading in the delivery month, the board of trade 
shall adopt position limitations or position accountability for 
speculators, where necessary and appropriate.'' 7 U.S.C. 7(d)(5).
    \41\ 17 CFR 38.2.
---------------------------------------------------------------------------

    The Reauthorization Act established Core Principle IV as part of 
new CEA section 2(h)(7) to require the establishment of position 
limitations or accountability levels for SPDCs listed on ECMs. As with 
DCM Core Principle 5, ECM Core Principle IV does not contain the 
exemptive provision for positions established in good faith--nor do its 
acceptable practices rely for authority on section 4a of the CEA. For 
this reason, the Commission was not obliged to adopt such a good faith 
exemption.\42\ In the Commission's view, the primary goal for an ECM 
with a SPDC should be to ensure that large positions not be disruptive 
to the market. Indeed, a sudden decrease in a position to meet an ECM's 
newly-adopted position limit could itself be disruptive. The 
Commission's proposed acceptable practice was crafted to permit market 
participants to make any necessary adjustments to their positions in an 
orderly fashion, thus reducing market disruptions and avoiding, as much 
as possible, an unfair impact on position holders. For the reasons 
discussed in these sections, the Commission has determined to adopt the 
acceptable practice as proposed (except with respect to uncleared 
trades, as discussed infra), and reminds interested parties that 
acceptable practices serve as a safe harbor and do not represent the 
only means of compliance with the core principles.
---------------------------------------------------------------------------

    \42\ In part for the reasons discussed in this section, the 
Commission expects in the near future to revisit and clarify Core 
Principle 5 for DCMs.
---------------------------------------------------------------------------

3. Position Accountability
    MFA also encourages the Commission to bring its Core Principle IV 
acceptable practices with respect to position accountability into 
closer alignment with its acceptable practices for DCMs. Although 
perfect symmetry between the DCM and ECM core principles and acceptable 
practices was not mandated by the Reauthorization Act and is not a 
primary goal of this rulemaking, it is the Commission's view that its 
expectations for DCMs and ECMs in this regard are not significantly 
different. MFA argues that ``DCMs are not mandated to conduct an 
inquiry in response to every breach of a position accountability level. 
Rather, DCMs have the discretion to determine whether to open an 
inquiry in particular cases.'' \43\ So, too, do ECMs under the Core 
Principle IV acceptable practices.\44\ Unlike position limits, 
accountability levels are not limitations on position sizes, as traders 
are permitted to take positions in excess of the established 
accountability levels. ECMs are obliged to monitor trading in their 
markets and to discourage manipulative activity in the spot month as 
well as in back months; the purpose of accountability levels is to 
provide the ECM with additional information and authority to address 
positions that threaten to create disorderly trading or market abuses. 
For positions that exceed a position accountability level, appropriate 
action by the ECM may be dictated by a number of factors, including 
characteristics of the market and the size of the position relative to 
the market. For smaller positions that exceed the accountability level, 
the ECM may find that placing such positions on a ``close watch'' is 
appropriate. For larger positions, depending on the potential threat to 
the market, it may be appropriate for the ECM to request that the 
trader not further increase (or even reduce) a position. Market 
liquidity also should be considered when monitoring traders with 
positions above the accountability level; an ECM may find it 
appropriate to more aggressively limit positions in markets that are 
relatively illiquid. In any event, ECMs are reminded that the 
acceptable practices serve as safe harbors; alternative methods to 
monitor trading may be sufficient.
---------------------------------------------------------------------------

    \43\ MFA CL 10 at 4.
    \44\ MFA points to the directive in the Core Principle IV 
acceptable practices that an ECM ``should initiate'' an inquiry once 
a trader exceeds a position accountability level as an indication 
that action is mandated in every case. The Commission does not view 
this language as a mandate; as noted above, acceptable practices 
serve as safe harbors and do not represent the only means of 
compliance with the core principles.
---------------------------------------------------------------------------

    Also in connection with the ECM's monitoring of positions, the 
Commission has considered MFA's concern that the term ``investigation'' 
may connote a level of wrongdoing which, in turn, might inadvertently 
render a commodity pool ineligible to receive investor funds\45\ or 
otherwise have an adverse effect on a trader's business. Although the 
Commission believes such a misimpression is unlikely, we have modified 
the acceptable practice to replace the word ``investigation'' with 
``inquiry.''
---------------------------------------------------------------------------

    \45\ MFA CL 10 at 4.
---------------------------------------------------------------------------

    With regard to establishing position accountability levels in non-
spot months and all months combined, MFA questioned why ECMs are given 
specific guidance--that is, the ``10% of open

[[Page 12184]]

interest'' standard--while DCMs are free to determine their own 
methodology.\46\ Again, the Commission wishes to emphasize that its 
guidance for ECMs need not follow precisely the guidance it has 
offered--or not offered--for DCMs. The Commission believes it is sound 
practice for DCMs and ECMs to adopt non-spot month and all-months-
combined position accountability levels or position limits and believes 
the specific guidance offered in this acceptable practice will be 
beneficial to ECMs wishing to take advantage of the safe harbor. 
Moreover, the Commission intends shortly to revisit DCM Core Principle 
5 with a view to providing more specific guidance with respect to non-
spot month and all-months-combined position accountability levels. 
Finally, the Commission wishes to remind interested parties that the 
``10% of open interest'' standard for determining position 
accountability levels applies to unique SPDCs (i.e., cleared ECM 
contracts that are determined to be SPDCs based on material price 
reference grounds, rather than on the basis of economic equivalence 
\47\ with another contract through a price linkage or arbitrage 
relationship). The acceptable practices for non-unique, economically-
equivalent SPDCs provide that the ECM may adopt the accountability 
levels adopted by the DCM for the underlying contract.\48\ As noted, 
the Commission expects to further consider the treatment of uncleared 
trades and anticipates proposing rule amendments as well as guidance 
and acceptable practices in the near future.
     Speculative Position Limits: Accountability Levels for Uncleared 
Trades.
---------------------------------------------------------------------------

    \46\ Id. at 4-5.
    \47\ With regard to ICE and ISDA's concern that economic 
equivalence is subjective (ICE CL 03 at 5; ISDA CL 06 at 2-3); the 
Commission believes the concept of economic equivalence is 
relatively straightforward. Essentially, the concept is designed to 
capture SPDCs that replicate or serve as a close substitute for a 
corresponding DCM, DTEF or second ECM SPDC contract. In this regard, 
any SPDC that is cash settled based on another contract's settlement 
price will be considered economically equivalent, assuming 
sufficient volume. In addition, SPDCs that can be used to arbitrage 
price discrepancies may be considered economically equivalent to DCM 
contracts. For arbitragable contracts to be considered economically 
equivalent, both the prices and the contract terms would have to be 
highly correlated. As part of its determination whether a particular 
contract is an SPDC, the Commission will indicate whether it 
considers the SPDC economically equivalent to another contract.
    \48\ ICE and ISDA warned that requiring an ECM to adopt a DCM's 
position limits for its economically-equivalent SPDCs may have 
anticompetitive implications for trading on an ECM (ICE CL 03 at 6; 
ISDA CL 06 at 3): a DCM could set an artificially low position limit 
for its own contract in order to squeeze out an ECM. The Commission 
does not believe this is a likely consequence of its acceptable 
practice. First, assuming that the DCM contract is the dominant 
market, setting the spot-month limit at an extraordinarily low level 
would limit trading in its own contract, which would be self-
defeating. Secondly, the instant procedures are acceptable practices 
that provide a safe harbor; they are not rules or requirements, and 
they do not comprise all possible means of satisfying Core Principle 
IV. If an ECM believes that a DCM is engaging in anticompetitive 
behavior (which is itself the subject of a core principle for both 
ECMs and DCMs), it should notify the Commission and should propose 
alternative position limits and/or accountability levels that are 
reasonable and based on economic analysis.
---------------------------------------------------------------------------

    Both ISDA\49\ and ICE \50\ opined that requiring ECMs to adopt the 
same speculative position limits as an ``unaffiliated'' DCM would be 
anticompetitive since the DCM would have the authority to dictate the 
ECM's position limits even where an ECM is the dominant, more liquid 
market. CME Group and APGA suggest that the Commission should propose 
comprehensive, industry-wide speculative position limits that would 
apply to both cleared and uncleared transactions.\51\ Similarly, MFA 
suggested that SPDCs should be incorporated into the existing 
regulatory framework because a separate category for uncleared trades 
could impede a trader's ability to reflect the true net economic 
exposure of a position and could chill legitimate economic 
activity.\52\
---------------------------------------------------------------------------

    \49\ ISDA CL 06 at 3.
    \50\ ICE CL 03 at 5-6.
    \51\ CME Group CL 02 at 6; APGA CL 07 at 3-4.
    \52\ MFA CL 10 at 6. AFIA requests that as part of the final 
rule the Commission exercise its authority to remove the exemption 
for position limits that has been given to Index Speculator Funds. 
CL 04 at 2-3. The Commission appreciates AFIA's concern but notes 
that such an action is beyond the scope of the instant rulemaking.
---------------------------------------------------------------------------

    APGA supports the use of spot month speculative position limits as 
an effective tool for addressing contracts on commodities--such as 
natural gas--with constrained deliverable supplies.\53\ It urges, 
however, that the Commission modify its proposed guidance such that an 
ECM must account for positions that may be held on another registered 
entity in economically-related SPDCs in setting such limits. Without 
such a revision, APGA believes that traders will be able to amass a far 
larger speculative position in the spot month by dividing its position 
among several markets or market segments for SPDCs.\54\ Accordingly 
APGA urges that the volume accountability level for uncleared contracts 
should be included in calculating the size of a trader's position for 
speculative position limits purposes. APGA expresses similar concerns 
with respect to the Commission's proposal in the Core Principle IV 
guidance, and similarly suggests the establishment of separate 
accountability levels for cleared and uncleared trades and a separate 
volume accountability level in the spot month.\55\ CME Group agrees 
that the proposed guidance should be reconsidered, and pointed out that 
the disparate standards provided by the acceptable practices make it 
possible for a trader to maintain double the position permitted for an 
economically equivalent contract on a DCM. CME Group believes that 
there should be one position limit and one associated set of 
accountability levels for non-spot contracts that apply across all 
activities for a SPDC, including cleared and uncleared trades.\56\
---------------------------------------------------------------------------

    \53\ APGA CL 07 at 2-3. APGA also suggested that the Commission 
set federal speculative limits for exempt commodities and that such 
limits should be applied to a given trader's aggregate position in 
economically-equivalent contracts across all registered entities. 
While innovative and worthy of further consideration in the future, 
the Commission believes these recommendations are beyond the scope 
of the instant rulemaking.
    \54\ APGA CL 07 at 2-3.
    \55\ Id. at 5-6. APGA argues that the separate volume 
accountability category potentially would enable speculative traders 
to amass a larger position before prompting an inquiry by the ECM. 
More critically, where there is a separate volume accountability 
level in the spot-month, APGA stated that a trader can readily avoid 
a spot month speculative position limit by holding a combination of 
cleared and uncleared positions, even on the same market.
    \56\ CME Group CL 02 at 6.
---------------------------------------------------------------------------

    As noted above, these and other recommendations related to the 
proposed guidance and acceptable practices for Core Principle IV with 
respect to uncleared trades raise complex issues which, in the 
Commission's view, warrant further serious consideration before a 
decision can be made whether, and to what extent, they should be 
implemented. For this reason, the Commission has determined not to make 
final those aspects of the Core Principle IV guidance and acceptable 
practices relating to uncleared trades pending additional study of 
these comments and consultation with the commenters and others, 
culminating in a subsequent rulemaking proposing guidance and 
acceptable practices applicable to uncleared trades. As part of this 
process, and in the course of formulating that proposed guidance, the 
Commission will consider the issues raised in the comments received in 
connection with the instant rulemaking.

C. Market, Transaction and Large Trader Reporting Rules

    Reporting Rules. With the three substantive exceptions noted below, 
the

[[Page 12185]]

Commission is promulgating the reporting rules as proposed.\57\ Five 
commenters addressed the proposed reporting rules. ATA expresses 
support for the extension of the reporting rules to SPDCs--
specifically, ATA endorses the application of the reporting 
requirements to ECM clearing members that clear SPDCs, regardless of 
their registration status with the Commission or their status as 
foreign or domestic persons.\58\ ATA additionally expressed support for 
the use of transaction and trader identification data that would be 
collected under new rule 16.02 to monitor large SPDC positions. Four 
commenters expressed general concerns or recommended the adoption of 
additional or alternative amendments to the reporting rules.
---------------------------------------------------------------------------

    \57\ 17 CFR parts 15 through 21.
    \58\ ATA CL 09 at 8.
---------------------------------------------------------------------------

    CME Group, for example, observes that while the acceptable 
practices for Core Principle IV advise ECMs to establish an effective 
program for enforcement of SPDC position limits that should include a 
large trader reporting system to monitor and enforce daily compliance 
with position limit rules, Appendix B to Part 36 does not establish 
similar acceptable practices that tie large trader reporting 
requirements to the daily monitoring of volume accountability levels 
for uncleared SPDCs.\59\ As noted above, the Commission intends 
expeditiously to propose rules and acceptable practices that will focus 
on position limit and accountability rules for uncleared SPDCs. The 
Commission intends to address CME Group's concern at that time.
---------------------------------------------------------------------------

    \59\ CME Group CL 02 at 5.
---------------------------------------------------------------------------

    HoustonStreet, an ECM, opined that voice brokers must be subject to 
the same reporting requirements as ECMs to ensure a level playing field 
in the OTC energy markets and to prevent market participants from 
avoiding transparency and disclosure obligations.\60\ The Commission 
does not have authority under the CEA to directly extend the reporting 
rules to voice-brokered transactions which are not entered into in 
reliance on a section 2(h)(3) exemption and are not otherwise fungible 
with SPDCs for clearing purposes. Although the Commission does have the 
authority to require the reporting of all OTC and cash market positions 
(including voice-brokered transactions) under section 4i of the Act 
when traders' positions in contracts executed on or subject to the 
rules of a registered entity exceeds fixed thresholds, such an 
extension of the reporting rules is beyond the scope of this 
rulemaking.\61\
---------------------------------------------------------------------------

    \60\ HoustonStreet, CL 01 at 1.
    \61\ A routine trader reporting requirement, including the 
routine reporting of OTC positions, is not a current requirement for 
any contract traded on or subject to the rules of a DCM.
---------------------------------------------------------------------------

    ISDA comments that the reporting rules' references to clearing 
members ``carrying'' large positions may be inappropriate in the 
context of transactions that are executed on ECMs, which by definition 
are principal-to-principal markets that do not permit some forms of 
intermediation.\62\ With respect to ECMs, the Commission reiterates 
that the large trader reporting requirements of part 17 place the 
burden of routine position reporting on clearing members that clear 
positions for market participants or clear proprietary transactions. 
The term ``carry'' is used in the reporting rules to refer to and 
encompass both positions that are cleared for market positions and 
those that are cleared for the benefit of proprietary accounts. In 
either instance, the reporting rules view the clearing member to be 
carrying positions that, when in excess of the levels delineated in 
rule 15.03, would be reportable as part of a special account under part 
17 of the Commission's rules. The continued use of the term ``carry'' 
in the reporting rules is consistent with the nature of ECM 
transactions. In coming to this determination, the Commission 
understands that clearing members that clear transactions for ECM 
market participants, although not executing SPDC or SPDC-fungible 
transactions on behalf of market participants, are in part providing 
clearing intermediation and taking on certain responsibilities that may 
be associated with executing brokers. In addition, the reporting rules 
generally need a working vocabulary that is flexible enough to cover 
transactions that are executed on disparate market structures and 
subject to different clearing methods. Because the reporting rules 
heretofore have not been applied to ECM transactions, the Commission 
will be mindful of the potential for ambiguities in the application of 
the rules to SPDCs and SPDC-fungible transactions, will monitor for the 
specific concerns raised by ISDA, and will implement appropriate 
amendments should they be required.
---------------------------------------------------------------------------

    \62\ ISDA CL 06 at 3-4.
---------------------------------------------------------------------------

    APGA raises a number of concerns and offered several 
recommendations. APGA noted that as proposed, the reporting rules would 
not routinely provide information on a SPDC trader's large uncleared 
positions and thus would leave a gap in the Commission's ability to 
collect necessary trader and market data. APGA initially notes that the 
transaction reporting requirements of new rule 16.02, which the 
Commission intends to use in part for market surveillance purposes, may 
not significantly improve the Commission's surveillance capability 
because of the possible inability to link the transaction-based 
information collected under the rule with a particular trader.\63\ The 
language of new rule 16.02 requires all reporting markets, including 
ECMs with SPDCs, to report trade data and related order information for 
each transaction executed on the market, and upon request to accompany 
such data with information that identifies or facilitates the 
identification of each trader for each reported transaction. Since rule 
16.02 only extends the identification requirement to markets that 
independently maintain such data, APGA is concerned that unless ECMs 
are explicitly required to maintain identifying information, the 
Commission will be unable to obtain the data it needs to construct an 
accurate picture of a trader's large positions in SPDCs.
---------------------------------------------------------------------------

    \63\ APGA CL 07 at 7-8.
---------------------------------------------------------------------------

    Section 2(h)(5)(B)(ii)(I) of the Act requires all ECMs to maintain 
current records that include the name and address of each participant 
that is authorized to enter into transactions on the facility in 
reliance on section 2(h)(3) of the Act. In addition, final rule 
36.3(b)(1) mandates that ECMs demonstrate that they require each 
authorized market participant to be an eligible commercial entity and 
that all contracts will be entered into solely on a principal-to-
principal basis. The rule also requires that ECMs have in place a 
program to routinely monitor participants' compliance with these 
requirements. The Commission believes that the nature of the section 
2(h)(3) qualified exemption itself, along with the above-mentioned 
statutory and regulatory requirements, mandates that ECMs know the 
identity of each trader for each transaction effected by such trader on 
or subject to the rules of the electronic trading facility regardless 
of whether such transactions are subject to centralized clearing or 
settled bilaterally by the executing traders. New rule 16.02 applies to 
all reporting markets, including DCMs. DCMs do not, as a matter of 
routine practice, collect detailed trader identifying data.\64\

[[Page 12186]]

Accordingly, rule 16.02 has been drafted to take into consideration 
current DCM practice while permitting the Commission to collect 
detailed trader identification data--which ECMs are required to 
maintain--from ECMs that are reporting markets.
---------------------------------------------------------------------------

    \64\ Unlike SPDCs traded on ECMs, however, all contracts on DCMs 
are funneled through clearing members that are subject to the large 
trader reporting rules. Therefore, the Commission need not rely on 
new rule 16.02 to conduct DCM market surveillance.
---------------------------------------------------------------------------

    APGA also argues that even if the Commission did collect 
identifying data under rule 16.02 from ECMs that are reporting markets, 
it still would be unable to determine a particular trader's ability to 
impact market prices without routinely obtaining information with 
respect to uncleared contracts that are economically related to SPDCs 
but effectuated off of a registered entity. Accordingly, APGA urges the 
Commission to use its authority under section 4i of the Act to require 
that large traders routinely report such transactions.\65\ 
Alternatively, APGA recommends that the Commission at a minimum adopt a 
formal policy of aggressively using its special call authority under 
rule 18.05 to request information with respect to such uncleared 
transactions. APGA describes this policy as one that could require 
staff to issue special calls for information regarding uncleared 
positions for all traders that hold positions that are below 
speculative position limits but which are large enough to be 
significant.\66\
---------------------------------------------------------------------------

    \65\ APGA CL 07 at 10.
    \66\ Id. at 9-10.
---------------------------------------------------------------------------

    As discussed above in connection with HoustonStreet's comment 
letter, the Commission does have the authority, under section 4i of the 
CEA and the special call provisions of part 18 of its rules, to require 
traders that hold reportable SPDC positions to report their OTC 
(cleared and uncleared) and cash market positions. An extension of 
routine reporting requirements to such positions is, however, beyond 
the scope of this rulemaking and at odds with a long-established large 
trader reporting system that places the initial burden of reporting on 
intermediaries that are typically regulated and well-versed in 
complying with routine reporting requirements. Any routine reporting 
requirement imposed on traders as a class would represent a substantial 
departure from the Commission's current reporting system and would 
necessitate careful study and consideration prior to a final 
determination.
    Lastly, APGA recommends that for the purpose of regulatory clarity 
the Commission's special call authority under rule 18.05 be amended to 
refer directly to traders that hold or control reportable futures or 
option SPDC positions on ECMs operating under sections 2(h)(3) through 
2(h)(5) of the Act.\67\ The language of rule 18.05 applies directly to 
traders with reportable positions. A reportable position, in turn, is 
defined in rule 15.00 to include commodity futures and options 
positions on reporting markets--including, with respect to a contract 
that the Commission determines to be a SPDC--that exceeds the reporting 
levels established by Commission rule 15.03. Accordingly, the 
Commission believes that the plain language of rule 18.05, as proposed, 
is directly applicable to traders that hold or control reportable 
futures or options SPDC positions on ECMs operating pursuant to 
sections 2(h)(3) through 2(h)(5) of the Act.
---------------------------------------------------------------------------

    \67\ Id.
---------------------------------------------------------------------------

    Changes to the Final Rules. For the purpose of regulatory clarity 
and to address generally the concerns raised by the commenters with 
respect to the scope of the reporting rules, the Commission is defining 
the terms futures and options contract solely for the purpose of the 
reporting rules as contracts executed on or subject to the rules of a 
reporting market, and all agreements, contracts and transactions that 
are treated by DCOs as fungible with such contracts.\68\ The new 
definition impacts all of the operative provisions of parts 15 through 
21 and reinforces and clarifies the applicability of the reporting 
rules, as proposed and adopted, to ECMs that list SPDCs, to SPDCs and 
to transactions that are treated as fungible with SPDCs by DCOs.
---------------------------------------------------------------------------

    \68\ As noted in text, the Commission is utilizing these 
definitions solely to clarify the scope of its reporting rules. It 
does not intend these definitions to have any bearing on determining 
the boundaries of futures and options transactions over which it has 
jurisdiction under the CEA.
---------------------------------------------------------------------------

    Rule 16.02 as adopted substitutes for the phrase ``for each 
transaction executed on the reporting market,'' the phrase ``for each 
futures or options contract.'' The Commission recognizes that certain 
transactions that are treated as fungible with SPDCs by DCOs may not 
clearly be executed on a reporting market, and this change is intended 
to address that point. In addition, final rule 15.05, which 
independently defines futures and options transactions, differs from 
the proposed rule in that it includes a conforming amendment to account 
for defining the terms futures and options contract in final rule 
15.00. Lastly, the final definition of reportable position in rule 
15.00 and final rule 19.00 differ from the proposed definitions in that 
they include nonsubstantive editorial amendments.

III. Related Matters

A. Cost Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before issuing new regulations under 
the Act. Section 15(a) does not require the Commission to quantify the 
costs and benefits of new regulations or to determine whether the 
benefits of adopted rules outweigh their costs. Rather, section 15(a) 
requires the Commission to consider the costs and benefits of the 
subject rules. Section 15(a) further specifies that the costs and 
benefits of the rules shall be evaluated in light of five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness and financial integrity of 
the market for listed derivatives; (3) price discovery; (4) sound risk 
management practices; and (5) other public interest considerations. The 
Commission may, in its discretion, give greater weight to any one of 
the five enumerated areas of concern and may, in its discretion, 
determine that, notwithstanding its costs, a particular rule is 
necessary and appropriate to protect the public interest or to 
effectuate any of the provisions or to accomplish any of the purposes 
of the Act.
    The final rules implement the Reauthorization Act by establishing 
an enhanced level of oversight of ECMs and ECM market participants. As 
a result, in certain cases, it is more appropriate to attribute the 
compliance costs imposed by the proposed rules to requirements that 
directly arise from the provisions of the Reauthorization Act.
    Under the final rules, all DCMs, DTEFs (unless the Commission 
determines otherwise) and ECMs with SPDCs are required to provide daily 
transaction and related data reports to the Commission under rule 
16.02. The costs associated with the daily transaction and related data 
reporting requirements of final rule 16.02, however, are ameliorated by 
the fact that DCMs have voluntarily provided transactional data to the 
Commission on a daily basis since the mid-1980s. The Commission 
estimates that DCMs would account for the substantial majority of the 
markets that likely would be required to file such reports under final 
rule 16.02.
    The final rules extend the reporting requirements of parts 15 to 21 
of the Commission's rules to ECMs with SPDCs and to transactions in 
SPDCs and SPDC-fungible contracts. The

[[Page 12187]]

requirements of the adopted rules are substantial, involve the 
submission of daily reports, and impose burdens on market participants 
that clear and trade SPDCs and SPDC-fungible contracts. More 
specifically, the adopted rules require ECMs with SPDCs to provide 
clearing member reports for SPDCs and SPDC-fungible contracts to the 
Commission pursuant to CFTC rule 16.00. Final rule 16.01 requires ECMs 
to submit to the Commission and publicly disseminate option deltas and 
aggregated trading data on a daily basis for such transactions. 
Pursuant to rule 17.00, ECM clearing members that clear SPDCs and SPDC-
fungible contracts are required to file reports with the Commission for 
large positions when such positions meet or exceed the contract 
reporting levels of rule 15.03. Under rule 17.01, clearing members also 
must identify the owners of reportable positions on Form 102. SPDC 
traders likewise are subject to the special call provisions of final 
part 18 of the Commission's rules for reportable positions, and 
clearing members, SPDC traders, and ECMs listing SPDCs are each subject 
to the special call provisions of final part 21 of the Commission's 
rules.
    The costs associated with the requirements of the reporting rules 
should be reduced in part by the substantial overlap between the 
persons that already are subject to the reporting rules and the persons 
that are subject to the reporting rules pursuant to the Commission's 
final rules. For example, there is substantial overlap between traders 
of the natural gas contract on ICE and traders of the same contract on 
NYMEX. With respect to clearing members of ICE, for example, such 
persons often are clearing members or affiliates of clearing members of 
NYMEX.
    The benefits of extending the reporting rules to SPDCs and SPDC-
fungible contracts are substantial. As an initial matter, it is 
important to note that a significant focus of the Reauthorization Act 
concerned amending the CEA with the specific intent of giving the CFTC 
authority to extend its reporting rules to SPDC markets and market 
participants. To the extent that contracts listed on ECMs serve a 
significant price discovery function, the regulatory value of enhanced 
oversight, through the application of the reporting rules to such 
contracts, is elevated. The Commission analyzes the information 
funneled to it by the requirements of the reporting rules to conduct 
financial, market and trade practice surveillance. Without such 
information, the ability of the Commission to discharge its regulatory 
responsibilities--including the responsibilities to prevent market 
manipulations and commodity price distortions and ensure the financial 
integrity of the listed derivatives marketplace--would be compromised.
    The bulk of the costs that are imposed by the requirements of final 
rule 36.3 relate to significant and increased submission of information 
requirements. For example, under final rule 36.3(b)(1), all ECMs are 
required to file certain basic information (including contract terms 
and conditions) with, and to make certain demonstrations related to 
compliance with the terms of the CEA section 2(h)(3) exemption to, the 
Commission. Final rule 36.3(b)(2) requires ECMs to submit transactional 
information on a weekly basis to the Commission for certain traded 
contracts that are not SPDCs and would not be subject to the terms of 
final rule 16.02. Likewise, final rule 36.3(c)(4) imposes a substantial 
cost on ECMs with SPDCs as a result of the information that such 
markets are required to submit to the Commission.
    In enacting the Reauthorization Act, Congress directed the 
Commission to take an active role in determining whether contracts 
listed by ECMs qualify as SPDCs. Accordingly, the Commission has 
adopted enhanced informational requirements for ECMs with respect to 
contracts that have not been identified as SPDCs specifically for the 
purpose of acquiring the information that it needs to discharge this 
newly-mandated responsibility. In addition, the substantial information 
submission and demonstration requirements that are imposed on ECMs with 
SPDCs have been adopted because ECMs with SPDCs, by statute, acquire 
certain of the self-regulatory responsibilities of fully regulated 
DCMs. The submission requirements associated with final rule 36.3(c)(4) 
are therefore tailored to enable the Commission to ensure that ECMs 
with SPDCs, as entities with the elevated status of a registered entity 
under the Act, are in compliance with the statutory terms of the core 
principles of section 2(h)(7)(C) of the Act. As with the final 
reporting rules, the primary benefit to the public of final rule 36.3 
is that its requirements enable the Commission to discharge its 
statutory responsibility for monitoring for the presence of SPDCs and 
extending its oversight to the trading of SPDCs.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies consider the impact of their rules on small 
businesses. As noted in the proposing release, the requirements related 
to the proposed amendments fall mainly on registered entities, 
exchanges, futures commission merchants, clearing members, foreign 
brokers and large traders. The Commission previously has determined 
that exchanges, futures commission merchants and large traders are not 
``small entities'' for purposes of the RFA.\69\ Similarly, clearing 
members, foreign brokers and traders would be subject to the final 
rules only if clearing, carrying or holding large positions. 
Accordingly, the Acting Chairman, on behalf of the Commission, 
certified in the NPRM pursuant to 5 U.S.C. 605(b) that the actions to 
be taken herein will not have a significant economic impact on a 
substantial number of small entities.\70\
---------------------------------------------------------------------------

    \69\ 47 FR 18618 (April 30, 1982).
    \70\ 73 FR 75888 at 75900.
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid control number. Final rule 16.02, the Commission's 
reporting rules, and certain provisions of final rule 36.3 result in 
information collection requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\71\ The Commission submitted the 
proposing release along with supporting documentation to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The Commission requested that OMB approve, 
and with respect to rules 36.3 and 16.02 assign a new control number 
for, the collections of information covered by the proposing release. 
The information collection burdens created by the Commission's proposed 
rules, which were discussed in detail in the proposing release, are 
identical to the collective information collection burdens of the final 
rules.
---------------------------------------------------------------------------

    \71\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------

    The Commission invited the public and other Federal agencies to 
comment on any aspect of the information collection requirements 
discussed above.\72\ Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission solicited comments in order to: (i) Evaluate whether the 
proposed collections of information were necessary for the proper 
performance of the functions of the Commission, including whether the 
information will have practical utility; (ii) evaluate the accuracy of 
the Commission's estimates of the burden of

[[Page 12188]]

the proposed collections of information; (iii) determine whether there 
are ways to enhance the quality, utility and clarity of the information 
to be collected; and (iv) minimize the burden of the collections of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology. The Commission received no comment on its burden estimates 
or on any other aspect of the information collection requirements 
contained in its proposing release.
---------------------------------------------------------------------------

    \72\ 73 FR 75888 at 75903.
---------------------------------------------------------------------------

    The title for the collection of information under rule 36.3 is 
``Regulation 36.3--Exempt Commercial Market Submission Requirements.'' 
OMB has approved and assigned OMB control number 3038-0060 to this 
collection of information. The requirements of Commission rule 36.3 
were covered previously by OMB control number 3038-0054 which applied 
to both EBOTs and ECMs. As a result of the Reauthorization Act, EBOTs 
and ECMs must comply with additional, divergent regulatory 
requirements. Accordingly, the Commission sought a new and separate 
control number for ECMs operating in compliance with the requirements 
of rule 36.3. As a result of OMB's approval of a control number 
specifically for ECMs, the Commission intends to submit the necessary 
documentation to OMB to enable it to apply OMB control number 3038-0054 
exclusively to EBOTs.
    The final amendments to parts 15 to 21 of the Commission's rules 
affect two existing collections of information titled ``Large Trader 
Reports'' (OMB control number 3038-0009) and ``Futures Volume, Open 
Interest, Price, Deliveries, and Exchanges of Futures'' (OMB control 
number 3038-0012). OMB has approved the amendments made to these two 
collections of information.
    Finally, the title for the collection of information of new rule 
16.02 is ``Regulation 16.02--Daily Trade and Supporting Data Reports.'' 
OMB has approved assigned OMB control number 3038-0061 to this 
collection of information.

List of Subjects

17 CFR Part 15

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements

17 CFR Part 16

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 17

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements

17 CFR Part 18

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 19

    Commodity futures, Cottons, Grains, Reporting and recordkeeping 
requirements.

17 CFR Part 21

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission

17 CFR Part 40

    Commodity futures, Contract markets, Designation application, 
Reporting and recordkeeping requirements.
    In consideration of the foregoing, and pursuant to the authority 
contained in the Act, as amended by the Reauthorization Act of 2008, 
Title XIII of Public Law 110-246, 122 Stat. 1624 (2008), and in 
particular sections 2, 5, 6, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 9, 
12a, 19, and 21, the Commodity Futures Trading Commission hereby amends 
17 CFR parts 15, 16, 17, 18, 19, 21, 36 and 40 as follows:

PART 15--REPORTS--GENERAL PROVISIONS

0
1. The authority citation for part 15 is revised to read as follows:

    Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 
9, 12a, 19, and 21, as amended by Title XIII of the Food, 
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat. 
1624 (June 18, 2008).


0
2. Section 15.00 is revised to read as follows:


Sec.  15.00  Definitions of terms used in parts 15 to 21 of this 
chapter.

    As used in parts 15 to 21 of this chapter:
    (a) Cash or Spot, when used in connection with any commodity, means 
the actual commodity as distinguished from a futures or options 
contract in such commodity.
    (b) Clearing member means any person who is a member of, or enjoys 
the privilege of clearing trades in his own name through, the clearing 
organization of a designated contract market, registered derivatives 
transaction execution facility, or registered entity under section 
1a(29) of the Act.
    (c) Clearing organization means the person or organization which 
acts as a medium for clearing transactions in commodities for future 
delivery or commodity option transactions, or for effecting settlements 
of contracts for future delivery or commodity option transactions, for 
and between members of any designated contract market, registered 
derivatives transaction execution facility or registered entity under 
section 1a(29) of the Act.
    (d) Compatible data processing media means data processing media 
approved by the Commission or its designee.
    (e) Customer means ``customer'' (as defined in Sec.  1.3(k) of this 
chapter) and ``options customer'' (as defined in Sec.  1.3(jj) of this 
chapter).
    (f) Customer trading program means any system of trading offered, 
sponsored, promoted, managed or in any other way supported by, or 
affiliated with, a futures commission merchant, an introducing broker, 
a commodity trading advisor, a commodity pool operator, or other 
trader, or any of its officers, partners or employees, and which by 
agreement, recommendations, advice or otherwise, directly or indirectly 
controls trading done and positions held by any other person. The term 
includes, but is not limited to, arrangements where a program 
participant enters into an expressed or implied agreement not obtained 
from other customers and makes a minimum deposit in excess of that 
required of other customers for the purpose of receiving specific 
advice or recommendations which are not made available to other 
customers. The term includes any program which is of the character of, 
or is commonly known to the trade as, a managed account, guided 
account, discretionary account, commodity pool or partnership account.
    (g) Discretionary account means a commodity futures or commodity 
option trading account for which buying or selling orders can be placed 
or originated, or for which transactions can be effected, under a 
general authorization and without the specific consent of the customer, 
whether the general authorization for such orders or transactions is 
pursuant to a written agreement, power of attorney, or otherwise.
    (h) Exclusively self-cleared contract means a cleared contract for 
which no persons, other than a reporting market and its clearing 
organization, are permitted to accept any money, securities, or 
property (or extend credit in lieu thereof) to margin, guarantee, or 
secure any trade.
    (i) Foreign clearing member means a ``clearing member'' (as defined 
by

[[Page 12189]]

paragraph (b) of this section) who resides or is domiciled outside of 
the United States, its territories or possessions.
    (j) Foreign trader means any trader (as defined in paragraph (s) of 
this section) who resides or is domiciled outside of the United States, 
its territories or possessions.
    (k) Futures, futures contract, future delivery or contract for 
future delivery, means any contract for the purchase or sale of any 
commodity for future delivery that is executed on or subject to the 
rules of a reporting market, including all agreements, contracts and 
transactions that are treated by a clearing organization as fungible 
with such contracts.
    (l) Guided account program means any customer trading program which 
limits trading to the purchase or sale of a particular contract for 
future delivery of a commodity or a particular commodity option that is 
advised or recommended to the participant in the program.
    (m) Managed account program means a customer trading program which 
includes two or more discretionary accounts traded pursuant to a common 
plan, advice or recommendations.
    (n) Open contracts means ``open contracts'' (as defined in Sec.  
1.3(t) of this chapter) and commodity option positions held by any 
person on or subject to the rules of a board of trade which have not 
expired, been exercised, or offset.
    (o) Option, options, option contract, or options contract, unless 
specifically provided otherwise, means any contract for the purchase or 
sale of a commodity option that is executed on or subject to the rules 
of a reporting market, including all agreements, contracts and 
transactions that are treated by a clearing organization as fungible 
with such contracts.
    (p) Reportable position means:
    (1) For reports specified in parts 17, 18 and Sec.  19.00(a)(2) and 
(a)(3) of this chapter any open contract position that at the close of 
the market on any business day equals or exceeds the quantity specified 
in Sec.  15.03 of this part in either:
    (i) Any one futures of any commodity on any one reporting market, 
excluding futures contracts against which notices of delivery have been 
stopped by a trader or issued by the clearing organization of a 
reporting market; or
    (ii) Long or short put or call options that exercise into the same 
future of any commodity, or long or short put or call options for 
options on physicals that have identical expirations and exercise into 
the same physical, on any one reporting market.
    (2) For the purposes of reports specified in Sec.  19.00(a)(1) of 
this chapter, any combined futures and futures-equivalent option open 
contract position as defined in part 150 of this chapter in any one 
month or in all months combined, either net long or net short in any 
commodity on any one reporting market, excluding futures positions 
against which notices of delivery have been stopped by a trader or 
issued by the clearing organization of a reporting market, which at the 
close of the market on the last business day of the week exceeds the 
net quantity limit in spot, single or in all-months fixed in Sec.  
150.2 of this chapter for the particular commodity and reporting 
market.
    (q) Reporting market means a designated contract market, registered 
entity under section 1a(29) of the Act, and unless determined otherwise 
by the Commission with respect to the facility or a specific contract 
listed by the facility, a registered derivatives transaction execution 
facility.
    (r) Special account means any commodity futures or option account 
in which there is a reportable position.
    (s) Trader means a person who, for his own account or for an 
account which he controls, makes transactions in commodity futures or 
options, or has such transactions made.

0
3. Section 15.01 is amended by revising paragraph (a) to read as 
follows:


Sec.  15.01  Persons required to report.

* * * * *
    (a) Reporting markets--as specified in parts 16, 17, and 21 of this 
chapter.
* * * * *

0
4. Section 15.05 is amended by revising the heading and paragraph (a); 
and by adding paragraph (i) to read as follows:


Sec.  15.05  Designation of agent for foreign persons.

    (a) For purposes of this section, the term ``futures contract'' 
means any contract for the purchase or sale of any commodity for future 
delivery, or a contract identified under section 36.3(b)(1)(i) as 
traded in reliance on the exemption in section 2(h)(3) of the Act, 
traded or executed on or subject to the rules of any designated 
contract market or registered derivatives transaction execution 
facility, or for the purposes of paragraph (i) of this section, a 
reporting market (including all agreements, contracts and transactions 
that are treated by a clearing organization as fungible with such 
contracts); the term ``option contract'' means any contract for the 
purchase or sale of a commodity option, or as applicable, any other 
instrument subject to the Act pursuant to section 5a(g) of the Act, 
traded or executed on or subject to the rules of any designated 
contract market or registered derivatives transaction execution 
facility, or for the purposes of paragraph (i) of this section, a 
reporting market (including all agreements, contracts and transactions 
that are treated by a clearing organization as fungible with such 
contracts); the term ``customer'' means any person for whose benefit a 
foreign broker makes or causes to be made any futures contract or 
option contract; and the term ``communication'' means any summons, 
complaint, order, subpoena, special call, request for information, or 
notice, as well as any other written document or correspondence.
* * * * *
    (i) Any reporting market that is a registered entity under section 
1a(29)(E) of the Act that permits a foreign clearing member or foreign 
trader to clear or effect contracts, agreements or transactions on the 
trading facility or its clearing organization, shall be deemed to be 
the agent of the foreign clearing member or foreign trader with respect 
to any such contracts, agreements or transactions cleared or executed 
by the foreign clearing member or the foreign trader. Service or 
delivery of any communication issued by or on behalf of the Commission 
to the reporting market shall constitute valid and effective service 
upon the foreign clearing member or foreign trader. The reporting 
market which has been served with, or to which there has been 
delivered, a communication issued by or on behalf of the Commission to 
a foreign clearing member or foreign trader shall transmit the 
communication promptly and in a manner which is reasonable under the 
circumstances, or in a manner specified by the Commission in the 
communication, to the foreign clearing member or foreign trader.
    (1) It shall be unlawful for any such reporting market to permit a 
foreign clearing member or a foreign trader to clear or effect 
contracts, agreements or transactions on the facility or its clearing 
organization unless the reporting market prior thereto informs the 
foreign clearing member or foreign trader of the requirements of this 
section.
    (2) The requirements of paragraphs (i) and (i)(1) of this section 
shall not apply to any contracts, transactions or agreements if the 
foreign clearing member or foreign trader has duly executed and 
maintains in effect a

[[Page 12190]]

written agency agreement in compliance with this paragraph with a 
person domiciled in the United States and has provided a copy of the 
agreement to the reporting market prior to effecting or clearing any 
contract, agreement or transaction on the trading facility or its 
clearing organization. This agreement must authorize the person 
domiciled in the United States to serve as the agent of the foreign 
clearing member or foreign trader for the purposes of accepting 
delivery and service of all communications issued by or on behalf of 
the Commission to the foreign clearing member or the foreign trader and 
must provide an address in the United States where the agent will 
accept delivery and service of communications from the Commission. This 
agreement must be filed with the Commission by the reporting market 
prior to permitting the foreign clearing member or the foreign trader 
to clear or effect any transactions in futures or option contracts. 
Unless otherwise specified by the Commission, the agreements required 
to be filed with the Commission shall be filed with the Secretary of 
the Commission at Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.
    (3) A foreign clearing member or a foreign trader shall notify the 
Commission immediately if the written agency agreement is terminated, 
revoked, or is otherwise no longer in effect. If the reporting market 
knows or should know that the agreement has expired, been terminated, 
or is no longer in effect, the reporting market shall notify the 
Secretary of the Commission immediately. If the written agency 
agreement expires, terminates, or is not in effect, the reporting 
market, the foreign clearing member and the foreign trader shall be 
subject to the provisions of paragraphs (i) and (i)(1) of this section.
* * * * *

0
5. Section 15.06 is added to read as follows:


Sec.  15.06  Delegations.

    (a) The Commission hereby delegates, until the Commission orders 
otherwise, the authority to approve data processing media, as 
referenced in Sec.  15.00(d), for data submissions to the Director of 
the Division of Market Oversight, to be exercised by such Director or 
by such other employee or employees of such Director as designated from 
time to time by the Director. The Director may submit to the Commission 
for its consideration any matter which has been delegated in this 
paragraph. Nothing in this paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in this paragraph.
    (b) [Reserved]

PART 16--REPORTS BY REPORTING MARKETS

0
6. The authority citation for part 16 is revised to read as follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as amended 
by Title XIII of the Food, Conservation and Energy Act of 2008, 
Public Law 110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise 
noted.


0
7. Section 16.01 is amended by revising paragraph (e) to read as 
follows:


Sec.  16.01  Trading volume, open contracts, prices, and critical 
dates.

* * * * *
    (e) Publication of recorded information. (1) Reporting markets 
shall make the information in paragraph (a) of this section readily 
available to the news media and the general public without charge, in a 
format that readily enables the consideration of such data, no later 
than the business day following the day to which the information 
pertains. The information in paragraphs (a)(4) through (a)(6) of this 
section shall be made readily available in a format that presents the 
information together.
    (2) Reporting markets shall make the information in paragraphs 
(b)(1) and (b)(2) of this section readily available to the news media 
and the general public, and the information in paragraph (b)(3) of this 
section readily available to the general public, in a format that 
readily enables the consideration of such data, no later than the 
business day following the day to which the information pertains.
* * * * *

0
8. Section 16.02 is added to read as follows:


Sec.  16.02  Daily trade and supporting data reports.

    Reporting markets shall provide trade and supporting data reports 
to the Commission on a daily basis. Such reports shall include 
transaction-level trade data and related order information for each 
futures or options contract. Reports shall also include time and sales 
data, reference files and other information as the Commission or its 
designee may require. All reports must be submitted at the time, and in 
the manner and format, and with the specific content specified by the 
Commission or its designee. Upon request, such information shall be 
accompanied by data that identifies or facilitates the identification 
of each trader for each transaction or order included in a submitted 
trade and supporting data report if the reporting market maintains such 
data.

0
9. Section 16.07 is amended by revising the heading and introductory 
text; and by adding paragraph (c) to read as follows:


Sec.  16.07  Delegation of authority to the Director of the Division of 
Market Oversight.

    The Commission hereby delegates, until the Commission orders 
otherwise, the authority set forth in paragraphs (a), (b) and (c) of 
this section to the Director of the Division of Market Oversight, to be 
exercised by such Director or by such other employee or employees of 
such Director as may be designated from time to time by the Director. 
The Director of the Division of Market Oversight may submit to the 
Commission for its consideration any matter which has been delegated in 
this paragraph. Nothing in this paragraph prohibits the Commission, at 
its election, from exercising the authority delegated in this 
paragraph.
* * * * *
    (c) Pursuant to Sec.  16.02, the authority to determine the 
specific content of any daily trade and supporting data report, request 
that such reports be accompanied by data that identifies or facilitates 
the identification of each trader for each transaction or order 
included in a submitted trade and supporting data report, and establish 
the time for the submission of and the manner and format of such 
reports.

PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION 
MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS

0
10. The authority citation for part 17 is revised to read as follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 7, 7a and 12a, as 
amended by Title XIII of the Food, Conservation and Energy Act of 
2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008), unless 
otherwise noted.


0
11. Revise the heading of part 17 as set forth above.

0
12. Section 17.00 is amended by the heading of paragraph (a) and 
paragraphs (a)(1), (b)(1), and (f); and by adding and reserving 
paragraph (c) to read as follows:


Sec.  17.00  Information to be furnished by futures commission 
merchants, clearing members and foreign brokers.

    (a) Special accounts--reportable futures and options positions, 
delivery notices, and exchanges of futures. (1) Each futures commission 
merchant, clearing member and foreign broker shall submit a report to 
the Commission

[[Page 12191]]

for each business day with respect to all special accounts carried by 
the futures commission merchant, clearing member or foreign broker, 
except for accounts carried on the books of another futures commission 
merchant or clearing member on a fully-disclosed basis. Except as 
otherwise authorized by the Commission or its designee, such report 
shall be made in accordance with the format and coding provisions set 
forth in paragraph (g) of this section. The report shall show each 
futures position, separately for each reporting market and for each 
future, and each put and call options position separately for each 
reporting market, expiration and strike price en each special account 
as of the close of market on the day covered by the report and, in 
addition, the quantity of exchanges of futures for commodities or for 
derivatives positions and the number of delivery notices issued for 
each such account by the clearing organization of a reporting market 
and the number stopped by the account. The report shall also show all 
positions in all contract months and option expirations of that same 
commodity on the same reporting market for which the special account is 
reportable.
* * * * *
    (b) * * *
    (1) Accounts of eligible entities--Accounts of eligible entities as 
defined in Sec.  150.1 of this chapter that are traded by an 
independent account controller shall, together with other accounts 
traded by the independent account controller or in which the 
independent controller has a financial interest, be considered a single 
account.
* * * * *
    (c) [Reserved]
* * * * *
    (f) Omnibus accounts. If the total open long positions or the total 
open short positions for any future of a commodity carried in an 
omnibus account is a reportable position, the omnibus account is in 
Special Account status and shall be reported by the futures commission 
merchant or foreign broker carrying the account in accordance with 
paragraph (a) of this section.
* * * * *

0
13. Section 17.03 is amended by revising the heading, the introductory 
text, and paragraphs (a) and (b) to read as follows:


Sec.  17.03  Delegation of authority to the Director of the Division of 
Market Oversight.

    The Commission hereby delegates, until the Commission orders 
otherwise, the authority set forth in the paragraphs below to the 
Director of the Division of Market Oversight to be exercised by such 
Director or by such other employee or employees of such Director as 
designated from time to time by the Director. The Director of the 
Division of Market Oversight may submit to the Commission for its 
consideration any matter which has been delegated in this paragraph. 
Nothing in this paragraph prohibits the Commission, at its election, 
from exercising the authority delegated in this paragraph.
    (a) Pursuant to Sec.  17.00(a) and (h), the authority to determine 
whether futures commission merchants, clearing members and foreign 
brokers can report the information required under paragraphs (a) and 
(h) of Sec.  17.00 on series '01 forms or using some other format upon 
a determination that such person is unable to report the information 
using the format, coding structure or electronic data transmission 
procedures otherwise required.
    (b) Pursuant to Sec.  17.02, the authority to instruct or approve 
the time at which the information required under Sec. Sec.  17.00 and 
17.01 must be submitted by futures commission merchants, clearing 
members and foreign brokers provided that such persons are unable to 
meet the requirements set forth in Sec. Sec.  17.01(g) and 17.02.
* * * * *

0
14. Section 17.04 is amended by revising the heading, paragraph (a), 
and paragraph (b)(1)(ii) to read as follows:


Sec.  17.04  Reporting omnibus accounts to reporting firms.

    (a) Any futures commission merchant, clearing member or foreign 
broker who establishes an omnibus account with another futures 
commission merchant, clearing member or foreign broker shall report to 
that futures commission merchant, clearing member or foreign broker the 
total open long positions and the total open short positions in each 
future of a commodity and, for commodity options transactions, the 
total open long put options, the total open short put options, the 
total open long call options, and the total open short call options for 
each commodity options expiration date and each strike price in such 
account at the close of trading each day. The information required by 
this section shall be reported in sufficient time to enable the futures 
commission merchant, clearing member or foreign broker with whom the 
omnibus account is established to comply with the regulations of this 
part and the reporting requirements established by the reporting 
markets.
    (b) * * *
    (1) * * *
    (ii) The account is an omnibus account of another futures 
commission merchant, clearing member or foreign broker; or
* * * * *

PART 18--REPORTS BY TRADERS

0
15. The authority citation for part 18 is revised to read as follows:

    Authority: 7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a 
and 19, as amended by Title XIII of the Food, Conservation and 
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18, 
2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.


0
16. Section 18.01 is revised to read as follows:


Sec.  18.01  Interest in or control of several accounts.

    If any trader holds, has a financial interest in or controls 
positions in more than one account, whether carried with the same or 
with different futures commission merchants or foreign brokers, all 
such positions and accounts shall be considered as a single account for 
the purpose of determining whether such trader has a reportable 
position and, unless instructed otherwise in the special call to report 
under Sec.  18.00 for the purpose of reporting.

0
17. Section 18.04 is amended by revising paragraphs (a)(7) and 
(b)(3)(i) to read as follows:


Sec.  18.04  Statement of reporting trader.

* * * * *
    (a) * * *
    (7) The names and locations of all futures commission merchants, 
clearing members, introducing brokers, and foreign brokers through whom 
accounts owned or controlled by the reporting trader are carried or 
introduced at the time of filing a Form 40, if such accounts are 
carried through more than one futures commission merchant, clearing 
member or foreign broker or carried through more than one office of the 
same futures commission merchant, clearing member or foreign broker, or 
introduced by more than one introducing broker clearing accounts 
through the same futures commission merchant, and the name of the 
reporting trader's account executive at each firm or office of the 
firm.
* * * * *
    (b) * * *
    (3) * * *
    (i) Commercial activity associated with use of the option or 
futures market (such as and including production, merchandising or 
processing of a cash commodity, asset or liability risk management by 
depository institutions, or security portfolio risk management).
* * * * *

[[Page 12192]]


0
18. Section 18.05 is amended by revising paragraphs (a)(2), (a)(3), and 
(a)(4) to read as follows:


Sec.  18.05  Maintenance of books and records.

    (a) * * *
    (2) Over the counter or pursuant to sections 2(d), 2(g) or 2(h)(1)-
(2) of the Act or part 35 of this chapter;
    (3) On exempt commercial markets operating pursuant to sections 
2(h)(3)-(5) of the Act;
    (4) On exempt boards of trade operating pursuant to section 5d of 
the Act; and
* * * * *

PART 19--REPORTS BY PERSONS HOLDING BONA FIDE HEDGE POSITIONS 
PURSUANT TO Sec.  1.3(z) OF THIS CHAPTER AND BY MERCHANTS AND 
DEALERS IN COTTON

0
19. The authority citation for part 19 is revised to read as follows:

    Authority: 7 U.S.C. 6g(a), 6i, and 12a(5), as amended by Title 
XIII of the Food, Conservation and Energy Act of 2008, Public Law 
110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.

0
20. Section 19.00 is amended by revising paragraph (a) to read as 
follows:

Sec.  19.00  General provisions.

    (a) Who must file series '04 reports. The following persons are 
required to file series '04 reports:
    (1) All persons holding or controlling futures and option positions 
that are reportable pursuant to Sec.  15.00(p)(2) of this chapter and 
any part of which constitute bona fide hedging positions as defined in 
Sec.  1.3(z) of this chapter;
    (2) Merchants and dealers of cotton holding or controlling 
positions for futures delivery in cotton that are reportable pursuant 
to Sec.  15.00(p)(1)(i) of this chapter, or
    (3) All persons holding or controlling positions for future 
delivery that are reportable pursuant to Sec.  15.00(p)(1) of this 
chapter who have received a special call for series '04 reports from 
the Commission or its designee. Filings in response to a special call 
shall be made within one business day of receipt of the special call 
unless otherwise specified in the call. For the purposes of this 
paragraph, the Commission hereby delegates to the Director of the 
Division of Market Oversight, or to such other person designated by the 
Director, authority to issue calls for series '04 reports.
* * * * *

0
21. Section 19.01 is amended by revising paragraph (b) introductory 
text and paragraph (b)(1) to read as follows:


Sec.  19.01  Reports on stocks and fixed price purchases and sales 
pertaining to futures positions in wheat, corn, oats, soybeans, soybean 
oil, soybean meal or cotton.

* * * * *
    (b) Time and place of filing reports--Except for reports filed in 
response to special calls made under Sec.  19.00(a)(3), each report 
shall be made monthly, as of the close of business on the last Friday 
of the month, and filed at the appropriate Commission office specified 
in paragraph (b)(1) or (2) of this section not later than the second 
business day following the date of the report in the case of the 304 
report and not later than the third business day following the date of 
the report in the case of the 204 report. Reports may be transmitted by 
facsimile or, alternatively, information on the form may be reported to 
the appropriate Commission office by telephone and the report mailed to 
the same office, not later than midnight of its due date.
    (1) CFTC Form 204 reports with respect to transactions in wheat, 
corn, oats, soybeans, soybean meal and soybean oil should be sent to 
the Commission's office in Chicago, IL, unless otherwise specifically 
authorized by the Commission or its designee.
* * * * *

PART 21--SPECIAL CALLS

0
22. The authority citation for part 21 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 
6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food, 
Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat. 
1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise 
noted.


0
23. Section 21.01 is revised to read as follows:


Sec.  21.01  Special calls for information on controlled accounts from 
futures commission merchants, clearing members and introducing brokers.

    Upon call by the Commission, each futures commission merchant, 
clearing member and introducing broker shall file with the Commission 
the names and addresses of all persons who, by power of attorney or 
otherwise, exercise trading control over any customer's account in 
commodity futures or commodity options on any reporting market.

0
24. Section 21.02 is amended by revising the heading, introductory 
text, and paragraphs (f) and (i) to read as follows:


Sec.  21.02  Special calls for information on open contracts in 
accounts carried or introduced by futures commission merchants, 
clearing members, members of reporting markets, introducing brokers, 
and foreign brokers.

    Upon special call by the Commission for information relating to 
futures or option positions held or introduced on the dates specified 
in the call, each futures commission merchant, clearing member, member 
of a reporting market, introducing broker, or foreign broker, and, in 
addition, for option information, each reporting market, shall furnish 
to the Commission the following information concerning accounts of 
traders owning or controlling such futures or option positions, except 
for accounts carried on a fully disclosed basis by another futures 
commission merchant or clearing member, as may be specified in the 
call:
* * * * *
    (f) The number of open futures or option positions introduced or 
carried in each account, as specified in the call;
* * * * *
    (i) As applicable, the following identifying information:
    (1) Whether a trader who holds commodity futures or option 
positions is classified as a commercial or as a noncommercial trader 
for each commodity futures or option contract;
    (2) Whether the open commodity futures or option contracts are 
classified as speculative, spreading (straddling), or hedging; and
    (3) Whether any of the accounts in question are omnibus accounts 
and, if so, whether the originator of the omnibus account is another 
futures commission merchant, clearing member or foreign broker.
* * * * *

0
25. Section 21.03 is amended as follows:
0
A. By revising the heading and paragraphs (a), (b), (c) and (d);
0
B. By revising paragraph (e) introductory text and paragraphs (e)(1) 
introductory text, (e)(1)(iv) and (e)(1)(v); and
0
C. By revising paragraphs (f), (g) and (h) to read as follows:


Sec.  21.03  Selected special calls-duties of foreign brokers, domestic 
and foreign traders, futures commission merchants, clearing members, 
introducing brokers, and reporting markets.

    (a) For purposes of this section, the term ``accounts of a futures 
commission merchant, clearing member or foreign broker'' means all open 
contracts and transactions in futures and options on the records of the 
futures commission merchant, clearing member or foreign

[[Page 12193]]

broker; the term ``beneficial interest'' means having or sharing in any 
rights, obligations or financial interest in any futures or options 
account; the term ``customer'' means any futures commission merchant, 
clearing member, introducing broker, foreign broker, or trader for whom 
a futures commission merchant, clearing member or reporting market that 
is a registered entity under section 1a(29) of the Act makes or causes 
to be made a futures or options contract. Paragraphs (e), (g) and (h) 
of this section shall not apply to any futures commission merchant, 
clearing member or customer whose books and records are open at all 
times to inspection in the United States by any representative of the 
Commission.
    (b) It shall be unlawful for a futures commission merchant to open 
a futures or options account or to effect transactions in futures or 
options contracts for an existing account, or for an introducing broker 
to introduce such an account, for any customer for whom the futures 
commission merchant or introducing broker is required to provide the 
explanation provided for in Sec.  15.05(c) of this chapter, or for a 
reporting market that is a registered entity under section 1a(29)(E) of 
the Act, to cause to open an account in a contract traded in reliance 
on the exemption in section 2(h)(3) of the Act or to cause to be 
effected transactions in a contract traded in reliance on the exemption 
in section 2(h)(3) of the Act for an existing account for any person 
that is a foreign clearing member or foreign trader, until the futures 
commission merchant, introducing broker, clearing member, or reporting 
market has explained fully to the customer, in any manner that such 
persons deem appropriate, the provisions of this section.
    (c) Upon a determination by the Commission that information 
concerning accounts may be relevant information in enabling the 
Commission to determine whether the threat of a market manipulation, 
corner, squeeze, or other market disorder exists on any reporting 
market, the Commission may issue a call for information from a futures 
commission merchant, clearing member, introducing broker or customer 
pursuant to the provisions of this section.
    (d) In the event the call is issued to a foreign broker, foreign 
clearing member or foreign trader, its agent, designated pursuant to 
Sec.  15.05 of this chapter, shall, if directed, promptly transmit 
calls made by the Commission pursuant to this section by electronic 
mail or a similarly expeditious means of communication.
    (e) The futures commission merchant, clearing member, introducing 
broker, or customer to whom the special call is issued must provide to 
the Commission the information specified below for the commodity, 
reporting market and delivery months or option expiration dates named 
in the call. Such information shall be filed at the place and within 
the time specified by the Commission.
    (1) For each account of a futures commission merchant, clearing 
member, introducing broker, or foreign broker, including those accounts 
in the name of the futures commission merchant, clearing member or 
foreign broker, on the dates specified in the call issued pursuant to 
this section, such persons shall provide the Commission with the 
following information:
* * * * *
    (iv) Whether the account is carried for and in the name of another 
futures commission merchant, clearing member, introducing broker, or 
foreign broker; and
    (v) For the accounts which are not carried for and in the name of 
another futures commission merchant, clearing member, introducing 
broker, or foreign broker, the name and address of any other person who 
controls the trading of the account, and the name and address of any 
person who has a ten percent or more beneficial interest in the 
account.
* * * * *
    (f) If the Commission has reason to believe that any person has not 
responded as required to a call made pursuant to this section, the 
Commission in writing may inform the reporting market specified in the 
call and that reporting market shall prohibit the execution of, and no 
futures commission merchant, clearing member, introducing broker, or 
foreign broker shall effect a transaction in connection with trades on 
the reporting market and in the months or expiration dates specified in 
the call for or on behalf of the futures commission merchant or 
customer named in the call, unless such trades offset existing open 
contracts of such futures commission merchant or customer.
    (g) Any person named in a special call that believes he or she is 
or may be adversely affected or aggrieved by action taken by the 
Commission under paragraph (f) of this section shall have the 
opportunity for a prompt hearing after the Commission acts. That person 
may immediately present in writing to the Commission for its 
consideration any comments or arguments concerning the Commission's 
action and may present for Commission consideration any documentary or 
other evidence that person deems appropriate. Upon request, the 
Commission may, in its discretion, determine that an oral hearing be 
conducted to permit the further presentation of information and views 
concerning any matters by any or all such persons. The oral hearing may 
be held before the Commission or any person designated by the 
Commission, which person shall cause all evidence to be reduced to 
writing and forthwith transmit the same and a recommended decision to 
the Commission. The Commission's directive under paragraph (f) of this 
section shall remain in effect unless and until modified or withdrawn 
by the Commission.
    (h) If, during the course of or after the Commission acts pursuant 
to paragraph (f) of this section, the Commission determines that it is 
appropriate to undertake a proceeding pursuant to section 6(c) of the 
Act, the Commission shall issue a complaint in accordance with the 
requirements of section 6(c), and, upon further determination by the 
Commission that the conditions described in paragraph (c) of this 
section still exist, a hearing pursuant to section 6(c) of the Act 
shall commence no later than five business days after service of the 
complaint. In the event the person served with the complaint under 
section 6(c) of the Act has, prior to the commencement of the hearing 
under section 6(c) of the Act, sought a hearing pursuant to paragraph 
(g) of this section and the Commission has determined to accord him 
such a hearing, the two hearings shall be conducted simultaneously. 
Nothing in this section shall preclude the Commission from taking other 
appropriate action under the Act or the Commission's regulations 
thereunder, including action under section 6(c) of the Act, regardless 
of whether the conditions described in paragraph (c) of this section 
still exist, and no ruling issued in the course of a hearing pursuant 
to paragraph (g) or this paragraph shall constitute an estoppel against 
the Commission in any other action.
* * * * *

0
26. Section 21.04 is revised to read as follows:


Sec.  21.04  Delegation of authority to the Director of the Division of 
Market Oversight.

    The Commission hereby delegates, until the Commission orders 
otherwise, the special call authority set forth in Sec. Sec.  21.01 and 
21.02 to the Director of the Division of Market Oversight to be 
exercised by such Director or by such other employee or employees of 
such Director as designated from time to time

[[Page 12194]]

by the Director. The Director of the Division of Market Oversight may 
submit to the Commission for its consideration any matter which has 
been delegated in this paragraph. Nothing in this section shall be 
deemed to prohibit the Commission, at its election, from exercising the 
authority delegated in this section to the Director.

PART 36--EXEMPT MARKETS

0
27. The authority citation for part 36 is revised to read as follows:

    Authority: 7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by 
Title XIII of the Food, Conservation and Energy Act of 2008, Public 
Law 110-246, 122 Stat. 1624 (June 18, 2008).

0
28. Section 36.3 is amended by revising paragraph (b) to read as 
follows:


Sec.  36.3  Exempt commercial markets.

* * * * *
    (b) Required information.
    (1) All electronic trading facilities. A facility operating in 
reliance on the exemption in section 2(h)(3) of the Act, initially and 
on an on-going basis, must:
    (i) Provide the Commission with the terms and conditions, as 
defined in Sec.  40.1(i) of this chapter and product descriptions for 
each agreement, contract or transaction listed by the facility in 
reliance on the exemption set forth in section 2(h)(3) of the Act, as 
well as trading conventions, mechanisms and practices;
    (ii) Provide the Commission with information explaining how the 
facility meets the definition of ``trading facility'' contained in 
section 1a(33) of the Act and provide the Commission with access to the 
electronic trading facility's trading protocols, in a format specified 
by the Commission;
    (iii) Demonstrate to the Commission that the facility requires, and 
will require, with respect to all current and future agreements, 
contracts and transactions, that each participant agrees to comply with 
all applicable laws; that the authorized participants are ``eligible 
commercial entities'' as defined in section 1a(11) of the Act; that all 
agreements, contracts and transactions are and will be entered into 
solely on a principal-to-principal basis; and that the facility has in 
place a program to routinely monitor participants' compliance with 
these requirements;
    (iv) At the request of the Commission, provide any other 
information that the Commission, in its discretion, deems relevant to 
its determination whether an agreement, contract, or transaction 
performs a significant price discovery function; and
    (v) File with the Commission annually, no later than the end of 
each calendar year, a completed copy of CFTC Form 205--Exempt 
Commercial Market Annual Certification. The information submitted in 
Form 205 shall include:
    (A) A statement indicating whether the electronic trading facility 
continues to operate under the exemption; and
    (B) A certification that affirms the accuracy of and/or updates the 
information contained in the previous Notification of Operation as an 
Exempt Commercial Market.
    (2) Electronic trading facilities trading or executing agreements, 
contracts or transactions other than significant price discovery 
contracts. In addition to the requirements of paragraph (b)(1) of this 
section, a facility operating in reliance on the exemption in section 
2(h)(3) of the Act, with respect to agreements, contracts or 
transactions that have not been determined to perform significant price 
discovery function, initially and on an on-going basis, must:
    (i) Identify to the Commission those agreements, contracts and 
transactions conducted on the electronic trading facility with respect 
to which it intends, in good faith, to rely on the exemption in section 
2(h)(3) of the Act, and which averaged five trades per day or more over 
the most recent calendar quarter; and, with respect to such agreements, 
contracts and transactions, either:
    (A) Submit to the Commission, in a form and manner acceptable to 
the Commission, a report for each business day. Each such report shall 
be electronically transmitted weekly, within such time period as is 
acceptable to the Commission after the end of the week to which the 
data applies, and shall show for each such agreement, contract or 
transaction executed the following information:
    (1) The underlying commodity, the delivery or price-basing location 
specified in the agreement, contract or transaction maturity date, 
whether it is a financially settled or physically delivered instrument, 
and the date of execution, time of execution, price, and quantity;
    (2) Total daily volume and, if cleared, open interest;
    (3) For an option instrument, in addition to the foregoing 
information, the type of option (i.e., call or put) and strike prices; 
and
    (4) Such other information as the Commission may determine; or
    (B) Provide to the Commission, in a form and manner acceptable to 
the Commission, electronic access to those transactions conducted on 
the electronic trading facility in reliance on the exemption in section 
2(h)(3) of the Act, and meeting the average five trades per day or more 
threshold test of this section, which would allow the Commission to 
compile the information described in paragraph (b)(2)(i)(A) of this 
section and create a permanent record thereof.
    (ii) Maintain a record of allegations or complaints received by the 
electronic trading facility concerning instances of suspected fraud or 
manipulation in trading activity conducted in reliance on the exemption 
set forth in section 2(h)(3) of the Act. The record shall contain the 
name of the complainant, if provided, date of the complaint, market 
instrument, substance of the allegations, and name of the person at the 
electronic trading facility who received the complaint;
    (iii) Provide to the Commission, in the form and manner prescribed 
by the Commission, a copy of the record of each complaint received 
pursuant to paragraph (b)(2)(ii) of this section that alleges, or 
relates to, facts that would constitute a violation of the Act or 
Commission regulations. Such copy shall be provided to the Commission 
no later than 30 calendar days after the complaint is received. 
Provided, however, that in the case of a complaint alleging, or 
relating to, facts that would constitute an ongoing fraud or market 
manipulation under the Act or Commission rules, such copy shall be 
provided to the Commission within three business days after the 
complaint is received; and
    (iv) Provide to the Commission on a quarterly basis, within 15 
calendar days of the close of each quarter, a list of each agreement, 
contract or transaction executed on the electronic trading facility in 
reliance on the exemption set forth in section 2(h)(3) of the Act and 
indicate for each such agreement, contract or transaction the contract 
terms and conditions, the contract's average daily trading volume, and 
the most recent open interest figures.
    (3) Electronic trading facilities trading or executing significant 
price discovery contracts. In addition to the requirements of paragraph 
(b)(1) of this section, if the Commission determines that a facility 
operating in reliance on the exemption in section 2(h)(3) of the Act 
trades or executes an agreement, contract or transaction that performs 
a significant price discovery function, the facility must, with respect 
to any significant price discovery contract, publish and provide to the 
Commission the information required by Sec.  16.01 of this chapter.
    (4) Delegation of authority. The Commission hereby delegates, until 
the

[[Page 12195]]

Commission orders otherwise, the authority to determine the form and 
manner of submitting the required information under paragraphs (b)(1) 
through (3) of this section, to the Director of the Division of Market 
Oversight and such members of the Commission's staff as the Director 
may designate. The Director may submit to the Commission for its 
consideration any matter that has been delegated by this paragraph. 
Nothing in this paragraph prohibits the Commission, at its election, 
from exercising the authority delegated in this paragraph.
    (5) Special calls. (i) All information required upon special call 
of the Commission under section 2(h)(5)(B)(iii) of the Act shall be 
transmitted at the time and to the office of the Commission as may be 
specified in the call.
    (ii) The Commission hereby delegates, until the Commission orders 
otherwise, the authority to make special calls as set forth in section 
2(h)(5)(B)(iii) of the Act to the Directors of the Divisions of Market 
Oversight, the Division of Clearing and Intermediary Oversight, and the 
Division of Enforcement to be exercised by each such Director or by 
such other employee or employees as the Director may designate. The 
Directors may submit to the Commission for its consideration any matter 
that has been delegated in this paragraph. Nothing in this paragraph 
prohibits the Commission, at its election, from exercising the 
authority delegated in this paragraph.
    (6) Subpoenas to foreign persons. A foreign person whose access to 
an electronic trading facility is limited or denied at the direction of 
the Commission based on the Commission's belief that the foreign person 
has failed timely to comply with a subpoena as provided under section 
2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt 
hearing under the procedures provided in Sec.  21.03(b) and (h) of this 
chapter.
    (7) Prohibited representation. An electronic trading facility 
relying upon the exemption in section 2(h)(3) of the Act, with respect 
to agreements, contracts or transactions that are not significant price 
discovery contracts, shall not represent to any person that it is 
registered with, designated, recognized, licensed or approved by the 
Commission.
* * * * *

0
29. Section 36.3 is amended by revising paragraph (c) to read as 
follows:


Sec.  36.3  Exempt commercial markets.

* * * * *
    (c) Significant price discovery contracts--(1) Criteria for 
significant price discovery determination. The Commission may 
determine, in its discretion, that an electronic trading facility 
operating a market in reliance on the exemption in section 2(h)(3) of 
the Act performs a significant price discovery function for 
transactions in the cash market for a commodity underlying any 
agreement, contract or transaction executed or traded on the facility. 
In making such a determination, the Commission shall consider, as 
appropriate:
    (i) Price linkage. The extent to which the agreement, contract or 
transaction uses or otherwise relies on a daily or final settlement 
price, or other major price parameter, of a contract or contracts 
listed for trading on or subject to the rules of a designated contract 
market or a derivatives transaction execution facility, or a 
significant price discovery contract traded on an electronic trading 
facility, to value a position, transfer or convert a position, cash or 
financially settle a position, or close out a position;
    (ii) Arbitrage. The extent to which the price for the agreement, 
contract or transaction is sufficiently related to the price of a 
contract or contracts listed for trading on or subject to the rules of 
a designated contract market or derivatives transaction execution 
facility, or a significant price discovery contract or contracts 
trading on or subject to the rules of an electronic trading facility, 
so as to permit market participants to effectively arbitrage between 
the markets by simultaneously maintaining positions or executing trades 
in the contracts on a frequent and recurring basis;
    (iii) Material price reference. The extent to which, on a frequent 
and recurring basis, bids, offers, or transactions in a commodity are 
directly based on, or are determined by referencing, the prices 
generated by agreements, contracts or transactions being traded or 
executed on the electronic trading facility;
    (iv) Material liquidity. The extent to which the volume of 
agreements, contracts or transactions in the commodity being traded on 
the electronic trading facility is sufficient to have a material effect 
on other agreements, contracts or transactions listed for trading on or 
subject to the rules of a designated contract market, a derivatives 
transaction execution facility, or an electronic trading facility 
operating in reliance on the exemption in section 2(h)(3) of the Act;
    (v) Other material factors [Reserved].
    (2) Notification of possible significant price discovery contract 
conditions. An electronic trading facility operating in reliance on 
section 2(h)(3) of the Act shall promptly notify the Commission, and 
such notification shall be accompanied by supporting information or 
data concerning any contract that:
    (i) Averaged five trades per day or more over the most recent 
calendar quarter; and
    (ii) (A) For which the exchange sells its price information 
regarding the contract to market participants or industry publications; 
or
    (B) Whose daily closing or settlement prices on 95 percent or more 
of the days in the most recent quarter were within 2.5 percent of the 
contemporaneously determined closing, settlement or other daily price 
of another agreement, contract or transaction.
    (3) Procedure for significant price discovery determination. Before 
making a final price discovery determination under this paragraph, the 
Commission shall publish notice in the Federal Register that it intends 
to undertake a determination with respect to whether a particular 
agreement, contract or transaction performs a significant price 
discovery function and to receive written data, views and arguments 
relevant to its determination from the electronic trading facility and 
other interested persons. Any such written data, views and arguments 
shall be filed with the Secretary of the Commission, in the form and 
manner specified by the Commission, within 30 calendar days of 
publication of notice in the Federal Register or within such other time 
specified by the Commission. After prompt consideration of all relevant 
information, the Commission shall, within a reasonable period of time 
after the close of the comment period, issue an order explaining its 
determination whether the agreement, contract or transaction executed 
or traded by the electronic trading facility performs a significant 
price discovery function under the criteria specified in paragraph 
(c)(1)(i) through (v) of this section.
    (4) Compliance with core principles. Following the issuance of an 
order by the Commission that the electronic trading facility executes 
or trades an agreement, contract or transaction that performs a 
significant price discovery function, the electronic trading facility 
must demonstrate, with respect to that agreement, contract or 
transaction, compliance with the Core Principles under section 
2(h)(7)(C) of the Act and the applicable provisions of this part. If 
the Commission's order represents the first time it has determined that 
one of the electronic trading facility's agreements, contracts or 
transactions performs a significant price discovery function, the 
facility must submit a

[[Page 12196]]

written demonstration of compliance with the Core Principles within 90 
calendar days of the date of the Commission's order. For each 
subsequent determination by the Commission that the electronic trading 
facility has an additional agreement, contract or transaction that 
performs a significant price discovery function, the facility must 
submit a written demonstration of compliance with the Core Principles 
within 30 calendar days of the date of the Commission's order. 
Attention is directed to Appendix B of this part for guidance on and 
acceptable practices for complying with the Core Principles. 
Submissions demonstrating how the electronic trading facility complies 
with the Core Principles with respect to its significant price 
discovery contract must be filed with the Secretary of the Commission 
at its Washington, DC headquarters. Submissions must include the 
following:
    (i) A written certification that the significant price discovery 
contract(s) complies with the Act and regulations thereunder;
    (ii) A copy of the electronic trading facility's rules (as defined 
in Sec.  40.1 of this chapter) and any technical manuals, other guides 
or instructions for users of, or participants in, the market, including 
minimum financial standards for members or market participants. 
Subsequent rule changes must be certified by the electronic trading 
facility pursuant to section 5c(c) of the Act and Sec.  40.6 of this 
chapter. The electronic trading facility also may request Commission 
approval of any rule changes pursuant to section 5c(c) of the Act and 
Sec.  40.5 of this chapter;
    (iii) A description of the trading system, algorithm, security and 
access limitation procedures with a timeline for an order from input 
through settlement, and a copy of any system test procedures, tests 
conducted, test results and contingency or disaster recovery plans;
    (iv) A copy of any documents pertaining to or describing the 
electronic trading system's legal status and governance structure, 
including governance fitness information;
    (v) An executed or executable copy of any agreements or contracts 
entered into or to be entered into by the electronic trading facility, 
including partnership or limited liability company, third-party 
regulatory service, or member or user agreements, that enable or 
empower the electronic trading facility to comply with a Core 
Principle;
    (vi) A copy of any manual or other document describing, with 
specificity, the manner in which the trading facility will conduct 
trade practice, market and financial surveillance;
    (vii) To the extent that any of the items in paragraphs (c)(4)(ii) 
through (vi) of this section raise issues that are novel, or for which 
compliance with a Core Principle is not self-evident, an explanation of 
how that item satisfies the applicable Core Principle or Principles.
    The electronic trading facility must identify with particularity 
information in the submission that will be subject to a request for 
confidential treatment pursuant to Sec.  145.09 of this chapter. The 
electronic trading facility must follow the procedures specified in 
Sec.  40.8 of this chapter with respect to any information in its 
submission for which confidential treatment is requested.
    (5) Determination of compliance with core principles. The 
Commission shall take into consideration differences between cleared 
and uncleared significant price discovery contracts when reviewing the 
implementation of the Core Principles by an electronic trading 
facility. The electronic facility also has reasonable discretion in 
accounting for differences between cleared and uncleared significant 
price discovery contracts when establishing the manner in which it 
complies with the Core Principles.
    (6) Information relating to compliance with core principles. Upon 
request by the Commission, an electronic trading facility trading a 
significant price discovery contract shall file with the Commission a 
written demonstration, containing such supporting data, information and 
documents, in the form and manner and within such time as the 
Commission may specify, that the electronic trading facility is in 
compliance with one or more Core Principles as specified in the 
request, or that is otherwise requested by the Commission to enable the 
Commission to satisfy its obligations under the Act.
    (7) Enforceability. An agreement, contract or transaction entered 
into on or pursuant to the rules of an electronic trading facility 
trading or executing a significant price discovery contract shall not 
be void, voidable, subject to rescission or otherwise invalidated or 
rendered unenforceable as a result of:
    (i) A violation by the electronic trading facility of the 
provisions of section 2(h) of the Act or this part; or
    (ii) Any Commission proceeding to alter or supplement a rule, term 
or condition under section 8a(7) of the Act, to declare an emergency 
under section 8a(9) of the Act, or any other proceeding the effect of 
which is to alter, supplement or require an electronic trading facility 
to adopt a specific term or condition, trading rule or procedure, or to 
take or refrain from taking a specific action.
    (8) Procedures for vacating a determination of a significant price 
discovery function--(i) By the electronic trading facility. An 
electronic trading facility that executes or trades an agreement, 
contract or transaction that the Commission has determined performs a 
significant price discovery function under paragraph (c)(3) of this 
section may petition the Commission to vacate that determination. The 
petition shall demonstrate that the agreement, contract or transaction 
no longer performs a significant price discovery function under the 
criteria specified in paragraph (c)(1), and has not done so for at 
least the prior 12 months. An electronic trading facility shall not 
petition for a vacation of a significant price discovery determination 
more frequently than once every 12 months for any individual contract.
    (ii) By the Commission. The Commission may, on its own initiative, 
begin vacation proceedings if it believes that an agreement, contract 
or transaction has not performed a significant price discovery function 
for at least the prior 12 months.
    (iii) Procedure. Before making a final determination whether an 
agreement, contract or transaction has ceased to perform a significant 
price discovery function, the Commission shall publish notice in the 
Federal Register that it intends to undertake such a determination and 
to receive written data, views and arguments relevant to its 
determination from the electronic trading facility and other interested 
persons. Written submissions shall be filed with the Secretary of the 
Commission in the form and manner specified by the Commission, within 
30 calendar days of publication of notice in the Federal Register or 
within such other time specified by the Commission. After consideration 
of all relevant information, the Commission shall issue an order 
explaining its determination whether the agreement, contract or 
transaction has ceased to perform a significant price discovery 
function and, if so, vacating its prior order. If such an order issues, 
and the Commission subsequently determines, on its own initiative or 
after notification by the electronic trading facility, that the 
agreement, contract or transaction that was subject to the vacation 
order again performs a significant price discovery function, the 
electronic trading facility must comply with the Core Principles within 
30 calendar days of the date of the Commission's order.

[[Page 12197]]

    (iv) Automatic vacation of significant price discovery 
determination. Regardless of whether a proceeding to vacate has been 
initiated, any significant price discovery contract that has no open 
interest and in which no trading has occurred for a period of 12 
complete and consecutive calendar months shall, without further 
proceedings, no longer be considered to be a significant price 
discovery contract.

0
30. Section 36.3 is amended by adding new paragraph (d) to read as 
follows:
    (d) Commission Review. The Commission shall, at least annually, 
evaluate as appropriate agreements, contracts or transactions conducted 
on an electronic trading facility in reliance on the exemption provided 
in section 2(h)(3) of the Act to determine whether they serve a 
significant price discovery function as described in Sec.  (d)(1) 
above.

0
31. Add a new Appendix A to Part 36 to read as follows:

Appendix A to Part 36--Guidance on Significant Price Discovery 
Contracts

    1. Section 2(h)(7) of the CEA specifies four factors that the 
Commission must consider, as appropriate, in making a determination 
that a contract is performing a significant price discovery 
function. The four factors prescribed by the statute are: Price 
Linkage; Arbitrage; Material Price Reference; and Material 
Liquidity.
    2. Not all listed factors must be present to support a 
determination that a contract performs a significant price discovery 
function. Moreover, the statutory language neither prioritizes the 
factors nor specifies the degree to which a significant price 
discovery contract must conform to the various factors. Congress has 
indicated that it intends that the Commission should not make a 
determination that an agreement, contract or transaction performs a 
significant price discovery function on the basis of the Price 
Linkage factor unless the agreement, contract or transaction also 
has sufficient volume to impact other regulated contracts or to 
become an independent price reference or benchmark that is regularly 
utilized by the public. The Commission believes that the Arbitrage 
and Material Price Reference factors can be considered separately 
from each other. That is, the Commission could make a determination 
that a contract serves a significant price discovery function based 
on the presence of one of these factors and the absence of the 
other. The presence of any of these factors, however, would not 
necessarily be sufficient to establish the contract as a significant 
price discovery contract. The fourth factor, Liquidity, would be 
considered in conjunction with the arbitrage and linkage factors as 
a significant amount of liquidity presumably would be necessary for 
a contract to perform a significant price discovery function in 
conjunction with these factors.
    3. These factors do not lend themselves to a mechanical 
checklist or formulaic analysis. Accordingly, this guidance is 
intended to illustrate which factors, or combinations of factors, 
the Commission will look to when determining that a contract is 
performing a significant price discovery function, and under what 
circumstances the presence of a particular factor or factors would 
be sufficient to support such a determination.
    (A) MATERIAL LIQUIDITY--The extent to which the volume of 
agreements, contracts or transactions in the commodity being traded 
on the electronic trading facility is sufficient to have a material 
effect on other agreements, contracts or transactions listed for 
trading on or subject to the rules of a designated contract market, 
a derivatives transaction execution facility, or an electronic 
trading facility operating in reliance on the exemption in section 
2(h)(3) of the Act.
    1. Liquidity is a broad concept that captures the ability to 
transact immediately with little or no price concession. 
Traditionally, objective measures of trading such as volume or open 
interest have been used as measures of liquidity. So, for example, a 
market in which trades occur multiple times per minute at prices 
that differ by only fractions of a cent normally would be considered 
highly liquid, since presumably a trader could quickly execute a 
trade at a price that was approximately the same as the price for 
other recently executed trades. Other factors also will affect the 
characterization of liquidity, such as whether a large trade--e.g., 
100 contracts versus 1 contract--could be executed without a 
significant price concession. For example, having to wait a day to 
sell 1000 bushels of corn may be considered an illiquid market while 
waiting a day to sell a home may be considered quite liquid. Thus, 
quantifying the levels of immediacy and price concession that would 
define material liquidity may differ from one market or commodity to 
another.
    2. The Commission believes that material liquidity alternatively 
can be identified by the impact liquidity exhibits through observed 
prices. In markets where material liquidity exists, a more or less 
continuous stream of prices can be observed and the prices should be 
similar. For example, if the trading of a contract occurs on average 
five times a day, there will be on average five observed prices for 
the contract per day. If the market is liquid in terms of traders 
having to make little in the way of price concessions to execute 
these trades, the prices of this contract should be similar to those 
observed for similar or related contracts traded in liquid markets 
elsewhere. Thus, in making determinations that contracts have 
material liquidity, the Commission will look to transaction prices, 
both in terms of how often prices are observed and the extent to 
which observed prices tend to correlate with other contemporaneous 
prices.
    3. The Commission anticipates that material liquidity will 
frequently be a consideration in evaluating whether a contract is a 
significant price discovery contract; however, there may be 
circumstances in which other factors so dominate the conclusion that 
a contract is serving a significant price discovery function that a 
finding of material liquidity in the contract would not be 
necessary. Circumstances in which this might arise are discussed 
with respect to the assessment of other factors below.
    4. Finally, material liquidity itself would not be sufficient to 
make a determination that a contract is a significant price 
discovery contract, but combined with other factors it can serve as 
a guidepost indicating which contracts are functioning as 
significant price discovery contracts. As further discussed below, 
material liquidity, as reflected through the prices of linked or 
arbitraged contracts, will be a primary consideration in determining 
whether such contracts are significant price discovery contracts.
    (B) PRICE LINKAGE--The extent to which the agreement, contract 
or transaction uses or otherwise relies on a daily or final 
settlement price, or other major price parameter, of a contract or 
contracts listed for trading on or subject to the rules of a 
designated contract market or a derivatives transaction execution 
facility, or a significant price discovery contract traded on an 
electronic trading facility, to value a position, transfer or 
convert a position, cash or financially settle a position, or close 
out a position.
    1. A price-linked contract is a contract that relies on a 
contract traded on another trading facility to settle, value or 
otherwise offset the price-linked contract. The link may involve a 
one-to-one linkage, in that the value of the linked contract is 
based on a single contract's price, or it may involve multiple 
contracts. An example of a multiple contract linkage might be where 
the settlement price is calculated as an index of prices obtained 
from a basket of contracts traded on other exchanges.
    2. For a linked contract, the mere fact that a contract is 
linked to another contract will not be sufficient to support a 
determination that a contract performs a significant price discovery 
function. To assess whether such a determination is warranted, the 
Commission will examine the relationship between transaction prices 
of the linked contract and the prices of the referenced contract(s). 
The Commission believes that where material liquidity exists, prices 
for the linked contract would be observed to be substantially the 
same as or move substantially in conjunction with the prices of the 
referenced contract(s). Where such price characteristics are 
observed on an ongoing basis, the Commission would expect to 
determine that the linked contract is a significant price discovery 
contract.
    3. As an example, where the Commission has observed price 
linkage, it will next consider whether transactions were occurring 
on a daily basis for the linked contract in material volumes. 
(Conversely, where volume has increased noticeably in a particular 
contract, the Commission would look for linkage) The ultimate level 
of volume that would be considered material for purposes of deeming 
a contract a significant price discovery contract will likely differ 
from one contract to another depending on the characteristics of the 
underlying commodity and the overall size of the physical market in 
which it is traded. At a minimum, however, the Commission will 
consider a linked contract which has volume

[[Page 12198]]

equal to 5% of the volume of trading in the contract to which it is 
linked to have sufficient volume potentially to be deemed a 
significant price discovery contract.
    4. In combination with this volume level, the Commission will 
also examine the relationship between prices of the linked contract 
and the contract to which it is linked to determine whether a 
contract is serving a significant price discovery function. As a 
threshold, the Commission will consider a 2.5 percent price range 
for 95 percent of contemporaneously determined closing, settlement, 
or other daily prices over the most recent quarter to be 
sufficiently close for a linked contract potentially to be deemed a 
significant price discovery contract. For example, if, over the most 
recent quarter, it was found that 95 percent of the closing, 
settlement, or other daily prices of the contract, which have been 
calculated using transaction prices, were within 2.5 percent of the 
contemporaneously determined closing, settlement, or other daily 
prices of a contract to which it was linked, the Commission 
potentially would consider the contract to perform a significant 
price discovery function.
    (C) ARBITRAGE CONTRACTS--The extent to which the price for the 
agreement, contract or transaction is sufficiently related to the 
price of a contract or contracts listed for trading on or subject to 
the rules of a designated contract market or derivatives transaction 
execution facility, or a significant price discovery contract or 
contracts trading on or subject to the rules of an electronic 
trading facility, so as to permit market participants to effectively 
arbitrage between the markets by simultaneously maintaining 
positions or executing trades in the contracts on a frequent and 
recurring basis.
    1. Arbitrage contracts are those contracts that can be combined 
with other contracts to exploit expected economic relationships in 
anticipation of a profit. In assessing whether a contract can be 
incorporated into an arbitrage strategy, the Commission will weigh 
the terms and conditions of a contract in comparison to contracts 
that potentially could be used in an arbitrage strategy; will 
consult with industry or other sources regarding a contract's 
viability in an arbitrage strategy; and will rely on direct 
observation confirming the use of a contract in arbitrage 
strategies.
    2. As with linked contracts, the mere fact that a contract could 
be employed in an arbitrage strategy will not be sufficient to make 
a determination that a contract is a significant price discovery 
contract. In addition, the level of liquidity will be considered. To 
assess whether designation as a significant price discovery contract 
is warranted, the Commission will examine the relationship between 
transaction prices of an arbitrage contract and the prices of the 
contract(s) to which it is related. The Commission believes that 
where material liquidity exists, prices for the arbitrage contract 
would be observed to move substantially in conjunction with the 
prices of the related contract(s) to which it is economically 
linked. Where such price characteristics are observed on an ongoing 
basis, it is likely that the linked contract performs a significant 
price discovery function.
    3. The Commission will apply the same threshold liquidity and 
price relationship standards for arbitrage contracts as it does for 
linked contracts. That is, the Commission will view the average of 
five trades per day or more threshold as the level of activity that 
would potentially meet the material volume criterion. With respect 
to prices, the Commission will consider an arbitrage contract 
potentially to be a significant price discovery contract if, over 
the most recent quarter, greater than 95 percent of the closing or 
settlement prices of the contract, which have been calculated using 
transaction prices, fall within 2.5 percent of the closing or 
settlement price of the contract or contracts to which it could be 
arbitraged.
    (D) MATERIAL PRICE REFERENCE--The extent to which, on a frequent 
and recurring basis, bids, offers or transactions in a commodity are 
directly based on, or are determined by referencing, the prices 
generated by agreements, contracts or transactions being traded or 
executed on the electronic trading facility.
    1. The Commission will rely on one of two sources of evidence--
direct or indirect--to determine that the price of a contract was 
being used as a material price reference and, therefore, serving a 
significant price discovery function. The primary source of direct 
evidence is that cash market bids, offers or transactions are 
directly based on, or quoted at a differential to, the prices 
generated on the market on a frequent and recurring basis. The 
Commission expects that normally only contracts with material 
liquidity will be referenced by the cash market; however, the 
Commission notes that it may be possible for a contract to have very 
low liquidity and yet still be used as a price reference. In such 
cases, the simple fact that participants in the underlying cash 
market broadly have elected to use the contract price as a price 
reference would be a strong indicator that the contract is a 
significant price discovery contract.
    2. In evaluating a contract's price discovery role as a directly 
referenced price source, the Commission will perform an analysis to 
determine whether cash market participants are quoting bid or offer 
prices or entering into transactions at prices that are set either 
explicitly or implicitly at a differential to prices established for 
the contract. Cash market prices are set explicitly at a 
differential to the section 2(h)(3) contract when, for instance, 
they are quoted in dollars and cents above or below the reference 
contract's price. Cash market prices are set implicitly at a 
differential to a section 2(h)(3) contract when, for instance, they 
are arrived at after adding to, or subtracting from the section 
2(h)(3) contract, but then quoted or reported at a flat price. The 
Commission will also consider whether cash market entities are 
quoting cash prices based on a section 2(h)(3) contract on a 
frequent and recurring basis.
    3. The second source of evidence is that the price of the 
contract is being routinely disseminated in widely distributed 
industry publications--or offered by the ECM itself for some form of 
remuneration--and consulted on a frequent and recurring basis by 
industry participants in pricing cash market transactions. As with 
contract prices that are directly incorporated into cash market 
prices, the Commission assumes that industry publications choose to 
publish prices because of the value they transfer to industry 
participants for the purpose of formulating prices in the cash 
market.
    4. In applying this criterion, consideration will be given to 
whether prices established by a section 2(h)(3) contract are 
reported in a widely distributed industry publication. In making 
this determination, the Commission will consider the reputation of 
the publication within the industry, how frequently it is published, 
and whether the information contained in the publication is 
routinely consulted by industry participants in pricing cash market 
transactions.
    5. Under a Material Price Reference analysis, the Commission 
expects that material liquidity in the contract likely will be the 
primary motivation for a publisher to publish particular prices. In 
other words, the fact that the price of a contract is being used as 
a reference by industry participants suggests, prima facie, that the 
contract performs a significant price discovery function. But the 
Commission recognizes that trading levels could nonetheless be low 
for the contract while still serving a significant price discovery 
function and that evidence of routine publication and consultation 
by industry participants may be sufficient to establish the contract 
as a significant price discovery contract. On the other hand, while 
cash market participants may regularly refer to published prices of 
a particular contract when establishing cash market prices, it may 
be the case that the contract itself is a niche market for a 
specialized grade of the commodity or for delivery at a minor 
geographic location. In such cases, the Commission will look to such 
measures as trading volume, open interest, and the significance of 
the underlying cash market to make a determination that a contract 
is functioning as a significant price discovery contract. If an 
examination of trading in the contract were to reveal that true 
price discovery was occurring in other more broadly defined 
contracts and that this contract was itself simply reflective of 
those broader contracts, it is less likely the Commission will deem 
the contract a significant price discovery contract.
    6. Because price referencing normally occurs out of the view of 
the electronic trading facility, the Commission may have difficulty 
ascertaining the extent to which cash market participants actually 
reference or consult a contract's price when transacting. The 
Commission expects, however, that as a contract begins to be relied 
upon to set a reference price, market participants will be 
increasingly willing to purchase price information. To the extent, 
then, that an electronic trading facility begins to sell its price 
information regarding a contract to market participants or industry 
publications, the contract will meet a threshold standard to 
indicate that the contract potentially is a significant price 
discovery contract.


0
32. Add a new Appendix B to Part 36 to read as follows:

[[Page 12199]]

Appendix B to Part 36--Guidance on, and Acceptable Practices in, 
Compliance With Core Principles

    1. This Appendix provides guidance on complying with the core 
principles under section 2(h)(7)(C) of the Act and this part, both 
initially and on an ongoing basis. The guidance is provided in 
paragraph (a) following each core principle and can be used to 
demonstrate to the Commission core principle compliance under Sec.  
36.3(c)(4). The guidance for each core principle is illustrative 
only of the types of matters an electronic trading facility may 
address, as applicable, and is not intended to be used as a 
mandatory checklist. Addressing the issues and questions set forth 
in this guidance will help the Commission in its consideration of 
whether the electronic trading facility is in compliance with the 
core principles. A submission pursuant to Sec.  36.3(c)(4) should 
include an explanation or other form of documentation demonstrating 
that the electronic trading facility complies with the core 
principles.
    2. Acceptable practices meeting selected requirements of the 
core principles are set forth in paragraph (b) following each core 
principle. Electronic trading facilities on which significant price 
discovery contracts are traded or executed that follow the specific 
practices outlined under paragraph (b) for any core principle in 
this appendix will meet the selected requirements of the applicable 
core principle. Paragraph (b) is for illustrative purposes only, and 
does not state the exclusive means for satisfying a core principle.
    CORE PRINCIPLE I OF SECTION 2(h)(7)(C)--CONTRACTS NOT READILY 
SUSCEPTIBLE TO MANIPULATION. The electronic trading facility shall 
list only significant price discovery contracts that are not readily 
susceptible to manipulation.
    (a) Guidance. Upon determination by the Commission that a 
contract listed for trading on an electronic trading facility is a 
significant price discovery contract, the electronic trading 
facility must self-certify the terms and conditions of the 
significant price discovery contract under Sec.  36.3(c)(4) within 
90 calendar days of the date of the Commission's order, if the 
contract is the electronic trading facility's first significant 
price discovery contract; or 30 days from the date of the 
Commission's order if the contract is not the electronic trading 
facility's first significant price discovery contract. Once the 
Commission determines that a contract performs a significant price 
discovery function, subsequent rule changes must be self-certified 
to the Commission by the electronic trading facility pursuant to 
Sec.  40.6 or submitted to the Commission for review and approval 
pursuant to Sec.  40.5.
    (b) Acceptable practices. Guideline No. 1, 17 CFR part 40, 
Appendix A may be used as guidance in meeting this core principle 
for significant price discovery contracts.
    CORE PRINCIPLE II OF SECTION 2(h)(7)(C)--MONITORING OF TRADING. 
The electronic trading facility shall monitor trading in significant 
price discovery contracts to prevent market manipulation, price 
distortion, and disruptions of the delivery of cash-settlement 
process through market surveillance, compliance and disciplinary 
practices and procedures, including methods for conducting real-time 
monitoring of trading and comprehensive and accurate trade 
reconstructions.
    (a) Guidance. An electronic trading facility on which 
significant price discovery contracts are traded or executed should, 
with respect to those contracts, demonstrate a capacity to prevent 
market manipulation and have trading and participation rules to 
detect and deter abuses. The facility should seek to prevent market 
manipulation and other trading abuses through a dedicated regulatory 
department or by delegation of that function to an appropriate third 
party. An electronic trading facility also should have the authority 
to intervene as necessary to maintain an orderly market.
    (b) Acceptable practices--(1) An acceptable trade monitoring 
program. An acceptable trade monitoring program should facilitate, 
on both a routine and non-routine basis, arrangements and resources 
to detect and deter abuses through direct surveillance of each 
significant price discovery contract. Direct surveillance of each 
significant price discovery contract will generally involve the 
collection of various market data, including information on 
participants' market activity. Those data should be evaluated on an 
ongoing basis in order to make an appropriate regulatory response to 
potential market disruptions or abusive practices. For contracts 
with a substantial number of participants, an effective surveillance 
program should employ a much more comprehensive large trader 
reporting system.
    (2) Authority to collect information and documents. The 
electronic trading facility should have the authority to collect 
information and documents in order to reconstruct trading for 
appropriate market analysis. Appropriate market analysis should 
enable the electronic trading facility to assess whether each 
significant price discovery contract is responding to the forces of 
supply and demand. Appropriate data usually include various 
fundamental data about the underlying commodity, its supply, its 
demand, and its movement through market channels. Especially 
important are data related to the size and ownership of deliverable 
supplies--the existing supply and the future or potential supply--
and to the pricing of the deliverable commodity relative to the 
futures price and relative to similar, but non-deliverable, kinds of 
the commodity. For cash-settled contracts, it is more appropriate to 
pay attention to the availability and pricing of the commodity 
making up the index to which the contract will be settled, as well 
as monitoring the continued suitability of the methodology for 
deriving the index.
    (3) Ability to assess participants' market activity and power. 
To assess participants' activity and potential power in a market, 
electronic trading facilities, with respect to significant price 
discovery contracts, at a minimum should have routine access to the 
positions and trading of its participants and, if applicable, should 
provide for such access through its agreements with its third-party 
provider of clearing services.
    CORE PRINCIPLE III OF SECTION 2(h)(7)(C)--ABILITY TO OBTAIN 
INFORMATION. The electronic trading facility shall establish and 
enforce rules that allow the electronic trading facility to obtain 
any necessary information to perform any of the functions described 
in this subparagraph, provide the information to the Commission upon 
request, and have the capacity to carry out such international 
information-sharing agreements as the Commission may require.
    (a) Guidance. An electronic trading facility on which 
significant price discovery contracts are traded or executed should, 
with respect to those contracts, have the ability and authority to 
collect information and documents on both a routine and non-routine 
basis, including the examination of books and records kept by 
participants. This includes having arrangements and resources for 
recording full data entry and trade details and safely storing audit 
trail data. An electronic trading facility should have systems 
sufficient to enable it to use the information for purposes of 
assisting in the prevention of participant and market abuses through 
reconstruction of trading and providing evidence of any violations 
of the electronic trading facility's rules.
    (b) Acceptable practices--(1) The goal of an audit trail is to 
detect and deter market abuse. An effective contract audit trail 
should capture and retain sufficient trade-related information to 
permit electronic trading facility staff to detect trading abuses 
and to reconstruct all transactions within a reasonable period of 
time. An audit trail should include specialized electronic 
surveillance programs that identify potentially abusive trades and 
trade patterns. An acceptable audit trail must be able to track an 
order from time of entry into the trading system through its fill. 
The electronic trading facility must create and maintain an 
electronic transaction history database that contains information 
with respect to transactions executed on each significant price 
discovery contract.
    (2) An acceptable audit trail should include the following: 
original source documents, transaction history, electronic analysis 
capability, and safe storage capability. An acceptable audit trail 
system would satisfy the following practices.
    (i) Original source documents. Original source documents include 
unalterable, sequentially identified records on which trade 
execution information is originally recorded. For each order 
(whether filled, unfilled or cancelled, each of which should be 
retained or electronically captured), such records reflect the terms 
of the order, an account identifier that relates back to the 
account(s) owner(s), and the time of order entry.
    (ii) Transaction history. A transaction history consists of an 
electronic history of each transaction, including (a) all the data 
that are input into the trade entry or matching system for the 
transaction to match and clear; (b) timing and sequencing data 
adequate to reconstruct trading; and (c) the identification of each 
account to which fills are allocated.
    (iii) Electronic analysis capability. An electronic analysis 
capability that permits

[[Page 12200]]

sorting and presenting data included in the transaction history so 
as to reconstruct trading and to identify possible trading 
violations with respect to market abuse.
    (iv) Safe storage capability. Safe storage capability provides 
for a method of storing the data included in the transaction history 
in a manner that protects the data from unauthorized alteration, as 
well as from accidental erasure or other loss. Data should be 
retained in the form and manner specified by the Commission or, 
where no acceptable manner of retention is specified, in accordance 
with the recordkeeping standards of Commission rule 1.31.
    (3) Arrangements and resources for the disclosure of the 
obtained information and documents to the Commission upon request. 
To satisfy section 2(h)(7)(C)(III)(bb), the electronic trading 
facility should maintain records of all information and documents 
related to each significant price discovery contract in a form and 
manner acceptable to the Commission. Where no acceptable manner of 
maintenance is specified, records should be maintained in accordance 
with the recordkeeping standards of Commission rule 1.31.
    (4) The capacity to carry out appropriate information-sharing 
agreements as the Commission may require. Appropriate information-
sharing agreements could be established with other markets or the 
Commission can act in conjunction with the electronic trading 
facility to carry out such information sharing.
    CORE PRINCIPLE IV OF SECTION 2(h)(7)(C)--POSITION LIMITATIONS OR 
ACCOUNTABILITY. The electronic trading facility shall adopt, where 
necessary and appropriate, position limitations or position 
accountability for speculators in significant price discovery 
contracts, taking into account positions in other agreements, 
contracts and transactions that are treated by a derivatives 
clearing organization, whether registered or not registered, as 
fungible with such significant price discovery contracts to reduce 
the potential threat of market manipulation or congestion, 
especially during trading in the delivery month.
    (a) Guidance. [Reserved]
    (b) Acceptable practices for uncleared trades [Reserved]
    (c) Acceptable practices for cleared trades--(1) Introduction. 
In order to diminish potential problems arising from excessively 
large speculative positions, and to facilitate orderly liquidation 
of expiring contracts, an electronic trading facility relying on the 
exemption in section 2(h)(3) should adopt rules that set position 
limits or accountability levels on traders' cleared positions in 
significant price discovery contracts. These position limit rules 
specifically may exempt bona fide hedging; permit other exemptions; 
or set limits differently by market, delivery month or time period. 
For the purpose of evaluating a significant price discovery 
contract's speculative-limit program for cleared positions, the 
Commission will consider the specified position limits or 
accountability levels, aggregation policies, types of exemptions 
allowed, methods for monitoring compliance with the specified limits 
or levels, and procedures for dealing with violations.
    (2) Accounting for cleared trades--(i) Speculative-limit levels 
typically should be set in terms of a trader's combined position 
involving cleared trades in a significant price discovery contract, 
plus positions in agreements, contracts and transactions that are 
treated by a derivatives clearing organization, whether registered 
or not registered, as fungible with such significant price discovery 
contract. (This circumstance typically exists where an exempt 
commercial market lists a particular contract for trading but also 
allows for positions in that contract to be cleared together with 
positions established through bilateral or off-exchange 
transactions, such as block trades, in the same contract. 
Essentially, both the on-facility and off-facility transactions are 
considered fungible with each other.) In this connection, the 
electronic trading facility should make arrangements to ensure that 
it is able to ascertain accurate position data for the market. (ii) 
For significant price discovery contracts that are traded on a 
cleared basis, the electronic trading facility should apply position 
limits to cleared transactions in the contract.
    (3) Limitations on spot-month positions. Spot-month limits 
should be adopted for significant price discovery contracts to 
minimize the susceptibility of the market to manipulation or price 
distortions, including squeezes and corners or other abusive trading 
practices.
    (i) Contracts economically equivalent to an existing contract. 
An electronic trading facility that lists a significant price 
discovery contract that is economically-equivalent to another 
significant price discovery contract or to a contract traded on a 
designated contract market or derivatives transaction execution 
facility should set the spot-month limit for its significant price 
discovery contract at the same level as that specified for the 
economically-equivalent contract.
    (ii) Contracts that are not economically equivalent to an 
existing contract. There may not be an economically-equivalent 
significant price discovery contract or economically-equivalent 
contract traded on a designated contract market or derivatives 
transaction execution facility. In this case, the spot-month 
speculative position limit should be established in the following 
manner. The spot-month limit for a physical delivery market should 
be based upon an analysis of deliverable supplies and the history of 
spot-month liquidations. The spot-month limit for a physical-
delivery market is appropriately set at no more than 25 percent of 
the estimated deliverable supply. In the case where a significant 
price discovery contract has a cash settlement provision, the spot-
month limit should be set at a level that minimizes the potential 
for price manipulation or distortion in the significant price 
discovery contract itself; in related futures and options contracts 
traded on a designated contract market or derivatives transaction 
execution facility; in other significant price discovery contracts; 
in other fungible agreements, contracts and transactions; and in the 
underlying commodity.
    (4) Position accountability for non-spot-month positions. The 
electronic trading facility should establish for its significant 
price discovery contracts non-spot individual month position 
accountability levels and all-months-combined position 
accountability levels. An electronic trading facility may establish 
non-spot individual month position limits and all-months-combined 
position limits for its significant price discovery contracts in 
lieu of position accountability levels.
    (i) Definition. Position accountability provisions provide a 
means for an exchange to monitor traders' positions that may 
threaten orderly trading. An acceptable accountability provision 
sets target accountability threshold levels that may be exceeded, 
but once a trader breaches such accountability levels, the 
electronic trading facility should initiate an inquiry to determine 
whether the individual's trading activity is justified and is not 
intended to manipulate the market. As part of its investigation, the 
electronic trading facility may inquire about the trader's rationale 
for holding a position in excess of the accountability levels. An 
acceptable accountability provision should provide the electronic 
trading facility with the authority to order the trader not to 
further increase positions. If a trader fails to comply with a 
request for information about positions held, provides information 
that does not sufficiently justify the position, or continues to 
increase contract positions after a request not to do so is issued 
by the facility, then the accountability provision should enable the 
electronic trading facility to require the trader to reduce 
positions.
    (ii) Contracts economically equivalent to an existing contract. 
When an electronic trading facility lists a significant price 
discovery contract that is economically equivalent to another 
significant price discovery contract or to a contract traded on a 
designated contract market or derivatives transaction execution 
facility, the electronic trading facility should set the non-spot 
individual month position accountability level and all-months-
combined position accountability level for its significant price 
discovery contract at the same levels, or lower, as those specified 
for the economically-equivalent contract.
    (iii) Contracts that are not economically equivalent to an 
existing contract. For significant price discovery contracts that 
are not economically equivalent to an existing contract, the trading 
facility shall adopt non-spot individual month and all-months-
combined position accountability levels that are no greater than 10 
percent of the average combined futures and delta-adjusted option 
month-end open interest for the most recent calendar year. For 
electronic trading facilities that choose to adopt non-spot 
individual month and all-months-combined position limits in lieu of 
position accountability levels for their significant price discovery 
contracts, the limits should be set in the same manner as the 
accountability levels.
    (iv) Contracts economically equivalent to an existing contract 
with position limits. If a significant price discovery contract is 
economically equivalent to another significant price discovery 
contract or to a contract traded on a designated contract

[[Page 12201]]

market or derivatives transaction execution facility that has 
adopted non-spot or all-months-combined position limits, the 
electronic trading facility should set non-spot month position 
limits and all-months-combined position limits for its significant 
price discovery contract at the same (or lower) levels as those 
specified for the economically-equivalent contract.
    (5) Account aggregation. An electronic trading facility should 
have aggregation rules for significant price discovery contracts 
that apply to accounts under common control, those with common 
ownership, i.e., where there is a ten percent or greater financial 
interest, and those traded according to an express or implied 
agreement. Such aggregation rules should apply to cleared 
transactions with respect to applicable speculative position limits. 
An electronic trading facility will be permitted to set more 
stringent aggregation policies. An electronic trading facility may 
grant exemptions to its price discovery contracts' position limits 
for bona fide hedging (as defined in Sec.  1.3(z) of this chapter) 
and may grant exemptions for reduced risk positions, such as 
spreads, straddles and arbitrage positions.
    (6) Implementation deadlines. An electronic trading facility 
with a significant price discovery contract is required to comply 
with Core Principle IV as set forth in section 2(h)(7)C) of the Act 
within 90 calendar days of the date of the Commission's order 
determining that the contract performs a significant price discovery 
function if such contract is the electronic trading facility's first 
significant price discovery contract, or within 30 days of the date 
of the Commission's order if such contract is not the electronic 
trading facility's first significant price discovery contract. For 
the purpose of applying limits on speculative positions in newly-
determined significant price discovery contracts, the Commission 
will permit a grace period following issuance of its order for 
traders with cleared positions in such contracts to become compliant 
with applicable position limit rules. Traders who hold cleared 
positions on a net basis in the electronic trading facility's 
significant price discovery contract must be at or below the 
specified position limit level no later than 90 calendar days from 
the date of the electronic trading facility's implementation of 
position limit rules, unless a hedge exemption is granted by the 
electronic trading facility. This grace period applies to both 
initial and subsequent price discovery contracts. Electronic trading 
facilities should notify traders of this requirement promptly upon 
implementation of such rules.
    (7) Enforcement provisions. The electronic trading facility 
should have appropriate procedures in place to monitor its position 
limit and accountability provisions and to address violations.
    (i) An electronic trading facility with significant price 
discovery contracts should use an automated means of detecting 
traders' violations of speculative limits or exemptions, 
particularly if the significant price discovery contracts have large 
numbers of traders. An electronic trading facility should monitor 
the continuing appropriateness of approved exemptions by 
periodically reviewing each trader's basis for exemption or 
requiring a reapplication. An automated system also should be used 
to determine whether a trader has exceeded applicable non-spot 
individual month position accountability levels and all-months-
combined position accountability levels.
    (ii) An electronic trading facility should establish a program 
for effective enforcement of position limits for significant price 
discovery contracts. Electronic trading facilities should use a 
large trader reporting system to monitor and enforce daily 
compliance with position limit rules. The Commission notes that an 
electronic trading facility may allow traders to periodically apply 
to the electronic trading facility for an exemption and, if 
appropriate, be granted a position level higher than the applicable 
speculative limit. The electronic trading facility should establish 
a program to monitor approved exemptions from the limits. The 
position levels granted under such hedge exemptions generally should 
be based upon the trader's commercial activity in related markets 
including, but not limited to, positions held in related futures and 
options contracts listed for trading on designated contract markets, 
fungible agreements, contracts and transactions, as determined by 
either a registered or unregistered derivatives clearing 
organization. Electronic trading facilities may allow a brief grace 
period where a qualifying trader may exceed speculative limits or an 
existing exemption level pending the submission and approval of 
appropriate justification. An electronic trading facility should 
consider whether it wants to restrict exemptions during the last 
several days of trading in a delivery month. Acceptable procedures 
for obtaining and granting exemptions include a requirement that the 
electronic trading facility approve a specific maximum higher level.
    (iii) An acceptable speculative limit program should have 
specific policies for taking regulatory action once a violation of a 
position limit or exemption is detected. The electronic trading 
facility policies should consider appropriate actions.
    (8) Violation of Commission rules. A violation of position 
limits for significant price discovery contracts that have been 
self-certified by an electronic trading facility is also a violation 
of section 4a(e) of the Act.
    CORE PRINCIPLE V OF SECTION 2(h)(7)(C)--EMERGENCY AUTHORITY--The 
electronic trading facility shall adopt rules to provide for the 
exercise of emergency authority, in consultation or cooperation with 
the Commission, where necessary and appropriate, including the 
authority to liquidate open positions in significant price discovery 
contracts and to suspend or curtail trading in a significant price 
discovery contract.
    (a) Guidance. An electronic trading facility on which 
significant price discovery contracts are traded should have clear 
procedures and guidelines for decision-making regarding emergency 
intervention in the market, including procedures and guidelines to 
avoid conflicts of interest while carrying out such decision-making. 
An electronic trading facility on which significant price discovery 
contracts are executed or traded should also have the authority to 
intervene as necessary to maintain markets with fair and orderly 
trading as well as procedures for carrying out the intervention. 
Procedures and guidelines should include notifying the Commission of 
the exercise of the electronic trading facility's regulatory 
emergency authority, explaining how conflicts of interest are 
minimized, and documenting the electronic trading facility's 
decision-making process and the reasons for using its emergency 
action authority. Information on steps taken under such procedures 
should be included in a submission of a certified rule and any 
related submissions for rule approval pursuant to part 40 of this 
chapter, when carried out pursuant to an electronic trading 
facility's emergency authority. To address perceived market threats, 
the electronic trading facility on which significant price discovery 
contracts are executed or traded should, among other things, be able 
to impose position limits in the delivery month, impose or modify 
price limits, modify circuit breakers, call for additional margin 
either from market participants or clearing members (for contracts 
that are cleared through a clearinghouse), order the liquidation or 
transfer of open positions, order the fixing of a settlement price, 
order a reduction in positions, extend or shorten the expiration 
date or the trading hours, suspend or curtail trading on the 
electronic trading facility, order the transfer of contracts and the 
margin for such contracts from one market participant to another, or 
alter the delivery terms or conditions or, if applicable, should 
provide for such actions through its agreements with its third-party 
provider of clearing services.
    (b) Acceptable practices. [Reserved]
    CORE PRINCIPLE VI OF SECTION 2(h)(7)(C)--DAILY PUBLICATION OF 
TRADING INFORMATION. The electronic trading facility shall make 
public daily information on price, trading volume, and other trading 
data to the extent appropriate for significant price discovery 
contracts.
    (a) Guidance. An electronic trading facility, with respect to 
significant price discovery contracts, should provide to the public 
information regarding settlement prices, price range, volume, open 
interest, and other related market information for all applicable 
contracts as determined by the Commission on a fair, equitable and 
timely basis. Provision of information for any applicable contract 
can be through such means as provision of the information to a 
financial information service or by timely placement of the 
information on the electronic trading facility's public Web site.
    (b) Acceptable practices. Compliance with Sec.  16.01 of this 
chapter, which is mandatory, is an acceptable practice that 
satisfies the requirements of Core Principle VI.
    CORE PRINCIPLE VII OF SECTION 2(h)(7)(C)--COMPLIANCE WITH RULES. 
The electronic trading facility shall monitor and enforce compliance 
with the rules of the electronic trading facility, including the 
terms and conditions of any contracts to be traded and any 
limitations on access to the electronic trading facility.

[[Page 12202]]

    (a) Guidance--(1) An electronic trading facility on which 
significant price discovery contracts are executed or traded should 
have appropriate arrangements and resources for effective trade 
practice surveillance programs, with the authority to collect 
information and documents on both a routine and non-routine basis, 
including the examination of books and records kept by its market 
participants. The arrangements and resources should facilitate the 
direct supervision of the market and the analysis of data collected. 
Trade practice surveillance programs may be carried out by the 
electronic trading facility itself or through delegation or 
contracting-out to a third party. If the electronic trading facility 
on which significant price discovery contracts are executed or 
traded delegates or contracts-out the trade practice surveillance 
responsibility to a third party, such third party should have the 
capacity and authority to carry out such programs, and the 
electronic trading facility should retain appropriate supervisory 
authority over the third party.
    (2) An electronic trading facility on which significant price 
discovery contracts are executed or traded should have arrangements, 
resources and authority for effective rule enforcement. The 
Commission believes that this should include the authority and 
ability to discipline and limit or suspend the activities of a 
market participant as well as the authority and ability to terminate 
the activities of a market participant pursuant to clear and fair 
standards. The electronic trading facility can satisfy this 
criterion for market participants by expelling or denying such 
person's future access upon a determination that such a person has 
violated the electronic trading facility's rules.
    (b) Acceptable practices. An acceptable trade practice 
surveillance program generally would include:
    (1) Maintenance of data reflecting the details of each 
transaction executed on the electronic trading facility;
    (2) Electronic analysis of this data routinely to detect 
potential trading violations;
    (3) Appropriate and thorough investigative analysis of these and 
other potential trading violations brought to the electronic trading 
facility's attention; and
    (4) Prompt and effective disciplinary action for any violation 
that is found to have been committed. The Commission believes that 
the latter element should include the authority and ability to 
discipline and limit or suspend the activities of a market 
participant pursuant to clear and fair standards that are available 
to market participants. See, e.g., 17 CFR part 8.
    CORE PRINCIPLE VIII OF SECTION 2(h)(7)(C)--CONFLICTS OF 
INTEREST. The electronic trading facility on which significant price 
discovery contracts are executed or traded shall establish and 
enforce rules to minimize conflicts of interest in the decision-
making process of the electronic trading facility and establish a 
process for resolving such conflicts of interest.
    (a) Guidance.
    (1) The means to address conflicts of interest in the decision-
making of an electronic trading facility on which significant price 
discovery contracts are executed or traded should include methods to 
ascertain the presence of conflicts of interest and to make 
decisions in the event of such a conflict. In addition, the 
Commission believes that the electronic trading facility on which 
significant price discovery contracts are executed or traded should 
provide for appropriate limitations on the use or disclosure of 
material non-public information gained through the performance of 
official duties by board members, committee members and electronic 
trading facility employees or gained through an ownership interest 
in the electronic trading facility or its parent organization(s).
    (2) All electronic trading facilities on which significant price 
discovery contracts are traded bear special responsibility to 
regulate effectively, impartially, and with due consideration of the 
public interest, as provided in section 3 of the Act. Under Core 
Principle VIII, they are also required to minimize conflicts of 
interest in their decision-making processes. To comply with this 
core principle, electronic trading facilities on which significant 
price discovery contracts are traded should be particularly vigilant 
for such conflicts between and among any of their self-regulatory 
responsibilities, their commercial interests, and the several 
interests of their management, members, owners, market participants, 
other industry participants and other constituencies.
    (b) Acceptable practices. [Reserved]
    CORE PRINCIPLE IX OF SECTION 2(h)(7)(C)--ANTITRUST 
CONSIDERATIONS. Unless necessary or appropriate to achieve the 
purposes of this Act, the electronic trading facility, with respect 
to any significant price discovery contracts, shall endeavor to 
avoid adopting any rules or taking any actions that result in any 
unreasonable restraints of trade or imposing any material 
anticompetitive burden on trading on the electronic trading 
facility.
    (a) Guidance. An electronic trading facility, with respect to a 
significant price discovery contract, may at any time request that 
the Commission consider under the provisions of section 15(b) of the 
Act any of the electronic trading facility's rules, which may be 
trading protocols or policies, operational rules, or terms or 
conditions of any significant price discovery contract. The 
Commission intends to apply section 15(b) of the Act to its 
consideration of issues under this core principle in a manner 
consistent with that previously applied to contract markets.
    (b) Acceptable practices. [Reserved]

PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

0
33. The authority citation for part 40 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as 
amended by Title XIII of the Food, Conservation and Energy Act of 
2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008).


0
34. Revise the heading of part 40 as set forth above.


Sec.  40.1  [Amended]

0
35. Section 40.1 is amended as follows:
0
A. The term ``registered entity'' is removed and the term ``designated 
contract market, derivatives transaction execution facility or 
derivatives clearing organization'' is added in its place in paragraphs 
(b)(2), (b)(3), and (f)(2); and
0
B. The term ``contract market, derivatives transaction execution 
facility or derivatives clearing organization'' is removed and the term 
``registered entity'' is added in its place in paragraph (h).

0
36. Section 40.2 is amended as follows:
0
A. The term ``registered entity'' is removed and ``designated contract 
market, derivatives transaction execution facility or derivatives 
clearing organization'' is added in its place in paragraph (a) 
introductory text;
0
B. The term ``registered entity'' is removed and ``designated contract 
market or derivatives transaction execution facility'' is added in its 
place in paragraphs (a)(1) and (a)(3)(iv); and
0
C. Paragraph (b) is revised to read as follows:


Sec.  40.2  Listing and accepting products for trading or clearing by 
certification.

* * * * *
    (b) A registered entity shall provide, if requested by Commission 
staff, additional evidence, information or data relating to whether any 
contract meets, initially or on a continuing basis, any of the 
requirements of the Act or Commission rules or policies thereunder 
which may be beneficial to the Commission in conducting a due diligence 
assessment of the product and the entity's compliance with these 
requirements.
* * * * *


Sec.  40.3  [Amended]

0
37. Section 40.3 is amended by removing the term ``registered entity'' 
and adding in its place the term ``designated contract market or 
registered derivatives transaction execution facility'' in paragraphs 
(a)(1), (c)(1), (c)(2), and (e)(2).


Sec.  40.6  [Amended]

0
38. Section 40.4 is amended by removing the term ``registered entity'' 
and adding in its place the term ``designated contract market'' in 
paragraph (b)(9)(ii).

0
39. Section 40.6 is amended by revising paragraphs (a)(2), 
(c)(3)(ii)(G), and (c)(3)(ii)(H) to read as follows:


Sec.  40.6  Self-certification of rules.

    (a) * * *

[[Page 12203]]

    (2) The registered entity has filed its submission electronically 
in a format specified by the Secretary of the Commission with the 
Secretary of the Commission at <a href="/cdn-cgi/l/email-protection#f4878196999d87879d9b9a87b497928097da939b82"><span class="__cf_email__" data-cfemail="24575146494d57574d4b4a5764474250470a434b52">[email protected]</span></a>, the relevant 
branch chief at the regional office having local jurisdiction over the 
registered entity, and, for filings submitted by a designated contract 
market, registered derivatives transaction execution facility, or 
electronic trading facility on which significant price discovery 
contracts are traded or executed, the Division of Market Oversight at 
<a href="/cdn-cgi/l/email-protection#22666f6d7157404f4b51514b4d4c5162414456410c454d54"><span class="__cf_email__" data-cfemail="4e0a03011d3b2c23273d3d2721203d0e2d283a2d60292138">[email protected]</span></a>, and the Commission has received the submission 
at its headquarters by the open of business on the business day 
preceding implementation of the rule; provided, however, rules or rule 
amendments implemented under procedures of the governing board to 
respond to an emergency as defined in Sec.  40.1, shall, if 
practicable, be filed with the Commission prior to the implementation 
or, if not practicable, be filed with the Commission at the earliest 
possible time after implementation, but in no event more than twenty-
four hours after implementation; and
* * * * *
    (c) * * *
    (3) * * *
    (ii) * * *
    (G) Option contract terms. For registered entities that are in 
compliance with the daily reporting requirements of Sec.  16.01 of this 
chapter, changes to option contract rules relating to the strike price 
listing procedures, strike price intervals, and the listing of strike 
prices on a discretionary basis.
    (H) Trading Months. For registered entities that are in compliance 
with the daily reporting requirements of Sec.  16.01 of this chapter, 
the initial listing of trading months which are within the currently 
established cycle of trading months.
* * * * *


Sec.  40.7  [Amended]

0
40. Section 40.7 is amended by removing the term ``designated contract 
market, registered derivatives transaction execution facility or 
registered derivatives clearing organization'' and adding in its place 
the term ``registered entity'' in paragraph (b).

0
41. Section 40.8 is amended by revising paragraph (a), redesignating 
paragraph (b) as paragraph (c), and adding new paragraph (b) to read as 
follows:


Sec.  40.8  Availability of public information.

    (a) The following sections of all applications to become a 
designated contract market, derivatives execution transaction facility 
or designated clearing organization will be public: transmittal letter, 
proposed rules, the applicant's regulatory compliance chart, documents 
establishing the applicant's legal status, documents setting forth the 
applicant's governance structure, and any other part of the application 
not covered by a request for confidential treatment.
    (b) The following submissions required by Sec.  36.3(c)(4) of this 
chapter by an electronic trading facility on which significant price 
discovery contracts are traded or executed will be public: rulebook, 
the facility's regulatory compliance chart, documents establishing the 
facility's legal status, documents setting forth the facility's 
governance structure, and any other parts of the submissions not 
covered by a request for confidential treatment.
* * * * *

0
42. Appendix D to part 40 is revised to read as follows:

Appendix D to Part 40--Submission Cover Sheet and Instructions

    A properly completed submission cover sheet must accompany all 
rule submissions submitted electronically by a registered entity to 
the Secretary of the Commodity Futures Trading Commission, at 
<a href="/cdn-cgi/l/email-protection#374442555a5e44445e585944775451435419505841"><span class="__cf_email__" data-cfemail="2e5d5b4c43475d5d4741405d6e4d485a4d00494158">[email protected]</span></a> in a format specified by the Secretary of the 
Commission.
    Each submission should include the following:
    1. Identifier Code (optional)--If applicable, the exchange or 
clearing organization Identifier Code at the top of the cover sheet. 
Such codes are commonly generated by the exchanges or clearing 
organizations to provide an identifier that is unique to each filing 
(e.g., NYMEX Submission 03-116).
    2. Date--The date of the filing.
    3. Organization--The name of the organization filing the 
submission (e.g., CBOT).
    4. Filing as a--Check the appropriate box for a designated 
contract market (DCM), derivatives clearing organization (DCO), 
derivatives transaction execution facility (DTEF), or electronic 
trading facility with a significant price discovery contract (ECM-
SPDC).
    5. Type of Filing--Indicate whether the filing is a rule 
amendment or new product and the applicable category under that 
heading.
    6. Rule Numbers--For rule filings only, identify rule number(s) 
being adopted or modified in the case of rule amendment filings.
    7. Description--For rule or rule amendment filings only, enter a 
brief description of the new rule or rule amendment. This narrative 
should describe the substance of the submission with enough 
specificity to characterize all essential aspects of the filing.
    8. Other Requirements--Comply with all filing requirements for 
the underlying proposed rule or rule amendment. The filing of the 
submission cover sheet does not obviate the responsibility to comply 
with any applicable filing requirement (e.g., rules submitted for 
Commission approval under Sec.  40.5 must be accompanied by an 
explanation of the purpose and effect of the proposed rule along 
with a description of any substantive opposing views). Rules 
submitted for Commission approval under Sec.  40.5 must be 
accompanied by an explanation of the purpose and effect of the 
proposed rule along with a description of any substantive opposing 
views).

    Issued in Washington, DC, this 16th day of March, 2009, by the 
Commission.
David Stawick,
Secretary of the Commission.
[FR Doc. E9-6044 Filed 3-20-09; 8:45 am]
BILLING CODE 6351-01-P


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