[Federal Register Volume 66, Number 105 (Thursday, May 31, 2001)]
[Proposed Rules]
[Pages 29517-29523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13316]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 41 and 140

RIN 3038-AB82


Designated Contract Markets in Security Futures Products: Notice-
Designation Requirements, Continuing Obligations, Applications for 
Exemptive Orders, and Exempt Provisions

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rulemaking and request for comment.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission today proposes new 
regulations which would provide notice procedures for a national 
securities exchange, a national securities association, or an 
alternative trading system to become a designated contract market in 
security futures products, in accordance with the Commodity Futures 
Modernization Act of 2000. The proposed regulations also would 
establish limited filing requirements for such notice-designated 
contract markets, in accordance with certain provisions of the 
Commodity Exchange Act, and would establish procedures permitting such 
notice-designated contract markets to apply for exemptive relief from 
any section of the Commodity Exchange Act or regulations thereunder, to 
the extent such an exemption is necessary or appropriate in the public 
interest and is consistent with the protection of investors.

DATES: Comments must be received by July 2, 2001.

ADDRESSES: Comments on the proposed rulemaking may be sent to Jean A. 
Webb, Secretary of the Commission, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. In addition, comments may be sent by facsimile to (202) 418-
5536 or by electronic mail to [email protected]. Reference should be 
made to ``Designated Contract Markets in Security Futures Products.''

FOR FURTHER INFORMATION CONTACT: Joshua R. Marlow, Attorney-Advisor, or 
David P. Van Wagner, Associate Director, Division of Trading and 
Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 
1155 21st Street, NW., Washington, DC 20581, (202) 418-5490, electronic 
mail: [email protected] or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    On December 21, 2000, the Commodity Futures Modernization Act of 
2000 (``CFMA'') was signed into law.\1\ Among other things, the CFMA 
added a provision to the Commodity Exchange Act (``Act'') that permits 
the trading of security futures products under the shared jurisdiction 
of the Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') and the Securities and Exchange Commission (``SEC'').\2\ 
Under the amended law,

[[Page 29518]]

security futures products may be traded on any board of trade that is 
designated as a contract market by the Commission pursuant to section 5 
of the Act, or that is registered with the Commission as a derivatives 
transaction execution facility (``DTF'') pursuant to section 5a of the 
Act.\3\
---------------------------------------------------------------------------

    \1\ Pub. L. 106-554, 114 Stat. 2763. The text of the CFMA may be 
accessed at http://www.cftc.gov/files/ogc/ogchr5660.pdf.
    \2\ See section 251(a)(2) of the CFMA. Previously, section 
2(a)(1)(B)(v) of the Act had prohibited the trading of security 
futures products.
    The term ``security futures product'' is defined in section 
1a(32) of the Act to mean ``a security future or any put, call, 
straddle, option, or privilege on any security future.'' The term 
``security future'' is defined in section 1a(31) of the Act and 
specifically excludes, among other things, ``excluded swap 
transactions'' (as defined in section 2(g) of the Act). Because the 
CFMA also provides that options on security futures cannot be traded 
until at least December 21, 2003, security futures are the only 
security futures products that may be available for trading before 
such date. See section 2(a)(1)(D)(iii)(II) of the Act.
    \3\ The CFMA prescribes certain dates before which trading in 
security futures products shall not commence. Specifically, no 
trading may occur prior to August 21, 2001, at which time principal-
to-principal transactions between ``eligible contract participants'' 
may begin. Retail transactions in security futures products may not 
begin until December 21, 2001. (Both starting dates are conditioned 
upon the registration of a futures association as a national 
securities association under the Securities Exchange Act of 1934 
(``'34 Act'').) See section 202(a)(5) of the CFMA and section 
6(g)(5) of the `34 Act.
---------------------------------------------------------------------------

    Alternatively, section 5f of the Act permits certain entities that 
are otherwise regulated by the SEC to be designated contract markets 
for the limited purpose of trading security futures products.\4\ 
Specifically, any board of trade that is registered with the SEC as a 
national securities exchange pursuant to section 6(a) of the '34 Act, 
is registered with the SEC as a national securities association 
pursuant to section 15A(a) of the '34 Act, or is an alternative trading 
system (``ATS'') as defined by section 1a(1) of the Act shall be a 
designated contract market in security futures products (``SFPCM'') if:
---------------------------------------------------------------------------

    \4\ See section 252(a)(2) of the CFMA.

    (1) Such national securities exchange, national securities 
association, or alternative trading system lists or trades no other 
contracts of sale for future delivery, except for security futures 
products;
    (2) Such national securities exchange, national securities 
association, or alternative trading system files written notice with 
the Commission in such form as the Commission, by rule, may 
prescribe containing such information as the Commission, by rule, 
may prescribe as necessary or appropriate in the public interest or 
for the protection of customers; and
    (3) The registration of such national securities exchange, 
national securities association, or alternative trading system is 
not suspended pursuant to an order by the Securities and Exchange 
Commission.\5\
---------------------------------------------------------------------------

    \5\ Section 5f(a) of the Act.

    The designation ``shall be effective contemporaneously with the 
submission of notice * * * to the Commission.'' \6\ Accordingly, the 
Commission is today proposing new regulation 41.31, which would 
establish notification procedures in accordance with Congress' mandate 
in section 5f(a)(2) of the Act.
---------------------------------------------------------------------------

    \6\ Id.
---------------------------------------------------------------------------

    In order to maintain such designation status with the Commission, 
an SFPCM would have to comply with proposed regulation 41.32, which 
would establish several, limited continuing obligations. These filing 
requirements, authorized by various recordkeeping and inspection 
provisions of the Act, would allow the Commission to meet its market 
oversight responsibilities.
    Regulations 41.31 and 41.32 are proposed in a manner that the 
Commission believes is consistent with the intent of the CFMA. The CFMA 
defines a security futures product as both a ``security,'' for purposes 
of the '34 Act, and as a ``future,'' for purposes of the Commodity 
Exchange Act.\7\ The practical consequence of this dual-definition is 
that boards of trade that are otherwise subject to the regulatory 
jurisdiction of only the SEC or the CFTC, but which seek to list 
security futures products for trading, might now be subject to both 
regulatory regimes. The CFMA attempts to resolve this potentially 
duplicative regulation by preserving the jurisdiction of an entity's 
primary regulator and reducing the jurisdiction of the other regulator. 
Accordingly, under new section 5f of the Act, a board of trade that is 
primarily regulated by the SEC and that seeks to list security futures 
products for trading is relieved from certain of the CFTC's otherwise 
applicable regulatory requirements. Likewise, under section 202 of the 
CFMA, a board of trade that is primarily regulated by the CFTC and that 
seeks to list security futures products for trading is relieved from 
certain of the SEC's otherwise applicable regulatory requirements. The 
Commission notes that, under the SEC proposal to implement sections 202 
of the CFMA and 6(g) of the '34 Act,\8\ a contract market designated 
under section 5 of the Act that notice-registers as a national 
securities exchange with the SEC in order to list security futures 
products for trading would be subject to more notice requirements and 
more periodic reporting with its non-primary regulator than a board of 
trade that notice-designates as an SFPCM with the CFTC. The Commission 
seeks comment from the public on this potential disparity. To what 
extent could these disparate regulatory regimes for notice-registrants 
create a competitive disadvantage for section 5 designated contract 
markets or section 5a DTFs which seek notice-registration as a national 
securities exchange pursuant to section 6(g) of the '34 Act? Are these 
differences consistent with the general intent of the CFMA to minimize 
the burden of shared jurisdiction?
---------------------------------------------------------------------------

    \7\ See sections 101 and 201 of the CFMA.
    \8\ See 66 FR 26977 (May 15, 2001).
---------------------------------------------------------------------------

    Finally, section 5f(b)(4) of the Act permits the Commission to 
exempt SFPCMs from any provision of the Act or regulations thereunder, 
and requires that the Commission determine procedures which would allow 
SFPCMs to apply to the Commission for an exemption from any provision 
of the Act or regulations thereunder, ``to the extent (any) such 
exemption is necessary or appropriate in the public interest and is 
consistent with the protection of investors.'' \9\ Accordingly, the 
Commission proposes new regulation 41.33 to provide SFPCMs with an 
opportunity to request exemptive relief from unnecessary or unduly 
burdensome requirements. Responsibility for considering such requests 
would be delegated to the Directors of the Commission's Division of 
Trading and Markets and Division of Economic Analysis, jointly, 
pursuant to paragraph (g) of proposed regulation 41.33.\10\ Moreover, 
the Commission proposes new regulation 41.34 to exempt all SFPCMs from 
section 6(a) of the Act.
---------------------------------------------------------------------------

    \9\ Section 5f(b)(4)(A) of the Act.
    \10\ This proposed rulemaking specifies that SFPCM requests for 
exemption under proposed Commission regulation 41.33 would not be 
subject to the requirements of Commission regulation 140.99.
---------------------------------------------------------------------------

II. Proposed Amendments

A. Regulation 41.1--Definitions

    To implement the procedures identified in proposed regulations 
41.31, 41.32, 41.33, and 41.34, the Commission proposes to establish 
regulation 41.1, which would contain six definitions: ``alternative 
trading system''; ``board of trade''; ``national securities 
association''; ``national securities exchange''; ``rule''; and 
``security futures product.'' The terms ``alternative trading system,'' 
``board of trade,'' and ``security futures product'' would have the 
same meanings as those terms have in section 1a of the Act. The terms 
``national securities exchange'' and ``national securities 
association'' would have the same meanings as in the '34 Act. The 
definition of ``rule'' would be identical to the definition for that 
term in Commission regulation 1.41(a)(1).\11\
---------------------------------------------------------------------------

    \11\ Under the Commission's proposed regulatory reform 
rulemaking, Commission regulation 1.41(a)(1) would be deleted and 
replaced by Commission regulation 40.1(e). See 66 FR 14262 (Mar. 9, 
2001). Should that proposal become final, regulation 41.1(e) would 
alternatively cross-reference Commission regulation 40.1(e). 
Commission regulations referred to herein are found at 17 CFR Ch. I 
(2000).

---------------------------------------------------------------------------

[[Page 29519]]

B. Regulation 41.31--Notice-Designation

    The Commission proposes to establish procedures necessary for a 
board of trade operating as a national securities exchange, national 
securities association, or alternative trading system to receive 
designation as an SFPCM. This regulation is proposed pursuant to 
section 5f(a)(2) of the Act, which states that such designation may be 
obtained by a board of trade by filing ``written notice with the 
Commission in such form as the Commission, by rule, may prescribe 
containing such information as the Commission, by rule, may prescribe 
as necessary or appropriate in the public interest or for the 
protection of customers.''
    The proposed content requirements of the notice relate to the 
Commission's abilities to maintain communication with a board of trade 
and to receive information about its operations, two goals that the 
Commission believes are ``necessary or appropriate in the public 
interest or for the protection of customers.'' Such notices would have 
to include: the name, address, and contact person of the board of 
trade; a description of the security futures products that the board of 
trade intends to make available for trading, including an 
identification of all facilities that would clear transactions in 
security futures products on behalf of the board of trade; a copy of 
the current rules of the board of trade; and five specific 
certifications by the board of trade derived from the requirements 
found in sections 5f and 2(a)(1)(D)(vii) of the Act.\12\ If a board of 
trade previously filed documents with the SEC containing information 
which would satisfy any of these proposed informational requirements, 
the Commission would accept copies of such documents in lieu of the 
required information.
---------------------------------------------------------------------------

    \12\ See proposed regulation 41.31(a)(5)(iv). Section 
2(a)(1)(D)(vii) of the Act states: ``It shall be unlawful for a 
board of trade to trade or execute a security futures product unless 
the board of trade has provided the Commission with a certification 
that the specific security futures product and the board of trade, 
as applicable, meet the criteria specified in subclauses (I) through 
(XI) of [section 2(a)(1)(D)(i)], except as otherwise provided in 
[section 2(a)(1)(D)(vi)].''
---------------------------------------------------------------------------

C. Regulation 41.32--Continuing Obligations

    The Commission proposes regulation 41.32 in order to establish a 
mechanism to receive the following from an SFPCM:
    (1) Notification of any change in its regulatory status with the 
SEC or with a futures association registered under section 17 of the 
Act; \13\
---------------------------------------------------------------------------

    \13\ A change in regulatory status would include, among other 
things, suspension of registration pursuant to an order by the SEC, 
a switch in SEC registration from ``alternative trading system'' to 
``national securities exchange,'' or suspension or revocation of 
membership by a registered futures association.
---------------------------------------------------------------------------

    (2) A certification consistent with the requirements of section 
2(a)(1)(D)(vii) of the Act each time the board of trade lists a new 
security futures product for trading; \14\
---------------------------------------------------------------------------

    \14\ See note 12.
---------------------------------------------------------------------------

    (3) Provision of a copy of any new rules or rule amendments that 
relate to the trading of security futures products, including any 
operational rules and the terms and conditions of any security futures 
products; \15\
---------------------------------------------------------------------------

    \15\ A change in the clearing facilities utilized by an SFPCM 
would be included in this category.
---------------------------------------------------------------------------

    (4) Upon request, information related to its business as a 
designated contract market in security futures products; and
    (5) Upon request, a written demonstration, including supporting 
data, that the board of trade is in compliance with a specified 
provision of the Act or regulations thereunder.
    This information would permit the Commission to carry out its 
various responsibilities under the Act and would ensure that an SFPCM 
continues to comply with the conditions of designation under section 
5f(a) of the Act and proposed regulation 41.31.\16\
---------------------------------------------------------------------------

    \16\ Similar to proposed regulation 41.31, if a board of trade 
previously filed documents with the SEC containing information which 
would satisfy any of these proposed informational requirements, the 
Commission would accept copies of such documents in lieu of the 
required information.
---------------------------------------------------------------------------

    The Commission notes various recordkeeping and reporting provisions 
of the Act, applicable to all designated contract markets, which 
facilitate the Commission's general market oversight responsibilities 
and authorize the Commission to require this information. In 
particular, section 4g(b) of the Act requires that ``[e]very registered 
entity * * * maintain daily trading records * * * includ[ing] such 
information as the Commission shall prescribe by rule,'' and section 
4g(d) of the Act continues, ``[d]aily trading records shall be 
maintained in a form suitable to the Commission. * * * Reports shall be 
made from the records maintained * * * in such form as the Commission 
may prescribe. * * * '' Moreover, sections 8(a)(1) and 
2(a)(1)(D)(iv)(I) of the Act, respectively, permit the Commission to 
``make such investigations as it deems necessary to ascertain the facts 
regarding the operations of boards of trade * * * subject to the 
provisions of this Act'' and to make ``such reasonable periodic or 
special examinations * * * as the Commission deems necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of this Act. * * * '' \17\ 
Under section 3 of the Act, the Commission also has general 
responsibilities, among others, to prevent manipulation and other 
disruptions to market integrity, to ensure the financial integrity of 
all transactions subject to the Act, and to protect all market 
participants from fraud.
---------------------------------------------------------------------------

    \17\ The Commission's authority under section 2(a)(1)(D)(iv)(I) 
of the Act is subject to certain limitations appearing later in that 
provision.
---------------------------------------------------------------------------

    Proposed regulation 41.32 is not meant to be an exhaustive list of 
SFPCM regulatory requirements. It would simply establish several 
additional reporting requirements which the Commission believes are 
necessary to carry out its statutory mandate relative to SFPCMs. Among 
others, the Commission emphasizes that SFPCMs must comply with the 
requirements of part 16 of the Commission's regulations,\18\ and must 
provide the Commission access to any books and records relating to 
transactions conducted in reliance on its designation as a contract 
market in security futures products.\19\ The Commission reiterates that 
SFPCMs would remain subject to all other applicable requirements of the 
Act and regulations thereunder.\20\
---------------------------------------------------------------------------

    \18\ The Commission will consider its need for data under part 
16 once it becomes more apparent how security futures products will 
be listed by section 5 designated contract markets, 5a DTFs, and 
section 5f SFPCMs. The Commission will endeavor to limit its 
requests to information deemed necessary for routine market 
surveillance.
    \19\ The Commission's authority to require access to books and 
records by SFPCMs can be found in sections 4(a)(3), 4(b), 9g(b), and 
4g(d) of the Act, in addition to Commission regulation 1.31, which 
would be reserved under the Commission's proposed regulatory reform 
rulemaking. See 66 FR 14262 (Mar. 9, 2001).
    \20\ See note 22.
---------------------------------------------------------------------------

    Additionally, the Commission has authority under Section 4i of the 
Act to collect information on the positions of large traders.\21\ This 
information ordinarily is provided to the Commission by futures 
commission merchants (``FCMs''), clearing members, and foreign brokers, 
pursuant to part 17 of the Commission's regulations. Part 17 will apply 
to the trading of security

[[Page 29520]]

futures products. However, the Commission is concerned that, in certain 
instances, part 17 might fail to capture large trader information for 
security futures products. For example, if an ATS operates a non-
intermediated marketplace and notice-designates as an SFPCM, it is not 
clear who would be responsible for providing to the Commission any 
large trader information arising out of security futures product 
transactions conducted on that marketplace. The Commission contemplates 
amending part 17 so that, in such circumstances, the ATS itself would 
be required to provide large trader position information that otherwise 
would be provided by an FCM. The Commission requests comment regarding 
this approach. More generally, the Commission invites comment on 
whether there are other potential circumstances under which large 
trader position information might not be captured by part 17, in its 
current form, particularly in light of this proposed rulemaking.
---------------------------------------------------------------------------

    \21\ Section 4i of the Act prohibits any person to ``have or 
obtain a long or short position in any commodity or any future of 
such commodity equal to or in excess of such amount as shall be 
fixed from time to time by the Commission, unless such person files 
or causes to be filed with the properly designated officer of the 
Commission such reports regarding any [such] transactions or 
positions * * * as the Commission may by rule or regulation require 
* * *.''
---------------------------------------------------------------------------

D. Regulations 41.33(a)-(f), 41.34, and 140.99--Exemptions

    Section 5f(b)(4)(A) of the Act provides that the Commission ``by 
rule, regulation or order, may conditionally or unconditionally 
exempt'' any board of trade designated as an SFPCM from any provisions 
of the Act or regulations thereunder, to the extent that the exemption 
is necessary or appropriate in the public interest and is consistent 
with the protection of investors. Section 5f(b)(4)(B) directs the 
Commission to determine the procedures by which an exemptive order 
under section 5f(b)(4)(A) shall be granted, and vests the Commission 
with sole discretion to decline to entertain any application for such 
an order.
    Accordingly, the Commission today proposes regulation 41.33. This 
provision would require an SFPCM seeking an exemption to file an 
application with the Commission containing various information, 
including: the name and address of the SFPCM requesting relief, and a 
contact person at the SFPCM; a certification that the SEC registration 
of the SFPCM is not suspended pursuant to an order of the SEC; an 
identification of the provision(s) from which the SFPCM is requesting 
relief and, if applicable, whether the SFPCM is subject to similar SEC 
provisions; the type of relief sought; and an explanation of the need 
for relief, including the extent to which such relief is necessary or 
appropriate in the public interest and consistent with the protection 
of investors.
    The Commission would have 90 days to review the application, but 
could stay the review period at any time if it determines that the 
application is materially incomplete. Moreover, the Commission could, 
in its sole discretion, decline to entertain an application for any 
reason, without explanation, at any time during the review period. 
These exemptive order procedures would become an enumerated exception 
to the applicability of Commission Regulation 140.99, which governs 
generally the form and manner of requests for exemptive letters.
    The Commission also proposes new regulation 41.34, which would list 
the provisions of the Act from which SFPCMs would be exempted. At this 
time, the Commission proposes that regulation 41.34(a) list each of the 
statutory provisions enumerated in section 5f(b)(1) of the Act.\22\ In 
addition, regulation 41.34(b) would include section 6(a) of the Act, 
which addresses applications for designation as a contract market 
generally and also the Commission's review of such applications. The 
Commission believes that including section 6(a) in regulation 41.34 
would eliminate any potential confusion about its applicability to 
SFPCMs and would make clear that the general contract market 
requirements of the Commission's proposed part 38 would not apply to 
SFPCMs.\23\ Because SFPCMs are exempted from sections 5 and 5c of the 
Act,\24\ and those provisions are the source for much of the authority 
for part 38, the Commission believes that SFPCMs would not have been 
subject to part 38. However, because proposed Sec. 38.1, addressing the 
``scope'' of part 38 generally, states that ``[t]he 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,'' \25\ the Commission believes that specifically exempting 
SFPCMs from section 6(a) of the Act would further clarify that part 38 
is inapplicable to SFPCMs.\26\
---------------------------------------------------------------------------

    \22\ Section 5f(b)(1) of the Act states--
    A national securities exchange, national securities association, 
or alternative trading system that is designated as a contract 
market pursuant to section 5f shall be exempt from the following 
provisions of this Act and the rules thereunder:
    (A) Subsections (c), (e), and (g) of section 4c.
    (B) Section 4j.
    (C) Section 5.
    (D) Section 5c.
    (E) Section 6a.
    (F) Section 8(d).
    (G) Section 9(f).
    (H) Section 16.
    \23\ See note 11.
    \24\ See note 22.
    \25\ The Commission likely will change the phrase ``section 6 of 
the Act'' in proposed Secs. 38.1 and 38.2 to ``section 6(a) of the 
Act'' when part 38 becomes final. The reason for this distinction is 
that other subsections in section 6 of the Act would continue to 
apply to SFPCMs. Likewise, although the inapplicability to SFPCMs of 
proposed part 40 is more certain, the Commission contemplates 
changing the definition of ``contract market'' in proposed Sec. 40.1 
so that it explicitly excludes SFPCMs.
    \26\ Notwithstanding the Commission's belief that its proposed 
part 38 rulemaking would not apply to SFPCMs, the Commission 
particularly seeks comment on whether any of the provisions of part 
38 would facilitate the Commission's ability to carry out its 
statutory mandate with respect to SFPCMs and, thus, whether any such 
provisions should be incorporated into proposed regulation 41.32.
---------------------------------------------------------------------------

    In addition to the proposals above, the Commission seeks comment 
from boards of trade and other interested persons regarding whether 
there are any other provisions of the Act or regulations thereunder 
from which SFPCMs should be exempt by regulation. The Commission is 
particularly interested in commenters' views regarding, among other 
things, the interplay between the enumerated exemptions in sections 
5f(b)(1) and (2) of the Act and the Commission's regulations 
generally.\27\
---------------------------------------------------------------------------

    \27\ Comments should indicate which provisions of the Act and 
regulations thereunder would be captured by the exemption in section 
5f(b)(2) of the Act. That provision reads:
    An alternative trading system that is a designated contract 
market under this section shall be required to be a member of a 
futures association registered under section 17 and shall be exempt 
from any provision of this Act that would require such alternative 
trading system to--
    (A) Set rules governing the conduct of subscribers other than 
the conduct of such subscribers' trading on such alternative trading 
system; or
    (B) Discipline subscribers other than by exclusion from trading.
---------------------------------------------------------------------------

E. Regulation 41.33(g)--Delegation of Authority

    Finally, the Commission also proposes to delegate to the Director 
of the Division of Trading and Markets and the Director of the Division 
of Economic Analysis, jointly, with the concurrence of the Commission's 
General Counsel, the authority to grant or deny applications for 
exemptive orders under proposed regulation 41.33. This proposed 
delegation of authority is intended to expedite the procedures 
described in proposed regulation 41.33 and place responsibility for 
them with those Commission staff members most directly involved in the 
relevant matters. The Commission believes that this delegation would 
maximize regulatory efficiency with respect to these applications.

[[Page 29521]]

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''),\28\ requires that 
agencies, in proposing regulations, consider the impact of those 
regulations on small businesses. The regulations discussed herein would 
affect boards of trade seeking to be designated as a contract market in 
security futures products under notice procedures promulgated pursuant 
to section 5f(a) of the Act. The Commission has previously established 
certain definitions of ``small entities'' to be used by the Commission 
in evaluating the impact of its regulations on such entities in 
accordance with the RFA.\29\ The Commission determined that contract 
markets are not small entities for the purpose of the RFA.\30\
---------------------------------------------------------------------------

    \28\ 5 U.S.C. 601 et seq. (1994 and Supp. II 1996).
    \29\ 47 CFR 18618 (April 30, 1982).
    \30\ 47 FR at 18619-20.
---------------------------------------------------------------------------

    The Commission further notes that section 252 of the CFMA requires 
the Commission to promulgate these regulations. Moreover, the 
regulations proposed herein would not impose any new burdens upon 
entities seeking to be designated as an SFPCM pursuant section 5f(a) of 
the Act. Rather, these regulations would facilitate exemptive relief 
from the more burdensome requirements in sections 5 and 5a of the Act, 
and regulations thereunder, that otherwise would be applicable to 
entities seeking to list security futures products for trading. 
Therefore, the Commission believes that the adoption of these 
regulations would reduce the burden of compliance by such entities.
    Accordingly, the Acting Chairman, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the regulations 
proposed herein would not have a significant economic impact on a 
substantial number of small entities. The Commission nonetheless 
requests comment on the impact these proposed regulations may have on 
small entities.

B. Paperwork Reduction Act

    The regulations proposed herein would contain information 
collection requirements. As required by the Paperwork Reduction Act of 
1995 (``PRA''), the Commission has submitted a copy of this part to the 
Office of Management and Budget (``OMB'') for its review.\31\
---------------------------------------------------------------------------

    \31\ 44 U.S.C. 3501 et seq. An agency may not sponsor, and a 
person is not required to respond to, any information collection 
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

Collection of Information
    Part 41, relating to security futures products, OMB Control Number 
3038-AB82.
    The burden associated with proposed regulation 41.31 is estimated 
to be 100 hours, which will result from designation as SFPCMs of 
various boards of trade that are otherwise subject to SEC jurisdiction. 
The estimated burden of the proposed new regulation was calculated as 
follows:
    Estimated number of respondents: 20.
    Reports annually by each respondent: 1.
    Total annual responses: 20.
    Estimated average number of hours per response: 5.
    Estimated total number of hours of annual burden in fiscal year: 
100.
    The burden associated with proposed regulation 41.32 is estimated 
to be 600 hours, which will result from continuing obligations of 
SFPCMs to file information with the Commission. The estimated burden of 
the proposed new regulation was calculated as follows:
    Estimated number of respondents: 20.
    Reports annually by each respondent: 10.
    Total annual responses: 200.
    Estimated average number of hours per response: 3.
    Estimated total number of hours of annual burden in fiscal year: 
600.
    The burden associated with proposed regulation 41.33 is estimated 
to be 500 hours, which will result from applications for exemptions by 
SFPCMs. The estimated burden of the proposed new regulation was 
calculated as follows:
    Estimated number of respondents: 20.
    Reports annually by each respondent: 1.
    Total annual responses: 20.
    Estimated average number of hours per response: 25.
    Estimated total number of hours of annual burden in fiscal year: 
500.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235 New Executive 
Office Building, Washington, DC 20503, Attention: Desk Officer for the 
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed 
collection of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
     Evaluating the accuracy of the Commission's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are required 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. A 
comment to OMB is most 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.

C. Cost-Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA, 
requires the Commission, before promulgating a new regulation under the 
Act, to consider the costs and benefits of the Commission's action. The 
Commission recently applied the cost-benefit provisions of section 15 
for the first time with respect to a final rulemaking,\32\ and 
understands that section 15, as amended, does not require the 
Commission to quantify the costs and benefits of a new regulation or 
determine whether the benefits of the regulation outweigh its costs.
---------------------------------------------------------------------------

    \32\ 66 FR 20740 (Apr. 25, 2001).
---------------------------------------------------------------------------

    The amended section 15 further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness, and financial integrity of futures 
markets; (3) price discovery; \33\ (4) sound risk management practices; 
and (5) other public interest considerations. The Commission may, in 
its discretion, give greater weight to any one of the five enumerated 
areas of concern and may, in its discretion, determine that, 
notwithstanding its

[[Page 29522]]

costs, a particular regulation 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.
---------------------------------------------------------------------------

    \33\ Price discovery is not a concern relevant to this 
rulemaking.
---------------------------------------------------------------------------

    The main areas of concern relevant to this proposal are the first 
two set forth in the Act, ``protection of market participants and the 
public'' and ``efficiency, competitiveness and financial integrity of 
the futures markets.'' The Commission notes that the CFMA specifically 
mandates that certain boards of trade be notice-designated by the 
Commission as a contract market if they seek to list or trade security 
futures products only, and that procedures be established by the 
Commission for such entities to apply for exemptions from the Act or 
regulations thereunder. Further, the Commission believes that these 
additional registrants may promote the efficiency and competitiveness 
of those futures markets on which security future products may be 
traded and, in turn, may serve to promote the financial integrity of 
those markets. The Commission has endeavored to impose minimal costs--
i.e., only necessary disclosure and recordkeeping--on any of the 
entities involved, so that the benefits of the notice-designation and 
exemptive processes intended by Congress can be fully realized. The 
Commission further notes that submitting an application for exemptive 
relief is not required of SFPCMs, but rather elected on a voluntary 
basis.

List of Subjects

17 CFR Part 41

    Contract markets, reporting and recordkeeping requirements, 
security futures products.

17 CFR Part 140

    Authority delegations.

    For the reasons discussed in the preamble, the Commission hereby 
proposes to amend Chapter I of Title 17 of the Code of Federal 
Regulations as follows:

PART 41--SECURITY FUTURES PRODUCTS

    1. The authority citation for Part 41 would be revised to read as 
follows:

    Authority: Pub. L. 106-554, 114 Stat. 2763, Sections 251 and 
252.

    2. Section 41.1 would be added as follows:


Sec. 41.1  Definitions.

    For purposes of this part:
    (a) Alternative trading system shall have the meaning set forth in 
section 1a(1) of the Act.
    (b) Board of Trade shall have the meaning set forth in section 
1a(2) of the Act.
    (c) National securities association means a board of trade 
registered with the Securities and Exchange Commission pursuant to 
section 15A(a) of the Securities Exchange Act of 1934.
    (d) National securities exchange means a board of trade registered 
with the Securities and Exchange Commission pursuant to section 6(a) of 
the Securities Exchange Act of 1934.
    (e) Rule shall have the meaning set forth in Commission regulation 
1.41(a)(1).
    (f) Security futures product shall have the meaning set forth in 
section 1a(32) of the Act.
    3. Section 41.31 would be added as follows:


Sec. 41.31  Designated contract markets in security futures products--
notice-designation requirements.

    (a) Any board of trade that is a national securities exchange, a 
national securities association, or an alternative trading system, and 
that seeks to operate as a designated contract market in security 
futures products under section 5f of the Act, shall so notify the 
Commission. Such 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 ``Notice of Designation as a 
Contract Market in Security Futures Products,'' and shall include:
    (1) The name and address of the board of trade;
    (2) The name and telephone number of a contact person designated to 
receive communications from the Commission on behalf of the board of 
trade;
    (3) A description of the security futures products that the board 
of trade intends to make available for trading, including an 
identification of all facilities that would clear transactions in 
security futures products on behalf of the board of trade;
    (4) A copy of the current rules of the board of trade; and
    (5) a certification that the board of trade--
    (i) will not list or trade any contracts of sale for future 
delivery, except for security futures products;
    (ii) is registered with the Securities and Exchange Commission as a 
national securities exchange, national securities association, or 
alternative trading system, and such registration is not suspended 
pursuant to an order by the Securities and Exchange Commission;
    (iii) will meet the criteria specified in subclauses (I) through 
(XI) of section 2(a)(1)(D)(i) of the Act, except as otherwise provided 
in section 2(a)(1)(D)(vi) of the Act, for each specific security 
futures product that the board of trade intends to make available for 
trading;
    (iv) will comply with the conditions for designation under this 
section and section 5f of the Act, including a specific representation 
by any alternative trading system that it is a member of a futures 
association registered under section 17 of the Act; and
    (v) will comply with the continuing obligations of regulation 
41.32.
    (b) A board of trade which files notice with the Commission under 
this section shall be deemed a designated contract market in security 
futures products upon the Commission's receipt of such notice. 
Accordingly, the Commission shall send prompt acknowledgment of receipt 
to the filer.
    (c) Designation as a contract market in security futures products 
pursuant to this section shall be deemed suspended if the board of 
trade:
    (1) Lists or trades any contracts of sale for future delivery, 
except for security futures products; or
    (2) Has its registration as a national securities exchange, 
national securities association, or alternative trading system 
suspended pursuant to an order by the Securities and Exchange 
Commission.
    4. Section 41.32 would be added as follows:


Sec. 41.32  Designated contract markets in security futures products--
continuing obligations.

    (a) A board of trade designated as a contract market in security 
futures products pursuant to Commission regulation 41.31 shall:
    (1) Notify the Commission of any change in its regulatory status 
with the Securities and Exchange Commission or with a futures 
association registered under section 17 of the Act;
    (2) Comply with the filing requirements of section 2(a)(1)(D)(vii) 
of the Act each time the board of trade lists a security futures 
product for trading;
    (3) Consistent with any requirements established by the Commission, 
provide the Commission with any new rules or rule amendments that 
relate to the trading of security futures products, including both 
operational rules and the terms and conditions of products listed for 
trading on the facility, promptly after final implementation of such 
rules or rule amendments; and
    (4) Upon request, file promptly with the Commission--
    (i) such information related to its business as a designated 
contract market

[[Page 29523]]

in security futures products as the Commission may request; and
    (ii) a written demonstration, containing such supporting data and 
other information and documents as the Commission may specify, that the 
board of trade is in compliance with one or more applicable provisions 
of the Act or regulations thereunder as specified in the request.
    (b) Except as exempted under section 5f(b) of the Act or under 
Commission regulations 41.33 and 41.34, any board of trade designated 
as a contract market in security futures products pursuant to 
Commission regulation 41.31 shall be subject to all applicable 
requirements of the Act and regulations thereunder. Failure to comply 
shall subject the board of trade to Commission action under, among 
other provisions, sections 5e and 6(b) of the Act.
    5. Section 41.33 would be added as follows:


Sec. 41.33  Designated contract markets in security futures products--
applications for exemptive orders.

    (a) Any board of trade designated as a contract market in security 
futures products pursuant to Commission regulation 41.31 may apply to 
the Commission for an exemption from any provision of the Act or 
regulations thereunder. Except as provided in sections 5f(b)(1) and 
5f(b)(2) of the Act, the Commission shall have sole discretion to 
exempt a board of trade, conditionally or unconditionally, from any 
provision of the Act or regulations thereunder pursuant to this 
section. The Commission may issue such an exemptive order in response 
to an application only to the extent it finds, after review, that the 
issuance of an exemptive order is necessary or appropriate in the 
public interest and is consistent with the protection of investors.
    (b) Each application for exemptive relief must comply with the 
requirements of this section. The Commission may, in its sole 
discretion, decline to entertain any application for an exemptive order 
under this section without explanation; provided, however, that the 
Commission shall notify the board of trade of such a decision in 
writing.
    (c) Application requirements.
    (1) Each application for an exemptive order made pursuant to this 
section must include:
    (i) The name and address of the board of trade requesting relief, 
and the name and telephone number of a person whom Commission staff may 
contact to obtain additional information regarding the request;
    (ii) A certification that the registration of the board of trade is 
not suspended pursuant to an order of the Securities and Exchange 
Commission;
    (iii) The provision(s) of the Act or regulations thereunder from 
which the board of trade seeks relief and, if applicable, whether the 
board of trade is otherwise subject to similar provisions as a result 
of Securities and Exchange Commission jurisdiction; and
    (iv) The type of relief requested and the order sought; an 
explanation of the need for relief, including all material facts and 
circumstances giving rise to the request; and the extent to which such 
relief is necessary or appropriate in the public interest and 
consistent with the protection of investors.
    (2) Each application must be filed with the Secretary of the 
Commission at its Washington, DC, headquarters, in either electronic or 
hard copy form, signed by an authorized representative of the board of 
trade, and labeled ``Application for an Exemptive Order pursuant to 
Commission regulation 41.33.''
    (d) Review period: (1) The Commission shall have 90 days upon 
receipt of an application for an exemptive order in which to make a 
determination as to whether such relief should be granted or denied.
    (2) The Commission may request additional information from the 
applicant at any time prior to the end of the review period.
    (3) The Commission may stay the review period if it determines that 
an application is materially incomplete; provided, however, that this 
paragraph does not limit the Commission's authority, under paragraph 
(b) of this section, to decline to entertain an application.
    (e) Upon conclusion of the review period, the Commission shall 
issue an order granting or denying relief, or granting relief subject 
to conditions; provided, however, that the Commission's obligations 
under this paragraph shall not limit its authority, under paragraph (b) 
of this section, to decline to entertain an application. The Commission 
shall notify the board of trade in writing of its decision to grant or 
deny relief under this paragraph.
    (f) An application for an exemptive order may be withdrawn by the 
applicant at any time, without explanation, by filing with the 
Secretary of the Commission a written request for withdrawal, signed by 
an authorized representative of the board of trade.
    (g) The Commission hereby delegates, until it orders otherwise, to 
the Director of the Division of Trading and Markets and the Director of 
the Division of Economic Analysis, jointly, with the concurrence of the 
General Counsel, authority to make determinations on applications for 
exemptive orders pursuant to this section; provided, however, that:
    (1) the Director of the Division of Trading and Markets or the 
Director of the Division of Economic Analysis may submit to the 
Commission for its consideration any matter which has been delegated 
pursuant to paragraph (g) of this section; and
    (2) nothing in this section shall be deemed to prohibit the 
Commission, at its election, from exercising the authority delegated to 
the Director of the Division of Trading and Markets and the Director of 
the Division of Economic Analysis under paragraph (g) of this section.
    6. Section 41.34 would be added as follows:


Sec. 41.34  Designated contract markets in security futures products--
exempt provisions.

    Any board of trade notice-designated as a contract market in 
security futures products pursuant to Commission regulation 41.31 also 
shall be exempt from:
    (a) the following provisions of the Act, pursuant to section 
5f(b)(1) of the Act:
    (1) section 4c(c);
    (2) section 4c(e);
    (3) section 4c(g);
    (4) section 4j;
    (5) section 5;
    (6) section 5c;
    (7) section 6a;
    (8) section 8(d);
    (9) section 9(f);
    (10) section 16; and
    (b) section 6(a) of the Act, pursuant to section 5f(b)(4) of the 
Act.

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    7. The authority citation for Part 140 would continue to read as 
follows:

    Authority: 7 U.S.C. 4a and 12a.

    8. Section 140.99 is amended by adding new paragraph (i)(3) as 
follows:


Sec. 140.99  Requests for exemptive, no-action and interpretive 
letters.

* * * * *
    (i) * * *
    (3) Requests for exemption pursuant to Commission regulation 41.33.

    Issued in Washington, DC on May 22, 2001 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-13316 Filed 5-30-01; 8:45 am]
BILLING CODE 6351-01-P