[Federal Register Volume 64, Number 104 (Tuesday, June 1, 1999)]
[Rules and Regulations]
[Pages 29217-29224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13780]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 5


Economic and Public Interest Requirements for Contract Market 
Designation

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
revising its Guideline on Economic and Public Interest Requirements for 
Contract Market Designation, 17 CFR Part 5, Appendix A (Guideline No. 
1). Guideline No. 1 details the information that an application for 
contract market designation should include in order to demonstrate that 
the contract market meets the economic requirements for designation. 
Previously, the Commission promulgated fast-track review procedures to 
reduce its review time to review designation applications. To 
streamline the application process further, the Commission is revising 
Guidelines No. 1, reducing any unnecessary burdens associated with the 
designation application itself.
    Specifically, the Commission is organizing Guideline No. 1 into 
several specific application forms, making use of a chart format for 
applications for designation of futures and options contracts to the 
extent possible. Moreover, the Commission is clarifying that a portion 
of the application may make use of third-party generated materials. In 
addition, the Commission is clarifying the review standards for several 
of the designation requirements. The Commission also is adding a new 
appendix Part 5 specifying the information that a foreign board of 
trade should submit to the Commission when seeking no-action relief to 
offer and to sell, to persons located in the United States, a futures 
contract on a foreign securities index traded on that foreign board of 
trade.

EFFECTIVE DATE: August 2, 1999.

FOR FURTHER INFORMATION CONTACT:
Paul M. Architzel, Chief Counsel, Richard H. Shilts, Director, Market 
Analysis Section, or Kimberly A. Browning, Attorney/Advisor, Division 
of Economic Analysis, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1125 21st Street, NW, Washington, DC 20581. Telephone 
(202) 418-5260. E-mail: [PA[email protected]], [RS[email protected]] or 
[KB[email protected]].

SUPPLEMENTARY INFORMATION:

I. Background

    The requirement that contract markets meet specified conditions has 
been a fundamental tool of federal regulation of commodity futures 
exchanges since the Futures Trading Act of 1921, Pub. L. No. 67-66, 42 
Stat. 187 (1921 Act).\1\ Currently, the statutory requirements for 
contract market designation are found in Sections 5 and 5a of the 
Commodity Exchange Act (Act) and, additionally, for indexes of 
securities, in Section 2(a)(1)(B) of the Act. Designated contract 
markets must provide for the prevention of dissemination of false 
information (Section 5(3) of the Act); must provide for the prevention 
of price manipulation (Section 5(4) of the Act); must provide for 
delivery periods which will prevent market congestion (Section 5a(a)(4) 
of the Act); and must permit delivery on the contract of such grades, 
at such points and at such quality and locational differentials as will 
tend to prevent or to diminish market manipulation (Section 5a(a)(10) 
of the Act).\2\ Included among these provisions is the general 
requirement of Section 5(7) of the Act that trading in a proposed 
contract not be contrary to the public interest. The contract market 
must meet these requirements both initially and on a continuing 
basis.\3\
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    \1\ A more complete description of the contract market approval 
process under the 1921 Act is provided in the proposed rulemaking, 
63 FR 38537, n. 1 (July 17, 1998).
    \2\ A further listing of contract market approval requirements 
under the Act is provided in the proposed rulemaking, 63 FR 38537, 
n. 2.
    \3\ Generally, the burden of demonstrating compliance rests with 
the contract market. Section 6 of the Act provides, in part, that:
    Any board of trade desiring to be designated a ``contract 
market'' shall make application to the Commission for such 
designation and accompany the same with a showing that it complies 
with the above conditions, and with a sufficient assurance that it 
will continue to comply with the above requirements.
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    The Commission, as an aid to the exchanges, has provided guidance 
in meeting these statutory requirements. In 1975, the newly formed 
Commission, in one of its earliest actions, issued its Guideline on 
Economic and Public Interest Requirements for Contract Market 
Designation, 40 FR 25849 (1975) (``Guideline No. 1'').
    Subsequently, the Commission revised this Guideline, publishing it 
as Appendix A to Part 5 of the Code of Federal Regulations. 47 FR 49832 
(November 3, 1982). Guideline No. 1 was again revised in 1992. 57 FR 
3518 (January 30, 1992). The 1992 revisions streamlined the designation 
application for both futures and option contract markets. In addition, 
the 1992 revisions introduced the use of a new checklist-style format 
for applications for designation of option contracts.\4\
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    \4\ For a more complete discussion of the revisions made to 
Guideline No. 1 in 1982 and 1992, see 63 FR 38537-38538.
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    In 1997, the Commission began a far-reaching program of regulatory 
reform. Its first initiative was to establish fast-track procedures for 
Commission review and approval of applications for contract market 
designation. See, Commission Rule 5.1, 62 FR 10434 (March 7, 1997). The 
fast-track procedure creates a streamlined and speedy alternative 
review process for Commission consideration of designation 
applications, reducing unnecessary regulatory burdens on exchanges 
while also preserving the opportunity for public participation and

[[Page 29218]]

fulfillment of the Commission's oversight responsibilities.\5\
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    \5\ Under the fast-track review procedures, applications for 
designation of certain cash-settled futures and option contracts are 
deemed to be approved in as few as ten days after receipt. Other 
applications are deemed approved 45 days after receipt, absent 
contrary notification. Since implementing the fast-track review rule 
in April 1997, 59 contracts have been approved by the Commission 
under this rule, 26 under the 10-day procedure and 33 under the 45-
day procedure. An additional 55 contracts were approved under non-
fast-track review procedures.
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    The Commission, in addition to promulgating the fast-track review 
rules, indicated its intent broadly to reexamine the form and content 
requirements of Guideline No. 1, including consideration of the 
possible applicability of an option-style checklist to applications for 
designation of proposed futures contracts.\6\ The Commission has noted 
that ``[i]mplementation of fast-track review and approval procedures, 
separately and together with the planned revision of the format and 
content requirements for designation applications, should result in 
significantly streamlining the procedures and regulatory requirements 
associated with the current contract designation process,'' 62 FR 
10435, and that these initiatives should permit the exchanges greater 
flexibility to compete with foreign exchange-traded products and with 
both foreign and domestic over-the-counter transactions while 
maintaining the basic protections embedded in the Act. 61 FR 59390 
(November 22, 1996). In this regard, the Commission's approval process 
for new contracts, as well as its designation application process, also 
is in keeping with a 1998 International Organization of Securities 
Commissions' (IOSCO) publication entitled ``Applicability of the 
Surveillance Guidance to Other Exchange-Traded Derivatives Products.'' 
That IOSCO report makes general recommendations to market authorities 
concerning what a market surveillance program should contain to monitor 
effectively exchange derivatives markets without unnecessarily 
affecting market innovation.
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    \6\ Guideline No. 1 applies only to the economic requirements 
that must be met in order to be designated as a contract market. 
Additional requirements are found in the Commission's Guideline No. 
2, 1 Comm. Fut. L. Rep (CCH) para. 6430. These relate to the 
contract market's program for compliance with its self-regulatory 
responsibilities. Generally, the review of these issues is most 
significant in connection with the first application for contract 
designation from a particular board of trade.
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A. Proposed Amendments

    Based upon its experience in administering the current Guideline 
and the fast track procedures, the Commission proposed to revise 
Guideline No. 1 in several important respects. 63 FR 38537 (July 17, 
1998). First, the Commission proposed to streamline the Guideline by 
reorganizing its contents to present applications for designation of 
futures contracts in a clearer, more focused format including the use 
of charts. Specifically, the Commission proposed to reorganize the 
contents of the Guideline to address applications for four different 
types of contracts: (1) Physical delivery futures; (2) cash-settled 
futures; (3) options on futures; and (4) options on physicals. Except 
for options on physicals, each separate application was proposed to be 
self-contained. Under the proposed amendments, information for option 
contracts would continue to be provided by checklist. In addition, the 
Commission proposed to clarify certain standards for review which have 
evolved based upon administrative experience and to clarify that 
exchanges may use information developed by third parties in the 
application.
    Finally, the Commission proposed that a new appendix be added to 
Part 5 specifying the information that a foreign board of trade should 
file with the Commission when seeking no-action relief to offer and to 
sell in the United States a futures contract on a foreign securities 
index traded on that foreign board of trade.

B. Comments

    Two commenters, the Chicago Board of Trade (CBT) and the 
Minneapolis Grain Exchange (MGE), responded to the notice of proposed 
rulemaking. Both CBT and MGE favored strongly the Commission's proposed 
revisions to streamline Guideline No. 1. However, although MGE 
supported the proposed revisions clarifying the review standards for 
several of the designation requirements, CBT opposed the proposed 
clarification of the review standards. The MGE's and the CBT's comments 
are discussed more fully below.

II. Final Revisions to the Guideline

    Based upon thorough and careful consideration of the comments to 
the proposed rulemaking and its experience in administering the current 
Guideline as well as the fast-track procedures, the Commission has 
determined to revise Guideline No. 1.

A. Final Changes to the Guideline's Format

1. Cash Market Overview
    Currently, exchanges are required to include a cash market 
description in their designation application. 17 CFR Part 5, Appendix A 
(a)(1). To reduce the burden on the exchanges in satisfying the 
Guideline's cash-market overview standards, the Commission is amending 
Guideline No. 1, as proposed, to recognize explicitly the acceptability 
of a variety of materials in fulfillment of this requirement. This 
final revision permits exchanges to submit cash-market descriptions 
based not only on material their staffs generate, but also on materials 
obtained from other sources.\7\ An exchange may develop such material 
through outside sources during a feasibility study of a proposed 
contract, as part of the exchange's development and consideration of a 
proposal or as part of its new product marketing effort. The two 
commenters, CBT and MGE, both supported this proposed revision. In 
particular, CBT was of the view that contracts markets using third 
party materials in support of their designation applications will 
experience financial and staff resource savings. Specifically, CBT 
stated that:

    \7\ In allowing the submission of such third party materials, 
the Commission is not amending the requirement that each application 
(except for options on futures) must include a cash-market overview.
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    [T]hird-party material is often times readily available to 
contract markets from sources such as trade groups and consultants 
[and] can prove less expensive to obtain than having a contract 
market's own staff, which may have limited resources, do the 
research and compile the data [in support of the application]. 
Moreover, this data from third parties can prove beneficial in that 
certain trade groups and consultants may possess a high level of 
expertise and knowledge of the subject matter in question.\8\
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    \8\ See, CBT's comment letter submitted to the Commission in 
response to the proposed rulemaking dated September 15, 1998 at p. 
2.
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2. Charts Relating to Individual Contract Terms and Conditions
    Guideline No. 1 requires exchanges to explain how each major term 
of a proposed contract, except for those identical to terms the 
Commission already has approved, is consistent with cash market 
practices or to justify the reason why the contract terms appropriately 
are inconsistent with such practices. Under the former Guideline, 
exchanges submitted this explanation or justification in narrative 
form. Further to streamline the application process, the Commission is 
clarifying, as proposed, that an exchange, in lieu of a

[[Page 29219]]

narrative description, may complete a chart to provide the required 
information.\9\ The revised chart format reduces the amount of verbiage 
and the overall length of designation applications. Both of the 
commenters agreed that the proposed chart format would benefit contract 
markets by reducing the amount of paperwork, costs and time necessary 
to satisfy designation application requirements.
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    \9\ Exchanges still have the option of submitting the required 
explanation or justification in narrative form if they perfer.
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    As the Commission noted in the notice of proposed rulemaking, the 
chart is a template enumerating the significant contract terms and 
conditions typically contained in most contracts. That template may be 
modified as necessary to reflect the nature of the particular 
commodity, the economic characteristics of the commodity or the 
contract's specific terms and conditions.\10\
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    \10\ For example, if a contract provides for more than one 
quality specification under commodity characteristics (e.g., a grade 
standard as well as a weight specification), the board of trade may 
add a separate line item to address each commodity characteristic 
separately. For line items in the chart that are not applicable to 
the proposed contract, the board of trade should simply indicate 
``N.A.''
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    The designation application includes a brief description of the 
contract's major terms and conditions. Where the term is consistent 
with prevailing cash market practices, column 4 may be completed by 
providing a very brief statement as to how the term or condition 
comports with cash practices. However, where the term or condition does 
not comport with cash market practices, a more extensive discussion is 
required showing why the provision is necessary or appropriate for the 
hedging or pricing utility of the contract and the overall effect of 
the provision on deliverable supplies. Consistent with current 
requirements, no such justification of an individual term or condition 
is required when that term or condition is the same as one the 
Commission already approved. For such contract terms, the board of 
trade should refer in column 2 of the chart to the rule number or other 
description of the original approved provision.
    In keeping with current requirements, the application also requires 
an exchange to specify exchange speculative position limits. The 
Commission on April 27, 1999, amended its speculative position limit 
rules and recodified the provisions of rule 1.61 as rule 150.5. 64 FR 
24038 (May 5, 1999). Guideline No. 1 has been amended to conform to the 
requirements of new rule 150.5. The Guideline No. 1 application forms 
set out the operative requirements for exchange speculative position 
limits at the time of initial designation. Specifically, the spot-month 
position limits for physical delivery contracts should be set in 
relation to the contract's deliverable supply estimate \11\ and for 
cash-settled contracts should be no greater than necessary to minimize 
the potential for manipulation or distortion of the contract's or the 
underlying commodity's price.
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    \11\ However, it should be noted that spot-month speculative 
position limits are not a substitute for inadequate deliverable 
supplies. In this respect, the fact that an exchange may specify a 
spot-month speculative position limit that equals or is less than 
the ``rule-of-thumb'' standard of one-fourth of a low deliverable 
supply estimate does not mean that deliverable supplies are at 
adequate levels. The Commission has approved new futures contracts 
or amended existing futures contracts with low deliverable supplies 
only after an exchange has exhausted potential sources of 
deliverable supplies and, if necessary, adopted low spot-month 
speculative limits to give it the ability to limit potential 
delivery demand. The preferred approach under the Act if deliverable 
supplies are inadequate is for the exchange to modify the delivery 
specifications to enhance deliverable supplies. See, section 
5a(a)(10) of the Act.
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    Guideline No. 1 incorporates the operative provisions of rule 
150.5(a) and (b) that establish the requirements for speculative 
position limits at the time of initial contract designation. Subsequent 
amendments to exchange-set speculative position limits which are 
permitted under other provisions of Commission rule 150.5 are not 
included on the application form. For example, adjustments to the 
initial speculative position limits are permitted under Commission rule 
1505(c) as open interest in a contract grows, and various forms of 
position accountability rules may be substituted for speculative 
position limits under Commission rule 150.5(e). In addition, exchange 
speculative position limits are not required for contracts on a ``major 
foreign currency'' under Commission rule 1505(a), and applications for 
designation of such a contract may simply leave that box of the 
application blank.
    To facilitate the submission of cash-market description data, the 
Commission is providing, through its Division of Economic Analysis Web 
Site (www.cftc.gov/dea/dea.html), the charts relating to individual 
contract terms and conditions, as described above. The exchanges will 
be able to download these charts onto their own computer systems for 
completion. The Commission believes that using such electronic charts 
will reduce the amount of paperwork generated during the designation 
application process. In addition, the use of these charts will foster 
more uniform exchange designation application submissions, aiding 
Commission staff in performing expeditious application reviews.

B. Clarification of Review Standards

    As explained in the proposed rulemaking, central to an application 
for designation is an exchange's demonstration that the proposed 
contract will not be susceptible to price manipulation or distortion. 
For physical delivery contracts, this requires a demonstration that the 
deliverable supplies provided under the contract's terms are adequate, 
and for cash-settled contracts, this requires that the cash price 
series to be used for settlement is reliable. In light of the 
importance of these issues to a designation application, the Commission 
is clarifying as proposed, these requirements in the Guideline.
    The two commenters gave differing views concerning these proposed 
clarifications. Specifically, MGE favored them and stated that 
``clarifying the [designation application] information required [is a] 
welcomed improvement to the application process.'' \12\ CBT, however, 
opposed the proposed clarifications. In particular, CBT expressed the 
view that adoption of the proposed revisions would inhibit necessary 
flexibility during the designation application process.
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    \12\ See MGE's comment letter to the proposed rulemaking dated 
September 15, 1998.
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1. Adequacy of Deliverable Supply
    Exchanges are required to demonstrate that proposed contracts 
provide for deliverable supplies that will not be conducive to price 
manipulation or distortion. The Commission is clarifying, as proposed, 
the requirement that an exchange include in its designation application 
an analysis of the adequacy of deliverable supply, including an 
estimate of the deliverable supplies for the delivery months specified 
in the proposed contract. Under the former Guideline, the requirement 
of an estimate of deliverable supplies was implicit. This final 
clarification explicitly requires that applications for designation of 
a physical delivery futures contract include within a separate chart a 
quantitative estimate of expected deliverable supplies and a 
description of the methodology used to derive the estimate.
    For commodities with seasonal supply or demand characteristics, the 
deliverable supply analysis should be based on that period when 
potential supplies typically are at their lowest

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levels. The estimate should be based on statistical data when 
reasonably available covering a period of time that is representative 
of actual patterns of production and consumption of the commodity. If 
data are taken from publicly available sources, the board of trade 
should reference the source material used. If the board of trade 
independently derives the estimate based on information not readily 
verifiable or on trade interviews, the Commission may request that the 
board of trade provide the workpapers or other source materials used in 
the analysis.
    As mentioned above, CBT did not favor the proposed clarifications. 
In particular, CBT argued that the Commission should provide a more 
definitive description of deliverable supply for the relevant cash 
market, as well as explain its ``rule-of-thumb'' formula for 
determining spot month speculative limits.\13\ However, the Guideline 
does provide such guidance on deriving an estimate of deliverable 
supplies. The estimate of deliverable supplies should be made taking 
into consideration the terms and conditions specified for the 
deliverable product and the economic realities of the cash market 
underlying the futures contract.\14\ Thus, for example, it should take 
into account the deliverable supply which is available when quality and 
price differentials are applied. For a physical-delivery futures 
contract, this estimate represents product which is in store at the 
delivery point(s) specified in the futures contract or economically can 
be moved into or through such points consistent with the delivery 
procedures set forth in the contract and which is available for sale on 
a spot basis within the marketing channels that normally are tributary 
to the delivery point(s). For contracts that utilize a shipping 
certificate or similar delivery instrument, the estimate of deliverable 
supply should reflect the fact that the underlying commodity may not 
have to be moved into or through the delivery point(s) prior to 
delivery of the shipping certificate in the futures market.
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    \13\ In its comments to the proposed rulemaking, CBT reasserts 
the arguments it made in a proceeding instituted by the Commission 
under Section 5a(a)(10) of the Act concerning the delivery 
specifications for CBT's corn and soybeans futures contracts. See, 
62 FR 60831 (November 13, 1997) (Commission Order changing and 
supplementing under Section 5a(a)(10) of the Act delivery terms of 
the CBT's corn and soybeans futures contracts). The Commission's 
determination in that proceeding was based on the application of the 
standards of Guideline No. 1 and Section 5a(a)(10) of the Act to the 
particular facts of those markets. The clarification of Guideline 
No. 1 as proposed is independent of its specific determination in 
that proceeding.
    \14\ Only product meeting the specified quality standards (e.g., 
the grade, age, purity, weight, etc. for tangible commodities or the 
issue, maturity, rating, etc. for financial instruments) is eligible 
for delivery on a futures contract and should be considered as part 
of the deliverable supply.
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    For financial instrument contracts, deliverable supply consists of 
available supplies of the instrument meeting the contract's delivery 
standards that are available, at prevailing cash market values, to 
traders wishing to make future delivery. For example, significant 
quantities of off-the-run notes and bonds typically may be held by the 
Federal Reserve and long-term investment portfolios (e.g., pension 
funds) and would not be readily available for delivery on proposed 
futures contracts on U.S. government debt instruments except at 
distorted prices. Recognizing this and based on the opinions of 
knowledgeable industry participants, Commission staff historically has 
used a rule-of-thumb that only 50 percent of the on-the-run U.S. 
Treasury bond and 10 percent of each of the next two off-the-run bonds 
are economically available for delivery.
2. Justification of Cash Settlement Price
    The adequacy of the procedures for determining the cash settlement 
price is central to the Commission's review of proposed cash-settled 
contracts. Applications for such proposed futures contracts continue to 
be required to demonstrate that those procedures will result in a cash 
settlement price which reflects the underlying cash market and is not 
subject to manipulation or distortion. In order to provide additional 
guidance to exchanges in meeting this requirement, the Commission is 
clarifying, as proposed, two of the criteria, which it has identified 
through past experience for meeting these requirements. In this regard, 
any cash settlement price which an exchange determines through a survey 
method to elicit price quotes should include a number of polled 
entities which is representative of the underlying cash market. In no 
event, however, may the polling sample include fewer than four 
unrelated entities that do not take positions for their own account in 
the futures, option or underlying cash markets. Where the entities to 
be polled may trade in such markets for their own accounts, a minimum 
of eight unrelated entities is required.
    After thoroughly considering all the comments received and based 
upon its own analysis, the Commission believes that the Guideline 
strikes the appropriate balance of providing greater clarification and 
specificity of the review standards without impeding the flexibility 
necessary for an effective designation application review process.

C. Foreign Futures Markets

    The offer or sale in the United States of futures contracts traded 
on or subject to the rules of a foreign board of trade is subject to 
the Commission's exclusive jurisdiction.\15\ Although Section 
2(a)(1)(B)(ii) of the Act provides that the Commission shall not 
designate a board of trade as a contract market in a futures on a 
securities index unless the Commission finds that the board of trade 
meets three enumerated criteria,\16\ Congress understood that a foreign 
board of trade would not necessarily have to obtain contract 
designation in order to offer futures contracts on stock indexes. Thus, 
the House Committee on Agriculture suggested that a foreign board of 
trade could apply for ``certification'' that its stock index contract 
meets all applicable Commission requirements. H.R. Rep. No. 565, Part 
1, 97th Cong., 2d Sess. 85 (1982). That Committee further explained 
that a foreign board of trade seeking to offer and to sell, to persons 
located in the United States, a futures contract based upon an index of 
United States securities must demonstrate that the proposed futures 
contract meets the requirements set forth in Section 2(a)(1)(B)(ii). 
Id. With regard to a foreign exchange traded futures contract based on 
`` foreign securities,'' the House Committee suggested that the 
Commission use such criteria as it deems appropriate.
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    \15\ Section 2(a)(1)(A), 7 U.S.C. 2 (1982); 120 Cong. Rec. 34497 
(1974) (statement of Senator Talmadge) (the terms ``any other board 
of trade, exchange, or market'' in Section 2(a)(1)(A) make clear the 
Commission's exclusive jurisdiction includes futures contracts 
executed on a foreign board of trade, exchange or market).
    \16\ These three criteria in Section 2(a)(1)(B)(ii) are:
    (1) The contract must provide for cash settlement;
    (2) The proposed contract will not be readily susceptible to 
manipulation or to being used to manipulate any underlying security; 
and
    (3) The index is predominately composed of the securities of 
unaffiliated issuers and reflects the market for all publicly traded 
securities or a substantial segment thereof.
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    The Commission has not promulgated procedures for foreign boards of 
trade filng requests to offer or to sell such contracts, but instead 
its staff has issued ``no-action'' letters \17\ regarding foreign

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stock index contracts based on foreign securities using the criteria 
set forth in Section 2(a)(1)(B)(ii) of the Act. As of March 16, 1999, 
such action has been taken for 24 stock index contracts for offer or 
sale to persons located in the U.S. submitted by 15 foreign boards of 
trade.\18\
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    \17\ A no-action letter is a written statement issued by the 
staff of a specific division of the Commission or the Office of the 
General Counsel that it will not recommend enforcement action to the 
Commission if a proposed transaction is completed or a proposed 
activity is conducted by the beneficiary. A no-action letter 
represents the position only of the division that issued it, or the 
Office of the General Counsel if issued thereby. A no-action letter 
binds only the issuing division or the Office of the General 
Counsel, as applicable, and not the Commission or other Commission 
staff. Further, a no-action letter is only effective with respect to 
the person or persons to whom it was issued. Commission Rule 140.99. 
See, 63 FR 68175 (December 10, 1998).
    \18\ These 15 foreign boards of trade include: (1) Osaka 
Securities Exchange; (2) Tokyo Stock Exchange; (3) Hong Kong Futures 
Exchange; (4) Singapore International Monetary Exchange, Ltd.; (5) 
Toronto Futures Exchange; (6) International Futures Exchange 
(Bermuda), Ltd.; (7) London International Financial Futures and 
Options Exchange Limited; (8) Marche a Terme International de 
France; (9) Sydney Futures Exchange Limited; (10) Meff Sociedad 
Rectora de Productos Financieros Derivados de Renta Variable, S.A. 
(Spain); (11) Deutsche Terminborse; (12) Italian Stock Exchange; 
(13) The Amsterdam Exchanges; (14) OMLX, The London Securities and 
Derivatives Exchange, Ltd.; and (15) OM Stockholm AB.
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    As detailed in the notice of proposed rulemaking at 63 FR 38540, 
the staff has analyzed such requests for a ``no-action'' opinion under 
the requirements of Section 2(a)(1)(B)(ii) of the Act. Accordingly, the 
staff has requested that the foreign board of trade file information 
that the staff deems relevant to those criteria. To facilitate the 
staff's review of such requests by foreign boards of trade, the 
Commission is adding, as proposed, a separate appendix to Part 5 
enumerating the information that foreign boards of trade should file 
with the Commission to assist in the staff's analysis of such requests. 
Some of the data which should be included are: the terms and conditions 
of the contract and all other relevant rules of the exchange; 
information on information sharing arrangements or any legal obstacles 
to such sharing of information; and specific information related to the 
composition and computation of the index. All information should be 
submitted in English, including any supplemental material such as 
explanatory notes, appended tables or charts. It should be noted that, 
in particular instances, the Commission consults with the Securities 
and Exchange Commission (SEC) regarding these contracts. When such 
consultation occurs, the SEC may request additional information.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies consider the impact of those rules on small 
entities. The Commission has previously determined that contract 
markets are not ``small entities'' for purposes of the RFA, 5 U.S.C. 
601 et seq. 47 FR 18618 (April 30, 1982). These final amendments 
establish alternative streamlined procedures for Commission review and 
approval of contract market designation applications and of amendments 
to contract terms and conditions. Accordingly, the Chairperson, on 
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 
605(b), that the action taken herein will not have a significant 
economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

    When publishing final rules, the Paperwork Reduction Act (``PRA'') 
of 1995 {Pub. L. 104-13 (May 13, 1995)} imposes certain requirements on 
federal agencies (including the Commission) in connection with their 
conducting or sponsoring any collection of information as the PRA 
defines. In compliance with the Act, these final rules inform the 
public of:
    (1) The reason the information is planned to be and/or has been 
collected; (2) the way such information is planned to be and/or has 
been used to further the proper performance of the functions of the 
agency; (3) an estimate, to the extent practicable, of the average 
burden of the collection (together with a request that the public 
direct to the agency any comments concerning the accuracy of this 
burden estimate and any suggestions for reducing this burden); (4) 
whether responses to the collection of information are voluntary, 
required to obtain or retain a benefit or mandatory; (5) the nature and 
extent of confidentiality to be provided, if any; and (6) the fact that 
any agency may not conduct or sponsor, and a person is not required to 
response to, a collection of information unless it displays a currently 
valid OMB control number.
    The Commission previously submitted this rule and its associated 
information collection requirements to the Office of Management and 
Budget. The Office of Management and Budget approved the collection of 
information associated with this rule on October 24, 1998, and assigned 
OMB control number 3038-0022 to the rule. The burden associated with 
this entire collection (3038-0022) including this final rule, is as 
follows:
    Average burden hours per response: 3,609.
    Number of Respondents: 15,693.
    Frequency of response: on Occasion.
    The burden associated with this specific rule is as follows:
    Average burden hours per response: 58.
    Number of Respondents: 11.
    Frequency of response: on Occasion.
    Person wishing to comment on the information this final rule 
requires should contact the Desk Officer, CFTC, Office of Management 
and Budget, Room 10202, NEOB, Washington, DC 20503, (202) 395-7340. 
Copies of the information collection submission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC 
20581, (202) 418-5160.
    Copies of the OMB-approved information collection package 
associated with this rulemaking may be obtained from Desk Officer, 
Commodity Futures Trading Commission, Office of Management and Budget, 
Room 10202, NEOB Washington, D.C. 20503, (202) 395-7340.

List of Subjects in 17 CFR Part 5

    Commodity futures, Contract markets, Designation application, 
Reporting and recordkeeping requirements.

    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act, and particular sections 4c, 5, 
5a, 6 and 8a, 7 U.S.C. 6c, 7, 7a, 8, and 12a, the Commission hereby 
amends Chapter I of Title 17 of the Code of Federal Regulations by 
amending Part 5 as follows:

PART 5--DESIGNATION OF AND CONTINUING COMPLIANCE BY CONTRACT 
MARKETS

    1. The authority citation for Part 5 continues to read as follows:

    Authority: 7 U.S.C. 6c, 7, 7a, 8 and 12a.

    2. In Part 5, Appendix A is revised to read as follows:

Appendix A to Part 5--Guideline No. 1; Interpretative Statement 
Regarding Economic and Public Interest Requirements for Contract Market 
Designation

(a) Application for Designation of Physical Delivery Futures 
Contracts

    A board of trade shall submit:
    (1) The rules setting froth the terms and conditions of the 
futures contract.
    (2) A description of the cash market for the commodity on which 
the contract is based.
    (i) The description may include, in addition to or in lieu of 
materials prepared by the board of trade, existing studies by 
industry trade groups, academics, governmental bodies or other 
entities, reports of consultants, or other materials which provide a 
description of the underlying cash market.
    (ii) Where the same, or a closely related commodity, is already 
designated as a contract market which and is not dormant, the cash 
market description can be confined to those aspects relevant to 
particular term(s) or condition(s) which differ from such existing 
contract.

[[Page 29222]]

    (3) A demonstration that 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 expected to be available to 
short traders and salable by long traders at its market value in 
normal cash marketing channels.
    For purposes of this demonstration, provide the following 
information in chart or narrative form.

                                          Contract Terms and Conditions
----------------------------------------------------------------------------------------------------------------
                                                                                               Explanation as to
                                                                              Rule number of   consistency with,
                                                              Exchange          identical        or reason for
                   Term or condition                          proposal           approved        variance from
                                                                            provision, if any     cash market
                                                                                   \1\              practice
----------------------------------------------------------------------------------------------------------------
1. Commodity characteristics (e.g., grade, quality,      .................  .................  .................
 weight, class, growth, issuer, origin, maturity,
 source, rating, etc.).................................
2. Any quality differentials for nonpar deliveries, or   .................  .................  .................
 lack thereof..........................................
3. Delivery points/region..............................  .................  .................  .................
4. Any locational differentials for nonpar deliveries,   .................  .................  .................
 or lack thereof.......................................
5. Delivery facilities (type, number, capacity,          .................  .................  .................
 ownership)............................................
6. Contract size and/or trading unit...................  .................  .................  .................
7. Delivery pack or composition of delivery units......  .................  .................  .................
8. Delivery instrument (e.g., warehouse receipt,         .................  .................  .................
 shipping certificate, bill of lading).................
9. Transportation terms (e.g., FOB, CIF, prepay freight  .................  .................  .................
 to destination).......................................
10. Delivery procedures................................  .................  .................  .................
11. Delivery months....................................  .................  .................  .................
12. Delivery period and last trading day...............  .................  .................  .................
13. Inspection/certification procedures (verification    .................  .................  .................
 of delivery eligibility, any discounts applied for
 age)..................................................
14. Minimum price change (tick) equal to or less than    .................  .................  .................
 cash market minimum price increment...................
15. Daily price limit provisions (note relationship to   .................  .................  .................
 cash market price movements)..........................
----------------------------------------------------------------------------------------------------------------
      DELIVERABLE SUPPLIES \2\--ESTIMATE OF DELIVERABLE SUPPLIES FOR TRADING MONTH(S) WITH LOWEST SUPPLIES
----------------------------------------------------------------------------------------------------------------
 
ESTIMATION METHODOLOGY.................................  .................  .................  .................
----------------------------------------------------------------------------------------------------------------
\1\ If an identical provision has been approved for a nondormant contract in the same commodity, there is no
  need to provide an explanation in the next column.
\2\ No estimate of deliverable supply is needed if a previously designated nondormant contract is trading. Also,
  no justification of the spot month limit is needed if the limit is the same as that approved by the Commission
  for an identical contract in that commodity (relative to the quantity or value of the identical contract).
  Where more than one contract is based on the same underlying commodity or instrument, positions should be
  combined for purposes of applying speculative limits.


                               Terms and Conditions Related to Speculative Limits
----------------------------------------------------------------------------------------------------------------
                                                                                                Level  (exchange
               Speculative limit                                   Standard                          rule)
----------------------------------------------------------------------------------------------------------------
1. Spot month.................................  No greater than one-fourth of estimated        .................
                                                 deliverable supply.
2. Nonspot individual month or all months       5,000 contract...............................  .................
 combined (financial and energy contract).
3. Nonspot individual month or all months       1,000 contracts..............................  .................
 combined (tangible commodity contracts).
4. Reporting level............................  Equal to or less than levels specified in      .................
                                                 CFTC rule 15.03.
5. Aggregation rule...........................  Same as CFTC rule 150.5(g) or previously       .................
                                                 approved language.
----------------------------------------------------------------------------------------------------------------

    (4) As specifically requested, such additional evidence, 
information or data relating to whether the contract meets, 
initially or on a continuing basis, any of the specific requirements 
of the Act, including the public interest standard contained in 
Section 5(7) of the Act, and whether the contract reasonably can be 
expected to be, or has been, used for hedging and/or price basing on 
more than an occasional basis, or any other requirement for 
designation under the Act or Commission rules and policies.

(b) Application for Cash Settled Futures Contracts

    A board of trade shall submit:
    (1) The rules setting forth the terms and conditions of the 
proposed futures contract.
    (2) A description of the cash market for the commodity on which 
the contract is based.
    (i) The description may include, in addition to or in lieu of 
materials prepared by the board of trade, existing studies by 
industry trade groups, academics, governmental bodies or other 
entities, reports of consultants, or other materials which provide a 
description of the underlying cash market.
    (ii) Where the same, or a closely related commodity, is already 
designated as a contract market which is not dormant, the cash 
market description can be confined to those aspects relevant to 
particular term(s) or conditions(s) which differ from such existing 
contract.
    (3) A demonstration that cash settlement of the contract is at a 
price reflecting the underlying cash market, will not be subject to 
manipulation or distortion, and is based on a cash price series that 
is reliable, acceptable, publicly available and timely.
    For purposes of this demonstration, provide the following 
information in chart or narrative form.

[[Page 29223]]



                                          Contract Terms and Conditions
----------------------------------------------------------------------------------------------------------------
                                                                                               Explanation as to
                                                                              Rule number of   consistency with,
                                                                                identical        or reason for
                   Term or condition                                             approved        variance from,
                                                                              provision, if       cash market
                                                                                  any\1\            practice
----------------------------------------------------------------------------------------------------------------
1. Commodity characteristics (e.g., grade, quality,      .................  .................  .................
 weight, class, growth, issuer, maturity, source,
 rating, etc.).........................................
2. Delivery months, noting any cyclical variations in    .................  .................  .................
 trading activity that may affect the potential for
 manipulating the cash settlement price................
3. Last trading day....................................  .................  .................  .................
4. Contract size.......................................  .................  .................  .................
5. Minimum price change (tick).........................  .................  .................  .................
6. Daily price limit provisions, relative to cash
 market price movements................................
----------------------------------------------------------------------------------------------------------------
\1\ If an identical provision has been approved for a nondormant contract in the same commodity, there is not
  need to provide an explanation in the next column.


      Terms and Conditions Related to Cash Settlement Price Series
------------------------------------------------------------------------
                                      Rule number of
                                        identical        Explanation or
            Requirement                  approved        justification
                                        provision
------------------------------------------------------------------------
1. Where an independent third       .................  .................
 party calculate the cash
 settlement price series, evidence
 that the third party does not
 object to its use and provides
 safeguards against susceptibility
 to manipulation..................
2. Where board of trade generates   .................  .................
 cash settlement rice series,
 specifications of calculation
 procedure and safeguards in cash
 settlement process to protect
 against susceptibility to
 manipulation (e.g., if self-
 generated survey, polling sample
 representative of cash market,
 but with a minimum of 4
 nontrading entities or 8 entities
 that trade for own account)......
3. Procedure for, and timeliness    .................  .................
 of, dissemination to public......
4. Evidence that price is reliable  .................  .................
 indicator of cash market values
 and acceptable for hedging.......
------------------------------------------------------------------------


                               Terms and Conditions Related to Speculative Limits
----------------------------------------------------------------------------------------------------------------
                                                                                                Level  (exchange
               Speculative limit                                   Standard                          rule)
----------------------------------------------------------------------------------------------------------------
1. Spot month.................................  Must be no greater than necessary to minimize  .................
                                                 the potential for manipulation or distortion
                                                 of the contract's or the underlying
                                                 commodity's price.
2. Nonspot individual month or all months       5,000 contracts..............................  .................
 combined (financial and energy contracts).
3. Nonspot individual month or all months       1,000 contracts..............................  .................
 combined (tangible commodity contracts).
4. Reporting level............................  Equal to or less than levels specified in      .................
                                                 CFTC rule 15.03.
5. Aggregation rule...........................  Same as CFTC rule 150.5(g) or previously       .................
                                                 approved language.
----------------------------------------------------------------------------------------------------------------

    (4) As specifically requested, such additional evidence, 
information or data relating to whether the contract meets, 
initially or on a continuing basis, any of the specific requirements 
of the Act, including the public interest standard contained in 
Section 5(7) of the Act, and whether the contract reasonably can be 
expected to be, or has been, used for hedging and/or price basing on 
more than an occasional basis, or any other requirement for 
designation under the Act or Commission rules and policies.

(c) Application for Option Contracts

    A board of trade shall submit:
    (1) The rules setting forth the terms and conditions of the 
proposed option contract.
    (2)(i) For options on futures contracts, the terms and 
conditions of the proposed or existing underlying futures contract.
    (2)(ii) For options on physical commodities:
    (A) A description of the cash market for the commodity on which 
the contract is based.
    (1) The description may include, in addition to or in lieu of 
material prepared by the board of trade: existing studies by 
industry trade groups, academics, governmental bodies or other 
entities; promotional or marketing materials prepared by or for the 
board of trade; reports of consultants; or other materials which 
provide a description of the underlying cash market.
    (2) Where the same, or a closely related commodity, is already 
designated and is not dormant, the cash market description can be 
confined to those aspects relevant to particular term(s) or 
condition(s) which differ from such existing contract.
    (B) Depending on the method of settling the option, the relevant 
chart for either a physical delivery or cash settled futures 
contract.
    (3) The following completed chart.

[[Page 29224]]



                                                                  Terms and Conditions
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                       Justification for
                                                                                                                                          not meeting
                                             Applicable CFTC Rule (17                                                Met by exchange   standard, or rule
                Criterion                              CFR)                              Standard                      rule number         number of
                                                                                                                                           identical
                                                                                                                                         approved rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Speculative limits....................  150.5......................  Combined net position in futures and        .................  .................
                                                                         options on a futures-equivalent basis at
                                                                         the futures position levels, with inter-
                                                                         month spread exemptions that are
                                                                         consistent with those of the futures
                                                                         contracts or consistent with Commission
                                                                         Rule 150.5(e) for underlying future.
2. Aggregation rule......................  150.4......................  Same as Rule 150.5(g) or previously         .................  .................
                                                                         approved language.
3. Reporting level.......................  15.00(b)(2)................  50 contracts or fewer.....................  .................  .................
4. Strike prices (number listed &          33.4(b)(1).................  Procedures for routine listing of strikes   .................  .................
 increments).                                                            are specified and automatic, provisions
                                                                         for listing discretionary strikes are
                                                                         specified.
5. Option expiration & last trading day..  33.4(b)(2).................  Except for options on cash-settled futures  .................  .................
                                                                         contracts, expiration is not less than
                                                                         one business day before the earlier of
                                                                         the last trading day or the first notice
                                                                         day of the underlying future.
6. Minimum tick..........................  33.4(d)....................  Equal to, or less than, the underlying      .................  .................
                                                                         futures tick.
7. Daily price limit, if specified.......  33.4(d)....................  Equal to, or greater than, the underlying   .................  .................
                                                                         futures price limit.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (4) As specifically requested, such additional evidence, 
information or data relating to whether the contract meets, 
initially or on a continuing basis, any of the specific requirements 
of the Act, including the public interest standard contained in 
Section 5(7) of the Act, or any other requirement for designation 
under the Act or Commission rules and policies.
    3. Part 5 is amended by adding new Appendix E to read as 
follows:

Appendix E--Information That a Foreign Board of Trade Should Submit 
When Seeking No-Action Relief to Offer and Sell, to Persons Located in 
the United States, a Futures Contract on a Foreign Securities Index 
Traded on That Foreign Board of Trade

    A foreign board of trade seeking no-action relief to offer and 
to sell, to persons located in the U.S., a futures contract on a 
foreign securities index traded on that foreign board of trade 
should submit the following in English:
    (1) The terms and conditions of the contract and all other 
relevant rules of the exchange and, if applicable, of the exchange 
on which the underlying securities are traded, which have an effect 
on the over-all trading of the contract, including circuit breakers, 
price limits, position limits or other controls on trading;
    (2) Surveillance agreements between the foreign board of trade 
and the exchange(s) on which the underlying securities are traded;
    (3) Information sharing agreements between the host regulator 
and the Commission or assurances of ability and willingness to share 
information with the Commission and assurances from the foreign 
board of trade of its ability and willingness to share information 
with the Commission, either directly or indirectly.
    (4) When applicable, information regarding foreign blocking 
statutes and their impact on the ability of United States government 
agencies to obtain information concerning the trading of such 
contracts; and
    (5) Information and data denoted in U.S. dollars relating to:
    (i) The method of computation, availability, and timeliness of 
the index;
    (ii) The total capitalization, number of stocks (including the 
number of unaffiliated issuers if different from the number of 
stocks), and weighting of the stocks by capitalization and, if 
applicable, by price in the index;
    (iii) Breakdown of the index by industry segment including the 
capitalization and weight of each industry segment;
    (iv) Procedures and criteria for selection of individual 
securities for inclusion in, or removal from, the index, how often 
the index is regularly reviewed, and any procedures for changes in 
the index between regularly scheduled reviews;
    (v) Method of calculation of the cash-settlement price and the 
timing of its public release;
    (vi) Average daily volume of trading by calendar month, measured 
by share turnover and dollar value, in each of the underlying 
securities for a six month period of time and, separately, the daily 
volume in each underlying security for six expirations (cash-
settlement dates) or for the six days of that period on which cash-
settlement would have occurred had each month of the period been an 
expiration month; and
    (vii) If applicable, average daily futures trading volume.

    Issued in Washington, D.C. this 25th day of May, 1999, by the 
Commodity Futures Trading Commission.
Jean Webb,
Secretary of the Commission.
[FR Doc. 99-13780 Filed 5-28-99; 8:45 am]
BILLING CODE 6351-01-M