I

104TH CONGRESS

2D SESSION H. R. 4276

To amend the Commodity Exchange Act to provide a conditional exemption

for certain transactions involving professional markets, to clarify the

effect of the designation of a board of trade as a contract market,

to simplify the process for the making effective of contract market

rules, to regulate audit trail requirements, to establish cost-benefit analysis requirements, to combat fraud in transactions in or involving foreign

currency, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

SEPTEMBER 28, 1996

Mr. EWING introduced the following bill; which was referred to the Committee

on Agriculture

A BILL

To amend the Commodity Exchange Act to provide a conditional exemption for certain transactions involving professional markets, to clarify the effect of the designation

of a board of trade as a contract market, to simplify

the process for the making effective of contract market

rules, to regulate audit trail requirements, to establish

cost-benefit analysis requirements, to combat fraud in

transactions in or involving foreign currency, and for

other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

2 (a) SHORT TITLE.—This Act may be cited as the

3 ‘‘Commodity Exchange Act Amendments of 1996’’.

4 (b) TABLE OF CONTENTS.—The table of contents of

5 this Act is as follows:

Sec. 1. Short title; table of contents.

TITLE I—ADMINISTRATION OF COMMODITY EXCHANGE

ACT

Sec. 101. Findings and purposes.

Sec. 102. Conditional exemption from Commodity Exchange Act for certain

transactions involving professional markets.

Sec. 103. Designation of contract markets.

Sec. 104. Process for submission and disapproval of contract market rules.

Sec. 105. Regulation of audit trail requirements.

Sec. 106. Use of benefit-cost analysis.

Sec. 107. Commission oversight and deficiency orders.

TITLE II—TREASURY AMENDMENT CLARIFICATION

Sec. 201. Regulation of transactions in or involving foreign currency.

6 TITLE I—ADMINISTRATION OF

7 COMMODITY EXCHANGE ACT

8 SEC. 101. FINDINGS AND PURPOSES.

9 Section 3 of the Commodity Exchange Act (7 U.S.C.

10 5) is amended to read as follows:

11 ‘‘SEC. 3. FINDINGS AND PURPOSES.

12 ‘‘(a) FINDINGS.—The Congress finds the following:

13 ‘‘(1) Commodity futures and commodity options

14 are traded in interstate commerce, and the regula15 tion of transactions in or involving commodity fu16 tures and commodity options is in the national pub17 lic interest.
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1 ‘‘(2) Commodity futures and commodity options

2 transactions are used to hedge and manage price or

3 other economic risks faced by businesses and finan4 cial enterprises throughout the world.

5 ‘‘(3) Such hedging activity allows businesses

6 and financial enterprises to operate in a more effi7 cient manner, with corresponding benefits to con8 sumers and others served by these businesses and

9 enterprises.

10 ‘‘(4) Liquid trading in commodity futures and

11 commodity options contracts also provides a mecha12 nism for discovering important pricing information

13 relating to the various commodities that are the sub14 ject of such trading.

15 ‘‘(5) Such pricing information may be widely

16 quoted and disseminated in order to allow consum17 ers, businesses, and financial enterprises to rely

18 upon such pricing information in making various

19 commercial arrangements and decisions relating to

20 the price of the affected commodities in interstate

21 commerce.

22 ‘‘(6) Unless appropriately and prudently regu23 lated, whether through self-regulation by the market

24 participants themselves or through Government reg-
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1 ulation, transactions subject to this Act may not

2 serve these public interests.

3 ‘‘(b) PURPOSE.—It is the purpose of this Act to pro4 vide for self-regulation that is in the public interest and

5 Government oversight of transactions subject to this

6 Act—

7 ‘‘(1) to prevent fraud, sales practice abuses,

8 and price manipulation;

9 ‘‘(2) to foster efficient and effective transaction

10 executions at fair prices;

11 ‘‘(3) to ensure conduct consistent with just and

12 equitable principles of trade and the financial integ13 rity of all futures and options transactions, market

14 participants, and markets; and

15 ‘‘(4) to promote responsible economic or finan16 cial innovation and fair competition among all mar17 kets, market participants, and consumers of the

18 markets’ services.’’.

19 SEC. 102. CONDITIONAL EXEMPTION FROM COMMODITY EX20 CHANGE ACT FOR CERTAIN TRANSACTIONS

21 INVOLVING PROFESSIONAL MARKETS.

22 Section 4 of the Commodity Exchange Act (7 U.S.C.

23 6) is amended by adding the following subsections:

24 ‘‘(e) EXEMPTION FOR CERTAIN PROFESSIONAL MAR25 KETS.—
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1 ‘‘(1) EXEMPTION.—Subject to paragraphs (2)

2 and (3), any agreement, contract, or transaction (or

3 class thereof) that is or may be subject to this Act

4 shall be exempt from all of the provisions of this Act

5 if the only parties eligible to enter into the agree6 ment, contract, or transaction (or class thereof)

7 qualify as appropriate persons (as defined in sub8 section (c)(3)).

9 ‘‘(2) RULES AGAINST FRAUD AND MANIPULA10 TION.—Any agreement, contract, or transaction (or

11 class thereof) for which an exemption is provided

12 under this subsection shall still be subject to prohibi13 tions against fraud or manipulation issued by the

14 Commission, following notice and opportunity for

15 hearing, that are specifically designed to apply to

16 such agreements, contracts, and transactions.

17 ‘‘(3) USE OF APPROVED CLEARINGHOUSES AND

18 SYSTEMS.—Any agreement, contract, or transaction

19 (or class thereof) for which an exemption is provided

20 under this subsection shall not be submitted to any

21 clearinghouse or clearing system (or similar entity)

22 unless that clearinghouse or clearing system (or

23 similar entity) has been approved by the Commission

24 to do business as a clearinghouse or clearing sys25 tem.’’.
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1 SEC. 103. DESIGNATION OF CONTRACT MARKETS.

2 (a) DESIGNATION REQUIRED.—Section 4(a)(1) of the

3 Commodity Exchange Act (7 U.S.C. 6(a)(1)) is amended

4 by striking ‘‘for such commodity’’.

5 (b) CONDITIONS AND REQUIREMENTS FOR DESIGNA6 TION.—Section 5 of the Commodity Exchange Act (7

7 U.S.C. 7) is amended—

8 (1) by striking the matter preceding paragraph

9 (1) and inserting the following:

10 ‘‘SEC. 5. DESIGNATION OF BOARD OF TRADE AS CONTRACT

11 MARKET.

12 ‘‘(a) IN GENERAL.—The Commission shall designate

13 a board of trade as a contract market if, and only if, the

14 board of trade complies with and carries out the following

15 conditions and requirements:’’;

16 (2) by striking paragraphs (1), (7), and (8);

17 (3) by redesignating paragraphs (2) through

18 (6) as paragraphs (1) through (5), respectively; and

19 (4) by inserting at the end the following new

20 paragraph:

21 ‘‘(6) When the board of trade demonstrates

22 that it is in compliance with the requirements of sec23 tion 5a(b).’’.

24 (c) EFFECT OF DESIGNATION.—Section 5 of the

25 Commodity Exchange Act (7 U.S.C. 7) is amended by in-
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1 serting after paragraph (6), as added by subsection (b)(4),

2 the following new subsection:

3 ‘‘(b) EXISTING AND FUTURE DESIGNATIONS.—

4 ‘‘(1) FUTURE DESIGNATIONS.—If a board of

5 trade is designated as a contract market by the

6 Commission under subsection (a) and section 6, the

7 board of trade shall retain the designation for all ex8 isting or future contracts, unless—

9 ‘‘(A) the Commission suspends or revokes

10 the designation; or

11 ‘‘(B) the board of trade relinquishes the

12 designation.

13 ‘‘(2) EXISTING DESIGNATIONS.—A board of

14 trade that has been designated as a contract market

15 as of the date of the enactment of this subsection

16 shall retain the designation unless—

17 ‘‘(A) the Commission finds that a violation

18 of this Act or a rule, regulation, or order of the

19 Commission by the contract market justifies

20 suspension or revocation of the designation

21 under section 6(b); or

22 ‘‘(B) the board of trade relinquishes the

23 designation.’’.

24 (d) APPLICATION FOR DESIGNATION.—The first sen25 tence of section 6(a) of the Commodity Exchange Act (7
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1 U.S.C. 8(a)) is amended by striking ‘‘Any board of trade

2 desiring to be designated a ‘contract market’ ’’ and insert3 ing ‘‘A board of trade that has not obtained designation

4 as a contract market for a contract of sale for a commod5 ity under section 5, but that desires to be designated as

6 a contract market,’’.

7 SEC. 104. PROCESS FOR SUBMISSION AND DISAPPROVAL

8 OF CONTRACT MARKET RULES.

9 Section 5a of the Commodity Exchange Act (7 U.S.C.

10 7a) is amended—

11 (1) in subsection (a), by striking paragraph

12 (12); and

13 (2) by adding at the end the following new sub14 section:

15 ‘‘(c) CONTRACT MARKET BYLAWS, RULES, REGULA16 TIONS, AND RESOLUTIONS.—

17 ‘‘(1) SUBMISSION TO COMMISSION.—Except as

18 otherwise provided in this subsection, each contract

19 market shall submit to the Commission all bylaws,

20 rules, regulations, and resolutions (in this subsection

21 referred to as ‘rules’) made or issued by the contract

22 market, or by the governing board or any committee

23 thereof, other than rules that relate to the setting of

24 levels of margin and such other rules as the Com25 mission may specify by regulation.
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1 ‘‘(2) EFFECTIVE DATE.—

2 ‘‘(A) IN GENERAL.—Except in the case of

3 a rule described in subparagraph (B) or (C), a

4 contract market may make a rule of that con5 tract market effective 10 days after the date on

6 which the Commission receives the rule under

7 paragraph (1), unless, within such period, the

8 contract market requests review of the rule by

9 the Commission or the Commission institutes

10 proceedings to determine whether the rule

11 should be disapproved. The disapproval pro12 ceedings shall be conducted in accordance with

13 paragraph (3).

14 ‘‘(B) SPECIAL EFFECTIVE DATE FOR CER15 TAIN RULES.—In the case of a rule that would

16 establish the terms and conditions of a contract

17 for the purchase or sale of a commodity for fu18 ture delivery, which is to be executed subject to

19 the rules of a contract market and has not pre20 viously been traded subject to the rules of the

21 contract market, the contract market may make

22 the rule effective 15 days after the date on

23 which the Commission receives the rule under

24 paragraph (1), unless, within such period, the

25 Commission institutes proceedings to determine
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1 whether the rule should be disapproved. The

2 disapproval proceedings shall be conducted in

3 accordance with paragraph (3).

4 ‘‘(C) EXCEPTION.—A board of trade may

5 not make effective any rule to establish the

6 terms and conditions of a new contract (or op7 tion on such a contract) that is subject to the

8 requirements and procedures of clauses (ii)

9 through (v) of section 2(a)(1)(B) unless and

10 until the requirements and procedures of such

11 clauses are satisfied and carried out.

12 ‘‘(3) DISAPPROVAL PROCESS.—

13 ‘‘(A) NOTICE OF PROPOSED DIS14 APPROVAL.—If the Commission institutes a

15 proceeding to determine whether a rule submit16 ted under paragraph (1) should be disapproved,

17 the Commission shall provide the contract mar18 ket with written notice of the proposed grounds

19 for disapproval, including—

20 ‘‘(i) the specific sections of this Act or

21 the regulations of the Commission that

22 would be violated; and

23 ‘‘(ii) in the case of a rule described in

24 paragraph (2)(B), the specific reason or
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1 reasons why the rule might be contrary to

2 the public interest.

3 ‘‘(B) DISAPPROVAL PROCEEDING.—In a

4 disapproval proceeding under this paragraph,

5 the Commission shall afford the contract mar6 ket a reasonable opportunity to respond in writ7 ing and an opportunity for a hearing, including

8 the right to an oral hearing before a quorum of

9 the Commission. In a disapproval proceeding in10 volving a rule described in paragraph (2)(B),

11 the Commission shall have the burden of prov12 ing that the rule is contrary to the public inter13 est.

14 ‘‘(C) DISAPPROVAL.—At the conclusion of

15 a disapproval proceeding under this paragraph,

16 the Commission shall determine whether to dis17 approve the rule and shall disapprove the rule

18 if the Commission determines in the proceeding

19 that the rule would be—

20 ‘‘(i) in violation of the provisions of

21 this Act or the regulations of the Commis22 sion; or

23 ‘‘(ii) in the case of a rule described in

24 paragraph (2)(B), contrary to the public

25 interest.
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1 ‘‘(D) NOTICE OF DISAPPROVAL.—The

2 Commission shall provide the contract market

3 with written notice of the disapproval of a rule

4 of the contract market. The notice shall—

5 ‘‘(i) specify the sections of this Act or

6 the Commission’s regulations that the

7 Commission determines the rule violates

8 or, if effective, would violate; and

9 ‘‘(ii) in the case of a rule described in

10 paragraph (2)(B), contain an explanation

11 and analysis of the substantive basis why

12 the rule violates or, if effective, would vio13 late the public interest.

14 ‘‘(E) TIME FOR DISAPPROVAL.—Before the

15 end of the 60-day period beginning on the date

16 on which the Commission receives a rule under

17 paragraph (1), the Commission shall complete

18 any disapproval proceeding instituted under this

19 paragraph regarding the rule. Unless the Com20 mission has notified the contract market by the

21 end of such period that the Commission has

22 disapproved the rule, the contract market may

23 make such rule effective, and the Commission

24 shall not thereafter disapprove the rule. How25 ever, this subparagraph shall not be construed
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1 to modify or affect the ability of the Commis2 sion to alter or supplement any rules of a con3 tract market pursuant to section 8a(7).

4 ‘‘(5) RULE OF CONSTRUCTION REGARDING PUB5 LIC INTEREST STANDARD.—The authority of the

6 Commission to disapprove a rule described in para7 graph (2)(B) on the basis that the rule is contrary

8 to the public interest shall not be construed to au9 thorize the Commission to apply such a standard to

10 any other provision of this Act or any other action

11 of the Commission.

12 ‘‘(6) TEMPORARY EFFECTIVENESS FOR EMER13 GENCY RULES.—

14 ‘‘(A) EMERGENCY RULES AUTHORIZED.—

15 The Commission shall issue regulations to

16 specify the terms and conditions under which,

17 in an emergency as defined by the Commission,

18 a contract market may, by a two-thirds vote of

19 its governing board, make a rule (in this para20 graph referred to as an ‘emergency rule’) imme21 diately effective on a temporary basis without

22 compliance with the applicable notice require23 ments under paragraph (2), or during any pe24 riod of review by the Commission, if the con25 tract market makes every effort practicable to
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1 notify the Commission of the emergency rule

2 before making the emergency rule effective. The

3 notification shall include a complete explanation

4 of the emergency involved. If the contract mar5 ket does not provide the Commission with such

6 notification and explanation before making the

7 emergency rule effective, the contract market

8 shall provide the Commission with such notifi9 cation and explanation at the earliest possible

10 date. The Commission may delegate the power

11 to receive such notification and explanation to

12 such individuals as the Commission determines

13 necessary and appropriate.

14 ‘‘(B) COMMISSION CONSIDERATION OF

15 EMERGENCY RULES.—Within 10 days of the re16 ceipt from a contract market of notification of

17 an emergency rule and an explanation of the

18 emergency involved, or as soon as practicable,

19 the Commission shall determine whether it is

20 appropriate either—

21 ‘‘(i) to permit the emergency rule to

22 remain in effect during the pendency of the

23 emergency; or

24 ‘‘(ii) to suspend the effect of the

25 emergency rule pending review either
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1 under the procedures of this subsection or

2 otherwise.

3 ‘‘(C) REPORT ON CONSIDERATION.—The

4 Commission shall submit to the affected con5 tract market, to the Committee on Agriculture

6 of the House of Representatives and the Com7 mittee on Agriculture, Nutrition, and Forestry

8 of the Senate a report regarding its determina9 tion (and the basis thereof) with respect to an

10 emergency rule. If the report is submitted more

11 than 10 days after the Commission’s receipt of

12 notification of the emergency rule, the report

13 shall also contain an explanation of why sub14 mission within such period was not practicable.

15 A determination by the Commission to suspend

16 the effect of a rule under this paragraph shall

17 be subject to judicial review on the same basis

18 as an emergency determination under section

19 8a(9). Nothing in this paragraph shall be con20 strued to limit the authority of the Commission

21 under section 8a(9).’’.

22 SEC. 105. REGULATION OF AUDIT TRAIL REQUIREMENTS.

23 Section 5a(b) of the Commodity Exchange Act (7

24 U.S.C. 7a(b)) is amended—

25 (1) by striking paragraphs (3), (4), and (6);
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1 (2) by redesignating paragraph (5) as para2 graph (6);

3 (3) in paragraph (6) (as so redesignated)—

4 (A) by striking ‘‘paragraph (3)’’ both

5 places it appears and inserting ‘‘this sub6 section’’ and

7 (B) by striking ‘‘such paragraph’’ and in8 serting ‘‘this subsection’’; and

9 (4) by inserting after paragraph (2) the follow10 ing new paragraphs:

11 ‘‘(3) DEVELOPMENT OF STANDARDS FOR TIME

12 OF EXECUTION.—Not later than nine months after

13 the date of the enactment of this paragraph, the

14 Commission shall issue a regulation, after notice and

15 an opportunity for a hearing, that prescribes an ob16 jective standard or methodology for establishing

17 whether a contract market meets the requirement

18 under paragraph (2) that each contract market must

19 be able to determine, with reasonable accuracy, the

20 time of execution, in increments of no more than one

21 minute in length. In issuing the regulation, the Com22 mission—

23 ‘‘(A) shall take into account any unique

24 features and trading practices of each contract

25 market and any surveillance mechanisms be-
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1 yond a manual trade recordation system adopt2 ed by each contract market;

3 ‘‘(B) shall not prescribe a specific means

4 or technology for meeting the accuracy or any

5 other requirement.

6 ‘‘(4) USE OF TRADE RECORDATION DATA.—

7 Consistent with Commission regulations, the audit

8 trail system for a contract market shall rely upon

9 trade recordation data that are—

10 ‘‘(A) entered by floor traders, floor brokers

11 or others in nonerasable ink or other form that

12 cannot be altered without leaving a complete

13 record of such alteration; and

14 ‘‘(B) continually provided to the contract

15 market during the trading day in intervals of

16 not more than 30 minutes for processing by the

17 contract market.

18 ‘‘(5) USE OF TIME STAMPS.—The audit trail

19 system for a contract market shall rely upon accu20 rate time stamps or similarly reliable devices for re21 cording when a customer’s order reaches the trading

22 floor and when that order is reported from the floor

23 as having been executed.’’.
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1 SEC. 106. USE OF BENEFIT-COST ANALYSIS.

2 Section 12 of the Commodity Exchange Act (7 U.S.C.

3 16) is amended by adding at the end the following new

4 subsection:

5 ‘‘(h) USE OF BENEFIT-COST ANALYSIS.—

6 ‘‘(1) ANALYSIS REQUIRED.—Except as provided

7 in paragraph (4), the Commission shall not adopt

8 any rule, regulation, or order, or take any other reg9 ulatory action, if the benefits of such an action do

10 not exceed the costs. The Commission shall make

11 this benefit-cost determination based upon the infor12 mation available in the record of such action main13 tained by the Commission.

14 ‘‘(2) BENEFITS DEFINED.—For purposes of

15 this subsection, the term ‘benefits’ means the signifi16 cant, reasonably identifiable, favorable effects (in17 cluding the impact on market liquidity and effi18 ciency, financial and market integrity, customer pro19 tection, and fair competition) that are reasonably ex20 pected to result, directly or indirectly, from the

21 adoption of a rule or other agency action.

22 ‘‘(3) COSTS DEFINED.—For purposes of this

23 subsection, the term ‘costs’ means the significant,

24 reasonably identifiable, adverse effects (including the

25 impact on market liquidity and efficiency, financial

26 and market integrity, customer protection, and fair
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1 competition) that are reasonably expected to result,

2 directly or indirectly, from the adoption of a rule or

3 other agency action.

4 ‘‘(4) EXCEPTION FOR CERTAIN RULES AND AC5 TIONS.—This subsection shall not apply to the fol6 lowing:

7 ‘‘(A) Any adjudicatory or formal rule8 making determinations made by the Commis9 sion after a hearing on the record.

10 ‘‘(B) Any emergency determination made

11 by the Commission under section 8a(a)(9).

12 ‘‘(C) Any review or action taken by the

13 Commission on appeal from a contract market

14 disciplinary action in accordance with section

15 8c.

16 ‘‘(D) Any Commission approvals of rules

17 or rule changes in accordance with section

18 5a(c).

19 ‘‘(E) Any Commission approvals of con20 tract market designation applications under sec21 tion 6.’’.

22 SEC. 107. COMMISSION OVERSIGHT AND DEFICIENCY OR23 DERS.

24 (a) REPEAL.—Section 8e of the Commodity Ex25 change Act (7 U.S.C. 12e) is repealed.
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1 (b) CONFORMING AMENDMENTS.—(1) Section 4j(a)

2 of the Commodity Exchange Act (7 U.S.C. 6j(a)) is

3 amended—

4 (1) in paragraph (3)(B)(ii), by striking ‘‘, such

5 as those described in section 8e,’’; and

6 (2) in paragraph (5)(A)(ii), by striking ‘‘, such

7 as those described in section 8e,’’.

8 TITLE II—TREASURY

9 AMENDMENT CLARIFICATION

10 SEC. 201. TREASURY AMENDMENT CLARIFICATION.

11 Section 2(a)(1)(A)(ii) of the Commodity Exchange

12 Act (7 U.S.C. 2(ii)) is amended—

13 (1) by inserting ‘‘or transactions involving’’

14 after ‘‘transactions in’’;

15 (2) by inserting ‘‘to the general public’’ after

16 ‘‘sale thereof’’; and

17 (3) by adding at the end the following new sen18 tence: ‘‘For purposes of this clause only, the term

19 ‘board of trade’, as it applies to transactions in or

20 involving foreign currency, means any facility where21 by standardized contracts are systematically mar22 keted to retail investors (other than individuals and

23 entities described as eligible participants under the

24 regulations of the Commission published in the Fed25 eral Register on January 22, 1993, as codified in
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1 section 35.1(b)(2) of part 35 of title 17, Code of

2 Federal Regulations).’’.

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