[Title 17 CFR 37]
[Code of Federal Regulations (annual edition) - April 1, 2003 Edition]
[Title 17 - COMMODITY AND SECURITIES EXCHANGES]
[Chapter I - COMMODITY FUTURES TRADING COMMISSION]
[Part 37 - DERIVATIVES TRANSACTION EXECUTION FACILITIES]
[From the U.S. Government Printing Office]


17COMMODITY AND SECURITIES EXCHANGES12003-04-012003-04-01false37PART 37COMMODITY AND SECURITIES EXCHANGESCOMMODITY FUTURES TRADING COMMISSION
PART 37--DERIVATIVES TRANSACTION EXECUTION FACILITIES--Table of Contents




Sec.
37.1  Scope and definition.
37.2  Exemption.
37.3  Requirements for underlying commodities.
37.4  Election to trade excluded and exempt commodities.
37.5  Procedures for registration.
37.6  Compliance with core principles.
37.7  Additional requirements.
37.8  Information relating to transactions on derivative transaction 
          execution facilities.
37.9  Enforceability.

Appendix A to Part 37--Application Guidance
Appendix B to Part 37--Guidance on Compliance with Core Principles

    Authority: 7 U.S.C. 2, 5, 6, 6c, 6(c), 7a and 12a, as amended by 
Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

    Source: 66 FR 42271, Aug. 10, 2001, unless otherwise noted.



Sec. 37.1  Scope and definition.

    (a) Scope. The provisions of this part apply to any board of trade 
or trading facility operating as a registered derivatives transaction 
execution facility.
    (b) Definition. As used in this part, the term ``eligible commercial 
entity'' means, and shall include, in addition to a party or entity so 
defined in section 1a(11) of the Act, a registered floor trader or floor 
broker trading for its own account, whose trading obligations are 
guaranteed by a registered futures commission merchant.



Sec. 37.2  Exemption.

    Contracts, agreements or transactions traded on a derivatives 
transaction execution facility registered as such with the Commission 
under section 5a of the Act, the facility and the facility's operator 
are exempt from all Commission regulations for such activity, except for 
the requirements of this part 37 and Secs. 1.3, 1.31, 1.59(d), 1.63(c), 
15.05, 33.10, part 40, part 41 and part 190 of this chapter, and as 
applicable to the market, parts 15 through 21 of this chapter, which are 
applicable to a registered derivatives transaction execution facility as 
though they were set forth in this section and included specific 
reference to derivatives transaction execution facilities.

[67 FR 62876, Oct. 9, 2002]



Sec. 37.3  Requirements for underlying commodities.

    (a) Trading facilities limited to eligible traders. Trading 
facilities limited to eligible traders as defined by section 5a(b)(3) of 
the Act, may trade any contract of sale of a commodity for future 
delivery (or option on such a contract) on any of the following 
underlying commodities:
    (1) Commodities having--
    (i) A nearly inexhaustible deliverable supply;
    (ii) A deliverable supply that is sufficiently large that the 
contract is highly unlikely to be susceptible to the threat of 
manipulation; or
    (iii) No cash market;
    (2) Commodities that are a security futures product, and the 
registered derivatives transaction execution facility is a national 
securities exchange registered under the Securities Exchange Act of 
1934;
    (3) Commodities for which the Commission has determined, based on 
the market characteristics and surveillance history, and the self-
regulatory record and capacity of the facility, that trading in the 
contract (or option) based on that commodity is highly unlikely to be 
susceptible to the threat of manipulation; or
    (4) Commodities that are agricultural commodities enumerated in 
section 1a(4) of the Act that have been so approved by the Commission 
under the procedures of paragraph (c) of this section.
    (5) The commodities that meet the criteria of paragraph (a)(1) of 
this section are the commodities defined in section 1a(13) of the Act as 
``excluded commodities.''
    (6) The Commission may make the determination described in paragraph 
(a)(3) of this section by rule, regulation

[[Page 399]]

or order, after notice and an opportunity for a hearing through 
submission of written data, views and arguments. A registered 
derivatives transaction execution facility may request that the 
Commission make such an individualized determination by filing with the 
Secretary of the Commission at its Washington, DC headquarters a 
petition that includes:
    (i) The terms and conditions of the product to be listed; and
    (ii) A demonstration, supported by data, that the underlying 
commodity has a sufficiently liquid and deep cash market and a 
surveillance history based on actual trading experience and in light of 
any self-regulatory undertakings of the facility, to provide assurance 
that the contract or product is highly unlikely to be manipulated. The 
demonstration should address the following specific factors to the 
extent that the factor is not self-evident:
    (A) A high level of cash-market liquidity;
    (B) Cash-market bid-ask spreads that are narrow relative to traded 
values;
    (C) Relatively frequent cash market transactions involving 
participants that represent major segments of the industry;
    (D) The absence of material impediments to participation in the cash 
market by commercial entities;
    (E) Transfer of ownership of the cash commodity that is easily and 
readily accomplished at minimal cost;
    (F) A pattern of cash market pricing that exhibits continuity and 
the absence of frequent, sharp price changes such that a person cannot 
readily move materially the price of the product in normal cash market 
channels;
    (G) A history of actual trading experience that the contract or 
product's terms and conditions provide for a deliverable supply, or a 
reliable and acceptable cash-settlement procedure, that is adequate to 
minimize the threat of market abuses such as price manipulation and 
distortions, congestion, and defaults; and
    (H) Procedures to effectively oversee the market, including a large 
trader reporting system, as well as a history of active surveillance to 
prevent or mitigate market problems.
    (b) Trading facilities limited to eligible commercial entities. Any 
commodity, other than the agricultural commodities enumerated in section 
1a(4) of the Act, is eligible under section 5a(b)(2)(F) of the Act to be 
traded on a derivatives transaction execution facility that limits 
participants on the facility to eligible commercial entities as defined 
by Sec. 37.1(b) trading for their own account. Provided, however, an 
agricultural commodity enumerated in section 1a(4) of the Act may be so 
approved by the Commission under the procedures of paragraph (c) of this 
section.
    (c) Enumerated agricultural commodities. [Reserved]



Sec. 37.4  Election to trade excluded and exempt commodities.

    A board of trade that is or elects to become a registered 
derivatives transaction execution facility may, pursuant to section 
5a(g) of the Act, trade agreements, contracts, or transactions that are 
excluded or exempt from the Act pursuant to sections 2(c), 2(d), 2(g), 
or 2(h).



Sec. 37.5  Procedures for registration.

    (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, facility or entity that is designated as a 
contract market, which is not a dormant contract market as defined in 
Sec. 40.1 of this chapter, must:
    (i) Comply with the core principles for operation under section 
5a(d) of the Act and the provisions of this part 37; and
    (ii) 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 (which may be trading protocols) or a 
list of the designated contract market's rules that apply to operation 
of the derivatives transaction execution facility, and a certification 
by the contract market that it meets:
    (A) The requirements for trading of section 5a(b) of the Act; and
    (B) The criteria for registration under section 5a(c) of the Act.

[[Page 400]]

    (2) Before using the notification procedure of paragraph (a) of this 
section for registration as a derivatives transaction execution 
facility, a dormant contract market as defined in Sec. 40.1 of this 
chapter must reinstate its designation under Sec. 38.3(a)(2) of this 
chapter.
    (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 Sec. 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:
    (i) The application demonstrates that the applicant satisfies the 
requirements for trading and the criteria for registration of sections 
5a(b) and 5a(c) of the Act, respectively;
    (ii) The submission is labeled ``Application for DTF Registration'';
    (iii) The submission includes:
    (A) The derivatives transaction execution facility's rules, which 
may be trading protocols;
    (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 
results, and descriptions of the trading mechanism or algorithm used or 
to be used by such facility, to the extent such documentation was 
otherwise prepared; and
    (C) To the extent that compliance with the requirements for trading 
or the criteria for recognition is not self-evident, a brief explanation 
of how the rules or trading protocols satisfy each of the conditions for 
registration;
    (iv) The applicant does not amend or supplement the application for 
recognition, except as requested by the Commission or for correction of 
typographical errors, renumbering or other nonsubstantive revisions, 
during that period;
    (v) The applicant identifies with particularity information in the 
application that will be subject to a request for confidential treatment 
and supports that request for confidential treatment with reasonable 
justification; and
    (vi) The applicant has not instructed 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.
    (2) Reinstatement of dormant registration. Before listing products 
for trading, a dormant derivatives transaction execution facility as 
defined in Sec. 40.1 must reinstate its registration under the 
procedures of paragraphs (a)(1) or (b)(1) of this section, as 
applicable; provided however, that an application for reinstatement may 
rely upon previously submitted materials that still pertain to, and 
accurately describe, current conditions.
    (c) Guidance for applicants. Appendix A to this part provides 
guidance to applicants for registration as a derivatives transaction 
execution facility on how the conditions for registration in sections 
5a(b) and 5a(c) of the Act could be satisfied.
    (d) Termination of fast track review. During the thirty-day period 
for review pursuant to paragraph (b) of this section, the Commission 
shall notify the applicant seeking registration that the Commission is 
terminating review under this section and will review the proposal under 
the time period and procedures of section 6 of the Act, if it appears 
that the application's form or substance fails to meet the requirements 
of this part. This termination notification will state the nature of the 
issues raised and the specific condition of registration that the 
applicant would violate, appears to violate, or the violation of which 
cannot be ascertained from the application. Within ten days of receipt 
of this termination notification, the applicant seeking registration may 
request that the Commission render a decision whether to register the 
derivatives transaction

[[Page 401]]

execution facility or to institute a proceeding to deny the proposed 
application under procedures specified in section 6 of the Act by 
notifying the Commission that the applicant seeking registration views 
its submission as complete and final as submitted.
    (e) Request for withdrawal of application for registration or 
withdrawal of registration. An applicant to be registered, or a 
registered derivatives transaction execution facility may withdraw its 
application or its registration by filing with the Commission at its 
Washington, DC, headquarters such a request. Withdrawal from 
registration shall not affect any action taken or to be taken by the 
Commission based upon actions, activities or events occurring during the 
time that the application for registration was pending with, or that the 
facility was registered by, the Commission.
    (f) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Market 
Oversight or such other employee or employees as the Director 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.
    (2) The director may submit to the Commission for its consideration 
any matter that has been delegated in this paragraph.
    (3) Nothing in this paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in paragraph (f)(1) of 
this section.

[66 FR 42271, Aug. 10, 2001, as amended at 67 FR 62352, Oct. 7, 2002; 67 
FR 62876, Oct. 9, 2002]



Sec. 37.6  Compliance with core principles.

    (a) In general. To maintain registration as a derivatives 
transaction execution facility upon commencing operations by listing 
products for trading or otherwise, or for a dormant derivatives 
transaction execution facility as defined in Sec. 40.1 of this chapter 
that has been reinstated under Sec.  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.
    (b) New and reinstated derivatives transaction execution facilities-
-(1) Certification of compliance. Unless an applicant for registration 
or for reinstatement of registration has chosen to make a voluntary 
demonstration under paragraph (b)(2) of this section, a newly registered 
derivatives transaction execution facility at the time it commences 
operations, or a dormant derivatives transaction execution facility as 
defined in Sec. 40.1 of this chapter at the time that it recommences 
operations, must certify to the Commission that it has the capacity to, 
and will, operate in compliance with the core principles under section 
5a(d) of the Act.
    (2) Voluntary demonstration of compliance. An applicant for 
registration or for reinstatement of registration may choose to make a 
voluntary demonstration of its capacity to operate in compliance with 
the core principles as follows:
    (i) At least thirty days prior to commencing or recommencing 
operations, the applicant for registration or for reinstatement of 
registration must file (during the business hours defined in Sec. 40.1 
of this chapter) with the Secretary of the Commission at its Washington, 
DC, headquarters, either separately or with the application required by 
Sec. 37.5, a submission that includes:
    (A) The label, ``Demonstration of Compliance with Core Principles 
for Operation'';
    (B) The derivatives transaction execution facility's rules, which 
may be trading protocols, that enable or empower the facility to comply 
with the core principles;
    (C) Any agreements entered into or to be entered into between or 
among the facility, its operator or its participants that enable or 
empower the facility to comply with the core principles, including where 
applicable, technical manuals and other guides or instructions for users 
of the facility; and
    (D) To the extent that capacity to comply with a core principle is 
not self-evident, a brief explanation of how the facility has the 
capacity to meet the core principle.

[[Page 402]]

    (ii) Unless the applicant requests an extension of time, the 
applicant shall be deemed to have demonstrated its capacity to comply 
with the core principles thirty days after receipt by the Commission, 
unless notified otherwise.
    (iii) If it appears that the applicant has failed to make the 
requisite showing, the Commission will so notify the applicant at the 
end of that period. Upon commencement or recommencement of operations by 
the derivatives transaction execution facility, such a notice may be 
considered by the Commission in a determination to issue a notice of 
violation of core principles under section 5c(d) of the Act.
    (c) Existing derivatives transaction execution facilities--(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, DC, 
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.
    (d) Guidance regarding compliance with core principles. A 
derivatives transaction execution facility may meet the following core 
principles of section 5a(d) of the Act as specified in this paragraph:
    (1) Compliance with rules. The core principle regarding compliance 
with rules under section 5a(d)(2) of the Act may be met, as appropriate 
to the facility, through the effective monitoring of limitations on 
access to the facility;
    (2) Monitoring of trading. The core principle regarding monitoring 
of trading under section 5a(d)(3) of the Act may be met, as appropriate 
to the market and the products traded thereon, by providing information 
to the Commission as requested to satisfy the Commission's obligations 
under the Act;
    (3) Disclosure of general information. The core principle regarding 
disclosure of general information relevant to participation in trading 
on the facility under section 5a(d)(4)(D) of the Act also includes 
providing to market participants on a fair, equitable and timely basis 
information regarding, as appropriate to the market, prices, bids and 
offers, and such other information that the Commission may determine by 
rule, regulation or order, after notice and an opportunity for a hearing 
through submission of written data, views and arguments;
    (4) Daily publication of trading information. The Commission will 
determine by order, after notice and an opportunity for a hearing 
through submission of written data, views and arguments, whether the 
requirement of the core principle on publication of trading information 
under section 5a(d)(5) of the Act applies to a particular product or 
products traded on a facility;
    (5) Fitness. Appropriate minimum standards for participants having 
direct access to the facility under the core principle on fitness 
pursuant to section 5a(d)(6) of the Act also includes natural persons 
that directly or indirectly have greater than a ten percent ownership 
interest in the facility; and
    (6) In general. Appendix B to this part provides guidance to 
registered derivatives transaction execution facilities on how the core 
principles under section 5a(d) of the Act could be satisfied.

[66 FR 42271, Aug. 10, 2001, as amended at 67 FR 62877, Oct. 9, 2002]



Sec. 37.7  Additional requirements.

    (a) Products. Notwithstanding the provisions of section 5c(c) of the 
Act and Sec. 40.2 of this chapter, derivatives transaction execution 
facilities need only notify the Commission of the listing of new 
products for trading, posting of new product descriptions, terms and 
conditions or trading protocols or providing for a new system product

[[Page 403]]

functionality, by filing with the Secretary of the Commission at its 
Washington, D.C. headquarters, a submission labeled ``DTF Notice of 
Product Listing'' that includes the text of the product's terms or 
conditions, product description, trading protocol or description of the 
system functionality or by electronic notification of the foregoing at 
the time traders or participants in the market are notified, but in no 
event later than the close of business on the business day preceding 
initial listing, posting or implementation of the trading protocol or 
system functionality.
    (b) Material modifications. Notwithstanding the provisions of 
section 5c(c) of the Act, registered derivatives transaction execution 
facilities need not certify rules or rule amendments under Sec. 40.6 of 
this chapter, and must only notify the Commission prior to placing into 
effect or amending such a rule, which includes trading protocols, by:
    (1) Filing with the Secretary of the Commission at its Washington, 
D.C. headquarters at the time traders or participants in the market are 
notified, but (unless taken as an emergency action) in no event later 
than the close of business on the business day preceding implementation 
of the rule, a submission labeled, ``DTF Rule Notice.'' The submission 
shall include the text of the rule or rule amendment (deletions and 
additions must be indicated); or
    (2) By electronic notification to the Commission of the rule to be 
placed into effect or to be changed, in a format approved by the 
Secretary of the Commission, at the time traders or participants in the 
market are notified, but (unless taken as an emergency action) in no 
event later than the close of business on the business day preceding 
implementation. Provided, however, the derivatives transaction execution 
facility need not notify the Commission of rules or rule amendments for 
which no certification is required under Sec. 40.6(c) of this chapter.
    (3) The derivatives transaction execution facility must maintain 
documentation regarding all changes to rules, terms and conditions or 
trading protocols.
    (c) Voluntary request for Commission approval of rules or products. 
(1) A board of trade or trading facility seeking to be registered as, or 
registered as, a derivatives transaction execution facility, may request 
that the Commission approve under section 5c(c) of the Act, any or all 
of its rules and subsequent amendments thereto, including both 
operational rules and the terms or conditions of products listed for 
trading on the facility, prior to their implementation or, 
notwithstanding the provisions of section 5c(c)(2) of the Act, at 
anytime thereafter, under the procedures of Secs. 40.5 or 40.3 of this 
chapter, as applicable. A derivatives transaction execution facility may 
label a product in its rules as, ``Listed for trading pursuant to 
Commission approval,'' if the product and its terms or conditions have 
been approved by the Commission and it may label as, ``Approved by the 
Commission,'' only those rules that have been so approved.
    (2) Notwithstanding the forty-five day review period for voluntary 
approval under Sec. 40.3(b) of this chapter, the operating rules and the 
terms and conditions of one product submitted for voluntary Commission 
approval under Sec. 40.3 of this chapter, that has been submitted with, 
and at the same time as, an application for registration as a 
derivatives transaction execution facility, will be deemed approved by 
the Commission thirty days after receipt by the Commission, or at the 
conclusion of such extended period as provided under Sec. 40.3(c) of 
this chapter.
    (3) An applicant for registration, or a registered derivatives 
transaction execution facility may request that the Commission consider 
under the provisions of section 15(b) of the Act any of the derivatives 
transaction execution facility's rules or policies, including both 
operational rules and the terms or conditions of products listed for 
trading, at the time of registration or thereafter.
    (d) Identify participants. Registered derivatives transaction 
execution facilities must keep a record in permanent form, which shall 
show the true name, address, and principal occupation or business of any 
foreign trader executing transactions on the facility. In addition, upon 
request, a derivatives transaction execution facility shall provide to 
the Commission information

[[Page 404]]

regarding the name of any person exercising control over the trading of 
such foreign trader. Provided, however, this paragraph shall not apply 
to a derivatives transaction execution facility insofar as transactions 
in futures or option contracts of foreign traders are executed through, 
or the resulting transactions are maintained in accounts carried by, a 
registered futures commission merchant or introduced by an introducing 
broker subject to Sec. 1.37 of this chapter.
    (e) Identify persons subject to fitness requirement. Upon request by 
any representative of the Commission, a registered derivatives 
transaction execution facility shall furnish to the Commission's 
representative a current list of persons subject to the fitness 
requirements of section 5a(d)(6) of the Act.



Sec. 37.8  Information relating to transactions on derivatives transaction execution facilities.

    (a) Special calls for information from derivatives transaction 
execution facilities. Upon special call by the Commission, a registered 
derivatives transaction execution facility shall provide to the 
Commission such information related to its business as a derivatives 
transaction execution facility, including information relating to data 
entry and trade details, in the form and manner and within the time as 
specified by the Commission in the special call.
    (b) Special calls for information from futures commission merchants. 
Upon special call by the Commission, each person registered as a futures 
commission merchant that carries or has carried an account for a 
customer on a derivatives transaction execution facility shall provide 
information to the Commission concerning such accounts or related 
positions carried for the customer on that or other facilities or 
markets, in the form and manner and within the time specified by the 
Commission in the special call.
    (c) Special calls for information from participants. Upon special 
call by the Commission, any person who enters into or has entered into 
an agreement, contract or transaction on a derivatives transaction 
execution facility shall provide information to the Commission 
concerning such agreements, contracts or transactions or related 
agreements, contracts or transactions, or concerning related positions 
on other facilities or markets, in the form and manner and within the 
time specified by the Commission in the special call.
    (d) Delegation of authority. The Commission hereby delegates, until 
the Commission orders otherwise, the authority set forth in paragraphs 
(a) through (c) of this section to the Directors of the Division of 
Clearing and Intermediary Oversight and separately to the Director of 
Market Oversight or such other employee or employees as the Directors 
may designate from time to time. The Directors may submit to the 
Commission for its consideration any matter that has been delegated in 
this paragraph. Nothing in this paragraph prohibits the Commission, at 
its election, from exercising the authority delegated in this paragraph.



Sec. 37.9  Enforceability.

    An agreement, contract or transaction entered into on, or pursuant 
to the rules of, a registered derivatives transaction execution facility 
shall not be void, voidable, subject to rescission or otherwise 
invalidated or rendered unenforceable as a result of:
    (a) A violation by the registered derivatives transaction execution 
facility of the provisions of section 5a of the Act or this part 37; or
    (b) Any Commission proceeding to alter or supplement a rule, term or 
condition under section 8a(7) of the Act or any other proceeding the 
effect of which is to disapprove, alter, supplement, or require a 
registered derivatives transaction execution facility to adopt a 
specific term or condition, trading rule or procedure, or to take or 
refrain from taking a specific action.

[66 FR 42271, Aug. 10, 2001, as amended at 67 FR 62352, Oct. 7, 2002]

               Appendix A to Part 37--Application Guidance

    This appendix provides guidance to applicants for registration as 
derivatives transaction execution facilities under sections 5a(c) and 6 
of the Act and Sec. 37.5, on meeting the criteria for registration both 
initially

[[Page 405]]

and on an ongoing basis. The guidance following each registration 
criterion is illustrative only of the types of matters an applicant may 
address, as applicable, and is not intended to be a mandatory checklist. 
Addressing the issues and questions set forth in this appendix would 
help the Commission in its consideration of whether the application has 
met the criteria for registration. To the extent that compliance with, 
or satisfaction of, a criterion for registration is not self-explanatory 
from the face of the derivatives transaction execution facility's rules, 
which may be terms and conditions or trading protocols, the application 
should include an explanation or other form of documentation 
demonstrating that the applicant meets the registration criteria of 
section 5a(c) of the Act and Sec. 37.5.
    Registration Criterion 1 of section 5a(c) of the Act: IN GENERAL--To 
be registered as a registered derivatives transaction execution 
facility, the board of trade shall be required to demonstrate to the 
Commission only that the board of trade meets the criteria specified in 
Sec. 37.5(b).
    A board of trade preparing to submit to the Commission an 
application to operate as a registered derivatives transaction execution 
facility is encouraged to contact Commission staff for guidance and 
assistance in preparing its application. Applicants may submit a draft 
application for review prior to the submission of an actual application 
without triggering the application review procedures of Sec. 37.5.
    Registration Criterion 2 of section 5a(c) of the Act: DETERRENCE OF 
ABUSES--The board of trade shall establish and enforce trading and 
participation rules that will deter abuses and has the capacity to 
detect, investigate, and enforce those rules, including means to--(A) 
obtain information necessary to perform the functions required under 
this section; or (B) use technological means to--(i) provide market 
participants with impartial access to the market; and (ii) capture 
information that may be used in establishing whether rule violations 
have occurred.
    An application of a board of trade to operate as a registered 
derivatives transaction execution facility should include arrangements 
and resources to deter abuses by effective and affirmative rule 
enforcement, including documentation of the facility's authority to do 
so; such trading and participation rules should be designed with 
adequate specificity. The submission should include documentation on the 
ability of the facility either to obtain necessary information or to 
provide market participants with impartial access and capture 
information for use in establishing possible rule violations.
    Registration Criterion 3 of section 5a(c) of the Act: TRADING 
PROCEDURES--The board of trade shall establish and enforce rules or 
terms and conditions defining, or specifications detailing, trading 
procedures to be used in entering and executing orders traded on the 
facilities of the board of trade. The rules may authorize--(A) transfer 
trades or office trades; (B) an exchange of--(i) futures in connection 
with a cash commodity transaction; (ii) futures for cash commodities; or 
(iii) futures for swaps; or (C) a futures commission merchant, acting as 
principal or agent, to enter into or confirm the execution of a contract 
for the purchase or sale of a commodity for future delivery if the 
contract is reported, recorded, or cleared in accordance with the rules 
of the registered derivatives transaction execution facility or a 
derivatives clearing organization.
    (a) A submission of a board of trade to operate as an electronic 
registered derivatives transaction execution facility should include the 
system's trade-matching algorithm and order entry procedures. A 
submission involving a trade-matching algorithm that is based on order 
priority factors other than on a best price/earliest time basis should 
include a brief explanation of the alternative algorithm.
    (b) A board of trade's specifications on initial and periodic 
objective testing and review of proper system functioning, adequate 
capacity, and security for any automated systems should be included in 
its submission. The Commission believes that the guidelines issued by 
the International Organization of Securities Commissions (IOSCO) in 1990 
(which have been referred to as the ``Principles for Screen-Based 
Trading Systems''), and adopted by the Commission on November 21, 1990 
(55 FR 48670), as supplemented in October 2000, are appropriate 
guidelines for an electronic trading facility to apply to electronic 
trading systems. Any program of objective testing and review of the 
system should be performed by a qualified independent professional (but 
not necessarily a third-party contractor).
    (c) A registered derivatives transaction execution facility that 
authorizes transfer trades or office trades, an exchange of futures for 
physicals or futures for swaps, or any other non-competitive 
transactions, including block trades, should have rules particularly 
authorizing such transactions and establishing appropriate recordkeeping 
requirements. Block trading rules should ensure that the block trading 
does not operate in a manner that compromises the integrity of the 
prices or price discovery on the relevant market.
    Registration Criterion 4 of section 5a(c) of the Act: FINANCIAL 
INTEGRITY OF TRANSACTIONS--The board of trade shall establish and 
enforce rules or terms and conditions providing for the financial 
integrity of transactions entered on or through the facilities of the 
board of trade, and rules or terms and conditions to ensure the 
financial integrity of

[[Page 406]]

any futures commission merchants and introducing brokers and the 
protection of customer funds.
    (a) A board of trade operating as a registered derivatives 
transaction execution facility should provide for the financial 
integrity of transactions by setting appropriate minimum financial 
standards for members and non-intermediated market participants, 
appropriate margin forms, and appropriate default rules and procedures. 
If cleared, agreements, contracts and transactions in excluded or exempt 
commodities that are traded on a DTF may be cleared through clearing 
organizations other than DCOs registered with the Commission. The 
Commission believes ensuring and enforcing the financial integrity of 
transactions and intermediaries, and the protection of customer funds 
should include monitoring compliance with the facility's minimum 
financial standards. In order to monitor for minimum financial 
requirements, a facility should routinely receive and promptly review 
financial and related information.
    (b) A registered derivatives transaction execution facility that 
allows customers that qualify as ``eligible traders'' under the 
definition found in section 5a(b)(3) of the Act only by trading through 
a registered futures commission merchant pursuant to section 
5a(b)(3)(B), should have rules concerning the protection of customer 
funds that address appropriate minimum financial standards for 
intermediaries, the segregation of customer and proprietary funds, the 
custody of customer funds, the investment standards for customer funds, 
related recordkeeping procedures and related intermediary default 
procedures.

   Appendix B to Part 37--Guidance on Compliance With Core Principles

    1. This appendix provides guidance concerning the core principles 
with which a registered derivatives transaction execution facility must 
comply to maintain registration under section 5a(d) of the Act and 
Sec. 37.5(a). This guidance is illustrative only and is not intended to 
be a mandatory checklist.
    2. If a registered derivatives transaction execution facility 
chooses to certify that it has the capacity to, and upon initiation 
will, operate in compliance with the core principles under section 5a(d) 
of the Act and Sec. 37.6, it should consider the issues set forth in 
this appendix prior to certification.
    3. Alternatively, if a registered derivatives transaction execution 
facility chooses pursuant to Sec. 37.6(b)(2) to provide the Commission 
with a demonstration of its compliance with core principles, addressing 
the issues set forth in this appendix would help the Commission in its 
consideration of such compliance. To the extent that compliance with, or 
satisfaction of, the core principles is not self-explanatory from the 
face of the derivatives transaction execution facility's rules, which 
may be terms and conditions or trading protocols, a submission under 
Sec. 37.6(b)(2) should include an explanation or other form of 
documentation demonstrating that the derivatives transaction execution 
facility complies with the core principles.
    Core Principle 1 of section 5a(d) of the Act: IN GENERAL--To 
maintain the registration of a board of trade as a derivatives 
transaction execution facility, a board of trade shall comply with the 
core principles specified in this appendix.
    The board of trade shall have reasonable discretion in establishing 
the manner in which the board of trade complies with the core 
principles. A board of trade newly registered to operate as a 
derivatives transaction execution facility must certify or 
satisfactorily demonstrate its capacity to operate in compliance with 
the core principles under section 5a(d) of the Act prior to the 
commencement of its operations. The Commission also may require that a 
board of trade operating as a registered derivatives transaction 
execution facility demonstrate to the Commission that it is operating in 
compliance with one or more core principles.
    Core Principle 2 of section 5a(d) of the Act: COMPLIANCE WITH RULES-
-The board of trade shall monitor and enforce the rules of the facility, 
including any terms and conditions of any contracts traded on or through 
the facility and any limitations on access to the facility.
    (a) A board of trade operating as a registered derivatives 
transaction execution facility should have arrangements, resources and 
authority to detect and deter abuses by effectively and affirmatively 
enforcing its rules (which, in the case of a facility that restricts 
traders to eligible commercial entities, may be the effective monitoring 
of limitations on access to the facility), including the authority and 
ability to collect or capture information and documents on both a 
routine and non-routine basis and to investigate effectively possible 
rule violations.
    (b) This should include the authority and ability to discipline, 
limit or suspend, and/or terminate activities or access of a member, 
including members with trading privileges but having no, or only nominal 
equity, in the facility and non-member market participants or, in the 
case of a derivatives transaction execution facility restricting its 
traders to eligible commercial entities, the authority and ability to 
terminate activities or access of such a member. In either case, any 
termination should be carried out pursuant to clear and fair standards 
that are available and transparent to the member or market participant.
    Core Principle 3 of section 5a(d) of the Act: MONITORING OF TRADING-
-The board of trade shall monitor trading in the contracts of

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the facility to ensure orderly trading in the contract and to maintain 
an orderly market while providing any necessary trading information to 
the Commission to allow the Commission to discharge the responsibilities 
of the Commission under the Act.
    (a) Arrangements and resources to detect and deter abuses through 
effective trade monitoring programs should facilitate, on both a routine 
and nonroutine basis, direct supervision of the market. Appropriate 
objective testing and review of any automated systems should occur 
initially and periodically to ensure proper system functioning, adequate 
capacity and security. The analysis of data collected should be suitable 
for the type of information collected and should occur in a timely 
fashion. A board of trade operating as a registered derivatives 
transaction execution facility should have the authority to collect the 
information and documents necessary to reconstruct trading for 
appropriate market analysis as it carries out its programs to ensure 
orderly trading and to maintain an orderly market. The facility also 
should have the authority to intervene as necessary to maintain an 
orderly market.
    (b) Alternatively, if a board of trade operating as a registered 
derivatives transaction execution facility restricts contracts traded to 
those under Secs. 37.3(a)(1) and 37.3(b), it may choose to satisfy this 
core principle by providing information to the Commission as requested 
by the Commission to satisfy its obligations under the Act. The facility 
should have the authority to collect or capture and retrieve all 
necessary information.
    Core Principle 4 of section 5a(d) of the Act: DISCLOSURE OF GENERAL 
INFORMATION--The board of trade shall disclose publicly and to the 
Commission information concerning--(A) contract terms and conditions; 
(B) trading conventions, mechanisms, and practices; (C) financial 
integrity protections; and (D) other information relevant to 
participation in trading on the facility.
    The Commission considers that the public disclosure of information 
required under the core principle refers to disclosure to market 
participants, where the facility's user agreement requires all market 
participants to keep such information confidential. A board of trade 
operating as a registered derivatives transaction execution facility 
should have arrangements and resources for the disclosure and 
explanation of contract terms and conditions, trading conventions, 
trading mechanisms, trading practices, system functioning, system 
capacity, and financial integrity protections, including whether 
eligible contract participants will have the right to opt out of 
segregation of customer funds. Such information may be made publicly 
available through the derivatives transaction execution facility's 
website. The facility should also, as appropriate to the market, make 
information regarding prices, bids and offers, or other information as 
determined by the Commission, readily available to market participants 
on a fair, equitable and timely basis. Furthermore, the facility should 
make available information concerning steps taken by the facility in 
response to an emergency.
    Core Principle 5 of section 5a(d) of the Act: DAILY PUBLICATION OF 
TRADING INFORMATION--The board of trade shall make public daily 
information on settlement prices, volume, open interest, and opening and 
closing ranges for contracts traded on the facility if the Commission 
determines that the contracts perform a significant price discovery 
function for transactions in the cash market for the commodity 
underlying the contracts.
    A board of trade operating as a registered derivatives transaction 
execution facility should provide to the public information regarding 
settlement prices, price range, trading volume, open interest and other 
related market information for all applicable contracts, as determined 
by the Commission. The Commission will determine by order, after notice 
and an opportunity for a hearing through submission of written data, 
views and arguments, whether the requirement of the core principle on 
publication of trading information under section 5a(d)(5) of the Act 
applies to a particular product or products traded on a facility. 
Provision of information for any applicable contract could be through 
such means as providing the information to a financial information 
service or by timely placing the information on a facility's website.
    Core Principle 6 of section 5a(d): FITNESS STANDARDS--The board of 
trade shall establish and enforce appropriate fitness standards for 
directors, members of any disciplinary committee, members, and any other 
persons with direct access to the facility, including any parties 
affiliated with any of the persons described in this core principle.
    A derivatives transaction execution facility should have appropriate 
eligibility criteria for the categories of persons set forth in the core 
principle that would include standards for fitness and for the 
collection and verification of information supporting compliance with 
such standards. Minimum standards of fitness for persons who have member 
voting privileges, governing obligations or responsibilities, or who 
exercise disciplinary authority are those bases for refusal to register 
a person under section 8a(2) of the Act. In addition, persons who have 
governing obligations or responsibilities, or who exercise disciplinary 
authority, should not have a significant history of serious disciplinary 
offenses, such as those that would be disqualifying under Sec. 1.63 of 
this chapter. Eligible contract participants or eligible commercial 
entities who are members but do not have these privileges, obligations, 
responsibilities or disciplinary authority could

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satisfy minimum fitness standards by meeting the standards that they 
must meet to qualify under the Act's respective definitions of eligible 
contract participants or eligible commercial entities. Natural persons 
who directly or indirectly have greater than a ten percent ownership 
interest in a facility should meet the fitness standards applicable to 
members with voting rights. A demonstration of the fitness of the 
applicant's directors, members, or natural persons who directly or 
indirectly have greater than a ten percent ownership interest in a 
facility may include providing the Commission with registration 
information for such persons, certification to the fitness of such 
persons, an affidavit of such persons' fitness by the facility's counsel 
or other information substantiating the fitness of such persons.
    Core Principle 7 of section 5a(d) of the Act: CONFLICTS OF INTEREST-
-The board of trade shall establish and enforce rules to minimize 
conflicts of interest in the decision making process of the derivatives 
transaction execution facility and establish a process for resolving 
such conflicts of interest.
    The means to address conflicts of interest in decision-making of a 
board of trade operating as a registered derivatives transaction 
execution facility should include methods to ascertain the presence of 
conflicts of interest and to make decisions in the event of such a 
conflict. The Commission also believes that a board of trade operating 
as a registered derivatives transaction execution facility should 
provide for appropriate limitations on the use or disclosure of material 
non-public information gained through the performance of official duties 
by board members, committee members and facility employees or gained 
through an ownership interest in the facility.
    Core Principle 8 of section 5a(d) of the Act: RECORDKEEPING--The 
board of trade shall maintain records of all activities related to the 
business of the derivatives transaction execution facility in a form and 
manner acceptable to the Commission for a period of 5 years.
    Section 1.31 of this chapter governs recordkeeping obligations under 
the Act and the Commission's regulations thereunder. In order to provide 
broad flexible performance standards for recordkeeping, Sec. 1.31 was 
updated and amended by the Commission in 1999. Accordingly, Sec. 1.31 
itself establishes the guidance regarding the form and manner for 
keeping records.
    Core Principle 9 of section 5a(d) of the Act: ANTITRUST 
CONSIDERATIONS--Unless necessary or appropriate to achieve the purposes 
of this Act, the board of trade shall endeavor to avoid--(A) adopting 
any rules or taking any actions that result in any unreasonable 
restraint of trade; or (B) imposing any material anticompetitive burden 
on trading on the derivatives transaction execution facility.
    A board of trade seeking to operate as a registered derivatives 
transaction execution facility may request that the Commission consider 
under the provisions of section 15(b) of the Act any of the board of 
trade's rules, which may be trading protocols or policies, and including 
both operational rules and the terms or conditions of products listed 
for trading, at the time it submits its registration application or 
thereafter. The Commission intends to apply section 15(b) of the Act to 
its consideration of issues under this core principle in a manner 
consistent with that previously applied to contract markets.