[Federal Register Volume 64, Number 227 (Friday, November 26, 1999)]
[Proposed Rules]
[Pages 66428-66432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30512]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-ZA01


Proposed Revision of the Commission's Procedure for the Review of 
Contract Market Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comment.

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[[Page 66429]]

SUMMARY: As part of an ongoing program of regulatory reform, the 
Commodity Futures Trading Commission (``CFTC'' or ``Commission'') is 
proposing to revise its procedures for the review of contract market 
rules and rule amendments. Subject to stated conditions, the proposed 
rulemaking would permit contract markets to place new rules and rule 
amendments into effect on the business day following their submission 
to and receipt by the Commission.

DATES: Comments must be received on or before Janaury 25, 2000.

ADDRESSES: Comments should be mailed to Jean A. Webb, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW, Washington, DC 20581; transmitted by facsimile to (202) 
418-5521; or transmitted electronically to [[email protected]].

FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Associate 
Director, Division of Trading and Markets, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, 
DC 20581. Telephone: (202) 418-5490.

SUPPLEMENTARY INFORMATION

I. Statutory and Regulatory Background

    Section 5a(a)(12)(A) of the Commodity Exchange Act (``Act'') 
provides, among other things, that all rules \1\ of a contract market 
that relate to terms and conditions \2\ in futures or option contracts 
traded on or subject to the rules of a contract market must be 
submitted to the Commission for its prior approval. Section 
5a(a)(12)(A) further requires that contract markets submit all other 
rules to the Commission for prior review. Other sections of the Act 
require rules addressing specified matters to be explicitly approved by 
the Commission.\3\
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    \1\ Commission Regulation 1.41(a)(1) defines ``rule'' of a 
contract market to mean ``any constitutional provision, article of 
incorporation, bylaw, rule, regulation, resolution, interpretation, 
stated policy, or instrument corresponding thereto, in whatever form 
adopted, and any amendment or addition thereto or repeal thereof, 
made or issued by a contract market, or by the governing board 
thereof or any committee thereof.''
    \2\ Commission Regulation 1.41(a)(2) defines ``terms and 
conditions'' to mean ``any definition of the trading unit or the 
specific commodity underlying a contract for the future delivery of 
a commodity or commodity option contract, specification of 
settlement or delivery standards and procedures, and establishment 
of buyers' and sellers' rights and obligations under the contract.''
    \3\ For example, Section 4f(b) of the Act requires that contract 
markets must receive Commission approval for any minimum financial 
standards that they establish for futures commission merchants and 
introducing brokers.
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    Pursuant to Section 5a(a)(12)(A), the Commission adopted Regulation 
1.41 which sets forth procedures for the submission and review of 
proposed contract market rules. These procedures vary depending on the 
type of rule that the contract market seeks to implement. Paragraph (b) 
of Regulation 1.41 establishes review procedures for rules that relate 
to terms and conditions of a contract. Paragraph (c) of the regulation 
establishes review procedures for most rules that do not relate to 
terms and conditions.\4\ Commission Regulation 1.41 also contains 
procedures for the filing of other types of exchange rules that may be 
implemented before or simultaneous to filing with the Commission. These 
include, among others, rules that are exempt from the requirements of 
Section 5a(a)(12)(A) of the Act (Regulation 1.41(d)), temporary 
emergency rules (Regulation 1.41(f)), and physical emergency rules 
(Regulation 1.41(g)).
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    \4\ In Federal Register releases published on March 7, 1997, (62 
FR 10434 and 62 FR 10427), the Commission adopted amendments to 
streamline and to expedite the procedures contained in Regulations 
1.41 (b) and (c). Those amendments established alternative 
procedures that shortened the Commission's timeframe for reviewing 
contract market rules. Under these ``fast track'' review procedures, 
rule changes generally can be deemed approved, or permitted to be 
put into effect without Commission approval, ten days after 
Commission receipt, unless the Commission takes action to commence 
review of the rule for a 45-day period (or 75-day period in the case 
of rules published for comment in the Federal Register). The rules 
of certain non-cash settled contracts may be deemed approved forty-
five days after receipt by the Commission.
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    Section 4(c) of the Act provides that ``[i]n order to promote 
responsible economic or financial innovation and fair competition,'' 
the Commission may exempt any agreement, contract, or transaction (or 
class thereof) that is otherwise subject to Section 4(a) of the Act \5\ 
from any of the requirements of that provision or from any other 
provision of the Act except Section 2(a)(1)(B). The Commission may not 
grant such an exemption unless it determines that the agreement, 
contract, or transaction would be consistent with the public interest.
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    \5\ Among other things, Section 4(a) of the Act prohibits any 
person from executing, confirming the execution of, or otherwise 
dealing in any transaction in, or in connection with, a contract for 
the purchase or sale of a commodity for future delivery, unless such 
transaction is conducted subject to the rules of a board of trade 
which has been designed by the Commission as a contract market for 
such commodity.
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    Pursuant to this authority, the Commission is proposing to exempt 
contract markets from the rule review requirements of Section 
5a(a)(12)(A) of the Act and from the regulations adopted thereunder. 
The Commission would continue to pursue vigorously its surveillance and 
enforcement activities. The Commission intends that this proposed 
rulemaking, and the manner in which the Commission would conduct 
oversight of contract market rules adopted pursuant to such a 
provision, should ``promote responsible economic or financial 
innovation and fair competition.''

II. The Proposed Amendments

A. Description of the Procedure

    Proposed Commission Regulation 1.41(z) would permit contract 
markets \6\ to place a new rule into effect the business day after the 
Commission has received submission of the rule. There would be no 
requirement, as under current regulations, to allow for prior 
Commission review of the rule. The submission would have to include a 
brief explanation of the rule and a description of any substantive 
opposing views expressed by members of the contract market or others 
with respect to the rule. In addition, the contract market would be 
required to certify that the rule submitted neither violates nor is 
inconsistent with any provision of the Act or the Commission's 
regulations. Although the form and content requirements for Regulation 
1.41(z) rule filings would be more abbreviated than those for rule 
filings pursuant to Regulations 1.41(b) or 1.41(c), the Commission 
would retain its authority under Section 4(d) of the Act and other 
relevant provisions to conduct investigations, to gather information, 
and generally to oversee the contract market's adherence with the 
requirements and conditions of the Act.
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    \6\ For the purposes of Regulation 1.41, the term ``contract 
market'' includes a clearing organization that clears futures 
contract transactions. Regulation 1.41(a)(3).
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B. Eligibility for the Procedure

1. Previous Designation as a Contract Market
    In a companion Federal Register release (the ``Companion 
Release''), the Commission is adopting today a new Regulation 5.3 that 
establishes a similar streamlined procedure for the listing of 
contracts, and their subsequent amendment, without Commission prior 
review and approval.\7\ That procedure will be available solely to 
boards of trade that are designated as contract markets in at least one 
contract that is not dormant.\8\ In its comment letter on that 
proposal, the Chicago Mercantile Exchange supported this provision,

[[Page 66430]]

noting that start-up exchanges are not appropriate for this procedure, 
as ``the initial designation of a board of trade as a contract market 
entails a more lengthy review and analysis of its trading and clearing 
systems and its self-regulatory programs.'' The Commission believes 
that this rationale is equally applicable to the review of rules from 
inactive contract markets. Accordingly, the Commission is proposing to 
make the Regulation 1.41(z) process available solely to contract 
markets which are designated in at least one non-dormant contract.
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    \7\ The new designation procedure was proposed on July 20, 1999. 
64 FR 40528 (July 27, 1999).
    \8\ See Commission Regulation 5.2.
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2. Consistency with the Act and the Commission Regulations
    A contract market would be required to submit a certification that 
the rule being implemented neither violated nor was inconsistent with 
any provision of the Act or the Commission regulations. This is the 
standard used by the Commission in determining whether to disapprove a 
rule.\9\ Thus, the Regulation 1.41(z) procedure would not be available 
for contract market rules that, in the absence of some type of 
Commission exemption, would violate, or be inconsistent with the Act or 
the Commission regulations. For example, under Regulation 1.38(a), 
transactions are required to be executed in an open and competitive 
manner. Regulation 1.38(a), however, also permits exchanges to adopt 
rules for the execution of non-competitive transactions so long as such 
rules are submitted to and approved by the Commission. Thus, Regulation 
1.38(a) reserves to the Commission the authority to determine what 
types of trading procedures need not meet the open and competitive 
requirement. Accordingly, non-competitive trading rules, such as 
certain block trading procedures, would not qualify for the Regulation 
1.41(z) process because, absent affirmative Commission approval under 
Regulation 1.38, they would violate a provision of the regulations.
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    \9\ See Standard to be Applied by the Commission in Disapproving 
Contract Market Rules. 45 FR 34873 (May 23, 1980).
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C. Legal Certainty

    In the Companion Release, the Commission is adopting a provision 
that makes clear that, among other things, contracts listed pursuant to 
Rule 5.3 are not void or voidable in the event the Commission initiates 
a proceeding to disapprove, to alter, to amend, or to require a 
contract market to adopt a specific trading rule or procedure or to 
refrain from taking a specific action. The Commission is including a 
similar provision in proposed Regulation 1.41(z)(2) to ensure legal 
certainty for transactions effected subject to rules implemented 
pursuant to Regulation 1.41(z). Although the Commission would not 
approve, affirmatively allow into effect, or deem approved any contract 
market rules that were implemented pursuant to this proposed 
rulemaking, Regulation 1.41(z)(3) would expressly state that the 
submitting contract market would not be exempt from any provision of 
the Act or the Commission's regulations other than the rule review 
requirements of Section 5a(a)(12) of the Act and related Commission 
regulations. Therefore, for example, contract markets implementing 
rules pursuant to Regulation 1.41(z) would continue to be subject to 
the rule enforcement obligations of Section 5a(a)(8) of the Act.

III. Request for Comments

    The Commission is requesting comment on any aspect of the proposed 
procedure, including, but not limited to, the following.

A. Exclusivity of Regulation 14.1(z) Process

    Under the current rule review process of Regulation 1.41(b), rules 
relating to terms and conditions must be submitted for Commission 
approval. Rules that do not relate to terms and conditions must be 
submitted for Commission review pursuant to other provisions of 
Regulation 1.41. Unless the Commission determines otherwise, such rules 
may be deemed approved or placed into effect, as appropriate.
    Contract markets on occasion specifically request that the 
Commission approve a rule that otherwise did not require Commission 
approval under any provision of the Act or the Commission Regulations. 
Contract markets rules processed under Regulation 1.41(z) would simply 
be placed into effect and would not be considered to have been 
``approved'' by the Commission. The Commission is proposing the 
Regulation 1.41(z) procedure as an alternative to the existing 
Regulation 1.41 process. Under this proposal, contract markets could 
still submit a rule pursuant to Regulation 1.41(b) or 1.41(c), even if 
that rule qualified for the Regulation 1.41(z) process. However, the 
existence of these various rule review procedures may create confusion 
for market participants with respect to the regulatory history of rules 
and may lead to the inaccurate impression that rules adopted pursuant 
to Regulation 1.41(z) or 5.3 have been reviewed by the Commission.\10\
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    \10\ So, for example, rules that were adopted pursuant to 
Regulation 1.41(z) or 5.3 would not have been reviewed by the 
Commission for possible antitrust implications.
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    As a means of avoiding this possible confusion, the Commission 
requests comment on whether it should preserve the current approval 
process for rules that would qualify for the Regulation 1.41(z) process 
or whether the proposed Regulation 1.41(z) process should be the only 
process available. Similarly, should the Commission make the Regulation 
5.3 procedure adopted today the sole means of listing new contracts and 
of amending their terms and conditions?

B. Suspension of Effectiveness of a Rule

    The Act requires notice and opportunity for hearing before a rule 
may be disapproved or altered. This process can be lengthy. Market 
participants and others adversely affected by a rule change could incur 
harm during this period. The Commission requests comment on whether it 
should reserve the authority, under Regulation 1.41(z), to stay or to 
suspend the operation of an exchange rule once it has initiated a 
proceeding under Section 5a(a)(10), 5a(a)(12), 8a(7) or 8a(9) of the 
Act.

C. Contracts with Open Interest

    The Commission is requesting comment on whether the Regulation 
1.41(z) process should be available for rule amendments relating to 
contracts that have open interest at the time the rule is implemented. 
Could the rights of such position holders be impacted by a rule change 
affecting their contracts? How could the Commission and/or a contract 
market ensure that traders are not harmed by the adoption of a rule 
amendment for a contract with open positions?

D. Emergency Rules

    In Section 5a(a)(12)(B) of the Act, Congress mandated that the 
Commission create a special process for the implementation of contract 
market rules on an emergency basis without Commission approval. Section 
5a(a)(12)(B) was adopted in the Futures Trading Practices Act of 1992. 
The legislative history for this provision indicates that ``the 
Committee [on Agriculture] was concerned that the Commission might not 
be actively engaged in decisions by exchanges to invoke their emergency 
powers.'' \11\ The Commission notes that proposed

[[Page 66431]]

Regulation 1.41(z) may obviate the need for a contract market to follow 
Section 5a(a)(12)(B), and its implementing regulatory provision, 
Regulation 1.41(f), when adopting emergency rules. The Commission 
requests comment on how to differentiate an emergency rule provision 
from any other rule that could be adopted pursuant to proposed 
Regulation 1.41(z).
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    \11\ See Reported No. 101-236 to accompany H.R. 2869, 101st 
Cong., 1st Sess. at 20.
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E. New Electronic Trading Systems

    As noted, the Regulation 1.41(z) process would not be available to 
a board of trade that is not designated as a contract market in at 
least one non-dormant contract. The implementation of a new electronic 
trading system and adoption of related rules could be viewed as being 
analogous to the organization of a new exchange in many respects. The 
Commission requests comment on whether proposed rules implementing a 
new electronic trading system at an existing contract market should be 
processed under for Regulation 1.41(z).

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies, in promulgating rules, consider the impact of 
these 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). This rulemaking 
establishes streamlined procedures for the review of contract market 
rules and rule amendments. Accordingly, the Chairman, on behalf of the 
Commission, hereby certifies, pursuant to section 3(a) of the RFA, 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. Agency Information Activites: Proposed Collection; Comment Request

    Proposed Regulation 1.41(z) contains information collection 
requirements. As required by the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), the Commission has submitted a copy of this section to 
the Office of Management and Budget (``OMB'') for its review.
    Collection of Information: Rules Pertaining to Contract Markets and 
Their Members, OMB Control Number 3038-0022.
    The effect of the proposed Regulation 1.41(z) will be to reduce the 
burden previously approved by OMB for Regulations 1.41(b) and (c) by 
4290 hours because the predominant number of rule submissions will be 
made pursuant to new proposed Regulation 1.41(z) instead of either 
Regulation 1.41(b) or (c). The burden associated with the proposed new 
Regulation 141(z) is estimated to be 858 hours which will result from 
compliance with the requirements for information required for 
Regulation 1.41(z) submissions.
    The estimated burden of new Regulation 1.41(z) was calculated as 
follows:
    Number of respondents: 11.
    Annual responses by each respondent: 26.
    Total annual responses: 286.
    Estimated average hours per response: 3.
    Annual Reporting Burden: 858 hours.
    The revised estimated burden of Regulations 1.41(b) and (c) (which 
was 4,125 hours and 825 hours, respectively) is:
    Regulation 1.41(b).
    Number of respondents: 11.
    Annual responses by each respondent: 2.
    Total annual responses: 22.
    Estimated average hours per response: 25.
    Annual Reporting burden: 550 hours.
    Regulation 1.41(c).
    Number of respondents: 11.
    Annual responses by each respondent: 2.
    Total annual responses: 22.
    Estimated average hours per response: 5.
    Annual Reporting burden: 110.
    The burden associated with the entire collection (3038-0022) 
including this proposed rule is as follows:
    Number of respondents: 15,893.
    Number of responses per year: 434,052.
    Estimated average hours per response: 1.8095.
    Annual Reporting Burden: 785,443 hours.
    This annual reporting burden of 785,443 hours represents a 
reduction of 3,432 hours as a result of proposed new Regulation 
1.41(z).
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed 
collection of information in--
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
     Evaluating the accuracy of the Commission's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Commission on the 
proposed regulations.
    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.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity exchanges, Commodity futures, Contract markets, 
Reporting and recordkeeping requirements, Rule review procedures.
    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, sections 4, 
4c, 5, 5a, 6 and 8a thereof, 7 U.S.C. 6, 6c, 7, 7a, 8, and 12a, the 
Commission proposes to amend Chapter I of Title 17 of the Code of 
Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT 1

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

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6I, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 8, 9, 12, 12a, 12c, 
13a, 13a-1, 16, 16a, 19, 21, 23, and 24, unless stated otherwise.

    2. Section 1.41 is amended by adding a paragraph (z) to read as 
follows:


Sec. 1.41  Contract market rules; submission of rules to the 
Commission; exemption of certain rules.

* * * * *

[[Page 66432]]

    (z) Exemption from the rule review procedure requirements of 
Section 5a(a)(12) of the Act and related regulations. (1) 
Notwithstanding the rule filing requirements of Section 5a(a)(12) of 
the Act and related Commission regulations, a contract market may place 
a rule into effect without prior Commission review or approval provided 
that:
    (i) The contract market has filed a submission for the rule, and 
the Commission has received the submission at its Washington, D.C. 
headquarters and at the regional office having jurisdiction over the 
contract market by close of business on the business day preceding 
implementation of the rule;
    (ii) The contract market is designated in, or clears, at least one 
commodity contract, under Sections 4c, 5, 5a(a) and 6 of the Act, which 
is not dormant within the meaning of Sec. 5.2 of part 5 of the 
Commission's regulations; and
    (iii) The rule submission includes:
    (A) The text of the rule (in the case of a rule amendment, brackets 
must indicate words deleted and underscoring must indicate words 
added);
    (B) A brief explanation of the rule;
    (C) A description of any substantive opposing views expressed by 
members of the contract market or others with respect to the rule; and
    (D) A certification by the contract market that the rule neither 
violates nor is inconsistent with any provision of the Act or of the 
regulations thereunder.
    (2) A transaction effected subject to a rule implemented under this 
paragraph shall not be void or voidable as a result of:
    (i) A violation by the contract market of the provisions of this 
section; or
    (ii) The initiation, conduct or disposition of any Commission 
proceeding to disapprove the rule or require the contract market to 
revise the rule.
    (3) This paragraph does not exempt contract markets from any 
provision of the Act or the Commission's regulations, except for the 
rule review requirements of Section 5a(a)(12) of the Act and related 
Commission regulations.

    Issued in Washington, DC on November 17, 1999, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-30512 Filed 11-24-99; 8:45 am]
BILLING CODE 6351-01-P