[Federal Register Volume 66, Number 166 (Monday, August 27, 2001)]
[Rules and Regulations]
[Pages 44960-44967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21452]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 41 and 140

RIN 3038-AB82


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: The Commodity Futures Trading Commission hereby adopts new 
regulations providing notice procedures for a national securities 
exchange, a national securities association, or an alternative trading 
system to become a designated contract market in security futures 
products, in accordance with the Commodity Futures Modernization Act of 
2000. Such notice-designated contract markets would be subject to 
certain limited filing requirements, based on various provisions of the 
Commodity Exchange Act. Notice-designated contract markets may apply 
for exemptive relief from any section of the Commodity Exchange Act or 
regulations thereunder, to the extent such an exemption is necessary or 
appropriate in the public interest and is consistent with the 
protection of investors.

EFFECTIVE DATE: August 21, 2001.

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

SUPPLEMENTARY INFORMATION:

I. Background

    The Commodity Futures Modernization Act of 2000 (``CFMA'')\1\ 
amended the Commodity Exchange Act (``Act'') to permit the trading of 
security futures products,\2\ subject to the joint jurisdiction of the 
Commodity Futures Trading Commission (``Commission'' or ``CFTC'') and 
the Securities and Exchange Commission (``SEC'').\3\ Security futures 
products may be traded on any board of trade either designated as a 
contract market (``DCM'') by the Commission pursuant to section 5 of 
the Act or registered with the Commission as a derivatives transaction 
execution facility (``DTF'') pursuant to section 5a of the Act.\4\
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    \1\Pub. L. 106-554, 114 Stat. 2763 (December 21, 2000).
    \2\The term ``security futures product'' is defined in section 
1a(32) of the Act to mean ``a security future or any put, call, 
straddle, option, or privilege on any security future.'' The term 
``security future'' is defined in section 1a(31) of the Act and 
specifically excludes, among other things, ``excluded swap 
transactions'' (as defined in section 2(g) of the Act). Because the 
CFMA also provides that options on security futures cannot be traded 
until at least December 21, 2003, security futures are the only 
security futures products that may be available for trading before 
such date. See section 2(a)(1)(D)(iii)(II) of the Act.
    \3\See section 251(a)(2) of the CFMA. Prior to passage of the 
CFMA, section 2(a)(1)(B)(v) of the Act prohibited the trading of 
security futures products.
    \4\The CFMA prescribes certain dates before which trading in 
security futures products shall not commence. Specifically, trading 
on a principal-to-principal basis between eligible contract 
participants (``ECPs'') was not permissible prior to August 21, 
2001, and retail trading may not begin until December 21, 2001. 
However, both of these dates are conditioned upon the registration 
of a futures association as a national securities association under 
the Securities Exchange Act of 1934 (``'34 Act''). See section 
202(a)(5) of the CFMA and section 6(g)(5) of the '34 Act.
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    Alternatively, section 5f of the Act permits certain entities that 
are otherwise regulated by the SEC to become designated contract 
markets for the limited purpose of trading security futures 
products.\5\ Specifically, any board of trade registered with the SEC 
as a national securities exchange pursuant to section 6(a) of the '34 
Act or as a national securities association

[[Page 44961]]

pursuant to section 15A(a) of the '34 Act, or that operates as an 
alternative trading system (``ATS'') as defined by section 1a(1) of the 
Act, shall be a designated contract market in security futures products 
(``SFPCM'') if:
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    \5\See section 252(a)(2) of the CFMA.

    (1) Such national securities exchange, national securities 
association, or alternative trading system lists or trades no other 
contracts of sale for future delivery, except for security futures 
products;
    (2) such national securities exchange, national securities 
association, or alternative trading system files written notice with 
the Commission in such form as the Commission, by rule, may 
prescribe containing such information as the Commission, by rule, 
may prescribe as necessary or appropriate in the public interest or 
for the protection of customers; and
    (3) the registration of such national securities exchange, 
national securities association, or alternative trading system is 
not suspended pursuant to an order by the Securities and Exchange 
Commission.\6\
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    \6\Section 5f(a) of the Act.

    The designation ``shall be effective contemporaneously with the 
submission of notice * * * to the Commission.''\7\ Moreover, section 
5f(b)(4) of the Act permits the Commission to exempt SFPCMs from any 
provision of the Act or regulations thereunder, and requires that the 
Commission determine procedures which would allow SFPCMs to apply to 
the Commission for such an exemption, ``to the extent [any] such 
exemption is necessary or appropriate in the public interest and is 
consistent with the protection of investors.''
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    \7\Id.
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    Accordingly, on May 31, 2001, the Commission proposed new 
regulations 41.31, 41.32, 41.33, and 41.34, which would apply to boards 
of trade seeking notice-designation as an SFPCM.\8\ In addition to 
these rule proposals, the Commission sought comment on a variety of 
related issues, including a potential disparity between the 
Commission's proposed notice-designation procedures and related notice-
registration procedures proposed by the SEC. The Commission received 
two comment letters.\9\
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    \8\See 66 FR 29517 (May 31, 2001). The comment period expired on 
July 2, 2001.
    \9\Comments were provided by the Chicago Board of Trade 
(``CBT'') on July 2, 2001, and by the American Stock Exchange 
(``AMEX'') on July 12, 2001.
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II. Final Rules

A. Regulation 41.1--Definitions

    To implement the procedures identified in regulations 41.31 through 
41.34, the Commission proposed to establish regulation 41.1, which 
would contain six definitions: ``alternative trading system''; board of 
trade''; ``national securities association''; ``national securities 
exchange''; ``rule''; and ``security futures product.'' The definitions 
of ``alternative trading system,'' ``board of trade,'' and ``security 
futures product'' would be taken verbatim from section 1a of the Act. 
The terms ``national securities exchange'' and ``national securities 
association'' would have the same meanings as in the ``34 Act, and the 
definition of ``rule'' would be identical to the definition found in 
Commission regulation 40.1.\10\ No comments were received regarding 
this rule, and the Commission has determined to adopt it as proposed.
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    \10\See 66 FR 42256 (Aug. 10, 2001). Commission regulations 
referred to herein are found at 17 CFR Ch. I (2000).
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B. Regulation 41.31--Notice--Designation

    Section 5f(a)(2) of the Act states that a board of trade may obtain 
designation as a contract market in security futures products by filing 
``written notice with the Commission in such form as the Commission, by 
rule, may prescribe containing such information as the Commission, by 
rule, may prescribe as necessary or appropriate in the public interest 
or for the protection of customers.'' The Commission therefore proposed 
new regulation 41.31, which would establish notice-designation 
procedures for any board of trade which operates as a national 
securities exchange, national securities association, or alternative 
trading system and which seeks designation as an SFPCM.
    The proposed content requirements of the notice include contact 
information, a description of the security futures products that would 
be traded, a copy of the rules of the board of trade, and five 
certifications derived from various requirements found in sections 5f 
and 2(a)(1)(D)(vii) of the Act.\11\ The Commission believes that this 
information is necessary in order to maintain communication with a 
board of trade and to receive information about its operations, two 
functions that are ``necessary or appropriate in the public interest or 
for the protection of customers.'' CBT is supportive of this proposed 
rule, stating that the Commission's approach is ``reasonable and 
consistent with the intent of the CFMA.''\12\ The Commission has 
determined to adopt regulation 41.31 as proposed.\13\
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    \11\Section 2(a)(1)(D)(vii) of the Act states: ``It shall be 
unlawful for a board of trade to trade or execute a security futures 
product unless the board of trade has provided the Commission with a 
certification that the specific security futures product and the 
board of trade, as applicable, meet the criteria specified in 
subclauses (I) through (XI) of [section 2(a)(1)(D)(i)], except as 
otherwise provided in [section 2(a;)(1)(D)(vi)].''
    \12\CBT's comment in this regard was a response to both the 
Commission's proposed regulation 41.31 and the request for comment 
regarding the potential disparity between the proposed notice-
designation procedures and the related SEC notice-registration 
procedures.
    \13\If a board of trade previously filed documents with the SEC 
containing information that satisfies any of these requirements, the 
Commission would accept copies of such documents in lieu of the 
required information.
    The Commission intends to amend regulation 41.31(a)(5)(iii) so 
that it cross-references regulations 41.22 and 41.23, rather than 
the Act, should regulations 41.22 and 41.23 become final. Proposed 
regulations 41.22 and 41.23 would establish listing standards for 
the trading of security futures products, pursuant to section 
2(a)(1)(D)(i) and (vii) of the Act. See 66 FR 37932 (July 20, 2001).
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C. Regulation 41.32--Continuing Obligations

    Proposed regulation 41.32 would establish a mechanism for the 
Commission to receive the following from an SFPCM:
    (1) Notification of any change in its regulatory status with the 
SEC or with a futures association registered under section 17 of the 
Act;\14\
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    \14\A change in regulatory status includes, among other things, 
suspension of registration pursuant to an order by the SEC, a switch 
in SEC registration from ``alternative trading system'' to 
``national securities exchange,'' or suspension or revocation of 
membership by a registered futures association.
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    (2) a certification consistent with the requirements of section 
2(a)(1)(D)(vii) of the Act each time the board of trade lists a new 
security futures product for trading;\15\
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    \15\See supra note 11.
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    (3) a copy of any new rules or rule amendments that relate to the 
trading of security futures products, including any operational rules 
and the terms and conditions of any security futures products;\16\
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    \16\A change in the clearing facilities by an SFPCM would be 
included in this category.
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    (4) upon request, information related to its business as a 
designated contract market in security futures products; and
    (5) upon request, a written demonstration, including supporting 
data, that the board of trade is in compliance with a specified 
provision of the Act or regulations thereunder.
    This information would facilitate the Commission's efforts in 
carrying out its market oversight responsibilities under the Act and 
would help ensure that SFPCMs continue to comply with the conditions of 
designation under section 5f(a) of the Act and regulation 41.31.\17\
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    \17\As is the case under regulation 41.31, if a board of trade 
previously filed documents with the SEC which contain information 
satisfying any of these proposed informational requirements, the 
Commission would accept copies of such documents in lieu of the 
required information.

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[[Page 44962]]

    As stated in the proposing release,\18\ these requirements are 
authorized by various recordkeeping and reporting provisions of the Act 
that are applicable to all designated contract markets. In particular, 
section 4g(b) of the Act requires that ``[e]very registered entity * * 
* maintain daily trading records * * * includ[ing] such information as 
the Commission shall prescribe by rule,''\19\ and section 4g(d) of the 
Act continues, ``[d]aily trading records shall be maintained in a form 
suitable to the Commission * * * . Reports shall be made from the 
records maintained * * * in such form as the Commission may 
prescribe.'' Moreover, sections 8(a)(1) and 2(a)(1)(D)(iv)(I) of the 
Act, respectively, permit the Commission to ``make such investigations 
as it deems necessary to ascertain the facts regarding the operations 
of boards of trade * * * subject to the provisions of this Act'' and to 
make ``such reasonable periodic or special examinations * * * as the 
Commission deems necessary or appropriate in the public interest, for 
the protection of investors, or otherwise in furtherance of the 
purposes of this Act.''\20\ Under section 3 of the Act, the Commission 
also has general responsibilities to prevent manipulation and other 
disruptions to market integrity, to ensure the financial integrity of 
all transactions subject to the Act, and to protect all market 
participants from fraud.
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    \18\See 66 FR 29517 at 29519.
    \19\The term ``registered entity'' is defined by Section 1a(29) 
of the Act to include DCMs, DTFs, derivatives clearing 
organizations, and SFPCMs.
    \20\The Commission's authority under section 2(a)(1)(D)(iv)(I) 
of the Act is subject to certain limitations appearing later in that 
provision.
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    The Commission stated in the proposing release, and reiterates now, 
that regulation 41.32 is not an exhaustive list of SFPCM regulatory 
requirements meant to supplant SFPCMs' statutory and other regulatory 
obligations.\21\ AMEX commented that SFPCMs would face regulatory 
uncertainties because the Commission ``did not identify the particular* 
* * regulations with which SFPCMs were expected to comply.''\22\ 
Because AMEX's concern in this instance is bound up with its concerns 
over proposed regulation 41.34, the Commission will address the AMEX 
comment below in section II.D. AMEX did not, however, take issue with 
any of the particular requirements of regulation 41.32, and the 
Commission has decided to adopt regulation 41.32 in substantially the 
same form as proposed.\23\
    Additionally, the proposing release noted the Commission's 
authority under Section 4i of the Act to collect information on the 
positions of large traders.\24\ This information ordinarily is provided 
to the Commission by futures commission merchants (``FCMs''), clearing 
members, and foreign brokers, pursuant to Part 17 of the Commission's 
regulations. Because Part 17 will apply to the trading of security 
futures products, but might fail to capture large trader information 
under certain circumstances, the Commission requested comment on 
amending Part 17.\25\ No comments were received on this issue. The 
Commission plans to address this issue separately in the near 
future.\26\
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    \21\For example, the Commission emphasized in the proposing 
release that an SFPCM would be subject to the requirements of Part 
16 of the Commission's regulations, but that the Commission would 
endeavor to limit its requests to information deemed necessary for 
routine market surveillance. The Commission also noted that SFPCM 
would be required to grant the Commission access to any books and 
records relating to transactions conducted in reliance on its 
designation as an SFPCM, pursuant to sections 4(a)(3), 4(b), 4g(b), 
and 4g(d) of the Act and Commission regulation 1.31. (Regulation 
1.31 has been reserved by the Commission's recent regulatory reform 
rulemaking. See 66 FR 42256 at 42277).
    \22\CBT was generally supportive of regulation 41.32.
    \23\Proposed regulation 41.32 has been modified in two respects. 
The Commission has determined to delete the first eight words from 
proposed regulation 41.32(a)(3). This deletion is made in order to 
eliminate any potential confusion regarding the inapplicability of 
Part 40 to SFPCMs, discussed infra section II.D. The Commission also 
added a clause to the end of paragraph (a) to notice that all 
filings made pursuant to regulation 41.32(a) shall be addressed to 
the Commission's Secretary at its Washington, D.C. headquarters.
    The Commission intends to amend regulation 41.32(a)(2) so that 
it cross-references regulation 41.22 and 41.23, rather than the Act, 
should requlations 41.22 and 41.23 become final. Proposed 
regulations 41.22 and 41.23 would establish listing standards for 
the trading of security futures products, pursuant to section 
2(a)(1)(D)(i) and (vii) of the Act. See 66 FR 37932 (July 20, 2001).
    \24\Section 4i of the Act prohibits any person to ``have or 
obtain a long or short position in any commodity or any future of 
such commodity equal to or in excess of such amount as shall be 
fixed from time to time by the Commission, unless such person files 
or causes to be filed with the properly designated officer of the 
Commission such reports regarding any [such] transactions or 
positions * * * * as the Commission may by rule or regulation 
require''.
    \25\For example, if an ATS operates a non-intermediated 
marketplace and notice-designates as an SFPCM, it is not clear who 
would be responsible for providing to the Commission any large 
trader information arising out of security futures product 
transactions conducted on that marketplace. The Commission therefore 
requested comment on amending Part 17 so that, in such 
circumstances, the ATS itself would be required to provide large 
trader position information that otherwise would be provided by an 
FCM.
    \26\The Commission also requested comment on whether there are 
other potential circumstances under which large trader position 
information might not be captured by Part 17, in its current form, 
particularly in light of this rulemaking. No comments were received. 
The Commission will address this issue when a need arises.
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D. Regulations 41.33(a)-(f), 41.34, and 140.99--Exemptions

    Section 5f(b)(4)(A) of the Act provides that the Commission ``by 
rule, regulation or order, may conditionally or unconditionally 
exempt'' any board of trade designated as an SFPCM from any provisions 
of the Act or regulations thereunder, to the extent that the exemption 
is necessary or appropriate in the public interest and is consistent 
with the protection of investors. Section 5f(b)(4)(B) directs the 
Commission to determine the procedures by which an exemptive order 
under section 5f(b)(4)(A) shall be granted, and vests the Commission 
with sole discretion to decline to entertain any application for such 
an order.
    Accordingly, the Commission proposed regulation 41.33, which would 
require an SFPCM seeking an exemption to file an application with the 
Commission containing various information, including: the name and 
address of the SFPCM requesting relief, and a contact person at the 
SFPCM; a certification that the SEC registration of the SFPCM is not 
suspended pursuant to an order of the SEC; an identification of the 
provision(s) from which the SFPCM is requesting relief and, if 
applicable, whether the SFPCM is subject to similar SEC provisions; the 
type of relief sought; and an explanation of the need for relief, 
including the extent to which such relief is necessary or appropriate 
in the public interest and consistent with the protection of investors.
    The Commission proposed that it would have 90 days to review the 
application, but could stay the review period at any time if it 
determined that the application was materially incomplete. Moreover, 
the Commission could, in its sole discretion, decline to entertain an 
application for any reason, without explanation, at any time during the 
review period. These exemptive order procedures would become an 
enumerated exception to the applicability of Commission Regulation 
140.99, which governs generally the form and manner of requests for 
exemptive letters.
    AMEX objected to the discretion that would be afforded Commission 
staff under this exemption process.\27\ It asserted that the Commission 
should modify proposed regulation 41.33:
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    \27\CBT did not comment on this proposed rule.

    (1) To require Commission review of SFPCM requests for exemptive 
orders using

[[Page 44963]]

the CFMA standard, that is, the ``necessary or appropriate in the 
public interest and is consistent with the protection of investors'' 
standard; and
    (2) To require the preparation of a written explanation upon 
request of the reasons for a denial of a request for an exemptive 
order.\28\

    \28\This argument was made in the alternative. AMEX's primary 
objection, addressed below, is that the Commission should publish 
``a comprehensive list of rules that SFPCMs should comply with.'' 
AMEX believes that if the Commission does not publish such a list, 
it should seek to minimize the discretion afforded Commission staff 
in the exemptive order application process.
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(emphasis in original)
    The Commission notes that proposed regulation 41.33(a) already 
requires that requests for exemptive orders be reviewed using the CFMA 
standard. Moreover, paragraphs (b) and (e) of proposed regulation 41.33 
would require that the Commission notify the board of trade of any 
decision in writing. The Commission believes that this is appropriate 
in light of section 5f(b)(4)(B) of the Act, which states that ``the 
Commission shall, by rule or regulation, determine the procedures under 
which an exemptive order under this section is granted and may, in its 
sole discretion, decline to entertain any application for an order of 
exemption under this section.'' This grant of exemptive authority by 
Congress gives the Commission ``sole discretion'' whether to decline to 
entertain exemptive order applications. If the Commission were to bind 
itself to a requirement that a written explanation be provided, it 
would effectively undermine its authority to decline to entertain an 
application; a formal, written explanation under such circumstances 
would be indistinguishable from a denial of the application. In order 
to maintain conformity between the statutory and regulatory provisions, 
the Commission has determined that it will adopt regulation 41.33 as 
proposed.\29\ Nonetheless, as discussed below, the Commission welcomes 
any suggestions concerning potential exemptions, and is committed to 
providing a thorough, expeditious review to any petitions filed 
pursuant to these provisions.
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    \29\Adoption of regulation 41.33 includes an associated 
amendment to Commission regulation 140.99, which makes applications 
for exemptive orders submitted pursuant to regulation 41.33 an 
exception to the procedures identified in regulation 140.99.
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    The Commission also proposed regulation 41.34, which would list the 
provisions of the Act from which SFPCMs would be exempted. Paragraph 
(a) lists each of the statutory provisions enumerated in section 
5f(b)(1) of the Act.\30\ Paragraph (b), which originally contained only 
section 6(a) of the Act,\31\ has been expanded to include Parts 38 and 
40 of the regulations.\32\ Because SFPCMs are exempted from sections 5 
and 5c of the Act,\33\ which are the source for much of the authority 
for Parts 38 and 40, the Commission has modified regulation 41.34 to 
reflect that SFPCMs also are exempt from the provisions of Parts 38 and 
40.\34\
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    \30\Section 5f(b)(1) of the Act states--
    A national securities exchange, national securities association, 
or alternative trading system that is designated as a contract 
market pursuant to section 5f shall be exempt from the following 
provisions of this Act and the rules thereunder.
    (A) Subsections (c), (e), and (g) of section 4c.
    (B) Section 4j.
    (C) Section 5.
    (D) Section 5c.
    (E) Section 6a.
    (F) Section 8(d).
    (G) Section 9(f).
    (H) Section 16.
    \31\Section 6(a) of the Act addresses the application process 
applicable to DCMs and DTFs.
    \32\See 66 FR 42256 (Aug. 10, 2001) (promulgating, among other 
things, Parts 38 and 40 of the Commission's regulations). Although 
proposed regulation 41.34(b) only included section 6(a) of the Act, 
the proposing release discussed the inapplicability of parts 38 and 
40 to SFPCMs. See 66 FR 29517 at 29520. No comments were received 
regarding the Commission's proposal to exempt SFPCMs from section 
6(a) of the Act or the Commission's discussion of Parts 38 and 40 
generally.
    \33\See supra note 30.
    \34\Moreover, regulation 38.1, addressing the ``scope'' of Part 
38 generally, states that ``(t)he provisions of this part 38 shall 
apply to every board of trade or trading facility that has been 
designated as a contract market in a commodity under section 6 of 
the Act.'' Because other paragraphs under section 6 remain 
applicable to SFPCMs, the Commission believes that specifically 
exempting SFPCMs from section 6(a) of the Act further clarifies that 
Part 38 is inapplicable to SFPCMs.
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    Regarding paragraph (a) of proposed regulation 41.34, AMEX 
commented that the Commission did not identify the particular 
regulations with which SFPCMs were expected to comply.\35\ AMEX also 
noted that it may be difficult to ascertain which Commission 
requirements were promulgated pursuant to provisions of Act from which 
SFPCMs are exempt. The Commission understands this predicament, and 
requested comment on precisely these two issues.\36\ However, no 
commenters, including AMEX, offered any specific examples of which 
Commission requirements were duplicative of SEC obligations.
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    \35\CBT did not comment on this proposed rule.
    \36\``In addition to the proposals above, the Commission seeks 
comment from boards of trade and other interested persons regarding 
whether there are any other provisions of the Act or regulations 
thereunder from which SFPCMs should be exempt by regulation. The 
Commission is particularly interested in commenters' views 
regarding, among other things, the interplay between the enumerated 
exemptions in sections 5f(b)(1) and (2) of the Act and the 
Commission's regulations generally.'' 66FR 29517 at 29520.
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    As discussed above, the Commission has identified section 6(a) of 
the Act and Parts 38 and 40 of the regulations as additional provisions 
from which SFPCMs are exempted. Moreover, in the spirit of the general 
intent of the CFMA to reduce the burdens of shared jurisdiction, the 
Commission remains open to suggestions regarding any provisions from 
which SFPCMs should be exempted.\37\ The Commission believes that 
SFPCMs are in the best position to determine which Commission 
requirements are duplicative of their other regulatory obligations. 
Accordingly, regulation 41.34(a) will be adopted as proposed. 
Commission staff is always available to consult with any board of trade 
that seeks or accomplishes notice-designation and is unsure of its 
regulatory and compliance responsibilities.
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    \37\The Commission notes that no comments were received 
regarding which provisions a notice-designated ATS might be 
appropriately exempted from pursuant to section 5f(b)(2) of the Act. 
See 66 FR 29517 at note 27. The Commission also remains open to 
suggestions on this matter.
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E. Regulation 41.33(g)--Delegation of Authority

    Finally, the Commission proposed to delegate to the Director of the 
Division of Trading and Markets and the Director of the Division of 
Economic Analysis, jointly, with the concurrence of the Commission's 
General Counsel, the authority to grant or deny applications for 
exemptive orders under regulation 41.33. This delegation of authority 
is intended to expedite the procedures described in proposed regulation 
41.33 and to place responsibility for them with those Commission staff 
members most directly involved in the relevant matters. No comments 
were received on this issue, and the Commission will adopt the 
delegation of authority as proposed. The Commission believes that this 
delegation will maximize regulatory efficiency with respect to the 
processing of regulation 41.33 exemption applications.

III. Administrative Procedure Act

    Section 553(d) of the Administrative Procedure Act generally 
provides that a substantive rule may not be made effective less than 30 
days after notice is published in the Federal Register.\38\ One 
exception to the 30-day requirement, among others, is an agency's 
finding of good cause for providing a shorter effective date.
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    \38\See 5 U.S.C. 553(d).

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[[Page 44964]]

    The CFMA provides that principal-to-principal transactions in 
security futures products between ECPs may commence on August 21, 
2001.\39\ Prior to passage of the CFMA, there was no need for the 
Commission to have rules providing for the expedited designation of 
certain boards of trade as contract markets in security futures 
products. Since passage of the CFMA, the Commission has moved quickly 
to adopt rules that would facilitate notice-designation. The 
Commission, after reviewing and considering the comments received, is 
now adopting these rules in substantially the same form as proposed. By 
allowing certain principal-to-principal transactions to commence on 
August 21, 2001, Congress, in essence, established a statutory deadline 
for the promulgation of these rules. If the effective date is delayed 
for 30 days, then those boards of trade that wish to notice-designate 
as contract markets in security futures products would not be able to 
begin listing products for trading, assuming the various other 
conditions\40\ for the commencement of trading would have been met 
before the 30 days expired.
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    \39\See supra note 4.
    \40\Id.
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    The primary purpose of delaying effectiveness of new rules for 30 
days is to give affected parties a reasonable period of time to adjust. 
In this instance, parties that might be affected would not be harmed by 
immediate effectiveness of the rules because they would only be subject 
to the rules voluntarily. Moreover, to the extent that these rules have 
been promulgated in substantially the same form as the proposed rules 
and were published for comment, any affected boards of trade are 
already familiar with the rules. Finally, the 30-day delay in 
effectiveness could interfere with the goals and mandates of the CFMA. 
Therefore, the Commission concludes that there is good cause for making 
these rules effective immediately upon publication.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'')\41\ requires that 
agencies, in proposing regulations, consider the impact of those 
regulations on small businesses. The regulations discussed herein 
affect boards of trade seeking to be designated as contract markets in 
security futures products under notice procedures promulgated pursuant 
to section 5f(a) of the Act. The Commission has previously established 
certain definitions of ``small entities'' to be used by the Commission 
in evaluating the impact of its regulations on such entities in 
accordance with the RFA.\42\ The Commission determined that contract 
markets are not small entities for the purpose of the RFA.\43\
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    \41\See 5 U.S.C. 601 et seq. (1994) and Supp. II 1996).
    \42\See 47 18618 (April 30, 1982).
    \43\See 47 FR 18618 at 18619-20.
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    The Commission further notes that section 252 of the CFMA requires 
the Commission to promulgate these regulations. Moreover, the 
regulations promulgated herein would not impose any new burdens upon 
entities seeking to be designated as an SFPCM pursuant section 5f(a) of 
the Act. Rather, these regulations would facilitate exemptive relief 
from the more burdensome requirements in sections 5 and 5a of the Act, 
and regulations thereunder, that otherwise would be applicable to 
entities seeking to list security futures products for trading. 
Therefore, the Commission believes that the adoption of these 
regulations reduces the burden of compliance by such entities.
    Accordingly, the Acting Chairman, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the regulations 
herein will not have a significant economic impact on a substantial 
number of small entities.

B. Paperwork Reduction Act

    This rulemaking contains information collection requirements within 
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\44\ As 
required by the PRA, the Commission has submitted a copy of this part 
to the Office of Management and Budget (``OMB'') for its review. In 
response to the Commission's invitation in the notice of proposed 
rulemaking to comment on any potential paperwork burdens associated 
therewith, no comments were received.
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    \44\See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The final rules do not contain any disclosure requirements or any 
consumer reporting requirements. It does, however, require the 
collection of certain information from boards of trade seeking to be 
notice-designated as contract markets in security futures products, and 
from notice-designated contract markets in security futures products 
which seek an exemption from the Act or regulations thereunder. 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 received a control number 
for this information collection from OMB.

C. Cost-Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA, 
requires the Commission, before promulgating a new regulation under the 
Act, to consider the costs and benefits of the Commission's action. The 
Commission recently applied the cost-benefit provisions of section 15 
for the first time with respect to a final rulemaking,\45\ and 
understands that although section 15, as amended, requires the 
Commission to consider the costs and benefits of a new regulation, it 
does not require the Commission to quantify those costs and benefits or 
determine whether the benefits of the regulation outweigh its costs.
---------------------------------------------------------------------------

    \45\See 66 FR 20740 (Apr. 25, 2001).
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    The amended Section 15 further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness, and financial integrity of futures 
markets; (3) price discovery;\46\ (4) sound risk management practices; 
and (5) other public interest considerations. The Commission may, in 
its discretion, give greater weight to any one of the five enumerated 
areas of concern and may, in its discretion, determine that, 
notwithstanding its costs, a particular regulation was necessary or 
appropriate to protect the public interest or to effectuate any of the 
provisions or to accomplish any of the purposes of the Act.
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    \46\Price discovery is not a concern relevant to this 
rulemaking.
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    The main areas of concern relevant to this rulemaking are the first 
two set forth in the Act, ``protection of market participants and the 
public'' and ``efficiency, competitiveness and financial integrity of 
the futures markets.'' The Commission notes that the CFMA specifically 
mandates that certain boards of trade be notice-designated by the 
Commission as a contract market if they seek to list or trade security 
futures products only, and that procedures be established by the 
Commission for such entities to apply for exemptions from the Act or 
regulations thereunder. Further, the Commission believes that these 
additional registrants may promote the efficiency and competitiveness 
of those futures markets on which security future products may be 
traded and, in turn, may serve to promote the financial integrity of 
those markets. The Commission has endeavored to impose minimal costs--
i.e., only necessary disclosure and recordkeeping--on any of the 
entities involved, so that the benefits of the notice-designation and

[[Page 44965]]

exemptive processes intended by Congress can be fully realized. 
Furthermore, submission of an application for exemptive relief is not 
required of SFPCMs, but elected on a voluntary basis.
    AMEX commented that the costs and benefits of applying the 
Commission's regulations to SFPCMs should have been assessed in the 
proposed rulemaking. The Commission notes that SFPCMs' exposure to CFTC 
regulatory requirements has been imposed by Congress, by virtue of its 
passage of CFMA, rather than as a result of this rulemaking. The 
applicability of Commission regulations to SFPCMs is implicit in 
section 5f(b) of the Act, which exempts SFPCMs from only a limited 
number of provisions of the Act and regulations thereunder. If Congress 
intended that SFPCMs be exempt from additional provisions of the Act 
and regulations thereunder, the list of enumerated exemptions in 
section 5f(b)(1) would have been longer. Moreover, the fact that 
Congress contemplated procedures to exempt SFPCMs ``from any provision 
of this Act or of any rule or regulation thereunder''\47\ further 
demonstrates that it intended for any requirements not enumerated under 
section 5f(b)(1) to apply initially. Therefore, the Commission 
disagrees that SFPCMs are subjected to new regulatory requirements as a 
result of this rulemaking; the imposition of any new regulatory 
requirements result directly from passage of the CFMA.
---------------------------------------------------------------------------

    \47\See section 5f(b)(4) of the Act.
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List of Subjects

17 CFR Part 41

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

17 CFR Part 140

    Authority delegations.


    For the reasons discussed in the preamble, the Commission hereby 
amends Chapter I of Title 17 of the Code of Federal Regulations as 
follows:
    1. The heading for Part 41 is revised to read as follows:\1\
---------------------------------------------------------------------------

    \1\Note: This revision supersedes the part heading added on 
August 10, 2001 (66 FR 42287) which was to become effective October 
9, 2001.
---------------------------------------------------------------------------

PART 41--SECURITY FUTURES PRODUCTS

    2. The authority citation for Part 41 is revised to read as 
follows:

    Authority:  Sections 251 and 252, Pub. L. 106-554, 114 Stat. 
2763; 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a.

    3. Section 41.1 is amended by adding paragraphs (a) and (b) and (f) 
through (i) as follows:


Sec. 41.1  Definitions.

    For purposes of this part:
    (a) Alternative trading system shall have the meaning set forth in 
section 1a(1) of the Act.
    (b) Board of trade shall have the meaning set forth in section 
1a(2) of the Act.
* * * * *
    (f) National securities association means a board of trade 
registered with the Securities and Exchange Commission pursuant to 
section 15A(a) of the Securities Exchange Act of 1934.
    (g) National securities exchange means a board of trade registered 
with the Securities and Exchange Commission pursuant to section 6(a) of 
the Securities Exchange Act of 1934.
    (h) Rule shall have the meaning set forth in Commission regulation 
40.1.
    (i) Security futures product shall have the meaning set forth in 
section 1a(32) of the Act.

    4. Subpart D (Secs. 41.31 through 41.34) is added as follows:
Subpart D--Designated Contract Markets in Security Futures Products
Sec.
41.31   Notice-designation requirements.
41.32   Continuing obligations.
41.33   Applications for exemptive orders.
41.34   Exempt provisions.

Subpart D--Notice-Designated Contract Markets in Security Futures 
Products


Sec. 41.31  Notice-designation requirements.

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


Sec. 41.32  Continuing obligations.

    (a)(1) A board of trade designated as a contract market in security 
futures products pursuant to Sec. 41.31 of this chapter shall:
    (i) Notify the Commission of any change in its regulatory status 
with the Securities and Exchange Commission or with a futures 
association registered under section 17 of the Act;
    (ii) Comply with the filing requirements of section 2(a)(1)(D)(vii) 
of the Act each time the board of trade lists a security futures 
product for trading;

[[Page 44966]]

    (iii) Provide the Commission with any new rules or rule amendments 
that relate to the trading of security futures products, including both 
operational rules and the terms and conditions of products listed for 
trading on the facility, promptly after final implementation of such 
rules or rule amendments; and
    (iv) Upon request, file promptly with the Commission--
    (A) Such information related to its business as a designated 
contract market in security futures products as the Commission may 
request; and
    (B) A written demonstration, containing such supporting data and 
other information and documents as the Commission may specify, that the 
board of trade is in compliance with one or more applicable provisions 
of the Act or regulations thereunder as specified in the request.
    (2) Any information filed pursuant to paragraph (a) of this section 
shall be addressed to the Secretary of the Commission at its 
Washington, D.C. headquarters, shall be labeled ``SFPCM Continuing 
Obligations,'' and may be transmitted in either electronic or hard copy 
form.
    (b) Except as exempted under section 5f(b) of the Act or under 
Secs. 41.33 and 41.34 of this chapter, any board of trade designated as 
a contract market in security futures products pursuant to Sec. 41.31 
of this chapter shall be subject to all applicable requirements of the 
Act and regulations thereunder. Failure to comply shall subject the 
board of trade to Commission action under, among other provisions, 
sections 5e and 6(b) of the Act.


Sec. 41.33  Applications for exemptive orders.

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


Sec. 41.34  Exempt provisions.

    Any board of trade notice-designated as a contract market in 
security futures products pursuant to Sec. 41.31 of this chapter also 
shall be exempt from:
    (a) The following provisions of the Act, pursuant to section 
5f(b)(1) of the Act:
    (1) Section 4c(c);
    (2) Section 4c(e);
    (3) Section 4c(g);
    (4) Section 4j;
    (5) Section 5;
    (6) Section 5c;
    (7) Section 6a;
    (8) Section 8(d);
    (9) Section 9(f);
    (10) Section 16; and
    (b) The following provisions, pursuant to section 5f(b)(4) of the 
Act:
    (1) Section 6(a) of the Act;
    (2) Part 38 of this chapter; and
    (3) Part 40 of this chapter.

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

    5. The authority citation for Part 140 continues to read as 
follows:


[[Page 44967]]


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

    6. Section 140.99(i) is amended by revising paragraphs (i)(1) and 
(2) and adding new paragraph (i)(3) as follows:


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

* * * * *
    (i) * * *
    (1) Notice filings required to be made to claim relief from the Act 
or from a Commission rule, regulation, or order including, without 
limitations, Secs. 4.5, 4.7(a), 4.7(b), 4.12(b), 4.13(b) and 4.14(a)(8) 
of this chapter;
    (2) Requests for exemption pursuant to section 4(c) of the Act; or
    (3) Requests for exemption pursuant to Sec. 41.33 of this chapter.

    Issued in Washington, DC on August 20, 2001 by the Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 01-21452 Filed 8-24-01; 8:45 am]
BILLING CODE 6351-01-U