[Federal Register Volume 67, Number 196 (Wednesday, October 9, 2002)]
[Rules and Regulations]
[Pages 62873-62880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25476]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 37, 38, 39 and 40

RIN 3038-AB63


Amendments to New Regulatory Framework for Trading Facilities and 
Clearing Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is adopting a number of technical amendments to its rules implementing 
the Commodity Futures Modernization Act of 2000 with respect to trading 
facilities and clearing organizations. The rules add new categories of 
exchange rules or rule amendments that need not be approved by or self-
certified to the Commission; amend the definitions of ``rule'' and 
``dormant contract;'' add new definitions of ``dormant contract 
market,'' ``dormant derivatives transaction execution facility,'' and 
``dormant derivatives clearing organization''; and add a procedure for 
listing or relisting products for trading on a registered entity that 
has become dormant.

EFFECTIVE DATE: November 8, 2002.

FOR FURTHER INFORMATION CONTACT: Nancy E. Yanofsky, Assistant Chief 
Counsel, Division of Market Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. Telephone: (202) 418-5260. e-mail: [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    The Commission, on August 10, 2001, promulgated rules implementing 
the provisions of the Commodity Futures Modernization Act of 2000 
(CFMA) relating to trading facilities.\1\ 66 FR 42256. These rules, 
parts 36 through 40 of the Commission's rules, became effective on 
October 9, 2001.
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    \1\ The CFMA was intended, in part, ``to promote innovation for 
futures and derivatives,'' ``to reduce systemic risk,'' and ``to 
transform the role of the Commission to oversight of the futures 
markets.'' See section 2 of the CFMA.
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    The CFMA profoundly altered federal regulation of commodity futures 
and option markets. The new statutory framework established two 
categories of markets subject to Commission regulatory oversight, 
designated contract markets (contract markets) and registered 
derivatives transaction execution facilities (DTFs), and two categories 
of exempt markets, exempt boards of trade and, under section 2(h)(3) of 
the Commodity Exchange Act (Act), exempt commercial markets. The 
Commission's rules relating to trading facilities established 
administrative procedures necessary to implement the CFMA, interpreted 
certain of the CFMA's provisions and provided guidance on compliance 
with various of its requirements. In addition, the Commission, under 
its exemptive authority, in a limited number of instances, provided 
relief from, or

[[Page 62874]]

greater flexibility than, the CFMA's provisions.
    On April 26, 2002, the Commission proposed a limited number of 
amendments responding to initial issues that had arisen in 
administering its implementing rules, or which are technical in nature. 
67 FR 20702. The Commission received three comment letters, all from 
contract markets. The commenters generally supported the proposed 
rules, but expressed concern about the intended scope of the proposed 
amendments relating to self-certification of exchange fees. The 
Commission agrees with these comments, and is amending rule 40.6(c) to 
better describe those categories of exchange fees that will be subject 
to the self-certification requirement and those that will not. In all 
other respects, the Commission is adopting the rules as proposed.\2\
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    \2\ The Commission will consider as appropriate additional 
amendments to the rules implementing the CFMA related to trading 
facilities based upon further administrative experience.
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II. The Final Rules

A. Dormant Contract Markets and Products

    The Commission has long required boards of trade, before relisting 
a dormant contract for trading, to demonstrate that the contract 
continues to meet the Act's requirements. See 17 CFR 5.2. This 
requirement was based upon the premise that contracts that have been 
dormant for a significant period of time may not have been updated to 
reflect intervening changes in cash-market practices, and therefore may 
no longer meet applicable statutory and regulatory requirements. 
Accordingly, the relisting of a dormant contract was treated in some 
respects similarly to the designation of a new contract.
    Part 40 of the Commission's rules implementing the CFMA retains the 
concept that the Act's requirements for listing a new product for 
trading should also be applicable when relisting a dormant contract for 
trading. Specifically, Commission rule 40.2 requires that, before 
either listing a contract or relisting a dormant contract for trading, 
registered entities certify that the product complies with the Act. The 
Commission proposed amending its part 40 requirements relating to 
dormant contracts in two ways.
    First, the Commission proposed to revise the exemptive period in 
the definition of ``dormant contract'' in rule 40.1 from the time 
following ``initial listing'' to the time following initial exchange 
certification or Commission approval. The Commission originally used 
``initial listing'' to mark the beginning of the exemptive period based 
upon its belief that registered entities routinely would certify 
products to the Commission shortly before trading was imminent as 
permitted by rule 40.2. However, many exchanges have continued their 
prior practice of fulfilling regulatory requirements well in advance of 
a product's anticipated listing date. In addition, some exchanges have 
certified to the Commission, but have never listed for trading, a 
number of new products. Accordingly, the Commission proposed that the 
exemptive period under the dormant contract definition begin running 
from the time of certification or Commission approval. Second, in light 
of the far greater rapidity with which markets innovate and change 
today compared to when the dormant contract rule was first promulgated 
and the lessened burden of a simple self-certification compared to the 
previous requirement that dormant contracts be approved by the 
Commission prior to relisting, and for consistency with the operation 
of other rules, the Commission proposed to amend rule 40.1 to reduce 
the grace period during which a new contract is exempt from being 
defined as dormant from 60 to 36 complete calendar months.
    The Commission also proposed to amend rule 40.2 so that it would 
apply in instances where the registered entity itself has become 
dormant. Prior to enactment of the CFMA, the term ``designated contract 
market'' denoted the Commission-approved products traded on a board of 
trade.\3\ Accordingly, prior to the CFMA, a board of trade's initial 
application for designation as a contract market in a commodity 
triggered review of both the general requirements for designation as a 
contract market as well as those requirements that were product-
specific. If a board of trade determined to relist a contract for 
trading after all of its contracts had become dormant, the Commission 
would have reviewed both the terms and conditions of the product to be 
relisted as well as whether the board of trade continued to meet the 
general designation requirements. The Commission proposed to amend 
parts 37, 38, 39 and 40 of its rules to clarify that, when a registered 
entity that has become dormant determines to list or relist an initial 
product for trading (or in the case of a derivatives clearing 
organization, to accept a product for clearing), it must demonstrate 
that it continues to satisfy the criteria for designation or 
registration.\4\ In making such a demonstration, a registered entity 
may rely upon previously-submitted materials that still pertain to, and 
accurately describe, current conditions.
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    \3\ In contrast, the CFMA redefined the meaning of ``designated 
contract market'' to refer to the approved or licensed facility on 
which futures contracts and commodity options are traded.
    \4\ The definitions of ``dormant contract market,'' ``dormant 
derivatives transaction execution facility,'' and ``dormant 
derivatives clearing organization'' provide for a 36-month initial 
exemptive period that would begin when the Commission issues an 
order, including conditional orders, designating a contract market 
or registering a DTF or a derivatives clearing organization.
    The Commission is also adopting, as proposed, two technical 
amendments related to continuing goodstanding designation or 
registration status. The first makes clear that the notification 
procedure available to contract markets to operate as a DTF applies 
only to active contract markets. Accordingly, before using this 
notification procedure, dormant contract markets must reinstate 
their active contract market status. Of course, they could also 
become a registered DTF by application. The second provides that, 
upon a change of ownership of a contract market or DTF, the new 
owners must certify that the facility continues to meet the 
respective designation or registration requirement.
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    No comments were received concerning these proposed amendments on 
dormant markets and products and the Commission is adopting the rules 
as proposed.

B. Product Approval Procedures

    Contract markets or DTFs may request that the Commission review and 
approve new products and new rules or rule amendments. The Commission 
proposed amending rules 40.3 and 40.5 to include a provision similar to 
that for applications for contract market designation and DTF 
registration, that the applicant or submitting entity identify with 
particularity information in the submission that will be subject to a 
request for confidential treatment and support that request for 
confidential treatment with reasonable justification. See rules 
38.3(a)(5) and 37.5(b)(5). As proposed, rule 40.3 also provided that 
the terms and conditions of products for which approval is voluntarily 
requested will be made publicly available at the time of their 
submission to the Commission to enable the Commission, by obtaining the 
views of market participants and others, to ascertain whether the 
proposed product would be readily susceptible to manipulation, or 
otherwise violate the Act.\5\ Finally, the

[[Page 62875]]

Commission proposed a new rule 40.8 to make clear that all other 
information required by the core principles to be made public by a 
registered entity will be treated as public information by the 
Commission at the time the Commission issues an order of designation or 
registration, a registered entity is deemed approved, or a rule or rule 
amendment is approved or deemed approved by the Commission, or can 
first be made effective by the registered entity.\6\
    No comments were received concerning these proposed amendments on 
product approval procedures and the Commission is adopting the rules as 
proposed.
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    \5\ Commission staff routinely conduct trade interviews when 
reviewing novel instruments to ascertain the relative susceptibility 
of a product to being manipulated. To be meaningful, these 
interviews require the release of the proposed instrument's terms 
and conditions. Generally, the Commission also intends to continue 
its long-standing practice of requesting public comment on the terms 
and conditions of new products under review for Commission approval 
by publication of notices in the Federal Register. In instances 
where notice in the Federal Register is impracticable or otherwise 
unnecessary, notice of a submission for voluntary approval and of 
the public availability of the proposed product's terms and 
conditions will be through the Commission's internet Web site 
(http://www.cftc.gov).
    The terms and conditions of products eligible for trading by 
self-certification must be made publicly available by the contract 
market (Core Principle 7), or the DTF (Core Principle 4), and will 
be available from the Commission, at the time that the exchange 
legally could commence trading--the beginning of the business day 
following certification to the Commission.
    \6\ This requirement is limited to information required to be 
made public by a registered entity under a core principal, and does 
not apply to additional materials that may be filed in support of an 
application for designation or registration. For example, section 
5(d)(7) of the Act requires contract markets to make publicly 
available information concerning ``the terms and conditions of the 
contracts of the contract market and the mechanisms for executing 
transactions on or through the facilities.''
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C. Exchange Fees

    The Commission also proposed to amend rules 40.1, 40.4 and 40.6 
explicitly to address the procedures applicable to the imposition or 
amendment of exchange fees. The Commission's proposed rules provided 
that fees related to delivery of an enumerated agricultural commodity 
would be subject to the prior-approval requirements of the Act, and 
that all other fees would be subject only to the certification 
requirement. The Commission's proposed rules further provided that fees 
or fee changes of any type of less than $1.00 would be exempt from the 
certification requirement (or the prior-approval requirement, if 
applicable) as de minimis.\7\
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    \7\ Separately, as proposed, the Commission has revised the list 
of rule amendments that are not material changes to futures 
contracts on the enumerated agricultural commodities to clarify that 
rule changes not required to be certified to the Commission under 
rule 40.6(c) are also not material.
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    The three contract markets that commented expressed concern that 
the Commission's proposed rule could be read to require the exchanges 
to certify all fees and fee changes of $1.00 or more, including fees 
established by an independent third party and fees that are 
administrative in nature. The Commission did not intend this result and 
accordingly is revising rule 40.6 to clarify the treatment of rules 
relating to fees. Under the final rules, certification will still be 
required for fees or fee changes that are related to delivery, trading, 
clearing and dispute resolution and that are $1.00 or more.\8\ See rule 
40.6(a).\9\ Fees of $1.00 or more that are unrelated to the foregoing 
(delivery, trading, clearing and dispute resolution), or that are 
established by an independent third party,\10\ will be exempt from 
certification but subject to notification under rule 40.6(c)(2)(v). 
Finally, neither the certification nor notification requirements will 
apply to fees that are under $1.00, or that relate to matters that are 
administrative in nature, such as dues, badges, telecommunications 
services, booth space, real time quotations, historical information, 
publications or software licenses. See rule 40.6(c)(3)(ii)(E).
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    \8\ The $1.00 fee or fee change is on a per contract basis and 
not on a per unit basis.
    \9\ Such a certification includes the exchange's determination 
(which need not be separately stated) that the fee or fee change 
complies with the exchange's obligation under Core Principle 18 that 
its actions avoid resulting in an unreasonable restraint of trade or 
imposing any material anticompetitive burden on trading.
    \10\ These fees may include, for example, USDA grading and 
inspection charges.
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D. Definition of Rule

    The Commission proposed to amend the definition of ``rule'' in part 
40.1\11\ to exclude from its meaning exchange actions relating to the 
setting of margin levels, except with respect to security futures 
products and contracts on stock indices. Prior to the CFMA, section 
5a(a)(12) of the Act required that all changes to contract terms and 
conditions, with the exception of rules relating to the setting of 
margin levels, be submitted to the Commission for prior approval. The 
ability to adjust margin levels was afforded this special status 
because of the recognized need for exchanges to change margin levels 
rapidly, often changing margin levels within a single trading session, 
in response to changing market conditions. In section 113 of the CFMA, 
Congress removed the prior-approval provision, providing instead that 
registered entities could amend their rules by self-certification. 
However, there is no indication that Congress intended thereby to 
affect the special status accorded rules relating to the setting of 
margin levels.\12\ Accordingly, the Commission believes that 
specifically excluding the setting of margin levels (except with 
respect to stock index products and security futures products) from the 
definition of ``rule'' is consistent with Congress's intent and with 
the public interest.\13\ One commenter, the New York Mercantile 
Exchange, stated that it appreciated this proposed clarifying 
amendment. The Commission is amending the definition of ``rule'' as 
proposed.
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    \11\ With respect in general to the defintion of ``rule,'' 
Commission staff in recent months has learned, through bulletins and 
notices to the members of registered entities, of a number of rule 
changes that were not appropriately submitted to the Commission for 
review under part 40. The Commission again reminds registered 
entities, as it did in its proposal, that the definition of ``rule'' 
under part 40 encompasses more than just provisions labeled as 
``rules'' in rulebooks, but includes, among other things, 
resolutions, interpretations and stated policies. In order to 
relieve any administrative burdens, registered entities may submit 
rule changes to the Commission in the form of member bulletins and 
notices, so long as those submissions are labeled and, if necessary, 
certified in accordance with the procedural requirements of part 40. 
In this regard, the Commission notes that it does not interpret this 
requirement as expanding any requirement or its administrative 
practice with regard to rule submissions that existed prior to 
enactment of the CFMA. The Commission further notes that its rules 
provide several categories of exchange rules that registered 
entities are not required to certify or to report to the Commission 
in a weekly notification. The categories of rules that are exempt 
from the certification and notification requirements are those that, 
for instance, relate to the routine, daily administration, direction 
and control of employees. See rule 40.6(c)(3) for a complete list of 
rules that are exempt from both certification and notification 
requirements. In this Federal Register release, the Commission has 
expanded this category of exempt rules to include fees or fee 
changes that are eigther under $1.00 or that relate to matters that 
are administrative in nature.
    \12\ In this regard, Congress did not modify the Act's other 
provisions relating to margins. See section 2(a)(C)(v).
    \13\ The Commission is also adopting, as proposed, a number of 
technical amendments. Appendix C to part 40 details the information 
that foreign boards of trade should include in a request for no-
action relief to offer and sell to persons in the United States 
foreign exchange-traded futures contracts on broad-based securities 
indices. The Commission is amending that guidance to incorporate the 
changes made by the CFMA to the criteria for approving such stock 
index futures contracts. The Commission is also, as proposed, making 
conforming changes to a number of delegations in the rules and to 
several other provisions.
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III. Cost-Benefit Analysis

    Section 15 of the Act requires the Commission to consider the costs 
and benefits of its action before issuing a new regulation under the 
Act. 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

[[Page 62876]]

action, in light of five broad areas of market and public concern: 
protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. 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. 67 FR 20704. The Commission specifically invited commenters to 
submit any data that they may have quantifying the costs and benefits 
of the proposed rules. Id. The Commission has considered all of the 
comments letters received, none of which specifically addressed the 
costs or benefits of the proposed rules. The commenters, however, did 
raise concerns about the possible unintended consequences of the 
Commission's proposal concerning exchange fees and the Commission has 
responded favorably to those concerns and thus has limited any 
unintended costs.
    After considering the costs and benefits of these rules, the 
Commission had decided to adopt them as discussed above.

IV. 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 registered entities. 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.\14\ In its previous 
determinations, the Commission has concluded that contract markets, 
DTFs and clearing organizations are not small entities for the purpose 
of the RFA.\15\
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    \14\ 47 FR 18618-21 (Apr. 30, 1982).
    \15\ 47 FR 18618, 18619 (April 30, 1982) discussing contract 
markets); 66 FR 42256, 42268 (August 10, 2001) (discussing DTFs); 66 
FR 45605, 45609 (August 29, 2001) (discussing DCOs).
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    In the proposed rules, the Commission solicited comment on whether 
the rules as proposed would have a significant economic impact on a 
substantial number of small entities. The Commission received no 
comments in response to this request. The Commission hereby determines 
that the rules, as adopted herein, will not have a significant economic 
impact on a substantial number of small entities. Therefore, the 
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 
U.S.C. 605(b), that the proposed 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. 3507(d)), 
the Commission submitted a copy of this section to the Office of 
Management and Budget (OMB) for its review. 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 rules.

List of Subjects

17 CFR Part 37

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 38

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 39

    Commodity futures, Consumer protection.

17 CFR Part 40

    Commodity futures, Contract markets, Designation application, 
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:

PART 37--DERIVATIVES TRANSACTION EXECUTION FACILITIES

    1. The authority citation for part 37 is revised to read as 
follows:


    Authority: 7 U.S.C. 2, 5, 6, 6c, 6(c), 7a and 12a, as amended by 
Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

    2. Section 37.2 is revised to read as follows:


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 Sec. Sec.  1.3, 1.31, 1.59(d), 
1.63(c), 15.05, 33.10, part 40, part 41 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.

    3. Section 37.5 is amended by revising paragraphs (a), (b), and 
(f)(1) to read as follows:


Sec.  37.5  Procedures for registration.

    (a) Notification by contract markets. (1) 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, which is not a dormant contract market 
as defined in Sec.  40.1 of this chapter, must:
    (i) Comply with the core principles for operation under section 
5a(d) of the Act and the provisions of this part 37; and
    (ii) 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:
    (A) The requirements for trading of section 5a(b) of the Act; and
    (B) The criteria for registration under section 5a(c) of the Act.
    (2) Before using the notification procedure of paragraph (a) of 
this section for registration as a derivatives transaction execution 
facility, a dormant contract market as defined in Sec.  40.1 of this 
chapter must reinstate its designation under Sec.  38.3(a)(2) of this 
chapter.
    (b) Registration by application--(1) Initial registration. A board 
of trade, facility or entity shall be deemed to be registered as a 
derivatives transaction execution facility thirty days after receipt 
(during the business hours

[[Page 62877]]

defined in Sec. 40.1 of this chapter) by the Secretary of the 
Commission at its Washington, DC, headquarters, 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:
    (i) 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;
    (ii) The submission is labeled ``Application for DTF 
Registration'';
    (iii) The submission includes:
    (A) The derivatives transaction execution facility's rules, which 
may be trading protocols;
    (B) 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
    (C) 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;
    (iv) 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;
    (v) 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
    (vi) 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.
    (2) Reinstatement of dormant registration. Before listing products 
for trading, a dormant derivatives transaction execution facility as 
defined in Sec.  40.1 must reinstate its registration under the 
procedures of paragraphs (a)(1) or (b)(1) of this section, as 
applicable; provided however, that an application for reinstatement may 
rely upon previously submitted materials that still pertain to, and 
accurately describe, current conditions.
* * * * *
    (f) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Market 
Oversight or such other employee or employees as the Director 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 (d) of this section.
* * * * *

    4. Section 37.6 is amended by revising paragraphs (a), (b), 
introductory text, (b)(1), (b)(2) and (b)(2)(i) introductory text, 
(b)(2)(iii), and (c) to read as follows:


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, or for a dormant derivatives 
transaction execution facility as defined in Sec.  40.1 of this chapter 
that has been reinstated under Sec.  37.5(b)(2) upon recommencing 
operations by relisting 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 and reinstated derivatives transaction execution 
facilities.--(1) Certification of compliance. Unless an applicant for 
registration or for reinstatement of 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, or a dormant derivatives transaction execution 
facility as defined in Sec.  40.1 of this chapter at the time that it 
recommences 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 or for reinstatement of 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 or recommencing 
operations, the applicant for registration or for reinstatement of 
registration must file (during the business hours defined in Sec.  40.1 
of this chapter) with the Secretary of the Commission at its 
Washington, DC, headquarters, either separately or with the application 
required by Sec.  37.5, a submission that includes:
* * * * *
    (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 or recommencement 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.--(1) In 
general. 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.
    (2) Change of owners. Upon a change of ownership of an existing 
registered derivatives transaction execution facility, the new owner 
shall file with the Secretary of the Commission at its Washington, DC, 
headquarters, a certification that the derivatives transaction 
execution facility meets the requirements for trading and the criteria 
for registration of sections 5a(b) and 5a(c) of the Act, respectively.
* * * * *

PART 38--DESIGNATED CONTRACT MARKETS

    5. The authority citation for Part 38 is revised to read as 
follows:

    Authority: 7 U.S.C. 2, 5, 6, 6c, 7 and 12a, as amended by 
Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

    6. Section 38.2 is revised to read as follows:


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 
Sec. Sec.  1.3, 1.12(e), 1.31, 1.37(c)-(d), 1.38, 1.52, 1.59(d), 
1.63(c), 1.67, 33.10, part 9, parts 15 through 21,

[[Page 62878]]

part 40, part 41 and part 190 of this chapter.
    7. Section 38.3 is amended by revising paragraph (a) to read as 
follows:


Sec.  38.3  Procedures for designation by application.

    (a)(1) Initial Application. A board of trade or trading facility 
shall be deemed to be designated as a contract market sixty days after 
receipt (during the business hours defined in Sec.  40.1 of this 
chapter) by the Secretary of the Commission at its Washington, DC, 
headquarters, of an application for designation unless notified 
otherwise during that period, or, as determined by Commission order, 
designated upon conditions, if:
    (i) 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;
    (ii) The application is labeled as being submitted pursuant to this 
part 38;
    (iii) The application includes:
    (A) A copy of the applicant's rules and any technical manuals, 
other guides or instructions for users of, or participants in, the 
market, including minimum financial standards for members or market 
participants;
    (B) A description of the trading system, algorithm, security and 
access limitation procedures with a timeline for an order from input 
through settlement, and a copy of any system test procedures, tests 
conducted, test results and the nature of contingency or disaster 
recovery plans;
    (C) A copy of any documents pertaining to the applicant's legal 
status and governance structure, including governance fitness 
information;
    (D) A copy of any agreements or contracts entered into or to be 
entered into by the applicant, including partnership or limited 
liability company, third-party regulatory service, member or user 
agreements, that enable or empower the applicant to comply with a 
designation criterion or core principal; and
    (E) To the extent that any of the items in Sec.  
38.3(a)(1)(iii)(A)-(D) raise issues that are novel, or for which 
compliance with a condition for designation is not self-evident, a 
brief explanation of how that item and the application satisfies the 
conditions for designation;
    (iv) 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;
    (v) 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
    (vi) 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.
    (2) Reinstatement of dormant designation. Before listing or 
relisting products for trading, a dormant designated contract market as 
defined in Sec.  40.1 of this chapter must reinstate its designation 
under the procedures of paragraph (a)(1) of this section; provided 
however, that an application for reinstatement may rely upon previously 
submitted materials that still pertain to, and accurately describe, 
current conditions.
* * * * *
    8. Section 38.4(a)(2) is revised to read as follows:


Sec.  38.4  Procedures for listing products and implementing contract 
market rules.

    (a) Request for Commission approval of rules and products. (1) * * 
*
    (2) Notwithstanding the forty-five day review period for voluntary 
approval under Sec. Sec.  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 Sec.  40.3 or Sec.  40.5 of this 
chapter that have been submitted at the same time as an application for 
contract market designation or an application under Sec.  38.3(a)(2) to 
reinstate the designation of a dormant contract market as defined in 
Sec.  40.1 of this chapter, or while one of the foregoing is pending, 
will be deemed approved by the Commission no earlier than the facility 
is deemed to be designated or reinstated.
* * * * *
    9. Section 38.5 is amended by adding a new paragraph (c) to read as 
follows:


Sec.  38.5  Information relating to contract market compliance.

* * * * *
    (c) Upon a change of ownership of an existing designated contract 
market, the new owner shall file with the Secretary of the Commission 
at its Washington, DC, headquarters, a certification that the 
designated contract market meets all of the requirements of sections 
5(b) and 5(d) of the Act and the provisions of this part 38.

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    10. The authority citation for part 39 is revised to read as 
follows:

    Authority: 7 U.S.C. 7b as amended by Appendix E of Pub. L. 106-
554, 114 Stat. 2763A-365.
    11. Section 39.4 is amended by revising the section heading, by 
redesignating the text in paragraph (c) as paragraph (c)(2) and by 
adding a new paragraph (c)(1) to read as follows:


Sec.  39.4  Procedures for implementing derivatives clearing 
organization rules and clearing new products.

* * * * *
    (c) Acceptance of new products for clearing. (1) A dormant 
derivatives clearing organization within the meaning of Sec.  40.1 of 
this chapter may not accept for clearing a new product until its 
registration as a derivatives clearing organization is reinstated under 
the procedures of Sec.  39.3 of this part; provided however, that an 
application for reinstatement may rely upon previously submitted 
materials that still pertain to, and accurately describe, current 
conditions.
* * * * *

PART 40--PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES 
TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING 
ORANIZATIONS

    12. The authority citation for part 40 is revised to read as 
follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as 
amended by appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

    13. Section 40.1 is amended by revising the definitions of dormant 
contract, rule, and paragraph (6) of terms and conditions, by 
republishing the introductory text of terms and conditions and by 
adding in alphabetical order definitions of business hours, dormant 
contract market, dormant derivatives clearing organization and dormant 
derivatives transaction execution facility, to read as follows:


Sec.  40.1  Definitions.

* * * * *
    Business hours means the hours between 8:15 a.m. and 4:45 p.m., 
eastern standard time or eastern daylight savings time, whichever is 
currently in effect in Washington, DC all days except Saturdays, 
Sundays and legal public holidays.
    Dormant contract or dormant product means any commodity futures or 
option contract or other agreement, contract,

[[Page 62879]]

transaction or 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 thirty-six complete calendar 
months following initial exchange certification or Commission approval.
    Dormant contract market means any designated contract market on 
which no trading has occurred for a period of six complete calendar 
months; provided, however, no contract market shall be considered to be 
dormant until the end of 36 complete calendar months following the day 
that the order of designation was issued or that the contract market 
was deemed to be designated.
    Dormant derivatives clearing organization means any derivatives 
clearing organization that has not accepted for clearing any agreement, 
contract or transaction that is required or permitted to be cleared by 
a derivatives clearing organization under sections 5b(a) and 5b(b) of 
the Act, respectively, for a period of six complete calendar months; 
provided, however, no derivatives clearing organization shall be 
considered to be dormant until the end of 36 complete calendar months 
following the day that the order of registration was issued or that the 
derivatives clearing organization was deemed to be registered.
    Dormant derivatives transaction execution facility means any 
derivatives transaction execution facility on which no trading has 
occurred for a period of six complete calendar months; provided, 
however, no derivatives transaction execution facility shall be 
considered to be dormant until the end of 36 complete calendar months 
following the day that the order of registration was issued or that the 
derivatives transaction execution facility was deemed to be registered.
* * * * *
    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, except those provisions relating to the setting of 
levels of margin for commodities other than those subject to the 
provisions of section 2(a)(1)(C)(v) of the Act and security futures as 
defined in section 1a(31) of the Act.
    Terms and conditions means 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:
* * * * *
    (6) Delivery standards and procedures, including fees related to 
delivery or the delivery process, alternatives to delivery and 
applicable penalties or sanctions for failure to perform;
* * * * *

    14. Section 40.3 is amended by revising paragraph (a)(4) and adding 
paragraph (a)(5) to read as follows:


Sec.  40.3  Voluntary submission of new products for Commission review 
and approval.

    (a) * * *
    (4) The submission identifies with particularity information in the 
submission, except for the product's terms and conditions which are 
made publicly available at the time of submission, that will be subject 
to a request for confidential treatment and supports that request for 
confidential treatment with reasonable justification; and
    (5) The submission includes the fee required under appendix B to 
this part.
* * * * *

    15. Section 40.4 is amended by revising paragraphs (b)(5) and 
(b)(6) and by adding paragraphs (b)(7) and (b)(8) to read as follows:


Sec.  40.4  Amendments to terms or conditions of enumerated 
agricultural contracts.

* * * * *
    (b) * * *
    (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;
    (6) 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;
    (7) Fees or fee changes of less than $1.00; and
    (8) 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, DC, 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.
    16. Section 40.5 is amended by revising paragraphs (a)(1)(v) and 
(a)(1)(vi) and by adding paragraph (a)(1)(vii) to read as follows:


Sec.  40.5  Voluntary submission of rules for Commission review and 
approval.

    (a) * * *
    (1) * * *
    (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;
    (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 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 to the Commission's rule 
or interpretation; and
    (vii) Identify with particularity information in the submission 
(except for a product's terms and conditions, which are made publicly 
available at the time of submission) that will be subject to a request 
for confidential treatment and support that request for confidential 
treatment with reasonable justification.
* * * * *

    17. Section 40.6 is amended by removing the words ``Sec.  40.1(d)'' 
in paragraph (a)(2) and, in their place, adding the words ``Sec.  
40.1'', and by revising paragraphs (c)(2)(iii), (c)(2)(iv), 
(c)(3)(ii)(B), (c)(3)(ii)(C) and (c)(3)(ii)(D), and adding paragraph 
(c)(2)(v) and (c)(3)(ii)(E) to read as follows:


Sec.  40.6  Self-certification of rules by designated contract markets 
and registered derivatives clearing organizations.

* * * * *
    (c) * * *
    (2) * * *
    (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

[[Page 62880]]

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;
    (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, 
or
    (v) Fees. Fees or fee changes that are $1.00 or more and are 
established by an independent third party or are unrelated to delivery, 
trading, clearing or dispute resolution.
    (3) * * *
    (ii) * * *
    (B) Administrative procedures. The organization and administrative 
procedures of a contract market or a derivatives clearing 
organization'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, use or disclosure of 
material non-public information gained through the performance of 
official duties, 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;
    (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; and
    (E) Fees. Fees or fee changes that are less than $1.00 or that 
relate to matters such as dues, badges, telecommunication services, 
booth space, real time quotations, historical information, 
publications, software licenses or other matters that are 
administrative in nature.

    18. Section 40.7(b)(1) is revised to read as follows:


Sec.  40.7  Delegations.

* * * * *
    (b) * * *
    (1) Relate to, but do not substantially 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;
* * * * *

    19. Part 40 is amended by adding a new Sec.  40.8 to read as 
follows:


Sec.  40.8  Availability of public information.

    Any information required to be made publicly available by a 
registered entity under sections 5(d)(7), 5a(d)(4) and 5b(c)(2)(L) of 
the Act, respectively, will be treated as public information by the 
Commission at the time an order of designation or registration is 
issued by the Commission, a registered entity is deemed to be 
designated or registered, a rule or rule amendment of the registered 
entity is approved or deemed to be approved by the Commission or can 
first be made effective the day following its certification by the 
registered entity.

    20. Appendix C to part 40 is amended by revising paragraphs (5)(ii) 
through (vii) to read as follows:

Appendix C--Information That a Foreign Board of Trade Should Submit 
When Seeking No-Action Relief To Offer and Sell, to Persons Located in 
the United States, a Futures Contract on a Broad-based Securities Index 
Traded on That Foreign Board of Trade

* * * * *
    (5) * * *
    (ii) The total capitalization, number of stocks (including the 
number of unaffiliated issuers if different from the number of stocks), 
and weighting of the stocks by capitalization and, if applicable, by 
price in the index as well as the combined weighting of the five 
highest-weighted stocks in the index;
    (iii) Procedures and criteria for selection of individual 
securities for inclusion in, or removal from, the index, how often the 
index is regularly reviewed, and any procedures for changes in the 
index between regularly scheduled reviews;
    (iv) Method of calculation of the cash-settlement price and the 
timing of its public release;
    (v) Average daily volume of trading by calendar month, measured by 
share turnover and dollar value, in each of the underlying securities 
for a six-month period of time and, separately, the dollar value of the 
average daily trading volume of the securities comprising the lowest 
weighted 25% of the index for the past six calendar months, calculated 
pursuant to Sec. 41.11;
    (vi) If applicable, average daily futures trading volume; and
    (vii) A statement that the index is not a narrow-based security 
index as defined in section 1a(25) of the Act.

    Issued in Washington, DC, this 1st day of October, 2002, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-25476 Filed 10-8-02; 8:45 am]
BILLING CODE 6351-01-P