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[Federal Register: November 22, 1996 (Volume 61, Number 227)]
[Proposed Rules]
[Page 59386-59393]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no96-34]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 5


Revised Procedures for Commission Review and Approval of
Applications for Contract Market Designation and of Exchange Rules
Relating to Contract Terms and Conditions

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to amend its procedures relating to its review and approval
of applications for contract market designation and proposed exchange
rules relating to contract terms and conditions. These fast-track
review procedures are intended further to streamline Commission review
of applications for contract market designation and proposed exchange
rule amendments of contract terms and conditions.
    Specifically, the Commission is proposing a new rule 5.1, providing
that exchanges which have already been designated as a contract market
may request fast-track review for additional designation applications
as an alternative to the current review procedures. Under proposed rule
5.1, applications for designation of certain cash-settled contracts
will be deemed to be approved ten days after receipt, unless the
exchange is notified otherwise. All other fast-track designation
applications will be deemed to be approved, unless the exchange is
notified otherwise, forty-five days after receipt.
    The Commission also is proposing to amend rule 1.41 to provide an
alternative fast-track review of proposed amendments to contract terms
or conditions. Similar to the fast-track designation procedures, many
categories of exchange rules relating to contract terms already are
deemed to be approved ten days after receipt. The Commission is
proposing that all other proposed exchange rules relating to contract
terms be deemed to be approved forty-five days after receipt by the
Commission, unless the exchange is notified otherwise. Notification by
the Commission that a contract application or proposed exchange rule
relating to a contract term or condition may not be made effective will
extend the applicable period for review for an additional thirty days.

DATE: Comments must be received by December 23, 1996.

ADDRESS: Comments should be mailed to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,
D.C. 20581, attention: Office of the Secretariat; transmitted by
facsimile at (202) 418-5521; or transmitted electronically at
[[email protected]]. Reference should be made to ``Fast-track
Designation and Rule Approval Procedures.''

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581,
(202) 418-5260, or electronically, [[email protected]].

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Requirements for Commission Designation of
Proposed Contract Markets

    The requirement that boards of trade meet specified conditions in
order to be designated as contract markets has been a fundamental tool
of federal regulation of commodity futures exchanges since the Futures
Trading Act of 1921, Public Law No. 67-66, 42 Stat. 187 (1921).<SUP>1
Currently, the statutory requirements for designation are found in
Sections 5 and 5a of the Commodity Exchange Act, 7 U.S.C. Sec. 1 et
seq. (``Act''), and additionally, for indexes of equities, in Section
2(a)(1)(B) of the Act. In the Commission's experience, problems of
possible price manipulation, cornering or other market distortions are
most readily avoided when the terms of a futures contract are properly
designed, reflecting closely the underlying cash market. Thus, one of
the most effective market surveillance tools has proven to be
prophylactic, close examination of the terms of a contract before it
begins to trade.
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    \1\ Designation as a contract market under the 1921 Act was
contingent upon a board of trade's providing for the prevention of
manipulative activity and the prevention of dissemination of false
information, upon providing for certain types of recordkeeping, for
admission into exchange membership of cooperative producer
associations, and upon location of the contract market at a terminal
cash market. See, Secs. 5(a), (b), (c), (d) and (e) of the Future
Trading Act of 1921. Although the constitutionality of this Act was
successfully challenged as an improper use of the Congressional
taxing power in Hill v. Wallace, 259 U.S. 44 (1922), all subsequent
legislation regulating the futures industry was patterned after this
statutory scheme.
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    In the absence of properly designed contract terms, damage to
hedgers or industry pricing may result before corrections to the
contract can be made. The impact of a market manipulation or other
disruption in a newly introduced futures contract potentially could be
far wider than the futures market itself, adversely affecting the
underlying cash market, as well.<SUP>2 Correcting this type of problem
after trading has already begun may require extraordinary measures such
as emergency action. At a minimum, such an occurrence would probably
result in diminished credibility for futures trading in that contract,
and possibly for futures trading, generally.
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    \2\ Section 3 of the Act recognizes the national interest in
properly functioning futures markets, noting that
    The prices involved in such transactions are generally quoted
and disseminated throughout the United States and in foreign
countries as a basis for determining the prices to the producer and
the consumer of commodities and the products and byproducts thereof
and to facilitate the movements thereof in interstate commerce.
[P]rices of commodities on such boards of trade are susceptible to
excessive speculation and can be manipulated, controlled, cornered
or squeezed, to the detriment of the producer or the consumer * * *
rendering regulation imperative for the protection of such commerce
and the national public interest therein.
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    The designation process yields important benefits by ensuring a
mechanism for public input relating to contract design before trading
commences. Thus, in addition to independently evaluating the proposal
through its own research, Commission staff identifies and interviews
knowledgeable trade sources regarding a proposed contract's terms.
Moreover, a notice of the public availability of the terms of proposed
contracts is published in the Federal Register along with a request for
public comment. The proposed contract is also sent by the Commission to
its sister agencies having a regulatory interest in the underlying
commodity for analysis and possible comment. Not infrequently, this
process has identified deficiencies in proposed contracts, many of them
serious, which have been corrected before trading has begun. Exchanges
have also determined with some frequency to modify proposed contracts
in response to suggestions by Commission staff, other government
agencies or the public.
    The goals of the designation process are reflected in the Act's
requirements that, to be designated, contract markets provide for
delivery periods which will prevent market congestion (Section 5a(a)(4)
of the Act); permit delivery on

[[Page 59387]]

the contract of such qualities, at such points and at such
differentials as will minimize market disruptions (Sections 5a(a)(10)
and 5(1) of the Act); provide for the prevention of dissemination of
false information (Section 5(3) of the Act); provide for the prevention
of price manipulation (Section 5(4) of the Act); and in general, that
trading in a proposed contract not be contrary to the public interest
(Section 5(7) of the Act).<SUP>3 Contract markets must meet these
requirements both initially and on a continuing basis.<SUP>4
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    \3\ In addition to these contract-specific requirements, boards
of trade, to be designated, must also meet several general
conditions. These, for example, require the board of trade to:
provide for various forms of recordkeeping (Section 5(2) and
5a(a)(2) of the Act); provide for compliance with Commission orders
(Section 5(6) of the Act); submit its rules to the Commission
(Sections 5a(a)(1) and 5a(a)(12)(A) of the Act); and enforce
exchange rules (Section 5a(a)(8) of the Act).
    \4\ Section 6 of the Act provides, in part, that:
    [a]ny board of trade desiring to be designated a `contract
market' shall make application to the Commission for such
designation and accompany the same with a showing that it complies
with the above conditions, and with a sufficient assurance that it
will continue to comply with the above requirements.
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    To provide guidance to the exchanges in meeting the designation
requirements of the statute, in 1975 the newly formed CFTC issued its
Guideline No. 1, now codified at 17 CFR Part 5, Appendix A. Guideline
No. 1 sets forth the information which must be submitted by an exchange
to demonstrate that a proposed contract meets the statutory
requirements for designation. It requires that the application for
designation include information demonstrating the conformity of
contract terms with commercial practices, the adequacy of deliverable
supplies or, if applicable, the appropriateness of the cash settlement
procedure, and other information as requested.
    The Commission, based upon its administrative experience, has
periodically revised and updated its procedures to provide exchanges
with more specific criteria for meeting the contract market designation
requirements; to reflect new developments in futures trading--such as
the introduction of financial futures, futures on aggregates or indices
of securities and cash settlement as a substitute for physical
delivery; and, where appropriate, to lessen the burden on applicants by
reducing the information required and streamlining the form of
application. In this regard, Guideline No. 1 was last amended in
January 1992, substantially reducing and streamlining its requirements.
Indeed, much of the application for options contracts has been reduced
to the form of a checklist. Moreover, under the Commission's internal
procedures established in 1992, notification of the public availability
of proposed contract terms normally appears in the Federal Register
within one week of receipt of an application. In addition, under these
procedures, substantive issues are identified and communicated
informally to the exchange very shortly after receipt, permitting their
prompt resolution.
    With the changes noted above, the total review time for new
contracts has declined significantly. The review and approval of new
contracts generally is completed shortly after the Federal Register
public comment period ends or as soon as the exchange makes the
modifications necessary to address a proposed contract's deficiencies.
Over the last five years, the average total review time has been
reduced to about three months. Strikingly, this reduction in processing
time coincides with the submission of record numbers of new contract
proposals.<SUP>5
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    \5\ About 230 new contracts have been approved in the four years
since Guideline No. 1 was last amended in 1992. These included
entirely new products, such as contracts on electricity, air
pollution allowances, insurance, cross-currency rates, fertilizers,
shrimp, dairy products, and various broad-based or commodity-
specific indexes of emerging markets.
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II. The Proposed Rules

A. Fast-Track Contract Market Designation--Cash-Settled Contracts

    As part of its continuing effort to impose the least costly means
necessary to achieve the regulatory objectives of the contract
designation review process, the Commission previously established a
very abbreviated, ten-day review procedure for the designation of
contracts that are eligible to be listed for trading under its Part 36
exemptive rules. See, Commission rule 36.4, 17 CFR 36.4 (1996). Such a
highly abbreviated review process was appropriate for those contracts,
the Commission reasoned, because Part 36 contracts are required to be
cash-settled and may not be based on the agricultural commodities
enumerated in Section 1a(3) of the Act, thus avoiding issues related to
delivery terms. ``Notice of Proposed Rulemaking,'' 59 FR 54139, 54148
(Oct. 28, 1994).
    Despite determining to provide this highly abbreviated procedure
initially only in the context of the pilot program for Part 36
transactions, the Commission nevertheless indicated that, based upon
its administrative experience and consistent with the views expressed
by several commenters, such procedures might be appropriately expanded
to some additional categories of applications for designation.<SUP>6
Thus, in promulgating these rules, the Commission noted that it would
``evaluate whether * * * the ten-day notification provision should be
extended to certain non-section 4(c) contract market transactions when
it evaluates trading experience under the pilot program.'' (60 FR at
51338.)
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    \6\ In this regard, several commenters suggested that the ten-
day review process ``apply to all exchange-traded contracts or to
certain categories of such contracts, such as financial futures and
options.'' 60 FR at 51338.
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    Although it may have preferred to test these procedures first in
the context of Part 36 markets that are by rule limited to the
relatively more sophisticated trader, there has been no trading
experience in connection with the pilot program for Part 36
transactions.<SUP>7 Moreover, the degree of pre-approval scrutiny
appropriate for particular types of proposed contracts is not
necessarily based upon restrictions on the nature of the traders who
may trade in the market. Accordingly, in light of the increasing
expertise of both the exchange and Commission staffs over the years,
the Commission has determined to propose a ten-day fast-track review of
applications for designation of certain cash-settled contracts for non-
Part 36 markets.
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    \7\ The three-year pilot program to test the operation of the
Part 36 rules begins the date when the first contract trades
pursuant to them. No exchange has yet listed for trading such
contracts.
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    This highly-abbreviated, ten-day fast-track procedure is intended
only to speed the review and to provide for automatic approval of new
contract applications; it does not modify the regulatory protections
currently provided under the Act. Accordingly, under the fast-track
review procedures, only applications for contract market designation
which are complete upon submission; which are not amended, except upon
request of the Commission; which do not raise novel or complex issues;
and which do not appear, on their face, to contravene a statutory or
regulatory requirement, would be automatically deemed to be approved
ten days after receipt. The Commission can extend fast-track review for
one thirty-day period. This will permit fast-track review to remain
available even for those applications which do raise novel or complex
issues.
    As noted above, because cash-settled contracts avoid issues
regarding delivery terms, the ten-day fast-track review is proposed to
be available only for cash-settled contracts.<SUP>8 Moreover,

[[Page 59388]]

applications for designation for those agricultural commodities which
are enumerated in section 1a(3) of the Act are not eligible for ten-day
fast-track treatment, even if the proposed contracts are cash-settled.
In the Commission's administrative experience, cash-price series of
agricultural commodities to be used for the purpose of cash-settlement
often have raised issues requiring careful analysis.
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    \8\ Although they may be settled by physical delivery, futures
contracts for foreign currencies generally do not raise the types of
issues common to physical delivery markets. Accordingly, the
Commission determined to include contracts for foreign currency
within the Part 36 exemption along with cash-settled contracts.
Commission rule 36.2(a)(1), 17 CFR 36.2(a)(1). Consistent with that
determination, the Commission is also including foreign currency
contracts within the ten-day fast-track review procedures, providing
there is no legal impediment to delivery of the currency and there
exists a liquid cash market in the currency.
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    In addition, fast-track review would not be available for
applications for contract market designation for those commodities
which are subject to the procedural requirements of section 2(a)(1)(B)
of the Act--securities, including any group or index of securities. The
procedures specified under that section of the Act provide that the
Securities and Exchange Commission make a determination regarding those
proposed contracts subject to its provisions.
    A separate provision of the Act, section 2(a)(8)(B)(ii), 7 U.S.C.
4a(g), provides forty-five days for the Department of the Treasury and
the Board of Governors of the Federal Reserve System to comment on any
application by a board of trade for designation as a contract market
involving transactions for the future delivery of any security issued
or guaranteed by the United States or any agency thereof. It does not,
however, require that the two agencies make a determination regarding
such contracts. A ten-day fast-track review period, even if extended
for an additional thirty days, is inconsistent with the time generally
permitted those agencies for comment, and unless such contracts were
exempted therefrom, they would likely have to be excluded from this
provision of the proposed rule.<SUP>9
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    \9\ The forty-five day comment period of section 2(a)(8)(B)(ii)
may also conflict with the review procedures of a second fast-track
procedure discussed below. That procedure provides for a forty-five
day fast-track review. Although the other regulators generally have
filed comments, if any, in fewer than forty-five days, the full
period for comment would be inconsistent with a forty-five day fast-
track review if the Commission were unable to provide notice of an
application on the very same day of its receipt.
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    The agencies did not comment adversely on inclusion of the section
2(a)(8)(B)(ii) commodities under the similar, ten-day automatic listing
procedures of the Commission's Part 36 rules. Accordingly, the
Commission finds that it is in the public interest, and is proposing,
that these commodities also be eligible for the comparable fast-track
procedures proposed herein. The Commission, therefore, is proposing to
exempt these transactions under section 4(c) of the Act from the
statutory time permitted the agencies for filing comments provided in
section 2(a)(8)(B)(ii) of the Act. Of course, the Commission will
continue to provide notice to the other regulators of applications and
would be responsive to their requests for additional time to review
complex or novel issues raised by an application. Accordingly, the
Commission seeks comment on whether the section 2(a)(8)(B)(ii)
commodities should be exempted from the forty-five day time for comment
and thus be eligible for fast-track treatment, and particularly, for
ten-day fast-track review.<SUP>10
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    \10\ Because no regulatory requirement other than the time
period for comment by other agencies is being waived, for purposes
of this exemption ``appropriate persons'' eligible to enter into the
exempted instruments include all those who may otherwise trade
designated futures or option contracts. The Commission believes that
this exercise of its exemptive authority will not have a material
adverse effect on the ability of the Commission, the other
regulators, or any contract market to discharge its, or their,
duties under the Act.
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B. Fast-Track Contract Market Designation--Other Contracts

    Use of a ten-day review process is not appropriate for every type
of contract. Because many cash agricultural markets are widely
dispersed, cash price series for certain of them may be less reliable,
available or timely, than for other types of commodities. Moreover, in
contracts requiring physical delivery, convergence of the futures and
cash market prices is dependent upon properly aligned delivery terms.
Accordingly, for these types of contracts, careful analysis and review
of contract terms in advance of trading will likely remain an important
market surveillance tool. This is particularly true for those
commodities which are characterized by seasonal variation in their
production or other factors which, from time to time, may impinge on
deliverable supplies.
    Although a ten-day review period for such contracts might be
inconsistent with accomplishing the regulatory objectives embodied in
the Act's designation requirements, in light of the increasing
expertise and experience of both the Commission and exchange staffs,
the Commission believes that, even for these contracts, substantial
reductions in the time currently needed to review such applications for
designation can be made. The Commission believes that these savings can
be achieved by further streamlining its procedures. This would also
preserve the opportunity for public participation in the designation of
those contracts. After a thorough review of its present procedures, the
Commission believes that for these contracts the current review period
can be cut in half.
    The Commission, therefore, is proposing an additional fast-track
procedure available for applications for designation of contracts for
physical delivery or for cash-settlement on the agricultural
commodities enumerated in the Act.<SUP>11 Under this additional fast-
track review procedure, applications for contract market designation
would be deemed to be approved by the Commission forty-five days after
receipt, unless the exchange is notified otherwise. As under the ten-
day process, the forty-five day review process would be available only
for applications for designation that are complete when filed and not
subsequently amended, except as requested by the Commission.
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    \11\ However, designation applications for commodities which are
subject to the procedural requirements of Section 2(a)(1)(B) of the
Act would not be eligible for this fast-track review, either.
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    As part of the forty-five day fast-track procedures, the Commission
will continue its current practice of publishing in the Federal
Register, within a few days of an application's receipt, notice of the
public availability of the proposed contract's terms and a request for
public comment thereon. The Commission will also continue its practice
of interviewing knowledgeable sources regarding cash market practices
and whether the proposed contract's terms are consistent with those
practices.
    However, in order to meet the very compressed time for review, the
Commission is proposing to reduce the public comment period for fast-
track applications from thirty days, as currently provided under
Appendix D to Part 5, to fifteen days. The Commission is aware that
some of those entities which have commented in the past on contract
applications, particularly membership organizations, may have
difficulty in meeting this deadline. However, the proposed reduction in
the comment period is necessary to provide the Commission with an
opportunity to assess comments which have been filed before the end of
the review period and is proportional to

[[Page 59389]]

the overall reduction in time for Commission review of an application.
Moreover, the Commission's recent initiatives to accept public comment
for filing through facsimile and electronic mail transmissions should
assist commenters in complying with this condensed comment period.
    Both the ten-day and forty-five day fast-track periods can be
extended by the Commission for one thirty-day period. In those
instances where issues raised by the application are complex or novel,
where there is an inadequate basis in the application upon which to
review the contract terms, or where a contract term raises the issue of
whether it violates a statutory or regulatory requirement, the
Commission, by notifying the exchange, can extend the review period and
halt automatic approval of the application for thirty days. The
notification must specify briefly the reason for the extension,
including the contract term or terms that are in issue.
    If at any time during the review period, the Commission believes
that a contract term raises serious issues, such that it may violate a
statutory or regulatory requirement, it will so notify the exchange.
This notification will halt the automatic approval of the designation,
terminate the fast-track procedures and convert the application from
fast-track to the current review and approval procedures. Because the
fast-track procedures are intended to be used only for those
applications for designation which do not raise complex or novel
issues, contracts that include such issues which have not been
susceptible to ready resolution during the fast-track review period are
not appropriate candidates for this automatic approval process.
    The exchange, if it disagrees with the Commission's determination
to terminate fast-track consideration, may request within ten days of
the termination notification that the Commission either approve the
application or initiate disapproval procedures, rather than continuing
with its review and approval of the application under its current
procedures. Historically, the Commission has never disapproved an
application for contract market designation. Rather, it has offered
exchanges an opportunity to cure defects in applications, including
instances where a contract term as initially proposed was in conflict
with statutory or regulatory requirements.<SUP>12
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    \12\ Similarly, when public comments identify deficiencies or
raise concerns regarding contract terms, exchanges at times have
responded by modifying the proposed contract, sometimes
substantially.
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    Proposed rule 5.1 builds on this long-time administrative practice,
applying it in the context of fast-track designation review, as well.
Where a proposed contract originally filed for fast-track review
appears to violate a statutory or regulatory requirement, the
Commission presumes that the exchange would prefer to convert the
application to one for review under current procedures, thus having an
opportunity to cure the defect, rather than to face disapproval.
However, when exchanges prefer that the Commission render a decision
whether to disapprove the application as filed, the Commission will
institute a formal disapproval proceeding upon notification that the
exchange views its application as complete and final as submitted.
    Moreover, at any time during the fast-track review period, the
exchange may instruct the Commission to consider the application under
the current, rather than the fast-track, review procedures. Current
procedures for review and approval of designation applications have
developed into an iterative process whereby the dialogue between
Commission and exchange staff may result in modifications being made by
the exchange to the proposed contract's terms after submission of the
application. In contrast, the fast-track procedure is intended to be an
automatic process and is based on the supposition that designation
applications submitted for fast-track review are complete and final, as
filed. Accordingly, because amending the terms of a pending contract
submitted for fast-track review after its initial submission--other
than correcting typographical mistakes, renumbering, or such other
nonsubstantive revisions--make an application ineligible for further
fast-track consideration, exchanges are free at any time to instruct
that the application be converted to current review procedures. This
ensures exchanges the freedom and flexibility to amend contracts after
submission by voluntarily converting the review procedure, rather than
mandating that they continue with the application in a form that they
no longer desire.
    By providing an alternative mechanism for reviewing a designation
application, the Commission does not intend to affect the standard of
review for such contracts. Under Section 5 of the Act, the Commission
is ``directed to designate any board of trade as a `contract market'
when * * *. [it] complies with * * * the [specified] conditions.'' The
Commission has been, and will continue to be, mindful that the
requirements for designation are performance, rather than design,
standards. In this regard, a number of different contract terms or
approaches may meet a particular statutory or regulatory designation
requirement. Choosing among these acceptable alternatives is a business
decision of the exchange. Commission staff will not use either the
current designation procedures or the fast-track procedure as a means
of expressing any view regarding exchange business decisions.
Accordingly, both the current procedures and the fast-track review
procedures ultimately impose the same standard of review--that is,
should the contract be disapproved because it violates a statutory or
regulatory condition of designation.

C. Fast-Track Review of Amendments to Contract Terms and Conditions

    In general, exchange rule amendments currently are required by
section 5a(a)(12)(A) of the Act to be submitted to the Commission for
review and may be made effective after ten-days.\13\ The primary
exception to this automatic ten-day provision is contract terms and
conditions (other than rules setting margin) which are required to be
submitted for Commission review and approval. See, section 5a(a)(12)(A)
of the Act.\14\ If the Commission does not act to approve or disapprove
such a rule within 180 days of submission, the exchange may make the
rule effective.
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    \13\ See also, section 5a(a)(1) of the Act (requiring notice to
the Commission of all contract market bylaws, rules, regulations and
resolutions).
    \14\ The Commission routinely reviews for approval certain other
categories of exchange rules that must be approved under other
sections of the Act or Commission regulations, such as exchange
rules relating to exchange-of-futures-for-physical transactions.
See, e.g., Section 4c(a) of the Act and Commission rule 1.38(a).
Additionally, an exchange may request Commission approval of a rule
amendment which, absent this request, would be subject to the
automatic ten-day review process.
    It should also be noted that there is an entirely separate
procedure for exchange rules that are temporary in nature and which
have been adopted in response to emergency conditions. None of the
existing or proposed procedures discussed above apply to exchange
emergency rules.
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    Contract terms are treated differently from other exchange rules so
that changes to contract specifications, which can modify a contract
significantly, can be given the same type of review they would have
received if submitted as part of an application for a new designation.
Indeed, several exchanges have used the rule amendment process to
transform a contract completely, for example, substituting cash
settlement for physical

[[Page 59390]]

delivery. Such a profound change is virtually identical to seeking a
new designation and raises the same regulatory concerns.
    However, not all proposed exchange amendments to contract terms and
conditions are subject to a single procedure for review. Based upon its
regulatory experience, the Commission, by rule, has created various
categories of exchange amendments to contract terms that are subject to
automatic approval for both futures and option contracts. See,
Commission rule 1.41(h)-(t). For example, among other categories of
amendments to contract terms, changes in the composition of a stock or
other index are approved upon adoption by the exchange (rules 1.41 (h)
and (i)), as are changes to survey lists (rule 1.41(j)) and changes to
trading hours, if within a specified window (rule 1.41(k)). Other
categories of rule amendments, such as changes to trading months (rule
1.41(l)) and changes to contract terms established by independent third
parties (rule 1.41(m)) are deemed to be approved ten days after receipt
by the Commission. Indeed, rule 1.41(n) enables the Commission to
establish such automatic approval procedures for any rule for which
such treatment is appropriate.
    The exchange rule amendments eligible for such automatic approval
procedures typically involve changes to exchange rules which are
recurring, predictable, clearly defined and subject to conditions which
can be specified in advance. As new commodities or types of contracts
are listed for trading, the Commission, based upon its experience, has
added new categories of automatic rule approvals, as appropriate. Thus,
in addition to the vast majority of exchange rule submissions that are
not contract terms and therefore are subject only to a ten-day review,
many if not a majority of amendments to contract terms and conditions
are already eligible for automatic approval.
    In light of the Commission's determination to propose two fast-
track periods to review applications for contract market designation,
the Commission believes that two similar fast-track periods for
amendments to contract terms should be provided as well. Accordingly,
the Commission is proposing to add to Commission rule 1.41(b) a fast-
track review procedure consistent with the proposed forty-five day
fast-track review of designation applications. The current provisions
of rule 1.41 providing for ten-day review and automatic approval of
many categories of amendments to contract terms would remain unchanged.
    The existing procedures for review of designation applications and
amendments to contract terms differ in their treatment of requests for
public comment. Similar to applications for designation, request for
public comment on certain amendments to contract terms and conditions
is discretionary. Thus, the Commission may, as a matter of discretion,
publish proposed amendments of contract terms for comment ``when
publication * * * is in the public interest and will assist the
Commission in considering the views of interested persons.'' Commission
rule 140.96(b), 17 CFR 140.96(b). For amendments to contract terms
published for public comment as a matter of Commission discretion, the
Commission will provide a fifteen-day comment period consistent with
its proposed practice for fast-track designation applications.
    However, Section 5a(a)(12)(A) of the Act requires amendments to
contract terms, when determined to be of major economic significance,
to be published in the Federal Register. That section of the Act also
requires that the comment period be for thirty days. If all proposed
amendments to contract terms required a full thirty-day comment period,
the Commission's ability to meet a forty-five day deadline would be
impossible with its present staff resources. However, only a limited
percentage of exchange rule amendments are of major economic
significance and would therefore be required to be published for public
comment for the thirty-day period. Although acting on even this limited
number of submissions within forty-five days will be difficult when a
thirty-day comment period is required, the Commission is proposing a
forty-five day review period for all proposed amendments of contract
terms and designation applications in order to achieve the most
consistent and simplest procedures for fast-track review.

D. Implementation

    The Commission is proposing these automatic approval procedures to
streamline further Commission review of applications for contract
market designation and proposed exchange rules relating to contract
terms and conditions. It believes that the proposed procedures, by
providing the exchanges an alternative means of achieving greater
certainty and ease in listing new products, will permit them greater
flexibility to compete with foreign exchange-traded products and with
both foreign and domestic over-the-counter transactions, while
maintaining the Commission's authority to review proposed contracts and
proposed exchange rules relating to existing contracts for their
consistency with the Act and Commission regulations and maintaining the
public's ability to participate in the process.
    To streamline comprehensively the designation and rule approval
procedures, the Commission must also examine the form and content of
the required submissions. The Commission last amended Guideline No. 1
in 1992. The Commission's 1992 revisions were undertaken with the view
of removing duplication of effort between its staff and the exchanges,
streamlining procedures, reducing paperwork, and refining the
requirements for designation.
    As noted above, one of the significant innovations of the 1992
revision was to reduce the form of application for designation of
option contracts to a checklist. Although the designation application
for futures contracts may be less susceptible to a checklist format,
the Commission believes that the concept of an extended checklist may
have value in the context of applications for designation of futures
contracts, as well. In this regard, to the extent that the required
information can be provided in a format requiring less verbiage, both
the exchanges and the Commission may save additional staff resources.
    Because the Commission believes that significant potential benefits
will accrue from the proposed fast-track revisions to its contract
designation procedures, it does not wish to delay public consideration
of such revisions in order to formulate a proposal concerning Guideline
No. 1. Accordingly, the Commission is currently proposing fast-track
procedures at this time and will undertake separately the time-
consuming task of reviewing the form and content requirements relating
to applications for designation contained in Guideline No. 1. Despite
this determination to proceed on these proposed fast-track rules
separately, the Commission nevertheless is committed to review the
broader Guideline No. 1 issues expeditiously. In addition to these
proposals regarding fast-track procedures for contract market
designation and amendments to contract terms and conditions, the
Commission is also considering separately procedures to streamline the
review and approval of contract market rules other than contract terms
and conditions.

[[Page 59391]]

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies, in promulgating rules, consider the impact of
these rules on small entities. The Commission has previously determined
that contract markets are not ``small entities'' for purposes of the
Regulatory Flexibility Act, 5 U.S.C. 601 et seq. 47 FR 18618 (April 30,
1982). These amendments propose to establish alternative streamlined
procedures for Commission review and approval of applications by
contract markets for additional designations and of amendments to
contract terms and conditions. Accordingly, the Chairperson, on behalf
of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that
the action taken herein will not have a significant economic impact on
a substantial number of small entities. However, the Commission invites
comments from any firms or other persons which believe that the
promulgation of these rules might have a significant impact upon their
activities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1980 (Act), 44 U.S.C. 501 et. seq.,
imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the Paperwork Reduction Act.
While this proposed rule has no burden, the group of rules (3038-0022)
of which this is a part has the following burden:

Average burden hours per response--3,546.26
Number of Respondents--10,971
Frequency of response--on occasion

    Persons wishing to comment on the information which would be
required by this proposed/amended rule should contact Jeff Hill, Office
of Management and Budget, Room 3228, NEOB, Washington, DC 20503, (202)
395-7340. Copies of the information collection submission to OMB are
available from Gerald P. Smith, CFTC Clearance Officer, 1155 21st
Street NW, Washington, DC 20581, (202) 418-5160.

List of Subjects in 17 CFR Part 1

    Commodity exchanges, Contract market rules, Rule review procedures.

List of Subjects in 17 CFR Part 5

    Contract markets, Designation application.

    In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections
4(c), 4c, 5, 5a, 6 and 8a of thereof, 7 U.S.C. 6(c), 6c, 7, 7a, 8, and
12a, the Commission hereby proposes to amend Chapter I of Title 17 of
the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 2, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 9, 12, 12a, 12c, 13a-1, 13a-2,
16, 19, 21, 23 and 24.

    2. In Section 1.41(b), the introductory text, paragraphs (b)(1),
(b)(2), (b)(3), (b)(4), (b)(5) and the concluding text are proposed to
be redesignated as (b)(1)(i), (b)(1)(i)(A), (b)(1)(i)(B), (b)(1)(i)(C),
(b)(1)(i)(D), (b)(1)(i)(E), and (b)(1)(ii), respectively; newly
redesignated paragraph (b)(1)(ii) is proposed to be revised; and
paragraphs (b)(2) through (b)(4) are proposed to be added, to read as
follows:


Sec. 1.41   Contract market rules; submission of rules to the
Commission; exemption of certain rules.

* * * * *
    (b) Submission of rules for prior Commission approval. (1)(i) * * *
    (ii) The Commission may remit to the contract market, with an
appropriate explanation where practicable, and not accept for review
any rule submission that does not comply with the form and content
requirements of paragraphs (b)(1)(i) (A) through (E) of this section.
    (2) All proposed contract market rules that relate to terms and
conditions submitted for review under paragraph (b)(1) shall be deemed
approved by the Commission under section 5a(a)(12)(A) of the Act,
forty-five days after receipt by the Commission, unless notified
otherwise within that period, if:
    (i) The contract market labels the submission as being submitted
pursuant to Commission rule 1.41(b)--Fast Track Review;
    (ii) The submission complies with the requirements of paragraphs
(b)(1)(i) (A) through (E) of this section, or for dormant contracts,
the requirements of Sec. 5.2 of this chapter;
    (iii) The contract market does not amend the proposed rule or
supplement the submission, except as requested by the Commission,
during the pendency of the review period; and
    (iv) The contract market has not instructed the Commission in
writing during the review period to review the proposed rule under the
usual procedures under section 5a(a)(12)(A) of the Act and paragraph
(b)(1) of this section.
    (3) The Commission, within forty-five days after receipt of a
submission filed pursuant to paragraph (b)(2) of this section, may
notify the contract market making the submission that the review period
has been extended for a period of thirty days where the proposed rule
raises novel or complex issues which require additional time for
review. This notification will briefly specify the nature of the
specific issues for which additional time for review is required. Upon
such notification, the period for fast-track review of paragraph (b)(2)
of this section shall be extended for a period of thirty days.
    (4) During the forty-five day period for fast-track review, or the
thirty-day extension when the period has been enlarged under paragraph
(b)(3) of this section, the Commission shall notify the contract market
that the Commission is terminating fast-track review procedures and
will review the proposed rule under the usual procedures of section
5a(a)(12)(A) of the Act and paragraph (b)(1) of this section, if it
appears that the proposed rule may violate a specific provision of the
Act, regulation, or form or content requirement of this section. This
termination notification will briefly specify the nature of the issues
raised and the specific provision of the Act, regulation, or form or
content requirement of this section that the proposed rule appears to
violate. Within ten days of receipt of this termination notification,
the contract market may request that the Commission render a decision
whether to approve the proposed rule or to institute a proceeding to
disapprove the proposed rule under the procedures specified in section
5a(a)(12)(A) of the Act by notifying the Commission that the contract
market views its submission as complete and final as submitted.
* * * * *
    3. Section 1.41b is proposed to be amended by revising paragraph
(b) to read as follows:


Sec. 1.41b.  Delegation of authority to the Director of the Division of
Trading and Markets and Director of the Division of Economic Analysis.

* * * * *
    (b) The Commission hereby delegates, until the Commission orders
otherwise:
    (1) To the Director of the Division of Economic Analysis, with the
concurrence of the General Counsel or the General Counsel's delegatee,
to be exercised by such Director or by such other employee or employees
of the Commission under the supervision of

[[Page 59392]]

such Director as may be designated from time to time by the Director,
the authority to approve, pursuant to section 5a(a)(12)(A) of the Act
and Sec. 1.41(b), contract market proposals, submitted pursuant to
Sec. 5.2, to list additional trading months or expiration for, or to
otherwise recommence trading in, a contract that is dormant within the
meaning of Sec. 5.2; and
    (2) To the Director of the Division of Economic Analysis, and to
the Director of the Division of Trading and Markets, with the
concurrence of the General Counsel or the General Counsel's delegatee,
to be exercised by such Director or by such other employee or employees
of the Commission under the supervision of such Director as may be
designated from time to time by the Director, authority to request
under Sec. 1.41(b)(2)(iii) that the contract market amend the proposed
rule or supplement the submission, to notify a contract market under
Sec. 1.41(b)(3) that the time for review of a proposed contract term
submitted under that section for fast-track review has been extended,
and to notify the contract market under Sec. 1.41(b)(4) that fast-track
procedures are being terminated.
* * * * *

PART 5--DESIGNATION OF AND CONTINUING COMPLIANCE BY CONTRACT
MARKETS

    3. The authority citation for Part 5 is proposed to be amended by
revising it to read as follows:

    Authority: 7 U.S.C. 6(c), 6c, 7, 7a, 8 and 12a.

    4. Part 5 is proposed to be amended by adding a new section 5.1,
and in Appendix D, by revising the second sentence, to read as follows:


Sec. 5.1  Fast-track designation review.

    (a) Cash-settled contracts. Boards of trade seeking designation as
a contract market under sections 4c, 5, 5a, and 6 of the Act, and
regulations thereunder, shall be deemed to be designated as a contract
market under section 6 of the Act ten days after receipt by the
Commission of the application for designation, unless notified
otherwise within that period, if:
    (1) The board of trade labels the submission as being submitted
pursuant to Commission rule 5.1--Fast Track Ten-Day Review;
    (2) (i) The application for designation is for a futures contract
providing for cash settlement or for delivery of a foreign currency for
which there is no legal impediment to delivery and for which there
exists a liquid cash market; or
    (ii) For an options contract that is itself cash-settled, is
exercised into a futures contract which meets the requirements of
paragraph (a)(2)(i) of this section, or is for delivery of a foreign
currency which meets the requirements of paragraph (a)(2)(i) of this
section;
    (3) The application for designation is for a commodity other than
those enumerated in section 1a(3) of the Act or subject to the
procedures of section 2(a)(1)(B) of the Act;
    (4) The board of trade currently is designated as a contract market
for at least one contract which is not dormant within the meaning of
this part;
    (5) The submission complies with the requirements of Appendix A of
this part--Guideline No. 1 and Sec. 1.61 of this chapter;
    (6) The board of trade does not amend the terms or conditions of
the proposed contract or supplement the application for designation,
except as requested by the Commission, during that period; and
    (7) The board of trade has not instructed the Commission in writing
during the review period to review the application for designation
under the usual procedures under section 6 of the Act.
    (b) Contracts for physical delivery. Boards of trade seeking
designation as a contract market under sections 4c, 5, 5a, and 6 of the
Act, and regulations thereunder, shall be deemed to be designated as a
contract market under section 6 of the Act forty-five days after
receipt by the Commission of the application for designation, unless
notified otherwise within that period, if:
    (1) The board of trade labels the submission as being submitted
pursuant to Commission rule 5.1--Fast Track Forty-five Day Review;
    (2) The application for designation is for a commodity other than
those subject to the procedures of section 2(a)(1)(B) of the Act;
    (3) The board of trade currently is designated as a contract market
for at least one contract which is not dormant within the meaning of
this part;
    (4) The submission complies with the requirements of Appendix A of
this part--Guideline No. 1 and Sec. 1.61 of this chapter;
    (5) The board of trade does not amend the terms or conditions of
the proposed contract or supplement the application for designation,
except as requested by the Commission, during that period; and
    (6) The board of trade has not instructed the Commission in writing
during the forty-five day review period to review the application for
designation under the usual procedures under section 6 of the Act.
    (c) Notification of extension of time. The Commission, within ten
days after receipt of a submission filed under paragraph (a) of this
section, or forty-five days after receipt of a submission filed under
paragraph (b) of this section, may notify the board of trade making the
submission that the review period has been extended for a period of
thirty days where the designation application raises novel or complex
issues which require additional time for review. This notification will
briefly specify the nature of the specific issues for which additional
time for review is required. Upon such notification, the period for
fast-track review of paragraphs (a) and (b) of this section shall be
extended for a period of thirty days.
    (d) Notification of termination of fast-track procedures. During
the fast-track review period provided under paragraphs (a) or (b) of
this section, or of the thirty-day extension when the period has been
enlarged under paragraph (c) of this section, the Commission shall
notify the board of trade that the Commission is terminating fast-track
review procedures and will review the proposed rule under the usual
procedures of section 6 of the Act, if it appears that the proposed
contract may violate a specific provision of the Act, regulation, or
form or content requirement of Appendix A of this part. This
termination notification will briefly specify the nature of the issues
raised and the specific provision of the Act, regulation, or form or
content requirement of Appendix A of this part that the proposed
contract appears to violate. Within ten days of receipt of this
termination notification, the board of trade may request that the
Commission render a decision whether to approve the designation or to
institute a proceeding to disapprove the proposed application for
designation under the procedures specified in section 6 of the Act by
notifying the Commission that the exchange views its application as
complete and final as submitted.
    (e) Delegation of authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Economic
Analysis or to the Director's delegatee, with the concurrence of the
General Counsel or the General Counsel's delegatee, authority to
request under paragraphs (a)(6) and (b)(5) of this section that the
contract market amend the proposed contract or supplement the
application, to notify a board of trade under paragraph (c) of this
section that the time for review of a proposed contract term submitted
for review under paragraphs (a) or (b) of this section has

[[Page 59393]]

been extended, and to notify the contract market under paragraph (d) of
this section that the fast-track procedures of this section are being
terminated.
    (2) The Director of the Division of Economic Analysis may submit to
the Commission for its consideration any matter which has been
delegated in paragraph (e)(1) of this section.
    (3) Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (e)(1).

Appendix D--Internal Procedure Regarding Period for Public Comment

    * * * Generally, the Commission will provide for a public
comment period of thirty days on such applications for designation;
provided, however, that the public comment period will be fifteen
days for those applications submitted for review under the fast-
track procedures of Sec. 5.1(b) of this part. * * *

    Issued in Washington, D.C. this 18th day of November, 1996, by
the Commodity Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-29835 Filed 11-21-96; 8:45 am]
BILLING CODE 6351-01-P
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