[Federal Register Volume 67, Number 51 (Friday, March 15, 2002)]
[Rules and Regulations]
[Pages 11569-11571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6288]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 15

RIN 3038-AB88


Reporting Levels for Large Trader Reports; Security Futures 
Products

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is amending its rules to establish reporting levels for security 
features products (SFPs) traded on designated contract markets and 
notice-designated contract markets. The reporting levels are 1000 
contracts for an SFP involving an individual security and 200 contracts 
for an SFP involving a narrow-based index of equity securities.

EFFECTIVE DATE: April 15, 2002.

FOR FURTHER INFORMATION CONTACT: Gary J. Martinaitis, Deputy Associate 
Director, Market Surveillance Section, or Nancy E. Yanofsky, Assistant 
Chief Counsel, Division of Economic Analysis, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. Telephone: (202) 418-5260. E-mail: [[email protected]] or 
[[email protected]].

SUPPLEMENTARY INFORMATION: On December 21, 2000, the President signed 
into law the Commodity Futures Modernization Act of 2000 (CFMA), Pub. 
L. 106-554, which extensively revised the Commodity Exchange Act (Act). 
Among other things, the CFMA removed the restriction in the Act on the 
trading of futures contracts on individual equity securities and 
narrow-based indices of equity securities.\1\ Under the revised law, 
these products are now referred to as ``security futures products'' 
(SFPs) \2\ and may be traded on designated contract markets, notice-
designated contract markets and registered derivatives transaction 
execution facilities.
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    \1\ See section 251(a) of the CFMA. This trading previously had 
been prohibited by section 2(a)(1)(B)(v) of the Act.
    \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; it 
generally means a contract of sale for future delivery of a single 
security or of a narrow-based security index, including any interest 
therein or based on the value thereof, except exempted securities 
(with the exclusion of municipal securities) and certain agreements, 
contracts, or transactions excluded from the Act. Because the CFMA 
provides that options on security futures cannot be traded until at 
least December 21, 2003, security futures are the only security 
futures product that may be made available for trading during the 
next two years.
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    SFPs, like all other commodities traded on Commission-designated 
markets, will be subject to the Commission's large trader reporting 
rules. Those rules require futures commission merchants, clearing 
members and foreign brokers to report to the Commission position 
information of the largest futures and options traders and require the 
traders themselves to provide certain identifying information. 
Reporting levels are set for individual futures and option markets 
under the authority of sections 4i and 4c of the Act to ensure that the 
Commission receives adequate information to carry out its market 
surveillance programs. These market surveillance programs are designed 
to detect and to prevent market congestion and price manipulation and 
to enforce speculative position limits. They also provide information 
regarding the overall hedging and speculative use of, and foreign 
participation in, the futures

[[Page 11570]]

markets and other matters of public interest. Generally, large trader 
reports are filed by the firm carrying the reportable trader's 
position.\3\
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    \3\ Generally, parts 17 and 18 of the regulations, 17 CFR parts 
17 and 18, require reports from firms and traders, respectively, 
when a trader holds a ``reportable position.'' A reportable position 
is any open contract position that at the close of the market on any 
business day equals or exceeds the quantity specified in Commission 
rule 15.03 in either: (1) Any one future of any commodity on any one 
contract market, excluding futures contracts against which notices 
of delivery have been stopped by a trader or issued by the clearing 
organization of a contract market; or (2) long or short put or call 
options that exercise into the same future of any commodity on any 
one contract market. 17 CFR 15.00 and part 150.
    The firms which carry accounts for traders holding ``reportable 
positions'' are required to identify those accounts by filing a CFTC 
Form 102 and to report all reportable positions in the accounts to 
the Commission. The individual trader who holds or controls the 
reportable position, however, is required to report to the 
Commission only in response to a special call.
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    Based upon its experience in administering the large trader 
reporting system, the Commission proposed establishing a reporting 
level of 1000 contracts for SFPs involving an individual security \4\ 
and 200 contracts for SFPs involving a narrow-based index of 
securities.\5\ 66 FR 64383 (December 13, 2001). In its proposal, the 
Commission stated its intent to review these levels an appropriate 
amount of time after trading in SFPs commences to determine if they 
provide adequate coverage for effective market surveillance. At that 
time, the Commission will also consider actual trading experience--
including trading volume, open interest and the number and position 
sizes of individual traders--to determine whether these levels are too 
high or too low for effective market surveillance.
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    \4\ Based on staff discussions with industry participants, the 
Commission understands that futures contracts on individual 
securities will specify 100 shares of the underlying security.
    \5\ This number corresponds to the current reporting level for 
security options.
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    The Commission noted in its proposal that the rules require the 
reporting of positions in SFPs on notice-designated contract markets. 
Notice-designated contract markets are entities that are otherwise 
regulated by the Securities and Exchange Commission (such as registered 
national securities exchanges and registered national securities 
associations) that apply for and, pursuant to a notice-filing 
procedure, become designated as contract markets by the Commission for 
the limited purpose of trading SFPs.\6\ The Act and the Commission's 
regulations exempt notice-designated contract markets from certain 
provisions of the Act and the Commission's regulations; these trading 
facilities, however, are subject to the Commission's large trader 
reporting system.\7\ Thus, futures commission merchants (whether 
registered under a full or a notice filing-procedure under rule 3.10 
\8\), clearing members, foreign brokers and others who have reporting 
and other obligations under parts 15 through 21 of the Commission's 
rules will have concomitant obligations with respect to SFPs traded on 
notice-designated contract markets.
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    \6\ See section 5f of the Act, 7 U.S.C. 7f.
    \7\ See section 4f(a)(4) of the Act, 7 U.S.C. 6f(a)(4); 17 CFR 
41.34. The Commission discussed the application of its large trader 
reporting system to notice-designated contract markets when it 
adopted its rules governing these markets. See 66 FR 44960 (Aug. 27, 
2001).
    \8\ See 66 FR 43080 (Aug. 17, 2001).
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    The Commission received two comment letters on its proposal--one 
from a contract market, the Chicago Mercantile Exchange (CME), and one 
from a national securities exchange that, in connection with listing 
and trading SFPs, is required to become a notice-designated contract 
market, the American Stock Exchange (AMEX). Both the CME and the AMEX 
generally supported the reporting levels. The CME specifically noted 
that the levels appropriately balance the protection of market 
integrity with administrative burdens. AMEX commented that, based on 
actual trading experience, the Commission may in the future need to 
establish higher reporting levels. AMEX also suggested that it may be 
appropriate for the Commission to tier reporting levels to take into 
account capitalization, trading volume and/or public float of the 
underlying security.\9\
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    \9\ AMEX also noted its intent to use its current reporting 
level of 200 (which applies to options positions on stocks, shares 
of exchange-traded funds and stock indexes) for SFPs.
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    The Commission is adopting the reporting levels as proposed. As 
stated in the proposal, and consistent with the comments, the 
Commission will review these levels an appropriate amount of time after 
trading in SFPs commences to determine if they provide adequate 
coverage for effective market surveillance. At that time, the 
Commission will also consider actual trading experience--including 
trading volume, open interest and the number and position sizes of 
individual traders--to determine whether the levels are too high or too 
low for effective market surveillance. While the Commission does not 
anticipate tiered reporting levels, due to the administrative 
difficulties inherent in such a system, the Commission has not ruled 
out such an approach and will consider it, as appropriate.\10\
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    \10\ AMEX noted that some firms are considering submitting their 
reports through the Security Industry Automation Corporation (SIAC). 
The Commission and the exchanges are working with SIAC to facilitate 
this. Whether or not the reports are filed through SIAC, the 
reporting firm remains responsible for the filing of the report.
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IV. Cost Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA, 
requires the Commission to consider the costs and benefits of its 
action before issuing a new regulation under the Act. 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 the 
subject rule.
    Section 15(a) further specifies that the costs and benefits of the 
proposed rule 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. 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 rule is 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 64384. 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. The Commission has 
considered the two comment letters received, neither of which 
specifically addressed the Commission's analysis of the costs and 
benefits of the proposed rules.
    The Commission has considered the costs and benefits of the 
proposed rules and has decided to adopt the rules as discussed above.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that federal agencies, in proposing rules, consider the impact 
of those rules on small

[[Page 11571]]

entities. The Commission has previously determined that large traders 
and FCMs are not ``small entities'' for purposes of the RFA.\11\ The 
amendment to reporting requirements primarily impacts FCMs. Similarly, 
foreign brokers and foreign traders report only if carrying or holding 
reportable, i.e., large positions. The Commission invited comments from 
any firm believing that these rules would have a significant economic 
impact on its operations. No comments were received in response to that 
invitation,
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    \11\ 47 FR 18618-20 (Apr. 30, 1982).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (PRA), 
which imposes certain requirements on federal agencies (including the 
Commission) in connection with their conducting or sponsoring any 
collection of information as defined by the PRA, does not apply to this 
rule. The Commission believes that the rule amendment does not contain 
information requirements which require the approval of the Office of 
Management and Budget. The purpose of this rule is to establish a 
specific reporting level for security futures products.

List of Subjects in 17 CFR Part 15

    Brokers, Reporting and recordkeeping requirements.


    In consideration of the foregoing, and pursuant to the authority 
contained in the Act, and in particular sections 4g, 4i, 5, 5a and 8a 
of the Act, 7 U.S.C. 6g, 6i, 7, 7a and 12a, as amended, the Commission 
hereby proposes to amend Part 15 of Chapter I of Title 17 of the Code 
of Federal Regulations as follows:

PART 15--REPORTS--GENERAL PROVISIONS

    1. The authority citation for part 15 is revised to read as 
follows:

    Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 
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; 5 U.S.C. 552 and 552(b).


    2. Section 15.03 is amended by revising paragraph (b) to read as 
follows:


Sec. 15.03  Reporting levels.

* * * * *
    (b) The quantities for the purpose of reports filed under parts 17 
and 18 of this chapter are as follows:

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                                                              Number of
                         Commodity                            contracts
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Agricultural:
  Wheat....................................................          100
  Corn.....................................................          150
  Oats.....................................................           60
  Soybeans.................................................          100
  Soybean Oil..............................................          200
  Soybean Meal.............................................          200
  Cotton...................................................           50
  Frozen Concentrated Orange Juice.........................           50
  Rough Rice...............................................           50
  Live Cattle..............................................          100
  Feeder Cattle............................................           50
  Lean Hogs................................................          100
  Sugar No. 11.............................................          400
  Sugar No. 14.............................................          100
  Cocoa....................................................          100
  Coffee...................................................           50
Natural Resources:
  Copper...................................................          100
  Gold.....................................................          200
  Silver Bullion...........................................          150
  Platinum.................................................           50
  No. 2 Heating Oil........................................          250
  Crude Oil, Sweet.........................................          350
  Unleaded Gasoline........................................          150
  Natural Gas..............................................          175
Financial:
  Municipal Bond Index.....................................          300
  3-month (13-week) U.S. Treasury Bills....................          150
  30-Year U.S. Treasury Bonds..............................        1,000
  10-Year U.S. Treasury Notes..............................        1,000
  5-Year U.S. Treasury Notes...............................          800
  2-Year U.S. Treasury Notes...............................          500
  3-Month Eurodollar Time Deposit Rates....................        1,000
  30-Day Fed Funds.........................................          300
  1-month LIBOR Rates......................................          300
  3-month Euroyen..........................................          100
  Major-Foreign Currencies.................................          400
  Other Foreign Currencies.................................          100
  U.S. Dollar Index........................................           50
  S&P 500 Stock Price Index................................        1,000
  E-Mini S&P Stock Price Index.............................          300
  S&P 400 Midcap Stock Index...............................          100
  Dow Jones Industrial Average Index.......................          100
  New York Stock Exchange Composite Index..................           50
  Amex Major Market Index, Maxi............................          100
  NASDAQ 100 Stock Index...................................          100
  Russell 2000 Stock Index.................................          100
  Value Line Average Index.................................           50
  NIKKEI Stock Index.......................................          100
  Goldman Sachs Commodity Index............................          100
  Security Futures Products:
        Individual Equity Security.........................        1,000
        Narrow-Based Index of Equity Securities............          100
All Other Commodities......................................           25
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    Issued in Washington, DC, this 11th day of March, 2002 by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-6288 Filed 3-14-02; 8:45 am]
BILLING CODE 6351-01-M