[Federal Register Volume 66, Number 133 (Wednesday, July 11, 2001)]
[Proposed Rules]
[Pages 36218-36223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17171]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

RIN 3038-AB83


Proposed Regulation To Restrict Dual Trading in Security Futures 
Products

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed regulation.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
proposing Regulation 41.27 that would restrict dual trading by floor 
brokers in security futures products. Under the proposed regulation, 
the dual trading restriction would affect floor brokers that trade 
security futures products through open outcry on the trading floor of a 
designated contract market (``DCM'') or registered derivatives 
transaction execution facility (``DTF''). The regulation would provide 
for certain exceptions to the restriction, including provisions for the 
correction of errors, customer consent, spread transactions, market 
emergencies, and unique or special characteristics of an agreement, 
contract, or transaction, or of the DCM or DTF.

DATES: Comments must be received by August 10, 2001.

ADDRESSES: Comments should be sent to the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC

[[Page 36219]]

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 ``Restriction of Dual 
Trading in Security Futures Products by Floor Brokers.''

FOR FURTHER INFORMATION CONTACT: Alan L. Seifert, Deputy Director, 
Division of Trading and Markets, Rachel Berdansky, Special Counsel, or 
Amy Fiordalisi, Attorney, 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].

SUPPLEMENTARY INFORMATION:

I. Background

    On December 15, 2000, Congress approved the Commodity Futures 
Modernization Act of 2000 (``CFMA''), which was signed by the President 
and became effective on December 21, 2000. Among other things, the 
CFMA, which substantially amended the Commodity Exchange Act (``Act''), 
establishes two categories of markets subject to Commission regulatory 
oversight, DCMs and DTFs.\1\ In addition, Title II of the CFMA repeals 
the longstanding ban on single stock futures and directs the Commission 
and the Securities and Exchange Commission (``SEC'') to implement a 
joint regulatory framework for security futures products.
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    \1\ Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000). Prior 
to its recent amendment, the Act referred to ``designated contract 
markets'' as Commission-approved products traded on a board of 
trade. 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. Proposed 
Regulation 41.27 refers to DCMs in this sense.
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    Section 251(c) of the CFMA amends Section 4j of the Act to require 
that the Commission issue regulations to restrict dual trading in 
security futures products on DCMs and DTFs. Section 4j(a), as amended, 
also provides the Commission with the discretion to permit exceptions 
to a dual trading restriction that are necessary to ensure fairness and 
orderly trading in security futures product markets.\2\ Section 
2(a)(D)(i) of the Act, as amended, sets forth listing standards for 
security futures products traded on a DCM or DTF. Section 
2(a)(D)(i)(VI) requires that security futures products be subject to 
the dual trading restriction of Section 4j of the Act or Section 11(a) 
of the Securities Exchange Act of 1934 (``1934 Act'') and the 
regulations promulgated thereunder, respectively.\3\
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    \2\ Section 4j of the Act, as amended, is different in scope 
than its predecessor and the Commission Regulation promulgated 
thereunder, Commission Regulation 155.5, which restricted dual 
trading in any contract market that exceeded certain volume 
thresholds unless an exchange requested, and the Commission granted, 
a dual trading exemption. As part of this rulemaking, the Commission 
also is proposing to remove Commission Regulation 155.5.
    \3\ With certain enumerated exceptions, Section 11(a)(1) of the 
1934 Act and SEC Rule 11a-1 make it unlawful for any member of a 
national securities exchange to effect any transaction for his or 
her own account, the account of an associated person, or an account 
with respect to which it or an associated person has discretion. 
Section 5f of the Act, as amended by Section 252(a) of the CFMA, 
provides that any board of trade that is registered with the SEC as 
a national securities exchange or a national securities association, 
or is an alternative trading system, shall be considered a DCM in 
security futures products, provided that certain enumerated 
requirements are satisfied, upon filing a notice with the 
Commission. Section 5f(b)(1)(B), however, specifically exempts such 
notice-registered entities from Section 4j of the Act. Similarly, 
Section 6(g) of the 1934 Act, as amended by Section 202(a) of the 
CFMA, provides that any board of trade that has been designated as a 
contract market by the Commission or has registered with the 
Commission as a DTF, may register with the SEC as a national 
securities exchange by filing notice with the SEC, solely for the 
purposes of trading security futures products, provided that certain 
enumerated requirements are satisfied. DCMs and DTFs that notice 
register with the SEC for the purpose of trading security futures 
products are exempt from Section 11(a)(1) of the 1934 Act.
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II. Discussion of Proposed Regulation 41.27

A. ``Customer''

    Proposed Regulation 41.27 would restrict dual trading of security 
futures products in accordance with the statutory mandate of Section 
4j(a), as amended by Section 251(c) of the CFMA. Proposed Regulation 
41.27(a)(4) would define ``customer'' to mean an account owner for 
which a trade is executed other than an account in which a floor 
broker's ownership interest or share of trading profits is ten percent 
or more; an account for which a floor broker has discretion; an account 
controlled by a person with whom a floor broker has a relationship 
through membership in a broker association; a house account for a floor 
broker's clearing member; or an account for another member present on 
the floor of a DCM or DTF or an account controlled by such other 
member.\4\ The Commission requests comment as to whether the accounts 
of all clearing members and the accounts of members not present on the 
floor of a DCM or DTF should be considered non-customer accounts and 
included within proposed Regulation 41.27(a)(4). In this regard, 
commenters should consider whether clearing members other than the 
floor broker's own clearing member and members not present on the floor 
of a DCM or DTF are in a better position to protect themselves against 
potential abuse of their orders by floor brokers than other 
customers.\5\
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    \4\ Under proposed Regulation 41.27(a)(2), the term ``member'' 
would have the meaning set forth in Section 1a(24) of the Act. 
Section 1a(24) defines ``member'' to mean ``an individual, 
association, partnership, corporation, or trust * * * owning or 
holding membership in, or admitted to membership representation on, 
[a designated contract market] or derivatives transaction execution 
facility, or having trading privileges on [a designated contract 
market] or derivatives transaction execution facility.''
    \5\ In order to enforce a dual trading restriction, DCMs and 
DTFs must be able to identify the source of each trade. 
Specifically, DCMs and DTFs must be able to determine whether a 
trade is for a customer. The Commission's proposed rulemaking ``A 
New Regulatory Framework for Trading Facilities, Intermediaries and 
Clearing Organizations,'' 66 FR 14262 (March 9, 2001), did not 
reserve Commission Regulation 1.35 with respect to DCMs or DTFs. 
Thus, exchanges would no longer be required to identify account 
types using customer type indicator (``CTI'') codes. Use of CTI 
codes, however, would be an effective way for DCMs or DTFs to 
monitor compliance with a dual trading restriction.
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B. ``Dual Trading''

    Proposed Regulation 41.27(a)(6) would define ``dual trading'' as 
the ``execution of customer orders by a floor broker through open 
outcry during the same trading session in which the floor broker 
executes, directly or indirectly, either through open outcry or through 
a trading system that electronically matches bids and offers, a 
transaction for the same security futures product on the same 
designated contract market or registered derivatives transaction 
execution facility for an account'' of a non-customer.\6\ For this 
purpose, non-customer accounts would include those categories of 
accounts set forth in proposed Regulation 41.27(a)(4)(i)-(v).
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    \6\ As noted above, prior to the CFMA, the Act referred to 
contract markets as Commission-approved products traded on a board 
of trade. The CFMA changes the use of the term ``contract market'' 
to mean a board of trade, rather than a product traded on a board of 
trade. The statutory language of Section 4j(b) of the Act, in 
contrast to the language of Section 4j(a), inadvertently uses the 
term contract market as it was used prior to the CFMA. this results 
in an anomaly, which, if read literally, changes the definition of 
dual trading in a manner that would restrict activity never 
considered to be dual trading by the Congress or the Commission.
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    The Commission's proposed dual trading definition refers to a floor 
broker executing ``directly or indirectly'' a transaction for a non-
customer account. The reference to ``indirectly'' executing a 
transaction is intended to prevent a floor broker from executing a 
customer order and during the same trading session initiating and 
passing an order for a non-customer account identified in proposed 
Regulation 41.27(a)(4)(i)-(v) to another broker for execution.
    Under the plain language of Section 4j of the Act, the dual trading 
restriction would not apply to a DCM or DTF that trades security 
futures products solely

[[Page 36220]]

through a system that electronically matches bids and offers entered 
into the system.\7\ Specifically, the dual trading definition found in 
Section 4j(b) refers to ``floor brokers'' who ``execute'' customer 
orders. Traditionally, floor brokers execute customer orders on the 
trading floor whereas various registrants as well as unregistered 
individuals enter orders into electronic trading systems that then 
match orders pursuant to a predetermined algorithm. In this connection, 
the definition of ``floor broker'' found in Section 1a(16) of the Act 
contemplates a person ``in or surrounding * * * any pit, ring, or post 
* * *'' on the floor of an exchange and not through a system that 
electronically matches bids and offers.\8\
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    \7\ In this connection, on February 24, 2000, the SEC approved 
the application of the International Securities Exchange LLC 
(``ISE''), a fully electronic options market, for registration as a 
national securities exchange. As part of the approval process, the 
SEC approved an ISE rule that permits an order for a member's 
personal account to be matched against a customer order entered by 
that member provided that: (1) The customer order is first exposed 
to the market for 30 seconds; (2) the member has been bidding or 
offering for at least 30-seconds prior to receiving a customer order 
that is executable against such bid or offer; or (3) the member 
utilized the facility mechanism described in ISE's block trading 
rule. The ISE's rules do not otherwise limit the ability of a member 
to trade for his or her personal account and for customers. See 
Exchange Act Release No. 34-42455 (February 24, 2000), 65 FR 11388 
(March 2, 2000).
    \8\ Section 1a(16) of the Act defines a floor broker as ``as any 
person who, in or surrounding any pit, ring, post, or other place 
provided by a contract market or derivatives transaction execution 
facility for the meeting of persons similarly engaged, shall 
purchase or sell for any other person any commodity for future 
delivery on or subject to the rules of any contract market or 
derivatives transaction execution facility.''
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    This application of the dual trading restriction takes into account 
that floor brokers who execute customer orders through open outcry have 
more control over those orders than customer orders entered into a 
system that electronically matches bids and offers. Specifically, a 
floor broker holding a customer order for trading through open outcry 
not only controls when the bid or offer is exposed to the market, but 
also controls the price of execution and whom the order is executed 
against. A broker holding a customer order for entry into a system that 
electronically matches bids and offers only can control when an order 
is entered into the system. An algorithm determines at what price and 
against whom the order is executed.\9\
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    \9\ Notably, the Commission has repeatedly made clear that 
persons who are employed by registrants and handle non-discretionary 
orders on electronic trading systems need not be registered. 
Further, discretionary orders on such systems can be handled by 
registrants other than a floor broker, such as the associated 
persons of a futures commission merchant. See the Commission's rules 
for the registration of floor traders, 58 FR 19575, 19576 (April 15, 
1993).
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    The Commission recognizes that a DCM or DTF may permit the 
simultaneous trading of security futures products through open outcry 
on a trading floor and the entry of bids and offers on a system that 
electronically matches bids and offers pursuant to a predetermined 
algorithm for the same product, ``side-by-side trading.'' Under such 
circumstances, proposed Regulation 41.27 only would be implicated if a 
floor broker executes a customer order through open outcry on a trading 
floor during a trading session. Thus, a floor broker would be permitted 
to enter a bid or offer for a particular security futures product for 
customer accounts on an electronic trading system and trade the same 
product for non-customer accounts through open outcry during the same 
trading session. In contrast, a floor broker would be prohibited during 
the same trading session from executing a customer order for a 
particular security futures product through open outcry and entering a 
bid or offer for the same product for a non-customer account listed in 
41.27(a)(4)(i)-(v) on an electronic trading system.\10\
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    \10\ The Chicago Mercantile Exchange lists several contracts 
that trade side-by-side through open outcry and on the electronic 
GLOBEX2 trading system that differ only with respect to 
contract size. For example, the e-mini S&P 500 futures contract that 
trades on GLOBEX 2 is one-fifth the size of the S&P 500 
futures contract that trades simultaneously through open outcry. If 
a DCM or DTF determines to trade side-by-side a particular security 
futures product that differs only with respect to contract size, the 
Commission would consider the two contracts to be the same contract 
for purposes of applying the dual trading restriction.
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C. Rules Implementing Dual Trading Prohibition

    Prior to listing a security futures product for trading on a 
trading floor where bids and offers are executed through open outcry, a 
DCM or DTF must adopt a rule prohibiting dual trading. Under proposed 
Regulation 41.27(c)(1), a DCM must submit such a rule to the Commission 
in accordance with proposed Regulation 40.6, along with a written 
certification that the rule complies with the Act and the regulations 
promulgated thereunder, or must obtain Commission approval of such a 
rule pursuant to proposed Regulation 40.5. Under proposed Regulation 
41.27(c)(2), a DTF must notify the Commission in accordance with 
proposed Regulation 37.7(b) that it has adopted a rule prohibiting dual 
trading or obtain Commission approval of such a rule pursuant to 
proposed Regulation 37.7(c).

D. Specific Permitted Exceptions to the Dual Trading Prohibition

    In proposed Regulation 41.27(d), the Commission implements the 
directive of Section 4j(a)(2)(A) and (B) of the Act to permit certain 
exceptions to the dual trading prohibition. Proposed Regulation 
41.27(d)(1)-(4) provides exceptions for the correction of errors 
resulting from the execution of a customer order, to permit a customer 
to designate in writing a floor broker to dual trade while executing 
orders for the customer's account, to permit a broker who 
unsuccessfully attempts to leg into a spread transaction to take the 
executed leg into his or her personal account and to offset such 
position, and to address market conditions that result in a temporary 
emergency. Prior to permitting such exceptions to a dual trading 
prohibition, a DCM or DTF would have to adopt a rule permitting the 
specific exceptions and submit the rule to the Commission or obtain 
Commission approval pursuant to the rule submission procedures of 
proposed Regulation 41.27(e)(1) or (2). These procedures are identical 
to the procedures under proposed Regulation 41.27(c)(1) and (2) for a 
DCM or DTF to submit a rule prohibiting dual trading.

E. Unique or Special Characteristics of an Agreement, Contract, or 
Transaction, or of the DCM or DTF

    Pursuant to Section 4j(a)(2)(C) of the Act, proposed Regulation 
41.27(f) would allow DCMs and DTFs to permit an exception to the dual 
trading prohibition to address an agreement, contract, or transaction 
that presents a unique or special characteristic, or to address a 
unique or special characteristic of the specific DCM or DTF. Any rule 
of either a DCM or a DTF permitting such an exception would be required 
to be submitted to the Commission for prior approval pursuant to the 
procedures set forth in proposed Regulation 40.5. Such a submission 
also should include an affirmative demonstration of why an exception is 
warranted.
    A DCM or DTF rule permitting a dual trading exception based on a 
unique or special characteristic of an agreement, contract, or 
transaction, or of the DCM or DTF would require prior Commission 
approval because standards cannot be established in advance to 
articulate what would constitute a unique or special characteristic 
deserving of a dual trading exception. Thus, a DCM could not certify as 
required by proposed Regulation 40.6 that its rule complies with the 
Act and the regulations promulgated thereunder. Similarly,

[[Page 36221]]

although a DTF is not required to provide a rule certification under 
the rule submission procedures of proposed Regulation 37.7(b), it is 
nevertheless required to comply with the Act and the Commission's 
regulations. Therefore, the Commission must evaluate each situation on 
its own merits to determine whether the DCM or DTF has demonstrated 
satisfactorily a unique or special characteristic of an individual 
agreement, contract, or transaction, or of the DCM or DTF warranting a 
dual trading exception.

III. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by the CFMA, requires the 
Commission to consider the costs and benefits of its action before 
issuing a new regulation under the Act. The Commission's understanding 
is that Section 15(a) 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. Rather, Section 
15(a) simply requires the Commission to consider the costs and benefits 
of its action 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.
    Section 4j(a) of the Act, as amended by the CFMA, directs the 
Commission to ``issue regulations to prohibit the privilege of dual 
trading in security futures products on each contract market and 
registered derivatives transaction execution facility.'' Section 4j(a) 
also provides the Commission with discretion to provide for limited 
exceptions to the dual trading prohibition that are necessary to 
``ensure fairness and orderly trading in security futures product 
markets.'' Proposed Regulation 41.27(c) would require DCMs and DTFs 
that list security futures products for trading through open outcry on 
a trading floor to implement and enforce rules prohibiting dual 
trading. In addition, DCMs and DTFs that elect to permit dual trading 
subject to any of the exceptions set forth in proposed Regulation 
41.27(d) or (f) would be required to enact and enforce rules regarding 
the particular exceptions.
    Proposed Regulation 41.27 would protect market participants and the 
general public while minimizing the impact on security futures product 
markets. Specifically, the dual trading restriction would not affect 
DCMs or DTFs that trade security futures products only through trading 
systems that electronically match bids and offers. As explained above, 
this is consistent with the plain language of Section 4j of the Act, 
and takes into account that floor brokers who execute customer orders 
through open outcry have more control over those orders than customer 
orders entered into a system that electronically matches bids and 
offers.
    Compliance with proposed Regulation 41.27 would impose costs on 
DCMs and DTFs with respect to enacting and enforcing rules restricting 
dual trading of security futures products traded through open outcry on 
a trading floor. The costs of enacting and enforcing rules associated 
with proposed Regulation 41.27 are either balanced or outweighed by the 
increased protection of market participants and the public. The 
Commission's exercise of its discretion in implementing the 
Congressional directive to restrict dual trading, as set forth in 
Section 4j of the Act, would not increase costs related to efficiency, 
competitiveness, and financial integrity of financial markets; price 
discovery; or sound risk management practices. After considering these 
factors, the Commission has determined to propose Regulation 41.27. 
Commenters are invited to submit any data that they might have 
quantifying the costs and benefits of the proposed regulation with 
their comments.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires federal agencies, in promulgating regulations, to consider the 
impact of those regulations on small entities. The regulation adopted 
herein would affect DCMs, DTFs, and floor brokers. The Commission 
previously has established certain definitions of ``small entities'' to 
be used by the Commission in evaluating the impact of its regulations 
on small entities in accordance with the RFA.\11\ In its previous 
determinations, the Commission has concluded that contract markets are 
not small entities for the purpose of the RFA.\12\ The Commission has 
recently proposed that DTFs, for reasons similar to those applicable to 
contract markets, are not small entities for purposes of the RFA.\13\ 
Certain floor brokers would be affected by proposed Regulation 41.27. 
Although, the Commission believes that proposed Regulation 41.27 would 
not have a significant economic impact on a substantial number of small 
entities, the Commission invites comments on this issue.
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    \11\ See 47 FR 18618-21 (Apr. 30, 1982).
    \12\ See 47 FR 18618 at 18619 (discussing contract markets).
    \13\ See 66 FR 14261, 14268 (Mar. 9, 2001).
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B. Paperwork Reduction Act of 1995

    This proposed Rulemaking contains information collection 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501 et seq.). The Commission has submitted a copy of this 
section to the Office of Management and Budget (OMB) for its review in 
accordance with 44 U.S.C. 3507 (d) and 5 CFR 1320.11, and has requested 
a new number for this collection. Collection of Information: Part 41 
Relating to Security Indexes and Security Futures Products, OMB Control 
Number 3038-XXXX.
    Proposed Regulation 41.27 contains some reporting requirements. 
Pursuant to proposed Regulation 41.27(c)(1), prior to listing a 
security futures product for trading through open outcry, a DCM would 
be required to submit to the Commission a rule prohibiting dual 
trading, together with a written certification that the rule complies 
with the Act, or obtain Commission approval of such a rule. Pursuant to 
proposed Regulation 41.27(c)(2), prior to listing a security futures 
product for trading through open outcry, a DTF would be required to 
notify the Commission that it had adopted a rule prohibiting dual 
trading or obtain Commission approval of such rule. DCMs and DTFs would 
have to comply with the same respective procedures prior to adopting a 
rule permitting any of the dual trading exceptions set forth in 
proposed Regulation 41.27(d)(1)-(4). Under proposed Regulation 
41.27(f), a DCM or DTF seeking to permit a dual trading exception based 
on a unique or special characteristic of an agreement, contract or 
transaction, or of the DCM or DTF, would be required to obtain 
Commission approval of any such rule. With respect to recordkeeping 
requirements, proposed Regulation 41.27(d)(3) would permit a broker who 
unsuccessfully attempts to leg into a spread transaction for a 
customer, to take the executed leg into his or her personal account, 
and to offset such position, provided that a record is prepared and 
maintained to demonstrate that the customer order was for a spread 
transaction.
    The estimated burden of proposed Regulation 41.27 was calculated as 
follows:
    Estimated number of respondents: 2,446.
    Total annual responses: 14,229.

[[Page 36222]]

    Estimated average hours per response: .07.
    Annual reporting burden: 993 hours.
    The Commission has submitted the proposed collection of information 
to OMB for approval. 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 for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    Evaluating the accuracy of the Commission's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
    Enhancing the quality, usefulness, and clarity of the information 
to be collected; and
    Minimizing the burden of collection of information on those who are 
to respond, including through the use of appropriate automated 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology; e.g., permitting electronic 
submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in this proposed regulation 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 Regulation 41.27.
    Copies of the information collection submission to OMB are 
available from the Commission Clearance Officer, 1155 21st Street, NW., 
Washington, DC 20581, (202) 418-5160.

List of Subjects in 17 CFR Part 41

    Security indexes and security futures products.

    Accordingly, for the reasons discussed in the preamble, the 
Commodity Futures Trading Commission proposes to amend 17 CFR as 
follows:

PART 41--SECURITY FUTURES PRODUCTS

    1. The authority citation for Part 41 reads as follows:

    Authority: Pub. L. 106-554, 114 Stat. 2763, Secs. 251 and 252.
    2. Section 41.27 is be added as follows:


Sec. 41.27  Prohibition of dual trading in security futures products by 
floor brokers.

    (a) Definitions. For purposes of this section:
    (1) Trading session means hours during which a designated contract 
market or registered derivatives transaction execution facility is 
scheduled to trade continuously during a trading day, as set forth in 
its rules, including any related post settlement trading session. A 
designated contract market or registered derivatives transaction 
execution facility may have more than one trading session during a 
trading day.
    (2) Member shall have the meaning set forth in Section 1a(24) of 
the Act.
    (3) Broker association includes two or more designated contract 
market or registered derivatives transaction execution facility members 
with floor trading privileges of whom at least one is acting as a floor 
broker who:
    (i) Engage in floor brokerage activity on behalf of the same 
employer;
    (ii) Have an employer and employee relationship which relates to 
floor brokerage activity;
    (iii) Share profits and losses associated with their brokerage or 
trading activity; or
    (iv) Regularly share a deck of orders.
    (4) Customer means an account owner for which a trade is executed 
other than:
    (i) An account in which a floor broker's ownership interest or 
share of trading profits is ten percent or more;
    (ii) An account for which a floor broker has discretion;
    (iii) An account controlled by a person with whom a floor broker 
has a relationship through membership in a broker association;
    (iv) A house account of the floor broker's clearing member; or
    (v) An account for another member present on the floor of a 
designated contract market or registered derivatives transaction 
execution facility or an account controlled by such other member.
    (5) Security futures product shall have the meaning set forth in 
Section 1a(32) of the Act.
    (6) Dual trading means the execution of customer orders by a floor 
broker through open outcry during the same trading session in which the 
floor broker executes directly or indirectly, either through open 
outcry or through a trading system that electronically matches bids and 
offers, a transaction for the same security futures product on the same 
designated contract market or registered derivatives transaction 
execution facility for an account described in paragraph (a)(4)(i)-(v) 
of this section.
    (b) Dual Trading Prohibition. No floor broker shall engage in dual 
trading in a security futures product on a designated contract market 
or registered derivatives transaction execution facility, except as 
otherwise provided under paragraphs (d) and (f) of this section.
    (c) Rules Prohibiting Dual Trading.--(1) Designated contract 
markets. Prior to listing a security futures product for trading on a 
trading floor where bids and offers are executed through open outcry, a 
designated contract market:
    (i) Must submit to the Commission in accordance with Commission 
Regulation 40.6, a rule prohibiting dual trading, together with a 
written certification that the rule complies with the Act and the 
regulations thereunder, including this section; or
    (ii) Must obtain Commission approval of such rule pursuant to 
Commission Regulation 40.5.
    (2) Registered derivatives transaction execution facilities. Prior 
to listing a security futures product for trading on a trading floor 
where bids and offers are executed through open outcry, a registered 
derivative transaction execution facility:
    (i) Must notify the Commission in accordance with Commission 
Regulation 37.7(b) that it has adopted a rule prohibiting dual trading; 
or
    (ii) Must obtain Commission approval of such rule pursuant to 
Commission Regulation 37.7(c).
    (d) Specific Permitted Exceptions. Notwithstanding the 
applicability of a dual trading prohibition under paragraph (b) of this 
section, dual trading may be permitted on a designated contract market 
or a registered derivatives transaction execution facility pursuant to 
one or more of the following specific exceptions:
    (1) Correction of errors. To offset trading errors resulting from 
the execution of customer orders, provided, that the floor broker must 
liquidate the position in his or her personal error account resulting 
from that error through open outcry or through a trading system that 
electronically matches bids and offers as soon as practicable, but, 
except as provided herein, not later than the close of business on the 
business day following

[[Page 36223]]

the discovery of error. In the event that a floor broker is unable to 
offset the error trade because the daily price fluctuation limit is 
reached, a trading halt is imposed by the designated contract market or 
registered derivatives transaction execution facility, or an emergency 
is declared pursuant to the rules of the designated contract market or 
registered derivatives transaction execution facility, the floor broker 
must liquidate the position in his or her personal error account 
resulting from that error as soon as practicable thereafter.
    (2) Customer consent. To permit a customer to designate in writing 
not less than once annually a specifically identified floor broker to 
dual trade while executing orders for such customer's account. An 
account controller acting pursuant to a power of attorney may designate 
a dual trading broker on behalf of its customer, provided, that the 
customer explicitly grants in writing to the individual account 
controller the authority to select a dual trading broker.
    (3) Spread transactions. To permit a broker who unsuccessfully 
attempts to leg into a spread transaction for a customer to take the 
executed leg into his or her personal account and to offset such 
position, provided, that a record is prepared and maintained to 
demonstrate that the customer order was for a spread.
    (4) Market emergencies. To address emergency market conditions 
resulting in a temporary emergency action as determined by a designated 
contract market or registered derivatives transaction execution 
facility.
    (e) Rules Permitting Specific Exceptions.--(1) Designated contract 
markets. Prior to permitting dual trading under any of the exceptions 
provided in paragraph (d)(1)-(4), a designated contract market:
    (i) Must submit to the Commission in accordance with Commission 
Regulation 40.6, a rule permitting the exception(s), together with a 
written certification that the rule complies with the Act and the 
regulations thereunder, including this section; or
    (ii) Must obtain Commission approval of such rule pursuant to 
Commission Regulation 40.5.
    (2) Registered derivatives transaction execution facilities. Prior 
to permitting dual trading under any of the exceptions provided in 
paragraph (d)(1)-(4), a registered derivatives transaction execution 
facility:
    (i) Must notify the Commission in accordance with Commission 
Regulation 37.7(b) that it has adopted a rule permitting the 
exception(s); or
    (ii) Must obtain Commission approval of such rule pursuant to 
Commission Regulation 37.7(c).
    (f) Unique or Special Characteristics of Agreements, Contracts, or 
Transactions, or of Designated Contract Markets or Registered 
Derivatives Transaction Execution Facilities.
    Notwithstanding the applicability of a dual trading prohibition 
under paragraph (b) of this section, dual trading may be permitted on a 
designated contract market or registered derivatives transaction 
execution facility to address unique or special characteristics of 
agreements, contracts, or transactions, or of the designated contract 
market or registered derivatives transaction execution facility as 
provided herein. Any rule of a designated contract market or registered 
derivatives transaction execution facility that would permit dual 
trading when it would otherwise be prohibited, based on a unique or 
special characteristic of agreements, contracts, or transactions, or of 
the designated contract market or registered derivatives transaction 
execution facility must be submitted to the Commission for approval 
under the procedures set forth in Commission Regulation 40.5. The rule 
submission must include a detailed demonstration of why an exception is 
warranted.

PART 155--TRADING STANDARDS

    3. Section 155.5 is proposed to be removed and reserved.

    Issued in Washington, DC on July 5, 2001, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-17171 Filed 7-10-01; 8:45 am]
BILLING CODE 6351-01-P