[Federal Register Volume 66, Number 47 (Friday, March 9, 2001)]
[Proposed Rules]
[Pages 14262-14289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5618]



[[Page 14261]]

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Part III





Commodity Futures Trading Commission





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17 CFR Parts 1, et al.



A New Regulatory Framework for Trading Facilities, Intermediaries and 
Clearing Organizations; Proposed Rule

  Federal Register / Vol. 66, No. 47 / Friday, March 9, 2001 / Proposed 
Rules  

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 5, 15, 36, 37, 38, 40, 41, 100, 166, 170 and 180

RIN 3038-AB63


A New Regulatory Framework for Trading Facilities, Intermediaries 
and Clearing Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing rules to implement the Commodity Futures Modernization Act 
of 2000 and the Commission's new regulatory framework. These proposed 
rules apply to trading facilities. The proposed rules implement the new 
statutory framework establishing three new market categories, including 
exempt markets and two categories of markets subject to Commission 
regulatory oversight--designated contract markets and registered 
derivatives transaction execution facilities. These proposed rules 
implement statutory changes that profoundly alter federal regulation of 
commodity futures and option markets. Nothing in these rules, however, 
diminishes the Commission's responsibility for overseeing and enforcing 
compliance by self-regulatory organizations, Commission registrants and 
market participants with the provisions of the Commodity Exchange Act.
    The remaining parts of the framework relating to clearing 
organizations and to intermediaries will be reproposed shortly.

DATES: Comments must be received by April 9, 2001.

ADDRESSES: Comments should be sent to the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581, attention: Office of the Secretariat. Comments may be sent by 
facsimile transmission to (202) 418-5521 or, by e-mail to 
[email protected]. Reference should be made to ``Regulatory 
Reinvention.''

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel, 
Division of Economic Analysis; Alan L. Seifert, Deputy Director, 
Division of Trading and Markets; Lawrence B. Patent, Associate Chief 
Counsel, Division of Trading and Markets; or Riva Spears Adriance, 
Special Counsel, Division of Trading and Markets, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581. Telephone: (202) 418-5260. E-mail: 
([email protected]), ([email protected]), ([email protected]) or 
([email protected]).

SUPPLEMENTARY INFORMATION:  

I. Background

    The Commission on June 22, 2000, proposed (65 FR 38986) and on 
December 13, 2000, issued (65 FR 77962) final rules promulgating a new 
regulatory framework to apply to multilateral transaction execution 
facilities that trade contracts for sale of a commodity for future 
delivery or commodity options. The final rules were to become effective 
on February 12, 2001. However, Congress on December 15, 2000, passed, 
and the President on December 21, 2000, signed into law, the Commodity 
Futures Modernization Act of 2000 (CFMA),\1\ which substantially 
amended the Commodity Exchange Act, 7 U.S.C. 1 et seq. (Act). The 
Commission on December 28, 2000, withdrew most of the final rules in 
order to determine their consistency with the Act as amended. 65 FR 
82272.
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    \1\ See Commodity Futures Modernization Act of 2000, Appendix E, 
Pub. L. No. 106-554, 114 Stat. 2763 (2000).
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    The Commission's new regulatory framework was intended to ``promote 
innovation, maintain U.S. competitiveness, and at the same time reduce 
systemic risk and protect customers,'' 65 FR 38986, and to provide U.S. 
futures exchanges greater flexibility with which to respond to the 
competitive challenges brought about by new technologies.\2\ 
Specifically, the framework replaced ``one-size-fits-all'' regulation 
for futures markets with broad, flexible ``core principles,'' and 
established three regulatory tiers for markets.
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    \2\ The President's Working Group on Financial Markets (PWG) and 
the chairmen of the Commission's congressional oversight committees 
encouraged the Commission to consider proposing such major revisions 
to the regulatory framework. 65 FR at 38987. Recognizing the 
importance of the OTC derivatives markets, the chairmen of the 
Senate and House Agriculture Committees asked the PWG to conduct a 
study of OTC derivatives markets. After studying OTC derivatives, 
the PWG on November 9, 1999, reported to Congress its 
recommendations. See Over-the-Counter Derivatives Markets and the 
Commodity Exchange Act, Report of the President's Working Group. The 
PWG report focused on promoting innovation, competition, efficiency, 
and transparency in OTC derivatives markets and in reducing systemic 
risk. Although specific recommendations about the regulatory 
structure applicable to exchange-traded futures were beyond the 
scope of its report, the PWG suggested that the Commission review 
existing regulatory structures (particularly those applicable to 
markets for financial futures) to determine whether they were 
appropriately tailored to serve valid regulatory goals.
    Subsequently, by letter dated November 30, 1999, the Chairmen of 
the Senate and House Agriculture Committees, joined by additional 
senior Senators and Members of the House of Representatives, 
``encourag[ed] the Commission to use the exemptive authority granted 
it by the Commodity Exchange Act to lessen regulatory burdens on 
United States' futures markets so that they may compete more 
effectively.''
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    In general, the framework provided a lower level of regulatory 
oversight where access to an exchange or facility would have been 
restricted to eligible participants or commercial participants or where 
the nature of the underlying commodity would have posed a relatively 
low susceptibility to manipulation. This reflects the reduced need to 
monitor closely such markets. The Commission also provided that markets 
serving a price discovery function, irrespective of the product traded 
or market participants, offer a degree of price transparency. The 
framework therefore balanced the public interests of market and price 
integrity, protection against manipulation and customer protection with 
the need to permit exchanges and other trading facilities to operate 
more flexibly in today's competitive environment.

II. The Statutory Scheme

    The Act, as amended by the CFMA, establishes two tiers of regulated 
markets, designated contract markets (contract markets) and registered 
derivatives transaction execution facilities (DTFs). In addition, the 
Act, as amended, provides for two markets exempt from regulation, 
exempt boards of trade and, under section 2(h)(3) of the Act, as 
amended, exempt commercial markets.
    The CFMA, in both its broad contours and in many of its specific 
provisions, codifies the Commission's regulatory framework without 
significant change. It varies from the rules withdrawn by the 
Commission in a number of its details and renders unnecessary a number 
of Commission rules by enacting their provisions into statute. The 
Commission therefore is reproposing rules conforming to and 
implementing the amended statutory scheme.

III. The Proposed Rules

A. Designated Contract Markets

    Proposed part 38 governs designated contract markets. Under the Act 
as amended, ``designated contract markets'' are those approved boards 
of trade or trading facilities on which contracts for future delivery 
on any commodity may be traded by any type

[[Page 14263]]

of market participant.\3\ Proposed rule 38.2 exempts designated 
contract markets operating under this part from all other Commission 
rules not specifically reserved.\4\
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    \3\ Prior to its recent amendment, the Act referred to 
``designated contract markets'' as the Commission-approved products 
traded on a board of trade. Commission rules were consistent with 
that usage. The Act, as amended, however, uses the term ``designated 
contract market'' to refer to the approved or licensed market on 
which futures contracts and commodity options are traded. Part 38 
refers to ``designated contract markets'' in this sense. The meaning 
of ``designated contract market'' in all other Commission rules must 
be inferred from the context.
    \4\ In addition, the Commission is proposing to delete a number 
of rules herein. With respect to those rules not reserved or 
deleted, the Commission intends to review its rulebook in its 
entirety and to remove all rules that have been superseded or that 
are otherwise no longer in force following completion of all of the 
rulemakings necessary to implement the CFMA.
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    Proposed rule 38.3 establishes the application and approval 
procedure for designation of new contract markets.\5\ As proposed, 
applicants meeting the criteria will be deemed to be designated by the 
Commission 60 days after receipt of the application.\6\ The proposed 
procedure permits the Commission to designate a contract market upon 
conditions. Applications must demonstrate that the contract market 
satisfies the criteria for designation under section 5(b) of the Act 
and the core principles for operation under section 5(d) of the Act. 
The application also must include a copy of the contract market's rules 
and, to the extent that compliance with the conditions for designation 
is not self-evident, a brief explanation of how the conditions for 
designation are satisfied. As provided under the Commission's current 
fast-track review rules, the applicant may not make substantive 
amendments to the application during the 60-day review period unless 
requested to do so by the Commission. Amended applications would be 
treated as being filed anew for purposes of fast-track review.
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    \5\ Section 5(c) of the Act, as amended, provides that existing 
boards of trade designated as a contract market are considered to be 
designated contract markets under the Act as amended.
    \6\ This 60-day review period is one-third of the 180-day review 
period permitted by the Act. See 7 U.S.C. 8(a).
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    As proposed, the Commission may terminate the 60-day fast-track 
review if it appears during that period that the application violates 
or appears to violate, or if there is insufficient information to 
determine whether it would violate, the Act or Commission rules. The 
Commission, after terminating a fast-track review, will continue to 
review the application under the deadlines of section 6 of the Act. 
Alternatively, within ten days of receiving a termination notification, 
the applicant may seek to have the Commission determine whether or not 
to institute a proceeding to deny a proposed designation application 
under section 6 of the Act.
    Section 5 of the Act, as amended, requires that an applicant meet a 
number of designation requirements. Under the proposed rules, an 
applicant must also demonstrate its ability to comply with core 
regulatory principles. The Commission has proposed rules giving notice 
of how it will interpret the meaning of several of the statutory 
requirements.\7\ In addition, the Commission has provided an appendix 
containing general guidance regarding application criteria and guidance 
with regard to acceptable practices for meeting the core principles.\8\ 
As the Commission previously noted, the guidance establishes non-
exclusive safe harbors. It does not establish a mandatory means of 
compliance with the core principles.
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    \7\ In particular, in proposed rule 38.3(b)(1) the Commission 
notes that the statutory designation requirement relating to 
preventing market manipulation includes the requirement that 
designated contract markets have a dedicated regulatory department 
or delegate that function. Proposed rule 38.3(b)(2) provides that 
the designation requirement relating to fair and equitable trading 
rules includes fair and timely availability to market participants 
of information regarding prices, bids and offers. This requirement 
may be satisfied by making such information available to traders 
through commercial vendors.
    In addition, proposed rule 38.3(b)(3) makes clear that a trading 
facility applying for designation may satisfy the requirement that 
it have disciplinary procedures with respect to non-members by 
having the capacity to sanction non-member violations by expelling 
them or by denying them future access. The proposed guidance with 
respect to acceptable practices for core principles applicable to 
contract markets and DTFs has similar provisions.
    \8\ Separate from the Appendix providing guidance on compliance 
with the core principles, proposed rule 38.3(b)(4) clarifies that 
the core principle on fitness standards, in the context of 
proprietary, rather than mutually-owned exchanges, applies to 
natural persons with greater than a ten percent ownership interest 
in the facility or in its owners. Moreover, fitness requirements 
that apply to members are required by the Act. However, the 
Commission, in providing guidance with regard to this requirement, 
has made clear that some types of members, such as those who do not 
have voting rights or exercise disciplinary or governing 
responsibilities, meet the fitness requirements by meeting the 
applicable requirements for market access or participation.
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    Section 5c of the Act permits designated contract markets to 
request that the Commission provide ``prior'' approval of the 
facility's rules and products. Proposed rule 38.4, pursuant to the 
Commission's exemptive authority under section 4(c) of the Act, 
provides designated contract markets the additional flexibility to 
request such approval at any time. Contract markets, for competitive 
reasons, may wish to choose to list a new product for trading by 
certification and subsequently to request Commission approval. The 
Commission believes that, in light of the increased competitiveness of 
these markets, such procedural flexibility is in the public interest. 
Based on the Commission's prior administrative experience, it has 
simplified and streamlined the review procedures. Under these 
procedures, qualifying contract market rules that are voluntarily 
submitted for review would be eligible for review and approval in 45 
days, half the time permitted under the Act.\9\
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    \9\ As noted above, prior to adoption of the CFMA, a board of 
trade or trading facility was required to be designated as a 
contract market in each specific contract traded thereon. As amended 
by the CFMA, however, the trading facility itself and not each 
contract is required to be designated as a contract market and 
contracts may be listed for trading pursuant to exchange 
certification. The facility also may request that the Commission 
review and approve new products.
    Proposed rule 38.4(a) provides that any contract that has been 
submitted for Commission review and approved by the Commission may 
be labeled in the facility's rules as ``Listed for trading pursuant 
to Commission approval.'' Contracts that were designated by the 
Commission as contract markets prior to December 21, 2000, may be 
labeled as approved by the Commission. Contracts listed for trading 
by exchange certification under the procedures then in effect under 
rule 5.3 are not eligible to be so labeled.
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    The Commission further proposes to exercise its section 4(c) 
exemptive authority to make less burdensome the statutory certification 
provision regarding contract market rules. Section 5c of the Act 
requires contract markets to certify that each and every rule or rule 
change does not violate the Act and Commission rules. However, based 
upon its experience administering the Act prior to its recent 
amendment, the Commission is of the view that many rules need not be so 
certified. Indeed, under prior practice, contract markets were required 
only to provide notice to the Commission when amending certain types of 
administrative rules, and in some instances, no notice was required. In 
light of the past successful conduct of its oversight duties without 
the submission of every rule change, the Commission believes that it is 
in the public interest to exempt contract markets from the requirement 
that they certify all rules. The Commission also believes that this 
additional flexibility is consistent with the overall intent and 
structure of the recent amendments to the Act.
    As proposed, the Commission would permit contract markets simply to 
notify the Commission on a weekly basis of amendments to some types of 
rules, and would not require a certification or

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notification of changes to rules that relate solely to administrative 
or ministerial matters. Nevertheless, each contract market is required 
to have available a full and accurate record of the procedural history 
of each of its rules.
    Proposed rule 38.5 provides for information requests to contract 
markets regarding compliance with the conditions for designation. These 
requests may be made for any oversight purpose.\10\ In this regard, for 
example, the Commission may request designated contract markets to 
provide information relating to their operations or their practices in 
connection with their compliance with particular core principles or 
other conditions of their designation or in connection with the 
Commission's formulation of statements of acceptable practice and its 
general oversight responsibilities under the Act.
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    \10\ Section 5c(d) of the Act provides a mechanism for notifying 
contract markets (and other registered entities) that they are 
violating a core principle. The request for a demonstration of 
compliance operates independently of the section 5c(d) procedure. 
Indeed, the request for such a demonstration from a registered 
entity, and the Commission's consideration of the entity's response 
may constitute a useful alternative to the more formal procedures of 
section 5c(d) of the Act. It would be the Commission's intent to 
explore such informal methods of resolving issues of compliance with 
core principles by registered entities prior to invoking more formal 
mechanisms.
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    Proposed rule 38.6 makes clear that a violation of these part 38 
rules is not intended to and does not constitute a basis for voiding an 
agreement, contract, or transaction that has been duly entered into. 
Under rule 38.6, a Commission proceeding to alter or supplement a rule, 
term, or condition of a contract for trading on the facility under 
section 8a(7) of the Act, to declare an emergency under section 8a(9), 
or to take any other action to require a designated contract market to 
take or refrain from taking specific action would not constitute 
grounds for rescinding contracts. This provision does not change 
applicable law and merely restates the existing understanding of the 
effect of such a Commission action on contracts entered into already.

B. Derivatives Transaction Execution Facilities

    Proposed part 37 implements section 5a of the Act, as amended. 
Section 5a of the Act provides for registration by the Commission of a 
board of trade or trading facility under an intermediate level of 
regulation as a DTF. This new category of market is available to 
eligible traders for futures and option contracts on commodities that 
have a nearly inexhaustible deliverable supply; are highly unlikely to 
be susceptible to the threat of manipulation; have no cash market; 
security futures products; or futures and option contracts on 
commodities that the Commission may determine, on a case-by-case basis, 
are highly unlikely to be susceptible to the threat of manipulation. In 
addition, except as provided in section 5(e)(2) of the Act, eligible 
commercial entities trading for their own account may do so on a DTF 
with respect to futures and option contracts on commodities other than 
those enumerated in section 1a(4) of the Act. Furthermore, a board of 
trade operating as a DTF may trade on the facility agreements, 
contracts, or transactions involving commodities excluded or exempt 
pursuant to sections 2(c), 2(d), 2(g), or 2(h) as provided by section 
5a(g) of the Act, subject to the Commission's exclusive jurisdiction. 
Proposed rule 37.2 exempts DTFs from all Commission regulations 
applicable to a trading facility that are not reserved. It also makes 
clear that the reserved regulations apply as though DTFs were 
specifically referenced therein.
    Proposed rule 37.3 identifies the commodities eligible to be traded 
on a DTF under section 5a of the Act. Specifically, proposed rule 37.3 
identifies those commodities that qualify under the requirements of 
section 5a(b)(2)(A) through (C) of the Act \11\ as those commodities 
defined as an ``excluded commodity'' in section 1a(13) of the Act.\12\ 
Excluded commodities under section 1a(13) of the Act include exempt 
securities. Unlike the provisions governing exempt boards of trade, the 
CFMA imposes no specific limitations or requirements for exempt 
securities to trade on a DTF. The Commission is requesting comment on 
whether additional regulatory requirements, such as large trader 
reporting, should be imposed as a condition for such trading on a DTF.
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    \11\ Section 5a(b)(2)(A) through (C) of the Act as amended 
provides that a registered derivatives transaction execution 
facility may trade any contract of sale of a commodity for future 
delivery (or option on such a contract) only if--
    ``(A) the underlying commodity has a nearly inexhaustible 
deliverable supply;
    (B) the underlying commodity has a deliverable supply that is 
sufficiently large that the contract is highly unlikely to be 
susceptible to the threat of manipulation; [or]
    (C) the underlying commodity has no cash market[.]''
    \12\ Section 1a(13) of the Act as amended defines an ``excluded 
commodity'' to mean among other things an interest rate, exchange 
rate, currency, credit risk or measure, debt instrument, measure of 
inflation, or other macroeconomic index or measure.
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    Proposed rule 37.3 also establishes a procedure whereby a specific 
DTF would be able to make a showing under section 5a(b)(2)(E) of the 
Act that a contract is highly unlikely to be susceptible to the threat 
of manipulation and should be eligible for trading on that DTF in light 
of the characteristics of the commodity and the market's surveillance 
history, including its self-regulatory record, capacity and 
undertakings. Proposed rule 37.3(a)(3)(ii)(B) lists those factors that 
are relevant in making such a showing. The rule does not require that 
the written demonstration include explanations of information that is 
self-evident. Agricultural commodities that are not enumerated in the 
Act, such as soft, world commodities, may trade on a DTF upon 
successfully making such a demonstration, or under section 5a(b)(2)(F) 
of the Act, by limiting trading access to eligible commercial 
entities.\13\
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    \13\ The Commission, pursuant to section 1a(11)(C) of the Act, 
has proposed to include within the definition of eligible commercial 
entity floor traders or floor brokers whose trading obligations are 
guaranteed by a futures commission merchant, trading for their own 
account. This is consistent with the Commission's withdrawn rules 
and with Congress' inclusion in the statutory definition (under 
section 1a(11)(B)) of certain other specified liquidity providers.
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    Consistent with section 5(e)(2) of the Act, as amended, the 
Commission will determine in a future rulemaking whether those 
agricultural commodities that are enumerated in the Act should be 
eligible for trading on a DTF and, if so, the appropriate conditions 
for such trading. The Commission has reserved a paragraph in rule 37.3 
for this purpose.
    Proposed part 37 includes a number of procedural provisions to 
provide greater administrative flexibility in the registration and 
oversight of DTFs. For example, proposed rule 37.5(b) permits the 
Commission to register a DTF upon conditions. This would enable the 
Commission to register a facility conditioned upon its subsequent 
compliance with a particular condition for registration. In addition, 
the Commission is proposing a fast-track review procedure for 
applications for registration that are not amended while under review. 
Such applicants would be deemed to be registered 30 days after 
receipt.\14\
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    \14\ Again, the proposed rule provides for a review period that 
is substantially less than that permitted by the statute. See 7 
U.S.C. 8(a).
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    Section 5a(c)(1) of the Act provides that applicants for DTF 
registration shall be required to demonstrate only that they comply 
with the requirements for trading specified in section 5a(b) and the 
criteria for registration specified in

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section 5a(c).\15\ However, to maintain registration, DTFs must be in 
compliance with the core principles of section 5a(d) of the Act. 
Accordingly, the Commission is proposing that an applicant for DTF 
registration may, if it chooses, become registered without 
demonstrating its capacity to comply with the core principles for 
trading. A new DTF that chooses not to make such a demonstration, 
however, must certify to the Commission that it has the capacity to, 
and upon commencing operations will, operate in compliance with the 
core principles. This certification may be made separately or as part 
of the initial application.
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    \15\ Existing contract markets need not make such a 
demonstration. As proposed, they must simply notify the Commission 
of their intent to operate as a DTF, and file with the Commission 
the DTF's rules and a certification that they meet all of the 
requirements for registration as a DTF.
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    As with the rules regarding contract markets, the Commission is 
proposing in an appendix general guidance regarding applications and 
acceptable practices for core principles. The proposed acceptable 
practices are not mandatory in nature, but rather provide a non-
exclusive safe-harbor for compliance. Proposed rule 37.6(d) interprets 
application of certain of the core principles in the circumstances 
specified in the rule. For example, the Commission proposes that an 
electronic platform that is accessible for trading only by eligible 
commercial entities and that trades only tailored products may satisfy 
the requirement to monitor trading in a manner ``appropriate to the 
market'' by assuring compliance with its rules regarding access 
limitations.
    In addition, the Commission is proposing in rule 37.1(b) to include 
within the definition of ``eligible commercial entity'' a registered 
floor broker or floor trader, trading for its own account, whose 
trading obligations are guaranteed by a futures commission merchant. 
This is consistent both with the Commission's withdrawn rules and with 
the CFMA's inclusion of certain types of liquidity providers within the 
statutory definition of ``eligible commercial entity.'' In this regard, 
it has been suggested that electronic markets may have functional 
counterparts to floor brokers and floor traders, and that these persons 
should also be included within the definition of eligible commercial 
entity. The Commission is requesting comment on how and by whom this 
market making function may be performed on electronic trading 
facilities, the similarities and differences in this market making 
function and its regulation when performed on an electronic platform 
rather than in a physical trading environment, and whether such persons 
should be included within the definition of eligible commercial entity.
    The Commission has proposed to interpret the core principle 
regarding disclosure of information relevant to market participants as 
including the principle of providing market participants information 
regarding prices, bids and offers on a fair, equitable and timely 
basis. Such transparency is key to protecting market participants from 
fraud and other types of abusive trading practices. Price transparency 
has been the hallmark of regulated markets and should be so recognized 
in the core principles. Finally, the Commission has proposed to 
interpret the core principle concerning fitness standards as including 
a DTF's owners, defined as natural persons that directly or indirectly 
have greater than a ten percent interest in the facility. By this 
interpretation, the Commission is proposing to clarify the application 
of the core principle on fitness to proprietary trading facilities.
    Like contract markets, DTFs may request that the Commission approve 
their trading rules, which may be trading protocols, and the products 
that they trade. The Commission has used its section 4(c) exemptive 
authority to permit DTFs to request such approval at any time, before 
or after the rule's implementation or the product's listing. Although 
this modification to the statutory scheme is modest, it may provide 
DTFs with far greater flexibility in bringing products to market.
    Proposed section 37.7 includes several special call provisions. 
Under these provisions, the Commission may issue special calls to the 
DTF, its market intermediaries or participants upon a determination 
that the Commission needs certain information to conduct limited 
surveillance of trading in one or more products traded on the DTF. On 
occasion, it may need to examine trading activity for a specific period 
of time to ensure against excessive speculation, manipulation, 
controls, corners or squeezes.

C. Exempt Markets

    In addition to the types of markets subject to the regulatory 
oversight of the Commission--designated contract markets and DTFs--the 
Act as amended authorizes two categories of markets that are exempt 
from regulatory oversight by the Commission. They are: exempt 
commercial markets and exempt boards of trade. The Commission in part 
36 has proposed rules necessary to implement these statutory 
exemptions.
1. Exempt Commercial Markets
    Transactions by eligible commercial entities in exempt commodities 
traded on an electronic trading facility are exempt commercial markets 
under section 2(h)(3) of the Act. These markets that satisfy the 
initial and ongoing requirements of sections 2(h)(3) through (5) of the 
Act as amended are excluded from the Act's other requirements.\16\ The 
Commission is proposing rules for these markets that implement the 
qualifying conditions of the exemption.
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    \16\ See Sections 2(e)(1) and 2(h)(3) of the Act, as added by 
sections 104 and 106 of the CFMA. The Act refers to electronic 
commercial markets as ``excluded'' from the Act's regulatory 
requirements that are not qualifying conditions for the exemption. 
These qualifying conditions are found in paragraphs 2(h)(4) and (5). 
Moreover, it should be noted that among these qualifying conditions, 
the Commission is authorized to promulgate rules to ensure 
disclosure of prices and to specify procedures regarding redress by 
participants to an order denying them access in response to a 
determination that the participant did not comply with a subpoena 
issued by the Commission. See sections 2(h)(4)(D), 2(h)(5)(C)(ii) 
and 2(h)(6) of the Act as amended.
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    Proposed rule 36.3(a) implements the notification requirements of 
section 2(h)(5)(A) of the Act. Proposed rule 36.3(b)(1) establishes 
information requirements for exempt commercial markets consistent with 
section 2(h)(5)(B) of the Act. In this regard, an exempt commercial 
market may satisfy reporting requirements by providing the Commission 
with electronic access to transactions conducted on the facility. 
Alternatively, an exempt commercial market may choose to satisfy its 
reporting requirements for such transactions by providing the 
Commission with information regarding such positions by large traders 
by an alternative means, the form and content of which the Commission 
may determine is acceptable pursuant to a petition to the Commission 
for such a determination. Such an alternative should provide the 
Commission with information comparable in coverage and frequency to 
that provided to the Commission by its large trader reporting system.
    As required by section 2(h)(6) of the Act, proposed rule 36.3(b)(3) 
establishes procedures for a foreign person named in a subpoena issued 
by the Commission under section 2(h)(5)(C) to challenge the 
Commission's action. In this regard, the Commission is proposing to use 
its existing hearing procedures found in rules 21.03(g) through (h) and 
to incorporate them by reference.
    Although the Act as amended exempts these electronic markets from 
Commission regulatory oversight, the

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Act at the same time affirmatively vests the Commission with 
comprehensive antimanipulation and antifraud enforcement authority over 
these trading facilities. Section 2(h)(4)(A) of the Act provides that 
an agreement, contract or transaction entered into on a qualifying 
exempt commercial market shall be subject to sections 6(c) and 9(a)(2) 
of the Act ``to the extent such sections prohibit manipulation of the 
market price of any commodity in interstate commerce and to the extent 
the agreement, contract or transaction would otherwise be subject to 
such sections[.]'' Section 2(h)(4)(B) of the Act provides that such 
transactions are subject to sections 4b and 4o, as well as regulations 
promulgated pursuant to 4c(b) proscribing fraudulent activity. Thus, 
the Commission is charged with monitoring these markets for 
manipulation and fraudulent conduct, and enforcing the antimanipulation 
and antifraud provisions of the Act. The informational requirements 
imposed by the Act and by these proposed rules are designed to ensure 
that the Commission can effectively perform these functions.
2. Exempt Boards of Trade
    Section 5d of the Act, as added by section 114 of the CFMA, 
establishes a category of market exempt from Commission regulatory 
oversight referred to as an ``exempt board of trade.'' The Commission 
in rule 36.2 is proposing implementing regulations for section 5d of 
the Act. First, the Commission is proposing to define those commodities 
that are eligible to trade on an exempt board of trade to include 
commodities defined in section 1a(13) of the Act as ``excluded 
commodities,'' other than securities, and such other commodities as the 
Commission may define by rule, regulation or order. See proposed rule 
36.2(a). The Commission believes that this definition provides legal 
certainty and further satisfies section 5d's requirements that the 
underlying commodity has ``(A) a nearly inexhaustible deliverable 
supply; (B) a deliverable supply that is sufficiently large, and a cash 
market sufficiently liquid, to render any contract traded on the 
commodity highly unlikely to be susceptible to the threat of 
manipulation; or (C) no cash market[.]'' In addition, proposed rule 
36.2(b) implements the notification requirements of section 5d of the 
Act.
3. Additional Requirements
    Consistent with sections 2(h)(5)(F) and 5d(g) of the Act, the 
proposed rules prohibit exempt boards of trade and exempt commercial 
markets from representing that they are registered with, designated, 
recognized, licensed or approved by the Commission. The Commission 
invites comment on whether the rule also should require that such 
exempt entities affirmatively disclose to traders that the facility and 
trading on the facility are not so regulated or approved by the 
Commission.

D. Anti-Fraud Provisions

    One of the purposes for which the CFMA was enacted was ``to clarify 
the jurisdiction of the Commodity Futures Trading Commission over 
certain retail foreign exchange transactions and bucket shops that may 
not be otherwise regulated.'' CFMA, section 2(5). The Commission is 
proposing rule 1.1, which applies in scope to such retail foreign 
exchange transactions not otherwise regulated, pursuant to its 
authority in sections 3 and 8a(5) of the Act. Congress recently amended 
section 3 of the Act through enactment of the CFMA. Section 3(a) 
expressly finds that the transactions subject to the Act are regularly 
entered into in interstate and international commerce and are affected 
with a ``national public interest by providing a means for managing and 
assuming price risks, discovering prices, or disseminating pricing 
information through trading in liquid, fair and financially secure 
trading facilities.'' Section 3(b) provides, as pertinent here, that it 
is the purpose of the Act

to deter and prevent price manipulation or any other disruptions to 
market integrity; to ensure the financial integrity of all 
transactions subject to this Act and the avoidance of systemic risk; 
to protect all market participants from fraudulent or other abusive 
sales practices and misuse of customer assets; and to promote 
responsible innovation and fair competition among boards of trade, 
other markets and market participants.
    Section 8a(5) authorizes the Commission ``to make and promulgate 
such rules and regulations as, in the judgment of the Commission, are 
reasonably necessary to effectuate any of the provisions or to 
accomplish any of the purposes of this Act.''
    In the judgment of the Commission, proposed rule 1.1 is reasonably 
necessary to effectuate the express purpose of the Act to protect 
retail foreign exchange market participants from fraudulent or other 
abusive sales practices. It is the Commission's intention that proposed 
rule 1.1 not replace the applicability of any existing antifraud rule, 
including rules 32.9 (fraud in connection with commodity option 
transactions), and 33.10 (fraud in connection with domestic exchange-
traded option transactions), which were promulgated under section 4c(b) 
of the Act, rule 30.9 (fraud involving any foreign futures contract or 
foreign options transaction), rule 4.41 (fraudulent advertising by 
commodity pool operators, commodity trading advisors, and principals 
thereof) and rule 31.3 (fraud in connection with leverage 
transactions).

E. Arbitration

    Section 110 of the CFMA removed the Act's previous requirements for 
contract market designation, including former section 5a(11) of the 
Act, governing exchange arbitration proceedings. The Commission is 
therefore proposing to delete Part 180 of its rules, which was based, 
in part, on the provisions of former Section 5a(11) of the Act, and to 
repropose its withdrawn rule 166.5, incorporating certain amendments 
required by the new legislation. For example, the reproposed version 
provides that an FCM may require an eligible contract participant to 
sign an agreement waiving the right to reparations as a condition to 
using the FCM's services.\17\ The CFMA is silent as to whether pre-
dispute arbitration agreements must be entered into voluntarily. 
Compare former Sec. 5a(11) of the Act with Sec. 5(d)(13) of the Act, as 
amended. The proposed rule retains this requirement.
---------------------------------------------------------------------------

    \17\ This provision is consistent with section 118 of the CFMA.
---------------------------------------------------------------------------

IV. Section 4(c) Findings

    Some of the proposals contained in this Federal Register notice are 
being proposed under section 4(c) of the Act, which grants the 
Commission broad exemptive authority. Section 4(c) of the Act provides 
that, in order to promote responsible economic or financial innovation 
and fair competition, the Commission may by rule, regulation or order 
exempt any class of agreements, contracts or transactions, either 
unconditionally or on stated terms or conditions, from any of the 
requirements of any provision of the Act (except certain provisions 
governing a group or index of securities and security futures 
products). As relevant here, when granting an exemption pursuant to 
section 4(c), the Commission must find that the exemption would be 
consistent with the public interest.
    The Commission is proposing to use its section 4(c) exemptive 
authority here to provide registered entities with greater procedural 
flexibility than is contained in the Act. For instance, pursuant to 
proposed rule 38.4, designated contract markets may request

[[Page 14267]]

approval of their contracts following certification of those contracts, 
notwithstanding the Act's limitation of the Commission's approval 
authority to ``prior'' approval. Furthermore, the Commission is 
proposing a less burdensome certification procedure than that provided 
in the Act. The Commission believes that providing this additional 
flexibility to registered entities is consistent with the public 
interest. The Commission invites public comment on this finding.

V. Cost-Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA, 
requires the Commission to consider the costs and benefits of its 
action before issuing a new regulation under the Act. The Commission is 
applying the cost-benefit provisions of section 15 for the first time 
in this rulemaking and understands that, by its terms, section 15 as 
amended does not require the Commission to quantify the costs and 
benefits of a new regulation or to determine whether the benefits of 
the proposed regulation outweigh its costs. Nor does it require that 
each proposed rule be analyzed in isolation when that rule is a 
component of a larger package of rules or rule revisions. Rather, 
section 15 simply requires the Commission to ``consider the costs and 
benefits'' of its action.
    The amended section 15 further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas of concern 
and could in its discretion determine that, notwithstanding its costs, 
a particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The new regulatory framework constitutes a package of related rule 
provisions. The Commission has considered their costs and benefits as a 
totality. The rules impose reporting, recordkeeping and other 
informational requirements on trading facilities that are either 
mandated by or fully consistent with the new provisions of the CFMA. 
The Commission has considered the costs and benefits of this rule 
package in light of the specific areas of concern identified in the 
CFMA:
    1. Protection of market participants and the public. In general, 
the proposed rules would be expected to cost little in terms of 
diminishing the protection of market participants and the public. The 
rules impose limited costs in terms of informational requirements. The 
countervailing benefit of these costs, however, is that the Commission 
will have the necessary information to perform its oversight functions 
and thus carry out its mandate of assuring the continued existence of 
competitive and efficient markets.
    2. Efficiency and competition. The rules are expected to benefit 
competition and market efficiency broadly by providing more options for 
market structure and greater legal certainty for covered instruments. 
The rules do not impose a cost on market efficiency or competition.
    3. Financial integrity of futures markets. The rules permit but do 
not require clearing for DTFs and contract markets. Nevertheless, the 
proposed rules require that such markets have and disclose their 
framework for financial integrity. Thus, consistent with the statute, 
the benefits of clearing are available but not mandated, and the 
facility may establish a financial integrity framework appropriate to 
its market.
    4. Price discovery. Consistent with the statute, markets that serve 
a price discovery function are required to disseminate publicly certain 
market information. While such a requirement may impose a cost on 
markets required to disseminate such information, the cost would be 
expected to be minimal since such price discovery markets are likely to 
make available such information anyway in the interest of attracting 
additional liquidity to the market. Moreover, many markets use this 
price information as a source of revenue and would therefore make it 
available even in the absence of a requirement to do so. Nevertheless, 
this information provides a great benefit to the public in terms of 
ensuring the supply of economic guidance to commodity producers and 
users and is important to a market participant's ability to protect him 
or herself from fraudulent and other abusive practices.
    5. Sound risk management practices. It is anticipated that the 
creation of the new regulatory structure will encourage better risk 
management practices by making available additional market outlets and 
more customized products for risk management purposes. The added 
competition for offering these products will tend to reduce the cost of 
risk management.
    6. Other public interest considerations. The rules also include an 
antifraud rule for certain retail foreign exchange transactions and 
bucket shops that may not otherwise be regulated. The Commission 
believes that this provision will benefit market participants and the 
public and will further serve the public interest by deterring illegal 
behavior. The nonrepudiation provisions included in the rules benefit 
the public interest by furthering legal certainty.
    After considering these factors, the Commission has determined to 
propose the revisions to its rules discussed above. The Commission 
invites public comment on its application of the new cost-benefit 
provision. Commenters also are invited to submit any data that they may 
have quantifying the costs and benefits of the proposed rules with 
their comment letters.

VI. Related Rulemakings

    As part of the final rules promulgating the new regulatory 
framework,\18\ the Commission also issued final rules and rule 
amendments that would have applied to market intermediaries and to 
clearing organizations.\19\ They too, for the most part, were withdrawn 
following the enactment of the CFMA.\20\
---------------------------------------------------------------------------

    \18\ Implementation of the CFMA requires the Commission to 
undertake a number of rulemakings in addition to those that were 
part of the Commission's new regulatory framework, such as rules 
relating to security futures products. Moreover, the initial rules 
of the new regulatory framework contemplated a number of subsequent 
rulemakings, such as permitting risk-based net capital requirements 
for intermediaries. Those rulemaking proceedings are separate from 
the rules that are referenced herein and also will be considered by 
the Commission within the coming year.
    \19\ See Rules Relating to Intermediaries of Commodity Interest 
Transactions, 65 FR 77993 (Dec. 13, 2000), and A New Regulatory 
Framework for Clearing Organizations, 65 FR 78020 (Dec. 13, 2000).
    \20\ With respect to those rules concerning the investment of 
customer funds, the Commission determined to move forward their 
effective date to December 28, 2000, as well as to make certain 
technical corrections to the rule amendments. See 65 FR 82270 (Dec. 
28, 2000).
---------------------------------------------------------------------------

    Upon further consideration, the Commission has determined that many 
of the withdrawn final rules and rule amendments relating to 
intermediaries are substantively unaffected by the CFMA's statutory 
revisions. Accordingly, the Commission intends, at a future date, to 
repropose and readopt those rules and rule amendments relating to 
intermediaries that are not implicated by the statutory revisions to 
the Act, with any necessary technical, conforming changes. These rules 
and rule amendments address, among other things, the definition of the

[[Page 14268]]

term ``principal,'' the addition of a principal, certified financial 
reports, ethics training, disclosure, account opening procedures, 
trading standards, reporting requirements, and offsetting positions. 
The Commission also intends to repropose rules for clearing 
organizations shortly, with the intention of promulgating final rules 
for registered derivatives clearing organizations. The Commission 
encourages interested persons to review the Federal Register releases 
discussing the background and purpose of the rules and rule amendments 
mentioned above for further information.\21\
---------------------------------------------------------------------------

    \21\ See 65 FR 77993 and 65 FR 78020. See also 65 FR 39008 and 
65 FR 39027 (June 22, 2000) (proposing rules).
---------------------------------------------------------------------------

VII. Implementation Issues; Comment Period and No-action

    The amendments to the Act contained in the CFMA generally became 
effective on December 21, 2000, the date that the CFMA was enacted into 
law.\22\ In light of the need to promulgate implementing regulations 
without delay, the Commission encourages commenters to submit their 
comments as early as possible during the comment period. The early 
filing of comments will assist the Commission in acting expeditiously 
to adopt the necessary implementing regulations. In any event, comments 
should be filed with the Commission by the end of the comment period. 
To the extent that the promulgation of implementing regulations is 
necessary to effectuate certain statutory provisions, any extension of 
the comment period likely would be contrary to the public interest and 
contrary to the intent of Congress that these statutory changes be made 
effective without delay.
---------------------------------------------------------------------------

    \22\ Certain provisions of the CFMA, however, have a delayed 
effective date. The Commission will adopt implementing rules for 
those provisions of the CFMA at a later date.
---------------------------------------------------------------------------

    In light of the Congressional intent to implement these statutory 
changes without delay, during this transition period between the 
effective date of the amendments to the Act and the adoption of final 
implementing regulations, the Commission will not bring any enforcement 
action against any person who complies with the rules proposed herein. 
Persons that do comply with the proposed rules, however, will be 
required to bring their conduct into compliance with the final rules to 
the extent that the final rules differ from the proposed rules.

VIII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires federal agencies, in promulgating rules, to consider the 
impact of those rules on small entities. The rules adopted herein would 
affect contract markets and other trading facilities. The Commission 
has previously established certain definitions of ``small entities'' to 
be used by the Commission in evaluating the impact of its rules on 
small entities in accordance with the RFA.\23\ In its previous 
determinations, the Commission has concluded that contract markets are 
not small entities for the purpose of the RFA.\24\ The Commission is 
proposing to determine that the other trading facilities covered by 
these rules, for reasons similar to those applicable to contract 
markets, are not small entities for purposes of the RFA. In any event, 
the rules being proposed today authorize these trading facilities to 
operate in a less regulated environment than may currently be the case; 
consequently, these rules should not have any, or result in only a de 
minimus, increase in the regulatory requirements that apply to contract 
markets and other trading facilities.
---------------------------------------------------------------------------

    \23\ 47 FR 18618-21 (Apr. 30, 1982).
    \24\ 47 FR 18618, 18619 (discussing contract markets).
---------------------------------------------------------------------------

    Accordingly, the Commission does not expect the rules, as proposed 
herein, to have a significant economic impact on a substantial number 
of small entities. Therefore, the Acting Chairman, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the 
proposed amendments will not have a significant economic impact on a 
substantial number of small entities. The Commission invites the public 
to comment on this finding and on its proposed determination that the 
trading facilities covered by these rules would not be small entities 
for purposes of the RFA.

B. Paperwork Reduction Act of 1995

    This proposed rulemaking contains information collection 
requirements. As required by the Paperwork Reduction Act of 1995 (44 
U.S.C. 3504(h)), the Commission has submitted a copy of this section to 
the Office of Management and Budget (OMB) for its review.
    Collection of Information: Rules Relating to Part 37, Establishing 
Procedures for Entities to be Registered as Derivatives Transaction 
Execution Facilities (DTFs), OMB Control Number 3038-0053. The proposed 
rules will not change the burden previously approved by OMB.
    The estimated burden was calculated as follows:
    Estimated number of respondents: 10.
    Annual responses by each respondent: 1.
    Total annual responses: 10.
    Estimated average hours per response: 200.
    Annual reporting burden: 2,000.
    Collection of Information: Rules Relating to Part 38, Establishing 
Procedures for Entities to become Designated as Contract Markets, OMB 
Control Number 3038-0052. The proposed rules will not change the burden 
previously approved by OMB.
    The estimated burden was calculated as follows:
    Estimated number of respondents: 10.
    Annual responses by each respondent: 1.
    Total annual responses: 10.
    Estimated average hours per response: 300.
    Annual reporting burden: 3,000.
    Collection of Information: Rules Pertaining to Large Trader 
Reports, OMB Control Number 3038-0009. The proposed rules will not 
change the burden previously approved by OMB.
    Estimated number of respondents: 4,731.
    Annual responses by each respondent: 14.67.
    Total annual responses: 69,392.
    Estimated average hours per response: .35213.
    Annual reporting burden: 24,435.
    Collection of Information: Rules Relating to Part 36, Establishing 
Procedures for Exempt Markets, OMB Control Number 3038-XXXX.
    The estimated burden was calculated as follows:
    Estimated number of respondents: 10.
    Annual responses by each respondent: 1.
    Total annual responses: 10.
    Estimated average hours per response: 1.
    Annual reporting burden: 10.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Room 10202, New Executive Office Building, 725 17th Street, NW., 
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

[[Page 14269]]

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 collecting 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

17 CFR Part 1

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

17 CFR Part 5

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

17 CFR Part 15

    Commodity futures, Contract markets, Reporting and recordkeeping 
requirements.

17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 37

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 38

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 40

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

17 CFR Part 41

    Security Futures, Commodity Futures Trading Commission.

17 CFR Part 100

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 166

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Part 170

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 180

    Claims, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.
    In consideration of the foregoing, and pursuant to the authority 
contained in the Act, as amended by the Commodity Futures Modernization 
Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000), and 
in particular, sections 1a, 2, 3, 4, 4c, 4i, 5, 5a, 5b, 5c, 5d, 6 and 
8a thereof, the Commission hereby 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. The authority citation for Part 1 is proposed to be amended to 
read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 5, 6, 6a, 6b, 6c, 6d, 6e, 
6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 
12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the 
Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 
No. 106-554, 114 Stat. 2763 (2000).

    2. Section 1.1 is proposed to be revised to read follows:


Sec. 1.1  Fraud in or in connection with transactions in foreign 
currency subject to the Commodity Exchange Act.

    (a) Scope. The provisions of this subsection shall be applicable to 
accounts, agreements, or transactions described in section 2(c)(1) of 
the Act, to the extent that the Commission exercises jurisdiction over 
such accounts, agreements, or transactions as provided in section 
2(c)(2)(B) of the Act (except that this section shall not be applicable 
to persons described in section 2(c)(2)(B)(ii)(II) or 
2(c)(2)(B)(ii)(III) of the Act).
    (b) Fraudulent conduct prohibited. It shall be unlawful for any 
person, directly or indirectly, in or in connection with any account, 
agreement, or transaction that is subject to paragraph (a) of this 
section:
    (1) To cheat or defraud or attempt to cheat or defraud any person;
    (2) Willfully to make or cause to be made to any person any false 
report or statement or cause to be entered for any person any false 
record; or
    (3) Willfully to deceive or attempt to deceive any person by any 
means whatsoever.
    3. Section 1.3 is proposed to be amended by revising the 
undesignated introductory paragraph to read as follows:


Sec. 1.3  Definitions.

    Words used in the singular form in the rules and regulations in 
this chapter shall be deemed to import the plural and vice versa, as 
the context may require. The following terms, as used in the Commodity 
Exchange Act, or in the rules and regulations in this chapter, shall 
have the meanings hereby assigned to them, unless the context otherwise 
requires:
* * * * *
    4. Section 1.37 is proposed to be amended by adding paragraphs (c) 
and (d) to read as follows:


Sec. 1.37  Customer's or option customer's name, address, and 
occupation recorded; record of guarantor or controller of account.

* * * * *
    (c) Each designated contract market shall 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 or exchange. In addition, upon request, a designated 
contract market shall provide to the Commission information regarding 
the name of any person guaranteeing such transactions or exercising any 
control over the trading of such foreign trader.
    (d) Paragraph (c) of this section shall not apply to a designated 
contract market on which transactions in futures or option contracts of 
foreign traders are executed through and the resulting transactions are 
maintained in accounts carried by a registered futures commission 
merchant or introducing broker subject to the provisions of paragraph 
(a) of this section.
    5.-6. Sections 1.41, 1.41b, 1.43, 1.45, 1.50 and 1.51 are proposed 
to be removed and reserved.

[[Page 14270]]

PART 15--REPORTS--GENERAL PROVISIONS

    7. The authority citation for Part 15 is proposed to be revised to 
read as follows:

    Authority: 7 U.S.C. 2, 4, 5, 6(c), 6a, 6c(a)-(d), 6f, 6g, 6i, 
6k, 6m, 6n, 7, 9, 12a, 19 and 21, as amended by the Commodity 
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 
114 Stat. 2763 (2000).

    8. Section 15.05 is proposed to be amended by revising the heading 
and adding paragraphs (e) through (h) to read as follows:


Sec. 15.05  Designation of agent for foreign brokers, customers of a 
foreign broker and foreign traders.

* * * * *
    (e) Any designated contract market or derivatives transaction 
execution facility that permits a foreign broker to intermediate 
contracts, agreements or transactions, or permits a foreign trader to 
effect contracts, agreements or transactions on the facility or 
exchange, shall be deemed to be the agent of the foreign broker and any 
of its customers for whom the transactions were executed, or the 
foreign trader, for purposes of accepting delivery and service of any 
communication issued by or on behalf of the Commission to the foreign 
broker, any of its customers or the foreign trader with respect to any 
contracts, agreements or transactions executed by the foreign broker or 
the foreign trader on the designated contract market or derivatives 
transaction execution facility. Service or delivery of any 
communication issued by or on behalf of the Commission to a designated 
contract market or derivatives transaction execution facility shall 
constitute valid and effective service upon the foreign broker, any of 
its customers, or the foreign trader. A designated contract market or 
derivatives transaction execution facility which has been served with, 
or to which there has been delivered, a communication issued by or on 
behalf of the Commission to a foreign broker, any of its customers, or 
a foreign trader shall transmit the communication promptly and in a 
manner which is reasonable under the circumstances, or in a manner 
specified by the Commission in the communication, to the foreign 
broker, any of its customers or the foreign trader.
    (f) It shall be unlawful for any designated contract market or 
derivatives transaction execution facility to permit a foreign broker, 
any of its customers or a foreign trader to effect contracts, 
agreements or transactions on the facility unless the designated 
contract market or derivatives transaction execution facility prior 
thereto informs the foreign broker, any of its customers or the foreign 
trader in any reasonable manner the facility deems to be appropriate, 
of the requirements of this section.
    (g) The requirements of paragraphs (e) and (f) of this section 
shall not apply to any contracts, transactions or agreements traded on 
any designated contract market or derivatives transaction execution 
facility if the foreign broker, any of its customers or the foreign 
trader has duly executed and maintains in effect a written agency 
agreement in compliance with this paragraph with a person domiciled in 
the United States and has provided a copy of the agreement to the 
designated contract market or derivatives transaction execution 
facility prior to effecting any contract, agreement or transaction on 
the facility. This agreement must authorize the person domiciled in the 
United States to serve as the agent of the foreign broker, any of its 
customers or the foreign trader for purposes of accepting delivery and 
service of all communications issued by or on behalf of the Commission 
to the foreign broker, any of its customers or the foreign trader and 
must provide an address in the United States where the agent will 
accept delivery and service of communications from the Commission. This 
agreement must be filed with the Commission by the designated contract 
market or derivatives transaction execution facility prior to 
permitting the foreign broker, any of its customers or the foreign 
trader to effect any transactions in futures or option contracts. 
Unless otherwise specified by the Commission, the agreements required 
to be filed with the Commission shall be filed with the Secretary of 
the Commission at Three Lafayette Centre, 1155 21st Street, N.W., 
Washington, D.C. 20581. A foreign broker, any of its customers or a 
foreign trader shall notify the Commission immediately if the written 
agency agreement is terminated, revoked, or is otherwise no longer in 
effect. If the designated contract market or derivatives transaction 
execution facility knows or should know that the agreement has expired, 
been terminated, or is no longer in effect, the designated contract 
market or derivatives transaction execution facility shall notify the 
Secretary of the Commission immediately. If the written agency 
agreement expires, terminates, or is not in effect, the designated 
contract market or derivatives transaction execution facility and the 
foreign broker, any of its customers or the foreign trader are subject 
to the provisions of paragraphs (e) and (f) of this section.
    (h) The provisions of paragraphs (e), (f) and (g) of this section 
shall not apply to a designated contract market or derivatives 
transaction execution facility on which all transactions in futures or 
option contracts or other instruments subject to the Act pursuant to 
section 5a(g) of the Act of foreign brokers, their customers or foreign 
traders are executed through or the resulting transactions are 
maintained in accounts carried by a registered futures commission 
merchant or introduced by a registered introducing broker subject to 
the provisions of paragraphs (a), (b), (c) and (d) of this section.
    9. Part 36 is proposed to be revised to read as follows:

PART 36--EXEMPT MARKETS

Sec.
36.1   Scope.
36.2   Exempt boards of trade.
36.3   Exempt commercial markets.

    Authority: 7 U.S.C. 2, 5, 6, 6c, and 12a, as amended by the 
Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 
106-554, 114 Stat. 2763 (2000).


Sec. 36.1  Scope.

    The provisions of this part apply to any board of trade or 
electronic trading facility eligible for exemption under sections 5d 
and 2(h)(3) through (5) of the Act, respectively.


Sec. 36.2  Exempt boards of trade.

    (a) Eligible commodities. Commodities eligible under section 
5d(b)(1) of the Act to be traded by an exempt board of trade are:
    (1) Commodities having--
    (i) A nearly inexhaustible deliverable supply;
    (ii) A deliverable supply that is sufficiently large, and a cash 
market sufficiently liquid, to render any contract traded on the 
commodity highly unlikely to be susceptible to the threat of 
manipulation; or
    (iii) No cash market.
    (2) The commodities that meet the criteria of paragraph (a)(1) of 
this section are:
    (i) The commodities defined in section 1a(13) of the Act as 
``excluded commodities'' (other than a security, including any group or 
index thereof or any interest in, or based on the value of, any 
security or group or index of securities); and
    (ii) Such other commodity or commodities as the Commission may 
determine by rule, regulation or order.
    (b) Notification. Boards of trade operating under section 5d of the 
Act as

[[Page 14271]]

exempt boards of trade shall so notify the Commission. This 
notification shall be filed with the Secretary of the Commission at its 
Washington, DC headquarters, in either electronic or hard copy form, 
shall be labeled as ``Notification of Operation as Exempt Board of 
Trade,'' and shall include:
    (1) The name and address of the exempt board of trade; and
    (2) The name and telephone number of a contact person.
    (c) Additional requirements. (1) A board of trade notifying the 
Commission that it meets the criteria of section 5d of the Act and 
elects to operate as an exempt board of trade shall not represent to 
any person that it is registered with, designated, recognized, licensed 
or approved by the Commission.
    (2) If the Commission finds by order, after notice and an 
opportunity for a hearing through submission of written data, views and 
arguments, that the facility serves as a significant source for the 
discovery of prices in the cash market for the underlying commodity, 
the facility must on a daily basis disseminate publicly trading volume, 
opening and closing price ranges, open interest and other trading data 
to the extent appropriate to that market with respect to transactions 
executed in reliance on the exemption as specified in the order.


Sec. 36.3  Exempt commercial markets.

    (a) Notification. An electronic trading facility relying upon the 
exemption in section 2(h)(3) of the Act shall notify the Commission of 
its intention to do so. This notification, and subsequent notification 
of any material changes in the information initially provided, shall be 
filed with the Secretary of the Commission at its Washington, DC 
headquarters, in either electronic or hard copy form, shall be labeled 
as ``Notification of Operation as Exempt Commercial Market,'' and shall 
include the information and certifications specified in section 
2(h)(5)(A) of the Act.
    (b) Required information. (1) A facility operating in reliance on 
the exemption in section 2(h)(3) of the Act, initially and on an on-
going basis, must provide the Commission with access to the facility's 
trading protocols and electronic access to transactions conducted on 
the facility in reliance on such exemption. Alternatively, the facility 
may attach its initial trading protocols and any amendments thereto in 
hard copy form to the notification required in paragraph (a) of this 
section and may provide in a form and manner acceptable to the 
Commission, as determined by the Commission in response to a petition 
by the exempt market relying upon the exemption in section 2(h)(3) of 
the Act, information regarding transactions by large traders on the 
facility.
    (2) Special calls. (i) All information required upon special call 
of the Commission under section 2(h)(5)(B)(iii) of the Act shall be 
prepared in the form and manner and in accordance with the 
instructions, and shall be transmitted at the time and to the office of 
the Commission, as may be specified in the call.
    (ii) The Commission hereby delegates, until the Commission orders 
otherwise, the authority to make special calls as set forth in section 
2(h)(5)(B)(iii) of the Act to the Director of the Division of Trading 
and Markets and to the Director of Economic Analysis to be exercised by 
either Director or by such other employee or employees as the Director 
may designate. 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.
    (3) Subpoenas to foreign persons. A foreign person whose access to 
a trading facility is limited or denied at the direction of the 
Commission based on the Commission's belief that the foreign person has 
failed timely to comply with a subpoena as provided under section 
2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt 
hearing under the procedures provided in Sec. 21.03(g) and (h) of this 
chapter.
    (c) Additional requirements. (1) An electronic trading facility 
relying upon the exemption in section 2(h)(3) of the Act shall not 
represent to any person that it is registered with, designated, 
recognized, licensed or approved by the Commission.
    (2) If the Commission finds by order, after notice and an 
opportunity for a hearing through submission of written data, views and 
arguments, that the facility performs a significant price discovery 
function for transactions in the cash market for the underlying 
commodity, the facility must disseminate publicly price, trading volume 
and other trading data to the extent appropriate with respect to 
transactions executed in reliance on the exemption as specified in the 
order.
    (3) The facility must require that each participant agree to comply 
with all applicable laws and the facility must have a reasonable basis 
for believing that authorized participants are ``eligible commercial 
entities'' as defined in section 1a(11) of the Act.
    10. Part 37 is proposed to be added to read as follows:

PART 37--DERIVATIVES TRANSACTION EXECUTION FACILITIES

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), 6(i), 7a and 12a, as 
amended by the Commodity Futures Modernization Act of 2000, Appendix 
E of Pub. L. 106-554, 114 Stat. 2763 (2000).


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, 15.05, 33.10, 
part 40 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.

[[Page 14272]]

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.
    (iv) The commodities defined in section 1a(13) of the Act as 
``excluded commodities,'' meet the criteria of paragraphs (a)(1)(i) 
through (iii) of this section.
    (2)(i) Commodities that are a security futures product, and
    (ii) The registered derivatives transaction execution facility is a 
national securities exchange registered under the Securities Exchange 
Act of 1934;
    (3)(i) Commodities for which the Commission has determined, based 
on the market characteristics, surveillance history, 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.
    (ii) The Commission may make such a determination by rule, 
regulation or order, after notice and an opportunity for a hearing 
through submission of written data, views and arguments. A registered 
derivative transaction execution facility may request that the 
Commission make such an individualized determination by filing with the 
Commission at its Washington, DC headquarters a petition that includes:
    (A) The terms and conditions of the product to be listed; and
    (B) 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:
    (1) A high level of cash-market liquidity;
    (2) Cash-market bid-ask spreads that are narrow relative to traded 
values;
    (3) Relatively frequent cash market transactions involving 
participants that represent major segments of the industry;
    (4) The absence of material impediments to participation in the 
cash market by commercial entities;
    (5) Transfer of ownership of the cash commodity that is easily and 
readily accomplished at minimal cost;
    (6) 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;
    (7) A history of actual trading experience that the contract or 
product's terms and conditions provide for a deliverable supply that is 
adequate to minimize the threat of market abuses such as price 
manipulation and distortions, congestion, and defaults; and
    (8) 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; 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;
    (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. To operate as a 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, must:
    (1) Comply with the core principles for operation under section 
5a(d) of the Act and the provisions of this part 37; and
    (2) Notify the Commission of its intent to so operate by filing 
with the Commission at its Washington, DC headquarters a copy of the 
facility's rules, which may be trading protocols, and a certification 
by the contract market that it meets:
    (i) The requirements for trading of section 5a(b) of the Act; and
    (ii) The criteria for registration under section 5a(c) of the Act.
    (b) Registration by application. A board of trade, facility or 
entity shall be deemed to be registered as a derivatives transaction 
execution facility thirty days after receipt by the Commission 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:
    (1) 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;
    (2) The submission is labeled, ``Application for DTF 
Registration'';
    (3) The submission includes:
    (i) The derivatives transaction execution facility's rules, which 
may be trading protocols;
    (ii) 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
    (iii) 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;
    (4) 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; and
    (5) The applicant has not instructed the Commission in writing 
during the review period to review the application pursuant to the time 
provisions of and procedures under section 6 of the Act.

[[Page 14273]]

    (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 section 
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 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 Trading 
and Markets and separately to the Director of Economic Analysis or the 
Director's delegatee, with the concurrence of the General Counsel or 
the General Counsel's delegatee, authority to exercise the functions 
provided under paragraph (b) of this section.
    (2) The directors 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.


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 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 derivatives transaction execution facilities. (1) 
Certification of compliance. Unless an applicant for 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 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 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 operations, the 
applicant for registration must file with the Commission at its 
Washington, D.C. headquarters, either separately or with the 
application required by Sec. 37.4, 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.
    (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 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. 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.
    (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 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

[[Page 14274]]

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.


Sec. 37.7  Additional requirements.

    (a) Products. Notwithstanding the provisions of section 5c(c) of 
the Act and Sec. 40.2 of this chapter, derivative 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 
functionality, by filing with 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 derivative 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 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) 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 derivative 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 derivative transaction execution facility shall provide 
to the Commission information 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 and the resulting 
transactions are maintained in accounts carried by a registered futures 
commission merchant or introducing broker subject to Sec. 1.37 of this 
chapter.
    (e) Identify persons subject to fitness requirement. Upon request 
by the Commission, a registered derivatives transaction execution 
facility shall furnish to the Commission 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 
Trading and Markets and separately to the Director of Economic Analysis 
or such other employee or employees as the Directors may designate from 
time to time. The Directors may submit to the

[[Page 14275]]

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, to declare an emergency 
under section 8a(9) 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.

Appendix A to Part 37--Application Guidance

    This appendix provides guidance to applicants for registration 
as derivatives transaction execution facilities under section 5a(c) 
of the Act and Sec. 37.5. 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 subsection (b) and this subsection.
    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 for effective and affirmative rule 
enforcement, including documentation of the facility's authority to 
do so. The submission should include documentation on the ability of 
the facility either to obtain necessary information or to provide 
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 price and time should include a 
brief explanation of the 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 subsequently adopted by the 
Commission on November 21, 1990 (55 FR 48670), 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.
    (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 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 users and/or members, appropriate margin forms and 
levels, and appropriate default rules and procedures. If cleared, 
transactions executed on the facility must be cleared through a 
derivatives clearing organization. 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 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

[[Page 14276]]

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 subsection. 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 for 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 terminate a member/participant's activities or 
access or, in the case of a derivatives transaction execution 
facility restricting its traders to eligible commercial entities, 
the authority and ability to terminate a member/participant's 
activities or access. In either case, any termination should be 
carried out pursuant to clear and fair standards.
    Core Principle 3 of section 5a(d) of the Act: MONITORING OF 
TRADING--The board of trade shall monitor trading in the contracts 
of 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 for 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 pursuant 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. 
    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, system security, 
system testing and review, and financial integrity protections, 
including whether eligible contract participants will have the right 
to opt out of segregation of customer funds. The facility must also 
disclose any limitations of liability (which may not include 
limitations of liability for violations of the Act or Commission 
regulations by fraud, or wanton or willful misconduct). Such 
information may be made publicly available through the derivatives 
transaction execution facility's website. The facility should also 
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 
paragraph. 
    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, or a history of serious disciplinary offenses, such as those 
which would be disqualifying under Sec. 1.63 of this chapter. 
Eligible contract participants or eligible commercial entities who 
have direct access but do not have these privileges, obligations, 
responsibilities or disciplinary authority could 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 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 a greater than ten percent 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. 

[[Page 14277]]

    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.

    11. Chapter I of 17 CFR is amended by adding new Part 38 as 
follows:

PART 38--DESIGNATED CONTRACT MARKETS

Sec.
38.1   Scope.
38.2   Exemption.
38.3   Procedures for designation by application.
38.4   Procedures for listing products and implementing contract 
market rules.
38.5   Information relating to contract market compliance.
38.6   Enforceability.
Appendix A to Part 38--Application Guidance
Appendix B to Part 38--Guidance on, and Acceptable Practices in, 
Compliance with Core Principles

    Authority: 7 U.S.C. 2, 5, 6, 6c, 7 and 12a, as amended by the 
Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 
106-554, 114 Stat. 2763 (2000).


Sec. 38.1  Scope.

    The provisions of this part 38 shall apply to every board of trade 
or trading facility that has been designated as a contract market in a 
commodity under section 6 of the Act. Provided, however, nothing in 
this provision affects the eligibility of designated contract markets 
to operate under the provisions of parts 36 or 37 of this chapter.


Sec. 38.2  Exemption.

    Agreements, contracts, or transactions traded on a designated 
contract market under section 6 of the Act, the contract market and the 
contract market's operator are exempt from all Commission regulations 
for such activity, except for the requirements of this part 38 and 
Secs. 1.3, 1.31, 1.38, 33.10, part 9, parts 15 through 21, part 40, and 
part 190 of this chapter.


Sec. 38.3  Procedures for designation by application.

    (a) Application. A board of trade or trading facility shall be 
deemed to be designated as a contract market sixty days after receipt 
by the Commission of an application for designation unless notified 
otherwise during that period, or, as determined by Commission order, 
designated upon conditions, if:
    (1) The application demonstrates that the applicant satisfies the 
criteria for designation of section 5(b) of the Act, the core 
principles for operation under section 5(d) of the Act and the 
provisions of this part 38;
    (2) The application is labeled as being submitted pursuant to this 
part 38;
    (3) The application includes a copy of the applicant's rules and, 
to the extent that compliance with the conditions for designation is 
not self-evident, a brief explanation of how the rules satisfy each of 
the conditions for designation;
    (4) The applicant does not amend or supplement the designation 
application, except as requested by the Commission or for correction of 
typographical errors, renumbering or other nonsubstantive revisions, 
during that period; and
    (5) The applicant has not instructed the Commission in writing 
during the review period to review the application pursuant to 
procedures under section 6 of the Act.
    (b) Guidance regarding application for designation. An applicant 
for contract market designation may meet the following conditions for 
designation as specified in this paragraph:
    (1) Prevention of market manipulation. The designation criterion to 
prevent market manipulation under section 5(b)(2) of the Act also 
includes the requirement that the designated contract market have a 
dedicated regulatory department, or delegation of that function;
    (2) Fair and equitable trading. The designation criterion requiring 
fair and equitable trading rules under section 5(b)(3) of the Act also 
includes fair, equitable and timely availability to market participants 
of information regarding prices, bids and offers;
    (3) Disciplinary procedures. The designation criterion to enforce 
disciplinary procedures under section 5(b)(6) of the Act may be 
satisfied by an organized exchange or a trading facility with respect 
to non-member participants of the contract market by expelling or by 
denying future access to such a person found to have violated the 
contract market's rules;
    (4) Governance fitness standards. The requirement to establish 
appropriate minimum fitness standards for participants in a facility 
having direct access to the facility under the core principle on 
fitness pursuant to section 5(d)(14) of the Act includes natural 
persons that directly or indirectly have greater than a ten percent 
ownership interest in the facility; and
    (5) In general. Appendix A to this part provides guidance to 
applicants for designation as contract markets on how the criteria for 
designation under section 5(b) of the Act can be satisfied and Appendix 
B to this part provides guidance to applicants for designation and 
designated contract markets on how the core principles of section 5(d) 
of the Act can be satisfied;
    (c) Termination of fast track review. During the sixty-day period 
for review pursuant to paragraph (a) of this section, the Commission 
shall notify the applicant seeking designation 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 designation 
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 
designation may request that the Commission render a decision whether 
to designate the

[[Page 14278]]

contract market 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 views its submission as 
complete and final as submitted.
    (d) Request for withdrawal of application for designation or 
vacation of designation. An applicant to be designated, or a designated 
contract market, may withdraw its application or vacate its designation 
under section 7 of the Act by filing with the Commission at its 
Washington, D.C., headquarters such a request. Withdrawal from 
registration or vacation of designation shall not affect any action 
taken or to be taken by the Commission based upon actions, activities 
or events occurring during the time that the application for 
designation was pending with, or that the facility was designated by, 
the Commission.
    (e) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Division 
of Trading and Markets and separately to the Director of Economic 
Analysis or the Directors' delegatee, with the concurrence of the 
General Counsel or the General Counsel's delegatee, authority to notify 
the entity seeking designation under paragraph (a) of this section that 
review under those procedures is being terminated or to designate the 
entity as a contract market upon conditions.
    (2) The Directors 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 (e)(1) 
of this section.


Sec. 38.4  Procedures for listing products and implementing contract 
market rules.

    (a) Request for Commission approval of rules and products. An 
applicant for designation, or a designated contract market, 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 designated contract market 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.
    (b) Self-certification of rules and products. Rules of a designated 
contract market and subsequent amendments thereto, including both 
operational rules and the terms or conditions of products listed for 
trading on the facility, not voluntarily submitted for prior Commission 
approval pursuant to paragraph (a) of this section must be submitted to 
the Commission with a certification that the rule, rule amendment or 
product complies with the Act or rules thereunder pursuant to the 
procedures of Secs. 40.6 and 40.2 of this chapter, as applicable. 
Provided, however, any rule or rule amendment that would, for a 
delivery month having open interest, materially change a term or 
condition of a contract for future delivery in an agricultural 
commodity enumerated in section 1a(4) of the Act, or of an option on 
such a contract or commodity, must be submitted to the Commission prior 
to its implementation for review and approval under Sec. 40.4 of this 
chapter.
    (c) An applicant for designation, or a designated contract market, 
may request that the Commission consider under the provisions of 
section 15(b) of the Act any of the contract market's rules or 
policies, including both operational rules and the terms or conditions 
of products listed for trading.


Sec. 38.5  Information relating to contract market compliance.

    (a) Upon request by the Commission, a designated contract market 
shall file with the Commission such information related to its business 
as a contract market, 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 request.
    (b) Upon request by the Commission, a designated contract market 
shall file with the Commission a written demonstration, containing such 
supporting data, information and documents, in the form and manner and 
within such time as the Commission may specify, that the designated 
contract market is in compliance with one or more core principles as 
specified in the request.


Sec. 38.6  Enforceability.

    An agreement, contract or transaction entered into on, or pursuant 
to the rules of a designated contract market shall not be void, 
voidable, subject to rescission or otherwise invalidated or rendered 
unenforceable as a result of:
    (a) A violation by the designated contract market of the provisions 
of section 5 of the Act or this part 38; or
    (b) Any Commission proceeding to alter or supplement a rule, term 
or condition under section 8a(7) of the Act, to declare an emergency 
under section 8a(9) of the Act, or any other proceeding the effect of 
which is to alter, supplement, or require a designated contract market 
to adopt a specific term or condition, trading rule or procedure, or to 
take or refrain from taking a specific action.

Appendix A to Part 38--Application Guidance

    This appendix provides guidance for applicants for designation 
as a contract market under section 5(b) of the Act and Sec. 38.3. 
The guidance following each designation 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 designation. To the extent that compliance 
with, or satisfaction of, a criterion for designation is not self-
explanatory from the face of the contract market's rules, which may 
be trading protocols or terms and conditions, the application should 
include an explanation or other form of documentation demonstrating 
that the applicant meets the designation criteria of section 5(b) of 
the Act.
    Designation Criterion 1 of section 5(b) of the Act: IN GENERAL--
To be designated as a contract market, the board of trade shall 
demonstrate to the Commission that the board of trade meets the 
criteria specified in this subsection.
    A board of trade preparing to submit to the Commission an 
application for designation as a contract market is encouraged to 
contact Commission staff for guidance and assistance in preparing an 
application. Applicants may submit a draft application for review 
and feedback prior to the submission of an actual application 
without triggering the application review procedures of Sec. 38.3.
    Designation Criterion 2 of section 5(b) of the Act: PREVENTION 
OF MARKET MANIPULATION--The board of trade shall have the capacity 
to prevent market manipulation through market surveillance, 
compliance, and enforcement practices and procedures, including 
methods for conducting real-time monitoring of trading and 
comprehensive and accurate trade reconstructions.
    A designation application should demonstrate a capacity to 
prevent market manipulation, including that the contract market has 
trading and participation rules deterring abuses and a dedicated 
regulatory department, or an effective delegation of that function.
    Designation Criterion 3 of section 5(b) of the Act: FAIR AND 
EQUITABLE TRADING--The board of trade shall establish and enforce 
trading rules to ensure fair and

[[Page 14279]]

equitable trading through the facilities of the contract market, and 
the capacity to detect, investigate, and discipline any person that 
violates the rules. 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 contract market or a derivatives 
clearing organization.
    (a) Ensuring fair and equitable trading on a contract market, 
among other things, includes:
    (1) Providing to market participants, on a fair, equitable and 
timely basis, information regarding prices, bids and offers; and
    (2) Limitations of contract market liability (or of any of its 
officers, directors, employees, licensors, contractors and/or 
affiliates) only if such limitations of liability do not arise from 
a person's violation of the Act or Commission regulations by fraud, 
or wanton or willful misconduct.
    (b) A contract market 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.
    Designation Criterion 4 of section 5(b) of the Act: TRADE 
EXECUTION FACILITY--The board of trade shall--(A) establish and 
enforce rules defining, or specifications detailing, the manner of 
operation of the trade execution facility maintained by the board of 
trade, including rules or specifications describing the operation of 
any electronic matching platform; and (B) demonstrate that the trade 
execution facility operates in accordance with the rules or 
specifications.
    (a) An application of a board of trade to be designated as a 
contract market should include the system's trade-matching algorithm 
and order entry procedures. An application involving a trade-
matching algorithm that is based on order priority factors other 
than price and time should include a brief explanation of the 
algorithm.
    (b) A designated contract market'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 application. A board of trade should submit in the 
contract market application, information on the objective testing 
and review carried out on its automated system. 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''), subsequently adopted by the Commission on November 21, 
1990 (55 FR 48670), 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.
    Designation Criterion 5 of section 5(b) of the Act: FINANCIAL 
INTEGRITY OF TRANSACTIONS--The board of trade shall establish and 
enforce rules and procedures for ensuring the financial integrity of 
transactions entered into by or through the facilities of the 
contract market, including the clearance and settlement of the 
transactions with a derivatives clearing organization.
    (a) A designated contract market should provide for the 
financial integrity of transactions by setting appropriate minimum 
financial standards for users and/or members, appropriate margin 
forms and levels, and appropriate default rules and procedures. 
Clearing of transactions executed on the contract market should be 
provided through a derivatives clearing organization. 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 contract 
market's minimum financial standards. In order to monitor for 
minimum financial requirements, a contract market should routinely 
receive and promptly review financial and related information.
    (b) A designated contract market 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.
    Designation Criterion 6 of section 5(b) of the Act: DISCIPLINARY 
PROCEDURES--The board of trade shall establish and enforce 
disciplinary procedures that authorize the board of trade to 
discipline, suspend, or expel members or market participants that 
violate the rules of the board of trade, or similar methods for 
performing the same functions, including delegation of the functions 
to third parties.
    The disciplinary procedures established by a designated contract 
market should give the contract market both the authority and 
ability to discipline and limit or suspend a member's activities as 
well as the authority and ability to terminate a member's activities 
pursuant to clear and fair standards. The authority to discipline or 
limit or suspend a member or participant's activities could be found 
in a contract market's rules, user agreements or other means. An 
organized exchange or a trading facility could satisfy this 
criterion for non-members by expelling or denying future access to 
such persons upon a finding that such a person has violated the 
board of trade's rules.
    Designation Criterion 7 of section 5(b) of the Act: PUBLIC 
ACCESS--The board of trade shall provide the public with access to 
the rules, regulations, and contract specifications of the board of 
trade.
    A board of trade operating as a contract market may provide 
information to the public by placing the information on its web 
site.
    Designation Criterion 8 of section 5(b) of the Act: ABILITY TO 
OBTAIN INFORMATION--The board of trade shall establish and enforce 
rules that will allow the board of trade to obtain any necessary 
information to perform any of the functions described in this 
subsection, including the capacity to carry out such international 
information-sharing agreements as the Commission may require.
    A designated contract market should have the authority to 
collect information and documents on both a routine and non-routine 
basis including the examination of books and records kept by 
members/participants of the contract market. Appropriate 
information-sharing agreements could be established with other 
boards of trade or the Commission could act in conjunction with the 
contract market to carry out such information sharing.

Appendix B to Part 38--Guidance on, and Acceptable Practices in, 
Compliance with Core Principles

    1. This appendix provides guidance concerning the core 
principles with which a board of trade must comply to maintain 
designation under section 5(d) of the Act and Secs. 38.3 and 38.5. 
The guidance is provided in subsection (a) following each core 
principle and it can be used to demonstrate to the Commission core 
principle compliance, under Secs. 38.3(a) and 38.5. The guidance for 
each core principle is illustrative only of the types of matters a 
board of trade 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 board of trade is in compliance with the core 
principles. To the extent that compliance with, or satisfaction of, 
a core principle is not self-explanatory from the face of the board 
of trade's rules, which may be terms and conditions or trading 
protocols, an application pursuant to Sec. 38.3, or a submission 
pursuant to Sec. 38.5 should include an explanation or other form of 
documentation demonstrating that the board of trade complies with 
the core principles.
    2. Acceptable practices meeting the requirements of the core 
principles are set forth in subsection (b) following each core 
principle. Boards of trade that follow the specific practices 
outlined under subsection (b) for any core principle in this 
appendix will meet the applicable core principle. Subsection (b) is 
for illustrative purposes only, and does not state the exclusive 
means for satisfying a core principle.
    Core Principle 1 of section 5(d) of the Act: IN GENERAL--To 
maintain the designation of a board of trade as a contract market, 
the board of trade shall comply with the core principles specified 
in this subsection. The board of trade shall have reasonable 
discretion in establishing the manner in which it complies with the 
core principles.
    A board of trade applying for designation as a contract market 
must satisfactorily demonstrate its capacity to operate in 
compliance with the core principles under section 5(d) of the Act 
and Sec. 38.3. The Commission may require that a board of trade

[[Page 14280]]

operating as a contract market demonstrate to the Commission that it 
is in compliance with one or more core principles.
    Core Principle 2 of section 5(d) of the Act: COMPLIANCE WITH 
RULES--The board of trade shall monitor and enforce compliance with 
the rules of the contract market, including the terms and conditions 
of any contracts to be traded and any limitations on access to the 
contract market.
    (a) Application Guidance. (1) A designated contract market 
should have arrangements and resources for effective trade practice 
surveillance programs, with the authority to collect information and 
documents on both a routine and non-routine basis including the 
examination of books and records kept by members/participants of the 
contract market. The arrangements and resources should facilitate 
the direct supervision of the market and the analysis of data 
collected. Trade practice surveillance programs could be carried out 
by the contract market itself or through delegation to a third 
party. If the contract market out-sources its trade practice 
surveillance program to a third party, such third party should have 
the capacity and authority to carry out such program, and the 
contract market should retain appropriate supervisory authority over 
the third party.
    (2) A designated contract market should have arrangements, 
resources and authority for effective rule enforcement. The 
Commission believes that this should include the authority and 
ability to discipline and limit, or suspend, a member/participant's 
activities as well as the authority and ability to terminate a 
member/participant's activities pursuant to clear and fair 
standards. An organized exchange or a trading facility could satisfy 
this criterion for non-members by expelling or denying such persons 
future access upon a finding that such a person has violated the 
board of trade's rules.
    (b) Acceptable Practices. An acceptable trade practice 
surveillance program generally would include:
    (1) Maintenance of data reflecting the details of each 
transaction executed on the contract market;
    (2) Electronic analysis of this data routinely to detect 
potential trading violations;
    (3) Appropriate and thorough investigative analysis of these and 
other potential trading violations brought to the contract market's 
attention; and
    (4) Prompt and effective disciplinary action for any violation 
that is found to have been committed. The Commission believes that 
the latter element should include the authority and ability to 
discipline and limit or suspend the activities of a member or 
participant pursuant to clear and fair standards. See, e.g., 17 CFR 
part 8.
    Core Principle 3 of section 5(d) of the Act: CONTRACTS NOT 
READILY SUBJECT TO MANIPULATION--The board of trade shall list on 
the contract market only contracts that are not readily susceptible 
to manipulation.
    (a) Application Guidance. Contract markets may list new products 
for trading by self-certification under Sec. 40.2 of this chapter or 
may submit products for Commission approval under Sec. 40.3 and part 
40, Appendix A, of this chapter.
    (b) Acceptable Practices. Guideline No. 1, 17 CFR Part 40, 
Appendix A may be used as guidance in meeting this core principle 
for both new product listings and existing listed contracts.
    Core Principle 4 of section 5(d) of the Act: MONITORING OF 
TRADING.--The board of trade shall monitor trading to prevent 
manipulation, price distortion, and disruptions of the delivery or 
cash-settlement process.
    (a) Application Guidance. A contract market could prevent market 
manipulation through a dedicated regulatory department, or by 
delegation of that function to an appropriate third party.
    (b) Acceptable Practices. (1) An acceptable program for 
monitoring markets will generally involve the collection of various 
market data, including information on traders' market activity. 
Those data should be evaluated on an ongoing basis in order to make 
an appropriate regulatory response to potential market disruptions 
or abusive practices.
    (2) The designated contract market should collect data in order 
to assess whether the market price is responding to the forces of 
supply and demand. Appropriate data usually include various 
fundamental data about the underlying commodity, its supply, its 
demand, and its movement through marketing channels. Especially 
important are data related (1) to the size and ownership of 
deliverable supplies--the existing supply and the future or 
potential supply, and (2) to the pricing of the deliverable 
commodity relative to the futures price and relative to similar, but 
nondeliverable, kinds of the commodity. For cash-settled markets, it 
is more appropriate to pay attention to the availability and pricing 
of the commodity making up the index to which the market will be 
settled, as well as monitoring the continued suitability of the 
methodology for deriving the index.
    (3) To assess traders' activity and potential power in a market, 
at a minimum, every contract market should have routine access to 
the positions and trading done by the members of its clearing 
facility. Although clearing member data may be sufficient for some 
contract markets, an effective surveillance program for contract 
markets with substantial numbers of customers trading through 
intermediaries should employ a much more comprehensive large-trader 
reporting system (LTRS). The Commission operates an industry-wide 
LTRS. As an alternative to having its own LTRS or contracting out 
for such a system, contract markets may find it more efficient to 
use information available from the Commission's LTRS data for 
position monitoring.
    Core Principle 5 of section 5(d) of the Act: POSITION 
LIMITATIONS OR ACCOUNTABILITY--To reduce the potential threat of 
market manipulation or congestion, especially during trading in the 
delivery month, the board of trade shall adopt position limitations 
or position accountability for speculators, where necessary and 
appropriate.
    (a) Application Guidance. [Reserved]
    (b) Acceptable Practices.
    (1) In order to diminish potential problems arising from 
excessively large speculative positions, the Commission sets limits 
on traders' positions for certain commodities. These position limits 
specifically exempt bona fide hedging, permit other exemptions, and 
set limits differently by markets, by futures or delivery months, or 
by time periods. For purposes of evaluating a contract market 
speculative-limit program, the Commission considers the specified 
limit levels, aggregation policies, types of exemptions allowed, 
methods for monitoring compliance with the specified levels, and 
procedures for enforcement to deal with violations.
    (2) In general, position limits are not necessary for markets 
where the threat of excessive speculation or manipulation is very 
low. Thus, contract markets do not need to set position-limit levels 
for futures markets in major foreign currencies and in certain 
financial futures having very liquid and deep underlying cash 
markets. Where speculative limits are appropriate, acceptable 
speculative-limit levels typically are set in terms of a trader's 
combined position in the futures contract plus its position in the 
option contract (on a delta-adjusted basis).
    (3) Spot-month levels for physical-delivery markets should be 
based upon an analysis of deliverable supplies and the history of 
spot-month liquidations. Spot-month limits for physical-delivery 
markets are appropriately set at no more than 25 percent of the 
estimated deliverable supply. For cash-settled markets, spot-month 
position limits may be necessary if the underlying cash market is 
small or illiquid such that traders can disrupt the cash market or 
otherwise influence the cash-settlement price to profit on a futures 
position. In these cases, the limit should be set at a level that 
minimizes the potential for manipulation or distortion of the 
futures contract's or the underlying commodity's price. Markets may 
elect not to provide all-months-combined and non-spot month limits.
    (4) A contract market may provide for position accountability 
provisions in lieu of position limits for contracts on financial 
instruments, intangible commodities, or certain tangible 
commodities. Markets appropriate for position accountability rules 
include those with large open-interest, high daily trading volumes 
and liquid cash markets.
    (5) Contract markets should have aggregation rules that apply to 
those accounts under common control, those with common ownership, 
i.e., where there is a ten percent or greater financial interest, 
and those traded according to an express or implied agreement. 
Contract markets will be permitted to set more stringent aggregation 
policies. For example, one major board of trade has adopted a policy 
of automatically aggregating the position of members of the same 
household, unless they were granted a specific waiver. Contract 
markets may grant exemptions to their position limits for bona fide 
hedging (as defined in Sec. 1.3(z) of this chapter) and may grant 
exemptions for reduced risk positions, such as spreads, straddles 
and arbitrage positions.
    (6) Contract markets should establish a program for effective 
monitoring and

[[Page 14281]]

enforcement of these limits. One acceptable enforcement mechanism is 
a program whereby traders apply for these exemptions by the contract 
market and are granted a position level higher than the applicable 
speculative limit. The position levels granted under hedge 
exemptions are based upon the trader's commercial activity in 
related markets. Contract markets may allow a brief grace period 
where a qualifying trader may exceed speculative limits or an 
existing exemption level pending the submission and approval of 
appropriate justification. A contract market should consider whether 
it wants to restrict exemptions during the last several days of 
trading in a delivery month. Acceptable procedures for obtaining and 
granting exemptions include a requirement that the contract market 
approve a specific maximum higher level.
    (7) Contract markets with many products with large numbers of 
traders should have an automated means of detecting traders' 
violations of speculative limits or exemptions. Contract markets 
should monitor the continuing appropriateness of approved exemptions 
by periodically reviewing each trader's basis for exemption or 
requiring a reapplication.
    (8) Finally, an acceptable speculative limit program should have 
specific policies for taking regulatory action once a violation of a 
position limit or exemption is detected. The contract market policy 
will need to consider appropriate actions where the violation is by 
a non-member and should address traders carrying accounts through 
more than one intermediary.
    (9) A violation of contract market position limits that have 
been approved by the Commission is also a violation of section 4a(e) 
of the Act.
    Core Principle 6 of section 5(d) of the Act: EMERGENCY 
AUTHORITY--The board of trade shall adopt rules to provide for the 
exercise of emergency authority, in consultation or cooperation with 
the Commission, where necessary and appropriate, including the 
authority to--(A) liquidate or transfer open positions in any 
contract; (B) suspend or curtail trading in any contract; and (C) 
require market participants in any contract to meet special margin 
requirements.
    (a) Application Guidance. A designated contract market should 
have clear procedures and guidelines for contract market decision-
making regarding emergency intervention in the market, including 
procedures and guidelines to carry out such decision-making without 
conflicts of interest. A contract market should also have the 
authority to intervene as necessary to maintain markets with fair 
and orderly trading as well as procedures for carrying out the 
intervention. Procedures and guidelines should also include 
notifying the Commission of the exercise of a contract market's 
regulatory emergency authority, preventing conflicts of interest, 
and documenting the contract market's decision-making process and 
the reasons for using its emergency action authority. Information on 
steps taken under such procedures should be included in a submission 
of a certified rule under Sec. 40.6 of this chapter and any related 
submissions for rule approval pursuant to Sec. 40.5 of this chapter, 
when carried out pursuant to a contract market's emergency 
authority.
    (b) Acceptable Practices. As is necessary to address perceived 
market threats, the contract market, among other things, should be 
able to impose position limits in particular in the delivery month, 
impose or modify price limits, modify circuit breakers, call for 
additional margin either from customers or clearing members, order 
the liquidation or transfer of open positions, order the fixing of a 
settlement price, order a reduction in positions, extend or shorten 
the expiration date or the trading hours, suspend or curtail trading 
on the market, order the transfer of customer contracts and the 
margin for such contracts from one member of the contract market to 
another, or alter the delivery terms or conditions.
    Core Principle 7 of section 5(d) of the Act: AVAILABILITY OF 
GENERAL INFORMATION--The board of trade shall make available to 
market authorities, market participants, and the public information 
concerning--(A) the terms and conditions of the contracts of the 
contract market; and (B) the mechanisms for executing transactions 
on or through the facilities of the contract market.
    (a) Application Guidance. A designated contract market should 
have arrangements and resources for the disclosure of contract terms 
and conditions and trading mechanisms to the Commission, users and 
the public. Procedures should also include providing information on 
listing new products, rule amendments or other changes to previously 
disclosed information to the Commission, users and the public.
    (b) Acceptable Practices. [Reserved]
    Core Principle 8 of section 5(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 actively traded contracts on the contract 
market.
    (a) Application Guidance. A contract market should provide to 
the public information regarding settlement prices, price range, 
volume, open interest and other related market information for all 
actively traded contracts, as determined by the Commission, on a 
fair, equitable and timely basis. The Commission believes that 
section 5(d)(8) requires contract markets to publicize trading 
information for any non-dormant contract. Provision of information 
for any applicable contract could be through such means as provision 
of the information to a financial information service and by timely 
placement of the information on a contract market's web site.
    (b) Acceptable Practices. [Reserved]
    Core Principle 9 of section 5(d) of the Act: EXECUTION OF 
TRANSACTIONS--The board of trade shall provide a competitive, open, 
and efficient market and mechanism for executing transactions.
    (a) Application Guidance. (1) Appropriate objective testing and 
review of any automated systems should occur initially and 
periodically to ensure proper system functioning, adequate capacity 
and security. A designated contract market's analysis of its 
automated system should address appropriate principles for the 
oversight of automated systems, ensuring proper system function, 
adequate capacity and security. 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''), subsequently 
adopted by the Commission on November 21, 1990 (55 FR 48670), are 
appropriate guidelines for a designated contract market to apply to 
electronic trading systems. Any program of objective testing and 
review of the system should be performed by a qualified independent 
professional. The Commission believes that information gathered by 
analysis, oversight or any program of objective testing and review 
of any automated systems regarding system functioning, capacity and 
security should be made available to the Commission and the public.
    (2) A designated contract market that determines to allow block 
trading should ensure that the block trading does not operate in a 
manner that compromises the integrity of prices or price discovery 
on the relevant market.
    (b) Acceptable Practices. A professional that is a certified 
member of the Informational Systems Audit and Control Association 
experienced in the industry would be an example of an acceptable 
party to carry out testing and review of an electronic trading 
system.
    Core Principle 10 of section 5(d) of the Act: TRADE 
INFORMATION--The board of trade shall maintain rules and procedures 
to provide for the recording and safe storage of all identifying 
trade information in a manner that enables the contract market to 
use the information for purposes of assisting in the prevention of 
customer and market abuses and providing evidence of any violations 
of the rules of the contract market. 
    (a) Application Guidance. A designated contract market should 
have arrangements and resources for recording of full data entry and 
trade details and the safe storage of audit trail data. A designated 
contract market should have systems sufficient to enable the 
contract market to use the information for purposes of assisting in 
the prevention of customer and market abuses through reconstruction 
of trading.
    (b) Acceptable Practices. (1) The goal of an audit trail is to 
detect and deter customer and market abuse. An effective contract 
market audit trail should capture and retain sufficient trade-
related information to permit contract market staff to detect 
trading abuses and to reconstruct all transactions within a 
reasonable period of time. An audit trail should include specialized 
electronic surveillance programs that would identify potentially 
abusive trades and trade patterns, including for instance, 
withholding or disclosing customer orders, trading ahead, and 
preferential allocation. An acceptable audit trail must be able to 
track a customer order from time of receipt through fill allocation. 
The contract market must create and maintain an electronic 
transaction history database that contains information

[[Page 14282]]

with respect to transactions effected on the designated contract 
market.
    (2) An acceptable audit trail, therefore, should include the 
following: original source documents, transaction history, 
electronic analysis capability, and safe storage capability. A 
contract market whose audit trail satisfies the following acceptable 
practices would satisfy Core Principle 9.
    (i) Original Source Documents. Original source documents include 
unalterable, sequentially identified records on which trade 
execution information is originally recorded, whether recorded 
manually or electronically. For each customer order (whether filled, 
unfilled or cancelled, each of which should be retained or 
electronically captured), such records reflect the terms of the 
order, an account identifier that relates back to the account(s) 
owner(s), and the time of order entry. For floor-based contract 
markets, the time of report of execution of the order should also be 
captured.
    (ii) Transaction History. A transaction history which consists 
of an electronic history of each transaction, including (a) all data 
that are input into the trade entry or matching system for the 
transaction to match and clear; (b) whether the trade was for a 
customer or proprietary account; (c) timing and sequencing data 
adequate to reconstruct trading; and (d) the identification of each 
account to which fills are allocated.
    (iii) Electronic Analysis Capability. An electronic analysis 
capability that permits sorting and presenting data included in the 
transaction history so as to reconstruct trading and to identify 
possible trading violations with respect to both customer and market 
abuse.
    (iv) Safe Storage Capability. Safe storage capability provides 
for a method of storing the data included in the transaction history 
in a manner that protects the data from unauthorized alteration, as 
well as from accidental erasure or other loss. Data should be 
retained in accordance with the recordkeeping standards of Core 
Principle 17.
    Core Principle 11 of section 5(d) of the Act: FINANCIAL 
INTEGRITY OF CONTRACTS--The board of trade shall establish and 
enforce rules providing for the financial integrity of any contracts 
traded on the contract market (including the clearance and 
settlement of the transactions with a derivatives clearing 
organization), and rules to ensure the financial integrity of any 
futures commission merchants and introducing brokers and the 
protection of customer funds. 
    (a) Application Guidance. Clearing of transactions executed on a 
designated contract market should be provided through a Commission-
designated clearing facility. In addition, a designated contract 
market should maintain the financial integrity of its transactions 
by maintaining minimum financial standards for its members and 
having default rules and procedures. The minimum financial standards 
should be monitored for compliance purposes. The Commission believes 
that in order to monitor for minimum financial requirements, a 
designated contract market should routinely receive and promptly 
review financial and related information. Rules concerning the 
protection of customer funds should address the segregation of 
customer and proprietary funds, the custody of customer funds, the 
investment standards for customer funds, related recordkeeping and 
related intermediary default procedures.
    (b) Acceptable Practices. [Reserved]
    Core Principle 12 of section 5(d) of the Act: PROTECTION OF 
MARKET PARTICIPANTS--The board of trade shall establish and enforce 
rules to protect market participants from abusive practices 
committed by any party acting as an agent for the participants. 
    (a) Application Guidance. A designated contract market should 
have rules prohibiting conduct by intermediaries that is fraudulent, 
noncompetitive, unfair, or an abusive practice in connection with 
the execution of trades and a program to detect and discipline such 
behavior. The contract market should have methods and resources 
appropriate to the nature of the trading system and the structure of 
the market to detect trade practice abuses.
    (b) Acceptable Practices. [Reserved]
    Core Principle 13 of section 5(d) of the Act: DISPUTE 
RESOLUTION--The board of trade shall establish and enforce rules 
regarding and provide facilities for alternative dispute resolution 
as appropriate for market participants and any market 
intermediaries.
    (a) Application Guidance. A designated contract market should 
provide customer dispute resolution procedures that are fair and 
equitable and that are made available to the customer on a voluntary 
basis, either directly or through another self-regulatory 
organization.
    (b) Acceptable Practices. (1) Under Core Principle 13, a 
designated contract market is required to provide for dispute 
resolution mechanisms that are appropriate to the nature of the 
market.
    (2) In order to satisfy acceptable standards, a designated 
contract market should provide a customer dispute resolution 
mechanism that is fundamentally fair and is equitable. An acceptable 
customer dispute resolution mechanism would provide:
    (i) The customer with an opportunity to have his or her claim 
decided by a decision-maker that is objective and impartial,
    (ii) Each party with the right to be represented by counsel, at 
the party's own expense,
    (iii) Each party with adequate notice of claims presented 
against him or her, an opportunity to be heard on all claims, 
defenses and permitted counterclaims, and an opportunity for a 
prompt hearing,
    (iv) For prompt written final settlement awards that are not 
subject to appeal within the contract market, and
    (v) Notice to the parties of the fees and costs that may be 
assessed.
    (3) The procedure employed also should be voluntary, and could 
permit counterclaims as provided in Sec. 166.5 of this chapter.
    (4) If the designated contract market also provides a procedure 
for the resolution of disputes that do not involve customers (i.e., 
member-to-member disputes), the procedure for resolving such 
disputes must be independent of and shall not interfere with or 
delay the resolution of customers' claims or grievances.
    (5) A designated contract market may delegate to another self-
regulatory organization or to a registered futures association its 
responsibility to provide for customer dispute resolution 
mechanisms, provided, however, that, if the designated contract 
market does delegate that responsibility, the contract market shall 
in all respects treat any decision issued by such other organization 
or association as if the decision were its own including providing 
for the appropriate enforcement of any award issued against a 
delinquent member.
    Core Principle 14 of section 5(d) of the Act: GOVERNANCE FITNESS 
STANDARDS--The board of trade shall establish and enforce 
appropriate fitness standards for directors, members of any 
disciplinary committee, members of the contract market, and any 
other persons with direct access to the facility (including any 
parties affiliated with any of the persons described in this 
paragraph). 
    (a) Application Guidance. (1) A designated contract market 
should have appropriate eligibility criteria for the categories of 
persons set forth in the Core Principle that should 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 or a history of serious 
disciplinary offenses, such as those that would be disqualifying 
under Sec. 1.63 of this chapter. Participants who have direct access 
to trade on the contract market, but do not have these privileges, 
obligations, responsibilities or disciplinary authority could 
satisfy minimum fitness standards by meeting the standards that they 
must meet to qualify as a ``participant.'' Natural persons who 
directly or indirectly have greater than a ten percent interest in a 
designated contract market should meet the fitness standards 
applicable to members with voting rights.
    (2) The Commission believes that such standards should include 
providing the Commission with fitness information for such persons, 
whether registration information, certification to the fitness of 
such persons, an affidavit of such persons' fitness by the contract 
market's counsel or other information substantiating the fitness of 
such persons. If a contract market provided certification of the 
fitness of such a person, the Commission believes that such 
certification should be based on verified information that the 
person is fit to be in his or her position.
    (b) Acceptable Practices. [Reserved]
    Core Principle 15 of section 5(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 
contract market and establish a process for resolving such conflicts 
of interest.
    The means to address conflicts of interest in decision-making of 
a contract market should include methods to ascertain the presence 
of conflicts of interest and to make decisions in the event of such 
a conflict. In addition, the Commission believes that the

[[Page 14283]]

contract market 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 contract market employees or gained through an ownership 
interest in the contract market.
    Core Principle 16 of section 5(d) of the Act: COMPOSITION OF 
BOARDS OF MUTUALLY OWNED CONTRACT MARKETS--In the case of a mutually 
owned contract market, the board of trade shall ensure that the 
composition of the governing board reflects market participants. 
    The composition of a mutually-owned contract market should 
fairly represent the diversity of interests of the contract market's 
market participants.
    Core Principle 17 of section 5(d) of the Act: RECORDKEEPING--The 
board of trade shall maintain records of all activities related to 
the business of the contract market in a form and manner acceptable 
to the Commission for a period of 5 years. 
    (a) Application Guidance. [Reserved]
    (b) Acceptable Practices. 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 18 of section 5(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 restraints of trade; or (B) imposing any material 
anticompetitive burden on trading on the contract market. 
    (a) Application Guidance. An entity seeking designation as a 
contract market may request that the Commission consider under the 
provisions of section 15(b) of the Act any of the entity's rules, 
including trading protocols or policies, and including both 
operational rules and the terms or conditions of products listed for 
trading, at the time of designation 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.
    (b) Acceptable Practices. [Reserved]

    12. Chapter I of 17 CFR is proposed to be amended by adding new 
Part 40 as follows:

PART 40--PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES 
TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING 
ORGANIZATIONS

Sec.
40.1   Definitions.
40.2   Listing products for trading by certification.
40.3   Voluntary submission of new products for Commission review 
and approval.
40.4   Amendments to terms or conditions of enumerated agricultural 
contracts.
40.5   Voluntary submission of rules for Commission review and 
approval.
40.6   Self-certification of rules by designated contract markets 
and registered derivatives clearing organizations.
40.7   Delegations.
Appendix A to Part 40--Guideline No. 1.
Appendix B--Schedule of fees.
Appendix C--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.

    Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6c, 7, 7a, 8 and 12a, as 
amended by the Commodity Futures Modernization Act of 2000, Appendix 
____ of Pub. L. No. 106-554, 114 Stat. 2763 (2000).


Sec. 40.1  Definitions.

    As used in this part:
    Contract market includes a clearing organization that clears trades 
for the contract market, unless reference also is made within the same 
section of the Code of Federal Regulations to derivatives clearing 
organization, as defined in Sec. 39.1 of this chapter.
    Dormant contract means any commodity futures or option contract or 
other instrument in which no trading has occurred in any future or 
option expiration for a period of six complete calendar months; 
provided, however, no contract or instrument shall be considered to be 
dormant until the end of 60 complete calendar months following initial 
listing.
    Emergency means any occurrence or circumstance which, in the 
opinion of the governing board of the contract market or derivatives 
transaction execution facility, requires immediate action and threatens 
or may threaten such things as the fair and orderly trading in, or the 
liquidation of or delivery pursuant to, any agreements, contracts or 
transactions on such a trading facility, including any manipulative or 
attempted manipulative activity; any actual, attempted, or threatened 
corner, squeeze, congestion, or undue concentration of positions; any 
circumstances which may materially affect the performance of 
agreements, contracts or transactions traded on the trading facility, 
including failure of the payment system or the bankruptcy or insolvency 
of any participant; any action taken by any governmental body, or any 
other board of trade, market or facility which may have a direct impact 
on trading on the trading facility; and any other circumstance which 
may have a severe, adverse effect upon the functioning of a designated 
contract market or derivatives transaction execution facility.
    Rule means any constitutional provision, article of incorporation, 
bylaw, rule, regulation, resolution, interpretation, stated policy, 
term and condition, trading protocol, agreement or instrument 
corresponding thereto, in whatever form adopted, and any amendment or 
addition thereto or repeal thereof, made or issued by a contract 
market, derivatives transaction execution facility or derivatives 
clearing organization or by the governing board thereof or any 
committee thereof.
    Terms and conditions 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. Terms and 
conditions include provisions relating to the following:
    (1) Quality or quantity standards for a commodity and any 
applicable premiums or discounts;
    (2) Trading hours, trading months and the listing of contracts;
    (3) Minimum and maximum price limits and the establishment of 
settlement prices;
    (4) Position limits and position reporting requirements;
    (5) Delivery points and locational price differentials;
    (6) Delivery standards and procedures, including alternatives to 
delivery and applicable penalties or sanctions for failure to perform;
    (7) Settlement of the contract; and
    (8) Payment or collection of commodity option premiums or margins.


Sec. 40.2  Listing products for trading by certification.

    To list a new product for trading, to list a product for trading 
that has become dormant, or to accept for clearing a product (not 
traded on a designated contract market or a derivatives transaction 
execution facility), a registered entity must file with the Commission 
at its Washington, D.C., headquarters no later than the close of 
business of the business day preceding the product's listing or 
acceptance for clearing, either in electronic or hard-copy form, a copy 
of the product's rules, including its terms and conditions, and a 
certification by the registered entity that the trading product or 
other instrument complies with the Act and rules thereunder.

[[Page 14284]]

Sec. 40.3  Voluntary submission of new products for Commission review 
and approval.

    (a) Request for approval. A designated contract market or 
registered derivatives transaction execution facility may request under 
section 5c(c)(2) of the Act that the Commission approve new products 
under the following procedures:
    (1) The submitting entity labels the request as ``Request for 
Commission Product Approval'';
    (2) The request for product approval is for a commodity other than 
a security future or a security futures product as defined in sections 
1a(31) or 1a(32) of the Act, respectively;
    (3) The submission complies with the requirements of Appendix A to 
this part--Guideline No. 1;
    (4) The submission includes the fee required under Appendix B to 
this part.
    (b) Forty-five day review. All products submitted for Commission 
approval under this paragraph shall be deemed approved by the 
Commission forty-five days after receipt by the Commission, or at the 
conclusion of such extended period as provided under paragraph (c) of 
this section, unless notified otherwise within the applicable period, 
if:
    (1) The submission complies with the requirements of paragraphs 
(a)(1) of this section; and
    (2) The submitting entity does not amend the terms or conditions of 
the proposed product or supplement the request for approval, except as 
requested by the Commission or for correction of typographical errors, 
renumbering or other such nonsubstantive revisions, during that period. 
Any voluntary, substantive amendment by the requestor will be treated 
as a new submission under this section.
    (c) Extension of time. The Commission may extend the forty-five day 
review period in paragraph (b) of this section for:
    (1) An additional forty-five days, if within the initial forty-five 
day review period, the Commission notifies the submitting entity that 
the proposed rule raises novel or complex issues that require 
additional time for review or is of major economic significance. This 
notification shall briefly describe the nature of the specific issues 
for which additional time for review is required; or
    (2) Such period as the submitting entity so instructs the 
Commission in writing.
    (d) Notice of non-approval. The Commission at any time during its 
review under this section may notify the submitting entity that it will 
not, or is unable to, approve the product or instrument. This 
notification will briefly specify the nature of the issues raised and 
the specific provision of the Act or regulations, including the form or 
content requirements of paragraph (a) of this section, that the 
proposed rule would violate, appears to violate or the violation of 
which cannot be ascertained from the submission.
    (e) Effect of non-approval. (1) Notification to a submitting entity 
under paragraph (d) of this section of the Commission's refusal to 
approve a proposed product or instrument does not prejudice the entity 
from subsequently submitting a revised version of the product or 
instrument for Commission approval or from submitting the product or 
instrument as initially proposed pursuant to a supplemented submission.
    (2) Notification to a submitting entity under paragraph (d) of this 
section of the Commission's refusal to approve a proposed rule or rule 
amendment shall be presumptive evidence that the entity may not 
truthfully certify under Sec. 40.2 that the same, or substantially the 
same, product does not violate the Act or rules thereunder.


Sec. 40.4  Amendments to terms or conditions of enumerated agricultural 
contracts.

    Designated contract markets and registered derivatives transaction 
execution facilities must submit for Commission approval under the 
procedures of Sec. 40.5, prior to its implementation, any rule or rule 
amendment that would, for a delivery month having open interest, 
materially change a term or condition as defined in Sec. 40.1(f), of a 
contract for future delivery in an agricultural commodity enumerated in 
section 1a(4) of the Act, or of an option on such a contract or 
commodity. Provided, however, the following rules or rule amendments 
would not be material changes:
    (a) Changes in trading hours;
    (b) Changes in lists of approved delivery facilities pursuant to 
previously set standards or criteria;
    (c) Changes to terms and conditions of options on futures other 
than those relating to last trading day, expiration date, option strike 
price delistings, and speculative position limits; and
    (d) Reductions in the minimum price fluctuation (or ``tick'').


Sec. 40.5  Voluntary submission of rules for Commission review and 
approval.

    (a) Request for approval of rules. A registered entity may request 
pursuant to section 5c(c) of the Act that the Commission approve any 
rule or proposed rule or rule amendment under the following procedures:
    (1) Three copies of each rule or rule amendment submission under 
this section shall be furnished in hard copy form to the Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street 
NW., Washington, DC 20581 or electronically in a format specified by 
the Secretary of the Commission. Each request for approval under this 
section shall be in the following order and shall:
    (i) Label the submission as ``Request for Commission rule 
approval'';
    (ii) Set forth the text of the rule or proposed rule (in the case 
of a rule amendment, deletions and additions must be indicated);
    (iii) Describe the proposed effective date of a proposed rule and 
any action taken or anticipated to be taken to adopt the proposed rule 
by the registered entity or by its governing board or by any committee 
thereof, and cite the rules of the entity that authorize the adoption 
of the proposed rule;
    (iv) Explain the operation, purpose, and effect of the proposed 
rule, including, as applicable, a description of the anticipated 
benefits to market participants or others, any potential 
anticompetitive effects on market participants or others, how the rule 
fits into the registered entity's framework of self-regulation, and any 
other information which may be beneficial to the Commission in 
analyzing the proposed rule. If a proposed rule affects, directly or 
indirectly, the application of any other rule of the submitting entity, 
set forth the pertinent text of any such rule and describe the 
anticipated effect;
    (v) Note and briefly describe any substantive opposing views 
expressed with respect to the proposed rule that were not incorporated 
into the proposed rule prior to its submission to the Commission; and
    (vi) Identify any Commission regulation that the Commission may 
need to amend, or sections of the Act or Commission regulations that 
the Commission may need to interpret in order to approve or allow into 
effect the proposed rule. To the extent that such an amendment or 
interpretation is necessary to accommodate a proposed rule, the 
submission should include a reasoned analysis supporting the amendment 
to the Commission's rule or interpretation.
    (2) [Reserved]
    (b) Forty-five day review. All rules submitted for Commission 
approval under paragraph (a) of this section shall be deemed approved 
by the Commission under section 5c(c) of the Act, forty-five days after 
receipt by the Commission, or at the conclusion of such extended period 
as provided under paragraph (c)

[[Page 14285]]

of this section, unless notified otherwise within the applicable 
period, if:
    (1) The submission complies with the requirements of paragraphs 
(a)(1)(i) through (vi) of this section, and
    (2) The submitting entity does not amend the proposed rule or 
supplement the submission, except as requested by the Commission, 
during the pendency of the review period. Any amendment or 
supplementation not requested by the Commission will be treated as the 
submission of a new filing under this section.
    (c) Extensions of time. The Commission may extend the review period 
in paragraph (b) of this section for:
    (1) An additional forty-five days, if the Commission, within the 
initial forty-five day review period, notifies the submitting entity 
that the proposed rule raises novel or complex issues that require 
additional time for review or is of major economic significance. This 
notification shall briefly describe the nature of the specific issues 
for which additional time for review is required; or
    (2) Such additional period as the submitting entity has so 
instructed the Commission in writing.
    (d) Notice of non-approval. The Commission at any time during its 
review under this section may notify the submitting entity that it will 
not, or is unable to, approve the proposed rule or rule amendment. This 
notification will briefly specify the nature of the issues raised and 
the specific provision of the Act or regulations, including the form or 
content requirements of this section, that the proposed rule would 
violate, appears to violate or the violation of which cannot be 
ascertained from the submission.
    (e) Effect of non-approval. (1) Notification to a registered entity 
under paragraph (d) of this section of the Commission's refusal to 
approve a proposed rule or rule amendment of a registered entity does 
not prejudice the entity from subsequently submitting a revised version 
of the proposed rule or rule amendment for Commission approval or from 
submitting the rule or rule amendment as initially proposed pursuant to 
a supplemented submission.
    (2) Notification to a registered entity under paragraph (d) of this 
section of the Commission's refusal to approve a proposed rule or rule 
amendment of a registered entity shall be presumptive evidence that the 
entity may not truthfully certify that the same, or substantially the 
same, proposed rule or rule amendment does not violate the Act or rules 
thereunder.
    (f) Expedited approval. Notwithstanding the provisions of paragraph 
(b) of this section, changes to terms and conditions of a product that 
are consistent with the Act and Commission regulations and with 
standards approved or established by the Commission in a written 
notification to the registered entity of the applicability of this 
paragraph (f) shall be deemed approved by the Commission at such time 
and under such conditions as the Commission shall specify in the 
notice, provided, however, that the Commission may, at any time, alter 
or revoke the applicability of such a notice to any particular product.


Sec. 40.6  Self-certification of rules by designated contract markets 
and registered derivatives clearing organizations.

    (a) Required certification. A designated contract market or a 
registered derivatives clearing organization may implement any new rule 
or rule amendment only if:
    (1) The rule or rule amendment does not materially change a term or 
condition of a contract for future delivery of an agricultural 
commodity enumerated in section 1a(4) of the Act or an option on such a 
contract or commodity in a delivery month having open interest;
    (2) The designated contract market or registered derivatives 
clearing organization has filed a submission for the rule or rule 
amendment, and the Commission has received the submission at its 
Washington, D.C. headquarters by close of business on the business day 
preceding implementation of the rule; provided, however, rules or rule 
amendments implemented under procedures of the governing board to 
respond to an emergency as defined in Sec. 40.1(d), must be filed with 
the Commission at the time of implementation of the rule or rule 
amendment, if implementation is sooner than the next business day; and
    (3) The rule submission includes:
    (i) The label, ``Rule Certification'' or, in the case of a rule or 
rule amendment that responds to an emergency, ``Emergency Rule 
Certification'';
    (ii) The text of the rule (in the case of a rule amendment, 
deletions and additions must be indicated);
    (iii) The date of implementation;
    (iv) A brief explanation of any substantive opposing views not 
incorporated into the rule; and
    (v) A certification by the entity that the rule complies with the 
Act and regulations thereunder.
    (b) Stay. The Commission may stay the effectiveness of a rule 
implemented pursuant to paragraph (a) of this section during the 
pendency of Commission proceedings for filing a false certification or 
to alter or amend the rule pursuant to section 8a(7) of the Act. The 
decision to stay the effectiveness of a rule in such circumstances 
shall not be delegable to any employee of the Commission.
    (c) Notification of rule amendments. Notwithstanding the rule 
certification requirement of section 5c(c)(1) of the Act, and 
paragraphs (a)(2) and (a)(3) of this section, a designated contract 
market or a registered derivatives clearing organization may place the 
following rules or rule amendments into effect without certification to 
the Commission if the following conditions are met:
    (1) The designated contract market or registered derivatives 
clearing organization provides to the Commission at least weekly a 
summary notice of all rule changes made effective pursuant to this 
paragraph during the preceding week. Such notice must be labeled 
``Weekly Notification of Rule Changes'' and need not be filed for weeks 
during which no such actions have been taken. One copy of each such 
submission shall be furnished in hard copy to the Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street N.W., 
Washington, DC 20581, or electronically in a format specified by the 
Secretary of the Commission; and
    (2) The rule governs:
    (i) Nonmaterial revisions. Corrections of typographical errors, 
renumbering, periodic routine updates to identifying information about 
approved entities and other such nonsubstantive revisions of a 
product's terms and conditions that have no effect on the economic 
characteristics of the product;
    (ii) Delivery standards set by third parties. Changes to grades or 
standards of commodities deliverable on a product that are established 
by an independent third party and that are incorporated by reference as 
product terms, provided that the grade or standard is not established, 
selected or calculated solely for use in connection with futures or 
option trading and such changes do not affect deliverable supplies or 
the pricing basis for the product;
    (iii) Index products. Routine changes in the composition, 
computation, or method of selection of component entities of an index 
(other than a stock index) referenced and defined in the product's 
terms, that do not affect the pricing basis of the index, which are 
made by an independent third party whose business relates to the 
collection or dissemination of price information and that was not 
formed solely for the

[[Page 14286]]

purpose of compiling an index for use in connection with a futures or 
option product; or
    (iv) Option contract terms. Changes to option contract rules 
relating to the strike price listing procedures, strike price 
intervals, and the listing of strike prices on a discretionary basis.
    (3) Notification of rule amendments not required. Notwithstanding 
the rule certification requirements of section 5c(c)(1) of the Act and 
of paragraphs (a)(2) and (a)(3) of this section, designated contract 
markets and registered derivatives clearing organizations may place the 
following rules or rule amendments into effect without certification or 
notice to the Commission if the following conditions are met:
    (i) The designated contract market or registered derivatives 
clearing organization maintains documentation regarding all changes to 
rules; and
    (ii) The rule governs:
    (A) Transfer of membership or ownership. Procedures and forms for 
the purchase, sale or transfer of membership or ownership, but not 
including qualifications for membership or ownership, any right or 
obligation of membership or ownership or dues or assessments;
    (B) Administrative procedures. The organization and administrative 
procedures of a contract market's governing bodies such as a Board of 
Directors, Officers and Committees, but not voting requirements, Board 
of Directors or Committee composition requirements, or procedures or 
requirements relating to conflicts of interest;
    (C) Administration. The routine, daily administration, direction 
and control of employees, requirements relating to gratuity and similar 
funds, but not guaranty, reserves, or similar funds; declaration of 
holidays, and changes to facilities housing the market, trading floor 
or trading area; and
    (D) Standards of decorum. Standards of decorum or attire or similar 
provisions relating to admission to the floor, badges, or visitors, but 
not the establishment of penalties for violations of such rules.


Sec. 40.7  Delegations.

    (a) Procedural matters. (1) Review of products or rules. The 
Commission hereby delegates, until it orders otherwise, to the Director 
of the Division of Trading and Markets and separately to the Director 
of Economic Analysis or to the Director's delegatee with the 
concurrence of the General Counsel or the General Counsel's delegatee, 
authority to request under Sec. 40.3(b)(2) or Sec. 40.5(b)(2) that the 
entity requesting approval amend the proposed product, rule or rule 
amendment or supplement the submission, to notify a submitting entity 
under Sec. 40.3(c) or Sec. 40.5(c) that the time for review has been 
extended, and to notify the submitting entity under Sec. 40.3(d) or 
Sec. 40.5(d) that the Commission is not approving, or is unable to 
approve, the proposed product, rule or rule amendment.
    (2) Emergency rules. The Commission hereby delegates authority to 
the Director of the Division of Trading and Markets, or the delegatees 
of the Director, authority to receive notification and the required 
certification of emergency rules under Sec. 40.6(a)(2).
    (b) Approval authority. The Commission hereby delegates, until the 
Commission orders otherwise, to the Director of the Division of Trading 
and Markets and separately to the Director of Economic Analysis, with 
the concurrence of the General Counsel or the General Counsel's 
delegatee, to be exercised by either of such Directors or by such other 
employee or employees of the Commission under the supervision of such 
Directors as may be designated from time to time by the Directors, the 
authority to approve, pursuant to section 5c(c)(3) of the Act and 
Sec. 40.5, rules or rule amendments of a designated contract market, 
registered derivatives transaction execution facility or registered 
derivatives clearing organization that:
    (1) Relate to, but do not materially change, the quantity, quality, 
or other delivery specifications, procedures, or obligations for 
delivery, cash settlement, or exercise under an agreement, contract or 
transaction approved for trading by the Commission; daily settlement 
prices; clearing position limits; requirements or procedures for 
governance of a registered entity; procedures for transfer trades; 
trading hours; minimum price fluctuations; and maximum price limit and 
trading suspension provisions;
    (2) Reflect routine modifications that are required or anticipated 
by the terms of the rule of a registered entity;
    (3) [Reserved].
    (4) Are in substance the same as a rule of the same or another 
registered entity which has been approved previously by the Commission 
pursuant to section 5c(c)(3) of the Act;
    (5) Are consistent with a specific, stated policy or interpretation 
of the Commission; or
    (6) Relate to the listing of additional trading months of approved 
contracts.
    (c) The Directors may submit to the Commission for its 
consideration any matter that has been delegated pursuant to paragraph 
(a) or (b) of this section.
    (d) Nothing in this section shall be deemed to prohibit the 
Commission, at its election, from exercising the authority delegated in 
paragraph (a) or (b) of this section to the Directors.
* * * * *

Appendix B--Schedule of fees

    (a) Applications for product approval. Each application for 
product approval under Sec. 40.3 must be accompanied by a check or 
money order made payable to the Commodity Futures Trading Commission 
in an amount to be determined annually by the Commission and 
published in the Federal Register.
    (b) Checks and applications should be sent to the attention of 
the Office of the Secretariat, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC 
20581. No checks or money orders may be accepted by personnel other 
than those in the Office of the Secretariat.
    (c) Failure to submit the fee with an application for product 
approval will result in return of the application. Fees will not be 
returned after receipt.
* * * * *
    12-a. Appendix A to Part 5 is redesignated as Appendix A to Part 40 
and the heading is revised; Appendix E to Part 5 is redesignated as 
Appendix C to Part 40; and Part 5 is removed and reserved. The revised 
heading reads as follows:

Appendix A to Part 40--Guideline No. 1

    13. Chapter I of 17 CFR is proposed to be amended by adding new 
Part 41 as follows:

PART 41--SECURITY FUTURES

Sec.
41.1  [Reserved]

PART 166--CUSTOMER PROTECTION RULES

    14. The authority citation for Part 166 is proposed to be revised 
to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7, 
12a, 21, and 23, as amended by the Commodity Futures Modernization 
Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

    15. Sec. Section 166.5 is proposed to be added to read as follows:


Sec. 166.5  Dispute settlement procedures.

    (a) Definitions. (1) The term claim or grievance as used in this 
section shall mean any dispute that:
    (i) Arises out of any transaction executed on or subject to the 
rules of a designated contract market,

[[Page 14287]]

    (ii) Is executed or effected through a member of such facility, a 
participant transacting on or through such facility or an employee of 
such facility, and
    (iii) Does not require for adjudication the presence of essential 
witnesses or third parties over whom the facility does not have 
jurisdiction and who are not otherwise available.
    (iv) The term claim or grievance does not include disputes arising 
from cash market transactions that are not a part of or directly 
connected with any transaction for the purchase or sale of any 
commodity for future delivery or commodity option.
    (2) The term customer as used in this section includes an option 
customer (as defined in Sec. 1.3(jj) of this chapter) and any person 
for or on behalf of whom a member of a designated contract market, or a 
participant transacting on or through such designated contract market, 
except another member of or participant in such designated contract 
market. Provided, however, a person who is an ``eligible contract 
participant'' as defined in section 1a(12) of the Act shall not be 
deemed to be a customer within the meaning of this section.
    (3) The term Commission registrant as used in this section means a 
person registered under the Act as a futures commission merchant, 
introducing broker, floor broker, commodity pool operator, commodity 
trading advisor, or associated person.
    (b) Voluntariness. The use by customers and eligible contract 
participants of dispute settlement procedures shall be voluntary as 
provided in paragraphs (c) and (g) of this section.
    (c) Customers. No Commission registrant shall enter into any 
agreement or understanding with a customer in which the customer 
agrees, prior to the time a claim or grievance arises, to submit such 
claim or grievance to any settlement procedure except as follows:
    (1) Signing the agreement must not be made a condition for the 
customer to utilize the services offered by the Commission registrant.
    (2) If the agreement is contained as a clause or clauses of a 
broader agreement, the customer must separately endorse the clause or 
clauses containing the cautionary language and provisions specified in 
this section. A futures commission merchant or introducing broker may 
obtain such endorsement as provided in Sec. 1.55(d) of this chapter for 
the following classes of customers only:
    (i) A plan defined as a government plan or church plan in section 
3(32) or section 3(33) of title I of the Employee Retirement Income 
Security Act of 1974 or a foreign person performing a similar role or 
function subject as such to comparable foreign regulation; and
    (ii) A person who is a ``qualified eligible participant'' or a 
``qualified eligible client'' as defined in Sec. 4.7 of this chapter.
    (3) The agreement may not require any customer to waive the right 
to seek reparations under section 14 of the Act and part 12 of this 
chapter. Accordingly, such customer must be advised in writing that he 
or she may seek reparations under section 14 of the Act by an election 
made within 45 days after the Commission registrant notifies the 
customer that arbitration will be demanded under the agreement. This 
notice must be given at the time when the Commission registrant 
notifies the customer of an intention to arbitrate. The customer must 
also be advised that if he or she seeks reparations under section 14 of 
the Act and the Commission declines to institute reparations 
proceedings, the claim or grievance will be subject to the pre-existing 
arbitration agreement and must also be advised that aspects of the 
claim or grievance that are not subject to the reparations procedure 
(i.e, do not constitute a violation of the Act or rules thereunder) may 
be required to be submitted to the arbitration or other dispute 
settlement procedure set forth in the pre-existing arbitration 
agreement.
    (4) The agreement must advise the customer that, at such time as he 
or she may notify the Commission registrant that he or she intends to 
submit a claim to arbitration, or at such time as such person notifies 
the customer of its intent to submit a claim to arbitration, the 
customer will have the opportunity to elect a qualified forum for 
conducting the proceeding.
    (5) Election of forum. (i) Within ten business days after receipt 
of notice from the customer that he or she intends to submit a claim to 
arbitration, or at the time a Commission registrant notifies the 
customer of its intent to submit a claim to arbitration, the Commission 
registrant must provide the customer with a list of organizations whose 
procedures meet Acceptable Practices established by the Commission for 
dispute resolution, together with a copy of the rules of each forum 
listed. The list must include:
    (A) The designated contract market, if available, upon which the 
transaction giving rise to the dispute was executed or could have been 
executed;
    (B) A registered futures association; and
    (C) At least one other organization that will provide the customer 
with the opportunity to select the location of the arbitration 
proceeding from among several major cities in diverse geographic 
regions and that will provide the customer with the choice of a panel 
or other decision-maker composed of at least one or more persons, of 
which at least a majority are not members or associated with a member 
of the designated contract market or employee thereof, and that are not 
otherwise associated with the designated contract market (mixed panel): 
Provided, however, that the list of qualified organizations provided by 
a Commission registrant that is a floor broker need not include a 
registered futures association unless a registered futures association 
has been authorized to act as a decision-maker in such matters.
    (ii) The customer shall, within forty-five days after receipt of 
such list, notify the opposing party of the organization selected. A 
customer's failure to provide such notice shall give the opposing party 
the right to select an organization from the list.
    (6) Fees. The agreement must acknowledge that the Commission 
registrant will pay any incremental fees that may be assessed by a 
qualified forum for provision of a mixed panel, unless the arbitrators 
in a particular proceeding determine that the customer has acted in bad 
faith in initiating or conducting that proceeding.
    (7) Cautionary Language. The agreement must include the following 
language printed in large boldface type:

    Three Forums Exist for the Resolution of Commodity Disputes: 
Civil Court litigation, reparations at the Commodity Futures Trading 
Commission (CFTC) and arbitration conducted by a self-regulatory or 
other private organization.
    The CFTC recognizes that the opportunity to settle disputes by 
arbitration may in some cases provide many benefits to customers, 
including the ability to obtain an expeditious and final resolution 
of disputes without incurring substantial costs. The CFTC requires, 
however, that each customer individually examine the relative merits 
of arbitration and that your consent to this arbitration agreement 
be voluntary.
    By signing this agreement, you: (1) May be waiving your right to 
sue in a court of law; and (2) are agreeing to be bound by 
arbitration of any claims or counterclaims which you or [name] may 
submit to arbitration under this agreement. You are not, however, 
waiving your right to elect instead to petition the CFTC to 
institute reparations proceedings under Section 14 of the Commodity 
Exchange Act with respect to any dispute that may be arbitrated 
pursuant to this agreement. In the event a dispute arises, you will 
be notified if [name] intends to submit the dispute to arbitration. 
If you believe a violation of the Commodity

[[Page 14288]]

Exchange Act is involved and if you prefer to request a section 14 
``Reparations'' proceeding before the CFTC, you will have 45 days 
from the date of such notice in which to make that election.
    You need not sign this agreement to open or maintain an account 
with [name]. See 17 CFR 166.5.

    (d) Enforceability. A dispute settlement procedure may require 
parties utilizing such procedure to agree, under applicable state law, 
submission agreement or otherwise, to be bound by an award rendered in 
the procedure, provided that the agreement to submit the claim or 
grievance to the procedure was made in accordance with paragraph (c) or 
(g) of this section or that the agreement to submit the claim or 
grievance was made after the claim or grievance arose. Any award so 
rendered shall be enforceable in accordance with applicable law.
    (e) Time limits for submission of claims. The dispute settlement 
procedure established by a designated contract market shall not include 
any unreasonably short limitation period foreclosing submission of 
customers' claims or grievances or counterclaims.
    (f) Counterclaims. A procedure established by a designated contract 
market under the Act for the settlement of customers' claims or 
grievances against a member or employee thereof may permit the 
submission of a counterclaim in the procedure by a person against whom 
a claim or grievance is brought. The designated contract market may 
permit such a counterclaim where the counterclaim arises out of the 
transaction or occurrence that is the subject of the customer's claim 
or grievance and does not require for adjudication the presence of 
essential witnesses, parties, or third persons over whom the designated 
contract market does not have jurisdiction. Other counterclaims arising 
out of a transaction subject to the Act and rules promulgated 
thereunder for which the customer utilizes the services of the 
registrant may be permissible where the customer and the registrant 
have agreed in advance to require that all such submissions be included 
in the proceeding, and if the aggregate monetary value of the 
counterclaims is capable of calculation.
    (g) Eligible contract participants. (1) A person who is an 
``eligible contract participant'' as defined in section 1a(12) of the 
Act may negotiate any term of an agreement or understanding with a 
Commission registrant in which the eligible contract participant 
agrees, prior to the time a claim or grievance arises, to submit such 
claim or grievance to any settlement procedure, except that signing the 
agreement must not be made a condition for the eligible contract 
participant to use the services offered by the registrant.
    (2) The agreement may require an eligible contract participant, to 
waive the right to seek reparations under section 14 of the Act and 
part 12 of this chapter.
    (3) If the agreement is contained as a clause or clauses of a 
broader agreement, the eligible contract participant must separately 
endorse the clause or clauses containing the agreement; Provided, 
however, a futures commission merchant may obtain such endorsement as 
provided in Sec. 1.55(d) of this chapter.

PART 170--REGISTERED FUTURES ASSOCIATIONS

Subpart A--Standards Governing Commission Review of Applications 
for Registration as a Futures Association Under Section 17 of the 
Act

    16. The authority citation for Part 170 is proposed to be revised 
to read as follows:

    Authority: 7 U.S.C. 6p, 12a, and 21, as amended by the Commodity 
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 
114 Stat. 2763 (2000).

    17. Section 170.8 is proposed to be revised to read as follows:


Sec. 170.8  Settlement of customer disputes (section 17(b)(10) of the 
Act).

    A futures association must be able to demonstrate its capacity to 
promulgate rules and to conduct proceedings that provide a fair, 
equitable and expeditious procedure, through arbitration or otherwise, 
for the voluntary settlement of a customer's claim or grievance brought 
against any member of the association or any employee of a member of 
the association. Such rules shall conform to and be consistent with 
section 17(b)(10) of the Act and be consistent with the guidelines and 
acceptable practices for dispute resolution found within Appendix A and 
Appendix B to Part 38 of this chapter.

PART 180--ARBITRATION OR OTHER DISPUTE SETTLEMENT PROCEDURES

    18. Part 180 is proposed to be removed.

    Issued in Washington, D.C., this 2nd day of March, 2001, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.

Concurring Statement of Commissioner Thomas J. Erickson

A New Regulatory Framework for Trading Facilities, Intermediaries, and 
Clearing Organizations

    I concur with the release of these proposed rules. First, the 
Commodity Futures Modernization Act of 2000 (``CFMA'') \1\ is now 
law, and it is imperative that the Commission provide some 
regulatory structure and guidance so that the intent behind the CFMA 
might be fully effectuated. Second, the CFMA represents profound 
change for the derivatives industry, and I therefore believe that it 
is important to solicit as much comment as is possible from as broad 
a cross-section of the public as is possible. This brings me to my 
primary concern.
---------------------------------------------------------------------------

    \1\ See Consolidated Appropriations Act 2001, Appendix E, Pub. 
L. No. 106-554, 114 Stat. 2763 (2000).
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    Over the past year, this Commission has devoted a tremendous 
amount of time and resources to devising a new regulatory 
framework,\2\ working with Congress on the CFMA, and drafting 
today's proposed rules which implement the CFMA. Throughout this 
process, the Commission has provided draft rules to certain 
interested parties for their review and comment--at times, prior to 
their publication in the Federal Register for general comment. 
Certainly, discussion and dialogue with the industry is to be 
encouraged, and I am pleased that the Commission has reached out to 
the industry and made every effort to accommodate its views. 
However, I fear that this process has given great weight to the 
views of a select few, depriving the Commission of an opportunity to 
hear from the broader community of interests on a broader range of 
issues. In particular, I believe the Commission would benefit from 
input on two additional issues: disclosure and fraud.
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    \2\ See A New Regulatory Framework for Multilateral Transaction 
Execution Facilities, Intermediaries and Clearing Organizations 
(final rulemaking), 65 FR. 77961 (Dec. 13, 2000); A New Regulatory 
Framework for Clearing Organizations (final rulemaking), 65 FR 78020 
(Dec. 13, 2000); Exemption for Bilateral Transactions (final rules), 
65 FR 78030 (Dec. 13, 2000); and Rules Relating to Intermediaries of 
Commodity Interest Transactions (final rules), 65 FR 77993 (Dec. 13, 
2000). The final rules were subsequently withdrawn following the 
passage of the CFMA. See A New Regulatory Framework for Multilateral 
Transaction Execution Facilities, Intermediaries and Clearing 
Organizations; Rules Relating to Intermediaries of Commodity 
Interest Transactions; A New Regulatory Framework for Clearing 
Organizations; Exemption for Bilateral Transactions (final rules; 
partial withdrawal), 65 FR 82272 (Dec. 28, 2000).
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Disclosure

    The CFMA is based largely on a regulatory reform package 
initially proposed by the Commission. From the very inception of 
this reform effort, the Commission has referred to its new 
regulatory framework as a

[[Page 14289]]

``disclosure-based'' system.\3\ The Commission today rightly asks 
whether, in the case of exempt markets, it should require that 
exempt entities affirmatively disclose to traders that the facility 
and trading on the facility are not regulated or approved by the 
Commission. It seems self-evident to me that rules implementing such 
a disclosure-based system ought to require disclosure. I would 
further suggest that it may be appropriate for the Commission to 
consider requiring all trading facilities at each of the tiers of 
regulation to disclose to their participants the type of regulation 
to which they are subject (if any). I am interested in hearing 
comment regarding the merits of a disclosure obligation. In the 
absence of such an obligation, should the Commission publish a 
listing of exchange markets identifying their regulatory status?
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    \3\ See A New Regulatory Framework: Report of the Commodity 
Futures Trading Commission Task Force, Feb. 2000, p. 2 (describing 
the taskforce's mission as providing recommendations regarding, 
among other things, ``moving the Commission * * * from merit to 
disclosure-based regulation''); A New Regulatory Framework for 
Multilateral Transaction Execution Facilities, Intermediaries and 
Clearing Organizations (proposed rulemaking), 65 FR 38985, 38986 
(June 22, 2000) (``the proposed framework to a large degree relies 
more heavily on disclosure rather than merit regulation''); A New 
Regulatory Framework for Multilateral Transaction Execution 
Facilities, Intermediaries and Clearing Organizations (final 
rulemaking), 65 FR 77961, 77962 (Dec. 13, 2000) (``the new framework 
relies more heavily on disclosure rather than merit regulation''); 
see also id. at 77974.
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Fraud

    One of the points about which there has been a great deal of 
discussion from the earliest days of the reform effort involves the 
Commission's antifraud authority. In the past, the Commission has 
had difficulty applying the antifraud provisions of the Act in some 
novel situations. In particular, the Commission's efforts to address 
fraud against retail customers has been hamstrung by some courts' 
interpretation of Section 4b of the Commodity Exchange Act.\4\ Given 
the inevitability of new market structures and classes of 
participants, the Commission has been wise to consider how its 
antifraud authority might be clarified through rulemaking. 
Nevertheless, throughout the reform process, the Commission has 
repeatedly heard from industry representatives that this would be a 
bad idea.
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    \4\ See Commodity Trend Service, Inc. v. Commodity Futures 
Trading Comm'n, 233 F.3d 981 (7th Cir. 2000) (Section 4b held not to 
apply to a financial publisher because the prohibition on fraud in 
connection with certain contracts of sale of a commodity for future 
delivery made for or on behalf of any other person applies only to 
brokers or others who have an agency relationship with their 
clients).
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    With the passage of the CFMA, members of Congress acknowledged 
the problems faced by the Commission in enforcing its antifraud 
provisions and stated their understanding that Section 4b was 
intended to be read broadly so as to give the Commission maximum 
enforcement authority.\5\ This intent is reflected in the ``Findings 
and Purpose'' section of the CFMA. That provision explicitly 
provides that, among other things, it is the purpose of the Act ``to 
protect all market participants from fraudulent or other abusive 
sales practices and misuses of customer assets * * *.'' \6\
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    \5\ ``It is the intent of Congress in retaining Section 4b in 
this bill that the provision not be limited to fiduciary, broker-
client or other agency-like relationships. Section 4b provides the 
Commission with broad authority to police fraudulent conduct within 
its jurisdiction, whether occurring in boiler rooms and bucket 
shops, or in the e-commerce and other markets that will develop 
under this new statutory framework.'' 146 Cong. Rec. S11924 at 
S11926 (daily ed. Dec. 15, 2000) (statement of Sen. Lugar). See also 
146 Cong. Rec. H12488 at H12489 (daily ed. Dec. 15, 2000)(statement 
of Rep. Ewing) (same).
    \6\ Consolidated Appropriations Act 2001, Appendix ____, Pub. L. 
No. 106-554 Sec. 108, 114 Stat. 2763 (2000) (amending Section 3 of 
the Commodity Exchange Act (7 U.S.C. 5)).
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    Today, the Commission proposes rules that include a free-
standing fraud provision. But the proposed rule, Rule 1.1, applies 
only to forex bucket shops because of expressed concerns about a 
broader rule of application. I believe it is in the public interest 
to propose a more comprehensive antifraud rule. While I concur 
generally with the publication of these proposed rules and certainly 
support the Commission asserting its authority under the CFMA to 
address forex bucket shops, I would like to hear precisely why 
adoption of such a comprehensive fraud rule in any way violates the 
public interest, overrides the intent of Congress, or oversteps the 
Commission's authority.


    Dated: March 2, 2001.
Thomas J. Erickson,
Commissioner.
[FR Doc. 01-5618 Filed 3-8-01; 8:45 am]
BILLING CODE 6351-01-U