[Federal Register Volume 66, Number 155 (Friday, August 10, 2001)]
[Rules and Regulations]
[Pages 42256-42289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19496]



[[Page 42255]]

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Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 5, 15, et al.



Trading Facilities, Intermediaries and Clearing Organizations; New 
Regulatory Framework; Final Rule

17 CFR Part 40



Fees for Product Review and Approval; Final Rule

  Federal Register / Vol. 66, No. 155 / Friday, August 10, 2001 / Rules 
and Regulations  

[[Page 42256]]


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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: Final rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is promulgating final rules to implement those provisions of the 
Commodity Futures Modernization Act of 2000 (CFMA) relating to trading 
facilities. The CFMA profoundly altered federal regulation of commodity 
futures and option markets. The new statutory framework establishes two 
categories of markets subject to Commission regulatory oversight, 
designated contract markets and registered derivatives transaction 
execution facilities, and two categories of exempt markets, exempt 
boards of trade and exempt commercial markets. These rules establish 
administrative procedures necessary to implement the CFMA, interpret 
certain of the CFMA's provisions and provide guidance on compliance 
with various of its requirements. In addition, the Commission, under 
its exemptive authority, in a limited number of instances is providing 
relief from, or greater flexibility than, the CFMA's provisions.
    Rules implementing the CFMA relating to clearing organizations were 
recently proposed in a separate notice of proposed rulemaking (66 FR 
24308 (May 14, 2001)), and rules pertaining to intermediaries which 
were previously withdrawn will be reproposed at a later time.

EFFECTIVE DATE: October 9, 2001.

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel, 
Nancy E. Yanofsky, Assistant Chief Counsel, Division of Economic 
Analysis; Alan L. Seifert, Deputy Director, or Riva Spear 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

A. Overview

    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 of sale of a commodity for future 
delivery or commodity options.\1\ The final rules were to become 
effective on February 12, 2001.
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    \1\ See also 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). These three related rule packages in their entirety 
constituted the Commission's new regulatory framework.
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    Before the Commission's new regulatory framework became effective, 
however, Congress on December 15, 2000, passed, and President Clinton 
on December 21, 2000, signed into law, the Commodity Futures 
Modernization Act of 2000 (CFMA) \2\, which substantially amended the 
Commodity Exchange Act, 7 U.S.C. 1 et seq. (Act). 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 categories of markets exempt from regulation, 
exempt boards of trade and exempt commercial markets.
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    \2\ P.L. 106-554, 114 Stat. 2763
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    The CFMA, in both its broad contours and in many of its specific 
provisions, codified the Commission's new regulatory framework without 
significant change. However, it varied from the rules implementing the 
framework in a number of details and rendered unnecessary a number of 
those rules by enacting their provisions into law. The Commission, 
therefore, withdrew most of the final rules in order to determine their 
consistency with the Act as amended.\3\ 65 FR 82272. On March 9, 2001, 
the Commission proposed new rules conforming to and implementing the 
amended statutory scheme with respect to transaction execution 
facilities. 66 FR 14262.\4\
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    \3\ The Commission determined not to withdraw rules concerning 
the investment of customer funds, but rather moved forward their 
effective date to December 28, 2000. See 65 FR 82270 (Dec. 28, 
2000).
    \4\ The Commission separately proposed rules implementing the 
CFMA with respect to Commission-regulated derivatives clearing 
organizations. 66 FR 24308 (May 14, 2001). Implementation of the 
CFMA also 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. Those rulemaking proceedings are separate from the rules 
being adopted herein. Finally, rules relating to intermediaries that 
were included in the new regulatory framework withdrawn in December, 
but which are not required by the CFMA, will be reproposed by the 
Commission at a later date.
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B. The Proposed Rules

    The Commission proposed a new part 38 relating to contract markets 
that, as proposed, would exempt contract markets operating under part 
38 from all Commission rules not specifically reserved.\5\ Part 38 also 
proposed application and approval procedures for new contract markets, 
including a 60-day fast-track approval procedure as well as procedures 
for product listing and amendments. Proposed part 38 also contained a 
number of rules explaining the Commission's interpretation of several 
statutory requirements.
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    \5\ It should be noted that rules that are not being reserved 
with respect to their application to contract markets (or DTFs) will 
still apply to intermediaries, or clearing organizations, and 
contract market members, if relevant to those entities. See, e.g., 
Commission rule 1.35.
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    Proposed part 37 construed section 5a of the Act, which provides 
for registration of DTFs. The proposed rules identified the commodities 
eligible to be traded on a DTF as a matter of right under section 
5a(b)(2)(A) through (C) of the Act, as those defined as ``excluded'' 
commodities in section 1a(13) of the Act.\6\ Part 37 also proposed a 
procedure under which a specific DTF could petition to list contracts 
on additional commodities. The Commission also proposed a number of 
provisions providing greater administrative flexibility in the 
registration \7\ and oversight of DTFs than provided for in the Act, as 
amended. Proposed appendices to parts 37 and 38 provided general 
guidance for complying with the rules.
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    \6\ Section 1a(13) of the Act 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.
    \7\ As proposed, existing contract markets need only 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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    The Commission also proposed a new part 36 relating to exempt 
boards of trade and exempt commercial markets. Transactions entered 
into by eligible commercial entities in exempt commodities \8\ traded 
on an electronic trading facility, are exempt commercial markets under 
section 2(h)(3) of the Act.\9\ Markets that satisfy the initial and

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ongoing requirements of sections 2(h)(3) through (5) of the Act, as 
amended, are excluded from the Act's other requirements. The Commission 
proposed rules in part 36 to implement the notification requirements of 
section 2(h)(5)(A) of the Act, and the information requirements for 
exempt commercial markets consistent with section 2(h)(5)(B) of the 
Act.
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    \8\ See section 1a(14) of the Act.
    \9\ 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.
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    In part 36, the Commission also proposed rules implementing Section 
5d of the Act, which establishes the category of ``exempt board of 
trade.'' Commission rule 36.2 proposed 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. In addition, rule 
36.2(b) proposed the form and manner of the notification to the 
Commission provided for under section 5d of the Act.
    The Commission also proposed an antifraud provision, proposed rule 
1.1, pursuant to its authority in sections 3 and 8a(5) of the Act. This 
proposed anti-fraud rule would apply to foreign currency transactions 
described in section 2(c)(1) of the Act.
    Finally, the Commission proposed to delete Part 180 of its rules 
governing arbitration of disputes arising on contract markets, and 
reproposed its withdrawn rule 166.5, incorporating the new provision 
added by the CFMA, which permits an FCM to require an eligible contract 
participant to waive the right to reparations as a condition of using 
the FCM's services.

C. Overview of Comments

    The Commission received a total of 20 comments \10\ from a range of 
commenters, including a government agency, an association of state 
securities regulators, a self-regulatory organization,\11\ five futures 
exchanges,\12\ a derivatives clearing organization,\13\ eight trade 
associations,\14\ a trading firm, an attorney and a group of energy 
firms.\15\
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    \10\ In this Notice of Final Rulemaking, comment letters (CL) 
are referenced by the letter's file number and page. These letters 
are available through the Commission's internet web site, http://www.cftc.gov.
    \11\ They are: United States Department of the Treasury 
(Treasury) (CL 14), North American Securities Administrators 
Association, Inc. (NASAA) (CL 2), and National Futures Association 
(NFA) (CL 16), respectively.
    \12\ They are: Board of Trade of the City of New York, Inc. 
(NYBOT) (CL 5),; Chicago Board of Trade (CBT) (CL 7),; New York 
Mercantile Exchange (NYMEX) (CL 10), Minneapolis Grain Exchange 
(MGE) (CL 15), and Chicago Mercantile Exchange (CME) (CL 18).
    \13\ Board of Trade Clearing Corporation (BOTCC) (CL 1).
    \14\ They are: International Swaps and Derivatives Association, 
Inc. (ISDA) (CL 3), @Markets (CL 6), National Grain and Feed 
Association (NGFA) (CL 9), Futures Industry Association (FIA) (CL 
11), the Silver Users Association (SUA) (CL 12), National Grain 
Trade Council (NGTC) (CL 17), Association of the Bar of the City of 
New York (NY Bar) (CL 19) and Securities Industry Association (SIA) 
(CL 20).
    \15\ They are: Advance Trading, Inc. (CL 13), Thomas Muth, Esq. 
(CL 8), and Energy Group (CL 4), respectively. In addition to the 
written comments, the proposed rules were discussed at a March 28, 
2001, meeting of the Commission's Agricultural Advisory Committee 
(AAC), chaired by Commissioner David D. Spears. A transcript of the 
AAC meeting is also included in the Commission's comment file and is 
available on the Commission's website.
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    Most commenters generally supported the proposed rules, especially 
those provisions that offered greater flexibility than provided by the 
CFMA. Commenters also expressed support for the guidance regarding 
compliance with the core principles applicable to contract markets and 
DTFs. Many commenters offered specific recommendations for 
clarification of the rules or requested that the Commission clarify how 
the rules would be applied in specific circumstances.

II. The Final Rules

A. Part 38--Contract Markets

    Part 38 governs trading on designated contract markets. Under rule 
38.2, contract markets operating under this part are exempt from all 
Commission rules not specifically reserved. Rule 38.3 contains 
application and approval procedures for new contract markets, including 
a 60-day fast-track approval procedure. The designation procedures, 
which include Commission authority to designate a contract market upon 
conditions, require applicants to (1) demonstrate that they satisfy the 
criteria for designation under section 5(b) of the Act and the core 
principles for operation under section 5(d) of the Act; (2) to include 
a copy of the contract market's rules; and (3) to provide a brief 
explanation of how the conditions for designation are satisfied to the 
extent that compliance with the conditions for designation is not self-
evident.
    Based upon its experience in processing applications for 
designation following proposal of these rules,\16\ the Commission is 
modifying final rule 38.3 to make clear that an applicant may instruct 
the Commission in writing at the time of application, to review the 
application under the procedures of section 6 of the Act, which provide 
for approval within 180 days, rather than under the rule's fast-track 
review procedures. This is different than the proposed rule, which 
provided that an applicant could instruct the Commission in writing 
``during the review period'' to review the application under the 
statutory review procedure.\17\ Absent such a written instruction, the 
application will be reviewed under the fast-track procedures, as was 
proposed.\18\
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    \16\ In its notice of proposed rulemaking, the Commission stated 
that during the transition period between the effective date of the 
CFMA and the adoption of final implementing regulations, it would, 
in effect, permit applications to be filed under the procedures as 
proposed. 66 FR 14268.
    \17\ Two applicants have indicated that they preferred for their 
applications to be processed more slowly than provided for under the 
fast-track rules and that the rule explicitly should permit 
applicants to so indicate at the time the application is filed. The 
Commission agrees.
    \18\ The Commission is making a similar clarification to rule 
37.5(b)(5), relating to applications for registration as a DTF.
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    The Commission is modifying proposed rule 38.4 (also based upon its 
administrative experience) to provide that the operational rules of an 
applicant for contract market designation and the terms or conditions 
of any products to be listed for trading that have been filed for 
voluntary Commission approval with the application or while it is 
pending shall be deemed approved by the Commission no earlier than at 
the time that the facility itself is deemed to be designated. This 
proviso has been added to final rule 38.4 to conform the time for 
review and approval of the rules of an applicant--in cases where the 
applicant voluntarily requests Commission approval of its operational 
or product-related rules--with the review period for the application 
for contract market designation itself.
    In response to a number of comments, proposed rule 38.3(b)(2) is 
being modified. The rule as proposed would have interpreted the 
designation requirement on fair and equitable trading to include making 
available to market participants timely information on prices, bids and 
offers. A number of commenters suggested that the proposed requirement 
be modified to apply in a

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manner ``appropriate to the market.'' \19\ As the CBT suggested:
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    \19\ The suggested revision applies equally to proposed rule 
37.6(d)(3) relating to DTFs, which has a similar provision.

while it may be expected that an electronic market would be able to 
routinely capture and disseminate bids and offers entered into the 
trading system, as well as execution prices, it is difficult for an 
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open outcry market to do the same.

CL 7-7. See also CL 10-3 and CL 18-3.
    The Commission agrees and is modifying the final rule by including 
the ``appropriate to the market'' language that it had previously 
included in the withdrawn rules.\20\ Currently, most open-outcry 
markets generally capture price changes only. By including the 
``appropriate to the market'' language, the Commission intends to make 
clear that it is not applying to open-outcry markets a standard for 
disseminating such information that is higher than the one presently in 
effect. However, the Commission expects that electronic trading systems 
can, and appropriately will, capture such information for every 
transaction, not just for those involving a price change.
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    \20\ The Commission also is making conforming changes to Part 
38, Appendix A, Criterion 3 and to Part 37, Appendix B, Core 
Principle 4.
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    CBT asked the Commission to clarify application of the core 
principle on fitness under section 5(d)(14) of the Act. That provision 
of the Act requires contract markets to apply 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.'' Regarding ``direct access,'' CBT noted:

automated order routing systems may enable numerous customers to 
send their orders directly to a trading floor or to an electronic 
trading system. Such trades may be intermediated and/or guaranteed 
by a clearing FCM. The CBOT does not believe that the Commission 
intended to require markets to impose fitness requirements on such 
customers.

CL 7-8. See also CL 5-4, CL 19-5.
    Generally, the core principles are intended to apply to contract 
markets (and DTFs) regardless of the form of business organization.\22\ 
Section 5(d)(14) requires persons who exercise governance 
responsibilities or control of the trading facility to meet a fitness 
requirement.\22\ In a mutually-owned enterprise, members would exercise 
such governance authority. In a demutualized contract market, the 
facility's owner or owners would have such authority.\23\ CBT correctly 
observes that customers having direct trading access through an 
automated order entry routing system or otherwise do not exercise a 
member's governance authority.\24\ The Commission interprets the core 
principle on fitness under section 5(d)(14) of the Act as not requiring 
contract markets to establish fitness standards for customers as a 
consequence of their using direct order routing systems to trade.
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    \21\ But see section 5(d)(16) of the Act, which unlike the other 
core principles, applies only to mutually-owned contract markets.
    \22\ Thus, directors, members of disciplinary committees, and 
members are required to meet a fitness requirement. Section 1a(24) 
defines a member as a person ``owning or holding membership in * * * 
the contract market, or having trading privileges on the contract 
market.''
    \23\ The Commission clarified the core principle's application 
with respect to demutualized contract markets by making explicit 
that the core principle on fitness requires a demutualized contract 
market to establish fitness requirements for all natural persons 
that directly or indirectly have greater than a ten percent 
ownership interest in the facility. See proposed rule 38.3(b)(4).
    \24\ CL 7-8. See also comments of NYBOT, CL 5-4, and NY Bar, CL 
19-5.
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    NY Bar raised a similar concern, stating that:

Appendix A to Part 38 in Designation Criterion 6 states that a 
contract market must have authority to discipline ``market 
participants.'' It should be made clear that this does not apply to 
customers of members.

CL 19-5. See also CL 5-5.
    The Commission does not agree. Designation criterion 6 (Section 
5(b)(6) of the Act) provides, in part, that:

a 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.

    Contract markets have the authority to deny access to persons who 
violate their rules, either directly, or indirectly through their 
members. The Commission also recognizes, however, that a contract 
market might encounter difficulty in enforcing fines or other sanctions 
to remedy violations of its rules by persons trading on a market that 
do not have a significant ownership interest in the facility. 
Accordingly, the Commission proposed in rule 38.3(b)(3) to make 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.'' 66 FR 14263, n. 7. 
Part 38, Appendix A, reflects rule 38.3(b)(3)'s interpretation of 
designation criterion 6 that a contract market need only have authority 
to deny access to such persons.
    Nevertheless, the Commission is modifying rule 38.3(b)(3) and 
Appendix A, in light of NY Bar's comment, to clarify that the denial of 
access may be either direct by order to the market participant or 
indirect by order to contract market members. The Commission is also 
clarifying that the capacity to expel or deny access to a member with 
trading privileges but having no, or only nominal equity interest in 
the facility, also satisfies the requirements of designation criterion 
6. In this regard, the definition of ``member'' in section 1a(24) of 
the Act includes persons with trading privileges. Such persons may have 
trading privileges under a ``user agreement'' with the facility or 
trading platform or by virtue of a non-equity ``membership'' of only 
nominal value. Levying fines or imposing other types of sanctions 
against non-equity ``members'' may be as difficult as imposing such 
remedies against non-member market participants.\25\
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    \25\ NY Bar also suggested that Part 38, Appendix A, clarify 
that ``a contract market is not required to establish minimum 
financial standards for customers of intermediaries.'' The 
Commission has modified the text by removing the term ``user,'' 
based on the understanding that the statutory meaning of ``member'' 
includes those only having trading privileges on the facility.
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    Core principle 4 requires contract markets to monitor trading to 
prevent manipulation. Part 38, Appendix B, provided that contract 
markets, as an acceptable practice, should have access to clearing 
information. BOTCC points out that, because a contract market's 
provider of clearing services may be a completely independent entity, 
the clearing entity should be required to provide such information to a 
contract market ``only in furtherance of the contract market's self-
regulatory responsibilities and only upon a showing of need or other 
good cause.'' CL 1-2. CBT disagreed, reasoning that, ``it is crucial to 
the performance of a contract market's trade monitoring function that 
it retains such access without any restrictions or any special showing 
of need.'' CL 7-6; CL 10-3. The Commission agrees that a contract 
market must be able to obtain such information without limitation. 
Accordingly, contract markets, by contract, must provide for such 
unimpeded access to information from third-parties performing clearing 
functions for the contract market.
    NYBOT asked the Commission to modify the guidance for the 
designation criterion on the financial integrity of

[[Page 42259]]

transactions. NYBOT argued that contract market rules are not required 
by the Act and are unnecessary because futures commission merchants 
continue to be subject to the segregation and related recordkeeping 
requirements of section 4d of the Act and Commission rules thereunder. 
CL 5-3. The Commission disagrees. The CFMA specifically requires 
contract markets (and DTFs) to establish and enforce rules addressing 
the financial integrity of transactions executed on or through the 
board of trade or facility.\26\
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    \26\ See Designation Criterion 5 of section 5(b) of the Act, 
providing that a contract market ``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.'' 
See also section 5a(c) of the Act, Registration Criterion 4, 
governing the financial integrity of transactions entered into on a 
DTF. The Commission notes that, in conformance with its notice of 
proposed rulemaking with respect to clearing, 66 FR 24308, it has 
modified the guidance for Designation Criterion 5 to reflect that 
transactions executed on a contract market, if cleared, must be 
cleared with a derivatives clearing organization DCO registered with 
the Commission, absent Commission action pursuant to its section 
4(c) exemptive authority.
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    The Commission anticipates that contract markets will continue to 
be able to fulfill their self-regulatory responsibilities concerning 
the financial responsibility of intermediaries through existing 
mechanisms, including audits conducted by designated self-regulatory 
organizations. The Commission has clarified this point in Appendix B, 
in the application guidance to Core Principle 11, and has noted 
explicitly that, ``A contract market may delegate to a designated self-
regulatory organization responsibility for receiving financial reports 
and for conducting compliance audits pursuant to the guidelines set 
forth in rule 1.52.'' Accordingly, rule 1.52 has been added to the 
rules reserved under Commission rule 38.2.\27\
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    \27\ The Commission also has modified Part 38, Appendix A, 
Designation Criterion 5, and Part 37, Appendix A, Registration 
Criterion 4, by referring to the form of margin rather than to 
margin ``levels.'' In this regard, it should be noted that the 
Commission is not mandating specific margining systems. Compare CL 
18 at 3. In addition, the Commission has made a number of conforming 
or technical textual changes to Part 38, Appendix B, in response to 
the comments of MGE, NY Bar, NYBOT, and NYMEX. As modified, Appendix 
B states explicitly that Core Principle 7, which relates to public 
disclosure of certain information, may be satisfied through timely 
placement of the information on the facility's web site. The 
language relating to Core Principle 6 (emergency authority) now 
reads, ``minimize the effects of conflicts of interest.'' Core 
Principle 9 has been modified to make clear that the qualified 
independent professional testing of a system need not be performed 
by a third-party provider, and the discussion related to Core 
Principle 10 (trade information) now reads ``transaction executed 
on'' rather than ``effected on.'' The Commission also clarified the 
discussion of position limits under Core Principle 5 and of trade 
information under Core Principle 10.
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B. Part 37--DTFs

    New part 37 implements section 5a of the Act, which provides for 
registration of DTFs. Rule 37.2 exempts DTFs from all Commission 
regulations applicable to a trading facility that are not reserved,\28\ 
and makes clear that the reserved regulations apply as though DTFs were 
specifically referenced therein. Rule 37.3 identifies the commodities 
eligible to be traded on a DTF under section 5a(b)(2)(A) through (C) of 
the Act as those defined as ``excluded'' commodities in section 1a(13) 
of the Act.\29\
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    \28\ As noted in footnote 5 above, rules that also have 
application to intermediaries or clearing organizations would still 
apply to those entities even though they are not being reserved with 
respect to their application to DTFs.
    \29\ Section 5a(b)(2)(A) through (C) of the Act, as amended, 
provides that a DTF 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[.]
    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. 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.
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    Rule 37.3 also establishes a procedure whereby a specific DTF may 
make an individualized 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. Rule 37.3(a)(6) lists the factors that are relevant in 
making such a showing.
    New part 37 provides greater administrative flexibility than the 
CFMA in the registration and oversight of DTFs, including provisions 
that (1) permit the Commission to register a DTF upon conditions; (2) 
provide a fast-track review procedure for applications for 
registration; and (3) permit applicants for DTF registration 
voluntarily to demonstrate their capacity to comply with the core 
principles for operation.\30\ The Commission has provided two 
appendices giving general guidance regarding applying for registration 
and compliance with core principles.
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    \30\ Existing contract markets need not make such a 
demonstration. They simply must notify the Commission of their 
intent to operate as a DTF, and file with the Commission the DTF's 
rules (or a list of its rules) and a certification that they meet 
all of the requirements for registration as a DTF.
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    Rule 37.6(d) includes interpretations of certain core principles. 
For example, it provides that an electronic trading platform used by 
eligible commercial entities only, may satisfy the requirement to 
monitor trading in a manner ``appropriate to the market'' by assuring 
compliance with its rules regarding access limitation; that the core 
principle on monitoring trading may be met, appropriate to the market, 
by providing information to the Commission as requested; and that the 
core principle concerning fitness standards applies to natural persons 
who directly or indirectly have greater than a ten percent ownership 
interest in a non-member-owned facility. Rule 37.7 includes several 
special call provisions for requesting information from a DTF, or its 
market intermediaries or participants. Finally, the Commission has used 
its section 4(c) exemptive authority to give DTFs greater procedural 
flexibility in amending their rules.
    The Commission, based upon administrative experience in processing 
applications for registration following proposal of the rules, is 
modifying the time period for voluntary approval of the applicant's 
operating rules and for one product to be listed for trading on the 
facility. Upon registration as a DTF, the facility may list products 
for trading that meet the automatic eligibility and other requirements 
by notification to the Commission. Alternatively, it may submit new 
products for voluntary approval under the forty-five day fast-track 
review period of rule 40.3. Although no commenter specifically raised 
the issue, the Commission, after further consideration occasioned by 
inquiries from potential applicants, is modifying rule 37.7 by adding a 
new paragraph (c)(2) to provide that the facility's operating rules, if 
Commission approval is requested, and one initial contract, if 
submitted for voluntary approval with an application for DTF 
registration, will be deemed approved in thirty days, rather than the 
normal forty-five day period under rule 40.3(b). This modification will 
enable an applicant for DTF registration to have its operating rules 
and one product considered by the Commission for approval under the 
same time-frame as the registration application itself. Because this is 
an exception to the normal review period, it is being limited to one 
product only. Such a submission for voluntary product approval must 
comply in all

[[Page 42260]]

other respects with the requirements of rule 40.3.\31\
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    \31\ Product approval is voluntary, and an applicant is not 
required to submit any of its products for Commission approval.
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    In addition, commenters made a number of suggestions for 
modification of, or raised issues relating to, the rules as proposed. 
These comments relate to eligibility of persons for trading, 
eligibility of commodities for trading, and interpretations regarding 
several of the registration criteria and core principles. Several 
commenters also suggested a number of specific textual clarifications.
1. Trader Eligibility
    The Commission proposed to include registered floor brokers and 
floor traders as eligible for trading on a commercial DTF. See proposed 
rule 37.1(b). CBT, NYMEX, and @Markets supported this proposal. NY Bar, 
however, opposed the proposed rule's requirement that an FCM guarantee 
the trades of such a qualifying floor broker or floor trader, arguing 
that ``[i]t should be sufficient if the floor trader or floor broker is 
simply `qualified,' i.e., that an FCM has agreed to accept all of the 
broker or trader's trades, instead of being fully guaranteed.'' CL 19-
3; see also CL 5-3. The Commission does not agree that ``acceptance'' 
of all trades rather than a guarantee is sufficient. A guarantee 
provides formal assurance that another's obligation will be fulfilled, 
a level of assurance not necessarily provided by acceptance.\32\ The 
Commission believes that this higher level of assurance is both 
necessary and appropriate for eligibility by floor brokers and floor 
traders as commercial entities, and is adopting the final rule as 
proposed.
---------------------------------------------------------------------------

    \32\ Several exchanges, including CBT, NYMEX and CME, require 
clearing guarantees for trades by non-clearing members.
---------------------------------------------------------------------------

    The Commission also requested comment on whether the definition of 
``eligible commercial entity'' under proposed rule 37.1(b) should be 
amended to include individuals whose function in electronic markets is 
similar to that provided by floor traders. A number of commenters 
generally supported including individuals who perform market-making 
functions on electronic trading facilities within the definition of 
eligible commercial entity. See CL 6-2, CL 4-2. @Markets, for example, 
opined that ``B2B markets are in their infancy''; ``certain markets may 
find that individual market makers are a critical element in accruing 
necessary liquidity''; and ``in lieu of the registration requirement * 
* *. such individuals [should] * * * meet the requirements for 
membership established by the facility.'' CL 6-3.
    NYBOT and NY Bar suggested that such a liquidity provider for 
electronic markets should be considered to be any eligible contract 
participant that ``undertakes to maintain a bid and ask spread pursuant 
to an agreement with, or the rules of, an electronic trading 
facility.'' CL 5-1; CL 19-2. CBT suggested that the electronic market 
equivalent of a floor trader would simply be a member that has its 
trading guaranteed by an FCM, and that is subject to the trade practice 
and disciplinary rules of exchanges. CL 7-4. However, that description 
would be a meaningful distinction only in the context of an 
intermediated market. Rather than attempting to establish a rule at 
this time, NYMEX suggested that the Commission make such determinations 
over time on a case-by-case basis for each facility seeking regulatory 
relief in this area. CL 10-5. SIA, although supporting the concept of a 
functional equivalent of a floor trader for electronic markets, noted 
that ``most corporate entities in that category would already fall 
within the statutory definition of eligible commercial entity.'' CL 20-
3. In light of the wide range of recommended standards, the suggestion 
by at least one commenter that existing categories already would cover 
those likely to fall within the scope of a new category for electronic 
market maker, and the lack of previous trading experience, the 
Commission is of the view that the issue should be considered based 
upon a fuller administrative record, after some trading experience with 
this type of market has been observed.
    NY Bar suggested that the Commission clarify that ``[s]ection 
37.3(b) is intended to permit a non-eligible commercial entity to 
access a commercial entity [DTF] through any FCM or broker-dealer.'' CL 
19-3. Access to trade on a DTF generally is limited to eligible traders 
under rule 37.3(a). Eligible traders are either eligible contract 
participants or non-eligible contract participants trading through a 
registered FCM that: (1) is a member of a futures self-regulatory 
association (or for a facility trading only security futures products, 
a national securities association); (2) is a clearing member of a 
derivatives clearing organization; and (3) has at least $20 million net 
capital. See section 5a(b)(3) of the Act. Moreover, for transactions 
other than security futures products, a DTF may by rule permit a 
broker-dealer or a depository or Farm Credit System institution to act 
as intermediary ``on behalf of customers'' if such entities do not hold 
customer funds for more than one business day. See section 5a(e) of the 
Act.
    In contrast to these provisions, section 5a(a)(2)(F) of the Act 
provides that a commercial DTF may trade any commodity (other than an 
enumerated agricultural commodity)\33\ when access to trade on the 
facility is limited to eligible commercial entities trading for their 
own account. Based upon this statutory language, commercial DTFs under 
rule 37.3(b) are limited to eligible commercial entities (as defined in 
Sec. 37.1(b)) trading for their own account. Accordingly, commercials 
may not execute their trades through an FCM, or any other intermediary, 
when trading on a commercial DTF under rule 37.3(b).\34\
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    \33\ The enumerated agricultural commodities are those listed in 
section 1a(4) of the Act, and include, among others: wheat, cotton, 
rice, corn, soybeans and the soybean complex, livestock, and frozen 
concentrated orange juice.
    \34\ Consistent with this provision, rule 37.1(b) includes floor 
brokers within the definition of ``eligible commercial entity'' only 
when trading for their own account.
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2. Commodity Eligibility
    Consistent with section 5(e)(2) of the Act, the Commission 
indicated in its notice of proposed rulemaking that it will determine 
in a future rulemaking whether to permit and, if so, the appropriate 
conditions for permitting, the enumerated agricultural commodities to 
trade on a DTF. 66 FR 14264. A number of commenters responded by 
suggesting that the enumerated agricultural commodities should be 
permitted to trade on a DTF immediately. See CL 3-3, CL 9-1, CL 18-4. 
The Commission intends to turn its attention to this issue at a later 
date in a separate rulemaking.
    As a class of excluded commodities, exempt securities are eligible 
to be traded on a DTF. The Commission requested comment on whether 
exempt securities trading on a DTF should be subject to additional 
requirements, such as reporting requirements, not applicable to other 
excluded commodities.\35\ CBT explained that it ``has found large 
trader reporting to be a useful tool for monitoring trading of futures 
and options on exempt securities,'' but wanted ``the form, levels and 
timing of any such reporting'' left

[[Page 42261]]

to the discretion of individual DTFs. CL 7-5.
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    \35\ The proposed rules provided that commodities defined in 
section 1a(13) of the Act as ``excluded commodities'' meet the 
deliverable supply eligibility test for trading on a DTF. Such 
excluded commodities include interest rates, currencies, securities, 
security indexes, macroeconomic and other types of indexes, and 
occurrences associated with an economic consequence beyond the 
control of the traders.
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    ISDA did not object ``in principle'' to the imposition of such 
requirements, but cautioned against imposing regulatory requirements in 
the absence of a ``compelling public interest.'' CL 3-3. SIA suggested 
that any large-trader reporting requirement should be consistent with 
market practice in the relevant cash market and only upon request of 
the Commission. CL 20-2.
    On the other hand, the United States Department of the Treasury 
(Treasury) expressed the opinion that all DTFs and contract markets 
should enforce a large-trader reporting system for contracts based on 
Treasury instruments. Treasury ``reiterate(d) its belief that large 
trader reporting requirements * * * reveal information that is useful 
to regulators, and also have a deterrent effect.'' CL 14-2.
    In light of all of the comments received, the Commission at this 
time has determined not to impose routine large-trader requirements on 
DTFs or their users for contracts based on Treasury instruments. Should 
market conditions warrant, however, the Commission will invoke its 
special call authority under Rule 37.8 to require such information for 
these contracts as the Commission deems necessary, taking into 
consideration the surveillance information routinely available with the 
DTF. The Commission's special call could require, for example, ongoing 
reporting of large-trader positions or other appropriate information.
    In addition to excluded commodities and security futures products, 
the Commission, under rule 37.3(a)(6), may make an individualized 
determination by rule, regulation or order, that a commodity is 
eligible to be traded on a DTF based on the commodity's characteristics 
and surveillance history, and the self-regulatory record and capacity 
of the facility on which it is to be traded. NYMEX questioned whether 
such determinations were included under the thirty-day period that 
applies to applications for DTF registration. If not, NYMEX requested 
that ``the Commission specify a comparable timeframe for such 
determinations that would provide for resolution of such applications 
in a reasonably expeditious manner.'' CL 10-2.
    The timing of an individualized Commission determination of 
commodity eligibility under rule 37.3(a)(6) is independent of a 
facility's initial registration as a DTF. In this regard, the rules do 
not require that a product be submitted for approval at the time the 
facility is registered as a DTF. Accordingly, the thirty-day time 
period for registration is independent of, and does not control, any 
product-specific consideration. Moreover, the Commission proposes to 
make case-by-case determinations with regard to eligibility of a 
commodity to trade on a DTF after notice and an opportunity for hearing 
through submission of written data, views and arguments. A number of 
commenters, including NYMEX and NYBOT, suggested that a petitioning DTF 
or applicant for DTF registration should be accorded the right to 
request an opportunity to present oral views and testimony to the 
Commission. CL 5-3, CL 10-3. The Commission concurs and will consider 
granting such requests in appropriate instances. Such an opportunity to 
present views, facts and argument orally before the Commission is not 
consistent with a thirty-day deadline. Accordingly, recognizing the 
potentially complex and highly individualistic nature of each 
determination, the Commission is not modifying the final rule by 
including a deadline. Nonetheless, the Commission intends to make these 
determinations expeditiously.
    NYMEX also requested that the Commission clarify that the relevant 
approval criteria are ``meaningful only in relative terms, i.e., in 
comparison to other markets''; that ``it is not necessary for a 
contract to meet all of these factors''; and how these factors might be 
interpreted for cash-settled or index-based contracts. CL 10-3. The 
Commission believes that a demonstration that a commodity meets the 
criteria of rule 37.3(a)(6)(ii) can be made either on an absolute basis 
or relative to a market that clearly meets the requirement that a 
``commodity is highly unlikely to be susceptible to the threat of 
manipulation.'' \36\ The Commission will consider such a demonstration 
based upon the totality of the showing, but will separately consider 
the petitioner's surveillance history and self-regulatory record from 
the commodity's general cash market characteristics. Nevertheless, the 
Commission would consider undertakings for enhanced surveillance and 
self-regulatory measures (beyond the required large-trader reporting 
system), such as spot-month speculative position limits, as an 
appropriate means to address instances where cash market 
characteristics alone may not provide sufficient assurance that the 
commodity is highly unlikely to be susceptible to the threat of 
manipulation.
---------------------------------------------------------------------------

    \36\ In this regard, the excluded commodities defined in section 
1a(13) of the Act clearly meet this standard, and may be used as a 
benchmark for comparison.
---------------------------------------------------------------------------

    With regard to cash-settled contracts, the Commission is modifying 
sub-paragraph 37.3(a)(6)(ii)(G) to make clear that the facility should 
be able to show that the contract or product's terms and conditions 
provide for a reliable and acceptable cash-settlement procedure that is 
adequate to minimize the threat of market abuse. The other criteria 
enumerated in paragraph (a)(6) apply equally to cash and physically 
settled contracts.
3. Registration Procedures
    Proposed rule 37.5(a)(2) would have required that a contract market 
filing notice that it wishes to operate as a DTF include in its 
submission a copy of the facility's rules. NYBOT opined that ``this 
should not be necessary, since the rules of the contract market would 
already be on file with the Commission, unless and to the extent the 
DTEF rules are different.'' CL 5-3; see also CL 15-4 (MGE). The 
Commission is modifying the final rule to provide that the notification 
need only list those rules of the contract market that also apply to 
operation of the DTF.\37\
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    \37\ The Commission is not modifying the provisions relating to 
DTF applications for registration. The notification procedure is an 
abbreviated procedure for existing contract markets. Applicants for 
registration generally will not have pre-existing approved or 
certified rulebooks.
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4. Interpretations of Registration Criteria and Core Principles 
Guidance
    The Commission proposed in its registration guidance in Appendix A 
that ``[i]f cleared, transactions executed on the facility must be 
cleared through a derivatives clearing organization.'' However, in a 
subsequent notice of proposed rulemaking to implement the CFMA with 
respect to derivatives clearing organizations (DCO), the Commission 
clarified that,

    excluded or exempted contracts, including those elected pursuant 
to section 5a(g) to be traded on a registered derivates transaction 
execution facility, are not required to be cleared by a DCO, 
although a clearing organization that clears these contracts may 
voluntarily apply, pursuant to section 5b(b), to register with the 
Commission as a DCO.

66 FR 24308 (May 14, 2001).
    SIA, in commenting upon the guidance in Appendix A, asserted that 
the registration guidance should be modified to recognize that 
contracts that are traded on a DTF on an ``opt-in'' basis are not 
required to be cleared by a DCO. CL 20 at 2. NY Bar asserted that a DTF 
should be permitted to clear through any recognized clearing 
organization including, e.g., clearing organizations

[[Page 42262]]

supervised by domestic and foreign banking authorities. CL 19-4-5. In 
light of these comments, and the fact that no comments were submitted 
in response to the Commission's clarification in the Federal Register 
notice proposing rules for clearing organizations, the Commission is 
modifying the guidance in Appendix A to make clear that agreements, 
contracts and transactions in excluded or exempt commodities that are 
traded on a DTF, if cleared, may be cleared through clearing 
organizations other than DCOs registered with the Commission.
    With regard to Appendix B for DTFs, Guidance on Compliance with 
Core Principles, NYBOT and NY Bar suggested that the Commission add a 
statement similar to one included in the guidance for contract markets 
(Appendix B of part 38), that ``[b]oards of trade that follow the 
specific practices outlined . . . for any core principle below will 
meet the applicable core principle.'' CL 5-4, CL 19-4. The guidance for 
DTFs, however, in keeping with the less regulated nature of those 
markets, is abbreviated and general in nature, and does not include the 
same level of detail as the guidance for contract markets. Accordingly, 
unlike the guidance for contract markets, the guidance for DTFs does 
not outline specific acceptable practices.
    NYBOT objected that the guidance on ``minimum'' fitness standards 
under Core Principle 6 for persons who have member voting privileges, 
governing obligations or responsibilities, or who exercise disciplinary 
authority, is not provided for in the CFMA and is unnecessarily 
onerous.\38\ CL 5-4. The Commission agrees in part and has modified the 
guidance accordingly.\39\ The guidance in Appendix B relating to 
minimum fitness standards interprets Section 5a(d)(6) of the Act, which 
requires DTFs to ``establish and enforce appropriate fitness 
standards.'' In the Commission's view, the fitness standards for the 
named categories of persons that should apply ats a minimum include the 
statutory disqualifications in section 8a(2) of the Act. Of course, 
DTFs remain free to impose higher fitness standards, including the 
statutory disqualification standards of section 8a(3) of the Act.\40\ 
Persons who have governing obligations or responsibilities, or who 
exercise disciplinary authority, should not have a significant history 
of serious disciplinary offenses, such as those that would be 
disqualifying under rule 1.63.
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    \38\ NYBOT also asserted that there should not be any fitness 
standards for natural persons who directly or indirectly have 
greater than a ten percent interest in the facility and are merely 
passive investors. This issue is addressed above in connection with 
comments related to a similar provision applicable to contract 
markets.
    \39\ The Commission has made similar modifications to the 
guidance governing designated contract markets contained in Part 38, 
Appendix B, Core Principle 14.
    \40\ The Commission notes that these minimum standards are 
consistent with the fitness standards that Congress itself adopted 
for exempt commercial markets. In this regard, section 
2(h)(5)(A)(iii) of the Act requires an exempt commercial market to 
certify to the Commission that ``no executive officer or member of 
the governing board of, or any holder of a 10 percent or greater 
equity interest in, the facility is a person described in any of 
subparagraphs (A) through (H) of section 8a(2)[.]''
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    CME and NYMEX commented that disclosing information on system 
security, as the proposed guidance on Core Principle 4 suggests, might 
compromise a system's integrity. CL 10-4, CL 18-4. The guidance did not 
intend that detailed, proprietary information on system security should 
be disclosed, and in light of these comments, the Commission has 
deleted this provision.\41\
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    \41\ The Commission has made a similar modification to Part 38, 
Appendix B, Core Principle 9. See comment of MGE, CL 15-3.
---------------------------------------------------------------------------

C. Product Listing and Rule Amendments

    Proposed part 40 would implement the procedural provisions of 
Section 5c(c) of the Act for new contracts, new rules and rule 
amendments.\42\ Based on administrative experience after the part 40 
rules were proposed, the Commission is amending rule 40.4 to provide 
contract markets greater certainty with respect to the approval of 
rules governing contracts on enumerated agricultural commodities. 
First, the Commission is adding to the list of non-material rule 
changes the category of rule changes necessary to comply with a binding 
court order, or with a rule or order of the Commission, or of another 
federal regulatory authority. Second, the Commission is adding a 
provision to the final rules that permits a contract market to submit 
to the Commission any rule that the contract market believes not to be 
material, but that is not listed as non-material in rule 40.4, and to 
implement the rule ten days after submission, absent contrary notice 
from the Commission. This procedure gives exchanges flexibility by 
providing that the listed categories are non-exclusive and at the same 
time provides a method to obtain certainty that the Commission agrees 
that the rule change is not material.\43\
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    \42\ In proposing these rules, the Commission noted that, in 
light of the Congressional intent to implement the provisions of the 
CFMA without delay, during the transition period between the 
effective date of the CFMA and promulgation of final implementing 
rules, the Commission would not take any enforcement action against 
any person who complied with the implementing rules, as proposed. 66 
FR 14268.
    \43\ CBT correctly asserted that rules listing additional 
delivery months for agricultural contracts should not be deemed to 
be material under rule 40.4, and thus subject to the requirement of 
prior approval. CL 7 at 2. Pursuant to section 5c(c)(B)(2) of the 
Act, the listing of additional delivery months is not subject to the 
prior approval requirement because such rules do not apply ``to 
contracts and delivery months which already have been listed for 
trading and have open interest.'' 7 U.S.C. 7c(c)(2)(B).
    CME asserted that the Commission should not retain the 
distinctions between in-house changes and those made by third 
parties with respect to delivery standards and index constructions 
and calculations. It asserted that ``there are sufficient safeguards 
embodied in the core principles to make requirements at this level 
of detail obsolete.'' CL 18 at 5. The Commission notes that it 
exercised its section 4(c) authority to excuse independent third 
party delivery and index changes from the statutory certification 
requirement for all rule changes in recognition that such rule 
changes are subject to the additional safeguard of being determined 
by the action of an independent party, for purposes not solely 
related to trading in derivatives contracts or to trading on the 
exchanges.
---------------------------------------------------------------------------

    While commenters strongly endorsed the increased flexibility of the 
proposed rules, see CL 7-2, CL 10-2, CL 18-1, several objected to 
certain specific requirements. In response to these comments, the 
Commission has decided to modify the proposed rules as discussed below.
1. Clearing
    BOTCC objected to the provision of proposed rule 40.2, which would 
have required a DCO to certify, with respect to a product that it 
clears that is not traded on a contract market or a DTF, that the 
trading product or instrument complies with the Act. BOTCC questioned 
the Commission's authority to require this certification, and 
questioned how a DCO could make such a certification ``about a product 
or instrument that it has not designed and for which it is providing 
only a discrete set of services.'' CL 1-5. As an alternative, BOTCC 
suggested that the Commission could require the DCO to certify that its 
clearing of the product complies with the Act, although it questioned 
the practical utility of such a certification.
    Under section 5c(c) of the Act, a registered entity may elect to 
``accept for clearing any new contract or other instrument, or may 
elect to approve and implement any new rule or rule amendment'' by 
certifying to the Commission that ``clearing of the new contract or 
instrument, new rule or rule amendment complies with [the] Act.'' The 
Commission is clarifying rule 40.2 to provide that a DCO may accept for 
clearing any new contract or other

[[Page 42263]]

instrument by filing with the Commission: (i) the rules of the DCO that 
permit it to accept the contract or other instrument for clearing 
(including any rules establishing the terms and conditions of products 
that make them acceptable for clearing); and (ii) a certification that 
the clearing of the new contract or instrument (including any rules 
establishing the terms and conditions of products that make them 
acceptable for clearing) complies with the Act. By so certifying, the 
DCO will be certifying not only that it is in compliance with the core 
principles applicable to it, but that its rules permitting acceptance 
for clearing (including any rules establishing terms of the product to 
be accepted for clearing) comply with the Act. These filing and 
certification requirements, as proposed, do not apply when a DCO 
accepts a new product for clearing that is traded on a contract market 
or a registered DTF.\44\
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    \44\ BOTCC objected to including clearing organizations within 
the definition of ``contract market'' under proposed rule 40.1. 
BOTCC reasoned that this definition was unnecessary and confusing 
since the Act now separately regulates trading facilities and 
clearing organizations. CL 1-4. The Commission agrees and has 
deleted the proposed definition from the final rules.
---------------------------------------------------------------------------

2. Product Listing
    CME objected to the requirement that trading facilities certify to 
the Commission compliance with the Act when relisting dormant contracts 
for trading. See proposed rule 40.2. CME argued that the proposed 
certification requirement for dormant contracts is a ``relic of the 
days of more intensive regulatory administration.'' CL 18 at 5. The 
Commission disagrees. Contracts become dormant only after five years 
from initial listing \45\ and cash markets are likely to change during 
that period. Consequently, the product as originally certified may no 
longer be in compliance with the applicable core principles. The 
recertification requirement is in keeping with the Commission's 
oversight role.
---------------------------------------------------------------------------

    \45\ See proposed Commission rule 40.1, which defines ``dormant 
contract'' as any futures or option contract in which no trading has 
occurred for six months beginning five years after initial listing.
---------------------------------------------------------------------------

3. Rule Submissions
    Proposed rule 40.5 would have established procedures for the 
voluntary submission of rules for Commission review and approval.\46\ 
CBT objected that this rule would result in a potentially longer review 
process than was provided for under the Commission's fast track review 
procedure prior to enactment of the CFMA. CL 7-2.
---------------------------------------------------------------------------

    \46\ Those procedures are also incorporated by reference in 
proposed rule 40.4, which implements the statutorily-mandated review 
and approval procedures for certain amendments to contracts 
involving enumerated agricultural commodities.
---------------------------------------------------------------------------

    Proposed rule 40.5 provided for a 45-day review period of rules 
submitted for Commission approval, with the possibility that the 
Commission could extend the review period once, for another 45 days, 
which would have comported with the statutory review period of 90 days. 
On further reflection, the Commission has determined to retain the 
review periods of its pre-CFMA fast track procedure: one 45-day initial 
review period, with the possibility of one 30-day extension.\47\
    When the Commission does not approve the rule of a registered 
entity submitted to it for voluntary approval, proposed rule 40.5(d) 
provided that the non-approval notice must briefly specify the nature 
of the issues raised and the specific provision of the Act or 
regulations, including the form or content requirement of rule 40.5, 
that the facility's rule would violate, appears to violate, or the 
violation of which could not be ascertained from the submission. Notice 
of the Commission's refusal to approve a registered entity's rule would 
have been presumptive evidence that the registered entity could not 
truthfully certify that the same, or substantially the same, proposed 
rule or rule amendment does did not violate the Act or rules 
thereunder. See proposed rule 40.5(e).
---------------------------------------------------------------------------

    \47\ As suggested by NYBOT and NY Bar, the Commission is 
modifying rule 40.6(a) by adding a parenthetical to make explicit 
that the self-certification requirement of rule 40.6 applies to all 
new rules or rule amendments of a contract market or DTF other than 
those rules or rule amendments that have been approved by the 
Commission under the voluntary approval procedures of rule 40.5. See 
CL 5-6 and 19-7. This does not preclude a contract market or DTF 
from voluntarily submitting a rule for Commission approval under 
rule 40.5 that it has already implemented by certification under 
rule 40.6.
---------------------------------------------------------------------------

    BOTCC argues that the presumption established by rule 40.5(e) is 
ill-advised, procedurally flawed, discourages rule submissions and 
should be withdrawn. CL 1-5. The Commission is not persuaded. The 
presumption established by rule 40.5(e) is not a conclusive, but 
rather, is a rebuttable presumption. If the registered entity were to 
certify such a rule following notice of non-approval, the burden of 
proceeding would rest with the Commission.\48\ In any administrative 
proceeding brought by the Commission, the registered entity would have 
an opportunity to supplement the record with evidence rebutting the 
presumption. Moreover, as the proposed rule makes clear, nothing will 
prejudice a registered entity's right to resubmit a revised rule or to 
supplement the submission. Accordingly, the Commission does not believe 
that this presumption will discourage voluntary rule submissions.
---------------------------------------------------------------------------

    \48\ In such a proceeding, the Commission would be required to 
satisfy the applicable legal standard. In a proceeding to alter or 
supplement the rules of a registered entity, the Commission would be 
required to establish that such changes ``are necessary or 
appropriate for the protection of persons producing, handling, 
processing, or consuming any commodity traded for future delivery on 
such registered entity * * * or for the protection of traders or to 
insure fair dealing in commodities traded for future delivery on 
such registered entity.'' 7 U.S.C. 12a(7). In an administrative 
enforcement proceeding alleging a false certification, the 
Commission's findings of fact must be supported by ``the weight of 
the evidence.'' 7 U.S.C. 8(b).
---------------------------------------------------------------------------

    Proposed rule 40.6 provides that the Commission may stay the 
effectiveness of a certified rule 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. CBT objected to the stay 
provision on the grounds that section 8a(7) does not reference a stay 
and that it is unnecessary and potentially detrimental for the 
Commission to have such authority. CL 7-3; see also CL 18 at 2-3. 
BOTCC, while expressing sympathy for the Commission's concern that an 
improperly adopted rule not be permitted to remain in effect pending 
the conclusion of the administrative proceeding, suggested that the 
Commission modify the rule to specify that any stay will not affect 
contracts and positions previously established in reliance on the 
disputed rule and that the Commission endeavor to delay the 
effectiveness of any such stay in order to give the registered entity 
and market users an opportunity to make appropriate arrangements. CL 1-
6, note 4.
    The Commission recognizes the potential market implications of a 
stay of a previously implemented rule or rule amendment. The Commission 
has not delegated this authority to its staff. The Commission intends 
to invoke its stay authority cautiously, and only in the rare instance 
when its use would be appropriate.
    FIA requested confirmation that the Commission will solicit comment 
on rules submitted for voluntary approval when warranted. CL 11-6-7. 
The Commission confirms its intent to solicit public comment in such 
cases and further confirms its intent to solicit public comment in 
appropriate cases on

[[Page 42264]]

interpretations issued or approved under section 5c(a) of the Act.\49\
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    \49\ BOTCC commented that the procedures governing amendments to 
the terms and conditions of contracts involving enumerated 
agricultural commodities, consistent with the Act, should apply only 
when the contract is traded on a designated contract market, and not 
when traded on a registered DTF pursuant to section 5a(g) of the 
Act. CL 1-5. The Commission agrees and has amended rule 40.4 
accordingly.
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4. Emergency Rule Submissions
    CME commented that the proposed definition of emergency in proposed 
rule 40.1 is too broad and particularly objected to including within 
the definition ``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.'' CME argued that this definition 
could require the ``declaration of an emergency if * * * the Federal 
Reserve changes the fed funds rate.'' CL 18-5. The proposed language is 
substantially identical to language included in the Commission's 
current definition,\50\ and is consistent with the Act's definition of 
emergency.\51\
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    \50\ See 17 CFR 1.41(a)(4)(iv)(2001).
    \51\ Section 8a(9) of the Act vests the Commission with 
emergency authority. The term emergency is defined to include ``in 
addition to threatened or actual market manipulations and corners, 
any act of the United States or a foreign government affecting a 
commodity or any other major market disturbance which prevents the 
market from accurately reflecting the forces of supply and demand 
for such commodity.''
---------------------------------------------------------------------------

    BOTCC, CME and NYMEX objected to the provisions of rule 40.6 that 
would require a contract market or registered DCO to file emergency 
rules at the time of implementation, if implementation is sooner than 
the next business day. CL 1-7-8; CL 10-4; CL 18-5. CME commented that 
this notification requirement ``more closely resembles micromanagement 
than oversight. It has the effect of requiring a DTEF to concern itself 
with an administrative procedure rather than concentrating on the 
emergency itself.'' CL 8-5
    After considering these comments, the Commission has decided to 
modify rule 40.6 to require the contract market or DCO to file rules 
implemented pursuant to an emergency at the earliest possible time 
after implementation of the rule (but in no event later than 24 hours 
after implementation), if it is not practicable for the contract market 
or DCO to file the rule prior to implementation.\52\
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    \52\ This is consistent with the approach taken in the current 
rules regarding the timing of notification of rules implemented 
pursuant to an emergency. See 17 C.F.R. 1.41(f)(2)(i).
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D. Part 36--Exempt Markets

    Part 36 applies 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.
    Section 5d of the Act establishes the category of ``exempt board of 
trade.'' Commission rule 36.2 defines 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. In addition, rule 36.2(b) provides 
the form and manner of the notification to the Commission provided for 
under section 5d of the Act.
    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.\53\ 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. The rules 
implement the notification requirements of section 2(h)(5)(A) of the 
Act and the information requirements for exempt commercial markets 
consistent with section 2(h)(5)(B) of the Act.\54\ Generally, the part 
36 rules incorporate by reference the statutory conditions that pertain 
to these exemptions, including the statutory provisions relating to 
eligibility.
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    \53\ See, note 9 supra.
    \54\ As proposed by rule 36.3(b), if an exempt commercial market 
chooses not to satisfy its reporting requirements by providing the 
Commission with electronic access to transactions conducted on the 
facility, it may do so 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.
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1. Exempt Boards of Trade
    Several commenters suggested that the Commission expand the 
commodities eligible to be traded on exempt boards of trade (EBOT) 
trading under proposed rule 36.2. ISDA stated that it ``believes it is 
important that the Commission indicate its intention to act with 
dispatch in designating additional commodities that may be traded on an 
exempt board of trade.'' CL 3-4. SIA suggested that the Commission 
``does not need to foreclose the determination that other commodities 
could satisfy the statutory standard for eligibility or to require in 
all cases that such a determination be made by the CFTC, where such a 
determination is not required by statute.'' CL 20-3. The Commission 
believes that the commodities defined as excluded under section 1a(13) 
of the Act clearly meet the statutory criteria to be traded on an EBOT. 
The Commission has not foreclosed the possibility of finding additional 
commodities eligible for trading on an EBOT at some future time by 
rule, regulation or order.
2. Exempt Commercial Markets
    With respect to the eligibility of traders to participate in exempt 
commercial markets, Energy Group ``suggest[ed] that the Commission 
consider clarifying the definition of principal for the purposes of 
principal-to-principal transactions to include eligible commercial 
entities entering into transactions on behalf of other eligible 
commercial entities.'' CL 4-2. As noted above, the Commission's 
proposed rules relating to exempt commercial markets rely directly upon 
the statutory definitions and conditions relating to the section 
2(h)(3) exemption. Any interpretation by the Commission of the 
definition of ``principal'' relating to eligible commercial entities 
necessarily would include consideration of the use and meaning of that 
term as it relates to other statutory exclusions or exemptions, and is 
beyond the scope of this rulemaking.
    With respect to the reporting requirements set forth in part 36, 
see note 55 supra and accompanying text, @Markets expressed the view 
that ``regular and periodic'' reports were beyond the scope of the 
Commission's authority under section 2(h)(5)(B) of the Act and Energy 
Group suggested that ``the focus on meeting ``large trader'' 
requirements is unnecessary for the Commission to fulfill its 
responsibilities under the CFMA.'' CL 4-2. The Commission disagrees. 
Section 2(h)(5)(B) of the Act requires that an exempt commercial market 
provide the Commission with electronic access to the market. The access 
requirement provides the Commission with information on a routine, on-
going basis, thereby serving many of the functions that large-trader 
reports serve on the regulated markets. Using this access, the 
Commission is able to surveil transactions on the market in order to 
enforce its anti-manipulation authority. The alternative to providing 
electronic access set forth in rule 36.3(b) is intended to offer exempt 
markets a substitute, but generally equivalent, means of complying with 
the statutory electronic access requirement.
    Two commenters raised issues relating to proposed rule 36.3(c)(3),

[[Page 42265]]

under which a facility must require that each participant agree to 
comply with all applicable law and must have a reasonable basis for 
believing that its participants are eligible. BOTCC suggested that the 
Commission clarify that the provision requiring each participant ``to 
agree to comply with all applicable law is intended to be limited to 
applicable provisions of the Act and Commission regulations.'' CL 1-4; 
see also CL 4-2 (Energy Group). That is indeed the intended meaning of 
the rule.
    Finally, @Markets requested that the Commission ``confirm that an 
exempt commercial market will be deemed to be a ``board of trade'' for 
purposes of the confidentiality provisions of section 8(a) of the Act 
and the relevant provisions of the Freedom of Information Act.'' CL 6-
4. Unlike contract markets and DTFs, which are specifically referred to 
as ``boards of trade'' in the Act, exempt commercial markets are not 
specifically referred to by the Act as ``boards of trade.'' Compare 
sections 5(a) and 5a(a) of the Act with section 2(h)(5) of the Act. 
Nevertheless, section 8(a) of the Act generally prohibits the 
Commission from publishing ``data and information that would separately 
disclose the business transactions or market positions of any person.'' 
``Person'' under section 1(a)(16) of the Act includes individuals, 
associations, partnerships, corporations and trusts, and would thereby 
apply to an exempt commercial market and to those trading thereon.
3. Common Provisions
    Part 36 provides that both exempt boards of trade and exempt 
commercial markets be required to disseminate publicly their trading 
volume, opening and closing price ranges, open interest and other 
trading data, to the extent appropriate to that market upon a 
Commission finding that the facility serves as a significant source for 
the discovery of prices in the cash market for the underlying 
commodity. Rules 36.2(c)(2) and 36.3(c)(2) provide that the Commission 
will make such a determination after notice and an opportunity for 
hearing through submission of written data, views and arguments.
    A number of commenters suggested modifications to the rule. BOTCC 
noted that price information is an important source of revenue for 
exchanges and suggested that the Commission revisit the public 
dissemination requirement at a future time after ``a fuller opportunity 
to evaluate the appropriate balance of public interests entailed by 
such requirement.'' CL 1-3. @Markets noted that although ``neither the 
Act nor the proposed rules define the standards that the Commission is 
to employ in determining that a market performs a significant price 
discovery function, [it] would expect to have the opportunity to 
comment on appropriate standards prior to or in connection with any 
such determination by the Commission under this section of the Act.'' 
CL 6-2. Others commented that oral hearings should not be precluded in 
appropriate cases. CL 5-2, CL 19-4.
    The Commission agrees with the above comments. Although the 
Commission has provided that its determination will be made through 
notice and an opportunity for hearing through submission of written 
data, views and comments, it is not precluded from convening a public 
meeting to receive oral comment and argument in appropriate cases. The 
Commission may determine sua sponte, or in response to a request by the 
affected trading facility, or any interested member of the public, that 
a public meeting to receive oral statements and arguments is in the 
public interest and will assist it in its consideration of the relevant 
issues. As part of its inquiry, the Commission would set forth the 
standards that it would use in making its determination. The facility, 
and other interested members of the public, would have an opportunity 
to challenge those standards and to raise any other objections or 
defenses to the issuance of an Order, including any possible adverse 
impact on a facility's property rights that may stem from the proposed 
order. The Commission is of the view that these issues are best 
addressed in the context of a fully-developed administrative record, 
rather than in the context of this generalized rulemaking. Accordingly, 
the Commission is adopting the final rules on procedures relating to 
price discovery determinations as proposed.
    The Commission invited comment on whether exempt boards of trade 
and exempt commercial markets should be required affirmatively to 
disclose to traders that the facility and trading on the facility are 
not regulated or approved by the Commission. 66 FR at 14266. Commenters 
responding to this question generally opposed requiring facilities to 
affirmatively make such disclosures. But see CL 10-5 (NYMEX); CL 12-2 
(SUA). For example, Energy Group suggested that

    [a]n exempt commercial market is open only to sophisticated 
market participants who are familiar with distinctions among the 
different facilities. Such participants would have no reason to 
believe such a facility is regulated * * *. A representation 
affirming that the facility is not regulated may cause confusion.

CL4-2. SIA and @Markets concurred with this view, noting respectively 
that ``[i]n light of the institutional character of these markets * * * 
such disclosure is not necessary,'' and that ``the participants in 
these markets * * * can be expected to make appropriate inquiries 
regarding a market before applying for trading privileges on the 
facility.'' CL 20-3; CL 6-4.
    The Commission agrees that eligible contract participants and 
eligible commercial entities can be expected to make appropriate 
inquiries regarding whether a market is regulated and is not requiring 
exempt boards of trade or exempt commercial markets affirmatively to 
disclose that they are not regulated or approved by the Commission.

E. Miscellaneous

1. Anti-Fraud
    The Commission additionally proposed an anti-fraud provision, 
proposed rule 1.1, pursuant to its authority in sections 3 and 8a(5) of 
the Act. This proposed anti-fraud rule would apply to retail foreign 
currency agreements, contracts and transactions described in section 
2(c)(1) of the Act.
    A number of the commenters particularly supported this proposed 
rule. SUA noted that it was the clear intent of Congress that the 
Commission ``retain broad powers to protect against fraud and 
manipulation'' (CL 12 at 1). NYMEX ``strongly support[ed] the proposed 
new rule.'' (CL 10 at 4). CBT commented that the rule ``addresses a 
regulatory gap with regard to * * * unregulated entities.'' (CL 7 at 
9). See also CL 11 at 6. NASAA, ``welcome[d] the clarification of the 
Commission's antifraud jurisdiction.'' CL 2 at 1.
    ISDA, however, suggested that the Commission expand the exclusion 
from the rule to include financial institutions, insurance companies, 
financial holding companies and investment bank holding companies.\55\ 
Such entities need not be excluded from operation of the rule because 
they are outside of its intended scope in the first instance.\56\ 
Accordingly, the Commission is adopting the rule as proposed.\57\
---------------------------------------------------------------------------

    \55\ The rule excludes broker-dealers, FCMs and their respective 
affiliates.
    \56\ Rule 1.1 on its face applies only to ``the extent that the 
Commission exercises jurisdiction over such accounts, agreements, or 
transactions as provided in section 2(c)(2)(B).''
    \57\ Separate from proposed rule 1.1, a number of commenters 
offered a range of opinion in response to the request for comment by 
Commissioner Thomas J. Erickson on the advisability of promulgating 
a broader anti-fraud rule. 66 FR at 14288. SUA supported a broader 
anti-fraud rule without qualification. CL 12 at 1. SIA did not 
object ``in concept'' to clarification by the Commission of its 
anti-fraud authority with respect to principal-to-principal 
transactions. CL 20 at 4. ISDA, however, warned that the Commission 
should proceed with caution in this area to avoid creating any 
uncertainty with respect to the scope of its jurisdiction. CL 3 at 
5. Finally, FIA expressed doubt whether an anti-fraud rule of more 
general applicability would appreciably enhance the Commission's 
authority to deter misconduct by persons subject to its 
jurisdiction, or the public's ability to recover damages as a result 
of such misconduct. CL 11 at 6.

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[[Page 42266]]

2. Delegation of Functions
    NFA asked the Commission to clarify a contract market's and DTF's 
ability to delegate functions under the core principles, noting that:

the CFMA specifically allows contract markets and [DTFs] to comply 
with any of the core principles through delegation of functions to a 
registered futures association or another registered entity * * *. 
The Commission's current proposal, however, does not specifically 
authorize a [DTF] to delegate these functions (although NFA believes 
that the language is sufficiently broad to be interpreted to permit 
this delegation.)

CL 16-1.
    Section 5c(b) of the Act specifically provides that both contract 
markets and DTFs may comply with any applicable core principle through 
delegation of any relevant function to a registered futures association 
or another registered entity. As NFA correctly notes, the rules as 
proposed are ``sufficiently broad to be interpreted to permit this 
delegation.'' Id.
    NFA further suggests that the Commission, by rule, limit entities 
acceptable ``for ``outsourcing'' of functions to registered futures 
associations and registered entities because the statute so provides 
and because ``Congress recognized that the Commission must have some 
authority over any entity carrying out these functions.'' Id. Section 
5c(b) of the Act, however, limits only ``delegations'' of functions to 
registered futures associations and to registered entities; it does not 
restrict ``outsourcing'' of specified activities on a contract basis.
    The Commission has long-recognized the ability of contract markets 
to meet their self-regulatory obligations by using persons under 
contract to perform specified duties. The Commission has conditioned 
the use of outside contractors to perform duties in connection with 
self-regulatory functions upon the contract market ``maintaining a 
sufficient degree of control over the persons under contract,'' and the 
person under contract having ``no conflict of interest.'' The 
Commission has further provided that, when using contractors to fulfill 
a self-regulatory function, it is the exchange's responsibility to 
ensure that its obligations under the Act are met. Comm. Fut. L. Rep. 
(CCH) para. 6430, CFTC, (May 13, 1975.) Accordingly, contract markets 
have contracted for the performance of various services related to 
their operations and self-regulatory responsibilities, including 
compliance with various core principles. For example, contract markets 
or DTFs reasonably may be expected to outsource to various contractors 
functions relating to operating their trading platforms or to 
disseminating information required to be made public.\58\
---------------------------------------------------------------------------

    \58\ Specifically, for example, the Merchants Exchange of St. 
Louis contracted with a technology company to operate its matching 
engine. A criterion for designation is that the contract market 
``establish and enforce rules defining * * * the operation of any 
electronic matching platform; and demonstrate that the trade 
execution facility operates in accordance with the rules.'' See 
section 5(b)(4) of the Act. Under Core Principle (2), the contract 
market must monitor and enforce compliance with those rules. 
Consistent with long-standing Commission interpretation, it is 
reasonable for a contract market or a DTF to outsource these 
functions, in whole or in part, to a technology contractor.
---------------------------------------------------------------------------

    In contrast to such contracting arrangements, a delegation confers 
upon another the authority to act in the delegating entity's name. The 
distinction between delegation of authority and contracting for 
services is particularly well-illustrated in matters related to member 
discipline and market surveillance. A market that delegates these 
functions empowers the delegatee to take appropriate remedial actions, 
including the sanctioning of members or market participants for rule 
violations. In contrast, a market may contract with an entity to 
conduct trading surveillance and to investigate the facts surrounding 
alleged rule infractions. Unlike a delegatee, a contractor would not 
have the authority to decide on behalf of the delegating entity whether 
an infraction had occurred or to impose remedial sanctions. These 
decisional functions can be exercised only by delegation of that 
authority to registered entities or a registered futures association, 
as Congress has provided.
    Further, although section 5c(b)(2) of the Act provides that the 
Commission would have oversight authority over a delegatee because it 
is a registered entity, the contract market or DTF that delegates 
responsibilities under the Act also ``shall remain responsible for 
carrying out the function.'' Therefore, regardless of whether a 
registered entity has delegated functions or contracted for services, 
the entity must assure itself that the delegated functions or 
contracted services will enable it to remain in compliance with the 
Act's requirements. Moreover, the registered entity must have a 
sufficient degree of control over the persons under contract because it 
remains the registered entity's ``responsibility to ensure that its 
obligations under the Act are met.'' Id.
3. Arbitration
    Rule 166.5 governs the use of pre-dispute arbitration agreements. 
Under subsection (g) of the proposed rule, an eligible contract 
participant would have retained the right to bring a private right of 
action under section 22 of the Act, but could have been required, in 
accordance with an amendment to section 14(g) of the Act,\59\ to waive 
the right to seek reparations.
---------------------------------------------------------------------------

    \59\ See CFMA, section 118.
---------------------------------------------------------------------------

    Several commenters questioned the need to retain the voluntariness 
requirement with respect to section 22 of the Act. SIA reasoned that, 
``(a)lthough the CFMA may not directly address the issue,'' the policy 
behind the CFMA's provision permitting FCMs to require eligible 
contract participant customers to waive their right to reparations, 
``would seem equally applicable in the case of pre-dispute arbitration 
agreements generally.'' CL 20-4. NFA also ``encourage[d] the Commission 
to provide more flexibility regarding pre-dispute arbitration 
agreements[,]'' and reasoned that any restrictions on such agreements 
are unnecessary with respect to eligible contract participants because 
``[t]hese customers are capable of negotiating favorable terms in their 
agreements with intermediaries.'' CL 16-2. Others opined that limiting 
the use of pre-dispute arbitration agreements for any customer 
contravenes prevailing law and policy regarding dispute resolution 
procedures. CL 11 at 2-6, CL 18 at 5-6.
    SIA, FIA, and NYMEX, advocated increased harmonization of the 
Commission's rules governing pre-dispute arbitration agreements with 
those governing pre-dispute arbitration agreements in the securities 
industry, particularly in light of the availability of security futures 
products. CL 10 at 4-5, CL 11 at 5-6, CL 20 at 4; see also CL 2-9 and 
CL 19-7. At a minimum, FIA suggested, the Commission should exclude 
claims relating to security futures products from the rule's 
applicability, particularly with respect to notice-registered FCMs. CL 
11 at 5-6. FIA further suggested that the Commission's rules permit 
FCMs to use the disclosure statement required on the

[[Page 42267]]

securities side of a dually registered broker-dealer/FCM.\60\
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    \60\ FIA also specifically recommended that the Commission 
decline to adopt proposed rule 166.5, while removing part 180. CL 11 
at 6. NFA commented that the Commission should provide that 
arbitration agreements bind both the customer and the intermediary 
equally. CL 16 at 2.
---------------------------------------------------------------------------

    In the final rules, the Commission has decided to remove any 
limitation on the FCM's use of account opening pre-dispute arbitration 
agreements for eligible contract participants. As several commenters 
noted, this is consistent with the CFMA, which permits FCMs to require 
that eligible contract participant customers waive their right to 
reparations as a condition of opening an account. It also should 
facilitate the ability of an FCM that is also a broker-dealer to use a 
single agreement with those customers.\61\ With regard to customers who 
are not eligible contract participants, the Commission is retaining the 
voluntariness requirement in its current form. However, it will further 
consider the issue as part of its study on the regulation of 
intermediaries and as part of its rules implementing the provisions of 
the Act relating to security futures products.
---------------------------------------------------------------------------

    \61\ A number of the above comments relating to greater 
harmonization of account opening disclosures to customers of dually 
registered FCMs/broker-dealers are outside of the scope of this 
rulemaking. Nevertheless, the Commission agrees that these issues 
are important and should be addressed, including the feasibility of 
using the disclosure currently mandated for securities customers for 
commodity customers as well. See, e.g., Rule 3110(f) of the National 
Association of Securities Dealers, Inc.;. see also 64 FR 66681 (Nov. 
29, 1999) (Self-Regulatory Organizations; Notice of Filing of 
Proposed Rule Change by the National Association of Securities 
Dealers, Inc. Relating to Amendments to NASD Rule 3110(f) Governing 
Use of Predispute Arbitration Agreements with Customers).
---------------------------------------------------------------------------

4. Contract Approval Fees
    Prior to the CFMA's amendments to the Act, boards of trade were 
required to be designated as a contract market in each commodity that 
they listed for trading. The CFMA amended the Act, in part, by 
providing that the facility must be designated as a ``contract market'' 
or registered as a DTF, that the contract market or DTF may list new 
products for trading by certification, and that they may voluntarily 
request Commission approval of those products. The Commission proposed 
to amend current 17 CFR part 5, Appendix B, to clarify that 
applications for voluntary product approval must be accompanied by a 
service fee.\62\ No comments were received and the Commission is 
adopting the provision as proposed. The Commission, in a separate 
notice of final rulemaking published elsewhere in this edition of the 
Federal Register, is revising the fees charged for this service.
---------------------------------------------------------------------------

    \62\ The Commission also proposed to redesignate the Appendix as 
Appendix B to Part 40. Previously, in November 1999, the Commission 
proposed to eliminate fees for contract market designation 
applications in connection with its adoption of Rule 5.3 that 
allowed exchanges to list new contracts by certification (64 FR 
66432, Nov. 26, 1999). The Commission deferred action while it 
considered additional regulatory reform.
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III. Section 4(c) Findings

    Some of the rules contained in this Federal Register notice are 
being adopted 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.
    When it proposed these rules, the Commission made a preliminary 
determination that the exemptions contained therein would be consistent 
with the public interest because they provide registered entities with 
greater procedural flexibility than is contained in the Act. For 
instance, pursuant to rule 38.4, contract markets may request 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 rules contain a less 
burdensome certification procedure than that provided for in the Act. 
The Commission invited public comment on its preliminary determination 
that this exercise of its exemptive authority would be consistent with 
the public interest. As noted above, the commenters broadly supported 
these exemptive rules. Accordingly, the Commission finds under section 
4(c) of the Act that the exemptions are consistent with the public 
interest.

IV. Cost-Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA, 
requires the Commission, before issuing a new regulation under the Act, 
to consider the costs and benefits of its action. The Commission 
understands that, by its terms, section 15 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 simply requires the Commission to ``consider 
the costs and benefits'' of its action.
    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; (4) sound risk management practices; and (5) 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 Commission's proposal contained an analysis of its 
consideration of these costs and benefits and solicited public comment 
thereon. 66 FR at 14267. The Commission specifically invited commenters 
to submit any data that they had quantifying the costs and benefits of 
the proposed rules with their comment letters. Id. The Commission has 
considered all the comment letters received, some of which contained 
narrative discussion of the costs and benefits of specific provisions 
of this rule package, but none of which set forth any data that 
quantified such costs and benefits.
    The Commission has considered the costs and benefits of this rule 
package in light of the specific areas of concern identified in section 
15. The Commission has endeavored in this rule package to impose the 
minimum requirements necessary to enable the Commission to perform its 
oversight functions, to carry out its mandate of assuring the continued 
existence of competitive and efficient markets and to protect the 
public interest in markets free of fraud and abuse. After considering 
their costs and benefits, the Commission has decided to adopt these 
rules as discussed above.

V. Implementation Issues; No-Action

    In light of Congress's intent to implement the changes of the CFMA 
without delay, the Commission determined when it proposed these rules 
that it would not bring any enforcement action against any person who 
complied with the proposed rules during the transition period between 
the

[[Page 42268]]

effective date of the amendments to the Act (generally, December 21, 
2000) and the adoption of final implementing regulations. 66 FR at 
14268. At that time, the Commission also advised persons relying on 
that no-action position that they would be required to bring their 
conduct into compliance with the final rules to the extent that the 
final rules differ from the proposed rules. Id.
    The rules being adopted today will become effective October 9, 
2001. The Commission will not bring any enforcement action against any 
person who complies with the final rules during the period between 
their adoption and effective date.

VI. 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.\63\ In its previous 
determinations, the Commission has concluded that contract markets are 
not small entities for the purpose of the RFA.\64\ The Commission 
proposed 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. 66 FR at 
14268. In its proposing release, the Commission also observed that the 
rules authorize these trading facilities to operate in a less regulated 
environment than may currently be the case and that, consequently, the 
rules should not result in, or should result in only a de minimis, 
increase in the regulatory requirements that apply to contract markets 
and other trading facilities. The Commission invited the public to 
comment on its proposed determination that the new categories of 
trading facilities covered by these rules would not be small entities 
for purposes of the RFA and on its finding of small entity impact. The 
Commission received no comments on its proposed determination or on its 
proposed finding.
---------------------------------------------------------------------------

    \63\ 47 FR 18618-21 (Apr. 30, 1982).
    \64\ 47 FR 18618, 18619 (discussing contract markets).
---------------------------------------------------------------------------

    The Commission hereby determines that the new categories of trading 
facilities covered by these rules (derivatives transaction execution 
facilities, exempt boards of trade and exempt commercial markets) are 
not small entities for purposes of the RFA. Furthermore, the Commission 
does not believe that these rules, as adopted, will 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 rule amendments will not have a 
significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act of 1995

    This rulemaking contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.), the Commission has submitted a copy of these rules to the Office 
of Management and Budget for its review. See 44 U.S.C. 3507(d)(1). No 
comments were received in response to the Commission's invitation in 
the notice of proposed rulemaking to comment on any potential paperwork 
burden associated with these regulations. See 44 U.S.C. 3507(d)(2).
    The final rules contain several disclosure requirements. Exempt 
commercial markets may not represent that they are regulated (rule 
36(c)). In addition, DTFs and contract markets must disclose 
information related to prices, bids and offers and certain trading 
information (part 37, Appendix B, Core Principles 4 and 5; part 38, 
Appendix B, Core Principles 7, 8 and 10.)
    The final rules also contain several reporting requirements. Exempt 
boards of trade and exempt commercial markets must notify the 
Commission that they are engaging in business (rules 36.2(b) and 
36.3(a)). Contract markets and DTFs must file applications for 
designation and registration, respectively, and must certify that 
certain rules are consistent with the Act (rules 37.5, 37.7, 38.3, 
38.4, 40.2 and 40.7).
    The final rules also require the collection of certain information 
from exempt boards of trade, exempt commercial markets, contract 
markets and DTFs. The Commission may not conduct or sponsor, and a 
person is not required to respond to an information collection unless 
it displays a currently valid OMB control number. The Commission has 
requested a control number for these information collections from OMB.

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 amends Chapter I of Title 17 of the 
Code of Federal Regulations as follows:

[[Page 42269]]

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 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. 106-554, 
114 Stat. 2763 (2000).


    2. Section 1.1 is 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 section shall be applicable to 
accounts, agreements, contracts, or transactions described in section 
2(c)(1) of the Act, to the extent that the Commission exercises 
jurisdiction over such accounts, agreements, contracts and 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, contract 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 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 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, 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 paragraph (a) of this section.


Secs. 1.41, 1.41b, 1.43, 1.45, 1.50, and 1.51  [Removed]

    5. Sections 1.41, 1.41b, 1.43, 1.45, 1.50 and 1.51 are removed and 
reserved.

PART 15--REPORTS--GENERAL PROVISIONS

    6. The authority citation for Part 15 is revised to read as 
follows:

    Authority: 7 U.S.C. 2, 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).


    7. Section 15.05 is 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 registered 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 registered derivatives transaction execution facility. Service or 
delivery of any communication issued by or on behalf of the Commission 
to a designated contract market or registered 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 registered 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 
registered 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 registered 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 registered 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 registered 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

[[Page 42270]]

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 registered 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, NW., Washington, DC 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 registered 
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 registered 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 registered 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 registered 
derivatives transaction execution facility on which all transactions of 
foreign brokers, their customers or foreign traders in futures or 
option contracts, or other instruments subject to the Act pursuant to 
section 5a(g) of the Act, 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.

    8. Part 36 is 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 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:
    (i) 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; or
    (ii) Attach its initial trading protocols and any amendments 
thereto in hard copy form to the notification required in paragraph (a) 
of this section and 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.

[[Page 42271]]

    (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 Secs. 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 represent in the notification provided under 
paragraph (a) of this section that it requires, and require, that each 
participant agree to comply with all applicable law 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.

    9. Part 37 is 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), 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, 1.59(d), 
1.63(c), 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.


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;
    (2) Commodities that are a security futures product, and the 
registered derivatives transaction execution facility is a national 
securities exchange registered under the Securities Exchange Act of 
1934;
    (3) Commodities for which the Commission has determined, based on 
the market characteristics and surveillance history, and the 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; 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.
    (5) The commodities that meet the criteria of paragraph (a)(1) of 
this section are the commodities defined in section 1a(13) of the Act 
as ``excluded commodities.''
    (6) The Commission may make the determination described in 
paragraph (a)(3) of this section by rule, regulation or order, after 
notice and an opportunity for a hearing through submission of written 
data, views and arguments. A registered derivatives transaction 
execution facility may request that the Commission make such an 
individualized determination by filing with the Secretary of the 
Commission at its Washington, DC headquarters a petition that includes:
    (i) The terms and conditions of the product to be listed; and
    (ii) 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:
    (A) A high level of cash-market liquidity;
    (B) Cash-market bid-ask spreads that are narrow relative to traded 
values;
    (C) Relatively frequent cash market transactions involving 
participants that represent major segments of the industry;
    (D) The absence of material impediments to participation in the 
cash market by commercial entities;
    (E) Transfer of ownership of the cash commodity that is easily and 
readily accomplished at minimal cost;
    (F) 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;
    (G) A history of actual trading experience that the contract or 
product's terms and conditions provide for a deliverable supply, or a 
reliable and acceptable cash-settlement procedure, that is adequate to 
minimize the threat of market abuses such as price manipulation and 
distortions, congestion, and defaults; and
    (H) Procedures to effectively oversee the market, including a large 
trader

[[Page 42272]]

reporting system, as well as a history of active surveillance to 
prevent or mitigate market problems.
    (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 registered 
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 Secretary of the Commission at its Washington, DC headquarters 
a copy of the facility's rules (which may be trading protocols) or a 
list of the designated contract market's rules that apply to operation 
of the derivatives transaction execution facility, 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;
    (5) The applicant identifies with particularity information in the 
application that will be subject to a request for confidential 
treatment and supports that request for confidential treatment with 
reasonable justification; and
    (6) The applicant has not instructed the Commission in writing at 
the time of submission of the application or during the review period 
to review the application pursuant to the time provisions of and 
procedures under section 6 of the Act.
    (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 sections 
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 such other employee or employees 
as the Directors may designate from time to time, 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

[[Page 42273]]

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 Secretary of the 
Commission at its Washington, DC 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, as appropriate to the market, 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 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, derivatives 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 Secretary of 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 derivatives 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 Secretary of 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.

[[Page 42274]]

    (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) Notwithstanding the forty-five day review period for voluntary 
approval under Sec. 40.3(b) of this chapter, the operating rules and 
the terms and conditions of one product submitted for voluntary 
Commission approval under Sec. 40.3 of this chapter, that has been 
submitted with, and at the same time as, an application for 
registration as a derivatives transaction execution facility, will be 
deemed approved by the Commission thirty days after receipt by the 
Commission, or at the conclusion of such extended period as provided 
under Sec. 40.3(c) of this chapter.
    (3) 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 derivatives 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 derivatives 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, or the resulting 
transactions are maintained in accounts carried by, a registered 
futures commission merchant or introduced by an introducing broker 
subject to Sec. 1.37 of this chapter.
    (e) Identify persons subject to fitness requirement. Upon request 
by any representative of the Commission, a registered derivatives 
transaction execution facility shall furnish to the Commission's 
representative 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 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 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 sections 5a(c) 
and 6 of the Act and Sec. 37.5, on meeting the criteria for 
registration both initially and on an ongoing basis. 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 Sec. 37.5(b).
    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

[[Page 42275]]

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 to deter abuses by effective and 
affirmative rule enforcement, including documentation of the 
facility's authority to do so; such trading and participation rules 
should be designed with adequate specificity. The submission should 
include documentation on the ability of the facility either to 
obtain necessary information or to provide market 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 on a best price/earliest time 
basis should include a brief explanation of the alternative 
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 adopted by the Commission on 
November 21, 1990 (55 FR 48670), as supplemented in October 2000, 
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 (but not necessarily a third-party 
contractor).
    (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 members and non-intermediated market participants, 
appropriate margin forms, and appropriate default rules and 
procedures. If cleared, agreements, contracts and transactions in 
excluded or exempt commodities that are traded on a DTF may be 
cleared through clearing organizations other than DCOs registered 
with the Commission. 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 registered 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 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 appendix.
    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 to detect and deter abuses by 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/or terminate activities or access of a member, 
including members with trading privileges but having no, or only 
nominal equity, in the facility and non-member market participants 
or, in the case of a derivatives transaction execution facility 
restricting its traders to

[[Page 42276]]

eligible commercial entities, the authority and ability to terminate 
activities or access of such a member. In either case, any 
termination should be carried out pursuant to clear and fair 
standards that are available and transparent to the member or market 
participant.
    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 to detect and deter abuses 
through 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 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.
    The Commission considers that the public disclosure of 
information required under the core principle refers to disclosure 
to market participants, where the facility's user agreement requires 
all market participants to keep such information confidential. 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, and financial integrity protections, 
including whether eligible contract participants will have the right 
to opt out of segregation of customer funds. Such information may be 
made publicly available through the derivatives transaction 
execution facility's website. The facility should also, as 
appropriate to the market, 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 core 
principle.
    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. In addition, persons who have governing obligations or 
responsibilities, or who exercise disciplinary authority, should not 
have a significant history of serious disciplinary offenses, such as 
those that would be disqualifying under Sec. 1.63 of this chapter. 
Eligible contract participants or eligible commercial entities who 
are members 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 ownership 
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 greater than a ten percent ownership 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.
    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

[[Page 42277]]

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.

    10. 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, 1.12(e), 1.31, 1.38, 1.52, 1.59(d), 1.63(c), 1.67, 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;
    (5) The applicant identifies with particularity information in the 
application that will be subject to a request for confidential 
treatment and supports that request for confidential treatment with 
reasonable justification; and
    (6) The applicant has not instructed the Commission in writing at 
the time of submission of the application or 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, as appropriate to the market, 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 members with trading privileges but having no, or only nominal, 
equity, in the facility and non-member market participants of the 
contract market by expelling or by denying future access, either 
directly or indirectly, 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 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 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 Secretary of the 
Commission at its Washington, DC, headquarters such a request. 
Withdrawal of an application for designation 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 such other employee or employees as the Directors may 
designate from time to time, with the concurrence of the General 
Counsel

[[Page 42278]]

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. (1) 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.
    (2) Notwithstanding the forty-five day review period for voluntary 
approval under Secs. 40.3(b) and 40.5(b) of this chapter, the operating 
rules and the terms and conditions of products submitted for voluntary 
Commission approval under Secs. 40.3 or 40.5 of this chapter that have 
been submitted at the same time as, or while an application for 
contract market designation is pending, will be deemed approved by the 
Commission no earlier than the facility is deemed to be designated.
    (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 sections 5(b) and 6 of the Act and 
Sec. 38.3, on meeting the criteria for designation both initially 
and on an ongoing basis. 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 appendix.
    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 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) Establishing and enforcing trading rules to ensure fair and 
equitable trading on a contract market, among other things, includes 
providing to market participants, on

[[Page 42279]]

a fair, equitable and timely basis, information regarding, prices, 
bids and offers, as applicable to the market.
    (b) Such trading rules should be designed with adequate 
specificity.
    (c) 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''), and adopted by the Commission on November 21, 1990 (55 
FR 48670), as supplemented in October, 2000, 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 
(but not necessarily a third-party contractor).
    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 members and non-intermediated market 
participants, margining systems, appropriate margin forms and 
appropriate default rules and procedures. Absent Commission action 
pursuant to its exemptive authority under section 4(c) of the Act, 
transactions executed on the contract market (other than stock 
futures products), if cleared, must be cleared through a derivatives 
clearing organization registered as such with the Commission. 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 the activities of a member or of a market 
participant could be established in a contract market's rules, user 
agreements or other means. An organized exchange or a trading 
facility could satisfy this criterion for a member with trading 
privileges but having no, or only nominal, equity, in the facility 
and for a non-member market participant 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 
appendix, 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 the 
contract market's members and by non-intermediated market 
participants. 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 paragraph (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 paragraph (b) following each core 
principle. Boards of trade that follow the specific practices 
outlined under paragraph (b) for any core principle in this appendix 
will meet the applicable core principle. Paragraph (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 
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

[[Page 42280]]

collect information and documents on both a routine and non-routine 
basis including the examination of books and records kept by the 
contract market's members and by non-intermediated market 
participants. 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 delegates the responsibility of carrying out a 
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 the activities of a 
member or market participant as well as the authority and ability to 
terminate the activities of a member or market participant pursuant 
to clear and fair standards. An organized exchange or a trading 
facility could satisfy this criterion for members with trading 
privileges but having no, or only nominal, equity, in the facility 
and non-member market participants, by expelling or denying such 
persons future access upon a determination 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 market 
participant pursuant to clear and fair standards that are available 
to market participants. 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 to the size and ownership of deliverable 
supplies--the existing supply and the future or potential supply, 
and 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 of its market participants and, if 
applicable, should provide for such access through its agreements 
with its third-party provider of clearing services. 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).
    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, and to facilitate orderly 
liquidation of expiring futures contracts, markets may need to set 
limits on traders' positions for certain commodities. These position 
limits specifically may exempt bona fide hedging, permit other 
exemptions, or set limits differently by markets, by delivery 
months, or by time periods. For purposes of evaluating a contract 
market's 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) Provisions concerning speculative position limits are set 
forth in part 150. In general, position limits are not necessary for 
markets where the threat of excessive speculation or manipulation is 
nonexistent or very low. Thus, contract markets do not need to adopt 
speculative position limits for futures markets on major foreign 
currencies, contracts based on certain financial instruments having 
very liquid and deep underlying cash markets, and contracts 
specifying cash settlement where the potential for distortion of 
such price is negligible. Where speculative position limits are 
necessary, acceptable speculative-limit levels typically should be 
set in terms of a trader's combined position in the futures contract 
plus its position in the related option contract (on a delta-
adjusted basis).
    (3) 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.
    (4) Spot-month limits should be adopted for markets based on 
commodities having more limited deliverable supplies or where 
otherwise necessary to minimize the susceptibility of the market to 
manipulation or price distortions. The level of the spot limit 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.
    (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.

[[Page 42281]]

    (6) 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.
    (7) Contract markets should establish a program for effective 
enforcement of these limits Contract markets should use their LTRS 
to monitor and enforce daily compliance with position limit rules. 
The Commission notes that a contract market may allow traders to 
periodically apply to the contract market for an exemption and, if 
appropriate, be granted a position level higher than the applicable 
speculative limit. The contract market should establish a program to 
monitor approved exemptions from the limits. The position levels 
granted under such hedge exemptions generally 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.
    (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 
should consider appropriate actions, regardless of whether the 
violation is by a non-member or 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. The Commission will consider for approval all contract 
market position limit rules.
    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 avoid conflicts of interest while 
carrying out such decision-making. 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, minimizing 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 including non-
intermediated market participants of the contract market to another, 
or alter the delivery terms or conditions, or, if applicable, should 
provide for such actions through its agreements with its third-party 
provider of clearing services.
    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, market 
participants 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, 
market participants and the public. Provision of all such 
information to market participants and the public could be by timely 
placement of the information on a contract market's web site.
    (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) A competitive, open and efficient 
market and mechanism for executing transactions includes a board of 
trade's methodology for entering orders and executing transactions.
    (2) 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''), and adopted by the Commission on November 21, 1990 (55 
FR 48670), as supplemented in October 2000, 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.
    (3) 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 Information 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

[[Page 42282]]

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 
or other disposition. The contract market must create and maintain 
an electronic transaction history database that contains information 
with respect to transactions executed on the designated contract 
market.
    (2) An acceptable audit trail 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 10.
    (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) Tansaction 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) the categories of participants 
for which such trades are executed, including whether the person 
executing a trade was executing it for his/her own account or an 
account for which he/she has discretion, his/her clearing member's 
house account, the account of another member, including market 
participants present on the floor, or the account of any other 
customer; (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 other than transactions in security 
futures products, should be provided through a Commission-registered 
derivatives clearing organization. In addition, a designated 
contract market should maintain the financial integrity of its 
transactions by maintaining minimum financial standards for its 
members and non-intermediated market participants and by 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 from its members. 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. The contract market should 
audit its members that are intermediaries for compliance with the 
foregoing rules as well as applicable Commission rules. These audits 
should be conducted consistent with the guidance set forth in 
Division of Trading and Markets Interpretations 4-1 and 4-2. A 
contract market may delegate to a designated self-regulatory 
organization responsibility for receiving financial reports and for 
conducting compliance audits pursuant to the guidelines set forth in 
Sec. 1.52 of this chapter.
    (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 make them available on a voluntary basis, either 
directly or through another self-regulatory organization, to 
customers that are non-eligible contract participants.
    (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:
    (i) Provide the customer with an opportunity to have his or her 
claim decided by an objective and impartial decision-maker,
    (ii) Provide each party with the right to be represented by 
counsel, at the party's own expense,
    (iii) Provide each party with adequate notice of the 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) Authorize prompt, written, final settlement awards that are 
not subject to appeal within the contract market, and
    (v) Notify the parties of the fees and costs that may be 
assessed.
    (3) The use of such procedures should be voluntary for customers 
who are not eligible contract participants, 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 core 
principle).
    (a) Application guidance. (1) A designated contract market 
should have appropriate eligibility criteria for the categories of

[[Page 42283]]

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. In addition, persons who have 
governing obligations or responsibilities, or who exercise 
disciplinary authority, should not have a significant history of 
serious disciplinary offenses, such as those that would be 
disqualifying under Sec. 1.63 of this chapter. Members with trading 
privileges but having no, or only nominal, equity, in the facility 
and non-member market participants who are not intermediated and 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 ``market 
participant.'' Natural persons who directly or indirectly have 
greater than a ten percent ownership 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 provides 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.
    (a) Application guidance. 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 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.
    (b) Acceptable practices. [Reserved]
    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.
    (a) Application guidance. The composition of a mutually-owned 
contract market should fairly represent the diversity of interests 
of the contract market's market participants.
    (b) Acceptable practices. [Reserved]
    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]


    11. Chapter I of 17 CFR is 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 [Reserved]

Appendix B to Part 40--Schedule of fees.

Appendix C to Part 40 [Reserved]

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

Sec. 40.1  Definitions.

    As used in this part:
    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 sixty 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;

[[Page 42284]]

    (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 registered derivatives 
transaction execution facility), a registered entity must file with the 
Secretary of 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, or the rules establishing the terms and conditions of 
products that make them acceptable for clearing, and a certification by 
the registered entity that the trading product or other instrument, or 
the clearing of the trading product or other instrument including any 
rules establishing the terms and conditions of products that make them 
acceptable for clearing), complies with the Act and rules thereunder.


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 paragraph (a) 
of this section; and
    (2) The submitting entity does not amend the terms or conditions of 
the 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 submitting entity 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 product 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 product 
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 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 product 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.

    (a) Designated contract markets must submit for Commission approval 
under the procedures of Sec. 40.5, prior to its implementation, any 
rule or rule amendment that, for a delivery month having open interest, 
would 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.
    (b) The following rules or rule amendments are not material 
changes:
    (1) Changes in trading hours;
    (2) Changes in lists of approved delivery facilities pursuant to 
previously set standards or criteria;
    (3) 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;
    (4) Reductions in the minimum price fluctuation (or ``tick'');
    (5) Changes required to comply with a binding order of a court of 
competent jurisdiction, or of a rule, regulation or order of the 
Commission or of another Federal regulatory authority; and
    (6) Any other rule, the text of which has been submitted to the 
Secretary of the Commission at least ten days prior to its 
implementation at its Washington, D.C. headquarters and that has been 
labeled ``Non-material Agricultural Rule Change,'' and with respect to 
which the Commission has not notified the contract market during that 
period that the rule appears to require or does require prior approval 
under this section.


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 Secretary of 
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. One copy of each 
submission shall be transmitted by the registered entity to the 
regional office of

[[Page 42285]]

the Commission having local jurisdiction over the registered entity. 
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 
or interpretation of the Commission's regulation.
    (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) 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 thirty 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 (other than a rule or rule amendment approved or 
deemed approved by the Commission under Sec. 40.5) only if:
    (1) The rule or rule amendment is not a rule or rule amendment of a 
designated contract market that materially changes 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 with the Commission at its Washington, D.C. headquarters and 
at the regional office having local jurisdiction, and the Commission 
has received the submission at its 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), 
shall, if practicable, be filed with the Commission prior to the 
implementation or, if not practicable, be filed with the Commission at 
the earliest possible time after implementation but in no event more 
than 24 hours after implementation; 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.

[[Page 42286]]

    (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 NW., 
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 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

[[Page 42287]]

    (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 A to Part 40 [Reserved]

Appendix B to Part 40--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, NW., 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.

Appendix C to Part 40 [Reserved]

Appendix A to Part 5 [Redesignated as] Appendix A to Part 40

Appendix E to Part 5 [Redesignated as] Appendix C to Part 40

PART 5--[REMOVED AND RESERVED]

    12. 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 amended by adding new Part 41 as 
follows:

PART 41--SECURITY FUTURES


41.1  [Reserved]

PART 166--CUSTOMER PROTECTION RULES

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

    Authority: 7 U.S.C. 1a, 2, 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. Section 166.5 is 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,
    (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, 
effects a transaction on such 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 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:

[[Page 42288]]

    (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 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. 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 provided for in the agreement.

PART 170--REGISTERED FUTURES ASSOCIATIONS

    16. The authority citation for Part 170 is 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 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 removed.

    Issued in Washington, DC, this 30th day of July, 2001, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.

Dissent of Commissioner Thomas J. Erickson Rules Implementing the 
Commodity Futures Modernization Act (CFMA) With Respect to Transaction 
Execution Facilities

    I dissent from the publication of these final rules because they 
fall well short of the minimum standards necessary to maintain 
integrity of markets and protect customers from trade practice 
abuses. Today, the Commission promulgates final rules intended to 
implement the Commodity Futures Modernization Act of 2000.\1\ While 
the Commission's rules reflect the thrust of the CFMA, they fail to 
recognize the discretion afforded the agency to ensure that the

[[Page 42289]]

markets it oversees remain open, fair and transparent.
---------------------------------------------------------------------------

    \1\ See Commodity Futures Modernization Act of 2000, Appendix E, 
Pub. L. No. 106-554, 114 Stat. 2763 (2000).
---------------------------------------------------------------------------

    I am confident that the new regulatory regime will foster the 
competitiveness of U.S. derivatives marketplaces, and that is good. 
I am less confident that the regulations implementing this new 
regime will foster open and competitive bids and offers for 
transactions in markets, which for customers and commercial 
participants is bad. Thus, I have repeatedly requested comment on 
those issues that would enable this agency to be confident that its 
regulatory framework retains tools necessary to detect and deter 
manipulation, detect and deter abusive trade practices, and 
vigorously enforce our fraud authority.\2\ Where this Commission has 
a regulatory interest, it should be demanding the maximum 
transparency allowed by law.\3\ Today's rules, I fear, leave 
enormous gaps in our regulatory oversight regime.
---------------------------------------------------------------------------

    \2\ Throughout the process of developing and implementing a new 
regulatory framework for the oversight of derivatives markets, the 
Commission, in my estimation, has not adequately taken into account 
the public interest by failing to request comment on issues salient 
to our ability to carry out our primary regulatory obligations. I 
have taken exception with the Commission's process in this regard. 
The resulting public record, in this case, lacks serious 
consideration of the public interest and has resulted in rules that 
require little and expect even less.
    \3\ Certainly, for example, the Commission has the discretion to 
require large trader reporting in DTF markets. In fact, the U.S. 
Department of the Treasury requested as much in comments submitted 
to the Commission on April 9, 2001. Treasury recommended ``that 
there be large trader reporting requirements for any exempt security 
futures that trade on a DTF as well as on a regulated contract 
market.'' Even with such a direct request from a fellow regulator, 
the Commission has failed to exercise its discretion to insist upon 
greater transparency.
---------------------------------------------------------------------------

    The longstanding tradition of public, open markets in the United 
States seems to have given way to the notion that private, closed 
markets are superior in every respect. Perhaps private, closed 
markets are more expedient for their participants. But it will be 
incumbent on industry participants to see to it that the public 
interest in open, fair and transparent markets is not compromised.
    In the end, public confidence in our markets will depend upon 
how the industry adapts to and carries out its new responsibilities 
under the law and these regulations. I sincerely hope that the 
derivatives markets will find self-interest to be a powerful 
motivator and that market participants will reward those markets 
adhering to the highest standards of market integrity.
/S/--------------------------------------------------------------------
Commissioner Thomas J. Erickson

Date: 7/26/01
[FR Doc. 01-19496 Filed 8-9-01; 8:45 am]
BILLING CODE 6351-01-P