Source: https://www.federalregister.gov/documents/2004/11/22/04-25614/application-procedures-for-registration-as-a-derivatives-transaction-execution-facility-or
Timestamp: 2017-08-16 17:49:24
Document Index: 768366182

Matched Legal Cases: ['art 37', 'art 37', 'art 38', '§\u200940', '§\u200940', '§\u200940', '§\u200937', '§\u200937', '§\u200937', '§\u200937', '§\u200937', '§\u200940', '§\u200940', '§\u200938', '§\u200938', '§\u200938', '§\u200938']

A Rule by the Commodity Futures Trading Commission on 11/22/2004
69 FR 67811
67811-67817 (7 pages)
04-25614
C. Comments and Final Rule
https://www.federalregister.gov/d/04-25614 https://www.federalregister.gov/d/04-25614
The Commodity Futures Trading Commission (Commission or CFTC) is amending its regulations to revise the application and review procedures for registration as a Derivatives Transaction Execution Facility (DTEF) or designation as a Contract Market (DCM). 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 statutory 180-day timeframe and procedures Start Printed Page 67812specified in Section 6(a) of the Commodity Exchange Act (CEA or Act). In lieu of the automatic fast-track review (under which applicants were deemed to be registered as DTEFs 30 days, or designated as DCMs 60 days, after receipt of an application), the amendments permit applicants to request expedited review and to be registered as a DTEF or designated as a DCM by the Commission not later than 90 days after the date of receipt of the application. The amendments also, among other things, more completely identify application content requirements; 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; reorganize the paragraphs being revised; and eliminate duplication. The amendments are responsive to the Commission's experience in processing applications and reflect administrative practices that have been implemented since the rules were first adopted.
Duane C. Andresen, Special Counsel, (telephone 202-418-5492, e-mail dandresen@cftc.gov), Division of Market Oversight, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. This document is also available at http://www.regulations.gov.
On September 1, 2004, the Commission published proposed amendments to its part 37 and 38 regulations governing application procedures.[15] The proposed amendments would modify the application procedures in a number of respects. With respect to the timeliness of the review of applications generally, the proposed amendments would establish the presumption that all applications are submitted for review under the 180-day timeframe specified in section 6(a) of the Act.[16] An expedited 90-day review could be requested by the applicant, in which case the Commission would register the applicant as a DTEF or designate the applicant as a DCM during or by the end of the 90-day period unless the Commission terminated the expedited review for certain specifically identified reasons. The proposed amendments would lengthen the expedited review periods for DCM applications by 30 days and for DTEF applications by 60 days. The longer time periods were believed to be necessary, based upon the Commission's review of eight DCM applications under the current DCM expedited review period, to ensure a comprehensive review of applications and to meet other public policy objectives, including the Commission's policy to promote transparency in Commission operations, implemented in August of 2003, by providing for the posting of all such applications on the Commission's website for a period of at least 15 days for public review and comment.[17] The proposed 90-day review period should provide sufficient time to review applications and to respond to any public comments. While longer than the current fast-track review periods, the 90-day review period would be substantially shorter than the 180-day review period established under the Act.[18]
The proposed amendments would also modify the Commission's internal processing procedures under which an applicant would be registered as a DTEF or designated as a DCM. Under the proposal, an applicant would no longer be deemed to be registered or designated based upon the passage of time (30 days for DTEFs, 60 days for DCMs). If the applicant requested expedited review, the Commission would take affirmative action to register or designate the applicant as a DTEF or DCM, respectively, subject to conditions if appropriate, not later than 90 days after receipt of the application, unless the Commission terminated the expedited review. Thus, registration as a DTEF or designation as a DCM would involve affirmative action by the Commission, which would normally be in the form of issuance of a Commission order. It would be possible, under the proposed procedures, for applicants who submit Start Printed Page 67813applications that are complete and not amended or supplemented during the review period to be registered as a DTEF or designated as a DCM in less than 90 days.
With respect to the termination of expedited review, the rules provide that fast-track review may be terminated because the application's form or substance fails to meet the requirements of Part 37 or 38, as appropriate, or upon written instruction of the applicant during the review period. The proposed amendments would clarify and expand the rationale for terminating expedited review and would provide that the expedited review period also could be terminated if the application is materially incomplete, raises novel or complex issues that require additional time for review or, as more fully described below, undergoes major amendment or supplementation. If expedited review were terminated for any of the reasons cited above, the application would continue to be reviewed pursuant to the 180-day statutory procedure. Finally, the proposed amendments would delete the provision of the rules that would require the Commission, upon terminating fast-track review, to commence a proceeding to deny a DCM or DTEF application upon the request of the applicant. This procedure has proved to be unnecessary to date, and an analogous procedure is available under the statutory review procedure.[19]
In order to further enhance the application process, the proposed amendments would more completely identify and expand the information required to be provided by an applicant under both the statutory 180-day and the expedited 90-day review procedures. The proposal would clarify that the rules required to be included in all applications are those rules as defined in Commission Regulation 40.1 and would more clearly identify the documents required to be provided pertaining to the applicant's legal status and governance structure. The Commission anticipates that such documents would include copies of corporate charters, limited liability corporation or partnership agreements, and the like.[20]
The proposed amendments would make it clear that all applicants would be required to submit for review an executed or executable copy of any agreements or contracts entered into or to be entered into by the applicant that enable the applicant to comply with a requirement for trading or registration criterion (DTEFs) or a designation criterion or core principle (DCMs) and that final, signed copies of such documents would be required to be submitted prior to registration or designation. The initial application would be required to include something more than a letter of intent or draft contract or agreement, such as a final contract or agreement signed by at least one of the parties. While the Commission is cognizant that applicants may prefer to defer the finalization of contracts in order to defer associated costs until registration or designation, it must balance that preference against the assurance that a contract or agreement will actually be executed prior to registration or designation.
With respect to the additional information that would be required to be submitted as part of the application,[21] the proposed amendments would require that applicants submit a “regulatory chart” that describes the manner in which the items included in the application enable the applicant to comply with each requirement for trading and registration criterion (DTEFs) or with each designation criterion and core principle (DCMs). The proposal would also require that the applicant identify any item included in the application that raises novel issues and explain how that item satisfies the requirements for trading or the registration criteria (DTEFs) or the designation criteria or the core principles (DCMs). In addition, the proposed amendments would require that the applicant submit a copy of any manual or other document describing the manner in which the applicant will conduct trade practice, market, and financial surveillance. Based upon experience in reviewing DCM applications, the Commission recognizes that this additional information is necessary for Commission review of the application when determining whether the applicant satisfies the requirements for trading and registration criteria (DTEFs) or the designation criteria and core principles (DCMs). Finally, the proposed amendments would eliminate the requirement that the applicant support requests for confidential treatment of information included in the application with reasonable justification. The Commission believes that the procedures provided in Commission Regulation 145.9, Petition for confidential treatment of information submitted to the Commission, should be followed by all applicants.
Under the proposed amendments, the items required to be included in an application to be reviewed under the statutory 180-day review procedures would be identical to those required to be included in an application to be reviewed under the expedited review procedures with the following exceptions for the expedited review applicants and applications: (1) The applicant must request expedited review; and (2) the application must not be amended or supplemented by the applicant, except as requested by the Commission or for correction of typographical errors, renumbering or other nonsubstantive revisions. The proposal would provide that amending or supplementing an application in a manner that is inconsistent with the above provision would result in termination of the expedited review.
The proposed amendments would also modify and standardize the delegation of authority provisions applicable to applications for registration as a DTEF and for designation as a DCM. Currently, the rules provide for the delegation of authority to the Director of the Division of Market Oversight, with the concurrence of the General Counsel, (1) to terminate the fast-track review of both types of applications and (2) to designate an applicant as a DCM subject to conditions. Under the proposed amendment, the Commission would also delegate to the Director of the Division of Market Oversight, with the concurrence of the General Counsel, the authority to stay the running of the 180-day statutory review period for both types of applications if they are materially incomplete, as is provided under section 6(a) of the Act. Because one result of the proposed amendments would be that registration as a DTEF and designation as a DCM would involve affirmative action on the part of the Commission, the proposal would rescind the delegation of the authority to designate the applicant as a DCM subject to conditions.
Finally, the proposed amendments would reorganize the sequence of paragraphs in the rules where appropriate and to make minor word changes and deletions in order to clarify the application requirements. The proposal would also delete certain guidance regarding applications for designation as that information Start Printed Page 67814duplicates information available elsewhere in Part 38.[22]
In response to the proposed amendments, the Commission received comment letters from the Chicago Mercantile Exchange and the Chicago Board of Trade (CBOT), both of which voiced support for the proposed amendments. With respect to the proposed application content requirements, however, the CBOT, suggested that the Commission should also require submission of documents detailing the applicant's plans to offer payment for order flow, or other incentives that could encourage wash trading or compromise the fiduciary responsibilities of intermediaries, as well as documentation of plans to allow or encourage trading off the centralized market. The Commission has carefully considered this suggestion, but does not believe that the application content requirements need to be expanded to include this information.
If an applicant's plans regarding payment for order flow [23] or other incentive plans are established at the time of the application, it is expected that they would be included in the application because they would be considered to be rules and the applicant's proposed rules are required to be submitted as part of the application. The same is true with respect to plans to allow or encourage trading off the centralized market, such as block trading. Of course, any proposal to implement incentive and/or off-centralized market trading plans after DCM designation or DTEF registration would have to be submitted to the Commission by the registrant as rule changes, either seeking Commission approval or certifying compliance with designation criteria and core principles (DCM) or with core principles (DTEF) as required under the Act.
Although the Commission expects that an application represents the applicant's actual business plan at the time of its submission, the Commission has never required an applicant to reveal all of its potential future plans, which may be in various stages of development and indeed may never be adopted, when considering whether the application satisfies the designation criteria and core principles. Commission staff appropriately considers the materials filed and representations made by an applicant in drawing conclusions as to whether designation or registration is warranted. Subsequent to designation or registration, the DCM or DTEF may adopt changes to its rules and procedures; however, under the Act, DCMs and DTEFs must, on a continuing basis, comply with all designation criteria and core principles (DCMs) and core principles (DTEFs). In implementing changes to their business plans, DCMs and DTEFs seek Commission approval or certify compliance with the designation criteria and core principles, as applicable, as required under the Act. The Commission considers whether to approve new rules or rule amendments or whether to take action concerning certifications when a DCM or DTEF proposes to implement its revised plans.[24]
For the reasons cited above, the Commission does not believe that the application content requirements need to be expanded to include documents detailing the applicant's incentive plans or documentation of plans to allow or encourage trading off the centralized market. After careful review and consideration of the comments received, the Commission has determined to adopt the proposed amendments to the application procedures as written. The Commission continues to encourage would-be applicants to consult with Commission staff prior to formally submitting a DTEF or DCM application to help ensure that an application, once formally submitted, will be reviewed in a timely manner.
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 DCMs and DTEFs. 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.[25] In its previous determinations, the Commission has concluded that DCMs and DTEFs are not small entities for the purpose of the RFA.[26]
In the proposed rules, the Commission solicited comment on whether the proposed amendments would have a significant impact on a substantial number of small entities. The Commission received no comments in response to this request. Accordingly, the Commission hereby determines that the rules, as adopted herein, will not 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.
As required by the Paperwork Reduction Act of 1995, 44 U.S.C. 3507(d), the Commission submitted a copy of the proposed rule amendments to the Office of Management and Budget for its review. The Commission did not receive any public comments relative to its analysis of paperwork burdens associated with this rulemaking.
Section 15(a) 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. By its terms, section 15(a) 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(a) simply requires the Commission to “consider the costs and benefits” of its action.
Section 15(a) further specifies that the costs and benefits of the proposed rule shall be evaluated in light of five broad areas of market and public concern: (1) Start Printed Page 67815Protection 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 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 published an analysis of costs and benefits when it proposed the rule amendments that have now been adopted.[27] The Commission did not receive any public comments pertaining to the analysis.
In consideration of the foregoing, and pursuant to the authority contained in the Act, and, in particular, sections 2, 3, 4, 4c, 5, 5a and 8a of the Act, the Commission hereby amends Chapter I of Title 17 of the Code of Federal Regulations as follows:
(a) Notification by contract markets. (1) To operate as a registered derivatives transaction execution facility pursuant to section 5a of the Act, a board of trade that is designated as a contract market, which is not a dormant contract market as defined in § 40.1 of this chapter, must:
(i) Notify the Commission of its intent to so operate by filing with the Secretary of the Commission at its Washington, DC, headquarters a copy of the facility's rules (as defined in § 40.1 of this chapter) or a list of the designated contract market's rules that apply to the operation of the derivatives transaction execution facility, and a certification by the contract market that it meets:
(b) Application Procedures. (1) Statutory (180-day) review procedures. A board of trade desiring to be registered as a derivatives transaction execution facility shall file an application for registration with the Secretary of the Commission at its Washington, DC, headquarters. Except as provided under the 90-day review procedures described in paragraph (b)(2) of this section, the Commission will review the application for registration as a derivatives transaction execution facility pursuant to the 180-day timeframe and procedures specified in section 6(a) of the Act. The Commission shall approve or deny the application or, if deemed appropriate, register the applicant as a derivatives transaction execution facility subject to conditions.
(A) The derivatives transaction execution facility's rules (as defined in § 40.1 of this chapter);
(E) A copy of any manual or other document describing, with specificity, the manner in which the applicant will conduct trade practice, market and financial surveillance;
(F) A document that describes the manner in which the applicable items in § 37.5(b)(1)(ii)(A) through (E) enable or empower the applicant to comply with each requirement for trading and registration criterion (a regulatory chart); and
(G) To the extent that any of the items in § 37.5(b)(1)(ii)(A) through (E) raise issues that are novel, or for which compliance with a requirement for trading or condition for registration is not self-evident, an explanation of how that item and the application satisfy the requirements for trading and registration criteria.
(ii) The application must include the items described in § 37.5(b)(1)(ii) and (iii); and
(iii) The applicant must not amend or supplement the application, except as requested by the Commission or for correction of typographical errors, renumbering or other nonsubstantive Start Printed Page 67816revisions, during the 90-day review period.
(c) Termination of 90-day review. (1) During the 90-day period for review pursuant to paragraph (b)(2) of this section, the Commission shall notify the applicant seeking registration that the Commission is terminating review under this section, and will review the application under the 180-day time period and procedures of section 6(a) of the Act, if it appears to the Commission that the application:
(iv) Is amended or supplemented in a manner that is inconsistent with § 37.5(b)(2)(iii).
(2) The Commission shall also terminate review under this section if requested in writing to do so by the applicant.
(3) The termination notification shall identify the deficiencies in the application that render it incomplete, the manner in which the application fails to meet the requirements of this part, the novel or complex issues that require additional time for review, or the amendment or supplement that is inconsistent with § 37.5(b)(2)(iii).
(f) Request for withdrawal of application for registration. An applicant for registration may withdraw its application submitted pursuant to paragraph (b)(1) or (b)(2) of this section by filing such a request with the Commission at its Washington, DC, headquarters. Withdrawal of an application for 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 the Commission.
(a) Application procedures. (1) Statutory (180-day) review procedures. A board of trade desiring to be designated as a contract market shall file an application for designation with the Secretary of the Commission at its Washington, DC, headquarters. Except as provided under the 90-day review procedures described in paragraph (a)(2) of this section, the Commission will review the application for designation as a contract market pursuant to the 180-day timeframe and procedures specified in section 6(a) of the Act. The Commission shall approve or deny the application or, if deemed appropriate, designate the applicant as a contract market subject to conditions.
(A) A copy of the applicant's rules (as defined in § 40.1 of this chapter) and any technical manuals, other guides or instructions for users of, or participants in, the market, including minimum financial standards for members or market participants;
(2) Ninety-day review procedures. A board of trade desiring to be designated as a contract market may request that its application be reviewed on an expedited basis and that the applicant be designated as a contract market not later than 90 days after the date of receipt of the application for designation by the Secretary of the Commission. The 90-day period shall begin on the first business day (during Start Printed Page 67817the 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 § 38.3(b), the Commission will designate the applicant as a contract market during the 90-day period. If deemed appropriate by the Commission, the designation may be subject to such conditions as the Commission may stipulate.
(ii) The application must include the items described in § 38.3(a)(1)(ii) and (iii); and
(iv) Is amended or supplemented in a manner that is inconsistent with § 38.3(a)(2)(iii).
(3) The termination notification shall identify the deficiencies in the application that render it incomplete, the manner in which the application fails to meet the requirements of this part, the novel or complex issues that require additional time for review, or the amendment or supplement that is inconsistent with § 38.3(a)(2)(iii).
(e) Request for withdrawal of application for designation. An applicant for designation may withdraw its application submitted pursuant to paragraph (a)(1) or (a)(2) of this section by filing such a request with the Commission at its Washington, DC, headquarters. Withdrawal of an application for 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 the Commission.
(f) Request for vacation of designation. A designated contract market may vacate its designation under section 7 of the Act by filing such a request with the Commission at its Washington, DC, headquarters. 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 facility was designated by the Commission.
3. See 66 FR 42256 (August 10, 2001). The CFMA, Appendix E of Pub. L. 106-554, 114 Stat. 2763, substantially revised the Commodity Exchange Act, 7 U.S.C. 1 et seq.
15. 69 FR 53367 (September 1, 2004).
16. Under the current rules, DCM and DTEF applications are routinely reviewed under the fast-track procedures unless the applicant instructs the Commission in writing at the time of submission of the application or during the review period to review the application pursuant to the time provisions of and procedures under section 6 of the Act. See 17 CFR 37.5(b)(1)(vi); 38.3(a)(1)(vi).
17. The Commission has recently proposed revisions to Commission Regulation 40.8 to specify which portions of an application for registration as a DTEF or designation as a DCM will routinely be made public. See 69 FR 44981 (July 28, 2004).
18. Although the Commission has not yet reviewed an application to become registered as a DTEF under the fast track procedure, it anticipates that such an application would likely require a review period similar to that experienced in the review of DCM applications. Accordingly, the Commission proposed to conform the DTEF expedited review period to that applicable to DCMs.
19. See 7 U.S.C. 8(a).
20. The proposal adds the requirement that DTEF applications also must include a copy of any documents describing the applicant's legal status and governance structure.
21. It should be noted that the “additional information” referred to herein is additional only in the sense that the proposal specifically codifies the information that must be included in an application. In fact, Commission staff has been requesting this type of information from each of the DCM applicants that have applied.
23. The term “payment for order flow” is more commonly used to describe incentives offered by securities exchanges or market makers to securities brokers to direct orders to a particular exchange or an over-the-counter (OTC) dealer. Commission staff generally views these plans as volume discount programs because their primary purpose is to enhance volume by discounting transaction costs.
24. For instance, when reviewing an incentive program proposed to be adopted by a DCM, Commission staff's regulatory analysis of the proposed rule would focus on the manner of implementation and the potential for distorting open, competitive, and efficient trading by facilitating illegal trading practices, such as wash or fictitious trading. DCMs are obligated by Core Principle 2 to monitor trading for trade practice abuses. Staff would also analyze a plan's potential for eroding fiduciary obligations owed by futures brokers to customers. Core Principle 12 requires that DCMs establish and enforce rules that protect market participants from abusive trading practices committed by any party acting as an agent for a participant, and in a situation where a broker handles an order that could be executed at more than one exchange, Commission staff would want to ensure that an incentive plan does not compromise the broker's fiduciary obligations.
25. 47 FR 18618, 18618-21 (April 30, 1982).
26. 47 FR 18618, 18619 (April 30, 1982) (discussing DCMs); 66 FR 42256, 42268 (August 10, 2001) (discussing DTEFs).
27. 69 FR 53367, 53370 (September 1, 2004).
[FR Doc. 04-25614 Filed 11-19-04; 8:45 am]