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[Federal Register: May 31, 2001 (Volume 66, Number 105)]
[Proposed Rules]
[Page 29517-29523]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31my01-25]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 41 and 140

RIN 3038-AB82


Designated Contract Markets in Security Futures Products: Notice-
Designation Requirements, Continuing Obligations, Applications for
Exemptive Orders, and Exempt Provisions

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rulemaking and request for comment.

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SUMMARY: The Commodity Futures Trading Commission today proposes new
regulations which would provide notice procedures for a national
securities exchange, a national securities association, or an
alternative trading system to become a designated contract market in
security futures products, in accordance with the Commodity Futures
Modernization Act of 2000. The proposed regulations also would
establish limited filing requirements for such notice-designated
contract markets, in accordance with certain provisions of the
Commodity Exchange Act, and would establish procedures permitting such
notice-designated contract markets to apply for exemptive relief from
any section of the Commodity Exchange Act or regulations thereunder, to
the extent such an exemption is necessary or appropriate in the public
interest and is consistent with the protection of investors.

DATES: Comments must be received by July 2, 2001.

ADDRESSES: Comments on the proposed rulemaking may be sent to Jean A.
Webb, Secretary of the Commission, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. In addition, comments may be sent by facsimile to (202) 418-
5536 or by electronic mail to [email protected]. Reference should be
made to "Designated Contract Markets in Security Futures Products."

FOR FURTHER INFORMATION CONTACT: Joshua R. Marlow, Attorney-Advisor, or
David P. Van Wagner, Associate Director, Division of Trading and
Markets, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC 20581, (202) 418-5490, electronic
mail: [email protected] or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    On December 21, 2000, the Commodity Futures Modernization Act of
2000 ("CFMA") was signed into law.\1\ Among other things, the CFMA
added a provision to the Commodity Exchange Act ("Act") that permits
the trading of security futures products under the shared jurisdiction
of the Commodity Futures Trading Commission ("Commission" or
"CFTC") and the Securities and Exchange Commission ("SEC").\2\
Under the amended law,

[[Page 29518]]

security futures products may be traded on any board of trade that is
designated as a contract market by the Commission pursuant to section 5
of the Act, or that is registered with the Commission as a derivatives
transaction execution facility ("DTF") pursuant to section 5a of the
Act.\3\
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    \1\ Pub. L. 106-554, 114 Stat. 2763. The text of the CFMA may be
accessed at http://www.cftc.gov/files/ogc/ogchr5660.pdf.
    \2\ See section 251(a)(2) of the CFMA. Previously, section
2(a)(1)(B)(v) of the Act had prohibited the trading of security
futures products.
    The term "security futures product" is defined in section
1a(32) of the Act to mean "a security future or any put, call,
straddle, option, or privilege on any security future." The term
"security future" is defined in section 1a(31) of the Act and
specifically excludes, among other things, "excluded swap
transactions" (as defined in section 2(g) of the Act). Because the
CFMA also provides that options on security futures cannot be traded
until at least December 21, 2003, security futures are the only
security futures products that may be available for trading before
such date. See section 2(a)(1)(D)(iii)(II) of the Act.
    \3\ The CFMA prescribes certain dates before which trading in
security futures products shall not commence. Specifically, no
trading may occur prior to August 21, 2001, at which time principal-
to-principal transactions between "eligible contract participants"
may begin. Retail transactions in security futures products may not
begin until December 21, 2001. (Both starting dates are conditioned
upon the registration of a futures association as a national
securities association under the Securities Exchange Act of 1934
("'34 Act").) See section 202(a)(5) of the CFMA and section
6(g)(5) of the `34 Act.
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    Alternatively, section 5f of the Act permits certain entities that
are otherwise regulated by the SEC to be designated contract markets
for the limited purpose of trading security futures products.\4\
Specifically, any board of trade that is registered with the SEC as a
national securities exchange pursuant to section 6(a) of the '34 Act,
is registered with the SEC as a national securities association
pursuant to section 15A(a) of the '34 Act, or is an alternative trading
system ("ATS") as defined by section 1a(1) of the Act shall be a
designated contract market in security futures products ("SFPCM") if:
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    \4\ See section 252(a)(2) of the CFMA.

    (1) Such national securities exchange, national securities
association, or alternative trading system lists or trades no other
contracts of sale for future delivery, except for security futures
products;
    (2) Such national securities exchange, national securities
association, or alternative trading system files written notice with
the Commission in such form as the Commission, by rule, may
prescribe containing such information as the Commission, by rule,
may prescribe as necessary or appropriate in the public interest or
for the protection of customers; and
    (3) The registration of such national securities exchange,
national securities association, or alternative trading system is
not suspended pursuant to an order by the Securities and Exchange
Commission.\5\
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    \5\ Section 5f(a) of the Act.

    The designation "shall be effective contemporaneously with the
submission of notice * * * to the Commission." \6\ Accordingly, the
Commission is today proposing new regulation 41.31, which would
establish notification procedures in accordance with Congress' mandate
in section 5f(a)(2) of the Act.
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    \6\ Id.
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    In order to maintain such designation status with the Commission,
an SFPCM would have to comply with proposed regulation 41.32, which
would establish several, limited continuing obligations. These filing
requirements, authorized by various recordkeeping and inspection
provisions of the Act, would allow the Commission to meet its market
oversight responsibilities.
    Regulations 41.31 and 41.32 are proposed in a manner that the
Commission believes is consistent with the intent of the CFMA. The CFMA
defines a security futures product as both a "security," for purposes
of the '34 Act, and as a "future," for purposes of the Commodity
Exchange Act.\7\ The practical consequence of this dual-definition is
that boards of trade that are otherwise subject to the regulatory
jurisdiction of only the SEC or the CFTC, but which seek to list
security futures products for trading, might now be subject to both
regulatory regimes. The CFMA attempts to resolve this potentially
duplicative regulation by preserving the jurisdiction of an entity's
primary regulator and reducing the jurisdiction of the other regulator.
Accordingly, under new section 5f of the Act, a board of trade that is
primarily regulated by the SEC and that seeks to list security futures
products for trading is relieved from certain of the CFTC's otherwise
applicable regulatory requirements. Likewise, under section 202 of the
CFMA, a board of trade that is primarily regulated by the CFTC and that
seeks to list security futures products for trading is relieved from
certain of the SEC's otherwise applicable regulatory requirements. The
Commission notes that, under the SEC proposal to implement sections 202
of the CFMA and 6(g) of the '34 Act,\8\ a contract market designated
under section 5 of the Act that notice-registers as a national
securities exchange with the SEC in order to list security futures
products for trading would be subject to more notice requirements and
more periodic reporting with its non-primary regulator than a board of
trade that notice-designates as an SFPCM with the CFTC. The Commission
seeks comment from the public on this potential disparity. To what
extent could these disparate regulatory regimes for notice-registrants
create a competitive disadvantage for section 5 designated contract
markets or section 5a DTFs which seek notice-registration as a national
securities exchange pursuant to section 6(g) of the '34 Act? Are these
differences consistent with the general intent of the CFMA to minimize
the burden of shared jurisdiction?
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    \7\ See sections 101 and 201 of the CFMA.
    \8\ See 66 FR 26977 (May 15, 2001).
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    Finally, section 5f(b)(4) of the Act permits the Commission to
exempt SFPCMs from any provision of the Act or regulations thereunder,
and requires that the Commission determine procedures which would allow
SFPCMs to apply to the Commission for an exemption from any provision
of the Act or regulations thereunder, "to the extent (any) such
exemption is necessary or appropriate in the public interest and is
consistent with the protection of investors." \9\ Accordingly, the
Commission proposes new regulation 41.33 to provide SFPCMs with an
opportunity to request exemptive relief from unnecessary or unduly
burdensome requirements. Responsibility for considering such requests
would be delegated to the Directors of the Commission's Division of
Trading and Markets and Division of Economic Analysis, jointly,
pursuant to paragraph (g) of proposed regulation 41.33.\10\ Moreover,
the Commission proposes new regulation 41.34 to exempt all SFPCMs from
section 6(a) of the Act.
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    \9\ Section 5f(b)(4)(A) of the Act.
    \10\ This proposed rulemaking specifies that SFPCM requests for
exemption under proposed Commission regulation 41.33 would not be
subject to the requirements of Commission regulation 140.99.
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II. Proposed Amendments

A. Regulation 41.1--Definitions

    To implement the procedures identified in proposed regulations
41.31, 41.32, 41.33, and 41.34, the Commission proposes to establish
regulation 41.1, which would contain six definitions: "alternative
trading system"; "board of trade"; "national securities
association"; "national securities exchange"; "rule"; and
"security futures product." The terms "alternative trading system,"
"board of trade," and "security futures product" would have the
same meanings as those terms have in section 1a of the Act. The terms
"national securities exchange" and "national securities
association" would have the same meanings as in the '34 Act. The
definition of "rule" would be identical to the definition for that
term in Commission regulation 1.41(a)(1).\11\
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    \11\ Under the Commission's proposed regulatory reform
rulemaking, Commission regulation 1.41(a)(1) would be deleted and
replaced by Commission regulation 40.1(e). See 66 FR 14262 (Mar. 9,
2001). Should that proposal become final, regulation 41.1(e) would
alternatively cross-reference Commission regulation 40.1(e).
Commission regulations referred to herein are found at 17 CFR Ch. I
(2000).

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[[Page 29519]]

B. Regulation 41.31--Notice-Designation

    The Commission proposes to establish procedures necessary for a
board of trade operating as a national securities exchange, national
securities association, or alternative trading system to receive
designation as an SFPCM. This regulation is proposed pursuant to
section 5f(a)(2) of the Act, which states that such designation may be
obtained by a board of trade by filing "written notice with the
Commission in such form as the Commission, by rule, may prescribe
containing such information as the Commission, by rule, may prescribe
as necessary or appropriate in the public interest or for the
protection of customers."
    The proposed content requirements of the notice relate to the
Commission's abilities to maintain communication with a board of trade
and to receive information about its operations, two goals that the
Commission believes are "necessary or appropriate in the public
interest or for the protection of customers." Such notices would have
to include: the name, address, and contact person of the board of
trade; a description of the security futures products that the board of
trade intends to make available for trading, including an
identification of all facilities that would clear transactions in
security futures products on behalf of the board of trade; a copy of
the current rules of the board of trade; and five specific
certifications by the board of trade derived from the requirements
found in sections 5f and 2(a)(1)(D)(vii) of the Act.\12\ If a board of
trade previously filed documents with the SEC containing information
which would satisfy any of these proposed informational requirements,
the Commission would accept copies of such documents in lieu of the
required information.
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    \12\ See proposed regulation 41.31(a)(5)(iv). Section
2(a)(1)(D)(vii) of the Act states: "It shall be unlawful for a
board of trade to trade or execute a security futures product unless
the board of trade has provided the Commission with a certification
that the specific security futures product and the board of trade,
as applicable, meet the criteria specified in subclauses (I) through
(XI) of [section 2(a)(1)(D)(i)], except as otherwise provided in
[section 2(a)(1)(D)(vi)]."
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C. Regulation 41.32--Continuing Obligations

    The Commission proposes regulation 41.32 in order to establish a
mechanism to receive the following from an SFPCM:
    (1) Notification of any change in its regulatory status with the
SEC or with a futures association registered under section 17 of the
Act; \13\
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    \13\ A change in regulatory status would include, among other
things, suspension of registration pursuant to an order by the SEC,
a switch in SEC registration from "alternative trading system" to
"national securities exchange," or suspension or revocation of
membership by a registered futures association.
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    (2) A certification consistent with the requirements of section
2(a)(1)(D)(vii) of the Act each time the board of trade lists a new
security futures product for trading; \14\
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    \14\ See note 12.
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    (3) Provision of a copy of any new rules or rule amendments that
relate to the trading of security futures products, including any
operational rules and the terms and conditions of any security futures
products; \15\
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    \15\ A change in the clearing facilities utilized by an SFPCM
would be included in this category.
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    (4) Upon request, information related to its business as a
designated contract market in security futures products; and
    (5) Upon request, a written demonstration, including supporting
data, that the board of trade is in compliance with a specified
provision of the Act or regulations thereunder.
    This information would permit the Commission to carry out its
various responsibilities under the Act and would ensure that an SFPCM
continues to comply with the conditions of designation under section
5f(a) of the Act and proposed regulation 41.31.\16\
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    \16\ Similar to proposed regulation 41.31, if a board of trade
previously filed documents with the SEC containing information which
would satisfy any of these proposed informational requirements, the
Commission would accept copies of such documents in lieu of the
required information.
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    The Commission notes various recordkeeping and reporting provisions
of the Act, applicable to all designated contract markets, which
facilitate the Commission's general market oversight responsibilities
and authorize the Commission to require this information. In
particular, section 4g(b) of the Act requires that "[e]very registered
entity * * * maintain daily trading records * * * includ[ing] such
information as the Commission shall prescribe by rule," and section
4g(d) of the Act continues, "[d]aily trading records shall be
maintained in a form suitable to the Commission. * * * Reports shall be
made from the records maintained * * * in such form as the Commission
may prescribe. * * * " Moreover, sections 8(a)(1) and
2(a)(1)(D)(iv)(I) of the Act, respectively, permit the Commission to
"make such investigations as it deems necessary to ascertain the facts
regarding the operations of boards of trade * * * subject to the
provisions of this Act" and to make "such reasonable periodic or
special examinations * * * as the Commission deems necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of this Act. * * * " \17\
Under section 3 of the Act, the Commission also has general
responsibilities, among others, to prevent manipulation and other
disruptions to market integrity, to ensure the financial integrity of
all transactions subject to the Act, and to protect all market
participants from fraud.
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    \17\ The Commission's authority under section 2(a)(1)(D)(iv)(I)
of the Act is subject to certain limitations appearing later in that
provision.
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    Proposed regulation 41.32 is not meant to be an exhaustive list of
SFPCM regulatory requirements. It would simply establish several
additional reporting requirements which the Commission believes are
necessary to carry out its statutory mandate relative to SFPCMs. Among
others, the Commission emphasizes that SFPCMs must comply with the
requirements of part 16 of the Commission's regulations,\18\ and must
provide the Commission access to any books and records relating to
transactions conducted in reliance on its designation as a contract
market in security futures products.\19\ The Commission reiterates that
SFPCMs would remain subject to all other applicable requirements of the
Act and regulations thereunder.\20\
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    \18\ The Commission will consider its need for data under part
16 once it becomes more apparent how security futures products will
be listed by section 5 designated contract markets, 5a DTFs, and
section 5f SFPCMs. The Commission will endeavor to limit its
requests to information deemed necessary for routine market
surveillance.
    \19\ The Commission's authority to require access to books and
records by SFPCMs can be found in sections 4(a)(3), 4(b), 9g(b), and
4g(d) of the Act, in addition to Commission regulation 1.31, which
would be reserved under the Commission's proposed regulatory reform
rulemaking. See 66 FR 14262 (Mar. 9, 2001).
    \20\ See note 22.
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    Additionally, the Commission has authority under Section 4i of the
Act to collect information on the positions of large traders.\21\ This
information ordinarily is provided to the Commission by futures
commission merchants ("FCMs"), clearing members, and foreign brokers,
pursuant to part 17 of the Commission's regulations. Part 17 will apply
to the trading of security

[[Page 29520]]

futures products. However, the Commission is concerned that, in certain
instances, part 17 might fail to capture large trader information for
security futures products. For example, if an ATS operates a non-
intermediated marketplace and notice-designates as an SFPCM, it is not
clear who would be responsible for providing to the Commission any
large trader information arising out of security futures product
transactions conducted on that marketplace. The Commission contemplates
amending part 17 so that, in such circumstances, the ATS itself would
be required to provide large trader position information that otherwise
would be provided by an FCM. The Commission requests comment regarding
this approach. More generally, the Commission invites comment on
whether there are other potential circumstances under which large
trader position information might not be captured by part 17, in its
current form, particularly in light of this proposed rulemaking.
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    \21\ Section 4i of the Act prohibits any person to "have or
obtain a long or short position in any commodity or any future of
such commodity equal to or in excess of such amount as shall be
fixed from time to time by the Commission, unless such person files
or causes to be filed with the properly designated officer of the
Commission such reports regarding any [such] transactions or
positions * * * as the Commission may by rule or regulation require
* * *."
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D. Regulations 41.33(a)-(f), 41.34, and 140.99--Exemptions

    Section 5f(b)(4)(A) of the Act provides that the Commission "by
rule, regulation or order, may conditionally or unconditionally
exempt" any board of trade designated as an SFPCM from any provisions
of the Act or regulations thereunder, to the extent that the exemption
is necessary or appropriate in the public interest and is consistent
with the protection of investors. Section 5f(b)(4)(B) directs the
Commission to determine the procedures by which an exemptive order
under section 5f(b)(4)(A) shall be granted, and vests the Commission
with sole discretion to decline to entertain any application for such
an order.
    Accordingly, the Commission today proposes regulation 41.33. This
provision would require an SFPCM seeking an exemption to file an
application with the Commission containing various information,
including: the name and address of the SFPCM requesting relief, and a
contact person at the SFPCM; a certification that the SEC registration
of the SFPCM is not suspended pursuant to an order of the SEC; an
identification of the provision(s) from which the SFPCM is requesting
relief and, if applicable, whether the SFPCM is subject to similar SEC
provisions; the type of relief sought; and an explanation of the need
for relief, including the extent to which such relief is necessary or
appropriate in the public interest and consistent with the protection
of investors.
    The Commission would have 90 days to review the application, but
could stay the review period at any time if it determines that the
application is materially incomplete. Moreover, the Commission could,
in its sole discretion, decline to entertain an application for any
reason, without explanation, at any time during the review period.
These exemptive order procedures would become an enumerated exception
to the applicability of Commission Regulation 140.99, which governs
generally the form and manner of requests for exemptive letters.
    The Commission also proposes new regulation 41.34, which would list
the provisions of the Act from which SFPCMs would be exempted. At this
time, the Commission proposes that regulation 41.34(a) list each of the
statutory provisions enumerated in section 5f(b)(1) of the Act.\22\ In
addition, regulation 41.34(b) would include section 6(a) of the Act,
which addresses applications for designation as a contract market
generally and also the Commission's review of such applications. The
Commission believes that including section 6(a) in regulation 41.34
would eliminate any potential confusion about its applicability to
SFPCMs and would make clear that the general contract market
requirements of the Commission's proposed part 38 would not apply to
SFPCMs.\23\ Because SFPCMs are exempted from sections 5 and 5c of the
Act,\24\ and those provisions are the source for much of the authority
for part 38, the Commission believes that SFPCMs would not have been
subject to part 38. However, because proposed Sec. 38.1, addressing the
"scope" of part 38 generally, states that "[t]he provisions of this
part 38 shall apply to every board of trade or trading facility that
has been designated as a contract market in a commodity under section 6
of the Act," \25\ the Commission believes that specifically exempting
SFPCMs from section 6(a) of the Act would further clarify that part 38
is inapplicable to SFPCMs.\26\
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    \22\ Section 5f(b)(1) of the Act states--
    A national securities exchange, national securities association,
or alternative trading system that is designated as a contract
market pursuant to section 5f shall be exempt from the following
provisions of this Act and the rules thereunder:
    (A) Subsections (c), (e), and (g) of section 4c.
    (B) Section 4j.
    (C) Section 5.
    (D) Section 5c.
    (E) Section 6a.
    (F) Section 8(d).
    (G) Section 9(f).
    (H) Section 16.
    \23\ See note 11.
    \24\ See note 22.
    \25\ The Commission likely will change the phrase "section 6 of
the Act" in proposed Secs. 38.1 and 38.2 to "section 6(a) of the
Act" when part 38 becomes final. The reason for this distinction is
that other subsections in section 6 of the Act would continue to
apply to SFPCMs. Likewise, although the inapplicability to SFPCMs of
proposed part 40 is more certain, the Commission contemplates
changing the definition of "contract market" in proposed Sec. 40.1
so that it explicitly excludes SFPCMs.
    \26\ Notwithstanding the Commission's belief that its proposed
part 38 rulemaking would not apply to SFPCMs, the Commission
particularly seeks comment on whether any of the provisions of part
38 would facilitate the Commission's ability to carry out its
statutory mandate with respect to SFPCMs and, thus, whether any such
provisions should be incorporated into proposed regulation 41.32.
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    In addition to the proposals above, the Commission seeks comment
from boards of trade and other interested persons regarding whether
there are any other provisions of the Act or regulations thereunder
from which SFPCMs should be exempt by regulation. The Commission is
particularly interested in commenters' views regarding, among other
things, the interplay between the enumerated exemptions in sections
5f(b)(1) and (2) of the Act and the Commission's regulations
generally.\27\
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    \27\ Comments should indicate which provisions of the Act and
regulations thereunder would be captured by the exemption in section
5f(b)(2) of the Act. That provision reads:
    An alternative trading system that is a designated contract
market under this section shall be required to be a member of a
futures association registered under section 17 and shall be exempt
from any provision of this Act that would require such alternative
trading system to--
    (A) Set rules governing the conduct of subscribers other than
the conduct of such subscribers' trading on such alternative trading
system; or
    (B) Discipline subscribers other than by exclusion from trading.
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E. Regulation 41.33(g)--Delegation of Authority

    Finally, the Commission also proposes to delegate to the Director
of the Division of Trading and Markets and the Director of the Division
of Economic Analysis, jointly, with the concurrence of the Commission's
General Counsel, the authority to grant or deny applications for
exemptive orders under proposed regulation 41.33. This proposed
delegation of authority is intended to expedite the procedures
described in proposed regulation 41.33 and place responsibility for
them with those Commission staff members most directly involved in the
relevant matters. The Commission believes that this delegation would
maximize regulatory efficiency with respect to these applications.

[[Page 29521]]

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act ("RFA"),\28\ requires that
agencies, in proposing regulations, consider the impact of those
regulations on small businesses. The regulations discussed herein would
affect boards of trade seeking to be designated as a contract market in
security futures products under notice procedures promulgated pursuant
to section 5f(a) of the Act. The Commission has previously established
certain definitions of "small entities" to be used by the Commission
in evaluating the impact of its regulations on such entities in
accordance with the RFA.\29\ The Commission determined that contract
markets are not small entities for the purpose of the RFA.\30\
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    \28\ 5 U.S.C. 601 et seq. (1994 and Supp. II 1996).
    \29\ 47 CFR 18618 (April 30, 1982).
    \30\ 47 FR at 18619-20.
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    The Commission further notes that section 252 of the CFMA requires
the Commission to promulgate these regulations. Moreover, the
regulations proposed herein would not impose any new burdens upon
entities seeking to be designated as an SFPCM pursuant section 5f(a) of
the Act. Rather, these regulations would facilitate exemptive relief
from the more burdensome requirements in sections 5 and 5a of the Act,
and regulations thereunder, that otherwise would be applicable to
entities seeking to list security futures products for trading.
Therefore, the Commission believes that the adoption of these
regulations would reduce the burden of compliance by such entities.
    Accordingly, the Acting Chairman, on behalf of the Commission,
hereby certifies, pursuant to 5 U.S.C. 605(b), that the regulations
proposed herein would not have a significant economic impact on a
substantial number of small entities. The Commission nonetheless
requests comment on the impact these proposed regulations may have on
small entities.

B. Paperwork Reduction Act

    The regulations proposed herein would contain information
collection requirements. As required by the Paperwork Reduction Act of
1995 ("PRA"), the Commission has submitted a copy of this part to the
Office of Management and Budget ("OMB") for its review.\31\
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    \31\ 44 U.S.C. 3501 et seq. An agency may not sponsor, and a
person is not required to respond to, any information collection
unless it displays a currently valid OMB control number.
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Collection of Information
    Part 41, relating to security futures products, OMB Control Number
3038-AB82.
    The burden associated with proposed regulation 41.31 is estimated
to be 100 hours, which will result from designation as SFPCMs of
various boards of trade that are otherwise subject to SEC jurisdiction.
The estimated burden of the proposed new regulation was calculated as
follows:
    Estimated number of respondents: 20.
    Reports annually by each respondent: 1.
    Total annual responses: 20.
    Estimated average number of hours per response: 5.
    Estimated total number of hours of annual burden in fiscal year:
100.
    The burden associated with proposed regulation 41.32 is estimated
to be 600 hours, which will result from continuing obligations of
SFPCMs to file information with the Commission. The estimated burden of
the proposed new regulation was calculated as follows:
    Estimated number of respondents: 20.
    Reports annually by each respondent: 10.
    Total annual responses: 200.
    Estimated average number of hours per response: 3.
    Estimated total number of hours of annual burden in fiscal year:
600.
    The burden associated with proposed regulation 41.33 is estimated
to be 500 hours, which will result from applications for exemptions by
SFPCMs. The estimated burden of the proposed new regulation was
calculated as follows:
    Estimated number of respondents: 20.
    Reports annually by each respondent: 1.
    Total annual responses: 20.
    Estimated average number of hours per response: 25.
    Estimated total number of hours of annual burden in fiscal year:
500.
    Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235 New Executive
Office Building, Washington, DC 20503, Attention: Desk Officer for the
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed
collection of information in:
    � Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
    � Evaluating the accuracy of the Commission's estimate of
the burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
    � Enhancing the quality, usefulness, and clarity of the
information to be collected; and
    � Minimizing the burden of collection of information on
those who are required to respond, including through the use of
appropriate automated, electronic, mechanical, or other technological
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
    OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register. A
comment to OMB is most assured of having its full effect if OMB
receives it within 30 days of publication. This does not affect the
deadline for the public to comment to the Commission on the proposed
regulations.
    Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street, NW.,
Washington, DC 20581, (202) 418-5160.

C. Cost-Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA,
requires the Commission, before promulgating a new regulation under the
Act, to consider the costs and benefits of the Commission's action. The
Commission recently applied the cost-benefit provisions of section 15
for the first time with respect to a final rulemaking,\32\ and
understands that section 15, as amended, does not require the
Commission to quantify the costs and benefits of a new regulation or
determine whether the benefits of the regulation outweigh its costs.
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    \32\ 66 FR 20740 (Apr. 25, 2001).
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    The amended section 15 further specifies that costs and benefits
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 futures
markets; (3) price discovery; \33\ (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

[[Page 29522]]

costs, a particular regulation was necessary or appropriate to protect
the public interest or to effectuate any of the provisions or to
accomplish any of the purposes of the Act.
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    \33\ Price discovery is not a concern relevant to this
rulemaking.
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    The main areas of concern relevant to this proposal are the first
two set forth in the Act, "protection of market participants and the
public" and "efficiency, competitiveness and financial integrity of
the futures markets." The Commission notes that the CFMA specifically
mandates that certain boards of trade be notice-designated by the
Commission as a contract market if they seek to list or trade security
futures products only, and that procedures be established by the
Commission for such entities to apply for exemptions from the Act or
regulations thereunder. Further, the Commission believes that these
additional registrants may promote the efficiency and competitiveness
of those futures markets on which security future products may be
traded and, in turn, may serve to promote the financial integrity of
those markets. The Commission has endeavored to impose minimal costs--
i.e., only necessary disclosure and recordkeeping--on any of the
entities involved, so that the benefits of the notice-designation and
exemptive processes intended by Congress can be fully realized. The
Commission further notes that submitting an application for exemptive
relief is not required of SFPCMs, but rather elected on a voluntary
basis.

List of Subjects

17 CFR Part 41

    Contract markets, reporting and recordkeeping requirements,
security futures products.

17 CFR Part 140

    Authority delegations.

    For the reasons discussed in the preamble, the Commission hereby
proposes to amend Chapter I of Title 17 of the Code of Federal
Regulations as follows:

PART 41--SECURITY FUTURES PRODUCTS

    1. The authority citation for Part 41 would be revised to read as
follows:

    Authority: Pub. L. 106-554, 114 Stat. 2763, Sections 251 and
252.

    2. Section 41.1 would be added as follows:


Sec. 41.1  Definitions.

    For purposes of this part:
    (a) Alternative trading system shall have the meaning set forth in
section 1a(1) of the Act.
    (b) Board of Trade shall have the meaning set forth in section
1a(2) of the Act.
    (c) National securities association means a board of trade
registered with the Securities and Exchange Commission pursuant to
section 15A(a) of the Securities Exchange Act of 1934.
    (d) National securities exchange means a board of trade registered
with the Securities and Exchange Commission pursuant to section 6(a) of
the Securities Exchange Act of 1934.
    (e) Rule shall have the meaning set forth in Commission regulation
1.41(a)(1).
    (f) Security futures product shall have the meaning set forth in
section 1a(32) of the Act.
    3. Section 41.31 would be added as follows:


Sec. 41.31  Designated contract markets in security futures products--
notice-designation requirements.

    (a) Any board of trade that is a national securities exchange, a
national securities association, or an alternative trading system, and
that seeks to operate as a designated contract market in security
futures products under section 5f of the Act, shall so notify the
Commission. Such notification shall be filed with the Secretary of the
Commission at its Washington, DC, headquarters, in either electronic or
hard copy form, shall be labeled as "Notice of Designation as a
Contract Market in Security Futures Products," and shall include:
    (1) The name and address of the board of trade;
    (2) The name and telephone number of a contact person designated to
receive communications from the Commission on behalf of the board of
trade;
    (3) A description of the security futures products that the board
of trade intends to make available for trading, including an
identification of all facilities that would clear transactions in
security futures products on behalf of the board of trade;
    (4) A copy of the current rules of the board of trade; and
    (5) a certification that the board of trade--
    (i) will not list or trade any contracts of sale for future
delivery, except for security futures products;
    (ii) is registered with the Securities and Exchange Commission as a
national securities exchange, national securities association, or
alternative trading system, and such registration is not suspended
pursuant to an order by the Securities and Exchange Commission;
    (iii) will meet the criteria specified in subclauses (I) through
(XI) of section 2(a)(1)(D)(i) of the Act, except as otherwise provided
in section 2(a)(1)(D)(vi) of the Act, for each specific security
futures product that the board of trade intends to make available for
trading;
    (iv) will comply with the conditions for designation under this
section and section 5f of the Act, including a specific representation
by any alternative trading system that it is a member of a futures
association registered under section 17 of the Act; and
    (v) will comply with the continuing obligations of regulation
41.32.
    (b) A board of trade which files notice with the Commission under
this section shall be deemed a designated contract market in security
futures products upon the Commission's receipt of such notice.
Accordingly, the Commission shall send prompt acknowledgment of receipt
to the filer.
    (c) Designation as a contract market in security futures products
pursuant to this section shall be deemed suspended if the board of
trade:
    (1) Lists or trades any contracts of sale for future delivery,
except for security futures products; or
    (2) Has its registration as a national securities exchange,
national securities association, or alternative trading system
suspended pursuant to an order by the Securities and Exchange
Commission.
    4. Section 41.32 would be added as follows:


Sec. 41.32  Designated contract markets in security futures products--
continuing obligations.

    (a) A board of trade designated as a contract market in security
futures products pursuant to Commission regulation 41.31 shall:
    (1) Notify the Commission of any change in its regulatory status
with the Securities and Exchange Commission or with a futures
association registered under section 17 of the Act;
    (2) Comply with the filing requirements of section 2(a)(1)(D)(vii)
of the Act each time the board of trade lists a security futures
product for trading;
    (3) Consistent with any requirements established by the Commission,
provide the Commission with any new rules or rule amendments that
relate to the trading of security futures products, including both
operational rules and the terms and conditions of products listed for
trading on the facility, promptly after final implementation of such
rules or rule amendments; and
    (4) Upon request, file promptly with the Commission--
    (i) such information related to its business as a designated
contract market

[[Page 29523]]

in security futures products as the Commission may request; and
    (ii) a written demonstration, containing such supporting data and
other information and documents as the Commission may specify, that the
board of trade is in compliance with one or more applicable provisions
of the Act or regulations thereunder as specified in the request.
    (b) Except as exempted under section 5f(b) of the Act or under
Commission regulations 41.33 and 41.34, any board of trade designated
as a contract market in security futures products pursuant to
Commission regulation 41.31 shall be subject to all applicable
requirements of the Act and regulations thereunder. Failure to comply
shall subject the board of trade to Commission action under, among
other provisions, sections 5e and 6(b) of the Act.
    5. Section 41.33 would be added as follows:


Sec. 41.33  Designated contract markets in security futures products--
applications for exemptive orders.

    (a) Any board of trade designated as a contract market in security
futures products pursuant to Commission regulation 41.31 may apply to
the Commission for an exemption from any provision of the Act or
regulations thereunder. Except as provided in sections 5f(b)(1) and
5f(b)(2) of the Act, the Commission shall have sole discretion to
exempt a board of trade, conditionally or unconditionally, from any
provision of the Act or regulations thereunder pursuant to this
section. The Commission may issue such an exemptive order in response
to an application only to the extent it finds, after review, that the
issuance of an exemptive order is necessary or appropriate in the
public interest and is consistent with the protection of investors.
    (b) Each application for exemptive relief must comply with the
requirements of this section. The Commission may, in its sole
discretion, decline to entertain any application for an exemptive order
under this section without explanation; provided, however, that the
Commission shall notify the board of trade of such a decision in
writing.
    (c) Application requirements.
    (1) Each application for an exemptive order made pursuant to this
section must include:
    (i) The name and address of the board of trade requesting relief,
and the name and telephone number of a person whom Commission staff may
contact to obtain additional information regarding the request;
    (ii) A certification that the registration of the board of trade is
not suspended pursuant to an order of the Securities and Exchange
Commission;
    (iii) The provision(s) of the Act or regulations thereunder from
which the board of trade seeks relief and, if applicable, whether the
board of trade is otherwise subject to similar provisions as a result
of Securities and Exchange Commission jurisdiction; and
    (iv) The type of relief requested and the order sought; an
explanation of the need for relief, including all material facts and
circumstances giving rise to the request; and the extent to which such
relief is necessary or appropriate in the public interest and
consistent with the protection of investors.
    (2) Each application must be filed with the Secretary of the
Commission at its Washington, DC, headquarters, in either electronic or
hard copy form, signed by an authorized representative of the board of
trade, and labeled "Application for an Exemptive Order pursuant to
Commission regulation 41.33."
    (d) Review period: (1) The Commission shall have 90 days upon
receipt of an application for an exemptive order in which to make a
determination as to whether such relief should be granted or denied.
    (2) The Commission may request additional information from the
applicant at any time prior to the end of the review period.
    (3) The Commission may stay the review period if it determines that
an application is materially incomplete; provided, however, that this
paragraph does not limit the Commission's authority, under paragraph
(b) of this section, to decline to entertain an application.
    (e) Upon conclusion of the review period, the Commission shall
issue an order granting or denying relief, or granting relief subject
to conditions; provided, however, that the Commission's obligations
under this paragraph shall not limit its authority, under paragraph (b)
of this section, to decline to entertain an application. The Commission
shall notify the board of trade in writing of its decision to grant or
deny relief under this paragraph.
    (f) An application for an exemptive order may be withdrawn by the
applicant at any time, without explanation, by filing with the
Secretary of the Commission a written request for withdrawal, signed by
an authorized representative of the board of trade.
    (g) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Trading and Markets and the Director of
the Division of Economic Analysis, jointly, with the concurrence of the
General Counsel, authority to make determinations on applications for
exemptive orders pursuant to this section; provided, however, that:
    (1) the Director of the Division of Trading and Markets or the
Director of the Division of Economic Analysis may submit to the
Commission for its consideration any matter which has been delegated
pursuant to paragraph (g) of this section; and
    (2) nothing in this section shall be deemed to prohibit the
Commission, at its election, from exercising the authority delegated to
the Director of the Division of Trading and Markets and the Director of
the Division of Economic Analysis under paragraph (g) of this section.
    6. Section 41.34 would be added as follows:


Sec. 41.34  Designated contract markets in security futures products--
exempt provisions.

    Any board of trade notice-designated as a contract market in
security futures products pursuant to Commission regulation 41.31 also
shall be exempt from:
    (a) the following provisions of the Act, pursuant to section
5f(b)(1) of the Act:
    (1) section 4c(c);
    (2) section 4c(e);
    (3) section 4c(g);
    (4) section 4j;
    (5) section 5;
    (6) section 5c;
    (7) section 6a;
    (8) section 8(d);
    (9) section 9(f);
    (10) section 16; and
    (b) section 6(a) of the Act, pursuant to section 5f(b)(4) of the
Act.

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    7. The authority citation for Part 140 would continue to read as
follows:

    Authority: 7 U.S.C. 4a and 12a.

    8. Section 140.99 is amended by adding new paragraph (i)(3) as
follows:


Sec. 140.99  Requests for exemptive, no-action and interpretive
letters.

* * * * *
    (i) * * *
    (3) Requests for exemption pursuant to Commission regulation 41.33.

    Issued in Washington, DC on May 22, 2001 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-13316 Filed 5-30-01; 8:45 am]
BILLING CODE 6351-01-P
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