Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Proposed Rules 54097 

1 69 FR 39880. 

2Public Law 106–554, 114 Stat. 2763 (2000). 

Under the CFMA, such DCM rules may be effected 

by the certification procedures set forth in section 

5c(c) of the Commodity Exchange Act and 40.6 of 

the Commission’s regulations. 

3Regulation 1.38 was originally adopted in 1953 

by the Commodity Exchange Authority, the 

predecessor of the Commission. See 18 FR 176 (Jan. 

19, 1953). For subsequent amendments, see 31 FR 

5054 (Mar. 29, 1966), 41 FR 3191 (Jan. 21, 1976, eff. 

Feb. 20, 1976), and 46 FR 54500 (Nov. 3, 1981, eff. 

Dec. 3, 1981). 

4The CFMA was intended, in part, ‘‘to promote 

innovation for futures and derivatives.’’ § 2 of the 

CFMA. It was also intended ‘‘to reduce systemic 

risk,’’ and ‘‘to transform the role of the 

[Commission] to oversight of the futures markets.’’ 

Id. 

5 7 U.S.C. § 5 (2000). 

6See Section 7(b)(3) of the Act. 

7See 66 FR 14262 (Mar. 9, 2001) and 66 FR 42256 

(Aug. 10, 2001). 

8See 67 FR 20702 (Apr. 26, 2002) and 67 FR 

62873 (Oct. 9, 2002). 

calendar year and every quarter 

thereafter. 

(A) Who must report. A BE–150 report 

is required from each U.S. company that 

operates networks for clearing and 

settling credit card transactions made by 

U.S. cardholders in foreign countries 

and by foreign cardholders in the 

United States. Each reporting company 

must complete all applicable parts of 

the BE–150 form before transmitting it 

to BEA. Issuing banks, acquiring banks, 

and individual cardholders are not 

required to report. 

(B) Covered Transactions. The BE– 

150 survey collects aggregate 

information on the use of credit, debit, 

and charge cards by U.S. cardholders 

when traveling abroad and foreign 

cardholders when traveling in the 

United States. Data are collected by the 

type of transaction, by type of card, by 

spending category, and by country. 

(ii) [Reserved] 

[FR Doc. E8–21896 Filed 9–17–08; 8:45 am] 

BILLING CODE 3510–06–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1 and 38 

Execution of Transactions: Regulation 

1.38 and Guidance on Core Principle 9 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Proposed rules. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is re-proposing a number of 

amendments to its rules, guidance and 

acceptable practices, initially proposed 

on July 1, 2004,1 concerning trading off 

the centralized market, including the 

addition of guidance on contract market 

block trading rules and exchanges of 

futures for commodities or derivatives 

positions. The Commission is reproposing these amendments and 

requesting comment as part of its 

continuing efforts to update its 

regulations in light of the Commodity 

Futures Modernization Act of 2000 

(‘‘CFMA’’). 

DATES: Comments must be received by 

November 17, 2008. 

ADDRESSES: Comments should be sent to 

the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581, attention: Office of the 

Secretariat. Comments may be sent by 

facsimile transmission to 202–418–5521 

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

Reference should be made to ‘‘Proposed 

Rules for Trading Off the Centralized 

Market.’’ Comments may also be 

submitted by connecting to the Federal 

eRulemaking Portal at http:// 

www.regulations.gov and following 

comment submission instructions. 

FOR FURTHER INFORMATION CONTACT: 

Gabrielle A. Sudik, Special Counsel, 

Division of Market Oversight; 

Telephone 202–418–5171; e-mail 

gsudik@cftc.gov; Commodity Futures 

Trading Commission, Three Lafayette 

Center, 1155 21st Street, NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Commission Regulation 1.38 (17 CFR 

1.38) sets forth a requirement that all 

purchases and sales of a commodity for 

future delivery or a commodity option 

on or subject to the rules of a designated 

contract market (‘‘DCM’’) should be 

executed by open and competitive 

methods. This ‘‘open and competitive’’ 

requirement is modified by a proviso 

that allows transactions to be executed 

in a ‘‘non-competitive’’ manner if the 

transaction is in compliance with DCM 

rules specifically providing for the noncompetitive execution of such 

transactions, and such rules have been 

submitted to, and approved by, the 

Commission. 

The Commodity Futures 

Modernization Act of 2000 (‘‘CFMA’’),2

which was enacted after Regulation 1.38 

was promulgated,3 significantly 

changed the Federal regulation of 

commodity futures and option markets 

by replacing ‘‘one-size-fits-all’’ 

regulation with broad, flexible core 

principles.4 At the same time, the 

CFMA modified section 3 of the 

Commodity Exchange Act (‘‘Act’’) (7 

U.S.C. 1 et seq.), making a finding that 

transactions subject to the Act provide 

‘‘a means for managing and assuming 

price risks, discovering prices, or 

disseminating pricing information 

through trading in liquid, fair and 

financially secure trading facilities,’’ 

and providing that the purpose of the 

Act is now, among other things, ‘‘to 

deter and prevent price manipulation or 

any other disruptions to market 

integrity; to ensure the financial 

integrity of all transactions subject to 

this Act and the avoidance of systemic 

risk; to protect all market participants 

from fraudulent or other abusive sales 

practices and misuses of customer 

assets. * * * ’’ 5 The CFMA also 

expanded the types of transactions that 

could lawfully be executed off the 

centralized market. Specifically, the 

CFMA permits DCMs to establish 

trading rules that: (1) Authorize the 

exchange of futures for swaps; or (2) 

allow a futures commission merchant, 

acting as principal or agent, to enter into 

or confirm the execution of a contract 

for the purchase or sale of a commodity 

for future delivery if the contract is 

reported, recorded, or cleared in 

accordance with the rules of a contract 

market or derivatives clearing 

organization.6 At the same time, 

exchanges must balance such rules with 

Core Principle 9 (7 U.S.C. 5(d)(9)) 

(Execution of transactions), which states 

‘‘The board of trade shall provide a 

competitive, open, and efficient market 

and mechanism for executing 

transactions.’’ 

In 2001, the Commission promulgated 

regulations implementing provisions of 

the CFMA that established procedures 

relating to trading facilities, interpreted 

certain of the CFMA’s provisions, and 

provided guidance on compliance with 

various of its requirements.7 Later, in 

2002, the Commission promulgated 

amendments to those regulations in 

response to issues that had arisen in 

administering the rules, noting that the 

Commission would consider 

‘‘additional amendments to the rules 

implementing the CFMA based upon 

further administrative experience.’’ 8

Consistent with that rationale, the 

Commission now proposes to amend 

Commission Regulation 1.38 and 

Commission guidance and acceptable 

practices concerning Core Principle 9 as 

it relates to Commission Regulation 1.38 

to include changes that the Commission 

has developed based upon its 

experience administering those 

provisions. 


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9 69 FR 39880 (July 1, 2004). 

10See Section 5c(a) of the Act 7 U.S.C. 7a–2(a). 

11The Commission notes that safe harbor 

treatment applies only to compliance with the 

specific aspect of the Core Principle in question. In 

this regard, an exchange rule that meets a safe 

harbor will not necessarily protect the exchange or 

market participants from charges of violations of 

other sections of the Act or other aspects of the Core 

Principle. 

12See also A New Regulatory Framework for 

Trading Facilities, Intermediaries and Clearing 

Organizations Proposed Rules, 66 FR 14262, 14263 

(March 9, 2001). 

II. Discussion of the Proposed Rule 

Amendments, Guidance and 

Acceptable Practices 

A. The Commission’s July 1, 2004 

Notice of Proposed Rulemaking 

On July 1, 2004, the Commission 

published proposed amendments to 

Regulation 1.38 and Commission 

guidance concerning Core Principle 9, 

found in Appendix B to Part 38 of the 

Commission’s Regulations (17 CFR Part 

38) (the ‘‘July 1, 2004 NPRM’’).9 The 

Commission proposed to update the 

language of Regulation 1.38 to more 

accurately identify the types of 

transactions that may lawfully be 

executed off a contract market’s 

centralized market and to simplify the 

language of the Regulation. The 

Commission also wished to provide 

more detail regarding acceptable 

practices for how contract markets can 

satisfy the requirements of Core 

Principle 9, particularly on four general 

topics: Electronic trading systems, 

general provisions for transactions off 

the centralized market, block 

transactions, and the exchange of 

futures for a commodity or a derivatives 

position. 

The Commission received seven 

comment letters in response to the July 

1, 2004 NPRM: From the Chicago 

Mercantile Exchange (‘‘CME’’), the 

Futures Industry Association (‘‘FIA’’), 

the Chicago Board of Trade (‘‘CBOT’’), 

the U.S. Futures Exchange (‘‘USFE’’) 

(two letters), the DRW Trading Group 

(‘‘DRW’’), and Man Financial. The 

comments addressed eight general areas 

of concern: The proposed amendments 

to Regulation 1.38, the Commission’s 

proposed guidance for compliance with 

Core Principle 9 in general, block 

trading in general, the minimum size of 

block transactions, block trade prices, 

the time within which parties must 

report block trades to the exchange, 

block trades between affiliated parties, 

and the exchange of futures for a 

commodity or a derivatives position. 

Some comments offered specific 

recommendations regarding the 

proposed amendments, while other 

comments were of a more general 

nature. 

Between the publication of the July 1, 

2004 NPRM and this current proposal, 

the Commission has continued to gain 

experience in administering Regulation 

1.38 and Core Principle 9. Staff has also 

learned more about the common 

practices involved in transactions done 

off of the centralized market from the 

comment letters received, from informal 

interviews with various entities in the 

futures industry, from DCM rule 

submissions, and from informal studies 

of trading data related to off-centralizedmarket transactions. In light of this, as 

well as the length of time that has 

passed since the July 1, 2004 NPRM, the 

Commission has determined to repropose amendments to Regulation 1.38 

and the guidance to Core Principle 9. 

Commenters are invited to submit 

feedback on all areas of this proposal, 

including those areas already addressed 

in earlier comment letters. 

B. Core Principle 9 Guidance and 

Acceptable Practices 

This proposal contains regulations, 

guidance and acceptable practices. 

Commission regulations, such as 

Regulation 1.38, are requirements that 

all contract markets must follow. Such 

regulations go beyond mere illustrations 

of how a contract market may comply 

with a section of the Act; they are 

requirements that stand alone and that 

the Commission believes are necessary 

in order to comply with the Act. In 

issuing guidance, the Commission 

strives to offer advice about how 

contract markets can ensure compliance 

with sections of the Act. The 

Commission recognizes that in certain 

areas there is more than one possible 

approach that would allow a contract 

market to comply with a related Section 

of the Act. For example, as will be 

discussed below, there can be more than 

one way to determine an appropriate 

minimum size for block trades. The 

Commission offers guidance on such 

subjects in an effort to inform the 

exchanges of what it believes are some 

reasonable approaches to take when 

tackling such issues and concerns to be 

addressed in complying with Core 

Principles. The acceptable practices 

provide examples of how exchanges 

may satisfy particular requirements of 

the Core Principles; they do not 

establish mandatory means of 

compliance.10 Acceptable practices are 

more specific than guidance. An 

exchange rule modeled after an 

acceptable practice will be presumed to 

comply with the related Core Principle, 

since the Commission has already found 

such practice complies with that Core 

Principle. The Commission wishes to 

emphasize that acceptable practices are 

intended to assist DCMs by establishing 

non-exclusive safe harbors.11 The 

introduction to Appendix B to Part 38 

makes it clear that the acceptable 

practices in Appendix B are not the sole 

means of achieving compliance with the 

Act: 

Acceptable practices meeting the 

requirements of the core principles are set 

forth in paragraph (b) following each core 

principle. Boards of trade that follow the 

specific practices outlined under paragraph 

(b) for any core principle in this appendix 

will meet the applicable core principle. 

Paragraph (b) is for illustrative purposes 

only, and does not state the exclusive means 

for satisfying a core principle.12

The Commission also notes that it 

drafted the acceptable practices based 

on its experience in reviewing exchange 

rules and in considering related matters 

currently facing the Commission. The 

acceptable practices provided in the 

proposal are, in large measure, modeled 

on exchange rules that have previously 

been found to satisfy the requirements 

of Core Principle 9. The Commission 

does not mean to imply that it will find 

other rules unacceptable. Indeed, some 

of the acceptable practices explicitly 

note that a DCM could adopt rules that 

differ from the acceptable practice, 

although any such deviation would still 

require the DCM and parties to trades to 

comply with Core Principle 9, as 

required by section 5(d)(1) of the Act. 

The Commission believes that its 

proposed issuance of guidance and 

acceptable practices will generally ease 

the burden on exchanges in complying 

with Core Principle 9. Without the 

adoption of these amendments, DCMs 

are without any meaningful guidance as 

to whether their requirements for 

trading off the centralized market 

comply with Core Principle 9. These 

amendments provide certainty for those 

rules that fall under an acceptable 

practice, while the burden for those that 

fall outside of the acceptable practices is 

no greater than before. The Commission 

believes that it would not be appropriate 

to lessen the specificity of the 

acceptable practices because doing so 

would render the guidance meaningless. 

C. General Changes to the Re-Proposed 

Amendments 

The amendments proposed in this 

rulemaking are in large measure 

substantively similar to what was 

proposed in the July 1, 2004 NPRM. 

This proposal, like its predecessor, 

strives to update the language of 

Regulation 1.38 to more accurately 


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Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Proposed Rules 54099 

13See also, section 3(a) of the Act, which finds 

that transactions subject to the Act provide ‘‘a 

means for managing and assuming price risks, 

discovering prices, or disseminating pricing 

information through trading in liquid, fair and 

financially secure trading facilities.’’ Using the 

example above, markets on which transactions are 

exclusively or predominantly carried out by blocks 

are not liquid markets. Furthermore, it has been 

questioned whether markets are fair if they do not 

offer viable centralized trading. This also calls into 

question such a market’s compliance with 

designation criterion 3, 7 U.S.C. 7(b)(3), which 

requires the exchange to establish and enforce 

trading rules to ensure fair and equitable trading 

through the facilities of the contract market. 

identify the types of transactions that 

may lawfully be executed off of a 

contract market’s centralized market 

and to simplify the language of the 

Regulation. The proposed language also 

updates Regulation 1.38 to make it clear 

that DCMs may self-certify (not just seek 

approval for) rules or rule amendments 

related to transactions off the 

centralized marketplace. This proposed 

amendment is consistent with section 

5c(c) of the Act, which allows for the 

certification of any DCM rule or rule 

amendment. 

In addition, Regulation 1.38 requires, 

subject to certain exceptions, that all 

purchases and sales of a commodity for 

future delivery or a commodity option 

on or subject to the rules of a DCM 

should be executed by open and 

competitive methods. The implicit 

assumption in Regulation 1.38 is that 

trading should take place on the 

centralized market unless there is a 

compelling reason to allow certain 

transactions to take place off the 

centralized market. Similarly, exchange 

rules and policies that allow such 

transactions should ensure that the 

impact on the centralized market is kept 

to a minimum. For example, certain 

types of off-centralized market 

transactions, such as block trades and 

exchanges of futures for related 

positions, can create new positions or 

reduce prior positions. If these 

transactions become the exclusive or 

predominant method of establishing or 

offsetting positions in a particular 

market, it might jeopardize the 

centralized market’s role in price 

discovery and would not comply with 

Core Principle 9, which provides that 

trading be competitive, open and 

efficient.13 Other types of off-centralized 

market transactions are bookkeeping in 

nature, such as transfer trades or office 

trades, which move existing positions 

between accounts. These transactions 

do not affect the price discovery 

mechanism of the centralized market 

because they do not establish or offset 

positions. 

This proposed rulemaking also 

addresses the same four general topics 

under Core Principle 9 that were 

addressed in the July 1, 2004 NPRM: 

Electronic trading systems, general 

provisions for transactions off the 

centralized market, block transactions, 

and the exchange of futures for a 

commodity or a derivatives position. 

The majority of changes made since 

the July 1, 2004 NPRM strive to do one 

of two things. First, the Commission has 

attempted to clarify any language that 

was ambiguous, particularly in response 

to questions raised in the comment 

letters. Second, the proposed acceptable 

practices under Core Principle 9 have 

been redrafted to more closely resemble 

the language of the acceptable practices 

for the other Core Principles. The 

Commission believes that in addition to 

harmonizing the language of the 

acceptable practices, these changes 

make the language of the acceptable 

practices easier to read. 

The Commission has made more 

significant changes to the proposed 

amendments in three areas, based on the 

comment letters received, as well as the 

Commission’s own experience in 

administering Regulation 1.38 and Core 

Principle 9. These three areas, discussed 

in more detail below, concern the 

appropriate minimum size of block 

trades; when block trades may be 

permitted between affiliated parties; and 

exchanges of futures for a commodity or 

derivatives position, including the 

permissibility of transitory exchanges of 

futures for a commodity or derivatives 

position (‘‘transitory EFPs’’). 

D. The Minimum Size of Block Trades 

In the July 1, 2004 NPRM the 

Commission proposed that an 

acceptable minimum size for block 

trades would be at a level larger than 

90% of the transactions in a relevant 

market (‘‘90% threshold’’) or, for new 

contracts with no relevant market, 100 

contracts. CME, CBOT, DRW, FIA and 

USFE all offered comments regarding 

those proposed acceptable practices. 

CME and CBOT disagreed with the 

Commission’s proposed minimum sizes 

of the 90% threshold and 100 contracts: 

CME thought the numbers were 

arbitrary, unresponsive to market needs 

and inconsistent with the Commission’s 

oversight role. Similarly, CBOT believed 

there may be instances where 90% or 

100 contracts could be too high or not 

high enough. CBOT suggested that an 

acceptable minimum block trade size be 

at the point where the block would 

move the market or where the customer 

would not be able to obtain a fair price 

or fill the order on the centralized 

market. 

DRW suggested that the Commission 

clarify its intent that the minimum 

block trade size should be derived from 

the size of trades in the entire relevant 

market, which should include the 

central market, related derivatives 

markets and the cash market. DRW also 

suggested that using the 90% threshold 

would result in artificially low 

minimums because many transactions 

in the central market are often broken 

down into smaller trades at the same 

price. DRW suggested tying the 

minimum block trade size to the size of 

orders instead of trades or by 

developing a risk-based system that 

would consider both outright and 

spread transactions. 

USFE seemed to imply that the 90% 

threshold should be lower for options 

than for futures. USFE noted that 

options transactions, particularly 

combination trades, are more complex 

than futures trades and require more 

human intervention than other trades. 

The options market is therefore more 

conducive to trading off the centralized 

market. While USFE did not suggest a 

different minimum threshold for 

options, it indicated that more offcentralized-market trading of options 

was necessary until technology could 

accommodate complex options 

positions on the electronic trading 

screen. 

In response to these comments, as 

well as the Commission’s own increased 

knowledge about block trades, the 

Commission is changing the proposed 

guidance and acceptable practices on 

this topic. In this regard, the 

Commission’s guidance for determining 

appropriate minimum sizes relies on the 

purpose for allowing block trades. Block 

trades are allowed to be transacted off 

the centralized market for two reasons. 

First, prices attendant to the execution 

of large transactions on the centralized 

market may diverge from prevailing 

market prices that reflect supply and 

demand of the commodity. This is 

because the centralized market may not 

provide sufficient liquidity to execute 

large transactions without a significant 

risk premium, so that the prices of such 

trades tend to reflect, to a significant 

degree, the cost of executing the trade. 

Accordingly, reporting these prices as 

conventional market trades would be 

misleading to the public. Second, block 

trading facilitates hedging by providing 

a means for commercial firms to transact 

large orders without the need for 

significant price concessions and 

resulting price uncertainty for parties to 

the transaction that would occur if 

transacted on the centralized market. 

Using these reasons as guidance, block 

trades should be limited to large orders, 

where ‘‘large’’ is the number at which 

there is a reasonable expectation that 


dwashington3 on PRODPC61 with PROPOSALS
54100 Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Proposed Rules 

14 In this regard, the guidance could result in 

different DCMs arriving at different minimum size 

requirements for the same or similar futures 

contracts, if the liquidity and volume on each DCM 

is different. 

the order could not be filled in its 

entirety at a single price, but would 

need to be broken up and executed at 

different prices if transacted in the 

centralized marketplace. As such, the 

proposed guidance notes that minimum 

block trade sizes should be larger than 

the size at which a single buy or sell 

order is customarily able to be filled in 

its entirety at a single price (though not 

necessarily with a single counterparty) 

in that contract’s centralized market, 

and exchanges should determine a fixed 

minimum number of contracts needed 

to meet this threshold. 

The Commission now believes that its 

previous means of determining an 

appropriate minimum size—the 90% 

threshold—may not be appropriate for 

all markets because this figure does not 

necessarily correspond with the size of 

the order that would move the market 

price. Because the determination of 

what constitutes a large trade will vary 

between DCMs, contracts and even over 

time, the acceptable practices will not 

set forth an explicit threshold, but will 

instead leave it to the DCMs to 

determine appropriate minimum sizes, 

based on the above purpose.14 This new 

approach should also address DRW’s 

concern that using trade size alone to 

determine a threshold might result in 

lower-than-appropriate minimum sizes, 

because breaking an order into several 

small trades ideally should not affect 

the overall volume or liquidity of the 

centralized market. Similarly, the 

presence of many small trades 

submitted by multiple traders will also 

not artificially lower the appropriate 

minimum block trade size. The 

Commission also understands that, as 

exchange volume migrates from floor 

trading to electronic trading, the average 

size of transactions tends to decrease, 

resulting in artificially low 90% 

thresholds and minimum block trade 

sizes that are too low given the criteria 

discussed above. 

One method by which DCMs could 

determine what number of contracts is 

an appropriate minimum size would be 

to assess the market liquidity (the 

number of contracts the centralized 

market is able to absorb at the best 

execution price) and market depth 

(which measures the potential price 

slippage if a large order were to be 

executed in the centralized market). For 

example, a DCM could examine a 

contract’s market liquidity over time 

and determine that a certain size order 

in that contract could rarely, if ever, be 

filled in its entirety at the best price, and 

set a minimum block trade size based on 

this data. Such calculations should be 

re-examined periodically, as volume, 

liquidity and market depth change over 

time to ensure that a contract’s 

minimum block trade size remains 

appropriate. Such an analysis would 

most easily be done for an 

electronically-traded contract, since 

trade data about the contract is easy to 

gather and analyze. 

Calculating a minimum size based on 

market liquidity and depth is not the 

only possible way to determine what 

size order should be considered ‘‘large.’’ 

DCMs could employ other methods to 

reasonably determine what size order 

would move the price in the centralized 

market. For instance, along with a 

review of trade sizes and/or order sizes, 

DCMs could interview experienced floor 

brokers and floor traders to determine 

what size order is generally too large to 

fill at a single price. This method might 

be most appropriate for open-outcry 

markets because DCMs will not have the 

same type of trade data generated by 

electronic trading platforms, and will 

not as easily be able to determine, based 

on electronic data, what size order is 

‘‘large.’’ 

For new contracts that have no 

trading history, a DCM should strive to 

set its initial minimum block trade size 

based on what the DCM reasonably 

believes will be a ‘‘large’’ order (i.e., the 

order size that would likely move the 

market price). So, for example, the DCM 

might base its initial minimum block 

trade size on sources of data other than 

transaction data in that particular 

contract such as transaction patterns in 

related futures or cash markets, the 

DCM’s experience regarding other 

newly-launched contracts, and/or a 

survey of potential market users to 

determine how many contracts might be 

executed in a typical transaction. Where 

a DCM is unable to determine an 

appropriate minimum size (due, for 

instance, to the lack of data in other 

markets or other methods for estimating 

an appropriate minimum size), the 

Commission believes it would be an 

acceptable practice for a DCM to set the 

minimum block trade size at 100 

contracts. In the past, the Commission 

has considered 100 contracts to be a 

reasonable figure to use as the minimum 

size until enough market data exist to 

allow that figure to be adjusted, if need 

be. Once there is adequate trade data to 

re-evaluate the minimum size, the DCM 

should ensure that it be adjusted to a 

level where a trade would move the 

centralized market, if traded there. 

In this regard, the Commission 

proposes as an acceptable practice that 

DCMs review the minimum size 

thresholds for block trades no less 

frequently than on a quarterly basis to 

ensure that the minimum sizes remain 

appropriate for each contract. As noted 

in the proposed guidance, such review 

should take into account the sizes of 

trades in the centralized market and the 

market’s volume and liquidity. This 

review and any necessary adjustments 

should be made to both new and 

existing contracts. In addition, quarterly 

reviews of minimum block trade sizes 

should take into account whether the 

minimum sizes ensure that block trades 

remain the exception, rather than the 

rule. As noted above, transactions off 

the centralized market should remain an 

exception as the expectation is that most 

trading will occur on the centralized 

market. Exchanges that established their 

minimum sizes for block trades long ago 

may find they need to adjust their 

minimum sizes as a result of changes in 

volume, liquidity, or the typical sizes of 

transactions in the respective market. 

Finally, the Commission notes that 

DCMs are free to require a minimum 

size that is larger than what the 

guidance suggests a ‘‘large’’ trade would 

be. They are not obligated to set the 

minimum size at the smallest acceptable 

minimum size. 

E. Block Trades Between Affiliated 

Parties 

Based on comment letters and the 

Commission’s growing experience with 

implementing Core Principle 9, the 

Commission has determined to revise 

Regulation 1.38 and the related 

acceptable practices regarding block 

trades between affiliated parties. An 

affiliated party is a party that directly or 

indirectly through one or more persons, 

controls, is controlled by, or is under 

common control with another party. 

These proposed changes differ from the 

July 1, 2004 NPRM’s treatment of block 

trades between affiliated parties. 

Block trades between affiliated parties 

may be permitted by DCMs, so long as 

appropriate safeguards are in place to 

guard against the heightened possibility 

that transactions between two closely 

related parties are more susceptible to 

abuse, such as setting unreasonable 

prices, artificially boosting volume, 

money passing, or wash trading. It is not 

always clear that two related parties are 

motivated solely by their own separable 

best interests, since they often both 

report to or are accountable to a single 

person or entity, and as such they may 

be encouraged by those in control of 

both sides of the transaction to engage 

in trading strategies that benefit from 

abusive trading practices. It is for this 

reason that the Commission believes it 


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15Similarly, the proposed acceptable practices 

regarding the prices of block trades also include 

reference to Regulation 1.38 as it relates to block 

trades between affiliated parties. 

16 DIVISION OF TRADING AND MARKETS, 

REPORT ON EXCHANGES OF FUTURES FOR 

PHYSICALS (1987) (the 1987 EFP Report); 63 FR 

3708 (Jan. 26, 1998) (the 1998 EFP Concept 

Release). 

17See generally, the 1987 EFP Report. See also, 

CBOT Rules 331.08; CFE Rule 414; CME Rule 538; 

KCBT Rules 1128.00, 1128.02, 1129.00, and 

1129.02; MGE Rule 719; NYBOT Rules 4.12 and 

4.13; NYMEX Rules 6.21, 6.21A and 6.21E; and 

OCX Rule 416. 

is appropriate that DCMs that allow 

block trades between affiliates also 

include additional safeguards to guard 

against the heightened possibility of 

abuse, and that DCMs must have rules 

to ensure that these safeguards are 

satisfied. 

The Commission proposes to amend 

Regulation 1.38 by requiring that when 

block trades take place between 

affiliated parties: (i) The block trade 

price must be based on a competitive 

market price, either by falling within the 

contemporaneous bid/ask spread on the 

centralized market or calculated based 

on a contemporaneous market price in 

a related cash market; (ii) each party 

must have a separate and independent 

legal bona fide business purpose for 

engaging in the trades; and (iii) each 

party’s decision to enter into the block 

trade must be made by a separate and 

independent decision-maker. Under the 

acceptable practices for Core Principle 

9, a DCM could permit block trades 

between affiliated parties that meet 

these requirements and are otherwise 

appropriate parties to engage in block 

trading.15

The Commission believes these 

proposed requirements for block trades 

between affiliated parties strike an 

appropriate balance between making 

clear that such trades are allowable and 

ensuring that each party is acting 

independently when it agrees to enter 

into such a transaction. The requirement 

that affiliated parties who engage in a 

block trade meet objective criteria 

regarding that block trade will help 

guard against the possibility that such 

closely related parties might collude in 

some type of abuse. 

F. Exchange of Futures for a Commodity 

or for a Derivatives Position 

In the July 1, 2004 NPRM, the 

Commission proposed to include 

acceptable practices regarding the 

exchange of futures for a commodity or 

derivatives position (often referred to as 

an exchange-for-physical or EFP, 

although it also includes, but is not 

limited to, similar transactions such as 

exchanges-for-swaps or exchanges-forrisk). Specifically, the Commission 

proposed a definition of what 

constituted a bona fide EFP in the Core 

Principle 9 acceptable practices. The 

Commission received comments from 

FIA, CBOT and CME regarding these 

acceptable practices. Among other 

things, the commenters requested the 

Commission clarify that trades 

commonly known as ‘‘transitory EFPs’’ 

are still permitted and that third parties 

may effect the cash portion of an EFP 

transaction. 

In response to these comments and 

other concerns that have arisen since 

the July 1, 2004 NPRM, the Commission 

is proposing to make two substantive 

amendments to its acceptable practices 

regarding exchanges of futures for a 

commodity or derivatives position. 

First, the Commission is proposing to 

expand the acceptable practices 

regarding EFPs’ bona fides, pricing, 

reporting, and DCMs’ publication of EFP 

transactions. Second, the Commission is 

proposing to make clear that transitory 

EFPs are permissible when each part of 

the transaction—the EFP itself and the 

related cash transaction—is a standalone, bona fide transaction. 

The Commission is proposing to offer 

general acceptable practices for 

exchange of futures for a commodity or 

derivatives position, including a 

definition of what constitutes a bona 

fide EFP, the pricing of the legs, the 

reporting of the transaction to the 

exchange, and the exchange’s 

obligation, consistent with Regulation 

16.01, to publicize daily the total 

quantity of exchanges of futures for a 

commodity or derivatives position. In 

response to the comment letters, the 

Commission is proposing to clarify in 

the text of the acceptable practices that 

a DCM may permit a third party to 

facilitate the transfer of the cash leg of 

an EFP, so long as the commodity or 

derivatives position is passed through to 

the party receiving the futures position. 

These provisions are meant to be 

consistent with previous publications 

by the Commission, including the 1987 

EFP Report prepared by the 

Commission’s then Division of Trading 

and Markets and the 1998 EFP Concept 

Release.16

The essential elements of bona fide 

EFPs have been provided in the 

guidance to Core Principle 9 below. The 

proposed elements are found in current 

contract market ‘‘exchange of futures’’ 

rules and are based on the essential 

elements for bona fide EFPs detailed in 

the 1987 EFP Report.17 The elements 

include separate but integrally related 

transactions, an actual transfer of 

ownership of the commodity or 

derivatives position, and both legs 

transacted between the same two 

parties. The Commission notes that the 

determination whether an actual 

transfer of ownership has occurred will 

depend upon the facts and 

circumstances of each transaction. In 

each instance where an exchange of 

futures for a commodity or for a 

derivatives position is linked to another 

offsetting transaction, the particular 

facts and circumstances may warrant a 

determination that there was not an 

actual ownership transfer of each leg of 

the commodity or derivatives position. 

Further, the Commission is proposing 

that the acceptable practices relating to 

the bona fides of an EFP should apply 

to transitory EFPs as well. A transitory 

EFP involves both an EFP and an 

offsetting cash commodity transfer. For 

example, party A purchases the cash 

commodity from party B and then 

engages in an EFP whereby A sells the 

cash commodity back to B and receives 

a long futures position. As a result of 

these two transactions, the parties 

acquire futures positions but end up 

with the same cash market positions 

they had before the transaction. 

To be a legitimate transitory EFP, the 

cash transaction must be bona fide and 

the EFP itself must be bona fide. As 

with an EFP, a primary indicator of a 

bona fide cash transaction is the actual 

transfer of ownership of the cash 

commodity or position. In this regard, 

the cash leg of the transaction must be 

able to stand on its own as a 

commercially appropriate transaction, 

and may not be intrinsically linked to 

the EFP transaction. A cash commodity 

transfer that cannot stand on its own 

may indicate that there was no actual 

economic risk in the cash leg of the 

related EFP and may raise concerns 

about whether the EFP involved an 

‘‘exchange’’ of futures contracts for cash 

commodity as required by Section 4c(a) 

of the Act. There must be no obligation 

on either party that the cash transaction 

will require the execution of a related 

EFP, or vice versa. 

G. Other Proposed Acceptable Practices 

The rest of the proposed acceptable 

practices are for the most part similar to 

what was proposed in the July 1, 2004 

NPRM. As with the acceptable practices 

discussed more fully above, the 

Commission considered the comment 

letters when re-drafting these acceptable 

practices, and strove to clarify any 

ambiguities and make them easier to 

read. And, as in the July 1, 2004 NPRM, 

the Commission notes that these 

proposed acceptable practices are based 

in large measure on existing DCM rules. 


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18See, e.g., CBOT Rule 331.05(d); CME Rule 

526(F); NYMEX Rule 6.21C. 19See, e.g., CME Rule 526(F). 

20This also is an element of compliance with 

Designation Criterion 3 (Fair and Equitable Trading) 

and Core Principle 8 (Daily Publication of Trading 

Information). 

21FASB Statement No. 133 provides guidance on 

the use of accounting for corporate hedge activity 

involving derivative transactions. The statement 

includes guidance on documenting the hedging 

relationship. 

1. Block Trade Prices 

In the July 1, 2004 NPRM, the 

Commission proposed acceptable 

practices regarding the prices of block 

trades. The most basic element of this 

acceptable practice is that prices be ‘‘fair 

and reasonable.’’ In its comment letter, 

CBOT noted an inconsistency between 

the text of the July 1, 2004 NPRM 

proposed guidance and the preamble 

and also questioned whether 

‘‘circumstances’’ of the party or market 

could or should be relevant in 

determining whether a block trade price 

is fair and reasonable. In this proposal, 

the Commission intends to eliminate the 

ambiguity and to make clear its belief 

that a DCM could permit 

‘‘circumstances’’ to be a factor in 

determining whether a block trade price 

was fair and reasonable. Such an 

approach could include, for example, 

the participants’ legitimate trading 

objectives or the condition of the 

market. The Commission does not 

believe that permitting such flexibility 

will harm the centralized market 

because, regardless of how a block trade 

price is determined, it must still be fair 

and reasonable. The ability to price the 

trade away from the centralized market 

is not a carte blanche to set unfair or 

unreasonable prices. 

2. Block Trade Reporting Times 

In the July 1, 2004 NPRM, the 

Commission proposed in its acceptable 

practices that block trades should be 

reported to the contract market within a 

reasonable period of time. In response, 

DRW made two suggestions: First, that 

reasonable reporting times for block 

trades should be as close to immediately 

after the completion of the trade as 

possible, with a maximum of no more 

than 5 minutes; and second, that parties 

to a block trade should not be allowed 

to trade in the centralized market until 

information about the block trade has 

been made public. 

The Commission will re-propose that 

block trades should be reported to the 

contract market within a reasonable 

period of time. The Commission 

declines to establish a specific length of 

time in order to allow exchanges to 

determine what an appropriate length of 

time should be on a contract-by-contract 

basis. But the Commission notes that 

most current DCM rules require 

reporting of block trades within 5 

minutes.18 A small number of DCM 

rules allow as many as 15 minutes, but 

the Commission understands these are 

limited to contracts that have very high 

block trade minimum size thresholds or 

where the contracts are typically traded 

as part of large and complex spreads, 

requiring more time to double check 

details and convey the information to 

the exchange.19 When determining 

length of time for parties to report block 

trades, DCMs should consider the 

importance of providing information 

about block trades to the market as well 

as the potential for abuses, such as front 

running, and whether longer reporting 

periods may heighten the potential for 

abuse. Additionally, staff has previously 

noted that allowing a few minutes’ 

delay between the time a block trade is 

executed and reported will allow the 

market price to continue to respond to 

prevailing supply and demand factors, 

and not be unduly influenced by the 

block itself. In other words, a reporting 

delay will help the centralized market 

avoid the momentary price and volume 

distortion that would occur if large 

trades were made on the centralized 

market in the first place. In regards to 

whether parties to a block trade may 

trade in the centralized market before 

the block trade information is 

published, the Commission believes that 

the reporting window offers parties to 

the block trade an opportunity to hedge 

or offset the trade, which in turn 

supplies information to the centralized 

market. As such, the Commission 

believes that compliance with the Core 

Principles does not require that DCMs 

restrict the ability of parties to a block 

trade from making transactions on the 

central marketplace before the block 

trade is reported. DCMs, however, are 

permitted to forbid such trading. 

3. Publication of Transaction Details 

The Commission is re-proposing that 

DCMs would publicize details about 

transactions off the centralized market 

immediately upon the receipt of the 

transaction report. The Commission 

wishes to clarify that it does not intend 

to impose new publication requirements 

on DCMs in regards to trades made off 

the centralized market beyond what is 

required by the Commission’s 

regulations. So, for example, DCMs 

would need to publish the total number 

of exchanges of futures for a commodity 

or for a derivatives position, as required 

by Commission Regulation 16.01. But 

there would be no similar requirement 

to publish office trades or transfer 

trades. 

Similarly, the proposed guidance also 

identifies publication of block trade 

details by DCMs immediately upon 

receipt of block trade reports as an 

acceptable practice.20 The proposed 

acceptable practices also would require 

the DCM to identify block trades on its 

trade register. 

4. Recordkeeping 

Current Commission Regulation 

1.38(b) provides that every person 

handling, executing, clearing, or 

carrying trades, transactions or positions 

that are not competitively executed, 

must identify and mark by appropriate 

symbol or designation all such 

transactions or contracts and all 

associated orders, records, and 

memoranda. In addition to updating the 

language of Regulation 1.38(b), the 

proposed amendments add this 

requirement to the guidance under Core 

Principle 9, in order to provide 

consolidated guidance regarding 

recordkeeping practices pertaining to 

transactions off the centralized market. 

Similarly, acceptable block trade rules 

would require parties to, and members 

facilitating, a block trade to keep 

appropriate records. Appropriate block 

trade records would comply with the 

requirements of Core Principle 10 and 

Core Principle 17. Records kept in 

accordance with the requirements of 

Statement No. 133 (‘‘Accounting for 

Derivative Instruments and Hedging 

Activities’’), issued by the Financial 

Accounting Standards Board (‘‘FASB’’), 

would be satisfactory.21 Acceptable 

block trade rules would require that 

block orders be recorded by the member 

and time-stamped with both the time 

the order was received by the member 

and the time the order was executed. 

When requested by the exchange, the 

Commission or the Department of 

Justice, parties to, and members 

facilitating, a block trade shall provide 

records to document that the block trade 

is executed in accordance with contract 

market rules. 

5. Testing of Automated Trading 

Systems 

The guidance for Core Principle 9 also 

addresses the testing and review of 

automated trading systems. Currently, 

the guidance states that acceptable 

testing of automated systems should be 

‘‘objective,’’ and calls for the provision 

of ‘‘objective’’ test results to the 

Commission. The proposed guidance 

would also call for the provision to the 


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Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Proposed Rules 54103 

22See CME Rule 526(C), CFE Rule 415(a)(i), 

CBOT Rule 331.05(a), NYBOT Rule 4.31(a)(ii)(A), 

OCX Rule 417(a)(i), and USFE Rule 415(c). 

23 5 U.S.C. 601 et seq. 

24 47 FR 18618–21 (Apr. 30, 1982). 

25 Id. at 18618–19. 

26 Id. at 18619–20. 

27 Id. at 18620. 28 Id. at 18620. 

Commission of test results of any ‘‘nonobjective’’ testing carried out by or for 

a DCM (such as informal in-house 

reviews) regarding the system 

functioning capacity or security of any 

automated trading systems. Although 

the results of ‘‘non-objective’’ testing 

would be of more limited use, the 

Commission believes that test results of 

any ‘‘non-objective’’ testing carried out 

by or for the DCM should also be 

provided to the Commission. 

6. Parties to a Block Trade 

The Commission is proposing that 

block trade parties are required to be 

eligible contract participants (‘‘ECPs’’) 

as that term is defined in Section 1a(12) 

of the Act, although commodity trading 

advisors (‘‘CTAs’’) and investment 

advisors having over $25 million in 

assets under management, including 

foreign persons performing equivalent 

roles, are allowed to carry out block 

trades for non-ECP customers. 

A majority of exchanges that permit 

block trading prohibit persons from 

effecting block trades on behalf of 

customers unless the person receives a 

customer’s explicit instruction or prior 

consent to do so.22 The proposed 

rulemaking incorporates this 

prohibition as an acceptable practice. 

III. Request for Comment 

The Commission requests comment 

on all aspects of this proposal. 

IV. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 23

requires federal agencies, in proposing 

rules, to consider the impact of those 

rules on small businesses. The rule 

amendments proposed herein will affect 

DCMs, FCMs, CTAs and large traders. 

The Commission has previously 

established certain definitions of ‘‘small 

entities’’ to be used by the Commission 

in evaluating the impact of its rules on 

small entities in accordance with the 

RFA.24 The Commission has previously 

determined that DCMs,25 registered 

FCMs,26 and large traders 27 are not 

small entities for purposes of the RFA. 

With respect to CTAs, the Commission 

has determined to evaluate within the 

context of a particular rule proposal 

whether CTAs would be considered 

‘‘small entities’’ for purposes of the 

Regulatory Flexibility Act and, if so, to 

analyze the economic impact on the 

affected entities of any such rule at that 

time.28 The Commission believes that 

the instant proposed rules will not place 

any new burdens on entities that would 

be affected hereunder, and the 

Commission does not expect the 

proposed amendments in most cases to 

cause persons to change their current 

methods of doing business. This is 

because requirements under this 

proposal, if adopted, would be similar 

to most existing DCM requirements. 

Accordingly, the Commission does 

not expect the rules, as proposed herein, 

to have a significant economic impact 

on a substantial number of small 

entities. Therefore, the Chairman, on 

behalf of the Commission, hereby 

certifies, pursuant to 5 U.S.C. 605(b), 

that the proposed amendments will not 

have a significant economic impact on 

a substantial number of small entities. 

The Commission invites the public to 

comment on this finding and on its 

proposed determination that the entities 

covered by these rules would not be 

small entities for purposes of the 

Regulatory Flexibility Act. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

imposes certain requirements on federal 

agencies (including the Commission) in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA. The 

proposed rule amendments do not 

require a new collection of information 

on the part of any entities subject to 

these rules. Accordingly, for purposes of 

the Paperwork Reduction Act of 1995, 

the Commission certifies that these rule 

amendments do not impose any new 

reporting or recordkeeping 

requirements. 

C. Cost-Benefit Analysis 

Section 15 of the Act, as amended by 

section 119 of the CFMA, requires the 

Commission to consider the costs and 

benefits of its action before issuing a 

new regulation. The Commission 

understands that, by its terms, Section 

15 does not require the Commission to 

quantify the costs and benefits of a new 

regulation or to determine whether the 

benefits of the proposed regulation 

outweigh its costs. Nor does it require 

that each proposed regulation be 

analyzed in isolation when that 

regulation is a component of a larger 

package of regulations or of rule 

revisions. Rather, Section 15 simply 

requires the Commission to ‘‘consider 

the costs and benefits’’ of its action. 

Section 15(a) further specifies that 

costs and benefits shall be evaluated in 

light of five broad areas of market and 

public concern: Protection of market 

participants and the public; efficiency, 

competitiveness, and financial integrity 

of futures markets; price discovery; 

sound risk management practices; and 

other public interest considerations. 

Accordingly, the Commission could, in 

its discretion, give greater weight to any 

one of the five enumerated areas of 

concern and could, in its discretion, 

determine that, notwithstanding its 

costs, a particular regulation was 

necessary or appropriate to protect the 

public interest, to effectuate any of the 

provisions, or to accomplish any of the 

purposes of the Act. 

The proposed amendments constitute 

a package of amendments to Regulation 

1.38 and to guidance that the 

Commission originally promulgated to 

implement the CFMA. The amendments 

are proposed in light of past experience 

with the implementation of the CFMA 

and are intended to facilitate increased 

flexibility and consistency. Some 

sections of the proposed amendments 

merely clarify or make explicit past 

Commission decisions concerning 

transactions off the centralized market. 

As most provisions incorporate DCM 

rules previously approved by the 

Commission or submitted to the 

Commission under its self-certification 

procedures, the proposed amendments 

would not, in most cases, impose new 

costs on DCMs or market participants. 

The great majority of current DCM rules 

already meet the acceptable practices 

proposed. Furthermore, these 

amendments incorporate standards that 

the Commission has previously 

determined protect market participants 

and the public, the financial integrity or 

price discovery function of the markets, 

and sound risk management practices. 

Moreover, the additional clarification of 

acceptable practices provides a benefit 

to markets and market participants. In 

addition, the amendments are expected 

to benefit efficiency and competition by 

providing more detailed guidance as to 

acceptable means of meeting the 

applicable designation criteria and core 

principles, thus allowing a greater 

degree of legal certainty to the markets 

and market participants. 

After considering the five factors 

enumerated in the Act, the Commission 

has determined to propose the rules and 

rule amendments set forth below. The 

Commission invites public comment on 

its application of the cost-benefit 

provision. Commenters also are invited 

to submit any data that they may have 

quantifying the costs and benefits of the 


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54104 Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Proposed Rules 

proposed rules with their comment 

letters. 

List of Subjects 

17 CFR Part 1 

Block transactions, Commodity 

futures, Contract markets, Transactions 

off the centralized market, Reporting 

and recordkeeping requirements. 

17 CFR Part 38 

Block transactions, Commodity 

futures, Contract markets, Transactions 

off the centralized market, Reporting 

and recordkeeping requirements. 

In consideration of the foregoing, 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. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1, 

16, 16a, 19, 21, 24, and 24, as amended by 

the Commodity Futures Modernization Act of 

2000, Appendix E of Pub L. 106–554, 114 

Stat. 2763 (2000). 

2. Section 1.38 is revised to read as 

follows: 

§ 1.38 Execution of transactions. 

(a) Transactions on the centralized 

market. All purchases and sales of any 

commodity for future delivery, and of 

any commodity option, on or subject to 

the rules of a designated contract 

market, shall be executed openly and 

competitively by open outcry, or posting 

of bids and offers, or by other equally 

open and competitive methods, in a 

place or through an electronic system 

provided by the contract market, during 

the hours prescribed by the contract 

market for trading in such commodity or 

commodity option. 

(b) Transactions off the centralized 

market; requirements. 

(1) Notwithstanding paragraph (a) of 

this section, transactions may be 

executed off the centralized market, 

including by transfer trades, office 

trades, block trades, inter-exchange 

spread transactions, or trades involving 

the exchange of futures for commodities 

or for derivatives positions, if transacted 

in accordance with written rules of a 

contract market that provide for 

execution away from the centralized 

market and that have been certified to 

or approved by the Commission. Every 

person handling, executing, clearing, or 

carrying the trades, transactions or 

positions described in this paragraph 

shall comply with the rules of the 

appropriate contract market and 

derivatives clearing organization, 

including to identify and mark by 

appropriate symbol or designation all 

such transactions or contracts and all 

orders, records, and memoranda 

pertaining thereto. 

(2) Block trades between affiliated 

parties; requirements. An affiliated 

party is a party that directly or 

indirectly through one or more persons, 

controls, is controlled by, or is under 

common control with another party. In 

addition to the other requirements of 

this section, block trades between 

affiliated parties are permitted only in 

accordance with written rules of a 

contract market that provide that: 

(i) The block trade price must be 

based on a competitive market price, 

either by falling within the 

contemporaneous bid/ask spread on the 

centralized market or calculated based 

on a contemporaneous market price in 

a related cash market, 

(ii) Each party must have a separate 

and independent legal bona fide 

business purpose for engaging in the 

trades, and 

(iii) Each party’s decision to enter into 

the block trade must be made by a 

separate and independent decisionmaker. 

PART 38—DESIGNATED CONTRACT 

MARKETS 

3. The authority citation for part 38 is 

revised to read as follows: 

Authority: 7 U.S.C. 2, 5, 6, 6c, 7 and 12a, 

as amended by the Commodity Futures 

Modernization Act of 2000, Appendix E of 

Pub. L. 106–554, 114 Stat. 2763 (2000). 

4. Appendix B to Part 38 is revised to 

read as follows: 

Appendix B to Part 38—Guidance on, 

and Acceptable Practices in, 

Compliance With Core Principles 

Core Principle 9 of section 5(d) of the Act: 

EXECUTION OF TRANSACTIONS—The 

board of trade shall provide a competitive, 

open, and efficient market and mechanism 

for executing transactions. 

(a) Guidance. 

(1) Transactions on the centralized market. 

(i) Purchases and sales of any commodity 

for future delivery, and of any commodity 

option, on or subject to the rules of a contract 

market shall be executed openly and 

competitively by open outcry, by posting of 

bids and offers, or by other equally open and 

competitive methods, in a place or through 

an electronic system provided by the contract 

market, during the hours prescribed by the 

contract market for trading in such 

commodity or commodity option. 

(ii) A competitive and open market’s 

mechanism for executing transactions 

includes a contract market’s methodology for 

entering orders and executing transactions. 

(iii) Appropriate objective testing and 

review of a contract market’s automated 

systems should occur initially and 

periodically to ensure proper system 

functioning, adequate capacity and security. 

A designated contract market’s analysis of its 

automated system shall address compliance 

with appropriate principles for the oversight 

of automated systems, ensuring proper 

system functionality, adequate capacity and 

security. 

(2) Transactions off the centralized market. 

(i) In order to facilitate the execution of 

transactions, transactions may be executed 

off the centralized market, including by 

transfer trades, office trades, block trades, 

inter-exchange spread transactions, or trades 

involving the exchange of futures for a 

commodity or for a derivatives position, if 

transacted in accordance with written rules 

of a contract market that specifically provide 

for execution of such transactions away from 

the centralized market and that have been 

certified to or approved by the Commission. 

(ii) Every person handling, executing, 

clearing, or carrying trades off the centralized 

market shall comply with the rules of the 

applicable designated contract market and 

derivatives clearing organization, including 

to identify and mark by appropriate symbol 

or designation all such transactions or 

contracts and all orders, records, and 

memoranda pertaining thereto. 

(iii) A designated contract market that 

determines to allow trades off the centralized 

market shall ensure that such trading does 

not operate in a manner that compromises 

the integrity of price discovery on the 

centralized market or facilitate illegal or nonbona fide transactions. 

(3) Block trades–minimum size. 

(i) When determining the number of 

contracts that constitutes the appropriate 

minimum size for block trades, a contract 

market should ensure that block trades are 

limited to large transactions and that the 

minimum size is appropriate for that specific 

contract, by applying the principles set forth 

in this section. For any contract that has been 

trading for one calendar quarter or longer, the 

acceptable minimum block trade size should 

be a number larger than the size at which a 

single buy or sell order is customarily able 

to be filled in its entirety at a single price in 

that contract’s centralized market. Factors to 

consider in determining what constitutes a 

large transaction could include an analysis of 

the market’s volume, liquidity and depth; a 

review of typical trade sizes and/or order 

sizes; and input from floor brokers, floor 

traders and/or market users. For any contract 

that has been listed for trading for less than 

one calendar quarter, an acceptable 

minimum block trade size in such contract 

should be the size of trade the exchange 

reasonably anticipates will not be able to be 

filled in its entirety at a single price in that 

contract’s centralized market. An appropriate 

minimum size could be estimated based on 

centralized market data in a related futures 

contract, the same contract traded on another 

exchange, or trading activity in the 

underlying cash market. The exchange could 

also consider the anticipated volume, 


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liquidity and depth of the contract; input 

from potential market users; or consider that 

exchange’s experience with offering similar 

new contracts. The minimum size thresholds 

for block trades should be reviewed 

periodically to ensure that the minimum size 

remains appropriate for each contract. Such 

review should take into account the sizes of 

trades in the centralized market and the 

market’s volume and liquidity. 

(b) Acceptable practices. 

(1) General matters relating to trade 

execution facilities. 

(i) General provisions. [Reserved] 

(ii) Electronic trading systems. 

(A) The guidelines issued by the 

International Organization of Securities 

Commissions (IOSCO) in 1990 (which have 

been referred to as the ‘‘Principles for ScreenBased Trading Systems’’), and adopted by the 

Commission on November 21, 1990 (55 FR 

48670), as supplemented in October 2000, are 

appropriate guidelines for a designated 

contract market to apply to electronic trading 

systems. 

(B) Any objective testing and review of the 

system should be performed by a qualified 

independent professional. A professional that 

is a certified member of the Information 

Systems Audit and Control Association 

experienced in the industry is an example of 

an acceptable party to carry out testing and 

review of an electronic trading system. 

(C) Information gathered by analysis, 

oversight, or any program of testing and 

review of any automated systems regarding 

system functioning, capacity and security 

must be made available to the Commission 

upon request. 

(iii) Pit trading. [Reserved] 

(2) Transactions off the centralized market. 

(i) General provisions. 

(A) Allowable trades. Acceptable 

transactions off the centralized market 

include: transfer trades, office trades, block 

trades, inter-exchange spread transactions or 

trades involving the exchange of futures for 

commodities or for derivatives positions, if 

transacted in accordance with written rules 

of a contract market that specifically provide 

for execution away from the centralized 

market and that have been certified to or 

approved by the Commission. 

(B) Reporting. Transactions executed off 

the centralized market should be reported to 

the contract market within a reasonable 

period of time. 

(C) Publication. The contract market 

should publicize details about block trade 

transactions immediately upon the receipt of 

the transaction report and publicize daily the 

total quantity of the exchange of futures for 

commodities or for derivatives positions and 

the total quantity of the block trades that are 

included in the total volume of trading, as 

required by § 16.01 of this chapter. 

(D) Recordkeeping. Parties to, and 

members facilitating, transactions off the 

centralized market should keep appropriate 

records. Appropriate recordkeeping for 

transactions off the centralized market would 

comply with Core Principle 10 and Core 

Principle 17. 

(E) Identification of trades. Section 1.38(b) 

of this chapter establishes the requirements 

regarding the identification of trades off the 

centralized market. It requires contract 

market rules to require every person 

handling, executing, clearing, or carrying 

trades, transactions or positions that are 

executed off the centralized market, 

including transfer trades, office trades, block 

trades or trades involving the exchange of 

futures for a commodity or for a derivatives 

position, to identify and mark by appropriate 

symbol or designation all such transactions 

or contracts and all orders, records, and 

memoranda pertaining thereto. 

(F) Identification in the trade register. The 

contract market should identify transactions 

executed off the centralized market in its 

trade register, using separate indicators for 

each such type of transaction. 

(ii) Block trades. 

(A) Acceptable minimum block trade size. 

(a) New contracts or contracts that have 

been listed for trading for less than one 

calendar quarter. If an exchange has no 

reasonable basis upon which to estimate an 

initial minimum size, a minimum block trade 

size of 100 contracts would be appropriate. 

(b) Periodic review. The minimum size 

thresholds for block trades should be 

reviewed no less frequently than on a 

quarterly basis to ensure that the minimum 

size remains appropriate for each contract. 

(B) Appropriate parties. 

(a) Acceptable block trade parties should 

be limited to eligible contract participants. 

However, contract market rules could also 

allow a commodity trading advisor registered 

pursuant to Section 4m of the Act, or a 

principal thereof, including any investment 

advisor who satisfies the criteria of 

§ 4.7(a)(2)(v) of this chapter, or a foreign 

person performing a similar role or function 

and subject as such to foreign regulation, to 

transact block trades for customers who are 

not eligible contract participants, if such 

commodity trading advisor, investment 

advisor or foreign person has more than 

$25,000,000 in total assets under 

management. 

(b) Affiliated parties. An affiliated party is 

a party that directly or indirectly through one 

or more persons, controls, is controlled by, or 

is under common control with another party. 

Section 1.38(b) of this chapter establishes the 

requirements regarding block trades between 

affiliated parties. Contract market rules could 

permit block trades between affiliated parties 

that meet the requirements of Regulation 1.38 

and are otherwise appropriate parties. 

(C) Aggregation of orders. The aggregation 

of orders for different accounts in order to 

satisfy the minimum size requirement should 

be prohibited except in appropriate 

circumstances. Aggregation would be 

acceptable if done by a commodity trading 

advisor registered pursuant to Section 4m of 

the Act, or a principal thereof, including any 

investment advisor who satisfies the criteria 

of § 4.7(a)(2)(v) of this chapter, or a foreign 

person performing a similar role or function 

and subject as such to foreign regulation, if 

such commodity trading advisor, investment 

advisor or foreign person has more than 

$25,000,000 in total assets under 

management. 

(D) Acting for a customer. A person should 

transact a block trade on behalf of a customer 

only when the person has received an 

instruction or prior consent to do so from the 

customer. 

(E) Recordkeeping. Parties to, and members 

facilitating, a block trade should keep 

appropriate records. Appropriate block trade 

records would comply with Core Principle 10 

and Core Principle 17. Records kept in 

accordance with the requirements of FASB 

Statement No. 133 (‘‘Accounting for 

Derivative Instruments and Hedging 

Activities’’) would be acceptable records. 

Block trade orders must be recorded by the 

member and time-stamped with both the 

time the order was received and the time the 

order was reported, and must indicate when 

block trades are between affiliated parties. 

When requested by the exchange, the 

Commission or the Department of Justice, 

parties to, and members facilitating, a block 

trade shall provide records to document that 

the block trade is executed in conformance 

with contract market rules. 

(F) Reporting. Block trades should be 

reported to the contract market within a 

reasonable period of time. 

(G) Publication. The contract market 

should publicize details about the block trade 

immediately upon the receipt of the 

transaction report and publicize daily the 

total quantity of the block trades that are 

included in the total volume of trading, as 

required by § 16.01 of this chapter. 

(H) Identification in the trade register. The 

contract market should identify block trades 

as such on its trade register, and should 

identify when block trades are between 

affiliated parties. 

(I) Pricing. (a) Block trades between nonaffiliated parties should be at a price that is 

fair and reasonable. Consideration of whether 

a block trade price is fair and reasonable 

could take into account the size of the block 

plus the price and size of other trades in any 

relevant markets at the applicable time, or 

the circumstances of the market or the parties 

to the block trade. Relevant markets could 

include the contract market itself, the 

underlying cash markets and/or other related 

futures or options markets. If a contract 

market rule requiring a fair and reasonable 

price includes the circumstances of the 

parties or of the market, a block trade 

participant could execute a block transaction 

at a price that was away from the market 

provided that the participant retains 

documentation to demonstrate that the price 

was indeed fair and reasonable under the 

participant’s or market’s particular 

circumstances. 

(b) Block trades between affiliated parties 

are subject to the pricing requirements of 

§ 1.38(b) of this chapter. 

(iii) Exchange of futures for commodities or 

for derivatives positions. 

(A) Bona fide exchange of futures for 

commodities or for derivatives positions. The 

exchange of futures for commodities or for 

derivatives positions would include separate 

but integrally related transactions involving 

the same or a related commodity, with price 

correlation and quantitative equivalence of 

the futures and cash legs. An exchange of 

futures for commodities or for derivatives 

positions would be between a buyer of 

futures who is the seller of the corresponding 

commodity or derivatives position and a 


dwashington3 on PRODPC61 with PROPOSALS
54106 Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Proposed Rules 

seller of futures who is the buyer of the 

corresponding commodity or derivatives 

position. A third party could be permitted to 

facilitate the purchase and sale of the 

commodity or derivatives position as long as 

the commodity or derivatives position is 

passed through to the party that receives the 

futures position. The transaction would have 

to result in an actual transfer of ownership 

of the commodity or derivatives position. It 

also would have to be between parties with 

different beneficial owners or under separate 

control, who had possession, right of 

possession, or right to future possession of 

the commodity or derivatives position prior 

to the trade, the ability to perform the 

transaction, and resulting in a transfer of 

title. 

(B) Pricing. The price differential between 

the futures leg and the commodities leg or 

derivatives position should reflect 

commercial realities, and at least one leg of 

the transaction should be priced at the 

prevailing market price. 

(C) Transitory exchange of futures for 

commodities or for derivatives positions. 

Parties to an exchange of futures for 

commodities or for derivatives positions 

could be permitted to engage in a separate 

but related cash transaction that offsets the 

cash leg of the exchange of futures for 

commodities or for derivatives positions. The 

related cash transaction would have to result 

in an actual transfer of ownership of the 

commodity or derivatives position and 

demonstrate other indicia of being a bona 

fide transaction as described in paragraph (a). 

The cash transaction must be able to stand 

on its own as a commercially appropriate 

transaction, with no obligation on either 

party that the cash transaction be dependent 

upon the execution of the related exchange 

of futures for commodities or for derivatives 

positions, or vice versa. 

(D) Reporting. Exchanges of futures for 

commodities or for derivatives positions 

should be reported to the contract market 

within a reasonable period of time. 

(E) Publication. The contract market would 

publicize daily the total quantity of 

exchanges of futures for commodities or for 

derivatives positions that are included in the 

total volume of trading, as required by 

§ 16.01 of this chapter. 

(iv) Office trades. [Reserved] 

(v) Transfer trades. [Reserved] 

Issued in Washington, DC on September 

12, 2008 by the Commission. 

David Stawick, 

Secretary of the Commission. 

[FR Doc. E8–21865 Filed 9–17–08; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Food and Drug Administration 

21 CFR Part 1 

[Docket No. FDA–2007–N–0465] 

RIN 0910–AF61 

Label Requirement for Food That Has 

Been Refused Admission into the 

United States 

AGENCY: Food and Drug Administration, 

HHS. 

ACTION: Proposed rule. 

SUMMARY: The Food and Drug 

Administration (FDA) is issuing a 

proposed rule that would require 

owners or consignees to label imported 

food that is refused entry into the 

United States. The label would read, 

‘‘UNITED STATES: REFUSED ENTRY.’’ 

The proposal would describe the label’s 

characteristics (such as its size) and 

processes for verifying that the label has 

been affixed properly. We are taking this 

action to prevent the reintroduction of 

refused food into the United States, to 

facilitate the examination of imported 

food, and to implement part of the 

Public Health Security and Bioterrorism 

Preparedness and Response Act of 2002. 

DATES: Submit written or electronic 

comments on the proposed rule by 

December 2, 2008. Submit comments on 

information collection issues under the 

Paperwork Reduction Act of 1995 

October 20, 2008, (see the ‘‘Paperwork 

Reduction Act of 1995’’ section of this 

document). 

ADDRESSES: You may submit comments, 

identified by Docket No. FDA–2007–N– 

0465, by any of the following methods, 

except that comments on information 

collection issues under the Paperwork 

Reduction Act of 1995 must be 

submitted to the Office of Regulatory 

Affairs, Office of Management and 

Budget (OMB) (see the ‘‘Paperwork 

Reduction Act of 1995’’ section of this 

document). 

Electronic Submissions 

Submit electronic comments in the 

following way: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Written Submissions 

Submit written submissions in the 

following ways: 

• FAX: 301–827–6870. 

• Mail/Hand delivery/Courier (for 

paper, disk, or CD–ROM submissions): 

Division of Dockets Management (HFA– 

305), Food and Drug Administration, 

5630 Fishers Lane, rm. 1061, Rockville, 

MD 20852. 

To ensure more timely processing of 

comments, FDA is no longer accepting 

comments submitted to the agency by email. FDA encourages you to continue 

to submit electronic comments by using 

the Federal eRulemaking Portal or the 

agency Web site, as described 

previously, in the ADDRESSES portion of 

this document under Electronic 

Submissions. 

Instructions: All submissions received 

must include the agency name and 

docket number and Regulatory 

Information Number (RIN) for this 

rulemaking. All comments received may 

be posted without change to http:// 

www.regulations.gov, including any 

personal information provided. For 

additional information on submitting 

comments, see the ‘‘Comments’’ heading 

of the SUPPLEMENTARY INFORMATION

section of this document. 

Docket: For access to the docket to 

read background documents or 

comments received, go to http:// 

www.regulations.gov and insert the 

docket number, found in brackets in the 

heading of this document, into the 

‘‘Search’’ box and follow the prompts 

and/or go to the Division of Dockets 

Management, 5630 Fishers Lane, rm. 

1061, Rockville, MD 20852. 

FOR FURTHER INFORMATION CONTACT: 

Philip L. Chao, Office of Policy and 

Planning (HF–23), Food and Drug 

Administration, 5600 Fishers Lane, 

Rockville, MD 20857, 301–827–0587. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

A. How Did the Idea of Marking Refused 

Food Imports Originate? 

Section 801 of the Federal Food, Drug, 

and Cosmetic Act (the act) (21 U.S.C. 

381) authorizes us to examine foods, 

drugs, devices, and cosmetics that are 

imported or offered for import into the 

United States and to refuse admission to 

products that appear, from examination 

or otherwise, to be (among other things) 

adulterated or misbranded. 

Our examination of food imports 

usually begins with an electronic prior 

notice and then an entry review to 

determine whether additional scrutiny 

at arrival or thereafter is warranted. We 

may, based on our review, permit the 

goods to proceed without further 

examination. We may take additional 

steps to determine whether the 

shipment appears to comply with the 

act, including: (1) Visually examining 

the goods; (2) taking samples of the 

goods for laboratory analysis; (3) 

verifying the registration, declarations, 

and certifications for the goods; and/or 

(4) requesting supporting 

documentation. If our additional 


dwashington3 on PRODPC61 with PROPOSALS