14262 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

1See Commodity Futures Modernization Act of

2000, Appendix E, Pub. L. No. 106–554, 114 Stat.

2763 (2000).

2The President’s Working Group on Financial

Markets (PWG) and the chairmen of the

Commission’s congressional oversight committees

encouraged the Commission to consider proposing

such major revisions to the regulatory framework.

65 FR at 38987. Recognizing the importance of the

OTC derivatives markets, the chairmen of the

Senate and House Agriculture Committees asked

the PWG to conduct a study of OTC derivatives

markets. After studying OTC derivatives, the PWG

on November 9, 1999, reported to Congress its

recommendations. See Over-the-Counter

Derivatives Markets and the Commodity Exchange

Act, Report of the President’s Working Group. The

PWG report focused on promoting innovation,

competition, efficiency, and transparency in OTC

derivatives markets and in reducing systemic risk.

Although specific recommendations about the

regulatory structure applicable to exchange-traded

futures were beyond the scope of its report, the

PWG suggested that the Commission review

existing regulatory structures (particularly those

applicable to markets for financial futures) to

determine whether they were appropriately tailored

to serve valid regulatory goals.

Subsequently, by letter dated November 30, 1999,

the Chairmen of the Senate and House Agriculture

Committees, joined by additional senior Senators

and Members of the House of Representatives,

‘‘encourag[ed] the Commission to use the exemptive

authority granted it by the Commodity Exchange

Act to lessen regulatory burdens on United States’

futures markets so that they may compete more

effectively.’’

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Parts 1, 5, 15, 36, 37, 38, 40,

41, 100, 166, 170 and 180

RIN 3038–AB63

A New Regulatory Framework for

Trading Facilities, Intermediaries and

Clearing Organizations

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed rules.

SUMMARY: The Commodity Futures

Trading Commission (Commission or

CFTC) is proposing rules to implement

the Commodity Futures Modernization

Act of 2000 and the Commission’s new

regulatory framework. These proposed

rules apply to trading facilities. The

proposed rules implement the new

statutory framework establishing three

new market categories, including

exempt markets and two categories of

markets subject to Commission

regulatory oversight—designated

contract markets and registered

derivatives transaction execution

facilities. These proposed rules

implement statutory changes that

profoundly alter federal regulation of

commodity futures and option markets.

Nothing in these rules, however,

diminishes the Commission’s

responsibility for overseeing and

enforcing compliance by self-regulatory

organizations, Commission registrants

and market participants with the

provisions of the Commodity Exchange

Act.

The remaining parts of the framework

relating to clearing organizations and to

intermediaries will be reproposed

shortly.

DATES: Comments must be received by

April 9, 2001.

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

‘‘Regulatory Reinvention.’’

FOR FURTHER INFORMATION CONTACT: Paul

M. Architzel, Chief Counsel, Division of

Economic Analysis; Alan L. Seifert,

Deputy Director, Division of Trading

and Markets; Lawrence B. Patent,

Associate Chief Counsel, Division of

Trading and Markets; or Riva Spears

Adriance, Special Counsel, Division of

Trading and Markets, Commodity

Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, NW.,

Washington, DC 20581. Telephone:

(202) 418–5260. E-mail:

(PArchitzel@cftc.gov),

(ASeifert@cftc.gov), (LPatent@cftc.gov)

or (RAdriance@cftc.gov).

SUPPLEMENTARY INFORMATION:

I. Background

The Commission on June 22, 2000,

proposed (65 FR 38986) and on

December 13, 2000, issued (65 FR

77962) final rules promulgating a new

regulatory framework to apply to

multilateral transaction execution

facilities that trade contracts for sale of

a commodity for future delivery or

commodity options. The final rules

were to become effective on February

12, 2001. However, Congress on

December 15, 2000, passed, and the

President on December 21, 2000, signed

into law, the Commodity Futures

Modernization Act of 2000 (CFMA),1

which substantially amended the

Commodity Exchange Act, 7 U.S.C. 1 et

seq. (Act). The Commission on

December 28, 2000, withdrew most of

the final rules in order to determine

their consistency with the Act as

amended. 65 FR 82272.

The Commission’s new regulatory

framework was intended to ‘‘promote

innovation, maintain U.S.

competitiveness, and at the same time

reduce systemic risk and protect

customers,’’ 65 FR 38986, and to

provide U.S. futures exchanges greater

flexibility with which to respond to the

competitive challenges brought about by

new technologies.2 Specifically, the

framework replaced ‘‘one-size-fits-all’’

regulation for futures markets with

broad, flexible ‘‘core principles,’’ and

established three regulatory tiers for

markets.

In general, the framework provided a

lower level of regulatory oversight

where access to an exchange or facility

would have been restricted to eligible

participants or commercial participants

or where the nature of the underlying

commodity would have posed a

relatively low susceptibility to

manipulation. This reflects the reduced

need to monitor closely such markets.

The Commission also provided that

markets serving a price discovery

function, irrespective of the product

traded or market participants, offer a

degree of price transparency. The

framework therefore balanced the public

interests of market and price integrity,

protection against manipulation and

customer protection with the need to

permit exchanges and other trading

facilities to operate more flexibly in

today’s competitive environment.

II. The Statutory Scheme

The Act, as amended by the CFMA,

establishes two tiers of regulated

markets, designated contract markets

(contract markets) and registered

derivatives transaction execution

facilities (DTFs). In addition, the Act, as

amended, provides for two markets

exempt from regulation, exempt boards

of trade and, under section 2(h)(3) of the

Act, as amended, exempt commercial

markets.

The CFMA, in both its broad contours

and in many of its specific provisions,

codifies the Commission’s regulatory

framework without significant change. It

varies from the rules withdrawn by the

Commission in a number of its details

and renders unnecessary a number of

Commission rules by enacting their

provisions into statute. The Commission

therefore is reproposing rules

conforming to and implementing the

amended statutory scheme.

III. The Proposed Rules

A. Designated Contract Markets

Proposed part 38 governs designated

contract markets. Under the Act as

amended, ‘‘designated contract

markets’’ are those approved boards of

trade or trading facilities on which

contracts for future delivery on any

commodity may be traded by any type

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14263

3Prior to its recent amendment, the Act referred

to ‘‘designated contract markets’’ as the

Commission-approved products traded on a board

of trade. Commission rules were consistent with

that usage. The Act, as amended, however, uses the

term ‘‘designated contract market’’ to refer to the

approved or licensed market on which futures

contracts and commodity options are traded. Part

38 refers to ‘‘designated contract markets’’ in this

sense. The meaning of ‘‘designated contract market’’

in all other Commission rules must be inferred from

the context.

4 In addition, the Commission is proposing to

delete a number of rules herein. With respect to

those rules not reserved or deleted, the Commission

intends to review its rulebook in its entirety and to

remove all rules that have been superseded or that

are otherwise no longer in force following

completion of all of the rulemakings necessary to

implement the CFMA.

5Section 5(c) of the Act, as amended, provides

that existing boards of trade designated as a contract

market are considered to be designated contract

markets under the Act as amended.

6This 60-day review period is one-third of the

180-day review period permitted by the Act. See 7

U.S.C. 8(a).

7 In particular, in proposed rule 38.3(b)(1) the

Commission notes that the statutory designation

requirement relating to preventing market

manipulation includes the requirement that

designated contract markets have a dedicated

regulatory department or delegate that function.

Proposed rule 38.3(b)(2) provides that the

designation requirement relating to fair and

equitable trading rules includes fair and timely

availability to market participants of information

regarding prices, bids and offers. This requirement

may be satisfied by making such information

available to traders through commercial vendors.

In addition, proposed rule 38.3(b)(3) makes clear

that a trading facility applying for designation may

satisfy the requirement that it have disciplinary

procedures with respect to non-members by having

the capacity to sanction non-member violations by

expelling them or by denying them future access.

The proposed guidance with respect to acceptable

practices for core principles applicable to contract

markets and DTFs has similar provisions.

8Separate from the Appendix providing guidance

on compliance with the core principles, proposed

rule 38.3(b)(4) clarifies that the core principle on

fitness standards, in the context of proprietary,

rather than mutually-owned exchanges, applies to

natural persons with greater than a ten percent

ownership interest in the facility or in its owners.

Moreover, fitness requirements that apply to

members are required by the Act. However, the

Commission, in providing guidance with regard to

this requirement, has made clear that some types of

members, such as those who do not have voting

rights or exercise disciplinary or governing

responsibilities, meet the fitness requirements by

meeting the applicable requirements for market

access or participation.

9As noted above, prior to adoption of the CFMA,

a board of trade or trading facility was required to

be designated as a contract market in each specific

contract traded thereon. As amended by the CFMA,

however, the trading facility itself and not each

contract is required to be designated as a contract

market and contracts may be listed for trading

pursuant to exchange certification. The facility also

may request that the Commission review and

approve new products.

Proposed rule 38.4(a) provides that any contract

that has been submitted for Commission review and

approved by the Commission may be labeled in the

facility’s rules as ‘‘Listed for trading pursuant to

Commission approval.’’ Contracts that were

designated by the Commission as contract markets

prior to December 21, 2000, may be labeled as

approved by the Commission. Contracts listed for

trading by exchange certification under the

procedures then in effect under rule 5.3 are not

eligible to be so labeled.

of market participant.3 Proposed rule

38.2 exempts designated contract

markets operating under this part from

all other Commission rules not

specifically reserved.4

Proposed rule 38.3 establishes the

application and approval procedure for

designation of new contract markets.5

As proposed, applicants meeting the

criteria will be deemed to be designated

by the Commission 60 days after receipt

of the application.6 The proposed

procedure permits the Commission to

designate a contract market upon

conditions. Applications must

demonstrate that the contract market

satisfies the criteria for designation

under section 5(b) of the Act and the

core principles for operation under

section 5(d) of the Act. The application

also must include a copy of the contract

market’s rules and, to the extent that

compliance with the conditions for

designation is not self-evident, a brief

explanation of how the conditions for

designation are satisfied. As provided

under the Commission’s current fasttrack review rules, the applicant may

not make substantive amendments to

the application during the 60-day

review period unless requested to do so

by the Commission. Amended

applications would be treated as being

filed anew for purposes of fast-track

review.

As proposed, the Commission may

terminate the 60-day fast-track review if

it appears during that period that the

application violates or appears to

violate, or if there is insufficient

information to determine whether it

would violate, the Act or Commission

rules. The Commission, after

terminating a fast-track review, will

continue to review the application

under the deadlines of section 6 of the

Act. Alternatively, within ten days of

receiving a termination notification, the

applicant may seek to have the

Commission determine whether or not

to institute a proceeding to deny a

proposed designation application under

section 6 of the Act.

Section 5 of the Act, as amended,

requires that an applicant meet a

number of designation requirements.

Under the proposed rules, an applicant

must also demonstrate its ability to

comply with core regulatory principles.

The Commission has proposed rules

giving notice of how it will interpret the

meaning of several of the statutory

requirements.7 In addition, the

Commission has provided an appendix

containing general guidance regarding

application criteria and guidance with

regard to acceptable practices for

meeting the core principles.8 As the

Commission previously noted, the

guidance establishes non-exclusive safe

harbors. It does not establish a

mandatory means of compliance with

the core principles.

Section 5c of the Act permits

designated contract markets to request

that the Commission provide ‘‘prior’’

approval of the facility’s rules and

products. Proposed rule 38.4, pursuant

to the Commission’s exemptive

authority under section 4(c) of the Act,

provides designated contract markets

the additional flexibility to request such

approval at any time. Contract markets,

for competitive reasons, may wish to

choose to list a new product for trading

by certification and subsequently to

request Commission approval. The

Commission believes that, in light of the

increased competitiveness of these

markets, such procedural flexibility is in

the public interest. Based on the

Commission’s prior administrative

experience, it has simplified and

streamlined the review procedures.

Under these procedures, qualifying

contract market rules that are

voluntarily submitted for review would

be eligible for review and approval in 45

days, half the time permitted under the

Act.9

The Commission further proposes to

exercise its section 4(c) exemptive

authority to make less burdensome the

statutory certification provision

regarding contract market rules. Section

5c of the Act requires contract markets

to certify that each and every rule or

rule change does not violate the Act and

Commission rules. However, based

upon its experience administering the

Act prior to its recent amendment, the

Commission is of the view that many

rules need not be so certified. Indeed,

under prior practice, contract markets

were required only to provide notice to

the Commission when amending certain

types of administrative rules, and in

some instances, no notice was required.

In light of the past successful conduct

of its oversight duties without the

submission of every rule change, the

Commission believes that it is in the

public interest to exempt contract

markets from the requirement that they

certify all rules. The Commission also

believes that this additional flexibility is

consistent with the overall intent and

structure of the recent amendments to

the Act.

As proposed, the Commission would

permit contract markets simply to notify

the Commission on a weekly basis of

amendments to some types of rules, and

would not require a certification or

14264 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

10Section 5c(d) of the Act provides a mechanism

for notifying contract markets (and other registered

entities) that they are violating a core principle. The

request for a demonstration of compliance operates

independently of the section 5c(d) procedure.

Indeed, the request for such a demonstration from

a registered entity, and the Commission’s

consideration of the entity’s response may

constitute a useful alternative to the more formal

procedures of section 5c(d) of the Act. It would be

the Commission’s intent to explore such informal

methods of resolving issues of compliance with

core principles by registered entities prior to

invoking more formal mechanisms.

11Section 5a(b)(2)(A) through (C) of the Act as

amended provides that a registered derivatives

transaction execution facility may trade any

contract of sale of a commodity for future delivery

(or option on such a contract) only if—

‘‘(A) the underlying commodity has a nearly

inexhaustible deliverable supply;

(B) the underlying commodity has a deliverable

supply that is sufficiently large that the contract is

highly unlikely to be susceptible to the threat of

manipulation; [or]

(C) the underlying commodity has no cash

market[.]’’

12Section 1a(13) of the Act as amended defines

an ‘‘excluded commodity’’ to mean among other

things an interest rate, exchange rate, currency,

credit risk or measure, debt instrument, measure of

inflation, or other macroeconomic index or

measure.

13The Commission, pursuant to section 1a(11)(C)

of the Act, has proposed to include within the

definition of eligible commercial entity floor traders

or floor brokers whose trading obligations are

guaranteed by a futures commission merchant,

trading for their own account. This is consistent

with the Commission’s withdrawn rules and with

Congress’ inclusion in the statutory definition

(under section 1a(11)(B)) of certain other specified

liquidity providers.

14Again, the proposed rule provides for a review

period that is substantially less than that permitted

by the statute. See 7 U.S.C. 8(a).

notification of changes to rules that

relate solely to administrative or

ministerial matters. Nevertheless, each

contract market is required to have

available a full and accurate record of

the procedural history of each of its

rules.

Proposed rule 38.5 provides for

information requests to contract markets

regarding compliance with the

conditions for designation. These

requests may be made for any oversight

purpose.10 In this regard, for example,

the Commission may request designated

contract markets to provide information

relating to their operations or their

practices in connection with their

compliance with particular core

principles or other conditions of their

designation or in connection with the

Commission’s formulation of statements

of acceptable practice and its general

oversight responsibilities under the Act.

Proposed rule 38.6 makes clear that a

violation of these part 38 rules is not

intended to and does not constitute a

basis for voiding an agreement, contract,

or transaction that has been duly

entered into. Under rule 38.6, a

Commission proceeding to alter or

supplement a rule, term, or condition of

a contract for trading on the facility

under section 8a(7) of the Act, to declare

an emergency under section 8a(9), or to

take any other action to require a

designated contract market to take or

refrain from taking specific action

would not constitute grounds for

rescinding contracts. This provision

does not change applicable law and

merely restates the existing

understanding of the effect of such a

Commission action on contracts entered

into already.

B. Derivatives Transaction Execution

Facilities

Proposed part 37 implements section

5a of the Act, as amended. Section 5a

of the Act provides for registration by

the Commission of a board of trade or

trading facility under an intermediate

level of regulation as a DTF. This new

category of market is available to

eligible traders for futures and option

contracts on commodities that have a

nearly inexhaustible deliverable supply;

are highly unlikely to be susceptible to

the threat of manipulation; have no cash

market; security futures products; or

futures and option contracts on

commodities that the Commission may

determine, on a case-by-case basis, are

highly unlikely to be susceptible to the

threat of manipulation. In addition,

except as provided in section 5(e)(2) of

the Act, eligible commercial entities

trading for their own account may do so

on a DTF with respect to futures and

option contracts on commodities other

than those enumerated in section 1a(4)

of the Act. Furthermore, a board of trade

operating as a DTF may trade on the

facility agreements, contracts, or

transactions involving commodities

excluded or exempt pursuant to sections

2(c), 2(d), 2(g), or 2(h) as provided by

section 5a(g) of the Act, subject to the

Commission’s exclusive jurisdiction.

Proposed rule 37.2 exempts DTFs from

all Commission regulations applicable

to a trading facility that are not reserved.

It also makes clear that the reserved

regulations apply as though DTFs were

specifically referenced therein.

Proposed rule 37.3 identifies the

commodities eligible to be traded on a

DTF under section 5a of the Act.

Specifically, proposed rule 37.3

identifies those commodities that

qualify under the requirements of

section 5a(b)(2)(A) through (C) of the

Act 11 as those commodities defined as

an ‘‘excluded commodity’’ in section

1a(13) of the Act.12 Excluded

commodities under section 1a(13) of the

Act include exempt securities. Unlike

the provisions governing exempt boards

of trade, the CFMA imposes no specific

limitations or requirements for exempt

securities to trade on a DTF. The

Commission is requesting comment on

whether additional regulatory

requirements, such as large trader

reporting, should be imposed as a

condition for such trading on a DTF.

Proposed rule 37.3 also establishes a

procedure whereby a specific DTF

would be able to make a showing under

section 5a(b)(2)(E) of the Act that a

contract is highly unlikely to be

susceptible to the threat of manipulation

and should be eligible for trading on

that DTF in light of the characteristics

of the commodity and the market’s

surveillance history, including its selfregulatory record, capacity and

undertakings. Proposed rule

37.3(a)(3)(ii)(B) lists those factors that

are relevant in making such a showing.

The rule does not require that the

written demonstration include

explanations of information that is selfevident. Agricultural commodities that

are not enumerated in the Act, such as

soft, world commodities, may trade on

a DTF upon successfully making such a

demonstration, or under section

5a(b)(2)(F) of the Act, by limiting

trading access to eligible commercial

entities.13

Consistent with section 5(e)(2) of the

Act, as amended, the Commission will

determine in a future rulemaking

whether those agricultural commodities

that are enumerated in the Act should

be eligible for trading on a DTF and, if

so, the appropriate conditions for such

trading. The Commission has reserved a

paragraph in rule 37.3 for this purpose.

Proposed part 37 includes a number

of procedural provisions to provide

greater administrative flexibility in the

registration and oversight of DTFs. For

example, proposed rule 37.5(b) permits

the Commission to register a DTF upon

conditions. This would enable the

Commission to register a facility

conditioned upon its subsequent

compliance with a particular condition

for registration. In addition, the

Commission is proposing a fast-track

review procedure for applications for

registration that are not amended while

under review. Such applicants would be

deemed to be registered 30 days after

receipt.14

Section 5a(c)(1) of the Act provides

that applicants for DTF registration shall

be required to demonstrate only that

they comply with the requirements for

trading specified in section 5a(b) and

the criteria for registration specified in

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14265

15Existing contract markets need not make such

a demonstration. As proposed, they must simply

notify the Commission of their intent to operate as

a DTF, and file with the Commission the DTF’s

rules and a certification that they meet all of the

requirements for registration as a DTF.

16See Sections 2(e)(1) and 2(h)(3) of the Act, as

added by sections 104 and 106 of the CFMA. The

Act refers to electronic commercial markets as

‘‘excluded’’ from the Act’s regulatory requirements

that are not qualifying conditions for the

exemption. These qualifying conditions are found

in paragraphs 2(h)(4) and (5). Moreover, it should

be noted that among these qualifying conditions,

the Commission is authorized to promulgate rules

to ensure disclosure of prices and to specify

procedures regarding redress by participants to an

order denying them access in response to a

determination that the participant did not comply

with a subpoena issued by the Commission. See

sections 2(h)(4)(D), 2(h)(5)(C)(ii) and 2(h)(6) of the

Act as amended.

section 5a(c).15 However, to maintain

registration, DTFs must be in

compliance with the core principles of

section 5a(d) of the Act. Accordingly,

the Commission is proposing that an

applicant for DTF registration may, if it

chooses, become registered without

demonstrating its capacity to comply

with the core principles for trading. A

new DTF that chooses not to make such

a demonstration, however, must certify

to the Commission that it has the

capacity to, and upon commencing

operations will, operate in compliance

with the core principles. This

certification may be made separately or

as part of the initial application.

As with the rules regarding contract

markets, the Commission is proposing

in an appendix general guidance

regarding applications and acceptable

practices for core principles. The

proposed acceptable practices are not

mandatory in nature, but rather provide

a non-exclusive safe-harbor for

compliance. Proposed rule 37.6(d)

interprets application of certain of the

core principles in the circumstances

specified in the rule. For example, the

Commission proposes that an electronic

platform that is accessible for trading

only by eligible commercial entities and

that trades only tailored products may

satisfy the requirement to monitor

trading in a manner ‘‘appropriate to the

market’’ by assuring compliance with its

rules regarding access limitations.

In addition, the Commission is

proposing in rule 37.1(b) to include

within the definition of ‘‘eligible

commercial entity’’ a registered floor

broker or floor trader, trading for its own

account, whose trading obligations are

guaranteed by a futures commission

merchant. This is consistent both with

the Commission’s withdrawn rules and

with the CFMA’s inclusion of certain

types of liquidity providers within the

statutory definition of ‘‘eligible

commercial entity.’’ In this regard, it has

been suggested that electronic markets

may have functional counterparts to

floor brokers and floor traders, and that

these persons should also be included

within the definition of eligible

commercial entity. The Commission is

requesting comment on how and by

whom this market making function may

be performed on electronic trading

facilities, the similarities and

differences in this market making

function and its regulation when

performed on an electronic platform

rather than in a physical trading

environment, and whether such persons

should be included within the

definition of eligible commercial entity.

The Commission has proposed to

interpret the core principle regarding

disclosure of information relevant to

market participants as including the

principle of providing market

participants information regarding

prices, bids and offers on a fair,

equitable and timely basis. Such

transparency is key to protecting market

participants from fraud and other types

of abusive trading practices. Price

transparency has been the hallmark of

regulated markets and should be so

recognized in the core principles.

Finally, the Commission has proposed

to interpret the core principle

concerning fitness standards as

including a DTF’s owners, defined as

natural persons that directly or

indirectly have greater than a ten

percent interest in the facility. By this

interpretation, the Commission is

proposing to clarify the application of

the core principle on fitness to

proprietary trading facilities.

Like contract markets, DTFs may

request that the Commission approve

their trading rules, which may be

trading protocols, and the products that

they trade. The Commission has used its

section 4(c) exemptive authority to

permit DTFs to request such approval at

any time, before or after the rule’s

implementation or the product’s listing.

Although this modification to the

statutory scheme is modest, it may

provide DTFs with far greater flexibility

in bringing products to market.

Proposed section 37.7 includes

several special call provisions. Under

these provisions, the Commission may

issue special calls to the DTF, its market

intermediaries or participants upon a

determination that the Commission

needs certain information to conduct

limited surveillance of trading in one or

more products traded on the DTF. On

occasion, it may need to examine

trading activity for a specific period of

time to ensure against excessive

speculation, manipulation, controls,

corners or squeezes.

C. Exempt Markets

In addition to the types of markets

subject to the regulatory oversight of the

Commission—designated contract

markets and DTFs—the Act as amended

authorizes two categories of markets

that are exempt from regulatory

oversight by the Commission. They are:

exempt commercial markets and exempt

boards of trade. The Commission in part

36 has proposed rules necessary to

implement these statutory exemptions.

1. Exempt Commercial Markets

Transactions by eligible commercial

entities in exempt commodities traded

on an electronic trading facility are

exempt commercial markets under

section 2(h)(3) of the Act. These markets

that satisfy the initial and ongoing

requirements of sections 2(h)(3) through

(5) of the Act as amended are excluded

from the Act’s other requirements.16

The Commission is proposing rules for

these markets that implement the

qualifying conditions of the exemption.

Proposed rule 36.3(a) implements the

notification requirements of section

2(h)(5)(A) of the Act. Proposed rule

36.3(b)(1) establishes information

requirements for exempt commercial

markets consistent with section

2(h)(5)(B) of the Act. In this regard, an

exempt commercial market may satisfy

reporting requirements by providing the

Commission with electronic access to

transactions conducted on the facility.

Alternatively, an exempt commercial

market may choose to satisfy its

reporting requirements for such

transactions by providing the

Commission with information regarding

such positions by large traders by an

alternative means, the form and content

of which the Commission may

determine is acceptable pursuant to a

petition to the Commission for such a

determination. Such an alternative

should provide the Commission with

information comparable in coverage and

frequency to that provided to the

Commission by its large trader reporting

system.

As required by section 2(h)(6) of the

Act, proposed rule 36.3(b)(3) establishes

procedures for a foreign person named

in a subpoena issued by the

Commission under section 2(h)(5)(C) to

challenge the Commission’s action. In

this regard, the Commission is

proposing to use its existing hearing

procedures found in rules 21.03(g)

through (h) and to incorporate them by

reference.

Although the Act as amended

exempts these electronic markets from

Commission regulatory oversight, the

14266 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

17This provision is consistent with section 118 of

the CFMA.

Act at the same time affirmatively vests

the Commission with comprehensive

antimanipulation and antifraud

enforcement authority over these

trading facilities. Section 2(h)(4)(A) of

the Act provides that an agreement,

contract or transaction entered into on

a qualifying exempt commercial market

shall be subject to sections 6(c) and

9(a)(2) of the Act ‘‘to the extent such

sections prohibit manipulation of the

market price of any commodity in

interstate commerce and to the extent

the agreement, contract or transaction

would otherwise be subject to such

sections[.]’’ Section 2(h)(4)(B) of the Act

provides that such transactions are

subject to sections 4b and 4o, as well as

regulations promulgated pursuant to

4c(b) proscribing fraudulent activity.

Thus, the Commission is charged with

monitoring these markets for

manipulation and fraudulent conduct,

and enforcing the antimanipulation and

antifraud provisions of the Act. The

informational requirements imposed by

the Act and by these proposed rules are

designed to ensure that the Commission

can effectively perform these functions.

2. Exempt Boards of Trade

Section 5d of the Act, as added by

section 114 of the CFMA, establishes a

category of market exempt from

Commission regulatory oversight

referred to as an ‘‘exempt board of

trade.’’ The Commission in rule 36.2 is

proposing implementing regulations for

section 5d of the Act. First, the

Commission is proposing to define

those commodities that are eligible to

trade on an exempt board of trade to

include commodities defined in section

1a(13) of the Act as ‘‘excluded

commodities,’’ other than securities,

and such other commodities as the

Commission may define by rule,

regulation or order. See proposed rule

36.2(a). The Commission believes that

this definition provides legal certainty

and further satisfies section 5d’s

requirements that the underlying

commodity has ‘‘(A) a nearly

inexhaustible deliverable supply; (B) a

deliverable supply that is sufficiently

large, and a cash market sufficiently

liquid, to render any contract traded on

the commodity highly unlikely to be

susceptible to the threat of

manipulation; or (C) no cash market[.]’’

In addition, proposed rule 36.2(b)

implements the notification

requirements of section 5d of the Act.

3. Additional Requirements

Consistent with sections 2(h)(5)(F)

and 5d(g) of the Act, the proposed rules

prohibit exempt boards of trade and

exempt commercial markets from

representing that they are registered

with, designated, recognized, licensed

or approved by the Commission. The

Commission invites comment on

whether the rule also should require

that such exempt entities affirmatively

disclose to traders that the facility and

trading on the facility are not so

regulated or approved by the

Commission.

D. Anti-Fraud Provisions

One of the purposes for which the

CFMA was enacted was ‘‘to clarify the

jurisdiction of the Commodity Futures

Trading Commission over certain retail

foreign exchange transactions and

bucket shops that may not be otherwise

regulated.’’ CFMA, section 2(5). The

Commission is proposing rule 1.1,

which applies in scope to such retail

foreign exchange transactions not

otherwise regulated, pursuant to its

authority in sections 3 and 8a(5) of the

Act. Congress recently amended section

3 of the Act through enactment of the

CFMA. Section 3(a) expressly finds that

the transactions subject to the Act are

regularly entered into in interstate and

international commerce and are affected

with a ‘‘national public interest by

providing a means for managing and

assuming price risks, discovering prices,

or disseminating pricing information

through trading in liquid, fair and

financially secure trading facilities.’’

Section 3(b) provides, as pertinent here,

that it is the purpose of the Act

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 misuse of

customer assets; and to promote responsible

innovation and fair competition among

boards of trade, other markets and market

participants.

Section 8a(5) authorizes the

Commission ‘‘to make and promulgate

such rules and regulations as, in the

judgment of the Commission, are

reasonably necessary to effectuate any of

the provisions or to accomplish any of

the purposes of this Act.’’

In the judgment of the Commission,

proposed rule 1.1 is reasonably

necessary to effectuate the express

purpose of the Act to protect retail

foreign exchange market participants

from fraudulent or other abusive sales

practices. It is the Commission’s

intention that proposed rule 1.1 not

replace the applicability of any existing

antifraud rule, including rules 32.9

(fraud in connection with commodity

option transactions), and 33.10 (fraud in

connection with domestic exchangetraded option transactions), which were

promulgated under section 4c(b) of the

Act, rule 30.9 (fraud involving any

foreign futures contract or foreign

options transaction), rule 4.41

(fraudulent advertising by commodity

pool operators, commodity trading

advisors, and principals thereof) and

rule 31.3 (fraud in connection with

leverage transactions).

E. Arbitration

Section 110 of the CFMA removed the

Act’s previous requirements for contract

market designation, including former

section 5a(11) of the Act, governing

exchange arbitration proceedings. The

Commission is therefore proposing to

delete Part 180 of its rules, which was

based, in part, on the provisions of

former Section 5a(11) of the Act, and to

repropose its withdrawn rule 166.5,

incorporating certain amendments

required by the new legislation. For

example, the reproposed version

provides that an FCM may require an

eligible contract participant to sign an

agreement waiving the right to

reparations as a condition to using the

FCM’s services.17 The CFMA is silent as

to whether pre-dispute arbitration

agreements must be entered into

voluntarily. Compare former § 5a(11) of

the Act with § 5(d)(13) of the Act, as

amended. The proposed rule retains this

requirement.

IV. Section 4(c) Findings

Some of the proposals contained in

this Federal Register notice are being

proposed under section 4(c) of the Act,

which grants the Commission broad

exemptive authority. Section 4(c) of the

Act provides that, in order to promote

responsible economic or financial

innovation and fair competition, the

Commission may by rule, regulation or

order exempt any class of agreements,

contracts or transactions, either

unconditionally or on stated terms or

conditions, from any of the

requirements of any provision of the Act

(except certain provisions governing a

group or index of securities and security

futures products). As relevant here,

when granting an exemption pursuant

to section 4(c), the Commission must

find that the exemption would be

consistent with the public interest.

The Commission is proposing to use

its section 4(c) exemptive authority here

to provide registered entities with

greater procedural flexibility than is

contained in the Act. For instance,

pursuant to proposed rule 38.4,

designated contract markets may request

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14267

18 Implementation of the CFMA requires the

Commission to undertake a number of rulemakings

in addition to those that were part of the

Commission’s new regulatory framework, such as

rules relating to security futures products.

Moreover, the initial rules of the new regulatory

framework contemplated a number of subsequent

rulemakings, such as permitting risk-based net

capital requirements for intermediaries. Those

rulemaking proceedings are separate from the rules

that are referenced herein and also will be

considered by the Commission within the coming

year.

19See Rules Relating to Intermediaries of

Commodity Interest Transactions, 65 FR 77993

(Dec. 13, 2000), and A New Regulatory Framework

for Clearing Organizations, 65 FR 78020 (Dec. 13,

2000).

20With respect to those rules concerning the

investment of customer funds, the Commission

determined to move forward their effective date to

December 28, 2000, as well as to make certain

technical corrections to the rule amendments. See

65 FR 82270 (Dec. 28, 2000).

approval of their contracts following

certification of those contracts,

notwithstanding the Act’s limitation of

the Commission’s approval authority to

‘‘prior’’ approval. Furthermore, the

Commission is proposing a less

burdensome certification procedure

than that provided in the Act. The

Commission believes that providing this

additional flexibility to registered

entities is consistent with the public

interest. The Commission invites public

comment on this finding.

V. 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 under the Act. The

Commission is applying the cost-benefit

provisions of section 15 for the first time

in this rulemaking and understands

that, by its terms, section 15 as amended

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 rule be analyzed in

isolation when that rule is a component

of a larger package of rules or rule

revisions. Rather, section 15 simply

requires the Commission to ‘‘consider

the costs and benefits’’ of its action.

The amended section 15 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

rule was necessary or appropriate to

protect the public interest or to

effectuate any of the provisions or to

accomplish any of the purposes of the

Act.

The new regulatory framework

constitutes a package of related rule

provisions. The Commission has

considered their costs and benefits as a

totality. The rules impose reporting,

recordkeeping and other informational

requirements on trading facilities that

are either mandated by or fully

consistent with the new provisions of

the CFMA. The Commission has

considered the costs and benefits of this

rule package in light of the specific

areas of concern identified in the

CFMA:

1. Protection of market participants

and the public. In general, the proposed

rules would be expected to cost little in

terms of diminishing the protection of

market participants and the public. The

rules impose limited costs in terms of

informational requirements. The

countervailing benefit of these costs,

however, is that the Commission will

have the necessary information to

perform its oversight functions and thus

carry out its mandate of assuring the

continued existence of competitive and

efficient markets.

2. Efficiency and competition. The

rules are expected to benefit

competition and market efficiency

broadly by providing more options for

market structure and greater legal

certainty for covered instruments. The

rules do not impose a cost on market

efficiency or competition.

3. Financial integrity of futures

markets. The rules permit but do not

require clearing for DTFs and contract

markets. Nevertheless, the proposed

rules require that such markets have and

disclose their framework for financial

integrity. Thus, consistent with the

statute, the benefits of clearing are

available but not mandated, and the

facility may establish a financial

integrity framework appropriate to its

market.

4. Price discovery. Consistent with the

statute, markets that serve a price

discovery function are required to

disseminate publicly certain market

information. While such a requirement

may impose a cost on markets required

to disseminate such information, the

cost would be expected to be minimal

since such price discovery markets are

likely to make available such

information anyway in the interest of

attracting additional liquidity to the

market. Moreover, many markets use

this price information as a source of

revenue and would therefore make it

available even in the absence of a

requirement to do so. Nevertheless, this

information provides a great benefit to

the public in terms of ensuring the

supply of economic guidance to

commodity producers and users and is

important to a market participant’s

ability to protect him or herself from

fraudulent and other abusive practices.

5. Sound risk management practices.

It is anticipated that the creation of the

new regulatory structure will encourage

better risk management practices by

making available additional market

outlets and more customized products

for risk management purposes. The

added competition for offering these

products will tend to reduce the cost of

risk management.

6. Other public interest

considerations. The rules also include

an antifraud rule for certain retail

foreign exchange transactions and

bucket shops that may not otherwise be

regulated. The Commission believes that

this provision will benefit market

participants and the public and will

further serve the public interest by

deterring illegal behavior. The

nonrepudiation provisions included in

the rules benefit the public interest by

furthering legal certainty.

After considering these factors, the

Commission has determined to propose

the revisions to its rules discussed

above. The Commission invites public

comment on its application of the new

cost-benefit provision. Commenters also

are invited to submit any data that they

may have quantifying the costs and

benefits of the proposed rules with their

comment letters.

VI. Related Rulemakings

As part of the final rules promulgating

the new regulatory framework,18 the

Commission also issued final rules and

rule amendments that would have

applied to market intermediaries and to

clearing organizations.19 They too, for

the most part, were withdrawn

following the enactment of the CFMA.20

Upon further consideration, the

Commission has determined that many

of the withdrawn final rules and rule

amendments relating to intermediaries

are substantively unaffected by the

CFMA’s statutory revisions.

Accordingly, the Commission intends,

at a future date, to repropose and

readopt those rules and rule

amendments relating to intermediaries

that are not implicated by the statutory

revisions to the Act, with any necessary

technical, conforming changes. These

rules and rule amendments address,

among other things, the definition of the

14268 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

21See 65 FR 77993 and 65 FR 78020. See also 65

FR 39008 and 65 FR 39027 (June 22, 2000)

(proposing rules).

22Certain provisions of the CFMA, however, have

a delayed effective date. The Commission will

adopt implementing rules for those provisions of

the CFMA at a later date.

23 47 FR 18618–21 (Apr. 30, 1982).

24 47 FR 18618, 18619 (discussing contract

markets).

term ‘‘principal,’’ the addition of a

principal, certified financial reports,

ethics training, disclosure, account

opening procedures, trading standards,

reporting requirements, and offsetting

positions. The Commission also intends

to repropose rules for clearing

organizations shortly, with the intention

of promulgating final rules for registered

derivatives clearing organizations. The

Commission encourages interested

persons to review the Federal Register

releases discussing the background and

purpose of the rules and rule

amendments mentioned above for

further information.21

VII. Implementation Issues; Comment

Period and No-action

The amendments to the Act contained

in the CFMA generally became effective

on December 21, 2000, the date that the

CFMA was enacted into law.22 In light

of the need to promulgate implementing

regulations without delay, the

Commission encourages commenters to

submit their comments as early as

possible during the comment period.

The early filing of comments will assist

the Commission in acting expeditiously

to adopt the necessary implementing

regulations. In any event, comments

should be filed with the Commission by

the end of the comment period. To the

extent that the promulgation of

implementing regulations is necessary

to effectuate certain statutory

provisions, any extension of the

comment period likely would be

contrary to the public interest and

contrary to the intent of Congress that

these statutory changes be made

effective without delay.

In light of the Congressional intent to

implement these statutory changes

without delay, during this transition

period between the effective date of the

amendments to the Act and the

adoption of final implementing

regulations, the Commission will not

bring any enforcement action against

any person who complies with the rules

proposed herein. Persons that do

comply with the proposed rules,

however, will be required to bring their

conduct into compliance with the final

rules to the extent that the final rules

differ from the proposed rules.

VIII. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA),

5 U.S.C. 601 et seq., requires federal

agencies, in promulgating rules, to

consider the impact of those rules on

small entities. The rules adopted herein

would affect contract markets and other

trading facilities. 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.23 In its

previous determinations, the

Commission has concluded that

contract markets are not small entities

for the purpose of the RFA.24 The

Commission is proposing to determine

that the other trading facilities covered

by these rules, for reasons similar to

those applicable to contract markets, are

not small entities for purposes of the

RFA. In any event, the rules being

proposed today authorize these trading

facilities to operate in a less regulated

environment than may currently be the

case; consequently, these rules should

not have any, or result in only a de

minimus, increase in the regulatory

requirements that apply to contract

markets and other trading facilities.

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 Acting

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

trading facilities covered by these rules

would not be small entities for purposes

of the RFA.

B. Paperwork Reduction Act of 1995

This proposed rulemaking contains

information collection requirements. As

required by the Paperwork Reduction

Act of 1995 (44 U.S.C. 3504(h)), the

Commission has submitted a copy of

this section to the Office of Management

and Budget (OMB) for its review.

Collection of Information: Rules

Relating to Part 37, Establishing

Procedures for Entities to be Registered

as Derivatives Transaction Execution

Facilities (DTFs), OMB Control Number

3038–0053. The proposed rules will not

change the burden previously approved

by OMB.

The estimated burden was calculated

as follows:

Estimated number of respondents: 10.

Annual responses by each

respondent: 1.

Total annual responses: 10.

Estimated average hours per response:

200.

Annual reporting burden: 2,000.

Collection of Information: Rules

Relating to Part 38, Establishing

Procedures for Entities to become

Designated as Contract Markets, OMB

Control Number 3038–0052. The

proposed rules will not change the

burden previously approved by OMB.

The estimated burden was calculated

as follows:

Estimated number of respondents: 10.

Annual responses by each

respondent: 1.

Total annual responses: 10.

Estimated average hours per response:

300.

Annual reporting burden: 3,000.

Collection of Information: Rules

Pertaining to Large Trader Reports,

OMB Control Number 3038–0009. The

proposed rules will not change the

burden previously approved by OMB.

Estimated number of respondents:

4,731.

Annual responses by each

respondent: 14.67.

Total annual responses: 69,392.

Estimated average hours per response:

.35213.

Annual reporting burden: 24,435.

Collection of Information: Rules

Relating to Part 36, Establishing

Procedures for Exempt Markets, OMB

Control Number 3038–XXXX.

The estimated burden was calculated

as follows:

Estimated number of respondents: 10.

Annual responses by each

respondent: 1.

Total annual responses: 10.

Estimated average hours per response:

1.

Annual reporting burden: 10.

Organizations and individuals

desiring to submit comments on the

information collection requirements

should direct them to the Office of

Information and Regulatory Affairs,

Office of Management and Budget,

Room 10202, New Executive Office

Building, 725 17th Street, NW.,

Washington, DC 20503; Attention: Desk

Officer for the Commodity Futures

Trading Commission.

The Commission considers comments

by the public on this proposed

collection of information in:

• Evaluating whether the proposed

collection of information is necessary

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14269

for the proper performance of the

functions of the Commission, including

whether the information will have a

practical use;

• Evaluating the accuracy of the

Commission’s estimate of the burden of

the proposed collection of information,

including the validity of the

methodology and assumptions used;

• Enhancing the quality, usefulness,

and clarity of the information to be

collected; and

• Minimizing the burden of collecting

information on those who are to

respond, including through the use of

appropriate automated electronic,

mechanical, or other technological

collection techniques or other forms of

information technology; e.g., permitting

electronic submission of responses.

OMB is required to make a decision

concerning the collection of information

contained in these proposed regulations

between 30 and 60 days after

publication of this document in the

Federal Register. Therefore, a comment

to OMB is best assured of having its full

effect if OMB receives it within 30 days

of publication. This does not affect the

deadline for the public to comment to

the Commission on the proposed

regulations.

Copies of the information collection

submission to OMB are available from

the CFTC Clearance Officer, 1155 21st

Street, NW., Washington DC 20581,

(202) 418–5160.

List of Subjects

17 CFR Part 1

Commodity futures, Contract markets,

Designation application, Reporting and

recordkeeping requirements.

17 CFR Part 5

Commodity futures, Contract markets,

Designation application, Reporting and

recordkeeping requirements.

17 CFR Part 15

Commodity futures, Contract markets,

Reporting and recordkeeping

requirements.

17 CFR Part 36

Commodity futures, Commodity

Futures Trading Commission.

17 CFR Part 37

Commodity futures, Commodity

Futures Trading Commission.

17 CFR Part 38

Commodity futures, Commodity

Futures Trading Commission.

17 CFR Part 40

Commodity futures, Contract markets,

Designation application, Reporting and

recordkeeping requirements.

17 CFR Part 41

Security Futures, Commodity Futures

Trading Commission.

17 CFR Part 100

Commodity futures, Commodity

Futures Trading Commission.

17 CFR Part 166

Brokers, Commodity futures,

Consumer protection, Reporting and

recordkeeping requirements.

17 CFR Part 170

Commodity futures, Reporting and

recordkeeping requirements.

17 CFR Part 180

Claims, Commodity futures,

Consumer protection, Reporting and

recordkeeping requirements.

In consideration of the foregoing, and

pursuant to the authority contained in

the Act, as amended by the Commodity

Futures Modernization Act of 2000,

Appendix E of Pub. L. 106–554, 114

Stat. 2763 (2000), and in particular,

sections 1a, 2, 3, 4, 4c, 4i, 5, 5a, 5b, 5c,

5d, 6 and 8a thereof, 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 is

proposed to be amended to read as

follows:

Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 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, 23, and 24, as

amended by the Commodity Futures

Modernization Act of 2000, Appendix E of

Pub. L. No. 106–554, 114 Stat. 2763 (2000).

2. Section 1.1 is proposed to be

revised to read follows:

§ 1.1 Fraud in or in connection with

transactions in foreign currency subject to

the Commodity Exchange Act.

(a) Scope. The provisions of this

subsection shall be applicable to

accounts, agreements, or transactions

described in section 2(c)(1) of the Act,

to the extent that the Commission

exercises jurisdiction over such

accounts, agreements, or transactions as

provided in section 2(c)(2)(B) of the Act

(except that this section shall not be

applicable to persons described in

section 2(c)(2)(B)(ii)(II) or

2(c)(2)(B)(ii)(III) of the Act).

(b) Fraudulent conduct prohibited. It

shall be unlawful for any person,

directly or indirectly, in or in

connection with any account,

agreement, or transaction that is subject

to paragraph (a) of this section:

(1) To cheat or defraud or attempt to

cheat or defraud any person;

(2) Willfully to make or cause to be

made to any person any false report or

statement or cause to be entered for any

person any false record; or

(3) Willfully to deceive or attempt to

deceive any person by any means

whatsoever.

3. Section 1.3 is proposed to be

amended by revising the undesignated

introductory paragraph to read as

follows:

§ 1.3 Definitions.

Words used in the singular form in

the rules and regulations in this chapter

shall be deemed to import the plural

and vice versa, as the context may

require. The following terms, as used in

the Commodity Exchange Act, or in the

rules and regulations in this chapter,

shall have the meanings hereby assigned

to them, unless the context otherwise

requires:

* * * * *

4. Section 1.37 is proposed to be

amended by adding paragraphs (c) and

(d) to read as follows:

§ 1.37 Customer’s or option customer’s

name, address, and occupation recorded;

record of guarantor or controller of

account.

* * * * *

(c) Each designated contract market

shall keep a record in permanent form,

which shall show the true name,

address, and principal occupation or

business of any foreign trader executing

transactions on the facility or exchange.

In addition, upon request, a designated

contract market shall provide to the

Commission information regarding the

name of any person guaranteeing such

transactions or exercising any control

over the trading of such foreign trader.

(d) Paragraph (c) of this section shall

not apply to a designated contract

market on which transactions in futures

or option contracts of foreign traders are

executed through and the resulting

transactions are maintained in accounts

carried by a registered futures

commission merchant or introducing

broker subject to the provisions of

paragraph (a) of this section.

5.–6. Sections 1.41, 1.41b, 1.43, 1.45,

1.50 and 1.51 are proposed to be

removed and reserved.

14270 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

PART 15—REPORTS—GENERAL

PROVISIONS

7. The authority citation for Part 15 is

proposed to be revised to read as

follows:

Authority: 7 U.S.C. 2, 4, 5, 6(c), 6a, 6c(a)–

(d), 6f, 6g, 6i, 6k, 6m, 6n, 7, 9, 12a, 19 and

21, as amended by the Commodity Futures

Modernization Act of 2000, Appendix E of

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

8. Section 15.05 is proposed to be

amended by revising the heading and

adding paragraphs (e) through (h) to

read as follows:

§ 15.05 Designation of agent for foreign

brokers, customers of a foreign broker and

foreign traders.

* * * * *

(e) Any designated contract market or

derivatives transaction execution

facility that permits a foreign broker to

intermediate contracts, agreements or

transactions, or permits a foreign trader

to effect contracts, agreements or

transactions on the facility or exchange,

shall be deemed to be the agent of the

foreign broker and any of its customers

for whom the transactions were

executed, or the foreign trader, for

purposes of accepting delivery and

service of any communication issued by

or on behalf of the Commission to the

foreign broker, any of its customers or

the foreign trader with respect to any

contracts, agreements or transactions

executed by the foreign broker or the

foreign trader on the designated contract

market or derivatives transaction

execution facility. Service or delivery of

any communication issued by or on

behalf of the Commission to a

designated contract market or

derivatives transaction execution

facility shall constitute valid and

effective service upon the foreign

broker, any of its customers, or the

foreign trader. A designated contract

market or derivatives transaction

execution facility which has been

served with, or to which there has been

delivered, a communication issued by

or on behalf of the Commission to a

foreign broker, any of its customers, or

a foreign trader shall transmit the

communication promptly and in a

manner which is reasonable under the

circumstances, or in a manner specified

by the Commission in the

communication, to the foreign broker,

any of its customers or the foreign

trader.

(f) It shall be unlawful for any

designated contract market or

derivatives transaction execution

facility to permit a foreign broker, any

of its customers or a foreign trader to

effect contracts, agreements or

transactions on the facility unless the

designated contract market or

derivatives transaction execution

facility prior thereto informs the foreign

broker, any of its customers or the

foreign trader in any reasonable manner

the facility deems to be appropriate, of

the requirements of this section.

(g) The requirements of paragraphs (e)

and (f) of this section shall not apply to

any contracts, transactions or

agreements traded on any designated

contract market or derivatives

transaction execution facility if the

foreign broker, any of its customers or

the foreign trader has duly executed and

maintains in effect a written agency

agreement in compliance with this

paragraph with a person domiciled in

the United States and has provided a

copy of the agreement to the designated

contract market or derivatives

transaction execution facility prior to

effecting any contract, agreement or

transaction on the facility. This

agreement must authorize the person

domiciled in the United States to serve

as the agent of the foreign broker, any

of its customers or the foreign trader for

purposes of accepting delivery and

service of all communications issued by

or on behalf of the Commission to the

foreign broker, any of its customers or

the foreign trader and must provide an

address in the United States where the

agent will accept delivery and service of

communications from the Commission.

This agreement must be filed with the

Commission by the designated contract

market or derivatives transaction

execution facility prior to permitting the

foreign broker, any of its customers or

the foreign trader to effect any

transactions in futures or option

contracts. Unless otherwise specified by

the Commission, the agreements

required to be filed with the

Commission shall be filed with the

Secretary of the Commission at Three

Lafayette Centre, 1155 21st Street, N.W.,

Washington, D.C. 20581. A foreign

broker, any of its customers or a foreign

trader shall notify the Commission

immediately if the written agency

agreement is terminated, revoked, or is

otherwise no longer in effect. If the

designated contract market or

derivatives transaction execution

facility knows or should know that the

agreement has expired, been terminated,

or is no longer in effect, the designated

contract market or derivatives

transaction execution facility shall

notify the Secretary of the Commission

immediately. If the written agency

agreement expires, terminates, or is not

in effect, the designated contract market

or derivatives transaction execution

facility and the foreign broker, any of its

customers or the foreign trader are

subject to the provisions of paragraphs

(e) and (f) of this section.

(h) The provisions of paragraphs (e),

(f) and (g) of this section shall not apply

to a designated contract market or

derivatives transaction execution

facility on which all transactions in

futures or option contracts or other

instruments subject to the Act pursuant

to section 5a(g) of the Act of foreign

brokers, their customers or foreign

traders are executed through or the

resulting transactions are maintained in

accounts carried by a registered futures

commission merchant or introduced by

a registered introducing broker subject

to the provisions of paragraphs (a), (b),

(c) and (d) of this section.

9. Part 36 is proposed to be revised to

read as follows:

PART 36—EXEMPT MARKETS

Sec.

36.1 Scope.

36.2 Exempt boards of trade.

36.3 Exempt commercial markets.

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

amended by the Commodity Futures

Modernization Act of 2000, Appendix E of

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

§ 36.1 Scope.

The provisions of this part apply to

any board of trade or electronic trading

facility eligible for exemption under

sections 5d and 2(h)(3) through (5) of

the Act, respectively.

§ 36.2 Exempt boards of trade.

(a) Eligible commodities.

Commodities eligible under section

5d(b)(1) of the Act to be traded by an

exempt board of trade are:

(1) Commodities having—

(i) A nearly inexhaustible deliverable

supply;

(ii) A deliverable supply that is

sufficiently large, and a cash market

sufficiently liquid, to render any

contract traded on the commodity

highly unlikely to be susceptible to the

threat of manipulation; or

(iii) No cash market.

(2) The commodities that meet the

criteria of paragraph (a)(1) of this

section are:

(i) The commodities defined in

section 1a(13) of the Act as ‘‘excluded

commodities’’ (other than a security,

including any group or index thereof or

any interest in, or based on the value of,

any security or group or index of

securities); and

(ii) Such other commodity or

commodities as the Commission may

determine by rule, regulation or order.

(b) Notification. Boards of trade

operating under section 5d of the Act as

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14271

exempt boards of trade shall so notify

the Commission. This notification shall

be filed with the Secretary of the

Commission at its Washington, DC

headquarters, in either electronic or

hard copy form, shall be labeled as

‘‘Notification of Operation as Exempt

Board of Trade,’’ and shall include:

(1) The name and address of the

exempt board of trade; and

(2) The name and telephone number

of a contact person.

(c) Additional requirements. (1) A

board of trade notifying the Commission

that it meets the criteria of section 5d of

the Act and elects to operate as an

exempt board of trade shall not

represent to any person that it is

registered with, designated, recognized,

licensed or approved by the

Commission.

(2) If the Commission finds by order,

after notice and an opportunity for a

hearing through submission of written

data, views and arguments, that the

facility serves as a significant source for

the discovery of prices in the cash

market for the underlying commodity,

the facility must on a daily basis

disseminate publicly trading volume,

opening and closing price ranges, open

interest and other trading data to the

extent appropriate to that market with

respect to transactions executed in

reliance on the exemption as specified

in the order.

§ 36.3 Exempt commercial markets.

(a) Notification. An electronic trading

facility relying upon the exemption in

section 2(h)(3) of the Act shall notify the

Commission of its intention to do so.

This notification, and subsequent

notification of any material changes in

the information initially provided, shall

be filed with the Secretary of the

Commission at its Washington, DC

headquarters, in either electronic or

hard copy form, shall be labeled as

‘‘Notification of Operation as Exempt

Commercial Market,’’ and shall include

the information and certifications

specified in section 2(h)(5)(A) of the

Act.

(b) Required information. (1) A

facility operating in reliance on the

exemption in section 2(h)(3) of the Act,

initially and on an on-going basis, must

provide the Commission with access to

the facility’s trading protocols and

electronic access to transactions

conducted on the facility in reliance on

such exemption. Alternatively, the

facility may attach its initial trading

protocols and any amendments thereto

in hard copy form to the notification

required in paragraph (a) of this section

and may provide in a form and manner

acceptable to the Commission, as

determined by the Commission in

response to a petition by the exempt

market relying upon the exemption in

section 2(h)(3) of the Act, information

regarding transactions by large traders

on the facility.

(2) Special calls. (i) All information

required upon special call of the

Commission under section 2(h)(5)(B)(iii)

of the Act shall be prepared in the form

and manner and in accordance with the

instructions, and shall be transmitted at

the time and to the office of the

Commission, as may be specified in the

call.

(ii) The Commission hereby delegates,

until the Commission orders otherwise,

the authority to make special calls as set

forth in section 2(h)(5)(B)(iii) of the Act

to the Director of the Division of

Trading and Markets and to the Director

of Economic Analysis to be exercised by

either Director or by such other

employee or employees as the Director

may designate. The directors may

submit to the Commission for its

consideration any matter that has been

delegated in this paragraph. Nothing in

this paragraph prohibits the

Commission, at its election, from

exercising the authority delegated in

this paragraph.

(3) Subpoenas to foreign persons. A

foreign person whose access to a trading

facility is limited or denied at the

direction of the Commission based on

the Commission’s belief that the foreign

person has failed timely to comply with

a subpoena as provided under section

2(h)(5)(C)(ii) of the Act shall have an

opportunity for a prompt hearing under

the procedures provided in § 21.03(g)

and (h) of this chapter.

(c) Additional requirements. (1) An

electronic trading facility relying upon

the exemption in section 2(h)(3) of the

Act shall not represent to any person

that it is registered with, designated,

recognized, licensed or approved by the

Commission.

(2) If the Commission finds by order,

after notice and an opportunity for a

hearing through submission of written

data, views and arguments, that the

facility performs a significant price

discovery function for transactions in

the cash market for the underlying

commodity, the facility must

disseminate publicly price, trading

volume and other trading data to the

extent appropriate with respect to

transactions executed in reliance on the

exemption as specified in the order.

(3) The facility must require that each

participant agree to comply with all

applicable laws and the facility must

have a reasonable basis for believing

that authorized participants are ‘‘eligible

commercial entities’’ as defined in

section 1a(11) of the Act.

10. Part 37 is proposed to be added to

read as follows:

PART 37—DERIVATIVES

TRANSACTION EXECUTION

FACILITIES

Sec.

37.1 Scope and definition.

37.2 Exemption.

37.3 Requirements for underlying

commodities.

37.4 Election to trade excluded and exempt

commodities.

37.5 Procedures for registration.

37.6 Compliance with core principles.

37.7 Additional requirements.

37.8 Information relating to transactions on

derivative transaction execution

facilities.

37.9 Enforceability.

Appendix A to Part 37—Application

Guidance

Appendix B to Part 37—Guidance on

Compliance with Core Principles

Authority: 7 U.S.C. 2, 5, 6, 6c, 6(c), 6(i), 7a

and 12a, as amended by the Commodity

Futures Modernization Act of 2000,

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

2763 (2000).

§ 37.1 Scope and definition.

(a) Scope. The provisions of this part

apply to any board of trade or trading

facility operating as a registered

derivatives transaction execution

facility.

(b) Definition. As used in this part, the

term ‘‘eligible commercial entity’’

means, and shall include, in addition to

a party or entity so defined in section

1a(11) of the Act, a registered floor

trader or floor broker trading for its own

account, whose trading obligations are

guaranteed by a registered futures

commission merchant.

§ 37.2 Exemption.

Contracts, agreements or transactions

traded on a derivatives transaction

execution facility registered as such

with the Commission under section 5a

of the Act, the facility and the facility’s

operator are exempt from all

Commission regulations for such

activity, except for the requirements of

this part 37 and §§ 1.3, 1.31, 15.05,

33.10, part 40 and part 190 of this

chapter; and as applicable to the market,

parts 15 through 21 of this chapter,

which are applicable to a registered

derivatives transaction execution

facility as though they were set forth in

this section and included specific

reference to derivatives transaction

execution facilities.

14272 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

§ 37.3 Requirements for underlying

commodities.

(a) Trading facilities limited to eligible

traders. Trading facilities limited to

eligible traders as defined by section

5a(b)(3) of the Act, may trade any

contract of sale of a commodity for

future delivery (or option on such a

contract) on any of the following

underlying commodities:

(1) Commodities having—

(i) A nearly inexhaustible deliverable

supply;

(ii) A deliverable supply that is

sufficiently large that the contract is

highly unlikely to be susceptible to the

threat of manipulation; or

(iii) No cash market.

(iv) The commodities defined in

section 1a(13) of the Act as ‘‘excluded

commodities,’’ meet the criteria of

paragraphs (a)(1)(i) through (iii) of this

section.

(2)(i) Commodities that are a security

futures product, and

(ii) The registered derivatives

transaction execution facility is a

national securities exchange registered

under the Securities Exchange Act of

1934;

(3)(i) Commodities for which the

Commission has determined, based on

the market characteristics, surveillance

history, self-regulatory record, and

capacity of the facility, that trading in

the contract (or option) based on that

commodity is highly unlikely to be

susceptible to the threat of

manipulation.

(ii) The Commission may make such

a determination by rule, regulation or

order, after notice and an opportunity

for a hearing through submission of

written data, views and arguments. A

registered derivative transaction

execution facility may request that the

Commission make such an

individualized determination by filing

with the Commission at its Washington,

DC headquarters a petition that

includes:

(A) The terms and conditions of the

product to be listed; and

(B) A demonstration, supported by

data, that the underlying commodity has

a sufficiently liquid and deep cash

market and a surveillance history based

on actual trading experience and in light

of any self-regulatory undertakings of

the facility, to provide assurance that

the contract or product is highly

unlikely to be manipulated. The

demonstration should address the

following specific factors to the extent

that the factor is not self-evident:

(1) A high level of cash-market

liquidity;

(2) Cash-market bid-ask spreads that

are narrow relative to traded values;

(3) Relatively frequent cash market

transactions involving participants that

represent major segments of the

industry;

(4) The absence of material

impediments to participation in the

cash market by commercial entities;

(5) Transfer of ownership of the cash

commodity that is easily and readily

accomplished at minimal cost;

(6) A pattern of cash market pricing

that exhibits continuity and the absence

of frequent, sharp price changes such

that a person cannot readily move

materially the price of the product in

normal cash market channels;

(7) A history of actual trading

experience that the contract or product’s

terms and conditions provide for a

deliverable supply that is adequate to

minimize the threat of market abuses

such as price manipulation and

distortions, congestion, and defaults;

and

(8) Procedures to effectively oversee

the market, including a large trader

reporting system, as well as a history of

active surveillance to prevent or

mitigate market problems; or

(4) Commodities that are agricultural

commodities enumerated in section

1a(4) of the Act that have been so

approved by the Commission under the

procedures of paragraph (c) of this

section;

(b) Trading facilities limited to eligible

commercial entities. Any commodity,

other than the agricultural commodities

enumerated in section 1a(4) of the Act,

is eligible under section 5a(b)(2)(F) of

the Act to be traded on a derivatives

transaction execution facility that limits

participants on the facility to eligible

commercial entities as defined by

§ 37.1(b) trading for their own account.

Provided, however, an agricultural

commodity enumerated in section 1a(4)

of the Act may be so approved by the

Commission under the procedures of

paragraph (c) of this section.

(c) Enumerated agricultural

commodities. [Reserved]

§ 37.4 Election to trade excluded and

exempt commodities.

A board of trade that is or elects to

become a registered derivatives

transaction execution facility may,

pursuant to section 5a(g) of the Act,

trade agreements, contracts, or

transactions that are excluded or exempt

from the Act pursuant to sections 2(c),

2(d), 2(g), or 2(h).

§ 37.5 Procedures for registration.

(a) Notification by contract markets.

To operate as a derivatives transaction

execution facility pursuant to section 5a

of the Act, a board of trade, facility or

entity that is designated as a contract

market, must:

(1) Comply with the core principles

for operation under section 5a(d) of the

Act and the provisions of this part 37;

and

(2) Notify the Commission of its intent

to so operate by filing with the

Commission at its Washington, DC

headquarters a copy of the facility’s

rules, which may be trading protocols,

and a certification by the contract

market that it meets:

(i) The requirements for trading of

section 5a(b) of the Act; and

(ii) The criteria for registration under

section 5a(c) of the Act.

(b) Registration by application. A

board of trade, facility or entity shall be

deemed to be registered as a derivatives

transaction execution facility thirty days

after receipt by the Commission of an

application for registration as a

derivatives transaction execution

facility unless notified otherwise during

that period, or, as determined by

Commission order, registered upon

conditions, if:

(1) The application demonstrates that

the applicant satisfies the requirements

for trading and the criteria for

registration of sections 5a(b) and 5a(c) of

the Act, respectively;

(2) The submission is labeled,

‘‘Application for DTF Registration’’;

(3) The submission includes:

(i) The derivatives transaction

execution facility’s rules, which may be

trading protocols;

(ii) Any agreements entered into or to

be entered into between or among the

facility, its operator or its participants,

technical manuals and other guides or

instructions for users of such facility,

descriptions of any system test

procedures, tests conducted or test

results, and descriptions of the trading

mechanism or algorithm used or to be

used by such facility, to the extent such

documentation was otherwise prepared;

and

(iii) To the extent that compliance

with the requirements for trading or the

criteria for recognition is not selfevident, a brief explanation of how the

rules or trading protocols satisfy each of

the conditions for registration;

(4) The applicant does not amend or

supplement the application for

recognition, except as requested by the

Commission or for correction of

typographical errors, renumbering or

other nonsubstantive revisions, during

that period; and

(5) The applicant has not instructed

the Commission in writing during the

review period to review the application

pursuant to the time provisions of and

procedures under section 6 of the Act.

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14273

(c) Guidance for applicants.

Appendix A to this part provides

guidance to applicants for registration as

a derivatives transaction execution

facility on how the conditions for

registration in section 5a(b) and 5a(c) of

the Act could be satisfied.

(d) Termination of fast track review.

During the thirty-day period for review

pursuant to paragraph (b) of this section,

the Commission shall notify the

applicant seeking registration that the

Commission is terminating review

under this section and will review the

proposal under the time period and

procedures of section 6 of the Act, if it

appears that the application’s form or

substance fails to meet the requirements

of this part. This termination

notification will state the nature of the

issues raised and the specific condition

of registration that the applicant would

violate, appears to violate, or the

violation of which cannot be ascertained

from the application. Within ten days of

receipt of this termination notification,

the applicant seeking registration may

request that the Commission render a

decision whether to register the

derivatives transaction execution

facility or to institute a proceeding to

deny the proposed application under

procedures specified in section 6 of the

Act by notifying the Commission that

the applicant seeking registration views

its submission as complete and final as

submitted.

(e) Request for withdrawal of

application for registration or

withdrawal of registration. An applicant

to be registered, or a registered

derivatives transaction execution

facility may withdraw its application or

its registration by filing with the

Commission at its Washington, DC,

headquarters such a request.

Withdrawal from registration shall not

affect any action taken or to be taken by

the Commission based upon actions,

activities or events occurring during the

time that the application for registration

was pending with, or that the facility

was registered by, the Commission.

(f) Delegation of authority. (1) The

Commission hereby delegates, until it

orders otherwise, to the Director of the

Division of Trading and Markets and

separately to the Director of Economic

Analysis or the Director’s delegatee,

with the concurrence of the General

Counsel or the General Counsel’s

delegatee, authority to exercise the

functions provided under paragraph (b)

of this section.

(2) The directors may submit to the

Commission for its consideration any

matter that has been delegated in this

paragraph.

(3) Nothing in this paragraph

prohibits the Commission, at its

election, from exercising the authority

delegated in paragraph (f)(1) of this

section.

§ 37.6 Compliance with core principles.

(a) In general. To maintain

registration as a derivatives transaction

execution facility upon commencing

operations by listing products for

trading or otherwise and on a

continuing basis thereafter, the

derivatives transaction execution

facility must have the capacity to be,

and be, in compliance with the core

principles of section 5a(d) of the Act.

(b) New derivatives transaction

execution facilities. (1) Certification of

compliance. Unless an applicant for

registration has chosen to make a

voluntary demonstration under

paragraph (b)(2) of this section, a newly

registered derivatives transaction

execution facility at the time it

commences operations must certify to

the Commission that it has the capacity

to, and will, operate in compliance with

the core principles under section 5a(d)

of the Act.

(2) Voluntary demonstration of

compliance. An applicant for

registration may choose to make a

voluntary demonstration of its capacity

to operate in compliance with the core

principles as follows:

(i) At least thirty days prior to

commencing operations, the applicant

for registration must file with the

Commission at its Washington, D.C.

headquarters, either separately or with

the application required by § 37.4, a

submission that includes:

(A) The label, ‘‘Demonstration of

Compliance with Core Principles for

Operation;’’

(B) The derivatives transaction

execution facility’s rules, which may be

trading protocols, that enable or

empower the facility to comply with the

core principles;

(C) Any agreements entered into or to

be entered into between or among the

facility, its operator or its participants

that enable or empower the facility to

comply with the core principles,

including where applicable, technical

manuals and other guides or

instructions for users of the facility; and

(D) To the extent that capacity to

comply with a core principle is not selfevident, a brief explanation of how the

facility has the capacity to meet the core

principle.

(ii) Unless the applicant requests an

extension of time, the applicant shall be

deemed to have demonstrated its

capacity to comply with the core

principles thirty days after receipt by

the Commission, unless notified

otherwise.

(iii) If it appears that the applicant has

failed to make the requisite showing, the

Commission will so notify the applicant

at the end of that period. Upon

commencement of operations by the

derivatives transaction execution

facility, such a notice may be

considered by the Commission in a

determination to issue a notice of

violation of core principles under

section 5c(d) of the Act.

(c) Existing derivatives transaction

execution facilities. Upon request by the

Commission, a registered derivatives

transaction execution facility shall file

with the Commission such data,

documents and other information as the

Commission may specify in its request

that demonstrates that the registered

derivatives transaction execution

facility is in compliance with one or

more core principles as specified in the

request or that is requested by the

Commission to enable the Commission

to satisfy its obligations under the Act.

(d) Guidance regarding compliance

with core principles. A derivatives

transaction execution facility may meet

the following core principles of section

5a(d) of the Act as specified in this

paragraph:

(1) Compliance with rules. The core

principle regarding compliance with

rules under section 5a(d)(2) of the Act

may be met, as appropriate to the

facility, through the effective monitoring

of limitations on access to the facility;

(2) Monitoring of trading. The core

principle regarding monitoring of

trading under section 5a(d)(3) of the Act

may be met, as appropriate to the

market and the products traded thereon,

by providing information to the

Commission as requested to satisfy the

Commission’s obligations under the Act;

(3) Disclosure of general information.

The core principle regarding disclosure

of general information relevant to

participation in trading on the facility

under section 5a(d)(4)(D) of the Act also

includes providing to market

participants on a fair, equitable and

timely basis information regarding

prices, bids and offers, and such other

information that the Commission may

determine by rule, regulation or order,

after notice and an opportunity for a

hearing through submission of written

data, views and arguments;

(4) Daily publication of trading

information. The Commission will

determine by order, after notice and an

opportunity for a hearing through

submission of written data, views and

arguments, whether the requirement of

the core principle on publication of

trading information under section

14274 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

5a(d)(5) of the Act applies to a particular

product or products traded on a facility;

(5) Fitness. Appropriate minimum

standards for participants having direct

access to the facility under the core

principle on fitness pursuant to section

5a(d)(6) of the Act also includes natural

persons that directly or indirectly have

greater than a ten percent ownership

interest in the facility; and

(6) In general. Appendix B to this part

provides guidance to registered

derivatives transaction execution

facilities on how the core principles

under section 5a(d) of the Act could be

satisfied.

§ 37.7 Additional requirements.

(a) Products. Notwithstanding the

provisions of section 5c(c) of the Act

and § 40.2 of this chapter, derivative

transaction execution facilities need

only notify the Commission of the

listing of new products for trading,

posting of new product descriptions,

terms and conditions or trading

protocols or providing for a new system

product functionality, by filing with the

Commission at its Washington, D.C.

headquarters, a submission labeled

‘‘DTF Notice of Product Listing’’ that

includes the text of the product’s terms

or conditions, product description,

trading protocol or description of the

system functionality or by electronic

notification of the foregoing at the time

traders or participants in the market are

notified, but in no event later than the

close of business on the business day

preceding initial listing, posting or

implementation of the trading protocol

or system functionality.

(b) Material modifications.

Notwithstanding the provisions of

section 5c(c) of the Act, registered

derivative transaction execution

facilities need not certify rules or rule

amendments under § 40.6 of this

chapter, and must only notify the

Commission prior to placing into effect

or amending such a rule, which

includes trading protocols, by:

(1) Filing with the Commission at its

Washington, D.C. headquarters at the

time traders or participants in the

market are notified, but (unless taken as

an emergency action) in no event later

than the close of business on the

business day preceding implementation

of the rule, a submission labeled, ‘‘DTF

Rule Notice.’’ The submission shall

include the text of the rule or rule

amendment, (deletions and additions

must be indicated); or

(2) By electronic notification to the

Commission of the rule to be placed into

effect or to be changed, in a format

approved by the Secretary of the

Commission, at the time traders or

participants in the market are notified,

but (unless taken as an emergency

action) in no event later than the close

of business on the business day

preceding implementation. Provided,

however, the derivatives transaction

execution facility need not notify the

Commission of rules or rule

amendments for which no certification

is required under § 40.6(c) of this

chapter.

(3) The derivatives transaction

execution facility must maintain

documentation regarding all changes to

rules, terms and conditions or trading

protocols.

(c) Voluntary request for Commission

approval of rules or products. (1) A

board of trade or trading facility seeking

to be registered as, or registered as, a

derivatives transaction execution

facility, may request that the

Commission approve under section

5c(c) of the Act, any or all of its rules

and subsequent amendments thereto,

including both operational rules and the

terms or conditions of products listed

for trading on the facility, prior to their

implementation or, notwithstanding the

provisions of section 5c(c)(2) of the Act,

at anytime thereafter, under the

procedures of §§ 40.5 or 40.3 of this

chapter, as applicable. A derivatives

transaction execution facility may label

a product in its rules as, ‘‘Listed for

trading pursuant to Commission

approval,’’ if the product and its terms

or conditions have been approved by

the Commission and it may label as,

‘‘Approved by the Commission,’’ only

those rules that have been so approved.

(2) An applicant for registration, or a

registered derivatives transaction

execution facility may request that the

Commission consider under the

provisions of section 15(b) of the Act

any of the derivatives transaction

execution facility’s rules or policies,

including both operational rules and the

terms or conditions of products listed

for trading, at the time of registration or

thereafter.

(d) Identify participants. Registered

derivative transaction execution

facilities must keep a record in

permanent form, which shall show the

true name, address, and principal

occupation or business of any foreign

trader executing transactions on the

facility. In addition, upon request, a

derivative transaction execution facility

shall provide to the Commission

information regarding the name of any

person exercising control over the

trading of such foreign trader. Provided,

however, this paragraph shall not apply

to a derivatives transaction execution

facility insofar as transactions in futures

or option contracts of foreign traders are

executed through and the resulting

transactions are maintained in accounts

carried by a registered futures

commission merchant or introducing

broker subject to § 1.37 of this chapter.

(e) Identify persons subject to fitness

requirement. Upon request by the

Commission, a registered derivatives

transaction execution facility shall

furnish to the Commission a current list

of persons subject to the fitness

requirements of section 5a(d)(6) of the

Act.

§ 37.8 Information relating to transactions

on derivatives transaction execution

facilities.

(a) Special calls for information from

derivatives transaction execution

facilities. Upon special call by the

Commission, a registered derivatives

transaction execution facility shall

provide to the Commission such

information related to its business as a

derivatives transaction execution

facility, including information relating

to data entry and trade details, in the

form and manner and within the time as

specified by the Commission in the

special call.

(b) Special calls for information from

futures commission merchants. Upon

special call by the Commission, each

person registered as a futures

commission merchant that carries or has

carried an account for a customer on a

derivatives transaction execution

facility shall provide information to the

Commission concerning such accounts

or related positions carried for the

customer on that or other facilities or

markets, in the form and manner and

within the time specified by the

Commission in the special call.

(c) Special calls for information from

participants. Upon special call by the

Commission, any person who enters

into or has entered into an agreement,

contract or transaction on a derivatives

transaction execution facility shall

provide information to the Commission

concerning such agreements, contracts

or transactions or related agreements,

contracts or transactions, or concerning

related positions on other facilities or

markets, in the form and manner and

within the time specified by the

Commission in the special call.

(d) Delegation of authority. The

Commission hereby delegates, until the

Commission orders otherwise, the

authority set forth in paragraphs (a)

through (c) of this section to the

Directors of the Division of Trading and

Markets and separately to the Director of

Economic Analysis or such other

employee or employees as the Directors

may designate from time to time. The

Directors may submit to the

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14275

Commission for its consideration any

matter that has been delegated in this

paragraph. Nothing in this paragraph

prohibits the Commission, at its

election, from exercising the authority

delegated in this paragraph.

§ 37.9 Enforceability.

An agreement, contract or transaction

entered into on, or pursuant to, the rules

of a registered derivatives transaction

execution facility shall not be void,

voidable, subject to rescission or

otherwise invalidated or rendered

unenforceable as a result of:

(a) A violation by the registered

derivatives transaction execution

facility of the provisions of section 5a of

the Act or this part 37; or

(b) Any Commission proceeding to

alter or supplement a rule, term or

condition under section 8a(7) of the Act,

to declare an emergency under section

8a(9) of the Act, or any other proceeding

the effect of which is to disapprove,

alter, supplement, or require a registered

derivatives transaction execution

facility to adopt a specific term or

condition, trading rule or procedure, or

to take or refrain from taking a specific

action.

Appendix A to Part 37—Application

Guidance

This appendix provides guidance to

applicants for registration as derivatives

transaction execution facilities under section

5a(c) of the Act and § 37.5. The guidance

following each registration criterion is

illustrative only of the types of matters an

applicant may address, as applicable, and is

not intended to be a mandatory checklist.

Addressing the issues and questions set forth

in this appendix would help the Commission

in its consideration of whether the

application has met the criteria for

registration. To the extent that compliance

with, or satisfaction of, a criterion for

registration is not self-explanatory from the

face of the derivatives transaction execution

facility’s rules, which may be terms and

conditions or trading protocols, the

application should include an explanation or

other form of documentation demonstrating

that the applicant meets the registration

criteria of section 5a(c) of the Act and § 37.5.

Registration Criterion 1 of section 5a(c) of

the Act: IN GENERAL—To be registered as a

registered derivatives transaction execution

facility, the board of trade shall be required

to demonstrate to the Commission only that

the board of trade meets the criteria specified

in subsection (b) and this subsection.

A board of trade preparing to submit to the

Commission an application to operate as a

registered derivatives transaction execution

facility is encouraged to contact Commission

staff for guidance and assistance in preparing

its application. Applicants may submit a

draft application for review prior to the

submission of an actual application without

triggering the application review procedures

of § 37.5.

Registration Criterion 2 of section 5a(c) of

the Act: DETERRENCE OF ABUSES—The

board of trade shall establish and enforce

trading and participation rules that will deter

abuses and has the capacity to detect,

investigate, and enforce those rules,

including means to—(A) obtain information

necessary to perform the functions required

under this section; or (B) use technological

means to—(i) provide market participants

with impartial access to the market; and (ii)

capture information that may be used in

establishing whether rule violations have

occurred.

An application of a board of trade to

operate as a registered derivatives transaction

execution facility should include

arrangements and resources for effective and

affirmative rule enforcement, including

documentation of the facility’s authority to

do so. The submission should include

documentation on the ability of the facility

either to obtain necessary information or to

provide participants with impartial access

and capture information for use in

establishing possible rule violations.

Registration Criterion 3 of section 5a(c) of

the Act: TRADING PROCEDURES—The

board of trade shall establish and enforce

rules or terms and conditions defining, or

specifications detailing, trading procedures

to be used in entering and executing orders

traded on the facilities of the board of trade.

The rules may authorize—(A) transfer trades

or office trades; (B) an exchange of—(i)

futures in connection with a cash commodity

transaction; (ii) futures for cash commodities;

or (iii) futures for swaps; or (C) 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 the registered

derivatives transaction execution facility or a

derivatives clearing organization. 

(a) A submission of a board of trade to

operate as an electronic registered derivatives

transaction execution facility should include

the system’s trade-matching algorithm and

order entry procedures. A submission

involving a trade-matching algorithm that is

based on order priority factors other than

price and time should include a brief

explanation of the algorithm.

(b) A board of trade’s specifications on

initial and periodic objective testing and

review of proper system functioning,

adequate capacity, and security for any

automated systems should be included in its

submission. The Commission believes that

the guidelines issued by the International

Organization of Securities Commissions

(IOSCO) in 1990 (which have been referred

to as the ‘‘Principles for Screen-Based

Trading Systems’’), and subsequently

adopted by the Commission on November 21,

1990 (55 FR 48670), are appropriate

guidelines for an electronic trading facility to

apply to electronic trading systems. Any

program of objective testing and review of the

system should be performed by a qualified

independent professional.

(c) A registered derivatives transaction

execution facility that authorizes transfer

trades or office trades; an exchange of futures

for physicals or futures for swaps; or any

other non-competitive transactions,

including block trades, should have rules

particularly authorizing such transactions

and establishing appropriate recordkeeping

requirements. Block trading rules should

ensure that the block trading does not operate

in a manner that compromises the integrity

of the prices or price discovery on the

relevant market.

Registration Criterion 4 of section 5a(c) of

the Act: FINANCIAL INTEGRITY OF

TRANSACTIONS—The board of trade shall

establish and enforce rules or terms and

conditions providing for the financial

integrity of transactions entered on or

through the facilities of the board of trade,

and rules or terms and conditions to ensure

the financial integrity of any futures

commission merchants and introducing

brokers and the protection of customer funds. 

(a) A board of trade operating as a

registered derivatives transaction execution

facility should provide for the financial

integrity of transactions by setting

appropriate minimum financial standards for

users and/or members, appropriate margin

forms and levels, and appropriate default

rules and procedures. If cleared, transactions

executed on the facility must be cleared

through a derivatives clearing organization.

The Commission believes ensuring and

enforcing the financial integrity of

transactions and intermediaries, and the

protection of customer funds should include

monitoring compliance with the facility’s

minimum financial standards. In order to

monitor for minimum financial requirements,

a facility should routinely receive and

promptly review financial and related

information.

(b) A registered derivatives transaction

execution facility that allows customers that

qualify as ‘‘eligible traders’’ under the

definition found in section 5a(b)(3) of the Act

only by trading through a futures commission

merchant pursuant to section 5a(b)(3)(B),

should have rules concerning the protection

of customer funds that address appropriate

minimum financial standards for

intermediaries, the segregation of customer

and proprietary funds, the custody of

customer funds, the investment standards for

customer funds, related recordkeeping

procedures and related intermediary default

procedures.

Appendix B to Part 37—Guidance on

Compliance With Core Principles

1. This appendix provides guidance

concerning the core principles with which a

registered derivatives transaction execution

facility must comply to maintain registration

under section 5a(d) of the Act and § 37.5(a).

This guidance is illustrative only and is not

intended to be a mandatory checklist.

2. If a registered derivatives transaction

execution facility chooses to certify that it

has the capacity to, and upon initiation will,

operate in compliance with the core

principles under section 5a(d) of the Act and

§ 37.6, it should consider the issues set forth

in this appendix prior to certification.

3. Alternatively, if a registered derivatives

transaction execution facility chooses

pursuant to § 37.6(b)(2) to provide the

14276 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

Commission with a demonstration of its

compliance with core principles, addressing

the issues set forth in this appendix would

help the Commission in its consideration of

such compliance. To the extent that

compliance with, or satisfaction of, the core

principles is not self-explanatory from the

face of the derivatives transaction execution

facility’s rules, which may be terms and

conditions or trading protocols, a submission

under § 37.6(b)(2) should include an

explanation or other form of documentation

demonstrating that the derivatives

transaction execution facility complies with

the core principles.

Core Principle 1 of section 5a(d) of the Act:

IN GENERAL—To maintain the registration

of a board of trade as a derivatives

transaction execution facility, a board of

trade shall comply with the core principles

specified in this subsection. The board of

trade shall have reasonable discretion in

establishing the manner in which the board

of trade complies with the core principles. 

A board of trade newly registered to

operate as a derivatives transaction execution

facility must certify or satisfactorily

demonstrate its capacity to operate in

compliance with the core principles under

section 5a(d) of the Act prior to the

commencement of its operations. The

Commission also may require that a board of

trade operating as a registered derivatives

transaction execution facility demonstrate to

the Commission that it is operating in

compliance with one or more core principles.

Core Principle 2 of section 5a(d) of the Act:

COMPLIANCE WITH RULES—The board of

trade shall monitor and enforce the rules of

the facility, including any terms and

conditions of any contracts traded on or

through the facility and any limitations on

access to the facility. 

(a) A board of trade operating as a

registered derivatives transaction execution

facility should have arrangements, resources

and authority for effectively and affirmatively

enforcing its rules (which, in the case of a

facility that restricts traders to eligible

commercial entities, may be the effective

monitoring of limitations on access to the

facility), including the authority and ability

to collect or capture information and

documents on both a routine and non-routine

basis and to investigate effectively possible

rule violations.

(b) This should include the authority and

ability to discipline, limit or suspend, and

terminate a member/participant’s activities or

access or, in the case of a derivatives

transaction execution facility restricting its

traders to eligible commercial entities, the

authority and ability to terminate a member/

participant’s activities or access. In either

case, any termination should be carried out

pursuant to clear and fair standards.

Core Principle 3 of section 5a(d) of the Act:

MONITORING OF TRADING—The board of

trade shall monitor trading in the contracts

of the facility to ensure orderly trading in the

contract and to maintain an orderly market

while providing any necessary trading

information to the Commission to allow the

Commission to discharge the responsibilities

of the Commission under the Act. 

(a) Arrangements and resources for

effective trade monitoring programs should

facilitate, on both a routine and nonroutine

basis, direct supervision of the market.

Appropriate objective testing and review of

any automated systems should occur initially

and periodically to ensure proper system

functioning, adequate capacity and security.

The analysis of data collected should be

suitable for the type of information collected

and should occur in a timely fashion. A

board of trade operating as a registered

derivatives transaction execution facility

should have the authority to collect the

information and documents necessary to

reconstruct trading for appropriate market

analysis as it carries out its programs to

ensure orderly trading and to maintain an

orderly market. The facility also should have

the authority to intervene as necessary to

maintain an orderly market.

(b) Alternatively, if a board of trade

operating as a registered derivatives

transaction execution facility restricts

contracts traded pursuant to those under

§§ 37.3(a)(1) and 37.3(b), it may choose to

satisfy this core principle by providing

information to the Commission as requested

by the Commission to satisfy its obligations

under the Act. The facility should have the

authority to collect or capture and retrieve all

necessary information.

Core Principle 4 of section 5a(d) of the Act:

DISCLOSURE OF GENERAL

INFORMATION—The board of trade shall

disclose publicly and to the Commission

information concerning—(A) contract terms

and conditions; (B) trading conventions,

mechanisms, and practices; (C) financial

integrity protections; and (D) other

information relevant to participation in

trading on the facility. 

A board of trade operating as a registered

derivatives transaction execution facility

should have arrangements and resources for

the disclosure and explanation of contract

terms and conditions, trading conventions,

trading mechanisms, trading practices,

system functioning, system capacity, system

security, system testing and review, and

financial integrity protections, including

whether eligible contract participants will

have the right to opt out of segregation of

customer funds. The facility must also

disclose any limitations of liability (which

may not include limitations of liability for

violations of the Act or Commission

regulations by fraud, or wanton or willful

misconduct). Such information may be made

publicly available through the derivatives

transaction execution facility’s website. The

facility should also make information

regarding prices, bids and offers, or other

information as determined by the

Commission, readily available to market

participants on a fair, equitable and timely

basis. Furthermore, the facility should make

available information concerning steps taken

by the facility in response to an emergency.

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

DAILY PUBLICATION OF TRADING

INFORMATION—The board of trade shall

make public daily information on settlement

prices, volume, open interest, and opening

and closing ranges for contracts traded on

the facility if the Commission determines that

the contracts perform a significant price

discovery function for transactions in the

cash market for the commodity underlying

the contracts. 

A board of trade operating as a registered

derivatives transaction execution facility

should provide to the public information

regarding settlement prices, price range,

trading volume, open interest and other

related market information for all applicable

contracts, as determined by the Commission.

The Commission will determine by order,

after notice and an opportunity for a hearing

through submission of written data, views

and arguments, whether the requirement of

the core principle on publication of trading

information under section 5a(d)(5) of the Act

applies to a particular product or products

traded on a facility. Provision of information

for any applicable contract could be through

such means as providing the information to

a financial information service or by timely

placing the information on a facility’s

website.

Core Principle 6 of section 5a(d): FITNESS

STANDARDS—The board of trade shall

establish and enforce appropriate fitness

standards for directors, members of any

disciplinary committee, members, and any

other persons with direct access to the

facility, including any parties affiliated with

any of the persons described in this

paragraph. 

A derivatives transaction execution facility

should have appropriate eligibility criteria

for the categories of persons set forth in the

core principle that would include standards

for fitness and for the collection and

verification of information supporting

compliance with such standards. Minimum

standards of fitness for persons who have

member voting privileges, governing

obligations or responsibilities, or who

exercise disciplinary authority are those

bases for refusal to register a person under

section 8a(2) of the Act, or a history of

serious disciplinary offenses, such as those

which would be disqualifying under § 1.63 of

this chapter. Eligible contract participants or

eligible commercial entities who have direct

access but do not have these privileges,

obligations, responsibilities or disciplinary

authority could satisfy minimum fitness

standards by meeting the standards that they

must meet to qualify under the Act’s

respective definitions of eligible contract

participants or eligible commercial entities.

Natural persons who directly or indirectly

have greater than a ten percent interest in a

facility should meet the fitness standards

applicable to members with voting rights. A

demonstration of the fitness of the

applicant’s directors, members, or natural

persons who directly or indirectly have a

greater than ten percent interest in a facility

may include providing the Commission with

registration information for such persons,

certification to the fitness of such persons, an

affidavit of such persons’ fitness by the

facility’s Counsel or other information

substantiating the fitness of such persons.

Core Principle 7 of section 5a(d) of the Act:

CONFLICTS OF INTEREST—The board of

trade shall establish and enforce rules to

minimize conflicts of interest in the decision

making process of the derivatives transaction

execution facility and establish a process for

resolving such conflicts of interest. 

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14277

The means to address conflicts of interest

in decision-making of a board of trade

operating as a registered derivatives

transaction execution facility should include

methods to ascertain the presence of conflicts

of interest and to make decisions in the event

of such a conflict. The Commission also

believes that a board of trade operating as a

registered derivatives transaction execution

facility should provide for appropriate

limitations on the use or disclosure of

material non-public information gained

through the performance of official duties by

board members, committee members and

facility employees or gained through an

ownership interest in the facility.

Core Principle 8 of section 5a(d) of the Act:

RECORDKEEPING—The board of trade shall

maintain records of all activities related to

the business of the derivatives transaction

execution facility in a form and manner

acceptable to the Commission for a period of

5 years. 

Section 1.31 of this chapter governs

recordkeeping obligations under the Act and

the Commission’s regulations thereunder. In

order to provide broad flexible performance

standards for recordkeeping, § 1.31 was

updated and amended by the Commission in

1999. Accordingly, § 1.31 itself establishes

the guidance regarding the form and manner

for keeping records.

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

ANTITRUST CONSIDERATIONS—Unless

necessary or appropriate to achieve the

purposes of this Act, the board of trade shall

endeavor to avoid—(A) adopting any rules or

taking any actions that result in any

unreasonable restraint of trade; or (B)

imposing any material anticompetitive

burden on trading on the derivatives

transaction execution facility. 

A board of trade seeking to operate as a

registered derivatives transaction execution

facility may request that the Commission

consider under the provisions of section

15(b) of the Act any of the board of trade’s

rules, which may be trading protocols or

policies, and including both operational rules

and the terms or conditions of products listed

for trading, at the time it submits its

registration application or thereafter. The

Commission intends to apply section 15(b) of

the Act to its consideration of issues under

this core principle in a manner consistent

with that previously applied to contract

markets.

11. Chapter I of 17 CFR is amended

by adding new Part 38 as follows:

PART 38—DESIGNATED CONTRACT

MARKETS

Sec.

38.1 Scope.

38.2 Exemption.

38.3 Procedures for designation by

application.

38.4 Procedures for listing products and

implementing contract market rules.

38.5 Information relating to contract market

compliance.

38.6 Enforceability.

Appendix A to Part 38—Application

Guidance

Appendix B to Part 38—Guidance on, and

Acceptable Practices in, Compliance

with Core Principles

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).

§ 38.1 Scope.

The provisions of this part 38 shall

apply to every board of trade or trading

facility that has been designated as a

contract market in a commodity under

section 6 of the Act. Provided, however,

nothing in this provision affects the

eligibility of designated contract

markets to operate under the provisions

of parts 36 or 37 of this chapter.

§ 38.2 Exemption.

Agreements, contracts, or transactions

traded on a designated contract market

under section 6 of the Act, the contract

market and the contract market’s

operator are exempt from all

Commission regulations for such

activity, except for the requirements of

this part 38 and §§ 1.3, 1.31, 1.38, 33.10,

part 9, parts 15 through 21, part 40, and

part 190 of this chapter.

§ 38.3 Procedures for designation by

application.

(a) Application. A board of trade or

trading facility shall be deemed to be

designated as a contract market sixty

days after receipt by the Commission of

an application for designation unless

notified otherwise during that period,

or, as determined by Commission order,

designated upon conditions, if:

(1) The application demonstrates that

the applicant satisfies the criteria for

designation of section 5(b) of the Act,

the core principles for operation under

section 5(d) of the Act and the

provisions of this part 38;

(2) The application is labeled as being

submitted pursuant to this part 38;

(3) The application includes a copy of

the applicant’s rules and, to the extent

that compliance with the conditions for

designation is not self-evident, a brief

explanation of how the rules satisfy

each of the conditions for designation;

(4) The applicant does not amend or

supplement the designation application,

except as requested by the Commission

or for correction of typographical errors,

renumbering or other nonsubstantive

revisions, during that period; and

(5) The applicant has not instructed

the Commission in writing during the

review period to review the application

pursuant to procedures under section 6

of the Act.

(b) Guidance regarding application for

designation. An applicant for contract

market designation may meet the

following conditions for designation as

specified in this paragraph:

(1) Prevention of market

manipulation. The designation criterion

to prevent market manipulation under

section 5(b)(2) of the Act also includes

the requirement that the designated

contract market have a dedicated

regulatory department, or delegation of

that function;

(2) Fair and equitable trading. The

designation criterion requiring fair and

equitable trading rules under section

5(b)(3) of the Act also includes fair,

equitable and timely availability to

market participants of information

regarding prices, bids and offers;

(3) Disciplinary procedures. The

designation criterion to enforce

disciplinary procedures under section

5(b)(6) of the Act may be satisfied by an

organized exchange or a trading facility

with respect to non-member

participants of the contract market by

expelling or by denying future access to

such a person found to have violated the

contract market’s rules;

(4) Governance fitness standards. The

requirement to establish appropriate

minimum fitness standards for

participants in a facility having direct

access to the facility under the core

principle on fitness pursuant to section

5(d)(14) of the Act includes natural

persons that directly or indirectly have

greater than a ten percent ownership

interest in the facility; and

(5) In general. Appendix A to this part

provides guidance to applicants for

designation as contract markets on how

the criteria for designation under

section 5(b) of the Act can be satisfied

and Appendix B to this part provides

guidance to applicants for designation

and designated contract markets on how

the core principles of section 5(d) of the

Act can be satisfied;

(c) Termination of fast track review.

During the sixty-day period for review

pursuant to paragraph (a) of this section,

the Commission shall notify the

applicant seeking designation that the

Commission is terminating review

under this section and will review the

proposal under the time period and

procedures of section 6 of the Act, if it

appears that the application’s form or

substance fails to meet the requirements

of this part. This termination

notification will state the nature of the

issues raised and the specific condition

of designation that the applicant would

violate, appears to violate, or the

violation of which cannot be ascertained

from the application. Within ten days of

receipt of this termination notification,

the applicant seeking designation may

request that the Commission render a

decision whether to designate the

14278 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

contract market or to institute a

proceeding to deny the proposed

application under procedures specified

in section 6 of the Act by notifying the

Commission that the applicant views its

submission as complete and final as

submitted.

(d) Request for withdrawal of

application for designation or vacation

of designation. An applicant to be

designated, or a designated contract

market, may withdraw its application or

vacate its designation under section 7 of

the Act by filing with the Commission

at its Washington, D.C., headquarters

such a request. Withdrawal from

registration or vacation of designation

shall not affect any action taken or to be

taken by the Commission based upon

actions, activities or events occurring

during the time that the application for

designation was pending with, or that

the facility was designated by, the

Commission.

(e) Delegation of authority. (1) The

Commission hereby delegates, until it

orders otherwise, to the Director of the

Division of Division of Trading and

Markets and separately to the Director of

Economic Analysis or the Directors’

delegatee, with the concurrence of the

General Counsel or the General

Counsel’s delegatee, authority to notify

the entity seeking designation under

paragraph (a) of this section that review

under those procedures is being

terminated or to designate the entity as

a contract market upon conditions.

(2) The Directors may submit to the

Commission for its consideration any

matter that has been delegated in this

paragraph.

(3) Nothing in this paragraph

prohibits the Commission, at its

election, from exercising the authority

delegated in paragraph (e)(1) of this

section.

§ 38.4 Procedures for listing products and

implementing contract market rules.

(a) Request for Commission approval

of rules and products. An applicant for

designation, or a designated contract

market, may request that the

Commission approve under section

5c(c) of the Act, any or all of its rules

and subsequent amendments thereto,

including both operational rules and the

terms or conditions of products listed

for trading on the facility, prior to their

implementation or, notwithstanding the

provisions of section 5c(c)(2) of the Act,

at anytime thereafter, under the

procedures of §§ 40.5 or 40.3 of this

chapter, as applicable. A designated

contract market may label a product in

its rules as, ‘‘Listed for trading pursuant

to Commission approval,’’ if the product

and its terms or conditions have been

approved by the Commission and it may

label as, ‘‘Approved by the

Commission,’’ only those rules that have

been so approved.

(b) Self-certification of rules and

products. Rules of a designated contract

market and subsequent amendments

thereto, including both operational rules

and the terms or conditions of products

listed for trading on the facility, not

voluntarily submitted for prior

Commission approval pursuant to

paragraph (a) of this section must be

submitted to the Commission with a

certification that the rule, rule

amendment or product complies with

the Act or rules thereunder pursuant to

the procedures of §§ 40.6 and 40.2 of

this chapter, as applicable. Provided,

however, any rule or rule amendment

that would, for a delivery month having

open interest, materially change a term

or condition of a contract for future

delivery in an agricultural commodity

enumerated in section 1a(4) of the Act,

or of an option on such a contract or

commodity, must be submitted to the

Commission prior to its implementation

for review and approval under § 40.4 of

this chapter.

(c) An applicant for designation, or a

designated contract market, may request

that the Commission consider under the

provisions of section 15(b) of the Act

any of the contract market’s rules or

policies, including both operational

rules and the terms or conditions of

products listed for trading.

§ 38.5 Information relating to contract

market compliance.

(a) Upon request by the Commission,

a designated contract market shall file

with the Commission such information

related to its business as a contract

market, including information relating

to data entry and trade details, in the

form and manner and within the time as

specified by the Commission in the

request.

(b) Upon request by the Commission,

a designated contract market shall file

with the Commission a written

demonstration, containing such

supporting data, information and

documents, in the form and manner and

within such time as the Commission

may specify, that the designated

contract market is in compliance with

one or more core principles as specified

in the request.

§ 38.6 Enforceability.

An agreement, contract or transaction

entered into on, or pursuant to the rules

of a designated contract market shall not

be void, voidable, subject to rescission

or otherwise invalidated or rendered

unenforceable as a result of:

(a) A violation by the designated

contract market of the provisions of

section 5 of the Act or this part 38; or

(b) Any Commission proceeding to

alter or supplement a rule, term or

condition under section 8a(7) of the Act,

to declare an emergency under section

8a(9) of the Act, or any other proceeding

the effect of which is to alter,

supplement, or require a designated

contract market to adopt a specific term

or condition, trading rule or procedure,

or to take or refrain from taking a

specific action.

Appendix A to Part 38—Application

Guidance

This appendix provides guidance for

applicants for designation as a contract

market under section 5(b) of the Act and

§ 38.3. The guidance following each

designation criterion is illustrative only of

the types of matters an applicant may

address, as applicable, and is not intended to

be a mandatory checklist. Addressing the

issues and questions set forth in this

appendix would help the Commission in its

consideration of whether the application has

met the criteria for designation. To the extent

that compliance with, or satisfaction of, a

criterion for designation is not selfexplanatory from the face of the contract

market’s rules, which may be trading

protocols or terms and conditions, the

application should include an explanation or

other form of documentation demonstrating

that the applicant meets the designation

criteria of section 5(b) of the Act.

Designation Criterion 1 of section 5(b) of

the Act: IN GENERAL—To be designated as

a contract market, the board of trade shall

demonstrate to the Commission that the

board of trade meets the criteria specified in

this subsection.

A board of trade preparing to submit to the

Commission an application for designation as

a contract market is encouraged to contact

Commission staff for guidance and assistance

in preparing an application. Applicants may

submit a draft application for review and

feedback prior to the submission of an actual

application without triggering the application

review procedures of § 38.3.

Designation Criterion 2 of section 5(b) of

the Act: PREVENTION OF MARKET

MANIPULATION—The board of trade shall

have the capacity to prevent market

manipulation through market surveillance,

compliance, and enforcement practices and

procedures, including methods for

conducting real-time monitoring of trading

and comprehensive and accurate trade

reconstructions.

A designation application should

demonstrate a capacity to prevent market

manipulation, including that the contract

market has trading and participation rules

deterring abuses and a dedicated regulatory

department, or an effective delegation of that

function.

Designation Criterion 3 of section 5(b) of

the Act: FAIR AND EQUITABLE TRADING—

The board of trade shall establish and

enforce trading rules to ensure fair and

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14279

equitable trading through the facilities of the

contract market, and the capacity to detect,

investigate, and discipline any person that

violates the rules. The rules may authorize—

(A) transfer trades or office trades; (B) an

exchange of—(i) futures in connection with a

cash commodity transaction; (ii) futures for

cash commodities; or (iii) futures for swaps;

or (C) 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 the contract

market or a derivatives clearing organization.

(a) Ensuring fair and equitable trading on

a contract market, among other things,

includes:

(1) Providing to market participants, on a

fair, equitable and timely basis, information

regarding prices, bids and offers; and

(2) Limitations of contract market liability

(or of any of its officers, directors, employees,

licensors, contractors and/or affiliates) only if

such limitations of liability do not arise from

a person’s violation of the Act or Commission

regulations by fraud, or wanton or willful

misconduct.

(b) A contract market that authorizes

transfer trades or office trades; an exchange

of futures for physicals or futures for swaps;

or any other non-competitive transactions,

including block trades, should have rules

particularly authorizing such transactions

and establishing appropriate recordkeeping

requirements.

Designation Criterion 4 of section 5(b) of

the Act: TRADE EXECUTION FACILITY—

The board of trade shall—(A) establish and

enforce rules defining, or specifications

detailing, the manner of operation of the

trade execution facility maintained by the

board of trade, including rules or

specifications describing the operation of any

electronic matching platform; and (B)

demonstrate that the trade execution facility

operates in accordance with the rules or

specifications.

(a) An application of a board of trade to be

designated as a contract market should

include the system’s trade-matching

algorithm and order entry procedures. An

application involving a trade-matching

algorithm that is based on order priority

factors other than price and time should

include a brief explanation of the algorithm.

(b) A designated contract market’s

specifications on initial and periodic

objective testing and review of proper system

functioning, adequate capacity and security

for any automated systems should be

included in its application. A board of trade

should submit in the contract market

application, information on the objective

testing and review carried out on its

automated system. The Commission believes

that 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’’), subsequently

adopted by the Commission on November 21,

1990 (55 FR 48670), are appropriate

guidelines for an electronic trading facility to

apply to electronic trading systems. Any

program of objective testing and review of the

system should be performed by a qualified

independent professional.

Designation Criterion 5 of section 5(b) of

the Act: FINANCIAL INTEGRITY OF

TRANSACTIONS—The board of trade shall

establish and enforce rules and procedures

for ensuring the financial integrity of

transactions entered into by or through the

facilities of the contract market, including

the clearance and settlement of the

transactions with a derivatives clearing

organization.

(a) A designated contract market should

provide for the financial integrity of

transactions by setting appropriate minimum

financial standards for users and/or

members, appropriate margin forms and

levels, and appropriate default rules and

procedures. Clearing of transactions executed

on the contract market should be provided

through a derivatives clearing organization.

The Commission believes ensuring and

enforcing the financial integrity of

transactions and intermediaries, and the

protection of customer funds should include

monitoring compliance with the contract

market’s minimum financial standards. In

order to monitor for minimum financial

requirements, a contract market should

routinely receive and promptly review

financial and related information.

(b) A designated contract market should

have rules concerning the protection of

customer funds that address appropriate

minimum financial standards for

intermediaries, the segregation of customer

and proprietary funds, the custody of

customer funds, the investment standards for

customer funds, related recordkeeping

procedures and related intermediary default

procedures.

Designation Criterion 6 of section 5(b) of

the Act: DISCIPLINARY PROCEDURES—The

board of trade shall establish and enforce

disciplinary procedures that authorize the

board of trade to discipline, suspend, or

expel members or market participants that

violate the rules of the board of trade, or

similar methods for performing the same

functions, including delegation of the

functions to third parties.

The disciplinary procedures established by

a designated contract market should give the

contract market both the authority and ability

to discipline and limit or suspend a

member’s activities as well as the authority

and ability to terminate a member’s activities

pursuant to clear and fair standards. The

authority to discipline or limit or suspend a

member or participant’s activities could be

found in a contract market’s rules, user

agreements or other means. An organized

exchange or a trading facility could satisfy

this criterion for non-members by expelling

or denying future access to such persons

upon a finding that such a person has

violated the board of trade’s rules.

Designation Criterion 7 of section 5(b) of

the Act: PUBLIC ACCESS—The board of

trade shall provide the public with access to

the rules, regulations, and contract

specifications of the board of trade.

A board of trade operating as a contract

market may provide information to the

public by placing the information on its web

site.

Designation Criterion 8 of section 5(b) of

the Act: ABILITY TO OBTAIN

INFORMATION—The board of trade shall

establish and enforce rules that will allow the

board of trade to obtain any necessary

information to perform any of the functions

described in this subsection, including the

capacity to carry out such international

information-sharing agreements as the

Commission may require.

A designated contract market should have

the authority to collect information and

documents on both a routine and non-routine

basis including the examination of books and

records kept by members/participants of the

contract market. Appropriate informationsharing agreements could be established with

other boards of trade or the Commission

could act in conjunction with the contract

market to carry out such information sharing.

Appendix B to Part 38—Guidance on,

and Acceptable Practices in,

Compliance with Core Principles

1. This appendix provides guidance

concerning the core principles with which a

board of trade must comply to maintain

designation under section 5(d) of the Act and

§§ 38.3 and 38.5. The guidance is provided

in subsection (a) following each core

principle and it can be used to demonstrate

to the Commission core principle

compliance, under §§ 38.3(a) and 38.5. The

guidance for each core principle is

illustrative only of the types of matters a

board of trade may address, as applicable,

and is not intended to be a mandatory

checklist. Addressing the issues and

questions set forth in this appendix would

help the Commission in its consideration of

whether the board of trade is in compliance

with the core principles. To the extent that

compliance with, or satisfaction of, a core

principle is not self-explanatory from the face

of the board of trade’s rules, which may be

terms and conditions or trading protocols, an

application pursuant to § 38.3, or a

submission pursuant to § 38.5 should include

an explanation or other form of

documentation demonstrating that the board

of trade complies with the core principles.

2. Acceptable practices meeting the

requirements of the core principles are set

forth in subsection (b) following each core

principle. Boards of trade that follow the

specific practices outlined under subsection

(b) for any core principle in this appendix

will meet the applicable core principle.

Subsection (b) is for illustrative purposes

only, and does not state the exclusive means

for satisfying a core principle.

Core Principle 1 of section 5(d) of the Act:

IN GENERAL—To maintain the designation

of a board of trade as a contract market, the

board of trade shall comply with the core

principles specified in this subsection. The

board of trade shall have reasonable

discretion in establishing the manner in

which it complies with the core principles.

A board of trade applying for designation

as a contract market must satisfactorily

demonstrate its capacity to operate in

compliance with the core principles under

section 5(d) of the Act and § 38.3. The

Commission may require that a board of trade

14280 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

operating as a contract market demonstrate to

the Commission that it is in compliance with

one or more core principles.

Core Principle 2 of section 5(d) of the Act:

COMPLIANCE WITH RULES—The board of

trade shall monitor and enforce compliance

with the rules of the contract market,

including the terms and conditions of any

contracts to be traded and any limitations on

access to the contract market.

(a) Application Guidance. (1) A designated

contract market should have arrangements

and resources for effective trade practice

surveillance programs, with the authority to

collect information and documents on both a

routine and non-routine basis including the

examination of books and records kept by

members/participants of the contract market.

The arrangements and resources should

facilitate the direct supervision of the market

and the analysis of data collected. Trade

practice surveillance programs could be

carried out by the contract market itself or

through delegation to a third party. If the

contract market out-sources its trade practice

surveillance program to a third party, such

third party should have the capacity and

authority to carry out such program, and the

contract market should retain appropriate

supervisory authority over the third party.

(2) A designated contract market should

have arrangements, resources and authority

for effective rule enforcement. The

Commission believes that this should include

the authority and ability to discipline and

limit, or suspend, a member/participant’s

activities as well as the authority and ability

to terminate a member/participant’s activities

pursuant to clear and fair standards. An

organized exchange or a trading facility could

satisfy this criterion for non-members by

expelling or denying such persons future

access upon a finding that such a person has

violated the board of trade’s rules.

(b) Acceptable Practices. An acceptable

trade practice surveillance program generally

would include:

(1) Maintenance of data reflecting the

details of each transaction executed on the

contract market;

(2) Electronic analysis of this data

routinely to detect potential trading

violations;

(3) Appropriate and thorough investigative

analysis of these and other potential trading

violations brought to the contract market’s

attention; and

(4) Prompt and effective disciplinary action

for any violation that is found to have been

committed. The Commission believes that

the latter element should include the

authority and ability to discipline and limit

or suspend the activities of a member or

participant pursuant to clear and fair

standards. See, e.g., 17 CFR part 8.

Core Principle 3 of section 5(d) of the Act:

CONTRACTS NOT READILY SUBJECT TO

MANIPULATION—The board of trade shall

list on the contract market only contracts that

are not readily susceptible to manipulation.

(a) Application Guidance. Contract markets

may list new products for trading by selfcertification under § 40.2 of this chapter or

may submit products for Commission

approval under § 40.3 and part 40, Appendix

A, of this chapter.

(b) Acceptable Practices. Guideline No. 1,

17 CFR Part 40, Appendix A may be used as

guidance in meeting this core principle for

both new product listings and existing listed

contracts.

Core Principle 4 of section 5(d) of the Act:

MONITORING OF TRADING.—The board of

trade shall monitor trading to prevent

manipulation, price distortion, and

disruptions of the delivery or cash-settlement

process.

(a) Application Guidance. A contract

market could prevent market manipulation

through a dedicated regulatory department,

or by delegation of that function to an

appropriate third party.

(b) Acceptable Practices. (1) An acceptable

program for monitoring markets will

generally involve the collection of various

market data, including information on

traders’ market activity. Those data should be

evaluated on an ongoing basis in order to

make an appropriate regulatory response to

potential market disruptions or abusive

practices.

(2) The designated contract market should

collect data in order to assess whether the

market price is responding to the forces of

supply and demand. Appropriate data

usually include various fundamental data

about the underlying commodity, its supply,

its demand, and its movement through

marketing channels. Especially important are

data related (1) to the size and ownership of

deliverable supplies—the existing supply

and the future or potential supply, and (2) to

the pricing of the deliverable commodity

relative to the futures price and relative to

similar, but nondeliverable, kinds of the

commodity. For cash-settled markets, it is

more appropriate to pay attention to the

availability and pricing of the commodity

making up the index to which the market

will be settled, as well as monitoring the

continued suitability of the methodology for

deriving the index.

(3) To assess traders’ activity and potential

power in a market, at a minimum, every

contract market should have routine access to

the positions and trading done by the

members of its clearing facility. Although

clearing member data may be sufficient for

some contract markets, an effective

surveillance program for contract markets

with substantial numbers of customers

trading through intermediaries should

employ a much more comprehensive largetrader reporting system (LTRS). The

Commission operates an industry-wide

LTRS. As an alternative to having its own

LTRS or contracting out for such a system,

contract markets may find it more efficient to

use information available from the

Commission’s LTRS data for position

monitoring.

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

POSITION LIMITATIONS OR

ACCOUNTABILITY—To reduce the potential

threat of market manipulation or congestion,

especially during trading in the delivery

month, the board of trade shall adopt

position limitations or position

accountability for speculators, where

necessary and appropriate.

(a) Application Guidance. [Reserved]

(b) Acceptable Practices.

(1) In order to diminish potential problems

arising from excessively large speculative

positions, the Commission sets limits on

traders’ positions for certain commodities.

These position limits specifically exempt

bona fide hedging, permit other exemptions,

and set limits differently by markets, by

futures or delivery months, or by time

periods. For purposes of evaluating a contract

market speculative-limit program, the

Commission considers the specified limit

levels, aggregation policies, types of

exemptions allowed, methods for monitoring

compliance with the specified levels, and

procedures for enforcement to deal with

violations.

(2) In general, position limits are not

necessary for markets where the threat of

excessive speculation or manipulation is very

low. Thus, contract markets do not need to

set position-limit levels for futures markets in

major foreign currencies and in certain

financial futures having very liquid and deep

underlying cash markets. Where speculative

limits are appropriate, acceptable

speculative-limit levels typically are set in

terms of a trader’s combined position in the

futures contract plus its position in the

option contract (on a delta-adjusted basis).

(3) Spot-month levels for physical-delivery

markets should be based upon an analysis of

deliverable supplies and the history of spotmonth liquidations. Spot-month limits for

physical-delivery markets are appropriately

set at no more than 25 percent of the

estimated deliverable supply. For cashsettled markets, spot-month position limits

may be necessary if the underlying cash

market is small or illiquid such that traders

can disrupt the cash market or otherwise

influence the cash-settlement price to profit

on a futures position. In these cases, the limit

should be set at a level that minimizes the

potential for manipulation or distortion of

the futures contract’s or the underlying

commodity’s price. Markets may elect not to

provide all-months-combined and non-spot

month limits.

(4) A contract market may provide for

position accountability provisions in lieu of

position limits for contracts on financial

instruments, intangible commodities, or

certain tangible commodities. Markets

appropriate for position accountability rules

include those with large open-interest, high

daily trading volumes and liquid cash

markets.

(5) Contract markets should have

aggregation rules that apply to those accounts

under common control, those with common

ownership, i.e., where there is a ten percent

or greater financial interest, and those traded

according to an express or implied

agreement. Contract markets will be

permitted to set more stringent aggregation

policies. For example, one major board of

trade has adopted a policy of automatically

aggregating the position of members of the

same household, unless they were granted a

specific waiver. Contract markets may grant

exemptions to their position limits for bona

fide hedging (as defined in § 1.3(z) of this

chapter) and may grant exemptions for

reduced risk positions, such as spreads,

straddles and arbitrage positions.

(6) Contract markets should establish a

program for effective monitoring and

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14281

enforcement of these limits. One acceptable

enforcement mechanism is a program

whereby traders apply for these exemptions

by the contract market and are granted a

position level higher than the applicable

speculative limit. The position levels granted

under hedge exemptions are based upon the

trader’s commercial activity in related

markets. Contract markets may allow a brief

grace period where a qualifying trader may

exceed speculative limits or an existing

exemption level pending the submission and

approval of appropriate justification. A

contract market should consider whether it

wants to restrict exemptions during the last

several days of trading in a delivery month.

Acceptable procedures for obtaining and

granting exemptions include a requirement

that the contract market approve a specific

maximum higher level.

(7) Contract markets with many products

with large numbers of traders should have an

automated means of detecting traders’

violations of speculative limits or

exemptions. Contract markets should

monitor the continuing appropriateness of

approved exemptions by periodically

reviewing each trader’s basis for exemption

or requiring a reapplication.

(8) Finally, an acceptable speculative limit

program should have specific policies for

taking regulatory action once a violation of a

position limit or exemption is detected. The

contract market policy will need to consider

appropriate actions where the violation is by

a non-member and should address traders

carrying accounts through more than one

intermediary.

(9) A violation of contract market position

limits that have been approved by the

Commission is also a violation of section

4a(e) of the Act.

Core Principle 6 of section 5(d) of the Act:

EMERGENCY AUTHORITY—The board of

trade shall adopt rules to provide for the

exercise of emergency authority, in

consultation or cooperation with the

Commission, where necessary and

appropriate, including the authority to—(A)

liquidate or transfer open positions in any

contract; (B) suspend or curtail trading in

any contract; and (C) require market

participants in any contract to meet special

margin requirements.

(a) Application Guidance. A designated

contract market should have clear procedures

and guidelines for contract market decisionmaking regarding emergency intervention in

the market, including procedures and

guidelines to carry out such decision-making

without conflicts of interest. A contract

market should also have the authority to

intervene as necessary to maintain markets

with fair and orderly trading as well as

procedures for carrying out the intervention.

Procedures and guidelines should also

include notifying the Commission of the

exercise of a contract market’s regulatory

emergency authority, preventing conflicts of

interest, and documenting the contract

market’s decision-making process and the

reasons for using its emergency action

authority. Information on steps taken under

such procedures should be included in a

submission of a certified rule under § 40.6 of

this chapter and any related submissions for

rule approval pursuant to § 40.5 of this

chapter, when carried out pursuant to a

contract market’s emergency authority.

(b) Acceptable Practices. As is necessary to

address perceived market threats, the

contract market, among other things, should

be able to impose position limits in particular

in the delivery month, impose or modify

price limits, modify circuit breakers, call for

additional margin either from customers or

clearing members, order the liquidation or

transfer of open positions, order the fixing of

a settlement price, order a reduction in

positions, extend or shorten the expiration

date or the trading hours, suspend or curtail

trading on the market, order the transfer of

customer contracts and the margin for such

contracts from one member of the contract

market to another, or alter the delivery terms

or conditions.

Core Principle 7 of section 5(d) of the Act:

AVAILABILITY OF GENERAL

INFORMATION—The board of trade shall

make available to market authorities, market

participants, and the public information

concerning—(A) the terms and conditions of

the contracts of the contract market; and (B)

the mechanisms for executing transactions

on or through the facilities of the contract

market.

(a) Application Guidance. A designated

contract market should have arrangements

and resources for the disclosure of contract

terms and conditions and trading

mechanisms to the Commission, users and

the public. Procedures should also include

providing information on listing new

products, rule amendments or other changes

to previously disclosed information to the

Commission, users and the public.

(b) Acceptable Practices. [Reserved]

Core Principle 8 of section 5(d) of the Act:

DAILY PUBLICATION OF TRADING

INFORMATION—The board of trade shall

make public daily information on settlement

prices, volume, open interest, and opening

and closing ranges for actively traded

contracts on the contract market.

(a) Application Guidance. A contract

market should provide to the public

information regarding settlement prices,

price range, volume, open interest and other

related market information for all actively

traded contracts, as determined by the

Commission, on a fair, equitable and timely

basis. The Commission believes that section

5(d)(8) requires contract markets to publicize

trading information for any non-dormant

contract. Provision of information for any

applicable contract could be through such

means as provision of the information to a

financial information service and by timely

placement of the information on a contract

market’s web site.

(b) Acceptable Practices. [Reserved]

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) Application Guidance. (1) Appropriate

objective testing and review of any

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 should address

appropriate principles for the oversight of

automated systems, ensuring proper system

function, adequate capacity and security. The

Commission believes that the guidelines

issued by the International Organization of

Securities Commissions (IOSCO) in 1990

(which have been referred to as the

‘‘Principles for Screen-Based Trading

Systems’’), subsequently adopted by the

Commission on November 21, 1990 (55 FR

48670), are appropriate guidelines for a

designated contract market to apply to

electronic trading systems. Any program of

objective testing and review of the system

should be performed by a qualified

independent professional. The Commission

believes that information gathered by

analysis, oversight or any program of

objective testing and review of any

automated systems regarding system

functioning, capacity and security should be

made available to the Commission and the

public.

(2) A designated contract market that

determines to allow block trading should

ensure that the block trading does not operate

in a manner that compromises the integrity

of prices or price discovery on the relevant

market.

(b) Acceptable Practices. A professional

that is a certified member of the

Informational Systems Audit and Control

Association experienced in the industry

would be an example of an acceptable party

to carry out testing and review of an

electronic trading system.

Core Principle 10 of section 5(d) of the Act:

TRADE INFORMATION—The board of trade

shall maintain rules and procedures to

provide for the recording and safe storage of

all identifying trade information in a manner

that enables the contract market to use the

information for purposes of assisting in the

prevention of customer and market abuses

and providing evidence of any violations of

the rules of the contract market. 

(a) Application Guidance. A designated

contract market should have arrangements

and resources for recording of full data entry

and trade details and the safe storage of audit

trail data. A designated contract market

should have systems sufficient to enable the

contract market to use the information for

purposes of assisting in the prevention of

customer and market abuses through

reconstruction of trading.

(b) Acceptable Practices. (1) The goal of an

audit trail is to detect and deter customer and

market abuse. An effective contract market

audit trail should capture and retain

sufficient trade-related information to permit

contract market staff to detect trading abuses

and to reconstruct all transactions within a

reasonable period of time. An audit trail

should include specialized electronic

surveillance programs that would identify

potentially abusive trades and trade patterns,

including for instance, withholding or

disclosing customer orders, trading ahead,

and preferential allocation. An acceptable

audit trail must be able to track a customer

order from time of receipt through fill

allocation. The contract market must create

and maintain an electronic transaction

history database that contains information

14282 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

with respect to transactions effected on the

designated contract market.

(2) An acceptable audit trail, therefore,

should include the following: original source

documents, transaction history, electronic

analysis capability, and safe storage

capability. A contract market whose audit

trail satisfies the following acceptable

practices would satisfy Core Principle 9.

(i) Original Source Documents. Original

source documents include unalterable,

sequentially identified records on which

trade execution information is originally

recorded, whether recorded manually or

electronically. For each customer order

(whether filled, unfilled or cancelled, each of

which should be retained or electronically

captured), such records reflect the terms of

the order, an account identifier that relates

back to the account(s) owner(s), and the time

of order entry. For floor-based contract

markets, the time of report of execution of the

order should also be captured.

(ii) Transaction History. A transaction

history which consists of an electronic

history of each transaction, including (a) all

data that are input into the trade entry or

matching system for the transaction to match

and clear; (b) whether the trade was for a

customer or proprietary account; (c) timing

and sequencing data adequate to reconstruct

trading; and (d) the identification of each

account to which fills are allocated.

(iii) Electronic Analysis Capability. An

electronic analysis capability that permits

sorting and presenting data included in the

transaction history so as to reconstruct

trading and to identify possible trading

violations with respect to both customer and

market abuse.

(iv) Safe Storage Capability. Safe storage

capability provides for a method of storing

the data included in the transaction history

in a manner that protects the data from

unauthorized alteration, as well as from

accidental erasure or other loss. Data should

be retained in accordance with the

recordkeeping standards of Core Principle 17.

Core Principle 11 of section 5(d) of the Act:

FINANCIAL INTEGRITY OF CONTRACTS—

The board of trade shall establish and

enforce rules providing for the financial

integrity of any contracts traded on the

contract market (including the clearance and

settlement of the transactions with a

derivatives clearing organization), and rules

to ensure the financial integrity of any

futures commission merchants and

introducing brokers and the protection of

customer funds. 

(a) Application Guidance. Clearing of

transactions executed on a designated

contract market should be provided through

a Commission-designated clearing facility. In

addition, a designated contract market

should maintain the financial integrity of its

transactions by maintaining minimum

financial standards for its members and

having default rules and procedures. The

minimum financial standards should be

monitored for compliance purposes. The

Commission believes that in order to monitor

for minimum financial requirements, a

designated contract market should routinely

receive and promptly review financial and

related information. Rules concerning the

protection of customer funds should address

the segregation of customer and proprietary

funds, the custody of customer funds, the

investment standards for customer funds,

related recordkeeping and related

intermediary default procedures.

(b) Acceptable Practices. [Reserved]

Core Principle 12 of section 5(d) of the Act:

PROTECTION OF MARKET

PARTICIPANTS—The board of trade shall

establish and enforce rules to protect market

participants from abusive practices

committed by any party acting as an agent

for the participants. 

(a) Application Guidance. A designated

contract market should have rules

prohibiting conduct by intermediaries that is

fraudulent, noncompetitive, unfair, or an

abusive practice in connection with the

execution of trades and a program to detect

and discipline such behavior. The contract

market should have methods and resources

appropriate to the nature of the trading

system and the structure of the market to

detect trade practice abuses.

(b) Acceptable Practices. [Reserved]

Core Principle 13 of section 5(d) of the Act:

DISPUTE RESOLUTION—The board of trade

shall establish and enforce rules regarding

and provide facilities for alternative dispute

resolution as appropriate for market

participants and any market intermediaries.

(a) Application Guidance. A designated

contract market should provide customer

dispute resolution procedures that are fair

and equitable and that are made available to

the customer on a voluntary basis, either

directly or through another self-regulatory

organization.

(b) Acceptable Practices. (1) Under Core

Principle 13, a designated contract market is

required to provide for dispute resolution

mechanisms that are appropriate to the

nature of the market.

(2) In order to satisfy acceptable standards,

a designated contract market should provide

a customer dispute resolution mechanism

that is fundamentally fair and is equitable.

An acceptable customer dispute resolution

mechanism would provide:

(i) The customer with an opportunity to

have his or her claim decided by a decisionmaker that is objective and impartial,

(ii) Each party with the right to be

represented by counsel, at the party’s own

expense,

(iii) Each party with adequate notice of

claims presented against him or her, an

opportunity to be heard on all claims,

defenses and permitted counterclaims, and

an opportunity for a prompt hearing,

(iv) For prompt written final settlement

awards that are not subject to appeal within

the contract market, and

(v) Notice to the parties of the fees and

costs that may be assessed.

(3) The procedure employed also should be

voluntary, and could permit counterclaims as

provided in § 166.5 of this chapter.

(4) If the designated contract market also

provides a procedure for the resolution of

disputes that do not involve customers (i.e.,

member-to-member disputes), the procedure

for resolving such disputes must be

independent of and shall not interfere with

or delay the resolution of customers’ claims

or grievances.

(5) A designated contract market may

delegate to another self-regulatory

organization or to a registered futures

association its responsibility to provide for

customer dispute resolution mechanisms,

provided, however, that, if the designated

contract market does delegate that

responsibility, the contract market shall in all

respects treat any decision issued by such

other organization or association as if the

decision were its own including providing

for the appropriate enforcement of any award

issued against a delinquent member.

Core Principle 14 of section 5(d) of the Act:

GOVERNANCE FITNESS STANDARDS—The

board of trade shall establish and enforce

appropriate fitness standards for directors,

members of any disciplinary committee,

members of the contract market, and any

other persons with direct access to the facility

(including any parties affiliated with any of

the persons described in this paragraph). 

(a) Application Guidance. (1) A designated

contract market should have appropriate

eligibility criteria for the categories of

persons set forth in the Core Principle that

should include standards for fitness and for

the collection and verification of information

supporting compliance with such standards.

Minimum standards of fitness for persons

who have member voting privileges,

governing obligations or responsibilities, or

who exercise disciplinary authority are those

bases for refusal to register a person under

section 8a(2) of the Act or a history of serious

disciplinary offenses, such as those that

would be disqualifying under § 1.63 of this

chapter. Participants who have direct access

to trade on the contract market, but do not

have these privileges, obligations,

responsibilities or disciplinary authority

could satisfy minimum fitness standards by

meeting the standards that they must meet to

qualify as a ‘‘participant.’’ Natural persons

who directly or indirectly have greater than

a ten percent interest in a designated contract

market should meet the fitness standards

applicable to members with voting rights.

(2) The Commission believes that such

standards should include providing the

Commission with fitness information for

such persons, whether registration

information, certification to the fitness of

such persons, an affidavit of such persons’

fitness by the contract market’s counsel or

other information substantiating the fitness of

such persons. If a contract market provided

certification of the fitness of such a person,

the Commission believes that such

certification should be based on verified

information that the person is fit to be in his

or her position.

(b) Acceptable Practices. [Reserved]

Core Principle 15 of section 5(d) of the Act:

CONFLICTS OF INTEREST—The board of

trade shall establish and enforce rules to

minimize conflicts of interest in the decision

making process of the contract market and

establish a process for resolving such

conflicts of interest.

The means to address conflicts of interest

in decision-making of a contract market

should include methods to ascertain the

presence of conflicts of interest and to make

decisions in the event of such a conflict. In

addition, the Commission believes that the

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14283

contract market should provide for

appropriate limitations on the use or

disclosure of material non-public information

gained through the performance of official

duties by board members, committee

members and contract market employees or

gained through an ownership interest in the

contract market.

Core Principle 16 of section 5(d) of the Act:

COMPOSITION OF BOARDS OF MUTUALLY

OWNED CONTRACT MARKETS—In the case

of a mutually owned contract market, the

board of trade shall ensure that the

composition of the governing board reflects

market participants. 

The composition of a mutually-owned

contract market should fairly represent the

diversity of interests of the contract market’s

market participants.

Core Principle 17 of section 5(d) of the Act:

RECORDKEEPING—The board of trade shall

maintain records of all activities related to

the business of the contract market in a form

and manner acceptable to the Commission

for a period of 5 years. 

(a) Application Guidance. [Reserved]

(b) Acceptable Practices. Section 1.31 of

this chapter governs recordkeeping

obligations under the Act and the

Commission’s regulations thereunder. In

order to provide broad flexible performance

standards for recordkeeping, § 1.31 was

updated and amended by the Commission in

1999. Accordingly, § 1.31 itself establishes

the guidance regarding the form and manner

for keeping records.

Core Principle 18 of section 5(d) of the Act:

ANTITRUST CONSIDERATIONS—Unless

necessary or appropriate to achieve the

purposes of this Act, the board of trade shall

endeavor to avoid—(A) adopting any rules or

taking any actions that result in any

unreasonable restraints of trade; or (B)

imposing any material anticompetitive

burden on trading on the contract market. 

(a) Application Guidance. An entity

seeking designation as a contract market may

request that the Commission consider under

the provisions of section 15(b) of the Act any

of the entity’s rules, including trading

protocols or policies, and including both

operational rules and the terms or conditions

of products listed for trading, at the time of

designation or thereafter. The Commission

intends to apply section 15(b) of the Act to

its consideration of issues under this core

principle in a manner consistent with that

previously applied to contract markets.

(b) Acceptable Practices. [Reserved]

12. Chapter I of 17 CFR is proposed

to be amended by adding new Part 40

as follows:

PART 40—PROVISIONS COMMON TO

CONTRACT MARKETS, DERIVATIVES

TRANSACTION EXECUTION

FACILITIES AND DERIVATIVES

CLEARING ORGANIZATIONS

Sec.

40.1 Definitions.

40.2 Listing products for trading by

certification.

40.3 Voluntary submission of new products

for Commission review and approval.

40.4 Amendments to terms or conditions of

enumerated agricultural contracts.

40.5 Voluntary submission of rules for

Commission review and approval.

40.6 Self-certification of rules by designated

contract markets and registered

derivatives clearing organizations.

40.7 Delegations.

Appendix A to Part 40—Guideline No. 1.

Appendix B—Schedule of fees.

Appendix C—Information that a foreign

board of trade should submit when

seeking no-action relief to offer and sell,

to persons located in the United States,

a futures contract on a foreign securities

index traded on that foreign board of

trade.

Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6c, 7,

7a, 8 and 12a, as amended by the Commodity

Futures Modernization Act of 2000,

Appendix ll of Pub. L. No. 106–554, 114

Stat. 2763 (2000).

§ 40.1 Definitions.

As used in this part:

Contract market includes a clearing

organization that clears trades for the

contract market, unless reference also is

made within the same section of the

Code of Federal Regulations to

derivatives clearing organization, as

defined in § 39.1 of this chapter.

Dormant contract means any

commodity futures or option contract or

other instrument in which no trading

has occurred in any future or option

expiration for a period of six complete

calendar months; provided, however, no

contract or instrument shall be

considered to be dormant until the end

of 60 complete calendar months

following initial listing.

Emergency means any occurrence or

circumstance which, in the opinion of

the governing board of the contract

market or derivatives transaction

execution facility, requires immediate

action and threatens or may threaten

such things as the fair and orderly

trading in, or the liquidation of or

delivery pursuant to, any agreements,

contracts or transactions on such a

trading facility, including any

manipulative or attempted manipulative

activity; any actual, attempted, or

threatened corner, squeeze, congestion,

or undue concentration of positions; any

circumstances which may materially

affect the performance of agreements,

contracts or transactions traded on the

trading facility, including failure of the

payment system or the bankruptcy or

insolvency of any participant; any

action taken by any governmental body,

or any other board of trade, market or

facility which may have a direct impact

on trading on the trading facility; and

any other circumstance which may have

a severe, adverse effect upon the

functioning of a designated contract

market or derivatives transaction

execution facility.

Rule means any constitutional

provision, article of incorporation,

bylaw, rule, regulation, resolution,

interpretation, stated policy, term and

condition, trading protocol, agreement

or instrument corresponding thereto, in

whatever form adopted, and any

amendment or addition thereto or repeal

thereof, made or issued by a contract

market, derivatives transaction

execution facility or derivatives clearing

organization or by the governing board

thereof or any committee thereof.

Terms and conditions mean any

definition of the trading unit or the

specific commodity underlying a

contract for the future delivery of a

commodity or commodity option

contract, specification of settlement or

delivery standards and procedures, and

establishment of buyers’ and sellers’

rights and obligations under the

contract. Terms and conditions include

provisions relating to the following:

(1) Quality or quantity standards for a

commodity and any applicable

premiums or discounts;

(2) Trading hours, trading months and

the listing of contracts;

(3) Minimum and maximum price

limits and the establishment of

settlement prices;

(4) Position limits and position

reporting requirements;

(5) Delivery points and locational

price differentials;

(6) Delivery standards and

procedures, including alternatives to

delivery and applicable penalties or

sanctions for failure to perform;

(7) Settlement of the contract; and

(8) Payment or collection of

commodity option premiums or

margins.

§ 40.2 Listing products for trading by

certification.

To list a new product for trading, to

list a product for trading that has

become dormant, or to accept for

clearing a product (not traded on a

designated contract market or a

derivatives transaction execution

facility), a registered entity must file

with the Commission at its Washington,

D.C., headquarters no later than the

close of business of the business day

preceding the product’s listing or

acceptance for clearing, either in

electronic or hard-copy form, a copy of

the product’s rules, including its terms

and conditions, and a certification by

the registered entity that the trading

product or other instrument complies

with the Act and rules thereunder.

14284 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

§ 40.3 Voluntary submission of new

products for Commission review and

approval.

(a) Request for approval. A designated

contract market or registered derivatives

transaction execution facility may

request under section 5c(c)(2) of the Act

that the Commission approve new

products under the following

procedures:

(1) The submitting entity labels the

request as ‘‘Request for Commission

Product Approval’’;

(2) The request for product approval

is for a commodity other than a security

future or a security futures product as

defined in sections 1a(31) or 1a(32) of

the Act, respectively;

(3) The submission complies with the

requirements of Appendix A to this

part—Guideline No. 1;

(4) The submission includes the fee

required under Appendix B to this part.

(b) Forty-five day review. All products

submitted for Commission approval

under this paragraph shall be deemed

approved by the Commission forty-five

days after receipt by the Commission, or

at the conclusion of such extended

period as provided under paragraph (c)

of this section, unless notified otherwise

within the applicable period, if:

(1) The submission complies with the

requirements of paragraphs (a)(1) of this

section; and

(2) The submitting entity does not

amend the terms or conditions of the

proposed product or supplement the

request for approval, except as

requested by the Commission or for

correction of typographical errors,

renumbering or other such

nonsubstantive revisions, during that

period. Any voluntary, substantive

amendment by the requestor will be

treated as a new submission under this

section.

(c) Extension of time. The

Commission may extend the forty-five

day review period in paragraph (b) of

this section for:

(1) An additional forty-five days, if

within the initial forty-five day review

period, the Commission notifies the

submitting entity that the proposed rule

raises novel or complex issues that

require additional time for review or is

of major economic significance. This

notification shall briefly describe the

nature of the specific issues for which

additional time for review is required;

or

(2) Such period as the submitting

entity so instructs the Commission in

writing.

(d) Notice of non-approval. The

Commission at any time during its

review under this section may notify the

submitting entity that it will not, or is

unable to, approve the product or

instrument. This notification will briefly

specify the nature of the issues raised

and the specific provision of the Act or

regulations, including the form or

content requirements of paragraph (a) of

this section, that the proposed rule

would violate, appears to violate or the

violation of which cannot be ascertained

from the submission.

(e) Effect of non-approval. (1)

Notification to a submitting entity under

paragraph (d) of this section of the

Commission’s refusal to approve a

proposed product or instrument does

not prejudice the entity from

subsequently submitting a revised

version of the product or instrument for

Commission approval or from

submitting the product or instrument as

initially proposed pursuant to a

supplemented submission.

(2) Notification to a submitting entity

under paragraph (d) of this section of

the Commission’s refusal to approve a

proposed rule or rule amendment shall

be presumptive evidence that the entity

may not truthfully certify under § 40.2

that the same, or substantially the same,

product does not violate the Act or rules

thereunder.

§ 40.4 Amendments to terms or conditions

of enumerated agricultural contracts.

Designated contract markets and

registered derivatives transaction

execution facilities must submit for

Commission approval under the

procedures of § 40.5, prior to its

implementation, any rule or rule

amendment that would, for a delivery

month having open interest, materially

change a term or condition as defined in

§ 40.1(f), of a contract for future delivery

in an agricultural commodity

enumerated in section 1a(4) of the Act,

or of an option on such a contract or

commodity. Provided, however, the

following rules or rule amendments

would not be material changes:

(a) Changes in trading hours;

(b) Changes in lists of approved

delivery facilities pursuant to

previously set standards or criteria;

(c) Changes to terms and conditions of

options on futures other than those

relating to last trading day, expiration

date, option strike price delistings, and

speculative position limits; and

(d) Reductions in the minimum price

fluctuation (or ‘‘tick’’).

§ 40.5 Voluntary submission of rules for

Commission review and approval.

(a) Request for approval of rules. A

registered entity may request pursuant

to section 5c(c) of the Act that the

Commission approve any rule or

proposed rule or rule amendment under

the following procedures:

(1) Three copies of each rule or rule

amendment submission under this

section shall be furnished in hard copy

form to the Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street NW., Washington, DC

20581 or electronically in a format

specified by the Secretary of the

Commission. Each request for approval

under this section shall be in the

following order and shall:

(i) Label the submission as ‘‘Request

for Commission rule approval’’;

(ii) Set forth the text of the rule or

proposed rule (in the case of a rule

amendment, deletions and additions

must be indicated);

(iii) Describe the proposed effective

date of a proposed rule and any action

taken or anticipated to be taken to adopt

the proposed rule by the registered

entity or by its governing board or by

any committee thereof, and cite the

rules of the entity that authorize the

adoption of the proposed rule;

(iv) Explain the operation, purpose,

and effect of the proposed rule,

including, as applicable, a description

of the anticipated benefits to market

participants or others, any potential

anticompetitive effects on market

participants or others, how the rule fits

into the registered entity’s framework of

self-regulation, and any other

information which may be beneficial to

the Commission in analyzing the

proposed rule. If a proposed rule affects,

directly or indirectly, the application of

any other rule of the submitting entity,

set forth the pertinent text of any such

rule and describe the anticipated effect;

(v) Note and briefly describe any

substantive opposing views expressed

with respect to the proposed rule that

were not incorporated into the proposed

rule prior to its submission to the

Commission; and

(vi) Identify any Commission

regulation that the Commission may

need to amend, or sections of the Act or

Commission regulations that the

Commission may need to interpret in

order to approve or allow into effect the

proposed rule. To the extent that such

an amendment or interpretation is

necessary to accommodate a proposed

rule, the submission should include a

reasoned analysis supporting the

amendment to the Commission’s rule or

interpretation.

(2) [Reserved]

(b) Forty-five day review. All rules

submitted for Commission approval

under paragraph (a) of this section shall

be deemed approved by the Commission

under section 5c(c) of the Act, forty-five

days after receipt by the Commission, or

at the conclusion of such extended

period as provided under paragraph (c)

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14285

of this section, unless notified otherwise

within the applicable period, if:

(1) The submission complies with the

requirements of paragraphs (a)(1)(i)

through (vi) of this section, and

(2) The submitting entity does not

amend the proposed rule or supplement

the submission, except as requested by

the Commission, during the pendency

of the review period. Any amendment

or supplementation not requested by the

Commission will be treated as the

submission of a new filing under this

section.

(c) Extensions of time. The

Commission may extend the review

period in paragraph (b) of this section

for:

(1) An additional forty-five days, if

the Commission, within the initial fortyfive day review period, notifies the

submitting entity that the proposed rule

raises novel or complex issues that

require additional time for review or is

of major economic significance. This

notification shall briefly describe the

nature of the specific issues for which

additional time for review is required;

or

(2) Such additional period as the

submitting entity has so instructed the

Commission in writing.

(d) Notice of non-approval. The

Commission at any time during its

review under this section may notify the

submitting entity that it will not, or is

unable to, approve the proposed rule or

rule amendment. This notification will

briefly specify the nature of the issues

raised and the specific provision of the

Act or regulations, including the form or

content requirements of this section,

that the proposed rule would violate,

appears to violate or the violation of

which cannot be ascertained from the

submission.

(e) Effect of non-approval. (1)

Notification to a registered entity under

paragraph (d) of this section of the

Commission’s refusal to approve a

proposed rule or rule amendment of a

registered entity does not prejudice the

entity from subsequently submitting a

revised version of the proposed rule or

rule amendment for Commission

approval or from submitting the rule or

rule amendment as initially proposed

pursuant to a supplemented submission.

(2) Notification to a registered entity

under paragraph (d) of this section of

the Commission’s refusal to approve a

proposed rule or rule amendment of a

registered entity shall be presumptive

evidence that the entity may not

truthfully certify that the same, or

substantially the same, proposed rule or

rule amendment does not violate the

Act or rules thereunder.

(f) Expedited approval.

Notwithstanding the provisions of

paragraph (b) of this section, changes to

terms and conditions of a product that

are consistent with the Act and

Commission regulations and with

standards approved or established by

the Commission in a written notification

to the registered entity of the

applicability of this paragraph (f) shall

be deemed approved by the Commission

at such time and under such conditions

as the Commission shall specify in the

notice, provided, however, that the

Commission may, at any time, alter or

revoke the applicability of such a notice

to any particular product.

§ 40.6 Self-certification of rules by

designated contract markets and registered

derivatives clearing organizations.

(a) Required certification. A

designated contract market or a

registered derivatives clearing

organization may implement any new

rule or rule amendment only if:

(1) The rule or rule amendment does

not materially change a term or

condition of a contract for future

delivery of an agricultural commodity

enumerated in section 1a(4) of the Act

or an option on such a contract or

commodity in a delivery month having

open interest;

(2) The designated contract market or

registered derivatives clearing

organization has filed a submission for

the rule or rule amendment, and the

Commission has received the

submission at its Washington, D.C.

headquarters by close of business on the

business day preceding implementation

of the rule; provided, however, rules or

rule amendments implemented under

procedures of the governing board to

respond to an emergency as defined in

§ 40.1(d), must be filed with the

Commission at the time of

implementation of the rule or rule

amendment, if implementation is sooner

than the next business day; and

(3) The rule submission includes:

(i) The label, ‘‘Rule Certification’’ or,

in the case of a rule or rule amendment

that responds to an emergency,

‘‘Emergency Rule Certification’’;

(ii) The text of the rule (in the case of

a rule amendment, deletions and

additions must be indicated);

(iii) The date of implementation;

(iv) A brief explanation of any

substantive opposing views not

incorporated into the rule; and

(v) A certification by the entity that

the rule complies with the Act and

regulations thereunder.

(b) Stay. The Commission may stay

the effectiveness of a rule implemented

pursuant to paragraph (a) of this section

during the pendency of Commission

proceedings for filing a false

certification or to alter or amend the

rule pursuant to section 8a(7) of the Act.

The decision to stay the effectiveness of

a rule in such circumstances shall not

be delegable to any employee of the

Commission.

(c) Notification of rule amendments.

Notwithstanding the rule certification

requirement of section 5c(c)(1) of the

Act, and paragraphs (a)(2) and (a)(3) of

this section, a designated contract

market or a registered derivatives

clearing organization may place the

following rules or rule amendments into

effect without certification to the

Commission if the following conditions

are met:

(1) The designated contract market or

registered derivatives clearing

organization provides to the

Commission at least weekly a summary

notice of all rule changes made effective

pursuant to this paragraph during the

preceding week. Such notice must be

labeled ‘‘Weekly Notification of Rule

Changes’’ and need not be filed for

weeks during which no such actions

have been taken. One copy of each such

submission shall be furnished in hard

copy to the Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street N.W., Washington, DC

20581, or electronically in a format

specified by the Secretary of the

Commission; and

(2) The rule governs:

(i) Nonmaterial revisions. Corrections

of typographical errors, renumbering,

periodic routine updates to identifying

information about approved entities and

other such nonsubstantive revisions of a

product’s terms and conditions that

have no effect on the economic

characteristics of the product;

(ii) Delivery standards set by third

parties. Changes to grades or standards

of commodities deliverable on a product

that are established by an independent

third party and that are incorporated by

reference as product terms, provided

that the grade or standard is not

established, selected or calculated solely

for use in connection with futures or

option trading and such changes do not

affect deliverable supplies or the pricing

basis for the product;

(iii) Index products. Routine changes

in the composition, computation, or

method of selection of component

entities of an index (other than a stock

index) referenced and defined in the

product’s terms, that do not affect the

pricing basis of the index, which are

made by an independent third party

whose business relates to the collection

or dissemination of price information

and that was not formed solely for the

14286 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

purpose of compiling an index for use

in connection with a futures or option

product; or

(iv) Option contract terms. Changes to

option contract rules relating to the

strike price listing procedures, strike

price intervals, and the listing of strike

prices on a discretionary basis.

(3) Notification of rule amendments

not required. Notwithstanding the rule

certification requirements of section

5c(c)(1) of the Act and of paragraphs

(a)(2) and (a)(3) of this section,

designated contract markets and

registered derivatives clearing

organizations may place the following

rules or rule amendments into effect

without certification or notice to the

Commission if the following conditions

are met:

(i) The designated contract market or

registered derivatives clearing

organization maintains documentation

regarding all changes to rules; and

(ii) The rule governs:

(A) Transfer of membership or

ownership. Procedures and forms for the

purchase, sale or transfer of membership

or ownership, but not including

qualifications for membership or

ownership, any right or obligation of

membership or ownership or dues or

assessments;

(B) Administrative procedures. The

organization and administrative

procedures of a contract market’s

governing bodies such as a Board of

Directors, Officers and Committees, but

not voting requirements, Board of

Directors or Committee composition

requirements, or procedures or

requirements relating to conflicts of

interest;

(C) Administration. The routine, daily

administration, direction and control of

employees, requirements relating to

gratuity and similar funds, but not

guaranty, reserves, or similar funds;

declaration of holidays, and changes to

facilities housing the market, trading

floor or trading area; and

(D) Standards of decorum. Standards

of decorum or attire or similar

provisions relating to admission to the

floor, badges, or visitors, but not the

establishment of penalties for violations

of such rules.

§ 40.7 Delegations.

(a) Procedural matters. (1) Review of

products or rules. The Commission

hereby delegates, until it orders

otherwise, to the Director of the

Division of Trading and Markets and

separately to the Director of Economic

Analysis or to the Director’s delegatee

with the concurrence of the General

Counsel or the General Counsel’s

delegatee, authority to request under

§ 40.3(b)(2) or § 40.5(b)(2) that the entity

requesting approval amend the

proposed product, rule or rule

amendment or supplement the

submission, to notify a submitting entity

under § 40.3(c) or § 40.5(c) that the time

for review has been extended, and to

notify the submitting entity under

§ 40.3(d) or § 40.5(d) that the

Commission is not approving, or is

unable to approve, the proposed

product, rule or rule amendment.

(2) Emergency rules. The Commission

hereby delegates authority to the

Director of the Division of Trading and

Markets, or the delegatees of the

Director, authority to receive

notification and the required

certification of emergency rules under

§ 40.6(a)(2).

(b) Approval authority. The

Commission hereby delegates, until the

Commission orders otherwise, to the

Director of the Division of Trading and

Markets and separately to the Director of

Economic Analysis, with the

concurrence of the General Counsel or

the General Counsel’s delegatee, to be

exercised by either of such Directors or

by such other employee or employees of

the Commission under the supervision

of such Directors as may be designated

from time to time by the Directors, the

authority to approve, pursuant to

section 5c(c)(3) of the Act and § 40.5,

rules or rule amendments of a

designated contract market, registered

derivatives transaction execution

facility or registered derivatives clearing

organization that:

(1) Relate to, but do not materially

change, the quantity, quality, or other

delivery specifications, procedures, or

obligations for delivery, cash settlement,

or exercise under an agreement, contract

or transaction approved for trading by

the Commission; daily settlement

prices; clearing position limits;

requirements or procedures for

governance of a registered entity;

procedures for transfer trades; trading

hours; minimum price fluctuations; and

maximum price limit and trading

suspension provisions;

(2) Reflect routine modifications that

are required or anticipated by the terms

of the rule of a registered entity;

(3) [Reserved].

(4) Are in substance the same as a rule

of the same or another registered entity

which has been approved previously by

the Commission pursuant to section

5c(c)(3) of the Act;

(5) Are consistent with a specific,

stated policy or interpretation of the

Commission; or

(6) Relate to the listing of additional

trading months of approved contracts.

(c) The Directors may submit to the

Commission for its consideration any

matter that has been delegated pursuant

to paragraph (a) or (b) of this section.

(d) Nothing in this section shall be

deemed to prohibit the Commission, at

its election, from exercising the

authority delegated in paragraph (a) or

(b) of this section to the Directors.

* * * * *

Appendix B—Schedule of fees

(a) Applications for product approval. Each

application for product approval under § 40.3

must be accompanied by a check or money

order made payable to the Commodity

Futures Trading Commission in an amount to

be determined annually by the Commission

and published in the Federal Register.

(b) Checks and applications should be sent

to the attention of the Office of the

Secretariat, Commodity Futures Trading

Commission, Three Lafayette Centre, 1155

21st Street, N.W., Washington, DC 20581. No

checks or money orders may be accepted by

personnel other than those in the Office of

the Secretariat.

(c) Failure to submit the fee with an

application for product approval will result

in return of the application. Fees will not be

returned after receipt.

* * * * *

12–a. Appendix A to Part 5 is

redesignated as Appendix A to Part 40

and the heading is revised; Appendix E

to Part 5 is redesignated as Appendix C

to Part 40; and Part 5 is removed and

reserved. The revised heading reads as

follows:

Appendix A to Part 40—Guideline No.

1

13. Chapter I of 17 CFR is proposed

to be amended by adding new Part 41

as follows:

PART 41—SECURITY FUTURES

Sec.

41.1 [Reserved]

PART 166—CUSTOMER PROTECTION

RULES

14. The authority citation for Part 166

is proposed to be revised to read as

follows:

Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6d, 6g,

6h, 6k, 6l, 6o, 7, 12a, 21, and 23, as amended

by the Commodity Futures Modernization

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

114 Stat. 2763 (2000).

15. § Section 166.5 is proposed to be

added to read as follows:

§ 166.5 Dispute settlement procedures.

(a) Definitions. (1) The term claim or

grievance as used in this section shall

mean any dispute that:

(i) Arises out of any transaction

executed on or subject to the rules of a

designated contract market,

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14287

(ii) Is executed or effected through a

member of such facility, a participant

transacting on or through such facility

or an employee of such facility, and

(iii) Does not require for adjudication

the presence of essential witnesses or

third parties over whom the facility

does not have jurisdiction and who are

not otherwise available.

(iv) The term claim or grievance does

not include disputes arising from cash

market transactions that are not a part

of or directly connected with any

transaction for the purchase or sale of

any commodity for future delivery or

commodity option.

(2) The term customer as used in this

section includes an option customer (as

defined in § 1.3(jj) of this chapter) and

any person for or on behalf of whom a

member of a designated contract market,

or a participant transacting on or

through such designated contract

market, except another member of or

participant in such designated contract

market. Provided, however, a person

who is an ‘‘eligible contract participant’’

as defined in section 1a(12) of the Act

shall not be deemed to be a customer

within the meaning of this section.

(3) The term Commission registrant as

used in this section means a person

registered under the Act as a futures

commission merchant, introducing

broker, floor broker, commodity pool

operator, commodity trading advisor, or

associated person.

(b) Voluntariness. The use by

customers and eligible contract

participants of dispute settlement

procedures shall be voluntary as

provided in paragraphs (c) and (g) of

this section.

(c) Customers. No Commission

registrant shall enter into any agreement

or understanding with a customer in

which the customer agrees, prior to the

time a claim or grievance arises, to

submit such claim or grievance to any

settlement procedure except as follows:

(1) Signing the agreement must not be

made a condition for the customer to

utilize the services offered by the

Commission registrant.

(2) If the agreement is contained as a

clause or clauses of a broader

agreement, the customer must

separately endorse the clause or clauses

containing the cautionary language and

provisions specified in this section. A

futures commission merchant or

introducing broker may obtain such

endorsement as provided in § 1.55(d) of

this chapter for the following classes of

customers only:

(i) A plan defined as a government

plan or church plan in section 3(32) or

section 3(33) of title I of the Employee

Retirement Income Security Act of 1974

or a foreign person performing a similar

role or function subject as such to

comparable foreign regulation; and

(ii) A person who is a ‘‘qualified

eligible participant’’ or a ‘‘qualified

eligible client’’ as defined in § 4.7 of this

chapter.

(3) The agreement may not require

any customer to waive the right to seek

reparations under section 14 of the Act

and part 12 of this chapter. Accordingly,

such customer must be advised in

writing that he or she may seek

reparations under section 14 of the Act

by an election made within 45 days after

the Commission registrant notifies the

customer that arbitration will be

demanded under the agreement. This

notice must be given at the time when

the Commission registrant notifies the

customer of an intention to arbitrate.

The customer must also be advised that

if he or she seeks reparations under

section 14 of the Act and the

Commission declines to institute

reparations proceedings, the claim or

grievance will be subject to the preexisting arbitration agreement and must

also be advised that aspects of the claim

or grievance that are not subject to the

reparations procedure (i.e, do not

constitute a violation of the Act or rules

thereunder) may be required to be

submitted to the arbitration or other

dispute settlement procedure set forth

in the pre-existing arbitration

agreement.

(4) The agreement must advise the

customer that, at such time as he or she

may notify the Commission registrant

that he or she intends to submit a claim

to arbitration, or at such time as such

person notifies the customer of its intent

to submit a claim to arbitration, the

customer will have the opportunity to

elect a qualified forum for conducting

the proceeding.

(5) Election of forum. (i) Within ten

business days after receipt of notice

from the customer that he or she intends

to submit a claim to arbitration, or at the

time a Commission registrant notifies

the customer of its intent to submit a

claim to arbitration, the Commission

registrant must provide the customer

with a list of organizations whose

procedures meet Acceptable Practices

established by the Commission for

dispute resolution, together with a copy

of the rules of each forum listed. The list

must include:

(A) The designated contract market, if

available, upon which the transaction

giving rise to the dispute was executed

or could have been executed;

(B) A registered futures association;

and

(C) At least one other organization

that will provide the customer with the

opportunity to select the location of the

arbitration proceeding from among

several major cities in diverse

geographic regions and that will provide

the customer with the choice of a panel

or other decision-maker composed of at

least one or more persons, of which at

least a majority are not members or

associated with a member of the

designated contract market or employee

thereof, and that are not otherwise

associated with the designated contract

market (mixed panel): Provided,

however, that the list of qualified

organizations provided by a

Commission registrant that is a floor

broker need not include a registered

futures association unless a registered

futures association has been authorized

to act as a decision-maker in such

matters.

(ii) The customer shall, within fortyfive days after receipt of such list, notify

the opposing party of the organization

selected. A customer’s failure to provide

such notice shall give the opposing

party the right to select an organization

from the list.

(6) Fees. The agreement must

acknowledge that the Commission

registrant will pay any incremental fees

that may be assessed by a qualified

forum for provision of a mixed panel,

unless the arbitrators in a particular

proceeding determine that the customer

has acted in bad faith in initiating or

conducting that proceeding.

(7) Cautionary Language. The

agreement must include the following

language printed in large boldface type:

Three Forums Exist for the Resolution of

Commodity Disputes: Civil Court litigation,

reparations at the Commodity Futures

Trading Commission (CFTC) and arbitration

conducted by a self-regulatory or other

private organization.

The CFTC recognizes that the opportunity

to settle disputes by arbitration may in some

cases provide many benefits to customers,

including the ability to obtain an expeditious

and final resolution of disputes without

incurring substantial costs. The CFTC

requires, however, that each customer

individually examine the relative merits of

arbitration and that your consent to this

arbitration agreement be voluntary.

By signing this agreement, you: (1) May be

waiving your right to sue in a court of law;

and (2) are agreeing to be bound by

arbitration of any claims or counterclaims

which you or [name] may submit to

arbitration under this agreement. You are not,

however, waiving your right to elect instead

to petition the CFTC to institute reparations

proceedings under Section 14 of the

Commodity Exchange Act with respect to any

dispute that may be arbitrated pursuant to

this agreement. In the event a dispute arises,

you will be notified if [name] intends to

submit the dispute to arbitration. If you

believe a violation of the Commodity

14288 Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules

1See Consolidated Appropriations Act 2001,

Appendix E, Pub. L. No. 106–554, 114 Stat. 2763

(2000).

2See A New Regulatory Framework for

Multilateral Transaction Execution Facilities,

Intermediaries and Clearing Organizations (final

rulemaking), 65 FR. 77961 (Dec. 13, 2000); A New

Regulatory Framework for Clearing Organizations

(final rulemaking), 65 FR 78020 (Dec. 13, 2000);

Exemption for Bilateral Transactions (final rules),

65 FR 78030 (Dec. 13, 2000); and Rules Relating to

Intermediaries of Commodity Interest Transactions

(final rules), 65 FR 77993 (Dec. 13, 2000). The final

rules were subsequently withdrawn following the

passage of the CFMA. See A New Regulatory

Framework for Multilateral Transaction Execution

Facilities, Intermediaries and Clearing

Organizations; Rules Relating to Intermediaries of

Commodity Interest Transactions; A New

Regulatory Framework for Clearing Organizations;

Exemption for Bilateral Transactions (final rules;

partial withdrawal), 65 FR 82272 (Dec. 28, 2000).

Exchange Act is involved and if you prefer

to request a section 14 ‘‘Reparations’’

proceeding before the CFTC, you will have

45 days from the date of such notice in which

to make that election.

You need not sign this agreement to open

or maintain an account with [name]. See 17

CFR 166.5.

(d) Enforceability. A dispute

settlement procedure may require

parties utilizing such procedure to

agree, under applicable state law,

submission agreement or otherwise, to

be bound by an award rendered in the

procedure, provided that the agreement

to submit the claim or grievance to the

procedure was made in accordance with

paragraph (c) or (g) of this section or

that the agreement to submit the claim

or grievance was made after the claim or

grievance arose. Any award so rendered

shall be enforceable in accordance with

applicable law.

(e) Time limits for submission of

claims. The dispute settlement

procedure established by a designated

contract market shall not include any

unreasonably short limitation period

foreclosing submission of customers’

claims or grievances or counterclaims.

(f) Counterclaims. A procedure

established by a designated contract

market under the Act for the settlement

of customers’ claims or grievances

against a member or employee thereof

may permit the submission of a

counterclaim in the procedure by a

person against whom a claim or

grievance is brought. The designated

contract market may permit such a

counterclaim where the counterclaim

arises out of the transaction or

occurrence that is the subject of the

customer’s claim or grievance and does

not require for adjudication the

presence of essential witnesses, parties,

or third persons over whom the

designated contract market does not

have jurisdiction. Other counterclaims

arising out of a transaction subject to the

Act and rules promulgated thereunder

for which the customer utilizes the

services of the registrant may be

permissible where the customer and the

registrant have agreed in advance to

require that all such submissions be

included in the proceeding, and if the

aggregate monetary value of the

counterclaims is capable of calculation.

(g) Eligible contract participants. (1) A

person who is an ‘‘eligible contract

participant’’ as defined in section 1a(12)

of the Act may negotiate any term of an

agreement or understanding with a

Commission registrant in which the

eligible contract participant agrees, prior

to the time a claim or grievance arises,

to submit such claim or grievance to any

settlement procedure, except that

signing the agreement must not be made

a condition for the eligible contract

participant to use the services offered by

the registrant.

(2) The agreement may require an

eligible contract participant, to waive

the right to seek reparations under

section 14 of the Act and part 12 of this

chapter.

(3) If the agreement is contained as a

clause or clauses of a broader

agreement, the eligible contract

participant must separately endorse the

clause or clauses containing the

agreement; Provided, however, a futures

commission merchant may obtain such

endorsement as provided in § 1.55(d) of

this chapter.

PART 170—REGISTERED FUTURES

ASSOCIATIONS

Subpart A—Standards Governing

Commission Review of Applications

for Registration as a Futures

Association Under Section 17 of the

Act

16. The authority citation for Part 170

is proposed to be revised to read as

follows:

Authority: 7 U.S.C. 6p, 12a, and 21, as

amended by the Commodity Futures

Modernization Act of 2000, Appendix E of

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

17. Section 170.8 is proposed to be

revised to read as follows:

§ 170.8 Settlement of customer disputes

(section 17(b)(10) of the Act).

A futures association must be able to

demonstrate its capacity to promulgate

rules and to conduct proceedings that

provide a fair, equitable and expeditious

procedure, through arbitration or

otherwise, for the voluntary settlement

of a customer’s claim or grievance

brought against any member of the

association or any employee of a

member of the association. Such rules

shall conform to and be consistent with

section 17(b)(10) of the Act and be

consistent with the guidelines and

acceptable practices for dispute

resolution found within Appendix A

and Appendix B to Part 38 of this

chapter.

PART 180—ARBITRATION OR OTHER

DISPUTE SETTLEMENT PROCEDURES

18. Part 180 is proposed to be

removed.

Issued in Washington, D.C., this 2nd day

of March, 2001, by the Commission.

Jean A. Webb,

Secretary of the Commission.

Concurring Statement of Commissioner

Thomas J. Erickson

A New Regulatory Framework for Trading

Facilities, Intermediaries, and Clearing

Organizations

I concur with the release of these proposed

rules. First, the Commodity Futures

Modernization Act of 2000 (‘‘CFMA’’) 1 is

now law, and it is imperative that the

Commission provide some regulatory

structure and guidance so that the intent

behind the CFMA might be fully effectuated.

Second, the CFMA represents profound

change for the derivatives industry, and I

therefore believe that it is important to solicit

as much comment as is possible from as

broad a cross-section of the public as is

possible. This brings me to my primary

concern.

Over the past year, this Commission has

devoted a tremendous amount of time and

resources to devising a new regulatory

framework,2 working with Congress on the

CFMA, and drafting today’s proposed rules

which implement the CFMA. Throughout

this process, the Commission has provided

draft rules to certain interested parties for

their review and comment—at times, prior to

their publication in the Federal Register for

general comment. Certainly, discussion and

dialogue with the industry is to be

encouraged, and I am pleased that the

Commission has reached out to the industry

and made every effort to accommodate its

views. However, I fear that this process has

given great weight to the views of a select

few, depriving the Commission of an

opportunity to hear from the broader

community of interests on a broader range of

issues. In particular, I believe the

Commission would benefit from input on

two additional issues: disclosure and fraud.

Disclosure

The CFMA is based largely on a regulatory

reform package initially proposed by the

Commission. From the very inception of this

reform effort, the Commission has referred to

its new regulatory framework as a

Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed Rules 14289

3See A New Regulatory Framework: Report of the

Commodity Futures Trading Commission Task

Force, Feb. 2000, p. 2 (describing the taskforce’s

mission as providing recommendations regarding,

among other things, ‘‘moving the Commission

* * * from merit to disclosure-based regulation’’);

A New Regulatory Framework for Multilateral

Transaction Execution Facilities, Intermediaries

and Clearing Organizations (proposed rulemaking),

65 FR 38985, 38986 (June 22, 2000) (‘‘the proposed

framework to a large degree relies more heavily on

disclosure rather than merit regulation’’); A New

Regulatory Framework for Multilateral Transaction

Execution Facilities, Intermediaries and Clearing

Organizations (final rulemaking), 65 FR 77961,

77962 (Dec. 13, 2000) (‘‘the new framework relies

more heavily on disclosure rather than merit

regulation’’); see also id. at 77974.

4See Commodity Trend Service, Inc. v.

Commodity Futures Trading Comm’n, 233 F.3d 981

(7th Cir. 2000) (Section 4b held not to apply to a

financial publisher because the prohibition on fraud

in connection with certain contracts of sale of a

commodity for future delivery made for or on behalf

of any other person applies only to brokers or others

who have an agency relationship with their clients).

5 ‘‘It is the intent of Congress in retaining Section

4b in this bill that the provision not be limited to

fiduciary, broker-client or other agency-like

relationships. Section 4b provides the Commission

with broad authority to police fraudulent conduct

within its jurisdiction, whether occurring in boiler

rooms and bucket shops, or in the e-commerce and

other markets that will develop under this new

statutory framework.’’ 146 Cong. Rec. S11924 at

S11926 (daily ed. Dec. 15, 2000) (statement of Sen.

Lugar). See also 146 Cong. Rec. H12488 at H12489

(daily ed. Dec. 15, 2000)(statement of Rep. Ewing)

(same).

6Consolidated Appropriations Act 2001,

Appendix ll, Pub. L. No. 106–554 § 108, 114 Stat.

2763 (2000) (amending Section 3 of the Commodity

Exchange Act (7 U.S.C. 5)).

‘‘disclosure-based’’ system.3 The Commission

today rightly asks whether, in the case of

exempt markets, it should require that

exempt entities affirmatively disclose to

traders that the facility and trading on the

facility are not regulated or approved by the

Commission. It seems self-evident to me that

rules implementing such a disclosure-based

system ought to require disclosure. I would

further suggest that it may be appropriate for

the Commission to consider requiring all

trading facilities at each of the tiers of

regulation to disclose to their participants the

type of regulation to which they are subject

(if any). I am interested in hearing comment

regarding the merits of a disclosure

obligation. In the absence of such an

obligation, should the Commission publish a

listing of exchange markets identifying their

regulatory status?

Fraud

One of the points about which there has

been a great deal of discussion from the

earliest days of the reform effort involves the

Commission’s antifraud authority. In the

past, the Commission has had difficulty

applying the antifraud provisions of the Act

in some novel situations. In particular, the

Commission’s efforts to address fraud against

retail customers has been hamstrung by some

courts’ interpretation of Section 4b of the

Commodity Exchange Act.4 Given the

inevitability of new market structures and

classes of participants, the Commission has

been wise to consider how its antifraud

authority might be clarified through

rulemaking. Nevertheless, throughout the

reform process, the Commission has

repeatedly heard from industry

representatives that this would be a bad idea.

With the passage of the CFMA, members of

Congress acknowledged the problems faced

by the Commission in enforcing its antifraud

provisions and stated their understanding

that Section 4b was intended to be read

broadly so as to give the Commission

maximum enforcement authority.5 This

intent is reflected in the ‘‘Findings and

Purpose’’ section of the CFMA. That

provision explicitly provides that, among

other things, it is the purpose of the Act ‘‘to

protect all market participants from

fraudulent or other abusive sales practices

and misuses of customer assets * * *.’’ 6

Today, the Commission proposes rules that

include a free-standing fraud provision. But

the proposed rule, Rule 1.1, applies only to

forex bucket shops because of expressed

concerns about a broader rule of application.

I believe it is in the public interest to propose

a more comprehensive antifraud rule. While

I concur generally with the publication of

these proposed rules and certainly support

the Commission asserting its authority under

the CFMA to address forex bucket shops, I

would like to hear precisely why adoption of

such a comprehensive fraud rule in any way

violates the public interest, overrides the

intent of Congress, or oversteps the

Commission’s authority.

Dated: March 2, 2001.

Thomas J. Erickson,

Commissioner.

[FR Doc. 01–5618 Filed 3–8–01; 8:45 am]

BILLING CODE 6351–01–U