[Federal Register Volume 68, Number 50 (Friday, March 14, 2003)]
[Proposed Rules]
[Pages 12319-12324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6177]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AB94


Account Identification for Eligible Bunched Orders

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to amend Commission Rule 1.35(a-1) (``Rule 
1.35(a-1)''), which allows certain account managers to bunch customer 
orders for execution and to allocate them to individual accounts at the 
end of the trading session (hereinafter referred to as ``bunching''). 
The

[[Page 12320]]

proposed rule would expand the availability of bunching, simplify the 
process, and clarify the respective responsibilities of account 
managers and futures commission merchants (``FCMs'').

DATES: Comments must be received by April 28, 2003.

ADDRESSES: Interested persons should submit their views and comments to 
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In 
addition, comments may be sent by facsimile transmission to facsimile 
number (202) 418-5521, or by electronic mail to [email protected]. 
Reference should be made to ``Eligible orders.''

FOR FURTHER INFORMATION CONTACT: Christopher W. Cummings, Special 
Counsel, or R. Trabue Bland, Attorney-Advisor, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5430. Email: [email protected] or 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Regulatory Requirements

    Commission Rule 1.35(a-1), in effect since August 27, 1998, allows 
bunched orders for eligible customers to be placed on a contract market 
without specific customer account identification either at the time of 
order placement or at the time of report of execution. Rule 1.35(a-1) 
limits the types of customers whose orders may be bunched and requires 
eligible account managers \1\ to make certain disclosures regarding the 
allocation methodology, the standard of fairness of allocations, 
composite or summary data of the trades, and whether the account 
manager has any interest in the bunched order.
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    \1\ The term account manager as used herein includes commodity 
trading advisors, investment advisers and other persons identified 
in the proposed regulation, who would place orders and direct the 
allocation in accordance with the procedures set forth in the 
proposal.
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    Before placing an order eligible for post-execution allocation, the 
account manager must identify, to the FCM clearing the order, each 
eligible customer account to which fills will be allocated. Account 
managers must provide written certification that they have identified 
the eligible customer accounts to the FCM. Foreign account managers 
must provide written certification from foreign authorities that they 
are subject to regulation.
    Currently, account managers must create and timestamp an order 
origination document, identify the order by group identifier on the 
office or floor order tickets, and identify the transaction on contract 
market trade registers. The current rule also requires contract markets 
to adopt audit procedures to determine compliance with Rule 1.35(a-1).

B. Developments Since Current Regulations Were Adopted

    In December 2000, Congress passed the Commodity Futures 
Modernization Act (``CFMA''). One of the mandates of the CFMA was for 
the Commission to review its rules relating to intermediaries with an 
eye to identifying areas where greater flexibility might be warranted. 
Since the passage of the CFMA, numerous industry participants have 
stated to Commission staff that the regulations related to bunched 
orders needed to be revisited for a number of reasons.
    For example, enhancements in technology have made it easier for 
account managers to enter orders directly, thereby making certain 
aspects of the current requirements less workable. Similarly, as 
markets become more global in scope, account managers, both domestic 
and foreign, have claimed that the current bunched order requirements 
serve as a disincentive to using U.S. futures markets.
    On February 2, 2001, the National Futures Association and the 
Futures Industry Institute issued an industry-wide study of issues 
associated with order transmission and order entry process by commodity 
professionals (``Best Practices Study'').\2\ The study found that 
although the current rule increased flexibility over previously 
applicable requirements, many commenters in the study felt that the 
current rule caused ``unnecessary processing delays without adding 
customer protections that otherwise could be realized through equally 
effective, less costly procedures.''\3\ The rule the Commission is 
proposing today would adopt many of the approaches recommended in the 
Best Practices Study.
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    \2\ National Futures Association & Futures Industry Institute, 
Recommendations for Best Practices in Order Entry and Transmission 
of Exchange Traded Futures and Options Transactions (2001).
    \3\ Id. at 25.
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II. Proposed Changes to Rule 1.35(a-1)(5)

A. Eligible Customers

    As noted, the current rule limits eligibility for bunching to 
certain types of sophisticated customers. The proposed rule would 
expand eligibility to all customers who provide written investment 
discretion to account managers.\4\
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    \4\ Rule 1.35(a-1)(5) and NFA Compliance Rule 2-8(a), require 
that grants of discretionary authority to account controllers be in 
writing.
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    Bunched orders can provide advantages to account managers and their 
customers by facilitating the prompt execution of small orders. 
Customers can benefit when a bunched order is placed because a bunched 
order is more likely to be executed at a single price than would be the 
case for a series of separate orders. In fact, customers may be 
disadvantaged in the quality of the timing and execution of their order 
if their orders are not bunched. With proper protections in place under 
the proposed rule, customers should be assured that their trade 
allocations are fair and equitable. Thus, the Commission proposes to 
eliminate existing Rule 1.35(a-1)(5)(ii). Under the proposed rule, all 
customer orders would be eligible for inclusion in bunched orders and 
thus all customers that have granted written discretion to an eligible 
account manager would be able to benefit from the advantages of bunched 
orders.
    The Commission invites comment on whether the proposed expansion of 
the class of eligible customers is appropriate and whether the rule 
contains proper protections.
    On a related manner, in 1997, the Commission issued an interpretive 
notice currently found at Appendix C to part 1 which allows bunching 
under certain circumstances.\5\ Specifically, the Commission allows 
CTAs to bunch orders if they prefile their allocation procedures with a 
clearing member, NFA, or an exchange. The Commission requests comments 
on whether this interpretive notice should be modified in any way given 
the proposed changes to Rule 1.35(a-1)(5).
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    \5\ 17 CFR part 1, Appendix C (2002), 62 FR 25470 (May 8, 1997).
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B. Eligible Account Managers

    The Commission also is proposing to expand the class of account 
managers permitted to bunch orders. The current rule applies to, among 
others, commodity trading advisors (``CTAs'') and investment advisers 
(``IAs'') who are registered with the Commission or the Securities 
Exchange Commission (``SEC''). The Commission is proposing to allow 
CTAs and IAs who are exempt from registration or are excluded from the 
definition of CTA or IA by operation of law or rule to be eligible 
account managers. Such entities are generally

[[Page 12321]]

exempt from registration because their clients are sophisticated 
investors. Exempt account managers, however, remain subject to the 
antifraud provisions of the Commodity Exchange Act and the Commission's 
regulations. The proposed rule would not apply to associated persons or 
Introducing Brokers exempt from Commission registration as CTAs 
pursuant to Rule 4.14(a)(3) and (6).\6\
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    \6\ 17 CFR 4.14(a)(3) (2002), 17 CFR 4.14(a)(6) (2002).
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    The current rule allows foreign advisors to be eligible account 
managers only if they are subject to regulation by a foreign regulator 
or self-regulatory organization that has been granted an exemption 
pursuant to Rule 30.10\7\ or have entered into a Memorandum of 
Understanding or other arrangement with the Commission. As proposed, 
Rule 1.35(a-1)(5)(i)(D) would allow foreign advisors, who exercise 
discretionary trading authority over the accounts of non-United States 
persons, to be eligible account managers.\8\
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    \7\ 17 CFR 30.10 (2002). Rule 30.10 permits any person to 
petition for an exemption from the Commission's Part 30 rules, which 
govern foreign futures and option trading by persons located in the 
United States. Commission orders issued pursuant to Rule 30.10 
permit firms to solicit and accept orders for foreign futures and 
option contracts from United States customers without registering 
under the Commodity Exchange Act, based upon substituted compliance 
with the rules and regulations of the jurisdiction in which the firm 
is located.
    \8\ 48 FR 35248, 35261 (August 3, 1983); see also, CFTC Staff 
Letter No. 76-2 [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) 
] 20,222 (August 15, 1976)(Commission staff would not recommend 
enforcement action for failure to register as a CPO where such 
persons are located outside the U.S. and operating a pool that 
accepts no United States participants and no funds from United 
States sources).
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    The Commission, of course, would retain antifraud and 
antimanipulation authority. The Commission notes that foreign advisers 
under the proposed rule would be foreign brokers or foreign traders 
subject to Commission Rule 15.05, which makes the FCMs through which 
foreign advisers make or cause to be made trades the agents of the 
foreign advisers for purposes of communications from the Commission.\9\
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    \9\ See 17 CFR 15.00(e) and 17 CFR 15.05 (2002).
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    As noted above, the proposal would expand the categories of 
entities permitted to bunch orders. The Commission requests comments on 
whether it is appropriate to permit these entities to be eligible 
account managers and whether the proposed protections are sufficient.

C. Disclosure

    The Commission proposes to amend the disclosure requirement to be 
an information availability requirement based upon the fact that the 
Commission does not generally require registrants to affirmatively 
disclose the mechanics of the process of trading.\10\
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    \10\ Registrants must provide such information if requested.
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    Current Rule 1.35(a-1)(5)(iii) specifies certain disclosure 
requirements that account managers must provide to customers. The 
proposal would replace these requirements with more general 
requirements that eligible account managers make certain information 
available to customers upon request. Account managers would be required 
to make the following information available to customers: (1) The 
general nature of the allocation methodology the account manager uses; 
(2) summary or composite data sufficient for that customer to compare 
its results with those of other relevant customers and, if applicable, 
any account in which the account manager has an interest; and (3) 
whether accounts in which the account manager may have any interest may 
be included with customer accounts in bunched orders eligible for post-
execution allocation. The Commission is proposing to delete the 
requirement that account managers set forth the standard by which they 
will judge the fairness of the post-execution allocations as this 
essential requirement is provided by the description of the nature of 
the methodology and monitoring the account manager's post execution 
allocations for bias over time. More importantly, the Commission is 
proposing to retain the requirement that summary or composite data, 
sufficient to compare results with the results of other comparable 
customers, be made available to customers. In addition, the Commission 
proposes to add a requirement that summary or composite data about 
accounts in which the account manager has an interest be made available 
to customers.
    The Commission invites comment on whether the proposal to change 
the disclosure requirement into an information availability requirement 
is appropriate.

D. Account Certification

    Current Rule 1.35(a-1)(5)(iv) requires that account managers make 
certain certifications to FCMs. Both account managers and FCMs have 
claimed that this requirement is burdensome, an impediment to the use 
of current procedures and that it contributes to uncertainty regarding 
the relative responsibility of FCMs and account managers. Accordingly, 
the Commission is proposing to delete this requirement.

E. Allocation

    The proposed rule would retain the essential requirement contained 
in the existing rule that the allocation must be fair and equitable and 
that no account or group of accounts may receive consistently favorable 
or unfavorable treatment. The proposal, however, would make several 
changes to the provisions governing allocation.
    First, as noted above, the Commission is proposing to expand 
eligibility to all customers who have provided written discretion to an 
eligible account manager. Thus, the proposal would eliminate existing 
Rule 1.35(a-1)(5)(v)(A) that requires that allocations only be made 
among eligible customers. Second, to minimize end-of-trading session 
congestion, the Commission proposes to amend existing Rule 1.35(a-
1)(5)(v) by requiring account managers to provide allocation 
information to FCMs in a time sufficiently before the end of the 
trading session during which the order is executed to ensure that 
clearing records identify the ultimate customer for each trade. Third, 
the Commission proposes to modify the provision addressing independent 
review of allocations. The proposed rule would retain the requirement 
that allocation methodology must be sufficiently objective and specific 
to permit independent verification of the fairness of the 
allocation.\11\ The Commission, however, is deleting the requirement 
that appropriate allocation of a given trade should be verifiable 
because that requirement, along with the accompanying recordkeeping 
requirement in Rule 1.35(a-1)(vi) required an assessment of 
``appropriateness'' on an order-by-order basis. Industry 
representatives have stated that requiring an assessment of the 
fairness on an order-by-order basis may not result in the most 
efficient allocation of trades entered by an account manager.\12\ 
Therefore, and consistent with the recommendation of the Best Practices 
Study, the proposed rule would require that verification of fairness be 
judged over time rather than on an order-by-order basis.\13\
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    \11\ Appendix C of part 1 contains examples of allocation 
methods. See, 17 CFR Part 1, Appendix C (2002), 62 FR 25470 (May 8, 
1997). As noted in Appendix C, ``the appropriateness of any 
particular method for allocating split and partial fills depends on 
the CTA's overall trading approach. For example, a daily rotation of 
accounts may satisfy the general standards for CTAs who trade on a 
daily basis but inappropriate for CTAs who trade less frequently.''
    \12\ It is important to note that the standards for fair 
allocation of trades may shift over time.
    \13\ Best Practices Study at 26.
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    The proposal also would clarify the respective responsibilities of 
account

[[Page 12322]]

managers and FCMs. Proposed Rule 1.35(a-1)(5)(iii) would explicitly 
state that allocation of bunched orders must be made by account 
managers, not FCMs. Eliminating the certification requirements will 
reduce the administrative and recordkeeping burden on FCMs. Of course, 
FCMs will still have responsibility to monitor for unusual account 
activity. In an interpretive notice accompanying NFA Compliance Rule 2-
10, NFA notes ``[t]he FCM has certain basic duties to its customers, 
including the duty to supervise its own activities in a way designed to 
ensure that it treats its customers fairly. Specifically, the FCM would 
violate this duty if it has actual or constructive notice that 
allocations for its customers may be fraudulent and fails to take 
appropriate action. The FCM with such notice must make a reasonable 
inquiry into the matter and, if appropriate, refer the matter to the 
proper regulatory authorities.''\14\ Thus, FCMs will have an ongoing 
responsibility to monitor for unusual account activity.\15\
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    \14\ Interpretive Notice, NFA Compliance Rule 2-10: The 
Allocation of Block Orders for Multiple Accounts (June 9, 1998).
    \15\ Id; see also, 17 CFR 166.3 (2002)(stating that Commission 
registrants have a duty to diligently supervise handling of all 
commodity interest accounts). FCMs also have a duty to monitor for 
money laundering and report such activities to the appropriate 
regulatory authority. Interpretive Notice, NFA Compliance Rule 2-9: 
FCM and IB Anti-Money Laundering Program. For example, if an adviser 
places bunched orders with an FCM and routinely instructs the FCM to 
allocate favorable trades or unfavorable trades in a bunched order 
to one customer account, then this could constitute unusual account 
activity that an FCM has a duty to investigate and if appropriate 
report to regulators.
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    The Commission requests comment on whether the proposed changes 
strike the appropriate balance with regard to judging allocations and 
assigning responsibilities to account managers and FCMs.

F. Recordkeeping

    Current Rule 1.35(a-1)(5)(vi) requires account managers and FCMs to 
keep specific information to identify customer orders and reconstruct 
trades. Pursuant to the proposed rule, the Commission is clarifying 
that the fairness of an allocation will not be assessed on an order-by-
order basis but on an assessment over time. If divergent performance 
among client accounts occurs over time, the account manager must have 
records to demonstrate that the divergent performance is attributable 
to factors other than unfair trade allocation. Thus, the proposed rule 
will allow account managers and FCMs greater flexibility in 
recordkeeping, while retaining the ability of the Commission to 
determine unfair trade allocation.
    Specifically, the Commission proposes to eliminate existing Rule 
1.35(a-1)(5)(vi) and to replace the recordkeeping requirement with a 
requirement that account managers make certain information available to 
any representative of the Commission, the United States Department of 
Justice, or other appropriate regulatory agency. The information would 
include the information required to be made available to customers 
pursuant to proposed Rule 1.35(a-1)(5)(ii) and the allocation 
information created pursuant to proposed Rule 1.35(a-1)(5)(iii). Under 
proposed Rule 1.35(a-1)(5)(iv)(C), FCMs that execute trades for orders 
eligible for post-execution allocation, or that carry accounts to which 
contracts executed for such orders are allocated, must maintain records 
that identify each order subject to post-execution allocation and the 
accounts to which contracts executed for such order are allocated.\16\
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    \16\ The recordkeeping provisions of Rule 1.31 would still 
apply. 17 CFR 1.31 (2002).
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    For example, account managers employing post-execution allocation 
procedures generally would be expected to forward written allocation 
instructions to the clearing firm by facsimile or e-mail or other 
electronic means.\17\ In those instances in which allocation 
instructions are furnished orally, the FCM must create a written record 
of the account manager's instructions. In each case, these records will 
be available to the Commission and other regulatory agencies or self-
regulatory organizations. The Commission should be able to reconstruct 
trades from these records.
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    \17\ It is important to note that unless the order is submitted 
consistent with the requirements of this proposed rule, the order 
must contain a customer identification number. See, 17 CFR 1.35(a-1) 
(2002).
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    The proposal contains a provision to address cases in which account 
managers fail to provide the Commission with the information requested 
pursuant to proposed Rule 1.35(a-1)(5)(iv)(A) or proposed Rule 1.35(a-
1)(5)(iv)(B). Specifically, the Commission may prohibit the account 
manager from submitting orders for execution on designated contract 
markets and prohibit FCMs from accepting orders from such account 
managers. Commission action under this provision would not require 
prior notice and hearing. The failure of an account manager to respond 
to a request for information under this rule would be sufficient. Any 
account manager that believes he or she is adversely affected by this 
process may use the procedures outlined in Rule 21.03(g).\18\ Any 
prohibitions imposed pursuant to this Rule 1.35(a-1)(5)(iv)(D) would be 
without prejudice to other remedies the Commission or other regulatory 
body may have against the account manager in question for violation of 
the rule or any other legal requirements.\19\
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    \18\ 17 CFR 21.03(g) (2002).
    \19\ See, 17 CFR 21.03(h) (2002).
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G. Self-Regulatory Organization Rule Enforcement and Audit Procedures

    Existing Rule 1.35(a-1)(5)(vii) requires contract markets to adopt 
audit procedures to determine compliance with the certification 
requirements of Rule 1.35(a-1)(5)(vi). As noted above, the Commission 
is proposing to eliminate the recordkeeping and certification 
requirement and, accordingly, to eliminate Rule 1.35(a-1)(5)(vii).
    Although, the Commission proposes to eliminate Rule 1.35(a-
1)(5)(vii), the Commission will work with NFA to evaluate NFA's audit 
and examination process to identify any supervisory enhancements that 
will be necessary to ensure that customers are adequately protected and 
treated fairly.

III. Requests For Comment

    The Commission has identified throughout this release issues on 
which it requests comment. In addition to the specific issues raised 
above, the Commission welcomes comment on any aspect of the proposed 
rule.

IV. Other Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et. seq., 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The Commission has previously 
determined that contract markets,\20\ futures commission merchants,\21\ 
registered commodity pool operators \22\ and large traders \23\ are not 
``small entities'' for purposes of the Regulatory Flexibility Act. The 
Commission has previously determined to evaluate within the context of 
a particular rule proposal whether all or some commodity trading 
advisors should be considered ``small entities'' for purposes of the 
Regulatory Flexibility Act and, if so, to analyze the economic impact 
on commodity trading advisors of any such rule at that time.\24\

[[Page 12323]]

Commodity trading advisors who would place eligible orders pursuant to 
these procedures would likely do so for multiple clients and would 
likely be participating as investment managers in more than one 
financial market. Accordingly, the Commission does not believe that 
commodity trading advisors should be considered ``small entities'' for 
purposes of this rule.
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    \20\ 47 FR 18618, 18619 (April 30, 1982).
    \21\ Id.
    \22\ Id. at 18620.
    \23\ Id.
    \24\ Id.
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    Therefore, the Chairman, on behalf of the Commission, hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the action proposed to be 
taken herein will not have a significant economic impact on a 
substantial number of small entities.

B. Paperwork Reduction Act of 1995

    This proposed rulemaking affects information collection 
requirements. As required by the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), the Commission has submitted a copy of this section to 
the Office of Management and Budget for its review.
Collection of Information
    Rules Pertaining to Contract Markets and Their Members, OMB Control 
Number 3038-0022.
    The expected effect of the proposed amended rule will be to not 
change the burden previously approved by OMB for this collection 
because, although it will result in an increase in the number of 
filings by account managers, it will result in a decrease in filings by 
FCMs.
    Specifically:
The burden associated with Commission Rule 1.35(a-1)(5) is expected to 
be unchanged:

    Estimated number of respondents: 400.
    Annual responses by each respondent: 1.
    Estimated average hours per response: 13.
    Annual reporting burden: 52 hours.
    This annual reporting burden of 52 hours represents no change in 
the number of hours as a result of the proposed amendments to Rule 
1.35(a-1).
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235 New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed 
collection of information in--
    [sbull] Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    [sbull] Evaluating the accuracy of the Commission's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
    [sbull] Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
    [sbull] Minimizing the burden of collection of information on those 
who are to respond, including through the use of appropriate automated 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., permitting electronic 
submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Commission on the 
proposed regulations.
    Copies of the information collection submission to OMB are 
available from the CFTC Clearance Officer, 1155 21st Street N.W., 
Washington, DC 20581, (202) 418-5160.

C. Cost-Benefit Analysis

    Section 15(a) of the Act 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(a) does not require the Commission to 
quantify the costs and benefits of a new regulation or to determine 
whether the benefits of the proposed regulation outweigh its costs. 
Rather, section 15(a) simply requires the Commission to ``consider the 
costs and benefits'' of its action.
    Section 15(a) further specifies that costs and benefits shall be 
evaluated 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 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 proposed amendments are intended to facilitate increased 
flexibility and consistency, and to rationalize application of 
Commission regulations to entities subject to other regulatory 
frameworks. The Commission is considering the costs and benefits of 
these rules in light of the specific provisions of section 15(a) of the 
Act:
    1. Protection of market participants and the public.
    While certain of the proposed amendments are expected to lessen the 
burden imposed upon FCMs and account managers, market participants and 
the public will be protected by requirements in the allocation 
procedure. Accordingly, the proposed amendments should have no effect 
on the Commission's ability to protect market participants and the 
public.
    2. Efficiency and competition.
    The proposed amendments are expected to benefit efficiency in the 
commodity futures and options markets, resulting in greater liquidity 
and market efficiency.
    3. Financial integrity of futures markets and price discovery.
    The proposed amendments should have no effect, from the standpoint 
of imposing costs or creating benefits, on the financial integrity or 
price discovery function of the commodity futures and options markets.
    4. Sound risk management practices.
    The proposed amendments should have no effect on sound risk 
management practices.
    5. Other public interest considerations.
    The proposed amendments will also take into account certain effects 
of legislative changes and the passage of time.
    After considering these factors, the Commission has determined to 
propose the amendments discussed above. The Commission invites public 
comment on its application of the cost-benefit provision. Commenters 
also are invited to submit any data that they may have quantifying the 
costs and benefits of the proposal with their comment letters.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Commodity options, Consumer protection, 
Contract markets, Customers, Members of contract markets, 
Noncompetitive trading, Reporting and recordkeeping requirements, Rule 
enforcement programs.

    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act and, in

[[Page 12324]]

particular, sections 5, 5a, 5b, 6(a), 6b, 8a(7), and 8c, 7 U.S.C. 7, 
7a, 7b, 8(a), 8b, 12a(7), 12a(9), and 12c, the Commission hereby 
proposes to amend Part 1 of Chapter I of Title 17 of the Code of 
Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.

    2. Section 1.35 is proposed to be amended by revising paragraph (a-
1)(5) to read as follows:


Sec.  1.35  Records of cash commodity, futures and option transactions.

* * * * *
    (a-1) * * *
    (5) Post-execution allocation of bunched orders. Specific customer 
account identifiers for accounts included in bunched orders need not be 
recorded at time of order placement or upon report of execution if the 
requirements of paragraphs (a-1)(5)(i)-(iv) are met.
    (i) Eligible account managers. The person placing and directing the 
allocation of an order eligible for post-execution allocation must have 
been granted written investment discretion with regard to participating 
customer accounts. The following persons shall qualify as eligible 
account managers:
    (A) A commodity trading advisor registered with the Commission 
pursuant to the Act or excluded or exempt from registration under the 
Act or the Commission's rules, except for entities exempt under Sec.  
4.14(a)(3) or Sec.  4.14(a)(6) of this chapter;
    (B) An investment adviser registered with the Securities and 
Exchange Commission pursuant to the Investment Advisers Act of 1940 or 
with a state pursuant to applicable state law or excluded or exempt 
from registration under such Act or applicable state law or rule;
    (C) A bank, insurance company, trust company, or savings and loan 
association subject to federal or state regulation; or
    (D) A foreign adviser that exercises discretionary trading 
authority solely over the accounts of non-U.S. persons, as defined in 
Sec.  4.7(a)(1)(iv) of this chapter.
    (ii) Information. Eligible account managers shall make the 
following information available to customers upon request:
    (A) The general nature of the allocation methodology the account 
manager will use;
    (B) Whether accounts in which the account manager may have any 
interest may be included with customer accounts in bunched orders 
eligible for post-execution allocation; and
    (C) Summary or composite data sufficient for that customer to 
compare its results with those of other comparable customers and, if 
applicable, any account in which the account manager has an interest.
    (iii) Allocation. Orders eligible for post-execution allocation 
must be allocated by an eligible account manager in accordance with the 
following:
    (A) Allocations must be made as soon as practicable after the 
entire transaction is executed, but in any event account managers must 
provide allocation information to futures commission merchants no later 
than a time sufficiently before the end of the day the order is 
executed to ensure that clearing records identify the ultimate customer 
for each trade.
    (B) Allocations must be fair and equitable. No account or group of 
accounts may receive consistently favorable or unfavorable treatment.
    (C) The allocation methodology must be sufficiently objective and 
specific to permit independent verification of the fairness of the 
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
    (iv) Records.
    (A) Eligible account managers shall keep and must make available 
upon request of any representative of the Commission, the United States 
Department of Justice, or other appropriate regulatory agency, the 
information specified in paragraph (a-1)(5)(ii) of this section.
    (B) Eligible account managers shall keep and must make available 
upon request of any representative of the Commission, the United States 
Department of Justice, or other appropriate regulatory agency, records 
sufficient to demonstrate that all allocations meet the standards of 
paragraph (a-1)(5)(iii) of this section and to permit the 
reconstruction of the handling of the order from the time of placement 
by the account manager to the allocation to individual accounts.
    (C) Futures commission merchants that execute orders or that carry 
accounts eligible for post-execution allocation, and members of 
contract markets that execute such orders, must maintain records that, 
as applicable, identify each order subject to post-execution allocation 
and the accounts to which contracts executed for such order are 
allocated.
    (D) In addition to any other remedies that may be available under 
the Act or otherwise, if the Commission has reason to believe that an 
account manager has failed to provide information requested pursuant to 
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the 
Commission may inform in writing any designated contract market or 
derivatives transaction execution facility and that designated contract 
market or derivatives transaction execution facility shall prohibit the 
account manager from submitting orders for execution except for 
liquidation of open positions and no futures commission merchants shall 
accept orders for execution on any designated contract market or 
derivatives transaction execution facility from the account manager 
except for liquidation of open positions.
    (E) Any account manager that believes he or she is or may be 
adversely affected or aggrieved by action taken by the Commission under 
paragraph (D) of this section shall have the opportunity for a prompt 
hearing in accordance with the provisions of Sec.  21.03(g) of this 
chapter.
* * * * *

    Issued in Washington, DC on March 10, 2003 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-6177 Filed 3-13-03; 8:45 am]
BILLING CODE 6351-01-P