Source: https://www.federalregister.gov/documents/2002/04/26/02-10031/amendments-to-new-regulatory-framework-for-trading-facilities-and-clearing-organizations
Timestamp: 2018-10-23 16:23:17
Document Index: 582664604

Matched Legal Cases: ['arts 36', 'art 40', 'art 40', 'arts 37', 'art 40', 'art 37', '§\u200940', '§\u200940', '§\u200937', 'art 38', '§\u20091', 'art 9', 'arts 15', 'art 40', 'art 41', 'art 190', 'art 38', '§\u200940', '§\u200940', '§\u200940', '§\u200938', '§\u200940', 'art 40', '§\u200940', 'art 40', '§\u200941', 'art 40', 'art 40', 'art 40', 'art 40']

A Proposed Rule by the Commodity Futures Trading Commission on 04/26/2002
Comments must be received by June 25, 2002.
67 FR 20702
20702-20709 (8 pages)
02-10031
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 Broad-based Foreign Securities Index Traded on That Board of Trade
https://www.federalregister.gov/d/02-10031 https://www.federalregister.gov/d/02-10031
Start Preamble Start Printed Page 20702
The Commodity Futures Trading Commission (Commission or CFTC) is proposing a number of technical amendments to its rules implementing the Commodity Futures Modernization Act of 2000 with respect to trading facilities and clearing organizations. The Commission is proposing additional categories of exchange rules or rule amendments that need not be self-certified to the Commission; amendments to the definitions of “rule” and “dormant contract;” the addition of new definitions of “dormant contract market,” “dormant derivatives transaction execution facility,” and “dormant derivatives clearing organization”; and the addition of a procedure for listing or relisting products for trading on a registered entity that has become dormant.
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 “Amendments to Trading Facility Rules.”
Paul M. Architzel, Chief Counsel, Division of Economic Analysis, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5260. E-mail: PArchitzel@cftc.gov.
The Commission, on August 10, 2001, promulgated rules implementing those provisions of the Commodity Futures Modernization Act of 2000 (CFMA) relating to trading facilities.[1] 66 FR 42256. These rules, parts 36 through 40 of the Commission's rules, became effective on October 9, 2001.
The CFMA profoundly altered federal regulation of commodity futures and option markets. The new statutory framework established two categories of markets subject to Commission regulatory oversight, designated contract markets (contract markets) and registered derivatives transaction execution facilities (DTFs), and two categories of exempt markets, exempt boards of trade and, under section 2(h)(3) of the Commodity Exchange Act (Act), exempt commercial markets. The Commission's rules relating to trading facilities established administrative procedures necessary to implement the CFMA, interpreted certain of the CFMA's provisions and provided guidance on compliance with various of its requirements. In addition, the Commission, under its exemptive authority, in a limited number of instances, provided relief from, or greater flexibility than, the CFMA's provisions. The Commission is proposing a limited number of amendments responding to initial issues that have arisen in administering its implementing rules, or which are technical in nature. The Commission will consider as appropriate additional amendments to the rules implementing the CFMA related to trading facilities based upon further administrative experience.
Part 40 of the Commission's rules implementing the CFMA retains the concept that the Act's requirements for listing a new product for trading should also be applicable when relisting a dormant contract for trading. Specifically, Commission rule 40.2 requires that, before either listing a contract or relisting a dormant contract for trading, registered entities certify that the product complies with the Act. The Commission is proposing to amend its part 40 requirements relating to dormant contracts in two ways.
First, the Commission is proposing to revise the exemptive period in the definition of “dormant contract” in rule 40.1 from the time following “initial listing” to the time following initial exchange certification or Commission approval. The Commission originally used “initial listing” to mark the beginning of the exemptive period based upon its belief that registered entities routinely would certify products to the Commission shortly before trading was imminent as permitted by rule 40.2. However, many exchanges have continued their prior practice of fulfilling regulatory requirements well in advance of a product's anticipated listing date. In addition, some exchanges have certified to the Commission, but have never listed for trading, a number of new products. Accordingly, the Commission is proposing that the exemptive period under the dormant contract definition begin running from the time of certification or Commission approval. Second, in light of the far greater rapidity with which markets innovate and change today compared to when the dormant contract rule was first promulgated and the lessened burden of a simple self-certification compared to the previous requirement that dormant contracts be approved by the Commission prior to relisting, and for Start Printed Page 20703consistency with the operation of other rules, the Commission is proposing to amend rule 40.1 to reduce the grace period during which a new contract is exempt from being defined as dormant from 60 to 36 complete calendar months.
The Commission also is proposing to amend rule 40.2 so that it would apply in instances where the registered entity itself has become dormant. Prior to enactment of the CFMA, the term “designated contract market” denoted the Commission-approved products traded on a board of trade.[2] Accordingly, prior to the CFMA, a board of trade's initial application for designation as a contract market in a commodity triggered review of both the general requirements for designation as a contract market as well as those requirements that were product-specific. If a board of trade determined to relist a contract for trading after all of its contracts had become dormant, the Commission would have reviewed both the terms and conditions of the product to be relisted as well as whether the board of trade continued to meet the general designation requirements. The Commission is proposing to amend parts 37, 38, 39 and 40 of its rules to clarify that, when a registered entity that has become dormant determines to list or relist an initial product for trading (or in the case of a derivatives clearing organization, to accept a product for clearing), it must demonstrate that it continues to satisfy the criteria for designation or registration.[3] In making such a demonstration, a registered entity may rely upon previously-submitted materials that still pertain to, and accurately describe, current conditions.
Contract markets or DTFs may request that the Commission review and approve new products and new rules or rule amendments. The Commission is proposing to amend rules 40.3 and 40.5 to include a provision similar to that for applications for contract market designation and DTF registration, that the applicant or submitting entity identify with particularity information in the submission that will be subject to a request for confidential treatment and support that request for confidential treatment with reasonable justification. See rules 38.3(a)(5) and 37.5(b)(5). Proposed rule 40.3 also provides that the terms and conditions of products for which approval is voluntarily requested will be made publicly available at the time of their submission to the Commission to enable the Commission, by obtaining the views of market participants and others, to ascertain whether the proposed product would be readily susceptible to manipulation, or otherwise violate the Act.[4] Finally, the Commission is proposing a new rule 40.8 to make clear that all other information required by the core principles to be made public [5] by a registered entity will be treated as public information by the Commission at the time the Commission issues an order of designation or registration, a registered entity is deemed approved, or a rule or rule amendment is approved or deemed approved by the Commission or can first be made effective by the registered entity.
The Commission is also proposing to amend rules 40.1, 40.4 and 40.6 explicitly to address the procedures applicable to the imposition or amendment of exchange fees. Generally, the Commission is clarifying that only fees related to delivery of an enumerated agricultural commodity would be subject to the prior-approval requirements of the Act, and that all other fees would be subject only to the certification requirement. Fees or fee changes of any type of less than $1.00 are proposed to be exempt from the certification requirement (or the prior-approval requirement, if applicable) as de minimis. Specifically, the Commission is proposing to amend the definition of “terms and conditions” in rule 40.1 to reference explicitly delivery-related fees. It is also proposing to amend rule 40.4 to make clear, however, that the imposition or amendment of such delivery-related fees by less than $1.00 per contract is not material for purposes of the prior-approval requirement relating to amendments of the terms or conditions of contracts on agricultural commodities.[6] Moreover, the Commission is proposing to amend rule 40.6 to provide that the imposition or change of any fee by less than $1.00, including delivery-related fees, need not be certified to the Commission.[7]
The Commission is also proposing to amend the definition of “rule” in part 40.1[8] to exclude from its meaning Start Printed Page 20704exchange actions relating to the setting of margin levels, except with respect to security futures products and contracts on stock indices. Prior to the CFMA, section 5a(a)(12) of the Act required that all changes to contract terms and conditions, with the exception of rules relating to the setting of margin levels, be submitted to the Commission for prior approval. The ability to adjust margin levels was afforded this special status because of the recognized need for exchanges to change margin levels rapidly, often changing margin levels within a single trading session, in response to changing market conditions. In section 113 of the CFMA, Congress removed the prior-approval provision, providing instead that registered entities could amend their rules by self-certification. However, there is no indication that Congress intended thereby to affect the special status accorded rules relating to the setting of margin levels.[9] Accordingly, the Commission believes that specifically excluding the setting of margin levels (except with respect to stock index products and security futures products) from the definition of “rule” is consistent with Congress” intent and with the public interest.[10]
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. Section 15 does not require the Commission to quantify the costs and benefits of a new regulation or to determine whether the benefits of the proposed regulation outweigh its costs. Rather, section 15 simply requires the Commission to “consider the costs and benefits” of its action, 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 proposed rules constitute a package of largely procedural amendments to the rules it recently promulgated to implement the CFMA. Many of the proposed amendments merely clarify or make explicit existing requirements. Others reduce required submissions to the Commission. Except for the proposal to require that dormant contract markets reapply for designation prior to listing products for trading, none of the proposed amendments imposes a significant obligation, burden or cost on any person or registered entity. With regard to dormant contract markets, the public interest in ensuring that a dormant market meets the requirements of the Act when it lists or relists an initial product for trading outweigh the burden of reapplying for contract market designation. The cost of reapplying for designation should be diminished to the extent that a contract market has kept its rules, trading platform and other aspects of its infrastructure up-to-date during the period it was dormant. On the other hand, to the extent that a dormant contract market has not kept its infrastructure up-to-date during the period of dormancy, the public interest in a review of its reapplication increases.
After considering the five factors enumerated in the Act, the Commission has determined to propose the revisions to its rules discussed above. The Commission invites public comment on its application of the cost-benefit provision. Commenters also are invited to submit any data that they may have quantifying the costs and benefits of the proposed rules with their comment letters.
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 registered entities. 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.[11] In its previous determinations, the Commission has concluded that contract markets, DTFs and clearing organizations are not small entities for the purpose of the RFA.[12]
This proposed rulemaking contains information-collection requirements. As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 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.
Annual reporting burden: 3,000. Start Printed Page 20705
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:
(b) Registration by application.— (1) Initial registration. A board of trade, facility or entity shall be deemed to be registered as a derivatives transaction execution facility thirty days after receipt (during the business hours defined in § 40.1 of this chapter) by the Secretary of the Commission at its Washington, DC, headquarters, 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:
(B) 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 Start Printed Page 20706results, 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
(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 such other employee or employees as the Directors may designate from time to time, with the concurrence of the General Counsel or the General Counsel's delegatee, authority to exercise the functions provided under paragraph (d) of this section.
4. Section 37.6 is amended by revising paragraphs (a), (b), (b)(1), (b)(2) and (b)(2)(i) introductory text, (b)(2)(iii), and (c) to read as follows:
(a) In general. To maintain registration as a derivatives transaction execution facility upon commencing operations by listing products for trading or otherwise, or for a dormant derivatives transaction execution facility as defined in § 40.1 of this chapter that has been reinstated under § 37.5(b)(2) upon recommencing operations by relisting 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.
(c) Existing derivatives transaction execution facilities.— (1) In general. 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.
(2) Change of owners. Upon a change of ownership of an existing registered derivatives transaction execution facility, the new owner shall file with the Secretary of the Commission at its Washington, D.C., headquarters, a certification that the derivatives transaction execution facility meets the requirements for trading and the criteria for registration of sections 5a(b) and 5a(c) of the Act, respectively.
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, 1.12(e), 1.31, 1.37(c)-(d), 1.38, 1.52, 1.59(d), 1.63(c), 1.67, 33.10, part 9, parts 15 through 21, part 40, part 41 and part 190 of this chapter.
(i) 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; Start Printed Page 20707
(2) Notwithstanding the forty-five day review period for voluntary approval under §§ 40.3(b) and 40.5(b) of this chapter, the operating rules and the terms and conditions of products submitted for voluntary Commission approval under § 40.3 or § 40.5 of this chapter that have been submitted at the same time as an application for contract market designation or an application under § 38.3(a)(2) to reinstate the designation of a dormant contract market as defined in § 40.1 of this chapter, or while one of the foregoing is pending, will be deemed approved by the Commission no earlier than the facility is deemed to be designated or reinstated.
Authority: 7 U.S.C. 7b as amended by Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365. 11. Section 39.4 is amended by revising the section heading, by redesignating the text in paragraph (c) as paragraph (c)(2) and by adding a new paragraph (c)(1) to read as follows:
13. Section 40.1 is amended by revising the definitions of dormant contract, rule, and paragraph (6) of terms or conditions and by adding in alphabetic placement definitions of business hours, dormant contract market, dormant derivatives clearing organization and dormant derivatives transaction execution facility, to read as follows:
Business hours means the hours between 8:15 a.m. and 4:45 p.m., eastern standard time or eastern daylight savings time, whichever is currently in effect in Washington, DC, all days except Saturdays, Sundays and legal public holidays.
Dormant derivatives transaction execution facility means any derivatives transaction execution facility on which no trading has occurred for a period of Start Printed Page 20708six complete calendar months; provided, however, no derivatives transaction execution facility shall be considered to be dormant until the end of 36 complete calendar months following the day that the order of registration was issued or that the derivatives transaction execution facility was deemed to be registered.
Dormant contract or dormant product means any commodity futures or option contract or other agreement, contract, transaction or 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 thirty-six complete calendar months following initial exchange certification or Commission approval.
17. Section 40.6 is amended by revising paragraphs (c)(2)(iii), (c)(2)(iv), (c)(3)(ii)(B) and (c)(3)(ii)(C), and by adding paragraph (c)(2)(v) to read as follows:
(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 purpose of compiling an index for use in connection with a futures or option product;
(v) Fees. Fees or fee changes of less than $1.00.
(C) Administration. The routine, daily administration, direction and control of employees, requirements relating to Start Printed Page 20709gratuity 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; or
19. Section 40.7(b)(1) is revised to read as follows:
20. Part 40 is amended by adding a new § 40.8 to read as follows:
17. Appendix C to part 40 is amended by revising paragraphs (5)(ii) through (vii) to read as follows:
(v) Average daily volume of trading by calendar month, measured by share turnover and dollar value, in each of the underlying securities for a six-month period of time and, separately, the dollar value of the average daily trading volume of the securities comprising the lowest weighted 25% of the index for the past six calendar months, calculated pursuant to § 41.11;
Issued in Washington, DC, this 19th day of April, 2002, by the Commission.
2. In contrast, the CFMA redefined the meaning of “designated contract market” to refer to the approved or licensed facility on which futures contracts and commodity options are traded.
3. The proposed definitions of “dormant contract market,” “dormant derivatives transaction execution facility,” and “dormant derivatives clearing organization” provide for a 36-month initial exemptive period that would begin when the Commission issues an order, including conditional orders, designating a contract market or registering a DTF or a derivatives clearing organization.
The Commission is also proposing two technical amendments related to continuing goodstanding designation or registration status. The first would make clear that the notification procedure available to contract markets to operate as a DTF applies only to active contract markets. Accordingly, before using this notification procedure, dormant contract markets must reinstate their active contract market status. Of course, they could also become a registered DTF by application. The second would provide that, upon a change of ownership of a contract market or DTF, the new owners must certify that the facility continues to meet the respective designation or registration requirements.
4. Commission staff routinely conduct trade interviews when reviewing novel instruments to ascertain the relative susceptibility of a product to being manipulated. To be meaningful, these interviews require the release of the proposed instrument's terms and conditions. Generally, the Commission also intends to continue its long-standing practice of requesting public comment on the terms and conditions of new products under review for Commission approval by publication of notices in the Federal Register. In instances where notice in the Federal Register is impracticable or otherwise unnecessary, notice of a submission for voluntary approval and of the public availability of the proposed product's terms and conditions will be through the Commission's internet web site (www/cftc.gov).
The terms and conditions of products eligible for trading by self-certification must be made publicly available by the contract market (Core Principle 7) or the DTF (Core Principle 4), and will be available from the Commission, at the time that the exchange legally could commence trading—the beginning of the business day following certification to the Commission.
5. This requirement is limited to information required to be made public by a registered entity under a core principal, and does not apply to additional materials that may be filed in support of an application for designation or registration. For example, section 5(d)(7) of the Act requires contract markets to make publicly available information concerning “the terms and conditions of the contracts of the contract market and the mechanisms for executing transactions on or through the facilities.”
6. Separately, the Commission is proposing to revise the list of rule amendments that are not material changes to futures contracts on the enumerated agricultural commodities to clarify that rule changes not required to be certified to the Commission under rule 40.6(c) are also not material.
7. Such a certification includes the exchange's determination that the fee or fee change complies with the exchange's obligation under Core Principle 18 that its actions avoid resulting in an unreasonable restraint of trade or imposing any material anticompetitive burden on trading.
8. With respect in general to the definition of “rule,” Commission staff in recent months has learned, through bulletins and notices to the members of registered entities, of a number of rule changes that were not appropriately submitted to the Commission for review under Part 40. The Commission reminds registered entities that the definition of “rule” under part 40.1 encompasses more than just provisions labeled as “rules” in rulebooks, but includes, among other things, resolutions, interpretations and stated policies. In order to relieve any administrative burdens, registered entities may submit rule changes to the Commission in the form of member bulletins and notices, so long as those submissions are labeled and, if necessary, certified in accordance with the procedural requirements of part 40.
9. In this regard, Congress did not modify the Act's other provisions relating to margins. See section 2(a)(C)(v).
10. The Commission is also proposing a number of technical amendments. Appendix C to part 40 details the information that foreign boards of trade should include in a request for no-action relief to offer and sell to persons in the United States futures contracts on broad-based foreign securities indices. The Commission is proposing to amend that guidance to incorporate the changes made by the CFMA to the criteria for designating such stock indexes. The Commission is also proposing conforming changes to a number of delegations in the rules and to several other provisions.
11. 47 FR 18618-21 (Apr. 30, 1982).
12. 47 FR 18618, 18619 (April 30, 1982) (discussing contract markets); 66 FR 42256, 42268 (August 10, 2001) (discussing DTFs); 66 FR 45605, 45609 (August 29, 2001) (discussing DCOs).
[FR Doc. 02-10031 Filed 4-25-02; 8:45 am]