Source: https://www.federalregister.gov/documents/2006/01/12/06-242/technical-and-clarifying-amendments-to-rules-for-exempt-markets-derivatives-transaction-execution
Timestamp: 2018-04-22 20:22:47
Document Index: 506139260

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A Rule by the Commodity Futures Trading Commission on 01/12/2006
1953-1971 (19 pages)
https://www.federalregister.gov/d/06-242 https://www.federalregister.gov/d/06-242
On August 10, 2001, the Commodity Futures Trading Commission (“Commission”) published final rules implementing the provisions of the Commodity Futures Modernization Act of 2000 (“CFMA”) relating to trading facilities.[1] These amendments are intended to clarify and codify acceptable practices under the rules for trading facilities, based on the Commission's experience over the intervening four years in applying those rules, including the adoption of several amendments to the original rules over the same period. The amendments also include various technical corrections and conforming amendments to the rules. Start Printed Page 1954
In addition, these amendments revise the application and review process for registration as a derivatives clearing organization (“DCO”) by eliminating the presumption of automatic fast-track review of applications and replacing it with the presumption that all applications will be reviewed pursuant to the 180-day timeframe and procedures specified in Section 6(a) of the Commodity Exchange Act (“CEA” or “Act”). In lieu of the current 60-day automatic fast-track review, the Commission will permit applicants to request expedited review and to be registered as a DCO by affirmative Commission action not later than 90 days after the Commission receives the application.
The CFMA amended the Commodity Exchange Act to profoundly alter Federal regulation of commodity futures and option markets. The new statutory framework created by the CFMA established two categories of markets subject to Commission regulatory oversight, designated contract markets (“DCMs”) and registered derivatives transaction execution facilities (“DTEFs”), and two categories of exempt markets, exempt boards of trade (“EBOTs”) and exempt commercial markets (“ECMs”). The original rules applicable to these trading facilities [2] established administrative procedures necessary to implement the CFMA, interpreted certain of the CFMA's provisions, and provided guidance on compliance with various of the CFMA's requirements. In addition, the Commission, under the general exemptive authority of Section 4(c) of the Act, in a limited number of instances provided relief from, or greater flexibility than, the CFMA's provisions.
In addition, over the four years during which these new rules for trading facilities have been in effect, they have been amended several times.[3] These amendments are intended to clarify and codify acceptable practices under the Commission's rules for trading facilities, as amended, based on the Commission's experience in applying those rules over the last four years. The amendments also include a number of technical and clarifying corrections and conforming amendments to enhance the consistency and clarity of the rules.
In addition, these amendments revise the application and review procedures for registration as a DCO. Specifically, the amendments eliminate the presumption of automatic fast-track review of applications and replace it with the presumption that all applications will be reviewed pursuant to the 180-day timeframe and procedures specified in Section 6(a) of the Act. In lieu of the automatic fast-track review (under which applicants were deemed to be registered as DCOs 60 days after receipt of an application), the amendments permit applicants to request expedited review and to be registered as a DCO by the Commission not later than 90 days after the date of receipt of the application. The amendments also provide that review under the expedited review procedures may be terminated if it appears that the application is materially incomplete, raises novel or complex issues that require additional time for review, or has undergone substantive amendment or supplementation during the review period. The amendments are based upon the Commission's experience in processing applications, including administrative practices that have been implemented since the rules were first adopted. These amendments establish procedures substantially similar, where appropriate, to those recently amended in Parts 37 and 38 for processing applications for registration of derivatives transaction execution facilities and contract market designation, respectively.[4]
NYMEX expressed concern about the proposed amendment to rule 38.2 to make clear that the references therein to the reserved provisions of the regulations applicable to DCMs “also include related definitions and cross-referenced sections cited in those reserved provisions.” NYMEX suggests that the provision could “have the unintended effect of bringing back into force overly prescriptive regulations of the kind the CFMA was appropriately intended to eliminate.” In particular, NYMEX notes that applying the definitions in § 1.63(a) to reserved § 1.63(c) would include the definition of “disciplinary offense.” That definition specifies that violations of SRO reporting or recordkeeping rules that result in fines aggregating more than $5,000 in any calendar year will be included among the disciplinary offenses that would disqualify a person from service on SRO governing boards, disciplinary committees and arbitration Start Printed Page 1955or oversight panels. NYMEX points out that in January 2002, it submitted a self-certified rule, which the Commission did not disapprove, deleting a provision modeled after the $5,000 threshold approach set forth in § 1.63(a) and replacing it with a policy of reviewing potential disqualifications based on reporting/recordkeeping fines or settlements on a case-by-case basis. On July 12, 2005, NYMEX self-certified further amendments “codifying the procedure by which reporting and recordkeeping violations resulting in cumulative fines of over $5,000 in a calendar year would be considered with regard to Board and disciplinary committee service.”
The Commission believes that the $5,000 limit in § 1.63(a) continues appropriately to reflect conduct that “demonstrates a lack of respect for SRO rules sufficient to warrant [a] bar from service on SRO committees.” [5] Therefore, the amendment to § 38.2 will be implemented as proposed. The Commission acknowledges, however, that it did not object to NYMEX's adoption of rules implementing a case-by-case review of reporting/recordkeeping disciplinary actions in lieu of the fine schedule in § 1.63(a). The Commission agrees that applying the § 1.63(a) fine schedule could be unfair to persons who, in agreeing to settle exchange disciplinary actions, acted in reliance on exchange rules that were at variance with that schedule. Therefore, the Commission will not bring action for violating § 1.63(a) against any NYMEX board, committee or arbitration panel member elected while a rule at variance with § 1.63(a) was in effect, in reliance on such rule, during the remainder of that person's current term of office, provided that the § 1.63(a) fine schedule will apply prospectively to all such individuals.
Two of the commenters expressed concern over proposed new § 38.5(c), which would delegate to staff the Commission's authority under revised § 38.5(b) to request additional information from a DCM demonstrating that it is in compliance with one or more designation criteria or core principles or that is requested by the Commission to satisfy its obligations under the Act. Eurex contends that regulation 38.5(b) and its permitting of compliance demonstration requests is patterned after former Commission regulation 1.50 and would be “anything but a routine request.” [6] Eurex suggests that responding to such a request “is likely to place a very heavy (and costly) burden on an exchange.” Thus, this authority should be reserved to the Commission. MGEX expressed concern that the proposed amendment indicates that exchanges “can expect more frequent requests for information outside the routine [rule enforcement] review process,” which could become an “unnecessary regulatory burden.”
The amendments to §§ 38.5(b) and (c) are not intended to impose regulatory burdens on the exchanges, but rather to relieve administrative burdens on the Commission. The matters described in § 38.5(b) potentially cover a wide variety of possible written requests, from a routine request for details concerning a new exchange policy to a comprehensive inquiry regarding a potential exchange violation of designation criteria or core principles. In the case of the former, such routine requests are appropriately delegated to staff. In the case of the latter more significant requests, it should be noted that new § 38.5(c) both allows the Director of DMO to submit any matter delegated thereunder to the Commission and allows the Commission to exercise the authority directly. Accordingly, the Commission has determined to implement the amendments to §§ 38.5(b) and (c) as proposed.
Eurex expresses its concern that the amendments will result in unnecessary barriers to entry and adversely affect competition and innovation. Specifically, Eurex is concerned that a new entrant will lose flexibility if required to provide executed or executable contracts as part of its application. The language of the rule, which requires the submission of contracts entered or to be entered into, does not mean that contracts must be in force such that contract costs are being incurred before DCO registration or before the service for which the costs are incurred is supplied. Nevertheless, in light of this comment, the Commission has further clarified what is required in the language of the rule itself. The amended rule requires an applicant to submit agreements entered into or to be entered into between or Start Printed Page 1956among the applicant, its operator/service provider or its participants that identify the services that will be provided that will enable the applicant to comply or demonstrate the applicant's ability to comply with the core principles specified in Section 5b(c)(2) of the Act. When the arrangement submitted is not final and executed, the rule also requires evidence that provides reasonable assurance that the agreed upon services will be provided when the operations that require the services begin. This may include evidence that the service provider is prepared to provide the services when they are needed and, to the extent not otherwise obvious, that the applicant has the financial resources to pay the fees required under the agreement.
Eurex also contends that procedural fairness requires a mechanism to hold staff accountable for a decision to terminate expedited review. The Commission notes that the Act does not establish any timeframe for review of DCO applicants. However, under Part 39, the Commission voluntarily committed itself to the timeframe under Section 6(a) and pursuant to § 39.3(g)(3), the Commission retains supervisory authority over staff decisions in this area.
NYMEX suggests that the definition of “emergency” in § 40.1 should be amended to make clear that the authority to declare an emergency is vested not only in a DCM's governing board, but also in “a subcommittee or exchange official that is duly authorized under a DCM's rules to act with the governing board's authority in such circumstances.” While the existing language may possibly be read to permit such an interpretation, the Commission believes that such an amendment may have merit in avoiding uncertainty. However, because nothing in the original Part 36-40 notice of proposed rulemaking provided notice that such an amendment was contemplated, the public was not given the opportunity to comment on it. Therefore, it would not be appropriate to include such an amendment in these final rules. However, the Commission may consider including such an amendment in a future rulemaking proposal.
Several exchanges commented on §§ 40.2(b), 40.3(a)(9) and 40.6(a)(4), all of which would make clear that registered entities shall provide, if requested by Commission staff, additional evidence, information or data relating to whether new products, rules or rule amendments meet the requirements of the Act or Commission regulations or policies thereunder. The preamble to the proposed rules noted that such evidence may be beneficial to the Commission in conducting due diligence assessments of such products and rules.
Eurex suggests that requests to demonstrate compliance with the Act should be more formally treated, pursuant to Rule 38.5, than requests for information related to routine due diligence reviews. Eurex notes that, “the authority to request information, if misused, can constitute a significant burden on registered entities.” MGEX expresses concern that staff requests for additional evidence, information or data under §§ 40.2(b) or 40.6(a) might have a “chilling effect” on the self-certification process. However, rather than oppose the amendments, the exchange urges the Commission staff to use this authority “reasonably and judiciously.” CBOT likewise expresses concern that routine requests for “sometimes voluminous supporting data” regarding self-certified contracts could have a “chilling effect” on listing products immediately after certification because an exchange may be hesitant to begin trading until it knows the Commission has requested any additional data and completed its review. CBOT asks the Commission to make clear that any requests for additional information under §§ 40.2(b) or 40.6(a), and any due diligence assessment by the Commission, “is not intended implicitly or explicitly to operate as a stay” with respect to listing self-certified products or implementing self-certified rules.
All of these comments reflect the need to balance the flexibility the CFMA gives a DCM in being able to self-certify new products and rules quickly against the obligations of both the DCM and the Commission to assure themselves that the certification is accurate—i.e., that the product or rule does indeed comply with applicable designation criteria and core principles. It is certainly not the intention of the Commission or its staff to inject a chilling effect into the self-certification process or to conduct the required due diligence oversight of that process in anything less than a reasonable and judicious manner. Nor are such information requests intended to operate as a stay with regard to immediately listing new products or implementing new rules. The listing of a new product or implementation of a new rule may be stayed only during the pendency of a Commission proceeding for filing a false certification or to alter or supplement the contract terms or the rule under Section 8a(7) of the Act. Further, pursuant to §§ 40.2(c) and 40.6(b), respectively, the decision to impose such a stay rests with the Commission alone and cannot be delegated to the staff.
However, the fact remains that under the Act DCMs are responsible in the first instance, and the Commission is ultimately responsible in its oversight role, for assuring that DCM products and rules comply with applicable designation criteria and core principles. When a DCM self-certifies a product or rule it is, in effect, pledging that the product or rule does meet those standards. Assuming the DCM is acting in good faith, it must have some reasonable basis for making that pledge. Therefore, when reasonable questions arise, it should not be burdensome for the DCM to share information regarding the reasonable basis underlying the new product or rule with the Commission or its staff. Therefore, §§ 40.2(b), 40.3(a)(9) and 40.6(a)(4) will be implemented as proposed.
CBOT expressed concern about the proposed amendment to conform the review periods in § 40.3 (voluntary submission of new products for Commission review and approval) and § 40.5 (voluntary submission of rules for Commission review and approval). Both sections establish an initial review period of 45 days, with a possible additional extension. The proposed amendments provide for an extension of 45 days under § 40.5 (as opposed to the 30-day extension allowed under the current rules) to conform it to the 45-day extension period under § 40.3. CBOT points out that, when the proposed Part 40 rules were published in 2001, the Commission initially proposed a 45-day extension under § 40.5. In the final rules, however, the Commission lowered the period to the current 30 days after the CBOT commented that a 45-day extension period for rule reviews would have resulted in a potentially longer review process than that allowed under the pre-CFMA fast-track rule review procedure. CBOT argues that the reasons it expressed in favor of a 30-day extension period in 2001, and the reasons the Commission relied on in adopting such period, remain valid and recommends that the current 30-day extension period in § 40.5 should not be amended.
The Commission notes that new products generally include accompanying rule amendments. These new rules can raise questions just as complex, and requiring just as much additional review, as the new products to which they apply. Therefore, the review periods for both products and rules should be identical. It should also be noted that, based on actual experience, the effect of equalizing the review periods for products and rules Start Printed Page 1957should be negligible since the extended review period is rarely invoked (only six times since the regulations were adopted in 2001). Therefore, the Commission has determined to implement the amendment to § 40.5 as proposed.
The amendments also add new §§ 36.2(c)(3) and 36.3(c)(4) requiring EBOTs and ECMs, respectively, to annually file a notice with the Commission, no later than the end of each calendar year. The notice must include a statement that the entity continues to operate under the exemption and a certification that the information in its original notification of operation is still correct. Annual notification of operation by the facility will allow the Commission to track whether facilities that notified the Commission of their intent to operate actually commenced operations and will allow the Commission to eliminate inactive facilities from any listing of active EBOTs or ECMs maintained on its Web site.
Section 37.2 is revised to identify certain reserved provisions of the Commission's regulations that specifically and comprehensively reference DTEFs separately from other reserved provisions that do not. The revisions also make clear that all the references in § 37.2 to reserved provisions of the regulations applicable to DTEFs also include related definitions and cross-referenced sections cited in those reserved provisions. Finally, § 1.60 is added to the list of reserved provisions of the regulations applicable to DTEFs under § 37.2 to make clear that DTEFs need to notify the Commission of any material legal proceeding to which the DTEF is a party or to which its property or assets are subject.
In § 37.3, subparagraph (a)(5) is renumbered as subparagraph (b) and the remaining subparagraphs are renumbered accordingly.
Section 37.6, Compliance with Core Principles, is revised to harmonize DTEF core principle compliance with the previously noted new application procedures for DCMs and DTEFs.[7]
New § 37.6(c)(2) is added delegating to the Division of Market Oversight (the “Division”) the authority under § 37.6(c)(1) to request additional information in reviewing a DTEF's continued compliance with one or more core principles, or to enable the Commission to satisfy its obligations under the Act. The delegation provides that the Commission, at its election, may exercise the delegated authority directly. A similar delegation is made in new § 38.5(c) to allow the Division to request additional information in reviewing a DCM's continued compliance with designation criteria and core principles, or to enable the Commission to satisfy its obligations under the Act. The foregoing delegated authority also extends to other requests by Commission staff to DTEFs or DCMs for additional information: (1) Under new § 40.2(b), regarding compliance with respect to new products listed by certification; (2) under § 40.3(a)(9), regarding voluntary submission of new products for Commission review and approval; and (3) under new § 40.6(a)(4), regarding compliance with respect to self-certified rules. This delegated authority will aid the staff in reviewing DTEF and DCM compliance with the requirements of the Act or Commission regulations or policies thereunder without involving the Commission in day-to-day oversight of trading facilities.
In addition, the guidance in current § 37.6(d) is deleted as duplicative of “Appendix B to Part 37—Guidance on Compliance with Core Principles” and replaced with a reference to Appendix B.
Section 37.8(b), regarding special calls for information, is amended to make clear that the section applies not only to futures commission merchants, but to foreign brokers (as defined in § 15.00) as well.
In Appendix B to Part 37, subsection 1 of the appendix is revised to make clear that the guidance therein applies to all registered DTEFs, whether they come in by notification under § 37.5(a) or by application. Subsection 3 of the appendix is revised to make clear that, consistent with § 37.6(b)(2), the guidance therein applies to applicants for registration, rather than registered DTEFs.
Core Principle 5 of Appendix B to Part 37, “Daily Publication of Trading Information,” is revised in a manner consistent with the price discovery/price dissemination provisions applicable to EBOTs and ECMs, which are not as comprehensive as those applicable to DCMs. This reflects the fact that DTEFs are subject to a different informational standard than DCMs. DCMs are subject to a blanket requirement, under Core Principle 8 of Appendix B to Part 38, to publish daily trading information for all actively traded contracts. DTEFs, however, are subject to Core Principle 5 (Section 5a(d)(5) of the Act), which includes language similar to that applicable to EBOTs and ECMs (under Sections 5d(d) and 2(h)(4)(D) of the Act, respectively) requiring DTEFs to make public certain daily trading information only if the Commission determines that contracts traded on the facility perform a significant price discovery function for transactions in the cash market for the commodity underlying the contracts. Start Printed Page 1958Thus, the revised core principle explanatory language applies to DTEFs the same standards that apply to EBOTs and ECMs (see §§ 36.2(b)(2) and 36.3(c)(2), respectively) whereby a DTEF performs a significant price discovery function if: (1) cash market bids, offers or transactions are directly based on, or quoted at a differential to, the prices generated on the market on a more than occasional basis; or (2) the market's prices are routinely disseminated in a widely distributed industry publication and are routinely consulted by industry participants in pricing cash market transactions. If the Commission has reason to believe that a DTEF may meet either of these standards, or if the facility holds itself out to the public as performing a price discovery function, the Commission will notify the DTEF and provide it with an opportunity for a hearing through the submission of written data, views and arguments. If, after considering all relevant matters, the Commission finds that the DTEF meets the price discovery standards, it will direct the DTEF to publish daily trading information in accordance with the core principle. The information could be published by providing it to a financial information service or by placing it on the facility's Web site. The information should be made available to the public without charge no later than the business day following the day to which the information pertains.
In § 38.1, language is added to make clear that the provisions of Part 38 apply to applicants for designation as well as to already designated contract markets, and redundant and inapplicable references are deleted.
In § 38.2, language is added to make clear that the references therein to reserved provisions of the regulations applicable to DCMs also include related definitions and cross-referenced sections cited in those reserved provisions. Similar clarifying amendments, reserving the applicability of related definitions and cross-referenced sections, appear in other sections of these final rules. Also, § 1.60 is added to the list of reserved provisions of the regulations applicable to DCMs under § 38.2 to make clear that DCMs need to notify the Commission of any material legal proceeding to which the DCM is a party or to which its property or assets are subject.
In § 38.5, subparagraph (b) is amended to make clear that DCMs are required to comply with the designation criteria and the core principles both initially and on an ongoing basis, and to conform its language to § 37.6(c)(1). As noted in the discussion of new § 37.6(c)(2) above, new § 38.5(c) is added, delegating to the Division of Market Oversight the authority under § 38.5(b) to request additional information in reviewing a DCM's continued compliance with designation criteria or core principles, or to enable the Commission to satisfy its obligations under the Act.
Under Core Principle 2 of Appendix B to Part 38, a reference is added in subparagraph (a)(1) to clarify that a DCM may carry out trade practice surveillance programs through delegation or “contracting out.” A delegation confers upon the delegee/third party contractor the authority to act on behalf of the delegating authority. A third party contractor would not act in the DCM's name, but the DCM will be required to maintain sufficient control over the contractor because it remains the DCM's responsibility to assure that its obligations under the Act are met.[8]
Core Principle 8 of Appendix B requires that a DCM shall make public daily information on settlement prices, volume, open interest, and opening and closing ranges for actively traded contracts. New language is added to subparagraph (b), Acceptable Practices, whereby compliance with § 16.01 of the Commission's regulations, which is mandatory since § 16.01 is one of the sections reserved under § 38.2, constitutes an acceptable practice under Core Principle 8. All currently designated DCMs are in compliance with § 16.01.
The Commission adopted the application procedures specified in Commission Regulation 39.3 [9] for entities applying to be registered as DCOs in 2001 when it first implemented the CFMA.[10] The Commission is modifying the application procedures in a number of respects. Most of these Start Printed Page 1959modifications mirror changes recently made to Parts 37 and 38 regarding, among other things, the review and processing of applications for registration of DTEFs and DCMs.[11] With respect to the review period for applications generally, it is establishing, as it has under Parts 37 and 38, the presumption that all applications are submitted for review under the 180-day timeframe specified in Section 6(a) of the Act for DCMs and DTEFs.[12] An expedited 90-day review can be requested by the applicant, in which case the Commission will register the applicant as a DCO during or by the end of the 90-day period unless the Commission, or staff under delegated authority, terminates the expedited review for certain specifically identified reasons. In comparison to the former rules, the Commission is lengthening the expedited review period for DCO applications by 30 days. The Commission believes, based upon its experience in processing DCO applications and in light of certain administrative practices that have developed since these rules were first adopted, that this potentially longer review period is necessary to ensure a comprehensive review of applications and to meet other public policy objectives.
The Commission has reviewed nine DCO applications since passage of the CFMA. The applications were large and complex and contained technical documents describing operations and operational outsourcing agreements. The applications frequently generated a series of requests for information by Commission staff responsible for reviewing the applications. In addition, a new Commission policy to promote transparency in Commission operations, implemented in August of 2003, provides for the posting of all such applications on the Commission's Web site for a period of at least 15 days for public review and comment.[13] This lengthens the review process. The 90-day review period is intended to provide the Commission with sufficient time to review these substantial applications, to consider any public comments, and to take informed action. The Commission notes that the new 90-day “fast-track” review period, while longer than the former fast-track review period, would continue to be substantially shorter than the 180-day review period set forth in Section 6(a) for DCMs and DTEFs.
In § 40.1, the definitions therein are redesignated as numbered subparagraphs, beginning with subparagraph (a). In redesignated subparagraphs 40.1(b)-(e), the definitions of dormant contract/product, dormant contract market, dormant derivatives clearing organization and dormant derivatives transaction execution facility, respectively, the length of time during which no trading (or clearing) has occurred before dormancy can be declared is extended from six to twelve calendar months. Also, in § 40.1(b), in the proviso granting a 36-month grace period after initial certification or Commission approval before a contract/product can be considered dormant, language is added to make clear that, if the DCM or DTEF itself becomes dormant prior to the running of the 36-month period, the contract/product will likewise be considered dormant. Finally, language is added to § 40.1(b) to allow a board of trade to self-declare a contract/product to be dormant at any time after initial certification or Commission approval.
Under new § 40.1(f), a definition of “dormant rule” is added whereby a new rule or rule amendment that is not made effective and implemented within twelve months of initial certification or Commission approval will be considered dormant and will have to be resubmitted, either by certification or for approval, before it may be implemented.
Sections 40.2, 40.3, 40.5 and 40.6 are revised for internal consistency between sections. In addition, in § 40.2, relating to listing new products for trading by certification, new subparagraph 40.2(b) makes clear that a registered entity shall provide, if requested by Commission staff, additional evidence, information Start Printed Page 1960or data relating to whether the contract meets, initially or on a continuing basis, any of the requirements of the Act or Commission regulations or policies thereunder. Such evidence may be beneficial to the Commission in conducting a due diligence assessment of the product and the registered entity's compliance with these requirements, including the obligation that the registered entity must have reason to believe the certification is proper. This language is consistent with the Commission's obligation to assure that the Act and Commission regulations and policies thereunder are not being violated. Similar language is added in § 40.3(a)(9) with respect to voluntary submission of new products for approval, and in § 40.6(a)(4) with respect to self-certification of rules by DCMs and DTEFs. DCMs and DTEFs should be aware that, in conducting routine due diligence reviews of self-certified new product listings and new rules or rule amendments under § 40.2(b) and § 40.6(a)(4), respectively, the staff gives special consideration to particular requirements. For DTEFs, the key requirements are: § 5a(b)(2) of the Act (requirements for underlying commodities); Core Principle 3 (monitoring trading to assure an orderly market); and Core Principle 4 (disclosure of general information). For DCMs, the key requirements are: Core Principle 3 (listing contracts that are not readily susceptible to manipulation); Core Principle 4 (monitoring trading to prevent manipulation, price distortion or disruptions of the delivery or cash-settlement process); and Core Principle 5 (adopting position limits or position accountability rules to reduce the threat of market manipulation or distortion, especially in the delivery month). To the extent that a DCM or DTEF includes with its initial submission, data, research reports, trade interview reports, exchange or third party analyses, or other background information demonstrating compliance with these requirements, a DTEF or DCM can minimize the prospect of requests for additional information under § 40.2(b) or § 40.6(a)(4), respectively.
The revisions to § 40.3 set forth with greater particularity the information Commission staff needs to make a determination on whether to approve a new product voluntarily submitted for Commission review and approval.
Section 5c(c)(2)(B) of the Act and § 40.4 of the regulations require prior Commission approval of DCM rule amendments that, for a delivery month having open interest, would materially change a term or condition of a contract for future delivery of an enumerated agricultural commodity, or an option on such a contract or commodity.[14] These amendments add new subsection 40.4(b)(8) to include fees or fee changes that are $1.00 or more per contract and are established by an independent third party or are unrelated to delivery, trading, clearing or dispute resolution to the types of rule changes for which a materiality determination is not required. The amendments also make clear that the non-material changes described in § 40.4(b), subparagraphs (1)-(8), fall within the provisions of revised § 40.6(c) and will be subject to the weekly notification procedures set out therein. Also, in § 40.4(b)(9) under subparagraph (i), the deadline for Commission review of “non-material agricultural rule changes” is changed from 10 calendar days to 10 business days to provide for a consistent review period for all submissions and to allow for more time for review. Under subparagraph (ii), the DCM will be required to provide an explanation of why the DCM believes the proposed rule change is non-material. Similarly, in § 40.5(c)(1), the review period for rules that are voluntarily submitted by DCMs or DTEFs for approval is extended from 30 days to 45 days, to be consistent with § 40.3.
Under § 40.6, current § 40.6(a) sets out the conditions under which a DCM or DCO may implement new rules by certifying them to the Commission. Subparagraph 40.6(a)(1) provides that the certification procedure does not apply to rules of a DCM that materially change a term or condition of a futures or option contract on an enumerated agricultural commodity in a delivery month with open interest. Subparagraphs 40.6(a)(2) and (3) set out the filing requirements for rule certifications and the information to be provided in such certifications. Section 40.6(c) establishes an exception to the rule certification requirements of §§ 40.6 (a)(2) and (3) whereby DCMs and DCOs may place certain rules and rule amendments into effect without certification, provided that certain conditions are met. The conditions are that: (1) The DCM or DCO provide to the Commission a weekly summary of rule changes made effective pursuant to this paragraph; and (2) the rule change governs such routine matters as nonmaterial revisions, changes to delivery standards made by third parties that do not affect deliverable supplies or the pricing basis for the product, changes in the composition of an index (other than a stock index) that do not affect the pricing basis of the index, routine changes to option contract terms, and certain fee changes established by independent third parties. These amendments add a reference to § 40.6(a)(1) to the exception established in § 40.6(c). The effect is to make clear that, while material rule changes involving contract months with open interest in enumerated agricultural commodities may not be certified to the Commission, the type of routine changes described in § 40.6(c)(2), as well as the partially overlapping list of non-material changes in §§ 40.4(b)(1)-(8), do not constitute material changes within the meaning of the Act or Commission regulations. Therefore, DCMs may inform the Commission of such rule changes on a weekly basis under the provisions of § 40.6(c). Also, new § 40.6(c)(2)(vi) adds to the list of items that may be reported weekly under § 40.6(c)(1), changes in survey lists of banks, brokers or dealers that provide market information to an independent third party and that are incorporated by reference as product terms. Finally, new § 40.6(c)(3)(ii)(F) adds minor changes to security indexes to the list of information the Commission does not require to be certified or reported weekly by a DCM or DCO.
Under § 40.7, Delegations, new § 40.7(a)(3) delegates to the Division, with the concurrence of the Office of the General Counsel, the authority to determine whether a rule change submitted by a DCM for a materiality determination under § 40.4(b)(9) is not material (in which case it may be reported pursuant to the provisions of § 40.6(c)), or is material and, therefore, must be submitted for Commission prior approval. Finally, new § 40.7(b)(3) will increase the Division of Market Oversight's delegated authority to allow it, with the concurrence of the Office of the General Counsel, to approve rules regarding speculative limits or position accountability.
Section 15(a) further specifies that the costs and benefits of the proposed rule Start Printed Page 1961or order shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission may, in its discretion, give greater weight to any one of the five enumerated areas of concern and may, in its discretion, determine that, notwithstanding its costs, a particular rule or order is 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 Commission has considered the costs and benefits of these amendments in light of the specific areas of concern identified in § 15. The Commission has endeavored in these amendments to impose the minimum requirements necessary to enable the Commission to perform its oversight functions, to carry out its mandate of assuring the continued existence of competitive and efficient markets and to protect the public interest in markets free of fraud and abuse. After considering their costs and benefits, the Commission has decided to adopt these amendments as discussed above.
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 rule amendments adopted herein will affect exempt commercial markets, exempt boards of trade, derivatives transaction execution facilities, designated contract markets and designated clearing organizations. The Commission has previously determined that the foregoing entities are not small entities for purposes of the RFA.[15] Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rule amendments will not have a significant economic impact on a substantial number of small entities.
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).
2. Section 36.2 is amended by revising paragraphs (b) and (c) to read as follows:
(B) The market's prices are routinely disseminated in a widely distributed industry publication and are routinely consulted by industry participants in pricing cash market transactions.Start Printed Page 1962
3. Section 36.3 is amended by revising paragraph (a) revising paragraph (c)(2)(ii), and adding a new paragraph (c)(4) to read as follows:
(c) Additional requirements. * * *
(2) Market data dissemination. * * *
4. The authority citation for Part 37 continues to read as follows:
5. Section 37.1 is amended by revising paragraph (a) to read as follows:
6. Section 37.2 is revised to read as follows:
(b) Sections 1.3, 1.31, 1.59(d), 1.60, 1.63(c), 33.10, and Part 190 of this chapter and, as applicable to the market, §§ 15.00 to 15.04 and Parts 16 through 21 of this chapter, including any related definitions and cross-referenced Start Printed Page 1963sections, which are applicable as though they were set forth in this Part 37 and included specific reference to derivatives transaction execution facilities.
7. Section 37.3 is amended as follows:
8. Section 37.6 is revised to read as follows:
9. Section 37.7 is amended by revising paragraph (b) to read as follows:
10. Section 37.8 is amended by revising paragraph (b) to read as follows:
(b) Special calls for information from futures commission merchants or foreign brokers. Upon special call by the Commission, each person registered as a futures commission merchant or a foreign broker (as defined in § 15.00 of this title) 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 Start Printed Page 1964specified by the Commission in the special call.
11. Appendix A to Part 37 is amended by revising the heading of the appendix and the first paragraph of the appendix to read as follows:
12. Appendix B to Part 37 is amended by revising paragraphs 1. and 3. of the appendix to read as follows:
13. Appendix B to Part 37 is further amended by revising the second paragraph of Core Principle 5 to read as follows:
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. In making such determination, the Commission will consider whether a contract performs a significant price discovery function for transactions in the cash market for the commodity underlying the contract. The Commission will apply the same standards applicable to exempt boards of trade and exempt commercial markets (see §§ 36.2(b)(2) and 36.3(c)(2), respectively) whereby a market performs a significant price discovery function for transactions in the cash market for an underlying commodity if: (1) Cash market bids, offers or transactions are directly based on, or quoted at a differential to, the prices generated on the market on a more than occasional basis; or (2) the market's prices are routinely disseminated in a widely distributed industry publication and are routinely consulted by industry participants in pricing cash market transactions. In the event the Commission has reason to believe that a derivatives transaction execution facility may meet either of the foregoing standards, or if the facility holds itself out to the public as performing a price discovery function for the cash market for the underlying commodity, the Commission shall notify the facility that it appears to meet the criteria for performing a significant price discovery function under Core Principle 5. Before making a final price discovery determination under this core principle, the Commission shall provide the facility with an opportunity for a hearing through the submission of written data, views and arguments. After consideration of all relevant matters, the Commission shall issue an order containing its determination whether the requirement of the core principle on publication of trading information under Section 5a(d)(5) of the Act applies to a particular contract 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 placing the information on a facility's Web site. Such information shall be made available to the public without charge no later than the business day following the day to which the information pertains.
14. The authority citation for Part 38 continues to read as follows:
15. Section 38.1 is revised to read as follows:
16. Section 38.2 is revised to read as follows:
17. Section 38.5 is amended by revising paragraph (b), redesignating paragraph (c) as paragraph (d), and adding new paragraph (c) as follows:
(b) Upon request by the Commission, a designated contract market shall file with the Commission a written demonstration, containing such supporting data, information and Start Printed Page 1965documents, 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 designation criteria or 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.
18. Appendix A to Part 38 is amended by revising the heading of the appendix and the first paragraph of the appendix to read as follows:
19. Appendix A to Part 38 is further amended by revising the second paragraph of Designation Criterion 7 to read as follows:
20. Appendix B to Part 38 is amended by revising paragraphs 1. and 2. to read as follows:
21. Appendix B to Part 38 is further amended by revising paragraph (a)(1) of Core Principle 2 to read as follows:
22. Appendix B to Part 38 is further amended by revising paragraphs (a) and (b) of Core Principle 6 to read as follows:
(a) Application guidance. A designated contract market should have clear procedures and guidelines for contract market decision-making regarding emergency intervention in the market, including procedures and guidelines to avoid conflicts of interest while carrying out such decision-making. 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 include notifying the Commission of the exercise of a contract market's regulatory emergency authority, explaining how conflicts of interest are minimized, 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 and any related submissions for rule approval pursuant to Part 40, when carried out pursuant to a contract market's emergency authority. To address perceived market threats, the contract market, among other things, should be able to impose position limits in the delivery month, impose or modify price limits, modify circuit breakers, Start Printed Page 1966call 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 including non-intermediated market participants of the contract market to another, or alter the delivery terms or conditions, or, if applicable, should provide for such actions through its agreements with its third-party provider of clearing services.
23. Appendix B to Part 38 is further amended by adding paragraph (b) of Core Principle 7 to read as follows:
24. Appendix B to Part 38 is further amended by adding paragraph (b) of Core Principle 8 to read as follows:
25. Appendix B to Part 38 is further amended by revising paragraph (a) of Core Principle 16 to read as follows:
26. The authority citation for Part 39 continues to read as follows:
Authority: 7 U.S.C. 7b, as amended by Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.
27. Section 39.3 is revised to read as follows:
(3) Ninety-day review procedures. An organization desiring to be registered as a derivatives clearing organization may request that its application be reviewed on a 90-day basis and that the applicant be registered as a derivatives clearing organization 90 days after the date of receipt of the application for registration by the Secretary of the Commission. The 90-day period shall begin on the first business day (during the business hours defined in § 40.1 of this chapter) that the Commission is in receipt of the application. Unless the Commission notifies the applicant during the 90-day period that the expedited review has been terminated pursuant to § 39.3(b), the Commission will register the applicant as a derivatives clearing organization during the 90-day period. If deemed appropriate by the Commission, the registration may be subject to such conditions as the Commission may stipulate. Start Printed Page 1967
(i) The application must include the items described in §§ 39.3(a)(2)(i) through (vi); and
(e) Reinstatement of dormant registration. Before listing or relisting contracts for clearing, a dormant registered derivatives clearing organization as defined in § 40.1 of this chapter must reinstate its registration under the procedures of paragraph (a)(1) through (2) or (a)(3) of this section; provided, however, that an application for reinstatement may rely upon previously submitted materials that still pertain to, and accurately describe, current conditions.
29. Section 40.1 is revised to read as follows:
(f) Dormant rule means any new rule or rule amendment which the designated contract market, derivatives transaction execution facility or derivatives clearing organization has not made effective and implemented; provided, however, no new rule or rule amendment shall be considered to be dormant until the end of twelve complete calendar months following initial certification or Commission approval. Prior to implementing a dormant rule, it should be resubmitted to the Commission, either by certification or for approval. Start Printed Page 1968
(g) Emergency means any occurrence or circumstance which, in the opinion of the governing board of the contract market, derivatives transaction execution facility or derivatives clearing organization, 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.
30. Section 40.2 is revised to read as follows:
31. Section 40.3 is amended by revising paragraphs (a), (c), and (e)(2) to read as follows:
(ii) For physical delivery contracts, an explanation as to how the terms and conditions as a whole will result in a deliverable supply such that the contract will not be conducive to price manipulation or distortion and that the deliverable supply reasonably can be Start Printed Page 1969expected to be available to short traders and salable by long traders at its market value in normal cash marketing channels.
(6) Include the certifications required in § 41.22 for product approval of a commodity that is a security future or a security futures product as defined in Sections 1a(31) or 1a(32) of the Act, respectively;
32. Section 40.4 is revised to read as follows:
33. Section 40.5 is amended by revising paragraph (a), revising paragraph (c)(1) and revising paragraph (e)(2) to read as follows:
(5) Explain the operation, purpose, and effect of the proposed rule, Start Printed Page 1970including, 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, a demonstration that the submission complies with the requirements of Appendix A to this part—Guideline No. 1, 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 registered entity, set forth the pertinent text of any such rule and describe the anticipated effect;
(e) Effect of non-approval. * * *
34. Section 40.6 is amended by revising paragraph (a) introductory text, paragraphs (a)(2) and (3), paragraph (c) introductory text, and paragraphs (c)(1), (c)(2)(iii) and (c)(2)(v), and by adding new paragraphs (a)(4), (c)(2)(vi) and (c)(3)(ii)(F) to read as follows:
(vi) Survey lists. Changes to lists of banks, brokers, dealers, or other entities that provide price or cash market information to an independent third Start Printed Page 1971party and that are incorporated by reference as product terms.
35. Section 40.7 is amended by adding paragraphs (a)(3) and (b)(3) to read as follows:
(3) The Commission hereby delegates to the Director of the Division of Market Oversight or to the Director's delegate, with the concurrence of the General Counsel or the General Counsel's delegate, the authority to determine whether a rule change submitted by a DCM for a materiality determination under § 40.4(b)(9) is not material (in which case it may be reported pursuant to the provisions of § 40.6(c)), or is material, in which case he or she shall notify the DCM that the rule change must be submitted for the Commission's prior approval.
36. Section 40.8 is amended by revising paragraph (b) to read as follows:
37. Appendix D to Part 40 is amended by revising the first paragraph to read as follows:
14. The “enumerated commodities” are those agricultural commodities listed in § 1a(4) of the Act.