[Federal Register Volume 73, Number 240 (Friday, December 12, 2008)]
[Proposed Rules]
[Pages 75888-75921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-28867]



[[Page 75887]]

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Part III





Commodity Futures Trading Commission





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17 CFR Parts 15, 16, 17, et al.



Significant Price Discovery Contracts on Exempt Commercial Markets; 
Proposed Rule

  Federal Register / Vol. 73, No. 240 / Friday, December 12, 2008 / 
Proposed Rules  

[[Page 75888]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 15, 16, 17, 18, 19, 21, 36, and 40


Significant Price Discovery Contracts on Exempt Commercial 
Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing rules to implement the CFTC Reauthorization Act 
of 2008 (``Reauthorization Act'').\1\ In pertinent part, the 
Reauthorization Act amends the Commodity Exchange Act to significantly 
expand the CFTC's regulatory authority over exempt commercial markets 
(``ECMs''), which had heretofore operated largely outside the 
Commission's regulatory reach, by creating a new regulatory category--
ECMs with significant price discovery contracts (``SPDCs'')--and 
directing the Commission to adopt rules to implement this expanded 
authority. In addition to proposing regulations mandated by the 
Reauthorization Act, the Commission is also proposing to amend existing 
regulations applicable to registered entities in order to clarify that 
such regulations are now applicable to ECMs with SPDCs.
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    \1\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 
2008).

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DATES: Comments must be received by February 10, 2009.

ADDRESSES: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov.
     Mail/Hand Deliver: David Stawick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.
     E-mail: [email protected].

FOR FURTHER INFORMATION CONTACT: Susan Nathan, Senior Special Counsel, 
Division of Market Oversight, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5133. E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. The Commodity Futures Modernization Act of 2000 Established a 
New Regulatory Framework
    1. Multi-Tiered Regulation
    2. Exempt Commercial Markets
    3. Differences Between ECMs and DCMs
    B. The Changing ECM Landscape
    C. The CFTC's Response to the Changing Energy Markets
    1. Empirical Study of Trades on ICE and NYMEX
    2. Commission Surveillance of Energy Markets
    3. The Commission's ECM Hearing
    4. The Commission's Findings and Legislative Recommendations
    D. The Reauthorization Legislation and the Statutory Scheme
II. The Proposed Rules
    A. Part 36--Exempt Markets
    1. Required Information
    2. Identifying Significant Price Discovery Contracts
    (i) Criteria for SPDC Determination
    (ii) Notification Requirement for ECMs With a SPDC
    3. Procedures
    4. Substantive Compliance With the Core Principles
    5. Annual Commission Review
    B. Market, Transaction and Large Trader Reporting Rules
    C. Other Regulatory Provisions
    1. Part 40--Provisions Common to Registered Entities
III. Related Matters
    A. Cost Benefit Analysis
    B. Regulatory Flexibility Act
    C. Paperwork Reduction Act
List of Subjects: Proposed Rules

I. Background

A. The Commodity Futures Modernization Act of 2000 Established a New 
Regulatory Framework

1. Multi-Tiered Regulation
    On December 21, 2000, Congress enacted the Commodity Futures 
Modernization Act (``CFMA''), which amended the Commodity Exchange Act 
(``Act'' or ``CEA'') \2\ to replace the Act's ``one-size-fits-all'' 
supervisory framework for futures trading with a multi-tiered approach 
to regulatory oversight of derivatives markets. The CFMA applies 
different levels of regulatory oversight to markets based primarily on 
the nature of the underlying commodity being traded and the 
participants who are trading. In general, the more sophisticated the 
traders or commercial participants, or the less susceptible a commodity 
is to manipulation or other market or trading abuses, the less 
regulatory oversight is required under the CFMA.
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    \2\ 7 U.S.C. 1 et seq.
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    Accordingly, designated contract markets (``DCMs''), are subject to 
the highest level of regulatory oversight because they are open to all 
participants and may offer all types of commodities.\3\ Derivatives 
Transaction Execution Facilities (``DTEFs'') \4\ are subject to less 
regulatory oversight than DCMs because participants must be 
sophisticated investors or must be hedging risk associated with their 
commercial activities. Additionally, the CFMA imposes limitations on 
the types of commodities that may be traded, and the manner in which 
they may be traded.\5\ Exempt Boards of Trade (``EBOTs'') are subject 
to virtually no regulatory oversight and are not registered with or 
designated by the Commission. EBOTs are exempt from most provisions of 
the CEA other than its antifraud and anti-manipulation prohibitions, 
but are subject to significant commodity and participant 
restrictions.\6\ In addition to creating these three new categories of 
trading facility, the CFMA created a broad array of exclusions and 
exemptions from regulation for certain swaps and other derivatives 
products traded either bilaterally or on electronic trading 
facilities.\7\ These exclusions and exemptions reflected a view, 
consistent with Congressional and Commission actions relating to the 
passage of the CFMA, that transactions between sophisticated 
counterparties do not necessarily require the protections that the CEA 
provides for transactions on DCMs and DTEFs.
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    \3\ 7 U.S.C. 7.
    \4\ To qualify as a DTEF, an exchange must implement certain 
restrictions on retail market participation and can only trade 
certain commodities (including excluded commodities and other 
commodities with very high levels of deliverable supply) and 
generally must exclude retail participants. CFTC Glossary 
(Glossary).
    \5\ 7 U.S.C. 7a.
    \6\ EBOTs may trade only ``excluded commodities'' (7 U.S.C. 
1a(13); 17 CFR Sec.  36.2(a)(2)(i)), and are open only to ``eligible 
contract participants'' (``ECPs'') (7 U.S.C. 1a(12)).
    \7\ For example, section 2(g) created an exclusion from the CEA 
for individually negotiated swaps, based on non-agricultural 
commodities entered into between eligible contract participants, 7 
U.S.C. 2(g). Similarly excluded are transactions between ECPs 
involving excluded commodities that are not executed on a trading 
facility. 7 U.S.C. 2(d)(1).
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2. Exempt Commercial Markets
    The CFMA established an exemption for transactions in exempt 
commodities traded on electronic trading facilities, also known as 
exempt commercial markets (``ECMs'').\8\ To qualify as an ECM, a 
facility must limit its transactions to principal-to-principal 
transactions executed between ``eligible commercial entities'' 
(``ECEs'') \9\ on an ``electronic trading facility.'' \10\ Contracts

[[Page 75889]]

for all commodities except agricultural and excluded commodities 
(primarily financial commodities but also commodities such as weather) 
potentially are eligible to trade on an ECM. Examples of commodities 
traded on ECMs are energy products, metals, chemicals, air emission 
allowances, paper pulp, and barge freight rates.\11\ ECMs fall 
somewhere between DTEFs and EBOTs on the regulatory oversight spectrum. 
Like EBOTs, they are neither licensed nor registered with the CFTC and 
are subject to the Act's antifraud and anti-manipulation 
provisions.\12\ In addition, and different from EBOTs, ECMs are subject 
to certain recordkeeping and reporting requirements under the CEA.\13\
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    \8\ 7 U.S.C. 2(h)(3)-(5).
    \9\ 7 U.S.C. 1a(11) (a subset of ECPs).
    \10\ 7 U.S.C. 1a(10). For purposes of this proposed rulemaking, 
the terms electronic trading facility and ECM are used 
interchangeably. The term ``trading facility'' means a person or 
group of persons that constitutes, maintains, or provides a physical 
or electronic facility or system in which multiple participants have 
the ability to execute or trade agreements, contracts or 
transactions--(i) by accepting bids or offers made by other 
participants that are open to multiple participants in the facility 
or system; or (ii) through the interaction of multiple bids or 
multiple offers within a system with a pre-determined non-
discretionary automated trade matching and execution algorithm. 7 
U.S.C. 1a(34).
    \11\ 7 U.S.C. 1a(14).
    \12\ Sections 2(h)(4)(B) and (C) of the Act, 7 U.S.C. 2(h)(4)(B) 
and (C).
    \13\ For example, an ECM must maintain for five years and make 
available for inspection records of its activities relating to its 
business as a trading facility. 7 U.S.C. 2(h)(5)(B)(ii). More 
specifically, Commission rule 36.3, 17 CFR 36.3, requires that an 
ECM identify to the Commission those transactions for which it 
intends to rely on the exemption in section 2(h)(3) of the CEA and 
which averaged five trades per day or more over the most recent 
calendar quarter. For all such transactions, the ECM must provide to 
the Commission weekly reports showing certain basic trading 
information, or provide the Commission with electronic access that 
would allow it to compile the same information. 17 CFR 
36.3(b)(1)(ii). An ECM also must provide to the Commission, upon 
special call, any information relating to its business that the 
Commission determines is appropriate to enforce the antifraud and 
anti-manipulation provisions of the CEA, to evaluate a systemic 
market event, or to obtain information on behalf of another federal 
financial regulator. 7 U.S.C. 2(h)(5)(B)(iii); 17 CFR 36.3(b)(3). An 
ECM must maintain a record of any allegations or complaints it 
receives concerning suspected fraud or manipulation and must provide 
the Commission with a copy of the record of each such complaint. 17 
CFR 36.3(b)(1)(iii). Finally, an ECM is required to file an annual 
certification that it continues to operate in reliance on the 
exemption in section 2(h)(3) of the Act and that the information it 
previously provided to the Commission remains correct. 17 CFR 
36.3(c)(4).
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3. Differences Between ECMs and DCMs
    ECMs are not subject to the level of transparency and Commission 
oversight associated with DCMs. DCMs must satisfy specified criteria to 
become designated, and then must demonstrate continuing compliance with 
18 core principles set out in the Act.\14\ The Act provides flexibility 
with respect to how DCMs may choose to meet the core principles' 
mandate that DCMs undertake significant supervisory responsibility with 
respect to trading on their markets. DCMs must, for example, establish 
rules and procedures for preventing market manipulation and must adopt 
necessary and appropriate position limit or accountability rules to 
address the potential for manipulation or congestion. DCMs also must 
establish compliance and surveillance programs, which the Commission 
evaluates through rule enforcement reviews,\15\ must monitor trading on 
their markets and must undertake other self-regulatory responsibilities 
mandated by the CEA.
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    \14\ See sections 5(d)(1)-(18) of the Act, 7 U.S.C. 7(d)(1)-
(18).
    \15\ The Commission conducts regular rule enforcement reviews of 
the self regulatory programs operated by DCMs for enforcing exchange 
rules, preventing market manipulations and customer and market 
abuses, and ensuring that trade related information is recorded and 
stored in a manner consistent with the Act.
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    The CFMA did not impose these obligations on ECMs. While the 
Commission was given the authority to determine whether an ECM performs 
a significant price discovery function for transactions in an 
underlying cash market,\16\ such a determination did not trigger any 
self-regulatory responsibilities for the ECM or confer any additional 
oversight authority on the Commission. Rather, the presence of a 
contract performing a significant price discovery function required the 
ECM to publicly disseminate certain basic information, such as contract 
terms and conditions and daily trading volume, open interest, and 
opening and closing prices or price ranges.\17\
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    \16\ In 2004, the Commission amended its part 36 rules to 
include the requirement that an ECM 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) of the CEA has been met or if the market holds 
itself out to the public as performing a price discovery function 
for the cash market of a commodity. 17 CFR 36.3(c)(2)(i) and (ii). 
69 FR 43285 (July 20, 2004).
    \17\ Id.
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B. The Changing ECM Landscape

    Following enactment of the CFMA in December 2000, the first ECMs 
that notified the Commission of their intent to operate generally were 
simple trading platforms, resembling in many ways business-to-business 
facilities for large commercial firms. ECMs facilitate the execution of 
trades between commercial counterparties by offering an anonymous and 
efficient electronic matching system which many believed to be superior 
to the existing voice broker system, and to provide a competitive 
advantage over the bilateral OTC market, especially for energy 
products. Initially, most ECMs were small operations with low trading 
volumes that were small relative to DCMs. The first ECMs did not offer 
centralized clearing, but sought to address counterparty risk through 
the use of credit filters whereby traders could limit their potential 
counterparties to a list of traders whose credit they found 
satisfactory. Significantly, early ECM contracts were not linked to 
contracts listed on DCMs. Over time, however, ECMs began to offer 
``look-alike'' contracts that were linked to the settlement prices of 
their exchange-traded counterparts, and these look-alike contracts in 
one case began to garner significant volumes. In recent years, several 
active ECMs began to offer the option of centralized clearing for their 
contracts--an option which became widely utilized by their customers to 
manage counterparty risk.
    This evolution, and particularly the linkage of ECM contract 
settlement prices to DCM futures contract settlement prices, began to 
raise questions about whether ECM trading activity could impact trading 
on DCMs and whether the CFTC had adequate authority to address that 
impact and protect markets from manipulation and abuse. Of special 
concern to CFTC staff was the existence of the ECM cash-settled ``look-
alike'' contracts that could provide an incentive to manipulate the 
settlement price of an underlying DCM futures contract to benefit 
positions in the look-alike ECM contract. As discussed more fully 
below, the Commission subsequently considered and studied these 
concerns in a variety of ways, culminating, in September 2007, in a 
public hearing examining trading on regulated exchanges and ECMs.\18\
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    \18\ See Commodity Futures Trading Commission, Report on the 
Oversight of Trading on Regulated Futures Exchanges and Exempt 
Commercial Markets (October 2007), http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/pr5403-07_ecmreport.pdf for 
a comprehensive report of the Commission's findings following its 
September 2007 hearing (``ECM Report'').
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C. The CFTC's Response to the Changing Energy Markets

1. Empirical Study of Trades on ICE \19\ and NYMEX
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    \19\ Intercontinental Exchange, or ICE, consists of four 
separate entities: ICE OTC, to which this document refers, is an ECM 
trading energy products. ICE Future Europe trades energy futures and 
is regulated by the Financial Services Authority of Great Britain; 
ICE Futures US focuses primarily on futures based on soft 
commodities (e.g., coffee, sugar, cocoa, cotton) and financial 
futures and is regulated by the CFTC; ICE Futures Canada trades 
futures and options and is regulated by the Manitoba Securities 
Commission.
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    During the last several years, one ECM in particular--the 
Intercontinental

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Exchange (``ICE'')--has become a major trading venue for natural gas 
contracts in direct competition with the New York Mercantile Exchange 
(``NYMEX'') natural gas benchmark futures contract, in addition, 
Commission staff has found that the traders on ICE are virtually the 
same as the traders on NYMEX. All of the top 25 natural gas traders on 
NYMEX are also significant traders on ICE. For the Henry Hub natural 
gas market,\20\ market participants generally view ICE and NYMEX as 
essentially a single market, looking to both ICE and NYMEX when 
determining where to execute a trade at the best price.
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    \20\ Henry Hub is a natural gas pipeline hub in Louisiana that 
serves as the delivery point for NYMEX natural gas futures contracts 
and often serves as a benchmark for wholesale natural gas prices 
across the U.S. Glossary.
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    To assess these changes in the marketplace, the Commission's Office 
of the Chief Economist (``OCE'') conducted an empirical study of the 
relationship between the natural gas contracts that trade on ICE and 
NYMEX. OCE collected transaction prices for ICE and NYMEX natural gas 
contracts from January 3, 2006 through December 31, 2006 and evaluated 
trading for 12 contract months when trading on each market was 
appropriately active. OCE examined the timing of price changes on ICE 
and NYMEX to draw inferences about where information arrives first. If 
price changes on one venue consistently ``led'' those on the other 
venue, then OCE concluded that informed traders preferred trading at 
that ``leading'' venue and inferred that market to be ``discovering'' 
prices.\21\ OCE found that ICE exhibited price leadership with respect 
to NYMEX on 20 percent of the contract-days, while NYMEX exhibited 
price leadership on 63 percent of the contract-days. OCE concluded that 
these results suggested that both ICE and NYMEX are significant price 
discovery venues for natural gas futures contracts.
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    \21\ See ECM Report at 11-12. Price discovery is the process of 
determining the price level for a commodity based on supply and 
demand conditions. Price discovery may occur in a futures market or 
cash market. Glossary.
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2. Commission Surveillance of the Energy Markets
    The Commission's surveillance of natural gas energy markets 
traditionally has focused on the regulated futures markets traded on 
NYMEX. Prior to the Reauthorization Act, ECMs were not subject to the 
requirements of the Commission's large trader reporting system 
(``LTRS'').\22\ In order to obtain analogous large trader information 
from ECMs, the Commission had to issue special calls.\23\ Based on the 
prominent role played by the ICE natural gas contract in the price 
discovery process and the possible impact on the NYMEX natural gas 
contract, the Commission determined to issue a series of special calls 
for information related to ICE's cleared natural gas swap contracts 
that are cash-settled based on the settlement price of the NYMEX 
physical delivery natural gas contract.\24\
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    \22\ The LTRS is the centerpiece of the Commission's market 
surveillance system. Under the LTRS, clearing members, futures 
commission merchants and foreign brokers file daily reports with the 
CFTC showing futures and option positions in accounts they carry 
that are above reporting levels set by the Commission. The reporting 
level for the NYMEX natural gas futures market is 200 contracts.
    \23\ Section 2(h)(5)(B)(iii) of the Act, 7 U.S.C. 
2(h)(5)(B)(iii), requires that an electronic trading facility 
relying on the exemption provided in section 2(h)(3) must, upon a 
special call by the Commission, provide such information related to 
its business as an electronic trading facility as the Commission may 
determine appropriate to enforce the antifraud provisions of the 
CEA, to evaluate a systemic market event, or to obtain information 
requested by a Federal financial regulatory authority in connection 
with its regulatory or supervisory responsibilities.
    \24\ The special calls were issued primarily to assist the 
Commission in its surveillance of the NYMEX natural gas contract. 
They were not issued as part of an investigation of any particular 
market participant or trading activity on either ICE or NYMEX, nor 
were they issued to conduct regular market surveillance of ICE. The 
first special call, issued on September 28, 2006, requested daily 
clearing member position data for ICE's natural gas swap contracts, 
broken out between house and aggregate customer positions, which is 
similar to information that the Commission receives from NYMEX 
pursuant to Commission rule 16.00. This information permits CFTC 
market surveillance staff to see all cleared positions at the 
clearing member level, but it is not possible to determine 
individual customer positions. To obtain daily individual trader 
positions, the Commission issued a second special call on December 
1, 2006. While the data received is similar to large trader 
reporting for DCMs, the methodology for reporting is very different. 
Because ICE is a principal-to-principal market and therefore does 
not receive position reporting from firms, it was necessary for ICE 
to develop an algorithm to infer open positions from the sum of all 
trading by each individual trader. While this approach has provided 
valuable information, it is less accurate than traditional large 
trader reporting. The third special call, issued on September 5, 
2007, required ICE to provide all cleared transaction data for its 
Henry Hub swap contracts and identify counterparties for the final 
two trading sessions prior to the expiration of prompt month Henry 
Hub natural gas products. This data is similar to transaction data 
that the Commission receives from NYMEX for all trading days and 
enables CFTC staff to monitor trading activity on ICE and obtain 
more complete coverage to counter possible manipulative schemes that 
could affect trading on ICE.
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3. The Commission's ECM Hearing
    Following the OCE study and the special calls issued to ICE, the 
Commission held a public hearing on September 18, 2007, to examine the 
oversight of DCMs and ECMs. Witnesses at the hearing included 
Commission staff, representatives of DCMs and ECMs, and representatives 
of a broad spectrum of market users and consumer groups. The hearing 
focused on a number of issues, including the tiered regulatory approach 
of the CFMA and whether it was adequate; the similarities and 
differences between ECMs and DCMs; the associated regulatory risks of 
each market category; the types of regulatory or legislative changes 
that may be appropriate to address identified risks; and the impact 
that regulatory or legislative changes might have on the U.S. futures 
industry and the global competitiveness of the U.S. financial industry. 
In announcing the hearing, CFTC Acting Chairman Lukken observed that:

    The evolution of these energy markets [ECMs] in recent years 
requires our agency to address whether the level of regulatory 
oversight is proper given the importance of energy prices to all 
Americans.* * * This oversight hearing will provide a better 
understanding of the inter-relationship of these trading venues so 
policymakers can make informed decisions to protect these vital 
markets.\25\

    \25\ CFTC Release 5368-07, August 2, 2007 (CFTC Announces 
September Hearing to Examine Trading on Regulated Exchanges and 
Exempt Commercial Markets).
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4. The Commission's Findings and Legislative Recommendations
    Based on information developed through various studies, 
surveillance, special calls and its public hearing, the Commission 
published in October 2007 a ``Report on the Oversight of Trading on 
Regulated Futures Exchanges and Exempt Commercial Markets.'' (``ECM 
Report'').\26\ The report was provided to the Commission's 
Congressional oversight committees, which were then in the process of 
considering legislation to amend the CEA and reauthorize the 
Commission.
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    \26\ supra n. 20.
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    The ECM Report noted that while some participants disagreed, most 
witnesses at the September 18 hearing generally supported the tiered 
regulatory structure of the CFMA, but expressed concern regarding the 
regulatory provisions governing ECMs and the regulatory disparity 
between DCMs and ECMs.\27\ Witnesses suggested that this disparity made 
markets more susceptible to manipulation and put regulated exchanges at 
a competitive disadvantage vis-[agrave]-vis ECMs offering virtually 
identical products. Generally, most witnesses felt that some changes to 
the ECM provisions might be appropriate, provided those changes

[[Page 75891]]

were prudently targeted and did not adversely affect the ability of 
ECMs to innovate and grow.\28\
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    \27\ Id. at 15.
    \28\ Id.
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    Based on the hearing testimony and its own experience in 
administering the Act, the Commission at that time concluded that the 
tiered approach of the CFMA generally had operated effectively. ECMs 
had proven popular for new start-up markets and had provided 
competition for DCMs, spurring them toward innovations of their own. 
The Commission further found that, to the extent that trading volume on 
an ECM contract remained low and its prices were not significantly 
relied upon by other markets, the current level of regulation remained 
appropriate. However, when a futures contract traded on an ECM matured 
and began to serve a significant price discovery function for 
transactions in commodities in interstate commerce, the contract 
warranted increased oversight to deter and prevent price manipulation 
or other disruptions to market integrity, both on the ECM itself and in 
any related futures contracts trading on DCMs. Such increased oversight 
would also help to ensure fair competition among ECMs and DCMs trading 
similar products and competing for the same business.
    In light of these conclusions, the Commission's ECM Report 
recommended that the CEA be amended to grant the Commission additional 
authority over ECM contracts serving a significant price discovery 
function, and that certain self-regulatory responsibilities be assigned 
to ECMs offering such contracts. Specifically, the Commission advocated 
that (1) An ECM contract that is determined to perform a significant 
price discovery function be subject to large trader reporting 
requirements comparable to those applicable to all DCM contracts; (2) 
an ECM should be required to adopt position limits or accountability 
levels, as appropriate, for a listed contract that serves a significant 
price discovery function similar to the limits on DCMs; (3) an ECM 
should be required to monitor trading of a listed contract that serves 
a significant price discovery function to detect and prevent 
manipulation, price distortion, and disruptions of the delivery or 
cash-settlement process; and (4) the Commission and the ECM should be 
provided with emergency authority to alter or supplement contract 
rules, liquidate open positions, and suspend or curtail trading in any 
listed contract that serves a significant price discovery function. 
These authorities would be essential tools for the Commission and the 
ECM to prevent manipulation and disruptions of the delivery or cash-
settlement process.
    The Commission further recommended that the determination whether 
an ECM contract serves a significant price discovery function should 
focus on the following factors: (1) Material Liquidity--trading volume 
in the ECM contract must be significant enough to affect regulated 
markets or to become a pricing benchmark; and (2) Linkage/Material 
Price Reference--the relevant ECM contract must either influence other 
markets and transactions through this linkage or be materially 
referenced by others in interstate commerce on a frequent and recurring 
basis.

D. The Reauthorization Legislation and the Statutory Scheme

    The CFTC Reauthorization Act of 2008 \29\ adds a new section 
2(h)(7) to the CEA to govern the treatment of ``significant price 
discovery contracts'' (``SPDCs'') on ECMs.\30\ The legislation, based 
largely on the Commission's recommendations for improving oversight of 
ECMs, provides for greater regulation of contracts traded on ECMs that 
fulfill a significant price discovery function and establishes criteria 
for the Commission to consider in determining whether an ECM contract 
qualifies as a SPDC. The Reauthorization Act directs the CFTC to extend 
its regulatory oversight to the trading of SPDCs; requires ECMs to 
adopt position and accountability limits for SPDCs; authorizes the 
Commission to require large traders to report their positions in SPDCs; 
and establishes core principles for ECMs with contracts that are 
determined to perform a significant price discovery function. Finally, 
the legislation directs the Commission to issue rules implementing the 
provisions of new section 2(h)(7) of the CEA and to include in such 
rules the conditions under which an ECM will have the responsibility to 
notify the Commission that an agreement, contract or transaction 
conducted in reliance on the exemption provided in section 2(h)(3) of 
the CEA may perform a price discovery function.\31\
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    \29\ Public Law No. 110-246, supra. n. 1 (``Pub. L. 110-246''). 
The Reauthorization Act was incorporated into the Food, Conservation 
and Energy Act of 2008 as Title XIII of that legislation. Title XIII 
was not the subject of Congressional hearings and the legislative 
history is limited to The Joint Explanatory Statement of the 
Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d Sess. 
at 978-86 (2008) (Conference Committee Report).
    \30\ 7 U.S.C. 2(h)(7).
    \31\ Pub. L. 110-246 at sec. 12304. See also Conference 
Committee Report, at 985-86; 2008 Farm Bill Commodity Futures Title: 
Strengthening Oversight of Futures Markets, House Committee on 
Agriculture (May 9, 2008) http://agriculture.house.gov/inside/Legislation/110/FB/Conf/Title_XIII_fs.pdf.
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    The Reauthorization Act significantly broadens the CFTC's 
regulatory authority over ECMs by creating, in section 2(h)(7) of the 
CEA, a new regulatory category--ECMs on which SPDCs are traded--and 
treating electronic trading facilities in that category as registered 
entities subject to all provisions of the CEA that are applicable to 
registered entities.\32\ The legislation confers on the CFTC the 
authority to designate an agreement, contract or transaction as a SPDC 
if the Commission determines, in its discretion, that the agreement, 
contract or transaction performs a significant price discovery function 
under criteria established by section 2(h)(7). When the Commission 
makes such a determination, the ECM on which the SPDC is traded must 
assume, with respect to that contract or contracts, all the 
responsibilities and obligations of a registered entity under the Act 
and Commission regulations, and must comply with nine core principles 
established by new section 2(h)(7)(C)--including the obligation to 
establish position limits and/or accountability standards for 
SPDCs.\33\ The Reauthorization Act separately amends section 4i of the 
CEA to authorize the Commission to require large trader reports for 
SPDCs listed on ECMs.\34\
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    \32\ Conference Committee Report, at 985-86.
    \33\ Congress has made clear that an ECM with a SPDC shall be 
considered as a registered entity for purposes of the CEA. Id. at 
985.
    \34\ Public Law 110-246 at sec. 13202.
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    Consistent with Congress' directive, the Commission is issuing this 
proposed notice of rulemaking as an initial step to implementing the 
amended statutory scheme for ECMs with SPDCs.\35\ These regulations are 
applicable to exempt markets, but also implicate parts 16 through 21 
(market, transaction and large trader reporting rules), and 40 
(provisions common to contract markets, derivatives transaction 
execution facilities and derivatives clearing organizations).
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    \35\ Id. at sec. 13204. Congress has directed that the 
Commission issue proposed rules implementing section 2(h)(7) of the 
CEA not later than 180 days after the date of enactment of the 
Reauthorization Act and that the Commission issue a final rule no 
later than 270 days after the date of enactment. The Reauthorization 
Act initially was enacted as H.R. 2419 on May 22, 2008 but was 
repealed due to clerical error--and concurrently enacted--by H.R. 
2164, Public Law 110-264 on June 18, 2008.

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[[Page 75892]]

II. The Proposed Rules

A. Part 36--Exempt Markets

    Part 36 of the Commission's regulations contains the provisions 
that apply to exempt boards of trade and to exempt commercial markets, 
regardless of whether the markets are a significant source for price 
discovery. Rule 36.3 imposes a number of requirements and restrictions 
on ECMs--electronic trading facilities relying on the exemption in 
section 2(h)(3) of the CEA--including notification of intent to rely on 
the exemption; initial and ongoing information submission requirements; 
prohibited representations; price discovery notification; and price 
dissemination requirements. The Commission proposes to amend rule 36.3 
to implement its broadened regulatory authority over ECMs with SPDCs 
under section 2(h)(7) of the CEA.
1. Required Information
    The notification provision in rule 36.3(a) is unchanged. The 
Commission proposes to amend rule 36.3(b) to separately specify the 
information submission requirements, both initially and on an ongoing 
basis, for: (1) All ECMs; (2) for ECMs with respect to agreements, 
contracts or transactions that have not been determined to perform a 
significant price discovery function; and (3) for ECMs with SPDCs.\36\ 
The proposed amendment to rule 36.3(b) additionally includes provisions 
related to subpoenas, special calls and the delegation of authority and 
provides that an electronic trading facility relying on the exemption 
in section 2(h)(3) of the Act shall not, with respect to agreements, 
contracts or transactions that are not SPDCs, represent to any person 
that it is registered with, designated, recognized, licensed or 
approved by the Commission. This prohibition has its origin in section 
2(h)(5) of the CEA, which sets forth the requirements and obligations 
for ECMs. Although the Reauthorization Act did not amend the 
prohibition on representation in section 2(h)(5)(7) of the Act, the 
legislation did amend the statutory definition of ``registered entity'' 
to include, ``with respect to a contract that the Commission determines 
is a significant price discovery contract, any electronic trading 
facility on which the contract is executed or traded.'' \37\ 
Accordingly, the Commission believes that when it has determined that a 
contract, agreement or transaction executed or traded on the trading 
facility is a SPDC, the trading facility may represent that it is a 
registered entity, provided that the representation clearly and 
prominently states that the ECM is a registered entity only with 
respect to its SPDCs.
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    \36\ Enhanced obligations for ECMs with SPDCs apply only to the 
SPDCs and need not be applied to ECM contracts, agreements or 
transactions that are not SPDCs.
    \37\ Public Law 110-246 at sec. 13203(b)(3).
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    In general, the proposed information submission requirements for 
ECMs without SPDCs are drafted to be substantively similar to the 
information that all ECMs currently are required to provide.\38\ A 
significant change to the submission requirements for ECMs is the 
proposed requirement to file, initially and on a quarterly basis, 
information about the terms and conditions as well as related 
information for all contracts traded on the facility. Although the 
proposed rules set forth the terms, standards and conditions under 
which an ECM will be responsible to notify the Commission that it may 
have a SPDC, the Commission is mindful that it must independently be 
aware of ECM contracts that may develop into SPDCs. The Commission 
believes that requiring ECMs to identify all agreements, contracts and 
transactions and to provide basic trading information will enable it to 
fulfill that obligation. To that end, the Commission proposes to retain 
for non-SPDCs the requirement that ECMs submit to the Commission weekly 
reports (or alternatively provide electronic access that would allow 
the Commission to capture the same information) for contracts that 
average five trades per day or more.\39\ In addition, the Commission is 
proposing to add a quarterly reporting requirement for all non-SPDCs, 
to include their terms and conditions, average daily trading volume, 
and open interest. This quarterly reporting requirement also is being 
proposed to provide the Commission with information that will assist it 
in making prompt assessments whether ECM contracts may be SPDCs. ECMs 
should note that this provision will require them to fulfill the 
quarterly reporting requirement beginning with the end of the calendar 
quarter following the adoption of these final rules. Under proposed 
rule 36.3(b)(3), ECMs with SPDCs will be required to comply with the 
daily reporting and publication requirements of regulation 16.01.\40\
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    \38\ ECMs that have already filed a Notification of Operation 
under section 2(h)(3) of the Act should note that proposed rule 
36.3(b) will not require them to provide any additional information 
to the Commission explaining how the facility meets the definition 
of trading facility or with information demonstrating that the 
facility requires all participants to be ECEs as long as the 
operations of the facility and the participants trading on the 
facility have not materially changed since the filing of the 
notification or the most recent ECM Annual Certification form.
    \39\ See 17 CFR 36.3(b).
    \40\ Once in compliance with the core principles and daily 
reporting and publication requirements applicable to ECMs with 
SPDCs, ECMs will not be required to comply with proposed rule 
36.3(b)(2) except in regard to non-SPDC contracts that are traded or 
executed on the facility.
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2. Identifying Significant Price Discovery Contracts
    The Reauthorization Act directs the Commission to consider, as 
appropriate, four specific criteria when identifying whether an 
agreement, contract or transaction is a SPDC: Price linkage, arbitrage, 
material price reference, and material liquidity.\41\ The legislation 
further directs that in its rulemaking to implement the provisions of 
section 2(h)(7) of the CEA, the Commission shall include the standards, 
as well as conditions under which an ECM will have the responsibility 
to notify the Commission that a contract traded on the facility may 
perform a significant price discovery function. Accordingly, proposed 
rule 36.3(c) addresses: (i) The criteria on which the Commission will 
rely in making a determination that an agreement, contract or 
transaction is a SPDC; (ii) the factors that will trigger the ECM's 
obligation to notify the Commission that it may have a SPDC; (iii) the 
procedures the Commission will follow in reaching its determination 
whether a contract is a SPDC (and in determining that a contract is no 
longer a SPDC); and (iv) the procedures and standards by which an ECM 
with a SPDC must demonstrate compliance with the core principles.
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    \41\ Section 2(h)(7)(B)(v) also authorizes the Commission to 
specify by rule other material factors relevant to a determination 
whether a contract is a SPDC.
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    (i) Criteria for SPDC Determination. In enacting new section 
2(h)(7) of the CEA, Congress specified four criteria that the 
Commission must consider in making a determination that an agreement, 
contract or transaction performs a significant price discovery 
function. Proposed rule 36.3(c)(1) enumerates the factors--price 
linkage, arbitrage, material price reference, and material liquidity. 
Because the legislation does not assign priority to any of the factors, 
and neither the statutory language nor the Conference Committee Report 
specifies the degree to which any of the factors must be present, 
section 2(h)(7)(B) gives the Commission flexibility in applying the 
criteria to a particular contract and market. The Commission is also 
mindful that:

    [n]ot all the listed factors must be present to make a 
determination that a contract

[[Page 75893]]

performs a significant price discovery function. However, the 
Managers intend that the Commission should not make a determination 
that an agreement, contract or transaction performs a significant 
price discovery function on the basis of the price linkage factor 
unless the agreement, contract or transaction has sufficient volume 
to impact other regulated contracts or to become an independent 
price reference or benchmark that is regularly utilized by the 
public.\42\
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    \42\ Conference Committee Report at 984-85. In addition to the 
four criteria established by Congress, section 2(h)(7) permits the 
Commission to consider such other material factors as it may specify 
by rule as relevant to a determination whether an agreement, 
contract or transaction serves a significant price discovery 
function. 7 U.S.C. 2(h)(7)(B)(v).

    Because the criteria mandated by Congress do not lend themselves to 
bright-line rules, the Commission proposes to explain, in Appendix A to 
the part 36 rules, how it expects to apply the criteria in making its 
determinations. This proposed guidance explains that the Commission 
will make SPDC determinations on a case-by-case basis, applying and 
weighing each factor as appropriate to the specific contract and 
circumstances under consideration; offers examples to illustrate which 
factor or combinations of factors the Commission would look to when 
evaluating whether a contract is performing a significant price 
discovery function; and describes the circumstances under which the 
presence of a factor or factors would be sufficient to warrant such a 
determination.
    By way of example, for contracts that are linked to other contracts 
or that may be arbitraged with other contracts, the Commission would 
determine that the contract is a SPDC if the price of the contract 
moves in such harmony with the other contract that the two markets 
essentially become interchangeable. This co-movement of prices would be 
an indication that liquidity in the contract has reached a level 
sufficient for the contract to perform a significant price discovery 
function. Accordingly, the proposed guidance establishes threshold 
liquidity and price relationship standards that will inform the 
Commission's determination. A different approach is required when 
considering the price discovery potential of a contract that is serving 
as a material price reference. In these circumstances, the Commission 
would rely on either of two sources of evidence in making its 
determination. The Commission believes that a direct indicator that a 
contract is serving as a material price reference is observation that 
cash market participants are actively referencing the contract price 
when they enter into cash market transactions. Routine publication of 
an ECM's contract price in widely distributed industry publications and 
newsletters also would indicate that industry participants attach some 
value to this information.
    (ii) Notification requirement for ECMs with a SPDC. The 
Reauthorization Act requires that as part of its rulemaking to 
implement new section 2(h)(7) of the CEA, the Commission include the 
standards, terms and conditions under which an ECM will have the 
responsibility to notify the Commission that an agreement, contract or 
transaction conducted in reliance on the exemption provided in section 
2(h)(3) of the CEA may perform a significant price discovery 
function.\43\ Accordingly, in proposed rule 36.3(c)(2) the Commission 
has specified conditions, derived from the statutory criteria, which 
signal the ECM's obligation to notify the Commission of a possible 
SPDC. An ECM will be obligated to notify the Commission of a potential 
SPDC when an agreement, contract or transaction is traded an average of 
5 trades per day or more over the most recent calendar quarter and also 
meets one of the other two reporting factors. The Commission is aware 
that this requirement may result in over-reporting by ECMs, and wishes 
to emphasize that the presence of one factor alone will not necessarily 
result in a determination that a contract is a SPDC. This notice 
requirement, however, will serve to alert the Commission to the 
contracts that are most likely to be SPDCs. The Commission believes 
that the benefit of having the maximum available information with which 
to make its determinations outweighs the costs associated with possible 
over-reporting by ECMs.
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    \43\ Public Law 110-246 at sec. 13204.
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3. Procedures
    When the Commission learns of a potential SPDC--whether through its 
own information collection and surveillance activities,\44\ 
notification by an ECM pursuant to proposed rule 36.3(c)(2), or 
unsolicited information from participants in the cash market underlying 
a contract--the Reauthorization Act directs the Commission to implement 
a process for determining whether ECM contracts are SPDCs. In proposed 
rule 36.3(c)(3) the Commission establishes procedures under which the 
Commission will make and announce its determination whether a 
particular contract performs a significant price discovery function and 
also sets forth the actions that must be taken by an ECM following such 
a determination. With respect to the former, proposed rule 36.3(c)(3) 
provides that when the Commission intends to undertake such a 
determination in response to notice by an ECM pursuant to rule 
36.3(c)(2), or upon its own initiative, it will notice its intention in 
the Federal Register. The proposed rule also specifies that the 
Commission, as part of its consideration, will solicit written data, 
views and arguments from the ECM that lists the potential SPDC and from 
any other interested parties. Generally, such written submissions must 
be received within 30 calendar days of the date of publication in the 
Federal Register. After consideration of all relevant matters the 
Commission will issue an order explaining its determination. The 
issuance of an affirmative Commission order signals the effectiveness 
of the Commission's authorities with respect to ECMs with SPDCs \45\ 
and triggers the obligations, requirements--both procedural and 
substantive--and timetables prescribed in proposed rule 36.3(c)(4) for 
the ECM.\46\
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    \44\ The Reauthorization Act amended the CEA to require that the 
Commission review all ECM contracts at least once a year to 
determine whether any contract is a SPDC. In addition to these 
formal reviews, it is expected that Commission staff might also 
become aware of the price discovery attributes of ECM contracts in 
the ordinary course of discussion or interaction with ECM personnel 
and various cash and futures market participants.
    \45\ Those authorities include the emergency powers conferred by 
section 8a(9) of the Act, 7 U.S.C. 12a(9), which permits the 
Commission to intervene when it has reason to believe an emergency 
exists and to take action necessary to maintain or restore orderly 
trading or liquidation of any futures contract.
    \46\ Should the Commission conclude, either formally or 
informally, that a contract which demonstrates some characteristics 
consistent with a SPDC nonetheless does not serve a significant 
price discovery function, the Commission may continue to monitor the 
contract pursuant to its special call authority under proposed rule 
36.3(b)(1)(iv), and will advise the ECM as to what further reporting 
it may require with respect to the contract.
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    Under proposed rule 36.3(c)(4), an ECM with a SPDC must submit to 
the Commission a written demonstration that it complies with the nine 
core principles established in section 2(h)(7) of the CEA with respect 
to the SPDC. Although status as a registered entity attaches to an ECM 
as soon as the Commission issues its order determining that a 
particular ECM contract performs a significant price discovery 
function, the Commission has included in proposed rule 36.3(c)(4) a 
grace period for achieving compliance with the core principles. As 
proposed, the rule provides 90 calendar days for ECMs with a first-time 
determination of a SPDC to demonstrate compliance with

[[Page 75894]]

the core principles.\47\ For each subsequent SPDC, the ECM is given 15 
calendar days from the date of the Commission's order to achieve 
compliance. The grace period is designed to ensure that the ECM has 
sufficient time to implement its new regulatory requirements and 
operations, while avoiding the market disruption that might occur by 
the sudden imposition of position limits and other trading rules. The 
Commission is aware that position limits that become effective at the 
end of the applicable grace period may negatively impact traders who in 
good faith acquired positions that are above that limit. Requiring 
immediate compliance would force such traders to liquidate positions in 
order to be at or below the limit. Accordingly, for the purpose of 
applying limits on speculative positions in newly-determined SPDCs, the 
Commission proposes to permit a grace period following the ECM's 
implementation of position limits applicable to SPDCs for traders with 
cleared positions in such contracts to become compliant with applicable 
position limit rules. Traders who hold cleared positions on a net basis 
in the electronic trading facility's SPDC must be at or below the 
specified position limit no later than 90 calendar days from the date 
on which the electronic trading facility implements a position limit, 
unless a hedge exemption is granted by the electronic trading facility. 
This grace period applies to both initial and subsequent SPDCs on an 
ECM, and the ECM should promptly notify traders when it has set 
position limits. This provision is outlined in the proposed Guidance to 
Core Principle IV.
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    \47\ Conference Committee Report at 986.
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    Rule 36.3(c)(4) requires that the ECM's submission include specific 
information designed to permit the Commission to evaluate whether the 
ECM is indeed in compliance with the core principles. Although there 
are obvious differences between them, this procedure was modeled on the 
procedure required of applicants to become designated contract 
markets.\48\ As with other aspects of this rulemaking, the Commission 
is striving to make the procedures and requirements for ECMs with SPDCs 
as close as possible to those for DCMs, and in this regard will review 
the adequacy of submitted materials with the same rigor it applies to 
DCM applications. Submissions that are incomplete or do not adequately 
demonstrate compliance with each of the core principles may trigger 
Commission proceedings under section 5c(d) of the Act and may, pursuant 
to section 5e or 6 of the Act, result in the revocation of the ECM's 
right to operate in reliance on the exemption set forth in section 
2(h)(3) of the Act with respect to a SPDC.
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    \48\ DCM applicants make submissions prior to designation as a 
registered entity and prior to the listing of any contract, whereas 
the Commission must review the same information for ECMs after they 
are deemed registered entities and after the subject contract has 
established trading volume and open interest.
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    The Commission also proposes to establish a process for vacating a 
SPDC determination when the contract no longer meets the criteria 
specified in section 2(h)(7)(B). Under proposed regulation 36.3(c)(6), 
the Commission may, on its own initiative or at the request of an ECM 
with a SPDC, determine that a contract no longer performs a significant 
price discovery function and vacate its previous determination. Any 
subsequent determination that the contract once again is a SPDC will be 
subject to the procedures proposed in regulation 36.3(c)(2). Proposed 
rule 36.3(c)(6) further provides for the automatic vacation of a 
significant price discovery contract determination when the SPDC has no 
open interest and no trading on the contract has occurred for a period 
of 12 complete calendar months. The Commission is proposing this 
provision in order to reduce the administrative burden on staff and the 
compliance burden on an ECM where lack of activity eliminates any 
possibility that a contract performs a significant price discovery 
function for the underlying cash market.
4. Substantive Compliance With the Core Principles: Guidance and 
Acceptable Practices
    Section 2(h)(7) of the CEA, as amended, requires that an electronic 
trading facility on which significant price discovery contracts are 
traded comply with nine core regulatory principles. Consistent with 
Congress's intent that status as a registered entity attach to an ECM 
following the Commission's determination that a particular ECM contract 
serves a significant price discovery function,\49\ these core 
principles have their origins in their DCM counterparts in section 5 of 
the CEA and have been construed similarly.\50\ The Commission proposes 
to adopt Appendix B to the part 36 rules to provide general guidance 
and acceptable practices with respect to compliance with the ECM core 
principles; the acceptable practices for compliance with the ECM core 
principles will, where appropriate, mirror those for DCMs. The 
Commission intends in the acceptable practices to provide non-exclusive 
safe harbors for compliance with the core principles by ECMs with 
SPDCs. As is the case with the core principles established for other 
registered entities, the guidance offered for ECMs is neither mandatory 
nor the only means of compliance with the core principles. Consistent 
with its practice of evaluating a DCM's compliance with the core 
principles during rule enforcement reviews, the Commission will conduct 
regular rule enforcement reviews of ECMs with SPDCs to evaluate 
compliance with the nine core regulatory principles.
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    \49\ Conference Committee Report at 986.
    \50\ 7 U.S.C. 7(d); Conference Committee Report at 985.
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    The Guidance to Core Principle I of section 2(h)(7)(C) of the Act 
requires the ECM to certify the terms and conditions of the SPDC within 
90 calendar days of an ECM's initial SPDC, or 15 calendar days if the 
ECM has previously traded a SPDC. The acceptable practice for this core 
principle provides that Guideline No. 1 in Appendix A to the 
Commission's part 40 rules may be used as guidance to satisfy this 
provision. To ensure continued compliance with all elements of the 
Commission's statutory and regulatory regimes for ECMs with SPDCs, the 
ECM is expected to monitor the SPDC and its trading activity on a 
continuous basis.
    Core Principle II requires ECMs to monitor trading in SPDCs to 
prevent market manipulation and participation abuses. Its guidance and 
acceptable practices were derived from DCM Core Principle 4 (Monitoring 
of Trading) and DCM Designation Criterion 2 (Prevention of Market 
Manipulation).\51\ The proposed guidance and acceptable practices in 
Appendix B to part 36 make clear that ECMs with SPDCs must demonstrate 
the capacity to prevent market manipulation and have rules deterring 
trading and participation abuses. Under the proposed guidance, ECMs 
with SPDCs can demonstrate this capacity through either a dedicated 
regulatory department or by delegation of that function to an 
appropriate third party.\52\ In either case, the regulatory

[[Page 75895]]

department or third party should have an acceptable trade monitoring 
program, the authority to collect information and documents, and the 
ability to assess participants' market activity and power.
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    \51\ 17 CFR 38, Appendices A and B to Part 38.
    \52\ As is the case for DCMs and DTEFs, ECMs with SPDCs may 
comply with any core principle through delegation of any relevant 
function to any registered futures association or another registered 
entity, but the ECM remains responsible for carrying out the 
function. Section 5c(b) of the CEA, 7 U.S.C. 7a-2(b). A detailed 
discussion of registered entities' responsibilities and obligations 
with respect to delegated functions, as well as a discussion of the 
distinctions between delegation of functions and outsourcing, or 
contracting out specified core principle duties is found in the 
Commission's final rulemaking implementing provisions of the CFMA 
relating to trading facilities (``A New Regulatory Framework''), 66 
FR 42256, 42266 (August 10, 2001).
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    Core Principle III addresses the ability of an ECM with a SPDC to 
obtain information necessary to perform any of the functions enumerated 
in section 2(h)(7)(C) of the CEA (the core principles), to provide that 
information to the Commission, and to have the capacity to carry out 
any required information sharing agreements. Core Principle III's 
guidance and acceptable practices have as their source the guidance and 
acceptable practices of DCM Designation Criterion 8--Ability to Obtain 
Information.\53\ Proposed Appendix B to part 36 makes clear that ECMs 
with SPDCs must have the authority to collect information and documents 
on both a routine and non-routine basis; maintain and properly store 
audit trail data; maintain records in a form and manner acceptable to 
the Commission; and have the capacity to carry out appropriate 
information-sharing agreements. In providing guidance on compliance 
with this requirement, the Commission also proposes to incorporate the 
guidance and acceptable practices provided for DCM Core Principles 10 
(Trade Information) and 17 (Recordkeeping).\54\ The Commission believes 
that the acceptable practices outlined in Core Principle 10 should be 
made applicable to ECMs with SPDCs because the ability to record full 
data entry and trade details, as well as the safe storage of audit 
trail data, is a necessary component in assessing potential 
manipulation and conducting effective market surveillance. DCM Core 
Principle 17 requires that DCMs maintain required records in a form and 
manner acceptable to the Commission and establishes as guidance for 
acceptable recordkeeping the standards prescribed in Commission 
regulation 1.31.\55\ To ensure that all information required by the 
Commission is maintained in a uniform manner, the Commission proposes 
in the acceptable practices for Core Principle III to adopt the 
acceptable practices for recordkeeping found in DCM Core Principle 17.
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    \53\ 17 CFR 38, Appendix B to Part 38.
    \54\ 17 CFR 38, Appendix B to Part 38.
    \55\ 17 CFR 1.31.
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    Core Principle IV requires electronic trading facilities with 
significant price discovery contracts to establish position limit or 
accountability rules for traders in such significant price discovery 
contracts. Speculative position limits are necessary to reduce the 
potential for market manipulation. The acceptable practices for Core 
Principle IV were derived largely from Core Principle 5 for designated 
contract markets.\56\
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    \56\ 17 CFR 38, Appendix B to Part 38.
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    DCMs can list for trading futures contracts on a wide range of 
commodities, including enumerated agricultural products, excluded 
commodities (e.g., financial products such as currencies), and exempt 
commodities (e.g., metals, crude oil, natural gas and electricity). 
Some of these commodities have limited deliverable supplies while 
others have deep and liquid cash markets. Depending on the variety of 
possible contracts listed for trading, a DCM may have a mix of position 
limit and accountability rules. Specifically, futures contracts based 
on commodities with limited deliverable supplies should have spot-month 
speculative position limits. In contrast, financial products having 
deep and liquid cash markets may be eligible for position 
accountability levels in lieu of position limits since the potential 
for market manipulation is minimal.
    Unlike DCMs, ECMs relying on the exemption in section 2(h)(3) of 
the CEA are permitted to offer for trading only contracts on exempt 
commodities. Because the deliverable supplies of exempt commodities 
typically are limited, the Commission believes that it will be 
necessary for SPDCs to have spot-month position limits.
    The acceptable practices for Core Principle IV make recommendations 
with respect to how ECMs should establish spot-month speculative 
position limits. For a unique SPDC,\57\ the spot-month speculative 
position limit should be set in the same manner outlined for contracts 
listed for trading on DCMs. In this regard, for a physically-delivered 
SPDC, the level of the spot-month limit should be based upon an 
analysis of the deliverable supply and the history of spot-month 
liquidations. The spot-month limit for a physical-delivery market is 
appropriately set at no more than 25 percent of the estimated 
deliverable supply.\58\ Where a SPDC has a cash settlement provision, 
the spot-month speculative position limit should be set at a level that 
minimizes the potential for price manipulation or distortion in the 
SPDC itself; in related futures and option contracts traded on a DCM or 
DTEF; in other SPDCs; in other fungible agreements, contracts and 
transactions; and in the underlying commodity.
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    \57\ A unique SPDC is one that is not economically equivalent to 
another SPDC or to a contract traded on a DCM or DTEF.
    \58\ The Commission notes that deliverable supply typically is 
less than total supply. In this regard, it is common for some 
portion of the supply to be unavailable for delivery for a variety 
of reasons. Deliverable supply is the amount of the underlying 
commodity that reasonably can be expected to be available to short 
traders and salable by long traders at its market value in normal 
cash market channels.
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    The Commission notes that some SPDCs may not be unique. In other 
words, a SPDC may be economically equivalent to another SPDC or to a 
contract traded on a DCM or DTEF. Economic equivalence can arise due to 
substantial similarity among contracts' terms and conditions (e.g., two 
physically-delivered contracts or two cash-settled contracts having the 
same specifications). A SPDC also can be economically equivalent to 
another SPDC or to a contract listed for trading on a DCM or DTEF if it 
is cash settled based on a daily settlement price or the final 
settlement price of the referenced contract. For economically-
equivalent SPDCs, the electronic trading facility should establish the 
same spot-month speculative position limits as specified for the 
equivalent contract.\59\
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    \59\ Many DCMs have non-spot individual month and all-months-
combined position accountability rules for their futures contracts. 
Moreover, some DCMs establish non-spot individual month and all-
months-combined position limits in lieu of the position 
accountability levels. The Commission believes that the 
implementation of such accountability provisions or position limits 
is a good practice. Accordingly, the Commission proposes to adopt it 
as an acceptable practice for ECMs.
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    ECMs should establish non-spot individual month position 
accountability levels and all-months-combined position accountability 
levels for its SPDCs. Once a trader exceeds an established position 
accountability level, the ECM should initiate an investigation to 
determine whether the individual's trading activity is justified and is 
not intended to manipulate the market. As part of its investigation, 
the ECM should inquire about the trader's rationale for holding a net 
position in excess of the accountability levels. The ECM also can 
request that the trader not further increase contract positions. If a 
trader fails to comply with a request for information, provides 
information that does not sufficiently justify the position, or 
continues to increase contract positions after a request not to do so 
is issued by the ECM, then the accountability provisions should enable 
the ECM to order the trader to reduce the positions.
    If a SPDC is economically equivalent to another SPDC or to a 
contract traded

[[Page 75896]]

on a DCM or DTEF, then the ECM should set the non-spot individual month 
position accountability level and all-months-combined position 
accountability level at the same level as those specified for the 
economically-equivalent contract. For a unique SPDC, the ECM should 
adopt non-spot individual month and all-months-combined position 
accountability levels that are no greater than 10 percent of the 
average combined futures and delta-adjusted option month-end open 
interest for the most recent calendar year.
    Position accountability levels are not necessary for SPDCs that 
specify non-spot individual month position limits and all-months-
combined position limits. If a SPDC is economically equivalent to 
another contract, then the non-spot individual month position limit and 
all-months-combined position limit should be set at the same levels 
specified for the equivalent or referenced contract. For unique SPDCs, 
the non-spot individual month and all-months-combined position limits 
should be set in the same manner as for position accountability levels, 
i.e., levels that capture a material amount of large positions that 
could threaten the market.
    An ECM with a SPDC may require that all transactions in that 
contract be cleared only through a DCO. Alternatively, an ECM's SPDC 
may not be subject to any clearing requirement, in which case the 
contract would trade on an uncleared basis. Lastly, an ECM may permit a 
given SPDC to trade on either a cleared or uncleared basis depending on 
the status of the counterparties involved. The amendments to the CEA 
give electronic trading facilities reasonable discretion to take into 
account the differences between cleared and uncleared transactions when 
complying with Core Principle IV.\60\ For the purpose of applying 
speculative limits to positions in SPDCs, the ECM should apply 
speculative position limits to cleared positions only.
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    \60\ Public Law 110-246 at sec. 13201.
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    Uncleared transactions in SPDCs potentially play an important role 
in risk management strategies and price formation. As a result, the 
Commission believes that an ECM should monitor not only trading in 
cleared transactions but also trading with respect to uncleared 
transactions. However, the Commission is cognizant of the fact that 
uncleared trades conducted on the ECM may be offset by trades done off 
the facility. Such offsetting transactions consummated outside of an 
ECM typically are not reported to the facility. Thus, the ECM likely 
would find it difficult to net uncleared transactions and maintain 
records of traders' uncleared positions in a given SPDC. In order to 
account for this situation, the Commission proposes for ECMs with SPDCs 
a new measure of trading activity called the volume accountability 
level. For this measure, the ECM should keep track of each trader's 
uncleared transactions in a SPDC on a net basis that are conducted on 
the facility. (For the purpose of netting uncleared transactions, long 
and short uncleared transactions are only offset if they are conducted 
with the same counterparty.) A volume accountability level is similar 
to a position accountability level in that a trader may exceed the 
volume accountability level. However, if a trader's net volume of 
uncleared trades exceeds the volume accountability level, the ECM 
should initiate an investigation to determine whether the trading 
activity is justified and is not intended to manipulate the market. As 
part of its investigation, the ECM should inquire about the trader's 
rationale for holding a net volume of uncleared trades in excess of the 
volume accountability level. The ECM also can request that the trader 
not further increase the volume of uncleared trades. If a trader fails 
to comply with a request for information about the portfolio of 
uncleared trades, provides information that does not sufficiently 
justify the uncleared transactions conducted, or continues to increase 
the volume of uncleared trades after a request not to do so is issued 
by the ECM, then the volume accountability provisions should enable the 
ECM to require the trader to reduce the volume of uncleared trades.
    Consistent with the specific directive of Core Principle IV, the 
Commission expects ECMs to impose position limit and position 
accountability requirements on SPDCs as well as positions in 
agreements, contracts and transactions that are fungible and cleared 
together with any SPDC. This circumstance typically occurs where an ECM 
lists a particular contract on its multilateral trading platform and 
the resultant positions are cleared by a DCO. Separately, the ECM also 
provides a non-multilateral trading platform capability for the trading 
of the same contract and the resultant positions are cleared at the 
same clearing organization together with positions established on the 
multilateral platform. Given the fact that such arrangements allow 
market participants to put on positions on the multilateral platform 
and take them off away from the platform--as well as vice versa--the 
Commission believes that it is appropriate for position limit 
requirements to be applied to overall positions regardless of where 
they originated.
    With regard to compliance with a particular position limit or 
position accountability rule, ECMs should aggregate on a net basis 
cleared transactions, including those that are treated by a DCO 
(registered or unregistered) as fungible with the SPDC. Aggregate 
positions then will be compared with the applicable position limit and 
position accountability rules to determine compliance. Uncleared 
transactions also should be aggregated by trader on a net basis in 
order to determine whether such trader's volume of uncleared trades 
exceeds the spot-month volume accountability level.
    An ECM with SPDCs should use an automated means of detecting 
traders' violations of speculative limit rules and exemptions. An 
automated system also should be used to determine whether a trader has 
exceeded applicable non-spot individual month accountability levels, 
all-months-combined accountability levels, and spot-month volume 
accountability levels. An electronic trading facility should establish 
a program for effective enforcement of position limits for SPDCs. 
Lastly, ECMs should use a large trader reporting system to monitor and 
enforce daily compliance with position limit rules.
    The Commission recognizes that some traders with relatively large 
positions may be adversely affected by newly imposed position limits 
when a SPDC initially comes into compliance with the core principles. 
To address this issue, the Commission proposes, for the purpose of 
applying limits on speculative positions in newly-determined SPDCs, to 
permit a grace period following issuance of its order for traders with 
cleared positions in such contracts to become compliant with applicable 
position limit rules. Traders who hold cleared positions on a net basis 
in the ECMs SPDC must be at or below the specified position limit level 
no later than 90 calendar days from the date of the ECM's 
implementation of position limit rules, unless a hedge exemption is 
granted by the ECM.
    Core Principle V requires the ECM to adopt rules to provide for the 
exercise of emergency authority. The proposed guidance contained in 
Appendix B to part 36 is substantially similar to the guidance for DCM 
Core Principle 6.\61\ However, the Commission added a

[[Page 75897]]

reference in the proposed guidance for Core Principle V to acknowledge 
that calls for additional margin apply only to contracts that are 
cleared through a clearinghouse, since not all contracts traded on 
electronic trading facilities are cleared.
---------------------------------------------------------------------------

    \61\ 17 CFR 38, Appendix B to Part 38.
---------------------------------------------------------------------------

    Core Principle VI requires that an ECM with a SPDC make public 
daily information on price, trading volume, and other trading data. The 
Commission believes this information should include settlement prices, 
price range, volume, open interest, and other related market 
information, and has proposed in the acceptable practices that 
compliance with Commission regulation 16.01,\62\ which the Commission 
proposes to make mandatory for ECMs with SPDCs, would constitute an 
acceptable practice under Core Principle VI.
---------------------------------------------------------------------------

    \62\ 17 CFR 16.01.
---------------------------------------------------------------------------

    Core Principle VII requires the ECM to monitor and enforce 
compliance with the rules of its market. The proposed guidance and 
acceptable practices provided in Appendix B to part 36 are roughly 
parallel to the guidance and acceptable practices prescribed for DCM 
Core Principle 2.\63\ The Commission notes that ECMs on which SPDCs are 
traded are non-intermediated markets, and for this reason guidance 
relating to a DCM's authority to examine the books and records of 
intermediaries has not been included in the proposed guidance for Core 
Principle VII.
---------------------------------------------------------------------------

    \63\ 17 CFR 38, Appendix B to part 38.
---------------------------------------------------------------------------

    Core Principle VIII requires the electronic trading facility to 
establish and enforce rules to minimize conflicts of interest in its 
decision-making processes. The Commission notes that an ECM may face 
conflicts between its self-regulatory responsibilities and its 
commercial interests similar to those encountered by a DCM. For this 
reason the Commission proposes to insert certain general elements of 
the acceptable practices for DCM Core Principle 15 \64\--specifically, 
those descriptive elements that provide greater clarity and context to 
particular conflicts--into paragraph (a)(2) of the guidance section for 
ECM Core Principle VIII.
---------------------------------------------------------------------------

    \64\ Id.
---------------------------------------------------------------------------

    The acceptable practices for DCM Core Principle 15 include four 
specific provisions that must be met to receive the benefit of the safe 
harbor. These provisions address: (1) Board Composition; (2) Definition 
of Public Director; (3) Regulatory Oversight Committee; and (4) 
Disciplinary Panels. Although the Commission did not propose any 
acceptable practices for Core Principle VIII, the Commission emphasizes 
that the four provisions in the acceptable practices for DCM Core 
Principle 15 are a clear articulation of acceptable methods for 
managing conflicts of interest in decision-making. Accordingly, the 
Commission encourages ECMs with SPDCs to consult the DCM Core Principle 
15 acceptable practices for additional guidance as to the spirit of 
Core Principle VIII.
    The Commission recognizes that an electronic trading facility may 
become subject to compliance with Core Principle VIII by virtue of a 
single contract representing a small portion of the facility's 
operations. Thus, the ECM's conflicts may be contract-specific and not 
require the all-encompassing safe harbor offered for the benefit of 
DCMs in Core Principle 15.\65\ The Commission also recognizes that it 
may not be practicable for an ECM to implement the full panoply of the 
Core Principle 15 acceptable practices. The ECM must nonetheless ensure 
that appropriate measures are in place to guard against conflicts of 
interest in decision-making. An electronic trading facility should 
carefully consider its method of compliance, including whether 
additional measures may be required as the number or importance of its 
SPDCs increases. The Commission reserves the right to issue additional 
guidance or specific acceptable practices for Core Principle VIII as 
circumstances warrant.
---------------------------------------------------------------------------

    \65\ The Commission recognizes that, pursuant to the 
Reauthorization Act, compliance with the core regulatory principles 
is limited to ECMs with SPDCs. However, the Commission also 
recognizes that all ECMs, not just ECMs with SPDCs, may face 
potential conflicts of interest in their decision-making processes. 
Therefore, all ECMs may want to consider implementing appropriate 
measures to minimize conflicts of interests.
---------------------------------------------------------------------------

    Core Principle IX requires ECMs with SPDCs to avoid adopting rules 
or taking actions that result in unreasonable restraints of trade or 
impose a material anticompetitive burden on trading. The Commission is 
required by section 15(b) of its statute to take into consideration the 
public interest to be protected by the antitrust laws and to take the 
least anticompetitive means of achieving the objectives, policies and 
purposes of the CEA.\66\ Consistent with the Commission's approach to 
antitrust considerations with respect to DCMs,\67\ it is the 
Commission's intent to be guided by section 15(b) of the Act in its 
consideration of any issues arising under this core principle.
---------------------------------------------------------------------------

    \66\ 7 U.S.C. 19.
    \67\ 17 CFR 38, Appendix B to part 38, Guidance for Core 
Principle 18.
---------------------------------------------------------------------------

5. Annual Commission Review
    In accordance with section 2(h)(7) of the CEA, proposed regulation 
36.3(d) provides that the Commission will review at least annually 
agreements, contracts and transactions traded on ECMs to determine 
whether they serve a significant price discovery function. The 
Commission proposes to limit these annual reviews to those contracts 
that have an average daily volume of five or more trades or that have 
been brought to the attention of the Commission, through the 
notification procedures of proposed regulation 36.3(c)(2) or otherwise, 
as possible SPDCs. The Commission believes this approach is consistent 
with Congress' intent as reflected in the Conference Committee Report:

    The Managers do not intend that the Commission conduct an 
exhaustive annual examination of every contract traded on an 
electronic trading facility pursuant to the section 2(h)(3) 
exemption, but instead to concentrate on those contracts that are 
most likely to meet the criteria for performing a significant price 
discovery function.\68\
---------------------------------------------------------------------------

    \68\ Conference Committee Report at 985.
---------------------------------------------------------------------------

B. Market, Transaction and Large Trader Reporting Rules

    The Commission's market and large trader reporting rules 
(``reporting rules'') are contained in parts 15 through 21 of the 
Commission's regulations.\69\ Collectively, the reporting rules 
effectuate the Commission's market and financial surveillance 
programs.\70\ The market surveillance programs analyze market data to 
detect and prevent market manipulation and disruptions and to enforce 
speculative position limits. The financial surveillance programs use 
market data to measure the financial risks that large contract 
positions may pose to Commission registrants and clearing 
organizations.
---------------------------------------------------------------------------

    \69\ 17 CFR parts 15 to 21.
    \70\ See 69 FR 76392 (Dec. 21, 2004).
---------------------------------------------------------------------------

    The Commission's reporting rules can be applied to SPDCs traded on 
ECMs pursuant to the authority of sections 4a, 4c(b), 4g and 4i of the 
CEA.\71\ The amendments introduced to the CEA by the Reauthorization 
Act, both by defining ECMs with SPDCs as registered entities with 
respect to those contracts and by making certain provisions of the

[[Page 75898]]

Act directly applicable to SPDCs, give the Commission the authority to 
establish a comprehensive transaction and position reporting system for 
SPDCs. Specifically, section 4a of the CEA permits the Commission to 
set, approve exchange-set, and enforce speculative position limits.\72\ 
Section 4c(b) of the Act,\73\ which gives the Commission plenary 
authority to establish the rules pursuant to which the terms and 
conditions on which commodity options transactions may be conducted, 
provides the basis for the Commission's authority to establish a large 
trader reporting system for transactions on ECMs that involve commodity 
options. Section 4g of the Act, as amended, imposes reporting and 
recordkeeping obligations on registered persons and requires them to 
file such reports as the Commission may require on proprietary and 
customer positions executed on any board of trade and in any SPDC 
traded or executed on an electronic trading facility.\74\ Finally, 
section 4i of the Act requires the filing of such reports as the 
Commission may require when positions made or obtained on DCMs, DTEFs 
or ECMs with respect to SPDCs equal or exceed Commission-set 
levels.\75\
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    \71\ The Reauthorization Act amended section 2(h)(4)(B) of the 
Act to subject SPDCs requiring large trader reporting to the 
provisions of section 4c(b) of the Act. In addition, section 
2(h)(4)(D) of the Act provides that transactions executed on ECMs 
shall be subject to ``such rules, regulations, and orders as the 
Commission may issue to ensure timely compliance with any of the 
provisions of this Act applicable to a significant price discovery 
contract traded on or executed on any electronic trading facility * 
* *.'' 7 U.S.C. 2(h)(4)(D).
    \72\ 7 U.S.C. 6a.
    \73\ 7 U.S.C. 6c(b).
    \74\ 7 U.S.C. 6g.
    \75\ 7 U.S.C. 6i.
---------------------------------------------------------------------------

    In addition to proposing technical and conforming amendments to 
parts 15 through 21 of its regulations, the Commission seeks, through 
the proposed regulations, to extend to SPDCs the reporting rules that 
currently apply to DCMs and DTEFs by defining clearing member and 
clearing organization and amending the definition of reporting market 
in Commission regulation 15.00 to apply to positions in, and the 
trading and clearing of, SPDCs executed on ECMs. Under the proposed 
rules, ECMs would provide clearing member reports for SPDCs to the 
Commission pursuant to Commission regulation 16.00. As with DCMs, 
proposed rule 16.01 would require ECMs to submit to the Commission and 
publicly disseminate option deltas and aggregated trading data on a 
daily basis.\76\ ECM clearing members that clear SPDCs, regardless of 
their registration status with the Commission or their status as 
domestic or foreign persons, would be required to file position reports 
with the Commission for large SPDC positions held in accounts carried 
by such brokers when customer positions exceed the contract reporting 
levels of Commission regulation 15.03(b). In addition, the proposed 
regulations would require clearing members to identify the owners of 
reportable SPDC positions on Form 102 (Identification of Special 
Accounts).\77\
---------------------------------------------------------------------------

    \76\ Currently, the public dissemination requirement of 
Commission regulation 16.01(e) applies only to DCMs. The proposed 
rules would uniformly apply the public dissemination requirement of 
Commission regulation 16.01(e) to actively traded DCM contracts and 
SPDCs executed on DTEFs and ECMs. 17 CFR 16.01(e).
    \77\ The Commission's Division of Market Oversight increasingly 
has been charged with administering the procedural requirements of 
the reporting rules. Accordingly, the Commission is proposing to 
shift any delegation of the Commission's authority to determine the 
format of reports and the manner of reporting under parts 15 through 
21 of the Commission's regulations from the Executive Director to 
the Director of the Division of Market Oversight.
---------------------------------------------------------------------------

    Under the proposed regulations, SPDC traders likewise would be 
subject to the special call provisions of part 18 of the Commission's 
regulations for reportable positions. Moreover, clearing members for 
SPDCs, SPDC traders, and ECMs listing SPDCs each would be subject to 
the special call provisions of part 21 of the Commission's regulations, 
which establish the Commission's ability to request information on 
persons that exercise trading control over commodity futures and 
options accounts along with additional account-related information for 
positions that may or may not be reportable under Commission regulation 
15.03(b).\78\
---------------------------------------------------------------------------

    \78\ 17 CFR 15.03(b). The proposed rules also seek to amend 
paragraphs (i)(1) and (i)(2) of Commission regulation 21.01 to 
ensure that any special call to an intermediary for information that 
classifies a trader as a commercial or noncommercial trader, and the 
positions of the trader as speculative, spread positions, or 
positions held to hedge commercial risks, can be made with respect 
to both commodity futures and commodity options contracts. 17 CFR 
21.02(i).
---------------------------------------------------------------------------

    In order to effectively communicate with foreign clearing members 
and foreign traders and to properly administer the proposed special 
call provisions of parts 17, 18 and 21 of the Commission's regulations, 
the Commission is also proposing to amend the designation of agent 
provisions of Commission regulation 15.05. This rule relates to the 
appointment of an agent for service of process for foreign persons; it 
is self-effectuating and is designed to permit the Commission to 
communicate expeditiously with foreign individuals and entities that 
trade on domestic commodity exchanges.\79\ Similar to requirements that 
currently apply to DCMs and DTEFs, the proposed amendments to 
regulation 15.05 would require ECMs that list SPDCs to act as the agent 
of foreign clearing members and foreign traders for the purpose of 
accepting service or delivery of any communication, including special 
calls, issued by the Commission to a foreign clearing member or foreign 
trader.\80\
---------------------------------------------------------------------------

    \79\ For background on the adoption of the rule, see 45 FR 30426 
(May 8, 1980).
    \80\ In order to ensure that the Commission can expeditiously 
communicate with all foreign individuals and entities that may 
effect transactions in ECM SPDCs, the Commission is proposing to 
define the term foreign clearing member in proposed regulation 
15.00(g), and to use that term along with the term foreign trader as 
defined in regulation 15.00(h), in proposed regulation 15.05(i).
---------------------------------------------------------------------------

    The Commission is also proposing new regulation 16.02 to require 
all reporting markets--a definition that currently includes DCMs and 
DTEFs (unless the Commission determines otherwise) and, as proposed, 
will include ECMs listing SPDCs with respect to such contracts--to 
report on a daily basis trade data and related order information for 
each transaction that is executed on the market. Such reports would 
include time and sales data, reference files and such other information 
as the Commission or its designee may require and, upon request, would 
be accompanied by data that identifies or facilitates the 
identification of each trader for each transaction or order included in 
a submitted report. For some time, DCMs have consistently provided 
transaction level data to the Commission pursuant to rule 38.5(a), 
under which they must file trade data upon request by the 
Commission.\81\ Recent acquisitions of technology have enabled the 
Commission more effectively to integrate trade data and related order 
information into its trade practice, market and financial surveillance 
programs. Accordingly, the Commission proposes in new regulation 16.02 
to make the submission of trade data and related order information 
mandatory.
---------------------------------------------------------------------------

    \81\ 17 CFR 38.5(a).
---------------------------------------------------------------------------

    In this regard, and specifically with respect to SPDCs, the 
Commission notes that the proposed amendments to part 17 of the 
Commission's regulations do not apply to SPDC transactions that are not 
cleared for the simple reason that no clearing members are involved in 
clearing such transactions. For purposes of enforcing SPDC position 
limits and monitoring large SPDC positions, the Commission would use 
proposed regulation 16.02 to access transaction information and trader 
identifications to enforce position limits and monitor large positions 
for market and financial surveillance purposes.

[[Page 75899]]

C. Other Regulatory Provisions

1. Part 40--Provisions Common to Registered Entities
    ECMs with SPDCs are integrated into the definition of ``registered 
entity'' in section 1a(29) of the CEA, as amended. Part 40 of the 
Commission's regulations applies to registered entities, and therefore, 
ECMs with SPDCs. Proposed part 40 is being amended to specify which 
provisions would be, or would not be, applicable to all registered 
entities. In particular, rules 40.1, 40.2 and 40.5-40.8 and Appendix D 
apply to ECMs with SPDCs. Although not all provisions of part 40 will 
be applicable to ECMs with SPDCs,\82\ interested parties are strongly 
encouraged to review all of part 40 because even those sections that 
are not being amended in this rulemaking may be de facto amended by 
virtue of the fact that the term ``registered entity'' now includes 
ECMs with SPDCs.
---------------------------------------------------------------------------

    \82\ Regulation 40.3 will not apply to ECMs with SPDCs because 
it addresses Commission approval of products. Regulation 40.4 
applies solely to agricultural products, which cannot be traded on 
ECMs.
---------------------------------------------------------------------------

III. Related Matters

A. Cost Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before issuing new regulations under 
the Act. Section 15(a) does not require the Commission to quantify the 
costs and benefits of new regulations or to determine whether the 
benefits of adopted regulations outweigh their costs. Rather, section 
15(a) requires the Commission to consider the cost and benefits of the 
subject regulations. Section 15(a) further specifies that the costs and 
benefits of the regulations 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 the market for listed derivatives; (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 regulation 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 proposed regulations implement the Reauthorization Act by 
establishing an enhanced level of oversight of ECMs--including ECMs 
with SPDCs and ECM market participants--as mandated by Reauthorization 
Act. As a result, in certain cases, it may be more appropriate to 
attribute the compliance costs imposed by the proposed regulations to 
requirements that directly arise from the provisions of the 
Reauthorization Act.
    Under the proposed rules, all DCMs, DTEFs (unless the Commission 
determines otherwise) and ECMs with SPDCs would be required to provide 
daily transaction and related data reports to the Commission under 
proposed rule 16.02. The costs associated with the daily transaction 
and related data reporting requirements of proposed regulation 16.02, 
however, may be ameliorated by the fact that DCMs have been voluntarily 
providing transactional data to the Commission on a daily basis since 
the mid-1980s. The Commission estimates that DCMs would account for the 
substantial majority of the markets that would likely be required to 
file such reports pursuant to proposed rule 16.02.
    The proposed regulations would extend the market and position 
reporting requirements of parts 15 to 21 of the Commission's 
regulations to ECMs with SPDCs with respect to such contracts. The 
requirements of the proposed regulations are substantial, would involve 
the submission of daily reports, and would impose burdens on market 
participants that clear and trade SPDCs. More specifically, the 
proposed rules would require ECMs with SPDCs with respect to such 
contracts to provide clearing member reports for SPDCs to the 
Commission pursuant to Commission regulation 16.00. Proposed rule 16.01 
would require ECMs to submit to the Commission and publicly disseminate 
option deltas and aggregated trading data on a daily basis. Pursuant to 
proposed rule 17.00 ECM clearing members that clear SPDCs would be 
required to file position reports with the Commission for large SPDC 
positions held in accounts carried by such brokers when customer 
positions exceed contract reporting levels and would be required to 
identify the owners of reportable SPDC positions on Form 102 under 
proposed rule 17.01. SPDC traders likewise would be subject to the 
special call provisions of part 18 of the Commission's regulations for 
reportable positions, and clearing members for SPDCs, SPDC traders, and 
ECMs listing SPDCs each would be subject to the special call provisions 
of part 21 of the Commission's regulations.
    The costs associated with the requirements of the market and 
position reporting rules, should, however, be reduced in part by the 
substantial overlap between the persons that are currently subject to 
the reporting rules, and the persons that would be subject to the 
reporting rules pursuant to the Commission's proposed regulations. For 
example, there is substantial overlap between traders of the natural 
gas contract on ICE OTC and traders of the same contract on NYMEX. With 
respect to clearing members of ICE OTC, for example, such persons are 
often clearing members or affiliates of clearing members of NYMEX.
    The benefits of extending the market and reporting rules to SPDCs 
are substantial. As an initial matter, it is important to note that a 
significant focus of the Reauthorization Act concerned amending the CEA 
with the specific intent of giving the Commission the authority to 
extend the market and position reporting rules to SPDC markets and 
market participants. To the extent that contracts listed on ECMs serve 
a significant price discovery function, the regulatory value of 
enhanced oversight, through the application of the market and position 
reporting rules to such contracts, is elevated. The Commission analyzes 
the information funneled to it by the requirements of the market and 
position reporting rules to conduct market and financial surveillance. 
Without such information, the ability of the Commission to discharge 
its regulatory responsibilities, including the responsibilities of 
preventing market manipulations and contract price distortions and 
ensuring the financial integrity of the listed derivatives marketplace, 
would be compromised.
    The bulk of the costs that would be imposed by the requirements of 
proposed regulation 36.3 relate to significant and increased submission 
of information requirements. For example, under proposed regulation 
36.3(b)(1), all ECMs would be required to file certain basic 
information including contract terms and conditions with, and make 
certain demonstrations related to compliance with the terms of the 
section 2(h)(3) exemption to, the Commission. Proposed regulation 
36.3(b)(2) would require ECMs to submit transactional information on a 
weekly basis to the Commission for certain traded contracts that are 
not SPDCs and would not be subject to the terms of proposed rule 16.02. 
Proposed regulation 36.3(c)(4) would impose a substantial cost on ECMs 
with SPDCs in terms of providing information to the Commission.
    In enacting the Reauthorization Act, Congress directed the 
Commission to take an active role in determining

[[Page 75900]]

whether contracts listed by ECMs could qualify as SPDCs. Accordingly, 
the enhanced informational requirements that would be imposed on ECMs 
with respect to contracts that have not been identified as SPDCs have 
been proposed by the Commission in order to acquire the information 
that it requires to discharge this newly mandated responsibility. In 
addition, the substantial information submission and demonstration 
requirements that would be imposed on ECMs with SPDCs have been 
proposed because ECMs with SPDCs, by statute, acquire certain of the 
self-regulatory responsibilities of DCMs. The submission requirements 
associated with proposed regulation 36.3(c)(4) are tailored to enable 
the Commission to ensure that ECMs with SPDCs, as entities with the 
elevated status of a registered entity under the Act, are in compliance 
with the statutory terms of the core principles of section 2(h)(7)(C) 
of the Act. As with the market and position reporting rules, the 
primary benefit to the public of proposed regulation 36.3 is that its 
requirements give the Commission the ability to discharge its 
statutorily mandated responsibility for monitoring for the presence of 
SPDCs and extending its oversight to the trading of SPDCs.

B. The Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that agencies consider the impact of their regulations on 
small businesses. The requirements related to the proposed amendments 
fall mainly on registered entities, exchanges, futures commission 
merchants, clearing members, foreign brokers, and large traders. The 
Commission has previously determined that exchanges, futures commission 
merchants and large traders are not ``small entities'' for the purposes 
of the RFA.\83\ Similarly, clearing members, foreign brokers and 
traders would be subject to the proposed regulations only if carrying 
or holding large positions. Accordingly, the Acting Chairman, on behalf 
of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that 
the actions proposed to be taken herein will not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \83\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    Certain provisions of proposed Commission regulation 36.3 would 
result in new collection of information requirements within the meaning 
of the Paperwork Reduction Act of 1995 (PRA).\84\ The Commission 
therefore is submitting this proposal to the Office of Management and 
Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The title for this collection of information is ``Regulation 
36.3--Exempt Commercial Market Submission Requirements'' (OMB control 
number 3038-NEW). If adopted, responses to this collection of 
information would be mandatory. The Commission will protect proprietary 
information according to the Freedom of Information Act and 17 CFR part 
145, ``Commission Records and Information.'' In addition, section 
8(a)(1) of the Act strictly prohibits the Commission, unless 
specifically authorized by the Act, from making public ``data and 
information that would separately disclose the business transactions or 
market positions of any person and trade secrets or names of 
customers.'' \85\
---------------------------------------------------------------------------

    \84\ 44 U.S.C. 3501-3520.
    \85\ 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------

    The requirements of Commission regulation 36.3 are currently 
covered by OMB control number 3038-0054 which applies to both EBOTs and 
ECMs. As a result of the Reauthorization Act, EBOTs and ECMs have to 
comply with additional divergent regulatory requirements. Accordingly, 
the Commission is seeking a new and separate control number for ECMs 
operating in compliance with the requirements of regulation 36.3. Upon 
OMB's approval and assignment of a separate control number specifically 
for the collection of information requirements of proposed regulation 
36.3, the Commission intends to submit the necessary documentation to 
OMB to enable it to apply OMB control number 3038-0054 exclusively to 
EBOTs.
    In addition, the Commission is proposing amendments to parts 15 to 
21 of the Commission's regulations, which amend two existing 
collections of information titled ``Large Trader Reports'' (OMB control 
number 3038-0009) and ``Futures Volume, Open Interest, Price, 
Deliveries, and Exchanges of Futures'' (OMB control number 3038-0012). 
Responses to this collections of information would be mandatory. Where 
appropriate, the Commission will protect proprietary information 
pursuant to the Freedom of Information Act \86\ and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the Act prohibits the Commission, unless specifically authorized by the 
Act, from making public ``data and information that would separately 
disclose the business transactions or market positions of any person 
and trade secrets or names of customers.'' \87\
---------------------------------------------------------------------------

    \86\ 5 U.S.C. 552 et seq.
    \87\ Id.
---------------------------------------------------------------------------

    Finally, proposed regulation 16.02 would result in a new collection 
of information requirement within the meaning of the PRA. The 
Commission is therefore submitting the proposal for regulation 16.02 to 
OMB for review. The title for the collection of information requirement 
is ``Regulation 16.02--Daily Trade and Supporting Data Reports'' (OMB 
control number 3038-NEW). If adopted, this collection would be 
mandatory. The Commission will protect proprietary information 
according to the Freedom of Information Act and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the Act strictly prohibits the Commission, unless specifically 
authorized by the Act, from making public ``data and information that 
would separately disclose the business transactions or market positions 
of any person and trade secrets or names of customers.'' \88\
---------------------------------------------------------------------------

    \88\ Id.
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid control number. OMB has not yet assigned control 
numbers to the new collections for proposed regulations 36.3 and 16.02. 
The approved collection of information requirements associated with 
parts 15 to 21, which would be revised by the proposed rules and rule 
amendments, display control numbers 3038-0009 and 3038-0012.
1. Proposed Regulation 36.3
A. Regulation 36.3(a)
    Regulation 36.3(a) requires that ECMs notify the Commission of the 
intent to operate as an ECM in reliance of section 2(h)(3) of the Act 
and further provide the information and certifications required by 
section 2(h)(5)(A) of the Act. Section 2(h)(5)(A) of the Act requires 
an ECM to provide the name and address of the person who is authorized 
on behalf of the ECM to receive communications from the Commission, the 
commodity categories that the ECM intends to offer, and certifications 
that certain owners and principals of the ECM are not bad actors, that 
the facility will comply with the requirements of the ECM exemption, 
and that the facility will update its filings under section 2(h)(5)(A) 
to account for material changes in the information submitted to the 
Commission.

[[Page 75901]]

    The substantive requirements of regulation 36.3(a) repeat the 
requirements that are imposed by the Act as a condition of operating 
pursuant to the ECM exemption. The reporting or recordkeeping burden 
associated with Commission regulation 36.3(a) involves the compilation 
and submission of the required information to the Commission. 
Commission staff estimates that each ECM would expend approximately 4 
hours of professional time annually to maintain, verify, and update the 
notification and required certifications. Commission staff estimates 
that 20 ECMs will be subject to the requirement resulting in an 
aggregate burden of 80 hours annually.
B. Regulation 36.3(b)(1)
    Under proposed regulation 36.3(b)(1), each ECM would be required to 
provide contract descriptions and terms and conditions, the market's 
trading conventions, and the market's trading protocols to the 
Commission. Each ECM would be required to describe how it meets the 
statutory definition of a trading facility and demonstrate that it 
requires each participant to comply with all applicable laws; complies 
with the initial statutory requirements for the ECM exemption under 
section 2(h)(3) of the Act; and directs a program to monitor market 
participants for compliance with the transactional requirements of the 
ECM exemption. Proposed regulation 36.3(b)(1) would further require 
that each ECM provide, upon the Commission's request, information that 
the Commission would deem helpful to its determination as to whether a 
particular contract is a SPDC. Lastly, each ECM would be required to 
annually indicate on Form 205 whether it continues to operate under the 
ECM exemption and certify the accuracy of the information contained in 
its Notification of Operation submitted pursuant to section 2(h)(5)(A) 
of the Act and regulation 36.3(a).
    Based on the number of contract submissions made by DCMs, the 
Commission estimates that ECMs collectively would list for trading 250 
commodity futures and options contracts annually. Commission staff 
estimates that compliance with the above requirements and the 
transmission of descriptions and terms and conditions for such products 
would take approximately 2 hours of professional time to prepare per 
contract resulting in a collective burden of 500 hours annually for all 
ECMs.
C. Regulation 36.3(b)(2)
    Proposed regulation 36.3(b)(2) would require that ECMs, with 
respect to contracts that are not SPDCs, identify contracts which 
average 5 or more trades per day over a calendar quarter, and for such 
contracts, compile daily transaction-based reports that include the 
date of execution, the time of execution, the price of execution, the 
quantity executed, the total daily trading volume, the total open 
interest, option type, option strike prices for each qualifying 
contract, and such other information as may be requested by the 
Commission. Proposed regulation 36.3(b)(2) would require the submission 
of the reports on a weekly basis. Such data is generated by ECMs in the 
normal course of operation. The Commission staff estimates that ECMs 
would submit weekly reports for a total of 40 contracts annually (2,080 
reports). Commission staff estimates that ECMs would expend 
approximately 20 minutes of professional time to compile and transmit 
each weekly report to the Commission resulting in an annual burden of 
approximately 693 hours.
    Proposed regulation 36.3(b)(2) would give an ECM the flexibility to 
choose to submit weekly transaction-based reports or, in the 
alternative, give the Commission electronic access to its trading 
facility to enable the Commission to create the weekly reports. Should 
an ECM select this option, Commission staff believes that such access 
would not result in any estimable burden on an ECM.
    Proposed regulation 36.3(b)(2) also would require that ECMs, with 
respect to contracts that are not SPDCs, to identify contracts which 
average 1 or more trades per day over a calendar quarter, and for such 
contracts, to provide to the Commission on a quarterly basis, the terms 
and conditions of such contracts, the average daily trading volume, and 
the most recent level of open interest. As with weekly reports, such 
data is generated by ECMs in the normal course of operation. The 
Commission staff estimates that ECMs would submit quarterly reports for 
a total of 90 contracts annually (360 total reports). Commission staff 
estimates that ECMs would expend approximately 20 minutes of 
professional time to compile and transmit each quarterly report 
resulting in an annual burden of 120 hours.
    Furthermore, proposed regulation 36.3(b)(2) would require ECMs to 
maintain an inventory of all fraud or manipulation based complaints and 
submit a copy of such complaints to the Commission within 3 or 30 days, 
depending on the specific facts of the complaints. ECMs should record 
and retain an inventory of complaints in the normal course of 
operation. Commission staff is unable to estimate the hourly burden 
associated with the routine transmittal of such reports to the 
Commission. However, Commission staff would presume that such 
transmittal requirements should not result in any materially measurable 
burden on ECMs.
    Lastly, proposed regulation 36.3(b)(2) addresses the Commission's 
authority to require the submission of data upon special call under 
section 2(h)(5)(B)(iii) of the Act. Pursuant to that section of the 
Act, the Commission has the authority to issue special calls in order 
to enforce certain provisions of the Act including the anti-fraud and 
anti-manipulation provisions. In addition, the Commission is authorized 
to issue special calls to ECMs to facilitate its determination as to 
whether certain contracts are SPDCs, to evaluate a systemic market 
event, or to obtain information requested by another Federal financial 
regulator. Commission staff estimates that a total of 15 special calls 
would be issued to ECMs annually under section 2(h)(5)(B)(iii) of the 
Act. Each ECM that has been issued a special call would expend 
approximately 5 hours of professional time to respond to the call 
resulting in a burden of 75 hours annually.
D. Proposed Regulation 36.3(c)(2)
    Proposed regulation 36.3(c)(2) establishes for ECMs certain 
requirements for notifying the Commission of possible SPDCs that may be 
listed by the ECM. Specifically, an ECM's obligation to notify the 
Commission would apply to contracts that average 5 trades or more per 
day over the most recent calendar quarter, and may be triggered by 
either the ECM's sale of contract price data or by a contract's daily 
settlement price being within 2.5 percent of the contemporaneously 
determined closing, settlement or daily price of another contract 95 
percent or more of the days in the most recent quarter. Such 
notifications would be accompanied by supporting details. Commission 
staff estimates that cost of monitoring for the triggering conditions 
is nominal. Commission staff estimates that collectively 10 contracts 
would be the subject of the notification requirement annually. Each ECM 
with a qualifying contract would expend approximately 1 hour of 
professional time to compile and transmit such data to the Commission 
at an aggregate annual burden of 10 hours.

[[Page 75902]]

E. Proposed Regulation 36.6(c)(4)
    An ECM with a SPDC, with respect to such a contract, has 
substantial regulatory responsibilities including the obligation to 
comply with the core principles of section 2(h)(7)(C) of the Act and to 
certify the compliance of SPDC contract terms and conditions and 
exchange rules with the core principles, other applicable provisions of 
the Act, and Commission regulations thereunder. To enable the 
Commission to evaluate an ECM's compliance with the statutory and 
regulatory provisions applicable to SPDCs and ECMs listing SPDCs, 
Commission regulation 36.3(c)(4) would require ECMs with SPDCs to 
submit a substantial amount of information and documentation to the 
Commission including the market's rules, a description of financial 
standards for members or participants, a description of the market's 
trading algorithm, legal status documents, and a description of the 
governance structure of the market. As proposed, such information 
collectively would be filed only once upon the market's listing of a 
SPDC. However, subsequent exchange rule changes, as with initial SPDC 
contract terms and conditions and amendments thereto, would be required 
to be certified on an ongoing basis.
    Commission staff estimates that up to three new ECMs could list at 
least one SPDC during the next five years. Commission staff estimates 
that each new ECM listing its initial SPDC would expend approximately 
200 hours of professional time providing the information and 
documentation required under regulation 36.3(c)(4) for an aggregate 
burden of 600 hours. Assuming that such trading facilities will operate 
for ten years, the aggregated annualized cost, in terms of burden 
hours, would be 60 hours. Additionally, Commission staff estimates that 
the Commission would receive approximately 50 certified filings per 
SPDC. For each SPDC related certified filing, an ECM would expend, in 
accordance with the procedural and submission requirements of 
Commission regulation 40.6, approximately 30 minutes resulting in an 
aggregate annual burden of 75 hours.
F. Proposed Regulation 36.3(c)(6)
    Proposed regulation 36.3(c)(6) requires an ECM listing a SPDC, upon 
the Commission's request, to file a written demonstration that the ECM 
is in compliance with the core principles of section 2(h)(7)(C) of the 
Act. Commission staff estimates that such demonstrations of compliance 
could require up to 20 hours of response time. Commission staff 
anticipates issuing 2 requests annually resulting in an aggregate 
burden of 40 hours.
2. Proposed Regulation 16.02
    Under proposed regulation 16.02, reporting markets, a term which as 
proposed would include ECMs with SPDCs with respect to SPDCs, in 
addition to DCMs and DTEFs (unless determined otherwise by the 
Commission), would be required to provide trade and supporting data 
reports to the Commission on a daily basis. Such reports would include 
transaction-level trade data and related order information for each 
transaction executed on the reporting market and would be accompanied 
by data that identifies traders for each transaction when reporting 
markets maintain such data.
    Since the mid-1980s, all DCMs have voluntarily provided the 
Commission with transaction level data on a daily basis. Proposed 
regulation 16.02 seeks to formalize and codify the submission process. 
Commission staff estimates that each reporting market would expend 18 
hours for onsite visits to the Commission, discussions with staff to 
introduce the order flow process, and meetings with staff for follow-up 
discussions. The proposed rules would require that reporting markets 
expend approximately 2325 hours in additional start-up costs to 
establish the required information technology infrastructure. 
Commission staff estimates that it would receive daily trade and 
supporting data reports from up to15 reporting markets annually. 
Accordingly the start-up burden in terms of hours would in the 
aggregate be 35,145 hours. Annualized over a useful life of ten years, 
the aggregated annual burden hours would be 3,514.
    It is also estimated that start-up and continuing costs may involve 
product and service purchases. Commission staff estimates that 
reporting markets could expend up to $5,000 annually per market on 
product and service purchases to comply with proposed regulation 16.02. 
This would result in an aggregated cost of $75,000 per annum (15 
reporting markets x $5,000). This estimate, however, is speculative 
because reporting markets must possess the ability to audit and track 
transactions in the ordinary course of operations independently of 
proposed regulation 16.02.
    In addition to the start-up burden, proposed regulation 16.02, if 
adopted, would impose certain ongoing costs. Commission staff estimates 
that each reporting market would expend 30 minutes for each daily trade 
and supporting data report transmitted to the Commission resulting in 
an aggregate burden of 1,875 hours annually (assuming that such reports 
are provided for each of 250 trading days).
3. Market and Large Trader Reporting Rules
    In order to implement the CEA as amended by the Reauthorization 
Act, the Commission through this rulemaking proposes to extend the 
market and large trader reporting requirements that currently apply to 
DCMs and DTEFs to ECMs with SPDCs with respect to such contracts.
A. Futures Volume, Open Interest, Price, Deliveries, and Exchanges of 
Futures (OMB control number 3038-0012)
    Twelve exchanges currently submit aggregated market data to the 
Commission and are required to publicly disseminate for each of 
approximately 250 trading days per year under Commission regulation 
16.01. The information includes aggregate figures on a per contract 
basis on total gross open contracts, open futures contracts against 
which delivery notices have been stopped, volume generated from the 
exchange of futures, delta factors as well as certain pricing data. 
Should the proposed amendments be adopted, it is estimated that up to 
15 reporting markets, including ECMs with SPDCs with respect to such 
contracts, could be required to submit this data to the Commission on a 
continuing basis. Commission staff estimates that such markets would 
expend approximately 30 minutes per day to generate the required data 
files, transmit that file to Commission offices, and publish the 
required information. This would results in an annual burden of 
approximately 1,875 hours.
B. Large Trader Reports (OMB Control Number 3038-0009)
1. Clearing Member Reports
    Twelve designated contract markets provide clearing member reports 
pursuant to Commission regulation 16.00 once on each of an estimated 
250 trading days per year. Should the proposed rules be adopted, it is 
estimated that up to 15 reporting markets, including ECMs with SPDCs 
with respect to such contracts, would be providing this data to the 
Commission on a continuing basis. The exchanges and ECMs would be 
required to submit confidential information to the Commission on the 
aggregate positions and trading activity of each clearing member.
    Reporting markets, on a daily basis, are required under regulation 
16.00 to

[[Page 75903]]

report each clearing member's open long and short positions, purchases 
and sales, exchanges of futures, and futures delivery notices. The data 
is reported separately by proprietary and customer accounts by futures 
month and, for options, by puts and calls by expiration date and strike 
price. The Commission obtains clearing member reports from the 
reporting markets or the clearing organizations of each reporting 
market. Reporting markets and the clearing organizations routinely 
compile, analyze and provide such data to each clearing member. Since 
the data is routinely provided to clearing members, the reporting 
burden for this set of data is estimated at 20 minutes for each 
reporting market per day. Assuming that a total of 15 entities would 
provide this data on a daily basis to the Commission, the total 
aggregate burden hours for reporting would be 1,250 hours (assuming 
that there are 250 trading days annually).
2. Reporting Firms
    Under Commission regulation 17.00, routine reports are filed only 
for accounts with commodity futures and option positions that exceed 
levels set by the Commission in regulation 15.03(b). As proposed, 
regulation 17.00 would extend the routine reporting requirements of 
regulation 17.00 to clearing members on ECMs with SPDCs with respect to 
SPDCs. Should proposed regulation 17.00 be adopted, it is estimated 
that up to an additional 30 respondents would be required to file 
reports at any one time under regulation 17.00 increasing the total 
number of respondents to 250. The reporting burden consists of staff of 
reporting firms initializing their information technology systems for 
new contracts and new accounts. On average it is expected that about 15 
minutes per day is expended by these reporting firm staff. Over 250 
trading days annually, the aggregate burden would be 15,625 hours.
3. Forms 102
    Each account reported to the Commission by an FCM, clearing member, 
or foreign broker must also be identified on a Form 102 pursuant to 
regulation 17.01. By amending the definition of reporting market, 
clearing member, and clearing organization, the notice of proposed 
rulemaking would extend the requirements of regulation 17.01 to 
clearing members of ECMs with SPDCs with respect to such contracts. 
Forms 102 provide information that allows the Commission to combine 
different accounts held or controlled by the same trader and to 
identify commercial firms using the markets for hedging. Should the 
notice of proposed rulemaking be adopted, the total number of Forms 102 
filed with the Commission is estimated to increase by 500 to 4,500 per 
year. Respondents would expend 12 minutes completing each form for a 
total aggregate burden of 900 hours annually.
4. Reports From Traders
    Traders provide identifying information using Forms 40 under 
Commission regulation 18.04 and position data upon special call under 
Commission regulations 18.00 and 18.05. The notice of proposed 
rulemaking would extend the requirements of those regulations to 
traders of SPDCs. Should the proposed amendments be adopted, the total 
estimated number of traders filing the Form 40 under regulation 18.04 
would increase by 100 to 2,500 per year with each response requiring 
approximately 20 minutes, resulting in an aggregate annual burden of 
833 hours.
    The Commission has maintained the authority to make special calls 
on traders under part 18 of the Commission's regulations when the 
information obtained routinely under part 17 of the Commission's 
regulations is incomplete for its market and financial surveillance 
purposes. Information obtained on call under Commission regulations 
18.00 and 18.05 is provided in the manner stipulated per instruction 
contained in the special call. Should the proposed regulations be 
adopted, the Commission estimates that 12 special calls would be issued 
to each of 45 traders under Commission regulations 18.00 and 18.05 and 
that each response to a call would require approximately 5 hours, for 
an estimated aggregate annual burden of 2,700 hours.
5. Part 21 of the Commission Regulations
    Under part 21 of the Commission's regulations, the Commission may 
issue special calls for additional cash and futures data concerning 
traders from FCMs, introducing broker, clearing members, foreign 
brokers, and traders. In addition, under part 21 of the Commission's 
regulations (17 CFR part 21), the Commission may request identifying 
information regarding persons who exercise trading control over 
accounts. Position information collected pursuant to special call under 
part 21 of the Commission's regulations may be used to audit large 
trader reports and is used to investigate potential market abuses. 
Although similar to the standardized information routinely collected 
under part 17 of the Commission's regulations for reportable accounts, 
such data is submitted in response to customized requests for 
information and may regard accounts and positions that are not 
reportable. In contrast to special calls for identifying data made 
under Commission regulation 18.04, special calls made under any 
provision of part 21 of the Commission's regulations generally occur 
only when a particular market shows a potential for disruption or when 
there is an investigation of possible violations of the Act or the 
regulations thereunder. The notice of proposed rulemaking would apply 
the terms of part 21 to ECMs with SPDCs with respect to such contracts, 
clearing members clearing SPDCs, and SPDC traders. Should the proposed 
regulations be adopted, the Commission estimates that the Commission 
will continue to make less than 10 special calls under all of the 
provisions of part 21 of the Commission's regulations and that each 
response to a call will require approximately 1 hour, resulting in an 
aggregate reporting burden of 10 hours annually.
4. Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the reporting and recordkeeping burdens 
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission 
solicits comments in order to: (i) Evaluate whether the proposed 
collections of information are necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have practical utility; (ii) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collections of information; 
(iii) determine whether there are ways to enhance the quality, utility, 
and clarity of the information to be collected; and (iv) minimize the 
burden of the collections of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    You may submit your comments directly to the Office of Information 
and Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at [email protected]. Please provide the Commission with a copy of 
your comments so that we can summarize all written comments and address 
them in the final rule preamble. Refer to the Addresses section of this 
notice of proposed rulemaking for comment submission instructions to 
the Commission. You may obtain a copy of the supporting statements for 
the

[[Page 75904]]

collections of information discussed above by visiting RegInfo.gov. OMB 
is required to make a decision concerning the collections of 
information between 30 and 60 days after publication of this Release. 
Consequently, a comment to OMB is most assured of being fully effective 
if received by OMB (and the Commission) within 30 days after 
publication of this notice of proposed rulemaking.

List of Subjects

17 CFR Part 15

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 16

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 17

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 18

    Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 19

    Commodity futures, Cottons, Grains, Reporting and recordkeeping 
requirements.

17 CFR Part 21

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission.

17 CFR Part 40

    Commodity futures, Contract markets, Designation application, 
Reporting and recordkeeping requirements.
    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR parts 15, 16, 17, 18, 19, 
21, 36 and 40 as follows:

PART 15--REPORTS--GENERAL PROVISIONS

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

    Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 
9, 12a, 19, and 21, as amended by Title XIII of the Food, 
Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 
1624 (June 18, 2008).

    2. Revise Sec.  15.00 to read as follows:


Sec.  15.00  Definitions of terms used in parts 15 to 21 of this 
chapter.

    As used in parts 15 to 21 of this chapter:
    (a) Cash or Spot, when used in connection with any commodity, means 
the actual commodity as distinguished from a futures or option contract 
in such commodity.
    (b) Clearing member means any person who is a member of, or enjoys 
the privilege of clearing trades in his own name through, the clearing 
organization of a designated contract market, registered derivatives 
transaction execution facility, or registered entity under section 
1a(29) of the Act.
    (c) Clearing organization means the person or organization which 
acts as a medium for clearing transactions in commodities for future 
delivery or commodity option transactions, or for effecting settlements 
of contracts for future delivery or commodity option transactions, for 
and between members of any designated contract market, registered 
derivatives transaction execution facility or registered entity under 
section 1a(29) of the Act.
    (d) Compatible data processing media means data processing media 
approved by the Commission or its designee.
    (e) Customer means ``customer'' (as defined in Sec.  1.3(k) of this 
chapter) and ``option customer'' (as defined in Sec.  1.3(jj) of this 
chapter).
    (f) Customer trading program means any system of trading offered, 
sponsored, promoted, managed or in any other way supported by, or 
affiliated with, a futures commission merchant, an introducing broker, 
a commodity trading advisor, a commodity pool operator, or other 
trader, or any of its officers, partners or employees, and which by 
agreement, recommendations, advice or otherwise, directly or indirectly 
controls trading done and positions held by any other person. The term 
includes, but is not limited to, arrangements where a program 
participant enters into an expressed or implied agreement not obtained 
from other customers and makes a minimum deposit in excess of that 
required of other customers for the purpose of receiving specific 
advice or recommendations which are not made available to other 
customers. The term includes any program which is of the character of, 
or is commonly known to the trade as, a managed account, guided 
account, discretionary account, commodity pool or partnership account.
    (g) Discretionary account means a commodity futures or commodity 
option trading account for which buying or selling orders can be placed 
or originated, or for which transactions can be effected, under a 
general authorization and without the specific consent of the customer, 
whether the general authorization for such orders or transactions is 
pursuant to a written agreement, power of attorney, or otherwise.
    (h) Exclusively self-cleared contract means a cleared contract for 
which no persons, other than a reporting market and its clearing 
organization, are permitted to accept any money, securities, or 
property (or extend credit in lieu thereof) to margin, guarantee, or 
secure any trade.
    (i) Foreign clearing member means a ``clearing member'' (as defined 
by paragraph (b) of this section) who resides or is domiciled outside 
of the United States, its territories or possessions.
    (j) Foreign trader means any trader (as defined in paragraph (o) of 
this section) who resides or is domiciled outside of the United States, 
its territories or possessions.
    (k) Guided account program means any customer trading program which 
limits trading to the purchase or sale of a particular contract for 
future delivery of a commodity or a particular commodity option that is 
advised or recommended to the participant in the program.
    (l) Managed account program means a customer trading program which 
includes two or more discretionary accounts traded pursuant to a common 
plan, advice or recommendations.
    (m) Open contracts means ``open contracts'' (as defined in Sec.  
1.3(t) of this chapter) and commodity option positions held by any 
person on or subject to the rules of a board of trade which have not 
expired, been exercised, or offset.
    (n) Reportable position means:
    (1) For reports specified in parts 17, 18 and Sec.  19.00(a)(2) and 
(a)(3) of this chapter any open contract position that at the close of 
the market on any business day equals or exceeds the quantity specified 
in Sec.  15.03 of this part in either:
    (i) Any one future of any commodity on any one reporting market, 
excluding future contracts against which notices of delivery have been 
stopped by a trader or issued by the clearing organization of a 
reporting market; or
    (ii) Long or short put or call options that exercise into the same 
future of any commodity, or long or short put or call options for 
options on physicals that have identical expirations and exercise into 
the same physical, on any one reporting market.

[[Page 75905]]

    (2) For the purposes of reports specified in Sec.  19.00(a)(1) of 
this chapter, any combined futures and futures-equivalent option open 
contract position as defined in part 150 of this chapter in any one 
month or in all months combined, either net long or net short in any 
commodity on any one reporting market, excluding futures positions 
against which notices of delivery have been stopped by a trader or 
issued by the clearing organization of a reporting market, which at the 
close of the market on the last business day of the week exceeds the 
net quantity limit in spot, single or in all-months fixed in Sec.  
150.2 of this chapter for the particular commodity and reporting 
market.
    (o) Reporting market means a designated contract market, registered 
entity under section 1a(29)(E) of the Act, and unless determined 
otherwise by the Commission with respect to the facility or a specific 
contract listed by the facility, a registered derivatives transaction 
execution facility.
    (p) Special account means any commodity futures or option account 
in which there is a reportable position.
    (q) Trader means a person who, for his own account or for an 
account which he controls, makes transactions in commodity futures or 
options, or has such transactions made.
    3. In Sec.  15.01, revise paragraph (a) to read as follows:


Sec.  15.01  Persons required to report.

* * * * *
    (a) Reporting markets--as specified in parts 16, 17, and 21 of this 
chapter.
* * * * *
    4. In Sec.  15.05, revise the heading and paragraph (a); and add 
paragraph (i) to read as follows:


Sec.  15.05  Designation of agent for foreign persons.

    (a) For purposes of this section, the term ``futures contract'' 
means any contract for the purchase or sale of any commodity for future 
delivery, or a contract identified under Sec.  36.3(b)(i) of this 
chapter as traded in reliance on the exemption in section 2(h)(3) of 
the Act, traded or executed on or subject to the rules of any 
designated contract market or registered derivatives transaction 
execution facility, or for the purposes of paragraph (i) of this 
section, a reporting market; the term ``option contract'' means any 
contract for the purchase or sale of a commodity option, or as 
applicable, any other instrument subject to the Act pursuant to section 
5a(g) of the Act, traded or executed on or subject to the rules of any 
designated contract market or registered derivatives transaction 
execution facility, or for the purposes of paragraph (i) of this 
section, a reporting market; the term ``customer'' means any person for 
whose benefit a foreign broker makes or causes to be made any futures 
contract or option contract; and the term ``communication'' means any 
summons, complaint, order, subpoena, special call, request for 
information, or notice, as well as any other written document or 
correspondence.
* * * * *
    (i) Any reporting market that is a registered entity under section 
1a(29)(E) of the Act that permits a foreign clearing member or foreign 
trader to clear or effect contracts, agreements or transactions on the 
trading facility or its clearing organization, shall be deemed to be 
the agent of the foreign clearing member or foreign trader with respect 
to any such contracts, agreements or transactions cleared or executed 
by the foreign clearing member or the foreign trader. Service or 
delivery of any communication issued by or on behalf of the Commission 
to the reporting market shall constitute valid and effective service 
upon the foreign clearing member or foreign trader. The reporting 
market which has been served with, or to which there has been 
delivered, a communication issued by or on behalf of the Commission to 
a foreign clearing member or foreign trader shall transmit the 
communication promptly and in a manner which is reasonable under the 
circumstances, or in a manner specified by the Commission in the 
communication, to the foreign clearing member or foreign trader.
    (1) It shall be unlawful for any such reporting market to permit a 
foreign clearing member or a foreign trader to clear or effect 
contracts, agreements or transactions on the facility or its clearing 
organization unless the reporting market prior thereto informs the 
foreign clearing member or foreign trader of the requirements of this 
section.
    (2) The requirements of paragraphs (i) introductory text and (i)(1) 
of this section shall not apply to any contracts, transactions or 
agreements if the foreign clearing member or foreign trader has duly 
executed and maintains in effect a written agency agreement in 
compliance with this paragraph with a person domiciled in the United 
States and has provided a copy of the agreement to the reporting market 
prior to effecting or clearing any contract, agreement or transaction 
on the trading facility or its clearing organization. This agreement 
must authorize the person domiciled in the United States to serve as 
the agent of the foreign clearing member or foreign trader for the 
purposes of accepting delivery and service of all communications issued 
by or on behalf of the Commission to the foreign clearing member or the 
foreign trader and must provide an address in the United States where 
the agent will accept delivery and service of communications from the 
Commission. This agreement must be filed with the Commission by the 
reporting market prior to permitting the foreign clearing member or the 
foreign trader to clear or effect any transactions in futures or option 
contracts. Unless otherwise specified by the Commission, the agreements 
required to be filed with the Commission shall be filed with the 
Secretary of the Commission at Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
    (3) A foreign clearing member or a foreign trader shall notify the 
Commission immediately if the written agency agreement is terminated, 
revoked, or is otherwise no longer in effect. If the reporting market 
knows or should know that the agreement has expired, been terminated, 
or is no longer in effect, the reporting market shall notify the 
Secretary of the Commission immediately. If the written agency 
agreement expires, terminates, or is not in effect, the reporting 
market, the foreign clearing member and the foreign trader shall be 
subject to the provisions of paragraphs (i) introductory text and 
(i)(1) of this section.
    5. Add Sec.  15.06 to read as follows:


Sec.  15.06  Delegations.

    (a) The Commission hereby delegates, until the Commission orders 
otherwise, the authority to approve data processing media, as 
referenced in Sec.  15.00(d), for data submissions to the Director of 
the Division of Market Oversight, to be exercised by such Director or 
by such other employee or employees of such Director as designated from 
time to time by the Director. The Director may submit to the Commission 
for its consideration any matter which has been delegated in this 
paragraph. Nothing in this paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in this paragraph.
    (b) [Reserved]

PART 16--REPORTS BY REPORTING MARKETS

    6. The authority citation for part 16 is revised to read as 
follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as amended 
by Title XIII of the Food, Conservation and Energy Act of 2008,

[[Page 75906]]

Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008), unless 
otherwise noted.

    7. In Sec.  16.01, revise paragraphs (e)(1) and (e)(2) to read as 
follows:


Sec.  16.01  Trading volume, open contracts, prices, and critical 
dates.

* * * * *
    (e) Publication of recorded information. (1) Reporting markets 
shall make the information in paragraph (a) of this section readily 
available to the news media and the general public without charge, in a 
format that readily enables the consideration of such data, no later 
than the business day following the day to which the information 
pertains. The information in paragraphs (a)(4) through (a)(6) of this 
section shall be made readily available in a format that presents the 
information together.
    (2) Reporting markets shall make the information in paragraphs 
(b)(1) and (b)(2) of this section readily available to the news media 
and the general public, and the information in paragraph (b)(3) of this 
section readily available to the general public, in a format that 
readily enables the consideration of such data, no later than the 
business day following the day to which the information pertains.
* * * * *
    8. Section 16.02 is added to read as follows:


Sec.  16.02  Daily trade and supporting data reports.

    Reporting markets shall provide trade and supporting data reports 
to the Commission on a daily basis. Such reports shall include 
transaction-level trade data and related order information for each 
transaction that is executed on the reporting market. Reports shall 
also include time and sales data, reference files and other information 
as the Commission or its designee may require. All reports must be 
submitted at the time, and in the manner and format, and with the 
specific content specified by the Commission or its designee. Upon 
request, such information shall be accompanied by data that identifies 
or facilitates the identification of each trader for each transaction 
or order included in a submitted trade and supporting data report if 
the reporting market maintains such data.
    9. In Sec.  16.07, revise the heading and introductory text; and 
add paragraph (c) to read as follows:


Sec.  16.07  Delegation of authority to the Director of the Division of 
Market Oversight.

    The Commission hereby delegates, until the Commission orders 
otherwise, the authority set forth in paragraphs (a), (b) and (c) of 
this section to the Director of the Division of Market Oversight, to be 
exercised by such Director or by such other employee or employees of 
such Director as may be designated from time to time by the Director. 
The Director of the Division of Market Oversight may submit to the 
Commission for its consideration any matter which has been delegated in 
this paragraph. Nothing in this paragraph prohibits the Commission, at 
its election, from exercising the authority delegated in this 
paragraph.
* * * * *
    (c) Pursuant to Sec.  16.02, the authority to determine the 
specific content of any daily trade and supporting data report, request 
that such reports be accompanied by data that identifies or facilitates 
the identification of each trader for each transaction or order 
included in a submitted trade and supporting data report, and the time 
for the submission of and the manner and format of such reports.

PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION 
MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS

    10. The authority citation for part 17 is revised to read as 
follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 7, 7a and 12a, as 
amended by Title XIII of the Food, Conservation and Energy Act of 
2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008), unless 
otherwise noted.

    11. Revise the heading of part 17 as set forth above.
    12. In Sec.  17.00, revise paragraph (a) introductory text and 
paragraphs (a)(1), (b)(1), and (f); and add and reserve paragraph (c) 
to read as follows:


Sec.  17.00  Information to be furnished by futures commission 
merchants, clearing members and foreign brokers.

    (a) Special accounts--reportable futures and options positions, 
delivery notices, and exchanges of futures. (1) Each futures commission 
merchant, clearing member and foreign broker shall submit a report to 
the Commission for each business day with respect to all special 
accounts carried by the futures commission merchant, clearing member or 
foreign broker, except for accounts carried on the books of another 
futures commission merchant or clearing member on a fully-disclosed 
basis. Except as otherwise authorized by the Commission or its 
designee, such report shall be made in accordance with the format and 
coding provisions set forth in paragraph (g) of this section. The 
report shall show each futures position traded in reliance on the 
exemption in section 2(h)(3) of the Act, separately for each reporting 
market and for each future position traded in reliance on the exemption 
in section 2(h)(3) of the Act, and each put and call options position 
separately for each reporting market, expiration and strike price in 
each special account as of the close of market on the day covered by 
the report and, in addition, the quantity of exchanges of futures for 
commodities or for derivatives positions and the number of delivery 
notices issued for each such account by the clearing organization of a 
reporting market and the number stopped by the account. The report 
shall also show all positions in all contract months and option 
expirations of that same commodity on the same reporting market for 
which the special account is reportable.
* * * * *
    (b) * * *
    (1) Accounts of eligible entities--Accounts of eligible entities as 
defined in Sec.  150.1 of this chapter that are traded by an 
independent account controller shall, together with other accounts 
traded by the independent account controller or in which the 
independent controller has a financial interest, be considered a single 
account.
* * * * *
    (c) [Reserved]
* * * * *
    (f) Omnibus accounts. If the total open long positions or the total 
open short positions for any future of a commodity carried in an 
omnibus account is a reportable position, the omnibus account is in 
Special Account status and shall be reported by the futures commission 
merchant or foreign broker carrying the account in accordance with 
paragraph (a) of this section.
* * * * *
    13. In Sec.  17.03, revise the heading, the introductory text, and 
paragraphs (a) and (b) to read as follows:


Sec.  17.03  Delegation of authority to the Director of the Division of 
Market Oversight.

    The Commission hereby delegates, until the Commission orders 
otherwise, the authority set forth in the paragraphs below to the 
Director of the Division of Market Oversight to be exercised by such 
Director or by such other employee or employees of such Director as 
designated from time to time by the Director. The Director of the 
Division of Market Oversight may submit to the Commission for its 
consideration any matter which has been delegated in this paragraph. 
Nothing in this paragraph prohibits the Commission, at its election, 
from exercising the authority delegated in this paragraph.

[[Page 75907]]

    (a) Pursuant to Sec.  17.00(a) and (h), the authority to determine 
whether futures commission merchants, clearing members and foreign 
brokers can report the information required under paragraphs (a) and 
(h) of Sec.  17.00 on series '01 forms or using some other format upon 
a determination that such person is unable to report the information 
using the format, coding structure or electronic data transmission 
procedures otherwise required.
    (b) Pursuant to Sec.  17.02, the authority to instruct or approve 
the time at which the information required under Sec. Sec.  17.00 and 
17.01 must be submitted by futures commission merchants, clearing 
members and foreign brokers provided that such persons are unable to 
meet the requirements set forth in Sec. Sec.  17.01(g) and 17.02.
* * * * *
    14. In Sec.  17.04, revise the heading, paragraph (a), and 
paragraph (b)(1)(ii) to read as follows:


Sec.  17.04  Reporting omnibus accounts to reporting firms.

    (a) Any futures commission merchant, clearing member or foreign 
broker who establishes an omnibus account with another futures 
commission merchant, clearing member or foreign broker shall report to 
that futures commission merchant, clearing member or foreign broker the 
total open long positions and the total open short positions in each 
future of a commodity and, for commodity options transactions, the 
total open long put options, the total open short put options, the 
total open long call options, and the total open short call options for 
each commodity options expiration date and each strike price in such 
account at the close of trading each day. The information required by 
this section shall be reported in sufficient time to enable the futures 
commission merchant, clearing member or foreign broker with whom the 
omnibus account is established to comply with the regulations of this 
part and the reporting requirements established by the reporting 
markets.
    (b) * * *
    (1) * * *
    (ii) The account is an omnibus account of another futures 
commission merchant, clearing member or foreign broker; or
* * * * *

PART 18--REPORTS BY TRADERS

    15. The authority citation for part 18 continues to read as 
follows:

    Authority: 7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a 
and 19, as amended by Title XIII of the Food, Conservation and 
Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 
2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.

    16. Revise Sec.  18.01 to read as follows:


Sec.  18.01  Interest in or control of several accounts.

    If any trader holds, has a financial interest in or controls 
positions in more than one account, whether carried with the same or 
with different futures commission merchants or foreign brokers, all 
such positions and accounts shall be considered as a single account for 
the purpose of determining whether such trader has a reportable 
position and, unless instructed otherwise in the special call to report 
under Sec.  18.00 for the purpose of reporting.
    17. In Sec.  18.04, revise paragraphs (a)(7) and (b)(3)(i) to read 
as follows:


Sec.  18.04  Statement of reporting trader.

* * * * *
    (a) * * *
    (7) The names and locations of all futures commission merchants, 
clearing members, introducing brokers, and foreign brokers through whom 
accounts owned or controlled by the reporting trader are carried or 
introduced at the time of filing a Form 40, if such accounts are 
carried through more than one futures commission merchant, clearing 
member or foreign broker or carried through more than one office of the 
same futures commission merchant, clearing member or foreign broker, or 
introduced by more than one introducing broker clearing accounts 
through the same futures commission merchant, and the name of the 
reporting trader's account executive at each firm or office of the 
firm.
    (b) * * *
    (3) * * *
    (i) Commercial activity associated with use of the option or 
futures market (such as and including production, merchandising or 
processing of a cash commodity, asset or liability risk management by 
depository institutions, or security portfolio risk management).
* * * * *
    18. In Sec.  18.05, revise paragraphs (a)(2), (a)(3), and (a)(4) to 
read as follows:


Sec.  18.05  Maintenance of books and records.

    (a) * * *
    (2) Over the counter or pursuant to sections 2(d), 2(g) or 2(h)(1)-
(2) of the Act or part 35 of this chapter;
    (3) On exempt commercial markets operating pursuant to sections 
2(h)(3)-(5) of the Act;
    (4) On exempt boards of trade operating pursuant to section 5d of 
the Act; and
* * * * *

PART 19--REPORTS BY PERSONS HOLDING BONA FIDE HEDGE POSITIONS 
PURSUANT TO Sec.  1.3(z) OF THIS CHAPTER AND BY MERCHANTS AND 
DEALERS IN COTTON

    19. The authority citation for part 19 continues to read as 
follows:

    Authority: 7 U.S.C. 6g(a), 6i, and 12a(5), as amended by Title 
XIII of the Food, Conservation and Energy Act of 2008, Pub. L. No. 
110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.

    20. In Sec.  19.00, revise paragraph (a) to read as follows:


Sec.  19.00  General provisions.

    (a) Who must file series '04 reports. The following persons are 
required to file series '04 reports:
    (1) All persons holding or controlling futures and option positions 
that are reportable pursuant to Sec.  15.00(n)(2) of this chapter and 
any part of which constitute bona fide hedging positions as defined in 
Sec.  1.3(z) of this chapter;
    (2) Merchants and dealers of cotton holding or controlling 
positions for futures delivery in cotton that are reportable pursuant 
to Sec.  15.00(n)(1)(i) of this chapter, or
    (3) All persons holding or controlling positions for future 
delivery that are reportable pursuant to Sec.  15.00(n)(1) of this 
chapter who have received a special call for series '04 reports from 
the Commission or its designee. Filings in response to a special call 
shall be made within one business day of receipt of the special call 
unless otherwise specified in the call. For the purposes of this 
paragraph, the Commission hereby delegates to the Director of the 
Division of Market Oversight, or to such other person designated by the 
Director, authority to issue calls for series '04 reports.
* * * * *
    21. In Sec.  19.01, revise paragraph (b) introductory text and 
paragraph (b)(1) to read as follows:


Sec.  19.01  Reports on stocks and fixed price purchases and sales 
pertaining to futures positions in wheat, corn, oats, soybeans, soybean 
oil, soybean meal or cotton.

* * * * *
    (b) Time and place of filing reports--Except for reports filed in 
response to special calls made under Sec.  19.00(a)(3), each report 
shall be made monthly, as of the close of business on the last Friday 
of the month, and filed at the appropriate Commission office specified 
in paragraph (b)(1) or (2) of this section not later than the second 
business day following the date of the report in the case of the 304 
report and not later than the third business day following the

[[Page 75908]]

date of the report in the case of the 204 report. Reports may be 
transmitted by facsimile or, alternatively, information on the form may 
be reported to the appropriate Commission office by telephone and the 
report mailed to the same office, not later than midnight of its due 
date.
    (1) CFTC Form 204 reports with respect to transactions in wheat, 
corn, oats, soybeans, soybean meal and soybean oil should be sent to 
the Commission's office in Chicago, IL, unless otherwise specifically 
authorized by the Commission or its designee.
* * * * *

PART 21--SPECIAL CALLS

    22. The authority citation for part 21 continues to read as 
follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 
6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food, 
Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 
1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise 
noted.

    23. Revise Sec.  21.01 to read as follows:


Sec.  21.01  Special calls for information on controlled accounts from 
futures commission merchants, clearing members and introducing brokers.

    Upon call by the Commission, each futures commission merchant, 
clearing member and introducing broker shall file with the Commission 
the names and addresses of all persons who, by power of attorney or 
otherwise, exercise trading control over any customer's account in 
commodity futures or commodity options on any reporting market.
    24. In Sec.  21.02, revise the heading, introductory text, and 
paragraphs (f) and (i) to read as follows:


Sec.  21.02  Special calls for information on open contracts in 
accounts carried or introduced by futures commission merchants, 
clearing members, members of reporting markets, introducing brokers, 
and foreign brokers.

    Upon special call by the Commission for information relating to 
futures or option positions held or introduced on the dates specified 
in the call, each futures commission merchant, clearing member, member 
of a reporting market, introducing broker, or foreign broker, and, in 
addition, for option information, each reporting market, shall furnish 
to the Commission the following information concerning accounts of 
traders owning or controlling such futures or option positions, except 
for accounts carried on a fully disclosed basis by another futures 
commission merchant or clearing member, as may be specified in the 
call:
* * * * *
    (f) The number of open futures or option positions introduced or 
carried in each account, as specified in the call;
* * * * *
    (i) As applicable, the following identifying information:
    (1) Whether a trader who holds commodity futures or option 
positions is classified as a commercial or as a noncommercial trader 
for each commodity futures or option contract;
    (2) Whether the open commodity futures or option contracts are 
classified as speculative, spreading (straddling), or hedging; and
    (3) Whether any of the accounts in question are omnibus accounts 
and, if so, whether the originator of the omnibus account is another 
futures commission merchant, clearing member or foreign broker.
* * * * *
    25. Amend Sec.  21.03 as follows:
    A. Revise the heading and paragraphs (a), (b), (c) and (d);
    B. Revise paragraph (e) introductory text and paragraphs (e)(1) 
introductory text , (e)(1)(iv) and (e)(1)(v); and
    C. Revise paragraphs (f), (g) and (h) to read as follows:


Sec.  21.03  Selected special calls-duties of foreign brokers, domestic 
and foreign traders, futures commission merchants, clearing members, 
introducing brokers, and reporting markets.

    (a) For purposes of this section, the term ``accounts of a futures 
commission merchant, clearing member or foreign broker'' means all open 
contracts and transactions in futures and options on the records of the 
futures commission merchant, clearing member or foreign broker; the 
term ``beneficial interest'' means having or sharing in any rights, 
obligations or financial interest in any futures or options account; 
the term ``customer'' means any futures commission merchant, clearing 
member, introducing broker, foreign broker, or trader for whom a 
futures commission merchant, clearing member or reporting market that 
is a registered entity under section 1a(29)(E) of the Act makes or 
causes to be made a futures or options contract. Paragraphs (e), (g) 
and (h) of this section shall not apply to any futures commission 
merchant, clearing member or customer whose books and records are open 
at all times to inspection in the United States by any representative 
of the Commission.
    (b) It shall be unlawful for a futures commission merchant to open 
a futures or options account or to effect transactions in futures or 
options contracts for an existing account, or for an introducing broker 
to introduce such an account, for any customer for whom the futures 
commission merchant or introducing broker is required to provide the 
explanation provided for in Sec.  15.05(c) of this chapter, or for a 
reporting market that is a registered entity under section 1a(29)(E) of 
the Act, to cause to open an account in a contract traded in reliance 
on the exemption in section 2(h)(3) of the Act or to cause to be 
effected transactions in a contract traded in reliance on the exemption 
in section 2(h)(3) of the Act for an existing account for any person 
that is a foreign clearing member or foreign trader, until the futures 
commission merchant, introducing broker, clearing member, or reporting 
market has explained fully to the customer, in any manner that such 
persons deem appropriate, the provisions of this section.
    (c) Upon a determination by the Commission that information 
concerning accounts may be relevant information in enabling the 
Commission to determine whether the threat of a market manipulation, 
corner, squeeze, or other market disorder exists on any reporting 
market, the Commission may issue a call for information from a futures 
commission merchant, clearing member, introducing broker or customer 
pursuant to the provisions of this section.
    (d) In the event the call is issued to a foreign broker, foreign 
clearing member or foreign trader, its agent, designated pursuant to 
Sec.  15.05 of this chapter, shall, if directed, promptly transmit 
calls made by the Commission pursuant to this section by electronic 
mail or a similarly expeditious means of communication.
    (e) The futures commission merchant, clearing member, introducing 
broker, or customer to whom the special call is issued must provide to 
the Commission the information specified below for the commodity, 
reporting market and delivery months or option expiration dates named 
in the call. Such information shall be filed at the place and within 
the time specified by the Commission.
    (1) For each account of a futures commission merchant, clearing 
member, introducing broker, or foreign broker, including those accounts 
in the name of the futures commission merchant, clearing member or 
foreign broker, on the dates specified in the call issued pursuant to 
this section, such persons shall provide the Commission with the 
following information:
* * * * *

[[Page 75909]]

    (iv) Whether the account is carried for and in the name of another 
futures commission merchant, clearing member, introducing broker, or 
foreign broker; and
    (v) For the accounts which are not carried for and in the name of 
another futures commission merchant, clearing member, introducing 
broker, or foreign broker, the name and address of any other person who 
controls the trading of the account, and the name and address of any 
person who has a ten percent or more beneficial interest in the 
account.
* * * * *
    (f) If the Commission has reason to believe that any person has not 
responded as required to a call made pursuant to this section, the 
Commission in writing may inform the reporting market specified in the 
call and that reporting market shall prohibit the execution of, and no 
futures commission merchant, clearing member, introducing broker, or 
foreign broker shall effect a transaction in connection with trades on 
the reporting market and in the months or expiration dates specified in 
the call for or on behalf of the futures commission merchant or 
customer named in the call, unless such trades offset existing open 
contracts of such futures commission merchant or customer.
    (g) Any person named in a special call that believes he or she is 
or may be adversely affected or aggrieved by action taken by the 
Commission under paragraph (f) of this section shall have the 
opportunity for a prompt hearing after the Commission acts. That person 
may immediately present in writing to the Commission for its 
consideration any comments or arguments concerning the Commission's 
action and may present for Commission consideration any documentary or 
other evidence that person deems appropriate. Upon request, the 
Commission may, in its discretion, determine that an oral hearing be 
conducted to permit the further presentation of information and views 
concerning any matters by any or all such persons. The oral hearing may 
be held before the Commission or any person designated by the 
Commission, which person shall cause all evidence to be reduced to 
writing and forthwith transmit the same and a recommended decision to 
the Commission. The Commission's directive under paragraph (f) of this 
section shall remain in effect unless and until modified or withdrawn 
by the Commission.
    (h) If, during the course of or after the Commission acts pursuant 
to paragraph (f) of this section, the Commission determines that it is 
appropriate to undertake a proceeding pursuant to section 6(c) of the 
Act, the Commission shall issue a complaint in accordance with the 
requirements of section 6(c), and, upon further determination by the 
Commission that the conditions described in paragraph (c) of this 
section still exist, a hearing pursuant to section 6(c) of the Act 
shall commence no later than five business days after service of the 
complaint. In the event the person served with the complaint under 
section 6(c) of the Act has, prior to the commencement of the hearing 
under section 6(c) of the Act, sought a hearing pursuant to paragraph 
(g) of this section and the Commission has determined to accord him 
such a hearing, the two hearings shall be conducted simultaneously. 
Nothing in this section shall preclude the Commission from taking other 
appropriate action under the Act or the Commission's regulations 
thereunder, including action under section 6(c) of the Act, regardless 
of whether the conditions described in paragraph (c) of this section 
still exist, and no ruling issued in the course of a hearing pursuant 
to paragraph (g) or this section shall constitute an estoppel against 
the Commission in any other action.
    26. Revise Sec.  21.04 to read as follows:


Sec.  21.04  Delegation of authority to the Director of the Division of 
Market Oversight.

    The Commission hereby delegates, until the Commission orders 
otherwise, the special call authority set forth in Sec. Sec.  21.01 and 
21.02 the Director of the Division of Market Oversight to be exercised 
by such Director or by such other employee or employees of such 
Director as designated from time to time by the Director. The Director 
of the Division of Market Oversight may submit to the Commission for 
its consideration any matter which has been delegated in this 
paragraph. Nothing in this section shall be deemed to prohibit the 
Commission, at its election, from exercising the authority delegated in 
this section to the Director.

PART 36--EXEMPT MARKETS

    27. The authority citation for part 36 is revised to read as 
follows:

    Authority: 7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by 
Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L. 
No. 110-246, 122 Stat. 1624 (June 18, 2008).

    28-30. Section 36.3 is amended by revising paragraphs (b) and (c), 
and adding paragraph (d), to read as follows:


Sec.  36.3  Exempt commercial markets.

* * * * *
    (b) Required information.
    (1) All electronic trading facilities. A facility operating in 
reliance on the exemption in section 2(h)(3) of the Act, initially and 
on an on-going basis, must:
    (i) Provide the Commission with the terms and conditions, as 
defined in part 40.1(i) of this chapter and product descriptions for 
each agreement, contract or transaction listed by the facility in 
reliance on the exemption set forth in section 2(h)(3) of the Act, as 
well as trading conventions, mechanisms and practices;
    (ii) Provide the Commission with information explaining how the 
facility meets the definition of ``trading facility'' contained in 
section 1a(33) of the Act and provide the Commission with access to the 
electronic trading facility's trading protocols, in a format specified 
by the Commission;
    (iii) Demonstrate to the Commission that the facility requires, and 
will require, with respect to all current and future agreements, 
contracts and transactions, that each participant agrees to comply with 
all applicable laws; that the authorized participants are ``eligible 
commercial entities'' as defined in section 1a(11) of the Act; that all 
agreements, contracts and transactions are and will be entered into 
solely on a principal-to-principal basis; and that the facility has in 
place a program to routinely monitor participants' compliance with 
these requirements;
    (iv) At the request of the Commission, provide any other 
information that the Commission, in its discretion, deems relevant to 
its determination whether an agreement, contract, or transaction 
performs a significant price discovery function; and
    (v) File with the Commission annually, no later than the end of 
each calendar year, a completed copy of CFTC Form 205--Exempt 
Commercial Market Annual Certification. The information submitted in 
Form 205 shall include:
    (A) A statement indicating whether the electronic trading facility 
continues to operate under the exemption; and
    (B) A certification that affirms the accuracy of and/or updates the 
information contained in the previous Notification of Operation as an 
Exempt Commercial Market.
    (2) Electronic trading facilities trading or executing agreements, 
contracts or transactions other than significant price discovery 
contracts. In addition to the requirements of paragraph (b)(1) of this 
section, a facility operating in reliance on the exemption in section 
2(h)(3) of the Act, with respect to agreements, contracts or 
transactions that have not been determined to perform significant

[[Page 75910]]

price discovery function, initially and on an on-going basis, must:
    (i) Identify to the Commission those agreements, contracts and 
transactions conducted on the electronic trading 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 agreements, 
contracts and 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 such 
agreement, contract or transaction executed the following information:
    (1) The underlying commodity, the delivery or price-basing location 
specified in the agreement, contract or transaction maturity date, 
whether it is a financially settled or physically delivered instrument, 
and the date of execution, time of execution, price, and quantity;
    (2) Total daily volume and, if cleared, open interest;
    (3) For an option instrument, in addition to the foregoing 
information, the type of option (i.e., call or put) and strike prices; 
and
    (4) Such other information as the Commission may determine.
    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) (1) Provide to the Commission, in a form and manner acceptable 
to the Commission, electronic access to those transactions conducted on 
the electronic trading facility in reliance on the exemption in section 
2(h)(3) of the Act, and meeting the average five trades per day or more 
threshold test of this section, which would allow the Commission to 
compile the information described in paragraph (b)(2)(i)(A) of this 
section and create a permanent record thereof;
    (2) Maintain a record of allegations or complaints received by the 
electronic 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, date of the complaint, market 
instrument, substance of the allegations, and name of the person at the 
electronic trading facility who received the complaint;
    (3) Provide to the Commission, in the form and manner prescribed by 
the Commission, a copy of the record of each complaint received 
pursuant to paragraph (b)(2)(ii) 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; and
    (4) Provide to the Commission on a quarterly basis, within 15 
calendar days of the close of each quarter, a list of each agreement, 
contract or transaction executed on the electronic trading facility in 
reliance on the exemption set forth in section 2(h)(3) of the Act and 
indicate for each such agreement, contract or transaction the contract 
terms and conditions, the contract's average daily trading volume, and 
the most recent open interest figures.
    (3) Electronic trading facilities trading or executing significant 
price discovery contracts. In addition to the requirements of paragraph 
(b)(1) of this section, if the Commission determines that a facility 
operating in reliance on the exemption in section 2(h)(3) of the Act 
trades or executes an agreement, contract or transaction that performs 
a significant price discovery function, the facility must, with respect 
to any significant price discovery contract, publish and provide to the 
Commission the information required by Sec.  16.01 of this chapter.
    (4) Delegation of authority. The Commission hereby delegates, until 
the Commission orders otherwise, the authority to determine the form 
and manner of submitting the required information under paragraphs 
(b)(1) through (3) 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.
    (5) Special calls.
    (i) All information required upon special call of the Commission 
under section 2(h)(5)(B)(iii) of the Act shall be transmitted at the 
time and to the office of the Commission as may be specified in the 
call.
    (ii) The Commission hereby delegates, until the Commission orders 
otherwise, the authority to make special calls as set forth in section 
2(h)(5)(B)(iii) of the Act to the Directors of the Division of Market 
Oversight, the Division of Clearing and Intermediary Oversight, and the 
Division of Enforcement to be exercised by each such Director or by 
such other employee or employees as the Director may designate. The 
Directors may submit to the Commission for its consideration any matter 
that has been delegated in this paragraph. Nothing in this paragraph 
prohibits the Commission, at its election, from exercising the 
authority delegated in this paragraph.
    (6) Subpoenas to foreign persons. A foreign person whose access to 
an electronic trading facility is limited or denied at the direction of 
the Commission based on the Commission's belief that the foreign person 
has failed timely to comply with a subpoena as provided under section 
2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt 
hearing under the procedures provided in Sec.  21.03(b) and (h) of this 
chapter.
    (7) Prohibited representation. An electronic trading facility 
relying upon the exemption in section 2(h)(3) of the Act, with respect 
to agreements, contracts or transactions that are not significant price 
discovery contracts, shall not represent to any person that it is 
registered with, designated, recognized, licensed or approved by the 
Commission.
    (c) Significant price discovery contracts.
    (1) Criteria for significant price discovery determination. The 
Commission may determine, in its discretion, that 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 facility. 
In making such a determination, the Commission shall consider, as 
appropriate:
    (i) Price linkage. The extent to which the agreement, contract or 
transaction uses or otherwise relies on a daily or final settlement 
price, or other major price parameter, of a contract or contracts 
listed for trading on or subject to the rules of a designated contract 
market or a derivatives transaction execution facility to value a 
position, transfer or convert a position, cash or financially settle a 
position, or close out a position;
    (ii) Arbitrage. The extent to which the price for the agreement, 
contract or transaction is sufficiently related to the price of a 
contract or contracts listed for

[[Page 75911]]

trading on or subject to the rules of a designated contract market or 
derivatives transaction execution facility, or a significant price 
discovery contract or contracts trading on or subject to the rules of 
an electronic trading facility, so as to permit market participants to 
effectively arbitrage between the markets by simultaneously maintaining 
positions or executing trades in the contracts on a frequent and 
recurring basis;
    (iii) Material price reference. The extent to which, on a frequent 
and recurring basis, bids, offers, or transactions in a commodity are 
directly based on, or are determined by referencing, the prices 
generated by agreements, contracts or transactions being traded or 
executed on the electronic trading facility;
    (iv) Material liquidity. The extent to which the volume of 
agreements, contracts or transactions in the commodity being traded on 
the electronic trading facility is sufficient to have a material effect 
on other agreements, contracts or transactions listed for trading on or 
subject to the rules of a designated contract market, a derivatives 
transaction execution facility, or an electronic trading facility 
operating in reliance on the exemption in section 2(h)(3) of the Act;
    (v) Other material factors [Reserved].
    (2) Notification of possible significant price discovery contract 
conditions. An electronic trading facility operating in reliance on 
section 2(h)(3) of the Act shall promptly notify the Commission, and 
such notification shall be accompanied by supporting information or 
data concerning any contract that:
    (i) Averaged five trades per day or more over the most recent 
calendar quarter; and
    (ii) (A) For which the exchange sells its price information 
regarding the contract to market participants or industry publications; 
or
    (B) Whose daily closing or settlement prices on 95 percent or more 
of the days in the most recent quarter were within 2.5 percent of the 
contemporaneously determined closing, settlement or other daily price 
of another agreement, contract or transaction.
    (3) Procedure for significant price discovery determination. Before 
making a final price discovery determination under this paragraph, the 
Commission shall publish notice in the Federal Register that it intends 
to undertake a determination with respect to whether a particular 
agreement, contract or transaction performs a significant price 
discovery function and to receive written data, views and arguments 
relevant to its determination from the electronic trading facility and 
other interested persons. Any such written data, views and arguments 
shall be filed with the Secretary of the Commission, in the form and 
manner specified by the Commission, within 30 calendar days of 
publication of notice in the Federal Register or within such other time 
specified by the Commission. After consideration of all relevant 
information, the Commission shall issue an order explaining its 
determination whether the agreement, contract or transaction executed 
or traded by the electronic trading facility performs a significant 
price discovery function under the criteria specified in paragraphs 
(c)(1)(i) through (v) of this section.
    (4) Compliance with Core Principles. Following the issuance of an 
order by the Commission that the electronic trading facility executes 
or trades an agreement, contract or transaction that performs a 
significant price discovery function, the electronic trading facility 
must demonstrate, with respect to that agreement, contract or 
transaction, compliance with the Core Principles under section 
2(h)(7)(C) of the Act and the applicable provisions of this part. If 
the Commission's order represents the first time it has determined that 
the electronic trading facility's agreement, contract or transaction 
performs a significant price discovery function, the facility must 
submit a written demonstration of compliance with the Core Principles 
within 90 calendar days of the date of the Commission's order. For 
subsequent determinations by the Commission that the electronic trading 
facility has an additional agreement, contract or transaction that 
performs a significant price discovery function, the facility must 
submit a written demonstration of compliance with the Core Principles 
within 15 calendar days of the date of the Commission's order. 
Attention is directed to Appendix B of this part for guidance on and 
acceptable practices for complying with the Core Principles. 
Submissions demonstrating how the electronic trading facility complies 
with the Core Principles with respect to its significant price 
discovery contract must be filed with the Secretary of the Commission 
at its Washington, DC headquarters. Submissions must include the 
following:
    (i) A written certification that the significant price discovery 
contract(s) complies with the Act and regulations thereunder;
    (ii) A copy of the electronic trading facility's rules (as defined 
in Sec.  40.1 of this chapter) and any technical manuals, other guides 
or instructions for users of, or participants in, the market, including 
minimum financial standards for members or market participants. 
Subsequent rule changes must be certified by the electronic trading 
facility pursuant to section 5c(c) of the Act and Sec.  40.6 of this 
chapter. The electronic trading facility also may request Commission 
approval of any rule changes pursuant to section 5c(c) of the Act and 
Sec.  40.5 of this chapter;
    (iii) A description of the trading system, algorithm, security and 
access limitation procedures with a timeline for an order from input 
through settlement, and a copy of any system test procedures, tests 
conducted, test results and contingency or disaster recovery plans;
    (iv) A copy of any documents pertaining to or describing the 
electronic trading system's legal status and governance structure, 
including governance fitness information;
    (v) An executed or executable copy of any agreements or contracts 
entered into or to be entered into by the electronic trading facility, 
including partnership or limited liability company, third-party 
regulatory service, or member or user agreements, that enable or 
empower the electronic trading facility to comply with a Core 
Principle;
    (vi) A copy of any manual or other document describing, with 
specificity, the manner in which the trading facility will conduct 
trade practice, market and financial surveillance;
    (vii) To the extent that any of the items in paragraphs (c)(4)(ii) 
through (vi) of this section raise issues that are novel, or for which 
compliance with a core principle is not self-evident, an explanation of 
how that item satisfies the applicable core principle or principles. 
The electronic trading facility must identify with particularity 
information in the submission that will be subject to a request for 
confidential treatment pursuant to Sec.  145.09 of this chapter. The 
electronic trading facility must follow the procedures specified in 
Sec.  40.8 of this chapter with respect to any information in its 
submission for which confidential treatment is requested.
    (5) Determination of compliance with core principles. The 
Commission shall take into consideration differences between cleared 
and uncleared significant price discovery contracts when reviewing the 
implementation of the Core Principles by an electronic trading 
facility. The electronic facility also has reasonable discretion in 
accounting for differences between cleared and uncleared significant 
price discovery contracts when establishing the manner in which it 
complies with the Core Principles.

[[Page 75912]]

    (6) Information relating to compliance with core principles. Upon 
request by the Commission, an electronic trading facility trading a 
significant price discovery contract shall file with the Commission a 
written demonstration, containing such supporting data, information and 
documents, in the form and manner and within such time as the 
Commission may specify, that the electronic trading facility is in 
compliance with one or more core principles as specified in the 
request, or that is otherwise requested by the Commission to enable the 
Commission to satisfy its obligations under the Act.
    (7) Enforceability. An agreement, contract or transaction entered 
into on or pursuant to the rules of an electronic trading facility 
trading or executing a significant price discovery contract shall not 
be void, voidable, subject to rescission or otherwise invalidated or 
rendered unenforceable as a result of:
    (i) A violation by the electronic trading facility of the 
provisions of section 2(h) of the Act or this part; or
    (ii) Any Commission proceeding to alter or supplement a rule, term 
or condition under section 8a(7) of the Act, to declare an emergency 
under section 8a(9) of the Act, or any other proceeding the effect of 
which is to alter, supplement or require an electronic trading facility 
to adopt a specific term or condition, trading rule or procedure, or to 
take or refrain from taking a specific action.
    (8) Procedures for vacating a determination of a significant price 
discovery function.
    (i) By the electronic trading facility. An electronic trading 
facility that executes or trades an agreement, contract or transaction 
that the Commission has determined performs a significant price 
discovery function under paragraph (c)(3) of this section may petition 
the Commission to vacate that determination. The petition shall 
demonstrate that the agreement, contract or transaction no longer 
performs a significant price discovery function under the criteria 
specified in paragraph (c)(1) of this section, and has not done so for 
at least the prior 12 months. An electronic trading facility shall not 
petition for a vacation of a significant price discovery determination 
more frequently than once every 12 months.
    (ii) By the Commission. The Commission may, on its own initiative, 
begin vacation proceedings if it believes that an agreement, contract 
or transaction has not performed a significant price discovery function 
for at least the prior 12 months.
    (iii) Procedure. Before making a final determination whether an 
agreement, contract or transaction has ceased to perform a significant 
price discovery function, the Commission shall publish notice in the 
Federal Register that it intends to undertake such a determination and 
to receive written data, views and arguments relevant to its 
determination from the electronic trading facility and other interested 
persons. Written submissions shall be filed with the Secretary of the 
Commission in the form and manner specified by the Commission, within 
30 calendar days of publication of notice in the Federal Register or 
within such other time specified by the Commission. After consideration 
of all relevant information, the Commission shall issue an order 
explaining its determination whether the agreement, contract or 
transaction has ceased to perform a significant price discovery 
function and, if so, vacating its prior order. If such an order issues, 
and the Commission subsequently determines, on its own initiative or 
after notification by the electronic trading facility, that the 
agreement, contract or transaction that was subject to the vacation 
order again performs a significant price discovery function, the 
electronic trading facility must comply with the Core Principles within 
15 calendar days of the date of the Commission's order.
    (iv) Automatic vacation of significant price discovery 
determination. Regardless of whether a proceeding to vacate has been 
initiated, any significant price discovery contract that has no open 
interest and in which no trading has occurred for a period of 12 
complete and consecutive calendar months shall, without further 
proceedings, no longer be considered to be a significant price 
discovery contract.
    (d) Commission review. The Commission shall, at least annually, 
evaluate as appropriate agreements, contracts or transactions conducted 
on an electronic trading facility in reliance on the exemption provided 
in section 2(h)(3) of the Act to determine whether they serve a 
significant price discovery function as described in paragraph (c)(1) 
of this section 31. Part 36 is amended by adding a new Appendix A to 
read as follows:

Appendix A to Part 36--Guidance on Significant Price Discovery 
Contracts

    1. Section 2(h)(7) of the CEA specifies four factors that the 
Commission must consider, as appropriate, in making a determination 
that a contract is performing a significant price discovery 
function. The four factors prescribed by the statute are: Price 
Linkage; Arbitrage; Material Price Reference; and Material 
Liquidity.
    2. Not all listed factors must be present to support a 
determination that a contract performs a significant price discovery 
function. Moreover, the statutory language neither prioritizes the 
factors nor specifies the degree to which a significant price 
discovery contract must conform to the various factors. Congress has 
indicated that it intends that the Commission should not make a 
determination that an agreement, contract or transaction performs a 
significant price discovery function on the basis of the Price 
Linkage factor unless the agreement, contract or transaction also 
has sufficient volume to impact other regulated contracts or to 
become an independent price reference or benchmark that is regularly 
utilized by the public. The Commission believes that the Arbitrage 
and Material Price Reference factors can be considered separately 
from each other. That is, the Commission could make a determination 
that a contract serves a significant price discovery function based 
on the presence of one of these factors and the absence of the 
other. The presence of any of these factors, however, would not 
necessarily be sufficient to establish the contract as a significant 
price discovery contract. The fourth factor, Liquidity, would be 
considered in conjunction with the arbitrage and linkage factors as 
a significant amount of liquidity presumably would be necessary for 
a contract to perform a significant price discovery function in 
conjunction with these factors.
    3. These factors do not lend themselves to a mechanical 
checklist or formulaic analysis. Accordingly, this guidance is 
intended to illustrate which factors, or combinations of factors, 
the Commission will look to when determining that a contract is 
performing a significant price discovery function, and under what 
circumstances the presence of a particular factor or factors would 
be sufficient to support such a determination.
    (A) MATERIAL LIQUIDITY--The extent to which the volume of 
agreements, contracts or transactions in the commodity being traded 
on the electronic trading facility is sufficient to have a material 
effect on other agreements, contracts or transactions listed for 
trading on or subject to the rules of a designated contract market, 
a derivatives transaction execution facility, or an electronic 
trading facility operating in reliance on the exemption in section 
2(h)(3) of the Act.
    (1) Liquidity is a broad concept that captures the ability to 
transact immediately with little or no price concession. 
Traditionally, objective measures of trading such as volume or open 
interest have been used as measures of liquidity. So, for example, a 
market in which trades occur multiple times per minute at prices 
that differ by only fractions of a cent normally would be considered 
highly liquid, since presumably a trader could quickly execute a 
trade at a price that was approximately the same as the price for 
other recently executed trades. Other factors also will affect the 
characterization of liquidity, such as whether a large trade--e.g., 
100 contracts versus 1 contract--could be executed without a 
significant price concession. For example,

[[Page 75913]]

having to wait a day to sell 1000 bushels of corn may be considered 
an illiquid market while waiting a day to sell a home may be 
considered quite liquid. Thus, quantifying the levels of immediacy 
and price concession that would define material liquidity may differ 
from one market or commodity to another.
    (2) The Commission believes that material liquidity 
alternatively can be identified by the impact liquidity exhibits 
through observed prices. In markets where material liquidity exists, 
a more or less continuous stream of prices can be observed and the 
prices should be similar. For example, if the trading of a contract 
occurs on average five times a day, there will be on average five 
observed prices for the contract per day. If the market is liquid in 
terms of traders having to make little in the way of price 
concessions to execute these trades, the prices of this contract 
should be similar to those observed for similar or related contracts 
traded in liquid markets elsewhere. Thus, in making determinations 
that contracts have material liquidity, the Commission will look to 
transaction prices, both in terms of how often prices are observed 
and the extent to which observed prices tend to correlate with other 
contemporaneous prices.
    (3) The Commission anticipates that material liquidity will 
frequently be a consideration in evaluating whether a contract is a 
significant price discovery contract; however, there may be 
circumstances in which other factors so dominate the conclusion that 
a contract is serving a significant price discovery function that a 
finding of material liquidity in the contract would not be 
necessary. Circumstances in which this might arise are discussed 
with respect to the assessment of other factors below.
    (4) Finally, material liquidity itself would not be sufficient 
to make a determination that a contract is a significant price 
discovery contract, but combined with other factors it can serve as 
a guidepost indicating which contracts are functioning as 
significant price discovery contracts. As further discussed below, 
material liquidity, as reflected through the prices of linked or 
arbitraged contracts, will be a primary consideration in determining 
whether such contracts are significant price discovery contracts.
    (B) PRICE LINKAGE--The extent to which the agreement, contract 
or transaction uses or otherwise relies on a daily or final 
settlement price, or other major price parameter, of a contract or 
contracts listed for trading on or subject to the rules of a 
designated contract market or a derivatives transaction execution 
facility to value a position, transfer or convert a position, cash 
or financially settle a position, or close out a position.
    (1) A price-linked contract is a contract that relies on a 
contract traded on another trading facility to settle, value or 
otherwise offset the price-linked contract. The link may involve a 
one-to-one linkage, in that the value of the linked contract is 
based on a single contract's price, or it may involve multiple 
contracts. An example of a multiple contract linkage might be where 
the settlement price is calculated as an index of prices obtained 
from a basket of contracts traded on other exchanges.
    (2) For a linked contract, the mere fact that a contract is 
linked to another contract will not be sufficient to support a 
determination that a contract performs a significant price discovery 
function. To assess whether such a determination is warranted, the 
Commission will examine the relationship between transaction prices 
of the linked contract and the prices of the referenced contract(s). 
The Commission believes that where material liquidity exists, prices 
for the linked contract would be observed to be substantially the 
same as or move substantially in conjunction with the prices of the 
referenced contract(s). Where such price characteristics are 
observed on an ongoing basis, the Commission would expect to 
determine that the linked contract is a significant price discovery 
contract.
    (3) As an example, where the Commission has observed price 
linkage, it will next consider whether transactions were occurring 
on a daily basis for the linked contract in material volumes. 
(Conversely, where volume has increased noticeably in a particular 
contract, the Commission would look for linkage) The ultimate level 
of volume that would be considered material for purposes of deeming 
a contract a significant price discovery contract will likely differ 
from one contract to another depending on the characteristics of the 
underlying commodity and the overall size of the physical market in 
which it is traded. At a minimum, however, the Commission will 
consider a linked contract which has volume equal to 5% of the 
volume of trading in the contract to which it is linked to have 
sufficient volume potentially to be deemed a significant price 
discovery contract. In combination with this volume level, the 
Commission will also examine the relationship between prices of the 
linked contract and the contract to which it is linked to determine 
whether a contract is serving a significant price discovery 
function. As a threshold, the Commission will consider a 2.5 percent 
price range for 95 percent of contemporaneously determined closing, 
settlement, or other daily prices over the most recent quarter to be 
sufficiently close for a linked contract potentially to be deemed a 
significant price discovery contract. For example, if, over the most 
recent quarter, it was found that 95 percent of the closing, 
settlement, or other daily prices of the contract, which have been 
calculated using transaction prices, were within 2.5 percent of the 
contemporaneously determined closing, settlement, or other daily 
prices of a contract to which it was linked, the Commission 
potentially would consider the contract to perform a significant 
price discovery function.
    (4) If, in the example above, the Commission determines that 
material volume existed, it will examine the relationship between 
the prices of the linked contracts and the referenced contracts. If 
it finds that the transaction prices of the linked contract were 
consistently within a small percentage of the referenced contract or 
index of contracts that was being referenced, the Commission will be 
likely to find the linked contract to be a significant price 
discovery contract. As a threshold, the Commission will consider a 
2.5 percent price range for 95 per cent of closing or settlement 
prices over the most recent quarter to be sufficiently close for a 
linked contract to potentially be deemed a significant price 
discovery contract. For example, if, over the most recent quarter, 
it was found that on 95 percent or more of the days the closing or 
settlement price of the contract, which has been calculated using 
transaction prices, was within 2.5 percent of the closing or 
settlement price of a contract to which it was linked, the 
Commission potentially will consider the contract to perform a 
significant price discovery function.
    (C) ARBITRAGE CONTRACTS--The extent to which the price for the 
agreement, contract or transaction is sufficiently related to the 
price of a contract or contracts listed for trading on or subject to 
the rules of a designated contract market or derivatives transaction 
execution facility, or a significant price discovery contract or 
contracts trading on or subject to the rules of an electronic 
trading facility, so as to permit market participants to effectively 
arbitrage between the markets by simultaneously maintaining 
positions or executing trades in the contracts on a frequent and 
recurring basis.
    (1) Arbitrage contracts are those contracts that can be combined 
with other contracts to exploit expected economic relationships in 
anticipation of a profit. In assessing whether a contract can be 
incorporated into an arbitrage strategy, the Commission will weigh 
the terms and conditions of a contract in comparison to contracts 
that potentially could be used in an arbitrage strategy; will 
consult with industry or other sources regarding a contract's 
viability in an arbitrage strategy; and will rely on direct 
observation confirming the use of a contract in arbitrage 
strategies.
    (2) As with linked contracts, the mere fact that a contract 
could be employed in an arbitrage strategy will not be sufficient to 
make a determination that a contract is a significant price 
discovery contract. In addition, the level of liquidity will be 
considered. To assess whether designation as a significant price 
discovery contract is warranted, the Commission will examine the 
relationship between transaction prices of an arbitrage contract and 
the prices of the contract(s) to which it is related. The Commission 
believes that where material liquidity exists, prices for the 
arbitrage contract would be observed to move substantially in 
conjunction with the prices of the related contract(s) to which it 
is economically linked. Where such price characteristics are 
observed on an ongoing basis, it is likely that the linked contract 
performs a significant price discovery function.
    (3) The Commission will apply the same threshold liquidity and 
price relationship standards for arbitrage contracts as it does for 
linked contracts. That is, the Commission will view the average of 5 
trades per day or more threshold as the level of activity that would 
potentially meet the material volume criterion. With respect to 
prices, the Commission will consider an arbitrage

[[Page 75914]]

contract potentially to be a significant price discovery contract 
if, over the most recent quarter, greater than 95 percent of the 
closing or settlement prices of the contract, which have been 
calculated using transaction prices, fall within 2.5 percent of the 
closing or settlement price of the contract or contracts to which it 
could be arbitraged.
    (D) MATERIAL PRICE REFERENCE--The extent to which, on a frequent 
and recurring basis, bids, offers or transactions in a commodity are 
directly based on, or are determined by referencing, the prices 
generated by agreements, contracts or transactions being traded or 
executed on the electronic trading facility.
    (1) The Commission will rely on one of two sources of evidence--
direct or indirect--to determine that the price of a contract was 
being used as a material price reference and, therefore, serving a 
significant price discovery function. The primary source of direct 
evidence is that cash market bids, offers or transactions are 
directly based on, or quoted at a differential to, the prices 
generated on the market on a frequent and recurring basis. The 
Commission expects that normally only contracts with material 
liquidity will be referenced by the cash market; however, the 
Commission notes that it may be possible for a contract to have very 
low liquidity and yet still be used as a price reference. In such 
cases, the simple fact that participants in the underlying cash 
market broadly have elected to use the contract price as a price 
reference would be a strong indicator that the contract is a 
significant price discovery contract.
    (2) In evaluating a contract's price discovery role as a 
directly referenced price source, the Commission will perform an 
analysis to determine 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 for the contract. Cash market prices are set explicitly 
at a differential to the section 2(h)(3) contract when, for 
instance, they are quoted in dollars and cents above or below the 
reference contract's price. Cash market prices are set implicitly at 
a differential to a section 2(h)(3) contract when, for instance, 
they are arrived at after adding to, or subtracting from the section 
2(h)(3) contract, but then quoted or reported at a flat price. The 
Commission will also consider whether cash market entities are 
quoting cash prices based on a section 2(h)(3) contract on a 
frequent and recurring basis.
    (3) The second source of evidence is that the price of the 
contract is being routinely disseminated in widely distributed 
industry publications--or offered by the ECM itself for some form of 
remuneration--and consulted on a frequent and recurring basis by 
industry participants in pricing cash market transactions. As with 
contract prices that are directly incorporated into cash market 
prices, the Commission assumes that industry publications choose to 
publish prices because of the value they transfer to industry 
participants for the purpose of formulating prices in the cash 
market.
    (4) In applying this criterion, consideration will be given to 
whether prices established by a section 2(h)(3) contract are 
reported in a widely distributed industry publication. 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.
    (5) Under a Material Price Reference analysis, the Commission 
expects that material liquidity in the contract likely will be the 
primary motivation for a publisher to publish particular prices. In 
other words, the fact that the price of a contract is being used as 
a reference by industry participants suggests, prima facie, that the 
contract performs a significant price discovery function. But the 
Commission recognizes that trading levels could nonetheless be low 
for the contract while still serving a significant price discovery 
function and that evidence of routine publication and consultation 
by industry participants may be sufficient to establish the contract 
as a significant price discovery contract. On the other hand, while 
cash market participants may regularly refer to published prices of 
a particular contract when establishing cash market prices, it may 
be the case that the contract itself is a niche market for a 
specialized grade of the commodity or for delivery at a minor 
geographic location. In such cases, the Commission will look to such 
measures as trading volume, open interest, and the significance of 
the underlying cash market to make a determination that a contract 
is functioning as a significant price discovery contract. If an 
examination of trading in the contract were to reveal that true 
price discovery was occurring in other more broadly defined 
contracts and that this contract was itself simply reflective of 
those broader contracts, it is less likely the Commission will deem 
the contract a significant price discovery contract.
    (6) Because price referencing normally occurs out of the view of 
the electronic trading facility, the Commission may have difficulty 
ascertaining the extent to which cash market participants actually 
reference or consult a contract's price when transacting. The 
Commission expects, however, that as a contract begins to be relied 
upon to set a reference price, market participants will be 
increasingly willing to purchase price information. To the extent, 
then, that an electronic trading facility begins to sell its price 
information regarding a contract to market participants or industry 
publications, the contract will meet a threshold standard to 
indicate that the contract potentially is a significant price 
discovery contract.

    32. Part 36 is amended by adding a new Appendix B to read as 
follows:

Appendix B to Part 36--Guidance On, and Acceptable Practices in, 
Compliance With Core Principles

    1. This Appendix provides guidance on complying with the core 
principles under section 2(h)(7)(C) of the Act and this part, both 
initially and on an ongoing basis. The guidance is provided in 
paragraph (a) following each core principle and can be used to 
demonstrate to the Commission core principle compliance under Sec.  
36.3(c)(4). The guidance for each core principle is illustrative 
only of the types of matters an electronic trading facility may 
address, as applicable, and is not intended to be used as a 
mandatory checklist. Addressing the issues and questions set forth 
in this guidance will help the Commission in its consideration of 
whether the electronic trading facility is in compliance with the 
core principles. A submission pursuant to Sec.  36.3(c)(4) should 
include an explanation or other form of documentation demonstrating 
that the electronic trading facility complies with the core 
principles.
    2. Acceptable practices meeting selected requirements of the 
core principles are set forth in paragraph (b) following each core 
principle. Electronic trading facilities on which significant price 
discovery contracts are traded or executed that follow the specific 
practices outlined under paragraph (b) for any core principle in 
this appendix will meet the selected requirements of the applicable 
core principle. Paragraph (b) is for illustrative purposes only, and 
does not state the exclusive means for satisfying a core principle.
    CORE PRINCIPLE I OF SECTION 2(h)(7)(C)--CONTRACTS NOT READILY 
SUSCEPTIBLE TO MANIPULATION. The electronic trading facility shall 
list only significant price discovery contracts that are not readily 
susceptible to manipulation.
    (a) Guidance. Upon determination by the Commission that a 
contract listed for trading on an electronic trading facility is a 
significant price discovery contract, the electronic trading 
facility must self-certify the terms and conditions of the 
significant price discovery contract under Sec.  36.3(c)(4) within 
90 calendar days of the date of the Commission's order, if the 
contract is the electronic trading facility's first significant 
price discovery contract; or 15 days from the date of the 
Commission's order if the contract is not the electronic trading 
facility's first significant price discovery contract. Once the 
Commission determines that a contract performs a significant price 
discovery function, subsequent rule changes must be self-certified 
to the Commission by the electronic trading facility pursuant to 
Sec.  40.6 of this chapter.
    (b) Acceptable practices. Guideline No. 1, 17 CFR part 40, 
Appendix A may be used as guidance in meeting this core principle 
for significant price discovery contracts.
    CORE PRINCIPLE II OF SECTION 2(h)(7)(C)--MONITORING OF TRADING. 
The electronic trading facility shall monitor trading in significant 
price discovery contracts to prevent market manipulation, price 
distortion, and disruptions of the delivery of cash-settlement 
process through market surveillance, compliance and disciplinary 
practices and procedures, including methods for conducting real-time 
monitoring of trading and comprehensive and accurate trade 
reconstructions.
    (a) Guidance. An electronic trading facility on which 
significant price discovery contracts are traded or executed should, 
with respect to those contracts, demonstrate a capacity to prevent 
market manipulation and

[[Page 75915]]

have trading and participation rules to detect and deter abuses. The 
facility should seek to prevent market manipulation and other 
trading abuses through a dedicated regulatory department or by 
delegation of that function to an appropriate third party. An 
electronic trading facility also should have the authority to 
intervene as necessary to maintain an orderly market.
    (b) Acceptable practices.
    (1) An acceptable trade monitoring program. An acceptable trade 
monitoring program should facilitate, on both a routine and non-
routine basis, arrangements and resources to detect and deter abuses 
through direct surveillance of each significant price discovery 
contract. Direct surveillance of each significant price discovery 
contract will generally involve the collection of various market 
data, including information on participants' market activity. Those 
data should be evaluated on an ongoing basis in order to make an 
appropriate regulatory response to potential market disruptions or 
abusive practices. For contracts with a substantial number of 
participants, an effective surveillance program should employ a much 
more comprehensive large trader reporting system.
    (2) Authority to collect information and documents. The 
electronic trading facility should have the authority to collect 
information and documents in order to reconstruct trading for 
appropriate market analysis. Appropriate market analysis should 
enable the electronic trading facility to assess whether each 
significant price discovery contract is responding to the forces of 
supply and demand. Appropriate data usually include various 
fundamental data about the underlying commodity, its supply, its 
demand, and its movement through market channels. Especially 
important are data related to the size and ownership of deliverable 
supplies--the existing supply and the future or potential supply--
and to the pricing of the deliverable commodity relative to the 
futures price and relative to similar, but non-deliverable, kinds of 
the commodity. For cash-settled contracts, it is more appropriate to 
pay attention to the availability and pricing of the commodity 
making up the index to which the contract will be settled, as well 
as monitoring the continued suitability of the methodology for 
deriving the index.
    (3) Ability to assess participants' market activity and power. 
To assess participants' activity and potential power in a market, 
electronic trading facilities, with respect to significant price 
discovery contracts, at a minimum should have routine access to the 
positions and trading of its participants and, if applicable, should 
provide for such access through its agreements with its third-party 
provider of clearing services.
    CORE PRINCIPLE III OF SECTION 2(h)(7)(C)--ABILITY TO OBTAIN 
INFORMATION. The electronic trading facility shall establish and 
enforce rules that allow the electronic trading facility to obtain 
any necessary information to perform any of the functions described 
in this subparagraph, provide the information to the Commission upon 
request, and have the capacity to carry out such international 
information-sharing agreements as the Commission may require.
    (a) Guidance. An electronic trading facility on which 
significant price discovery contracts are traded or executed should, 
with respect to those contracts, have the ability and authority to 
collect information and documents on both a routine and non-routine 
basis, including the examination of books and records kept by 
participants. This includes having arrangements and resources for 
recording full data entry and trade details and safely storing audit 
trail data. An electronic trading facility should have systems 
sufficient to enable it to use the information for purposes of 
assisting in the prevention of participant and market abuses through 
reconstruction of trading and providing evidence of any violations 
of the electronic trading facility's rules.
    (b) Acceptable practices.
    (1) The goal of an audit trail is to detect and deter market 
abuse. An effective contract audit trail should capture and retain 
sufficient trade-related information to permit electronic trading 
facility staff to detect trading abuses and to reconstruct all 
transactions within a reasonable period of time. An audit trail 
should include specialized electronic surveillance programs that 
identify potentially abusive trades and trade patterns. An 
acceptable audit trail must be able to track an order from time of 
entry into the trading system through its fill. The electronic 
trading facility must create and maintain an electronic transaction 
history database that contains information with respect to 
transactions executed on each significant price discovery contract.
    (2) An acceptable audit trail should include the following: 
original source documents, transaction history, electronic analysis 
capability, and safe storage capability. An acceptable audit trail 
system would satisfy the following practices.
    (i) Original source documents. Original source documents include 
unalterable, sequentially identified records on which trade 
execution information is originally recorded. For each order 
(whether filled, unfilled or cancelled, each of which should be 
retained or electronically captured), such records reflect the terms 
of the order, an account identifier that relates back to the 
account(s) owner(s), and the time of order entry.
    (ii) Transaction history. A transaction history consists of an 
electronic history of each transaction, including:
    (A) All the data that are input into the trade entry or matching 
system for the transaction to match and clear;
    (B) Timing and sequencing data adequate to reconstruct trading; 
and
    (C) The identification of each account to which fills are 
allocated.
    (iii) Electronic analysis capability. An electronic analysis 
capability that permits sorting and presenting data included in the 
transaction history so as to reconstruct trading and to identify 
possible trading violations with respect to market abuse.
    (iv) Safe storage capability. Safe storage capability provides 
for a method of storing the data included in the transaction history 
in a manner that protects the data from unauthorized alteration, as 
well as from accidental erasure or other loss. Data should be 
retained in the form and manner specified by the Commission or, 
where no acceptable manner of retention is specified, in accordance 
with the recordkeeping standards of Commission regulation 1.31.
    (3) Arrangements and resources for the disclosure of the 
obtained information and documents to the Commission upon request. 
To satisfy section 2(h)(7)(C)(III)(bb), the electronic trading 
facility should maintain records of all information and documents 
related to each significant price discovery contract in a form and 
manner acceptable to the Commission. Where no acceptable manner of 
maintenance is specified, records should be maintained in accordance 
with the recordkeeping standards of Commission regulation 1.31.
    (4) The capacity to carry out appropriate information-sharing 
agreements as the Commission may require. Appropriate information-
sharing agreements could be established with other markets or the 
Commission can act in conjunction with the electronic trading 
facility to carry out such information sharing.
    CORE PRINCIPLE IV OF SECTION 2(h)(7)(C)--POSITION LIMITATIONS OR 
ACCOUNTABILITY. The electronic trading facility shall adopt, where 
necessary and appropriate, position limitations or position 
accountability for speculators in significant price discovery 
contracts, taking into account positions in other agreements, 
contracts and transactions that are treated by a derivatives 
clearing organization, whether registered or not registered, as 
fungible with such significant price discovery contracts to reduce 
the potential threat of market manipulation or congestion, 
especially during trading in the delivery month.
    (a) Guidance. [Reserved]
    (b) Acceptable practices.
    (1) Introduction. In order to diminish potential problems 
arising from excessively large speculative positions, and to 
facilitate orderly liquidation of expiring contracts, an electronic 
trading facility relying on the exemption in section 2(h)(3) should 
adopt rules that set position limits or accountability levels on 
traders' cleared positions in significant price discovery contracts. 
These position limit rules specifically may exempt bona fide 
hedging; permit other exemptions; or set limits differently by 
market, delivery month or time period. For the purpose of evaluating 
a significant price discovery contract's speculative-limit program 
for cleared positions, the Commission will consider the specified 
position limits or accountability levels, aggregation policies, 
types of exemptions allowed, methods for monitoring compliance with 
the specified limits or levels, and procedures for dealing with 
violations.
    (2) Accounting for cleared and uncleared trades.
    (i) Speculative-limit levels typically should be set in terms of 
a trader's combined position involving cleared trades in a 
significant price discovery contract, plus positions in agreements, 
contracts and transactions that are treated by a derivatives 
clearing organization, whether registered or not registered, as 
fungible with such significant price discovery contract. (This

[[Page 75916]]

circumstance typically exists where an exempt commercial market 
lists a particular contract for trading but also allows for 
positions in that contract to be cleared together with positions 
established through bilateral or off-exchange transactions, such as 
block trades, in the same contract. Essentially, both the on-
facility and off-facility transactions are considered fungible with 
each other.) In this connection, the electronic trading facility 
should make arrangements to ensure that it is able to ascertain 
accurate position data for the market.
    (ii) For significant price discovery contracts that may be 
traded on either a cleared or an uncleared basis, the electronic 
trading facility should apply position limits to cleared 
transactions in the contract. For those transactions in the contract 
that are not cleared, the electronic trading facility should 
establish accountability procedures for monitoring traders' overall 
positions and take that information into account when ascertaining 
whether an individual trader's overall position poses a threat to 
the market.
    (3) Limitations on spot-month positions. Spot-month limits 
should be adopted for significant price discovery contracts to 
minimize the susceptibility of the market to manipulation or price 
distortions, including squeezes and corners or other abusive trading 
practices.
    (i) Contracts economically equivalent to an existing contract. 
An electronic trading facility that lists a significant price 
discovery contract that is economically-equivalent to another 
significant price discovery contract or to a contract traded on a 
designated contract market or derivatives transaction execution 
facility should set the spot-month limit for its significant price 
discovery contract at the same level as that specified for the 
economically-equivalent contract.
    (ii) Contracts that are not economically equivalent to an 
existing contract. There may not be an economically-equivalent 
significant price discovery contract or economically equivalent 
contract traded on a designated contract market or derivatives 
transaction execution facility. In this case, the spot-month 
speculative position limit should be established in the following 
manner. The spot-month limit for a physical delivery market should 
be based upon an analysis of deliverable supplies and the history of 
spot-month liquidations. The spot-month limit for a physical-
delivery market is appropriately set at no more than 25 percent of 
the estimated deliverable supply. In the case where a significant 
price discovery contract has a cash settlement provision, the spot-
month limit should be set at a level that minimizes the potential 
for price manipulation or distortion in the significant price 
discovery contract itself; in related futures and options contracts 
traded on a designated contract market or derivatives transaction 
execution facility; in other significant price discovery contracts; 
in other fungible agreements, contracts and transactions; and in the 
underlying commodity.
    (4) Position accountability for non-spot-month positions. The 
electronic trading facility should establish for its significant 
price discovery contracts non-spot individual month position 
accountability levels and all-months-combined position 
accountability levels. An electronic trading facility may establish 
non-spot individual month position limits and all-months-combined 
position limits for its significant price discovery contracts in 
lieu of position accountability levels.
    (i) Definition. Position accountability provisions provide a 
means for an exchange to monitor traders' positions that may 
threaten orderly trading. An acceptable accountability provision 
sets target accountability threshold levels that may be exceeded, 
but once a trader breaches such accountability levels, the 
electronic trading facility should initiate an investigation to 
determine whether the individual's trading activity is justified and 
is not intended to manipulate the market. As part of its 
investigation, the electronic trading facility should inquire about 
the trader's rationale for holding a position in excess of the 
accountability levels. An acceptable accountability provision should 
provide the electronic trading facility with the authority to order 
the trader not to further increase positions. If a trader fails to 
comply with a request for information about positions held, provides 
information that does not sufficiently justify the position, or 
continues to increase contract positions after a request not to do 
so is issued by the facility, then the accountability provision 
should enable the electronic trading facility to require the trader 
to reduce positions.
    (ii) Contracts economically equivalent to an existing contract. 
When an electronic trading facility lists a significant price 
discovery contract that is economically equivalent to another 
significant price discovery contract or to a contract traded on a 
designated contract market or derivatives transaction execution 
facility, the electronic trading facility should set the non-spot 
individual month position accountability level and all-months-
combined position accountability level for its significant price 
discovery contract at the same levels, or lower, as those specified 
for the economically-equivalent contract.
    (iii) Contracts that are not economically equivalent to an 
existing contract. For significant price discovery contracts that 
are not economically equivalent to an existing contract, the trading 
facility shall adopt non-spot individual month and all-months-
combined position accountability levels that are no greater than 10 
percent of the average combined futures and delta-adjusted option 
month-end open interest for the most recent calendar year. For 
electronic trading facilities that choose to adopt non-spot 
individual month and all-months-combined position limits in lieu of 
position accountability levels for their significant price discovery 
contracts, the limits should be set in the same manner as the 
accountability levels.
    (iv) Contracts economically equivalent to an existing contract 
with position limits. If a significant price discovery contract is 
economically equivalent to another significant price discovery 
contract or to a contract traded on a designated contract market or 
derivatives transaction execution facility that has adopted non-spot 
or all-months-combined position limits, the electronic trading 
facility should set non-spot month position limits and all-months-
combined position limits for its significant price discovery 
contract at the same (or lower) levels as those specified for the 
economically-equivalent contract.
    (5) Provisions for uncleared contracts. If an electronic trading 
facility offers a significant price discovery contract that is 
exclusively uncleared, or one that may be either cleared by a 
derivatives clearing organization or uncleared at the discretion of 
the trader, the trading facility should establish for the uncleared 
trades a spot-month volume accountability level equal to the spot-
month speculative position limit. In this regard, the electronic 
trading facility should keep track of each trader's uncleared 
transactions in a significant price discovery contract on a net 
basis. (For the purpose of netting uncleared transactions, long and 
short uncleared transactions are only offset if they are conducted 
with the same counterparty.) If a particular trader's net volume of 
uncleared transactions exceeds the specified spot-month volume 
accountability level, the electronic trading facility should conduct 
an investigation to determine whether the trader's trading activity 
is warranted and is not intended to manipulate the market.
    (6) Account aggregation. An electronic trading facility should 
have aggregation rules for significant price discovery contracts 
that apply to accounts under common control, those with common 
ownership, i.e., where there is a ten percent or greater financial 
interest, and those traded according to an express or implied 
agreement. Such aggregation rules should apply to cleared 
transactions with respect to applicable speculative position limits, 
as well as to uncleared transactions with respect to applicable 
spot-month volume accountability levels. An electronic trading 
facility will be permitted to set more stringent aggregation 
policies. An electronic trading facility may grant exemptions to its 
price discovery contracts' position limits for bona fide hedging (as 
defined in Sec.  1.3(z) of this chapter) and may grant exemptions 
for reduced risk positions, such as spreads, straddles and arbitrage 
positions.
    (7) Implementation deadlines. An electronic trading facility 
with a significant price discovery contract is required to comply 
with Core Principle IV as set forth in section 2(h)(7)C) of the Act 
within 90 calendar days of the date of the Commission's order 
determining that the contract performs a significant price discovery 
function if such contract is the electronic trading facility's first 
significant price discovery contract, or within 15 days of the date 
of the Commission's order if such contract is not the electronic 
trading facility's first significant price discovery contract. For 
the purpose of applying limits on speculative positions in newly-
determined significant price discovery contracts, the Commission 
will permit a grace period following issuance of its order for 
traders with cleared positions in such contracts to become compliant 
with applicable position limit rules. Traders who hold cleared 
positions on a net basis in the

[[Page 75917]]

electronic trading facility's significant price discovery contract 
must be at or below the specified position limit level no later than 
90 calendar days from the date of the electronic trading facility's 
implementation of position limit rules, unless a hedge exemption is 
granted by the electronic trading facility. This grace period 
applies to both initial and subsequent price discovery contracts. 
Electronic trading facilities should notify traders of this 
requirement promptly upon implementation of such rules.
    (8) Enforcement provisions. The electronic trading facility 
should have appropriate procedures in place to monitor its position 
limit and accountability provisions and to address violations.
    (i) An electronic trading facility with significant price 
discovery contracts should use an automated means of detecting 
traders' violations of speculative limits or exemptions, 
particularly if the significant price discovery contracts have large 
numbers of traders. An electronic trading facility should monitor 
the continuing appropriateness of approved exemptions by 
periodically reviewing each trader's basis for exemption or 
requiring a reapplication. An automated system also should be used 
to determine whether a trader has exceeded applicable non-spot 
individual month position accountability levels, all-months-combined 
position accountability levels, and spot-month volume accountability 
levels.
    (ii) An electronic trading facility should establish a program 
for effective enforcement of position limits for significant price 
discovery contracts. Electronic trading facilities should use a 
large trader reporting system to monitor and enforce daily 
compliance with position limit rules. The Commission notes that an 
electronic trading facility may allow traders to periodically apply 
to the electronic trading facility for an exemption and, if 
appropriate, be granted a position level higher than the applicable 
speculative limit. The electronic trading facility should establish 
a program to monitor approved exemptions from the limits. The 
position levels granted under such hedge exemptions generally should 
be based upon the trader's commercial activity in related markets 
including, but not limited to, positions held in related futures and 
options contracts listed for trading on designated contract markets, 
fungible agreements, contracts and transactions, as determined by 
either a registered or unregistered derivatives clearing 
organization. Electronic trading facilities may allow a brief grace 
period where a qualifying trader may exceed speculative limits or an 
existing exemption level pending the submission and approval of 
appropriate justification. An electronic trading facility should 
consider whether it wants to restrict exemptions during the last 
several days of trading in a delivery month. Acceptable procedures 
for obtaining and granting exemptions include a requirement that the 
electronic trading facility approve a specific maximum higher level.
    (iii) An acceptable speculative limit program should have 
specific policies for taking regulatory action once a violation of a 
position limit or exemption is detected. The electronic trading 
facility policies should consider appropriate actions.
    (9) Violation of Commission rules. A violation of position 
limits for significant price discovery contracts that have been 
self-certified by an electronic trading facility also a violation of 
section 4a(e) of the Act.
    CORE PRINCIPLE V OF SECTION 2(h)(7)(C)--EMERGENCY AUTHORITY--The 
electronic trading facility shall adopt rules to provide for the 
exercise of emergency authority, in consultation or cooperation with 
the Commission, where necessary and appropriate, including the 
authority to liquidate open positions in significant price discovery 
contracts and to suspend or curtail trading in a significant price 
discovery contract.
    (a) Guidance. An electronic trading facility on which 
significant price discovery contracts are traded should have clear 
procedures and guidelines for decision-making regarding emergency 
intervention in the market, including procedures and guidelines to 
avoid conflicts of interest while carrying out such decision-making. 
An electronic trading facility on which significant price discovery 
contracts are executed or traded should also have the authority to 
intervene as necessary to maintain markets with fair and orderly 
trading as well as procedures for carrying out the intervention. 
Procedures and guidelines should include notifying the Commission of 
the exercise of the electronic trading facility's regulatory 
emergency authority, explaining how conflicts of interest are 
minimized, and documenting the electronic trading facility's 
decision-making process and the reasons for using its emergency 
action authority. Information on steps taken under such procedures 
should be included in a submission of a certified rule and any 
related submissions for rule approval pursuant to part 40 of this 
chapter, when carried out pursuant to an electronic trading 
facility's emergency authority. To address perceived market threats, 
the electronic trading facility on which significant price discovery 
contracts are executed or traded should, among other things, be able 
to impose position limits in the delivery month, impose or modify 
price limits, modify circuit breakers, call for additional margin 
either from market participants or clearing members (for contracts 
that are cleared through a clearinghouse), order the liquidation or 
transfer of open positions, order the fixing of a settlement price, 
order a reduction in positions, extend or shorten the expiration 
date or the trading hours, suspend or curtail trading on the 
electronic trading facility, order the transfer of contracts and the 
margin for such contracts from one market participant to another, or 
alter the delivery terms or conditions or, if applicable, should 
provide for such actions through its agreements with its third-party 
provider of clearing services.
    (b) Acceptable practices. [Reserved]
    CORE PRINCIPLE VI OF SECTION 2(h)(7)(C)--DAILY PUBLICATION OF 
TRADING INFORMATION. The electronic trading facility shall make 
public daily information on price, trading volume, and other trading 
data to the extent appropriate for significant price discovery 
contracts.
    (a) Guidance. An electronic trading facility, with respect to 
significant price discovery contracts, should provide to the public 
information regarding settlement prices, price range, volume, open 
interest, and other related market information for all applicable 
contracts as determined by the Commission on a fair, equitable and 
timely basis. Provision of information for any applicable contract 
can be through such means as provision of the information to a 
financial information service or by timely placement of the 
information on the electronic trading facility's public Web site.
    (b) Acceptable practices. Compliance with Sec.  16.01 of this 
chapter, which is mandatory, is an acceptable practice and satisfies 
the requirements of under Core Principle VI.
    CORE PRINCIPLE VII OF SECTION 2(h)(7)(C)--COMPLIANCE WITH RULES. 
The electronic trading facility shall monitor and enforce compliance 
with the rules of the electronic trading facility, including the 
terms and conditions of any contracts to be traded and any 
limitations on access to the electronic trading facility.
    (a) Guidance.
    (1) An electronic trading facility on which significant price 
discovery contracts are executed or traded should have appropriate 
arrangements and resources for effective trade practice surveillance 
programs, with the authority to collect information and documents on 
both a routine and non-routine basis, including the examination of 
books and records kept by its market participants. The arrangements 
and resources should facilitate the direct supervision of the market 
and the analysis of data collected. Trade practice surveillance 
programs may be carried out by the electronic trading facility 
itself or through delegation or contracting-out to a third party. If 
the electronic trading facility on which significant price discovery 
contracts are executed or traded delegates or contracts-out the 
trade practice surveillance responsibility to a third party, such 
third party should have the capacity and authority to carry out such 
programs, and the electronic trading facility should retain 
appropriate supervisory authority over the third party.
    (2) An electronic trading facility on which significant price 
discovery contracts are executed or traded should have arrangements, 
resources and authority for effective rule enforcement. The 
Commission believes that this should include the authority and 
ability to discipline and limit or suspend the activities of a 
market participant as well as the authority and ability to terminate 
the activities of a market participant pursuant to clear and fair 
standards. The electronic trading facility can satisfy this 
criterion for market participants by expelling or denying such 
person's future access upon a determination that such a person has 
violated the electronic trading facility's rules.
    (b) Acceptable practices. An acceptable trade practice 
surveillance program generally would include:
    (1) Maintenance of data reflecting the details of each 
transaction executed on the electronic trading facility;
    (2) Electronic analysis of this data routinely to detect 
potential trading violations;

[[Page 75918]]

    (3) Appropriate and thorough investigative analysis of these and 
other potential trading violations brought to the electronic trading 
facility's attention; and
    (4) Prompt and effective disciplinary action for any violation 
that is found to have been committed. The Commission believes that 
the latter element should include the authority and ability to 
discipline and limit or suspend the activities of a market 
participant pursuant to clear and fair standards that are available 
to market participants. See, e.g., 17 CFR part 8.
    CORE PRINCIPLE VIII OF SECTION 2(h)(7)(C)--CONFLICTS OF 
INTEREST. The electronic trading facility on which significant price 
discovery contracts are executed or traded shall establish and 
enforce rules to minimize conflicts of interest in the decision-
making process of the electronic trading facility and establish a 
process for resolving such conflicts of interest.
    (a) Guidance.
    (1) The means to address conflicts of interest in the decision-
making of an electronic trading facility on which significant price 
discovery contracts are executed or traded should include methods to 
ascertain the presence of conflicts of interest and to make 
decisions in the event of such a conflict. In addition, the 
Commission believes that the electronic trading facility on which 
significant price discovery contracts are executed or traded should 
provide for appropriate limitations on the use or disclosure of 
material non-public information gained through the performance of 
official duties by board members, committee members and electronic 
trading facility employees or gained through an ownership interest 
in the electronic trading facility or its parent organization(s).
    (2) All electronic trading facilities on which significant price 
discovery contracts are traded bear special responsibility to 
regulate effectively, impartially, and with due consideration of the 
public interest, as provided in section 3 of the Act. Under Core 
Principle VIII, they are also required to minimize conflicts of 
interest in their decision-making processes. To comply with this 
core principle, electronic trading facilities on which significant 
price discovery contracts are traded should be particularly vigilant 
for such conflicts between and among any of their self-regulatory 
responsibilities, their commercial interests, and the several 
interests of their management, members, owners, market participants, 
other industry participants and other constituencies.
    (b) Acceptable practices. [Reserved]
    CORE PRINCIPLE IX OF SECTION 2(h)(7)(C)--ANTITRUST 
CONSIDERATIONS. Unless necessary or appropriate to achieve the 
purposes of this Act, the electronic trading facility, with respect 
to any significant price discovery contracts, shall endeavor to 
avoid adopting any rules or taking any actions that result in any 
unreasonable restraints of trade or imposing any material 
anticompetitive burden on trading on the electronic trading 
facility.
    (a) Guidance. An electronic trading facility, with respect to a 
significant price discovery contract, may at any time request that 
the Commission consider under the provisions of section 15(b) of the 
Act any of the electronic trading facility's rules, which may be 
trading protocols or policies, operational rules, or terms or 
conditions of any significant price discovery contract. The 
Commission intends to apply section 15(b) of the Act to its 
consideration of issues under this core principle in a manner 
consistent with that previously applied to contract markets.
    (b) Acceptable practices. [Reserved]

PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

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

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as 
amended by Title XIII of the Food, Conservation and Energy Act of 
2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008).

    34. Revise the heading of part 40 as set forth above.
    35. Amend Sec.  40.1 as follows:
    A. Remove the term ``registered entity'' and add in its place the 
term ``contract market, derivatives transaction execution facility or 
derivatives clearing organization'' in paragraphs (b)(2), (b)(3), and 
(f)(2); and
    B. Remove the term ``contract market, derivatives transaction 
execution facility or derivatives clearing organization'' and add in 
its place the term ``registered entity'' in paragraph (h).
    36. Amend Sec.  40.2 as follows:
    A. Remove the term ``registered entity'' and add in its place 
``contract market, derivatives transaction execution facility on which 
significant price discovery contracts are traded or executed'' in 
paragraph (a);
    B. Remove the term ``registered entity'' and add in its place 
``contract market, derivatives transaction execution facility or 
derivatives clearing organization'' in paragraphs (a)(1) and 
(a)(3)(iv); and
    C. Revise paragraph (b) to read as follows:


Sec.  40.2  Listing and accepting products for trading or clearing by 
certification.

* * * * *
    (b) A registered entity shall provide, if requested by Commission 
staff, additional evidence, information or data relating to whether any 
contract meets, initially or on a continuing basis, any of the 
requirements of the Act or Commission regulations or policies 
thereunder which may be beneficial to the Commission in conducting a 
due diligence assessment of the product and the entity's compliance 
with these requirements.
* * * * *
    37. In Sec.  40.3, remove the term ``registered entity'' and add in 
its place the term ``designated contract market or registered 
derivatives transaction execution facility'' in paragraphs (a)(1), 
(c)(1), (c)(2), and (e)(2).
    38. In Sec.  40.4, remove the term ``registered entity'' and add in 
its place the term ``designated contract market'' in paragraph 
(b)(9)(ii).
    39. In Sec.  40.6, revise paragraphs (a)(2), (c)(3)(ii)(G), and 
(c)(3)(ii)(H) to read as follows:


Sec.  40.6  Self-certification of rules.

    (a) * * *
    (2) The registered entity has filed its submission electronically 
in a format specified by the Secretary of the Commission with the 
Secretary of the Commission at [email protected], the relevant 
branch chief at the regional office having local jurisdiction over the 
registered entity, and, for filings submitted by a designated contract 
market, registered derivatives transaction execution facility, or 
electronic trading facility on which significant price discovery 
contracts are traded or executed, the Division of Market Oversight at 
[email protected], and the Commission has received the submission 
at its headquarters by the open of business on the business day 
preceding implementation of the rule; provided, however, rules or rule 
amendments implemented under procedures of the governing board to 
respond to an emergency as defined in Sec.  40.1, shall, if 
practicable, be filed with the Commission prior to the implementation 
or, if not practicable, be filed with the Commission at the earliest 
possible time after implementation, but in no event more than twenty-
four hours after implementation; and
* * * * *
    (c) * * *
    (3) * * *
    (ii) * * *
    (G) Option contract terms. For registered entities that are in 
compliance with the daily reporting requirements of Sec.  16.01 of this 
chapter, changes to option contract rules relating to the strike price 
listing procedures, strike price intervals, and the listing of strike 
prices on a discretionary basis.
    (H) Trading months. For registered entities that are in compliance 
with the daily reporting requirements of Sec.  16.01 of this chapter, 
the initial listing of trading months which are within the currently 
established cycle of trading months.
    40. In Sec.  40.7, remove the term ``designated contract market, 
registered derivatives transaction execution

[[Page 75919]]

facility or registered derivatives clearing organization'' and add in 
its place the term ``registered entity'' in paragraph (b) introductory 
text.
    41. In Sec.  40.8, revise paragraph (a), redesignate paragraph (b) 
as paragraph (c), and add new paragraph (b) to read as follows:


Sec.  40.8  Availability of public information.

    (a) The following sections of all applications to become a 
designated contract market, derivatives execution transaction facility 
or designated clearing organization will be public: transmittal letter, 
proposed rules, the applicant's regulatory compliance chart, documents 
establishing the applicant's legal status, documents setting forth the 
applicant's governance structure, and any other part of the application 
not covered by a request for confidential treatment.
    (b) The following submissions required by Sec.  36.3(c)(4) by an 
electronic trading facility on which significant price discovery 
contracts are traded or executed will be public: rulebook, the 
facility's regulatory compliance chart, documents establishing the 
facility's legal status, documents setting forth the facility's 
governance structure, and any other parts of the submissions not 
covered by a request for confidential treatment.
* * * * *
    42. Revise Appendix D to part 40 to read as follows:

Appendix D to Part 40--Submission Cover Sheet and Instructions

    A properly completed submission cover sheet must accompany all 
rule submissions submitted electronically by a registered entity to 
the Secretary of the Commodity Futures Trading Commission, at 
[email protected] in a format specified by the Secretary of the 
Commission. Each submission should include the following:
    1. Identifier Code (optional)--If applicable, the exchange or 
clearing organization Identifier Code at the top of the cover sheet. 
Such codes are commonly generated by the exchanges or clearing 
organizations to provide an identifier that is unique to each filing 
(e.g., NYMEX Submission 03-116).
    2. Date--The date of the filing.
    3. Organization--The name of the organization filing the 
submission (e.g., CBOT).
    4. Filing as a--Check the appropriate box for a designated 
contract market (DCM), derivatives clearing organization (DCO), 
derivatives transaction execution facility (DTEF), or electronic 
trading facility with a significant price discovery contract (ECM-
SPDC).
    5. Type of Filing--Indicate whether the filing is a rule 
amendment or new product and the applicable category under that 
heading.
    6. Rule Numbers--For rule filings only, identify rule number(s) 
being adopted or modified in the case of rule amendment filings.
    7. Description--For rule or rule amendment filings only, enter a 
brief description of the new rule or rule amendment. This narrative 
should describe the substance of the submission with enough 
specificity to characterize all essential aspects of the filing.
    8. Other Requirements--Comply with all filing requirements for 
the underlying proposed rule or rule amendment. The filing of the 
submission cover sheet does not obviate the responsibility to comply 
with any applicable filing requirement (e.g., rules submitted for 
Commission approval under Sec.  40.5 must be accompanied by an 
explanation of the purpose and effect of the proposed rule along 
with a description of any substantive opposing views).
    A sample of the required submission cover sheet follows.
BILLING CODE 6351-01-P

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    Issued in Washington, DC, on December 2, 2008, by the 
Commission.
David Stawick,
Secretary of the Commission.
[FR Doc. E8-28867 Filed 12-11-08; 8:45 am]
BILLING CODE 6351-01-C