[Federal Register Volume 69, Number 138 (Tuesday, July 20, 2004)]
[Rules and Regulations]
[Pages 43285-43295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16319]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 36


Exempt Commercial Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
promulgating final rules relating to electronic trading facilities that 
operate in reliance on the exemption in section 2(h)(3) of the 
Commodity Exchange Act (``the Act''). First, the Commission is amending 
Rule 36.3(b), which governs Commission access to information regarding 
transactions on such trading facilities, to provide for access to more 
relevant and useful information from all such markets. Second, the 
Commission

[[Page 43286]]

is amending Rule 36.3(c)(2) to require those electronic trading 
facilities that operate in reliance on the exemption in section 2(h)(3) 
and that perform a significant price discovery function for 
transactions in the underlying cash market to publicly disseminate 
certain specified trading data. These price discovery rules are being 
promulgated pursuant to section 2(h)(4) of the Act, which authorizes 
the Commission to prescribe rules and regulations to ensure timely 
dissemination by such trading facilities of price, trading volume, and 
other trading data to the extent appropriate.

DATES: Effective Date: September 20, 2004.

FOR FURTHER INFORMATION CONTACT: Don Heitman, Senior Special Counsel 
(telephone 202-418-5041, e-mail [email protected]), Division of Market 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Center, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Overview

    The Commodity Futures Modernization Act of 2000 (``CFMA''), 
appendix E of Public Law 106-554, 114 Stat. 2763 (2000), created a 
limited exemption from the Commission's jurisdiction for transactions 
conducted on certain electronic commercial markets (``exempt commercial 
markets,'' ``ECMs'' or ``section 2(h)(3) markets''). Specifically, 
section 2(h)(3) of the Act, as amended by the CFMA, provides that, 
except to the extent provided in section 2(h)(4), nothing in the Act 
shall apply to a transaction in an exempt commodity \1\ that is: (a) 
entered into on a principal-to-principal basis solely between persons 
that are eligible commercial entities at the time the persons enter 
into the agreement, contract, or transaction; and (b) executed or 
traded on an electronic trading facility. Section 2(h)(4) provides that 
a transaction described in section 2(h)(3) shall be subject to certain 
specified provisions of the Act, such as the Act's antimanipulation and 
antifraud provisions, and furthermore, that such transactions shall be 
subject to price dissemination rules if the electronic trading facility 
serves a significant price discovery function for the underlying cash 
market. Section 2(h)(5) requires an electronic trading facility relying 
on the exemption in section 2(h)(3) to provide the Commission with 
certain information and to comply with trading information access 
provisions set out in section 2(h)(5)(B)(i). The regulations governing 
ECMs appear at section 36.3 of the Commission's Rules.
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    \1\ Under the Act, exempt commodities generally are tangible, 
non-agricultural commodities and include energy and metals products. 
See section 1a(14) of the Act, 7 U.S.C. 1a(14). See also, 146 Cong. 
Rec. S11896-01 (Dec. 15, 2000) (Statement of Senator Harkin).
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B. The Proposed Rules

    On November 25, 2003, the Commission published proposed amendments 
\2\ to its part 36 regulations governing exempt commercial markets. 
With respect to information access, the proposal noted that section 
2(h)(5)(B)(i) of the Act requires ECMs to provide the Commission with 
either: (1) ``access to the facility's trading protocols and electronic 
access to the facility with respect to transactions conducted in 
reliance on the exemption [in section 2(h)(3)]''; or (2) ``such reports 
* * * regarding transactions executed on the facility in reliance on 
the exemption [in section 2(h)(3)] as the Commission may from time to 
time request to enable the Commission to satisfy its obligations under 
this Act.'' The proposal referred to these two statutory alternatives 
as, respectively, the ``electronic access option'' and the ``reporting 
option.''
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    \2\ 68 FR 66032 (Nov. 25, 2003).
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    The proposal noted that, under the existing part 36 regulations, 
ECMs have generally chosen to comply with the information access 
requirements through the electronic access option. Under this 
alternative, the Commission has accepted from ECMs electronic access to 
their trading protocols (i.e., the trading agreements and/or other 
terms and conditions applicable to trades on the facility, generally 
available on their websites) in addition to view-only electronic access 
to the data stream of trades taking place on the system. In practice, 
however, the Commission has found that the information provided under 
the current electronic access option is neither as relevant,\3\ nor as 
useful,\4\ as anticipated.
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    \3\ The electronic access option, as currently applied, gives 
the Commission information regarding all contracts traded on an 
ECM's trading facility. This may include a large amount of 
extraneous data regarding contracts that are not contracts for 
future delivery of a commodity, or options, and are, therefore, not 
within the Commission's exclusive jurisdiction.
    \4\ The Commission's surveillance staff has determined that the 
information available through the current view-only electronic 
access to ECM trading facilities is not, in fact, equivalent to the 
large trader information received with respect to designated 
contract markets, as anticipated in the preamble to the original 
Part 36 Rules (See 66 FR 42256, at 42264 (Aug. 10, 2001)).
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    Therefore, the Commission proposed to amend its regulations to 
focus Rule 36.3(b)(1) more precisely so as to provide the Commission 
with access to more relevant and useful information regarding trading 
activity on ECMs. Under the proposed rules, an ECM filing a 
notification with the Commission under Rule 36.3 would be required, 
initially and on an ongoing basis, to: (1) Provide the Commission with 
access to the facility's trading protocols, either electronically or in 
hard copy form; (2) identify those transactions conducted on the 
facility with respect to which it intends to rely on the exemption in 
section 2(h)(3); and (3) inform the Commission whether it intends to 
satisfy the information access requirement of section 2(h)(5)(B)(i) of 
the Act with respect to such transactions through either a revised 
reporting option or a revised electronic access option, as provided in 
the proposed rules.
    The proposed new reporting option would require an ECM to file 
weekly a report for each business day, showing for each transaction 
executed on the facility in reliance on the exemption set forth in 
section 2(h)(3), certain basic commodity, maturity, price, time and 
quantity information. Alternatively, the proposed new electronic access 
option would require ECMs to grant the Commission electronic access to 
transactions conducted on the facility in reliance on the exemption in 
section 2(h)(3) that would allow the Commission to capture in permanent 
form a continuing record of trades on the facility such that the 
Commission would be able to reconstruct and compile the same 
information that would otherwise be provided by the trading facility 
under the reporting option described above.
    The proposed information access rules also would require ECMs to 
maintain a record of allegations or complaints of instances of 
suspected fraud or manipulation on the facility and to provide the 
Commission with a copy of the record of each substantive complaint no 
later than three days after the complaint was received.
    With respect to price discovery, the November 25 proposed rules 
noted that section 2(h)(4)(D) of the Act specifically provides that a 
transaction described in section 2(h)(3) shall be subject to:

    Such rules and regulations as the Commission may prescribe if 
necessary to ensure timely dissemination by the electronic trading 
facility of price, trading volume, and other trading data to the 
extent appropriate, if the Commission determines that the electronic 
trading facility performs a significant price discovery function for

[[Page 43287]]

transactions in the cash market for the commodity underlying any 
agreement, contract, or transaction executed or traded on the 
electronic trading facility.

    The existing part 36 regulations provide that if the Commission 
finds by order, after notice and opportunity for a hearing, that a 
trading facility performs a significant price discovery function for 
transactions in the cash market in the underlying commodity, the 
facility must disseminate publicly price, trading volume and other 
trading data, to the extent appropriate, with respect to transactions 
executed in reliance on the exemption as specified in the order.
    The November 25, 2003 proposed rules would add specificity to the 
Commission's price discovery regulations in several ways. First, the 
Commission proposed to adopt two criteria that it would use to 
determine whether a section 2(h)(3) market performs a significant price 
discovery function for the underlying cash market. Second, the 
Commission proposed to specify the information that must be 
disseminated by section 2(h)(3) markets that serve such a significant 
price discovery function. Third, the Commission proposed certain 
amendments to its procedures for making a price discovery 
determination.\5\
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    \5\ The types of instruments traded on exempt commercial markets 
vary widely. Some of these instruments, but not all of them, are 
subject to the Commission's exclusive jurisdiction. The Commission's 
proposed rules were directed only to those instruments that are 
traded in reliance on the section 2(h)(3) exemption and are 
otherwise subject to the Commission's exclusive jurisdiction.
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C. Overview of Comments

    The Commission received comments from two exempt commercial 
markets, the IntercontinentalExchange, Inc. (``ICE'') and the Natural 
Gas Exchange, Inc. (``NGX''). Both markets expressed concerns about 
various aspects of the proposed information access provisions. ICE also 
raised issues regarding certain elements of the price discovery 
provisions. The specific comments, and the Commission's responses, are 
described in the discussion of the Final Rules that appears below.

II. The Final Rules

A. Information Access Provisions

1. The Scope of Commission Oversight, Reliance on Section 2(h)(3), 
Competitive Concerns
    The proposed rules would require ECMs to ``make their best effort 
to identify to the Commission those transactions conducted on the 
facility with respect to which it intends to rely on the exemption in 
section 2(h)(3).'' Transactions so identified would then be subject to 
either the reporting requirement or the electronic access requirement. 
The preamble noted that the trading facility would not be required to 
include in such identification, agreements, contracts or transactions 
that are not contracts for future delivery of a commodity, or options, 
and are, therefore, not subject to the Commission's exclusive 
jurisdiction. Thus, for example, the trading facility would not be 
required to identify, or provide information with respect to, 
agreements, contracts or transactions involving ``any sale of any cash 
commodity for deferred shipment or delivery.'' Such transactions are 
excluded from the Commission's exclusive jurisdiction under section 
1a(19) of the Act (commonly referred to as ``the forward contract 
exclusion''). Neither would a trading facility be required to identify, 
or provide information with respect to, agreements, contracts or 
transactions that constitute cash or spot transactions, which are 
contracts for present, rather than future, delivery and likewise are 
not subject to the Commission's exclusive jurisdiction.
    Both commenters express concern over the scope of Commission 
oversight, the scope of ``reliance'' on section 2(h)(3) and the burden 
of categorizing transactions for purposes of the information access 
requirements. ICE points out that, while the Act does give the 
Commission ``limited jurisdiction to obtain information from ECMs,'' it 
does not give the Commission ``ongoing regulatory jurisdiction over 
ECMs.'' According to ICE, the Act does not give the Commission 
``authority to require ECMs to maintain specific records or to submit 
prescribed reports'' except to a ``limited extent.'' In this regard, 
ICE asserts that, ``[i]n particular, if the ECM provides the Commission 
with access to its trading facility (e.g., `view only' access) the CEA 
does not give the Commission the authority to require that the ECM 
submit reports to the Commission.'' Thus, the proposed rules ``go 
beyond the clear direction of the CEA and subject ECMs to ongoing 
regulatory oversight or requirements.''
    The Commission agrees that the CEA does not give the Commission the 
same degree of oversight authority with respect to ECMs that it has 
over designated contract markets (``DCMs'') or derivatives transaction 
execution facilities (``DTFs''). Importantly, however, Congress did 
make ECMs subject to the antifraud and antimanipulation provisions of 
the Act. If the Commission is to have the ability to enforce those 
provisions, it must have access to meaningful information concerning 
transactions on ECMs. Congress would not have written section 
2(h)(5)(B)(i) into the Act for the purpose of giving the Commission 
access to, or reports of, information that would not assist the 
Commission in detecting fraud or manipulation. ICE correctly points to 
the current ``view only access'' as an example of the type of 
information that the Commission might access from an ECM, but it is not 
the only example. For instance, under the Act the Commission would not 
be prohibited from requiring access to an ECM's proprietary screen, 
including the names of the parties to each transaction. Such 
information would certainly be more useful for antifraud and 
antimanipulation enforcement purposes than the anonymous transaction-
related data proposed in the notice of proposed rulemaking. However, as 
noted in the letters of both commenters, ECMs are in competition with 
voice brokers and the Commission is well aware that requiring ECMs to 
provide counterparty names to the government could put them at a 
significant competitive disadvantage to their voice broker competitors. 
The information access provisions in these final rules (which have been 
significantly revised and narrowed, as discussed below) strike a 
balance between business concerns and the Commission's need for access 
to meaningful information with which to enforce its antifraud and 
antimanipulation authority as mandated by Congress.
    Also with respect to competitive concerns, NGX notes that proposed 
Rule 36.3(b)(1)(ii)(A), the reporting option, would require ECMs to 
report (in addition to time, price, quantity, etc.) ``such other 
information as the Commission may determine.'' NGX suggests that the 
Commission should reconsider using this phrase on the grounds that it 
would authorize routine collection of counterparty information, which 
should be available to the Commission only upon special call, and 
disclosure of which would put ECMs at a competitive disadvantage to 
voice brokers. NGX also asks that the Commission make clear that any 
counterparty information collected would be treated as ``nonpublic'' 
under the Commission's Freedom of Information Act (``FOIA'') 
regulations.
    The language referring to ``such other information as the 
Commission may determine'' is necessary to give the Commission 
flexibility to seek additional transactional data and has not been 
changed in the final rules. However, it was not the Commission's 
intention that such language could be

[[Page 43288]]

interpreted or applied to encompass counterparty information. Under 
these final rules, the Commission would expect to obtain counterparty 
information from an ECM pursuant to a special call issued under section 
2(h)(5)(B)(iii) of the Act, in which case it would be classified as 
``nonpublic'' under the FOIA.
    ICE raises the same competitive issue about data publishers as 
about voice brokers. Like voice brokers, ``data publishers similarly 
obtain and disseminate information regarding market transactions--
including, in some cases, those executed on ECMs--and may also be 
involved in the execution of transactions. As a result, data publishers 
have as much, if not more, of an ability to influence pricing decisions 
in the cash and derivatives markets as ECMs. The Commission should, 
therefore, take into account the activities of voice brokers and data 
publishers and their roles in the market, and consider the competitive 
burdens that would be placed on ECMs, in determining the final form of 
the Proposed Rules.'' As noted above, the proposed information access 
requirements for ECMs are not intrusive, and are consistent with 
appropriate enforcement of the Commission's antifraud and 
antimanipulation authority. The Act does not give the Commission 
authority to require data publishers to file reports, or grant access, 
like ECMs. However, to the extent such data publishers published 
knowingly inaccurate information, or participated in other cash or 
futures market manipulative activity within the Commission's 
jurisdiction, they would be subject to the Commission's enforcement 
authority. The string of recent Commission enforcement actions 
involving false natural gas price reporting is clear evidence that the 
Commission is committed to strictly enforcing that authority. To date, 
the Commission has filed 19 major enforcement actions as a result of 
its investigation of wrongdoing in the energy markets. Sixteen of these 
actions have been settled, with sanctions that include civil monetary 
penalties of over $220 million, while three actions remain pending.
    ICE states that, ``it will be unnecessarily burdensome for an ECM 
to identify all transactions for which it is relying on section 
2(h)(3).'' NGX, on the other hand, suggests that the Commission should 
reconsider its proposal to require ECMs to segregate out transactions 
that are subject to the Commission's exclusive jurisdiction from (for 
example) physical sales and to report, or provide access, only with 
respect to such (futures and options) data. NGX argues against 
narrowing the scope of information access because: (1) ``The Commission 
needs all of the market data it is receiving'' because its fraud and 
manipulation authority is not limited to futures and options, but 
extends to the cash market as well; and (2) ``The proposal infers that 
only some ECM transactions (principally futures and options) are 
covered by section 2(h)(3),'' but ``the intent of section 2(h)(3) is to 
extend its benefits to all forms of transaction.''
    The statute gives each ECM the right and the responsibility to 
determine its own reliance on the section 2(h)(3) exemption. Thus, an 
ECM has no choice but to identify those transactions for which it 
chooses to rely on the exemption. Under the final rules, if some of the 
transactions on the ECM's trading facility are, in its view, not within 
the Commission's exclusive jurisdiction--for example, the same day and 
next day spot trades mentioned in ICE's comments--the ECM need not rely 
on the exemption for those transactions and so need not provide 
information access with respect to those transactions. If, however, an 
ECM finds that making such an identification is ``unnecessarily 
burdensome,'' it can simply decide to rely on the exemption--and 
provide the Commission with information access--with respect to all 
transactions on the facility, just as ECMs are already doing with 
respect to the view-only electronic information provided to the 
Commission under the current rules. Thus, ECMs have the choice, but not 
the obligation, to limit their identification of transactions to 
futures and options. If ECMs voluntarily choose not to limit data to 
futures and options, the Commission would have access to the additional 
market data described in NGX's point one. However, to require ECMs to 
provide market data concerning transactions that are not within the 
Commission's exclusive jurisdiction, as suggested in NGX's point two, 
would appear to be contrary to the spirit of section 2(h)(3).
    More significantly, in response to the commenters' concerns over 
the scope of the information access provisions, the Commission has 
determined to substantially narrow the reach of that provision. Under 
the final rules, an ECM will only be required to identify to the 
Commission (and file reports, or grant electronic access concerning) 
``transactions conducted on the facility with respect to which it 
intends, in good faith, to rely on the exemption in section 2(h)(3) of 
the Act, and which averaged five trades per day or more over the most 
recent calendar quarter.'' [emphasis supplied] The Commission's 
surveillance staff has determined that imposing such a volume threshold 
test will eliminate reports concerning many thinly traded contracts. 
Such reports would be of very limited utility in detecting market 
manipulation, due to the high incidence of ``false positives'' \6\ in 
markets that experience infrequent trading. Thinly traded contracts 
that do not meet the volume test would, nevertheless, remain subject to 
the Commission's antifraud and antimanipulation authority (as well as 
the complaint reporting requirement, as discussed below).
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    \6\ A ``false positive'' in this context means an instance in 
which an analysis of price activity alone may indicate the 
possibility of manipulation, but upon further examination it becomes 
apparent that the price activity did not result from manipulation.
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    By substantially narrowing the scope of information to be provided 
to that which will be of real utility to Commission surveillance staff, 
the final rules will also address the commenters' concerns over the 
scope of information to be provided and the attendant problems in 
segregating out contracts subject to the Commission's exclusive 
jurisdiction. Under this standard, new ECMs first beginning operations 
will not be required to make a determination under Rule 36.3(b)(1)(ii) 
until after the first full calendar quarter of trading and will not be 
required to provide information under the reporting option or the 
electronic access option until at least one contract traded on the 
facility meets the five trade per day volume threshold.
    NGX states that attempting to draw lines between ``futures'' and 
``options'' and other types of transactions has ``engendered confusion 
and controversy including substantial legal uncertainty [and] the 
current proposal would restore that uncertainty.'' NGX further notes 
that imposing ``a formal duty by ECMs to confine their data streams to 
the Commission only to futures and options'' could generate a high 
error rate (including some transactions the Commission does not wish to 
review and overlooking others that would be of interest). It would also 
subject ECMs to the penalties under section 9(a)(3) for knowingly 
omitting a material fact in a report to the Commission. ICE points out 
that requiring an ECM to ``amend its notice to reflect the addition of, 
or amendments to, products traded in reliance on'' section 2(h)(3) will 
be ``burdensome and inconsistent with'' the purposes of the CFMA. It 
may be difficult to determine whether modifications to an existing 
product transform it into a new product.

[[Page 43289]]

Furthermore, requiring such frequent filings is ``inconsistent with the 
CEA and * * * unwarranted.''
    As pointed out in the preamble to the NPRM, ECMs identifying 
contracts with respect to which they intend to rely on section 2(h)(3), 
or amending such identifications, would not be subject to liability 
under section 4(a) for any contracts that were misidentified in good 
faith. ECMs would not be subject to penalties under section 9(a)(3) 
because that section is not among the provisions of the Act, listed in 
section 2(h)(3), which apply to ECMs.
    With respect to legal uncertainty, consistent with section 2(i) of 
the Act,\7\ even if an agreement, contract or transaction was 
identified as being traded in reliance on the section 2(h)(3) 
exemption, in any enforcement action involving any such agreement, 
contract or transaction, the Commission would be required to prove its 
jurisdiction independently of an ECM's identification of that 
agreement, contract or transaction for purposes of compliance with the 
information access provisions under Rule 36.3. Also, should a trading 
facility seeking in good faith \8\ to comply with the information 
access provisions of Rule 36.3 fail to identify a particular agreement, 
contract or transaction, which is later determined to be a futures or 
option contract subject to the Commission's exclusive jurisdiction, 
such failure would not be construed by the Commission as a violation of 
section 4(a) of the Act.\9\ However, such transaction would still 
remain subject to the Commission's antifraud and antimanipulation 
authority. Furthermore, in view of the new volume threshold test, the 
universe of contracts to which the identification will have to be 
applied should be significantly narrowed.
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    \7\ Section 2(i) of the Commodity Exchange Act provides that:
    (1) No provision of this Act shall be construed as implying or 
creating any presumption that--
    (A) any agreement, contract, or transaction that is excluded 
from this Act under section 2(c), 2(d), 2(e), 2(f), or 2(g) of this 
Act or title IV of the Commodity Futures Modernization Act of 2000, 
or exempted under section 2(h) or 4(c) of this Act; or
    (B) any agreement, contract, or transaction, not otherwise 
subject to this Act, that is not so excluded or exempted, is or 
would otherwise be subject to this Act.
    (2) No provision of, or amendment made by, the Commodity Futures 
Modernization Act of 2000 shall be construed as conferring 
jurisdiction on the Commission with respect to any such agreement, 
contract or transaction, except as expressly provided in section 5a 
of this Act (to the extent provided in section 5a(g) of this Act), 
5b of this Act, or 5d of this Act.
    \8\ The ``good faith'' standard will apply only to the 
requirement that ECMs identify contracts with respect to which they 
intend to rely on section 2(h)(3). It does not apply to the 
requirement that ECMs must comply with section 2(h)(5), including 
notice to the Commission of their intention to operate an electronic 
trading facility in reliance on section 2(h)(3), in order to qualify 
for the exemption. In other words, the Division of Enforcement would 
not have to establish that a trading facility did not act in good 
faith in order to prevail in an action alleging violation, for 
example, of section 4(a), against a trading facility that failed to 
comply with the notice requirements of section 2(h)(5). See, e.g., 
CFTC v. Enron Corp., et al., No. H-03-909 (S.D. Tex. filed Mar. 12, 
2003).
    \9\ Section 4(a) of the Act makes it unlawful to trade a 
contract for future delivery of a commodity in the U.S. unless on a 
contract market designated by, or a derivatives transaction 
execution facility registered with, the Commission.
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    As noted in the preamble to the proposed rules, a trading facility 
that does not offer trading in any futures or option contracts subject 
to the Commission's exclusive jurisdiction--for example, a facility 
where only cash or forward contracts are traded--is not required to 
file a notification under Rule 36.3. Such a facility is not generally 
subject to the Act.\10\
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    \10\ The Commission notes that, under section 12(e)(2) of the 
Act, an agreement, contract, or transaction that is not subject to 
the Commission's exclusive jurisdiction would be subject to state 
antifraud provisions of general applicability.
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2. Applying the Information Access Rules
    Trading facilities electing to provide information under the 
reporting option (Rule 36.3(b)(1)(ii)(A)) will be required to file 
weekly reports concerning only agreements, contracts or transactions 
with respect to which they are relying on the section 2(h)(3) 
exemption, and which meet the five trade per day volume standard for 
the preceding calendar quarter. Such reports will contain information 
that could be useful to the Commission in enforcing its antifraud and 
antimanipulation authority with respect to those trading facilities. 
Such reports would include, in a form and manner approved by the 
Commission, a report for each business day, showing for each qualifying 
transaction executed on the facility the following information: the 
commodity, the location,\11\ the maturity date, whether it is a 
financially settled or physically delivered instrument, the date of 
execution, the time of execution, the price, the quantity, and such 
other information as the Commission may determine, and for an option 
instrument, in addition to the foregoing information, the type of 
option (call or put) and the strike price. Each such report would be 
required to be electronically transmitted weekly, within such time 
period as is acceptable to the Commission following the end of the week 
to which the data applies. At the beginning of each new calendar 
quarter, within such time period as is acceptable to the Commission, 
ECMs will be required to review trading for the previous calendar 
quarter to determine which of the contracts traded in reliance on 
section 2(h)(3) during that quarter also meet the five trade per day or 
more volume test. All contracts meeting both the reliance test and the 
volume test during the previous quarter will be subject to the weekly 
reporting requirement for the new quarter.
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    \11\ In this context, ``location'' means the delivery or the 
price-basing location specified in the agreement, contract or 
transaction.
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    Those ECMs wishing to provide information pursuant to the 
electronic access option (Rule 36.3(b)(1)(ii)(B)) will be required, 
initially and on an ongoing basis, to provide the Commission with 
electronic access to those transactions conducted on the facility in 
reliance on the exemption in section 2(h)(3), which averaged five 
trades per day or more over the most recent calendar quarter. Such 
access must be structured so as to permit the Commission to capture in 
permanent form a continuing record of trades on the facility such that 
the Commission would be able to reconstruct and compile the same 
information regarding transactions on the trading facility that would 
otherwise be provided by the trading facility under the reporting 
option (Rule 36.3(b)(1)(ii)(A) described above). If a trading facility 
does not wish to undertake the task of determining which contracts meet 
the five-trade-per-day requirement, it can give the Commission access 
to information on all transactions conducted in reliance on section 
2(h)(3) and the Commission will implement appropriate surveillance.
    The Commission expects that the information that will be provided 
by ECMs in reports required under Rule 36.3(b)(1)(ii)(A), or compiled 
by the Commission through electronic access provided under Rule 
36.3(b)(1)(ii)(B), will be useful in identifying aberrant price 
behavior, including intraday price spikes. Such price anomalies may 
serve as indicators of the need for further Commission investigation. 
In such instances, the Commission may, among other things, use the 
special call authority provided by section 2(h)(5)(B)(iii) of the Act 
to determine whether a fraud or manipulation may have been attempted or 
occurred warranting appropriate enforcement action.
3. Recording and Reporting Complaints
    The proposed rules would require ECMs to maintain a record of 
complaints received by the trading facility concerning instances of

[[Page 43290]]

suspected fraud or manipulation. The nature of the information to be 
recorded (and subsequently reported) concerning complaints remains 
unchanged in the final rules. Thus, Rule 36.3(b)(1)(iii) will require 
an ECM to maintain a record of all allegations or complaints concerning 
instances of suspected fraud or manipulation. The record will be 
required to include the name of the complainant, if provided, the date 
of the complaint, the market instrument, the substance of the 
allegations, and the name of the person at the trading facility who 
received the complaint.
    The proposed rules also would require ECMs to ``Provide to the 
Commission * * * a copy of the record of each substantive complaint * * 
* no later than three business days after the complaint is received.'' 
The preamble notes that the Commission's intent, in limiting the 
reporting requirement to ``substantive'' claims of manipulation or 
fraud, was to ``allow an ECM to exercise its judgment to weed out 
clearly frivolous claims.''
    ICE argues that the meaning of ``substantive'' is vague and 
potentially problematic. ICE is concerned that ``substantive'' could be 
construed to apply to every complaint, no matter how frivolous, 
provided the complaint, ``relates to substantive, and not procedural, 
aspects of the ECM's operations.'' The Commission agrees that 
``substantive'', in this context, is not a very precise term. In order 
to clarify the scope of the complaint-reporting requirement, the 
Commission has amended the final rules to provide that ECMs must report 
to the Commission complaints that allege, or relate to, facts that 
would constitute a violation of the Act or Commission regulations.
    ICE further argues that requiring complaints to be reported to the 
Commission after only three days ``is unnecessarily burdensome.'' ICE 
recommends that the rules should be amended to allow ECMs 30 calendar 
days to report complaints to the Commission. The Commission agrees 
that, with respect to most complaints, 30 calendar days is an 
appropriate time frame within which to evaluate complaints and has 
amended the final rules accordingly. However, with respect to one class 
of complaints, the Commission believes that the reporting period should 
not be changed. In the case of an ongoing market manipulation or fraud, 
time is of the essence. Therefore, if a complaint alleges, or relates 
to, a suspected ongoing market manipulation or fraud, an ECM will be 
required to provide to the Commission a copy of the record thereof 
within the original three-business-day time limit.
    Finally, ICE argues that the Commission should not require reports 
of complaints concerning markets ``other than those in which the ECM 
performs a significant price discovery function.'' The information 
access and price discovery portions of the proposed rules are based on 
separate statutory provisions with distinct purposes. The Commission's 
antifraud and antimanipulation authority and responsibility apply to 
all transactions conducted in reliance on the exemption in section 
2(h)(3), not just those that perform a significant price discovery 
function. Thus, there is a statutory basis for requiring ECMs to 
provide records of complaints concerning all trades conducted in 
reliance on the exemption in section 2(h)(3), not just those relating 
to a significant price discovery function, if the Commission is to 
discharge its duties under the Act. Therefore, the scope of the 
reporting requirement for complaints has not been changed in the final 
rules. Moreover, the Commission notes, this means that the complaint 
recording and reporting requirements apply to all trades conducted in 
reliance on section 2(h)(3), not just those that meet the five-trade-
per-day volume test. In such instances, the need for prompt review of 
any and all bona fide complaints alleging fraud or manipulation 
outweigh any inconvenience caused by applying the recording and 
reporting requirements to a larger group of agreements, contracts or 
transactions.

B. Price Discovery Provisions

    As the Commission notes above, with respect to price dissemination 
rules, section 2(h)(4)(D) specifically provides that a transaction 
described in Sec.  2(h)(3) shall be subject to such rules and 
regulations as the Commission may prescribe to ensure timely 
dissemination of trading data if the Commission determines that the 
electronic trading facility performs a significant price discovery 
function for transactions in the underlying cash market for the 
commodity.
    On August 10, 2001, the Commission published Rule 36.3, which 
implements the notification, information and other provisions of the 
CFMA related to section 2(h)(3) exempt commercial markets. See 66 FR 
42255. Subsection (c)(2) of Rule 36.3 provides that the Commission may 
make a determination that such a trading facility performs a 
significant price discovery function under section 2(h)(4)(D) by order, 
and that such finding shall be made after notice and an opportunity for 
a hearing through submission of written data, views and arguments.
    To date, ten electronic trading facilities have notified the 
Commission of their intent to operate as ECMs in reliance on the 
section 2(h)(3) exemption. In view of the Commission's receipt of these 
section 2(h)(3) notifications, the Commission proposed to add 
specificity to its price discovery rules in several ways. First, the 
Commission proposed to adopt two criteria to use to determine whether a 
section 2(h)(3) market performs a significant price discovery function 
for the underlying cash market. Second, the Commission proposed to 
specify the information that must be disseminated by section 2(h)(3) 
markets that serve such a significant price discovery function. Third, 
the Commission proposed certain amendments to its procedures for making 
a price discovery determination.
1. The Elements of Price Discovery
    Price discovery commonly is defined as the process of determining 
prices through the interaction of buyers and sellers based on supply 
and demand conditions. Prices may be discovered by a single buyer and 
seller in a privately negotiated bilateral cash market transaction, or 
through the simultaneous interaction of multiple buyers and sellers in 
organized markets.
    Organized markets, which include futures markets and certain cash 
markets where trading takes place in accordance with established rules, 
often perform an important role in facilitating price discovery in the 
broader cash markets. In particular, these markets facilitate price 
discovery in cash markets by efficiently incorporating supply and 
demand information for the underlying commodity into the transaction 
prices or bids and offers through the operation of a centralized market 
for the commodity. Thus, the price discovery process on organized 
markets may significantly enhance the efficiency of the overall cash 
market.
    The extent to which price information is used in establishing 
prices for cash market transactions that occur outside of the organized 
markets provides a relevant factor for determining the contribution of 
that market to price discovery and for determining whether there is a 
federal interest in the public dissemination of such price 
information.\12\ Such price information may be used in varying degrees 
to

[[Page 43291]]

facilitate the establishment of prices and may also serve as one of a 
number of sources of price information that are consulted by cash 
market participants in developing bids, offers, or transaction prices. 
In certain circumstances, such price information may be sufficiently 
well regarded by the industry that it serves as an important benchmark 
for cash market participants to consider in setting bids or offers or 
in negotiating cash market transaction prices.\13\ In other 
circumstances, prices discovered on a market may be such an integral 
and indispensable part of the price determination process in the 
underlying cash market that bids, offers or cash market transaction 
prices have a relatively high correlation to the prices discovered on 
the market. This latter practice is known as price basing.
---------------------------------------------------------------------------

    \12\ It is this effect that section 2(h)(4) addresses when it 
provides that information shall be disseminated by an exempt 
commercial market when ``the electronic trading facility performs a 
significant price discovery function for transactions in the cash 
market for the commodity underlying any agreement, contract, or 
transaction executed.''
    \13\ If the price information discovered on a market is widely 
recognized in an industry, such recognition by the industry in 
question may lead to the publication of such information in 
established industry publications.
---------------------------------------------------------------------------

    Price basing is a frequently observed practice in many futures 
markets and some cash markets. As indicated above, under price basing, 
commercial entities establish transaction prices for the underlying 
commodity, or a related commodity, based directly on the prices 
discovered on an organized market. These entities may or may not trade 
in the organized market. The cash market transaction prices established 
through price basing may be either spot or forward prices.
    The relative significance of prices discovered on an organized 
market for its underlying cash market is directly related to the extent 
to which such prices are used in establishing transaction prices 
between commercial entities. As a result of this relationship, the use 
of a market's prices for price basing, either directly or indirectly, 
provides observable indicia that the market performs a significant 
price discovery function that would serve as a basis for such a 
determination under section 2(h)(4).
2. Proposed Criteria for Making Price Discovery Determination
    While the Act authorizes the Commission to make a determination 
that a section 2(h)(3) market performs a significant price discovery 
function, it does not define that term or contain criteria to guide 
that determination. Accordingly, the Commission proposed two 
alternative criteria for making a determination that an ECM performs a 
significant price discovery function. The first criterion (the ``price 
basing criterion'') is whether ``cash market bids, offers or 
transactions are directly based on or quoted at a differential to the 
prices generated on the market on a more than occasional basis.'' \14\ 
This criterion reflects the commercial practice known as price basing. 
As explained in the proposed rules, price basing directly confirms that 
the prices being generated on the market have significant utility with 
regard to discovering prices in connection with cash market 
transactions.
---------------------------------------------------------------------------

    \14\ 68 FR 66032 at 66035 (Nov. 25, 2003).
---------------------------------------------------------------------------

    In evaluating a section 2(h)(3) market's price discovery role, 
assessments under this criterion would include an analysis of whether 
cash market participants are quoting bid or offer prices or entering 
into transactions at prices that are set, either explicitly or 
implicitly, at a differential to prices established on a particular 
section 2(h)(3) market. Cash market prices are set explicitly at a 
differential to the section 2(h)(3) market when, for instance, they are 
quoted in dollars and cents above or below the reference market's 
prices. Cash prices are set implicitly at a differential to a section 
2(h)(3) market's prices when, for instance, they are arrived at after 
adding to, or subtracting from, the section 2(h)(3) market's price, but 
then quoted or reported as a flat price.\15\ The Commission will also 
consider whether cash market entities are quoting cash prices based on 
a section 2(h)(3) market's prices on a more than occasional basis.\16\ 
The price-basing criterion is unchanged in the final rules.
---------------------------------------------------------------------------

    \15\ For example, if crude oil prices were generated on a 
section 2(h)(3) market, practices that would satisfy the price 
basing criterion would include cases where cash market bids or 
offers would be explicitly quoted at a differential to the prices 
generated on that market (e.g., ten cents per barrel above the 
exempt market's price for crude oil delivered in July). In addition, 
the price basing criterion would encompass cases where cash market 
bids, offers or transaction prices are quoted as a net price (e.g., 
$30/barrel) and such price is calculated implicitly by adding to, or 
subtracting from, the section 2(h)(3) market's prices a specified 
price differential (e.g., a $30/barrel quoted price is derived as 
the sum of a ten-cent per barrel differential plus the exempt 
market's price of $29.90/barrel).
    \16\ As in cash markets underlying many established futures 
markets, the differential for a particular cash market bid, offer or 
transaction may vary from time to time in response to changes in 
various factors that affect the relationship between cash market 
prices and prices discovered on a section 2(h)(3) market.
---------------------------------------------------------------------------

    The second criterion proposed by the Commission (the ``price 
discovery criterion'') is whether ``the market's prices are routinely 
disseminated in a widely distributed industry publication and are 
consulted by the industry on a more than occasional basis for pricing 
cash market transactions.'' With respect to this second criterion, the 
Commission stated in its proposal that such publication and industry 
consultation ``confirms that the prices are thought to be sufficiently 
reliable and acceptable to be considered a significant source of price 
discovery.''
    ICE believes that the second test should be deleted for a number of 
reasons. First, it asserts that the term ``consulted'' is vague and 
potentially all encompassing. In ICE's view, any published information 
is potentially consulted by market participants on more than an 
occasional basis but might not be a principal component of pricing 
decisions and thus should not be a basis for determining that an ECM 
performs a significant price discovery function. ICE further asserts 
that this test is circular in that it uses publication as a basis for 
determining that timely dissemination is required. Finally, ICE asserts 
that this second criterion adds nothing to the first.
    The Commission has considered ICE's comments and believes that the 
price discovery criterion is necessary to effectuate Congress's intent 
that ECMs that serve a ``significant price discovery function'' are 
subject to such rules as the Commission determines are necessary to 
ensure timely dissemination of trading data. If the Commission were to 
delete the second test, it essentially would be concluding that the 
only markets that can serve a significant price discovery function are 
those that are used for price basing. However, by imposing price 
dissemination requirements on markets that serve a significant price 
discovery function, in addition to those that serve a price basing 
function, Congress clearly did not intend such a result. In this 
regard, the Act explicitly references the price-basing role of futures 
markets in many places (see, e.g., section 4b(a)(2)(B)), and had 
Congress intended to limit the price discovery requirement with respect 
to ECMs only to those markets providing a price basing function, it 
would have set forth this requirement explicitly in the statute. 
Accordingly, the Commission has determined to retain the price 
discovery criterion, which will ensure that markets that serve a 
significant price discovery function, but do not necessarily serve a 
traditional price basing function, will be required to timely 
disseminate market data in the manner prescribed by the Commission's 
rules.
    However, in response to ICE's concerns that a standard based on 
prices that are consulted ``on a more than occasional basis'' is too 
vague and all-encompassing, the Commission has revised Rule 
36.3(c)(2)(i)(B). In

[[Page 43292]]

describing the industry's use of a market's prices, the final rules 
replace the phrase, ``are consulted by the industry on a more than 
occasional basis for pricing cash market transactions,'' with the 
phrase, ``are routinely consulted by industry participants in pricing 
cash market transactions.''
    The Commission acknowledges the apparent circularity of the test in 
the price discovery criterion--e.g., it requires ECMs to disseminate 
data based in large part upon a finding that the market is already 
disseminating such data--but notes that these rules will ensure that 
the trading data disseminated conforms to federal standards, subject to 
federal oversight, as Congress intended.
    Under the final rules, in applying the price discovery criterion, 
consideration will be given to whether prices established on a section 
2(h)(3) market are reported in a widely distributed industry 
publication, such as Platts Oil Gram, Inside FERC or the Lundberg 
Survey. In making this determination, the Commission will consider the 
reputation of the publication within the industry, how frequently it is 
published, and whether the information contained in the publication is 
routinely consulted by industry participants in pricing cash market 
transactions.
    Under the final rules, an ECM will be required to notify the 
Commission when it has reason to believe that one or more of the 
markets on which it is conducting agreements, contracts, or 
transactions in reliance on section 2(h)(3) meet either of the 
specified criteria.\17\ Upon receipt of such a filing, the Commission's 
staff will conduct an assessment of the markets on which the ECM is 
conducting agreements, contracts, or transactions in reliance on 
section 2(h)(3) to identify those markets that perform a significant 
price discovery function for the associated cash market. The scope of 
the inquiry conducted by the Commission will vary. In the course of its 
assessment, Commission staff might contact cash market participants to 
verify the extent to which they refer to the market for price basing. 
The assessment might also examine whether the section 2(h)(3) market, 
although occasionally performing a price discovery function, was not 
routinely consulted by industry participants in pricing cash market 
transactions and thus does not perform a significant price discovery 
function.
---------------------------------------------------------------------------

    \17\ In addition, the Commission may, at any time, sua sponte, 
conduct an assessment as to whether an ECM is serving a significant 
price discovery function for the associated cash market. In this 
regard, the Commission would consider a number of factors in 
deciding whether to initiate a review of a market's price discovery 
function, including whether the market holds itself out as 
performing a price discovery function for the underlying cash 
market. To facilitate its review of a market's price discovery 
function in such cases, the Commission will require that an 
electronic trading facility operating in reliance on section 2(h)(3) 
notify the Commission when the facility commences holding its 
markets out as serving a price discovery function.
---------------------------------------------------------------------------

    If the available information indicates that a market is serving a 
significant price discovery function for the underlying cash market, 
the Commission will notify the ECM that it appears to be performing a 
significant price discovery function and provide the market with an 
opportunity for a hearing through the submission of written data, views 
and arguments. The Commission's notification creates a presumption that 
the ECM is performing a significant price discovery function, which 
presumption the ECM can rebut during the hearing process. The 
Commission, after consideration of all relevant information, will issue 
an order determining whether or not the ECM serves a significant price 
discovery function.\18\
---------------------------------------------------------------------------

    \18\ The final rules also provide the market with an opportunity 
to request at any time that the Commission review the continuing 
appropriateness of its determination in light of changed facts or 
circumstances.
---------------------------------------------------------------------------

3. Information To Be Disseminated by a Price Discovery Market
    The Commission has not previously addressed the nature and scope of 
the information that should be disclosed by a price discovery market 
subject to section 2(h)(4)(D), other than by incorporating in its rules 
the Act's requirement that the ECM disseminate publicly ``price, 
trading volume and other trading data to the extent appropriate with 
respect to transactions executed in reliance on the exemption as 
specified in the order.'' See Commission Rule 36.3(c)(2). In 
determining the nature and scope of the information that should be 
disclosed under the proposed rules, the Commission looked to other 
provisions of the Act that impose public dissemination requirements on 
other categories of regulated and unregulated markets.
    With respect to other markets, sections 5(d)(7) and (8) of the Act 
require DCMs to make available to the public: (i) Information 
concerning the terms and conditions of the contracts and the mechanisms 
for executing transactions; and (ii) daily information on settlement 
prices, volume, open interest, and opening and closing ranges for 
actively traded contracts. Sections 5a(d)(4) and (5) require registered 
DTFs to disclose publicly: (i) information concerning contract terms 
and conditions, trading conventions, mechanisms and practices, 
financial integrity protections, and other information relevant to 
participation in trading on the facility; and (ii) if the Commission 
determines that the contracts perform a significant price discovery 
function for transactions in the cash market for the commodity 
underlying the contracts, daily information on settlement prices, 
volume, open interest, and opening and closing price ranges for 
contracts traded on the facility. Section 5d(d) requires exempt boards 
of trade (``EBOTs'') to disseminate publicly on a daily basis 
information on trading volume, opening and closing ranges, open 
interest, and other trading data appropriate to the market if the 
Commission determines that the EBOT is a significant source of price 
discovery for transactions in the cash market for the commodity 
underlying the contracts.
    As noted, the Act only stipulates that an ECM should make available 
``price, trading volume and other trading data to the extent 
appropriate.'' However, as also noted above, this requirement is 
unclear as to what precisely is intended to be made available to the 
public by ECMs, especially with regard to the term ``price.'' Based on 
the information that is required to be made available by the Act's 
other category of exempt market, the EBOT, the Commission requested 
comment on the reasonableness of requiring similar information, 
including trading activity measures, price information, and certain 
contextual information. The Commission also requested comment on what 
contextual information should be made available in order to assure that 
the public can accurately interpret the meaning of the trading activity 
and price information.
    Specifically, the Commission requested comment on a requirement 
that the ECMs serving a significant price discovery function publicly 
disseminate the following information on a daily basis:
    Contextual information:
     Contract terms and conditions or product descriptions; and
     Trading conventions, mechanisms, and practices.
    Trading activity information:
     Trading volume; and
     Open interest, if available.
    Price information:
     Opening and closing prices or price ranges;
     High and low prices;
     A volume-weighted average price; or

[[Page 43293]]

     Any other price information approved by the 
Commission.\19\
---------------------------------------------------------------------------

    \19\ The section 2(h)(3) market may satisfy the dissemination 
requirements by placing the information on its website, providing 
the information to a financial information service, or using a 
combination of these media. Furthermore, the section 2(h)(3) market 
may disseminate such additional information as it believes is 
appropriate for price discovery purposes. A section 2(h)(3) market 
may also publish all of the information specified in Rule 
36.3(c)(2)(iv) whether or not the Commission has made a price 
discovery determination applicable to that market under Rule 
36.3(c)(2)(iii). Such voluntary dissemination by a section2(h)(3) 
market may, in appropriate circumstances, obviate the need for the 
market to notify the Commission and for the Commission to make a 
significant price discovery determination.
---------------------------------------------------------------------------

    The types of contextual, trading activity and price information 
that the Commission proposed to require to be published potentially 
would be useful to the price basing process; i.e., this information 
potentially would be useful for commercial entities that do not 
participate directly in a market, but use the market's prices as a 
basis for setting prices for cash market transactions. Neither of the 
commenters commented on the contextual or trading information aspects 
of the proposed rules and the final rules with respect to public 
dissemination of that information are unchanged.
    With respect to price information, however, ICE asked the 
Commission to clarify its statement in the preamble to the proposed 
rules that ECMs are required to publish certain market summary 
information without charge to the marketplace on a delayed basis.\20\ 
Specifically, ICE suggested that the Commission clarify that, to the 
extent that ECMs are required to make information available on a 
delayed basis, DCMs are subject to the same requirement. ICE also 
requested clarification as to the meaning of the term ``delayed,'' and 
suggested that the Commission make express in its rules that delayed 
data be made available free of charge, if such a requirement is to be 
imposed. Finally, ICE requested clarification that the information 
dissemination requirements apply only to information on markets for 
which the ECM performs a significant price discovery function.
---------------------------------------------------------------------------

    \20\ That statement appears in the following passage from the 
preamble of the proposed rules (68 FR at 66037-66038):
    In considering price-reporting requirements, the Commission has 
focused on the reporting of delayed price information, rather than 
real-time price data. In this regard, the Commission notes that the 
Act does not appear to require publication of real-time price data. 
The Commission also notes that many exchanges charge fees for real-
time market data (usually bids, offers and transaction prices), and 
that such fees can be an important source of exchange revenues. The 
exchanges also make certain market summary data freely available to 
the public on a delayed basis (where the delay can be as little as 
10 minutes). This delayed market information generally includes 
opening and closing prices or price ranges, daily high and low 
prices, settlement prices, daily trading volume and open interest. 
The Commission interprets the Act as allowing exempt commercial 
markets to reap gains from the sale of real-time market data, but 
also to require these markets to publish the required market summary 
information noted above without charge to the marketplace on a 
delayed basis.
---------------------------------------------------------------------------

    The Commission's discussion in the proposed rules of industry price 
dissemination practices was intended to provide a context for 
establishing price dissemination standards for this relatively new 
category of markets. The Commission is unable at this time to directly 
respond to ICE's request that the Commission amend its rules concerning 
price dissemination by DCMs since the Commission has not yet proposed 
rules in this area. To the extent further clarification is needed 
regarding the price reporting obligations of DCMs, the Commission will 
clarify those obligations in a separate rulemaking.
    In response to ICE's request that the Commission clarify the 
meaning of the term ``delayed,'' the Commission is amending its 
proposed rules to provide that ECMs are required to make the data 
``readily available to the news media and the general public without 
charge no later than the business day following the day to which the 
information pertains.'' An ECM should make such information available 
on a fair, equitable and timely basis and may make it available by such 
means as providing the information to a financial information service 
and by timely placement of the information on the ECM's Web site. The 
Commission confirms that the price dissemination rules apply only to 
information on markets for which the ECM performs a significant price 
discovery function.
    In view of the different types of exempt markets, the Commission 
proposed, and the final rules provide, flexibility in regard to the 
specific price information to be published by section 2(h)(3) markets. 
Specifically, the final rules require that markets publish opening and 
closing prices or price ranges, daily high and low prices, or volume 
weighted average prices over a period of time that is representative of 
trading on the market. In addition, on a case-by-case basis, markets 
may publish other price information, in lieu of the price measures 
enumerated above, subject to the Commission's approval.
    As noted above, the Act requires that opening and closing price 
ranges be provided by the Act's other category of exempt market--EBOTs. 
However, because not all exempt markets will have such information 
available, as a consequence of the way trading is conducted, the final 
rules provide that two alternative price measures, the day's high and 
low, or the day's volume weighted average price, may be used. 
Established exchanges commonly publish high and low prices for each 
trading session. In addition, high and low prices provide useful 
information regarding the range of daily trading activity. Volume 
weighted average prices provide a good estimate of the price applicable 
to most transactions executed on a market during daily trading sessions 
and, accordingly, may provide a better indication of the representative 
prices observed in a market on a given day than the other measures 
noted above. Finally, as noted, the final rules give ECMs the 
flexibility of publishing alternative price measures, subject to 
Commission approval, if such measures would provide the public with an 
adequate indication of the market's daily price levels.

III. Cost Benefit Analysis

    Section 15(a) of the Act, as amended by section 119 of the CFMA, 
requires the Commission to consider the costs and benefits of its 
action before issuing a new regulation or order under the Act. By its 
terms, section 15(a) does not require the Commission to quantify the 
costs and benefits of its action or to determine whether the benefits 
of the action outweigh its costs. Rather, section 15(a) simply requires 
the Commission to ``consider the costs and benefits'' of the subject 
rule or order.
    Section 15(a) further specifies that the costs and benefits of the 
proposed rule or order shall be evaluated in light of five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
may, in its discretion, give greater weight to any one of the five 
enumerated areas of concern and may, in its discretion, determine that, 
notwithstanding its costs, a particular rule or order is necessary or 
appropriate to protect the public interest or to effectuate any of the 
provisions or to accomplish any of the purposes of the Act.
    The Commission's proposal contained an analysis of its 
consideration of these costs and benefits and solicited public comment 
thereon. 68 FR at 66038. The Commission specifically invited commenters 
to submit any data that they had quantifying the costs and benefits of 
the proposed rules with their

[[Page 43294]]

comment letters. Id. The Commission has considered the comment letters 
received, which included some narrative discussion of the costs and 
benefits of the proposed rule amendments, but neither of which set 
forth any data that quantified such costs and benefits.
    The Commission has considered the costs and benefits of these rules 
in light of the specific areas of concern identified in section 15. The 
Commission has endeavored in these rules to impose the minimum 
requirements necessary to enable the Commission to perform its 
oversight functions, to carry out its mandate of assuring the continued 
existence of competitive and efficient markets and to protect the 
public interest in markets free of fraud and abuse. After considering 
their costs and benefits, the Commission has decided to adopt these 
rules as discussed above.

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. These rules will affect exempt 
commercial markets. The Commission has previously determined that 
exempt commercial markets are not small entities for purposes of the 
RFA.\21\ The Commission received no comments regarding this 
determination.
---------------------------------------------------------------------------

    \21\ 66 FR 42268 (Aug. 10, 2001).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA''), 44 U.S.C. 3507(d), 
which imposes certain requirements on federal agencies (including the 
Commission) in connection with their conducting or sponsoring any 
collection of information as defined by the PRA, does not apply to 
these rules. The rules do not contain information collection 
requirements that require the approval of the Office of Management and 
Budget.

List of Subjects in 17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission.


0
In consideration of the foregoing, and pursuant to the authority in the 
Commodity Exchange Act and, in particular, sections 2(h)(3)-(5) of the 
Act, the Commission hereby amends title 17, chapter I, part 36 of the 
Code of Federal Regulations as follows:

PART 36--EXEMPT MARKETS

0
1. The authority section for part 36 continues to read as follows:

    Authority: 7 U.S.C. 2, 6, 6c, and 12a.


0
2. Section 36.3 is amended by revising paragraphs (b)(1)(i) and (ii), 
by adding new paragraphs (b)(1)(iii) and (iv), by redesignating 
paragraphs (b)(2) and (b)(3) as paragraphs (b)(3) and (b)(4), by adding 
a new paragraph (b)(2), by adding a heading to paragraph (c)(1), by 
revising paragraph (c)(2), and by adding a heading to paragraph (c)(3) 
to read as follows:


Sec.  36.3  Exempt commercial markets.

* * * * *
    (b) * * *
    (1) * * *
    (i) Provide the Commission with access to the facility's trading 
protocols, either electronically or in hard copy form;
    (ii) Identify to the Commission those transactions conducted on the 
facility with respect to which it intends, in good faith, to rely on 
the exemption in section 2(h)(3) of the Act, and which averaged five 
trades per day or more over the most recent calendar quarter, and, with 
respect to such transactions, either:
    (A) Submit to the Commission, in a form and manner acceptable to 
the Commission, a report for each business day, showing for each 
transaction executed on the facility in reliance on the exemption set 
forth in section 2(h)(3) of the Act, and meeting the five trades per 
day or more threshold test of this section, the following information: 
the commodity, the location, the maturity date, whether it is a 
financially settled or physically delivered instrument, the date of 
execution, the time of execution, the price, the quantity, and such 
other information as the Commission may determine, and for an option 
instrument, in addition to the foregoing information, the type of 
option (call or put) and the strike price. Each such report shall be 
electronically transmitted weekly, within such time period as is 
acceptable to the Commission after the end of the week to which the 
data applies; or
    (B) Provide the Commission, in a form and manner acceptable to the 
Commission, with electronic access to those transactions conducted on 
the facility in reliance on the exemption in section 2(h)(3) of the 
Act, and meeting the five trades per day or more threshold test of this 
section, which access would allow the Commission to compile the 
information described in paragraph (b)(1)(ii)(A) of this section and 
create a permanent record thereof;
    (iii) Maintain a record of allegations or complaints received by 
the trading facility concerning instances of suspected fraud or 
manipulation in trading activity conducted in reliance on the exemption 
set forth in section 2(h)(3) of the Act. The record shall contain the 
name of the complainant, if provided, the date of the complaint, the 
market instrument, the substance of the allegations, and the name of 
the person at the trading facility who received the complaint; and
    (iv) Provide to the Commission, either electronically or in hard 
copy form, a copy of the record of each complaint received pursuant to 
paragraph (b)(1)(iii) of this section that alleges, or relates to, 
facts that would constitute a violation of the Act or Commission 
regulations. Such copy shall be provided to the Commission no later 
than 30 calendar days after the complaint is received. Provided, 
however, that in the case of a complaint alleging, or relating to, 
facts that would constitute an ongoing fraud or market manipulation 
under the Act or Commission regulations, such copy shall be provided to 
the Commission within three business days after the complaint is 
received.
    (2) The Commission hereby delegates, until the Commission orders 
otherwise, the authority to determine the form and manner of submitting 
reports, the time within which such reports shall be filed, and the 
form and manner of providing electronic access, under paragraph (b)(1) 
of this section, to the Director of the Division of Market Oversight 
and such members of the Commission's staff as the Director may 
designate. The Director may submit to the Commission for its 
consideration any matter that has been delegated by this paragraph. 
Nothing in this paragraph prohibits the Commission, at its election, 
from exercising the authority delegated in this paragraph.
* * * * *
    (c) * * *
    (1) Prohibited representation. * * *
    (2) Market data dissemination. (i) Criteria for price discovery 
determination. An electronic trading facility operating a market in 
reliance on the exemption in section 2(h)(3) of the Act performs a 
significant price discovery function for transactions in the cash 
market for a commodity underlying any agreement, contract, or 
transaction executed or traded on the electronic trading facility when:
    (A) Cash market bids, offers or transactions are directly based on, 
or quoted at a differential to, the prices generated on the market on a 
more than occasional basis; or

[[Page 43295]]

    (B) The market's prices are routinely disseminated in a widely 
distributed industry publication and are routinely consulted by 
industry participants in pricing cash market transactions.
    (ii) Notification. An electronic trading facility operating in 
reliance on section 2(h)(3) of the Act shall notify the Commission when 
it has reason to believe that:
    (A) Cash market bids, offers or transactions are directly based on, 
or quoted at a differential to, the prices generated on the market on a 
more than occasional basis;
    (B) The market's prices are routinely disseminated in a widely 
distributed industry publication and are routinely consulted by 
industry participants in pricing cash market transactions; or
    (C) The market holds itself out to the public as performing a price 
discovery function for the cash market for the commodity.
    (iii) Price discovery determination. Following receipt of a notice 
under paragraph (c)(2)(ii) of this section, or on its own initiative, 
the Commission may notify an electronic trading facility operating in 
reliance on section 2(h)(3) of the Act that the trading facility 
appears to meet the criteria for performing a significant price 
discovery function under paragraph (c)(2)(i)(A) or (B) of this section. 
Before making a final price discovery determination under this 
paragraph, the Commission shall provide the electronic trading facility 
with an opportunity for a hearing through the submission of written 
data, views and arguments. Any such written data, views and arguments 
shall be filed with the Secretary of the Commission in the form and 
manner and within the time specified by the Commission. After 
consideration of all relevant matters, the Commission shall issue an 
order containing its determination whether the electronic trading 
facility performs a significant price discovery function under the 
criteria of paragraph (c)(2)(i)(A) or (B) of this section.
    (iv) Price dissemination. (A) An electronic trading facility that 
the Commission has determined performs a significant price discovery 
function under paragraph (c)(2)(iii) of this section shall disseminate 
publicly and on a daily basis all of the following information with 
respect to transactions executed in reliance on the exemption:
    (1) Contract terms and conditions, or a product description, and 
trading conventions, mechanisms and practices;
    (2) Trading volume by commodity and, if available, open interest; 
and
    (3) The opening and closing prices or price ranges, the daily high 
and low prices, a volume-weighted average price that is representative 
of trading on the trading facility, or such other daily price 
information as proposed by the facility and approved by the Commission.
    (B) The trading facility shall make such information readily 
available to the news media and the general public without charge no 
later than the business day following the day to which the information 
pertains.
    (v) Modification of price discovery determination. A trading 
facility that the Commission has determined performs a significant 
price discovery function under paragraph (c)(2)(iii) of this section 
may petition the Commission at any time to modify or vacate that 
determination. The petition shall contain an appropriate justification 
for the request. The Commission, after notice and opportunity for a 
hearing through the submission of written data, views and arguments, 
shall by order grant, grant subject to conditions, or deny such 
request.
    (3) Required representation. * * *

    Issued in Washington, DC, on July 13, 2004, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 04-16319 Filed 7-19-04; 8:45 am]
BILLING CODE 6351-01-P