[Federal Register Volume 77, Number 118 (Tuesday, June 19, 2012)]
[Rules and Regulations]
[Pages 36612-36726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-12746]



[[Page 36611]]

Vol. 77

Tuesday,

No. 118

June 19, 2012

Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 16, and 38





Core Principles and Other Requirements for Designated Contract Markets; 
Final Rule

  Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules 
and Regulations  

[[Page 36612]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 16, and 38

RIN 3038-AD09


Core Principles and Other Requirements for Designated Contract 
Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting new and amended rules, guidance, and acceptable 
practices to implement certain statutory provisions enacted by Title 
VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act''). The final rules, guidance and acceptable 
practices, which apply to the designation and operation of contract 
markets, implement the Dodd-Frank Act's new statutory framework that, 
among other things, amends section 5 of the Commodity Exchange Act 
(``the Act'' or ``CEA'') concerning designation and operation of 
contract markets, and adds a new CEA section 2(h)(8) to mandate the 
listing, trading and execution of certain swaps on designated contract 
markets (``DCMs'').

DATES: Effective date: The rules will become effective August 20, 2012. 
Compliance date: The compliance date for contract markets that have 
obtained designation on, or prior to, the date of publication of this 
release: Designated contract markets must comply with the rules adopted 
in this release (except Sec.  38.151(a)) by October 17, 2012; and must 
comply with Sec.  38.151(a) in accordance with the timeline described 
in SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Nancy Markowitz, Deputy Director, 202-
418-5453, [email protected], Nadia Zakir, Special Counsel, 202-418-
5720, [email protected], or Aaron Brodsky, Attorney-Advisor, 202-418-
5349, [email protected], Division of Market Oversight, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street 
NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Title VII of the Dodd-Frank Act
    B. The Dodd-Frank Act Amendments Applicable to Designated 
Contract Markets
II. Final Rules
    A. Repeal of Designation Criteria
    B. Adoption of Rules and Revised Guidance and Acceptable 
Practices
    C. General Regulations (Subpart A)
    1. Sec.  38.1-Scope
    2. Sec.  38.2-Exempt Provisions
    3. Sec.  38.3--Procedures for Designation
    4. Sec.  38.4--Procedures for Listing Products and Implementing 
Designated Contract Market Rules
    5. Sec.  38.5--Information Relating to Contract Market 
Compliance
    6. Sec.  38.7--Prohibited Use of Data Collected for Regulatory 
Purposes
    7. Sec.  38.8--Listing of Swaps on a Designated Contract Market
    8. Sec.  38.9--Boards of Trade Operating Both a Designated 
Contract Market and a Swap Execution Facility
    9. Sec.  38.10--Reporting of Swaps Traded on a Designated 
Contract Market
    D. Core Principles
    1. Subpart B--Designation as Contract Market
    2. Subpart C--Compliance With Rules
    i. Sec.  38.150--Core Principle 2
    ii. Sec.  38.151--Access Requirements
    iii. Sec.  38.152--Abusive Trading Practices Prohibited
    iv. Sec.  38.153--Capacity to Detect and Investigate Rule 
Violations
    v. Sec.  38.154--Regulatory Services Provided by a Third Party
    vi. Sec.  38.155--Compliance Staff and Resources
    vii. Sec.  38.156--Automated Trade Surveillance System
    viii. Sec.  38.157--Real-Time Market Monitoring
    ix. Sec.  38.158--Investigations and Investigation Reports
    x. Sec.  38.159--Ability to Obtain Information
    xi. Sec.  38.160--Additional Sources for Compliance
    3. Subpart D--Contracts Not Readily Subject to Manipulation
    4. Subpart E--Prevention of Market Disruption
    i. Sec.  38.251--General Requirements
    ii. Sec.  38.252--Additional Requirements for Physical-Delivery 
Contracts
    iii. Sec.  38.253--Additional Requirements for Cash-Settled 
Contracts
    iv. Sec.  38.254--Ability to Obtain Information
    v. Sec.  38.255--Risk Controls for Trading
    vi. Sec.  38.256--Trade Reconstruction
    vii. Sec.  38.257--Regulatory Service Provider
    viii. Sec.  38.258--Additional Sources for Compliance
    5. Subpart F--Position Limitations or Accountability
    6. Subpart G--Emergency Authority
    7. Subpart H--Availability of General Information
    i. Sec.  38.401(a)--General
    ii. Sec.  38.401(b)--Accuracy Requirement
    iii. Sec.  38.401(c)--Notice of Regulatory Submissions
    iv. Sec.  38.401(d)--Rulebook
    8. Subpart I--Daily Publication of Trading Information
    9. Subpart J--Execution of Transactions
    10. Subpart K--Trade Information
    i. Sec.  38.551--Audit Trail Required
    ii. Sec.  38.552--Elements of an Acceptable Audit Trail Program
    iii. Sec.  38.553--Enforcement of Audit Trail Requirements
    11. Subpart L--Financial Integrity of Transactions
    i. Sec.  38.601--Mandatory Clearing
    ii. Sec.  38.602--General Financial Integrity
    iii. Sec.  38.603--Protection of Customer Funds
    iv. Sec.  38.604--Financial Surveillance
    v. Sec.  38.605--Requirements for Financial Surveillance Program
    vi. Sec.  38.606--Financial Regulatory Services Provided by a 
Third Party
    vii. Sec.  38.607--Direct Access
    12. Subpart M--Protection of Markets and Market Participants
    i. Sec.  38.651--Additional Sources for Compliance
    13. Subpart N--Disciplinary Procedures
    i. Sec.  38.701--Enforcement Staff
    ii. Sec.  38.702--Disciplinary Panels
    iii. Sec.  38.703--Review of Investigation Report
    iv. Sec.  38.704--Notice of Charges
    v. Sec.  38.705--Right to Representation
    vi. Sec.  38.706--Answer to Charges
    vii. Sec.  38.707--Admission or Failure To Deny Charges
    viii. Sec.  38.708--Denial of Charges and Right to Hearing
    ix. Sec.  38.709--Settlement Offers
    x. Sec.  38.710--Hearings
    xi. Sec.  38.711--Decisions
    xii. Sec.  38.712--Right To Appeal
    xiii. Sec.  38.713--Final Decisions
    xiv. Sec.  38.714--Disciplinary Sanctions
    xv. Sec.  38.715--Summary Fines
    xvi. Sec.  38.716--Emergency Disciplinary Actions
    14. Subpart O--Dispute Resolution
    15. Subpart P--Governance Fitness Standards
    16. Subpart Q--Conflicts of Interest
    17. Subpart R--Composition of Governing Boards of Contract 
Markets
    18. Subpart S--Recordkeeping
    i. Sec.  38.951--Additional Sources for Compliance
    19. Subpart T--Antitrust Considerations
    20. Subpart U--System Safeguards
    i. Sec.  38.1051--General Requirements
    21. Subpart V--Financial Resources
    i. Sec.  38.1100(a)--Core Principle 21, and Sec.  38.1101(a) and 
(c)--General Rule and Computation of Financial Resources Requirement
    ii. Sec.  38.1101(b)--Types of Financial Resources
    iii. Sec.  38.1101(d)--Valuation of Financial Resources
    iv. Sec.  38.1101(e)--Liquidity of Financial Resources
    v. Sec.  38.1101(f)--Reporting Requirements
    22. Subpart W--Diversity of Boards of Directors
    23. Subpart X--Securities and Exchange Commission
    i. Sec.  38.1200 (Core Principle 23), Sec.  38.1201 (Additional 
Sources for Compliance), and Guidance in Appendix B.
III. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost Benefit Considerations
IV. Text of Final Rules

I. Background

A. Title VII of the Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

[[Page 36613]]

Reform and Consumer Protection Act.\1\ Title VII of the Dodd-Frank Act 
\2\ amended the CEA\3\ to establish a comprehensive, new regulatory 
framework for swaps and security-based swaps. The legislation was 
enacted to reduce risk, increase transparency, and promote market 
integrity within the financial system by, among other things: (1) 
Providing for the registration and comprehensive regulation of swap 
dealers and major swap participants; (2) imposing clearing and trade 
execution requirements on standardized derivative products; (3) 
creating robust recordkeeping and real-time reporting regimes; and (4) 
enhancing the Commission's rulemaking and enforcement authorities with 
respect to, among others, all registered entities and intermediaries 
subject to the Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank Act'').
    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq. (amended 2010).
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B. The Dodd-Frank Act Amendments Applicable to Designated Contract 
Markets

    In this final rulemaking, the Commission is establishing the 
regulatory obligations that each DCM must meet in order to comply with 
section 5 of the CEA, as amended by the Dodd-Frank Act, initially upon 
designation and thereafter on an ongoing basis.
    Section 735 of the Dodd-Frank Act amended section 5 of the CEA 
pertaining to the designation and operation of contract markets, by: 
(i) Eliminating the eight criteria that must be met for designation as 
a contract market, contained in former section 5(b) of the CEA; (ii) 
amending most of the core principles, including incorporating most of 
the substantive elements of the former designation criteria, and 
requiring that all DCMs demonstrate compliance with each of the core 
principles as a condition of obtaining and maintaining designation as a 
contract market; and (iii) adding five new core principles, including 
Core Principle 13 (Disciplinary Procedures), Core Principle 20 (System 
Safeguards), Core Principle 21 (Financial Resources), Core Principle 22 
(Diversity of Boards of Directors), and Core Principle 23 (Securities 
and Exchange Commission).\4\
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    \4\ New Core Principle 13 is verbatim of former Designation 
Criterion 6.
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    In addition, section 723(a)(3) of the Dodd-Frank Act added section 
2(h)(8) of the CEA to require, among other things, that swaps that are 
required to be cleared must be executed either on a DCM or on a Swap 
Execution Facility (``SEF''),\5\ unless no DCM or SEF makes the swap 
``available to trade.'' \6\ Section 5h(a)(1) of the CEA, as amended by 
the Dodd-Frank Act, also prohibits any person from operating a facility 
for the trading and processing of swaps unless the facility is 
registered as a SEF or a DCM. Accordingly, unless otherwise specified 
in this release, each of the 23 core principles and the final 
implementing regulations, guidance and acceptable practices, apply to 
all ``contracts'' listed on a DCM, which will include swaps, futures 
and options contracts. The rules adopted in this release also implement 
relevant provisions related to the trading and execution of swaps on 
DCMs.
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    \5\ The Commission proposed rules governing the registration and 
operation of SEFs in a separate, rulemaking titled ``Core Principles 
and Other Requirements for Swap Execution Facilities.'' 76 FR 1214, 
Jan. 7, 2011. The core principles applicable to DCMs pursuant to 
section 5 of the Act and the core principles applicable to swap 
execution facilities pursuant to section 5h of the Act include, in a 
number of instances, similar or identical language. Although the 
Commission's interpretation of specific language in section 5 of the 
Act may inform its interpretation of similar or identical language 
in section 5h of the Act, and vice versa, the Commission may 
interpret the core principles applicable to each category of 
registered entity in light of that category's unique market 
characteristics and regulatory functions and responsibilities.
    \6\ See section 723(a) of the Dodd-Frank Act. The Commission 
separately proposed rules implementing the ``made available to 
trade'' mandate. See 76 FR 77728, Dec. 14, 2011.
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    On December 22, 2010, the Commission published proposed regulations 
to implement the statutory provisions of the Dodd-Frank Act relevant to 
the designation and operation of DCMs (``DCM NPRM''), under part 38 of 
the Commission's regulations.\7\
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    \7\ 75 FR 80572, Dec. 22, 2010 (``DCM NPRM''). The DCM NPRM also 
proposed revisions to related regulations under parts 1 and 16.
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    The proposed rulemaking was subject to an initial 60-day comment 
period, which closed on February 22, 2011. The comment period was 
subsequently reopened on two separate occasions, each time for an 
additional 30 days.\8\ The Commission received numerous written 
comments from members of the public, and Commission staff participated 
in several meetings with market participants, including representatives 
of both currently-designated and prospective contract markets.\9\
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    \8\ See 76 FR 14825, Mar. 18, 2011; see also 76 FR 25274, May 4, 
2011.
    \9\ The Commission received comment letters from numerous 
parties, including the following: ACM Capital Management; Alice 
Corporation; Alternative Investment Management Association; American 
Bankers Association and ABA Securities Association; American Gas 
Association; Argus Media, Inc. (``Argus''); Better Markets, Inc. 
(``Better Markets''); BJ D'Milli; BlackRock, Inc. (``BlackRock''); 
Bloomberg; CBOE Futures Exchanges (``CFE''); CME Group Inc. 
(``CME'') (CME's comments were submitted on behalf of its four DCMs: 
the Chicago Mercantile Exchange, Inc., the Board of Trade of the 
City of Chicago, Inc., the New York Mercantile Exchange, Inc., and 
the Commodity Exchange, Inc.); Citadel; Committee on Capital Markets 
Regulation; Committee on Futures and Derivatives Regulation of the 
New York City Bar Association; DC Energy; The Depository Trust & 
Clearing Corporation; East Coast Petroleum; ELX Futures, L.P. 
(``ELX''); Eris Exchange, LLC (``Eris''); Electric Trade 
Association; FIA/FSR/IIB/IRI/ISDA/SIFMA/US Chamber of Commercial 
(jointly); Green Exchange LLC (``GreenX''); ICAP; 
IntercontinentalExchange, Inc. (``ICE'') (ICE's comments were 
submitted on behalf of its four regulated futures exchanges: ICE 
Future US, Chicago Climate Futures Exchange, ICE Futures Europe, and 
ICE Futures Canada); International Swaps and Derivatives Association 
(``ISDA''); Kansas City Board of Trade (``KCBT''); Markit; 
MarkitSERV; Minneapolis Grain Exchange, Inc. (``MGEX''); Noble 
Energy; NYSE Liffe US LLC (``NYSE Liffe''); Nodal Exchange, LLC 
(``Nodal''); Todd Petzel; OneChicago LLC Futures Exchange (``OCX''); 
Swaps and Derivatives Market Association; Tradeweb; Trading 
Technologies International, Inc. (``Trading Technologies''); 
Wholesale Markets Brokers' Association; Working Group of Commercial 
Energy Firms (Hunton and Williams); and joint letter from CME, NYSE 
Liffe, GreenX, Eris Exchange, CBOE Futures Exchange, KCBT and MGEX 
(``CME Joint Comment Letter''). A number of comment letters solely 
addressed the implementation phasing for Dodd-Frank rulemakings. 
Those comments are outside the scope of this rulemaking and are more 
appropriate to the recent rulemaking pertaining to ``Swap 
Transaction Compliance and Implementation Schedule: Clearing and 
Trade Execution Requirements under section 2(h) of the CEA.'' See 76 
FR 58186, Sep. 20, 2011.
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    In this notice of final rulemaking, the Commission is adopting many 
of the proposed rules, guidance, and acceptable practices. However, as 
a result of the written comments received and dialogue with market 
participants, the Commission has revised and/or eliminated a number of 
regulations that were proposed in the DCM NPRM, and in a number of 
instances, has codified guidance and/or acceptable practices in lieu of 
the proposed rules.
    The Commission also received a number of comments pertaining to the 
costs and/or benefits of certain proposed regulations. The Commission 
has undertaken an extensive review of the costs and benefits of the 
regulations being adopted in this release pursuant to section 15(a) of 
the CEA,\10\ as is further discussed in the cost benefit consideration 
section of this final rulemaking. As discussed in that section, the 
Commission has determined that the final rules appropriately balance 
the costs and benefits associated with oversight of DCMs pursuant to 
the

[[Page 36614]]

CEA, as amended by the Dodd-Frank Act.
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    \10\ 7 U.S.C. 19.
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    The Commission is hereby adopting final regulations to implement 
section 5 of the CEA, as well as the requirements of sections 2(h)(8) 
and 5h(a)(1) of the CEA, as amended by the Dodd-Frank Act, as 
applicable to DCMs. The final regulations will eliminate the guidance 
on compliance with the designation criteria for DCMs, implement new and 
revised regulations for the core principles, and codify certain 
requirements and practices that have evolved over the years and are 
commonly accepted in the industry.
    The final regulations adopted herein will become effective 60 days 
after publication in the Federal Register. Contract markets that have 
obtained designation prior to or at the time of the publication of this 
release must comply with the new and revised rules adopted in this 
release, except Sec.  38.151(a), within 60 days of the effective date 
of this release; and must comply with Sec.  38.151(a) in accordance 
with the timeline described in the discussion of that rule below.

II. Final Rules

A. Repeal of Designation Criteria

    Section 735 of the Dodd-Frank Act eliminated the eight DCM 
designation criteria in former CEA section 5(b), and largely 
incorporated the substance of those criteria into the core principles. 
Accordingly, the Commission is eliminating the guidance on compliance 
with the designation criteria for DCMs contained in appendix A to part 
38.\11\
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    \11\ As proposed in the DCM NPRM, appendix A to part 38 will 
contain the application form for contract market designation.
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B. Adoption of Rules and Revised Guidance and Acceptable Practices

    To implement section 735 of the Dodd-Frank Act, the Commission 
proposed a number of new and revised rules, guidance, and acceptable 
practices to implement the new and revised core principles. As 
described in the DCM NPRM, the Commission evaluated the preexisting 
regulatory framework for overseeing DCMs, which consisted largely of 
guidance and acceptable practices, in order to update those provisions 
and to determine which core principles would benefit from having new or 
revised derivative regulations. Based on that review, and in view of 
the Dodd-Frank Act's amendments to section 5(d)(1) of the CEA,\12\ 
which specifically provides the Commission with discretion to 
determine, by rule or regulation, the manner in which boards of trade 
comply with the core principles, the Commission proposed revised 
guidance and acceptable practices for some core principles and, for 
several core principles, proposed to codify rules in lieu of guidance 
and acceptable practices.\13\
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    \12\ Former Core Principle 1 stated, among other things, that 
boards of trade ``shall have reasonable discretion in establishing 
the manner in which they comply with the core principles.'' This 
``reasonable discretion'' provision underpinned the Commission's use 
of core principle guidance and acceptable practices. Section 735 of 
the Dodd-Frank Act amended this provision to include the proviso 
that ``[u]nless otherwise determined by the Commission by rule or 
regulation * * *,'' boards of trade shall have reasonable discretion 
in establishing the manner in which they comply with the core 
principles. See 7 U.S.C. 7(d)(1)(amended 2010).
    \13\ Guidance provides DCMs and DCM applicants with contextual 
information regarding the core principles, including important 
concerns which the Commission believes should be taken into account 
in complying with specific core principles. In contrast, the 
acceptable practices are more specific than guidance and provide 
examples of how DCMs may satisfy particular requirements of the core 
principles; they do not, however, establish mandatory means of 
compliance. Acceptable practices are intended to assist DCMs by 
establishing non-exclusive safe harbors. The safe harbors apply only 
to compliance with specific aspects of the core principle, and do 
not protect the contract market with respect to charges of 
violations of other sections of the CEA or other aspects of the core 
principle.
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Summary of Comments
    The Commission received a number of comments generally pertaining 
to the proposed codification of rules in lieu of guidance and/or 
acceptable practices. Several commenters contended that the principles-
based regime has permitted the U.S. futures markets to prosper and keep 
pace with rapidly changing technology and market needs, and that a 
rules-based regime will stifle growth, innovation, and competition.\14\ 
Others noted that the futures markets' resilience throughout the 
financial crisis is evidence in support of the effectiveness of a 
principles-based regime.\15\ Commenters also argued that the 
prescriptive nature of the rules will result in increased costs for 
DCMs and for the Commission \16\ and that current industry best 
practices are subject to change and are only able to evolve through 
continuous improvement and innovation, which is only possible under a 
flexible regime.\17\ Several commenters provided comments on the 
codification of specific rules in lieu of guidance and/or acceptable 
practices, which are addressed below, in the discussion of the 
respective rules.
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    \14\ CME Comment Letter at 3-4 (Feb. 22, 2011); Eris Comment 
Letter at 1-2 (Feb. 22, 2011); GreenX Comment Letter at 1 (Feb. 22, 
2011); ICE Comment Letter at 3 (Feb. 22, 2011); KCBT Comment Letter 
at 1, 9 (Feb. 22, 2011).
    \15\ CME Comment Letter at 3 (Feb. 22, 2011); ICE Comment Letter 
at 2 (Feb. 22, 2011); KCBT Comment Letter at 9 (Feb. 22, 2011); Eris 
Comment Letter at 3 (June 3, 2011).
    \16\ CME Comment Letter at 3 (Feb. 22, 2011); GreenX Comment 
Letter at 2 (Feb. 2, 2011); MGEX Comment Letter at 2 (Feb. 22, 
2011).
    \17\ CME Comment Letter at 3 (Feb. 22, 2011); GreenX Comment 
Letter at 2, 11 (Feb. 22, 2011).
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Discussion
    This final rulemaking largely adopts the framework of rules, 
guidance and acceptable practices that was proposed in the DCM NPRM, 
with certain substantive revisions to the regulations, as described in 
this release. For several core principles, the Commission is 
maintaining the rules, guidance and acceptable practices, as proposed, 
with appropriate revisions arising from the Commission's consideration 
of comments. In several instances, this final rulemaking converts 
proposed rules to guidance and/or acceptable practices for various DCM 
compliance practices.
    In determining whether to codify a compliance practice in the form 
of a rule or guidance/acceptable practice, the Commission was guided by 
whether the practice consisted of a commonly-accepted industry 
practice. Where there is a standard industry practice that the 
Commission has determined to be an acceptable compliance practice, the 
Commission believes that the promulgation of clear-cut regulations will 
provide greater legal certainty and transparency to DCMs in determining 
their compliance obligations, and to market participants in determining 
their obligations as DCM members, and will facilitate the enforcement 
of such provisions. Several of the rules adopted in this notice of 
final rulemaking largely codify practices that are commonly accepted in 
the industry and are currently being undertaken by most, if not all, 
DCMs.
    In the context of each individual rule, the Commission also was 
guided by comments that provided a basis for greater flexibility or, in 
some instances, for greater specificity, in respect to the stated 
compliance obligation.
    In addition, the Commission's determination to codify certain 
compliance practices as rules, rather than as guidance/acceptable 
practices, is based on its long experience in regulating DCMs. In 
numerous instances, the rules codify practices that have evolved from 
the Division of Market Oversight's (``DMO'') recommendations in the 
context of Rule Enforcement Reviews (``RERs'').\18\
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    \18\ As noted in the DCM NPRM, the RERs are the cornerstone of 
the Commission's oversight program, serving as a key tool for 
monitoring a DCM's compliance with the core principles, and also as 
a primary means for identifying industry trends and DCM best 
practices for self-regulation. See DCM NPRM at 80574-75 for a more 
detailed discussion of RERs.

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[[Page 36615]]

    Some commenters claimed that the Commission's approach was overly 
prescriptive and inconsistent with the core principle framework.\19\ 
While maintaining the core principle framework as part of the Dodd-
Frank Act, Congress revised DCM Core Principle 1 to specifically 
provide the Commission with discretion to determine, by rule or 
regulation, the manner in which boards of trade are to comply with the 
core principles.\20\ Accordingly, in circumstances where a standard 
industry practice has developed, the Commission is adopting rules in 
order to provide greater legal certainty and transparency to DCMs and 
market participants. In other circumstances, the Commission is 
maintaining the guidance and acceptable practices framework, 
particularly where the Commission experienced that a standard 
compliance approach has not evolved within the industry over the years. 
In those instances, the final regulations maintain the flexibility for 
DCMs to determine the specific manner in which they choose to satisfy 
their compliance obligations.
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    \19\ See e.g., CME Comment Letters (Feb. 22, 2011, Apr. 18, 
2011, Jun. 3, 2011 and Aug. 3, 2011); MGEX Comment Letter (Jun. 3, 
2011); GreenX Comment Letter (Feb. 22, 2011).
    \20\ 7 U.S.C. 7(d)(1)(amended 2010).
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    Several commenters claimed that the codification of additional 
rules will increase the Commission's costs of regulating DCMs. The 
Commission believes that a regulatory framework consisting of a higher 
proportion of rules, in addition to guidance and acceptable practices, 
may in fact be less costly to administer, as DCMs will have a clear 
understanding of what is required in order to demonstrate compliance 
with the core principles. The costs and benefits of this final 
rulemaking are described further in the Cost Benefit Consideration 
discussion of this release.

C. General Regulations (Subpart A)

    The regulations in this final rulemaking are codified in a series 
of subparts under part 38. The general regulations consisting of 
Sec. Sec.  38.1 through 38.10 \21\ are codified in subpart A, and the 
regulations applicable to each of the 23 core principles are codified 
in subparts B through X, respectively.\22\
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    \21\ The DCM NPRM did not propose any revisions to Sec.  38.6 of 
the Commission's regulations.
    \22\ Each of these subparts begins with a regulation containing 
the language of the core principle.
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1. Sec.  38.1--Scope
    The Commission proposed non-substantive revisions to Sec.  38.1 
that corrected cross-references to other sections of the Commission's 
regulations. Section 38.1 is adopted as proposed.
2. Sec.  38.2--Applicable Provisions
    Proposed Sec.  38.2 specified the Commission regulations that are 
applicable to DCMs. In addition to revising the heading, the proposed 
revisions to Sec.  38.2 updated the list of Commission regulations that 
are applicable to DCMs, including the relevant regulations that have 
been codified, or are proposed to be codified, upon the Commission's 
finalization of the relevant rulemakings that culminated upon enactment 
of the Dodd-Frank Act. These included regulations relating to real-time 
reporting of swaps and the determination of appropriate block size for 
swaps under part 43, requirements for swap data recordkeeping and 
reporting under part 45, designation requirements for swap data 
repositories under part 49, and position limits under part 150 and/or 
part 151, as applicable.
Discussion
    The Commission is revising Sec.  38.2 to specify the Commission 
regulations from which DCMs will be exempt. The original intent of 
Sec.  38.2 was to exempt DCMs from various Commission regulations under 
Title 17 that were codified prior to the CFMA. Proposed Sec.  38.2 
listed the specific regulations with which DCMs were required to 
comply, with the understanding that the DCM was exempt from those not 
listed. In this final rulemaking, to add clarity, the Commission is 
revising the title of the rule to ``Exempt Provisions'' and is 
modifying Sec.  38.2 to reflect the list of regulations from which DCMs 
are exempt. Those regulations include: Sec.  1.35(e)-(j), Sec.  
1.39(b), Sec.  1.44, Sec.  1.53, Sec.  1.54, Sec.  1.59(b) and (c), 
Sec.  1.62, Sec.  1.63(a) and (b) and (d) and(f), Sec.  1.64, Sec.  
1.69, part 8, Sec.  100.1, Sec.  155.2, and part 156. While Sec.  38.2 
likely will be amended if and when the referenced rules are eliminated 
from the regulations or modified, this revised approach will eliminate 
the need for the Commission to continually update Sec.  38.2 when new 
regulations with which DCMs must comply are codified.
3. Sec.  38.3--Procedures for Designation
Sec.  38.3(a)--Application Procedures
    Among the proposed revisions to Sec.  38.3, which contains the 
application and designation procedures for DCM applicants, the 
Commission proposed to eliminate the 90-day expedited review procedures 
for DCM applications, which currently are codified in Sec.  38.3(a)(2). 
The proposed modification would result in all DCM applications being 
subject to the statutory 180-day review procedures provided under 
section 6(a) of the CEA and Sec.  38.3(a)(1) of the Commission's 
regulations.\23\
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    \23\ 7 U.S.C. 8(a).
---------------------------------------------------------------------------

    As noted above, the Dodd-Frank Act eliminated the standalone DCM 
designation criteria. Accordingly, the Commission proposed re-
designating appendix A to include a new DCM application form (``Form 
DCM'') that contains comprehensive instructions and a list of necessary 
information and documentation required to initiate a DCM designation 
proceeding. All new applicants seeking designation would submit to the 
Commission a completed form, including the information required in each 
exhibit.\24\
---------------------------------------------------------------------------

    \24\ Form DCM would also be used by applicants amending a 
pending application and existing DCMs applying for an amendment to 
their order of designation.
---------------------------------------------------------------------------

    The DCM NPRM also proposed certain revisions to Sec.  38.3 that 
would require DCM applications and certain related DCM filings to be 
filed with the Secretary of the Commission in an electronic format, via 
the Internet, email, or other means of direct electronic submission as 
approved by the Commission.\25\
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    \25\ The proposed electronic filing requirements would 
specifically apply to DCM applications, reinstatements, requests for 
transfer of designations, requests for withdrawal of application for 
designation, and vacation of designations. As explained in the DCM 
NPRM, the proposed revisions would make the DCM application filing 
process consistent with the electronic process used for filing rule 
and product submissions under parts 39 and 40 of the Commission's 
regulations. See 17 CFR parts 39 and 40. In addition to these 
substantive revisions, many of the proposed revisions to Sec.  38.3 
were non-substantive and were intended to clarify the rule.
---------------------------------------------------------------------------

Summary of Comments
    Two commenters discussed the proposed elimination of the 90-day 
expedited review process for DCM applications in Sec.  38.3(a)(1). 
Nodal expressed support for the proposed elimination of the 90-day 
review procedures.\26\ Eris opposed the proposed elimination and 
commented, among other things, that Form DCM should result in a 
streamlined and standardized review process and that eliminating the 
90-day accelerated review process would place new entities at a 
competitive disadvantage because it

[[Page 36616]]

would delay their time to market, which is critical for new 
entrants.\27\
---------------------------------------------------------------------------

    \26\ Nodal Comment Letter at 5 (Feb. 22, 2011).
    \27\ Eris Comment Letter at 4 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting proposed Sec.  38.3(a) with one 
modification.
    As described in the DCM NPRM, the Commission proposed eliminating 
the 90-day accelerated review process based on its experience in 
processing DCM applications. Specifically, the Commission has found 
that in the interest of meeting the expedited approval timeline, 
applicants seeking expedited review often filed incomplete or draft 
applications without adequate supporting materials. Accordingly, the 
90-day review process required the expenditure of significant 
Commission resources as well as the applicant's resources, and often 
resulted in placing the DCM designation requests on the 180-day review 
track. It is the Commission's view that the 180-day review period is a 
more reasonable timeframe for the review of designation requests and 
will result in more efficient use of the applicant's and the 
Commission's resources.
    In regards to Eris' specific claim that elimination of the 90-day 
accelerated review process would place new entities at a competitive 
disadvantage by delaying their time to market, the Commission notes 
that eliminating the 90-day review process will not prevent Commission 
staff from reviewing and/or rendering a determination on a DCM 
application before the 180-day period ends, particularly in instances 
where a DCM application is substantially complete, does not raise novel 
issues, and/or where a DCM applicant timely provides supplemental or 
follow-up responses or documentation necessary for a designation 
determination.\28\ Similarly, while the Commission recognizes that Form 
DCM will provide the added benefit of a more streamlined and 
standardized procedure for submitting and reviewing DCM applications, 
such benefits will not necessarily result in an expedited Commission 
determination. Rather, the completeness of the application and timely 
response to Commission staff's requests will determine the timeframe 
within which the Commission reviews a DCM application.
---------------------------------------------------------------------------

    \28\ Section 6(a) of the Act provides that ``the Commission 
shall approve or deny an application for designation or registration 
as a contract market * * * within 180 days of the filing of the 
application.'' 7 U.S.C. 8(a).
---------------------------------------------------------------------------

    To account for potential changes in the Commission's prospective 
technological capabilities, the Commission is slightly modifying the 
proposed text of Sec.  38.3(a) to clarify that a board of trade must 
file Form DCM electronically ``in a format and manner specified by the 
Secretary of the Commission.''
    The Commission is also making several minor non-substantive and 
organizational revisions to Form DCM. Additionally, the Commission is 
clarifying that the exhibits submitted in connection with Form DCM 
should include a description of how the applicant meets the definition 
of ``board of trade'' (as defined in section 1a(2) of the CEA). 
Applicants must submit all applicable exhibits simultaneous with the 
submission of completed Form DCM. Form DCM and all exhibits must be 
substantially complete prior to submission.
Sec. 38.3(b)--Reinstatement of Dormant Designation
    Proposed Sec.  38.3(b) required that a dormant DCM, prior to 
listing or relisting products for trading, must reinstate its 
designation under the procedures of paragraphs (a)(1) and (2) of Sec.  
38.3. The proposed rule provided that applications for reinstatement of 
designation may rely upon previously-submitted materials that pertain 
to, and accurately describe, current conditions. The Commission did not 
receive any comments on Sec.  38.3(b) and is adopting this provision as 
proposed.
Sec. 38.3(c)--Delegation of Authority
    Proposed Sec.  38.3(c) delegated authority to the Director of the 
Division of Market Oversight (or such other employees as the Director 
may designate) to notify an applicant seeking designation in the event 
that the application is materially incomplete and that the 180-day 
review period is stayed. The Commission did not receive any comments on 
Sec.  38.3(c) and is adopting this provision as proposed.
Sec. 38.3(d)--Request for Transfer of Designation
    The Commission proposed new Sec.  38.3(d) to formalize the 
procedures that a DCM must follow when requesting the transfer of its 
DCM designation and positions comprising open interest, in anticipation 
of a corporate event (e.g., a merger, corporate reorganization, or 
change in corporate domicile) which results in the transfer of all or 
substantially all of the DCM's assets to another legal entity. Proposed 
Sec.  38.3(d)(2) required a DCM to submit to the Commission a request 
for transfer of designation no later than three months prior to the 
anticipated corporate change. If a DCM did not know or could not 
reasonably have known of the anticipated change three months prior to 
the change, it was required to immediately file the request as soon as 
it did know of such change. The proposed rule required, that in either 
case, the request must include a series of submissions, including, 
among other things, the underlying agreement that governs the corporate 
change, a narrative description of the corporate change that includes 
the reason for the change and its impact on the DCM, a discussion of 
the transferee's ability to comply with the CEA and the Commission's 
regulations, the governing documents of the transferee, and a list of 
contracts, agreements, transactions or swaps for which the DCM requests 
transfer of open interest.
    Proposed Sec.  38.3(d) also required, as a condition of approval, 
that the DCM submit a representation that it is in compliance with the 
CEA, including the DCM core principles, and the Commission's 
regulations. In addition, the proposed rule required a DCM to submit 
various representations by the transferee, including, but not limited 
to, a representation that the transferee will assume responsibility for 
complying with all applicable provisions of the CEA and the 
Commission's regulations and that none of the proposed rule changes 
will affect the rights and obligations of any participant to which open 
positions are transferred.
Summary of Comments
    CME contended that the proposed rule is overly prescriptive because 
it applies a ``one-size-fits-all approach'' even though the 
circumstances of each transfer are likely to be unique.\29\ While CME 
did not oppose the three-month advance notification requirement, it did 
oppose what it believed to be the broad scope of the additional 
documentation required to be submitted simultaneously with such 
notification.\30\ CME stated that the required information is 
unnecessary and is likely to result in later notification to the 
Commission.\31\ As an alternative, CME recommended that the Commission 
tailor the information it requires based on the nature of the requested 
transfer.\32\
---------------------------------------------------------------------------

    \29\ CME Comment Letter at 11 (Feb. 22, 2011).
    \30\ Id.
    \31\ Id.
    \32\ Id.
---------------------------------------------------------------------------

    CME also contended that if a DCM could not have reasonably known of 
an anticipated change three months in advance, then it cannot 
``immediately'' file both the request and all of the required 
submissions once it does know, because preparing the

[[Page 36617]]

submissions takes time. CME suggested that the rule be amended to 
require that the documentation be filed ``promptly'' as soon as the DCM 
knows of the change, rather than ``immediately.'' \33\
---------------------------------------------------------------------------

    \33\ Id.
---------------------------------------------------------------------------

Discussion
    In response to CME's contention that each transfer is likely to be 
unique, and its opposition to some of the documentation required by the 
rule, the Commission notes that the specific information requirements 
contained in the proposed rule are necessary to enable the Commission 
to determine that the transfer is in compliance with the CEA. The 
required documents, such as the transfer agreement, governing 
documents, list of contracts to be transferred, and compliance 
representations, are relevant to the Commission's determination of the 
DCM's ongoing compliance with the CEA. Such documentation is also 
relatively standard in transfer transactions. The Commission 
recognizes, however, that there may be some variations in the form of 
governance documents or underlying agreements for each transfer. 
Accordingly, DCMs may provide the substance of the required information 
in the form available to them.
    In response to CME's suggestion that the rule be amended to require 
that the documentation be filed ``promptly'' as soon as the DCM knows 
of the change, rather than ``immediately,'' the Commission notes that 
the proposed rule specifically stated that in situations where a DCM 
could not have reasonably known of an anticipated change three months 
in advance, the DCM must immediately file the request as soon as it 
knows of such change, with an explanation as to the timing of the 
request. The Commission believes that in the context of this rule, use 
of the term ``promptly'' rather than ``immediately'' would not provide 
a meaningful distinction, as the rule simply requires DCMs to provide 
the documentation as soon as they know of the change.
    As described in connection with Sec.  38.3(a), the Commission is 
slightly modifying the proposed text to clarify that a DCM must file a 
request for transfer of designation electronically ``in a format and 
manner specified by the Secretary of the Commission.'' The Commission 
is adopting the remainder of the rule as proposed.
Sec. 38.3(e)--Request for Withdrawal of Application for Designation
    Proposed Sec.  38.3(e) specified the procedures that a DCM must 
follow for withdrawing an application for designation. The Commission 
did not receive any comments on this provision. The Commission is 
slightly modifying the proposed text to clarify that an applicant must 
file a request for withdrawal of application for designation 
electronically ``in a format and manner specified by the Secretary of 
the Commission.'' The Commission is adopting the remainder of the rule 
as proposed.
Sec. 38.3(f)--Request for Vacation of Designation
    Proposed Sec.  38.3(f) specified the procedures that a DCM must 
follow for vacating its designation. The Commission did not receive any 
comments on this provision. The Commission is adopting it as proposed, 
with a slight modification to the proposed text to clarify that a DCM 
must file a request for vacation of designation electronically ``in a 
format and manner specified by the Secretary of the Commission.''
Sec. 38.3(g)--Requirements for Existing Designated Contract Markets
    Proposed Sec.  38.3(g) required that each existing DCM provide the 
Commission with a signed certification of its compliance with each of 
the 23 core principles and the Commission's regulations under part 38, 
within 60 days of the effective date of the publication of the final 
rules proposed in the DCM NPRM. The failure of any existing DCM to 
provide such certification would be grounds for revocation of the DCM's 
designation status. The Commission requested comments on whether the 60 
day period is sufficient, and if not, what period of time may be more 
appropriate, and why.
Summary of Comments
    Multiple commenters opposed the proposed 60-day timeframe for 
existing DCMs to certify compliance with the core principles and 
associated regulations. Commenters suggested several alternative 
timeframes, including 90 days,\34\ 120 days,\35\ 180 days,\36\ 12 
months,\37\ and 18 months.\38\ KCBT argued that the proposed effective 
date is unreasonable and would be burdensome for DCMs, and suggested 
that the Commission work with each DCM to create a reasonable 
compliance timeframe.\39\
---------------------------------------------------------------------------

    \34\ Nodal Comment Letter at 4 (Feb. 22, 2011).
    \35\ CFE Comment Letter at 6-7 (Feb. 22, 2011).
    \36\ GreenX Comment Letter at 21 (Feb. 22, 2011).
    \37\ MGEX Comment Letter at 2 (Feb. 22, 2011), and at 1 (June 3, 
2011).
    \38\ NYSE Liffe Comment Letter at 14 (Feb. 22, 2011).
    \39\ KCBT Comment Letter at 2 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Commenters stated that a 60-day timeframe would be unreasonable 
given the expenditure of resources and detailed analysis required as a 
result of significant changes to existing core principles and the 
addition of new core principles. GreenX stated that Core Principle 21 
(Financial Resources) may require DCMs to obtain new investment or 
financing arrangements.\40\ KCBT stated that it will take DCMs time to 
convert programs and processes from current acceptable practices to 
adherence to what it sees as prescriptive objectives and deadlines.\41\ 
Nodal, which is currently operating as an exempt commercial market 
(``ECM''), stated that 60 days is an unnecessarily harsh timeframe for 
an existing business to transform its operations and demand changes 
from its support providers.\42\ Finally, NYSE Liffe claimed that even 
90 or 120 days would be insufficient because certain proposals, such as 
Core Principles 2 (Compliance with Rules), 4 (Prevention of Market 
Disruption), and 20 (System Safeguards), will require the 
implementation of automated systems that require significant time to 
implement coding and conduct testing.\43\ NYSE Liffe further claimed 
that the DCM's management and boards will have to review and approve 
rule changes before they can be implemented, and that the DCM will also 
have to negotiate and execute changes to contracts with third-party 
service providers.\44\ CME disagreed with the assertion that the 
proposed new regulations simply codify practices that are commonly 
accepted in the industry, and argued that the rules will necessitate 
strategic, operational, system, and rule changes.\45\ CME claimed that 
it would need a minimum of 180 days just to assess the impact of the 
new regulations and to identify, design, and plan the projects 
necessary to implement them.\46\
---------------------------------------------------------------------------

    \40\ GreenX Comment Letter at 21 (Feb. 22, 2011).
    \41\ KCBT Comment Letter at 2 (Feb. 22, 2011).
    \42\ Nodal Comment Letter at 4 (Feb. 22, 2011).
    \43\ NYSE Liffe Comment Letter at 14 (Feb. 22, 2011).
    \44\ Id.
    \45\ CME Comment Letter at 12 (Feb. 22, 2011).
    \46\ Id.
---------------------------------------------------------------------------

    MGEX stated that a ``catch all'' certification is of limited value 
given that DCMs spend ``countless hours and dollars'' demonstrating 
that they are in compliance with core principles through RERs and 
responding to other

[[Page 36618]]

Commission inquiries.\47\ MGEX also questioned whether it can conclude 
with any certainty that it is in compliance with the new and revised 
core principles and regulations.\48\ MGEX requested that the 
certification requirement be stricken, or if the requirement is deemed 
necessary, that the process be limited to providing a signed letter 
attesting to compliance (and that all application forms and 
documentation that are required with a formal application should be 
waived for existing DCMs).\49\ MGEX also requested that current DCMs 
that are already compliant with the existing core principles should be 
grandfathered.\50\
---------------------------------------------------------------------------

    \47\ MGEX Comment Letter at 2 (Feb. 22, 2011).
    \48\ Id.
    \49\ Id.
    \50\ MGEX Comment Letter at 1 (June 3, 2011).
---------------------------------------------------------------------------

    Nodal stated that the proposed rules do not address how a DCM 
applicant that is operating as an ECM pursuant to a grandfathering 
order can comply with the DCM requirements, and suggested that the 
Commission stagger certain compliance timeframes to accommodate 
entities that are operating pursuant to grandfather relief and that may 
potentially seek to operate as a DCM.\51\
---------------------------------------------------------------------------

    \51\ Nodal Comment Letter at 4 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission acknowledges commenters' concerns regarding the 60-
day time frame for existing DCMs to certify compliance with the core 
principles and is eliminating this requirement from the final rules. In 
addition, the Commission has determined that existing DCMs may need 
additional time to comply with the rules being adopted in this release, 
and is therefore allowing DCMs an additional 60 days after the 
effective date of this release to comply with all of the new and 
revised final rules, except for Sec.  38.151(a), as described in this 
release. All DCMs are expected to be in compliance with the final rules 
by that date. Albeit, the new and revised core principles, as amended 
by the Dodd-Frank Act, took effect on July 16, 2011, and all DCMs were 
required to be in compliance with each of the new and revised core 
principles as of that date. The Commission further notes that all DCMs 
will continue to be subject to compliance reviews by the Commission, 
including RERs.
    With respect to Nodal's comments regarding the impact of the 
effective date of the DCM and SEF rules on ECMs, the Commission issued 
orders whereby entities operating as exempt commercial markets pursuant 
to section 2(h)(3)-(7) of the CEA, or as exempt boards of trade 
pursuant to section 5d of the CEA, could receive grandfather relief to 
continue to operate in accordance with those provisions notwithstanding 
their deletion from the CEA effective July 15, 2011, by the Dodd-Frank 
Act.\52\ The continued operation and compliance timeframes for exempt 
boards of trade and exempt commercial markets are addressed by those 
orders, and accordingly, are outside the scope of this rulemaking.
---------------------------------------------------------------------------

    \52\ See 75 FR 56513, Sept. 16, 2010; see also 76 FR 42508, Jul. 
14, 2011.
---------------------------------------------------------------------------

4. Sec.  38.4--Procedures for Listing Products and Implementing 
Designated Contract Market Rules
    The proposed amendments to Sec.  38.4 were largely intended to 
conform the rule to Sec. Sec.  40.3 (Voluntary submission of new 
products for Commission review and approval) and 40.5(b) (Voluntary 
submission of rules for Commission review and approval).\53\ Those 
rules were recently revised in the separate release pertaining to 
``Provisions Common to Registered Entities.'' \54\
---------------------------------------------------------------------------

    \53\ Section 40.3 was amended to require additional information 
to be provided by registered entities submitting new products for 
the Commission's review and approval. Section 40.5(b) codified a new 
standard for the review of new rules or rule amendments as 
established under the Dodd-Frank Act. 75 FR 44776, Jul. 27, 2011.
    \54\ Id.
---------------------------------------------------------------------------

Summary of Comments
    In comments submitted both in connection with this rulemaking and 
with the proposed rulemaking for ``Provisions Common to Registered 
Entities,'' \55\ CME stated that the proposed procedures for listing 
products would increase the burdens associated with new product 
submissions and rule changes and would create new and costly 
bureaucratic inefficiencies, competitive disadvantages in the global 
marketplace, and impediments to innovation.\56\ CME stated that there 
has been no showing that the current streamlined process undermines 
market integrity, and that the process in fact has facilitated growth 
and innovation.\57\
---------------------------------------------------------------------------

    \55\ Id.
    \56\ CME Comment Letter at 10, 13 (Feb. 22, 2011).
    \57\ Id.
---------------------------------------------------------------------------

    CFE stated that a number of the regulations proposed in the DCM 
NPRM require DCMs to provide notification and reports to the 
Commission, but that the proposed regulations do not specify the manner 
in which the required notifications and reports should be submitted to 
the Commission.\58\ CFE requested that the Commission designate a 
single email address for the submission of all DCM notifications and 
reports.\59\
---------------------------------------------------------------------------

    \58\ CFE Comment Letter at 7 (Feb. 22, 2011).
    \59\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed. The rule conforms 
to revisions to part 40 that were made in a separate rulemaking for 
``Provisions Common to Registered Entities.'' \60\ In that rulemaking, 
the Commission, among other things, revised and eliminated several 
proposed documentation provisions in order to respond to comments that 
the submission of documentation in connection with new rules and rule 
amendments would be burdensome. The Commission also noted that the 
final rules will conserve both Commission and registered entity 
resources and will be less burdensome than existing practice. CME's 
comments on these provisions were addressed in the part 40 rulemaking, 
and are outside the scope of this rulemaking.'' \61\
---------------------------------------------------------------------------

    \60\ 75 FR 44776, July 27, 2011.
    \61\ Id.
---------------------------------------------------------------------------

    In response to CFE's comment, the Commission notes that all filings 
submitted pursuant to part 38 should be filed electronically with the 
Secretary of the Commission, in a format and manner determined by the 
Secretary, at [email protected] and the Division of Market Oversight 
at [email protected].
5. Sec.  38.5--Information Relating to Contract Market Compliance
Sec. 38.5(a)--Requests for Information; Sec.  38.5(b)--Demonstration of 
Compliance; and, Sec. 38.5(d)--Delegation of Authority
    The provisions in Sec.  38.5 address requirements for DCMs to 
provide information relating to contract market compliance. Proposed 
Sec.  38.5(a) required that a DCM must file with the Commission 
information related to its business as a DCM, including information 
relating to data entry and trade details, upon Commission request. 
Proposed Sec.  38.5(b) required that a DCM must file with the 
Commission a written demonstration that the DCM is in compliance the 
core principles, upon Commission request. Proposed Sec.  38.5(d) 
delegates the Commission's authority to seek information as set forth 
in paragraph Sec.  38.5(b) to the Director of the Division of Market 
Oversight, or such other employees as the Director may designate. As 
noted in the DCM NPRM, except for technical revisions, the 
aforementioned proposed rules were not substantively modified from 
their current versions. The Commission did

[[Page 36619]]

not receive any comments on these rules and adopts them as proposed.
Sec. 38.5(c)--Equity Interest Transfers
    Proposed Sec.  38.5(c) required DCMs to file with the Commission a 
notice of the transfer of ten percent or more of its equity, no later 
than the business day following the date on which the DCM enters into a 
firm obligation to transfer the equity interest.\62\ The proposed rule 
required that the notification include several submissions, including 
any relevant agreements (including preliminary agreements), changes to 
relevant corporate documents, a chart outlining any new ownership or 
corporate or organizational structure, a brief description of the 
purpose and any impact of the equity interest transfer, and a 
representation from the DCM that it meets all of the requirements of 
section 5(d) of the Act and Commission regulations thereunder. The 
proposed rule also required that DCMs notify the Commission of the 
consummation of the transaction on the day in which it occurs. Proposed 
Sec.  38.5(c)(3) \63\ required that when there is a change in 
ownership, the DCM must certify, no later than two business days 
following the date on which the change in ownership occurs, that the 
DCM meets all of the requirements of section 5(d) of the CEA, as 
amended by the Dodd-Frank Act, and the provisions of part 38 of the 
Commission's regulations. The proposed rule also required that the DCM 
include, as part of its certification, an explanation of whether any 
aspects of the DCM's operations will change as a result of the change 
in ownership and, if so, that the DCM must provide a description of the 
changes.
---------------------------------------------------------------------------

    \62\ See generally, DCM NPRM for an explanation of the proposed 
10 percent threshold.
    \63\ The Commission proposed redesignating Sec.  38.5(d) as 
Sec.  38.5(c).
---------------------------------------------------------------------------

Summary of Comments
    Two commenters stated that they do not object to the general 
notification requirement, but contended that the submissions required 
to be simultaneously filed with the initial notification do not lend 
themselves to preparation within the 24-hour time frame proposed in the 
rules.\64\ NYSE Liffe proposed that a period of ten business days to 
provide the additional information would allow more time for the DCM to 
provide accurate and meaningful information.\65\ NYSE Liffe also 
requested clarification that the requirement to provide ``preliminary 
agreements'' only pertains to agreements that have been executed, and 
not to drafts that may have been exchanged for purposes of 
discussion.\66\
---------------------------------------------------------------------------

    \64\ CME Comment Letter at 13 (Feb. 22, 2011) (noting that 
associated changes to relevant corporate documents are unlikely to 
be finalized until closer to the transfer date); NYSE Liffe Comment 
Letter at 13 (Feb. 22, 2011) (noting that the information will have 
to be collected and formatted).
    \65\ NYSE Liffe Comment Letter at 14 (Feb. 22, 2011).
    \66\ Id.
---------------------------------------------------------------------------

    CME stated that a representation from a DCM that it meets all of 
the requirements of section 5(d) of the CEA is more appropriate as a 
requirement upon consummation of the equity interest transfer, rather 
than with the initial notification.\67\
---------------------------------------------------------------------------

    \67\ CME Comment Letter at 13 (Feb. 22, 2011).
---------------------------------------------------------------------------

    MGEX stated that as a mutual association with a membership-based 
ownership structure, it frequently experiences changes in membership 
and ownership.\68\ MGEX stated that notice to the Commission seems 
reasonable for single event situations where a new party obtains a ten 
percent or more interest at one time, but disagreed with the rationale 
for the requirement to recertify again as part of such event.\69\ 
Instead, MGEX suggested that the Commission should inquire only if 
there is a concern over such an event.\70\
---------------------------------------------------------------------------

    \68\ MGEX Comment Letter at 2 (Feb. 22, 2011).
    \69\ Id. at 3.
    \70\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule with certain 
revisions.
    The Commission is revising the rule to provide that the DCM must 
submit to the Commission a notification of each transaction involving 
the transfer of ten percent or more of the equity interest in the 
designated contract market, and that such notification must be provided 
at the earliest possible time but in no event later than ten business 
days following the date upon which the designated contract market 
enters into a legally binding obligation to transfer the equity 
interest.
    The Commission acknowledges NYSE Liffe and CME's concerns regarding 
the timing of the submission filing requirement and therefore has 
extended the time period to up to ten business days for a DCM to file 
notification with the Commission upon entering into an agreement to 
transfer an equity interest of ten percent or more. While DCMs may take 
up to ten business days to submit a notification, the DCM must provide 
Commission staff with sufficient time, prior to consummating the equity 
interest transfer, to review and consider the implications of the 
change in ownership, including whether the change in ownership will 
adversely impact the operations of the DCM or the DCM's ability to 
comply with the core principles and the Commission's regulations 
thereunder. The rule further reminds DCMs that any aspect of an equity 
interest transfer described that necessitates the filing of a rule as 
defined in part 40 of the Commission regulations must comply with the 
rule submission requirements, including timing of filing, of section 
5c(c) of the CEA and part 40, and all other applicable Commission 
regulations.
    In response to CME's comment that the representation from a DCM 
that it meets all of the requirements of section 5(d) of the CEA is 
more appropriate as a requirement upon consummation of the equity 
interest transfer, and NYSE Liffe's comment that the Commission clarify 
that ``preliminary agreements'' do not include draft documents, the 
Commission is revising the rule to eliminate references to the specific 
documents that must be provided with the notification. Rather, the 
Commission may upon receiving a notification of the equity interest 
transfer, where necessary, request appropriate documentation pursuant 
to its authority under Sec.  38.5 of the Commission's regulations. Such 
documentation may include: (i) Relevant agreement(s), including any 
preliminary agreements (not including draft documents); (ii) associated 
changes to relevant corporate documents; (iii) chart outlining any new 
ownership or corporate or organizational structure, if available; (iv) 
a brief description of the purpose and any impact of the equity 
interest transfer; and, (v) a certification, upon consummation of the 
equity interest transfer that the designated contract market continues 
to meet all of the requirements of section 5(d) of the Act and 
Commission regulations adopted thereunder.
    The Commission acknowledges MGEX's comment but believes that the 
rule is necessary. The Commission must oversee and ensure the continued 
compliance of all DCMs with the core principles and the Commission's 
regulations. In order to fulfill its oversight obligations, and to 
ensure that DCMs maintain compliance with their self-regulatory 
obligations, the Commission must undertake an effective due diligence 
review of the impact of ownership transfers. Accordingly, the 
Commission adopts the proposed rule, with the aforementioned 
modifications.

[[Page 36620]]

6. Sec.  38.7--Prohibited Use of Data Collected for Regulatory Purposes
    Proposed Sec.  38.7 \71\ prohibited DCMs from using proprietary 
data or personal information submitted by any person to the DCM for 
regulatory purposes, for business or marketing purposes. In the DCM 
NPRM, the Commission noted that nothing in the proposed provision 
should be viewed as prohibiting a DCM from sharing such information 
with another DCM or SEF for regulatory purposes, where necessary.
---------------------------------------------------------------------------

    \71\ The DCM NPRM did not propose any revisions to current Sec.  
38.6 (Enforceability), and this provision remains unchanged.
---------------------------------------------------------------------------

Summary of Comments
    Several commenters argued that the restriction on the use of 
proprietary or personal information is too broad. CME stated that the 
proposed rules should distinguish between proprietary and personal 
information that is provided to a DCM exclusively for regulatory 
purposes and information that is provided to a DCM for both regulatory 
and non-regulatory purposes.\72\ CME claimed that a DCM should be 
permitted to use the latter type of information for business or 
marketing purposes, provided that the DCM has transparent rules and 
policies which disclose what information collected by the DCM will be 
used exclusively for the furtherance of its self-regulatory obligations 
and how such confidential information will be protected.\73\ CME also 
contended that a DCM should not be precluded from using proprietary or 
personal information that is provided for regulatory purposes for 
business or marketing purposes where the market participant has 
specifically agreed to such use.\74\ MGEX agreed with the underlying 
purpose of the proposed rule but suggested allowing market participants 
to opt-out of having their information used for business or marketing 
purposes.\75\
---------------------------------------------------------------------------

    \72\ CME Comment Letter at 13-14 (Feb. 22, 2011).
    \73\ Id.
    \74\ Id.
    \75\ MGEX Comment Letter at 3 (Feb. 22, 2011).
---------------------------------------------------------------------------

    ELX stated that the standard should rest on whether the use and 
manner of use of the information violates the reasonable expectation of 
confidentiality on the part of the disclosing firm.\76\ For example, 
ELX stated that senior officers of the exchange should have access to 
such data to understand the markets they are responsible for overseeing 
even if they don't have a ``compliance'' moniker in their title.\77\ 
ELX also stated that an exchange should be able to consolidate 
proprietary data in an anonymous fashion to explain its markets without 
running afoul of the proposed rule.\78\ ELX also claimed that a DCM 
should be able to use its discretion to convey proprietary information 
for business or marketing purposes back to employees of the firm that 
supplied the data.\79\ For example, ELX stated that a DCM should be 
permitted to explain to a trading desk how the activities of its firm 
have changed or could be conducted more cost-effectively.\80\
---------------------------------------------------------------------------

    \76\ ELX Comment Letter at 3 (Feb. 22, 2011).
    \77\ Id.
    \78\ Id.
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission has considered the comments and is amending proposed 
Sec.  38.7 to allow DCMs to use proprietary or personal information for 
business or marketing purposes if the person from whom they collect or 
receive such information clearly consents to the use of its information 
in such a manner. In response to CME and ELX's comments, the Commission 
notes that a DCM could use information that it receives for both 
regulatory and non-regulatory purposes for business or marketing 
purposes (or could convey proprietary information back to employees of 
the firm that supplied the data) if the source of the information 
clearly consents to the use in such a manner. The Commission is also 
amending the proposed rule to prohibit a DCM from conditioning access 
to its trading facility based upon such consent.
    Finally, as stated in the preamble to the proposed rule and 
amplified above, the Commission notes that Sec.  38.7 is intended to 
protect regulatory information provided by market participants to DCMs 
from unauthorized commercial use.\81\ The Commission notes consistent 
with the requirements of the final rule, DCMs should have rules to 
safeguard regulatory information from misuse. The Commission would 
expect such rules, among other things, to restrict access to such 
information within the DCM to avoid improper use of such information 
for commercial purposes.
---------------------------------------------------------------------------

    \81\ See 75 FR 80572, 80577, note 37, Dec. 22, 2010.
---------------------------------------------------------------------------

7. Sec.  38.8--Listing of Swaps on a Designated Contract Market
    Proposed Sec.  38.8(a) required a DCM to notify the Commission, 
prior to or upon listing its first swap contract, of the manner in 
which it will fulfill each of the requirements under the amended CEA 
and part 38 with respect to the listing, trading, execution and 
reporting of swap transactions.
    Proposed Sec.  38.8(b) required a DCM, before it lists swaps, to 
request from the Commission a unique, alphanumeric code for the purpose 
of identifying the DCM. The rule required a DCM to do so pursuant to 
the swap recordkeeping and reporting requirements under then-proposed 
part 45 of the Commission's regulations. Proposed Sec.  38.8(b) also 
codified the obligations of DCMs to comply with the provisions of part 
45, which set forth the recordkeeping and reporting requirements for 
DCMs with respect to swaps.\82\
---------------------------------------------------------------------------

    \82\ See ``Swap Data Recordkeeping and Reporting Requirements,'' 
Proposed Rule, 75 FR 76573, Dec. 8, 2010.
---------------------------------------------------------------------------

Summary of Comments
    CFE argued that a DCM should be allowed to offer trading in swaps 
in the same manner that a SEF is permitted to do so, and that it would 
be costly and unnecessary to require a DCM to create a separate SEF in 
order to offer trading in swaps instead of just permitting the DCM to 
adopt separate rules that permit the trading of swaps on the DCM 
consistent with the SEF requirements.\83\ CFE argued that a DCM should 
not have to create a separate entity, board, board committees, 
membership application and approval process, and rule set in order to 
offer trading in swaps in the same manner that a SEF can do when it 
already has all of those components in place and can simply add any 
required components for SEFs.\84\
---------------------------------------------------------------------------

    \83\ CFE Comment Letter at 1 (Feb. 22, 2011).
    \84\ Id. at 2.
---------------------------------------------------------------------------

    ELX stated that the DCM NPRM did not make clear what criteria will 
be used to distinguish between a swap contract and a futures contract, 
and claimed that this ambiguity will cause uncertainty and redundant 
costs for boards of trade that would prefer to follow a DCM model 
without having to adopt a parallel set of rules and procedures.\85\ ELX 
cited compliance with section 727 of the Dodd-Frank Act and Sec.  38.10 
as one area where clarity is needed.\86\
---------------------------------------------------------------------------

    \85\ ELX Comment Letter at 4 (Feb. 22, 2011).
    \86\ Id. at 5.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed, with one 
clarification. CFE's comments take issue with provisions in the Dodd-
Frank Act that are not within the Commission's discretion to revise. 
Swaps are permitted to be traded on a SEF or a DCM, pursuant to rules 
promulgated for each entity.\87\ Accordingly, swaps

[[Page 36621]]

traded on a DCM must be traded pursuant to DCM rules. As noted in the 
Final Exemptive Order issued July 14, 2011,\88\ DCMs may list and trade 
swaps after July 16, 2011 without further exemptive relief. In that 
Order, the Commission noted that if a DCM intends to trade swaps 
pursuant to the rules, processes, and procedures currently regulating 
trading on its DCM, the DCM may need to amend or otherwise update its 
rules, processes, and procedures in order to address the trading of 
swaps.\89\ In response to ELX, the determining factors in 
distinguishing between swaps and futures are outside of the scope of 
this proceeding. The CEA provided a definition for swaps under section 
1a(47), and the Commission published proposed rules and interpretive 
guidance to further define the term on May 23, 2011.\90\
---------------------------------------------------------------------------

    \87\ See CEA section 2(h)(8), 7 U.S.C. 2(h)(8). See also 17 CFR 
38.9 (``A board of trade that operates a designated contract market 
and that intends to also operate a swap execution facility must 
separately register[hellip]and on an ongoing basis, comply with the 
core principles under Section 5h of the Act, and the swap execution 
facility rules under part 37 of this chapter'').
    \88\ 76 FR 42508, Jul. 14, 2011.
    \89\ Id. at 42,518, n. 131. On July 27, 2011, DMO staff sent a 
notification letter to all existing DCMs stating that if the DCM 
intends to list swaps prior to the effective date of the final rules 
implementing part 38, it must include with its initial submission of 
the terms and conditions of a swap contract (pursuant to section 
5c(c) of the CEA, as amended by the Dodd-Frank Act) any amendments 
to its rules that are necessary to provide for the trading of swaps, 
including a concise explanation and analysis of any systems and 
oversight procedures that the DCM proposes to revise in order to 
accommodate the trading of swaps. The information requested in the 
July 27 letter is separate from the request in proposed section 
38.8(a); however, information provided in response to the July 27 
letter may support, in part, the requirement under section 38.8(a) 
to provide a written demonstration detailing how the DCM is 
addressing its self-regulatory obligations with respect to swap 
transactions.
    \90\ 76 FR 29818, May 23, 2011.
---------------------------------------------------------------------------

    The Commission is modifying Sec.  38.8(b), consistent with the 
Commission's final Swap Data Recordkeeping and Reporting Requirements 
Rule,\91\ to require DCMs to generate and assign a unique swap 
identifier at, or as soon as technologically practicable following, the 
time of execution of the swap. The unique swap identifier (``USI'') 
must have two alphanumeric components. The first component is the 
unique alphanumeric code assigned to the DCM by the Commission for the 
purpose of identifying the DCM with respect to USI creation. DCMs must 
obtain this first alphanumeric component from the Commission prior to 
executing any swap on its facility.\92\ The second component is an 
alphanumeric code generated and assigned to that swap by the automated 
systems of the DCM, which shall be unique to that swap and different 
with respect to all such codes generated and assigned by that DCM to 
all other swaps. Each DCM must generate and assign a USI at, or as soon 
as technologically practicable, following the time of execution of the 
swap. The DCM is required to transmit the USI to the SDR, each swap 
counterparty, and the registered derivative clearing organization 
(``DCO'') (if the swap is cleared). The DCM, similar to all registered 
entities and counterparties, is required to use the USI to identify the 
swap in ``all recordkeeping and all swap data reporting pursuant to 
[part 45].'' This clarification is based upon the final rulemaking that 
implements swap data recordkeeping and reporting requirements under 
part 45 of the Commission's regulations.\93\
---------------------------------------------------------------------------

    \91\ 77 FR 2136, Jan. 13, 2012.
    \92\ The Commission will establish a formal process by which 
DCMs can obtain a USI identifier.
    \93\ 77 FR 2136, Jan. 13, 2012.
---------------------------------------------------------------------------

8. Sec.  38.9--Boards of Trade Operating Both a Designated Contract 
Market and a Swap Execution Facility
    Proposed Sec.  38.9(a) codified the requirement that a board of 
trade that operates a DCM and that intends to operate a SEF must 
separately register pursuant to the SEF registration requirements and, 
on an ongoing basis, must separately comply with the SEF core 
principles under section 5h of the CEA, as amended by the Dodd-Frank 
Act, and the applicable Commission regulations to be codified under 
part 37 of the Commission regulations.\94\
---------------------------------------------------------------------------

    \94\ See notice of proposed rulemaking pertaining to ``Core 
Principles and Other Requirements for Swap Execution Facilities.'' 
76 FR 1214, Jan. 7, 2011.
---------------------------------------------------------------------------

    Proposed Sec.  38.9(b) codified the statutory requirement that any 
board of trade that is a DCM and intends to operate as an independent 
SEF may use the same electronic trade execution system for listing and 
executing swaps, provided that the board of trade makes it clear to 
market participants whether the electronic trading of such swaps is 
taking place on or through the DCM or the SEF.\95\
---------------------------------------------------------------------------

    \95\ Section 5h(c) of the CEA, as amended by the Dodd-Frank Act, 
provides:
    IDENTIFICATION OF FACILITY USED TO TRADE SWAPS BY CONTRACT 
MARKETS.--A board of trade that operates a contract market shall, to 
the extent that the board of trade also operates a swap execution 
facility and uses the same electronic trade execution system for 
listing and executing trades of swaps on or through the contract 
market and the swap execution facility, identify whether the 
electronic trading of such swaps is taking place on or through the 
contract market or the swap execution facility.
---------------------------------------------------------------------------

Summary of Comments
    CME requested clarification as to whether the regulation is 
intended to create a more substantive obligation on the part of DCMs 
and SEFs given that market participants typically interface with 
electronic platforms through proprietary or third-party front end 
systems that are not controlled by the DCM.\96\
---------------------------------------------------------------------------

    \96\ CME Comment Letter at 14 (Feb. 22, 2011).
---------------------------------------------------------------------------

    ICE noted that while the proposed rule prescribed how a DCM can 
list swaps, it did not describe how the core principles, written for 
futures contracts, apply to a DCM listing swaps. ICE requested 
clarification that a swap can be executed on a DCM using the same 
execution methods as on a SEF, such as a request for quote (``RFQ'') 
mechanism.\97\ Finally, ICE stated that, like a SEF, a DCM should be 
able to allow the bilateral execution of swaps where there is no 
clearing mandate.\98\ ICE claimed that without these clarifications, 
there will be a bias away from the trading of swaps on DCMs in favor of 
SEFs, and that the rulemaking would frustrate Congress' intention of 
also having swaps trade on DCMs.\99\
---------------------------------------------------------------------------

    \97\ ICE Comment Letter at 10 (Feb. 22, 2011).
    \98\ Id.
    \99\ Id.
---------------------------------------------------------------------------

    Alice Corporation states that organizations that choose to operate 
both a SEF and DCM should be able to meet the requirements of both 
entities with a single organization.\100\ Alice Corporation also stated 
that it offers the ability to fill a large size order with multiple 
contracts on an all-or-nothing basis, as customers with large orders 
sometimes wish to execute with a single contracts.\101\ Alice stated 
that this design would enable automatic execution of block size trades, 
and questioned whether an impartially offered price discount for volume 
would be acceptable to the Commission.\102\
---------------------------------------------------------------------------

    \100\ Alice Corporation Comment Letter at 3 (May 31, 2011).
    \101\ Id.
    \102\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed. In response to 
CME's comment, the Commission notes that it would not be sufficient for 
a board of trade that operates both a DCM and a SEF to simply have DCM 
rules that might identify whether a transaction is being executed on a 
DCM or a SEF. Instead, a consolidated DCM/SEF trading screen must 
identify whether the execution is occurring on the DCM or the SEF, 
irrespective of how proprietary or third-party front end

[[Page 36622]]

systems eventually present that data to market participants. Section 
5h(c) of the CEA, as amended by the Dodd-Frank Act, clearly requires 
that a board of trade that operates both a DCM and SEF identify to 
market participants whether each swap is being executed on the DCM or 
the SEF.
    With respect to comments requesting clarification that a swap can 
be executed on a DCM using execution methods other than a central limit 
order book \103\ the Commission notes that swaps executed on a DCM are 
subject to all rules and requirements applicable to futures and options 
traded on DCMs.\104\ In particular, all swaps traded on a DCM must be 
executed through the DCM's trading facility, except as otherwise 
expressly permitted by Core Principle 9,\105\ and are subject to the 
Commission's rules pertaining to DCMs. Only certain Commission rules, 
for example, those relating to the real-time and regulatory reporting 
of swaps, will be different for swaps in relation to futures. In 
response to ICE's comment that a DCM, like a SEF, should be able to 
allow the bilateral execution of swaps where there is no clearing 
mandate, the Commission notes that ICE's position is based on the 
proposed SEF rules, which are not yet finalized.\106\ Moreover, the 
Commission further notes that under the CEA, a DCM must be a board of 
trade, which is defined under section 1a(2) of the CEA, 7 U.S.C. 1a(2), 
as an organized exchange or other trading facility.\107\ As defined 
under the CEA, both an organized exchange,\108\ and other trading 
facility \109\ require, among other things, multiple participants to 
execute or trade contracts or transactions, by accepting bids or offers 
made by other participants that are open to multiple participants in 
the facility or system, or through the interaction of multiple bids or 
offers within a system with a pre-determined nondiscretionary automated 
trade matching and execution algorithm.
---------------------------------------------------------------------------

    \103\ ICE Comment Letter at 2-3 (Feb. 22, 2011); Alice 
Corporation Comment Letter at 3 (May 31, 2011).
    \104\ Section 723 of the Dodd-Frank Act provides that the 
execution of swaps subject to the clearing requirement of section 
2(h)(1) of the CEA must occur either on a DCM or on a SEF, unless no 
DCM or SEF makes the swap available to trade.
    \105\ Core Principle 9 provides, in relevant part, that ``[t]he 
rules of the board of trade may authorize, for bona fide business 
purposes:
    (i) Transfer trades or office trades;
    (ii) An exchange of--
    (I) Futures in connection with a cash commodity transaction;
    (II) Futures for cash commodities; or
    (III) Futures for swaps; or
    (iii) A futures commission merchant, acting as principal or 
agent, to enter into or confirm the execution of a contract for the 
purchase or sale of a commodity for future delivery if the contract 
is reported, recorded, or cleared in accordance with the rules of 
the contract market or a derivatives clearing organization. 7 U.S.C. 
5(d)(9).
    \106\ The Commission further notes that pursuant to Core 
Principle 21, all contracts traded on a DCM must be cleared through 
a registered DCO, irrespective of the clearing mandate.
    \107\ The CEA requires that DCMs must be boards of trade, as 
defined under the CEA. See, e.g., 7 U.S.C. 7(a) (stating the a board 
of trade may apply for designation as a contract market); see also 7 
U.S.C. 7(d) (core principles apply to board of trade).
    \108\ As defined in section 1a(37) of the CEA, the term 
``organized exchange'' means a trading facility that: (A) Permits 
trading: (i) By or on behalf of a person that is not an eligible 
contract participant; or (ii) by persons other than on a principal-
to-principal basis; or (B) has adopted (directly or through another 
nongovernmental entity) rules that: (i) Govern the conduct of 
participants, other than rules that govern the submission of orders 
or execution of transactions on the trading facility; and (ii) 
include disciplinary sanctions other than the exclusion of 
participants from trading.
    \109\ As defined in section 1a(51) (A) of the CEA, 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 nondiscretionary automated trade matching and 
execution algorithm. See section 1a(51)(B) and (C) for exclusions 
and special rules application to trading facility.
---------------------------------------------------------------------------

    The Commission has considered Alice Corporation's comments, and 
notes that while a board of trade that is a single corporate entity may 
operate both a DCM and a SEF, DCMs and SEFs have separate core 
principles and requirements, and any entity that operates both must 
separately meet the statutory and regulatory requirements of each 
facility. In response to Alice Corporation's further comment that 
counterparties on a DCM should be able to offer volume-based quotes, it 
is unclear whether Alice Corporation's comment is being offered in the 
context of acceptable methods of trading on a DCM's central marketplace 
or in the context of off-exchange transactions. If the former, the 
Commission reiterates that the acceptable methods of trading on a DCM's 
central marketplace are specifically determined under the CEA, which 
requires at a minimum that DCMs must be ``trading facilities,'' though 
even in that context the Commission has accepted trading systems beyond 
pure price-and-time algorithms. If Alice Corporation's reference to 
volume-based quotes is some sort of off-exchange trading methodology, 
the Commission reiterates that its analysis of such a proposal would be 
conducted under Core Principle 9. The comment does not offer sufficient 
information to analyze the suggestion at this time.
9. Sec.  38.10--Reporting of Swaps Traded on a Designated Contract 
Market
    Proposed Sec.  38.10 codified the compliance obligations of DCMs 
with respect to real-time reporting of swap transactions and swap data 
recordkeeping and reporting obligations, as was required under then-
proposed parts 43 \110\ and 45 \111\ of the Commission's regulations, 
respectively.
---------------------------------------------------------------------------

    \110\ See ``Real Time Public Reporting of Swap Transaction 
Data,'' Proposed Rule, 75 FR 76139, Dec. 7, 2010.
    \111\ See ``Swap Data Recordkeeping and Reporting 
Requirements,'' Proposed Rule, 75 FR 76573, Dec. 8, 2010.
---------------------------------------------------------------------------

Summary of Comments and Discussion
    CME referred the Commission to comments it submitted on February 7, 
2011 with respect to proposed rulemakings under part 43 (real-time 
public reporting of swap transaction data) and part 45 (swap data 
recordkeeping and reporting requirements).\112\
---------------------------------------------------------------------------

    \112\ CME Comment Letter at 14 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Rule 38.10 references the reporting requirements contained under 
parts 43 and 45, but does not contain the substantive obligations 
associated with the requirements. Accordingly, CME's comments were 
considered in connection with the final rulemakings under parts 43 and 
45.
    The Commission is adopting this provision as proposed, with certain 
clarifications to conform the rule to the regulations under parts 43 
and 45. Specifically, proposed Sec.  38.10 required that each DCM, with 
respect to swaps traded on or through the DCM, report specified swap 
data to an SDR. The Commission is modifying Sec.  38.10 to clarify that 
DCMs must maintain and report specified swap data for swaps traded ``on 
or pursuant'' to the rules of the DCM. The clarification is consistent 
with the rulemakings that implement real-time reporting of swap 
transaction data and swap data recordkeeping and reporting requirements 
under parts 43 and 45 of the Commission's regulations.\113\
---------------------------------------------------------------------------

    \113\ 75 FR 76140, Dec. 7, 2010; 75 FR 76574, Dec. 8, 2010.
---------------------------------------------------------------------------

D. Core Principles

    As noted above, this release reorganizes part 38 to include 
subparts A through X. Each of subparts B through X includes relevant 
regulations applicable to the 23 core principles. This final rulemaking 
codifies within each subpart the statutory language of the respective 
core principle.\114\
---------------------------------------------------------------------------

    \114\ As noted in the DCM NPRM, in two instances the language of 
the core principle, as codified, was slightly revised to add 
references to the CEA where the statutory language simply cited to 
the CEA section without citing to the statute. These non-substantive 
edits were made to sections 38.100 and 38.1200.

---------------------------------------------------------------------------

[[Page 36623]]

1. Subpart B--Designation as Contract Market
    In the DCM NPRM, the Commission proposed to codify the statutory 
text of Core Principle 1 in Sec.  38.100.\115\ The Commission is 
adopting Sec.  38.100 as proposed.
---------------------------------------------------------------------------

    \115\ Section 735 of the Dodd-Frank Act amended Core Principle 1 
by adding that compliance with the core principles, and any other 
rule or regulation that the Commission may impose under section 
8a(5) of the CEA, is a necessary condition to obtain and maintain 
designation as a contract market, and by adding the condition that 
``unless otherwise determined by the Commission by rule or 
regulation,'' DCMs have reasonable discretion in establishing the 
manner in which they comply with the core principles. 7 U.S.C. 
7(d)(1).
---------------------------------------------------------------------------

2. Subpart C--Compliance With Rules
    Section 5(d)(2) of the CEA, as amended by the Dodd-Frank Act, 
requires that a DCM establish, monitor, and enforce compliance with its 
rules, including rules regarding access requirements and the terms and 
conditions of any contract to be traded on the contract market, and 
rules prohibiting abusive trade practices.\116\ A DCM must also have 
the capacity to detect and investigate potential rule violations and to 
sanction any person that violates its rules. In addition, a DCM's rules 
must provide it with the ability and authority to perform the 
obligations and responsibilities required under Core Principle 2, 
including the capacity to carry out such international information 
sharing agreements that the Commission may require.
---------------------------------------------------------------------------

    \116\ Section 735 of the Dodd-Frank Act amended section 5 of the 
CEA to eliminate DCM designation criteria and amends several core 
principles, including Core Principle 2. Core Principle 2 was amended 
to include language formerly found in Designation Criterion 8--
Ability to Obtain Information, and to specifically require that a 
DCM have the ability to detect, investigate, and sanction rule 
violations.
---------------------------------------------------------------------------

    The Commission proposed several rules implementing amended Core 
Principle 2, as further described below.
i. Sec.  38.150--Core Principle 2
    Proposed Sec.  38.150 codified the text of section 5(d)(2) of the 
CEA.
    CME commented that a DCM cannot be expected to carry out 
international or other informational sharing agreements to which it is 
not a party, and should not be compelled by regulation to enter into 
such agreements.\117\ KCBT opposed the requirement that a DCM establish 
rules and enter into informational-sharing agreements, particularly 
when such agreements contain specific requirements that are unsuitable 
to a DCM or conditions with which the DCM is unable to comply.\118\
---------------------------------------------------------------------------

    \117\ CME Comment Letter at 15 (Feb. 22, 2011).
    \118\ KCBT Comment Letter at 3 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.150 as proposed. Section 38.150 
simply codifies the statutory language of the core principle. The 
Commission, therefore, does not have discretion to amend the 
requirements or obligations imposed by the statute.\119\
---------------------------------------------------------------------------

    \119\ Section 5(d)(2)(C) of the CEA, as amended by the Dodd-
Frank Act, states that ``[t]he rules of the contract market shall 
provide the board of trade with the ability and authority to obtain 
any necessary information to perform any function described in this 
subsection, including the capacity to carry out such international 
information sharing agreements as the Commission may require.'' 7 
U.S.C. 7(d)(2).
---------------------------------------------------------------------------

ii. Sec.  38.151--Access Requirements
Sec. 38.151(a)--Jurisdiction
    Proposed Sec.  38.151(a) required that prior to granting a member 
or market participant access to its markets, the DCM must require the 
member or market participant to consent to its jurisdiction.
Summary of Comments
    CFE stated that the term ``market participant'' used in the 
proposed rule should be limited to non-members of a DCM that have the 
ability to enter orders directly into a DCM's trade matching system for 
execution, and that the term should not include non-members that do not 
have this ability.\120\ CFE further commented that the proposed rule 
should not apply to customers whose orders pass through a member's 
system before receipt by a DCM because, according to CFE, in that 
instance the customer order is being received by the DCM from the 
member.\121\ CFE also asserted that customers that submit orders 
through a member do not have the privilege of trading on a DCM and thus 
the proposed rule should not apply to them.\122\
---------------------------------------------------------------------------

    \120\ CFE Comment Letter at 2 (Feb. 22, 2011).
    \121\ Id.
    \122\ Id.
---------------------------------------------------------------------------

    CME recommended that the Commission withdraw the proposed 
rule.\123\ It contended that requiring clearing firms to obtain every 
customer's consent to the regulatory jurisdiction of each DCM would be 
costly.\124\ Moreover, CME commented that even if such consent were 
obtained, the proposed rule would be entirely ineffective in achieving 
the Commission's desired outcome.\125\ CME explained that if a non-
member who had consented to the exchange's jurisdiction under the 
proposed rule committed a rule violation and subsequently elected not 
to cooperate in the investigation or disciplinary process, the 
exchange's only recourse would be to deny the non-member access and, if 
appropriate, refer the matter to the Commission.\126\ CME further 
explained that a DCM's enforcement options, and the regulatory 
outcomes, do not change based on whether or not there is a record of 
the non-member consenting to jurisdiction, but rather depend on whether 
the non-member chooses to participate in the DCM's investigative and 
disciplinary processes.\127\
---------------------------------------------------------------------------

    \123\ CME Comment Letter at 17 (Feb. 22, 2011).
    \124\ Id. at 16.
    \125\ Id.
    \126\ Id.
    \127\ Id.
---------------------------------------------------------------------------

    ICE contended that the proposed rule should distinguish between 
direct-access and intermediated market participants.\128\ Furthermore, 
ICE stated that a trader should be specifically subject to the 
jurisdiction and the disciplinary process of the DCM only when the 
privilege of trading on a DCM is specifically granted by the DCM.\129\ 
Likewise, KCBT explained that even if a non-member consents to KCBT 
jurisdiction, but later fails to abide by such consent, KCBT's only 
recourse would be to revoke such participant's market access.\130\ 
Therefore, KCBT questioned the benefit of implementing the proposed 
rule.\131\
---------------------------------------------------------------------------

    \128\ ICE Comment Letter at 12-13 (Feb. 22, 2011).
    \129\ Id. at 15.
    \130\ KCBT Comment Letter at 2 (Feb. 22, 2011).
    \131\ Id.
---------------------------------------------------------------------------

    NYSE Liffe sought clarification regarding the type of market 
participant covered by the proposed rule.\132\ NYSE Liffe requested 
that the Commission confirm that, unless NYSE Liffe permits market 
participants direct access to its trading platform, it would not 
consider a DCM to be ``granting'' market participants access to its 
markets, thus necessitating that it require market participants to 
consent to the DCM's jurisdiction.\133\
---------------------------------------------------------------------------

    \132\ NYSE Liffe Comment Letter at 11 (Feb. 22, 2011).
    \133\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.151(a) as proposed. While 
acknowledging the comments described above, the Commission believes 
that Sec.  38.151(a) codifies jurisdictional requirements necessary to 
effectuate the statutory mandate of Core Principle 2 that a board of 
trade ``shall have the capacity to detect, investigate, and apply 
appropriate sanctions to any person that violates any rule of the

[[Page 36624]]

contract market.'' In the Commission's view, settled jurisdiction--
established by a DCM prior to granting members and market participants 
access to its markets--is necessary to effectively investigate and 
sanction persons that violate DCM rules. In particular, a DCM should 
not be in the position of asking market participants to voluntarily 
submit to jurisdiction and cooperate in investigatory proceedings after 
a potential rule violation has been found. Similarly, market 
participants should be clear that their trading practices are subject 
to the rules of a DCM, including rules that require cooperation in 
investigatory and disciplinary processes. For the avoidance of doubt, 
the Commission notes that the scope of Sec.  38.151(a) is not limited 
to market participants with direct market access, or limited as 
otherwise suggested by CFE, ICE and NYSE Liffe. To the contrary, 
persons whose trades are intermediated, persons who are customers of 
member firms, and persons whose access to the exchange is granted by or 
through member firms are within the scope of Sec.  38.151(a).
    The Commission notes commenters' suggestion that a DCM's ultimate 
recourse against non-members who fail to cooperate in investigations or 
disciplinary proceedings is to deny such non-members access to the 
exchange and, if appropriate, refer them to the Commission. The 
Commission confirms that denial of access and referral to the 
Commission are the appropriate steps for a DCM to take when a market 
participant fails to cooperate in an investigation or disciplinary 
proceedings. The Commission expects that DCMs will in fact follow these 
steps. However, the Commission does not agree that this absolves DCMs 
from their responsibility to establish jurisdiction over members and 
market participants as an initial condition of trading. Finally, the 
Commission recognizes that DCMs may need additional time to secure 
existing market participants' agreements to jurisdiction. Accordingly, 
the Commission is granting DCMs up to 180 days following the applicable 
effective date of the rules being adopted in this release to comply 
with the requirements of Sec.  38.151(a) with respect to existing 
members and market participants. Each DCM may determine for itself how 
it will secure such agreements. For example, a DCM could utilize its 
clearing firms to secure the agreement. With respect to new members and 
market participants, DCMs will be subject to Sec.  38.151(a) on the 
effective date of the rules being adopted in this release.
Sec. 38.151(b)--Impartial Access by Members, Market Participants and 
Independent Software Vendors
    Proposed Sec.  38.151(b) required that a DCM provide its members, 
market participants and independent software vendors (``ISVs'') with 
impartial access to its markets and services, including: (1) access 
criteria that are impartial, transparent, and applied in a non-
discriminatory manner, and (2) comparable fee structures for members, 
market participants and ISVs, receiving equal access to, or services 
from, the DCM. In regards to the proposed rule's comparable fee 
structure requirement, the DCM NPRM preamble discussion of proposed 
Sec.  38.151(b) stated that ``[f]ee structures may differ among 
categories if such fee structures are reasonably related to the cost of 
providing access or services to a particular category.''\134\
---------------------------------------------------------------------------

    \134\ See DCM NPRM at 80579. As an example, the preamble further 
stated that ``if a certain category required greater information 
technology or administrative expenses on the part of the DCM, then a 
DCM may recoup those costs in establishing fees for that category or 
member or market participant.'' Id.
---------------------------------------------------------------------------

Summary of Comments
    Chris Barnard supported this requirement, stating that the only 
reason for charging different fee structure would relate to differing 
costs of providing access or service to a particular category.\135\ CFE 
commented that the Commission's application of the requirement to have 
comparable fee structures is too narrow.\136\ CFE stated that it is in 
a DCM's best interest to set fees at levels that encourage 
participation on the DCM (rather than to exclude participants) because 
having greater participation leads to greater contract volume and thus 
more transaction revenue for the DCM.\137\ CFE agreed that a DCM should 
be able to have fee structures that differ among categories and did not 
believe that the only permitted differentiation should be based on 
cost.\138\
---------------------------------------------------------------------------

    \135\ Barnard Comment Letter at 2 (Feb. 22, 2011).
    \136\ CFE Comment Letter at 3 (Feb. 22, 2011).
    \137\ Id.
    \138\ Id.
---------------------------------------------------------------------------

    CME stated that the fee restrictions imposed by the proposed rule 
exceed the Commission's authority under the Dodd-Frank Act, and 
questioned the basis for the proposed rule.\139\ In particular, CME 
argued that the agency lacks authority to set or limit fees charged by 
DCMs.\140\
---------------------------------------------------------------------------

    \139\ CME Comment Letter at 8-9 (Feb. 22, 2011).
    \140\ Id.
---------------------------------------------------------------------------

    ELX stated that exchanges must have some flexibility in 
implementing fees in order to allow new markets to effectively build a 
customer base.\141\ According to ELX, not all customers ``receive the 
same commission'' from their FCM, IB or executing broker, and it is 
artificial to require exchanges to forego their flexibility in pricing 
to build a marketplace.\142\ ELX further stated that competition should 
not be rigidly regulated at the exchange level while other regulated 
entities doing business with customers are permitted to use competitive 
pricing.\143\
---------------------------------------------------------------------------

    \141\ ELX Comment Letter at 3 (Feb. 22, 2011).
    \142\ Id. at 4.
    \143\ Id.
---------------------------------------------------------------------------

    ICE noted that the discriminatory conduct prohibited by the 
proposed rule would be subject to review by the Commission as an 
``access denial'' issue under part 9 of the Commission's 
regulations.\144\ Moreover, ICE asserted that in its view, there has 
been no pattern of DCMs denying access to their markets that warrants 
the proposed rule.\145\ ICE added that the proposed rule should not 
require access requirements for traders who do not apply for, and are 
not granted access to, the trading platform by the DCM.\146\
---------------------------------------------------------------------------

    \144\ ICE Comment Letter at 15 (Feb. 22, 2011).
    \145\ Id. at 15.
    \146\ Id.
---------------------------------------------------------------------------

    KCBT objected to the Commission's mandate of access and fee 
equality, stating that the mandate may not take into consideration all 
aspects of an exchange's varying fee or access structures, including 
beneficial rate structures for high-volume traders or market maker 
programs.\147\ Consequently, KCBT urged the Commission to withdraw from 
its attempt to impose fee restrictions on DCMs.\148\
---------------------------------------------------------------------------

    \147\ KCBT Comment Letter at 3 (Feb. 22, 2011).
    \148\ Id.
---------------------------------------------------------------------------

    MGEX stated that in general, it is in the best interest of the DCM 
to have open and available markets and services.\149\ Therefore, MGEX 
argued that the proposed rule is unnecessary and infringes on the 
business judgment of the DCM.\150\
---------------------------------------------------------------------------

    \149\ MGEX Comment Letter at 3 (Feb. 22, 2011).
    \150\ Id.
---------------------------------------------------------------------------

    Trading Technologies stated that the Commission should modify its 
proposed impartial access rules to require that DCM co-location service 
fees be reasonably related to the cost of providing such services.\151\
---------------------------------------------------------------------------

    \151\ Trading Technologies Comment Letter at 4 (Jun. 3, 2011). 
The Commission recently addressed co-location fees in a separate 
proposed rulemaking for ``Co-location/Proximity Hosting Services.'' 
See notice of proposed rulemaking, 75 FR 33198, Jun. 11, 2010.

---------------------------------------------------------------------------

[[Page 36625]]

Discussion
    The Commission is adopting the rule as proposed, with the 
modifications and clarifications described below.
    The Commission believes that the proposed rule falls within the 
Commission's authority under the Dodd-Frank Act. As an initial matter, 
Congress, under the Dodd-Frank Act, expressly authorized the Commission 
to promulgate rules implementing requirements for DCMs, including 
access requirements.\152\ Moreover, the statutory language of Core 
Principle 2 expressly requires that DCMs ``establish, monitor and 
enforce compliance with the rules of the contract market, including: 
(1) Access requirements[.]'' \153\ Though the CEA does not specify that 
DCMs provide ``impartial'' access, the Commission believes that a 
reasonable reading of the CEA is that it permits rules that would 
promote impartial access.
---------------------------------------------------------------------------

    \152\ See CEA section 5(d)(1)(A)(ii) (Core Principle 1), 7 
U.S.C. 7(d)(1).
    \153\ CEA section 5(d)(2)(A)(i) (Core Principle 2), 7 U.S.C. 
7(d)(2).
---------------------------------------------------------------------------

    The Commission has considered comments that claimed that the rule 
is unnecessary, and believes that impartial access rules are necessary 
in order to prevent the use of discriminatory access requirements as a 
competitive tool against certain participants. In particular, access to 
a DCM should be based on the financial and operational soundness of a 
participant, not on factors that could bar access and result in 
discriminatory access or act as a barrier to entry. Any participant 
should be able to demonstrate financial soundness by showing either 
that it is a clearing member of a DCO that clears products traded on 
that DCM, or that it has clearing arrangements in place with such a 
clearing member. Furthermore, granting impartial access to participants 
that satisfy a DCM's access requirements will likely enhance the DCM's 
liquidity and the overall transparency of the swaps and futures 
markets.
    In regards to comments pertaining to the proposed rule's treatment 
of fees, the Commission believes that commenters have misinterpreted 
the proposed requirement for comparable fee structures for categories 
of market participants receiving equal access to the DCM. The 
requirement in proposed Sec.  38.151(b) neither sets nor limits fees 
charged by DCMs. Rather, it states only that the DCM set non-
discriminatory fee classes for those receiving access to the DCM as a 
way to implement the requirement of impartial access to DCMs. DCMs may 
establish different categories of market participants, but may not 
discriminate within a particular category. Accordingly, contrary to 
CME's comment claiming that the fee restrictions imposed by the 
proposed rule exceed the Commission's authority under the Dodd-Frank 
Act, the rule does not set or impose fees on DCMs.
    To clarify the DCM NPRM preamble discussion of the proposed rule's 
fee requirement, and in response to CFE and KCBT's comment that a DCM 
should be able to differentiate among categories by using factors other 
than cost, the Commission notes that when a DCM determines its fee 
structure, it may consider other factors in addition to the cost of 
providing a member, market participant or ISV with access. The proposed 
requirement that DCMs have a comparable fee structure for categories of 
market participants was not designed to be a rigid requirement that 
fails to take into account legitimate business justifications for 
offering different fees to different categories of entities seeking 
access. The Commission recognizes that DCMs may also consider services 
they receive from members, market participants or ISVs (in addition to 
costs) when determining their fee structure. Market making is an 
example of one type of service that could merit a fee discount.
    To address comments submitted in connection with proposed Sec.  
38.151(a) pertaining to the uncertainty of the term ``market 
participant,'' the Commission is replacing the term ``market 
participant'' in proposed Sec.  38.151(b) with the phrase ``persons 
with trading privileges.''
    The Commission is adopting the remainder of the rule as proposed.
Sec. 38.151(c)--Limitations on Access
    Proposed Sec.  38.151(c) required a DCM to establish and 
impartially enforce rules governing any decision by the DCM to deny, 
suspend, or permanently bar a member's or market participant's access 
to the contract market. Any decision by a DCM to deny, suspend, or 
permanently bar a member's or market participant's access to the DCM 
must be impartial and applied in a non-discriminatory manner.
Summary of Comments
    CFE, ICE, and NYSE Liffe commented on the uncertainty of the term 
``market participant'' as used in paragraphs (a), (b), and (c) of 
proposed Sec.  38.151.\154\
---------------------------------------------------------------------------

    \154\ CFE Comment Letter at 2 (Feb. 22, 2011); ICE Comment 
Letter at 14 (Feb. 22, 2011); NYSE Liffe Comment Letter at 11 (Feb. 
22, 2011).
---------------------------------------------------------------------------

Discussion
    To address comments pertaining to the uncertainty of the term 
``market participant,'' the Commission is replacing the term ``market 
participant'' in proposed Sec.  38.151(c) with the phrase ``persons 
with trading privileges.''
iii. Sec.  38.152--Abusive Trading Practices Prohibited
    As proposed, Sec.  38.152 required a DCM to prohibit the following 
abusive trading practices: front-running, wash trading, pre-arranged 
trading, fraudulent trading, money passes, and any other trading 
practices that the DCM deems to be abusive. Additionally, a DCM 
permitting intermediation would be required to prohibit additional 
trading practices, including trading ahead of customer orders, trading 
against customer orders, accommodation trading, and improper cross-
trading. The proposal also required a DCM to prohibit any other 
manipulative or disruptive trading practices prohibited by the Act or 
by the Commission pursuant to regulation.\155\
---------------------------------------------------------------------------

    \155\ Section 747 of the Dodd-Frank Act amended section 4c(a) of 
the CEA, 7 U.S.C. 6c(a), by adding three disruptive practices which 
make it: unlawful for any person to engage in any trading, practice, 
or conduct on or subject to the rules of a registered entity that--
    (A) Violate bids or offers;
    (B) Demonstrates intentional or reckless disregard for the 
orderly execution of transactions during the closing period; or
    (C) Is, is of the character of, or is commonly known as the 
trade as `spoofing' (bidding or offering with the intent to cancel 
the bid or offer before execution).
---------------------------------------------------------------------------

Summary of Comments
    CME and MGEX stated that the proposed rule is too vague because it 
does not specifically define the enumerated prohibited trade 
practices.\156\ CME also stated that DCMs should have reasonable 
discretion to establish rules appropriate to their markets that are 
consistent with the CEA and that satisfy the core principles.\157\ CME 
additionally commented that prearranged trading, which is identified in 
the proposed rule as a prohibited trade practice, may be permissible at 
DCMs that allow for block trading, exchange for related position 
transactions, and pre-execution communications, subject to specified 
conditions.\158\
---------------------------------------------------------------------------

    \156\ CME Comment Letter at 17 (Feb. 22, 2011) (CME also argued 
that the proposed regulation was superfluous given that Core 
Principle 12 already requires a DCM to establish and enforce rules 
to protect markets and market participants from abusive practices); 
MGEX Comment Letter at 3 (Feb. 22, 2011).
    \157\ CME Comment Letter at 17 (Feb. 22, 2011).
    \158\ Id. at 17-18.
---------------------------------------------------------------------------

    Chris Barnard commented that the proposed rule refers to the 
prohibition of ``any other manipulative or disruptive trading practices 
prohibited by the Act

[[Page 36626]]

or by the Commission,'' which is important in order to cover new 
disruptive practices as they emerge, including spoofing.\159\ Better 
Markets commented that it is unclear whether any of the practices 
associated with high frequency trading will be prohibited by the 
Commission.\160\ Better Markets recommended that the Commission expand 
its list of prohibited trade practices to include exploiting a large 
quantity or block trade, price spraying, rebate harvesting, and 
layering the market, as all four of those practices involve fraudulent 
trading.\161\
---------------------------------------------------------------------------

    \159\ Barnard Comment Letter at 3 (May 20, 2011).
    \160\ Better Markets Comment Letter at 5 (Feb. 22, 2011).
    \161\ Id. at 5-8.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.152 as proposed, subject to the 
modification described below.
    In response to CME and MGEX's concerns regarding the perceived 
vagueness of the enumerated trading practices, the Commission notes 
that the definitions of the respective abusive trading practices are 
commonly known within the industry. Moreover, the enumerated practices 
in the proposed rule are commonly prohibited within the industry and 
are typically already prohibited in DCM rulebooks.\162\ Although the 
Commission believes, as noted by CME, that a DCM should have reasonable 
discretion to establish rules for their markets, the Commission 
believes that, at a minimum, a DCM must prohibit the abusive trading 
practices identified in the rule. Indeed, in the RERs conducted by 
Commission staff to examine DCMs' core principle compliance, Commission 
staff has found that it is essential for a DCM to be able to 
demonstrate the capacity to detect, investigate, and enforce the 
trading violations prohibited under the rule. Consistent with CME's 
comments on this issue, the Commission clarifies that in certain 
limited circumstances, as provided under the CEA and the Commission 
regulations, pre-arranged trading, including block trading and exchange 
for related position transactions, are permissible at DCMs. 
Accordingly, the Commission is amending proposed Sec.  38.152 to 
clarify that a DCM must prohibit pre-arranged trading except as 
otherwise permitted in part 38 of this chapter. The Commission confirms 
that pre-execution communications are permissible if allowed by a DCM's 
rules that have been certified to or approved by the Commission.
---------------------------------------------------------------------------

    \162\ See e.g., CME Rule 534 (Wash Trades Prohibited), and MGEX 
Rule 743.00 (Accommodation or Wash Trades Forbidden).
---------------------------------------------------------------------------

    In response to Chris Barnard's comment about the inclusion of 
``spoofing'' as a prohibited trade practice, the Commission notes that 
section 747 of the Dodd-Frank Act amended section 4c(a) of the CEA and 
includes spoofing as a disruptive trading practice. In the final rule, 
DCMs are required to prohibit any other manipulative or disruptive 
trading practices prohibited by the Act. Additionally, the Commission 
notes that Better Markets' comments regarding Core Principle 2 and high 
frequency trading are addressed in the context of Core Principle 4.
iv. Sec.  38.153--Capacity To Detect and Investigate Rule Violations
    Proposed Sec.  38.153 required that a DCM have arrangements and 
resources for effective rule enforcement.\163\ This included the 
authority to collect information and examine books and records of 
members and market participants. Additionally, the proposed rule 
required a DCM to have, in addition to appropriate resources for trade 
practice surveillance programs, appropriate resources to enforce all of 
its rules.
---------------------------------------------------------------------------

    \163\ As noted in the DCM NPRM, proposed regulation 38.153 was 
based on the former application guidance for Core Principle 2.
---------------------------------------------------------------------------

Summary of Comments
    CFE requested that the Commission clarify the term ``market 
participant.'' \164\ CFE claimed that if the term ``market 
participant'' were to be interpreted to apply to all customers and not 
just those customers with direct electronic access to the DCM, then the 
rule would greatly expand a DCM's regulatory responsibilities over 
participants with whom it has no direct relationship or 
connection.\165\ CFE further asserted that the rule would greatly 
increase costs for the DCM and that it would be very difficult for a 
DCM to undertake the same examination responsibilities for customers 
that do not have a direct relationship with the DCM that are applicable 
to a DCM member.
---------------------------------------------------------------------------

    \164\ CFE Comment Letter at 2 (Feb. 2, 2011).
    \165\ Id.
---------------------------------------------------------------------------

    CME stated that the proposed rule appears to imply that the entire 
class of non-member, non-registered market participants will be subject 
to the panoply of recordkeeping requirements currently applicable only 
to members, registrants, and direct access clients of CME.\166\ 
Additionally, CME commented that the proposed rule does not detail 
which books, records and information the DCM must be able to obtain 
from non-member market participants.\167\
---------------------------------------------------------------------------

    \166\ CME Comment Letter at 18 (Feb. 22, 2011).
    \167\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting this provision as proposed, subject to 
the modification described below.
    The Commission is cognizant that a broad interpretation of the term 
``market participant'' could significantly increase the regulatory 
responsibilities for DCMs. As noted above, the use of ``market 
participant'' may be interpreted to capture a wider range of persons 
than the Commission intended. Therefore, in response to the commenters' 
concerns, the Commission is replacing the term ``market participant'' 
with ``persons under investigation'' in the final rule. Thus, a DCM 
must have the authority to collect books and records from its members, 
and from any persons under investigation, for effective enforcement of 
its rules. The books and records collected by the DCM should encompass 
all information and documents that are necessary to detect and 
prosecute rule violations.
v. Sec.  38.154--Regulatory Services Provided by a Third Party
    As the Commission stated in the DCM NPRM, the CEA ``provides that a 
DCM may comply with applicable core principles by delegating relevant 
functions to a registered futures association or another registered 
entity'' (collectively, a ``regulatory service provider'').\168\ 
Proposed Sec.  38.154(a) required that a DCM that contracts with a 
regulatory service provider ensure that its regulatory service provider 
has sufficient capacity and resources to provide timely and effective 
regulatory services. The proposed rule also made clear that a DCM 
``will at all times remain responsible for the performance of any 
regulatory services received, for compliance with the [DCM's] 
obligations under the CEA and Commission regulations, and for the 
regulatory service provider's performance on its behalf.'' \169\
---------------------------------------------------------------------------

    \168\ Id. at 80580.
    \169\ 75 FR 80572, 80612, Dec. 22, 2010.
---------------------------------------------------------------------------

    Proposed Sec.  38.154(b) required that a DCM maintain adequate 
compliance staff to supervise any services performed by a regulatory 
service provider. The proposed rule also required that the DCM hold 
regular meetings with its regulatory service provider to discuss 
current work and other matters of regulatory concern. The DCM must also 
conduct periodic reviews of the adequacy and

[[Page 36627]]

effectiveness of services provided on its behalf.
    Proposed Sec.  38.154(c) required a DCM that utilizes a regulatory 
service provider to retain exclusive authority over certain areas, 
including the cancellation of trades, issuance of disciplinary charges 
against members or market participants, and denials of access to the 
trading platform for disciplinary reasons. While the proposed rule 
permitted a DCM to retain exclusive authority in other areas of its 
choosing, it required that the decision to open an investigation into a 
possible rule violation reside with the regulatory service provider.
Summary of Comments
    MGEX, KCBT and CME asserted that the proposed rule was overly 
burdensome or unnecessary.\170\ MGEX expressed general opposition to 
proposed Sec.  38.154, stating that if a service has been delegated to 
another registered entity pursuant to a Commission-approved agreement, 
then this ``should be sufficient and no other formal agreement is 
necessary.'' \171\ KCBT contended that proposed Sec.  38.154 is overly 
burdensome and duplicative, particularly when a DCM contracts with a 
regulatory service provider that is also a DCM required to comply with 
the same core principles.\172\ KCBT noted that it currently is a party 
to a services agreement with another DCM and that it will be costly and 
unnecessary to perform periodic reviews and hold regular meetings with 
this regulatory service provider.\173\
---------------------------------------------------------------------------

    \170\ MGEX Comment Letter at 3 (Feb. 22, 2011); KCBT Comment 
Letter at 3 (Feb. 22, 2011); CME Comment Letter at 19 (Feb. 22, 
2011).
    \171\ MGEX Comment Letter at 3 (Feb. 22, 2011).
    \172\ KCBT Comment Letter at 3 (Feb. 22, 2011).
    \173\ Id.
---------------------------------------------------------------------------

    Similarly, CME contended that the proposed rule was overly 
prescriptive and suggested that the rules would better serve as 
guidance and acceptable practices.\174\ In particular, CME pointed to 
the requirements that a DCM conduct periodic reviews of the services 
provided and hold regular meetings with the regulatory service provider 
to discuss ongoing investigations, trading patterns, market 
participants, and any other matters of regulatory concern.\175\ CME 
stated that ``[w]hile it may well be that it is constructive for the 
DCM to hold regular meetings with its service provider and `discuss 
market participants,' the core principle should stand on its own and 
the DCM should have the flexibility to determine how best to 
demonstrate compliance with the core principle.'' \176\
---------------------------------------------------------------------------

    \174\ CME Comment Letter at 18-19 (Feb. 22, 2011).
    \175\ Id.
    \176\ CME Comment Letter at 19 (Feb. 22, 2011).
---------------------------------------------------------------------------

    CME further objected to the requirement that exclusive authority to 
open investigations remain with the regulatory service provider.\177\ 
While it argued that the regulatory service provider ``should have the 
independence to open an investigation at its discretion, [CME] sees no 
reason why the DCM cannot also direct the regulatory service provider 
to open an investigation.'' \178\ Additionally, CME and KCBT both 
objected to the requirement in proposed Sec.  38.154(c) that all 
decisions concerning the cancellation of trades remain within the 
exclusive authority of the DCM.\179\ CME and KCBT argued that a DCM may 
be better served by granting such authority to a regulatory service 
provider.\180\
---------------------------------------------------------------------------

    \177\ Id.
    \178\ Id.
    \179\ CME Comment Letter at 19 (Feb. 22, 2011); KCBT Comment 
Letter at 3 (Feb. 22, 2011).
    \180\ Id.
---------------------------------------------------------------------------

    NYSE Liffe expressed support for the idea that a DCM will remain 
ultimately responsible for meeting its regulatory obligations even when 
it contracts with a regulatory service provider.\181\ However, NYSE 
Liffe requested clarification regarding what authority must be 
maintained by a DCM when it uses a third-party regulatory service 
provider.\182\ NYSE Liffe pointed to the requirement in proposed Sec.  
38.154(c) that a DCM must retain ``exclusive authority'' in certain 
areas and requested further clarification as to the definition of 
``exclusive authority.'' \183\ In particular, NYSE Liffe requested 
guidance as to whether a DCM retains ``exclusive authority'' if its 
regulatory service provider prepares and presents an investigation 
report to a DCM's review panel, or assists DCM staff in presenting the 
matter, as long as the ultimate decision to bring a disciplinary action 
remains with the DCM's review panel.\184\ Additionally, NYSE Liffe 
sought guidance as to whether a regulatory service provider would be 
permitted to ``prosecute a disciplinary proceeding * * * so long as the 
ultimate decision to impose a penalty on a respondent, including a 
possible denial of access to the trading platform, resides with a 
hearing panel formed pursuant to the DCM's rules?'' \185\
---------------------------------------------------------------------------

    \181\ NYSE Liffe Comment Letter at 9 (Feb. 22, 2011).
    \182\ Id.
    \183\ Id.
    \184\ Id.
    \185\ Id. at 10.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.154(a) and (b), as proposed, 
and is adopting Sec.  38.154(c) with certain modifications.
    In the past, the Commission has described acceptable 
``contracting'' and ``delegating'' arrangements for the performance of 
core principle functions by third-parties.\186\ The Commission proposed 
Sec.  38.154 to clarify its previous guidance on such arrangements. In 
particular, the Commission does not draw substantive distinctions 
between ``contracting'' and ``delegating'' arrangements as they pertain 
to core principle compliance functions. Regardless of the term by which 
a DCM may refer to its utilization of a third-party, the Commission 
believes that the same regulatory requirements are applicable for 
purposes of part 38. For purposes of part 38, the Commission refers to 
such arrangements as ``delegation.'' The Commission also notes that 
DCMs must remain responsible for carrying out any function delegated to 
a third party, and that DCMs must ensure that the services received 
will enable the DCM to remain in compliance with the CEA's 
requirements. The Commission believes that proposed Sec.  38.154 
effectively establishes a system for administering regulatory services 
provided to DCMs by third party regulatory service providers. The 
Commission is of the view that the rule generally provides an 
appropriate balance between flexibility and ensuring that a DCM 
properly oversees the actions of its regulatory service provider to 
ensure accountability and effective performance.
---------------------------------------------------------------------------

    \186\ See 66 FR 42256, 42266, Aug. 10, 2001.
---------------------------------------------------------------------------

    The Commission acknowledges comments asserting that the rule is 
overly burdensome or unnecessary but believes that a DCM that elects to 
use a regulatory service provider must properly supervise the quality 
and effectiveness of the regulatory services provided on its behalf. 
The Commission believes that proper supervision will require that a DCM 
have complete and timely knowledge of relevant work performed by the 
DCM's regulatory service provider on its behalf. The Commission also 
believes that such knowledge can only be acquired through the periodic 
reviews and regular meetings required under proposed Sec.  38.154.
    Additionally, the Commission acknowledges CME and KCBT's comments 
regarding the cancellation of trades but believes that the potential 
economic consequences of trade

[[Page 36628]]

cancellations on a DCM's members and market participants are such that 
a DCM should retain exclusive authority over the cancellation of 
trades.
    The Commission has considered CME's comment regarding the 
importance of allowing a DCM to open investigations into possible rule 
violations. The Commission believes that a DCM should have the ability 
to request that its regulatory service provider conduct an 
investigation on a market participant or to conduct such an 
investigation on its own. Consequently, the Commission is modifying 
Sec.  38.154(c) by removing the requirement that the decision to open 
an investigation into possible rule violations reside exclusively with 
the regulatory service provider.
    Lastly, in response to the request by NYSE Liffe for additional 
guidance regarding whether certain regulatory decisions must be 
retained by a DCM, the Commission believes that a DCM would retain 
``exclusive authority'' under Sec.  38.154(c) if it permits a 
regulatory service provider to present, or assist DCM staff to present, 
an investigation report or evidence to a disciplinary panel as long as 
the decisions to bring a disciplinary action and impose a disciplinary 
penalty on a respondent, including the decision to deny access, remains 
with the DCM or the DCM's disciplinary bodies.
vi. Sec.  38.155--Compliance Staff and Resources
    In proposed Sec.  38.155(a), the Commission required that a DCM 
establish and maintain sufficient compliance staff and resources to 
conduct a number of enumerated tasks, such as audit trail reviews, 
trade practice surveillance, market surveillance, and real time market 
monitoring. The proposed rule also required that the DCM have 
sufficient compliance staff to address unusual market or trading events 
and to conduct and complete any investigations in a timely manner.
    In proposed Sec.  38.155(b), the Commission required a DCM to 
monitor the size and workload of its compliance staff annually to 
ensure that staff and resources are adequate. In the preamble to the 
proposed rule, the Commission clarified that it was not proposing that 
compliance staff size be determined based on a specific formula. 
Rather, the Commission intended ``to leave to the discretion of each 
individual DCM to determine the size of the staff it needs to 
effectively perform its self-regulatory responsibilities.'' \187\ In 
making this determination, the proposed rule also set forth certain 
factors that should be considered in determining the appropriate level 
of compliance resources and staff.
---------------------------------------------------------------------------

    \187\ DCM NPRM at 80580.
---------------------------------------------------------------------------

Summary of Comments
    NYSE Liffe noted that in proposed Sec.  38.154(b), ``a DCM that 
contracts with a regulatory service provider must still maintain 
sufficient compliance staff.'' \188\ NYSE Liffe suggested that Sec.  
38.155 take into consideration whether a DCM has contracted with a 
regulatory service provider in determining the appropriate level of 
compliance staff and resources.\189\ NYSE Liffe also requested that the 
Commission ``make clear that a DCM meets its requirement to have 
sufficient compliance staff to address unusual market or trading events 
where its regulatory services provider has sufficient resources for 
addressing these unusual events.'' \190\
---------------------------------------------------------------------------

    \188\ NYSE Liffe Comment Letter at 10 (Feb. 22, 2011). See also 
DCM NPRM at 80612.
    \189\ NYSE Comment Letter at 10 (Feb. 22, 2011).
    \190\ Id.
---------------------------------------------------------------------------

    Chris Barnard requested that the Commission amend Sec.  38.155 to 
require DCMs to have a chief compliance officer ``working within a job 
description, structures, rules and procedures that act to maintain its 
independence.'' \191\
---------------------------------------------------------------------------

    \191\ Barnard Comment Letter at 3 (May 20, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission believes that proposed Sec.  38.155 effectively sets 
forth the requirement that DCMs must establish and maintain sufficient 
compliance staff to enforce compliance with its rules as required under 
Core Principle 2, and accordingly, the Commission is adopting Sec.  
38.155 as proposed.
    The Commission is of the view that having adequate staff to perform 
a DCM's compliance and enforcement responsibilities is essential to the 
effectiveness of its self-regulatory programs, including market 
surveillance, audit trail, trade practice surveillance, and 
disciplinary programs. The Commission believes (as noted by NYSE Liffe) 
that the staff of a regulatory service provider may be taken into 
consideration when determining whether a DCM has sufficient compliance 
staff. However, the Commission notes that pursuant to Sec.  38.154(b), 
each DCM must still retain sufficient compliance staff to supervise the 
quality and effectiveness of any services provided by a regulatory 
service provider on its behalf.
    The Commission acknowledges Chris Barnard's comment that a DCM 
should be required to designate a chief compliance officer but notes 
that the Dodd-Frank Act mandates that certain regulated entities, such 
as SEFs, swap data repositories, and derivatives clearing 
organizations, designate chief compliance officers. There is no 
explicit statutory requirement for DCMs. Therefore, the Commission does 
not believe it is appropriate to require DCMs to appoint a chief 
compliance officer. However, it is current industry practice for DCMs 
to designate an individual as chief regulatory officer, and it will be 
difficult for a DCM to meet the requirements of Sec.  38.155 without a 
chief regulatory officer or similar individual to supervise its 
regulatory program, including any services rendered to the DCM by a 
regulatory service provider.
vii. Sec.  38.156--Automated Trade Surveillance System
    Proposed Sec.  38.156 required a DCM to maintain an automated trade 
surveillance system capable of detecting and investigating potential 
trade practice violations. The automated trade surveillance would be 
required to maintain all data reflecting the details of each order 
entered into the trading system, including order modifications and 
cancellations, and data reflecting transactions executed on the DCM. 
The proposed rule required the automated surveillance system to process 
this data on a trade date plus one day basis (``T+1 basis''). 
Additionally, according to the rule, the automated trade surveillance 
system would be required to provide users with the ability to compute, 
retain and compare trading statistics; compute profit and loss; and 
reconstruct the sequence of trading activity.
Summary of Comments
    CME commented that an exchange does not capture order details, 
modifications or cancellations for open-outcry orders in an automated 
manner unless such orders are transmitted to the floor via the 
exchange's order routing system, or with respect to privately 
negotiated transactions.\192\ CME asserted that it has been unable to 
design a system that automates the actual investigation of potential 
trade practice violations, and that it would not be able to do so 
within 60 days of the final rules taking effect.\193\ CME further 
argued that it is unclear whether the regulation applies to electronic 
trading or open outcry trading.\194\ CME challenged the use of what it 
deems as ``broad and ambiguous'' terms to describe

[[Page 36629]]

capabilities that a DCM's automated trade surveillance system is 
required to have, including the capability to detect and flag specific 
trade execution patterns and anomalies; compute, retain and compare 
trading statistics; and compute trade gains, losses, and futures-
equivalent positions.\195\ CME recommended that the Commission 
reconsider the requirements of this regulation and consider a more 
flexible, core principles-based approach.\196\
---------------------------------------------------------------------------

    \192\ CME Comment Letter at 20 (Feb. 22, 2011).
    \193\ Id.
    \194\ Id.
    \195\ Id.
    \196\ Id.
---------------------------------------------------------------------------

    MGEX agreed with the proposed requirement that a DCM's automated 
surveillance system must maintain all trade data and order data on a 
T+1 basis, but opposed the proposed requirement that a DCM compute, 
retain and compare trading statistics.\197\ MGEX contended that this 
information is not a trade data item and requested that this 
requirement be removed from the final rule.\198\
---------------------------------------------------------------------------

    \197\ MGEX Comment Letter at 4 (Feb. 22, 2011).
    \198\ Id.
---------------------------------------------------------------------------

    NYSE Liffe commented that it would take significant time to 
determine the types of changes to existing automated systems required 
to implement the proposed rules, including Sec.  38.156, and 
recommended that the Commission provide existing DCMs with at least 18 
months from the effective date of the rule to certify compliance with 
the final regulations.\199\
---------------------------------------------------------------------------

    \199\ NYSE Liffe Comment Letter at 14 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Better Markets commented that an automated trade surveillance 
system, which records orders, modifications of orders, and 
cancellations, must allow for such data to be time-stamped at intervals 
consistent with the capabilities of high frequency traders that use the 
DCM's systems to transact.\200\
---------------------------------------------------------------------------

    \200\ Better Markets Comment Letter at 9 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting proposed Sec.  38.156, with one 
modification.
    The requirement that an automated trade surveillance system 
maintain all data reflecting the details of each order entered into the 
trading system is being moved to Sec.  38.552 (Elements of an 
acceptable audit trail program). Specifically, the Commission believes 
that Sec.  38.552(b) is the more logical place in the Commission's 
rules to address this aspect of a DCM's automated surveillance system 
because paragraph (b) specifies the requirements for a DCM's audit 
trail program, including a history of all orders and trades.
    In response to CME's comment regarding a system that automates the 
actual investigation, the Commission notes that CME has misinterpreted 
the proposed rule, as Sec.  38.156 applies to a DCM's automated 
surveillance system and not to the actual investigation which the 
Commission expects would be carried out by a DCM's compliance staff 
with the assistance of automated surveillance tools. The Commission 
confirms that the speed and timing of capturing information through an 
automated trade surveillance system is different for open-outcry than 
for electronic trading, as CME stated in its comments; this is 
addressed in the discussion concerning Sec.  38.552.
    In regards to CME's comment pertaining to the breadth of the rule, 
while the Commission acknowledges that computing, retaining, and 
comparing trading statistics may not specifically be a trade data item, 
the Commission believes that these analytical tools are a necessary 
component of an effective trade surveillance system. The Commission 
notes that timing concerns raised by NYSE Liffe regarding compliance 
with the final rules are addressed above in the Sec.  38.3 discussion. 
Additionally, the Commission notes that Better Markets' comments 
regarding Core Principle 2 and high frequency trading are addressed in 
the context of Core Principle 4.
viii. Sec.  38.157--Real-Time Market Monitoring
    Proposed Sec.  38.157 codified existing practices at DCMs for real-
time monitoring of electronic trading, and reflected the growth of 
electronic trading in the U.S. futures markets, as well as the 
Commission's experience in designating new contract markets since 
passage of the CFMA.\201\ Proposed Sec.  38.157 required a DCM to 
conduct real-time market monitoring of all trading activity on its 
electronic trading platform to ensure orderly trading and identify 
market or system anomalies. The proposed rule further required a DCM to 
have the authority to cancel trades and adjust trade prices when 
necessary, and that any price adjustments or trade cancellations must 
be transparent to the market and subject to clear, fair and publicly-
available standards.
---------------------------------------------------------------------------

    \201\ See DCM NPRM at 80581.
---------------------------------------------------------------------------

Summary of Comments
    In its comments, CME reiterated its belief that the proposed rules 
are overly prescriptive.\202\ CME argued that the standards set in the 
proposed rule are unreasonably high.\203\ CME pointed to the 
requirement that a DCM ``conduct real-time market monitoring of all 
trading activity on its electronic trading platform(s) to ensure 
orderly trading and identify any market or system anomalies'' and 
argued that it is not clear whether any DCM could comply with these 
standards.\204\
---------------------------------------------------------------------------

    \202\ CME Comment Letter at 20-21 (Feb. 22, 2011).
    \203\ Id.
    \204\ CME Comment Letter at 20-21 (Feb. 22, 2011) (citing DCM 
NPRM at 80613, with emphasis added by CME).
---------------------------------------------------------------------------

    Better Markets stated that when conducting real-time market 
monitoring, DCMs should have the capability to monitor high frequency 
trading.\205\ Better Markets argued that this process should include 
``monitoring of orders and cancellations, each time-stamped at 
intervals consistent with the capabilities of [high frequency 
traders].'' \206\
---------------------------------------------------------------------------

    \205\ Better Markets Comment Letter at 9 (Feb. 22, 2011).
    \206\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.157, as proposed, subject to 
the modification described below.
    In regard to the CME's comment, the Commission believes that Sec.  
38.157, as proposed, enables a DCM to effectively monitor its 
electronic markets and grants a DCM the flexibility to determine the 
best way to conduct real-time market monitoring. The Commission also 
believes that the proposed rule correctly mandates that a DCM conduct 
real-time market monitoring of all trading activity that occurs on its 
electronic trading platform(s) in order to detect disorderly trading 
and market or system anomalies, and take appropriate regulatory action.
    The Commission recognizes that real-time market monitoring cannot 
ensure orderly trading at all times, but it should be able to identify 
disorderly trading when it occurs. Therefore, the Commission is 
modifying the first sentence of proposed Sec.  38.157 to remove the 
requirement to ``ensure orderly trading'' and instead state that ``a 
designated contract market must conduct real-time market monitoring of 
all trading activity on its electronic trading platform(s) to identify 
disorderly trading and any market or system anomalies.'' In response to 
Better Markets' comments, the Commission believes that Sec.  38.157 is 
sufficient to establish a DCM's obligations with respect to real-time 
market monitoring of all trading on a DCM's electronic trading 
platform, including high frequency trading. The Commission will 
continue to assess the impact of high

[[Page 36630]]

frequency trading on the markets regulated by the Commission.
    The Commission believes that Sec.  38.157 effectively establishes a 
DCM's obligations with respect to real-time market monitoring of 
trading activity on its electronic trading platforms. Accordingly, the 
Commission is adopting Sec.  38.157 as modified above.
ix. Sec.  38.158--Investigations and Investigation Reports
Sec. 38.158(a)--Procedures
    Proposed paragraph (a) of Sec.  38.158 required that a DCM have 
procedures to conduct investigations of possible rule violations. The 
proposed rule required that an investigation must be commenced upon 
Commission staff's request or upon discovery of information by the DCM 
indicating a possible basis for finding that a violation has occurred 
or will occur.
Summary of Comments
    CME argued that the proposed rule diminishes any discretion on 
behalf of DCMs to determine the matters that warrant a formal 
investigation, because at the time of discovery or upon receipt of 
information, and before a review occurs, there always may be a possible 
basis that a violation has occurred or will occur.\207\ CME agreed that 
written referrals from the Commission, law enforcement authorities, 
other regulatory agencies, or other SROs should result in a formal 
investigation in every instance.\208\ However, CME contended that the 
DCM should have reasonable discretion to determine how it responds to 
complaints and other referrals, including the discretion to follow-up 
with a less formal inquiry in certain situations.\209\
---------------------------------------------------------------------------

    \207\ CME Comment Letter at 21 (Feb. 22, 2011).
    \208\ Id.
    \209\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.158(a) as proposed, subject to 
a minor modification. The Commission confirms that in certain 
circumstances a DCM should have reasonable discretion regarding whether 
or not to open an investigation, as noted by CME. Consequently, the 
Commission is revising paragraph (a) of Sec.  38.158 to reflect that an 
investigation must be commenced upon receipt of a request from 
Commission staff or upon the discovery or receipt of information by the 
DCM that indicates a ``reasonable basis'' for finding that a violation 
``may have'' occurred or will occur.
Sec. 38.158(b)--Timeliness
    Proposed Sec.  38.158(b) required that an investigation be 
completed in a timely manner, which is defined in the proposed rule as 
12 months after an investigation is opened, absent mitigating factors. 
The mitigating factors identified in the proposed rule included the 
complexity of the investigation, the number of firms or individuals 
involved as potential wrongdoers, the number of potential violations to 
be investigated, and the volume of documents and data to be examined by 
compliance staff.
Summary of Comments
    CME expressed general support for the proposed rule, but 
recommended that the list of possible mitigating circumstances also 
include the domicile of the subjects and cooperative enforcement 
matters with the Commission, since the DCM may not have independent 
control over the pace of the investigation.\210\ CME also requested 
that the Commission make clear that the time period necessary to 
prosecute an investigation once it is referred for enforcement action 
is independent of the 12-month period referenced in the 
regulation.\211\
---------------------------------------------------------------------------

    \210\ Id.
    \211\ Id. at 22.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed.
    The Commission believes that a 12-month period to complete an 
investigation is appropriate and timely. Although the Commission 
believes, as noted by CME, that additional mitigating factors could 
justifiably contribute to a delay in completing an investigation within 
a 12-month period the Commission notes that the factors included in the 
proposed rule were not intended to be an exhaustive list of mitigating 
circumstances. In the Commission's view, the factors listed in the 
proposed rule represent some of the more common examples that could 
delay completing an investigation within the 12-month period. The 
Commission also confirms that Sec.  38.158 only applies to the 
investigation phase of a matter.
Sec. 38.158(c)--Investigation Reports When a Reasonable Basis Exists 
for Finding a Violation
    Proposed Sec.  38.158(c) sets forth the elements and information 
that must be included in an investigation report when there is a 
reasonable basis for finding a rule violation, including: (i) The 
reason for the investigation; (ii) a summary of the complaint, if any; 
(iii) the relevant facts; (iv) compliance staff's analysis and 
conclusions; (v) a recommendation as to whether disciplinary action 
should be pursued; and (vi) the member or market participant's 
disciplinary history.
Summary of Comments
    CME commented that rule violations can range from very minor to 
egregious and not every rule violation merits formal disciplinary 
action.\212\ CME argued that minor transgressions can effectively be 
addressed by the issuance of a warning letter by CME compliance staff, 
and that the Commission should amend the rule accordingly to account 
for this possibility.\213\
---------------------------------------------------------------------------

    \212\ Id.
    \213\ Id.
---------------------------------------------------------------------------

    CME and ICE opposed the requirement that a DCM include a 
respondent's disciplinary history in the investigative report that is 
submitted to a review panel.\214\ CME commented that a respondent's 
disciplinary history is not relevant to the consideration of whether 
that respondent has committed a further violation of the DCM's 
rules.\215\ However, CME noted that an exception would be where the 
prior disciplinary offense is an element of proof for the rule 
violations for which compliance staff is asking the review panel to 
issue charges, such as a violation of a previously issued ``cease and 
desist'' order.\216\ ICE stated that unless the rule violations that 
are the subject of the investigative report involve pervasive 
recordkeeping violations, only substantive violations in the 
respondent's history would be relevant to the review panel's 
deliberations.\217\
---------------------------------------------------------------------------

    \214\ CME Comment Letter at 21-22 (Feb. 22, 2011); ICE Comment 
Letter at 15 (Feb. 22, 2011).
    \215\ CME Comment Letter at 35 (Feb. 22, 2011).
    \216\ Id.
    \217\ ICE Comment Letter at 15 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed, subject to one 
modification to address the comments from CME and ICE.
    The Commission confirms, as CME noted, that ``minor 
transgressions'' can be addressed by a DCM's compliance staff with the 
issuance of warning letters and this is discussed below in Sec.  
38.158(e). However, as further discussed below in Sec. Sec.  38.158(d) 
and (e), no more than one warning letter may be issued to the same 
person or entity found to have committed the same rule violation within 
a rolling 12-month period.
    The Commission also agrees with CME and ICE that a respondent's 
disciplinary history is not always

[[Page 36631]]

relevant to the consideration of whether a respondent has committed a 
further violation of a DCM's rules. As a result, this requirement is 
being eliminated from the final rule. The Commission notes, however, 
that all disciplinary sanctions, including sanctions imposed pursuant 
to an accepted settlement offer, must take into account the 
respondent's disciplinary history.
Sec. 38.158(d)--Investigation Reports When No Reasonable Basis Exists 
for Finding a Violation
    Proposed Sec.  38.158(d) sets forth the elements and information 
that must be included in an investigation report when it has been 
determined that no reasonable basis exists for finding a rule 
violation, including: (i) The reason the investigation was initiated; 
(ii) a summary of the complaint, if any; (iii) the relevant facts; and 
(iv) compliance staff's analysis and conclusions. The proposed rule 
also required that if a DCM's compliance staff recommends that a 
warning letter be issued, the investigation report must also include 
the potential wrongdoer's disciplinary history.
Summary of Comments
    CME recommended that the Commission amend the proposed rule to 
account for a DCM's ability to close a case administratively and still 
issue a warning letter without disciplinary committee approval, as the 
CME Market Regulation Department currently has such authority.\218\
---------------------------------------------------------------------------

    \218\ CME Comment Letter at 22 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.158(d) as proposed, subject to 
one modification.
    The Commission is eliminating the provision in paragraph (d) that 
discussed the concept of warning letters because the Commission does 
not believe that a DCM would need to limit the number of warning 
letters that can be issued when a rule violation has not been found. 
For example, Commission staff has found in its RERs that some DCMs 
issue warning letters as reminders or for educational purposes. The 
Commission notes, however, that this modification does not impact the 
limitation on the number of warning letters that may be issued--by a 
disciplinary panel or by compliance staff--to the same person for the 
same violation in a rolling 12-month period when a rule violation is 
found to have been committed.
Sec. 38.158(e)--Warning Letters
    Proposed Sec.  38.158(e) provided that a DCM may authorize its 
compliance staff to issue a warning letter or to recommend that a 
disciplinary committee issue a warning letter. The proposed rule also 
provided that no more than one warning letter for the same potential 
violation may be issued to the same person or entity during a rolling 
12-month period.
Summary of Comments
    CME and MGEX opposed the requirement that a DCM may only issue one 
warning letter to the same person for the same rule violation in a 
rolling 12-month period.\219\ CME stated that the rule is unduly 
prescriptive and fails to take into consideration important factors 
that are relevant to a DCM when evaluating potential sanctions in a 
disciplinary matter.\220\ CME stated that the DCM should have 
discretion to determine the appropriate sanctions in all cases.\221\ 
MGEX contended that the requirement will effectively prohibit a DCM 
from using warning letters as an educational tool or reminder.\222\ 
According to MGEX, the proposed rule forces DCMs to adopt summary fines 
and prevents them from pursuing minor infractions, which may lead to 
additional unintended consequences outside of the purpose of the Dodd-
Frank Act.\223\ MGEX recommended that the Commission remove this 
requirement and provide the DCM more flexibility in determining the 
proper methodology for enforcing rules, regulations, and 
procedures.\224\
---------------------------------------------------------------------------

    \219\ CME Comment Letter at 22-23 (Feb. 22, 2011); MGEX Comment 
Letter at 4 (Feb. 22, 2011).
    \220\ CME Comment Letter at 22 (Feb. 22, 2011).
    \221\ Id.
    \222\ MGEX Comment Letter at 4 (Feb. 22, 2011).
    \223\ Id.
    \224\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.158(e) with certain 
modifications, including to convert a portion of the rule to guidance.
    The Commission acknowledges the comments from CME and MGEX 
concerning the issuance of warning letters but believes that in order 
to ensure that warning letters serve as effective deterrents, and to 
preserve the value of disciplinary sanctions, the Commission believes 
that no more than one warning letter may be issued to the same person 
or entity found to have committed the same rule violation within a 
rolling 12-month period.\225\ As discussed in the DCM NPRM, while a 
warning letter may be appropriate for a first-time violation, the 
Commission does not believe that more than one warning letter in a 
rolling 12-month period for the same violation is ever 
appropriate.\226\ This provision will remain as a rule. A policy of 
issuing repeated warning letters, rather than issuing meaningful 
sanctions, to members and market participants who repeatedly violate 
the same or similar rules denigrates the effectiveness of a DCM's rule 
enforcement program.\227\ Furthermore, the section of the proposed rule 
governing warning letters is consistent with what Commission staff has 
advised DCM applicants in the past and with recommendations made in 
prior RERs.\228\
---------------------------------------------------------------------------

    \225\ For purposes of this rule, the Commission does not 
consider a ``reminder letter'' or such other similar letter to be 
any different than a warning letter.
    \226\ See DCM NPRM at 80581.
    \227\ See id. at 80581.
    \228\ See 1998 Rule Enforcement Review of Kansas City Board of 
Trade; and Rule Enforcement Review of the Minneapolis Grain Exchange 
(Aug. 27, 2009).
---------------------------------------------------------------------------

    The Commission notes that the final rule does not include the 
reference that a warning letter issued in accordance with this section 
is not a penalty or an indication that a finding of a violation has 
been made because paragraph (e) only addresses warning letters that are 
issued for a finding of a violation. Also, the provision requiring a 
copy of a warning letter issued by compliance staff to be included in 
the investigation report is being eliminated from the final rule 
because the Commission has determined that such a requirement is 
unnecessary.
    As noted above, the Commission believes that minor transgressions 
can be addressed by the issuance of a warning letter by a DCM's 
compliance staff. Accordingly, in order to provide a DCM with 
flexibility in this regard, the Commission is moving this provision of 
the rule to the guidance section of Core Principle 2. The text of the 
guidance provides that the rules of a DCM may authorize compliance 
staff to issue a warning letter to a person or entity under 
investigation or to recommend that a disciplinary panel take such 
action.
x. Sec.  38.159--Ability To Obtain Information
    Proposed Sec.  38.159 required a DCM to have the ability and 
authority to obtain any necessary information to perform any function 
required under proposed subpart C (Compliance with rules) of the 
Commission's regulations. This would include the capacity to carry out 
any international information sharing agreements required by the

[[Page 36632]]

Commission. Proposed Sec.  38.159 also provided ``that information 
sharing agreements can be established with other designated contract 
markets and swap execution facilities, or the Commission can act in 
conjunction with a DCM to carry out such information sharing.'' \229\
---------------------------------------------------------------------------

    \229\ DCM NPRM at 80614.
---------------------------------------------------------------------------

Summary of Comments
    CME and KCBT stated that a DCM should not be mandated to carry out 
international or other informational sharing agreements to which it is 
not a party and should not be compelled by Commission regulation to 
enter into agreements, particularly when such agreements contain terms 
determined by other parties, which conceivably could include terms or 
conditions unsuitable to a DCM or conditions that a DCM is unable to 
comply with.\230\
---------------------------------------------------------------------------

    \230\ CME Comment Letter at 15 (Feb. 22, 2011); KCBT Comment 
Letter at 3 (Feb. 22, 2012).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.159 as proposed. In response to 
CME and KCBT's comments, Sec.  38.159 clarifies and codifies the Core 
Principle 2 requirement that a DCM have the ability and authority to 
obtain necessary information to perform its rule enforcement 
obligations. The core principle specifically requires that the rules of 
the DCM provide it with the ability and authority to perform any 
function described in the core principle, including capacity to carry 
out such international information sharing agreements, as the 
Commission may require. The rule provides that information sharing 
agreements can be established with other DCMs or SEFs, or that the 
Commission can act in conjunction with a DCM to carry out such 
information sharing.\231\ The Commission notes that the language of 
Sec.  38.159, including the language to which CME objects, is 
substantially similar to the language of Core Principle 2. The 
Commission also notes that while the rule requires DCMs to have the 
capacity to carry out such information sharing agreements, as is 
required by the statute, the rule does not mandate or prescribe the 
specific terms of such agreements, and thus, DCMs would have the 
ability to collaborate on the terms of such agreements. The Commission 
believes that Sec.  38.159 appropriately implements the requirements of 
section 5(d)(2)(C) of the CEA and is adopting Sec.  38.159 as proposed.
---------------------------------------------------------------------------

    \231\ As noted in the DCM NPRM, this proposed language is 
virtually identical to the language found in the guidance for former 
Designation Criterion 8.
---------------------------------------------------------------------------

xi. Sec.  38.160--Additional Rules Required
    Proposed Sec.  38.160 required a DCM to adopt and enforce any 
additional rules that it believes are necessary to comply with the 
requirements of this subpart C.
    The Commission has determined to codify proposed Sec.  38.160 as 
guidance for Core Principle 2 in appendix B, rather than a rule, in 
order to provide DCMs with added flexibility in adopting rules that 
they believe are necessary to comply with this core principle. 
Consistent with this determination, the Commission is replacing 
proposed Sec.  38.160 with new Sec.  38.160 (titled ``Additional 
sources for compliance'') that simply permits DCMs to rely upon the 
guidance in appendix B of this part to demonstrate to the Commission 
compliance with Sec.  38.150 of this part.
3. Subpart D--Contracts Not Readily Subject To Manipulation
    The Dodd-Frank Act did not revise the statutory text of Core 
Principle 3 (Contracts Not Readily Subject to Manipulation). DCMs 
historically have complied with the requirements of Core Principle 3 
through the guidance provided in Guideline No. 1, which was codified in 
former appendix A to part 40, which is now superseded by appendix C 
under part 38 of this final rulemaking. In the DCM NPRM, the Commission 
proposed to maintain the guidance under former Guideline No. 1 in new 
appendix C, but with certain proposed revisions, as the central mode of 
compliance for DCMs under Core Principle 3. In addition to the 
guidance, the DCM NPRM proposed two rules under Core Principle 3. 
Proposed Sec.  38.200 codified the statutory language of Core Principle 
3, and proposed Sec.  38.201 referred applicants and DCMs to the 
guidance in appendix C to part 38 for purposes of demonstrating to the 
Commission their compliance with the requirements of Sec.  38.200.
    In the DCM NPRM, the Commission proposed certain revisions to 
former Guideline No. 1, including: (1) Codifying the provision in 
appendix C of part 38, and eliminating it from part 40; (2) re-titling 
the guidance as ``Demonstration of Compliance That a Contract is not 
Readily Susceptible to Manipulation;'' and (3) amending and updating 
the guidance to expand the provision to include swap transactions.
    Proposed appendix C to part 38 was intended to act as a source for 
new and existing DCMs to reference for best practices when developing 
products to list for trading. The amended guidance provided greater 
detail to DCMs regarding the relevant considerations in demonstrating 
compliance with Core Principle 3 when designing a contract and 
submitting supporting documentation and data to the Commission at the 
time the DCM submits: (1) The terms and conditions of a new contract 
under Sec. Sec.  40.2 or 40.3, or (2) amendments to terms and 
conditions under Sec. Sec.  40.5 or 40.6. Specifically, proposed 
appendix C to part 38 provided guidance regarding: (1) The forms of 
supporting information a new contract submission should include; (2) 
how to estimate deliverable supplies; (3) the contract terms and 
conditions that should be specified for physically delivered contracts; 
(4) how to demonstrate that a cash-settled contract is reflective of 
the underlying cash market, is not readily subject to manipulation or 
distortion, and is based on a cash price series that is reliable, 
acceptable, publicly available and timely; (5) the contract terms and 
conditions that should be specified for cash-settled contracts; (6) the 
requirements for options on futures contracts; (7) the terms and 
conditions for non-price based futures contracts; and (8) the terms and 
conditions for swap contracts.
Estimating Deliverable Supply
Summary of Comments
    CME commented on the proposed guidance pertaining to estimating 
deliverable supply in paragraph (b)(1)(i)(A) of proposed appendix 
C.\232\ CME contended that the proposed definition of deliverable 
supply is restrictive and inconsistent with long-standing industry 
practice.\233\ Specifically, CME objected to the proposed provision 
that states that ``an appropriate estimate of deliverable supply 
excludes supplies that are committed to some commercial use.'' \234\ 
CME stated that DCMs have historically estimated deliverable supplies 
by including in their calculations all supplies that are stored in the 
delivery territory or that move through the

[[Page 36633]]

delivery territory, including a determination of amounts committed to 
commercial use.\235\ CME asserted that the proposed rulemaking does not 
identify any problems with continuing to use the current methodology in 
these markets, and claimed that if the proposed standard is adopted, it 
will impose additional costs on exchanges and market participants, 
including requiring exchanges to survey market participants annually 
with no defined benefit.\236\
---------------------------------------------------------------------------

    \232\ CME Comment Letter at 38 (Feb. 22, 2011). Proposed 
paragraph (b)(1)(i)(A) of appendix C provided guidance on how to 
estimate the deliverable supply of a commodity that underlies a 
futures contract. The estimated deliverable supply should reflect 
the amount of that commodity that can reasonably be expected to be 
readily available to long traders to take delivery and short traders 
to make delivery at the expiration of a futures contract. This 
information is used by Commission staff when considering a 
contract's terms and conditions in determining whether a contract is 
readily susceptible to manipulation. DCM NPRM at 80631.
    \233\ CME Comment Letter at 38 (Feb. 22, 2011).
    \234\ See proposed paragraph (b)(1)(i)(A), appendix C. DCM NPRM 
at 80631.
    \235\ CME Comment Letter at 38 (Feb. 22, 2011).
    \236\ Id.
---------------------------------------------------------------------------

    Moreover, CME argued that the requirement that DCMs submit monthly 
deliverable supply estimates ``for at least the most recent five years 
for which data sources permit'' to be used by the Commission to review 
a DCM's certification or approval request for a new contract or related 
rule amendment is onerous for DCMs.\237\ Instead, CME suggested that 
the Commission require monthly estimates of deliverable supply for the 
most recent three years.\238\
---------------------------------------------------------------------------

    \237\ Id.
    \238\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission acknowledges CME's comments regarding the proposed 
guidance for estimating deliverable supply but notes that a DCM has 
historically been required to estimate deliverable supplies, which has 
required that a DCM consult with market participants on a regular 
basis. In that regard, contrary to CME's claim, the proposed guidance 
stating that exchanges should survey market participants should not 
impose additional costs on exchanges. As noted above, Commission staff 
will continue to work with exchange staff to determine how the 
deliverable supply for a certain commodity should be estimated. 
Moreover, the Commission confirms, as noted by CME, that the term 
``commercial use'' may not be appropriate and could cause confusion. 
Accordingly, the Commission is eliminating the sentence in proposed 
paragraph (b)(1)(i)(A) that references the term ``commercial use,'' and 
is replacing it with the term ``long-term agreement.'' Specifically, 
the Commission will clarify in paragraph (b)(1)(i)(A) that an estimate 
of deliverable supply would not include supply that is committed for 
long-term agreements (i.e., the amount of supply that would not be 
available to fulfill the delivery obligations arising from current 
trading).
    The Commission is further clarifying in paragraph (b)(1)(i)(A) of 
the guidance that an exchange may include all or a portion of the 
supply that is committed for long-term agreements if it can demonstrate 
that those supplies are consistently and regularly made available to 
the spot market for traders to acquire at prevailing economic values. 
Specifically, the Commission is adding language to paragraph 
(b)(1)(i)(A) to provide that if the estimated deliverable supply that 
is committed for long-term agreements, or a significant portion 
thereof, can be demonstrated by the exchange to be consistently and 
regularly made available to the spot market for short traders to 
acquire at prevailing economic values, then those ``available'' 
supplies committed for long-term contracts may be included in the 
exchange's estimate of deliverable supply for that commodity.\239\
---------------------------------------------------------------------------

    \239\ In adding this language, the Commission is responding to 
CME's March 28, 2011 comment letter which stated that the Commission 
should define what it understands as ``long-term agreement,'' 
stating that requiring DCMs to consult with market participants to 
estimate deliverable supply on a monthly basis would be a 
substantial burden.
---------------------------------------------------------------------------

    Similarly, in paragraph (b)(1)(i)(C) of the guidance, the 
Commission is eliminating the term ``commercial use'' and replacing it 
with the term ``committed for long-term agreements.''
    The Commission further agrees with CME that three years of monthly 
estimates of deliverable supply is sufficient for the Commission to use 
to determine whether or not a contract is readily susceptible to 
manipulation or distortion. In this regard, the Commission is amending 
paragraphs (a)(2), (b)(1)(i)(A), (b)(1)(i)(B), and (b)(1)(i)(C) to 
reflect a three year obligation.
Calculation of Price Indices
Summary of Comments
    CME commented on the proposed guidance for calculating price 
indices in paragraphs (c)(3)(ii) and (g)(ii) of appendix C.\240\ CME 
stated that the guidance may not be applicable for some markets where 
there may not be eight independent entities in the entire industry, and 
that in those situations, the cash settlement survey should include 
transactions representing at least 51 percent of the total production 
of the commodity in question.\241\
---------------------------------------------------------------------------

    \240\ CME Comment Letter at 38-39 (Feb. 22, 2011). Proposed 
paragraphs (c)(3)(ii) and (g)(ii) of appendix C addressed 
calculation procedures for safeguarding against potential attempts 
to artificially influence a cash settlement price for futures 
contracts settled by cash settlement. The guidance provided that if 
the cash price is determined by a survey of cash market sources, the 
survey should include either: (1) at least four independent entities 
(if such sources do not take a position); or (2) eight entities (if 
such sources trade for their own accounts).
    \241\ CME Comment Letter at 38 (Feb. 22, 2011). Proposed 
c(3)(ii) and (g)(ii) of appendix C provided that: ``Where a 
designated contract market itself generates the cash settlement 
price series, the designated contract market should establish 
calculation procedures that safeguard against potential attempts to 
artificially influence the price. For example, if the cash 
settlement price is derived by the designated contract market based 
on a survey of cash market sources, the designated contract market 
should maintain a list of such entities which all should be 
reputable sources with knowledge of the cash market. In addition, 
the sample of sources polled should be representative of the cash 
market, and the poll should be conducted at a time when trading in 
the cash market is active. The cash-settlement survey should include 
a minimum of four independent entities if such sources do not take 
positions in the commodity (e.g., if the survey list is comprised 
exclusively of brokers) or at least eight independent entities if 
such sources trade for their own accounts (e.g., if the survey list 
is comprised of dealers or merchants).''
---------------------------------------------------------------------------

    Argus stated that it is important that the examination of a 
referenced index price should recognize the differences in markets and 
instrument types, and that the methodologies used to determine an index 
price may vary depending on the characteristics of the market in 
question.\242\ Accordingly, Argus recommended that any review of the 
integrity of a price index should be flexible enough to account for 
differences in markets and instrument types.\243\ Argus also requested 
that the Commission clarify that the proposed guidance for calculation 
of prices is applicable only to DCMs or SEFs, and does not apply to 
independent price data providers of price indices.\244\ Argus stated 
that as a market data price provider it obtains price data that is 
voluntarily provided to it by market participants, and that it has no 
means of requiring participants to provide that data.\245\ In that 
regard, Argus contended that for less liquid markets, there may only be 
a few market participants willing to provide data to Argus to use to 
determine a price series for a commodity.\246\ Argus noted that, in 
contrast, a DCM or SEF has the ability to use market transactions 
traded on its platform, or to survey market participants that trade on 
its platform, to determine a cash settlement price.\247\ Thus, Argus 
stated that the guidance in paragraph (c)(3)(ii) should not apply to 
market data price providers.\248\
---------------------------------------------------------------------------

    \242\ Argus Comment Letter at 4 (Feb. 22, 2011).
    \243\ Id.
    \244\ Id. at 4-6.
    \245\ Id.
    \246\ Id.
    \247\ Id.
    \248\ Id.
---------------------------------------------------------------------------

Discussion
    In light of the concerns raised in the comments above, the 
Commission is

[[Page 36634]]

eliminating the last sentence of paragraphs (c)(3)(ii) and (g)(ii), 
which provides that ``[t]he cash-settlement survey should include a 
minimum of four independent entities if such sources do not take 
positions in the commodity (e.g., if the survey list is comprised 
exclusively of brokers) or at least eight independent entities if such 
sources trade for their own accounts (e.g., if the survey list is 
comprised of dealers or merchants).'' The Commission notes that the 
guidance in appendix C to part 38 is not a restrictive list of 
acceptable methodologies. The Commission will continue to review a 
contract's susceptibility to manipulation on a contract-by-contract 
basis, including taking into account the characteristics of the 
underlying market with respect to the price methodology used by 
independent price data providers.
    The Commission is also making several clarifying amendments to 
appendix C to part 38. The Commission is amending the guidance in 
paragraph (c)(2) pertaining to a DCM's evaluation of the susceptibility 
of a cash-settled contract to manipulation. Specifically, the 
Commission is adding the phrase ``[i]n a manner that follows the 
determination of deliverable supply as noted above in b(1)'' to the 
first sentence in paragraph (c)(2). This will clarify that for cash-
settled contracts based on physical commodities, an exchange should 
analyze the size and liquidity of the cash market that underlies the 
listed contract as it would if the contract were settled through 
physical delivery.
    The Commission also is amending paragraph (c)(4)(i)(E) regarding 
Maximum Price Fluctuations Limits for cash-settled contracts, to 
clarify that for broad-based stock index futures contracts, rules 
should be adopted to coordinate with New York Stock Exchange (``NYSE'') 
declared Circuit Breaker Trading Halts.\249\ However, because there are 
proposals for alternative market coordination currently being 
considered (other than the Circuit Breaker Trading Halt), the guidance 
will be amended to add the proviso ``or other market coordinated 
Circuit Breaker mechanism.'' \250\
---------------------------------------------------------------------------

    \249\ See discussion of NYSE circuit breakers, available at: 
http://usequities.nyx.com/markets/nyse-equities/circuit-breakers.
    \250\ See supra discussion of section 38.255.
---------------------------------------------------------------------------

    Finally, the Commission is amending paragraph (e)(1), regarding 
Security Futures Contracts, to eliminate the sentence that states ``[a] 
designated contract market should follow the appropriate guidance 
regarding physically delivered security futures products that are 
settled through physical delivery or cash settlement.'' The sentence 
was included in the guidance and is being eliminated because part 41 
Security Futures Products governs trading in those contracts including 
the minimum requirements that an underlying security or security index 
must have and maintain to be listed for trading on a DCM.
4. Subpart E--Prevention of Market Disruption
    The Dodd-Frank Act amended current Core Principle 4 by: (i) 
Changing the title of the core principle from ``Monitoring of Trading'' 
to ``Prevention of Market Disruption;'' and (ii) specifying the methods 
and procedures DCMs must employ in discharging their obligations under 
Core Principle 4. The amendments to Core Principle 4 emphasize that 
DCMs must take an active role not only in monitoring trading activities 
within their markets, but in preventing market disruptions. The rules 
proposed for this core principle largely codified the relevant 
provisions of the existing Application Guidance and Acceptable 
Practices for Core Principle 4, as contained in appendix B to part 38, 
and included new requirements that clarified and strengthened certain 
DCM obligations arising under the amended core principle.
i. Sec.  38.251--General Requirements
    Core Principle 4 requires DCMs to conduct real-time monitoring of 
trading and have the ability to comprehensively and accurately 
reconstruct trading.\251\ Accordingly, these requirements are set forth 
in proposed Sec.  38.251. Further, the proposed rule required that 
intraday trade monitoring must include the capacity to detect abnormal 
price movements, unusual trading volumes, impairments to market 
liquidity, and position-limit violations. Proposed Sec.  38.251 also 
required that, where the DCM cannot reasonably demonstrate that its 
manual processes are effective in detecting and preventing abuses, the 
DCM must implement automated trading alerts to detect potential 
problems.
---------------------------------------------------------------------------

    \251\ 7 U.S.C. 7(d)(4).
---------------------------------------------------------------------------

    The Commission invited comment on whether DCMs should be required 
to monitor the extent of high frequency trading, and whether automated 
trading systems should include the ability to detect and flag high 
frequency trading anomalies.
Summary of Comments
    Several commenters asserted that their current regulatory systems 
do not allow for effective real-time monitoring of position limits. CME 
opined that requiring real-time monitoring capabilities across every 
instrument for vague terms such as ``abnormal price movements,'' 
``unusual trading volumes,'' and ``impairments to market liquidity'' 
does not provide DCMs with sufficient clarity with respect to what 
specific capabilities satisfy the standard.\252\ CME specifically 
stated that the Commission should clarify and appreciate the unique 
aspects of different types of trading venues and distinguish where 
requirements are different.\253\ CME also stated that the regulations 
should distinguish between trading conducted on an electronic venue and 
trading conducted in an open-outcry venue.\254\ MGEX stated that the 
automated trading alert requirement of proposed Sec.  38.251 ``seems to 
add more burden and cost than potentially providing any real value.'' 
\255\ KCBT requested that the Commission remove this requirement and 
stated that customer reportable positions are received once daily on a 
T+1 basis and that it is impractical to require DCMs to monitor for 
intraday compliance with position limits.\256\
---------------------------------------------------------------------------

    \252\ CME Comment Letter at 24 (Feb. 22, 2011).
    \253\ Id.
    \254\ Id.
    \255\ MGEX Comment Letter at 4 (Feb. 22, 2011). MGEX also stated 
that the Commission should adopt a more flexible core principle 
approach. See MGEX Comment Letter at 2 (June 3, 2011).
    \256\ KCBT Comment Letter at 4 (Feb. 22, 2011).
---------------------------------------------------------------------------

    ICE stated that it has previously made the Commission aware of the 
difficulties inherent in trying to monitor positions on a real-time 
basis, and that the only way to accurately determine whether an 
intraday position limit violation has occurred is on the basis of 
information available on a T+1 basis.\257\ ICE also requested that the 
Commission delete the phrase ``impairments to market liquidity'' from 
the rule, arguing that the wording is vague and has ``no foundation'' 
in the core principle.\258\
---------------------------------------------------------------------------

    \257\ ICE Comment Letter at 11 (Feb. 22, 2011).
    \258\ Id.
---------------------------------------------------------------------------

    With respect to the monitoring of high frequency trading, several 
commenters stated that such monitoring would be problematic.\259\ MGEX 
and CME raised concerns over the absence of a definition for high 
frequency trading, which CME claimed can include many

[[Page 36635]]

different trading strategies.\260\ CME questioned whether the 
Commission had unique concerns about high frequency traders, and 
further remarked that the Commission has not articulated what purpose 
would be served by singling out high frequency trading for special 
monitoring.\261\ CME further stated that empirical studies have 
consistently demonstrated that high frequency trading fosters tighter 
markets, greater liquidity and enhanced market efficiency.\262\
---------------------------------------------------------------------------

    \259\ KCBT Comment Letter at 4 (Feb. 22, 2011); MGEX Comment 
Letter at 4 (Feb. 22, 2011); CME Comment Letter at 24-25 (Feb. 22, 
2011).
    \260\ MGEX Comment Letter at 4 (Feb. 22, 2011); CME Comment 
Letter at 24-25 (Feb. 22, 2011).
    \261\ CME Comment Letter at 25 (Feb. 22, 2011).
    \262\ Id.
---------------------------------------------------------------------------

    CME stated that ``[a]s a practical matter, however, CME Group, and 
we imagine other DCMs, certainly have the capability to monitor the 
messaging frequency of participants in their markets and can quickly 
and easily identify which participants generate high messaging 
traffic.'' \263\ CME also stated that it requires registered users who 
predominantly enter orders via an automated trading system to be 
identified as automated traders and that their orders are identified in 
the audit trail as originating from automated systems.\264\ Finally, 
CME noted that its systems were designed to identify anomalies or 
transaction patterns that violate their rules or might otherwise be 
indicative of some other risk to the orderly functioning of the 
markets.\265\
---------------------------------------------------------------------------

    \263\ Id.
    \264\ Id.
    \265\ Id.
---------------------------------------------------------------------------

    Better Markets opined that the Dodd-Frank Act provides the 
Commission with an opportunity to get ahead of high frequency and 
algorithmic trading and that, while hedgers undoubtedly need market 
liquidity, high frequency traders generate volume that does not 
reliably generate liquidity for market participants.\266\ In addition, 
Better Markets commented that many widely used tactics of high 
frequency traders are specifically designed to influence pricing 
decisions by providing false signals of market price levels and depth, 
and, as a result, the Commission must take an expressly restrictive 
approach to high frequency trading.\267\
---------------------------------------------------------------------------

    \266\ Better Markets Comment Letter at 7 (Jun. 3, 2011).
    \267\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting proposed Sec.  38.251, with certain 
modifications, including converting portions of the rule to guidance.
    The Commission is modifying Sec.  38.251 to eliminate the 
obligation to monitor, on an intraday basis, for ``impairments to 
market liquidity.'' The Commission is also revising the rule to clarify 
what must be included in real-time monitoring as compared to monitoring 
of intraday trading that may not need to be done in real time. 
Monitoring of market conditions, price movements and trading volumes in 
order to detect and attempt to resolve abnormalities must be 
accomplished in real time in order to achieve, as much as is possible, 
the statute's new emphasis on preventive actions. It is acceptable, 
however, to have a program that detects, on a T+1 basis, trading abuses 
and position-limit violations that occur intraday.
    In addition, the rule is now being supplemented with guidance and 
acceptable practices in appendix B to part 38. The Commission believes 
that monitoring for market anomalies is a key part of a DCM's ability 
to demonstrate its ``capacity and responsibility to prevent 
manipulation, price distortion, and disruptions of the delivery or 
cash-settlement process,'' as required by the statute. Moreover, given 
the number of listed contracts and the volumes of trading on any 
particular DCM, the Commission believes that automated trading alerts, 
preferably in real time, are the most effective means of detecting 
market anomalies. While having an effective automated alerts regime 
will be set forth as a method of monitoring in guidance, a DCM will 
maintain flexibility in meeting the requirement of the rule by, for 
example, demonstrating the effectiveness of an alternate method of 
monitoring.
    With respect to position-limit monitoring, the DCM NPRM did not 
require that such limits necessarily be monitored in real time. 
However, DCMs must have the ability to monitor such limits, including 
for intraday violations, at a minimum on a T+1 basis. Therefore, the 
requirement to monitor for position-limit violations is clarified in 
the rule and further described in the guidance and acceptable practices 
in appendix B, giving the DCM some flexibility in meeting the 
requirement.
    As for the Commission's inquiry about requiring additional 
monitoring of high-frequency trading, the Commission recognizes that 
DCMs should be capable of monitoring for the types of trading that may 
be characterized as ``high frequency,'' but has decided not to 
implement, in this rulemaking, further rules pertaining to the 
monitoring of high frequency trading. The Commission is encouraged that 
there are efforts underway, both within and outside the Commission, to 
define and develop approaches for better monitoring of high-frequency 
and algorithmic trading. This is particularly evident from recent work 
done at the behest of the Commission's Technology Advisory Committee 
(TAC).\268\ Further, the United Kingdom government's Foresight Project 
also commissioned a recently released report on the future of computer 
trading in financial markets, which aims to assess the risks and 
benefits of automated buying and selling. This project may assist the 
Commission's further development of a regulatory framework for high 
frequency trading activities.\269\
---------------------------------------------------------------------------

    \268\ See, e.g., reports associated with the TAC available at 
http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.
    \269\ See ``The Future of Computer Trading in Financial 
Markets'' available at http://www.bis.gov.uk/foresight/our-work/projects/current-projects/computer-trading.
---------------------------------------------------------------------------

ii. Sec.  38.252--Additional Requirements for Physical-Delivery 
Contracts
    Proposed Sec.  38.252 required, among other things, that for 
physical-delivery contracts, DCMs must monitor each contract's terms 
and conditions as to whether there is convergence of the futures price 
to the cash price of the underlying commodity and must take meaningful 
corrective action, including addressing conditions that interfere with 
convergence, or if appropriate, change contract terms and conditions, 
when lack of convergence impacts the ability to use the markets for 
making hedging decisions and for price discovery.
    The Commission requested comments on what other factors, in 
addition to the delivery mechanism, a DCM should be required to 
consider in determining whether convergence is occurring.
Summary of Comments
    CME, MGEX and KCBT all opposed what they deemed to be a 
prescriptive rule, and noted that most of the requirements in proposed 
Sec.  38.252 are currently acceptable practices under appendix B for 
the monitoring of trading.\270\ These commenters contended that the 
requirements in proposed Sec.  38.252 should remain as acceptable 
practices.\271\
---------------------------------------------------------------------------

    \270\ CME Comment Letter at 25 (Feb. 22, 2011); MGEX Comment 
Letter at 5 (Feb. 22, 2011); KCBT Comment Letter at 4-5 (Feb. 22, 
2011).
    \271\ Id.
---------------------------------------------------------------------------

    ICE also noted that for certain products it is inherently more 
difficult to statistically determine convergence of futures to cash 
market prices.\272\
---------------------------------------------------------------------------

    \272\ ICE Comment Letter at 12 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.252, with certain 
modifications, including

[[Page 36636]]

converting a portion of the rule to acceptable practices.
    The Commission is retaining as a rule the general obligation that 
DCMs monitor physical-delivery contracts with respect to their terms 
and conditions as they relate to the underlying market and monitor the 
adequacy of deliverable supplies to meet futures delivery requirements. 
The DCM must also make a good-faith effort to resolve conditions that 
threaten reasonable convergence or the adequacy of deliverable 
supplies. While the Commission acknowledges ICE's comment that for 
certain products it may be more difficult to ascertain convergence 
because of the absence of reliable cash prices, the Commission is of 
the view that a DCM must monitor the performance of its contracts to 
ensure they continue to perform their economic functions.
    In order to provide DCMs with additional flexibility in meeting 
their monitoring obligations associated with physical-delivery 
contracts, the specific elements of such monitoring that were initially 
included in the proposed rule are now included in acceptable practices 
under appendix B of part 38, rather than in the rule.
iii. Sec.  38.253--Additional Requirements for Cash-Settled Contracts
    In addition to requirements that DCMs monitor the pricing and 
methodologies for settling cash-settled contracts, proposed Sec.  
38.253 required that, where a DCM contract is settled by reference to 
the price of a contract or instrument traded in another venue, 
including a price or index derived from prices on another exchange, the 
DCM must have rules that require the traders on the DCM's market to 
provide the DCM with their positions in the reference market as the 
traders' contracts approach settlement. In the alternative, Sec.  
38.253 provided that the DCM may have an information sharing agreement 
with the other venue or designated contract market.
Summary of Comments
    Argus commented that it is inappropriate to require DCMs to monitor 
the ``availability and pricing of the commodity making up the index to 
which the contract will be settled'' where the index price is generated 
based upon transactions that are executed off the DCM's market.\273\
---------------------------------------------------------------------------

    \273\ Argus Comment Letter at 6 (Feb. 22, 2011).
---------------------------------------------------------------------------

    CME disagreed with what it contended was the prescriptive nature of 
the proposed rule, and noted that many of the requirements in proposed 
Sec.  38.253 are currently acceptable practices for trade 
monitoring.\274\ CME suggested that the requirements in Sec.  38.253 
remain as acceptable practices.\275\ CME further stated that the 
Commission is uniquely situated to add regulatory value to the industry 
by reviewing for potential cross-venue rule violations, and noted that 
the Commission is the central repository for position information 
delivered to it on a daily basis and in a common format, across all 
venues.\276\ CME also asserted that the Commission would be imposing an 
onerous burden on DCMs and their customers by requiring the reporting 
of information that the Commission already receives or will be 
receiving.\277\ CME also stated that the alternative proposal, that the 
DCM enter into an information-sharing agreement with the other venue, 
also will result in additional costs to both entities, and that it may 
not be practical or prudent for a DCM to enter into such an agreement 
with the other venue.\278\ CME noted that its rules already allow it to 
request such information from market participants on an as-needed 
basis.\279\
---------------------------------------------------------------------------

    \274\ CME Comment Letter at 26 (Feb. 22, 2011).
    \275\ Id.
    \276\ Id.
    \277\ Id.
    \278\ Id.
    \279\ Id.
---------------------------------------------------------------------------

    Nodal stated that DCMs that are a party to an industry agreement 
(such as the International Information Sharing Memorandum of 
Understanding & Agreement) should satisfy the information sharing 
requirement in this rule by virtue of such agreement.\280\
---------------------------------------------------------------------------

    \280\ Nodal Comment Letter at 5 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is codifying proposed Sec.  38.253, with certain 
modifications, including to convert a portion of the rule to acceptable 
practices. The Commission removed from the rule the requirement that 
DCMs monitor the availability and pricing of the commodity making up 
the index to which the contract will be settled. Section 38.253(a) 
requires that DCMs monitor the pricing of the index to which the 
contract is settled, and that DCMs monitor the continued 
appropriateness of the index to which the contract is settled and take 
steps to resolve conditions, including amending contract terms where 
necessary, where there is a threat of manipulation, disruptions, or 
distortions. For cash-settled contracts, the Commission believes that a 
DCM must have the ability to determine whether a trader in its market 
is manipulating the instrument or index to which the DCM contract 
settles.
    In regards to Sec.  38.253(b), as the CME noted, the Commission 
does obtain certain position information in the large-trader reporting 
systems for futures and swaps. However, the Commission may not 
routinely obtain such position information, including where a DCM 
contract settles to the price of a non-U.S. futures contract or a cash 
index. Notwithstanding the continued importance of a DCM's obligation 
to monitor across other venues in such circumstances, the Commission 
believes that the rule need not set forth the specific methods to 
accomplish such monitoring. Accordingly, the Commission sets forth the 
specific methods of accomplishing the cross-venue monitoring under 
acceptable practices. Specifically, the rule requires that the 
monitoring of cash-settled contracts must include access to information 
on the activities of its traders' in the reference market. The 
acceptable practices for this rule provides that a DCM, at a minimum, 
gather such information, either directly or through information sharing 
agreements, to traders' position and transactions in the reference 
market for traders of a significant size in the DCM contract, near the 
settlement of the contract.
iv. Sec.  38.254--Ability To Obtain Information
    To ensure that DCMs have the ability to properly assess the 
potential for price manipulation, price distortions, and the disruption 
of the delivery or cash-settlement process, proposed Sec.  38.254 
provided that each DCM require that traders in their market keep 
records, including records of their activity in the underlying 
commodity and related derivative markets and contracts, and make such 
records available, upon request, to the designated contract 
market.\281\ The proposed rule further required that DCMs with 
participants trading through intermediaries must either use a 
comprehensive large-trader reporting system or be able to demonstrate 
that it can obtain position data from other sources in order to conduct 
an effective surveillance program.
---------------------------------------------------------------------------

    \281\ The pre-existing acceptable practice for Core Principle 4 
provides that DCMs, at a minimum, should have routine access to the 
positions and trading of their market participants.
---------------------------------------------------------------------------

Summary of Comments
    CME opposed the proposed rule and recommended that the types of 
records that the DCM should require traders to keep should be covered 
in acceptable

[[Page 36637]]

practices.\282\ KCBT contended that it is unnecessary and burdensome 
for a DCM to require traders to keep such records.\283\ Similarly, MGEX 
raised concerns about the burden that will be placed on its traders as 
a result of the proposed record-keeping obligation, and noted that, for 
contracts not traded on the DCM, it is unclear what records a DCM must 
tell its trader to keep.\284\
---------------------------------------------------------------------------

    \282\ CME Comment Letter at 26 (Feb. 22, 2011).
    \283\ KCBT Comment Letter at 5 (Feb. 22, 2011).
    \284\ MGEX Comment Letter at 5 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.254 as proposed, but is 
allowing, as an acceptable practice in appendix B, that DCMs limit the 
requirement of Sec.  38.254(b) to those transactions or positions that 
are reportable under the DCM's large-trader reporting system or where 
the market participant otherwise holds substantial positions.
    The Commission has considered the comments, but does not believe 
that this rule is unnecessary or that the requirements should instead 
be codified as acceptable practices. The Commission notes that a 
trader's burden to keep such records is sound commercial practice, and 
that a trader of a reportable size is already required, under 
Commission's regulations Sec.  18.05 for futures and options and Sec.  
20.6 for swaps, to keep records of such activity and to make them 
available to the Commission upon request. In addition, the Commission 
has found trader records to be an invaluable tool in its surveillance 
efforts, and believes that the DCM, as a self-regulatory organization, 
should have direct access to such information in order to discharge its 
obligations under the DCM core principles, and in particular Core 
Principle 4.
v. Sec.  38.255--Risk Controls for Trading
    Proposed Sec.  38.255 required DCMs to have in place effective risk 
controls including, but not limited to, pauses and/or halts to trading 
in the event of extraordinary price movements that may result in 
distorted prices or trigger market disruptions. Additionally, the rule 
provided that where a DCM's contract is linked to, or a substitute for, 
other contracts on the DCM or on other trading venues, including where 
a contract is based on the price of an equity security or the level of 
an equity index, risk controls should, to the extent possible, be 
coordinated with those other contracts or trading venues. In the 
preamble of the DCM NPRM, the Commission requested comments on what 
types of pauses and halts are necessary and appropriate for particular 
market conditions. The preamble of the DCM NPRM also recognized that 
pauses and halts comprise only one category of risk controls, and that 
additional controls may be necessary to reduce the potential for market 
disruptions. The preamble specifically listed several risk controls 
that the Commission had in mind, including price collars or bands, 
maximum order size limits, stop-loss order protections, kill buttons, 
and any others that may be suggested by commenters. The Commission 
invited comments on the appropriateness of the listed risk controls, 
and posed the following questions: What other DCM risk controls are 
appropriate or necessary to reduce the risk of market disruptions? 
Which risk controls should be mandated, and how?
Summary of Comments
    Several commenters asserted that DCMs should have discretion to 
determine the specific risk controls that should be implemented within 
their markets.\285\ CME commented that the marketplace would benefit 
from some standardization of the types of pre-trade risk controls 
employed by DCMs and other trading venues, and expressed support for an 
acceptable practice framework that includes pre-trade quantity limits, 
price banding, and messaging throttles, but argued that the specific 
parameters of such controls should be determined by the DCMs.\286\
---------------------------------------------------------------------------

    \285\ CME Comment Letter at 26 (Feb. 22, 2011); KCBT Comment 
Letter at 5 (Feb. 22, 2011); ICE Comment Letter at 11-12 (Feb. 22, 
2011); CFE Comment Letter at 4 (Feb. 22, 2011); NYSE Liffe Comment 
Letter at 11 (Feb. 22, 2011); ELX Comment Letter at 4 (Feb. 22, 
2011); MGEX Comment Letter at 5 (Feb. 22, 2011); ICE Comment Letter 
at 12 (Feb. 22, 2011); Barnard Comment Letter at 3 (Feb. 22, 2011).
    \286\ CME Comment Letter at 27 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Various commenters also stated that there are effective ways to 
prevent market disruptions other than pauses and halts, and that the 
appropriate controls may depend on a number of factors, such as the 
product, number of market participants, and the market's liquidity. CME 
contended that the Commission should not impose rules that mandate 
coordination of such risk controls.\287\ NYSE Liffe argued that a DCM 
should be able to take into account other controls, but should not be 
required to adopt identical controls.\288\ MGEX stated that forcing 
market coordination of trading pauses and halts is unnecessary, and 
that if market instability moves from one contract market to another, 
the next market should be able to pause or halt trading as it 
determines necessary.\289\ ICE stated that a temporary price floor or 
ceiling can work better than a pause or halt since trading can continue 
uninterrupted, thereby offering the earliest opportunity for price 
reversal should the market deem a sudden large move to be an 
overreaction or error.\290\ ICE also stated that pauses and halts are 
not the only effective way to prevent market disruption, and that by 
being prescriptive, the Commission is freezing innovation in preventing 
market disruptions.\291\
---------------------------------------------------------------------------

    \287\ Id.
    \288\ NYSE Liffe Comment Letter at 11 (Feb. 22, 2011).
    \289\ MGEX Comment Letter at 5 (Feb. 22, 2011).
    \290\ ICE Comment Letter at 12 (Feb. 22, 2011).
    \291\ Id.
---------------------------------------------------------------------------

    Finally, Better Markets asserted that the proposed rules are 
extremely useful, but incomplete.\292\ Better Markets stated that there 
should be a ``speed limit'' to serve as a buffer against the potential 
for an uncontrolled spiral of disruption fueled by HFTs, and that the 
rule should require that bids be kept open for minimum durations and 
that positions be held for minimum durations.\293\
---------------------------------------------------------------------------

    \292\ Better Markets Comment Letter at 9 (Feb. 22, 2011).
    \293\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting proposed Sec.  38.255, with certain 
modifications, including converting a portion of the rule to acceptable 
practices. As stated in the DCM NPRM, the Commission believes that 
pauses and halts are effective risk management tools that must be 
implemented by DCMs to facilitate orderly markets. As the Commission 
noted in the DCM NPRM, risk controls such as trading pauses and halts, 
among other things, can allow time for participants to analyze the 
market impact of new information that may have caused a sudden market 
move, allow new orders to come into a market that has moved 
dramatically, and allow traders to assess and secure their capital 
needs in the face of potential margin calls. Automated risk control 
mechanisms, including pauses and halts, have proven to be effective and 
necessary in preventing market disruptions and, therefore, will remain 
as part of the rule.
    The Commission notes that the pauses and halts are intended to 
apply in the event of extraordinary price movements that may trigger or 
propagate systemic disruptions. Accordingly, in response to ICE and 
other commenters that question the necessity of pauses and halts over 
other forms of risk controls, the Commission notes that a DCM's ability 
to pause or halt trading in extraordinary

[[Page 36638]]

circumstances and, importantly, to re-start trading through the 
appropriate re-opening procedures, will allow DCMs to mitigate the 
propagation of shocks that are of a systemic nature and to facilitate 
orderly markets. Furthermore, DCMs must ensure that such pauses and 
halts are effective for their specific order-routing and trading 
environment and are adapted to the specific types of products traded.
    Following the DCM NPRM's publication, the Pre-Trade Functionality 
Subcommittee of the CFTC Technology Advisory Committee (``TAC'') issued 
a report that recommended the implementation of several trade risk 
controls at the exchange level.\294\ The controls recommended in the 
Subcommittee report were consistent, in large part, with the trade 
controls referenced in the preamble to the DCM NPRM, and which are 
being adopted in this final rulemaking.\295\ The TAC accepted the 
Subcommittee report, which specifically recommended that exchanges 
implement pre-trade limits on order size, price collars around the 
current price, intraday position limits (of a type that represent 
financial risk to the clearing member), message throttles, and clear 
error-trade and order-cancellation policies.\296\ The Subcommittee 
report noted that ``[s]ome measure of standardization of pre-trade risk 
controls at the exchange level is the cheapest, most effective and most 
robust path to addressing the Commission's concern [for preserving 
market integrity].'' \297\
---------------------------------------------------------------------------

    \294\ ``Recommendations on Pre-Trade practices for Trading 
Firms, Clearing Firms and Exchanges involved in Direct Market 
Access,'' March 1, 2011, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.
    \295\ The DCM NPRM specifically mentioned position limits that 
must be monitored for intraday violations, daily price limits, 
trading pauses, reasonability tests for order price and size, stop 
logic functionality, and trade-cancellation policies in the form of 
``no-bust'' ranges.
    \296\ See ``Pre-Trade Functionality Subcommittee of the CFTC 
Technology Advisory Committee report, ``Recommendations on Pre-Trade 
Practices for Trading Firms, Clearing Firms, and Exchanges Involved 
in Direct Market Access,'' at 4-5 (March 1, 2011), accepted by the 
TAC and available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.
    \297\ Id. at 4.
---------------------------------------------------------------------------

    The Commission believes that the implementation of the specific 
automated trade risk controls listed in the DCM NPRM is generally 
desirable, but also recognizes that such controls should be adapted to 
the unique characteristics of the markets to which they apply. Indeed, 
any controls should consider the delicate balance between avoiding a 
market disruption while not impeding a market's price discovery 
function. Controls that unduly restrict a market's ability to respond 
to legitimate market events will interfere with price discovery.
    Accordingly, consistent with many of the comments on this subject, 
the Commission is enumerating specific types of automated risk 
controls, in addition to pauses and halts, that may be implemented by 
DCMs in the acceptable practices rather than in the rule, in order to 
give DCMs greater discretion to select among the enumerated risk 
controls, or to create new risk controls that may be more appropriate 
or necessary for their markets. DCMs also will have discretion in 
determining the parameters for the selected controls. Specifically, the 
acceptable practices for Core Principle 4 provide that DCMs should have 
appropriate trade risk controls adapted to the unique characteristics 
of the markets to which they apply that are designed to prevent market 
disruptions without unduly interfering with that market's price 
discovery function. The acceptable practices also enumerate several of 
the pre-trade controls cited by the Joint CFTC/Securities and Exchange 
Commission (``SEC'') Advisory Committee, specifically: Pre-trade limits 
on order size, price collars or bands around the current price, message 
throttles, and daily price limits.\298\
---------------------------------------------------------------------------

    \298\ The DCM NPRM did not specifically address whether DCMs 
should require market participants to certify that their electronic 
systems were adequately tested before trading on a DCM, nor did it 
specifically address pre-trade, post trade or emergency controls and 
supervision of electronic systems. The Commission may address 
electronic system testing, controls, and supervision-related issues 
in a subsequent proceeding.
---------------------------------------------------------------------------

    Additionally, in response to commenters' concerns, the Commission 
is moving the language in the proposed rule concerning the coordination 
of risk controls among other markets or exchanges to the acceptable 
practices. Specifically, a DCM with a contract that is linked to, or is 
a substitute for, other contracts, either on its market or on other 
trading venues, must, to the extent practicable, coordinate its risk 
controls with any similar controls placed on those other contracts. If 
a contract is based on the price of an equity security or the level of 
an equity index, such risk controls must, to the extent practicable, be 
coordinated with any similar controls placed on national security 
exchanges.
    Independent of this rulemaking, the Joint CFTC/SEC Advisory 
Committee recommended that the SEC and CFTC require that the pause 
rules of the exchanges and FINRA be expanded to cover all but the most 
inactively traded and listed equity securities, ETFs, and options and 
single stock futures on those securities.\299\
---------------------------------------------------------------------------

    \299\ The Joint CFTC-SEC Advisory Committee on Emerging 
Regulatory Issues was established a few days after the dramatic 
securities market events of May 6, 2010, called by some the ``Flash 
Crash.'' The Committee is charged with addressing regulatory issues 
of mutual concern to the CFTC and SEC. See ``Recommendations 
Regarding Regulatory Responses to the Market Events of May 6, 
2010,'' (Feb. 18, 2011) available at http://www.cftc.gov/MarketReports/StaffReportonMay6MarketEvents/index.htm.
---------------------------------------------------------------------------

vi. Sec.  38.256--Trade Reconstruction
    The Dodd-Frank Act added language to Core Principle 4 providing 
that a DCM must have the ability to comprehensively and accurately 
reconstruct all trading on its trading facility. These audit-trail data 
and reconstructions must also be made available to the Commission in a 
form, manner, and time as determined by the Commission. Proposed Sec.  
38.256 codified these requirements.
Summary of Comments
    CME argued that audit trial data is extremely detailed and 
voluminous and that the DCMs should be given adequate time to prepare 
the trading data before it is supplied to the Commission.\300\ CME 
suggested that the wording ``in a form, manner, and time as determined 
by the Commission'' be replaced with ``such reasonable time as 
determined by the Commission.\301\
---------------------------------------------------------------------------

    \300\ CME Comment Letter at 27 (Feb. 22, 2011).
    \301\ Id.
---------------------------------------------------------------------------

    Chris Barnard expressed support for the trade reconstruction 
requirement but requested that the rule be clarified to ensure that the 
trade reconstruction requirement includes all trading events, including 
the entry of bids and offers in the order of their occurrence, as well 
as executed trades in order.\302\
---------------------------------------------------------------------------

    \302\ Barnard Comment Letter at 2 (May 20, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is clarifying the rule slightly so that the audit 
trail data must be available to the Commission ``in a form, manner, and 
time that is acceptable to the Commission.'' The revised wording is 
consistent with Sec.  38.950(a), which requires that DCMs maintain 
records in a form and manner that is acceptable to the Commission.
    The Commission believes that the DCM audit-trail requirements 
contained in Sec.  38.551 and Sec.  38.552 clarify the DCM's obligation 
for reconstruction of trading and are sufficient to meet Mr. Barnard's 
concerns.

[[Page 36639]]

vii. Sec.  38.257--Regulatory Service Provider
    Proposed Sec.  38.257 provided that a DCM must comply with the 
regulations in subpart E through a dedicated regulatory department, or 
by delegation of that function to a regulatory service provider over 
which the DCM has supervisory authority.
Discussion
    The Commission did not receive any comments on the proposed rule, 
and is adopting the rule as proposed.
viii. Sec.  38.258--Additional Rules Required
    Proposed Sec.  38.258 required a DCM to adopt and enforce any 
additional rules that it believed were necessary to comply with the 
requirements of subpart E.
Discussion
    Though the Commission did not receive any comments on the proposed 
rule, the Commission is of the view that the obligations in the 
proposed rule are more appropriate in the guidance. Accordingly, the 
proposed rule is moved to guidance. Consistent with this determination, 
the Commission is replacing proposed Sec.  38.258 with new Sec.  38.258 
(titled ``Additional sources for compliance'') that simply permits DCMs 
to rely upon the guidance and acceptable practices in appendix B of 
this part to demonstrate to the Commission compliance with Core 
Principle 4.
5. Subpart F--Position Limitations or Accountability
    Core Principle 5 under section 5(d)(5) of the CEA requires that 
DCMs adopt for each contract, as is necessary and appropriate, position 
limitations or position accountability. The Dodd-Frank Act amended Core 
Principle 5 by adding that for any contract that is subject to a 
position limitation established by the Commission pursuant to section 
4a(a) of the CEA, the DCM shall set the position limitation of the 
board of trade at a level not higher than the position limitation 
established by the Commission. At the time of the publication of the 
DCM NPRM, the federal position limits established by the Commission 
were codified in part 150 of the Commission's regulations, and the 
Commission had proposed rules to replace part 150 with new requirements 
in part 151, consistent with the requirements of the Dodd-Frank Act. 
The Commission published the final rules for ``Position Limits for 
Futures and Swaps'' on November 18, 2011.\303\ That final rulemaking 
requires DCMs to comply with part 150 (Limits on Positions) until such 
time that the Commission replaces part 150 with the new part 151 
(Limits on Positions).\304\ In that final release, the Commission 
requires that exchanges adopt their own position limits for 28 physical 
commodity contracts subject to federal limits, and provides acceptable 
practices for establishing position limits in other commodity 
contracts. The Commission also established alternative acceptable 
practices of adopting position accountability rules in lieu of position 
limits for non-spot months in those other commodity contracts. Proposed 
Sec.  38.301 required that each DCM must comply with the requirements 
of part 151 as a condition of its compliance with Core Principle 5.
---------------------------------------------------------------------------

    \303\ See ``Position Limits for Futures and Swaps,'' 76 FR 
71626, Nov. 18, 2011.
    \304\ Id. at 71632.
---------------------------------------------------------------------------

Summary of Comments
    CME stated that the proposed position limits in the part 151 
rulemaking may affect the price discovery mechanism of the U.S. futures 
markets and asked that the Commission give careful consideration to the 
comments it submitted in the part 151 rulemaking.\305\
---------------------------------------------------------------------------

    \305\ CME Comment Letter at 27 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule, with one modification. The 
rule is being revised to add an additional clause that requires DCMs to 
continue to meet the requirements of part 150 of the Commission's 
regulations--the current position limit regulations--until such time 
that compliance is required under part 151. This clarification will 
ensure that DCMs are in compliance with the Commission's regulations 
under part 150 in the interim period--until the compliance date for the 
new position limits regulations takes effect. CME's comments were more 
appropriate to the Position Limit rulemaking proceeding, and they were 
addressed in that rulemaking.\306\
---------------------------------------------------------------------------

    \306\ 76 FR 71626, Nov. 18, 2011.
---------------------------------------------------------------------------

6. Subpart G--Emergency Authority
    The Dodd-Frank Act made minor, non-substantive changes to Core 
Principle 6 under section 5(d)(6) of the CEA. In implementing the core 
principles, the Commission proposed to retain most of the former 
Application Guidance associated with Core Principle 6 (found in 
appendix B to part 38 of the Commission's regulations) with some 
revisions and additions.
    Proposed Sec.  38.350 codified the statutory text of the core 
principle. Proposed Sec.  38.351 referred applicants and DCMs to the 
guidance and acceptable practices in appendix B to part 38 for purposes 
of demonstrating to the Commission their compliance with the 
requirements of subpart G. The proposed guidance provided that a DCM 
should have the authority to intervene as necessary to maintain fair 
and orderly trading and to prevent or address manipulation or 
disruptive trading practices, whether the need for intervention arises 
exclusively from the DCM's own market or as part of a coordinated, 
cross-market intervention. The proposed guidance also provided that the 
DCM rules should include procedures and guidelines to avoid conflicts 
of interest in accordance with new provisions proposed in Sec.  40.9 
and to include alternate lines of communication and approval procedures 
in order to be able to address, in real time, emergencies that may 
arise. The proposed guidance also clarified that the DCM must have 
rules that allow it to take such market actions as may be directed by 
the Commission.
    The proposed rulemaking also proposed certain acceptable practices, 
including that the DCM have: (i) Procedures and guidelines for 
decision-making and implementation of emergency intervention in the 
market, and (ii) the authority to: Liquidate or transfer open positions 
in the market,\307\ suspend or curtail trading in any contract, require 
market participants in any contract to meet special margin 
requirements, and allow it to take such market actions as the 
Commission may direct.
---------------------------------------------------------------------------

    \307\ In situations where a swap is traded on more than one 
platform, emergency action to liquidate or transfer open interest 
must be directed, or agreed to, by the Commission or Commission 
staff.
---------------------------------------------------------------------------

Summary of Comments
    KCBT contended that liquidation of positions and special margin 
requirements are more appropriately addressed in the rules and 
procedures relevant to Derivatives Clearing Organizations.\308\ CME 
commented that the Commission should revise the proposed guidance to 
make clear that DCMs have the flexibility and independence necessary to 
address market emergencies.\309\
---------------------------------------------------------------------------

    \308\ KCBT Comment Letter at 6 (Feb. 22, 2011); see also 76 FR 
69334, Nov. 8, 2011.
    \309\ CME Comment Letter at 28 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission adopts proposed Sec. Sec.  38.350 and 38.351, 
without modification.
    In response to the comments pertaining to the proposed guidance, 
the

[[Page 36640]]

Commission is making slight revisions to the guidance to clarify that 
DCMs retain the authority to independently respond to emergencies in an 
effective and timely manner consistent with the nature of the 
emergency, as long as all such actions taken by the DCM are made in 
good faith to protect the integrity of the markets.
    In response to KCBT's comments, the Commission notes that the 
statute requires DCMs, in consultation and cooperation with the 
Commission, to adopt rules permitting them to liquidate open positions 
and impose special margin requirements under their emergency authority.
7. Subpart H--Availability of General Information
    Core Principle 7 requires that DCMs make available to the public 
accurate information concerning the contract market's rules and 
regulations, contracts and operations. The Dodd-Frank Act amended Core 
Principle 7 by adding a provision requiring the board of trade to make 
public the rules and specifications describing the operation of the 
DCM's electronic matching platform or trade execution facility.\310\ 
Since passage of the CFMA, the types of information and the various 
practices for providing information have become standardized across the 
industry as DCMs have adopted practices that comply with the current 
guidance and acceptable practices for Core Principle 7. Accordingly, 
proposed Sec.  38.401 in subpart H codified these practices. In 
addition, the Commission proposed several additional provisions to 
ensure that pertinent information is available to the Commission, 
market participants and the public, as described below.
---------------------------------------------------------------------------

    \310\ This requirement, while new to the text of Core Principle 
7, was previously required as part of former Designation Criteria 4.
---------------------------------------------------------------------------

    The Commission also proposed to codify the statutory text of the 
core principle in Sec.  38.400, and is adopting the rule, as proposed.
i. Sec.  38.401(a)--General
    Proposed Sec.  38.401(a) required DCMs to have in place procedures, 
arrangements and resources for disclosing to market authorities, market 
participants, and the public accurate and relevant information 
pertaining to: (i) Contract terms and conditions, (ii) rules and 
regulations applicable to the trading mechanism; and (iii) rules and 
specifications pertaining to the operation of the electronic matching 
platform or trade execution facility. Under the proposed rule, DCMs are 
required to ensure that market authorities, market participants, and 
the public have available all material information pertaining to new 
product listings, new or amended governance, trading and product rules, 
or other changes to information previously disclosed by the DCM, within 
the time period prescribed in proposed Sec.  38.401(c). Section 
38.401(a) of the proposed regulation required that DCMs provide the 
required information to market participants and the public by posting 
such information on their Web site, as set forth in proposed Sec.  
38.401(c).
Discussion
    The Commission did not receive comments on the proposed rule, and 
is adopting the proposed rule with minor, non-substantive 
modifications.\311\
---------------------------------------------------------------------------

    \311\ The Commission is revising Sec.  38.401(a) to clarify 
several internal references.
---------------------------------------------------------------------------

ii. Sec.  38.401(b)--Accuracy Requirement
    Proposed Sec.  38.401(b) required that each DCM have procedures in 
place to ensure that any information or communication with the 
Commission is accurate and complete, and further that no false or 
misleading information is submitted and that no material information is 
omitted. Similarly, the proposed rule required that each DCM have 
procedures in place to ensure the accuracy and completeness of any 
information made available to market participants and the public, 
including information that is made available on its Web site.
Summary of Comments
    NYSE Liffe expressed concern that the requirement to provide 
``accurate and complete'' information in ``any communication'' with the 
Commission would chill dialogue between DCMs and Commission staff.\312\ 
NYSE Liffe argued that in addition to submitting formal filings with 
the Commission, DCM staff frequently interact with Commission staff on 
a more informal basis, and in some cases DCM staff may speak without 
complete information.\313\ NYSE Liffe asserted that a DCM may feel 
constrained from directly responding to Commission inquiries or from 
reaching out to Commission staff if it is concerned that the 
information it provides to the Commission may later prove to be 
inaccurate or incomplete.\314\ Accordingly, NYSE Liffe requested 
clarification that the proposed rule will only apply to formal filings 
made with the Commission.\315\ NYSE Liffe also noted that while it 
makes every effort to accurately post information required to be made 
public, for several data elements, it must rely on data sent to it by 
clearing service providers and member firms.\316\ NYSE Liffe argued 
that it would be inappropriate to set a strict liability standard over 
aggregated data that part 16 of the Commission's rules requires the DCM 
to make public when it does not entirely control the generation of 
component parts of that data.\317\
---------------------------------------------------------------------------

    \312\ NYSE Liffe Comment Letter at 12 (Feb. 22, 2011).
    \313\ Id.
    \314\ Id.
    \315\ Id.
    \316\ Id. at 13.
    \317\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting proposed Sec.  38.401(b), with certain 
revisions. While DCMs must provide the Commission with accurate and 
complete information, the Commission recognizes that the proposed rule 
text may raise concerns with DCMs in freely communicating with 
Commission staff in certain instances. Accordingly, the Commission is 
revising the rule to clarify that a DCM must ``provide information that 
it believes, to the best of its knowledge, is accurate and complete, 
and must not omit material information'' with respect to any 
communication with the Commission, and any information required to be 
transmitted or made available to market participants and the public, 
including on its Web site or otherwise. The requirements of Sec.  
38.401(b) are intended to be, and should be interpreted as being, 
consistent with the false reporting provision under section 9(a)(3) of 
the CEA, 7 U.S.C. 13. The amended rule accommodates the possibility 
that DCMs may not exercise complete control over all of the information 
that they receive from third-parties and later make public.
iii. Sec.  38.401(c)--Notice of Regulatory Submissions
    The Commission historically has required DCMs to update their 
rulebooks upon the effectiveness of a rule amendment, product listing 
or rule certification that has been filed with the Commission. While 
proposed Sec.  38.401(c) maintained the general requirement for posting 
rules in the DCM rulebook upon their effectiveness, the Commission 
believed that market participants and the public would benefit from 
notifications of proposed rule amendments, product listing (or de-
listings) and rule certifications in advance of their taking 
effect.\318\

[[Page 36641]]

Accordingly, proposed Sec.  38.401(c) required each DCM to post on its 
Web site all rule filings and submissions that it makes to the 
Secretary of the Commission. The proposed rule required that this 
information be posted on the DCM's Web site simultaneous with the 
filing of such information with the Commission. The DCM NPRM stated 
that, where applicable, the DCM Web site should make clear that the 
posted submissions are pending before the Commission.\319\ This 
requirement was designed to provide market participants with advance 
notice of rule amendments and certifications, consistent with the goal 
of Core Principle 7 to make pertinent information available to market 
participants and the public. This proposed posting requirement was in 
addition to the obligation of DCMs to update their rulebooks upon the 
effectiveness of a rule submission or certification.
---------------------------------------------------------------------------

    \318\ This is especially relevant when the Commission determines 
to stay the certification of a DCM submission, as provided by the 
Dodd-Frank Act, for a 90-day review period, thereby triggering a 
public comment period.
    \319\ The DCM NPRM noted, for example, that a DCM's Web site may 
contain a separate web page for ``regulatory filings'' or ``rule 
certifications'' for posting submissions or certifications 
pertaining to new product listings, new rules, rule amendments or 
changes to previously-disclosed information. DCM NPRM at 80586.
---------------------------------------------------------------------------

    To the extent that a DCM requests confidential treatment of certain 
information filed or submitted to the Commission, the proposed rule 
required the DCM to post the public portions of the filing or 
submission on its Web site.
Summary of Comments
    CME and KCBT both contended that the requirement that DCMs post 
regulatory submissions on their Web site simultaneously with their 
filing with the Commission is duplicative, as the Commission already 
posts these submissions on the CFTC Web site.\320\ CME and KCBT further 
argued that they use other methods to communicate regulatory changes to 
the public, including bulletins, email notifications, and press 
releases.\321\ CME requested that if the Commission does choose to 
retain this requirement, that a DCM be given a minimum of one business 
day to post such filings, rather than having to post ``simultaneously'' 
with the Commission filing.\322\ CME noted that even a one-day standard 
would be a significantly higher standard than the Commission holds 
itself to with respect to posting the filings it receives from DCMs 
today.\323\
---------------------------------------------------------------------------

    \320\ CME Comment Letter 28-29 (Feb. 22, 2011); KCBT Comment 
Letter at 6 (Feb. 22, 2011).
    \321\ CME Comment Letter at 29 (Feb. 22, 2011); KCBT Comment 
Letter at 6 (Feb. 22, 2011).
    \322\ CME Comment Letter at 29 (Feb. 22, 2011).
    \323\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule, with certain 
modifications. The Commission believes it is important for market 
participants and the public to have advance notice of rule amendments 
and certifications prior to their taking effect, consistent with the 
goal of Core Principle 7 to make pertinent information available to 
market participants and the public. Where applicable, the DCM Web site 
should make clear that the posted submissions have been submitted to 
the Commission, but are not yet in effect. For example, a DCM could 
post its submissions or information filed with the Commission on a 
separate web page that is designated as ``regulatory filings'' or 
``proposed rulebook amendments.'' The Commission notes that the 
requirement to make information available to the public necessitates 
that such information can be accessed by visitors to the Web site 
without the need to register, log in, provide a user name or obtain a 
password, as is the current practice under Commission regulations.\324\ 
In response to CME, the Commission notes that it adopted a similar 
requirement in the final rulemaking pertaining to Provisions Common to 
Registered Entities.\325\ In that final rulemaking, the Commission 
codified in Sec.  40.5(a)(6) the requirement that a registered entity 
submitting a voluntary rule submission post such submission on its Web 
site concurrent with the filing of such submission with the 
Commission.\326\ Consistent with Sec.  40.5, the Commission is revising 
the posting requirement in the proposed rule from ``simultaneous'' to 
``concurrently'' with the filing of the information with the 
Commission. The proposed rule is also being revised to clarify that the 
posting requirement applies to any information or ``submission'' 
provided to the Commission.
---------------------------------------------------------------------------

    \324\ See former acceptable practices to Core Principle 7. 17 
CFR part 38, appendix B (2010).
    \325\ See 76 FR 44776, 44794, July 27, 2011.
    \326\ Id.
---------------------------------------------------------------------------

iv. Sec.  38.401(d)--Rulebook
    Proposed Sec.  38.401(d) codified the pre-existing DCM practices 
pertaining to updating DCM rulebooks.\327\ The proposed rule required 
that DCMs post and routinely update, their rulebooks, which appear on 
their Web sites. The proposed rule required that each DCM update its 
rulebook the day that a new product is listed or a new or amended rule 
takes effect. The proposed rule further required that DCM Web sites be 
readily accessible to the public, and that the information posted 
therein be available to visitors to the Web site without requiring 
registration, log-in, or user name or password.
---------------------------------------------------------------------------

    \327\ As noted above, the requirement to maintain an accurate 
and updated rulebook does not relieve DCMs of their obligations 
under proposed paragraph (c) to post on their Web sites all rule 
filings and submissions submitted to the Commission.
---------------------------------------------------------------------------

Discussion
    The Commission did not receive comments regarding this proposed 
rule and is adopting the rule as proposed. As noted in the DCM NPRM, 
the vast majority of DCMs maintain Web sites that comply with the 
requirements in the rule.
8. Subpart I--Daily Publication of Trading Information
    Core Principle 8 requires that DCMs make available to the public 
accurate information on settlement prices, volume, open interest, and 
opening and closing ranges for actively traded contracts on the 
contract market. The Dodd-Frank Act did not amend Core Principle 8. 
Accordingly, proposed Sec.  38.451 codified the pre-existing acceptable 
practices, which largely required that DCMs comply with Sec.  16.01 
(Trading volume, open contracts, prices and critical dates) of the 
Commission's regulations.
    In addition, the Commission proposed certain revisions to Sec.  
16.01, consistent with the Dodd-Frank Act amendments to the CEA, 
including revisions regarding the information a reporting market must 
record and publish on futures, swap, and options contracts on a 
commodity.\328\ Specifically, the proposed amendments to part 16 
specified the type of information that DCMs or SEFs must publish daily 
regarding the swaps contracts traded. The proposed rule required that 
DCMs and SEFs publish specified information for each trading day, for 
each swap, class of swaps, option on a swap, or class of options on a 
swap, as appropriate. For swap contracts that are standard-sized 
contracts (i.e., contracts that have a set contract size for all 
contracts), the proposed rule required the reporting of volume and open 
interest for swaps and options on swaps in terms of number of contracts 
traded, similar to how futures contracts currently are reported. For 
swap contracts that are non-standard-sized (i.e., contracts whose 
contract size can

[[Page 36642]]

vary for each transaction), the proposed rule required that the volume 
and open interest be reported in terms of total notional value traded 
for that trading day.
---------------------------------------------------------------------------

    \328\ The term commodity also includes ``excluded commodities.''
---------------------------------------------------------------------------

    The Commission also proposed to amend Sec.  16.01(b) to require 
each DCM or SEF to publish for each trading day, by commodity and 
contract month or by tenor of the swap, the opening price, high price, 
low price and settlement price of the swap or option on swap contract.
    The Commission requested comments on end-of-day price reporting for 
swaps. Specifically, the Commission requested comments on the following 
issues:
     For interest rate swaps, because the tenor on an interest 
rate swap can be one of thousands of possible periods, what would be an 
appropriate manner to display end-of-day prices for each interest rate 
swap?
     Would certain end-of-day swap price reporting be more 
meaningful than others? If so, which methods of price reporting would 
be more meaningful and why?
     Would certain end-of-day swap price reporting be 
misleading? If so, which methods of price reporting would be misleading 
and why?
    The Commission also proposed to revise Sec.  16.01 to require 
reporting markets to report directly to the Commission pursuant to the 
requirements of 16.01(d), information pertaining to the total volume of 
block trades that are included in the total volume of trading.
    Finally, the Commission also proposed to codify the statutory text 
of the core principle in Sec.  38.450, and is adopting the rule, as 
proposed.
Summary of Comments
    Several commenters discussed the revised reporting requirements 
that were proposed in Sec.  16.01. Eris stated that DCMs and SEFs 
should be held to the same reporting standards for interest rate 
swaps.\329\ In particular, Eris commented that a DCM or SEF should 
report real-time, intraday prices for par swaps at standard maturities, 
publish open interest grouped in maturity buckets based on the 
remaining tenor of each instrument, and publish at the end of day the 
settlement curve from the clearinghouse as well as the specific 
settlement values applied to each cleared swap.\330\ Specifically, Eris 
recommended: (1) That daily open interest should be published publicly 
in a summary fashion with open interest grouped in maturity buckets 
based on the remaining tenor of each instrument, (2) that end of day 
pricing should be based upon a market-driven curve where the 
clearinghouse's methodology to generate the daily settlement curve, as 
well as all of the inputs and components of the settlement curve, are 
made transparent to the full trading community, and (3) the 
clearinghouse should publish the specific daily settlement values 
applied to each cleared swap, without revealing open interest at a 
granular level.\331\
---------------------------------------------------------------------------

    \329\ Eris Comment Letter at 4 (Feb. 22, 2011).
    \330\ Id. at 4-5.
    \331\ Id.
---------------------------------------------------------------------------

    Better Markets recommended that proposed Sec.  16.01 also require 
the daily publication of the number of orders and order cancellations 
separately for futures, options and swaps.\332\ According to Better 
Markets, that data would indicate the levels of high frequency trading 
activity within market segments.\333\
---------------------------------------------------------------------------

    \332\ Better Markets Comment Letter at 9 (Feb. 22, 2011).
    \333\ Id.
---------------------------------------------------------------------------

    CME stated that while it does not object to reporting block trades 
that are included in the daily volume of trading, this new requirement 
will require it to ascertain what systems changes will be necessary and 
how long such changes will take to implement.\334\ CME also stated that 
the end of day price reporting of interest rate swaps should be 
addressed as a separate initiative outside of the DCM and SEF 
rulemakings given the state of change in the swaps markets and how the 
market is expected to evolve as a result of regulatory reforms 
underway.\335\
---------------------------------------------------------------------------

    \334\ CME Comment Letter at 29 (Feb. 22, 2011).
    \335\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is codifying Sec.  16.01 as proposed, with a 
technical revision to renumber paragraph (a).
    The Commission recognizes that the end-of-day reporting for 
interest rate swaps by each DCM and SEF may require a more flexible 
reporting scheme to take into account the venue in which the interest-
rate swap is cleared. In this respect, the daily settlement curve (the 
yield curve for particular interest rate (e.g., LIBOR, TIBOR, Euribor, 
etc.)) at each clearinghouse may differ based on the assumptions of the 
curve. The Commission has considered the proposed reporting standard 
put forth by Eris, however, in light of the novelty of swaps trading on 
DCMs, the Commission believes that the more detailed reporting 
obligations under Sec.  16.01 are warranted at this time. The 
Commission did not receive any objections to the additional reporting 
of block trades or to the swaps reporting standards. The Commission 
further clarifies that in making information available to the general 
public, as required in 16.01(e), DCMs should ensure that such 
information can be accessed by visitors to the Web site without the 
need to register, log in, provide a user name or obtain a 
password.\336\
---------------------------------------------------------------------------

    \336\ See e.g., former acceptable practices to Core Principle 7 
(imposing similar requirement with respect to rulebooks). 17 CFR 
part 38, appendix B (2010).
---------------------------------------------------------------------------

    Better Markets' comments pertaining to high frequency trading are 
addressed under the general discussion in Core Principle 4 pertaining 
to HFTs.
9. Subpart J--Execution of Transactions
    The Dodd-Frank Act revised Core Principle 9 to read as follows:

    The board of trade shall provide a competitive, open and 
efficient market and mechanism for executing transactions that 
protects the price discovery process of trading in the centralized 
market of the board of trade. * * * The rules of the board of trade 
may authorize, for bona fide business purposes:
    (a) Transfer trades or office trades;
    (b) An exchange of:
    (1) Futures in connection with a cash commodity transaction;
    (2) Futures for cash commodities; or
    (3) Future for swaps; or
    (c) A futures commission merchant, acting as principal or agent, 
to enter into or confirm the execution of a contract for the 
purchase or sale of a commodity for future delivery if the contract 
is reported, recorded, or cleared in accordance with the rules of 
the contract market or a derivatives clearing organization.\337\
---------------------------------------------------------------------------

    \337\ 7 U.S.C. 7(d)(9). The language that provides that off-
exchange transactions are permitted for bona fide business purposes 
if authorized by the board of trade's rules was formerly contained 
in Designation Criteria 3.

    In view of Congress' revisions to Core Principle 9, and the 
Commission's own experience over the past decade in overseeing 
compliance with former Core Principle 9 \338\ and related regulation 
1.38,\339\ the Commission proposed a number of new and revised rules, 
guidance and acceptable practices in order to implement the revised 
core principle, which requires DCMs to

[[Page 36643]]

provide a competitive, open and efficient market and mechanism for 
executing transactions that protects the price discovery process of 
trading in the centralized market of the board of trade.
---------------------------------------------------------------------------

    \338\ Former Core Principle 9 provided as follows: ``[T]he board 
of trade shall provide a competitive, open and efficient market and 
mechanism for executing transactions.''
    \339\ As described in the DCM NPRM, regulation 1.38 (Execution 
of Transactions) of the Commission's regulations requires, among 
other things, that all purchases and sales of a commodity for future 
delivery or a commodity option on or subject to the rules of a DCM 
be executed by open and competitive methods, with certain exceptions 
for transactions that are executed noncompetitively pursuant to a 
DCM's rules. See DCM NPRM, 75 FR at 80588 (discussing regulation 
1.38).
---------------------------------------------------------------------------

    Proposed Sec.  38.500 codified the statutory text of Core Principle 
9.\340\ Proposed Sec.  38.501 specified the manner in which 
transactions on the DCM's centralized market must be executed, and set 
forth the requirements applicable to transactions that are executed off 
of the DCM's centralized market, and incorporated certain 
clarifications pertaining to the allowable types of off-exchange 
transactions. Proposed Sec.  38.502 implemented the core principle's 
requirement that DCMs provide a market and mechanism for executing 
transactions that protects the price discovery process of trading in 
its centralized market. The rule proposed a centralized market trading 
requirement for all contracts listed on a DCM.
---------------------------------------------------------------------------

    \340\ The Commission is finalizing regulation 38.500 in this 
release.
---------------------------------------------------------------------------

    Proposed Sec.  38.503 set forth revised rules and related guidance 
pertaining to block transactions in futures contracts, including the 
appropriate size, price and reporting of block trades; proposed Sec.  
38.504 set forth rules pertaining to block transactions in swap 
contracts. Finally, the DCM NPRM proposed new and revised rules under 
Core Principle 9 that clarified other off-exchange transactions, 
referred to collectively as ``exchanges of derivatives for related 
positions'' and office trades and transfer trades.
Summary of Comments and Discussion
    The Commission received a significant number of comments on all 
aspects of the proposed rules under Core Principle 9, comprising both 
general and specific comments pertaining to the Commission's 
interpretation of Core Principle 9 and various other aspects of the 
proposed rules.
    In particular, commenters raised numerous questions pertaining to 
the centralized market trading requirement rule's delisting requirement 
for non-compliant contracts and the available alternatives for trading 
such contracts.\341\ Commenters also raised questions pertaining to 
certain aspects of the proposed rules for block transactions and 
exchanges of derivatives for related position transactions.\342\ The 
Commission has considered these comments, along with comments 
pertaining to other aspects of the proposed rules under Core Principle 
9, and believes that additional time is appropriate before finalizing 
the proposed rules for Core Principle 9. In particular, the Commission 
plans and expects to take up the proposed rules under Core Principle 9 
when it considers the final SEF rulemaking. The additional time will 
allow the Commission to consider the available alternatives for 
contracts that may not comply with the proposed centralized market 
trading requirement (including listing contracts on a SEF), as well as 
the related implications of the rules for off-exchange transactions, 
including block transactions and exchange of derivatives for relates 
position transactions (``EDRPs''). At that time, the Commission will 
address the comments received in connection with proposed Sec. Sec.  
38.501-38.506.
---------------------------------------------------------------------------

    \341\ See, e.g., CME Comment Letter at 4-8, 29-30 (Feb. 22, 
2011); CME Comment Letter at 2-6 (April 18, 2011); CME Joint Comment 
Letter at 2-6 (June 3, 2011); CME Comment Letter (Aug. 3, 2011); 
BlackRock Comment Letter at 2-3 (Feb. 22, 2011); ICE Comment Letter 
at 3-6 (Feb. 22, 2011); CFE Comment Letter at 4-7 (Feb. 22, 2011); 
CFE Comment Letter (June 3, 2011); OCX Comment Letter at 2-5 (Feb. 
22, 2011); Eris Comment Letter at 1-3 (Feb. 22, 2011); Eris Comment 
Letter at 3 (June 3, 2011); GreenX Comment Letter at 8-11 (Feb. 22, 
2011); GreenX Comment Letter at 4 (April 18, 2011); and, GreenX 
Comment Letter (June 3, 2011).
    \342\ See, e.g., ICE Comment Letter at 7 (Feb. 22, 2011); CME 
Comment Letter at 31 (Feb. 22, 2011); ELX Comment Letter at 3 (Feb. 
22, 2011); and, KCBT Comment Letter at 6 (Feb. 22, 2011).
---------------------------------------------------------------------------

10. Subpart K--Trade Information
    Section 5(d)(10) of the CEA (Core Principle 10), as amended by the 
Dodd-Frank Act, requires DCMs to capture, verify, and retain detailed 
trade information (i.e., audit trail data) for all transactions in 
their markets. The core principle requires DCMs to maintain rules and 
procedures that provide for the recording and safe storage of all 
identifying trade information in a manner that enables the DCM to 
assist in the prevention of customer and market abuses and to provide 
evidence of any rule violations. The Dodd-Frank Act did not 
substantively revise Core Principle 10, and therefore, the application 
guidance and acceptable practices for former Core Principle 10 provided 
the basis for the Commission's proposed audit trail regulations in 
subpart K.\343\ In addition, the Commission also looked to the issues 
that arose in the context of RERs pertaining to Core Principle 10.
---------------------------------------------------------------------------

    \343\ The Commission previously expressed the regulatory 
requirements of former Core Principle 10 through its application 
guidance for that core principle. See 17 CFR part 38, app. B, 
Application Guidance and Acceptable Practices for Core Principle 10. 
It also provided additional insight regarding the core principle 
through detailed acceptable practices that all DCMs could use to 
demonstrate compliance with former Core Principle 10. The acceptable 
practices explained that ``the goal of an audit trail is to detect 
and deter customer and market abuse.'' Id. at (b)(1). It also 
outlined the elements of an effective audit trail. Those elements 
included original source documents, which help to establish the 
accuracy and authenticity of an audit trail. Also included is a 
transaction history database and electronic analysis capability, 
which allow a DCM to more easily access and review audit trail data 
to identify possible trading abuses and rule violations. Finally, 
the acceptable practices pointed to a DCM's safe storage capability, 
emphasizing that audit trail data must be stored in a manner that 
protects it from unauthorized alteration, accidental erasure, or 
other loss.
---------------------------------------------------------------------------

    The Commission proposed to codify the statutory text of Core 
Principle 10 in proposed Sec.  38.550, and is adopting that rule as 
proposed.
i. Sec.  38.551--Audit Trail Required
    Proposed Sec.  38.551 is based on the application guidance and 
acceptable practices for former Core Principle 10.\344\ Proposed Sec.  
38.551 established the overarching requirement that a DCM's audit trail 
program must help to ensure that the DCM can appropriately monitor and 
investigate any potential customer and market abuse. The proposed rule 
also provided that the audit trail data captured by a DCM must be 
sufficient to reconstruct all transactions within a reasonable period 
of time, and to provide evidence of any rule violations that may have 
occurred. The proposed rule further provided that audit trails must be 
sufficient to track customer orders from the time of receipt through 
fill, allocation, or other disposition. Proposed Sec.  38.551 applied 
equally to open-outcry and electronic trading.\345\
---------------------------------------------------------------------------

    \344\ 17 CFR part 38, app. B, Core Principle 10, Application 
Guidance and Acceptable Practices.
    \345\ 75 FR 80572, 80617-80618, Dec. 22, 2010.
---------------------------------------------------------------------------

Summary of Comments
    Two commenters stated that the proposed rule is too 
prescriptive.\346\ CME argued that the proposals were a departure from 
a principles-based regulatory regime and would stifle growth and 
innovation.\347\ Similarly, MGEX argued that prescriptive rules would 
impose additional burdens and costs upon DCMs.\348\
---------------------------------------------------------------------------

    \346\ CME Comment Letter at 33-34 (Feb. 22, 2011); and MGEX 
Comment Letter at 7 (Feb. 22, 2011).
    \347\ CME Comment Letter at 34 (Feb. 22, 2011).
    \348\ MGEX Comment Letter at 7 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Chris Barnard agreed with the proposed requirement that all DCMs 
have the ability to reconstruct all trading.\349\ Mr. Barnard suggested 
that the requirement that an exchange be able to reconstruct trading 
should include ``all trading events, including the entry of bids and 
offers in the order of their occurrence, as well as executed trades * * 
*'' in order to permit

[[Page 36644]]

exchanges to fully reconstruct and verify all trading activities.\350\
---------------------------------------------------------------------------

    \349\ Barnard Comment Letter at 2 (May 20, 2011).
    \350\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.551 as proposed. While the 
Commission acknowledges CME and MGEX's comments, the Commission does 
not believe that requiring an exchange to capture and retain all audit 
trail data--to ensure that the exchange can reconstruct all 
transactions on its markets--places an undue burden on exchanges or 
stifles innovation. As noted above, the requirement that DCMs capture 
and retain all audit trail data is central to ensuring that the DCM can 
appropriately monitor and investigate any potential customer and market 
abuse, as required by the core principle. The Commission is not 
persuaded that this requirement would unduly burden DCMs, as these 
requirements are the same as the responsibilities currently outlined in 
the Acceptable Practices and Application Guidance for Core Principle 
10. In addition, exchanges are free to decide the manner and the 
technology they use to capture and retain audit trail data. The 
Commission is not prescribing how this should be done and therefore 
does not believe that this requirement will stifle innovation.
    The Commission also notes that the text of Sec.  38.551 defines 
certain regulatory outcomes that exchanges must achieve, but does not 
prescribe a specific means by which exchanges must achieve those 
outcomes. Accordingly, the rule is not prescriptive as it permits an 
exchange to achieve the required outcome in a number of ways.
    Proposed Sec.  38.551 required that a DCM ``must capture and retain 
all audit trail data necessary to detect, investigate, and prevent 
customer and market abuses.'' \351\ The creation and retention of a 
comprehensive audit trail enables exchanges to properly reconstruct any 
and all trading events and to conduct a thorough forensic review of all 
trade information. The Commission believes that the ability to 
reconstruct trading is a fundamental element of a DCM's surveillance 
and rule enforcement programs.
---------------------------------------------------------------------------

    \351\ DCM NPRM at 80617-18.
---------------------------------------------------------------------------

ii. Sec.  38.552--Elements of an Acceptable Audit Trail Program
    Proposed Sec.  38.552 established the four elements of an 
acceptable audit trail program. First, proposed Sec.  38.552(a) 
required a DCM's audit trail to include original source documents, 
defined to include unalterable, sequentially-identified records on 
which trade execution information is originally recorded, whether 
manually or electronically. Additionally, the proposal required that 
customer order records indicate the terms of the order, the account 
identifier that relates to the account owner, and the time of the order 
entry. Finally, proposed Sec.  38.552(a) required that, for open-outcry 
trades, the time of report of order execution also be captured in the 
audit trail.
    Second, proposed Sec.  38.552(b) required that a DCM's audit trail 
program must include a transaction history database. Proposed Sec.  
38.552(b) specified the trade information required to be included in a 
transaction history database, including a history of all orders and 
trades; all data input in the trade matching system for clearing; the 
categories of participants for which trades were executed (i.e., 
customer type indicator or ``CTI'' codes); timing and sequencing data 
sufficient to reconstruct trading; and identification of each account 
to which fills were allocated.
    Third, proposed Sec.  38.552(c) required that a DCM's audit trail 
program have electronic analysis capability for all data in its 
transaction history database, and that such electronic analysis 
capability allow the exchange to reconstruct trades in order to 
identify possible rule violations.
    Finally, proposed Sec.  38.552(d) required that a DCM's audit trail 
program include the ability to safely store all audit trail data, and 
to retain data in accordance with the recordkeeping requirements of DCM 
Core Principle 18 and associated regulations. Safe storage capability 
required a DCM to protect its audit trail data from unauthorized 
alteration, accidental erasure, or other loss.
Summary of Comments
    In addition to submitting general comments asserting that the 
proposed rules are overly prescriptive, CME stated that while it 
currently maintains a database that includes a history of all orders 
and trades for electronic trading, the open outcry trading venue ``does 
not support an electronic transaction history database that captures 
the history of all orders, including orders that may be cancelled prior 
to execution.'' \352\ CME requested that, in the event that open-outcry 
orders are not entered into an electronic order routing system, the 
Commission clarify the requirements to take into account the 
distinctions between electronic and open-outcry trading.\353\
---------------------------------------------------------------------------

    \352\ CME Comment Letter at 33 (Feb. 22, 2011).
    \353\ Id.
---------------------------------------------------------------------------

    Better Markets requested that the Commission consider the impact 
that high-frequency traders may have on creation and maintenance of an 
exchange's audit trail data.\354\ Specifically, Better Markets 
commented that each of the elements of an exchange's audit trail, 
including all customer orders, should be ``time-stamped at intervals 
consistent with the capabilities of [high-frequency traders] * * *'' 
\355\
---------------------------------------------------------------------------

    \354\ Better Markets Comment Letter at 9 (Feb. 22, 2011).
    \355\ Id. at 10.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting Sec.  38.552 as proposed, with certain 
revisions in response to comments received, and additional 
clarifications as explained below.
    First, in response to CME's comment that the Commission's audit 
trail rules should recognize the distinctions between electronic 
trading and open outcry trading, the Commission is revising Sec.  
38.552(b) to specify that a transaction history database must include a 
history of all trades, whether executed electronically or via open-
outcry. However, order information must be included in the database 
only to the extent that such orders are entered into an electronic 
trading system. In addition, Sec.  38.552(b) also clarifies that order 
data includes modifications and cancellations of such orders. This 
reflects a regulatory requirement previously proposed as part of Sec.  
38.156, but moved to Sec.  38.552(b) in the final rules. The final 
rules further revise Sec.  38.552(b)(2) by replacing the customer type 
indicators listed in the proposed rule with the term ``customer type 
indicator code.''
    The final rules also revise Sec.  38.552(c) to include the 
requirement that an exchange's electronic analysis capability must 
provide it with the ability to reconstruct trading and identify 
possible trading violations.\356\
---------------------------------------------------------------------------

    \356\ The text added to regulation 38.552(c) is language 
originally proposed in regulation 38.156 and has now been deleted 
from regulation 38.156.
---------------------------------------------------------------------------

    The Commission acknowledges Better Markets' comments regarding 
audit trail data with respect to high-frequency trading. However, the 
Commission believes that the audit trail rules adopted herein, 
particularly the requirements that an exchange retain and maintain all 
data necessary to permit it to reconstruct trading, will help ensure 
that information and trades entered into an electronic trading system 
by high-frequency traders will be collected and retained as any other

[[Page 36645]]

audit trail data would be collected and retained.
    The Commission believes that the four elements set forth in Sec.  
38.552 are necessary to ensure that a DCM can capture and retain 
sufficient trade-related information, can reconstruct trading promptly, 
and has the necessary tools to detect and deter potential customer and 
market abuses through its audit trail. Specifically, original source 
documents must include all necessary trade information to reconstruct 
trading on the DCM. The transaction history database facilitates rapid 
access and analysis of all original source documents, thereby aiding 
DCMs in monitoring for customer and market abuses, while electronic 
analysis capability helps ensure effective use of audit trail data by 
requiring appropriate tools to use in conjunction with a DCM's 
transaction history database. Safe storage capability enables a DCM to 
properly preserve and protect the audit trail data so that it is 
readily available for the DCM to use in any future investigation or 
inquiry into possible violations of DCM rules.
    With the clarifications and revisions discussed above, the 
Commission adopts Sec.  38.552 as the elements required of an 
acceptable audit trail program.
iii. Sec.  38.553--Enforcement of Audit Trail Requirements
    Proposed Sec.  38.553 established the elements of an effective 
audit trail enforcement program. The proposed rule was organized in two 
parts. First, proposed Sec.  38.553(a) required a DCM to develop an 
effective audit trail enforcement program. The proposed rule provided 
that an effective enforcement program must, at a minimum, review all 
members and market participants annually to verify their compliance 
with all applicable audit trail requirements.
    Proposed Sec.  38.553(a) was further divided into two paragraphs. 
Paragraph (a)(1) set forth minimum review criteria for an electronic 
trading audit trail, including annual examinations by DCMs of randomly 
selected samples of front-end audit trail data from order routing 
systems to ensure the presence and accuracy of required audit trail 
data. In addition, paragraph (a)(1) required that exchanges: Review the 
processes used by members and market participants to assign and 
maintain exchange user identifications; review usage patterns 
associated with user identifications; and review account numbers and 
CTI codes in trade records to test for accuracy and improper usage. 
Paragraph (a)(2) of proposed Sec.  38.553 established minimum review 
criteria for open-outcry trading, requiring DCMs to conduct annual 
reviews of all members and market participants to verify their 
compliance with their trade timing, order ticket, and trading card 
requirements.
    Second, proposed Sec.  38.553(b) required DCMs to develop programs 
to ensure effective enforcement of their audit trail and recordkeeping 
requirements. This requirement applied equally to both open-outcry and 
electronic trading. Proposed Sec.  38.553(b) required exchanges' 
enforcement programs to identify members and market participants that 
routinely failed to comply with the requirements of Core Principle 10 
and to levy meaningful sanctions when deficiencies were found. Such 
sanctions could not include more than one warning letter or other non-
financial penalty for the same violation within a rolling 12 month 
period.
Summary of Comments
    As noted above with respect to other rules, several commenters 
requested clarification of the term ``market participant'' in Sec.  
38.553(a) and Sec.  38.553(b), including questioning who qualifies as a 
``market participant.'' \357\ Specifically, MGEX and NYSE Liffe 
suggested that the term ``market participant'' should be limited to 
only those participants who have direct access to the trading 
platform.\358\ CME commented that the Commission should limit the 
requirement for annual audit trail reviews to the ``clearing firm level 
rather than the market participant level'' because conducting an annual 
audit trail and recordkeeping review of ``every participant who enters 
an order into [a trading system would be] exceptionally onerous, costly 
and unproductive.'' \359\ Additionally, MGEX argued that exchanges 
should be permitted to conduct annual reviews by testing a sample of 
market participants in order to make the annual reviews of audit trail 
and recordkeeping requirements ``more efficient, adequate and less 
burdensome.'' \360\
---------------------------------------------------------------------------

    \357\ CME Comment Letter (Feb. 22, 2011); NYSE Liffe Comment 
Letter (Feb. 22, 2011); MGEX Comment Letter (Feb. 22, 2011).
    \358\ MGEX Comment Letter at 7 (Feb. 22, 2011); NYSE Liffe 
Comment Letter at 12 (Feb. 22, 2011).
    \359\ CME Comment Letter at 33(Feb. 22, 2011).
    \360\ MGEX Comment Letter at 7 (Feb. 22, 2011).
---------------------------------------------------------------------------

    In response to the proposed Sec.  38.553(b)'s requirement for 
sufficient sanctions for violations of audit trail and recordkeeping 
requirements, MGEX argued that such a requirement is ``arbitrary and 
counterproductive.'' \361\ MGEX proposed that the Commission should 
simply require exchanges to have an adequate audit trail program, 
including adequate enforcement of the audit trail requirements.\362\ 
MGEX argued that such an approach would allow an exchange to develop 
``what works best for their business while meeting intended audit trail 
requirements.'' \363\
---------------------------------------------------------------------------

    \361\ Id.
    \362\ Id.
    \363\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission adopts proposed Sec.  38.553, with certain 
amendments.
    The Commission has considered the comments pertaining to this rule 
and believes that the term ``market participants,'' as used in 
Sec. Sec.  38.553(a) and 38.553(b), requires clarification. 
Accordingly, ``market participants'' is amended to instead state 
``persons and firms subject to designated contract market recordkeeping 
rules'' throughout Sec.  38.553. The Commission recognizes that the 
term ``market participants'' may be viewed to capture a wider range of 
persons than the Commission intended to subject to the proposed 
regulation. Therefore, this amendment to Sec.  38.553 clarifies that 
its requirements apply to those individuals and firms that are subject 
to DCM recordkeeping rules.
    The Commission does not believe that sampling-based reviews of 
audit trail and recordkeeping requirements are adequate to reasonably 
ensure compliance with audit trail rules. Sections 38.553(a) and 
38.553(b) require audit trail enforcement programs that will yield some 
certainty with respect to exchanges' accurate and consistent access to 
all data necessary to reconstruct all transactions in their markets and 
provide evidence of customer and market abuses. Absent reliable audit 
trail data, an exchange's ability to detect or investigate customer or 
market abuses may be severely diminished.
    The Commission does not believe that requiring exchanges to issue 
no more than one warning letter for the same violation within a rolling 
12-month time period is arbitrary and counterproductive. The proposed 
requirement to limit DCMs to no more than one warning letter for the 
same violation within a rolling 12-month time period helps ensure that 
exchanges levy meaningful fines and sanctions to deter recidivist 
behavior. However, the Commission is amending Sec.  38.553(b) to 
clarify that its requirements with respect to warning letters only 
apply where exchange compliance staff finds an actual rule violation, 
rather than just the suspicion of a violation.

[[Page 36646]]

    The Commission notes that Sec.  38.553 reflects staff's findings 
and recommendations in recent RERs regarding DCMs' audit trail 
enforcement programs, including recommendations regarding more frequent 
audit trail reviews and larger sanctions for audit trail violations. 
The proposed rule also reflects the Commission's directive to DCMs in 
recent RERs to develop audit trail programs for electronic trading that 
are comparable in rigor and scope to their audit trail programs for 
open-outcry trading.\364\ Accordingly, the Commission is adopting Sec.  
38.553 with the aforementioned modifications.
---------------------------------------------------------------------------

    \364\ See Rule Enforcement Review of the Minneapolis Grain 
Exchange (August 27, 2009), and Rule Enforcement Review of ICE 
Futures U.S. (Feb. 2, 2010).
---------------------------------------------------------------------------

11. Subpart L--Financial Integrity of Transactions
    The Dodd-Frank Act amended the text of Core Principle 11 largely to 
incorporate the language from former Designation Criteria 5.\365\
---------------------------------------------------------------------------

    \365\ Former Designation Criterion 5 stated that ``the board of 
trade shall establish and enforce rules and procedures for ensuring 
the financial integrity of transactions entered into by or through 
the facilities of the contract market, including the clearance and 
settlement of the transactions with a derivatives clearing 
organization.'' 17 CFR Part 38, app. A (2010).
---------------------------------------------------------------------------

    This core principle requires that a DCM establish and enforce rules 
and procedures for ensuring the financial integrity of transactions 
entered into, on, or through the facilities of the contract market, 
including the clearing and settlement of the transactions with a DCO. 
Core Principle 11 also requires that a DCM establish and enforce rules 
to ensure: (i) The financial integrity of any futures commission 
merchant (``FCM'') and introducing broker (``IB''); and (ii) the 
protection of customer funds. Because the substance of this core 
principle is unchanged, the Commission interpreted the statutory 
provisions in the same manner as they are currently interpreted. The 
Commission proposed to codify current practices carried out by the 
industry, as well as practices listed in the application guidance for 
Core Principle 11 and former Designation Criterion 5. In addition, 
based upon its experience, the Commission proposed some new practices 
and requirements for DCMs in implementing Core Principle 11.\366\ Among 
other rules, the Commission proposed to codify the statutory text of 
Core Principle 11 in Sec.  38.600, and is adopting the rule as 
proposed.
---------------------------------------------------------------------------

    \366\ The Commission received five comment letters that 
discussed proposed regulations 38.600 through 38.607. The comments 
were received from ICE Comment Letter (Feb. 22, 2011), ELX Comment 
Letter (Feb. 22, 2011), MGEX Comment Letter (Feb. 22, 2011), KCBT 
Comment Letter (Feb. 22, 2011), and CME Comment Letter (Feb. 22, 
2011).
---------------------------------------------------------------------------

i. Sec.  38.601--Mandatory Clearing
    Proposed Sec.  38.601 provided that all transactions executed on or 
through a DCM, other than transactions in security futures products, be 
cleared through a Commission-registered DCO.
Summary of Comments
    CME commented that the mandatory clearing requirement should not 
apply to swaps traded on a DCM because not all swap contracts will be 
required to be cleared, such as foreign exchange swaps and swaps for 
end users.\367\ CME further stated that this requirement would put a 
DCM at a competitive disadvantage to a SEF without justification, and 
recommended that the Commission revise proposed Sec.  38.601 to exclude 
swaps from the clearing rule.\368\
---------------------------------------------------------------------------

    \367\ CME Comment Letter at 34 (Feb. 22, 2011).
    \368\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule, with certain 
amendments. The Commission believes that the language of the core 
principle specifically imposes a clearing obligation for all 
transactions executed on a DCM (as is the current practice) and has 
therefore not revised the rule to exclude swaps.\369\
---------------------------------------------------------------------------

    \369\ Although the DCM and SEF Financial Integrity Core 
Principles are similar, the SEF core principle contains the language 
``including the clearance and settlement of the swaps pursuant to 
section 2(h)(1).'' Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-2(f)(7), 
as added by section 733(f) of the Dodd-Frank Act. The DCM core 
principle states ``including the clearance and settlement of the 
transactions with a derivatives clearing organization.'' The 
Commission reads section 2(h)(1) as a limitation on the clearing 
obligation for SEFs, and as a result, proposed regulation 37.701 
requires all transactions executed on a SEF to be cleared unless the 
transaction is exempted from clearing under section 2(h)(7) of the 
CEA or the Commission determines that the clearing requirement under 
section 2(h)(1) of the CEA is inapplicable. Since Congress did not 
provide for a limitation on the clearing obligation in the DCM core 
principle, all transactions executed on or through a DCM must be 
cleared through a Commission-registered DCO.
---------------------------------------------------------------------------

    However, the Commission has revised the rule to make clear that 
transactions in security futures products that are executed on or 
through a DCM are also subject to the mandatory clearing requirement. 
Such products may be cleared either through a DCO or through a clearing 
agency registered pursuant to section 17A of the Securities Exchange 
Act of 1934.\370\
---------------------------------------------------------------------------

    \370\ 15 U.S.C. 78a et seq. (2010)
---------------------------------------------------------------------------

ii. Sec.  38.602--General Financial Integrity
    Proposed Sec.  38.602 provided that DCMs must adopt rules 
establishing minimum financial standards for both member FCMs and IBs 
and non-intermediated market participants.
Summary of Comments
    ICE contended that the Commission has expanded the standard in Core 
Principle 11 by requiring DCMs to establish minimum financial standards 
for all of their members and non-intermediated market 
participants.\371\ ICE further stated that many DCMs eliminated 
specific financial standards for their non-FCM members and instead 
require that non-FCM member transactions be guaranteed by a clearing 
member.\372\ As a result, ICE requested confirmation that a DCM rule 
requiring such clearing arrangements to be in place would satisfy 
proposed Sec.  38.602.\373\ ICE also requested confirmation that a DCM 
rule requiring an FCM to maintain capital in accordance with applicable 
Commission regulations would satisfy the DCM's duty to set financial 
requirements for its FCM members.\374\
---------------------------------------------------------------------------

    \371\ ICE Comment Letter at 12 (Feb. 22, 2011).
    \372\ Id. at 13.
    \373\ Id.
    \374\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed. In response to 
ICE's comments, the Commission confirms that a DCM rule requiring that 
transactions by a non-FCM member be guaranteed by a clearing member 
will satisfy Sec.  38.602.\375\
---------------------------------------------------------------------------

    \375\ The Commission notes that this requirement does not speak 
to DCO requirements under, for example, Core Principle D (Risk 
Management) for its clearing members.
---------------------------------------------------------------------------

    However, a DCM rule requiring an FCM to maintain capital in 
accordance with applicable Commission regulations will not, in itself, 
satisfy the DCM's duty to set minimum financial standards for its FCM 
members. The term ``minimum financial standards'' used in Sec.  38.602 
is not intended to cover only capital requirements. Rather, Sec.  
38.602 should be read in conjunction with Sec.  38.604, which requires 
surveillance by a DCM of financial and related information from each of 
its members. The Commission notes that a DCM's duty to set financial 
standards for its FCM members involves setting capital requirements, 
conducting surveillance of the potential future exposure of each FCM as 
compared to its capital, and taking appropriate action in light of the 
results of such surveillance.

[[Page 36647]]

iii. Sec.  38.603--Protection of Customer Funds
    Proposed Sec.  38.603 provided that DCMs must adopt rules for the 
protection of customer funds, including the segregation of customer and 
proprietary funds, the custody of customer funds, the investment 
standards for customer funds, intermediary default procedures and 
related recordkeeping.
Summary of Comments
    KCBT stated that because its rules incorporate by reference the 
requirements of the CEA, the requirement to implement exchange rules 
that mirror Commission regulations is duplicative, unnecessary and 
burdensome.\376\ In addition, KCBT noted that its clearing corporation 
already has rules in place to address intermediary default 
procedures.\377\
---------------------------------------------------------------------------

    \376\ KCBT Comment Letter at 7 (Feb. 22, 2011).
    \377\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed. In response to the 
comments, the Commission confirms that DCMs must adopt rules as 
required under Sec.  38.603. Establishing such rules is important 
because it will provide evidence: (i) that each DCM has focused 
attention on the specific regulations promulgated under the CEA; and 
(ii) that such regulations are appropriately implemented. Section 
38.603 does not specify the exact rules to be implemented by each DCM, 
but sets forth the substance of what the rules of each DCM must 
address.
    In response to KCBT's comment that its clearing corporation already 
has rules in place to address intermediary default procedures, the 
Commission notes that DCO rules protect the DCO, not fellow customers. 
Nonetheless, the performance of the functions required by Sec.  38.603 
may be allocated between a DCO and DCM pursuant to appropriate written 
agreements. Such agreements would have to include an arrangement 
between the DCO and DCM that the DCO would undertake the responsibility 
to protect the individual customers of the DCM.
iv. Sec.  38.604--Financial Surveillance
    Proposed Sec.  38.604 required that a DCM must routinely receive 
and promptly review financial and related information from its members, 
and conduct ongoing financial surveillance of the risk created by the 
positions taken by an FCM's customers. To meet this requirement, the 
DCM must have rules pertaining to minimum financial standards of 
intermediaries that include, among other things, rules prescribing 
minimum capital requirements for member FCMs and IBs.\378\ The DCM must 
also have rules pertaining to the protection of customer funds that 
must include, among other things, that each DCM must continually survey 
the obligations of each FCM created by its customers' positions and, as 
appropriate, compare those obligations to the financial resources of 
the FCM. If the obligations of a member FCM appear excessive as 
compared to the FCM's capital, a DCM should take appropriate action, 
including contacting the FCM or the FCM's designated self-regulatory 
organization (``DSRO'').
---------------------------------------------------------------------------

    \378\ An FCM that is a clearing member will also have additional 
obligations to the DCO as a result of its clearing membership.
---------------------------------------------------------------------------

Summary of Comments
    KCBT commented that it already reviews on a daily basis the open 
positions and percentage of open interest held by each clearing member, 
and ``pay/collect information'' based upon open positions and 
reportable positions.\379\ KCBT is concerned that the use of the terms 
``continually'' and ``excessive'' in the proposed regulation is 
vague.\380\ In addition, KCBT noted that the DSRO should continue to 
review the obligations of each firm for which it is the DSRO because 
the DSRO has access to all customer positions being carried by the FCM 
in all markets and thus is in a better position to ensure that the FCM 
has sufficient capital for the overall positions being carried by the 
FCM.\381\
---------------------------------------------------------------------------

    \379\ See KCBT Comment Letter at 7 (Feb. 22, 2011).
    \380\ Id.
    \381\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed and notes that the 
rule codifies existing industry practice. In response to comments 
raised by KCBT, the Commission notes that the term ``continually'' in 
the proposed rule requires that a DCM survey the obligations of each 
FCM created by the positions of its customers throughout the trading 
day, not just based upon end-of-day positions. Financial risk can shift 
dramatically throughout the day as a result of the combination of price 
move and new trades, making it difficult for a DCM to fulfill its 
obligations to establish and enforce rules to ensure: (i) the financial 
integrity of FCMs and IBs and (ii) the protection of customer funds 
pursuant to Core Principle 11, if such DCM limited its monitoring to 
daily. FCMs and IBs could be exposed to excessive risk if they are 
taking on risky positions during the day with the expectation that 
those risks will be offset prior to the daily review period set by the 
DCM. The Commission also notes that an arrangement between a DCO and a 
DCM, whereby the DCO is responsible to a DCM for the performance of 
certain functions, including the monitoring required pursuant to Sec.  
38.604, will continue to be permitted by the Commission.
    In response to KCBT's comment regarding the vagueness of the word 
``excessive,'' the Commission expects a DCM to exercise professional 
judgment in monitoring the risks of its FCMs as compared to their 
available capital, and to take follow-up action to inquire into and 
address any exceptional situations. This monitoring should occur in 
addition to any DSRO review.
v. Sec.  38.605--Requirements for Financial Surveillance Program
    Proposed Sec.  38.605 required DCMs, as self-regulatory 
organizations (``SROs''), to comply with the standards of amended Sec.  
1.52 to ensure the financial integrity of intermediaries by 
establishing and carrying out an SRO program for the examination and 
financial supervision of intermediaries. Section 1.52, as proposed to 
be amended, sets forth the required elements of SRO supervisory 
programs and permits one or more SROs to establish, subject to 
Commission approval, a joint audit plan to provide for the SRO 
supervision of members of more than one SRO. As noted in the DCM NPRM, 
proposed amendments to Sec.  1.52 included references to existing 
guidance to SROs contained in the Financial and Segregation 
Interpretation No. 4-1 (Advisory Interpretation for Self-Regulatory 
Organization Surveillance Over Members' Compliance with Minimum 
Financial, Segregation, Reporting, and Related Recordkeeping 
Requirements), and Addendums A and B to Financial and Segregation 
Interpretation No. 4-1, and Financial and Segregation Interpretation 
No. 4-2 (Risk-Based Auditing), which guided the practices of members of 
the Joint Audit Committee (``JAC'') operating a joint audit plan that 
had been approved by the Commission.\382\
---------------------------------------------------------------------------

    \382\ See 73 FR 52832, Sept. 11, 2008 (requesting comments prior 
to the Commission's approval of the most recent Joint Audit 
Committee agreement, which approval was granted March 18, 2009). See 
also, DCM NPRM, 75 FR at 80596.
---------------------------------------------------------------------------

Discussion
    No comments were received pertaining to the proposed rules, and the 
Commission is adopting proposed

[[Page 36648]]

Sec.  38.605 and Sec.  1.52 without modification.
    The Commission notes that the staff guidance contained in Division 
of Trading and Markets Financial and Segregation Interpretations 4-1 
and 4-2, and related Addendums A and B to Financial and Segregation 
Interpretations 4-1, remains effective. Accordingly, while the revised 
Sec.  1.52(b)(4) provides that an SRO's financial surveillance program 
must include the onsite examination of each member FCM no less 
frequently than once every 18 months, Financial and Segregation 
Interpretation No. 4-2 provides that FCMs should generally be subject 
to an onsite examination at least once every 9 to 18 months, with 
examination cycles exceeding 15 months only for registrants with a 
demonstrated history of strong compliance and risk management in order 
to provide flexibility for unexpected events or to vary examination 
dates.
    While Sec.  1.52 now codifies long established staff positions, and 
SRO practice, with respect to the manner in which SROs execute their 
financial surveillance and supervisory programs with respect to member 
intermediaries, the Commission will continue to evaluate options to 
further enhance the manner in which intermediaries are supervised and 
to strengthen the protection of customer funds.
vi. Sec.  38.606--Financial Regulatory Services Provided by a Third 
Party
    Proposed Sec.  38.606 provided that DCMs may satisfy their 
financial surveillance responsibilities under proposed Sec. Sec.  
38.604 and 38.605 by outsourcing such responsibilities to a registered 
futures association or other regulated entity, including, for example, 
a DCO. Proposed Sec.  38.606 provided that a DCM must ensure that the 
regulatory service provider has the capacity and resources to conduct 
the necessary financial surveillance and, notwithstanding the use of a 
regulatory service provider, the DCM remains responsible for compliance 
with its financial surveillance obligations.
Summary of Comments
    MGEX commented that the proposed requirements seem reasonable, and 
stated that the requirements could be satisfied under the current 
delegation and information sharing agreements such as the Commission-
approved JAC Agreement for Services.\383\ MGEX also commented that DCMs 
should not be required to audit third party regulatory providers 
because that would frustrate the purpose, efficiency, and economic 
value of outsourcing to a third party.\384\
---------------------------------------------------------------------------

    \383\ MGEX Comment Letter at 8 (Feb. 22, 2011).
    \384\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule without modification. 
In response to MGEX's comments, the Commission notes that Sec.  38.606 
would not be satisfied solely by relying on a DCM's JAC Agreement. The 
current JAC Agreement does not cover the type of financial surveillance 
specified in Sec.  38.604, nor does it, by its terms, serve as an 
outsourcing regulatory services agreement for the type of outsourcing 
contemplated under Sec.  38.606. Accordingly, in order to satisfy the 
requirements of both Sec. Sec.  38.604 and 38.605, a regulatory 
services agreement must specifically include the following: (i) the 
regulatory services to be performed, which to satisfy Sec.  38.604 must 
include intraday monitoring of FCM obligations and positions; (ii) to 
whom and for whom such services are to be provided; and (iii) a 
statement or representation that the provider of the services has the 
capacity and resources to perform the identified services.
vii. Sec.  38.607--Direct Access
    Proposed Sec.  38.607 required a DCM that allows customers direct 
access to its contract market to implement certain direct access 
controls and procedures in order to provide member FCMs with tools to 
manage their financial risk. The proposed rule contemplated that an FCM 
would continue to have primary responsibility for overall risk 
management, but that the DCM would be required to establish an 
automated risk management system permitting an FCM to set appropriate 
risk limits for each customer with direct access to the contract 
market.
Summary of Comments
    CME supports risk controls at both the DCM and DCO levels, and also 
at clearing firm and direct access client levels.\385\ CME supports the 
discretion that the proposed rules provide a DCM in terms of the 
control model for access, and recommended a level of standardization 
with respect to the types of DCM pre-trade controls in the form of 
acceptable practices.\386\ ELX recommended that the Commission consider 
allowing an FCM to bypass use of DCM-provided controls if an FCM has 
its own controls that a DCM tests and deems to be sufficient.\387\ MGEX 
commented that the Commission should not mandate that a DCM provide the 
technology as a prescriptive rule, and further claimed that such tools 
are the FCM's responsibility and DCMs should not be required to assume 
these responsibilities.\388\
---------------------------------------------------------------------------

    \385\ CME Comment Letter at 34 (Feb. 22, 2011).
    \386\ Id.
    \387\ ELX Comment Letter at 5 (Feb. 22, 2011).
    \388\ MGEX Comment Letter at 8 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    After reviewing the comments discussed above, the Commission is 
adopting the proposed rule without modification and believes that risk 
controls are appropriate at the FCM, DCO and DCM levels. The Commission 
notes that it is impossible for an FCM to protect itself without the 
aid of the DCM when a customer has direct access to a DCM and thus 
completes trades that are the financial responsibility of such 
customer's FCM before the FCM's systems have an opportunity to prevent 
the execution of such trades. As a result, DCMs allowing customers 
direct access to their markets must implement certain controls and 
procedures to allow FCMs to manage their risk. As stated in the 
proposed rule, these controls would not be required for a DCM that 
permits only intermediated transactions and does not permit direct 
access.
    The responsibility to utilize these controls and procedures remains 
with the FCM. Each FCM permitting direct access must use DCM-provided 
controls, regardless of the purported efficacy of an FCM's 
controls.\389\ This principle is supported by CME's comment letter, the 
Commission's Technology Advisory Committee report (the ``DMA 
Report''),\390\ and the FIA Report on Market Access Risk Management

[[Page 36649]]

Recommendations (the ``FIA Report'').\391\
---------------------------------------------------------------------------

    \389\ The efficacy of these controls also hinge, in part, on the 
proper functioning of the electronic systems of DCMs, FCMs and 
direct access market participants, and thus, necessitates that such 
electronic systems are routinely tested and monitored. Accordingly, 
the Commission may address additional electronic system testing and 
supervision-related issues in the future.
    \390\ See Pre-Trade Functionality Subcommittee of the CFTC 
Technology Advisory Committee report, ``Recommendations on Pre-Trade 
Practices for Trading Firms, Clearing Firms, and Exchanges Involved 
in Direct Market Access'' (March 1, 2011), accepted by the TAC and 
available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf. The DMA 
Report recommends specific controls that should be adopted by each 
FCM and DCM and notes that ``the exchanges are the point furthest 
downstream, so coordination at this level has the greatest leverage 
to impact the industry as a whole.'' DMA Report at p. 4. The 
controls provided by the DCM serve as the backstop, in the event 
that an FCM's controls are insufficient. The DMA Report notes that, 
although the recommendations may seem redundant, it ``strongly 
believes that an approach of multiple, redundant checks across the 
supply chain offers the most robust protection to markets.'' Id. at 
p. 5.
    \391\ See FIA report on ``Market Access Risk Management 
Recommendations'' (April 2010), available at: http://www.futuresindustry.org/downloads/Market_Access-6.pdf. (``FIA 
Report'').
---------------------------------------------------------------------------

    As discussed in the DCM NPRM, the Technical Committee of the 
International Organization of Security Commissions (``IOSCO'') 
published a final report on principles for direct electronic access in 
August of 2010 (the ``IOSCO DEA Report'') stating that, in an automated 
trading environment, the only controls that can effectively enforce 
limitations on risk are automated controls.\392\ Further, the IOSCO DEA 
Report noted that a market should not permit direct electronic access 
unless effective systems and controls are in place to enable risk 
management, including automated pre-trade controls enabling 
intermediaries to implement appropriate trading limits.\393\ The IOSCO 
DEA Report stated that ``[t]here is no convincing rationale for not 
using automated credit limit system filters * * * it will be critical 
for intermediaries, third party vendors and markets to cooperate in 
putting into place appropriate systems and controls.'' \394\ One 
example provided in the report was that a market could provide and 
operate an automated system (i.e., software and hardware) that would be 
used by the intermediary and clearing firm.\395\
---------------------------------------------------------------------------

    \392\ IOSCO, Final Report of the IOSCO Technical Committee, 
``Principles for Direct Electronic Access to Markets,'' at 20, IOSCO 
Doc. FR08/10 (August 12, 2010), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD332.pdf.
    \393\ Id.
    \394\ Id. at p. 22.
    \395\ Id.
---------------------------------------------------------------------------

    Further, the FIA's working group, consisting of DCMs, clearing 
firms, and trading firms, recommended that pre-trade controls be set at 
the exchange level, and that the controls be mandatory to ensure that 
there are no latency disadvantages.\396\ In a publication in January 
2011, the FIA reported that the majority of exchanges have policies and 
tools in place that comply with those recommendations.\397\ The DMA 
Report also discussed the latency for an FCM that elects to use a DCM's 
controls as compared to an FCM that does not.\398\ This disadvantage is 
eliminated if each DCM requires all FCMs to use the DCM-provided 
protections.
---------------------------------------------------------------------------

    \396\ See e.g., FIA Report.
    \397\ See Leslie Sutphen, ``Exchange Survey Finds Wide Range of 
Risk Controls in Place'' (January 2011), at 28, available at: http://www.futuresindustry.org/downloads/RC-survey.pdf.
    \398\ See DMA Report at p. 4.
---------------------------------------------------------------------------

12. Subpart M--Protection of Markets and Market Participants
    Core Principle 12, as amended by the Dodd-Frank Act, requires that 
DCMs establish and enforce rules to protect markets and market 
participants from abusive practices committed by any party, including 
abusive practices committed by a party acting as an agent for a 
participant, and promote fair and equitable trading on the contract 
market.
    The Commission proposed to codify the statutory text of the core 
principle in Sec.  38.650, and is adopting the rule as proposed.
i. Sec.  38.651--Additional Sources for Compliance
    Proposed Sec.  38.651 required that a DCM have and enforce rules 
that are designed to promote fair and equitable trading and to protect 
the market and market participants from abusive practices including 
fraudulent, noncompetitive or unfair actions, committed by any party. 
The rule also required that DCMs must have methods and resources 
appropriate to the nature of the trading system and the structure of 
the market to detect trade practice and market abuses and to discipline 
such behavior, in accordance with Core Principles 2 and 4, and the 
associated regulations in subparts C and E of this part, respectively. 
The proposed rule required that DCMs also must provide a competitive, 
open and efficient market and mechanism for executing transactions in 
accordance with Core Principle 9 and the associated regulations under 
subpart J of this part.
Summary of Comments
    Chris Barnard and Better Markets referenced a discussion from the 
DCM NPRM preamble that provided that a DCM must establish rules that 
require the fair, equitable, and timely provision of information 
regarding prices, bids, and offers to market participants.\399\ Mr. 
Barnard requested that the Commission amend the wording of proposed 
Sec. Sec.  38.650 and 38.651 to include this language and Better 
Markets requested that the proposed rules prohibit privileged access to 
data feeds, arguing that the practice is disruptive of fair and 
equitable trading.\400\
---------------------------------------------------------------------------

    \399\ Better Markets Comment Letter at 10 (Feb. 22, 2011) and 
Barnard Comment Letter at 4 (May 20, 2011) (citing DCM NPRM at 
80597).
    \400\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule with a technical modification 
to revise the heading of the rule from ``Additional sources for 
compliance'' to the more appropriate ``Protection of markets and market 
participants.'' All other aspects of the proposed rule will remain 
unchanged.
    The Commission believes that Mr. Barnard's concerns are adequately 
addressed by the rules adopted in this release. As an initial matter, 
Sec.  38.650 simply codifies the language of Core Principle 12 and thus 
cannot be amended by the Commission. Additionally, the broad 
requirement to promote ``fair and equitable trading'' contained in 
Sec. Sec.  38.650 and 38.651, as well as the Core Principle 9 
requirement to provide a ``competitive, open, and efficient market and 
mechanism for executing transactions,'' are sufficient to capture the 
obligation to provide fair, equitable, and timely information regarding 
prices, bids, and offers. With respect to Better Markets' comment, the 
Commission notes that the language from the DCM NPRM cited by Better 
Markets was not intended to preclude co-location. Instead, the DCM NPRM 
provides that a market should be fair and equitable in its information 
distribution, meaning all participants in co-location agreements should 
pay the same price for a given level of service and access. This does 
not mean that everyone in the market is required to get information at 
the same time, but rather that every member of a connection or access 
type class must be treated equally in terms of service and cost. The 
faster access to price, bid, and offer information afforded by co-
location is no different than the faster access to information afforded 
to traders in the pits prior to the markets becoming electronic. The 
Commission believes that prohibiting co-location, or requiring that co-
location services be throttled to a point that all participants are 
able to consume information or access the matching engine at the same 
speed, would not be practical or reasonable. The Commission also notes 
that it recently addressed co-location fees in a separate proposed 
rulemaking for ``Co-location/Proximity Hosting Services.'' \401\
---------------------------------------------------------------------------

    \401\ See, Notice of proposed rulemaking, 75 FR 33198, Jun. 11, 
2010.
---------------------------------------------------------------------------

13. Subpart N--Disciplinary Procedures
    Core Principle 13 is a new core principle, created by section 735 
of the Dodd-Frank Act. The core principle incorporates the concepts 
from former Designation Criterion 6 (Disciplinary Procedures) and 
former DCM Core Principle 2.\402\ The core principle

[[Page 36650]]

specifically requires that DCMs establish and enforce disciplinary 
procedures that authorize the DCM to discipline, suspend or expel 
market participants and members that violate the DCM's rules, or 
delegate the function to third parties.
---------------------------------------------------------------------------

    \402\ Compare former CEA section 5(b)(6) and section 5(d)(2) 
with CEA section 5(d)(13) as amended by the Dodd-Frank Act. Prior to 
the passage of the Dodd-Frank Act, the standards for DCMs' 
disciplinary practices were found in Designation Criterion 6 and the 
statutory language, guidance, and acceptable practices for former 
Core Principle 2. Designation Criterion 6 required that a DCM 
establish and enforce disciplinary procedures that authorized it to 
discipline, suspend, or expel members or market participants that 
violated the rules of the DCM, or similar methods for performing the 
same functions, including delegation of the functions to third 
parties. Paragraph (a)(2) of the application guidance for former 
Core Principle 2 required DCMs to have the ``arrangements, 
resources, and authority [necessary] for effective rule 
enforcement,'' and the ``authority and ability to discipline and 
limit, or suspend the activities of a member or market participant 
pursuant to clear and fair standards.'' 17 CFR part 38, app. B, 
Application Guidance for Core Principle 2 at (a)(2) (2010). In 
addition, paragraph (b)(4) of the former core principle's acceptable 
practices required any DCM that wished to take advantage of the 
acceptable practice's safe harbor to have ``prompt and effective 
disciplinary action for any violation * * * found to have been 
committed.'' 17 CFR part 38, app. B, Acceptable Practices for Core 
Principle 2 at (b)(4) (2010). Paragraph (b)(4) also referenced part 
8 of the Commission's regulations as an example that DCMs could 
follow to comply with Core Principle 2. 17 CFR 8.01 et seq. In its 
experience, the Commission has found that many DCMs' disciplinary 
programs do in fact model the disciplinary structures and processes 
in part 8. While the acceptable practices for former Core Principle 
2 offered the disciplinary procedures in part 8 as an example of 
appropriate disciplinary procedures, DCMs were exempt from part 8 
pursuant to regulation 38.2. The disciplinary procedures proposed 
herein do not re-subject DCMs to part 8 of the Commission's 
regulations, but rather propose new disciplinary procedures for 
inclusion in part 38.
---------------------------------------------------------------------------

Summary of Comments
    Several commenters submitted letters discussing the disciplinary 
procedures contained in subpart N. While the comments were generally 
supportive of the Commission's objectives, commenters expressed a 
general desire for the Commission to rely on a more principles-based 
approach, and argued that the proposed rules were overly prescriptive. 
Some commenters also articulated specific concerns regarding several 
rules that they believed would adversely impact DCMs.
Discussion
    The Commission thoroughly reviewed and considered all comments 
received and, where appropriate, made modifications to the proposed 
rules, including converting some proposed rules into guidance. These 
modifications, explained further below, have resulted in changes to the 
numbering of the proposed regulations and in a reduction in the number 
of separately-enumerated rules, from 16 proposed rules to 12 final 
rules.
    The Commission proposed to codify the statutory text of the core 
principle in proposed Sec.  38.700, and adopts the rule as proposed. 
The Commission is also adding Sec.  38.712 to refer applicants and DCMs 
to the guidance in appendix B to part 38.
i. Sec.  38.701--Enforcement Staff
    Proposed Sec.  38.701 required that a DCM establish and maintain 
sufficient enforcement staff and resources to effectively and promptly 
prosecute possible rule violations within the jurisdiction of the 
contract market. The proposed rule also required a DCM to monitor the 
size and workload of its enforcement staff annually and increase its 
resources and staff as appropriate. The Commission recognized that at 
some DCMs, compliance staff also serves as enforcement staff. That is, 
they both investigate cases and present them before disciplinary 
panels. These proposed rules were not intended to prohibit that 
practice.
    The Commission believes that adequate staff and resources are 
essential to the effective performance of a DCM's disciplinary program. 
This has repeatedly been reflected in Commission staff's findings and 
recommendations in recent RERs, in which DMO staff recommended that 
DCMs increase their compliance and/or enforcement staff levels and 
monitor the size of their staff and increase the number of staff 
appropriately as trading volume increases, new responsibilities are 
assigned to staff, or internal reviews demonstrate that work is not 
completed in an effective or timely manner.
    Proposed Sec.  38.701 also provided that a DCM's enforcement staff 
may not include members of the exchange or persons whose interests 
conflict with their enforcement duties. Moreover, the proposed rule 
prohibited a member of the enforcement staff from operating under the 
direction or control of any person or persons with trading privileges 
at the contract market. These provisions sought to ensure the 
independence of enforcement staff, and help promote disciplinary 
procedures that are free of potential conflicts of interest.
Summary of Comments
    MGEX noted that, as a combined DCM/DCO, it interprets the rule to 
allow staff to serve as enforcement and review staff for both the DCM 
and DCO divisions of MGEX, and any other entities that become a 
combined DCM/DCO.\403\
---------------------------------------------------------------------------

    \403\ MGEX Comment Letter at 8 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the rule as proposed. The Commission 
believes that adequate staff and resources are essential to the 
effective performance of a DCM's disciplinary program. This has 
repeatedly been reflected in Commission staff's findings and 
recommendations in recent RERs, in which Commission staff recommended 
that DCMs increase their compliance and/or enforcement staff levels and 
monitor the size of their staff and increase the number of staff 
appropriately as trading volume increases, new responsibilities are 
assigned to staff, or internal reviews demonstrate that work is not 
completed in an effective or timely manner.\404\
---------------------------------------------------------------------------

    \404\ See Rule Enforcement Review of the Minneapolis Grain 
Exchange (Aug. 27, 2009), Rule Enforcement Review of ICE Futures 
U.S. (Feb. 2, 2010), Rule Enforcement Review of the Chicago Board of 
Trade and the Chicago Mercantile Exchange (Sep. 13, 2010), and Rule 
Enforcement Review of New York Mercantile Exchange and Commodity 
Exchange (August 30, 2011) for findings and recommendations 
pertaining to the adequate size of DCM compliance and enforcement 
staffs.
---------------------------------------------------------------------------

    The Commission notes that MGEX's interpretation regarding the 
sharing of compliance staff across a combined DCM/DCO is acceptable, 
provided that the combined DCM/DCO has sufficient staff to meet the 
DCM's regulatory compliance needs in an effective and timely manner. In 
addition, with respect to DCM matters, staff must be accountable to the 
DCM and its Regulatory Oversight Committee. The Commission also notes, 
however, that its a priori acceptance of integrated compliance staff is 
limited to the unique circumstances of a fully integrated exchange and 
clearing house.
ii. Sec.  38.702--Disciplinary Panels
    Proposed Sec.  38.702 required a DCM to establish one or more 
Review Panels and one or more hearing panels (together, ``disciplinary 
panels'') to fulfill its obligations under this section. The 
composition of both panels was required to meet the composition 
requirements of proposed Sec.  40.9(c)(3)(ii) \405\ and could not 
include

[[Page 36651]]

any members of the DCM's compliance staff, or any person involved in 
adjudicating any other stage of the same proceeding. Paragraph (b) of 
the proposed rule provided that a Review Panel must be responsible for 
determining whether a reasonable basis exists for finding a violation 
of contract market rules, and for authorizing the issuance of a notice 
of charges against persons alleged to have violated exchange rules. If 
a notice of charges is issued, then paragraph (c) of the proposed rule 
helped to ensure an impartial hearing by requiring a separate hearing 
panel to adjudicate the matter and issue sanctions. While proposed 
Sec.  38.702 required DCMs to empanel distinct bodies to issue charges 
and to adjudicate charges in a particular matter, the rule permitted 
DCMs to determine for themselves whether their review and hearing 
panels are separate standing panels or ad hoc bodies whose members are 
chosen from a larger ``disciplinary committee'' to serve in one 
capacity or the other for a particular disciplinary matter.
---------------------------------------------------------------------------

    \405\ Section 40.9(c)(3)(ii), as proposed in the separate 
release titled ``Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities Regarding the Mitigation of Conflicts of Interest'', 
provided that ``Each Disciplinary Panel shall include at least one 
person who would not be disqualified from serving as a Public 
Director by regulation 1.3(ccc)(1)(i)-(vi) and (2) of this chapter 
(a ``Public Participant''). Such Public Participant shall chair each 
Disciplinary Panel. In addition, any registered entity specified in 
paragraph (c)(3)(i) of this section shall adopt rules that would, at 
a minimum: (A) Further preclude any group or class of participants 
from dominating or exercising disproportionate influence on a 
Disciplinary Panel and (B) Prohibit any member of a Disciplinary 
Panel from participating in deliberations or voting on any matter in 
which the member has a financial interest.'' See 75 FR 63732, Oct. 
18, 2010.
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Summary of Comments
    A number of commenters opposed the two-panel approach described in 
proposed Sec.  38.702. CME stated that the Commission should rely on 
core principles, rather than what it sees as a prescriptive approach, 
as DCMs may have an established structure or may develop new structures 
that clearly satisfy the objective of the core principle, but that may 
not precisely comply with the language.\406\ CME illustrated two 
practices it believed may be precluded by the text of proposed Sec.  
38.702: (1) CME's Market Regulation staff determines whether certain 
non-egregious rule violations merit referral to a Review Panel and they 
issue warning letters on an administrative basis; and (2) CME's hearing 
panel adjudicates a disciplinary case prior to the issuance of charges 
pursuant to a supported settlement agreement.\407\
---------------------------------------------------------------------------

    \406\ CME Comment Letter at 35 (Feb. 22, 2011).
    \407\ Id.
---------------------------------------------------------------------------

    ELX contended that the proposed rule would impose the need to 
create processes and procedures for certain functions already carried 
out by its Compliance Director, who is supervised by the Regulatory 
Oversight Committee.\408\ ELX suggested that a DCM should be able to 
obtain a waiver from the two-panel requirement if it already has been 
designated as a contract market and currently operates under an 
alternative structure with respect to disciplinary procedures that have 
sufficient controls.\409\
---------------------------------------------------------------------------

    \408\ ELX Comment letter at 5 (Feb. 22, 2011).
    \409\ Id.
---------------------------------------------------------------------------

    MGEX argued that the rule is overly prescriptive, that there is no 
reasonable basis for the distinction between the two panels, and that 
one panel would maximize resources and streamline the process for all 
involved.\410\ MGEX argued that staff is able to differentiate between 
the roles, and that the Commission should simply have the right to 
inquire if it has a question surrounding disciplinary panels or 
processes.\411\
---------------------------------------------------------------------------

    \410\ MGEX Comment Letter at 9 (Feb. 22, 2011).
    \411\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule with certain 
modifications to address comments. The Commission considered 
commenters' views and believes that the proposed rule can be modified 
to address concerns without diminishing the purpose of the proposed 
rule. Accordingly, the final rule will require DCMs to have one or more 
disciplinary panels, without imposing a specific requirement for DCMs 
to maintain a ``review panel'' and a ``hearing panel.'' The final rules 
replace specific panel names (i.e. ``review panel'' and ``hearing 
panel'') with a generic reference to the ``disciplinary panel'' 
throughout part 38. However, even under a single-panel approach, 
individuals who determine to issue charges in a particular disciplinary 
matter may not also adjudicate the matter. The final text of Sec.  
38.702 permits flexibility in the structure of DCMs' disciplinary 
bodies, but not in the basic prohibition against vesting the same 
individuals with the authority to both issue and adjudicate charges in 
the same matter. The modifications reflected in the final text of Sec.  
38.702, together with the revisions made to the final text of Sec.  
38.703, permit DCMs to rely on their senior-most compliance officer 
(i.e., a DCM's Chief Regulatory Officer), rather than on a disciplinary 
panel, to issue disciplinary charges, as suggested by ELX. However, the 
Commission notes that the adjudication of charges must still be 
performed by a disciplinary panel. Finally, the composition and 
conflicts requirements for disciplinary panels will be adopted with one 
modification, by replacing the reference to Sec.  40.9(c)(3)(ii) with a 
reference to the more general ``part 40.''
iii. Sec.  38.703--Review of Investigation Report
    The introductory paragraph of proposed Sec.  38.703 required a 
Review Panel to promptly review an investigation report received 
pursuant to proposed Sec.  38.158(c), and to take action on any 
investigation report received within 30 days of such receipt. Under 
paragraph (a) of the proposed rule, after receipt of the investigation 
report, if a Review Panel determined that additional investigation or 
evidence was needed, it would be required to promptly direct the 
compliance staff to conduct further investigation. In the alternative, 
under paragraph (b) of the proposed rule, if a Review Panel determined 
that no reasonable basis existed for finding a violation, or that 
prosecution was unwarranted, it would be permitted to direct that no 
further action be taken, and that a written statement be provided 
setting forth the facts and analysis supporting the decision.
    Finally, under paragraph (c) of the proposed rule, if a Review 
Panel determined that a reasonable basis existed for finding a 
violation and adjudication was warranted, it was required to direct 
that the person or entity alleged to have committed the violation be 
served with a notice of charges.
Summary of Comments
    While CME agreed that an investigation report should include the 
subject's disciplinary history, CME disagreed with the requirement in 
proposed Sec.  38.158 that the disciplinary history be included in the 
version of the investigation report sent to the Review Panel.\412\ CME 
believed that the disciplinary history should not be considered by the 
Review Panel at all when determining whether to issue formal charges, 
arguing that a market participant's disciplinary history is not 
relevant to the consideration of whether it committed a further 
violation of DCM rules.\413\
---------------------------------------------------------------------------

    \412\ CME Comment Letter at 35 (Feb. 22, 2011).
    \413\ Id. While the Commission largely agrees with CME's 
comment, the Commission directs interested parties to regulation 
38.158 for a further discussion of the required components of 
investigation reports.
---------------------------------------------------------------------------

Discussion
    Consistent with revisions to proposed Sec.  38.702, the Commission 
is modifying proposed Sec.  38.703 to provide greater flexibility to 
market participants in determining an approach to disciplinary panels. 
The Commission is eliminating

[[Page 36652]]

all but paragraph (c) of the proposed rule, and is moving paragraph (c) 
to Sec.  38.704 (Notice of charges), which the Commission is 
renumbering as Sec.  38.703. The revisions to proposed rules Sec.  
38.702 and Sec.  38.703 will provide DCMs with the flexibility to 
follow a single-panel approach, provided that a single panel does not 
perform the function of issuing and adjudicating the same charges. In 
addition, a DCM will have the flexibility to allow its senior-most 
regulatory officer, such as its Chief Regulatory Officer, to review an 
investigation report and determine whether a notice of charges should 
be issued in a particular matter.
iv. Sec.  38.704--Notice of Charges
    Proposed Sec.  38.704 described the minimally acceptable contents 
of a notice of charges (``notice'') issued by a Review Panel. The rule 
required that the notice adequately state the acts, conduct, or 
practices in which the respondent is alleged to have engaged; state the 
rule, or rules, alleged to have been violated; and prescribe the period 
within which a hearing on the charges may be requested. Further, the 
proposed rule also required that the notice advise the respondent 
charged that he is entitled, upon request, to a hearing on the charges. 
Paragraphs (a) and (b) of the proposed rule provided that a DCM may 
adopt rules providing that: (1) The failure to request a hearing within 
the time prescribed in the notice, except for good cause, may be deemed 
a waiver of the right to a hearing; and (2) the failure to answer or 
expressly deny a charge may be deemed to be an admission of such 
charge.
Discussion
    No comments were received regarding proposed Sec.  38.704, and the 
Commission is adopting the proposed rule with certain modifications.
    Given that paragraphs (a) and (b) of proposed Sec.  38.704 allowed, 
but did not require, a DCM to issue rules regarding failures to request 
a hearing and expressly answer or deny a charge, the Commission 
believes that the language in these paragraphs is better suited as 
guidance rather than a rule. The Commission will adopt this language as 
guidance in appendix B to part 38.
    In addition to the aforementioned revisions, and as described 
above, the Commission is moving paragraph (c) of proposed Sec.  38.703 
to proposed Sec.  38.704, and is renumbering proposed Sec.  38.704 as 
Sec.  38.703.
v. Sec.  38.705--Right to Representation
    Proposed Sec.  38.705 required that, upon being served with a 
notice of charges, a respondent must have the right to be represented 
by counsel or any other representative of his or her choosing in all 
succeeding stages of the disciplinary process. Together with proposed 
Sec. Sec.  38.704 (requiring an adequate notice of charges to the 
respondent), 38.708 (conferring the right to hearing), and 38.710 
(hearing procedures), Sec.  38.705 helped ensure basic fairness for 
respondents in disciplinary proceedings.
Summary of Comments
    CME commented that the language of this rule should be limited to 
avoid conflicts in representation and, accordingly, requested that the 
rule be revised to clarify that a respondent may not be represented by: 
(1) A member of the DCM's disciplinary committees; (2) a member of the 
DCM's Board of Directors; (3) an employee of the DCM; and (4) a person 
substantially related to the underlying investigation, such as a 
material witness or other respondent.\414\
---------------------------------------------------------------------------

    \414\ CME Comment Letter at 35 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule with certain 
modifications. The Commission acknowledges CME's concern and is 
amending the proposed rule to incorporate CME's suggestion to clarify 
that a respondent must have the right to be represented by legal 
counsel or any other representative of its choosing in all succeeding 
stages of the disciplinary process, except any member of the designated 
contract market's board of directors or disciplinary panel, any 
employee of the designated contract market, or any person substantially 
related to the underlying investigations, such as material witness or 
respondent. Additionally, as a result of the rule deletions and 
modifications discussed above, proposed Sec.  38.705 as modified is 
being adopted as Sec.  38.704.
vi. Sec.  38.706--Answer to Charges
    Proposed Sec.  38.706 provided that a respondent must be given a 
reasonable period of time to file an answer to a charge. In general, 
paragraphs (a) through (c) of the proposed rule provided that the rules 
of the DCM may require that: (1) The answer must be in writing and 
include a statement that the respondent admits, denies or does not have 
and is unable to obtain sufficient information to admit or deny each 
allegation; (2) failure to file an answer on a timely basis shall be 
deemed an admission of all allegations in the notice of charges; and 
(3) failure in an answer to deny expressly a charge shall be deemed to 
be an admission of such charge.
Discussion
    Although no specific comments were received on proposed Sec.  
38.706, commenters generally requested greater flexibility to establish 
their own disciplinary procedures.\415\ The Commission believes that 
proposed Sec.  38.706 is a rule where greater flexibility can 
reasonably be accorded. Accordingly, the Commission is maintaining as a 
rule the requirement that a respondent must be given a reasonable 
period of time to file an answer to a notice of charges, and is 
condensing the remainder of the proposed rule by replacing 
subparagraphs (a), (b), and (c) with a requirement that any rules 
adopted by a DCM governing the requirements and timeliness of a 
respondent's answer to charges must be ``fair, equitable, and publicly 
available.'' Finally, as a result of the rule deletions and 
modifications discussed above, proposed Sec.  38.706 as modified is 
being adopted as Sec.  38.705.
---------------------------------------------------------------------------

    \415\ See generally, CME Comment Letter (Feb. 22, 2011); and 
MGEX Comment Letter (Feb. 22, 2011).
---------------------------------------------------------------------------

vii. Sec.  38.707--Admission or Failure To Deny Charges
    Proposed Sec.  38.707 provided that, if a respondent admits or 
fails to deny any of the violations alleged in a notice of charges, 
then a hearing panel may find that the violations admitted or not 
denied have in fact been committed. If a DCM adopted a rule concerning 
the admission or failure to deny charges, then paragraphs (a) through 
(c) of the proposed rule provided that: (1) The hearing panel must 
impose a sanction for each violation found to have been committed; (2) 
the DCM must promptly notify the respondent in writing of any sanction 
to be imposed and advise the respondent that they may request a hearing 
on such sanction within the period of time stated in the notice; and 
(3) the rules of the DCM may provide that if the respondent fails to 
request a hearing within the period of time stated in the notice, then 
the respondent will be deemed to have accepted the sanction.
Discussion
    Although the Commission did not receive specific comments 
pertaining to the proposed rule, the Commission is moving the entire 
rule, with certain modifications, to the guidance in appendix B. Given 
that proposed Sec.  38.707 allowed, but did not require, a DCM to issue 
rules regarding a respondent's admission or failure to

[[Page 36653]]

deny charges, the Commission believes that the proposed rule is better 
suited as guidance in appendix B to part 38 rather than a rule. The 
Commission believes adopting the proposed rule as guidance, rather than 
a rule, will grant DCMs greater flexibility in administering their 
obligations, consistent with the general comments seeking the same. 
Furthermore, the text that will now be included as guidance is being 
modified to reflect the single-panel approach adopted in Sec.  38.702, 
replacing specific panel names with a generic reference to the 
``disciplinary panel.''
viii. Sec.  38.708--Denial of Charges and Right to Hearing
    Proposed Sec.  38.708 provided that in every instance where a 
respondent has requested a hearing on a charge that he or she denies, 
or on a sanction set by the hearing panel pursuant to proposed Sec.  
38.707, the respondent must be given the opportunity for a hearing in 
accordance with the requirements of proposed Sec.  38.710. The DCM's 
rules were permitted to provide that, except for good cause, the 
hearing must be concerned only with those charges denied or sanctions 
set by the hearing panel under proposed Sec.  38.707 for which a 
hearing has been requested.
Discussion
    The Commission did not receive comments pertaining to this rule, 
but is adopting the proposed rule with modifications.
    The Commission is revising the proposed rule to reflect the single-
panel approach adopted in Sec.  38.702, replacing specific panel names 
with a generic reference to the ``disciplinary panel.'' In order to 
provide DCMs with greater flexibility in establishing disciplinary 
procedures, the Commission also is removing the section of the proposed 
rule which was optional--allowing a DCM's rules to provide that, except 
for good cause, a hearing must be concerned only with those charges 
denied or sanctions set by the panel for which a hearing has been 
requested. Finally, as a result of the withdrawal of certain preceding 
rules discussed above, proposed Sec.  38.708 as modified is being 
adopted as Sec.  38.706.
ix. Sec.  38.709--Settlement Offers
    Proposed Sec.  38.709 provided the procedures a DCM must follow if 
it permits the use of settlements to resolve disciplinary cases. 
Paragraph (a) of the proposed rule stated that the rules of a DCM may 
permit a respondent to submit a written offer of settlement any time 
after an investigation report is completed. The proposed rule permitted 
the disciplinary panel presiding over the matter to accept the offer of 
settlement, but prohibited the panel from altering the terms of the 
offer unless the respondent agreed. In addition, paragraph (b) of the 
proposed rule provided that the rules of the DCM may allow a 
disciplinary panel to permit the respondent to accept a sanction 
without admitting or denying the rule violations upon which the 
sanction is based.
    Paragraph (c) of proposed Sec.  38.709 stated that a disciplinary 
panel accepting a settlement offer must issue a written decision 
specifying the rule violations it has reason to believe were committed, 
and any sanction imposed, including any order of restitution where 
customer harm has been demonstrated. Importantly, paragraph (c) also 
provided that if an offer of settlement is accepted without the 
agreement of a DCM's enforcement staff, the decision must carefully 
explain the disciplinary panel's acceptance of the settlement. Finally, 
paragraph (d) of proposed Sec.  38.709 allowed a respondent to withdraw 
his or her offer of settlement at any time before final acceptance by a 
disciplinary panel. If an offer is withdrawn after submission, or is 
rejected by a disciplinary panel, the respondent must not be deemed to 
have made any admissions by reason of the offer of settlement and must 
not be otherwise prejudiced by having submitted the offer of 
settlement.
Discussion
    Although no specific comments were received in regards to this 
proposed rule, the Commission is adopting the provisions of the 
proposed rule as guidance in appendix B. The Commission believes that 
adopting the proposed rule as guidance rather than a rule will grant 
DCMs greater flexibility in administering their obligations, consistent 
with the general comments seeking the same. Furthermore, the Commission 
is revising the guidance text to make it consistent with its 
modifications regarding the single-panel approach adopted in Sec.  
38.702 and the customer restitution revisions adopted below with 
respect to proposed Sec.  38.714.
x. Sec.  38.710--Hearings
    Proposed Sec.  38.710 required a DCM to adopt rules that provide 
certain minimum requirements for any hearing conducted pursuant to a 
notice of charges. In general, sections (a)(1) through (a)(7) of the 
proposed rule required the following: (1) A fair hearing; (2) authority 
for a respondent to examine evidence relied on by enforcement staff in 
presenting the charges contained in the notice of charges; (3) the 
DCM's enforcement and compliance staffs must be parties to the hearing 
and the enforcement staff must present its case on those charges and 
sanctions that are the subject of the hearing; (4) the respondent must 
be entitled to appear personally at the hearing, have the authority to 
cross-examine persons appearing as witnesses at the hearing, and call 
witnesses and present evidence as may be relevant to the charges; (5) 
the DCM must require persons within its jurisdiction who are called as 
witnesses to participate in the hearing and produce evidence; (6) a 
copy of the hearing must be made and become a record of the proceeding 
if the respondent has requested a hearing; and (7) the rules of the DCM 
may provide that the cost of transcribing the record must be borne by a 
respondent who requests a transcript. Additionally, proposed paragraph 
(b) specified that the rules of the DCM may provide that a sanction be 
summarily imposed upon any person within its jurisdiction whose actions 
impede the progress of a hearing.
Summary of Comments
    Two commenters requested that the Commission revise proposed Sec.  
38.710(a)(2). CFE commented that proposed Sec.  38.710(a)(2) should 
limit a respondent's access only to evidence a DCM plans to introduce 
at a hearing.\416\ CFE further requested the exclusion of evidence 
covered under attorney-client privilege, attorney work product 
privilege, or other confidential reports and methodologies, including 
the disclosure of the name of a confidential complainant.\417\ CFE also 
argued that investigation and examination materials prepared by a DCM 
should be protected from disclosure as internal work product unless the 
DCM intends to introduce them at the hearing.\418\
---------------------------------------------------------------------------

    \416\ CFE Comment Letter at 5 (Feb. 22, 2011).
    \417\ Id.
    \418\ Id.
---------------------------------------------------------------------------

    CME similarly argued that proposed Sec.  38.710(a)(2) should be 
revised so that a respondent may not access protected attorney work 
product, attorney-client communications, and investigative work product 
(such as investigation and exception reports).\419\
---------------------------------------------------------------------------

    \419\ CME Comment Letter at 36 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting paragraph (a) of the proposed rule with 
certain modifications, and is converting paragraph (b) of the proposed 
rule to guidance in appendix B.

[[Page 36654]]

    The Commission has considered CFE and CME's comments, and believes 
that a DCM should be permitted to withhold certain documents from a 
respondent in certain circumstances, and thus, is revising proposed 
Sec.  38.710(a)(2) (now Sec.  38.707(a)(2)) accordingly. Because 
proposed Sec.  38.710(b) (which provided that the DCMs' rules may 
provide that a sanction may be summarily imposed upon any person whose 
actions impede the progress of a hearing) was an optional requirement 
for DCMs, the Commission is adopting this language as guidance in 
appendix B to part 38. Furthermore, the Commission is eliminating 
proposed Sec.  38.710(a)(7), an optional rule that in certain cases 
allowed for the cost of transcribing the record of the hearing to be 
borne by the respondent. The Commission also is revising the rule text 
to make it consistent with its modifications regarding the single-panel 
approach adopted in Sec.  38.702 and its modifications to proposed 
Sec.  38.712 discussed below. Finally, as a result of the withdrawal 
and renumbering of the rules discussed above, proposed Sec.  38.710 as 
modified is being adopted as Sec.  38.707.
xi. Sec.  38.711--Decisions
    Proposed Sec.  38.711 detailed the procedures that a hearing panel 
must follow in rendering disciplinary decisions. The proposed rule 
required that all decisions include: (1) A notice of charges or a 
summary of the charges; (2) the answer, if any, or a summary of the 
answer; (3) a summary of the evidence produced at the hearing or, where 
appropriate, incorporation by reference in the investigation report; 
(4) a statement of findings and conclusions with respect to each 
charge, and a careful explanation of the evidentiary and other basis 
for such findings and conclusions with respect to each charge; (5) an 
indication of each specific rule with which the respondent was found to 
have violated; and (6) a declaration of any penalty imposed against the 
respondent, including the basis for such sanctions and the effective 
date of such sanctions.
Discussion
    No comments were received on proposed Sec.  38.711. The Commission 
is adopting Sec.  38.711 as proposed with minor modifications to 
reflect the single-panel approach adopted in Sec.  38.702, and 
replacing specific panel names with a generic reference to the 
``disciplinary panel.'' In addition, as a result of the withdrawal and 
renumbering of preceding rules discussed above, proposed Sec.  38.711 
as modified is being adopted as Sec.  38.708.
xii. Sec.  38.712--Right To Appeal
    Proposed Sec.  38.712 provided the procedures that a DCM must 
follow in the event that the DCM's rules authorize an appeal of adverse 
decisions in all or in certain classes of cases. Notably, the proposed 
rule required a DCM that permits appeals by disciplinary respondents to 
also permit appeals by its enforcement staff. For DCMs that permit 
appeals, the language in paragraphs (a) through (d) of proposed Sec.  
38.712 generally required the DCM to: (1) Establish an appellate panel 
that is authorized to hear appeals; (2) ensure that the appellate panel 
composition is consistent with Sec.  40.9(c)(iv) of the Commission's 
regulations and does not include any members of the DCM's compliance 
staff, or any person involved in adjudicating any other stage of the 
same proceeding; (3) except for good cause shown, conduct the appeal or 
review solely on the record before the hearing panel, the written 
exceptions filed by the parties, and the oral or written arguments of 
the parties; and (4) issue a written decision of the appellate panel 
and provide a copy to the respondent promptly following the appeal or 
review proceeding.
Discussion
    Although no specific comments were received on proposed Sec.  
38.712, the Commission is converting the proposed rule to guidance in 
appendix B. Given that proposed Sec.  38.712 allowed, but did not 
require, a DCM to issue rules regarding a respondent's right to appeal, 
the Commission is moving this provision to guidance in appendix B to 
part 38. The Commission believes that adopting the proposed rule as 
guidance rather than a rule, will grant DCMs greater flexibility in 
administering their obligations, consistent with the general comments 
seeking the same.
    The Commission notes that the reference to Sec.  40.9(c)(iv) in the 
proposed rule was a technical error. Instead, proposed Sec.  38.712 
should have referenced the composition requirements of an appellate 
panel outlined in Sec.  40.9(c)(3)(iii). Accordingly, the Commission is 
replacing the reference to Sec.  40.9(c)(iv) with a reference to the 
more general ``part 40'' in the guidance text. Furthermore, the 
Commission is revising the guidance text to reflect the single-panel 
approach now adopted in Sec.  38.702, replacing specific panel names 
with a generic reference to the ``disciplinary panel.''
xiii. Sec.  38.713--Final Decisions
    Proposed Sec.  38.713 required that each DCM establish rules 
setting forth when a decision rendered under this subpart N will become 
the final decision of the DCM.
Discussion
    No comments were received in regards to the proposed rule, and the 
Commission is adopting the proposal without modification. However, as a 
result of the renumbering of certain preceding rules discussed above, 
proposed Sec.  38.713 is being adopted as Sec.  38.709.
xiv. Sec.  38.714--Disciplinary Sanctions
    Proposed Sec.  38.714 required that every disciplinary sanction 
imposed by a DCM must be commensurate with the violations committed and 
must be clearly sufficient to deter recidivism or similar violations by 
other market participants. Additionally, the proposed rule required 
that, in the event of demonstrated customer harm, any disciplinary 
sanction must include full customer restitution. In evaluating 
appropriate sanctions, the proposed rule required the DCM to take into 
account a respondent's disciplinary history.\420\
---------------------------------------------------------------------------

    \420\ Proposed regulation 38.158(c), which was proposed with 
respect to Core Principle 2, required that a copy of a member or 
market participant's disciplinary history be included in the 
compliance staff's investigation report.
---------------------------------------------------------------------------

Summary of Comments
    CFE supported the goal articulated in proposed Sec.  38.714, but 
argued that in certain situations, the requirement for customer 
restitution should not apply where it may not be possible for a DCM to 
determine the amount of customer harm, which parties may have been 
harmed, and/or how the harm was allocated among potentially aggrieved 
parties.\421\ CFE requested that the Commission clarify that the 
requirement to include customer restitution in a disciplinary sanction 
does not apply to the extent that a DCM is unable to determine with 
reasonable certainty what the restitution should be, to whom to provide 
restitution, and/or how to allocate restitution.\422\
---------------------------------------------------------------------------

    \421\ CFE Comment Letter at 6 (Feb. 22, 2011).
    \422\ Id.
---------------------------------------------------------------------------

    Chris Barnard argued that sanctions should include a public 
reprimand and/or be published.\423\
---------------------------------------------------------------------------

    \423\ Barnard Comment Letter at 2, 4 (May 20, 2011) (Barnard 
stated that under a properly functioning sanctions regime, sanctions 
must be: (1) Significantly greater than potential benefits derived 
from a breach of rules; (2) targeted at those parties who stand to 
gain from a breach of rules, whether natural or legal persons; and 
(3) include a public reprimand and/or be published).

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[[Page 36655]]

Discussion
    The Commission is adopting the proposed rule with certain 
modifications. The Commission has considered CFE's comment, and is 
revising the proposed rule so that it does not require customer 
restitution if the amount of restitution, or the recipient, cannot be 
reasonably determined. Furthermore, the Commission is revising the 
proposed rule to clarify that a respondent's disciplinary history 
should be taken into account in all sanction determinations, including 
sanctions imposed pursuant to an accepted settlement offer. The 
Commission also notes that final disciplinary actions taken against 
registered persons and entities are recorded in the National Futures 
Association's Background Affiliation Status Information Center 
(``BASIC'') database, which is available to the public online. Finally, 
as a result of the renumbering of preceding rules discussed above, the 
Commission is renumbering the proposed rule as Sec.  38.710.
xv. Sec.  38.715--Summary Fines for Violations of Rules Regarding 
Timely Submission of Records, Decorum, or Other Similar Activities
    Proposed Sec.  38.715 permitted a DCM to adopt a summary fine 
schedule for violations of rules relating to timely submission of 
accurate records required for clearing or verifying each day's 
transactions, decorum, attire, or other similar activities. Under the 
proposed rule, a DCM may authorize its compliance staff to summarily 
impose minor sanctions against persons within the DCM's jurisdiction 
for violating such rules. The proposed rule made clear that a DCM 
should issue no more than one warning letter in a rolling 12-month 
period for the same violation before sanctions are imposed. 
Additionally, the proposed rule specified that a summary fine schedule 
must provide for progressively larger fines for recurring violations.
Summary of Comments
    CME objected to the restriction of one letter of warning per 
rolling 12-month period.\424\
---------------------------------------------------------------------------

    \424\ CME Comment Letter at 36 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is partially adopting the proposed rule, and is 
converting the remaining portion of the rule to guidance in appendix B.
    The Commission is maintaining as a rule the provision in the 
proposed rule that prohibits a DCM from issuing more than one warning 
letter per rolling 12-month period for the same violation. Commission 
staff has consistently recommended in RERs that DCMs must engage in 
progressive discipline in order to deter recidivism.
    The Commission is converting the remainder of proposed Sec.  38.715 
to guidance in appendix B because the proposed rule allowed, but did 
not require, a DCM to adopt a summary fine schedule.
    Finally, the proposed rule is being renumbered in its adopted form 
from Sec.  38.715 to Sec.  38.711, and is retitled as ``Warning 
letters.''
xvi. Sec.  38.716--Emergency Disciplinary Actions
    Proposed Sec.  38.716 provided that a DCM may impose a sanction, 
including a suspension, or take other summary action against a person 
or entity subject to its jurisdiction upon a reasonable belief that 
such immediate action is necessary to protect the best interest of the 
marketplace. The proposed rule also provided that any emergency action 
taken by the DCM must be in accordance with certain procedural 
safeguards that protect the respondent, including the right to be 
served with notice before the action is taken or otherwise at the 
earliest possible opportunity after action has been taken; the right to 
be represented by legal counsel in any proceeding subsequent to the 
emergency disciplinary action; the right to a hearing as soon as 
reasonably practical; and the right to receive a written decision on 
the summary action taken by the DCM.
Discussion
    No comments were received on proposed Sec.  38.716. Given that 
proposed Sec.  38.716 allowed, but did not require, a DCM to adopt 
rules regarding emergency disciplinary actions, the Commission is 
moving the text of proposed Sec.  38.716 to guidance in appendix B to 
part 38.
    Due to the renumbering described above, the Commission is also 
replacing proposed Sec.  38.712 with new Sec.  38.712 (titled 
``Additional sources for compliance'') that simply permits DCMs to rely 
upon the guidance in appendix B of this part to demonstrate to the 
Commission compliance with the requirements of Sec.  38.700 of this 
part.
14. Subpart O--Dispute Resolution
    The Dodd-Frank Act re-designated former Core Principle 13 as Core 
Principle 14. Aside from renumbering the core principle, the language 
of the core principle remained substantively unchanged. The core 
principle governs the obligations of DCMs to implement and enforce a 
dispute resolution program for their market participants and market 
intermediaries.\425\
---------------------------------------------------------------------------

    \425\ 17 CFR part 38, app. B.
---------------------------------------------------------------------------

    In addition to proposing to codify the statutory text of the core 
principle in proposed Sec.  38.750, the Commission proposed to maintain 
the guidance and acceptable practices.
Discussion
    No comments were received on proposed Sec.  38.750, Sec.  38.751, 
or the proposed guidance under Core Principle 14. The Commission is 
adopting the rules and guidance as proposed.
15. Subpart P--Governance Fitness Standards
    Other than to re-designate former Core Principle 14 as Core 
Principle 15, the Dodd-Frank Act did not revise the text of this core 
principle. Core Principle 15 requires DCMs to establish and enforce 
appropriate fitness standards for directors, members of any 
disciplinary committee, members of the contract market, and any other 
persons with direct access to the facility (including any parties 
affiliated with any of the persons described in this core principle). 
In the DCM NPRM, the Commission proposed to codify the statutory text 
of the core principle in Sec.  38.800. The Commission did not receive 
comments pertaining to proposed Sec.  38.800, and is adopting the rule 
as proposed.
    As noted in the DCM NPRM, the substantive regulations implementing 
Core Principle 15 were proposed in a separate rulemaking that also 
would implement Core Principles 16 (Conflicts of Interest), 17 
(Composition of Governing Boards of Contract Markets) and 22 (Diversity 
of Boards of Directors).\426\ Until such time as the Commission may 
adopt the substantive rules implementing Core Principle 15, the 
Commission is maintaining the current Guidance under part 38 applicable 
to Governance Fitness Standards (formerly Core Principle 14). 
Accordingly, the existing Guidance from appendix B of Part 38 
applicable to Core Principle 15 is being codified under the revised 
appendix B adopted in this final rulemaking.\427\ At such time as the

[[Page 36656]]

Commission may adopt the final rules implementing Core Principle 15, 
appendix B will be amended accordingly.
---------------------------------------------------------------------------

    \426\ See ``Governance Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities; Additional Requirements Regarding the Mitigation of 
Conflicts of Interest,'' Notice of Proposed Rulemaking, 76 FR 722, 
January 6, 2011. CME submitted a comment letter discussing proposed 
regulation 38.801 in connection with 76 FR 722.
    \427\ The Commission is also adding regulation 38.801 to simply 
permit DCMs to continue to rely upon the guidance in appendix B to 
demonstrate to the Commission compliance with regulation 38.800.
---------------------------------------------------------------------------

    CME submitted a comment letter discussing proposed Sec.  38.801 in 
connection with the separate proposed rulemaking implementing Core 
Principle 15. CME's comments will be considered in connection with that 
rulemaking.
 16. Subpart Q--Conflicts of Interest
    The Dodd-Frank Act re-designated current Core Principle 15 
(Conflicts of Interest) as Core Principle 16, and in all other 
respects, did not substantively amend the core principle. The 
Commission proposed to codify the statutory text of the core principle 
in proposed Sec.  38.850, and is codifying the statutory text of Core 
Principle 16 in Sec.  38.850 as proposed.
    As noted in the DCM NPRM, the substantive regulations implementing 
Core Principle 16 were proposed in two separate rulemakings that also 
would implement Core Principles 15 (Governance Fitness Standards), 17 
(Composition of Governing Boards of Contract Markets) and 22 (Diversity 
of Boards of Directors).\428\ Until such time as the Commission may 
adopt the substantive rules implementing Core Principle 16, the 
Commission is maintaining the current guidance and acceptable practices 
under Part 38 applicable to Conflicts of Interest (formerly Core 
Principle 15). Accordingly, the existing Guidance and Acceptable 
Practices from appendix B of part 38 applicable to Core Principle 16 
are being codified in the revised appendix B adopted in this final 
rulemaking.\429\ At such time as the Commission may adopt the final 
rules implementing Core Principle 16, appendix B will be amended 
accordingly.
---------------------------------------------------------------------------

    \428\ See ``Governance Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities; Additional Requirements Regarding the Mitigation of 
Conflicts of Interest,'' Notice of Proposed Rulemaking, 76 FR 722, 
January 6, 2011; and ``Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities Regarding the Mitigation of Conflicts of Interest,'' 75 
FR 63732, Oct. 18, 2010.
    \429\ The Commission is also adding regulation 38.851 to simply 
permit DCMs to continue to rely upon the guidance in appendix B to 
demonstrate to the Commission compliance with section 38.850.
---------------------------------------------------------------------------

    CME submitted a comment letter that referenced comments it 
submitted in connection with the separate rulemakings implementing Core 
Principle 16. CME's comments will be considered in connection with 
those rulemakings.
17. Subpart R--Composition of Governing Boards of Contract Markets
    The Dodd-Frank Act re-designated former Core Principle 16 
(Composition of Governing Boards of Mutually Owned Contract Markets) as 
Core Principle 17, and revised the title of the core principle to 
``Composition of Governing Boards of Contract Markets.'' In addition, 
while the core principle formerly applied only to mutually owned DCMs, 
and required such DCMs to ensure that the composition of their 
governing boards included market participants, the amended core 
principle was amended to require the governance arrangements of all DCM 
to be designed to permit the consideration of the views of market 
participants.\430\ The Commission proposed to codify the statutory text 
of the core principle in proposed Sec.  38.900, and is adopting the 
rule as proposed.
---------------------------------------------------------------------------

    \430\ 7 U.S.C. 7(d)(17).
---------------------------------------------------------------------------

    As noted in the DCM NPRM, the substantive regulations implementing 
Core Principle 17 were proposed in a separate rulemaking that also 
would implement Core Principles 15 (Governance Fitness Standards), 16 
(Conflicts of Interest), and 22 (Diversity of Boards of 
Directors).\431\ The rules implementing Core Principle 17 will be 
adopted in that separate rulemaking.
---------------------------------------------------------------------------

    \431\ See ``Governance Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities; Additional Requirements Regarding the Mitigation of 
Conflicts of Interest,'' Notice of Proposed Rulemaking, 76 FR 722, 
January 6, 2011. CME submitted a comment letter discussing proposed 
regulation 38.801 in connection with 76 FR 722.
---------------------------------------------------------------------------

18. Subpart S--Recordkeeping
    Core Principle 18, as amended by section 735 of the Dodd-Frank Act, 
requires all DCMs to maintain records of all activities related to 
their business as contract markets, in a form and manner acceptable to 
the Commission, for at least five years.\432\
---------------------------------------------------------------------------

    \432\ See section 5(d)(18) of the CEA, 7 U.S.C. 7(d)(18).
---------------------------------------------------------------------------

    The Commission proposed to codify the statutory text of the core 
principle in Sec.  38.950, and is adopting the rule as proposed.
i. Sec.  38.951--Additional Sources for Compliance
    Proposed Sec.  38.951 required all DCMs to maintain records, 
including trade records and investigatory and disciplinary files, in 
accordance with Commission regulation Sec.  1.31, and in accordance 
with proposed Commission regulation Sec.  45.1 with respect to swap 
transactions.\433\ The proposed rule reiterated DCMs' obligation to 
comply with Sec.  1.31(a), which requires that DCM books and records be 
readily accessible for the first two years of the minimum five-year 
statutory period, and be open to inspection by any representatives of 
the Commission or the United States Department of Justice.\434\ Section 
1.31(a) also requires DCMs to promptly provide either copies or 
original books and records upon request of a Commission 
representative.\435\ As noted in the preamble, the proposed rule also 
incorporated by reference Sec.  1.31(b)'s description of the acceptable 
methods of storing books and records.\436\ Finally, proposed Sec.  
38.951 also incorporated by reference the requirements set forth in 
Sec.  1.31(c) regarding electronic storage systems, and the 
requirements in Sec.  1.31(d) regarding retention of trading cards and 
of other trade, order, and financial reports.\437\ Separately, proposed 
Sec.  38.951 also required DCMs to comply with the recordkeeping 
requirements in Sec.  45.1 with respect to swaps transactions.\438\
---------------------------------------------------------------------------

    \433\ See DCM NPRM at 80622.
    \434\ Id.
    \435\ Id.
    \436\ Id. at 80601.
    \437\ Id. at 80622.
    \438\ See proposed regulation 38.951. At the time of the DCM 
NPRM, the part 45 rules were proposed. See 75 FR 80622, Dec. 22, 
2010. The part 45 rules were recently codified. See 77 FR 2136, Jan. 
13, 2012.
---------------------------------------------------------------------------

Summary of Comments
    MGEX argued that the proposed rule is too prescriptive in requiring 
that all records and data must be indexed and duplicated.\439\ MGEX 
also commented that the requirement to retain records for ``at least 5 
years'' created uncertainty and requested clarification on how long 
records must be kept.\440\ MGEX questioned the rationale for obligating 
DCMs to keep Commission-required data separate from other data.\441\ 
Further, MGEX stated that ``DCMs should not be substitute storage 
facilities for Commission data, nor should they be required to relocate 
and resubmit data that has already been submitted to the Commission.'' 
\442\ Chris Barnard recommended that records should be required to be 
kept indefinitely rather than for at least five years.\443\
---------------------------------------------------------------------------

    \439\ MGEX Comment Letters at 9 (Feb. 22, 2011) and at 3 (June 
3, 2011).
    \440\ Id. (requesting a limit on the length of time a DCM should 
be required to hold data).
    \441\ Id.
    \442\ Id.
    \443\ Barnard Comment Letter at 4 (Feb. 22, 2011).

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[[Page 36657]]

Discussion
    The Commission is adopting the proposed rules under Core Principle 
18 with the modification described below.
    The Commission acknowledges MGEX's comment but notes that Sec.  
38.951 incorporates recordkeeping requirements to which DCMs are 
already subject by direct operation of Sec.  1.31. Even if the 
Commission were to amend Sec.  38.951 as requested, many of the 
concerns expressed by MGEX would remain, including the obligation to 
keep certain data separately. In this regard, the Commission notes that 
the Acceptable Practices for former Core Principle 17 stated that Sec.  
1.31 ``governs recordkeeping requirements under the Act.'' \444\ Upon 
adopting Sec. Sec.  38.950 and 38.951, Sec.  1.31 will still govern 
significant elements of recordkeeping under the Act. Accordingly, the 
Commission is largely adopting Sec.  38.951 as proposed. The Commission 
is making one modification to the proposed rule, however, by replacing 
the reference to Sec.  45.1 with a reference to the more general ``part 
45.''
---------------------------------------------------------------------------

    \444\ See 17 CFR part 38, app. B, Application Guidance and 
Acceptable Practices for Core Principle 17.
---------------------------------------------------------------------------

    In response to MGEX's request for clarification regarding the 
requirement to retain records for ``at least 5 years,'' the Commission 
notes that the recordkeeping requirement for swaps is governed by rules 
that were recently codified in part 45, which requires DCMs to maintain 
all requisite records from the date of the creation of the swap through 
the life of the swap and for a period of at least five years from the 
final termination of the swap.\445\ With respect to all other records, 
DCMs can satisfy their recordkeeping requirement pursuant to Sec.  
38.950 by retaining such records for five years, unless the Commission 
determines prior to the expiration of the five-year term that the 
records must be retained for a longer period of time. The Commission 
also notes that the ``at least 5 years'' obligation is required under 
statute. Specifically, as noted in the preamble of the proposed rule, 
one notable difference between the former Core Principle 18, and the 
current amended version, is that while records were previously required 
to be maintained ``for a period of 5 years,'' Core Principle 18 now 
requires that records must be retained for ``at least 5 years.'' \446\ 
Accordingly, the proposed rule required a DCM maintain records of all 
activities related to its business as a DCM in a form and manner 
acceptable to the Commission for at least five years.\447\ Similarly, 
in response to Chris Barnard's recommendation that the records be held 
indefinitely, the Commission believes that the current statutory 
requirement to maintain records for at least 5 years is sufficient at 
this time, but notes that it may extend the time period if it 
determines that an extended recordkeeping time is necessary.
---------------------------------------------------------------------------

    \445\ 77 FR 2136, Jan. 13, 2012.
    \446\ See preamble to proposed regulation 38.950. 75 FR 80601, 
Dec. 22, 2010.
    \447\ See proposed regulation 38.950(a). 75 FR 80622, Dec. 22, 
2010.
---------------------------------------------------------------------------

19. Subpart T--Antitrust Considerations
    The Dodd-Frank Act renumbered former Core Principle 18 as Core 
Principle 19, and in all other respects, maintained the statutory text 
of the core principle. As noted in the DCM NPRM, the Commission 
believed that the existing guidance to this Core Principle remained 
appropriate. Accordingly, other than to codify the statutory text of 
Core Principle 19 into proposed Sec.  38.1000, the Commission did not 
propose any amendments to the pre-existing guidance under part 38.
    Proposed Sec.  38.1001 referred applicants and DCMs to the guidance 
in appendix B to part 38 for purposes of demonstrating to the 
Commission their compliance with the requirements of proposed Sec.  
38.1000.
Discussion
    No comments were received in regards to the proposed rule and 
guidance, and the Commission is adopting the rule and guidance as 
proposed.
20. Subpart U--System Safeguards
    Core Principle 20 is a new core principle created by the Dodd-Frank 
Act, and pertains to the establishment of system safeguards by all 
DCMs. Core Principle 20 specifically requires DCMs to: (1) Establish 
and maintain a program of risk oversight to identify and minimize 
sources of operational risk through the development of appropriate 
controls and procedures and the development of automated systems that 
are reliable, secure, and have adequate scalable capacity; (2) 
establish and maintain emergency procedures, backup facilities, and a 
plan for disaster recovery that allow for the timely recovery and 
resumption of operations and the fulfillment of the responsibilities 
and obligations of the DCM; and (3) periodically conduct tests to 
verify that backup resources are sufficient to ensure continued order 
processing and trade matching, price reporting, market surveillance, 
and maintenance of a comprehensive and accurate audit trail. The rules 
proposed under subpart U implement these requirements. The Commission 
proposed to codify the statutory text of the core principle in proposed 
Sec.  38.1050, and adopts the rule as proposed.
i. Sec.  38.1051--General Requirements
    The rules proposed under Sec.  38.1051 (a) and (b) would require a 
DCM's program of risk analysis and oversight to address six categories 
of risk analysis and oversight, including information security; 
business continuity-disaster recovery (``BC-DR'') planning and 
resources; capacity and performance planning; systems operations; 
systems development and quality assurance; and physical security and 
environmental controls.
    The proposed rule in Sec.  38.1051(c) specifically would require 
each DCM to maintain a BC-DR plan and BC-DR resources sufficient to 
enable resumption of trading and of all of the responsibilities and 
obligations of the DCM during the next business day following any 
disruption of its operations, either through sufficient infrastructure 
and personnel resources of its own or through sufficient contractual 
arrangements with other DCMs or disaster recovery service providers.
    The proposed rule also would require each DCM to notify Commission 
staff of various system security-related events, including prompt 
notice of all electronic trading halts and systems malfunctions in 
Sec.  38.1051(e)(1), timely advance notice of all planned changes to 
automated systems that may impact the reliability, security, or 
adequate scalable capacity of such systems in Sec.  38.1051(f)(1), and 
timely advance notice of all planned changes to programs of risk 
analysis and oversight in Sec.  38.1051(f)(2). The proposed rule also 
required DCMs to provide relevant documents to the Commission in Sec.  
38.1051(g) and to conduct regular, periodic, objective testing and 
review of its automated systems in Sec.  38.1051(h). Moreover, proposed 
Sec.  38.1051(i) would require each DCM, to the extent practicable, to 
coordinate its BC-DR plan with those of the members and market 
participants upon whom it depends to provide liquidity, to initiate 
coordinated testing of such plans, and to take into account in its own 
BC-DR plan, the BC-DR plans of relevant telecommunications, power, 
water, and other essential service providers.
Summary of Comments
    CME commented that recovery time objectives (``RTOs'') in each 
catastrophic

[[Page 36658]]

situation should consider the impact on all market participants and 
independent technology services providers in the context of determining 
a proper RTO.\448\ CME also objected to what it considers to be an 
overly broad requirement in Sec.  38.1051(e)(1) to notify Commission 
staff promptly of all electronic trading halts and systems 
malfunctions.\449\ CME argued that required reporting should be limited 
to any material system failures. Further, CME criticized Sec.  
38.1051(f)(1), arguing that the mandate that DCMs provide the 
Commission with timely advance notice of all planned changes to 
automated systems that may impact the reliability, security, or 
adequate scalable capacity of such systems is overly burdensome, and 
not cost effective.\450\ Additionally, CME argued that the Sec.  
38.1051(f)(2) requirement that DCMs provide timely advance notice of 
all planned changes to their program of risk analysis and oversight is 
too broad and generally unnecessary.\451\ Finally, CME noted that it 
does not control, or generally have access to, the details of the 
disaster recovery plans of its major vendors.\452\
---------------------------------------------------------------------------

    \448\ CME Comment Letter at 36 (Feb. 22, 2011).
    \449\ Id. at 37.
    \450\ Id.
    \451\ Id.
    \452\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule, with the 
modifications described below. As noted in the DCM NPRM, automated 
systems play a central and critical role in today's electronic 
financial market environment, and the oversight of core principle 
compliance by DCMs with respect to automated systems is an essential 
part of effective oversight of both futures and swaps markets. Advanced 
computer systems are fundamental to a DCM's ability to meet its 
obligations and responsibilities.\453\
---------------------------------------------------------------------------

    \453\ See 75 CFR 80572, 80601-80602, Dec., 22, 2010.
---------------------------------------------------------------------------

    The Commission has considered CME's comment, and believes that 
timely advance notice of all planned changes to address system 
malfunctions is not necessary and is revising the rule to provide that 
DCMs only need to promptly advise the Commission of all significant 
system malfunctions. With respect to planned changes to automated 
systems or risk analysis and oversight programs, the revised rule will 
require timely advance notification of material changes to automated 
systems or risk analysis and oversight programs. Finally, the rule does 
not require DCMs to control or have access to the details of the 
disaster recovery plans of its major vendors. Rather, the rule suggests 
coordination to the extent possible.
21. Subpart V--Financial Resources
    New Core Principle 21 requires DCMs to have adequate financial 
resources to discharge their responsibilities, and specifically 
requires that DCMs maintain financial resources sufficient to cover 
operating costs for a period of at least one year, calculated on a 
rolling basis.
i. Sec.  38.1100--Core Principle 21, and Sec.  38.1101(a) and (c) 
General Rule and Computation of Financial Resources Requirement
    Proposed Sec.  38.1100 codifies the statutory text of the core 
principle and is being adopted as proposed.
    Proposed Sec.  38.1101(a)(1) and (3) required DCMs to maintain 
sufficient financial resources to cover operating costs for at least 
one year, calculated on a rolling basis, at all times. Proposed Sec.  
38.1101(a)(2) would require any entity operating as both a DCM and a 
DCO to comply with both the DCM financial resources requirements, and 
also the DCO financial resources requirements in Sec.  39.11.\454\ 
Proposed Sec.  38.1101(c) required a DCM to make a reasonable 
calculation of the financial resources it needs to meet the 
requirements of proposed Sec.  38.1101(a) at the end of each fiscal 
quarter.
---------------------------------------------------------------------------

    \454\ See 76 FR 69334, Nov. 8, 2011. Commission regulation 39.11 
establishes requirements that a DCO will have to meet in order to 
comply with DCO Core Principle B (Financial Resources), as amended 
by the Dodd-Frank Act. Amended Core Principle B requires a DCO to 
possess financial resources that, at a minimum, exceed the total 
amount that would enable the DCO to meet its financial obligations 
to its clearing members notwithstanding a default by the clearing 
member creating the largest financial exposure for the DCO in 
extreme but plausible conditions; and enable the DCO to cover its 
operating costs for a period of 1 year, as calculated on a rolling 
basis.
---------------------------------------------------------------------------

Summary of Comments
    OCX requested that the Commission define whether ``operating 
costs'' are gross or net.\455\ GreenX recommended that the Commission 
expressly state that ``operating costs'' should be determined from a 
cash flow statement perspective.\456\
---------------------------------------------------------------------------

    \455\ OCX Comment Letter at 5 (Feb. 22, 2011).
    \456\ GreenX Comment Letter at 19 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Chris Barnard recommended that each DCM calculate and regularly 
publish its solvency ratio, defined as the DCM's available financial 
resources divided by the DCM's financial resources requirement.\457\ 
Chris Barnard stated that the Commission should be notified when this 
ratio falls below 105 percent.\458\
---------------------------------------------------------------------------

    \457\ Barnard Comment Letter at 5 (May 20, 2011).
    \458\ Id.
---------------------------------------------------------------------------

    KCBT stated that the proposed requirements would result in 
duplication for entities that operate both a DCM and a DCO, because 
proposed Sec.  39.11 imposed similar requirements on DCOs.\459\ KCBT 
stated that its DCO was established as its wholly-owned subsidiary 
corporation for purposes of limiting liability and that as a 
``privately-owned, for-profit corporation, it should be able to 
determine its own levels of capital resources and deployment.'' \460\ 
KCBT referenced this rationale in response to proposed Sec.  
38.1101(a)(3), (b), (e), and (f).\461\
---------------------------------------------------------------------------

    \459\ KCBT Comment Letter at 8 (Feb. 22, 2011).
    \460\ Id.
    \461\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting proposed Sec.  38.1101 (a) and (c) with 
the modification described below. The Commission notes that 
specifically defining ``operating costs'' could result in unintended 
restrictions on DCMs. The Commission will maintain the flexibility of 
the proposed rule by not further defining ``operating costs'' and 
instead permitting each DCM to have reasonable discretion in 
determining the methodology it will use to make the calculation. For 
these reasons, the Commission also declines to incorporate a solvency 
ratio requirement to the final rules.
    Finally, the Commission has revised the text of Sec.  38.1101(a)(2) 
(redesignated as paragraph (a)(3)) to clarify that a DCM that is also 
registered with the Commission as a DCO must demonstrate that it has 
sufficient resources to operate the combined entity as both a DCM and 
DCO,\462\ and further, that such combined entity need only file single 
quarterly financial resources reports in accordance with Sec.  
39.11(f). The Commission is not requiring a dually-registered entity to 
file two separate reports because the operating resource requirements 
for a DCM and DCO are the same, and the combined DCM/DCO is required to 
have sufficient financial resources to cover its operating costs as a 
combined entity. The DCO financial resource requirements in Sec.  39.11 
differ from those in Sec.  38.1101 only insofar as they add a 
requirement for default resources, which is applicable only to a

[[Page 36659]]

DCM/DCO acting in its capacity as a DCO.
---------------------------------------------------------------------------

    \462\ The Commission anticipates that a corporate entity that 
operates more than one registered entity may share certain costs, 
and may allocate those costs among the registered entities as 
determined by the Commission on a case by case basis.
---------------------------------------------------------------------------

ii. Sec.  38.1101(b)--Types of Financial Resources
    Under proposed Sec.  38.1101(b), financial resources available to 
DCMs to satisfy the applicable financial requirements would include the 
DCM's own capital (assets in excess of liabilities) and any other 
financial resource deemed acceptable by the Commission. A DCM would be 
able to request an informal interpretation from Commission staff on 
whether a particular financial resource would be acceptable.
Summary of Comments
    OCX stated that the proposed rule may encourage DCMs to cut 
services in order to reduce their operational need for cash.\463\
---------------------------------------------------------------------------

    \463\ OCX Comment Letter at 5 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Several commenters recommended that the Commission include specific 
examples of financial resources that might satisfy the requirement. OCX 
inquired whether firm commitments from owners to honor capital calls 
would be acceptable under the proposed rule.\464\ CME contended that 
the intent of Congress was to construe the terms ``financial 
resources'' broadly and include anything of value at the DCM's 
disposal, including operating revenues.\465\ CME stated that if 
Congress wanted to exclude operating revenues from what would be 
considered financial resources, Congress could have incorporated an 
``equity concept.'' \466\
---------------------------------------------------------------------------

    \464\ Id.
    \465\ CME Comment Letter at 37 (Feb. 22, 2011).
    \466\ Id.
---------------------------------------------------------------------------

    GreenX contended that the Commission should continue to permit 
flexibility for DCMs, but also requested that the Commission provide 
specific examples of which assets can be included in the calculation of 
``financial resources.'' \467\ GreenX requested confirmation that 
accounts receivable and other assets that are reasonably expected to 
result in payments to the DCM, as well as subordinated loans, are 
acceptable financial resources.\468\ GreenX also stated that committed 
lines of credit and similar facilities should be considered ``good'' 
financial resources, and that such interpretation is standard in the 
ordinary business world.\469\ GreenX stated that the proposed increase 
in the amount of financial resources needed by DCMs, and the 
restrictions on the use of debt financing, would impede the ability of 
start-ups to become and remain DCMs.\470\
---------------------------------------------------------------------------

    \467\ GreenX Comment Letter at 19 (Feb. 22, 2011).
    \468\ Id.
    \469\ Id. at 18.
    \470\ GreenX Comment Letter at 14 (Feb. 22, 2011).
---------------------------------------------------------------------------

    GreenX proposed language to replace proposed Sec.  38.1101(a)(3), 
(b), and (e) that would provide that a DCM ``be required to maintain 
sufficient financial resources to cover its projected operating costs 
for a period of at least one year, including unencumbered, liquid 
assets equal to at least six months of such projected operating costs, 
and that committed lines of credit or various debt instruments may be 
included in calculating those financial resources, as long as the DCM 
is not incurring indebtedness secured by its assets and counting both 
those assets and the indebtedness as part of its financial resources.'' 
\471\ GreenX further contended that if the Commission is unwilling to 
accept this language, the Commission should: (i) clearly specify that 
the ``financial resources'' requirement in proposed Sec.  38.1101(a)(3) 
is a separate requirement from the liquidity requirement in proposed 
Sec.  38.1101(e), and (ii) delete the language in the proposed 
liquidity requirement suggesting that proposed Sec.  38.1101(e) is part 
of the proposed one year's required operating costs coverage.\472\ 
Absent revision, GreenX stated that the current proposal could result 
in a requirement of up to 18 months of financial resources if a DCM 
used a line of credit to satisfy the liquidity requirement.\473\ 
Moreover, if this provision is not changed, GreenX recommended that the 
Commission undertake a cost-benefit analysis of requiring DCMs to 
maintain financial resources in excess of one year's operating 
costs.\474\ GreenX also stated that the Commission should not adopt a 
``one-size-fits-all approach'' to the financial resources requirements 
as between DCOs and DCMs, since different circumstances and different 
purposes support differential treatment.\475\
---------------------------------------------------------------------------

    \471\ Id. at 17.
    \472\ Id. GreenX recommended striking the words in proposed 
regulation 38.1101(e) ``to meet the requirements of paragraph (a) of 
this section'' and ``If any portion of such financial resources is 
not sufficiently liquid.''
    \473\ Id. at 14-15.
    \474\ Id. at 17-18.
    \475\ GreenX discussed the significantly different roles played 
by DCMs and DCOs (i.e., DCMs do not guarantee or novate trades and 
their capital is not at risk in the event of a default) and further 
states that the ``Commission should not adopt a one-size-fits-all 
approach and should not treat DCOs and DCMs in the same manner where 
different circumstances and different purposes support differential 
treatment.'' GreenX notes that ``the role of financial resources 
(and letters of credit) in the DCM context is to ensure that DCMs 
can continue to operate in the ordinary course of business and make 
payments as they become due, which does not have the same time 
sensitivity that it does in the DCO context.'' See GreenX Comment 
Letter at 17 (Feb. 22, 2001).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule with one modification.
    The provision in Sec.  38.1101(b) stating that acceptable financial 
resources include a DCM's own capital and ``any other financial 
resource deemed acceptable by the Commission'' was meant to capture 
other types of resources on a case-by-case basis and provide 
flexibility to both DCMs and the Commission. Accordingly, the 
Commission notes that a DCM's own capital means its assets minus its 
liabilities calculated in accordance with the Generally Accepted 
Accounting Principles (``GAAP''). The Commission believes that if a 
certain financial resource is deemed to be an asset under GAAP, it is 
appropriate for inclusion in the calculation for this rule, and the 
rule has been revised accordingly. To the extent a certain financial 
resource is not considered an asset under GAAP, but based upon the 
facts and circumstances a DCM believes that the particular asset should 
be so considered, Commission staff will work with the DCM to determine 
whether such resource is acceptable. In response to comments pertaining 
to the acceptable forms of financial resources, the Commission may 
consider projected revenues as an acceptable financial resource for 
established DCMs that can demonstrate a historical record of revenue; 
but not for DCM applicants, relatively new DCMs or DCMs with no such 
record.
    The Commission believes that GreenX misinterprets the relationship 
of Sec.  38.1101(a)(3) and Sec.  38.1101(e). The Commission clarifies 
that the one-year financial resources requirements in Sec.  
38.1101(a)(3) and the six month liquidity requirement in Sec.  
38.1101(e) could be met by using the same financial resources. GreenX 
is correct that if a sufficient portion of the financial resources used 
for the one-year financial resources requirement in Sec.  38.1101(a)(3) 
are illiquid, it is possible that an entity could be required to have 
18 months of financial resources to meet the requirements of these two 
sections. However, the Commission is requiring only one-year of 
financial resources, six months of which must be liquid financial 
resources. Each DCM may exercise discretion in determining how to meet 
this requirement (e.g., six months of liquid financial resources 
combined with six months of illiquid ones, 12 months of liquid 
financial resources, or 12 months of illiquid financial resources with 
a line of credit

[[Page 36660]]

covering six months of financial resources). Indeed, the Commission 
notes that most, if not all, DCMs have considerably more financial 
resources than the minimum one-year required by this rule. In addition, 
if a DCM does not have this liquidity, it is not achieving the goal of 
the core principle, as it will be unable to pay its creditors. Further, 
the language of the core principle does not limit the resource 
requirement to one year, as it specifically states that a DCM's 
financial resources are adequate if the value of such resources exceeds 
one year of operating costs. Also in response to GreenX, the costs and 
benefits associated with all of the rules being adopted in this 
release, including Sec.  38.1101, are discussed in the cost benefit 
section of the release.
    In response to GreenX's comment regarding the financial resources 
requirements of DCOs and DCMs, the Commission notes that the financial 
resources requirements in Sec.  38.1101, for DCMs, and in Sec.  39.11, 
for DCOs, are different. In addition to the requirement to maintain 
financial resources sufficient to cover operating costs for one year, 
Sec.  39.11 also requires DCOs to possess a certain level of default 
resources.\476\ As GreenX correctly notes, DCMs do not guarantee or 
novate trades and a ``one-size-fits-all'' approach is not being applied 
here.
---------------------------------------------------------------------------

    \476\ See 76 FR 69334, Nov. 8, 2011.
---------------------------------------------------------------------------

iii. Sec.  38.1101(d)--Valuation of Financial Resources
    Proposed Sec.  38.1101(d) required DCMs to calculate the current 
market value of each financial resource used to meet their obligations 
under these proposed rules, no less frequently than at the end of each 
fiscal quarter. The proposed rule required DCMs to perform the 
valuation at other times as appropriate. As the Commission noted in the 
DCM NPRM, the proposed rule is designed to address the need to update 
valuations in circumstances where there may have been material 
fluctuations in market value that could impact a DCM's ability to meet 
its obligations on a rolling basis as required by proposed Sec.  
38.1101(a). The proposed rule requires that when valuing a financial 
resource, the DCM reduce the value, as appropriate, to reflect any 
market or credit risk specific to that particular resource, i.e., apply 
a haircut.\477\ Under the proposed rule, DCMs would be permitted to 
exercise discretion in determining the applicable haircuts, although 
such haircuts would be subject to Commission review and acceptance.
---------------------------------------------------------------------------

    \477\ A ``haircut'' is a deduction taken from the value of an 
asset to reserve for potential future adverse price movements in 
such asset.
---------------------------------------------------------------------------

Summary of Comments
    GreenX recommended an explicit statement that the use of GAAP 
principles in calculating the market value of each financial resource 
in meeting obligations under the rules would satisfy the requirements 
of this subsection, without limiting other potential methods of 
complying.\478\
---------------------------------------------------------------------------

    \478\ GreenX Comment Letter at 19 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule without modification. 
In response to GreenX's comment, the Commission notes that GAAP does 
not include haircuts, but valuation under GAAP does take into account 
current market values. The Commission expects each DCM to monitor the 
value of its resources to be certain that the calculation of the value 
of its assets reflects current market conditions in accordance with 
GAAP. A haircut is not intended to be applied in the ordinary course, 
but to be used in those unusual market circumstances that require an 
accounting intervention. As stated in the DCM NPRM, the Commission will 
permit DCMs discretion to, in the first instance, choose an appropriate 
haircut methodology. The Commission will evaluate the appropriateness 
of such methodology on a case-by-case basis.
iv. Sec.  38.1101(e)--Liquidity of Financial Resources
    Proposed Sec.  38.1101(e) required that DCMs maintain unencumbered 
liquid financial assets, such as cash or highly liquid securities, 
equal to at least six months' operating costs. As noted in the DCM 
NPRM, the Commission believes the requirement to have six months' worth 
of unencumbered liquid financial assets would give a DCM time to 
liquidate the remaining financial assets it needs to continue operating 
for the last six months of the required one-year period. A DCM would be 
permitted to use a committed line of credit or similar facility to 
satisfy the requirement, in the event that the DCM does not have six 
months' worth of unencumbered liquid financial assets.
    The Commission notes that a DCM may only use a committed line of 
credit or similar facility to meet the liquidity requirements set forth 
in proposed Sec.  38.1101(e). Accordingly, a committed line of credit 
or similar facility is not listed in proposed Sec.  38.1101(b) as a 
financial resource available to a DCM to satisfy the requirements of 
proposed Sec.  38.1101(a).
Summary of Comments
    CME stated that the liquidity measurement is only relevant in the 
context of winding-down, and claims that a three month period, rather 
than six months, is a more accurate assessment of how long it would 
take for a DCM to wind down.\479\
---------------------------------------------------------------------------

    \479\ CME Comment Letter at 37 (Feb. 22, 2011).
---------------------------------------------------------------------------

    GreenX requested clarification of the terms ``unencumbered'' and 
``committed.'' \480\ GreenX suggested that assets should be considered 
unencumbered even if they are ``subject to security interests or 
adverse claims, as long as the DCM can use and expend those assets in 
the ordinary course without requiring consent of lenders or 
claimants.'' \481\ GreenX also requested that the Commission clarify 
whether ``committed'' is intended to mean anything other than a line of 
credit or similar facility that has been extended pursuant to a legally 
binding agreement.\482\ Finally, GreenX recommended that the Commission 
expressly state that lines of credit and similar facilities incurred 
from banks and other commercial financial institutions on market 
standard terms will presumptively qualify as good ``committed lines of 
credits and similar facilities'' for purposes of proposed Sec.  
38.1101.\483\ GreenX requested that any requirements applicable for 
lines of credit be specified in the final regulations.\484\
---------------------------------------------------------------------------

    \480\ GreenX Comment Letter at 18 (Feb. 22, 2011).
    \481\ Id.
    \482\ Id.
    \483\ Id.
    \484\ Id.
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule without modification.
    The Commission believes that a six month period is appropriate for 
a wind down period and notes that commenters did not provide any 
support for the claim that a wind down would take only three months.
    In response to GreenX's request for clarification, the Commission 
notes that it is using ``unencumbered'' in the ``normal commercial 
sense'' to ``refer to assets that are not subject to a security 
interest or other adverse claims.'' \485\ By ``committed line of credit 
or similar facility,'' the Commission means a committed, irrevocable 
contractual obligation to provide funds on demand with preconditions 
limited to the execution of appropriate agreements. In other words, a 
facility with a material adverse financial condition restriction would 
not be acceptable. The purpose of

[[Page 36661]]

this requirement is for a DCM to have no impediments to accessing its 
line of credit at the time it needs liquidity. Further, DCMs are 
encouraged to periodically check their line of credit arrangements to 
confirm that no operational difficulties are present.
---------------------------------------------------------------------------

    \485\ Id.
---------------------------------------------------------------------------

v. Sec.  38.1101(f)--Reporting Requirements
    Proposed Sec.  38.1101(f) required DCMs, at the end of each fiscal 
quarter, or at any time upon Commission request, to report to the 
Commission: (i) the amount of financial resources necessary to meet the 
requirements set forth in the regulation; and (ii) the value of each 
financial resource available to meet those requirements. The proposed 
rule also required a DCM to provide the Commission with a financial 
statement, including the balance sheet, income statement, and statement 
of cash flows, of the DCM or of its parent company (if the DCM does not 
have an independent financial statement and the parent company's 
financial statement is prepared on a consolidated basis).
    Under the proposed rule, a DCM was required to provide the 
Commission with sufficient documentation explaining the methodology it 
used to calculate its financial requirements, and the basis for its 
valuation and liquidity determinations. The proposed rule also required 
the DCM to provide copies of any agreements establishing or amending a 
credit facility, insurance coverage, or any similar arrangement that 
evidences or otherwise supports its conclusions. The Commission, in its 
sole discretion, would determine the sufficiency of the documentation 
provided. According to the proposed rule, the DCM would have 17 
business days \486\ from the end of the fiscal quarter to file the 
report, unless it requests an extension of time from the Commission.
---------------------------------------------------------------------------

    \486\ This filing deadline is consistent with the deadline 
imposed on FCMs for the filing of monthly financial reports. See 17 
CFR regulation 1.10(b).
---------------------------------------------------------------------------

Summary of Comments
    Three commenters requested an extended deadline for filing the 
financial reports required as a result of the proposed rule. CFE stated 
that for DCMs that are public, or have financial statements 
consolidated with those of a public company, the filing deadlines 
should be the same as those required by the SEC for Forms 10-Q and 10-
K.\487\ CME provided a similar comment stating that the proposed 17 day 
filing deadline is not feasible and that instead, the requirement 
should be consistent with the SEC's reporting requirements.\488\ 
Similarly, GreenX stated that it has procedures in place to comply with 
the SEC's requirements and that the proposed requirements in this rule 
would require new programming and resources.\489\ GreenX recommended 
extending the reporting deadline to 30 calendar days, noting that this 
is still more burdensome than the requirements imposed by the SEC on 
national securities exchanges.\490\ Rather than recommending an 
extended deadline, KCBT objected to the proposed quarterly filings and 
stated that the annual submissions that it provides to the Commission 
should suffice.\491\
---------------------------------------------------------------------------

    \487\ CFE Comment Letter at 6 (Feb. 22, 2011).
    \488\ CME Comment Letter at 38 (Feb. 22, 2011).
    \489\ GreenX Comment Letter at 20 (Feb. 22, 2011) (GreenX also 
stated that normal year-end adjustments typically require much more 
than 17 business days to complete).
    \490\ Id.
    \491\ KCBT Comment Letter at 8 (Feb. 22. 2011).
---------------------------------------------------------------------------

    In addition to the comments received regarding the reporting 
deadline, two commenters requested clarification as to the 
confidentiality of any filings made pursuant to proposed Sec.  
38.1101(f).\492\ Further, CME requested clarification that consolidated 
financial statements covering multiple DCMs, and DCOs where relevant, 
comply with the proposed rule.\493\
---------------------------------------------------------------------------

    \492\ CFE Comment Letter at 6 (Feb. 22, 2011); CME Comment 
Letter at 37-38 (Feb. 22, 2011).
    \493\ CME Comment Letter at 37-38 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rule with certain 
amendments.
    The Commission is persuaded that the proposed 17 business day 
filing deadline may be overly burdensome. The SEC requires its 
quarterly reports on Form 10-Q to be filed with the SEC 40 calendar 
days after the end of the fiscal quarter for accelerated filers and 45 
calendar days after the end of the fiscal quarter for all other SEC-
registered entities.\494\ The SEC requires annual reports on Form 10-K 
to be filed with the SEC 60 calendar days after the end of the fiscal 
year for large accelerated filers, 75 calendar days for other 
accelerated filers and 90 calendar days for non-accelerated 
filers.\495\ The Commission has extended the 17 business day proposed 
filing deadline to 40 calendar days for the required reports for the 
first three quarters. This revision to the rule will harmonize the 
Commission's financial resource filing requirement with the SEC's 
requirements for its Form 10-Q. Similarly, the Commission has extended 
the filing deadline for the fourth quarter report to 60 days in order 
to harmonize the requirement with the SEC's filing deadline for the 
Form 10-K. However, to the extent that a DCM is also registered as a 
DCO, the DCM must file its quarterly financial reports in accordance 
with the requirement of Sec.  39.11 (which requires that reports be 
filed within 17 business days after the end of each fiscal quarter). 
The shorter time frame for submission of a dual registrant's quarterly 
financial reports is based on the heightened significance of financial 
oversight for the clearinghouse, which serves as the central 
counterparty for all cleared transactions.
---------------------------------------------------------------------------

    \494\ See 17 CFR 249.308a.
    \495\ See 17 CFR 249.310.
---------------------------------------------------------------------------

    The Commission has considered KCBT's comments, but does not believe 
that annual submissions are sufficient. The Commission believes that 
prudent financial management requires DCMs to prepare and review 
financial reports more frequently than annually, and expects that DCMs 
currently are reviewing their finances on at least a quarterly basis.
    In response to the comments requesting clarification on the 
confidentiality of the filings made pursuant to the financial resources 
regulations, the Commission does not plan to make such reports public. 
However, where such information is, in fact, confidential, the 
Commission encourages DCMs to submit a written request for confidential 
treatment of such filings under the Freedom of Information Act 
(``FOIA''),\496\ pursuant to the procedures established in Sec.  145.9 
of the Commission's regulations.\497\ The determination of whether to 
disclose or exempt such information in the context of a FOIA proceeding 
would be governed by the provisions of part 145, and any other relevant 
provision.
---------------------------------------------------------------------------

    \496\ 5 U.S.C. 552 et seq. (2010).
    \497\ 17 CFR 145.9 (2010).
---------------------------------------------------------------------------

    In response to the request for clarification in regard to 
consolidated financial statements, the Commission clarifies that 
consolidated financial statements would comply with the rule.
    Section 38.1101(g) delegates authority to perform certain functions 
that are reserved to the Commission under Sec.  38.1101 to the Director 
of the Division of Market Oversight.
22. Subpart W--Diversity of Boards of Directors
    Core Principle 22 is a new core principle that was added by the 
Dodd-Frank Act. The core principle requires that publicly traded DCMs 
must endeavor to recruit individuals to serve on their board of 
directors from among

[[Page 36662]]

a broad and culturally diverse pool of qualified candidates.
    In the DCM NPRM, the Commission proposed to codify the statutory 
text of the core principle in proposed Sec.  38.1150, and is adopting 
Sec.  38.1150 as proposed.
    As noted in the DCM NPRM, the substantive regulations implementing 
Core Principle 22 were proposed in a separate rulemaking that also 
would implement Core Principles 15 (Governance Fitness Standards), 16 
(Conflicts of Interest), and 17 (Composition of Governing Boards of 
Contract Markets).\498\ The rules implementing Core Principle 22 will 
be adopted in that separate rulemaking.
---------------------------------------------------------------------------

    \498\ See ``Governance Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities; Additional Requirements Regarding the Mitigation of 
Conflicts of Interest,'' Notice of Proposed Rulemaking, 76 FR 722, 
January 6, 2011. CME submitted a comment letter discussing proposed 
regulation 38.801 in connection with 76 FR 722.
---------------------------------------------------------------------------

    CME submitted a comment letter responding to the DCM NPRM that 
referenced comments it submitted in connection with that rulemaking. 
CME's comments will be considered in connection with that rulemaking.
23. Subpart X--Securities and Exchange Commission
    The Dodd-Frank Act added new Core Principle 23, requiring that DCMs 
keep any records relating to swaps defined in CEA section 1a(47)(A)(v), 
as amended by the Dodd-Frank Act, open to inspection and examination by 
the SEC.\499\ Consistent with the text of this core principle, the 
Commission proposed guidance under part 38 that provided that each DCM 
should have arrangements and resources for collecting and maintaining 
accurate records pertaining to any swap agreements defined in section 
1a(47)(A)(v) of the amended CEA.
---------------------------------------------------------------------------

    \499\ 7 U.S.C. 7; see also section 5(d)(23) of the CEA, as 
amended by the Dodd-Frank Act.
---------------------------------------------------------------------------

i. Sec.  38.1200--Core Principle 23, Sec.  38.1201 (Additional Sources 
for Compliance), and Guidance in Appendix B
    The Commission proposed a combination of rules and guidance to 
implement the core principle. Proposed Sec.  38.1200 codified the 
statutory text of the core principle. Proposed Sec.  38.1201 referred 
applicants and DCMs to the guidance in appendix B to part 38 for 
purposes of demonstrating to the Commission their compliance with the 
requirements of the core principle. The proposed guidance stated that 
DCMs should have arrangements and resources for collecting and 
maintaining accurate records pertaining to any swaps agreements defined 
in section 1a(47)(A)(v) of the Act.
Summary of Comments
    CME requested guidance on what records need to be retained and for 
how long they must be retained.\500\
---------------------------------------------------------------------------

    \500\ CME Comment Letter at 38 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission is adopting the proposed rules and guidance, with 
the modifications described below.
    In response to CME's comment, the Commission notes that the 
guidance provides that DCMs should retain ``any'' records relevant to 
swaps defined under CEA section 1a(47)(a)(v), and that the DCM should 
leave such records open to inspection and examination, for a period of 
five years. Commission staff consulted with representatives from the 
SEC, who confirmed that SEC's relevant recordkeeping requirements 
typically extend for a period of five years.\501\ The five year 
requirement is also consistent with the recordkeeping requirement under 
Core Principle 18 and Sec.  1.31 of the Commission's regulations.
---------------------------------------------------------------------------

    \501\ See 76 FR 10982, Feb. 28, 2011, (Proposed regulation 
818(b) requires security-based swap execution facilities to keep 
books and records ``for a period of not less than five years,'' the 
first two years in an easily accessible place). Rule 17a-1(b) 
(240.17a-1(b) requires national securities exchanges, among others, 
to keep books and records for a period of not less than five years, 
the first two years in an easily accessible place, subject to a 
destruction and disposition provisions, which allows exchanges to 
destroy physical documents pursuant to an effective and approved 
plan regarding such destruction and transferring/indexing of such 
documents onto some recording medium.).
---------------------------------------------------------------------------

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \502\ requires federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. The rules adopted herein will affect designated 
contract markets (``DCMs''). The Commission has previously established 
certain definitions of ``small entities'' to be used by the Commission 
in evaluating the impact of its rules on small entities in accordance 
with the RFA.\503\ The Commission previously determined that DCMs are 
not small entities for the purpose of the RFA.\504\ The Commission 
received no comments on the impact of the rules contained herein on 
small entities. Therefore, the Chairman, on behalf of the Commission 
and pursuant to 5 U.S.C. 605(b), certifies that the rules will not have 
a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \502\ 5 U.S.C. 601 et seq. (2010).
    \503\ 47 FR 18618-21, Apr. 30 1982.
    \504\ Id.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    This final rulemaking contains information collection requirements. 
The Paperwork Reduction Act (``PRA'') \505\ imposes certain 
requirements on federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. 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. The Commission proposed to amend collection 3038-
0052 to allow for an increase in response hours for the proposed 
rulemaking amending part 38, which included the increase in burden 
hours that will result from the amendments to rules 1.52 and 16.01 that 
are also part of this rulemaking.\506\ Notably, most of the collection 
burdens associated with part 38 are covered by a currently approved 
collection of information for part 38, or by other existing or pending 
collections of information. Thus, only those burdens that are not 
covered elsewhere are included in the Commission's proposed amendment.
---------------------------------------------------------------------------

    \505\ 44 U.S.C. 3501 et seq.
    \506\ See 75 FR 80572, 80603, Dec. 22, 2010 .
---------------------------------------------------------------------------

    The title of the collection will continue to be ``Part 38--
Designated Contract Markets.'' The Commission submitted the amended 
collection to the Office of Management and Budget (``OMB'') for its 
review and approval in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. Pursuant to a notice of action from OMB in March 2011, 
approval of the amended collection is pending a resubmission of the 
proposed information collection that includes a description of the 
comments received on the collection and the Commission's responses 
thereto, which will be made available by OMB at www.reginfo.gov.
    Responses to this collection of information will be mandatory. The 
Commission will protect proprietary information gathered according to 
the FOIA and 17 CFR part 145, ``Commission Records and Information.'' 
In addition, section 8(a)(1) of the CEA strictly prohibits the 
Commission, unless specifically authorized by the CEA, 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.'' \507\ The Commission is also required 
to protect certain information

[[Page 36663]]

contained in a government system of records according to the Privacy 
Act of 1974.\508\
---------------------------------------------------------------------------

    \507\ 7 U.S.C. 12.
    \508\ 5 U.S.C. 552a.
---------------------------------------------------------------------------

Proposed Collection
    In its existing collection of information for part 38, the 
Commission estimated 300 hours average response time from each 
respondent for the collection of designation and compliance 
information.\509\ Based on its experience with administering registered 
entities' submission requirements since implementation of the Commodity 
Futures Modernization Act of 2000,\510\ the Commission estimated in the 
DCM NPRM that the response time for the designation and compliance 
collections in the proposed rule would generally increase the 
information collection burden by 10 percent. This increase is due to 
the introduction of swaps trading on DCMs permitted under section 
723(a)(3) of the Dodd-Frank Act and the addition of new core principles 
with which DCMs must comply, excepting Core Principle 21 (Financial 
Resources), for which a separate burden estimate is discussed below, 
and the burdens associated with any information collection requirements 
that are being accounted for in other existing or pending collections. 
With respect to all but financial resources compliance, the Commission 
estimated in the DCM NPRM that it would collect information from 17 
respondents.\511\ Accordingly, a 10 percent estimated increase would 
result in 30 additional hours per respondent and 510 additional hours 
annually for all respondents for designation and compliance.
---------------------------------------------------------------------------

    \509\ 66 FR 42256, 42268, Aug. 10, 2001.
    \510\ Public Law 106-554, 114 Stat. 2763 (2000).
    \511\ The number of designated contract markets increased from 
13 to 17 since the last amendment to Collection 3038-0052 and from 
17 to 18 since the DCM NPRM was published in the Federal Register.
---------------------------------------------------------------------------

    With respect to Core Principle 21, the Commission estimated in the 
DCM NPRM that each of the 17 anticipated respondents may expend up to 
10 hours quarterly for filings required under the proposed regulations, 
totaling 40 hours annually for each respondent and 680 hours across all 
respondents with respect to compliance with Core Principle 21.
    Commission staff estimated that respondents could expend up to an 
additional $3,640 annually based on an hourly wage rate of $52 (30 
hours + 40 hours x $52) to comply with the proposed rules. This would 
result in an aggregated additional cost of $61,880 per annum (17 
respondents x $3,640).
Summary of Comments and Discussion
Estimated Burden Hours for Compliance for Part 38 Amendments
    The Commission received several comments regarding the estimated 
hours of burden for compliance with the proposal to amend part 38.\512\
---------------------------------------------------------------------------

    \512\ As noted above, the Commission is not finalizing proposed 
regulations 38.501--38.506 at this time, and expects and plans to do 
so when it considers the final SEF rulemaking, The Commission will 
consider all comments related to these provisions at such time.
---------------------------------------------------------------------------

    In particular, the Commission confirms that that the new DCM 
application form, Form DCM, provides a roadmap of required 
documentation, balances the needs of the Commission with the needs of 
the marketplace, and should result in a streamlined and standardized 
review process, as was noted by Eris.\513\
---------------------------------------------------------------------------

    \513\ Eris Comment Letter at 4 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Other commenters suggested that the 60 days proposed in Sec.  
38.3(g) for existing DCMs to certify compliance with the core 
principles and the rules implementing them would be unduly 
burdensome.\514\ As discussed in the preamble, the Commission is 
eliminating this provision from the final rules.
---------------------------------------------------------------------------

    \514\ See, e.g., GreenX Comment Letter at 21 (Feb. 22, 2011); 
KCBT Comment Letter at 2 (Feb. 22, 2011); Nodal Comment Letter at 4 
(Feb. 22, 2011); NYSE Liffe Comment Letter at 14 (Feb. 22, 2011); 
CME Comment Letter at 12 (Feb. 22, 2011); and CFE Comment Letter at 
7 (Feb. 22, 2011).
---------------------------------------------------------------------------

    CME stated that it would be costly to comply with the proposed 
Sec.  38.151(a) requirement that clearing firms obtain every customer's 
consent to the regulatory jurisdiction of each DCM.\515\ The Commission 
believes that Sec.  38.151(a) codifies requirements necessary to 
effectuate Core Principle 2's statutory mandate; a DCM must have an 
agreement in place prior to granting members and market participants 
access to its markets in order to ensure that the DCM has the capacity 
to detect, investigate, and apply appropriate sanctions to persons that 
violate DCM rules. Any incremental costs associated with this rule are 
covered by the 10 percent increase contained in the Commission's 
amended information collection.
---------------------------------------------------------------------------

    \515\ CME Comment Letter at 16 (Feb. 22, 2011).
---------------------------------------------------------------------------

    CME stated that an increased documentation burden associated with 
the submission process would greatly increase the cost and timing for 
DCMs to list products, without providing any corresponding benefit to 
the marketplace.\516\ CME stated that the Commission indicated that the 
proposed rules for Provisions Common to Registered Entities will 
increase the overall collection burden on registered entities by 
approximately 8,300 hours per year.\517\ The referenced burden was 
accounted for in the Commission's information collection for the part 
40 rules that were adopted in July, 2011, however, and therefore the 
burden associated with that collection is not duplicated here.\518\ 
Notwithstanding this, the Commission believes that any DCM must have an 
agreement with its customers such that the customer agrees to cooperate 
with the DCM, where necessary, in order for the DCM to perform its 
statutory functions.
---------------------------------------------------------------------------

    \516\ CME Comment Letter at 10 (Feb. 22, 2011).
    \517\ See 75 FR 67282, 67290, Nov. 2, 2010.
    \518\ See Collection 3038-0093.
---------------------------------------------------------------------------

    Similarly, CME commented on the burdens associated with rules 
implementing Core Principles 8 and 18, in particular, the requirement 
to separately identify block trading in daily volume reports.\519\ The 
burden associated with block trading is accounted for in the 
information collection associated with the Commission's Real-Time 
Public Reporting of Swap Transaction Data rulemaking.\520\ To avoid 
double-counting, no adjustment is being made to the amendment to this 
part 38 collection.
---------------------------------------------------------------------------

    \519\ CME Comment Letter at 30-31 (Feb. 22, 2011).
    \520\ See ``Real Time Public Reporting of Swap Transaction 
Data,'' 77 FR 2909, Jan. 20, 2012.
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    In addition, MGEX commented on the rules implementing the general 
recordkeeping requirements of Core Principle 18.\521\ Core Principle 18 
incorporates by reference Sec.  1.31 of the Commission regulations and 
the recordkeeping requirements in the Commission's Swap Data, 
Recordkeeping, and Reporting Requirements rulemaking.\522\ The Sec.  
1.31 requirements are already covered by the existing information 
collection for part 38, with the incremental costs associated with the 
introduction of swap trading, if a DCM elects to do so, covered by the 
10 percent increase contained in the Commission's amended information 
collection. The recordkeeping requirements in the proposed Swap Data, 
Recordkeeping, and Reporting Requirements rulemaking are accounted for 
in the information collection request that was developed for that 
rulemaking. To avoid double-counting, no adjustment is being made to 
the amendment to the part 38 information collection in response to the 
comment.
---------------------------------------------------------------------------

    \521\ MGEX Comment Letter at 9 (Feb. 22, 2011).
    \522\ See ``Swap Data Recordkeeping and Reporting 
Requirements,'' 77 FR 2136, Jan. 13, 2012.
---------------------------------------------------------------------------

    With respect to the information collection in rules implementing 
Core

[[Page 36664]]

Principle 10, CME and MGEX commented that establishing specific audit 
trail requirements would be burdensome, costly, and unnecessary.\523\ 
DCM compliance with Core Principle 10 should predate the enactment of 
the Dodd-Frank Act, however, and the information collections associated 
with Core Principle 10 are covered by the Commission's existing part 38 
information collection. Any burden increase associated with the 
maintenance of additional records resulting from the introduction of 
swap trading, if a DCM elects to do so, has been accounted for in the 
10 percent increase in designation and compliance costs discussed 
above.
---------------------------------------------------------------------------

    \523\ CME Comment Letter at 33 (Feb. 22, 2011) and MGEX Comment 
Letter at 7 (Feb. 22, 2011).
---------------------------------------------------------------------------

    CME submitted a comment regarding the information collection 
burdens associated with rules that were proposed to implement new Core 
Principle 20, which requires each DCM to maintain a business 
continuity-disaster recovery plan and to report system security-related 
events and all planned changes to automated systems that may impact the 
reliability, security, or scalability of the systems.\524\ In response 
to CME's concerns that the rule would require reporting of 
insignificant system events, the Commission is adopting final rules 
that require reporting only of significant system malfunctions and 
advance notification only of material system changes. The resulting 
burden reduction eliminates the need to increase the proposed part 38 
information collection amendment.
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    \524\ CME Comment Letter at 36-37 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Finally, MGEX commented that the hours estimated for designation 
and compliance and the additional new annual cost of compliance with 
the proposed rules were extremely low, and claimed that due to the vast 
number of additional requirements, the total burden is becoming 
``unwieldy and excessive.'' \525\ MGEX did not provide any estimate of 
what costs would be more accurate for purposes of the part 38 
information collection, and thus the Commission could not evaluate 
alternative estimates to determine whether they would be more 
appropriate than what was proposed, which was based on past Commission 
experience with existing collections of information and which accounts 
only for those collections of information that are not now or will not 
be covered by other collections of information.
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    \525\ MGEX Comment Letter at 9-10 (Feb. 22, 2011).
---------------------------------------------------------------------------

Estimated Burden Hours for Core Principle 21
    In addition to the general increase proposed for the existing part 
38 collection discussed above, the Dodd-Frank Act established new Core 
Principle 21 (Financial Resources) that requires respondents to have 
adequate financial, operational and managerial resources.\526\ In order 
to demonstrate compliance with Core Principle 21, each respondent will 
need to file specific reports with the Commission on a quarterly basis, 
which would result in four quarterly responses per respondent per year. 
In the proposed rulemaking, the Commission estimated that each 
respondent would expend 10 hours to prepare each filing required under 
the proposed regulations, and the Commission estimated that it would 
receive filings from 17 respondents.
---------------------------------------------------------------------------

    \526\ See section 735(b) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Commission received several comments on the proposed financial 
resources collection. KCBT stated that the financial resources rules, 
as proposed, would result in duplicative reporting for entities that 
operate as both a DCM and DCO.\527\ In response to this comment, the 
Commission is now finalizing the rules with revisions that clarify that 
a DCM that also is registered with the Commission as a DCO is obligated 
only to file its financial resources reports under the DCO rules, 
though it nonetheless must maintain the financial resources necessary 
to satisfy the operating cost requirements of the DCM and the DCO 
separately.
---------------------------------------------------------------------------

    \527\ KCBT Comment Letter at 7-9 (Feb. 22, 2011).
---------------------------------------------------------------------------

    CFE, GreenX, and KCBT requested that the Commission extend the 
proposed deadline for filing of financial resources reports from 17 
days after the end of each quarter, in particular to accommodate DCMs 
that are public companies, or that have financial statements that are 
consolidated with those of a public company, so that the filing 
requirements would be aligned with the requirements for SEC forms 10-Q 
and 10-K, which are longer.\528\ GreenX stated that failing to extend 
the time for filing to align with the SEC filing requirements, for 
which it and other public companies already have procedures and 
controls in place, would result in unnecessary new programming and 
staff resources.\529\ KCBT objected to the quarterly filing requirement 
and suggested that annual reporting would be sufficient.\530\
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    \528\ CFE Comment Letter (Feb. 22, 2011), GreenX Comment Letter 
(Feb. 22, 2011), KCBT Comment Letter (Feb. 22, 2011).
    \529\ GreenX Comment Letter at 19-20 (Feb. 22, 2011).
    \530\ KCBT Comment Letter at 8-9 (Feb. 22, 2011).
---------------------------------------------------------------------------

    The Commission is not persuaded that an annual reporting 
requirement would be sufficient in terms of financial management on the 
part of the DCM or regulatory oversight on the part of the Commission. 
With respect to regulatory oversight, the adoption of an annual 
reporting requirement alone would result in a need for periodic checks 
by the Commission on financial resources compliance by DCMs between 
annual reports. The multiple unscheduled checks that would be necessary 
each year, in the form of calls for a demonstration of compliance by a 
DCM, as well as more formal rule enforcement reviews, would burden the 
Commission's examination resources. If DCMs are required to report on a 
quarterly basis, DCMs may be able to demonstrate risks toward which the 
Commission's resources should be directed. Moreover, unscheduled checks 
would most likely be more burdensome for DCMs than quarterly reporting. 
Thus, the Commission is adopting both quarterly and annual reporting 
requirements in these final rules.
    However, in response to the comments, the Commission is adopting 
final rules that would mitigate the burden that would result from the 
adoption of filing deadlines that do not align with SEC filing 
requirements. Accordingly, the final rules establish a deadline for the 
filing of financial resources reports of 40 calendar days after the end 
of the quarter for the first three quarters of a DCM's fiscal year, and 
60 calendar days after the end of the DCM's fourth quarter.
Final Burden Estimate
    The final rules require each respondent to file information with 
the Commission. Information collections are included in several of the 
general provisions being adopted in Subpart A, as well as in certain 
regulations implementing Core Principles 5, 7, 8, 10, 11, 13, 18, 20, 
and 21. The Commission has carefully evaluated the comments discussed 
above and determined that the 10 percent general increase by which the 
Commission seeks to amend its part 38 collection of information is 
appropriate. The 10 percent increase is intended to cover only the 
burdens associated with collections of information that are not already 
covered in the existing part 38 information collection, or in other 
existing collections or collections that are being established with 
other rulemakings.

[[Page 36665]]

    The 10 percent increase tracks the already approved part 38 
information collection, which accounted for the many one-time or 
infrequent information collections contained in part 38 over the 
assumed life of a DCM. As a general rule, the information collections 
in this rulemaking that are not already covered have the same 
characteristics: The required filing of one-time certifications and 
demonstrations of compliance by existing DCMs; the filing of occasional 
exemptive requests; reporting of material events that are expected to 
occur infrequently; the expansion of a DCM's existing audit trail 
program to cover swap transactions, if the DCM determines to list 
swaps; and the one-time or infrequent system changes needed to report 
transactions, such as EDRPs, that are not covered in the information 
collection requests of other rulemakings.
    The changes sought by the commenters that are being adopted would 
only marginally reduce the overall information collection burden. Thus 
the Commission has determined not to reduce its burden estimates. 
Accordingly, the Commission expects that with respect to all but 
financial resources compliance, a 10 percent estimated increase would 
result in 30 additional hours per respondent and 540 additional hours 
annually for all respondents for designation and compliance.
    With respect to Core Principle 21, the Commission expects that each 
of the 18 anticipated respondents may expend up to 10 hours quarterly 
for filings required under the regulations, totaling 40 hours annually 
for each respondent and 720 hours across all respondents with respect 
to compliance with Core Principle 21.
Aggregate Information Burden
    In conclusion, amended collection 3038-0052 will result in 
respondents expending up to an additional $3,640 annually based on an 
hourly wage rate of $52 (30 hours + 40 hours x $52) to comply with the 
proposed rules. This would result in an aggregated additional cost of 
$65,520 per annum (18 respondents x $3,640). This final burden estimate 
accounts for the 18 respondents that the Commission believes will be 
affected by the final rule, rather than the 17 initially proposed.\531\ 
Otherwise, there is no change from the rule as proposed.
---------------------------------------------------------------------------

    \531\ The DCM NPRM referenced 17 respondents. The number of 
respondents was revised to 18 to include Eris, which was designated 
on October 28, 2011.
---------------------------------------------------------------------------

C. Cost Benefit Considerations

Background on Designated Contract Markets
    Designated contract markets (``DCMs'') were established by the 
Commodity Futures Modernization Act of 2000 (``CFMA'') as one of two 
forms of Commission-regulated markets for the trading of futures and 
options contracts based on an underlying commodity, index, or 
instrument. Specifically, the CFMA established, under section 5 of the 
CEA, eight designation criteria and 18 core principles governing the 
designation and operation of DCMs. To implement the CFMA, the 
Commission codified regulations under part 38 consisting largely of 
guidance and acceptable practices which were illustrative of the types 
of matters an applicant or DCM may address and at times provided a safe 
harbor for demonstrating compliance, but did not necessarily mandate 
the principle means of compliance.
    Section 735 of the Dodd-Frank Act amended section 5 of the CEA by: 
(1) Eliminating the eight designation criteria contained in former 
section 5(b) of the CEA; (2) revising the existing core principles, 
including the incorporation of many of the substantive elements of the 
former designation criteria; and (3) adding five new core principles, 
thereby requiring applicants and DCMs to comply with a total of 23 core 
principles as a condition of obtaining and maintaining designation as a 
contract market.
    The Dodd-Frank Act also amended Core Principle 1 to provide that in 
its discretion, the Commission may determine by rule or regulation the 
manner in which DCMs comply with the Core Principles.\532\ Accordingly, 
in proposing this rulemaking, the Commission undertook a comprehensive 
evaluation of its existing DCM rules, guidance, and acceptable 
practices associated with each core principle in order to update those 
provisions and determine which core principles would benefit from new 
or revised regulations. As described in this notice of final 
rulemaking, in addition to codifying new rules for several core 
principles, the Commission also is maintaining the guidance and 
acceptable practices, with necessary modifications, in many instances. 
The Commission believes that the promulgation of bright-line 
requirements in those instances where an industry best practice has 
developed will better serve the goals of the Dodd-Frank Act, and will 
provide the industry and market participants with greater specificity 
and regulatory transparency, and will improve the Commission's ability 
to effectively enforce its regulations.
---------------------------------------------------------------------------

    \532\ The Dodd-Frank Act amended Core Principle 1 to clarify 
that boards of trade have reasonable discretion in establishing the 
manner in which they comply with the core principles, ``[u]nless 
otherwise determined by the Commission by rule or regulation.'' 7 
U.S.C. 7(d)(1).
---------------------------------------------------------------------------

The Commission's Cost Benefit Consideration
    Section 15(a) of the CEA requires the Commission to ``consider the 
costs and benefits'' of its actions in light of five broad areas of 
market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations.\533\
---------------------------------------------------------------------------

    \533\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    To further the Commission's consideration of the costs and benefits 
imposed by its regulations, the Commission requested in the DCM NPRM 
that commenters provide data and any other information or statistics on 
which they relied to reach any conclusions regarding the costs and 
benefits of the proposed rules.\534\ The Commission received one 
comment that provided quantitative information pertaining to the costs 
relevant to the Commission's proposed rules for Core Principle 9.\535\ 
A number of commenters did, however, express the general view that 
there would be significant costs associated with implementing and 
complying with the proposed rules, with some commenters generally 
stating their belief that the costs would outweigh any potential 
benefits.\536\ Given the lack of quantitative data provided in the 
comments or publicly available, the Commission has provided a 
qualitative description of the costs that would be incurred by 
DCMs.\537\ In a

[[Page 36666]]

number of instances, the Commission is adopting rules that codify 
existing norms and best practices of DCMs (often reflected in existing 
guidance and acceptable practices and recommendations made in recent 
Rule Enforcement Reviews (``RERs''). In those cases, the existing norms 
or best practices serve as the baseline--that is, the point from which 
the Commission considers the incremental costs and benefits of the 
regulations adopted in this release. In other cases, however, there is 
no existing baseline either because the requirements arise under the 
new or revised core principles, or because the Commission determined to 
revise existing requirements or practices.
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    \534\ 75 FR at 80605, Dec. 22, 2010.
    \535\ CME Comment Letter (Aug. 3, 2011). As discussed above, the 
Commission will consider all comments related to the proposed rules 
implementing Core Principle 9 when it finalizes those rules. The 
Commission expects and plans to finalize the rules implementing Core 
Principle 9 when it finalizes the SEF rulemaking.
    \536\ See, e.g., comment letters from CME (Feb. 22, 2011, Apr. 
18, 2011, Jun. 3, 2011 and Aug. 3, 2011), MGEX (Feb. 22, 2011 and 
Jun. 3, 2011), and GreenX (Feb. 22, 2011).
    \537\ Moreover, for each core principle, the first section of 
the regulation is a codification of the statutory language of the 
core principle as a rule--and accordingly, the Commission did not 
consider the costs and benefits of these rules because they do not 
reflect the exercise of discretion by the Commission. Where the 
Commission includes additional regulations for a core principle, the 
Commission considered the costs and benefits.
---------------------------------------------------------------------------

    To assist the Commission and the public in assessing and 
understanding the economic costs and benefits of the final rule, the 
Commission has analyzed the costs of those regulations adopted in this 
rulemaking that impose additional requirements on DCMs above and beyond 
the baseline described above. In most instances, quantification of 
costs is not reasonably feasible because costs depend on the size and 
structure of DCMs, which vary markedly, or because quantification 
required information or data in the possession of the DCMs to which the 
Commission does not have access, and which was not provided in response 
to the NPRM. The Commission notes that to the extent that the 
regulations adopted in this rulemaking result in additional costs, 
those costs will be realized by DCMs in order to protect market 
participants and the public. In adopting these final regulations, the 
Commission attempted to take the least-prescriptive means necessary to 
promote the interests of the Dodd-Frank Act without impacting 
innovation and flexibility.
    The following costs and benefits are organized, for the most part, 
by core principle. For each DCM core principle,\538\ the Commission 
summarizes the final regulations, describes and responds to comments 
discussing the costs and benefits of the proposed regulations, and 
considers the costs and benefits of the associated regulations, 
followed by a consideration of those costs and benefits in light of the 
five factors set out in Sec.  15(a) of the CEA. In addition, the 
Commission considers the costs and benefits associated with the 
codification of rules in place of guidance and acceptable practices. 
The Commission notes that many of its regulations refer to requirements 
that are contained in other rulemakings, some of which have been 
finalized and others which are still before the Commission. The costs 
and benefits of these regulations are discussed in connection with 
those other rulemakings.
---------------------------------------------------------------------------

    \538\ The costs and benefits of Core Principles 15, 16, 17, and 
22 are discussed in connection with separate rulemakings for 
``Governance Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities; 
Additional Requirements Regarding the Mitigation of Conflicts of 
Interest,'' 76 FR 722, Jan. 6, 2011, and ``Requirements for 
Derivatives Clearing Organizations, Designated Contract Markets, and 
Swap Execution Facilities Regarding the Mitigation of Conflicts of 
Interest,'' 75 FR 63732, Oct. 18, 2010. The substantive regulations 
implementing Core Principles 15, 16, 17, and 22 were proposed in 
those separate rulemakings. Until such time as the Commission may 
adopt the final substantive rules implementing these core 
principles, the Commission is maintaining the current guidance and 
acceptable practices under part 38 relevant to Core Principles 15 
and 16. Accordingly, the existing guidance and acceptable practices 
from appendix B to part 38 relevant to these core principles is 
being codified in the revised appendix B adopted in this final 
rulemaking. This will not result in additional costs because the 
Commission is simply codifying existing Guidance and Acceptable 
Practices. At such time as the Commission may adopt the final rules 
implementing these core principles, appendix B will be amended 
accordingly.
---------------------------------------------------------------------------

    The Commission further notes that certain final rules, including 
Sec. Sec.  38.3(b), (c), (e), and (f), 38.5(a) and (b) and 38.256, 
38.257, and 38.258 are essentially unchanged from existing rules 
applicable to DCMs and are not discussed further in this section, since 
they do not impose new costs and benefits as a result of the 
Commission's rulemaking.
    Finally, the Commission is obligated to estimate the burden of, and 
provide supporting statements for, any collections of information it 
seeks to establish under considerations contained in the Paperwork 
Reduction Act,\539\ and to seek approval of those requirements from the 
Office of Management and Budget. Therefore, the estimated burden and 
support for the collections of information in this rulemaking, as well 
as the consideration of comments thereto, are discussed in the 
Paperwork Reduction Act section of this rulemaking as required by that 
statute.
---------------------------------------------------------------------------

    \539\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

(1) Rules in Lieu of Guidance and Acceptable Practices
    Appendices A and B to part 38 of the Commission's regulations 
provide guidance and acceptable practices for DCMs to comply with the 
CFMA DCM core principles and designation criteria. In this release, the 
Commission is codifying as rules certain of these obligations of DCMs. 
The rules codify certain DCM practices that Commission staff has 
historically recommended in RERs as appropriate under the guidance and 
acceptable practices, which are already followed by DCMs. In certain 
cases, the rules are less prescriptive than the existing guidance and 
acceptable practices they replace, and the rules therefore maintain the 
flexibility for DCMs to determine many aspects of their compliance 
programs.
Summary of Comments
    As described in this release, the Commission received a number of 
comments opposing the codification of rules in lieu of guidance and 
acceptable practices. In response to commenters' concerns, the 
Commission is converting some of the proposed rules, in whole or in 
part, to guidance or acceptable practices.
    CME, GreenX, MGEX, and KCBT expressed concern with the costs 
imposed by the conversion of guidance and acceptable practices to 
rules, stating that rules are more costly and burdensome to DCMs and 
will increase costs to the Commission \540\ and end-users of 
derivatives.\541\ CME claimed that there is no public policy benefit to 
what it described as ``one-size fits all rules.'' \542\ OCX and CME 
questioned the benefit of what they viewed as the prescriptive tone of 
the proposed rules.\543\ Commenters also asserted that converting 
guidance and acceptable practices to rules may hinder or deter 
innovation for DCMs.\544\
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    \540\ See CME Comment Letters (Feb. 22, 2011, Apr. 18, 2011, 
Jun. 3, 2011 and Aug. 3, 2011); MGEX Comment Letter (Jun. 3, 2011); 
GreenX Comment Letter (Feb. 22, 2011); KCBT Comment Letter at 9 
(Feb. 22, 2011).
    \541\ CME Comment Letter at 3 (Feb. 22, 2011).
    \542\ CME Comment Letter at 8 (Feb. 22, 2011).
    \543\ OCX Comment Letter at 1-2 (Feb. 22, 2011); CME Comment 
Letter at 2-3 (Feb. 22, 2011).
    \544\ See e.g., ICE Comment Letter at 1-2 (Feb. 22, 2011), Eris 
Comment Letter at 2 (Feb. 22, 2011), CME Comment Letter at 3-4 (Feb. 
22, 2011), GreenX Comment Letter at 1 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    As explained throughout this release, in several instances the 
Commission has converted compliance obligations that were previously 
proposed as rules to guidance and acceptable practices (in whole or in 
part) in order to accommodate certain comments raised by market 
participants. In determining whether to codify a compliance practice in 
the form of a rule or guidance and acceptable practices, the Commission 
was guided by: (i) The comment letters that provided a basis for 
greater flexibility or, in some instances, for greater specificity, 
with respect to the stated compliance obligation; (ii) whether the 
practice consisted of a widely-accepted industry practice; and

[[Page 36667]]

(iii) whether the proposed rules were of a discretionary nature, and 
thus, were more appropriate as guidance and/or acceptable practices. In 
other circumstances, the Commission believes that maintaining certain 
regulations as rules will better serve market participants and the 
public by providing greater transparency and specificity and by 
improving the ability of the Commission to effectively enforce its 
regulations.
    While CME claimed that the codification of rules is more costly to 
the Commission,\545\ the Commission does not believe that rules are 
necessarily more costly to administer than guidance and acceptable 
practices. To the contrary, guidance and acceptable practices may be 
more costly to the Commission than rules because of the potential need 
to review individual exchange actions that do not meet the provisions 
of guidance and acceptable practices to determine if they comply with 
the underlying core principle. The Commission also notes that many of 
the rules are general in nature, allow for innovation and flexibility, 
and are not intended to be ``one size fits all.'' In response to the 
comment that rules will be more costly for end-users, the Commission 
notes that these regulations apply to DCMs, not to end-users, and are 
intended to protect market participants.
---------------------------------------------------------------------------

    \545\ CME Comment Letter at 2-4 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Commenters have suggested that as markets evolve or DCMs innovate, 
rules may become outdated and may no longer be consistent with evolving 
industry practice.\546\ The Commission notes that in such instances, 
DCMs could petition the Commission for exemptive orders in order to 
implement new methods of compliance or request that the Commission 
propose revisions to its rules. The Commission notes that in accordance 
with Executive Order 13579, it will periodically review its existing 
significant regulations to determine whether any such regulations 
should be modified, streamlined, expanded, or repealed so as to make 
the agency's regulatory program more effective or less burdensome in 
achieving the regulatory objectives.\547\
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    \546\ See e.g., CME Comment Letter at 3 (Feb. 22, 2011), Eris 
Comment Letter at 3 (Jun. 3, 2011), ICE Comment Letter at 10-11 
(Feb. 22, 2011).
    \547\ 76 FR 41587, July 14, 2011.
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    Commenters also stated that converting guidance and acceptable 
practices to rules may hinder or deter innovation for DCMs.\548\ The 
Commission notes, in response to comments received, that many of the 
rules that commenters interpret as possibly having an effect on 
innovation, such as those that relate to technology (including certain 
rules under Core Principle 4, Prevention of Market Disruption), have 
been moved to guidance and acceptable practices in the final rule in 
order to provide DCMs with greater flexibility.
---------------------------------------------------------------------------

    \548\ See e.g., ICE Comment Letter at 1-2 (Feb. 22, 2011), Eris 
Comment Letter at 2 (Feb. 22, 2011), CME Comment Letter at 3 (Feb. 
22, 2011), GreenX Comment Letter at 1 (Feb. 22, 2011).
---------------------------------------------------------------------------

Costs
Costs to DCMs
    As noted above, the rules finalized in this release generally are 
designed to codify existing industry practice, and implement new or 
revised core principles. However, the Commission is cognizant of the 
possibility that less established DCMs may require more significant 
modifications to their existing programs to comply with these rules if 
they do not currently follow industry practices. Nevertheless, it is 
likely less costly for DCMs to demonstrate compliance with rules than 
to demonstrate compliance with guidance and acceptable practices, which 
may require significantly more communications and exchange of documents 
with Commission staff. Accordingly, the primary cost imposed on DCMs as 
a result of converting guidance and acceptable practices to rules is 
the potential inability of DCMs to choose a different method of 
complying with the core principles as DCMs innovate or industry 
standards evolve. This cost may be present in each instance throughout 
this document where the Commission is replacing guidance or acceptable 
practices with rules. However, the Commission has made every attempt to 
provide sufficient flexibility to allow DCMs to continue to pursue the 
most efficient methods of compliance, within the rules, guidance and 
acceptable practice structure adopted in this release.
    It also is possible that certain DCMs are currently engaged in 
practices that they consider to be in compliance with core principles, 
but which do not precisely follow existing guidance or acceptable 
practices (perhaps because the DCM considers a somewhat different 
method of complying with the core principle to be more efficient given 
the nature of the DCM). In such an instance, a DCM would now need to 
change those practices to be in full compliance with the rule. The 
Commission is not aware of any specific examples of DCMs that consider 
themselves to be in compliance with core principles, while not 
following the Commission's guidance or acceptable practices. Therefore, 
the Commission is unable to quantify the cost associated with this 
potential scenario. However, all DCMs should be in compliance with 
existing guidance and acceptable practices, and the Commission does not 
believe that DCMs employing variant practices can object to the cost of 
complying with existing guidance and acceptable practices.
    As discussed above, the Commission notes that many of the rules 
that could affect innovation, such as those that relate to technology, 
have been moved to guidance and acceptable practices in the final rule 
in order to provide DCMs with added flexibility. However, even with 
guidance and acceptable practices in place of rules, innovation costs 
may still exist to a degree since the Commission may need to modify 
guidance and acceptable practices as industry practices evolve. 
Furthermore, as is the case under current guidance and acceptable 
practices, a DCM that devises a new method of complying with a core 
principle may incur certain costs to demonstrate such compliance to the 
Commission. It is not feasible to quantify these costs since the 
Commission has no way to predict how industry practices will evolve or 
what rule adjustments will be needed.
Costs to Market Participants and the Public
    If converting guidance and acceptable practices to rules hinders or 
deters innovation for DCMs, commenters have asserted that DCMs may 
decline to innovate to the same extent that they innovate at present, 
potentially depriving market participants and the public of important 
advancements. However, costs to market participants as a result of 
converting some of the guidance and acceptable practices to rules 
should be minimal since existing requirements, including guidance and 
acceptable practices, would also need to be adjusted as important 
advancements occur, and commenters provided no specific examples of how 
converting the guidance and acceptable practices to rules would deter 
innovation. It is not feasible to quantify these costs since the 
Commission has no way to predict how DCMs will innovate or industry 
practices will evolve.
Benefits
Benefits to DCMs, Market Participants, and the Public
    The codification of rules in lieu of guidance and acceptable 
practices provides specificity and transparency to DCMs, market 
participants, and the public. It also increases the likelihood of 
prompt compliance with the core

[[Page 36668]]

principles because DCMs will have a clear understanding of what is 
required in order to demonstrate compliance with the applicable core 
principle. In turn, a DCM's ability to achieve prompt compliance with 
the rules instills confidence in market participants and the public who 
utilize the markets to offset risk and who utilize prices derived from 
the price discovery process of trading in centralized DCM markets. 
Specific enforceable standards also promote more efficient and 
effective enforcement by the Commission.
    The costs and benefits of each of the rules, including rules that 
replace guidance or acceptable practices, are set out below in the 
cost-benefit discussion for the general compliance regulations under 
part 38 and for each core principle.
(2) General Compliance Regulations Under Part 38 \549\
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    \549\ Proposed regulations 38.1 and 38.2 are not discussed 
because they impose no requirements on market participants. 
Regulation 38.1 updates internal references within part 38 and 
regulation 38.2 specifies the regulations from which DCMs will be 
exempt. Proposed regulations 38.3(b), (c), (e), and (f) are 
essentially unchanged from existing rules and impose no new costs or 
benefits. Additionally, regulation 38.6 is not being revised by this 
release.
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Sec. 38.3(a) (Application procedures)
    Rule Sec.  38.3 sets forth the application and approval procedures 
for new DCM applicants. Rule Sec.  38.3(a) specifies the application 
process, including the new requirement that the board of trade file the 
DCM Application Form (``Form DCM'') electronically. Rule Sec.  38.3(a) 
also eliminates the 90-day expedited approval procedures for DCM 
applications. Accordingly, all DCM applications will be reviewed within 
the 180-day period governed by procedures specified in CEA section 
6(a).\550\
---------------------------------------------------------------------------

    \550\ 7 U.S.C. 8(a).
---------------------------------------------------------------------------

Summary of Comments and Discussion
    The Commission did not receive comments on the costs associated 
with filling out Form DCM.
    Eris contended that eliminating the 90-day accelerated review 
process would place new entities at a competitive disadvantage because 
it would delay their time to market, which they believe is critical for 
new entrants.\551\
---------------------------------------------------------------------------

    \551\ Eris Comment Letter at 4 (Feb. 22, 2011). Eris was 
designated as a contract market on October 28, 2011.
---------------------------------------------------------------------------

    The Commission has found that, in the interest of meeting the 
expedited approval timeline, applicants seeking expedited review often 
file incomplete or draft applications without adequate supporting 
materials. This has resulted in the expenditure of significant amounts 
of staff time reviewing incomplete or draft applications, necessitating 
numerous follow-up conversations with applicants, and usually resulting 
in the removal of applications from the expedited review timeline. 
Additionally, some applications raise new or unique issues that require 
additional time for the Commission to review. Notably, since the 
passage of the CFMA, eleven DCM applicants have requested expedited 
treatment, but, for some of the reasons noted above, only three were 
designated within the shortened timeframe.\552\ Moreover, eliminating 
the accelerated 90-day review process will not prevent DCMs from coming 
to market in an expeditious manner because the rule does not prevent 
the Commission from continuing to review applications within a shorter 
timeframe if DCM applicants submit substantially complete applications.
---------------------------------------------------------------------------

    \552\ The three applicants that were designated within the 
shortened timeframe included NYSE Liffe, Chicago Climate Futures 
Exchange (``CCFE''), and GreenX. The remaining applications that 
were not approved during the expedited timeframe included: Inet 
Futures Exchange, OneChicago, CBOE Futures Exchange, U.S. Futures 
Exchange, ELX Futures, The Trend Exchange, NQLX Futures Exchange, 
and Cantor Futures. The Commission notes that while NYSE Liffe, 
CCFE, and GreenX became designated within 90 days, they each 
submitted multiple draft DCM applications that were processed and 
reviewed by Commission staff for significantly longer than 90 days.
---------------------------------------------------------------------------

Costs
    Form DCM is designed to elicit a demonstration that an applicant 
can satisfy each of the DCM core principles. Toward this end, Form DCM 
requires submission of information about an applicant's intended 
operations. Much of this information has been required of applicants 
under previous regulations. Accordingly, the use of Form DCM does not 
represent a substantive departure from the Commission's practices over 
the past decade. With respect to new core principles, Form DCM captures 
information that tracks statutory requirements and applicable 
Commission implementing regulations. In fact, by providing greater 
specificity and transparency as to what is expected from an applicant 
and by reducing the need for Commission staff to request, and the 
applicant to provide, supplementary information, Form DCM should reduce 
costs for applicants by minimizing the flow of documentation and 
discussions between DCM applicants and Commission staff needed for 
applicants to submit a complete application.
    As noted above, eliminating the 90-day expedited review period is 
unlikely to impose additional costs on DCMs or to result in competitive 
disadvantage because it does not prevent the Commission from continuing 
to review applications within a shorter timeframe if DCM applicants 
submit substantially complete applications.
Benefits
    The new application form has several benefits for DCM applicants. 
The new form is designed to ensure that applicants are in compliance 
with the DCM Core Principles--as required by the statute. The form 
improves upon existing practice by standardizing the information that a 
DCM must provide. The form includes comprehensive instructions that 
will guide DCM applicants and specify lists of documents and 
information that must be provided as exhibits. The Commission 
anticipates that the new application form will streamline the DCM 
designation process, both for DCM applicants and the Commission. The 
form will provide applicants with greater specificity and transparency 
regarding the type of information that is required. The use of the 
standardized form is expected to reduce the amount of time Commission 
staff will need to review applications, which should enable qualified 
DCMs to begin operating sooner. Other than the specific requirements 
necessitated by the new and revised core principles, and applicable 
regulations, the majority of information required under the new form 
consists of information that the Commission historically has required.
    With respect to the elimination of the expedited review period, the 
Commission determined in the proposal that the 90-day accelerated 
review process was inefficient and impracticable. Applicants seeking 
expedited review often filed incomplete or draft applications, without 
adequate supporting materials, in the interest of meeting the expedited 
approval timeline.\553\ This required Commission staff to expend 
significant amounts of time reviewing incomplete or draft applications 
and usually resulted in removal of the application from the expedited 
review timeline. Eliminating the expedited process is consistent with

[[Page 36669]]

the statutory 180-day review period, and should result in a better use 
of Commission resources. During the 180-day review period, applicants 
will have adequate time to respond to Commission staff requests for 
additional information, resulting in a more efficient process for 
applicants and for the Commission.\554\
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    \553\ For example, while NYSE Liffe, GreenX, and CCFE became 
designated 79, 88, and 60 days, respectively, after they submitted 
their applications, they each submitted several versions of draft 
applications that required numerous follow-up conversations with 
Commission staff. While GreenX technically became designated within 
88 days, the Commission actually processed GreenX's application in 
draft form for nearly a year.
    \554\ This rule is consistent with the Commission's elimination 
of the 90-day expedited review procedures for derivatives clearing 
organization applications under part 39. See ``Derivatives Clearing 
Organization General Provisions and Core Principles,'' 76 FR 69334, 
69337, Nov. 8, 2011.
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Section 15(a) Factors
    1. Protection of market participants and the public. Given the 
critical role that DCMs play in the financial markets, a role that now 
includes providing a marketplace for the trading of swaps as well as 
futures and options, it is essential that the Commission conduct a 
comprehensive and thorough review of all DCM applications. Such review 
is essential for the protection of market participants and the public 
insofar as it serves to limit the performance of DCM functions to only 
those entities that have provided adequate demonstration that they are 
capable of satisfying the core principles. The new Form DCM and the 
elimination of the 90-day application review period will enable the 
Commission to more efficiently and accurately determine whether it is 
appropriate to designate a DCM applicant as a contract market.
    2. Efficiency, competitiveness, and financial integrity. The 
Commission expects that the use of Form DCM will promote efficiency, 
competitiveness, and financial integrity by requiring at the outset all 
information the Commission deems necessary to consider an application 
for designation as a contract market. As discussed above, the 
Commission's experience with lengthy reviews of draft applications and 
other materially incomplete submissions highlights the need for a 
streamlined and formalized process. By replacing a series of provisions 
under current Sec.  38.3(a) with a streamlined Form DCM, and by 
eliminating the 90-day expedited application review period, the 
Commission is promoting increased efficiency by providing specific 
guidance to applicants and DCMs before they undertake the application 
process, and by facilitating the submission of a materially complete 
final application. This also will reduce the need for the submission of 
supplemental materials and repeated consultation between applicants and 
Commission staff. The result will be a more cost effective and 
expeditious review and approval of applications. This will benefit 
potential and existing DCMs as well as free Commission staff to handle 
other regulatory matters.
    In addition, the use of Form DCM will make available to the public 
the Commission's informational requirements so that all prospective 
applicants have a heightened understanding of what is involved in the 
preparation and processing of an application. Form DCM will promote 
greater transparency in the process and will enhance competition among 
DCMs by making it easier for qualified applicants to undertake and 
navigate the application process in a timely manner.
    Form DCM is designed to address an applicant or a DCM's ability to 
comply with the core principles, which form the bedrock of the 
Commission's oversight, and which Congress determined are essential to 
ensure the financial integrity of transactions and derivatives markets, 
generally. In particular, the required information in the Form DCM 
(Exhibits I-J--Financial Information and M and T--Compliance) elicit 
important information supporting the applicant or DCM's ability to 
operate a financially sound DCM and appropriately manage the risks 
associated with its role in the financial markets.
    3. Price discovery. The Commission does not anticipate that use of 
Form DCM or the elimination of the 90-day review period will impact the 
price discovery process.
    4. Sound risk management policies. The Commission expects that the 
use of Form DCM will promote sound risk management practices by 
requiring applicants and DCMs to examine their proposed risk management 
program through a series of detailed exhibits and submissions. The 
submission of exhibits relating to risk management, including exhibits 
I-J (Financial Information) and M, O, and T (Compliance) aid Commission 
staff's analysis and evaluation of an applicant's ability to comply 
with the core principles.
    5. Other public interest considerations. The standardization and 
streamlining of the DCM application process benefits the public in 
terms of more efficient use of Commission resources and more cost-
effective and transparent requirements for applicants and DCMs. DCMs 
play a key role in the financial markets, and this role takes on even 
greater significance now that swaps may be traded on DCMs. A coherent 
and comprehensive approach to DCM designation is needed to ensure that 
only qualified applicants will be approved and that they are capable of 
satisfying the requirements of the core principles and Commission 
regulations.
Sec. 38.3(d) (Request for transfer of designation) and Sec.  38.5 
(Information relating to contract market compliance)
    Rule Sec.  38.3(d) is a new rule that formalizes the procedures 
under which a DCM may request the transfer of its designation to a new 
legal entity as a result of a corporate event such as a merger or 
corporate reorganization. Rule Sec.  38.5(c) \555\ is a new rule that 
requires that the DCM must submit to the Commission a notification of 
each transaction involving the transfer of ten percent or more of the 
equity interest in the designated contract market, and that such 
notification must be provided at the earliest possible time but in no 
event later than ten business days following the date upon which the 
designated contract market enters into a legally binding obligation to 
transfer the equity interest. As described in the preamble, upon 
receiving a notification of an equity interest transfer, the Commission 
may request, where necessary, additional information and specific 
documentation from the DCM pursuant to its authority under Sec.  38.5, 
although such documentation is no longer required with the initial 
notification. The Commission did not receive any comments discussing 
the costs or benefits of proposed Sec. Sec.  38.3(d) or 38.5(c).
---------------------------------------------------------------------------

    \555\ The provisions in regulation 38.5 regarding requests for 
information and demonstrations of compliance (paragraphs (a) and (b) 
in the final rules) were largely unchanged after Dodd-Frank and will 
not be discussed in this rulemaking because they do not result in 
any incremental costs or benefits.
---------------------------------------------------------------------------

Costs
    Under Sec.  38.3(d), only DCMs that wish to request the transfer of 
their designation will incur the one-time cost associated with filing 
the request with the Commission and preparing the underlying documents 
and representations that must be included with the request. The 
Commission notes that it has historically requested that DCMs file 
similar information in the event of a transfer of designation. The 
Commission is reducing the burden associated with the proposed 
regulations by clarifying that DCMs have the flexibility to determine 
the appropriate form of the documents they are required to submit. The 
Commission estimates that the submissions and notifications required 
under Sec.  38.3(d) will take around two hours to compile at a cost of 
approximately $104.
    The Commission is also reducing the burden associated with proposed

[[Page 36670]]

Sec.  38.5(c) by eliminating the requirement that DCMs must provide a 
series of documents and a representation along with the notification of 
an equity interest transfer. DCMs that enter into agreements that could 
result in equity interest transfers of 10 percent or more will incur 
one-time costs associated with preparing and submitting the required 
notification for each event. The Commission estimates that the initial 
notification required under Sec.  38.5(c) will take around one hour to 
compile at a cost of approximately $52.
Benefits
    Section 38.3(d) formalizes the procedures that a DCM must follow 
when requesting the transfer of its DCM designation and positions 
comprising open interest in anticipation of a corporate event. The 
provision requiring three months advance notice of an anticipated 
corporate change will provide the Commission with sufficient time to 
evaluate the anticipated change and determine the likely impact of the 
change on the DCM's governance and obligations, as well as the impact 
of the change on the rights and obligations of market participants 
holding open positions. The rule will permit the Commission to evaluate 
the transferee's ability to comply with the applicable laws and 
regulations. The rule also requires DCMs to submit a representation 
that they are in compliance with the applicable laws and regulations. 
This requirement provides regulatory specificity to DCMs regarding 
their obligations.
    Section 38.5 provides Commission staff with an opportunity to 
determine whether a change in ownership at a DCM resulting from an 
equity interest transfer will adversely impact the operations of the 
DCM, or the DCM's ability to comply with the Core Principles and the 
Commission's regulations. Section 38.5 ensures that DCMs remain mindful 
of their self-regulatory responsibilities when negotiating the terms of 
significant equity interest transfers.
Section 15(a) Factors (Sec. Sec.  38.3(d) and 38.5(c))
    1. Protection of market participants and the public. Given the 
critical role that DCMs play in the financial markets, a role that now 
includes providing a marketplace for the trading of swaps as well as 
futures and options, it is essential that the Commission conduct a 
comprehensive and thorough review of all requests for transfer of 
designation and notifications of equity interest transfers. Such review 
is essential for the protection of market participants and the public 
insofar as it serves to limit the performance of DCM functions to only 
those entities that have provided adequate demonstration that they are 
capable of satisfying the core principles. The new formalized 
procedures for transfers of designation and equity interest transfers 
will provide the Commission with the opportunity to determine the 
impact those transfers are likely to have on a DCM's ability to comply 
with the core principles and on the market.
    2. Efficiency, competitiveness, and financial integrity. The 
Commission expects that the formalized procedures for requesting a 
transfer of designation and for notifying the Commission of an equity 
interest transfer will promote efficiency, competitiveness, and 
financial integrity by providing the Commission with the opportunity to 
obtain the information the Commission deems necessary to consider such 
requests. The result will be more cost effective review and approval of 
requests for transfer of designation and equity interest. This will 
benefit DCMs. Financial integrity is also promoted as the transferee's 
ability to meet core principles will be examined.
    3. Price discovery. The Commission does not anticipate that the 
formalized process for requesting a transfer of designation or 
notifying the Commission of an equity interest transfer will impact the 
price discovery process.
    4. Sound risk management policies. The Commission expects that the 
formalized processes for transfers of designation and equity interests 
will promote sound risk management practices by requiring DCMs to 
examine their proposed risk management program through a series of 
submissions that aid Commission staff's analysis and evaluation of a 
DCM's ability to comply with the core principles.
    5. Other public interest considerations. The standardization and 
streamlining of the transfer of designation and equity interest 
transfer process benefits the public by permitting more efficient use 
of Commission resources and more cost-effective requirements for DCMs. 
A coherent and comprehensive approach to transfers of designations and 
equity interests is needed to ensure that all DCMs continue to satisfy 
the requirements of the core principles and Commission regulations.
Sec. 38.3(g) (Requirements for existing designated contract markets)
    Proposed rule Sec.  38.3(g) required existing DCMs to certify 
compliance with each of the core principles within 60 days of the 
effective date of the final rules. In response to comments, the 
Commission has eliminated this requirement from the final rules. The 
Commission believes that the removal of this provision will decrease 
costs for DCMs.
Sec. 38.4 (Procedures for Listing Products)
    Section 38.4 conforms the prior regulation to that of new rules in 
part 40 of the Commission's regulations.\556\ There are no costs 
imposed by the conforming changes beyond those discussed in connection 
with that rulemaking.
---------------------------------------------------------------------------

    \556\ ``Provisions Common to Registered Entities,'' 76 FR 44776, 
Jul. 27, 2011.
---------------------------------------------------------------------------

Sec. 38.7 (Prohibited use of data collected for regulatory purposes)
    Rule Sec.  38.7 is a new rule that prohibits a DCM from using for 
business or marketing purposes proprietary or personal information that 
it collects from market participants unless the market participant 
clearly consents to the use of its information in such a manner.\557\
---------------------------------------------------------------------------

    \557\ The Commission notes that the requirements of regulation 
38.7 are in line with similar rules intended to provide privacy 
protections to certain consumer information finalized in a separate 
rulemaking implementing regulations under the Fair Credit Reporting 
Act. See 76 FR 43879, Jul. 22, 2011.
---------------------------------------------------------------------------

Costs
    The Commission notes that in response to general comments that did 
not discuss costs or benefits, it has amended this provision to allow 
DCMs to use this information for business or marketing purposes if the 
market participant clearly consents to the use of its information in 
such a manner. The costs imposed by this provision are limited to the 
cost a DCM might incur in obtaining a market participant's consent to 
use its information for the purposes described above. The Commission 
does not prescribe the method by which a DCM must obtain such consent 
and believes that the burden of doing so would be minimal and would 
likely involve sending an email or a letter.
Benefits
    This rule protects market participants' information provided to a 
DCM for regulatory purposes from being used to advance the commercial 
interests of the DCM. The rule eliminates incentives on the part of 
DCMs to use market participants' proprietary or personal information 
for their own commercial gain. The rule does, however, afford market 
participants the flexibility to

[[Page 36671]]

consent to a DCM's use of their personal information for commercial 
purposes if they so desire.
Section 15(a) Factors
    1. Protection of market participants and the public. This rule 
protects market participants and the public by ensuring that 
information they provide to DCMs for regulatory purposes it not used 
inappropriately to advance the commercial interests of the DCM without 
their consent.
    2. Efficiency, competitiveness, and financial integrity. This rule 
encourages greater participation in the markets by ensuring market 
participants that their proprietary and personal information will not 
be used by DCMs without their consent. Increased participation by 
market participants will foster greater liquidity, tighter spreads, and 
more competitive markets. The rule also promotes efficient and 
competitive markets by ensuring that DCMs do not use access to their 
market participants' data (without their consent) as a source of 
competitive advantage.
    3. Price discovery. Fostering a competitive environment, as 
mentioned above, aids in the compilation of information traded in 
markets to further price discovery.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
Sec. 38.8 (Listing of Swaps on a Designated Contract Market)
    Section 38.8(a) provides that a DCM that lists a swap contract for 
trading on its contract market for the first time must file with the 
Commission a written demonstration detailing how the DCM is addressing 
its self-regulatory obligations with respect to swap transactions.
    Section 38.8(b) provides that prior to listing swaps for trading on 
or through the DCM, each DCM must request an alphanumeric code from the 
Commission for purposes of identifying the DCM pursuant to part 45.
Summary of Comments and Discussion
    ELX argued that the DCM NPRM did not make clear what criteria will 
be used to distinguish between a swap contract and a futures contract 
and argued that this ambiguity will cause uncertainty and redundant 
costs for boards of trade that would prefer to follow a DCM model 
without having to adopt a parallel set of rules and procedures.\558\
---------------------------------------------------------------------------

    \558\ ELX Comment Letter at 4 (Feb. 22, 2011).
---------------------------------------------------------------------------

    As noted in the Final Exemptive Order issued July 14, 2011,\559\ a 
DCM may list and trade swaps after July 16, 2011 under the DCM's rules 
related to futures contracts, without further exemptive relief. In the 
Order, the Commission noted that if a DCM intends to trade swaps 
pursuant to the rules, processes, and procedures currently regulating 
trading on its DCM, the DCM may need to amend or otherwise update its 
rules, processes, and procedures in order to address the trading of 
swaps.\560\
---------------------------------------------------------------------------

    \559\ 76 FR 42508, Jul. 14, 2011.
    \560\ Id. at 42518, n. 131.
---------------------------------------------------------------------------

Costs and Benefits
    In order to comply with new Sec.  38.8(a), DCMs listing swaps for 
the first time will incur costs associated with filing the required 
demonstration detailing how the DCM is addressing its self-regulatory 
obligations and fulfilling its statutory and regulatory obligations 
with respect to swap transactions. The Commission estimates that this 
filing will take two hours to complete at a cost of about $104.
    With respect to Sec.  38.8(b), the comments, costs, and benefits of 
this provision will be discussed in the rulemaking that implement swap 
data recordkeeping and reporting requirements under part 45 of the 
Commission's regulations.\561\
---------------------------------------------------------------------------

    \561\ See 77 FR 2136, Jan. 13, 2012.
---------------------------------------------------------------------------

Sec. 38.9 (Boards of Trade Operating Both a Designated Contract Market 
and Swap Execution Facility)
    Section 38.9 provides that a board of trade that operates a DCM 
also may operate a SEF, provided that the board of trade separately 
register as a SEF pursuant to the requirements set forth in part 37. 
The rule also requires such boards of trade to comply with the core 
principles under section 5h of the Act and the SEF rules under part 37, 
on an ongoing basis.
    Additionally, the rule codifies the requirement contained in 
section 5h(c) of the CEA, which provides that a board of trade that 
operates both a DCM and a SEF, and that uses the same electronic trade 
execution system for executing and trading swaps that it uses in its 
capacity as a DCM, must clearly identify to market participants for 
each swap whether the execution or trading is taking place on the DCM 
or the SEF. The Commission did not receive any comments on the costs or 
benefits of this provision and is adopting the rule as proposed.
Costs and Benefits
    The obligations imposed by Sec.  38.9 are codifications of the new 
statutory requirement placed on DCMs. The obligations imposed by the 
CEA are not within the Commission's discretion to change. However, the 
Commission believes there are several benefits to restating the 
statutory requirements in the regulations. Codification of statutory 
requirements in the regulations will improve the Commission's ability 
to enforce the statutory language and will provide market participants 
with a more unified regulatory picture and with greater context and 
specificity regarding the congressional intent underlying the 
regulations.
Sec. 38.10 (Reporting of Swaps Traded on a Designated Contract Market)
    Section 38.10 provides that each DCM that trades swaps must report 
specified swap data as provided under parts 43 and 45.\562\ This 
provision is consistent with the statute's reporting requirements as 
reflected in sections 2(a)(13)-(14) and 21(b) of the CEA. The costs and 
benefits of these rules are discussed in connection with those 
rulemakings.
---------------------------------------------------------------------------

    \562\ ``Real-Time Public Reporting of Swap Transaction Data,'' 
77 FR 1182, Jan. 9, 2012; ``Swap Data Recordkeeping and Reporting 
Requirements,'' 77 FR 2136, Jan. 13, 2012.
---------------------------------------------------------------------------

(3) Core Principle 2: Compliance With Rules
    For the most part, the regulations adopted under Core Principle 2 
codify: (1) Language found in the guidance and acceptable practices 
issued under former Core Principle 2 and former Designation Criterion 
8; (2) existing DCM compliance practices that the Commission believes 
constitute best practices; and (3) recommendations made over the past 
several years by the Commission in RERs, and which are currently 
largely followed. The Commission also incorporated into the rules for 
Core Principle 2 certain concepts contained in part 8 of its 
regulations--Exchange Procedures for Disciplinary, Summary, and 
Membership Denial Actions. Most DCMs' compliance and enforcement 
practices relating to Core Principle 2 obligations historically have 
been consistent with the rules contained in part 8. The Commission is 
also adopting some requirements that are new for DCMs. The costs and 
benefits of each of these requirements are discussed below.

[[Page 36672]]

Sec. 38.151(a) (Jurisdiction), Sec.  38.151(b) (Impartial access by 
members, persons with trading privileges, and independent software 
vendors) and Sec.  38.151(c) (Limitations on access)
    Section 38.151(a) requires that prior to granting a member or 
market participant access to its markets, the DCM must require the 
member or market participant to consent to its jurisdiction. Section 
38.151(b)(1) requires a DCM to provide its members, persons with 
trading privileges, and independent software vendors (``ISVs'') with 
impartial access to its markets and services, including access criteria 
that are impartial, transparent, and applied in a non-discriminatory 
manner. Section 38.151(b)(2) requires that the DCM provide comparable 
fee structures for members, persons with trading privileges, and ISVs 
receiving equal access to, or services from, the DCM.
    Section 38.151(c) (Limitations on Access) requires a DCM to 
establish and impartially enforce rules governing any decision by the 
DCM to deny, suspend, or permanently bar a member's or a person with 
trading privileges access to the contract market. Accordingly, any 
decision by a DCM to deny, suspend, or permanently bar a member's or 
person with trading privileges access to the DCM must be impartial and 
applied in a non-discriminatory manner. Section 38.151(a) derives from 
the statutory language of Core Principle 2. While Sec. Sec.  38.151(b) 
and (c) are new rules, they codify existing industry practice and 
current Commission requirements.
Summary of Comments
    CME stated that it would be costly to comply with the proposed 
Sec.  38.151(a) requirement that clearing firms obtain every customer's 
consent to the regulatory jurisdiction of each DCM.\563\ KCBT 
questioned the benefit of implementing the proposed rule.\564\
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    \563\ CME Comment Letter at 16 (Feb. 22, 2011).
    \564\ KCBT Comment Letter at 2 (Feb. 22, 2011).
---------------------------------------------------------------------------

    With respect to 38.151(b)(1), MGEX stated that it is generally in 
the best interest of the DCM to have open and available markets and 
services. Therefore, MGEX argued that the proposed rule was unnecessary 
and infringed on the business judgment of the DCM.\565\
---------------------------------------------------------------------------

    \565\ MGEX Comment Letter at 3 (Feb. 22, 2011).
---------------------------------------------------------------------------

    With respect to 38.151(b)(2), CME argued that the Commission does 
not have the authority to set or limit fees charged by DCMs, likening 
the requirement for comparable fee structures to an industry-wide fee 
cap that has the effect of a tax.\566\
---------------------------------------------------------------------------

    \566\ CME Comment Letter at 8-9 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission believes that Sec.  38.151(a) codifies 
jurisdictional requirements necessary to effectuate Core Principle 2's 
statutory mandate that a board of trade ``shall have the capacity to 
detect, investigate, and apply appropriate sanctions to any person that 
violates any rules of the contract market.'' In the Commission's view, 
a DCM must establish jurisdiction prior to granting members and market 
participants access to its markets in order to effectively investigate 
and sanction persons that violate DCM rules. A DCM should not be in the 
position of asking market participants to voluntarily submit to 
jurisdiction after a potential rule violation has been found. In 
response to CME's comment, the Commission clarifies that each DCM may 
determine for itself how it will secure such agreements. For example, a 
DCM could utilize its clearing firms to secure the agreement. The 
Commission recognizes that DCMs may need additional time to secure 
market participants' agreements to jurisdiction. Accordingly, in order 
to reduce the burden associated with this rule, the Commission is 
granting DCMs up to 180 additional days following the applicable 
effective date for existing members and market participants to comply 
with the requirements of Sec.  38.151(a).
    With respect to Sec.  38.151(b), and as discussed in further detail 
in the preamble, the Commission has considered the arguments asserted 
by commenters and determined that the rule is necessary in order to 
prevent the use of discriminatory access requirements as a competitive 
tool against certain participants. The Commission has, however, 
listened to commenters' concerns about the costs associated with the 
regulation and believes the rules strike an appropriate balance.
    Any comment implying that the Commission is attempting to set or 
limit fees charged by DCMs is misplaced. The requirement in Sec.  
38.151(b)(2) neither sets nor limits fees charged by DCMs. Rather, the 
rule states only that the DCM set non-discriminatory fee classes for 
those receiving access to the DCM as a way to implement the requirement 
of impartial access to DCMs. Accordingly, DCMs may establish different 
categories of market participants, but may not discriminate within a 
particular category. As the Commission noted in the preamble, when a 
DCM determines its fee structure, it may consider other factors in 
addition to the cost of providing access. The fee structure was not 
designed to be a rigid requirement that fails to take account of 
legitimate business justifications for offering different fees to 
different categories of entities seeking access. The Commission 
recognizes that DCMs may also consider services they receive (in 
addition to costs) when determining their fee structure. Accordingly, 
the comment suggesting that the Commission does not have authority to 
set fees is misplaced as the rule neither sets nor limits fees charged 
by DCMs.
 Costs
    The costs associated with Sec.  38.151(a) derive from the statute 
and are likely to be limited to the cost of obtaining customers' 
consent to the DCM's jurisdiction. In response to comments received, 
the Commission is not mandating the method for obtaining consent; this 
may afford cost savings to DCMs. The Commission believes that most DCMs 
are generally already in compliance with the requirements of Sec.  
38.151(b), which require that DCMs provide comparable fee structures 
for members, persons with trading privileges, and ISVs receiving equal 
access to, or services from, the DCM. In addition, the Commission 
believes that most DCMs currently have rules that comply with the 
requirements of Sec.  38.151(c), which states that DCMs must establish 
and enforce rules governing any decisions to deny, suspend, or 
permanently bar a member's or market participant's access to the 
contract market. Accordingly, the Commission believes that the final 
rule is unlikely to impose additional costs on DCMs.
Benefits
    The requirements of Sec.  38.151(a) ensure that DCMs can 
effectively investigate and sanction persons that violate DCM rules, as 
required by Core Principle 2. A DCM should not be in the position of 
asking market participants to voluntarily submit to jurisdiction after 
a potential rule violation has been found. This requirement also 
ensures that market participants are clear that their trading practices 
are subject to the rules of a DCM.
    As noted above, the impartial access requirements of Sec.  
38.151(b) prevent DCMs from using discriminatory access fee 
requirements as a competitive tool against certain participants. Access 
(and decisions to limit access) to a DCM should be based on the 
financial and operational soundness of a participant, rather than 
discriminatory or other improper motives. Impartial access benefits the 
market by ensuring that all participants that meet the requirements are 
able to trade on the DCM, thus

[[Page 36673]]

potentially increasing liquidity in the marketplace. The preamble's 
discussion that any participant should be able to demonstrate financial 
soundness either by showing that it is a clearing member of a DCO that 
clears products traded on that DCM or by showing that it has clearing 
arrangements in place with such a clearing member specifies that access 
will be neutral and non-discriminatory. Granting such impartial access 
to participants will likely improve competition within the market by 
ensuring access criteria do not inappropriately deter market 
participants from participating in the market.
    The benefits described above also apply to the requirement that DCM 
decisions to deny, suspend, or permanently bar a member or person with 
trading privileges' access to the DCM should be impartial and applied 
in a non-discriminatory manner.
Section 15(a) Factors
    1. Protection of market participants and the public. The final 
rules protect market participants by ensuring that DCMs can effectively 
investigate and sanction persons that violate DCM rules, and by 
ensuring that similarly situated market participants receive similar 
access criteria and comparable fee structures, consistent with the 
statute. Accordingly, the rules protect market participants from the 
potential that DCMs may employ unfair or discriminatory practices in 
rendering access determinations. In addition, the rules will provide 
market participants with greater specificity regarding DCMs procedures 
for denials and suspensions. This will benefit the market by ensuring 
that market participants know what behavior will lead to denials and 
suspensions and that denials and suspensions are being imposed in a 
fair and non-discriminatory manner.
    2. Efficiency, competitiveness, and financial integrity. The rules 
prevent DCMs from employing discriminatory or preferential criteria in 
granting members, persons with trading privileges, and ISVs access to 
their market. Accordingly, the rules will likely promote participation 
and competition within the marketplace by ensuring access criteria do 
not inappropriately deter market participants from participating in the 
market. Efficiency is promoted by defining clear rules governing the 
denial or suspension of a member's or person with trading privileges 
access to the contract market. The final rules may also promote 
financial integrity in the derivatives markets because sound, non-
discriminatory access criteria and fee structures are less likely to 
deter the financial integrity of members and market participants.
    3. Price discovery. As noted above, the rules are likely to 
increase competition within the market by optimizing market 
participation. Increased participation is likely to enhance the DCM's 
liquidity, leading to enhanced price discovery.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices other than the effects related to the factors 
above, especially with respect to financial integrity.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
Sec. 38.152 (Abusive Trading Practices Prohibited)
    Section 38.152 requires a DCM to prohibit abusive trading 
practices, including front-running, wash trading, fraudulent trading, 
and money passes, as well as any other trading practices that the DCM 
deems to be abusive. The Commission did not receive any comments 
discussing the costs or benefits of this provision.\567\
---------------------------------------------------------------------------

    \567\ CME commented that the rule is overly prescriptive. CME 
Comment Letter at 17-18 (Feb. 22, 2011). The Commission considered 
this comment in preparing this release and discusses the costs and 
benefits of the codification of rules in lieu of guidance and 
acceptable practices in further detail in section C(1) above.
---------------------------------------------------------------------------

Costs
    DCMs generally already have rules in place that prohibit the 
conduct enumerated in the CEA and the final rule. They also have the 
systems and staff necessary to detect, investigate, and prosecute 
possible rule violations. Accordingly, the Commission believes that the 
final rule is unlikely to impose additional costs on most DCMs.
Benefits
    The rule ensures that DCMs prohibit the specific trading practices 
identified in the rule, as well as any manipulative or disruptive 
trading practices prohibited by the CEA or by Commission regulation. 
Market participants and the public are likely to have greater 
confidence in markets that are protected from abusive trade practices, 
and therefore will be more willing to participate in the market, which 
may enhance liquidity, competition, and price discovery.
Section 15(a) Factors
    1. Protection of market participants and the public. Congress 
determined in Core Principle 2 that market participants must be 
protected from abusive trade practices. Market participants rely on 
properly functioning futures markets in order to hedge risk and must 
have confidence in the integrity of the markets in order to actively 
participate. Rule 38.152 requires DCMs to prohibit conduct that could 
result in harm to market participants, as well as members of the public 
who rely on the prices derived from the market. The rule protects 
market participants and the public from possible wrongdoing on the part 
of firms and commodity professionals with whom they deal.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. The rule promotes efficiency, competitiveness, and financial 
integrity in the DCM market because markets that are protected from 
abusive trade practices will likely attract greater market 
participation, and increase public confidence in the market, and 
thereby will likely increase competition and liquidity.
    3. Price discovery. The rule similarly promotes price discovery 
because markets protected from the trading abuses prohibited by the 
rule are likely to operate more efficiently and more accurately and to 
attract greater market participation and competition; such markets 
better reflect the forces of supply and demand, leading to greater 
price discovery.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices, other than the effects related to the factors 
above.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
Sec. 38.153 (Capacity To Detect and Investigate Rule Violations), Sec.  
38.155 (Compliance Staff and Resources), Sec.  38.156 (Automated Trade 
Surveillance System), and Sec.  38.157 (Real Time Market Monitoring)
Sec. 38.153 (Capacity To Detect and Investigate Rule Violations)
    Section 38.153 requires that a DCM have arrangements and 
appropriate resources for the effective enforcement of all of its 
rules, including the authority to collect information and examine books 
and records of members and persons under investigation, and adequate 
resources for trade and surveillance programs. While the proposed rule 
required DCMs to have the authority to collect information and

[[Page 36674]]

examine books and records for ``members'' and ``market participants,'' 
the final rule imposes a lesser burden on DCMs by replacing the term 
``market participants'' with ``persons under investigation.''
Summary of Comments and Discussion
    CFE requested that the Commission clarify the term ``market 
participant,'' arguing that if the term ``market participant'' were to 
be interpreted to apply to all customers--and not just those customers 
with direct electronic access to the DCM--a DCM's regulatory 
responsibilities would greatly expand over participants with whom it 
has no direct relationship or connection, greatly increasing costs for 
the DCM.\568\
---------------------------------------------------------------------------

    \568\ CFE Comment Letter at 2 (Feb. 22, 2011).
---------------------------------------------------------------------------

    Similarly, CME stated that the proposed rule implied that the 
entire class of non-member, non-registered market participants would be 
subject to the panoply of recordkeeping requirements currently 
applicable only to members, registrants, and direct access clients of 
CME.\569\ CME stated that there has been no showing that such a 
requirement will further the DCM's ability to effectively carry out its 
self-regulatory responsibilities and that it would be imprudent to 
impose these costs and burdens on market participants.\570\
---------------------------------------------------------------------------

    \569\ CME Comment Letter at 18 (Feb. 22, 2011).
    \570\ Id.
---------------------------------------------------------------------------

    The Commission notes that Core Principle 2 requires a DCM to have, 
in addition to appropriate resources for trade practice surveillance 
programs, appropriate resources to enforce all of its rules. Further, 
the Commission is cognizant that a broad interpretation of the term 
``market participant'' could significantly increase the regulatory 
responsibilities for DCMs. In response to the commenters' concerns, the 
Commission is replacing the term ``market participant'' in the proposed 
rule with ``persons under investigation'' in the final rule, which will 
reduce the costs of compliance.
Costs
    The requirements of this rule are not new for DCMs. Prior to the 
Dodd-Frank Act, the Commission expected a DCM to have adequate capacity 
and resources for effective rule enforcement.\571\ The existing costs 
associated with Sec.  38.153 include the initial and recurring costs 
associated with a DCM investing in the resources and staff necessary to 
provide effective rule enforcement. A DCM must have sufficient staff 
and resources, including the resources to collect information and 
examine books and records of members and persons under investigation 
and to analyze data to determine whether a rule violation occurred. 
Other costs include automated systems to assist the compliance staff in 
carrying out self-regulatory responsibilities for the DCM. The 
Commission believes that existing DCMs generally already have the 
systems necessary for effective rule enforcement. Further, replacing 
the term ``market participant'' with ``persons under investigation'' in 
the final rule will reduce the costs by narrowing the scope of the 
requirement.
---------------------------------------------------------------------------

    \571\ Commission staff has recommended these practices through 
RERs.
---------------------------------------------------------------------------

Benefits
    The rule ensures that a DCM has arrangements and resources for 
effective rule enforcement. A DCM can best administer its compliance 
and rule enforcement obligations when it has the ability to access and 
examine the books and records of its members and persons under 
investigation.
Sec. 38.155 (Compliance staff and resources)
    Section 38.155 requires that a DCM establish and maintain 
sufficient compliance staff and resources to conduct a number of 
enumerated tasks, such as audit trail reviews, trade practice 
surveillance, market surveillance, real-time market monitoring, and the 
ability to address unusual market or trading events and to complete any 
investigations in a timely manner. The Commission did not receive any 
comments discussing the costs or benefits of this provision.
Costs
    The Commission notes that it currently requires DCMs to have 
sufficient compliance staff and resources to perform the noted 
regulatory functions and that most DCMs have already expended the costs 
necessary to comply with the requirements under Sec.  38.155. Any DCM 
not currently in compliance with the rule will incur the cost of hiring 
and maintaining sufficient staff and resources (e.g. electronic 
systems) to conduct effective audit trail reviews, trade practice 
surveillance, market surveillance, and real-time market monitoring, to 
address unusual market or trading events, and to complete any 
investigations in a timely manner. However, this requirement is 
consistent with existing practice at many DCMs and reflects staff 
recommendations made in RERs from time to time. DCMs will also incur 
the cost of the annual monitoring of the size and workload of 
compliance staff and resources, which will require oversight time for 
compliance staff, management and the regulatory oversight committee. 
Any costs associated with Sec.  38.155 will vary depending upon a DCM's 
trading volumes, the number of products offered for trading, and the 
complexity of conducting surveillance on the particular products 
offered by the DCM. In addition, changes in market characteristics such 
as volatility, the presence or absence of intermediaries, and the 
nature and sophistication of market participants may also impact the 
costs associated with Sec.  38.155.
Benefits
    This rule ensures that DCMs have adequate compliance staff and 
resources to conduct effective audit trail reviews, trade practice 
surveillance, market surveillance, and real-time market monitoring in 
order to help detect rule violations and abusive trading practices. 
DCMs must also have adequate resources necessary to address unusual 
market or trading events in order to help stabilize market conditions 
if necessary and to complete any investigations in a timely manner. To 
this end, the rule promotes market integrity, customer protection, and 
the effectiveness of DCMs as self-regulatory organizations.
Sec. 38.156 (Automated trade surveillance system)
    Section 38.156 requires a DCM to maintain an automated trade 
surveillance system capable of detecting and investigating potential 
trade practice violations and able to process this data on a trade date 
plus one (``T+1 basis''). The Commission did not receive any comments 
discussing the costs or benefits of this provision.\572\
---------------------------------------------------------------------------

    \572\ In its comment letter, CME stated this rule is overly 
prescriptive. See CME Comment Letter at 20 (Feb. 22, 2011). The 
Commission considered this comment in preparing this release and 
discusses the costs and benefits of the codification of rules in 
lieu of guidance and acceptable practices in further detail in 
section C(1) above.
---------------------------------------------------------------------------

Costs
    Costs associated with Sec.  38.156 include the costs of developing 
and maintaining an automated system capable of conducting trade 
practice surveillance, as well as requiring a DCM to have adequate 
compliance staff to administer the trade surveillance system. Adequate 
staff resources are necessary to administer, maintain, and periodically 
upgrade the system. For existing DCMs, the costs associated with Sec.  
38.156 should not be new, as the regulation generally reflects current 
industry practices and Commission

[[Page 36675]]

requirements. Further, any costs will vary according to the complexity 
and analytical power of the trade surveillance system it builds, as 
well as the amount of compliance staff necessary to administer, 
maintain, and upgrade the system given the DCM's product and 
participant profiles. Moreover, the Commission has found, through RERs, 
that a DCM's automated surveillance system typically satisfies the 
requirements set forth in the final rule (e.g., the ability to compute, 
retain, and compare trading statistics). Therefore, the Commission 
believes that it will be unnecessary for most DCMs to incur costs to 
significantly upgrade their automated surveillance systems to comply 
with the final rule.
Benefits
    The rule ensures that a DCM has an adequate automated trade 
practice surveillance system. These systems play a critical role in 
ensuring that a DCM can effectively conduct investigations and detect 
and prosecute possible trading abuses, including the abusive trading 
practices enumerated in Sec.  38.152. Such systems improve DCM 
compliance staff's ability to sort and query voluminous amounts of data 
in order to better detect potential rule violations and abusive trading 
practices that could harm market participants.
Sec. 38.157 (Real-Time Market Monitoring)
    Section 38.157 requires a DCM to conduct real-time market 
monitoring of all trading activity on its electronic trading 
platform(s) to identify disorderly trading and any market or system 
anomalies and to have the authority to cancel trades and adjust trade 
prices when necessary.\573\
---------------------------------------------------------------------------

    \573\ In its comment letter, CME stated that this rule is overly 
prescriptive. CME Comment Letter at 20-21 (Feb. 22, 2011). The 
Commission considered this comment in preparing this release and 
discusses the costs and benefits of the codification of rules in 
lieu of guidance and acceptable practices in further detail in 
section C(1) above. The Commission did not receive any other 
comments discussing the costs or benefits of this provision.
---------------------------------------------------------------------------

Costs
    Costs associated with Sec.  38.157 include the costs of developing 
and maintaining electronic systems to facilitate real-time monitoring 
of all trading activity on a DCM's electronic trading platform(s). DCMs 
will also bear the cost of maintaining sufficient staff to conduct 
real-time market monitoring and to administer any interventions in the 
market that may be required, including the cancellation of trades, 
suspension and resumption of trading, and responses to any disorderly 
market conditions requiring human intervention.
    The Commission notes, however, that existing DCMs already have 
market monitoring capabilities, either directly or through a regulatory 
service provider. In addition, existing DCMs also have rules and 
procedures in place regarding items such as the cancellation of trades. 
As such, many of the costs associated with Sec.  38.157 are likely to 
have been previously expended by existing DCMs. The Commission also 
notes that the change in the final rule that replaces the requirement 
to ``ensure orderly trading'' with a requirement to ``identify 
disorderly trading'' will likely reduce the overall burden of the rule. 
Moreover, any costs associated with Sec.  38.157 will vary widely 
according to a DCM's trading volumes, the number of products offered 
for trading, and the complexity of conducting real-time market 
monitoring on the particular products offered by the DCM. In addition, 
changes in market characteristics such as volatility, the presence or 
absence of intermediaries, and the nature and sophistication of market 
participants may also impact the costs associated with Sec.  38.157 due 
to their correlation to system and staff requirements.
Benefits
    The real-time monitoring requirements imposed by the rule will 
promote orderly trading and will ensure that DCMs have the capability 
to promptly identify and correct market or system anomalies. Prompt 
responses to these anomalies will likely mitigate the effects of these 
anomalies and may help prevent them from generating systemic risk or 
other severe problems. The requirement that any price adjustments or 
trade cancellations be transparent to the market and subject to clear, 
fair, and publicly-available standards ensures that market participants 
are not subject to arbitrary or opaque processes in the event that 
their trades are involuntarily cancelled.
Section 15(a) Factors (Sec.  38.153 and Sec. Sec.  38.155-38.157)
    1. Protection of market participants and the public. The rules 
protect market participants and the public by requiring that a DCM has 
the capacity to detect and investigate rule violations, including 
adequate compliance staff and resources, automated trade surveillance 
and real time monitoring capability. These rules will help ensure fair 
and equitable markets that are protected from abusive trading practices 
or manipulative market conditions. Under the rules, market users are 
protected from possible wrongdoing on the parts of firms and commodity 
professionals with whom they deal to access the marketplace. In 
addition, the rules are likely to protect the public from the potential 
of price distortion.
    Additionally, the requirement in Sec.  38.157 that any price 
adjustments or trade cancellations are transparent to the market and 
subject to clear, fair and publicly-available standards protects market 
participants from opaque rules related to price adjustments and trade 
cancellations.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. The requirement that DCMs have the capability to monitor and 
detect rule and trade practice violations and market anomalies improves 
market efficiency, promotes financial integrity, and helps to ensure 
fair and equitable markets by ensuring that violations and market 
anomalies are promptly addressed and do not generate systemic risk or 
other severe problems. It also helps to ensure that market prices are 
not distorted by prohibited activities. The rules also enhance the 
competitiveness of the market by increasing participant confidence in 
the integrity of the market and by requiring DCMs to maintain and 
establish resources for effective rule enforcement through the 
collection of relevant information and examination of relevant books 
and records.
    3. Price discovery. Requiring DCMs to conduct effective monitoring 
and surveillance of their markets and to have the capacity to detect 
rule violations will help ensure that legitimate trades with 
fundamental supply and demand information are accurately portrayed in 
market prices. Mitigating rule violations, which deter from the price 
discovery process in DCM markets, helps provide confidence in the 
prices market participants use to hedge risk and to provide confidence 
in the price discovery process.
    4. Sound risk management practices. The rules promote sound risk 
management practices as they would allow DCMs to better evaluate and be 
aware of risks posed by trading practices or member activities.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
Sec. 38.154 (Regulatory Services Provided by a Third Party)
    Section 38.154(a) requires that a DCM that contracts with a 
registered futures association or another registered entity 
(collectively, a ``regulatory service provider'') ensures that its 
regulatory

[[Page 36676]]

service provider has sufficient capacity and resources to provide 
timely and effective regulatory services.
    Section 38.154(b) requires that a DCM maintain adequate compliance 
staff to supervise and periodically review any services performed by a 
regulatory service provider.
    Section 38.154(c) requires a DCM that utilizes a regulatory service 
provider to retain exclusive authority over certain decisions. While 
the proposed rule permitted a DCM to retain exclusive authority in 
other areas of its choosing, it required the decision to open an 
investigation into a possible rule violation to reside exclusively with 
the regulatory service provider. As discussed in the preamble, this 
requirement has been removed from the final rule. These regulations 
update and clarify the last general public guidance issued 
approximately 10 years ago by the Commission in this area.\574\
---------------------------------------------------------------------------

    \574\ See 66 FR 42256, 42266, Aug. 10, 2001.
---------------------------------------------------------------------------

Summary of Comments
    MGEX, KCBT, and CME stated that the proposed rule is either overly 
burdensome or unnecessary.\575\ MGEX expressed its general opposition 
to proposed Sec.  38.154 by stating that if a service has been 
delegated to another registered entity pursuant to a Commission-
approved agreement, then this ``should be sufficient and no other 
formal agreement is necessary.'' \576\ KCBT contended that proposed 
Sec.  38.154 is overly burdensome and duplicative, particularly when a 
DCM contracts with a regulatory service provider that is also a DCM 
required to comply with the same core principles.\577\ KCBT noted that 
it is currently party to a services agreement with another DCM and 
argued that it will be costly and unnecessary to perform periodic 
reviews and hold regular meetings with this regulatory service 
provider.\578\ CME contended that the proposed rule is overly 
prescriptive and suggested that the rule would be better served as 
guidance and acceptable practices.\579\
---------------------------------------------------------------------------

    \575\ MGEX Comment Letter at 3 (Feb. 22, 2011); KCBT Comment 
Letter at 3 (Feb. 22, 2011); CME Comment Letter at 18-19 (Feb. 22, 
2011).
    \576\ MGEX Comment Letter at 3 (Feb. 22, 2011).
    \577\ KCBT Comment Letter at 3 (Feb. 22, 2011).
    \578\ Id.
    \579\ CME Comment Letter at 18-19 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    The Commission has determined that, on the whole, Sec.  38.154 
strikes the appropriate balance between flexibility and ensuring that a 
DCM properly oversees the actions of its regulatory service provider to 
ensure accountability and effective performance. The Commission 
believes that it is necessary to require a DCM to conduct periodic 
reviews and to hold regular meetings with its regulatory service 
provider. A DCM that elects to use a regulatory service provider must 
properly supervise the quality and effectiveness of the services 
provided on its behalf, and can only do so by acquiring detailed 
knowledge during periodic reviews and regular meetings required under 
Sec.  38.154.
Costs
    The costs associated with Sec.  38.154 will include the cost of 
initially determining whether a regulatory service provider has the 
capacity and resources necessary to provide timely and effective 
regulatory services. An existing DCM replacing a current regulatory 
service provider with a new one will have a similar cost. For existing 
DCMs with a regulatory service provider, this should not be a new cost 
as DCMs are currently required to conduct such due diligence when 
entering into an agreement for regulatory services from a third-party 
provider, in line with existing industry practices.
    The costs associated with Sec.  38.154 will also include the cost 
of hiring and maintaining sufficient compliance staff at the exchange 
to effectively supervise the quality and effectiveness of the services 
provided by a regulatory service provider, including the cost of 
holding regular meetings with their regulatory service provider and the 
cost of periodic reviews of the adequacy and effectiveness of services 
provided. These costs will vary widely depending upon a DCM's trading 
volumes, the number of products offered for trading, and the complexity 
of conducting surveillance on the particular products offered by the 
DCM. Changes in market characteristics such as volatility, the presence 
or absence of intermediaries, and the nature and sophistication of 
market participants may also impact the costs associated with Sec.  
38.154. DCMs will also bear the cost of documenting any instances where 
their actions differed from those recommended by their regulatory 
service provider. Commenters did not, however, provide any specific 
costs to the Commission.
    The Commission notes that prior to the Dodd-Frank Act, many of the 
requirements under Sec.  38.154 (and many of the associated costs 
summarized above), were already required under Commission policy with 
respect to compliance with Core Principle 2. Section 38.154 
communicates the Commission's expectations with respect to supervision 
of third-party regulatory service providers in a more consistent and 
explicit manner.
Benefits
    The rule ensures that all regulatory service providers have the 
capacity to provide the services they contract to perform, and that 
DCMs are aware of the quality and outputs of the services provided on 
their behalf. Additionally, the rule ensures that all DCMs have the 
staff to adequately supervise their regulatory service providers and 
that these regulatory service providers effectively perform the 
services they are engaged to perform. By requiring that DCMs oversee 
the services provided by the regulatory service provider, and thereby 
ensuring that the service provider is meeting the expected standards 
for compliance, the rule will likely result in cost savings to the DCM, 
as the failure of a service provider to adequately fulfill its duties 
may result in costs to DCMs for not meeting compliance obligations.
Section 15(a) Factors
    1. Protection of market participants and the public. The final rule 
promotes the protection of market participants and the public because 
it ensures that regulatory service providers that are utilized by DCMs 
are properly supervised and have the capacity to perform the services 
they are engaged to provide, including conducting market surveillance 
for rule violations and performing other market regulatory activities 
that protect market participants and the public.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. Markets that have effective oversight, surveillance, and 
monitoring are likely to function more efficiently as rule violations 
and market abuses would be detected more quickly. Proper supervision of 
a regulatory service provider that provides these functions will ensure 
the provider has the ability to perform these activities and will in 
turn promote confidence in the market and likely increase competition.
    3. Price discovery. The Commission has not identified any effects 
that this rule will have on price discovery.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices, other than those enumerated with regard to the 
factors above.
    5. Other public interest considerations. Section 38.154 is 
particularly important in promoting the public interest as regulatory 
service providers that help DCMs comply with their obligations are 
effectively standing

[[Page 36677]]

in place of their DCM clients in providing elements of front-line self-
regulation.
Sec. 38.158 (Investigations and Investigation Reports)
    Section 38.158(a) requires that a DCM have procedures in place to 
conduct investigations of possible rule violations, and requires an 
investigation to be commenced upon the request of Commission staff, or 
upon the discovery by a DCM of information indicating a reasonable 
basis for a finding that a violation may have occurred or will occur. 
The final rule reduces the burden imposed by the proposed rule by now 
requiring that an investigation must be commenced upon receipt of a 
request from Commission staff or upon the discovery or receipt of 
information by the DCM that indicates a ``reasonable basis'' for 
finding that a violation ``may have'' occurred or will occur. Section 
38.158(b) requires that an investigation be completed within 12 months 
after an investigation is opened, absent mitigating factors as 
specified in the rule. Sections 38.158(c) and (d) set forth the 
elements and information that must be included in an investigation 
report when there is or is not a reasonable basis for finding a rule 
violation. Section 38.158(e) provides that no more than one warning 
letter for the same violation may be issued to the same person or 
entity during a rolling 12-month period.\580\
---------------------------------------------------------------------------

    \580\ In its comment letter, CME stated that this rule is overly 
prescriptive. CME Comment Letter at 21-22 (Feb. 22, 2011). The 
Commission considered this comment in preparing this release and 
discusses the costs and benefits of the codification of rules in 
lieu of guidance and acceptable practices in further detail in 
section C(1) above. The Commission did not receive any other 
comments discussing the costs or benefits of these provisions.
---------------------------------------------------------------------------

Costs
    Section 38.158(a) codifies the current practice at DCMs because 
every DCM already has investigation procedures, guidelines, and 
compliance staff. Therefore, the Commission does not believe the final 
rule creates any new resource requirements. Unlike the proposed rule, 
which may have imposed certain costs not currently incurred by DCMs, 
the final rule limits the situations under which a DCM must conduct an 
investigation and keeps the final rule in line with current practices.
    Under section 38.158(b), a DCM may have to periodically adjust its 
compliance staff resources to ensure that investigations are completed 
within the time period specified in the final rule. However, the 
Commission notes that this is not a new cost for DCMs. The Commission, 
through RERs, has already communicated to DCMs that it expects a DCM to 
complete investigations in a timely manner.
    Sections 38.158 (c) and (d) require a DCM to have sufficient 
compliance staff to conduct investigations and to prepare investigation 
reports. The Commission notes that this is not a new cost for DCMs. The 
Commission, through RERs, has already communicated to DCMs that it 
expects a DCM to have adequate staff to perform these responsibilities. 
The Commission has also reduced the cost associated with proposed Sec.  
38.158(c) by eliminating the requirement that an investigation report 
include the member or market participant's disciplinary history at the 
DCM.
    Under Sec.  38.158(e), a DCM will be required to maintain 
sufficient compliance staff to conduct investigations and to determine 
whether a warning letter should be issued for exchange rule violations. 
The Commission notes that this is not a new cost for DCMs. The 
Commission, through RERs, has already communicated to DCMs that it 
expects a DCM to have adequate staff to perform its self-regulatory 
responsibilities and to issue warning letters when appropriate.
Benefits
    Section 38.158(a) provides that a DCM must establish and maintain 
procedures that require its compliance staff to conduct investigations 
of possible rule violations. Investigations that examine potential rule 
violations help to ensure that rule violations are appropriately 
examined and prosecuted.
    The Commission has determined that the completion of investigations 
in a timely manner, as required by Sec.  38.158(b), increases the 
effectiveness of a DCM's rule enforcement program because prompt 
resolution of investigations is essential to discouraging further 
violations of a DCM's rules and addressing violations before they 
escalate. Timely investigations also assist the Commission in 
appropriately and quickly removing bad actors from markets. By ensuring 
that DCMs are effectively overseeing potential rule violations on a 
regular and timely basis, the rule helps DCMs to determine and address 
violations before they escalate, and serves as a beneficial deterrent 
against misconduct.
    The required elements and information that must be included in an 
investigation report under Sec. Sec.  38.158 (c) and (d) will assist 
disciplinary panels in determining whether there is a reasonable basis 
for finding that a violation of exchange rules warrants the issuance of 
charges. The investigation reports that must be provided to the 
Commission will also assist in reviewing the adequacy of a DCM's trade 
practice and disciplinary programs.
    Section 38.158(e) will ensure that warning letters serve as 
effective deterrents and will protect the public and market 
participants against individuals engaging in recidivist activity. A 
policy of issuing repeated warning letters rather than issuing 
meaningful sanctions to members and market participants who repeatedly 
violate the same or similar rules denigrates the effectiveness of a 
DCM's rule enforcement program.
Section 15(a) Factors
    1. Protection of market participants and the public. The final rule 
protects market participants and the public by requiring DCMs to flag 
potential rule violations, providing a framework for which an 
investigation is conducted, and protecting against individuals who 
attempt to engage in violative recidivist activity. By ensuring that 
investigations are adequately performed, the rule protects market 
participants and the public by ensuring that remedial action is taken 
as appropriate. Moreover, timely investigation of rule violations will 
help to promote fair and equitable markets free of abusive trading 
practices or manipulative market conditions, and will provide market 
users assurance that the overseers of the markets in which they trade 
have the capacity to effectively investigate wrongdoing.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. For the reasons noted above, the final rule also promotes 
efficiency, competitiveness, and financial integrity in the derivatives 
markets by requiring that a DCM have adequate resources to commence an 
investigation upon the discovery or receipt of information indicating 
that there is a reasonable basis for finding that a violation may have 
occurred or will occur, and to conduct this investigation in a timely 
manner.
    3. Price discovery. The requirement that DCMs conduct 
investigations in a timely manner helps to ensure that the market is 
protected from disruptive and manipulative practices. This rule will 
help protect the price discovery process of markets from these 
violations, and thus help provide confidence in the prices market 
participants use to hedge risk.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices other than

[[Page 36678]]

those enumerated with regard to the factors above.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
Sec. 38.159 (Ability To Obtain Information)
    Section 38.159 implements the Core Principle 2 requirement that a 
DCM have the ability and authority to obtain necessary information to 
perform its rule enforcement obligations, including information sharing 
agreements. The Commission did not receive any comments discussing the 
costs or benefits of this provision.
Costs and Benefits
    This rule codifies and implements the requirements of Core 
Principle 2 that DCM must have the ability and authority to obtain any 
necessary information to perform any required function, including the 
capacity to carry out such international information-sharing 
agreements, as the Commission may require. To the extent that a DCM 
determines it is necessary for it to enter into an information sharing 
agreement with other DCMs or SEFs, the rule makes it clear that this is 
permitted. In so doing, DCMs may face additional costs. However, these 
costs are unlikely to be significant and will only be incurred should a 
DCM determine that it is necessary to enter into an information sharing 
agreement with another DCM or with a SEF. Additionally, some DCMs are 
already parties to such agreements. The Commission is unable to 
quantify the cost of entering into such agreements as the costs will 
vary depending on several factors, including the nature of the 
agreement, the size of the DCM, and whether the DCM is negotiating a 
new agreement or signing-on to an existing agreement.
Section 15(a) Factors
    1. Protection of market participants and the public. The final rule 
protects market participants and the public by providing a mechanism 
for which DCMs can obtain necessary information to carry out their 
duties. A DCM's ability and authority to obtain information in order to 
perform its rule enforcement obligations is imperative in order to 
identify rule violations and ensure that remedial action is taken as 
appropriate. Moreover, this requirement will help to promote fair and 
equitable markets free of abusive trading practices or manipulative 
market conditions, and will provide market users assurance that the 
overseers of the markets in which they trade have the capacity to 
effectively investigate wrongdoing.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. For the reasons noted above, the final rule also promotes 
efficiency, competitiveness, and financial integrity in the derivatives 
markets by requiring that a DCM have an adequate means to obtain 
information to enforce its rules.
    3. Price discovery. The requirement that DCMs have a mechanism to 
obtain appropriate information about traders in its markets helps to 
ensure that the market is protected from disruptive and manipulative 
practices. This rule will help protect the price discovery process of 
markets from these violations, and thus help provide confidence in the 
prices market participants use to hedge risk.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices other than those enumerated with regard to the 
factors above.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
    (4) Core Principle 3: Contracts Not Readily Susceptible to 
Manipulation
    Sec. 38.201 (Additional Sources for Compliance and Appendix C)
    Section 38.201 refers applicants and DCMs to the guidance in 
appendix C to part 38 (Demonstration of Compliance That a Contract is 
Not Readily Susceptible to Manipulation), for purposes of demonstrating 
their compliance with the requirements of Sec.  38.200, which codifies 
Core Principle 3. The guidance under appendix C to part 38 amends and 
replaces Guideline No. 1 under appendix A to part 40.
Summary of Comments and Discussion
    CME commented that the proposed rulemaking did not identify any 
problems with continuing to use the current methodology to estimate 
deliverable supply, and claimed that if the proposed standard is 
adopted, it will impose additional costs on exchanges and market 
participants with no defined benefit, including requiring exchanges to 
survey market participants annually.\581\ CME also commented on the 
provision that DCMs submit monthly deliverable supply estimates, 
stating that this requirement is onerous for DCMs and suggesting that 
the Commission should only require monthly estimates of deliverable 
supply for the most recent three years.\582\
---------------------------------------------------------------------------

    \581\ CME Comment Letter at 38 (Feb. 22, 2011).
    \582\ CME Comment Letter at 9 (Mar. 28, 2011).
---------------------------------------------------------------------------

    The Commission notes that the proposed guidance regarding 
estimating deliverable supply is not a departure from existing and 
longstanding practice. Estimating deliverable supply has historically 
required that a DCM consult with market participants on a regular, if 
not monthly, basis. In that regard, the burden of maintaining contacts 
with market participants should not be any more or less than it has 
been. In response to CME's second comment, the Commission has made 
amendments to its proposed appendix C by requiring DCMs to submit 
monthly estimates of deliverable supply for the most recent three years 
rather than for five years.
Costs
    In order to comply with this regulation, DCMs would have to incur 
the cost of supplying supporting information and documentation to 
justify the contract specifications of a new product or substantial 
rule amendment. However, the Commission believes there will likely be 
no additional costs attributed to the rule because under existing 
practices, DCMs conduct market analysis for new products before 
deciding whether or not it makes business sense to list a new product 
for trading, including interviewing market participants. Additionally, 
DCMs also conduct market analysis before adopting amendments to 
existing contract terms and conditions.
Benefits
    The guidance outlined in appendix C to part 38 provides a reference 
for existing and new regulated markets for information that should be 
provided to the Commission for new products and rule amendments based 
on best practices developed over the past three decades by the 
Commission and other regulators. This guidance will likely reduce the 
time and costs that regulated markets will incur in providing the 
appropriate information. The guidance also reduces the amount of time 
it takes Commission staff to analyze whether a new product or rule 
amendment is in compliance with the CEA. Some DCMs regularly provide 
the information outlined in appendix C, but others do not include 
enough information for Commission staff to determine whether the 
contract is in compliance with the CEA. Having all of the supporting 
information included in a new product submission or rule amendment 
reduces the resources Commission staff must

[[Page 36679]]

expend to request such information from the exchange or to find 
independently.
Section 15(a) Factors
    1. Protection of market participants and the public. The 
information recommended in appendix C for inclusion in the new product 
or rule amendment submission provides insight and evidence of the DCM's 
research into the underlying cash market of the DCM's product. This 
should allow for a timely review by Commission staff of the DCM's 
supporting analysis and data to determine whether the contract is not 
readily susceptible to manipulation.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. By providing guidance based on best practices regarding what a 
DCM should consider when developing a futures contract or amending the 
rules of an existing contract, the contracts listed by DCMs, as a 
whole, should be more reflective of the underlying cash market by 
promoting efficient pricing through convergence.
    3. Price discovery. The guidance provides the information a DCM 
should analyze to determine if its contract is designed in such a way 
to promote convergence at expiration, and thus promote the price 
discovery mechanism of the centralized market.
    4. Sound risk management practices. By following the best practices 
outlined in the guidance in appendix C, a DCM can minimize the 
susceptibility of a contract to manipulation or price distortion while 
it is developing the contract terms and conditions for its futures 
contract. As a result, the risks to the DCM's clearing house and market 
participants would also be minimized.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
    (5) Core Principle 4: Prevention of Market Disruption
Sec. 38.251 (General Requirements)
    Section 38.251 requires that DCMs collect and evaluate data on 
individual traders' market activity on an ongoing basis, monitor and 
evaluate general market data, have the ability to conduct real-time 
monitoring of trading and comprehensive and accurate trade 
reconstructions, and monitor for violations of exchange-set position 
limits. Based upon comments, the Commission removed what were perceived 
as prescriptive elements from the proposed rule (including a 
requirement that DCMs have manual processes or automated alerts 
effective in detecting and preventing trading abuses) and included them 
in the guidance and acceptable practices in appendix B.
Summary of Comments and Discussion
    Several commenters asserted that their current regulatory systems 
do not allow for effective real-time monitoring of position limits and 
that this regulation would impose additional costs.\583\ Additionally, 
MGEX stated that the automated trading alert requirement of proposed 
Sec.  38.251 did not provide any real value and only imposed more 
burden and cost.\584\
---------------------------------------------------------------------------

    \583\ CME Comment Letter at 24-25 (Feb. 22, 2011), MGEX Comment 
Letter at 4 (Feb. 22, 2011), KCBT Comment Letter at 4 (Feb. 22, 
2011), and ICE Comment Letter at 4 (Feb. 22, 2011).
    \584\ MGEX Comment Letter at 4 (Feb. 22, 2011).
---------------------------------------------------------------------------

    The Commission notes that while Sec.  38.251 requires that DCMs 
monitor for intraday position-limit violations it does not require that 
position limits necessarily be monitored in real-time. Instead, the 
rule requires that DCMs demonstrate the ability to comprehensively and 
accurately reconstruct daily trading activity for the purposes of 
detecting trading abuses and violations of exchange-set position 
limits, including those that may have occurred intraday. The acceptable 
practices under appendix B explains that while real-time monitoring is 
the most effective method, an acceptable program may monitor for 
intraday violations on a T + 1 basis. The flexibility afforded by the 
guidance should limit the cost of compliance given that T+1 monitoring 
is likely less costly than real-time monitoring.
    In order to provide greater specificity to market participants, 
reduce costs, and maximize flexibility, the Commission is also 
converting the requirement that a DCM have an effective automated 
alerts regime to detect trading abuses from a rule to an acceptable 
practice so that a DCM will have added flexibility in meeting this 
requirement, as the Commission believes that automated trading alerts, 
though not necessarily in real time, are the most effective means of 
detecting market anomalies. The Commission is also removing provisions 
from the proposal dealing with the real-time monitoring of impairments 
to market liquidity and clarifying in the guidance and acceptable 
practices what must be included in real-time monitoring as compared to 
what may not need to be monitored in real-time.
Costs
    While some DCMs already have the ability to monitor for intraday 
trading abuses and market activity, including position-limit violations 
as required in Sec.  38.251, other DCMs may need to hire additional 
staff (even if the monitoring is done on a T+1 basis) and may need to 
install and maintain new or advanced systems with improved 
capabilities. Additional costs will vary based on the number of 
products a DCM offers and its trading volumes. However, the Commission 
notes that a DCM may be able to reduce the costs associated with this 
rule by using a unified monitoring system to jointly satisfy the 
requirements of Sec.  38.251 and Sec.  38.157 (Real-time market 
monitoring). Notwithstanding any related costs, Sec.  38.251 brings 
DCMs into compliance with the statutory language of the Dodd-Frank Act, 
which requires that DCMs conduct real-time monitoring of trading 
activities and be able to reconstruct trading. The regulation does so 
by minimizing costs while abiding by the Dodd-Frank Act.
Benefits
    The Dodd-Frank Act amended Core Principle 4 to emphasize that DCMs 
must take an active role not only in monitoring trading activities 
within their markets, but in preventing market disruptions. Rule 38.251 
requires that DCMs have the proper tools to prevent manipulation or 
other disruptions. By requiring DCMs to prevent manipulation or other 
disruptions, the Commission is able to help ensure that market 
participants are able to execute trades at prices that are not subject 
to preventable market disruptions. Moreover, to help reduce the cost of 
compliance, the Commission is providing DCMs with flexibility in 
meeting the rule's requirements as set forth in guidance and acceptable 
practices.
Sec. 38.252 (Additional Requirements for Physical-Delivery Contracts)
    Section 38.252 requires that DCMs monitor physical-delivery 
contracts' terms and conditions as they relate to the underlying 
commodity market and to the convergence between the contract price and 
the price of the underlying commodity, address conditions that 
interfere with convergence, and monitor the supply of the commodity 
used to satisfy the delivery requirements.\585\
---------------------------------------------------------------------------

    \585\ The Commission received comments from CME, MGEX, and KCBT 
stating that this rule is overly prescriptive. CME Comment Letter at 
25 (Feb. 22, 2011), MGEX Comment Letter at 4-5 (Feb. 22, 2011), KCBT 
Comment Letter at 4 (Feb. 22, 2011). The Commission considered these 
comments in preparing this release and discusses the costs and 
benefits of the codification of rules in lieu of guidance and 
acceptable practices in further detail in section C(1) above.

---------------------------------------------------------------------------

[[Page 36680]]

Costs and Benefits
    The Commission has a long history of monitoring for convergence and 
addressing issues of non-convergence.\586\ The Commission notes that 
this surveillance requirement is currently in place and that DCMs are 
unlikely to incur any additional costs as a result of this codification 
of an existing practice. The rules adopted in this release ensure that 
market participants are better able to hedge their risk and that price 
discovery is enhanced by helping to detect disconnects between futures 
and underlying physical market prices. Close monitoring of physical-
delivery contracts helps prevent the manipulation of prices, and the 
public benefits from futures prices that reflect actual market 
conditions because those prices often form the basis for transactions 
taking place in the physical market.
---------------------------------------------------------------------------

    \586\ See, e.g., ``Statement of the Agricultural Advisory 
Committee,'' October 29, 2009, available at: http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/aac102909_bruns.pdf.
---------------------------------------------------------------------------

Sec. 38.253 (Additional Requirements for Cash-Settled Contracts)
    Section 38.253 requires that for cash-settled contracts, a DCM must 
monitor the pricing of the index to which the contract will be settled 
and also monitor the continued appropriateness of the methodology for 
deriving the index. If a DCM's contract is settled by reference to the 
price of a contract or commodity traded in another venue, the DCM must 
have access to information on the activities of its traders in the 
reference market.
Summary of Comments and Discussion
    CME commented that the Commission is uniquely situated to add 
regulatory value to the industry by reviewing for potential cross-venue 
rule violations, noting that the Commission is the central repository 
for position information delivered to it on a daily basis in a common 
format across all venues.\587\ CME asserted that the Commission would 
be imposing an onerous burden on DCMs and their customers by requiring 
the reporting of information that the Commission already receives or 
will be receiving.\588\ CME also stated that the alternative proposal, 
that the DCM enter into an information-sharing agreement with the other 
venue, also will result in additional costs to both entities, and that 
it may not be practical or prudent for a DCM to enter into such an 
agreement with the other venue.\589\ CME noted that its rules already 
allow it to request such information from market participants on an as-
needed basis.\590\ Argus stated that the cost of monitoring the 
``availability and pricing'' of the commodity making up a third-party 
index to which a contract is settled would be prohibitive.\591\
---------------------------------------------------------------------------

    \587\ CME Comment Letter at 25-26 (Feb. 22, 2011).
    \588\ Id. at 26.
    \589\ Id.
    \590\ Id.
    \591\ Argus Comment Letter at 6-7 (Feb. 22, 2011).
---------------------------------------------------------------------------

    The Commission believes that a DCM must have the ability to 
determine whether a trader in its market is manipulating the instrument 
or index to which the DCM contract cash-settles. A DCM must be able to 
obtain information on its traders' activities in the underlying 
instrument or index. Nonetheless, the Commission believes the rule need 
not prescribe the specific methods to accomplish this, for example, by 
information-sharing agreements or by placing a reporting burden on 
traders who carry a position near contract settlement. Accordingly, the 
description of the methods for obtaining these data on traders' 
activity in an underlying index or instrument are set forth in the 
acceptable practices, rather than included in the rule. Also, the 
specific requirement that DCMs monitor the availability and pricing of 
the commodity making up the index has been removed from the rule.
Costs
    DCMs have, as a part of the contract market designation process, 
long been required to perform this type of surveillance on cash-settled 
contracts, and thus are unlikely to incur substantial additional costs 
on these contracts. DCMs may, however, incur significant additional 
costs for collecting information on traders' activities in the 
underlying instrument or index. These costs cannot be quantified 
because they will vary according to the particular instrument or index. 
Moreover, no DCM provided the Commission with any quantification of the 
costs of compliance. In consideration of the comment received from CME, 
the Commission has attempted to minimize the costs that will be 
incurred by giving DCMs some flexibility in determining the size of 
positions and the dates for which position data is collected. This will 
sharply reduce the costs for DCMs that routinely have few traders that 
hold substantial positions near contract expirations.
Benefits
    In certain markets, the settlement price is linked to prices 
established in another market. Linked markets are becoming more and 
more prevalent, and the interconnected nature of these markets may 
create incentives for traders to disrupt or manipulate prices in the 
reference market in order to influence the prices in the linked market. 
Detecting and preventing this sort of manipulation requires information 
on traders' activities in the cash-settled contract and in, or related 
to, the index to which it is settled. This rule ensures that DCMs have 
the information and tools they need to accomplish their statutory duty 
to prevent manipulation and disruptions to the cash-settlement process 
and enhances the confidence of market participants and the public that 
these contracts are free of manipulation.
Sec. 38.254 (Ability To Obtain Information)
    Section 38.254 requires DCMs to require that traders in their 
markets keep records, including records of their activity in the 
underlying commodity and related derivative markets and contracts. If 
its market has intermediaries, the DCM must either use a comprehensive 
large-trader reporting system or obtain position data from other 
sources in order to conduct an effective surveillance program.
Summary of Comments and Discussion
    KCBT contended that it is unnecessary and burdensome for a DCM to 
require traders to keep such records.\592\ Similarly, MGEX discussed 
the burden that the proposed rule would place on its traders as a 
result of the proposed record-keeping obligation, and noted that, for 
contracts not traded on the DCM, it is unclear what records a DCM must 
tell its traders to keep.\593\
---------------------------------------------------------------------------

    \592\ KCBT Comment Letter at 5 (Feb. 22, 2011).
    \593\ MGEX Comment Letter at 5 (Feb. 22, 2011).
---------------------------------------------------------------------------

    The Commission notes that a trader's burden to keep such records is 
sound commercial practice, and that a trader of a reportable size is 
already required, under Sec.  18.05 of the Commission's regulations, to 
keep records of such trades and to make them available to the 
Commission upon request. In addition, the Commission has found trader 
records to be an invaluable tool in its market surveillance effort, and 
believes that the DCM, as an SRO, should have direct access to such 
information in order to fulfill its obligations under the DCM core 
principles, and in particular, Core Principle 4. The Commission is, 
however, providing in appendix B an

[[Page 36681]]

acceptable practice for meeting the requirements of Sec.  38.254(b) 
that allows the DCM to limit the duration and scope of the trader's 
obligations. For instance, in the acceptable practices, the Commission 
permits a DCM to restrict the record-keeping requirement to traders who 
are reportable to the DCM in its large-trader reporting system or who 
otherwise hold a substantial position. As an acceptable practice, the 
reportable level of a trader is at the discretion of the DCM, as long 
as the reportable level is consistent with an effective oversight 
program.
Costs
    A trader's cost to keep such records should be minimal if, as 
expected, it is part of their normal business practice. Moreover, the 
Commission already imposes a similar requirement on large traders under 
its rule 18.05 (Maintenance of books and records). As a result, a 
trader's additional cost to provide records to the DCM, and the DCM's 
cost to request and process the records, will be low if, based upon the 
Commission's experience, such requests are infrequent and targeted to 
specific and significant market situations.\594\
---------------------------------------------------------------------------

    \594\ CME opposed the rule as proposed and recommended that the 
types of records the DCM should require traders to keep should be 
covered in acceptable practices. CME Comment Letter at 26 (Feb. 22, 
2011).
---------------------------------------------------------------------------

Benefits
    This rule ensures that DCMs have sufficient information in order to 
assess the potential for price manipulation, price distortions, and the 
disruption of the delivery or cash-settlement process as required by 
Core Principle 4. Detecting and preventing manipulation requires 
information on large traders' positions in the relevant contracts and 
their activities in the underlying markets. Access to this information 
is vital to an effective surveillance program. Absent this information, 
the DCM may fail in its statutory duty to prevent manipulation and 
disruptions to the cash-settlement process.
Sec. 38.255 (Risk controls for trading)
    Section 38.255 requires that DCMs establish and maintain risk 
control mechanisms to prevent or reduce the potential risk of price 
distortions and market disruptions, including, but not limited to, 
market restrictions that automatically pause or halt trading in market 
conditions prescribed by the DCM.\595\ While the rule requires pauses 
and halts, the acceptable practices enumerate other additional types of 
risk controls that would also be permitted, giving wide discretion to 
the DCM to select among the listed controls, to create new ones that 
are most appropriate for their markets, and to choose the parameters 
for those selected. If equity products are traded on the DCM, then the 
acceptable practices for this rule include, to the extent practicable, 
coordination of such controls with those placed by national security 
exchanges.\596\
---------------------------------------------------------------------------

    \595\ The Commission received several comments stating that rule 
Sec.  38.255 should not be prescriptive. See, e.g., CME Comment 
Letter at 26-27 (Feb. 22, 2011), KCBT Comment Letter at 5 (Feb. 22, 
2011), ICE Comment Letter at 12 (Feb. 22, 2011), CFE Comment Letter 
at 3-4 (Feb. 22, 2011), NYSE Liffe Comment Letter at 11 (Feb. 22, 
2011), ELX Comment Letter at 4 (Feb. 22, 2011), and MGEX Comment 
Letter at 5-6 (Feb. 22, 2011). The Commission considered these 
comments in preparing this release and discusses the costs and 
benefits of the codification of rules in lieu of guidance and 
acceptable practices in further detail in section C(1) above.
---------------------------------------------------------------------------

Summary of Comments and Discussion
    ICE stated that a temporary price floor or ceiling can work better 
than a pause or halt since trading can continue uninterrupted, thereby 
offering the earliest opportunity for price reversal should the market 
deem a sudden large move to be an overreaction or error.\597\ ICE also 
stated that pauses and halts are not the only effective way to prevent 
market disruption, and that by being prescriptive, the Commission is 
freezing innovation in preventing market disruptions.\598\
---------------------------------------------------------------------------

    \597\ ICE Comment Letter at 12 (Feb. 22, 2011).
    \598\ Id.
---------------------------------------------------------------------------

    In response to ICE and other commenters that question the necessity 
of pauses and halts over other forms of risk controls, the Commission 
notes that pauses and halts to trading have been effective in the past. 
The ability of DCMs to pause or halt trading in extraordinary 
circumstances and, importantly, to re-start trading through the 
appropriate re-opening procedures, will allow DCMs to mitigate the 
propagation of shocks that are of a systemic nature and to facilitate 
orderly markets. Furthermore, DCMs must ensure that such pauses and 
halts are effective for their specific order-routing and trading 
environment and are adapted to the specific types of products traded.
    With respect to ICE's comment regarding innovation, the Commission 
notes that DCMs are not prohibited from implementing additional risk 
controls, such as temporary price floors or ceilings as ICE suggests, 
or any other appropriate risk control, including those not enumerated 
in the acceptable practices.
Costs
    Although pauses and halts are not currently required by Commission 
regulation, many DCMs already have the types of risk controls that are 
required by Sec.  38.255, as well as others that have been moved to 
acceptable practices.\599\ There may be certain one-time costs of 
programming such controls where they are not already present as well as 
on-going costs to maintain and adjust such controls across time. Some 
DCMs have pauses and halts only for stock index futures, while 
utilizing other risk controls for other contracts. For those DCMs, the 
costs of adding pause and halt functionality to the other contracts 
should be minimal since much of that technology would already exist. 
DCMs that do not currently utilize pauses and halts should be able to 
implement them with existing software, so that the cost should be 
relatively modest. As noted in the Pre-Trade Functionality Subcommittee 
of the CFTC Technology Advisory Committee report, the costs would 
largely be borne by the exchanges and would center around intellectual 
property, as many exchanges develop, own, and manage their own 
technology.\600\ However, the exact costs associated with implementing 
risk controls were not described in verifiable detail in the Pre-Trade 
Functionality Subcommittee report and can vary greatly from one DCM to 
another. Additionally, the costs will depend on which specific risk 
controls will be implemented and the trading platform being used by the 
DCM. The Commission received no comments indicating that risk controls 
cannot be implemented in a cost-effective manner using commercially 
available technology.
---------------------------------------------------------------------------

    \599\ An FIA working group survey revealed that 66 percent of 
exchanges surveyed currently offer pre-trade risk controls at the 
exchange levels and that an additional 27 percent of respondents are 
planning to add such controls in the future. See http://www.futuresindustry.org/downloads/RC-survey.pdf at 27.
    \600\ See ``Recommendations on Pre-Trade Practices for Trading 
Firms, Clearing Firms and Exchanges involved in Direct Market 
Access,'' Pre-Trade Functionality Subcommittee of the CFTC 
Technology Advisory Committee (``TAC Subcommittee 
Recommendations''), (March 1, 2011) at 4, available at  http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf. The Commission notes that the 
subcommittee report was submitted to the Technology Advisory 
Committee and made available for public comment, but no final action 
has been taken by the full committee.
---------------------------------------------------------------------------

    As further noted in the Pre-Trade Functionality Subcommittee of the 
CFTC Technology Advisory Committee report, ``[s]ome measure of 
standardization of pre-trade risk controls at the exchange level is the

[[Page 36682]]

cheapest, most effective and most robust path to addressing the 
Commission's concern [for preserving market integrity].'' \601\ 
Congress specifically modified DCM Core Principle 4 to substitute the 
title ``prevention of market disruptions'' for the previous title of 
``monitoring of trading.'' The new rules on risk controls, which are 
designed to prevent market disruptions before they occur, bring the 
rules in line with the amended statute.
---------------------------------------------------------------------------

    \601\ See TAC Recommendations at 4, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pd.
---------------------------------------------------------------------------

Benefits
    The Commission anticipates that the benefits of this rule will be 
substantial. As noted in the DCM NPRM, risk controls such as automated 
trading pauses and halts can, among other things, allow time for 
participants to analyze the market impact of new information that may 
have caused a sudden market move, allow new orders to come into a 
market that has moved dramatically, and allow traders to assess and 
secure their capital needs in the face of potential margin calls.\602\ 
Moreover, the Commission notes that pauses and halts are particularly 
intended to apply in the event of extraordinary price movements that 
may trigger or propagate systemic disruptions. Accordingly, the 
Commission notes that a DCM's ability to pause or halt trading in 
certain circumstances and, importantly, to re-start trading through the 
appropriate re-opening procedures will allow DCMs to mitigate the 
propagation of shocks that are of a systemic nature and to facilitate 
orderly markets. For these reasons, the Commission believes that pauses 
and halts are the most effective risk management tools to carry out 
this purpose and will facilitate orderly markets and prevent systemic 
disruptions. While the Commission is requiring pauses and halts in the 
rule, the Commission is enumerating other types of automated risk 
controls that may be implemented by DCMs in the acceptable practices in 
order to give DCMs greater discretion to select among the enumerated 
risk controls or to create new risk controls. The Commission believes 
that this combination of rules and acceptable practices will facilitate 
orderly markets and mitigate systemic disruptions while maintaining a 
flexible environment that facilitates innovation.
---------------------------------------------------------------------------

    \602\ 75 FR 80572, 80584, Dec. 22, 2010.
---------------------------------------------------------------------------

Sec. 38.256 (Trade Reconstruction), Sec.  38.257 (Regulatory Service 
Provider), and Sec. 38.258 (Additional Sources for Compliance)
    Section 38.256 requires a DCM to have the ability to 
comprehensively and accurately reconstruct all trading on its trading 
facility. The requirement to have the ability to comprehensively and 
accurately reconstruct trading appears in the statute itself and has 
long been a part of the DCM requirements under former Core Principle 
10.
    Section 38.257 requires a DCM to comply with the regulations in 
this subpart through a dedicated regulatory department, or by 
delegation of that function to a regulatory service provider.
    The Commission eliminated proposed rule 38.258 (which required a 
DCM to adopt and enforce additional rules that are necessary to comply 
with this core principle), and replaced it with new Sec.  38.258, which 
allows a DCM to refer to the guidance and acceptable practices in 
appendix B in order to demonstrate compliance with Core Principle 4.
    The Commission received no comments discussing the costs or 
benefits of Sec. Sec.  38.256, 35.257, and 38.258 and is adopting Sec.  
38.256 with a minor modification, Sec.  35.257 as proposed, and Sec.  
38.258 as noted above. In addition, these rules do not contain any 
significant changes from existing DCM requirements, and thus it is 
unlikely that additional costs will be incurred.
Section 15(a) Factors (Sec. Sec.  38.251-38.258)
    1. Protection of market participants and the public. These rules 
implementing Core Principle 4 reduce the likelihood that markets will 
be subject to manipulation or other disruptions and ensure that market 
participants are better able to hedge their risk by requiring that: 
DCMs properly monitor their markets; market participants keep adequate 
records; DCMs are able to adequately collect information on market 
activity, including special considerations for physical-delivery 
contracts and cash-settled contracts; and reasonable pre-trade risk 
controls are in place that facilitate orderly markets and prevent 
systemic disruptions that could harm market participants and the 
public. Close monitoring of physical-delivery contracts helps prevent 
the manipulation of prices, and the public benefits from futures prices 
that reflect actual market conditions because those prices often form 
the basis for transactions taking place in the physical market.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. The rules for market monitoring and implementation of risk 
controls, including pauses and halts, help to facilitate orderly, 
efficient markets by requiring DCMs to establish and maintain risk 
control mechanisms that would be able to prevent or reduce the risks 
associated with a variety of market disruptions. By protecting against 
disruptions and market manipulation, the rules enhance competitiveness 
and promote the efficiency and financial integrity of DCM markets. 
Market mispricing that is due to disruptions or manipulation interferes 
with a market's efficiency by limiting its ability to reflect the value 
of the underlying commodity. Markets that are prone to disruption or 
manipulation have a severe competitive disadvantage to those without 
such problems. These rules are designed to address and mitigate such 
problems. Further, the rules are designed to prevent or mitigate 
extreme volatility or other market disruptions that can lead to 
unwarranted margin calls and losses of capital, which could otherwise 
impair the financial integrity of the market and its participants.
    3. Price discovery. Manipulation or other market disruptions 
interfere with the discovery of a commodity's value in normal market 
circumstances. These rules are designed to detect and, where possible, 
prevent such market mispricing and to detect disconnects between 
futures and underlying physical market prices. In physical-delivery 
markets, such disconnects usually relate to market convergence. In 
cash-settled markets, such disconnects usually relate to the integrity 
of the index used to settle the futures contract. Under the new rules, 
DCMs will need to monitor contract terms and resolve conditions that 
are interfering with the price discovery process.
    4. Sound risk management practices. Sound risk management relies 
upon execution of hedge strategies at market prices that are free of 
manipulation or other preventable disruptions. These rules are designed 
to facilitate hedging at prices free of distortions that may be 
preventable by adequate controls.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
(6) Core Principle 5: Position Limitations or Accountability
    Core Principle 5 requires that DCMs, for each contract and as 
necessary and appropriate, adopt position limitation or position 
accountability, and that, for any contract that is subject to a 
position

[[Page 36683]]

limitation established by the Commission in part 151 of the 
Commission's regulations,\603\ DCMs must set the position limit at a 
level not higher than the position limitation established by the 
Commission.
---------------------------------------------------------------------------

    \603\ See ``Position Limits for Futures and Swaps,'' 76 FR 
71626, Nov. 18, 2011.
---------------------------------------------------------------------------

Summary of Comments and Discussion
    The Commission received several comments pertaining to the 
Commission's codification of part 151 of its regulations. These 
comments were appropriately addressed in the relevant rulemaking for 
Position Limits for Futures and Swaps.\604\
---------------------------------------------------------------------------

    \604\ Id.
---------------------------------------------------------------------------

(7) Core Principle 6: Emergency Authority
Sec. 38.351 (Additional Sources for Compliance and Appendix B)
    Rule 38.351 refers applicants and DCMs to appendix B to part 38--
``Guidance on, and Acceptable Practices in, Compliance With Core 
Principles'' for purposes of demonstrating compliance with the 
requirements of Core Principle 6. The guidance for Core Principle 6 
tracks the former guidance to previous Core Principle 6. As such, the 
costs and benefits of administering emergency procedures pursuant to 
current Core Principle 6 should be no different than the costs and 
benefits of administering emergency procedures prior to the Dodd-Frank 
Act. The Commission did not receive any comments discussing the costs 
or benefits of these provisions.
(8) Core Principle 7: Availability of General Information
Sec. 38.401 (General Requirements)
    Section 38.401(a) requires DCMs to have in place procedures for 
disclosing to market authorities, market participants, and the public 
accurate and relevant information pertaining to rules and regulations, 
contract terms and conditions, and operations. Section 38.401(b) 
requires that each DCM have procedures in place to ensure that, to the 
best of its knowledge, any information or communication with the 
Commission is accurate and complete. Section 38.401(c) requires DCMs to 
post such information on their Web sites concurrent with the filing of 
such information with the Commission. Section 38.401(d) requires DCMs 
to update their rulebooks upon the effectiveness of a rule submission 
or certification.
Costs
    The few requirements in Sec.  38.401 that do not simply replicate 
the statutory language were derived from previous guidance and 
acceptable practices that reflect existing industry practices, and thus 
should impose no new costs on DCMs or market participants. For example, 
the accuracy requirement is unlikely to impose additional costs on 
market participants because the statute already contains an accuracy 
requirement; the rule simply adds additional context to the 
requirement. The requirements for a DCM to place information on its web 
site on the same business day as the filing of such information with 
the Commission and to post new or amended rules on the date of 
implementation are unlikely to result in additional costs to DCMs 
because similar requirements existed in the guidance and acceptable 
practices under the original Core Principle 7. No DCM commented on the 
costs imposed by this rule.
Benefits
    Market authorities, market participants, and the public all benefit 
from access to accurate, relevant, and timely information pertaining to 
contract terms and conditions, new product listings, new or amended 
governance, trading and product rules, and other changes to information 
previously disclosed by the DCM. The disclosure of accurate information 
to the Commission will assist the Commission's oversight of the markets 
by enabling the Commission to evaluate a DCM's compliance with the core 
principles and to take prompt action to ensure transparent, fair, and 
orderly markets.
    Prompt posting of information pertaining to new product listings, 
new rules, and rule amendments on the DCM's Web site will ensure that 
market participants and the public have sufficient notice and time to 
analyze proposed rule amendments, product listings/de-listings, and 
rule certifications in advance of their taking effect and to be able to 
plan their actions accordingly. Advance notice of rule amendments and 
certifications is consistent with the goal of Core Principle 7 to make 
pertinent information available to market participants and the public.
Section 15(a) Factors
    1. Protection of market participants and the public. To protect 
market participants and the public, the Commission has comprehensive 
regulatory, surveillance, investigative, and enforcement programs. To 
support these programs, the Commission must have access to accurate, 
relevant, and timely information regarding contract terms and 
conditions, new product listings, new or amended governance, trading 
and product rules, and other changes to information previously 
disclosed by the DCM. Additionally, prompt posting of information 
pertaining to new product listings, new rules, and rule amendments on 
the DCM's Web site will ensure that market participants and the public 
have sufficient notice and time to analyze these changes and report any 
problems to the Commission in advance of the changes taking effect.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. In order to promote efficient, competitive, and financially 
stable markets, the Commission must have access to accurate, relevant, 
and timely information regarding contract terms and conditions, new 
product listings, new or amended governance, trading and product rules, 
and other changes to information previously disclosed by the DCM. The 
Commission must have notice of these changes in order to analyze their 
likely impact on the efficiency, competitiveness, and financial 
integrity of the futures markets and to take action as necessary.
    3. Price discovery. The disclosure of accurate information to the 
Commission will assist the Commission's oversight of the markets and 
protect market participants by enabling the Commission to evaluate a 
DCM's compliance with the core principles.
    4. Sound risk management practices. The disclosure of accurate 
information to the Commission will assist the Commission's oversight of 
the markets and protect market participants by enabling the Commission 
to evaluate a DCM's compliance with the core principles, including Core 
Principle 11 (Financial Integrity of Transactions). A detailed 
discussion of Core Principle 11 in light of the section 15(a) factors 
appears later in this release.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
(9) Core Principle 8: Daily Publication of Trading Information
Sec. 38.451 (Reporting of Trade Information)
    Core Principle 8 requires that a board of trade make public daily 
information on settlement prices, volume, open interest, and opening 
and closing ranges

[[Page 36684]]

for actively traded contracts on the contract market. Section 38.451 
refers a DCM to part 16 of the Commission's regulations in order to 
meet the compliance requirements of Core Principle 8. This rulemaking 
also revises Sec.  16.01 with regards to the information a reporting 
market must record and publish by adding swaps and options on swaps. 
Also, Sec.  16.01 is revised to add the requirement that reporting 
markets also report to the Commission information pertaining to ``the 
total volume of block trades that are included in the total volume of 
trading.''
Summary of Comments and Discussion
    CME did not object to reporting block trades that are included in 
the daily volume of trading, but noted that this new requirement will 
require it to ascertain what systems changes will be necessary and how 
long such changes will take to implement.\605\ CME did not provide any 
cost or time estimates.
---------------------------------------------------------------------------

    \605\ CME Comment Letter at 29 (Feb. 22, 2011).
---------------------------------------------------------------------------

    The Commission believes that it is necessary for DCMs to report 
trade information; the regulation provides the reporting markets 
flexibility to make the necessary and appropriate changes to their 
systems in a cost-effective manner while providing transparency to the 
markets by means of basic summary trading information of that day's 
trading session.
Costs
    The cost of reporting volume for swaps should be similar to the 
cost of reporting volume for futures and options. The Commission did 
not receive any comments that provide otherwise. Further, the 
Commission does not anticipate that DCMs that choose to list swaps will 
need to make any changes to systems beyond those needed to report 
prices and volume for any new contract. The requirement to publish the 
total volume of block trading at the end of the day will be an added 
cost for the DCM. This provision may require some changes to DCMs' 
current systems. However, because DCMs already have or will have to 
have systems in place to provide daily trading volumes under Sec.  
16.01, any costs to now include the reporting of blocks should be 
minimal. It is not feasible to quantify the costs of necessary system 
changes, largely because it is unclear what system changes will be 
adopted by DCMs. The Commission did not receive any comments stating 
that the regulation imposes an unnecessary burden.
Benefits
    The Commission allows DCMs significant flexibility in complying 
with this rule. As such, DCMs are free to design a system that provides 
the transparency required by part 16 in the most cost effective manner. 
This rule complies with the statute and provides transparency to the 
markets by requiring DCMs to publish end of day price and volume 
summary information to the public and to the Commission.
Section 15(a) Factors
    1. Protection of market participants and the public. The rule 
complies with Core Principle 8 by ensuring that volume and price 
information is publicly available on a daily basis. Market participants 
and the public will be able to make economic decisions based on 
accurate futures and swaps prices that are reported on a timely basis.
    2. Efficiency, competitiveness, and financial integrity of futures 
markets. The rule will promote the efficiency and competitiveness of 
futures markets by ensuring that volume and price data for futures, 
options, and swaps traded at all DCMs are publicly available. 
Competitiveness may be enhanced to the extent that market participants 
are able to compare prices of similar contracts at different DCMs.
    3. Price discovery. The rule promotes price discovery by ensuring 
that end of day trading data, including volume and prices, are 
disseminated to the public. An important benefit of price discovery is 
the availability of prices to market participants and the public who 
may use this information to inform their economic decisions.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices.
    5. Other public interest considerations. The rule provides post-
trade transparency to the markets by requiring DCMs and SEFs to publish 
end of day trading data including volume and prices to show the 
activity that occurred during that day's trading session.
(10) Core Principle 9: Execution of Transactions
Sec. 38.501-38.506
    The Commission received a number of comments pertaining to the 
costs and/or benefits of proposed Sec. Sec.  38.501-38.506. As noted 
above, the Commission is not finalizing these provisions at this time, 
and expects and plans to take up the proposed rules under Core 
Principle 9 when it considers the final SEF rulemaking. Comments 
pertaining to these proposed rules, including those relative to costs 
and/or benefits, will be considered in such future rulemaking.
(11) Core Principle 10: Trade Information
Sec. 38.551 (Audit Trail Required), Sec. 38.552 (Elements of an 
Acceptable Audit Trail Program), and Sec. 38.553 (Enforcement of Audit 
Trail Requirements)
    Section 38.551 establishes the requirements of an acceptable audit 
trail program to help ensure that DCMs can monitor and investigate any 
customer or market abuses.
    Section 38.552 sets forth the four program areas that a DCM must 
address as part of an acceptable audit trail program, including 
original source documents, transaction history database, electronic 
analysis capability, and safe storage of all audit trail data.
    Section 38.553(a) establishes the elements of an effective audit 
trail enforcement program. Additionally, Sec.  38.553(b) requires that 
an effective audit trail enforcement program must enable the DCM to 
identify entities that are routinely non-compliant with the regulations 
under Core Principle 10 and to levy meaningful sanctions when such 
deficiencies are identified. The regulation prohibits DCMs from issuing 
more than one warning letter for the same violation within a rolling 
12-month time period.
Summary of Comments
    CME and MGEX argued that the requirement for enforcement of an 
audit trail program to annually audit all market participants would 
essentially require the exchange to review every participant who enters 
an order into the trading system, which would be onerous, costly, and 
unproductive.\606\ MGEX suggested that DCMs should only be required to 
review a sample of market participants.\607\
---------------------------------------------------------------------------

    \606\ CME Comment Letter at 33-34 (Feb. 22, 2011), MGEX Comment 
Letter at 7 (Feb. 22, 2011).
    \607\ MGEX Comment Letter at 7 (Feb. 22, 2011).
---------------------------------------------------------------------------

Discussion
    In response to comments that requiring exchanges to conduct annual 
audits of all members and market participants would be onerous and 
costly, the Commission is revising proposed Sec.  38.553 to apply only 
to ``members and persons and firms subject to designated contract 
market recordkeeping rules.'' With this change, the Commission limits 
the universe of entities that a DCM must audit for compliance with Core 
Principle 10. This

[[Page 36685]]

revision addresses commenters' concerns by making the annual audit 
requirement less burdensome.
    Additionally, this revision also responds to MGEX's comments that 
the Commission should allow DCMs to test for audit trail compliance by 
auditing only a sample of market participants. While the number of 
persons and entities subject to audit has been reduced in the final 
rule, the remaining population must still be audited annually to ensure 
compliance. As explained above, this revision will decrease the burden 
on DCMs.
    The Commission believes it is essential for DCMs to have complete 
and accurate access to trade information to facilitate trade 
reconstructions and thereby detect customer and market abuses. The 
Commission believes it is essential for DCMs to have complete and 
accurate access to trade information to facilitate trade 
reconstructions and thereby detect customer and market abuses. The 
Commission has determined that the audit trail requirements and the 
annual audits of members and entities subject to Commission or DCM 
recordkeeping rules are the best way to achieve its policy objectives, 
while providing DCMs with flexibility to achieve these objectives. The 
Commission has considered the comments raised related to the cost of 
ensuring that customer and market abuses can be detected, prosecuted, 
and ultimately discouraged, and believes that the benefits of the rule 
as finalized are substantial.
Costs
    The costs associated with Core Principle 10 include the cost of 
developing and maintaining an electronic history transaction database 
to maintain a history of all orders and transactions entered into the 
trading system and electronic analysis capability to permit the 
exchange to reconstruct orders and trades. DCMs will also bear the cost 
of developing and implementing a program to collect and maintain 
original source documents for trades entered both manually and 
electronically into the trading system. Core Principle 10 compliance 
also imposes costs for developing and maintaining a safe storage system 
for all the trade data collected and ensuring that such data is readily 
accessible to exchange compliance staff. The Commission notes, however, 
that almost all exchanges currently operating are in compliance with 
these regulations. Therefore, existing DCMs should have already 
established these programs and, as such, should have already borne the 
costs necessary to comply with these requirements.
    These requirements were previously explained in the guidance and 
acceptable practices for Core Principle 10--Trade Information. The 
Commission's RERs have frequently highlighted compliance with the 
guidance and acceptable practices in the discussion of an exchange's 
audit trail program. Specifically, past RERs have discussed exchanges' 
practices regarding use of an electronic history transaction database, 
electronic analysis capability, and safe storage systems. As such, the 
Commission is simply codifying these existing practices and regulations 
as rules.
    DCMs will incur costs to ensure they employ appropriate resources 
to enforce Core Principle 10's requirements, including the ability to 
conduct annual compliance audits by hiring sufficient staff to review 
the information and having in place adequate technology to retrieve and 
store the information. It is not feasible to quantify the costs for 
appropriate resources for audit trail and Core Principle 10 enforcement 
because the factors necessary to determine what resources are 
``appropriate'' vary widely from exchange to exchange, and the costs 
for each variable depend upon the particular circumstances of each 
exchange. For example, the number of participants who trade on a 
particular exchange varies widely and the number of participants who 
are members and persons and firms subject to Commission or DCM 
recordkeeping rules directly corresponds to the number of annual 
compliance audits a particular DCM will conduct to determine compliance 
with all audit trail requirements.
    While the Commission is imposing new requirements that specify 
certain components that must be incorporated in audit trail reviews, 
the Commission notes that most exchanges already have such resources in 
place and conduct audit trail reviews in such a manner to comply with 
these new regulations due to the RER process and recent 
recommendations. What constitutes ``appropriate resources'' to oversee 
and enforce the audit trail requirements is addressed on an 
individualized basis in the specific RERs for each exchange. 
Importantly, no DCM provided the Commission with information related to 
the current cost of compliance and the estimated increase related to 
codification of existing practices.
Benefits
    Core Principle 10 and the associated regulations promote the 
reliability, completeness, accuracy, and security of exchange order and 
trade data. The ability of DCMs to recover, review, and reconstruct 
trading transactions is imperative to monitor for potential customer 
and market abuses. The requirements of Core Principle 10 ensure the 
ability of DCMs to prosecute rule violations supported by evidence from 
audit trail data and order and trade information. This furthers the 
protection of market participants by requiring exchanges to have the 
ability to adequately conduct market surveillance and prosecute rule 
violations.
    The requirement that exchanges issue no more than one warning 
letter for the same violation within a rolling twelve-month time period 
will ensure that instead of simply sending multiple warning letters, 
exchanges levy meaningful fines and sanctions to deter recidivist 
behavior and prevent future rule violations.
Section 15(a) Factors (Sec. Sec.  38.551-38.553)
    1. Protection of market participants and the public. Sections 
38.551-38.553 benefit the protection of market participants and the 
public by requiring that DCMs maintain all order and trade information 
so that rule violations that could harm market participants and the 
public may be detected, reconstructed, investigated, and prosecuted. A 
DCM cannot complete its surveillance and enforcement practices without 
such audit trail data collection and requirements. The absence of these 
regulations would result in an increased potential for violations to go 
undetected. Such requirements strengthen DCMs' market oversight 
capabilities and result in stronger protection of market participants 
and the general public from rule violations and market abuses.
    2. Efficiency, competitiveness, and financial integrity of futures 
markets. The regulations under Core Principle 10 implemented in 
Sec. Sec.  38.551-38.553 promote efficiency and competitiveness by 
ensuring that DCMs can adequately monitor their markets for rule 
violations and effectively prosecute and deter such rule violations. 
These regulations strengthen market confidence by deterring such rule 
violations, thereby promoting efficient pricing and a competitive 
trading atmosphere.
    3. Price discovery. Sections 38.551-38.553 benefit the price 
discovery process of markets by allowing DCMs to detect and prosecute 
rule violations that impede market prices from accurately reflecting 
information pertaining to underlying fundamentals. Having a process by 
which to detect, reconstruct, investigate, and prosecute rule 
violations deters market participants

[[Page 36686]]

from engaging in activities which harm the market's price discovery 
process.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
(12) Core Principle 11: Financial Integrity of Transactions
Sec. 38.601-38.606
    Section 38.601 provides that all transactions executed on or 
through a DCM, other than transactions in security futures products, 
must be cleared through a Commission-registered DCO. Section 38.602 
provides that DCMs must adopt rules establishing minimum financial 
standards for both member FCMs and IBs and non-intermediated market 
participants. Section 38.603 provides that DCMs must adopt rules for 
the protection of customer funds.
    Section 38.604 requires that a DCM must routinely receive and 
promptly review financial and related information from its members, and 
conduct ongoing financial surveillance of the risk created by the 
positions taken by an FCM's customers. Section 38.605 requires DCMs, as 
self-regulatory organizations, to comply with the standards of amended 
Sec.  1.52 to ensure the financial integrity of intermediaries by 
establishing and carrying out an SRO program for the examination and 
financial supervision of intermediaries. Section 38.606 provides that 
DCMs may satisfy their financial surveillance responsibilities under 
Sec. Sec.  38.604 and 38.605 by outsourcing such responsibilities to a 
regulatory service provider if certain requirements are met.
Summary of Comments and Discussion
    KCBT commented that because its rules incorporate by reference the 
requirements of the CEA, the requirement to implement exchange rules 
that mirror Commission regulations is duplicative, unnecessary and 
burdensome.\608\
---------------------------------------------------------------------------

    \608\ KCBT Comment Letter at 7 (Feb. 22, 2011).
---------------------------------------------------------------------------

    The Commission believes the establishment of independent financial 
integrity rules is important because it will provide evidence that: (i) 
Each DCM has focused attention on the specific regulations promulgated 
under the CEA; and (ii) such regulations are appropriately implemented. 
Section 38.603 does not specify the exact rules to be implemented by 
each DCM, but sets forth the substance of what the rules of each DCM 
must address; therefore, a DCM would be unable to meet the requirements 
of the rule by incorporating the CEA requirements by reference.
Costs
    Section 38.601 imposes no new costs on DCMs, as all transactions on 
a DCM are currently subject to mandatory clearing; this was required by 
the former core principle, before it was amended by the Dodd-Frank Act.
    Section 38.602 imposes no new costs as all DCMs are currently 
required to have rules establishing minimum financial standards for 
member FCMs and IBs pursuant to Core Principle 11. The Commission will 
continue to review the financial standards that each DCM has 
established to be certain that the DCM is in compliance with the rule. 
The requirements of Sec.  38.603 relating to the protection of customer 
funds are all existing requirements pursuant to former Designation 
Criterion 5(b) and have been found to be effective in monitoring and 
mitigating financial risk. By incorporating the substantive standards 
from former designation criteria that have already been implemented by 
registered DCMs, the Commission aims to minimize implementation costs. 
However, the explicit requirement that DCMs adopt rules, as opposed to 
solely incorporating the requirements of the CEA by reference, will 
involve administrative costs on the part of DCMs, such as enacting the 
appropriate rules and building the understanding within its staff of 
those rules.
    The requirements of Sec.  38.604 also reflect requirements pursuant 
to former Designation Criterion 5(a). However, the rule does build on 
the foundation of historical compliance by DCMs by explicitly requiring 
intraday financial surveillance. The Commission believes that intraday 
surveillance is necessary to account for possible intraday risk build-
up and to meet the requirements of the financial integrity core 
principle. Because DCOs currently conduct intraday monitoring, DCMs 
should already meet this requirement through the DCO(s) that provides 
their clearing services. As the Commission notes in the preamble, an 
arrangement between a DCO and a DCM, whereby the DCO is responsible to 
a DCM for the performance of certain functions, including this 
monitoring, will continue to be permitted by the Commission. Therefore, 
intraday financial surveillance should not impose new costs on DCMs.
    DCMs will not need to expend significant additional resources to 
comply with Sec.  38.605 as all DCMs have existing SRO programs in 
place and currently are in compliance with section 1.52, as well as the 
guidance that has now been incorporated into section 1.52 from Division 
of Trading and Markets Financial and Segregation Interpretations 4-1 
and 4-2. Further, the JAC Agreement, as discussed above, is already in 
place and operating effectively.
    Section 38.606 provides DCMs with the option of outsourcing their 
financial surveillance responsibilities if they would prefer not to do 
such surveillance in house. Although Sec. Sec.  38.604 and 38.605 
impose the actual surveillance requirements, those DCMs electing to 
outsource such surveillance responsibilities will incur costs related 
to conducting due diligence of the regulatory service provider and 
making sure the DCM has adequate staff to monitor the provider. The 
Commission is unable to quantify such costs because the rule does not 
require a certain method of due diligence, and therefore the costs 
would vary based on the practices and choices of each DCM.
Benefits
    Section 38.601 is a codification of the statutory requirement in 
Core Principle 11. Section 38.602 requires a DCM to establish and 
maintain minimum financial standards for market participants, which is 
essential to mitigating systemic risk. Implementing the requirements of 
the core principle, which requires that each DCM has rules to ensure 
the financial integrity of FCMs and IBs, achieves the Commission's 
regulatory objectives by ensuring the financial integrity of the 
transactions entered into by or through the facilities of the contract 
market, while also providing flexibility as to how to meet the 
requirements of the core principle.
    Rule 38.603 implements the requirement of the core principle that 
DCMs establish and enforce rules to ensure the protection of customer 
funds. DCMs, as SROs, are well-positioned to undertake the 
responsibility of establishing such rules and ensuring the compliance 
of intermediaries with those rules. As a result, the requirements of 
Sec.  38.603 enhance the protection of customers (who are both market 
participants and members of the public) from the losses incurred by 
fellow customers. This directly enhances the protection of market 
participants and the public, and promotes sound risk management. 
Moreover, by mitigating the loss of customer funds, which loss in turn 
would damage all customers' confidence in the safety of the funds they 
post as collateral for cleared

[[Page 36687]]

positions, these requirements mitigate systemic risk.
    The intraday surveillance requirement in Sec.  38.604 requires that 
a DCM continually survey each FCM's obligations created by its 
customers. Satisfaction of this requirement is necessary for a DCM to 
meet the requirements of the core principle to have rules ensuring the 
financial integrity of market participants, as well as the protection 
of customer funds. By conducting intraday surveillance and acting on 
the results of the surveillance, DCMs will be able to address intraday 
risks before they grow larger and therefore avoid losses to DCOs 
carrying FCMs or customers.
    For section 38.605, existing benefits include avoiding duplicative 
review of members, as well as ensuring the financial integrity of FCMs 
and IBs, protecting customer funds and contributing to market 
confidence. In addition, because Sec.  38.606 provides a DCM with 
options, it is more efficient and cost-effective as DCMs can choose 
whether to allocate their own resources to this surveillance or to use 
a regulatory service provider.
Section 15(a) Factors (Sec. Sec.  38.601-38.606)
    1. Protection of market participants and the public. The rules 
protect market participants and the public by ensuring the financial 
integrity of DCM transactions via clearing of all transactions on a 
DCM, financial surveillance of members and minimum standards for 
members. The protection of customer funds rules protect customers from 
the losses incurred by either other market participants or fellow 
customers, thereby strengthening the financial integrity of the markets 
and decreasing potential systemic risks.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. Since most of these rules codify pre-existing requirements, 
DCMs are already in compliance. As a result, the rules do not require 
significant changes (i.e., costs), and therefore have minimal effect on 
the competitiveness of futures markets. The addition of rules requiring 
intraday financial surveillance will benefit the financial integrity of 
the markets by requiring DCMs to have procedures that will foster DCMs 
addressing intraday risks before they grow larger, thereby avoiding 
losses to DCOs carrying FCMs or customers.
    3. Price discovery. The Commission has not identified any effects 
that this rule will have on price discovery.
    4. Sound risk management practices. The rules requiring the 
establishment of minimum financial standards for DCM market 
participants promote sound risk management practices by ensuring that 
market participants have a certain level of sophistication and 
resources, which in turn, mitigates systemic risk.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
Sec. 38.607 (Direct Access)
    Section 38.607 requires a DCM that allows customers direct access 
to its contract market to implement certain direct access controls and 
procedures (such as automated pre-trade controls) in order to provide 
member FCMs with tools to manage their financial risk.
Costs
    As discussed in the preamble, a recent Futures Industry Association 
(``FIA'') report stated that the majority of exchanges have policies 
and tools in place that comply with the recommendation that mandatory 
pre-trade controls be set at the exchange level.\609\ As a result, 
these requirements will not impose significant costs on a majority of 
DCMs. Those DCMs that do not have controls and procedures in place, but 
do allow customers direct access to the contract market, will incur 
costs in implementing these controls and procedures, and FCMs will 
incur costs in utilizing the controls and procedures. The Commission is 
unable to quantify such costs because the rule does not require a 
certain set of controls and procedures, and therefore the costs would 
vary based on the controls adopted by the individual DCM. In addition, 
such costs would also vary depending on the DCM's existing 
infrastructure, which varies markedly across exchanges. Moreover, 
commenters did not discuss the costs of this provision.
---------------------------------------------------------------------------

    \609\ See FIA report on ``Market Access Risk Management 
Recommendations'' (April 2010), available at:  http://www.futuresindustry.org/downloads/Market_Access-6.pdf.
---------------------------------------------------------------------------

Benefits
    The requirements of this rule will enable an FCM to protect itself 
when a customer has direct access to a DCM and completes a trade before 
an FCM's systems have an opportunity to prevent the execution of such 
trade, thereby avoiding losses that could extend to customers or the 
DCO from trades that would exceed the parameters set by the FCM on the 
DCM. Further, as discussed in the preamble, the benefits of risk 
controls at the FCM, DCO and DCM level, discussed above, have been 
recognized both domestically and internationally.
Section 15(a) Factors
    1. Protection of market participants and the public. The final rule 
promotes the protection of market participants and the public because 
it enables an FCM to protect itself from its customers with direct 
access to the DCM, thereby preventing customers from undertaking risks 
that could bankrupt an FCM.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. Automated controls will permit an FCM to enforce limitations 
on its customers' trading via direct access, which will serve to 
protect all market participants, which will also promote the efficient, 
competitive, and financial integrity of futures markets.
    3. Price discovery. The Commission has not identified any effects 
that this rule will have on price discovery.
    4. Sound risk management practices. Without the aid of controls at 
the DCM-level, an FCM will be unable to protect itself from its 
customers with direct access to the DCM. Therefore, the final rule 
serves sound risk management practices by enabling FCMs to manage risk.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
(13) Core Principle 12: Protection of Markets and Market Participants
    Section 38.651 provides that a DCM must have and enforce rules that 
are designed to promote fair and equitable trading and to protect the 
market and market participants from abusive practices including 
fraudulent, noncompetitive or unfair actions, committed by any party.
Costs and Benefits
    Section Sec.  38.651 specifies DCMs' obligations under Core 
Principle 12 relating to their compliance with Core Principles 2, 4 and 
9, and the associated regulations. Accordingly, Sec.  38.651 does not 
impose any additional costs beyond those discussed under each of the 
respective Core Principles 2, 4 and 9.
(14) Core Principle 13: Disciplinary Procedures
    Core Principle 13 consists of a series of rules that, among other 
things, seek to ensure a fair, prompt, and effective disciplinary 
program.\610\ A more

[[Page 36688]]

detailed description of the Core Principle 13 rules themselves is 
contained in the preamble.
---------------------------------------------------------------------------

    \610\ CME and MGEX stated that a number of the rules 
implementing Core Principle 13 are overly prescriptive. See CME 
Comment Letter at 35-36 (Feb. 22, 2011) and MGEX Comment Letter at 9 
(Feb. 22, 2011). The Commission considered these comments in 
preparing this release and discusses the costs and benefits of the 
codification of rules in lieu of guidance and acceptable practices 
in further detail in section C(1) above.
---------------------------------------------------------------------------

Sec. 38.701 (Enforcement Staff)
    Rule 38.701 requires that a DCM must establish and maintain 
sufficient enforcement staff and resources to effectively and promptly 
prosecute possible rule violations.
Costs
    The obligations imposed by Sec.  38.701 are not new; rather, the 
requirements for DCMs to ensure adequate staff and resources stem from 
recent RERs, in which Commission staff recommended that DCMs increase 
their compliance staff levels and monitor the size of their staff and 
increase the number of staff as appropriate.\611\ Accordingly, the 
Commission does not anticipate that this provision will impose 
additional costs on DCMs.
---------------------------------------------------------------------------

    \611\ See Rule Enforcement Review of the Minneapolis Grain 
Exchange (Aug. 27, 2009), Rule Enforcement Review of ICE Futures 
U.S. (Feb. 2, 2010), and Rule Enforcement Review of the Chicago 
Board of Trade and the Chicago Mercantile Exchange (Sept. 13, 2010) 
for findings and recommendations pertaining to the adequate staff 
size of DCM compliance departments.
---------------------------------------------------------------------------

Benefits
    The Commission believes that adequate enforcement staff and 
resources are essential to the effective performance of a DCM's 
disciplinary program. Without an effective disciplinary program, a DCM 
will be unable to effectively and promptly investigate and adjudicate 
potential rule violations and deter future violations. Rule 38.701 
ensures that DCMs monitor the size of their staff and increase the 
number of staff appropriately as trading volume increases, new 
responsibilities are assigned to compliance staff, or internal reviews 
demonstrate that work is not completed in an effective or timely 
manner. Rule 38.701 also ensures the independence of enforcement staff 
and promotes disciplinary procedures that are free of potential 
conflicts of interest by providing that a DCM's enforcement staff may 
not include members of the exchange or persons whose interests conflict 
with their enforcement duties.
Sec. 38.702 (Disciplinary Panels)
    Rule 38.702 requires DCMs to have one or more ``review panels, 
without imposing a specific requirement for DCMs to maintain a ``review 
panel'' and a ``hearing panel.''
Costs
    The requirement in the rule to establish disciplinary panels 
reflects industry practices that have already been adopted by most 
DCMs. Accordingly, the Commission anticipates that Sec.  38.702 will 
not impose additional cost burdens on most DCMs. To the extent that the 
rule does impose costs on DCMs, the Commission notes that since 
disciplinary panel members are typically unpaid, any potential costs 
associated with Sec.  38.702 would be limited to administrative costs 
associated with establishing the disciplinary panel, which are likely 
to vary by DCM. Finally, as described above, in response to concerns 
raised by commenters, the Commission has removed the proposed 
requirement to maintain distinct hearing panels and review panels, 
thereby reducing the burden associated with the proposed rule.
Benefits
    Rule 38.702 requires DCMs to establish one or more disciplinary 
panels authorized to fulfill their obligations under the part 38 rules, 
including, among other things, to issue notices of charges, conduct 
hearings, render written decisions, and impose disciplinary sanctions. 
These functions are critical components of a DCM's disciplinary program 
and will deter violations of DCM rules, prevent recidivist behavior, 
protect respondents by requiring procedural safeguards to ensure 
fairness for all respondents in disciplinary actions, and protect 
customers by requiring full customer restitution in any disciplinary 
matter where customer harm is demonstrated.
    In addition to providing these numerous benefits, Sec.  38.702 
permits flexibility in the structure of DCMs' disciplinary bodies but 
protects against conflicts of interest by ensuring that the same 
individual is not invested with the authority to both issue and 
adjudicate charges in the same manner.
Sec. 38.703-38.711 and Guidance
    Rules 38.703-38.711, and the accompanying guidance, seek to ensure 
a fair, prompt, and effective disciplinary program by, among other 
things, requiring a notice of charges and providing respondents with a 
right to representation, a reasonable period of time to file an answer 
to charges, and the right to a fair hearing. The rules also outline 
procedures for rendering disciplinary decisions and issuing 
disciplinary sanctions and warning letters. In response to comments 
requesting greater flexibility, the Commission is also converting 
several proposed rules into guidance in order to reduce potential 
incremental costs resulting from the final rules. This guidance will 
cover notices of charges, the admission or failure to deny charges, 
settlement offers, hearings, rights to appeal, summary fines, and 
emergency disciplinary sanctions.
Summary of Comments and Discussion
    The Commission did not receive any specific comments discussing 
costs or benefits of proposed Sec. Sec.  38.703-38.716. However, 
several commenters made general requests for greater flexibility across 
all core principles. Accordingly, the Commission has modified certain 
aspects of the proposed rules under Core Principle 13 where it believes 
that flexibility can reasonably be afforded. To that end, the 
Commission is converting the following proposed rules, in their 
entirety, to guidance: proposed Sec.  38.707 (Admission or failure to 
deny charges); proposed Sec.  38.709 (Settlement offers); proposed 
Sec.  38.712 (Right to appeal); and proposed Sec.  38.716 (Emergency 
disciplinary actions). In addition, the Commission is moving the 
following specific requirements to guidance: the requirements under 
paragraphs (a) and (b) of proposed Sec.  38.704, which allowed, but did 
not require, a DCM to issue rules regarding failures to request a 
hearing and expressly answer or deny a charge; the provision under 
paragraph (b) of proposed Sec.  38.710, which provided that the DCM's 
rules may provide that a sanction may be summarily imposed upon any 
person whose actions impede the progress of a hearing; and the 
provisions under proposed Sec.  38.715 that permitted, but did not 
require, a DCM to adopt a summary fine schedule.
    The Commission is also removing the following proposed provisions 
from the final rules: paragraphs (a) and (b) under proposed Sec.  
38.703 regarding the review of investigation reports when additional 
evidence is needed or no reasonable basis exists for finding a 
violation; the section of proposed Sec.  38.708 which was optional, 
allowing a DCM's rule to provide that, except for good cause, a hearing 
must be concerned only with those charges denied or sanctions set by 
the panel for which a hearing has been requested; and the optional rule 
under proposed Sec.  38.710(a)(7) which, in certain cases, allowed for 
the cost of transcribing the record of the hearing to be borne by the 
respondent.
Costs (Sec.  38.703-38.712 and Guidance)
    While Sec.  38.701 and Sec.  38.702 impose specific requirements on 
DCMs to have sufficient enforcement staff and

[[Page 36689]]

resources and to establish disciplinary panels, the remainder of the 
Core Principle 13 regulations simply outline the policies and 
procedures that a DCM's disciplinary program must follow. The 
Commission notes that these Core Principle 13 regulations merely 
reflect disciplinary concepts formerly found in Designation Criterion 
6, part 8 of the Commission's regulations,\612\ and the guidance and 
acceptable practices for former Core Principle 2. Accordingly, existing 
exchanges generally have already established disciplinary programs and, 
as such, have already expended the fees and costs necessary to comply 
with the requirements under Sec. Sec.  38.703-38.712.
---------------------------------------------------------------------------

    \612\ Exchange Procedures for Disciplinary, Summary, and 
Membership Denial Actions.
---------------------------------------------------------------------------

    As discussed in the preamble, many of the new requirements 
applicable to DCMs with respect to their disciplinary procedures were 
derived from findings and recommendations made by Commission staff 
through RERs.\613\ These recommendations represent what the Commission 
staff believes are best practices and are typically adopted by DCMs as 
the standard form of compliance. Therefore, while the codification of 
certain disciplinary requirements may be new, Commission staff has 
already expressed these expectations to the industry through RERs.
---------------------------------------------------------------------------

    \613\ For example, the requirements in regulation 38.708 
(Decisions) and regulation 38.710 (Disciplinary Sanctions) are based 
on findings and recommendations in recent RERs.
---------------------------------------------------------------------------

    The exact incremental costs incurred by DCMs to comply with the 
specific requirements of final rules under Core Principle 13 cannot be 
ascertained since they will vary depending on the DCM's current 
disciplinary program. To ensure the effectiveness of their disciplinary 
programs and provide procedural safeguards to potential respondents, 
most DCMs already have disciplinary rules and procedures that are 
similar to those required by the rules, even though they were not 
previously required to do so by Commission regulation. Therefore, as a 
practical matter, the rules may likely require DCMs to amend existing 
disciplinary rules and procedures rather than creating them anew. 
Accordingly, costs would likely be limited to the resources allocated 
to amending existing rules and procedures to ensure compliance with the 
final rules.
    As described above, in response to commenters' request for greater 
flexibility, the Commission has sought to reduce any incremental costs 
imposed by the final rules by modifying certain rules where it believes 
that flexibility can reasonably be afforded and the overall burden on 
DCMs can be reduced. As described above, the Commission is moving 
numerous proposed regulations from rules to guidance, as well as 
removing certain provisions in their entirety. Finally, the Commission 
expects the following additional modifications to the proposed rules to 
also reduce the costs imposed by the rules on market participants: (1) 
The rules regarding a respondent's answer to a notice of charges, 
outlined in paragraphs (a), (b), and (c) of proposed Sec.  38.706, are 
being replaced with a requirement that any rules adopted pursuant to 
this rule be ``fair, equitable, and publically available;'' (2) 
Proposed Sec.  38.714 is being modified so that it does not require 
customer restitution if the amount of restitution, or the recipient, 
cannot be reasonably determined.
Benefits
    The regulations under Core Principle 13 protect market participants 
and the public by ensuring that exchanges will discipline, suspend or 
terminate the activities of members or market participants found to 
have committed rule violations. To that end, the rules will ensure that 
DCMs maintain fair, prompt, and effective disciplinary programs. The 
rules will deter violations of DCM rules by requiring disciplinary 
sanctions sufficient to deter recidivism underSec.  38.710 and by 
restricting repeat warning letters in Sec.  38.711. The rules protect 
respondents by requiring procedural safeguards to ensure fairness for 
respondents. These include an adequate notice of charges under Sec.  
38.703, the right to representation in Sec.  38.704, a reasonable 
period of time to file an answer to charges under Sec.  38.705, right 
to a hearing under Sec.  38.707, and a prompt written decision under 
Sec.  38.708, among others. Finally, the rules protect customers by 
requiring restitution where customer harm is demonstrated in Sec.  
38.710.
    The guidance provisions regarding settlement offers and Sec.  
38.708 (Decisions) were based on the Commission's recommendation that 
DCM disciplinary committees improve the documentation of their 
disciplinary decisions. As discussed in the DCM NPRM, the Commission 
believes that improved written documentation yields the following 
benefits: (1) Disciplinary panels will be required to focus their 
analysis more carefully in order to articulate the rationale for their 
decisions; (2) DCM enforcement staff will gain a better understanding 
of the evidentiary expectations to which different disciplinary panels 
adhere; (3) DCM enforcement staff and respondents will both have an 
improved record to base any appeals they may wish to file; and (4) 
Improved review of the DCMs' disciplinary program by the Commission.
    Section Sec.  38.710 (Disciplinary Sanctions), which provides that 
all disciplinary penalties imposed by a DCM or its disciplinary panels 
must be commensurate with the violations committed, and be sufficient 
to deter recidivist activity, and Sec.  38.711 (Warning Letters), which 
prohibits a DCM from issuing more than one warning letter in a rolling 
12 month period, are also examples of recommendations made by the 
Commission in RERs. As discussed in the DCM NPRM, these reflected DMO 
staff's concern regarding the adequacy of sanctions.
Section 15(a) Factors (Sec.  38.701-38.712 and Guidance)
    1. Protection of market participants and the public. The 
regulations and guidance under Core Principle 13 benefit the protection 
of market participants and the public by ensuring that exchanges 
maintain sufficient enforcement staff and resources through Sec.  
38.701 and will discipline, suspend or terminate the activities of 
members or market participants found to have committed rule violations. 
The regulations require that DCMs maintain fair, prompt, and effective 
disciplinary programs to ensure fairness for all respondents in 
disciplinary actions. Additionally, by requiring that DCMs levy 
meaningful sanctions against persons and entities that violate DCM 
rules under Sec. Sec.  38.710 and 38.711, the regulations seek to 
promote the effectiveness of disciplinary sanctions and deter 
recidivist behavior. Finally, to compensate customers who suffer harm, 
the rules require full customer restitution in any disciplinary matter 
where customer harm was demonstrated and where the amount of 
restitution and the recipient can be reasonably determined under Sec.  
38.710.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. The regulations under Core Principle 13 promote the financial 
integrity of the futures markets by ensuring that individuals and 
entities that violate the rules of a DCM are appropriately sanctioned, 
such sanctions are effective and discourage recidivist activity, and 
customers who are harmed received full restitution under Sec. Sec.  
38.710 and 38.711.
    3. Price discovery. The Commission has not identified any effects 
that these rules will have on price discovery other than those 
identified above.

[[Page 36690]]

    4. Sound risk management practices. The Commission has not 
identified any effects that these rules will have on sound risk 
management practices, other than those identified above.
    5. Other public interest considerations. The regulations under Core 
Principle 13 promote public interest considerations, such as market 
integrity and customer protection, by establishing an enforcement 
program through which DCMs can effectively prosecute members and market 
participants who engage in abusive trading practices or violate other 
DCM rules.
(15) Core Principle 14: Dispute Resolution
    The new guidance for Core Principle 14 is essentially identical to 
the prior guidance to former Core Principle 13. No comments were 
provided related to the costs of Core Principle 14. Therefore, the 
costs and benefits should be no different than the costs and benefits 
of administering a dispute resolution program under former Core 
Principle 13 prior to enactment of the Dodd-Frank Act.
(16) Core Principle 18: Recordkeeping
Sec. 38.951 (Additional Sources for Compliance)
    Section 38.951 requires DCMs to maintain records, including trade 
records and investigatory and disciplinary files, in accordance with 
Commission regulations, Sec.  1.31, and in accordance with part 45 of 
the Commission's regulations with respect to swap transactions.
Costs
    The Commission did not receive any comments related to the costs of 
this core principle. Although Sec.  38.951 incorporates by reference 
the requirements of existing Sec.  1.31 and part 45, it does not impose 
any additional burden or costs to which DCMs are not already subject 
under current regulations. Regulation 38.951 merely references 
recordkeeping obligations to which DCMs have always been subject under 
Sec.  1.31 and to which DCMs are required to comply with respect to 
swap transactions under part 45. Accordingly, DCMs will not bear any 
new costs solely due to Sec.  38.951.
Benefits
    Section Sec.  38.951 enables the Commission to obtain the books and 
records of DCMs, which is essential to carrying out the Commission's 
regulatory functions, including trade practice and market surveillance, 
regulatory examinations, and enforcement examinations. Furthermore, 
such books and records assist the Commission in prosecuting violations 
of the CEA and Commission regulations.
(17) Core Principle 19: Antitrust Considerations
    The guidance for Core Principle 19 is nearly identical to the 
guidance for former Core Principle 18 and therefore the costs and 
benefits of requiring DCMs to operate according to accepted antitrust 
law should be no different than the costs and benefits associated with 
the pre-existing guidance, prior to the enactment of the Dodd-Frank 
Act.
(18) Core Principle 20: System Safeguards
Sec. 38.1051 (General Requirements)
    Section 38.1051 establishes system safeguards requirements for all 
DCMs, pursuant to new Core Principle 20 added under the Dodd-Frank Act. 
The rules under Sec.  38.1051(a) and (b) require a DCM's program of 
risk analysis and oversight to address six categories of risk analysis 
and oversight and to follow generally accepted standards and best 
practices with respect to the development, operation, reliability, 
security, and capacity of automated systems. Section 38.1051(c) 
specifically requires each DCM to maintain a business continuity-
disaster recovery (``BC-DR'') plan and BC-DR resources sufficient to 
enable resumption of trading and of all of the responsibilities and 
obligations of the DCM during the next business day following any 
disruption of its operations. Section 38.1051(d) specifies the 
requirement to be able to resume trading and clearing during the next 
business day following a disruption for DCMs that are not determined to 
be a critical financial market. The rules also require each DCM to 
notify Commission staff of various system security-related events under 
Sec.  38.1051(e) and (f), to provide relevant documents to the 
Commission in Sec.  38.1051(g), and to conduct regular, periodic, 
objective testing and review of automated systems under Sec.  
38.1051(h). Finally, the rules under Sec.  38.1051(i) require each DCM 
to coordinate its BC-DR plan with its members and market participants.
Summary of Comments
    CME stated that the requirement for notice of all systems 
malfunctions is overly broad and would require onerous reporting of 
mundane and trivial incidents, and that the Commission should limit 
required reporting only to material system failures.\614\ CME also 
stated that the requirement that DCMs provide the Commission with 
timely advance notice of all planned changes to automated systems that 
may impact the reliability, security, or adequate scalable capacity of 
such systems is an ``extremely onerous burden for DCMs'' and that the 
requirement adds ``significant costs that are not at all commensurate 
with any value created.'' \615\ CME claimed that any change to a system 
could conceivably impact the operation of the system, and that it would 
be inefficient and unproductive to report every planned change to their 
automated systems.\616\ Finally, CME stated that the requirement that 
DCMs provide timely advance notice of all planned changes to the DCM's 
program of risk analysis and oversight is overly broad and is neither 
necessary nor productive.\617\
---------------------------------------------------------------------------

    \614\ CME Comment Letter at 36-37 (Feb. 22, 2011).
    \615\ Id.
    \616\ Id.
    \617\ Id.
---------------------------------------------------------------------------

Discussion
    In response to CME's concerns that the rule would require reporting 
of insignificant system events, the Commission is adopting final rules 
that require reporting only of significant system malfunctions and 
advance notification only of material system changes.
Costs
Sec. 38.1051(a) and (b)
    The Commission believes that DCMs generally will not incur 
significant additional costs to achieve compliance with the 
requirements described in Sec.  38.1051(a) and (b) because from the 
time Core Principle 20 went into effect, all DCMs would need to have a 
program addressing all six categories of risk analysis and oversight. 
Former Core Principle 9 and Designation Criteria 4 provided for 
essentially the same requirements which reflect activities that would 
normally be conducted by the DCM in the course of following industry 
standards, guidelines, and best practices for the management and 
operation of automated systems. Additionally, the requirement to 
maintain a program of risk analysis and oversight appears in Core 
Principle 20 itself and was not the product of Commission discretion.
Sec. 38.1051(c)
    The Commission believes that DCMs generally will not incur 
significant additional costs to achieve compliance with the 
requirements described in

[[Page 36691]]

Sec.  38.1051(c). The requirement to maintain a business continuity-
disaster recovery plan, business continuity disaster recovery 
resources, emergency procedures, and backup facilities appears in the 
core principle itself and was not the product of Commission discretion. 
Additionally, the requirements in Sec.  38.1051(c) reflect industry 
best practices; an exchange without the ability to resume operations 
shortly after a disastrous event, which by definition implies that they 
will not in that timeframe be able to operate out of their production 
environment, cannot expect to retain its customer base. In the event 
that an existing DCM is determined by the Commission to be a ``critical 
financial market,'' substantial additional initial and ongoing costs 
could be incurred due to the more stringent requirements in this 
regard, set forth in Sec.  40.9. The Commission expects to notify a DCM 
of its consideration of the DCM's status as a critical financial market 
sufficiently in advance of any formal designation as such; further, the 
Commission believes that any DCM subject to this designation would be 
generating sufficient volume to reasonably support additional costs 
incurred.
Sec. 38.1051(d)
    The Commission does not believe that any additional material costs 
will be incurred by DCMs in complying with the requirements listed in 
Sec.  38.1051(d), as DCMs covered by this provision are already in 
compliance with its requirements.
Sec. 38.1051(e)
    The Commission does not believe that any material costs will be 
incurred by DCMs in complying with the notification requirements listed 
in Sec.  38.1051(e). Given the general operating stability of the 
automated systems at existing DCMs, notification to Commission staff, 
either via email or telephone, would be fairly infrequent and could 
easily be combined with notifications distributed to market 
participants. Several DCMs have automated notification systems; adding 
an email address to these systems would not impose additional costs on 
DCMs. Minimal additional cost due to DCM staff time could be incurred 
in follow-up activities, including completing a systems outage 
notification template developed by Commission staff. However, this 
template closely follows standard technical post-mortem reporting 
procedures, and is not expected to require more than one hour to 
complete, at a cost of about $52. Additionally, the Commission notes 
that it is reducing the burden of this provision by revising the 
proposed rule to provide that DCMs must only promptly advise the 
Commission of all significant system malfunctions, rather than all 
system malfunctions.
Sec. 39.1051(f)
    The Commission does not believe that any significant material costs 
will be incurred by existing DCMs or applicants in complying with the 
notification requirements listed in Sec.  38.1051(f). Commission staff 
has developed notification templates for the notice requirements 
contained in both (f)(1) and (2); these templates have been designed to 
minimize additional work for DCM staff. As the templates largely follow 
guidelines for best practices in automated systems management and 
capacity planning, Commission staff believes that each notification 
will require no more than two hours of DCM staff time (at a cost of 
about $104). Commission notification of planned changes to a DCM's 
program of risk analysis and oversight should also not impose 
additional costs on DCMs, as copies of documents developed by DCM staff 
for change planning purposes are expected to be sufficient in meeting 
this requirement. Additionally, the Commission notes that it is 
reducing the burden of this provision on DCMs by revising the proposed 
rule to provide that, with respect to planned changes to automated 
systems or risk analysis and oversight programs, a DCM must only 
provide timely advance notification of material changes, rather than of 
all changes.
Sec. 38.1051(g)
    The Commission does not believe that any significant costs will be 
incurred by existing DCMs or applicants in complying with the 
requirements listed in Sec.  38.1051(g), as these documents and 
procedures can be provided electronically with minimal additional DCM 
staff effort, and would be produced by the DCM in the course of 
following industry standards, guidelines and best practices for the 
management and operation of automated systems. If the documents are 
available electronically, the request can likely be met in under 15 
minutes. Hardcopy responses would likely require no more than 30 
minutes of DCM staff time.
Sec. 38.1051(h)
    The Commission does not believe that any significant costs will be 
incurred by existing DCMs in complying with the requirements listed in 
Sec.  38.1051(h), as all DCMs should currently be performing this 
testing and review in the course of following industry standards, 
guidelines and best practices for the management and operation of 
automated systems.
Sec. 38.1051(i)
    The Commission does not believe that any significant costs will be 
incurred by existing DCMs in complying with the requirements listed in 
Sec.  38.1051(i), as all DCMs should meet the requirements of this 
provision in the course of following industry standards (including 
industry-wide tests conducted at least annually and sponsored by the 
Futures Industry Association (``FIA'')), guidelines and best practices 
for the management and operation of automated systems. Further, 
compliance with sections (1) and (3) would generally result from the 
development of contingency and disaster recovery plans following 
generally accepted best practices and standards. Finally, industry-wide 
testing currently conducted on an annual basis would result in 
substantial compliance with part (2) of this section.
Benefits
    Sophisticated computer systems are crucial to a DCM's ability to 
meet its obligations and responsibilities. Safeguarding the 
reliability, security, and capacity of such systems is essential to 
mitigate systemic risk for the nation's financial sector as a whole. 
The ability of DCMs to recover and resume trading promptly in the event 
of a disruption of their operations is highly important to the U.S. 
economy. Ensuring the resilience of the automated systems of DCMs is a 
vitally important part of the Commission's mission and will be crucial 
to the robust and transparent systemic risk management framework 
established by the Dodd- Frank Act. DCM compliance with generally 
accepted standards and best practices with respect to the development, 
operation, reliability, security, and capacity of automated systems can 
reduce the frequency and severity of automated system security breaches 
or functional failures, thereby augmenting efforts to mitigate systemic 
risk. Notice to the Commission concerning systems malfunctions, systems 
security incidents, or any events leading to the activation of a DCM's 
business continuity-disaster recovery (``BC-DR'') plan will assist the 
Commission's oversight and its ability to assess systemic risk levels. 
It would present unacceptable risks to the U.S. financial system if 
futures and swaps markets that comprise critical components of the 
world financial system were to become unavailable for an extended 
period of time for any reason. Adequate system

[[Page 36692]]

safeguards are crucial to mitigate such risks and this regulation will 
ensure such safeguards are in place.
Section 15(a) Factors
    1. Protection of market participants and the public. Because 
automated systems play a central and critical role in today's 
electronic financial market environment, oversight of core principle 
compliance by DCMs with respect to automated systems is an essential 
part of effective oversight of both futures and swaps markets. Timely 
reporting to the Commission of material system malfunctions, planned 
changes to automated systems, and planned changes to programs of risk 
analysis and oversight will facilitate the Commission's oversight of 
futures and swaps markets, augment the Commission's efforts to monitor 
systemic risk, and will further the protection of market participants 
and the public by helping to ensure that automated systems are 
available, reliable, secure, have adequate scalable capacity, and are 
effectively overseen.
    2. Efficiency, competitiveness, and financial integrity of futures 
markets. Sophisticated computer systems are crucial to a DCM's ability 
to meet its obligations and responsibilities. Safeguarding the 
reliability, security, and capacity of such systems is also essential 
to mitigation of system risk for the nation's financial sector as a 
whole. This is particularly true in light of the fact that the over-
the-counter swaps market is estimated to have in excess of $600 
trillion in outstanding contracts. The ability of DCMs to recover and 
resume trading promptly in the event of a disruption of their 
operations is highly important to the U.S. economy. Ensuring the 
resilience of the automated systems of DCMs is a critical part of the 
Commission's mission, and will be crucial to the robust and transparent 
systemic risk management framework established by the Dodd-Frank Act. 
Notice to the Commission concerning systems malfunctions, systems 
security incidents, or any events leading to the activation of a DCM's 
business continuity-disaster recovery plan will assist the Commission's 
oversight and its ability to assess systemic risk levels. It would 
present unacceptable risks to the U.S. financial system if futures and 
swaps markets that comprise critical components of the world financial 
system were to become unavailable for an extended period of time for 
any reason, and adequate system safeguards and timely notice to the 
Commission regarding the status of those safeguards are crucial to 
mitigation of such risks.
    3. Price discovery. The reliable function of sophisticated computer 
systems and networks is vital to the fulfillment of a DCM's duties and 
obligations, a crucial ingredient of adequate regulatory oversight, and 
central to the robust, conservative, and transparent risk management 
framework promulgated by the Dodd-Frank Act. Following generally 
accepted standards and best practices with respect to the development, 
operation, reliability, security, and capacity of automated systems 
will reduce the incidence and severity of automated system security 
breaches and functional failures, thereby providing reliable and 
available venues for price discovery.
    4. Sound risk management practices. Reliably functioning computer 
systems and networks are crucial to comprehensive risk management, and 
prompt notice to the Commission concerning systems malfunctions, 
systems security incidents, or any events leading to the activation of 
a DCM's business continuity-disaster recovery plan will assist the 
Commission in its oversight role, and will bolster its ability to 
assess systemic risk levels. Adequate system safeguards and timely 
notice to the Commission regarding the status of those safeguards are 
crucial to mitigation of potential systemic risks.
    5. Other public interest considerations. The American economy and 
the American public depend upon the availability of reliable and secure 
markets for price discovery, hedging, and speculation. Ensuring the 
adequate safeguarding and the reliability, security, and capacity of 
the systems supporting these market functions is a core focus in the 
Commission's role in monitoring and assessing the level of systemic 
risk, and is central to its fulfillment of responsibilities given to it 
by the Dodd-Frank Act.
(19) Core Principle 21: Financial Resources
Sec. 38.1101 (Financial Resources)
    Section 38.1101(a) requires DCMs to maintain and calculate 
sufficient financial resources to cover operating costs for at least 
one year, calculated on a rolling basis, at all times, and requires any 
entity operating as both a DCM and a DCO to comply with both the DCM 
and DCO financial resources requirements.
    Under section 38.1101(b), financial resources available to DCMs to 
satisfy the applicable financial resources requirements would include 
the DCM's own capital (assets in excess of liabilities) and any other 
financial resource deemed acceptable by the Commission.
    Sections 38.1101(c), (d), and (f) require each DCM, no less 
frequently than at the end of each fiscal quarter, to calculate the 
financial resources it needs to meet the requirements of Sec.  
38.1101(a) and the current market value of each financial resource and 
report this information to the Commission within a specified timeframe. 
Section 38.1101(e) requires DCMs to maintain unencumbered liquid 
financial assets, such as cash or highly liquid securities, equal to at 
least six months' operating costs, or a committed line of credit or 
similar facility.
Summary of Comments
    GreenX stated that the proposed rules implementing Core Principle 
21 could effectively require DCMs to maintain financial resources in 
excess of one year's operating costs.\618\ GreenX suggested modifying 
the rule so that the proposed six month liquidity requirement be 
explicitly included in the financial resources required to cover a 
DCM's operating costs for at least one year, or alternatively, 
requested that the Commission perform a cost benefit analysis of the 
proposed rule as written.\619\
---------------------------------------------------------------------------

    \618\ GreenX Comment Letter at 14-15 (Feb. 22, 2011).
    \619\ Id. at 17-18.
---------------------------------------------------------------------------

    GreenX also stated that revising the proposed rule to permit DCMs 
to include committed lines of credit as an acceptable financial 
resource would permit a DCM to reduce its operating costs by avoiding 
the need to incur unnecessary interest charges, while still ensuring 
that it has adequate funds available to pay its operating 
expenses.\620\
---------------------------------------------------------------------------

    \620\ Id. at 16.
---------------------------------------------------------------------------

    Several commenters requested an extended deadline for filing the 
financial reports required as a result of Sec.  38.1101(f). CME stated 
that the proposed 17 day filing deadline is not feasible and that 
instead, the requirement should be consistent with the SEC's reporting 
requirements.\621\ Similarly, GreenX stated that it has procedures in 
place to comply with the SEC's requirements and that the proposed 
requirements in this rule would require new programming and 
resources.\622\ GreenX recommended extending the reporting deadline to 
30 calendar days, noting that this is still more burdensome than the 
requirements imposed by the SEC on national securities exchanges.\623\ 
The

[[Page 36693]]

Commission received no comments discussing the costs and benefits of 
Sec. Sec.  38.1101(b) and 38.1101(d).
---------------------------------------------------------------------------

    \621\ CME Comment Letter at 38 (Feb. 22, 2011).
    \622\ GreenX Comment Letter at 20 (Feb. 22, 2011).
    \623\ Id.
---------------------------------------------------------------------------

Discussion
    As discussed in the preamble, the rule does not require each DCM to 
maintain eighteen months of financial resources, but, rather, requires 
each DCM to have at least twelve months of financial resources, 
including six months of liquid financial resources. Each DCM has the 
discretion to determine how to meet this requirement (e.g., six months 
of illiquid financial resources combined with six months of liquid 
ones, twelve months of illiquid financial resources with a line of 
credit covering six months' worth of financial resources, or twelve 
months of illiquid financial resources and six months of liquid ones). 
There are similar proposed financial resources rules in the rulemakings 
for each type of registered entity (i.e., SEFs, SDRs, and DCOs).
    The provision in the rule text stating that acceptable financial 
resources include a DCM's own capital and ``any other financial 
resource deemed acceptable by the Commission'' was meant to capture 
other types of resources on a case-by-case basis and provide 
flexibility to both DCMs and the Commission. Accordingly, the 
Commission has revised the rule text to state that a DCM's own capital 
means its assets minus its liabilities calculated in accordance with 
GAAP. The Commission believes that if a certain financial resource is 
deemed to be an asset under GAAP, it is appropriate for inclusion in 
the calculation for this rule. To the extent a certain financial 
resource is not considered an asset under GAAP, but based upon the 
facts and circumstances a DCM believes that the particular asset should 
be so considered, Commission staff will work with the DCM to determine 
whether such resource is acceptable.
    The Commission is persuaded that the proposed 17 business day 
filing deadline may be overly burdensome. The SEC requires its 
quarterly reports on Form 10-Q to be filed with the SEC 40 calendar 
days after the end of the fiscal quarter for accelerated filers and 45 
calendar days after the end of the fiscal quarter for all other SEC-
registered entities. The SEC requires annual reports on Form 10-K to be 
filed with the SEC 60 calendar days after the end of the fiscal year 
for large accelerated filers, 75 calendar days for other accelerated 
filers and 90 calendar days for non-accelerated filers. Accordingly, 
the Commission is extending the 17 business day proposed filing 
deadline to 40 calendar days for the required reports for the first 
three quarters. This will harmonize the Commission's regulations with 
the SEC's requirements for its Form 10-Q. Similarly, the Commission has 
extended the filing deadline to 60 days for the fourth quarter report 
to harmonize with the SEC deadlines for the Form 10-K. The Commission 
does not believe that annual submissions are sufficient. The Commission 
believes that prudent financial management requires DCMs to prepare and 
review financial reports more frequently than annually, and expects 
that DCMs currently are reviewing their finances on at least a 
quarterly basis.
Costs
    This is a new core principle for DCMs, so the requirement to 
maintain and calculate the financial resources necessary to meet the 
requirements of this rule may require an outlay of resources to achieve 
compliance. However, the Commission has required recent DCM registrants 
pursuant to their designation order to calculate and maintain a certain 
level of financial resources and therefore some DCMs are already 
generally in compliance with this requirement.
    The Commission expects that most, if not all, DCMs already 
calculate and prepare financial statements quarterly. Accordingly, the 
Commission does not believe that the calculation of the financial 
resources required to meet the requirements of this core principle 
imposes a significant burden on DCMs. Extrapolation from the prepared 
financial statements should be relatively straightforward, but will 
require some resources on the part of DCMs, potentially including staff 
and technology resources to calculate, monitor, and report financial 
resources. Given the staffing and operational differences among DCMs, 
the Commission is unable to accurately estimate or quantify the 
additional costs DCMs may incur to comply with the new financial 
resource rules, and no information was provided in the comments in 
response to the NPRM. The proposed regulation imposes additional costs 
on the Commission as staff will be required to review the filings 
received from DCMs. However, once the first couple of filings have been 
received and reviewed, Commission staff will be familiarized with the 
financial resources of each DCM and the Commission expects that the 
review will become increasingly more efficient.
Benefits
    A DCM is obligated to ensure that trading occurs in a liquid, fair, 
and financially secure trading facility. In order to fulfill its 
responsibilities, a DCM must have appropriate minimum financial 
resources on hand and on an ongoing basis to sustain operations for a 
reasonable period of time. This includes a DCM having sufficient 
resources to allow it to close out trading in a manner not disruptive 
to the market, if necessary. The Commission believes that the benefits 
of the rule requiring six months' worth of unencumbered liquid 
financial assets are substantial. Specifically, this provision would 
give a DCM time to liquidate the remaining financial assets it would 
need to continue operating for the last six months of the required one 
year period. If a DCM does not have six months' worth of unencumbered 
liquid financial assets, it would be allowed to use a committed line of 
credit or similar facility to satisfy the requirement. If a DCM does 
not have the liquidity required under Sec.  38.1101(e), it is not 
achieving the goal of the core principle, as it will be unable to pay 
its creditors. Liquidity is implicit in the core principle requirement 
that the financial resources be adequate. Additionally, the rules 
ensure that the Commission can be certain that DCMs are in compliance 
with the core principle as required by the Dodd-Frank Act. In addition, 
the reporting requirements will facilitate the Commission's oversight 
role of ensuring DCMs maintain sufficient financial resources, as 
required by the core principle.
Section 15(a) Factors
    1. Protection of market participants and the public. As discussed 
herein, these rules implement the requirements of new Core Principle 21 
pursuant to the Dodd-Frank Act. These requirements will enable a DCM to 
fulfill its responsibilities of ensuring that trading occurs in a 
liquid, fair, and financially secure trading facility by maintaining 
appropriate minimum financial resources on hand and on an ongoing basis 
to sustain operations for a reasonable period of time. As discussed, as 
a result of these requirements, DCMs will also have the financial 
resources necessary to close out trading in a manner not disruptive to 
the market. By establishing uniform standards that further the goals of 
avoiding market disruptions, financial losses, and systemic problems 
that could arise from a DCM's failure to maintain adequate financial 
resources, these rules will protect market participants and the public.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. The rules also promote the financial

[[Page 36694]]

integrity of the futures markets by requiring DCMs to have adequate 
operating resources (i.e., operating resources sufficient to fund both 
current operations and ensure operations of sufficient length in the 
future), and preventing those DCMs that lack these resources from 
expanding in ways that may ultimately harm the broader financial market 
(i.e., confining the operations of DCMs to levels their financial 
resources can support).
    3. Price discovery. The Commission has not identified any effects 
that this rule will have on price discovery.
    4. Sound risk management practices. By setting specific standards 
with respect to how DCMs should assess and monitor the adequacy of 
their financial resources, the rules promote sound risk management 
practices and further the goal of minimizing systemic risk.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.
(20) Core Principle 23: Securities and Exchange Commission
    The Dodd-Frank Act added new Core Principle 23, requiring that DCMs 
keep any records relating to swaps defined in CEA section 1a(47)(A)(v), 
as amended by the Dodd-Frank Act, open to inspection and examination by 
the SEC. Consistent with the text of the core principle, the Commission 
is adopting guidance that provides that each DCM should have 
arrangements and resources for collecting and maintaining accurate 
records pertaining to any swap agreements defined in section 
1a(47)(A)(v) of the amended CEA, and should leave them open to 
inspection and examination for a period of five years. The Commission 
did not receive any comments discussing the costs or benefits of this 
provision.
Costs
    Core Principle 23 requires DCMs to keep records relating only to 
security-based swaps open to inspection and examination by the SEC. The 
accompanying guidance simply tracks the language of the Core Principle 
and does not impose any additional substantive requirements on DCMs. 
The five-year period is unlikely to impose significant costs on market 
participants because the core principle already requires DCMs to keep 
records relating to certain swaps open to inspection and examination by 
the SEC; the guidance simply provides additional information with 
respect to the duration of the obligation imposed by the core 
principle. The Commission believes the five-year retention period is 
reasonable and reflects industry standards; the recordkeeping 
requirement under Core Principle 18 extends for a period of five years 
and the SEC's relevant recordkeeping requirements typically extend for 
a period of five years as well. Additionally, the requirement only 
applies to security-based swaps.
Benefits
    The Dodd-Frank Act was intended to establish a comprehensive, new 
regulatory framework for swaps and security-based swaps. The 
legislation was enacted to reduce risk, increase transparency, and 
promote market integrity within the financial system. In order to 
perform effective oversight and ensure the goals of Dodd-Frank are 
realized, the regulatory agencies charged with overseeing the swaps 
market must have access to accurate information regarding swap 
transactions. The SEC shares jurisdiction over the regulation of the 
swaps markets with the Commission and must have access to accurate 
records relating to swaps in order to effectively oversee those 
markets.
Section 15(a) Factors
    1. Protection of market participants and the public. To protect 
market participants and the public, the SEC has comprehensive 
regulatory, surveillance, investigative, and enforcement programs. To 
support these programs, the SEC must have access to accurate 
information regarding swap agreements. Section 38.1201 and the 
accompanying guidance ensure that DCMs keep accurate records relating 
to certain swaps open to inspection and examination by the SEC for a 
sufficient period of time of five years.
    2. Efficiency, competitiveness and financial integrity of futures 
markets. The SEC has comprehensive regulatory programs designed to 
promote efficient, competitive, and financially stable markets. In 
order to support these programs, the SEC must have access to accurate 
information regarding swap agreements. Section 38.1201 and the 
accompanying guidance ensure that DCMs keep accurate records relating 
to certain swaps open to inspection and examination by the SEC for a 
sufficient period of time of five years.
    3. Price discovery. The Commission has not identified any effects 
that this rule will have on price discovery.
    4. Sound risk management practices. The Commission has not 
identified any effects that this rule will have on sound risk 
management practices.
    5. Other public interest considerations. The Commission has not 
identified any effects that this rule will have on other public 
interest considerations.

IV. Text of Final Rules

List of Subjects

17 CFR Part 1

    Commodity futures, Designated contract markets, Minimum financial 
requirements for intermediaries, Reporting and recordkeeping 
requirements.

17 CFR Part 16

    Commodity futures, Reporting and recordkeeping requirements

17 CFR Part 38

    Block transaction, Commodity futures, Designated contract markets, 
Reporting and recordkeeping requirements, Transactions off the 
centralized market.

    For the reasons stated in the preamble, and under the authority of 
7 U.S.C. 1, et seq., the Commodity Futures Trading Commission amends 17 
CFR parts 1, 16, and 38 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. Revise the authority citation for part 1 to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as 
amended by Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).


0
2. Revise Sec.  1.52 to read as follows:


Sec.  1.52  Self-regulatory organization adoption and surveillance of 
minimum financial requirements.

    (a) Each self-regulatory organization must adopt rules prescribing 
minimum financial and related reporting requirements for members who 
are registered futures commission merchants, registered retail foreign 
exchange dealers, or registered introducing brokers. The self-
regulatory minimum financial and related reporting requirements must be 
the same as, or more stringent than, the requirements contained in 
Sec. Sec.  1.10 and 1.17 of this chapter, for futures commission 
merchants and introducing brokers, and Sec. Sec.  5.7 and 5.12 of this 
chapter for retail foreign exchange dealers; provided, however, a self-
regulatory organization may permit its member registrants that are 
registered with the Securities and Exchange Commission as securities 
brokers or

[[Page 36695]]

dealers to file (in accordance with Sec.  1.10(h) of this chapter) a 
copy of their Financial and Operational Combined Uniform Single Report 
under the Securities Exchange Act of 1934, Part II, Part IIA, or Part 
II CSE, in lieu of Form 1-FR. The definition of adjusted net capital 
must be the same as that prescribed in Sec.  1.17(c) of this chapter 
for futures commission merchants and introducing brokers, and Sec.  
5.7(b)(2) of this chapter for futures commission merchants offering or 
engaging in retail forex transactions and for retail foreign exchange 
dealers. (b) Each self-regulatory organization must establish and 
operate a supervisory program for the purpose of assessing whether each 
member registrant is in compliance with the applicable self-regulatory 
organization and Commission rules and regulations governing minimum net 
capital and related financial requirements, the obligation to segregate 
customer funds, financial reporting requirements, recordkeeping 
requirements, and sales practice and other compliance requirements. The 
supervisory program also must address the following elements:
    (1) Adequate levels and independence of audit staff. A self-
regulatory organization must maintain staff of an adequate size, 
training, and experience to effectively implement a supervisory 
program. Staff of the self-regulatory organization, including officers, 
directors and supervising committee members, must maintain independent 
judgment and its actions must not impair its independence nor appear to 
impair its independence in matters related to the supervisory program. 
The self-regulatory organization must provide annual ethics training to 
all staff with responsibilities for the supervisory program.
    (2) Ongoing surveillance. A self-regulatory organization's ongoing 
surveillance of member registrants must include the review and analysis 
of financial reports and regulatory notices filed by member registrants 
with the designated self-regulatory organization.
    (3) High-risk firms. A self-regulatory organization's supervisory 
program must include procedures for identifying member registrants that 
are determined to pose a high degree of potential financial risk, 
including the potential risk of loss of customer funds. High-risk 
member registrants must include firms experiencing financial or 
operational difficulties, failing to meet segregation or net capital 
requirements, failing to maintain current books and records, or 
experiencing material inadequacies in internal controls. Enhanced 
monitoring for high risk firms should include, as appropriate, daily 
review of net capital, segregation, and secured calculations, to assess 
compliance with self-regulatory and Commission requirements.
    (4) On-site examinations. (i) A self-regulatory organization must 
conduct routine periodic on-site examinations of member registrants. 
Member futures commission merchants and retail foreign exchange dealers 
must be subject to on-site examinations no less frequently than once 
every eighteen months. A self-regulatory organization may establish a 
risk-based method of establishing the scope of each on-site 
examination, provided however, that the scope of each on-site 
examination of a futures commission merchant or retail foreign exchange 
dealer must include an assessment of whether the registrant is in 
compliance with applicable Commission and self-regulatory organization 
minimum capital and customer fund protection requirements, 
recordkeeping, and reporting requirements.
    (ii) A self-regulatory organization must establish the frequency of 
on-site examinations of member introducing brokers that do not operate 
pursuant to guarantee agreements with futures commission merchants or 
retail foreign exchange dealers using a risk-based approach, provided 
however, that each introducing broker is subject to an on-site 
examination no less frequently than once every three years.
    (iii) A self-regulatory organization must conduct on-site 
examinations of member registrants in accordance with uniform audit 
programs and procedures that have been submitted to the Commission.
    (5) Adequate documentation. A self-regulatory organization must 
adequately document all aspects of the operation of the supervisory 
program, including the conduct of risk-based scope setting and the 
risk-based surveillance of high-risk member registrants, and the 
imposition of remedial and punitive action(s) for material violations.
    (c) Any two or more self-regulatory organizations may file with the 
Commission a plan for delegating to a designated self-regulatory 
organization, for any registered futures commission merchant, retail 
foreign exchange dealer, or introducing broker that is a member of more 
than one such self-regulatory organization, the responsibility of:
    (1) Monitoring and auditing for compliance with the minimum 
financial and related reporting requirements adopted by such self-
regulatory organizations and the Commission in accordance with 
paragraphs (a) and (b) of this section; and
    (2) Receiving the financial reports necessitated by such minimum 
financial and related reporting requirements.
    (d) Any plan filed under this section may contain provisions for 
the allocation of expenses reasonably incurred by the designated self-
regulatory organization among the self-regulatory organizations 
participating in such a plan.
    (e) A plan's designated self-regulatory organization must report 
to:
    (1) That plan's other self-regulatory organizations any violation 
of such other self-regulatory organizations' rules and regulations for 
which the responsibility to monitor, audit or examine has been 
delegated to such designated self-regulatory organization under this 
section; and
    (2) The Commission any violation of a self-regulatory 
organization's rules and regulations or any violation of the 
Commission's regulations for which the responsibility to monitor, audit 
or examine has been delegated to such designated self-regulatory 
organization under this section.
    (f) The self-regulatory organizations may, among themselves, 
establish programs to provide access to any necessary financial or 
related information.
    (g) After appropriate notice and opportunity for comment, the 
Commission may, by written notice, approve such a plan, or any part of 
the plan, if it finds that the plan, or any part of it:
    (1) Is necessary or appropriate to serve the public interest;
    (2) Is for the protection and in the interest of customers;
    (3) Reduces multiple monitoring and multiple auditing for 
compliance with the minimum financial rules of the self-regulatory 
organizations submitting the plan of any futures commission merchant, 
retail foreign exchange dealer, or introducing broker that is a member 
of more than one self-regulatory organization;
    (4) Reduces multiple reporting of the financial information 
necessitated by such minimum financial and related reporting 
requirements by any futures commission merchant, retail foreign 
exchange dealer, or introducing broker that is a member of more than 
one self-regulatory organization;
    (5) Fosters cooperation and coordination among the self-regulatory 
organizations; and
    (6) Does not hinder the development of a registered futures 
association under section 17 of the Act.
    (h) After the Commission has approved a plan, or part thereof, 
under Sec.  1.52(g), a self-regulatory organization

[[Page 36696]]

relieved of responsibility must notify each of its members that are 
subject to such a plan:
    (1) Of the limited nature of its responsibility for such a member's 
compliance with its minimum financial and related reporting 
requirements; and
    (2) Of the identity of the designated self-regulatory organization 
that has been delegated responsibility for such a member.
    (i) The Commission may at any time, after appropriate notice and 
opportunity for hearing, withdraw its approval of any plan, or part 
thereof, established under this section, if such plan, or part thereof, 
ceases to adequately effectuate the purposes of section 4f(b) of the 
Act or of this section.
    (j) Whenever a registered futures commission merchant, a registered 
retail foreign exchange dealer, or a registered introducing broker 
holding membership in a self-regulatory organization ceases to be a 
member in good standing of that self-regulatory organization, such 
self-regulatory organization must, on the same day that event takes 
place, give electronic notice of that event to the Commission at its 
Washington, DC, headquarters and send a copy of that notification to 
such futures commission merchant, retail foreign exchange dealer, or 
introducing broker.
    (k) Nothing in this section shall preclude the Commission from 
examining any futures commission merchant, retail foreign exchange 
dealer, or introducing broker for compliance with the minimum financial 
and related reporting requirements to which such futures commission 
merchant, retail foreign exchange dealer, or introducing broker is 
subject.
    (l) In the event a plan is not filed and/or approved for each 
registered futures commission merchant, retail foreign exchange dealer, 
or introducing broker that is a member of more than one self-regulatory 
organization, the Commission may design and, after notice and 
opportunity for comment, approve a plan for those futures commission 
merchants, retail foreign exchange dealers, or introducing brokers that 
are not the subject of an approved plan (under paragraph (g) of this 
section), delegating to a designated self-regulatory organization the 
responsibilities described in paragraph (c) of this section.

PART 16--REPORTS BY CONTRACT MARKETS AND SWAP EXECUTION FACILITIES

0
3. The authority citation for part 16 is revised to read as follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, and 7, and 7b-3, as 
amended by Pub. L. 111-203, 124 Stat. 1376.


0
4. The heading for part 16 is revised to read as set forth above.

0
5. Revise Sec.  16.01 to read as follows:


Sec.  16.01  Publication of market data on futures, swaps and options 
thereon: trading volume, open contracts, prices, and critical dates.

    (a) Trading volume and open contracts. (1) Each reporting market, 
as defined in part 15 of this chapter, must separately record for each 
business day the information prescribed in paragraphs (a)(2)(i) through 
(vi) of this section for each of the following contract categories:
    (i) For futures, by commodity and by futures expiration date;
    (ii) For options, by underlying futures contracts for options on 
futures contracts or by underlying physical for options on physicals, 
and by put, by call, by expiration date and by strike price;
    (iii) For swaps or class of swaps, by product type and by term life 
of the swap; and
    (iv) For options on swaps or classes of options on swaps, by 
underlying swap contracts for options on swap contracts or by 
underlying physical for options on swaps on physicals, and by put, by 
call, by expiration date and by strike price.
    (2) Each reporting market must record for each trading session the 
following trading volume and open interest summary data:
    (i) The option delta, where a delta system is used;
    (ii) The total gross open contracts for futures, excluding those 
contracts against which delivery notices have been stopped;
    (iii) For futures products that specify delivery, open contracts 
against which delivery notices have been issued on that business day;
    (iv) The total volume of trading, excluding transfer trades or 
office trades:
    (A) For swaps and options on swaps, trading volume shall be 
reported in terms of the number of contracts traded for standard-sized 
contracts (i.e., contracts with a set contract size for all 
transactions) or in terms of notional value for non-standard-sized 
contracts (i.e., contracts whose contract size is not set and can vary 
for each transaction).
    (v) The total volume of futures/options/swaps/swaptions exchanged 
for commodities or for derivatives positions that are included in the 
total volume of trading; and
    (vi) The total volume of block trades included in the total volume 
of trading.
    (b) Prices. (1) Each reporting market must record the following 
contract types separately
    (i) For futures, by commodity and by futures expiration;
    (ii) For options, by underlying futures contracts for options on 
futures contracts or by underlying physical for options on physicals, 
and by put, by call, by expiration date and by strike price;
    (iii) For swaps, by product type and contract month or term life of 
the swap; and
    (iv) For options on swaps or classes of options on swaps, by 
underlying swap contracts for options on swap contracts or by 
underlying physical for options on swaps on physicals, and by put, by 
call, by expiration date and by strike price.
    (2) Each reporting market must record for the trading session and 
for the opening and closing periods of trading as determined by each 
reporting market:
    (i) The opening and closing prices of each futures, option, swap or 
swaption;
    (ii) The price that is used for settlement purposes, if different 
from the closing price; and
    (iii) The lowest price of a sale or offer, whichever is lower, and 
the highest price of a sale or bid, whichever is higher, that the 
reporting market reasonably determines accurately reflects market 
conditions. Bids and offers vacated or withdrawn shall not be used in 
making this determination. A bid is vacated if followed by a higher bid 
or price and an offer is vacated if followed by a lower offer or price.
    (3) If there are no transactions, bids, or offers during the 
opening or closing periods, the reporting market may record as 
appropriate:
    (i) The first price (in lieu of opening price data) or the last 
price (in lieu of closing price data) occurring during the trading 
session, clearly indicating that such prices are the first and last 
prices; or
    (ii) Nominal opening or nominal closing prices that the reporting 
market reasonably determines to accurately reflect market conditions, 
clearly indicating that such prices are nominal.
    (4) Additional information. Each reporting market must record the 
following information with respect to transactions in commodity 
futures, commodity options, swaps or options on swaps on that reporting 
market:
    (i) The method used by the reporting market in determining nominal 
prices and settlement prices; and
    (ii) If discretion is used by the reporting market in determining 
the opening and/or closing ranges or the settlement prices, an 
explanation that certain discretion may be employed by

[[Page 36697]]

the reporting market and a description of the manner in which that 
discretion may be employed. Discretionary authority must be noted 
explicitly in each case in which it is applied (for example, by use of 
an asterisk or footnote).
    (c) Critical dates. Each reporting market must report to the 
Commission, for each futures contract, the first notice date and the 
last trading date, and for each option contract, the expiration date in 
accordance with paragraph (d) of this section.
    (d) Form, manner and time of filing reports. Unless otherwise 
approved by the Commission or its designee, reporting markets must 
submit to the Commission the information specified in paragraphs (a), 
(b), and (c) of this section as follows:
    (1) Using the format, coding structure and electronic data 
transmission procedures approved in writing by the Commission or its 
designee; provided however, that the information must be made available 
to the Commission or its designee in hard copy upon request;
    (2) When each such form of the data is first available, but not 
later than 7:00 a.m. on the business day following the day to which the 
information pertains for the delta factor and settlement price and not 
later than 12:00 p.m. for the remainder of the information. Unless 
otherwise specified by the Commission or its designee, the stated time 
is U.S. eastern standard time for information concerning markets 
located in that time zone, and U.S. central time for information 
concerning all other markets; and
    (3) For information on reports to the Commission for swap or 
options on swap contracts, refer to part 20 of this chapter.
    (e) Publication of recorded information. (1) Reporting markets must 
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)(2)(iv) through (vi) of this section shall 
be made readily available in a format that presents the information 
together.
    (2) Reporting markets must make the information in paragraphs 
(b)(2) and (3) of this section readily available to the news media and 
the general public, and the information in paragraph (b)(4)(ii) 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. 
Information in paragraph (b)(4)(i) of this section must be made 
available in the registered entity's rulebook, which is publicly 
accessible on its Web site.

PART 38--DESIGNATED CONTRACT MARKETS

0
6. The authority citation for part 38 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j, 
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 (2010).


0
7. Designate existing Sec. Sec.  38.1 through 38.6 as subpart A under 
the following subpart heading:

Subpart A--General Provisions

* * * * *


Sec.  38.1  [Amended]

0
8. Amend Sec.  38.1 by removing the reference ``Parts 36 or 37 of this 
chapter'' and adding in its place the reference ``parts 37 or 49 of 
this chapter''.

0
9. Revise Sec.  38.2 to read as follows:


Sec.  38.2  Exempt provisions.

    A designated contract market, the designated contract market's 
operator and transactions traded on or through a designated contract 
market under section 5 of the Act shall comply with all applicable 
regulations under Title 17 of the Code of Federal Regulations, except 
for the requirements of Sec.  1.35(e) through (j), Sec.  1.39(b), Sec.  
1.44, Sec.  1.53, Sec.  1.54, Sec.  1.59(b) and (c), Sec.  1.62, Sec.  
1.63(a) and (b) and (d) through (f), Sec.  1.64, Sec.  1.69, part 8, 
Sec.  100.1, Sec.  155.2, and part 156.

0
10. Revise Sec.  38.3 to read as follows:


Sec.  38.3  Procedures for designation.

    (a) Application procedures. (1) A board of trade seeking 
designation as a contract market must file electronically, in a format 
and manner specified by the Secretary of the Commission, the Form DCM 
provided in appendix A of this part, with the Secretary of the 
Commission at its Washington, DC headquarters at [email protected] 
and the Division of Market Oversight at [email protected]. The 
Commission will review the application for designation as a contract 
market pursuant to the 180-day timeframe and procedures specified in 
section 6(a) of the Act. The Commission shall approve or deny the 
application or, if deemed appropriate, designate the applicant as a 
contract market subject to conditions.
    (2) The application must include information sufficient to 
demonstrate compliance with the core principles specified in section 
5(d) of the Act. Form DCM consists of instructions, general questions 
and a list of exhibits (documents, information and evidence) required 
by the Commission in order to determine whether an applicant is able to 
comply with the core principles. An application will not be considered 
to be materially complete unless the applicant has submitted, at a 
minimum, the exhibits required in Form DCM. If the application is not 
materially complete, the Commission shall notify the applicant that the 
application will not be deemed to have been submitted for purposes of 
starting the 180-day review period set forth in paragraph (a)(1) of 
this section.
    (3) The applicant must identify with particularity any information 
in the application that will be subject to a request for confidential 
treatment pursuant to Sec.  145.9 of this chapter.
    (4) Section 40.8 of this chapter sets forth those sections of the 
application that will be made publicly available, notwithstanding a 
request for confidential treatment pursuant to Sec.  145.9 of this 
chapter.
    (5) If any information contained in the application or in any 
exhibit is or becomes inaccurate for any reason, an amendment to the 
application or a submission filed under part 40 of this chapter must be 
filed promptly correcting such information.
    (b) Reinstatement of dormant designation. Before listing or 
relisting products for trading, a dormant designated contract market as 
defined in Sec.  40.1 of this chapter must reinstate its designation 
under the procedures of paragraphs (a)(1) and (2) of this section; 
provided, however, that an application for reinstatement may rely upon 
previously submitted materials that still pertain to, and accurately 
describe, current conditions.
    (c) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Market 
Oversight or such other employee or employees as the Director may 
designate from time to time, upon consultation with the General Counsel 
or the General Counsel's designee, authority to notify the applicant 
seeking designation under section 6(a) of the Act that the application 
is materially incomplete and the running of the 180-day period is 
stayed.
    (2) The Director may submit to the Commission for its consideration 
any matter that has been delegated in this paragraph.

[[Page 36698]]

    (3) Nothing in this paragraph prohibits the Commission, at its 
election, from exercising the authority delegated in paragraph (c)(1) 
of this section.
    (d) Request for transfer of designation. (1) Request for transfer 
of designation, listed contracts and open interest. A designated 
contract market that wants to request the transfer of its designation 
from its current legal entity to a new legal entity, as a result of a 
corporate reorganization or otherwise, must file a request with the 
Commission for approval to transfer the designation, listed contracts 
and positions comprising all associated open interest. Such request 
must be filed electronically, in a format and manner specified by the 
Secretary of the Commission, with the Secretary of the Commission at 
its Washington, DC headquarters at [email protected] and the 
Division of Market Oversight at [email protected].
    (2) Timing of submission. The request must be filed no later than 
three months prior to the anticipated corporate change; provided that 
the designated contract market may file a request with the Commission 
later than three months prior to the anticipated corporate change if 
the designated contract market does not know and reasonably could not 
have known of the anticipated change three months prior to the 
anticipated corporate change. In such event, the designated contract 
market shall be required to immediately file the request with the 
Commission as soon as it knows of such change, with an explanation as 
to the timing of the request.
    (3) Required information. The request shall include the following:
    (i) The underlying agreement that governs the corporate change;
    (ii) A narrative description of the corporate change, including the 
reason for the change and its impact on the designated contract market, 
including its governance and operations, and its impact on the rights 
and obligations of market participants holding the open interest 
positions;
    (iii) A discussion of the transferee's ability to comply with the 
Act, including the core principles applicable to designated contract 
markets, and the Commission's regulations thereunder;
    (iv) The governing documents of the transferee including, but not 
limited to, articles of incorporation and bylaws;
    (v) The transferee's rules marked to show changes from the current 
rules of the designated contract market;
    (vi) A list of contracts, agreements, transactions or swaps for 
which the designated contract market requests transfer of open 
interest;
    (vii) A representation by the transferee that it:
    (A) Will be the surviving legal entity and successor-in-interest to 
the transferor designated contract market and will retain and assume, 
without limitation, all the assets and liabilities of the transferor;
    (B) Will assume responsibility for complying with all applicable 
provisions of the Act and the Commission's regulations thereunder, 
including part 38 and Appendices thereto;
    (C) Will assume, maintain and enforce all rules implementing and 
complying with these core principles, including the adoption of the 
transferor's rulebook, as amended in the request, and that any such 
amendments will be submitted to the Commission pursuant to section 
5c(c) of the Act and part 40 of the Commission's regulations; and
    (D) Will comply with all self-regulatory responsibilities except if 
otherwise indicated in the request, and will maintain and enforce all 
self-regulatory programs.
    (viii) A representation by the transferee that upon the transfer:
    (A) All open interest in all contracts listed on the transferor 
will be transferred to and represent equivalent open interest in all 
such contracts listed on the transferee;
    (B) It will assume responsibility for and maintain compliance with 
the core principles for all contracts previously listed for trading 
through the transferor, whether by certification or approval; and
    (C) That none of the proposed rule changes will affect the rights 
and obligations of any market participant with open positions 
transferred to it and that the proposed rule changes do not modify the 
manner in which such contracts are settled or cleared.
    (ix) A representation by the transferee that market participants 
will be notified of all changes to the transferor's rulebook prior to 
the transfer and will be further notified of the concurrent transfer of 
the contract market designation, and the related transfer of all listed 
contracts and all associated open interest, to the transferee upon 
Commission approval and issuance of an order permitting this transfer.
    (4) Commission determination. The Commission will review a request 
as soon as practicable and such request will be approved or denied 
pursuant to a Commission order and based on the Commission's 
determination as to the transferee's ability to continue to operate the 
designated contract market in compliance with the Act and the 
Commission's regulations thereunder.
    (e) Request for withdrawal of application for designation. An 
applicant for designation may withdraw its application submitted 
pursuant to paragraphs (a)(1) and (2) of this section by filing such a 
request with the Commission. Such request must be filed electronically, 
in a format and manner specified by the Secretary of the Commission, 
with the Secretary of the Commission at its Washington, DC 
headquarters, at [email protected], and the Division of Market 
Oversight, at [email protected]. Withdrawal of an application for 
designation shall not affect any action taken or to be taken by the 
Commission based upon actions, activities or events occurring during 
the time that the application for designation was pending with the 
Commission.
    (f) Request for vacation of designation. A designated contract 
market may vacate its designation under section 7 of the Act by filing 
a request electronically, in a format and manner specified by the 
Secretary of the Commission, with the Secretary of the Commission at 
its Washington, DC headquarters at [email protected] and the 
Division of Market Oversight at [email protected]. Vacation of 
designation shall not affect any action taken or to be taken by the 
Commission based upon actions, activities or events occurring during 
the time that the facility was designated by the Commission.

0
11. In Sec.  38.4, revise paragraphs (a) and (b) to read as follows:


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

    (a) Request for Commission approval of rules and products. (1) An 
applicant for designation, or a designated contract market, may request 
that the Commission approve under section 5c(c) of the Act, any or all 
of its rules and contract terms and conditions, and subsequent 
amendments thereto, prior to their implementation or, notwithstanding 
the provisions of section 5c(c)(4) of the Act, at any time thereafter, 
under the procedures of Sec.  40.3 or Sec.  40.5 of this chapter, as 
applicable. A designated contract market may label a future, swap or 
options product in its rules as ``Listed for trading pursuant to 
Commission approval,'' if the future, swap or options product and its 
terms or conditions have been approved by the Commission, and it may 
label as ``Approved by the Commission'' only those rules that have been 
so approved.

[[Page 36699]]

    (2) Notwithstanding the timeline under Sec. Sec.  40.3(c) and 
40.5(c) of this chapter, the operating rules, and terms and conditions 
of futures, swaps and option products that have been submitted for 
Commission approval at the same time as an application for contract 
market designation or an application under Sec.  38.3(b) of this part 
to reinstate the designation of a dormant designated contract market, 
as defined in Sec.  40.1 of this chapter, or while one of the foregoing 
is pending, will be deemed approved by the Commission no earlier than 
when the facility is deemed to be designated or reinstated.
    (b) Self-certification of rules and products. Rules of a designated 
contract market and subsequent amendments thereto, including both 
operational rules and the terms or conditions of futures, swaps and 
option products listed for trading on the facility, not voluntarily 
submitted for prior Commission approval pursuant to paragraph (a) of 
this section, must be submitted to the Commission with a certification 
that the rule, rule amendment or futures, swap or options product 
complies with the Act or rules thereunder pursuant to the procedures of 
Sec.  40.6 of this chapter, as applicable. Provided, however, any rule 
or rule amendment that would, for a delivery month having open 
interest, materially change a term or condition of a swap or a contract 
for future delivery in an agricultural commodity enumerated in section 
1a(9) of the Act, or of an option on such contract or commodity, must 
be submitted to the Commission prior to its implementation for review 
and approval under Sec.  40.4 of this chapter.
* * * * *

0
12. Revise Sec.  38.5 to read as follows:


Sec.  38.5  Information relating to contract market compliance.

    (a) Requests for information. Upon request by the Commission, a 
designated contract market must file with the Commission information 
related to its business as a designated contract market, including 
information relating to data entry and trade details, in the form and 
manner and within the time specified by the Commission in its request.
    (b) Demonstration of compliance. Upon request by the Commission, a 
designated contract market must file with the Commission a written 
demonstration, containing supporting data, information and documents, 
in the form and manner and within the time specified by the Commission, 
that the designated contract market is in compliance with one or more 
core principles as specified in the request, or that is requested by 
the Commission to show that the designated contract market satisfies 
its obligations under the Act.
    (c) Equity interest transfers. (1) Equity interest transfer 
notification. A designated contract market shall file with the 
Commission a notification of each transaction that the designated 
contract market enters into involving the transfer of ten percent or 
more of the equity interest in the designated contract market.
    (2) Timing of Notification. The equity transfer notice described in 
paragraph (1) shall be filed electronically with the Secretary of the 
Commission at its Washington, DC headquarters at [email protected] 
and the Division of Market Oversight at [email protected], at the 
earliest possible time but in no event later than the open of business 
ten business days following the date upon which the designated contract 
market enters into a firm obligation to transfer the equity interest.
    (3) Rule filing. Notwithstanding the foregoing, any aspect of an 
equity interest transfer described in paragraph (c)(1) of this section 
that necessitates the filing of a rule as defined in part 40 of this 
chapter shall comply with the requirements of 5c(c) of the Act and part 
40 of this chapter, and all other applicable Commission regulations.
    (d) Delegation of authority. The Commission hereby delegates, until 
it orders otherwise, the authority set forth in paragraph (b) of this 
section to the Director of the Division of Market Oversight or such 
other employee or employees as the Director may designate from time to 
time. The Director 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.

0
13. Add Sec.  38.7 to subpart A to read as follows:


Sec.  38.7  Prohibited use of data collected for regulatory purposes.

    A designated contract market may not use for business or marketing 
purposes any proprietary data or personal information it collects or 
receives, from or on behalf of any person, for the purpose of 
fulfilling its regulatory obligations; provided however, that a 
designated contract market may use such data or information for 
business or marketing purposes if the person from whom it collects or 
receives such data or information clearly consents to the designated 
contract market's use of such data or information in such manner. A 
designated contract market, where necessary, for regulatory purposes, 
may share such data or information with one or more designated contract 
markets or swap execution facilities registered with the Commission. A 
designated contract market may not condition access to its trading 
facility on a market participant's consent to the use of proprietary 
data or personal information for business or marketing purposes.

0
14. Add Sec.  38.8 to subpart A to read as follows:


Sec.  38.8  Listing of swaps on a designated contract market.

    (a) A designated contract market that lists for the first time a 
swap contract for trading on its contract market must, either prior to 
or at the time of such listing, file with the Commission a written 
demonstration detailing how the designated contract market is 
addressing its self-regulatory obligations and is fulfilling its 
statutory and regulatory obligations with respect to swap transactions.
    (b)(1) Prior to listing swaps for trading on or through a 
designated contract market, each designated contract market must obtain 
from the Commission a unique, alphanumeric code assigned to the 
designated contract market by the Commission for the purpose of 
identifying the designated contract market with respect to unique swap 
identifier creation. (2) Each designated contract market must generate 
and assign a unique swap identifier at, or as soon as technologically 
practicable following, the time of execution of the swap, in a manner 
consistent with the requirements of part 45.

0
15. Add Sec.  38.9 to subpart A to read as follows:


Sec.  38.9  Boards of trade operating both a designated contract market 
and a swap execution facility.

    (a) A board of trade that operates a designated contract market and 
that intends to also operate a swap execution facility must separately 
register, pursuant to the swap execution facility registration 
requirements set forth in part 37 of this chapter, and on an ongoing 
basis, comply with the core principles under section 5h of the Act, and 
the swap execution facility rules under part 37 of this chapter.
    (b) A board of trade that operates both a designated contract 
market and a swap execution facility, and that uses the same electronic 
trade execution system for executing and trading swaps that it uses in 
its capacity as a designated contract market, must clearly identify to 
market participants for each swap

[[Page 36700]]

whether the execution or trading of such swap is taking place on the 
designated contract market or on the swap execution facility.

0
16. Add Sec.  38.10 to subpart A to read as follows:


Sec.  38.10  Reporting of swaps traded on a designated contract market.

    With respect to swaps traded on and/or pursuant to the rules of a 
designated contract market, each designated contract market must 
maintain and report specified swap data as provided under parts 43 and 
45 of this chapter.
0
17. Add subparts B through X to read as follows:
Subpart B--Designation as Contract Market
Sec.
38.100 Core Principle 1.
Subpart C--Compliance With Rules
38.150 Core Principle 2.
38.151 Access requirements.
38.152 Abusive trading practices prohibited.
38.153 Capacity to detect and investigate rule violations.
38.154 Regulatory services provided by a third party.
38.155 Compliance staff and resources.
38.156 Automated trade surveillance system.
38.157 Real-time market monitoring.
38.158 Investigations and investigation reports.
38.159 Ability to obtain information.
38.160 Additional sources for compliance.
Subpart D--Contracts Not Readily Subject to Manipulation
38.200 Core Principle 3.
38.201 Additional sources for compliance.
Subpart E--Prevention of Market Disruption
38.250 Core Principle 4.
38.251 General requirements.
38.252 Additional requirements for physical-delivery contracts.
38.253 Additional requirements for cash-settled contracts.
38.254 Ability to obtain information.
38.255 Risk controls for trading.
38.256 Trade reconstruction.
38.257 Regulatory service provider.
38.258 Additional sources for compliance.
Subpart F--Position Limitations or Accountability
38.300 Core Principle 5.
38.301 Position limitations and accountability.
Subpart G--Emergency Authority
38.350 Core Principle 6.
38. 351 Additional sources for compliance.
Subpart H--Availability of General Information
38.400 Core Principle 7.
38.401 General requirements.
Subpart I--Daily Publication of Trading Information
38.450 Core Principle 8.
38.451 Reporting of trade information.
Subpart J--Execution of Transactions
38.500 Core Principle 9.
Subpart K--Trade Information
38.550 Core Principle 10.
38.551 Audit trail required.
38.552 Elements of an acceptable audit trail program.
38.553 Enforcement of audit trail requirements.
Subpart L--Financial Integrity of Transactions
38.600 Core Principle 11.
38.601 Mandatory clearing.
38.602 General financial integrity.
38.603 Protection of customer funds.
38.604 Financial surveillance.
38.605 Requirements for financial surveillance program.
38.606 Financial regulatory services provided by a third party.
38.607 Direct access.
Subpart M--Protection of Markets and Market Participants
38.650 Core Principle 12.
38.651 Protection of Markets and Market Participants.
Subpart N--Disciplinary Procedures
38.700 Core Principle 13.
38.701 Enforcement staff.
38.702 Disciplinary panels.
38.703 Notice of charges.
38.704 Right to representation.
38.705 Answer to charges.
38.706 Denial of charges and right to hearing.
38.707 Hearings.
38.708 Decisions.
38.709 Final decisions.
38.710 Disciplinary sanctions.
38.711 Warning letters.
38.712 Additional sources for compliance.
Subpart O--Dispute Resolution
38.750 Core Principle 14.
38.751 Additional sources for compliance.
Subpart P--Governance Fitness Standards
38.800 Core Principle 15.
38.801 Additional sources for compliance.
Subpart Q--Conflicts of Interest
38.850 Core Principle 16.
38.851 Additional sources for compliance.
Subpart R--Composition of Governing Boards of Contract Markets
38.900 Core Principle 17.
Subpart S--Recordkeeping
38.950 Core Principle 18.
38.951 Additional sources for compliance.
Subpart T--Antitrust Considerations
38.1000 Core Principle 19.
38.1001 Additional sources for compliance.
Subpart U--System Safeguards
38.1050 Core Principle 20.
38.1051 General requirements.
Subpart V--Financial Resources
38.1100 Core Principle 21.
38.1101 General requirements.
Subpart W--Diversity of Boards of Directors
38.1150 Core Principle 22.
Subpart X--Securities and Exchange Commission
38.1200 Core Principle 23.
38.1201 Additional sources for compliance.

Subpart B--Designation as Contract Market


Sec.  38.100  Core Principle 1.

    (a) In general. To be designated, and maintain a designation, as a 
contract market, a board of trade shall comply with:
    (1) Any core principle described in section 5(d) of the Act, and
    (2) Any requirement that the Commission may impose by rule or 
regulation pursuant to section 8a(5) of the Act.
    (b) Reasonable discretion of the contract market. Unless otherwise 
determined by the Commission by rule or regulation, a board of trade 
described in paragraph (a) of this section shall have reasonable 
discretion in establishing the manner in which the board of trade 
complies with the core principles described in this subsection.

Subpart C--Compliance With Rules


Sec.  38.150  Core Principle 2.

    (a) In general. The board of trade shall establish, monitor, and 
enforce compliance with the rules of the contract market, including:
    (1) Access requirements;
    (2) The terms and conditions of any contracts to be traded on the 
contract market; and
    (3) Rules prohibiting abusive trade practices on the contract 
market.
    (b) Capacity of contract market. The board of trade shall have the 
capacity to detect, investigate, and apply appropriate sanctions to any 
person that violates any rule of the contract market.
    (c) Requirement of rules. The rules of the contract market shall 
provide the board of trade with the ability and authority to obtain any 
necessary information to perform any function described in this 
section, including the capacity to carry out such international 
information-sharing agreements, as the Commission may require.


Sec.  38.151  Access requirements.

    (a) Jurisdiction. Prior to granting any member or market 
participant access to its markets, a designated contract market must 
require that the member or market participant consent to its 
jurisdiction.

[[Page 36701]]

    (b) Impartial access by members, persons with trading privileges 
and independent software vendors. A designated contract market must 
provide its members, persons with trading privileges, and independent 
software vendors with impartial access to its markets and services, 
including:
    (1) Access criteria that are impartial, transparent, and applied in 
a non-discriminatory manner; and
    (2) Comparable fee structures for members, persons with trading 
privileges and independent software vendors receiving equal access to, 
or services from, the designated contract market.
    (c) Limitations on access. A designated contract market must 
establish and impartially enforce rules governing denials, suspensions, 
and revocations of a member's and a person with trading privileges' 
access privileges to the designated contract market, including when 
such actions are part of a disciplinary or emergency action by the 
designated contract market.


Sec.  38.152  Abusive trading practices prohibited.

    A designated contract market must prohibit abusive trading 
practices on its markets by members and market participants. Designated 
contract markets that permit intermediation must prohibit customer-
related abuses including, but not limited to, trading ahead of customer 
orders, trading against customer orders, accommodation trading, and 
improper cross trading. Specific trading practices that must be 
prohibited by all designated contract markets include front-running, 
wash trading, pre-arranged trading (except for certain transactions 
specifically permitted under part 38 of this chapter), fraudulent 
trading, money passes, and any other trading practices that a 
designated contract market deems to be abusive. In addition, a 
designated contract market also must prohibit any other manipulative or 
disruptive trading practices prohibited by the Act or by the Commission 
pursuant to Commission regulation.


Sec.  38.153  Capacity to detect and investigate rule violations.

    A designated contract market must have arrangements and resources 
for effective enforcement of its rules. Such arrangements must include 
the authority to collect information and documents on both a routine 
and non-routine basis, including the authority to examine books and 
records kept by the designated contract market's members and by persons 
under investigation. A designated contract market's arrangements and 
resources must also facilitate the direct supervision of the market and 
the analysis of data collected to determine whether a rule violation 
occurred.


Sec.  38.154  Regulatory services provided by a third party.

    (a) Use of third-party provider permitted. A designated contract 
market may choose to utilize a registered futures association or 
another registered entity, as such terms are defined under the Act, 
(collectively, ``regulatory service provider''), for the provision of 
services to assist in complying with the core principles, as approved 
by the Commission. Any designated contract market that chooses to 
utilize a regulatory service provider must ensure that its regulatory 
service provider has the capacity and resources necessary to provide 
timely and effective regulatory services, including adequate staff and 
automated surveillance systems. A designated contract market will at 
all times remain responsible for the performance of any regulatory 
services received, for compliance with the designated contract market's 
obligations under the Act and Commission regulations, and for the 
regulatory service provider's performance on its behalf.
    (b) Duty to supervise third party. A designated contract market 
that elects to utilize a regulatory service provider must retain 
sufficient compliance staff to supervise the quality and effectiveness 
of the services provided on its behalf. Compliance staff of the 
designated contract market must hold regular meetings with the 
regulatory service provider to discuss ongoing investigations, trading 
patterns, market participants, and any other matters of regulatory 
concern. A designated contract market also must conduct periodic 
reviews of the adequacy and effectiveness of services provided on its 
behalf. Such reviews must be documented carefully and made available to 
the Commission upon request.
    (c) Regulatory decisions required from the designated contract 
market. A designated contract market that elects to utilize a 
regulatory service provider must retain exclusive authority in 
decisions involving the cancellation of trades, the issuance of 
disciplinary charges against members or market participants, and the 
denials of access to the trading platform for disciplinary reasons. A 
designated contract market may also retain exclusive authority in other 
areas of its choosing. A designated contract market must document any 
instances where its actions differ from those recommended by its 
regulatory service provider, including the reasons for the course of 
action recommended by the regulatory service provider and the reasons 
why the designated contract market chose a different course of action.


Sec.  38.155  Compliance staff and resources.

    (a) Sufficient compliance staff. A designated contract market must 
establish and maintain sufficient compliance department resources and 
staff to ensure that it can conduct effective audit trail reviews, 
trade practice surveillance, market surveillance, and real-time market 
monitoring. The designated contract market's compliance staff also must 
be sufficient to address unusual market or trading events as they 
arise, and to conduct and complete investigations in a timely manner, 
as set forth in Sec.  38.158(b) of this part.
    (b) Ongoing monitoring of compliance staff resources. A designated 
contract market must monitor the size and workload of its compliance 
staff annually, and ensure that its compliance resources and staff are 
at appropriate levels. In determining the appropriate level of 
compliance resources and staff, the designated contract market should 
consider trading volume increases, the number of new products or 
contracts to be listed for trading, any new responsibilities to be 
assigned to compliance staff, the results of any internal review 
demonstrating that work is not completed in an effective or timely 
manner, and any other factors suggesting the need for increased 
resources and staff.


Sec.  38.156  Automated trade surveillance system.

    A designated contract market must maintain an automated trade 
surveillance system capable of detecting and investigating potential 
trade practice violations. The automated system must load and process 
daily orders and trades no later than 24 hours after the completion of 
the trading day. In addition, the automated trade surveillance system 
must have the capability to detect and flag specific trade execution 
patterns and trade anomalies; compute, retain, and compare trading 
statistics; compute trade gains, losses, and futures-equivalent 
positions; reconstruct the sequence of market activity; perform market 
analyses; and support system users to perform in-depth analyses and ad 
hoc queries of trade-related data.

[[Page 36702]]

Sec.  38.157  Real-time market monitoring.

    A designated contract market must conduct real-time market 
monitoring of all trading activity on its electronic trading 
platform(s) to identify disorderly trading and any market or system 
anomalies. A designated contract market must have the authority to 
adjust trade prices or cancel trades when necessary to mitigate market 
disrupting events caused by malfunctions in its electronic trading 
platform(s) or errors in orders submitted by members and market 
participants. Any trade price adjustments or trade cancellations must 
be transparent to the market and subject to standards that are clear, 
fair, and publicly available.


Sec.  38.158  Investigations and investigation reports.

    (a) Procedures. A designated contract market must establish and 
maintain procedures that require its compliance staff to conduct 
investigations of possible rule violations. An investigation must be 
commenced upon the receipt of a request from Commission staff or upon 
the discovery or receipt of information by the designated contract 
market that indicates a reasonable basis for finding that a violation 
may have occurred or will occur.
    (b) Timeliness. Each compliance staff investigation must be 
completed in a timely manner. Absent mitigating factors, a timely 
manner is no later than 12 months after the date that an investigation 
is opened. Mitigating factors that may reasonably justify an 
investigation taking longer than 12 months to complete include the 
complexity of the investigation, the number of firms or individuals 
involved as potential wrongdoers, the number of potential violations to 
be investigated, and the volume of documents and data to be examined 
and analyzed by compliance staff.
    (c) Investigation reports when a reasonable basis exists for 
finding a violation. Compliance staff must submit a written 
investigation report for disciplinary action in every instance in which 
compliance staff determines from surveillance or from an investigation 
that a reasonable basis exists for finding a rule violation. The 
investigation report must include the reason the investigation was 
initiated; a summary of the complaint, if any; the relevant facts; 
compliance staff's analysis and conclusions; and a recommendation as to 
whether disciplinary action should be pursued.
    (d) Investigation reports when no reasonable basis exists for 
finding a violation. If after conducting an investigation, compliance 
staff determines that no reasonable basis exists for finding a 
violation, it must prepare a written report including the reason(s) the 
investigation was initiated; a summary of the complaint, if any; the 
relevant facts; and compliance staff's analysis and conclusions.
    (e) Warning letters. No more than one warning letter may be issued 
to the same person or entity found to have committed the same rule 
violation within a rolling twelve month period.


Sec.  38.159  Ability to obtain information.

    A designated contract market must have the ability and authority to 
obtain any necessary information to perform any function required under 
this subpart C of the Commission's regulations, including the capacity 
to carry out international information-sharing agreements as the 
Commission may require. Appropriate information-sharing agreements can 
be established with other designated contract markets and swap 
execution facilities, or the Commission can act in conjunction with the 
designated contract market to carry out such information sharing.


Sec.  38.160  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance in appendix B of this part to demonstrate to the Commission 
compliance with the requirements of Sec.  38.150 of this part.

Subpart D--Contracts Not Readily Subject to Manipulation


Sec.  38.200  Core Principle 3.

    The board of trade shall list on the contract market only contracts 
that are not readily susceptible to manipulation.


Sec.  38.201  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance in appendix C of this part to demonstrate to the Commission 
compliance with the requirements of Sec.  38.200 of this part.

Subpart E--Prevention of Market Disruption


Sec.  38.250  Core Principle 4.

    The board of trade shall have the capacity and responsibility to 
prevent manipulation, price distortion, and disruptions of the delivery 
or cash-settlement process through market surveillance, compliance, and 
enforcement practices and procedures, including:
    (a) Methods for conducting real-time monitoring of trading; and
    (b) Comprehensive and accurate trade reconstructions.


Sec.  38.251  General requirements.

    A designated contract market must:
    (a) Collect and evaluate data on individual traders' market 
activity on an ongoing basis in order to detect and prevent 
manipulation, price distortions and, where possible, disruptions of the 
physical-delivery or cash-settlement process;
    (b) Monitor and evaluate general market data in order to detect and 
prevent manipulative activity that would result in the failure of the 
market price to reflect the normal forces of supply and demand;
    (c) Demonstrate an effective program for conducting real-time 
monitoring of market conditions, price movements and volumes, in order 
to detect abnormalities and, when necessary, make a good-faith effort 
to resolve conditions that are, or threaten to be, disruptive to the 
market; and
    (d) Demonstrate the ability to comprehensively and accurately 
reconstruct daily trading activity for the purposes of detecting 
trading abuses and violations of exchange-set position limits, 
including those that may have occurred intraday.


Sec.  38.252  Additional requirements for physical-delivery contracts.

    For physical-delivery contracts, the designated contract market 
must demonstrate that it:
    (a) Monitors a contract's terms and conditions as they relate to 
the underlying commodity market and to the convergence between the 
contract price and the price of the underlying commodity and show a 
good-faith effort to resolve conditions that are interfering with 
convergence; and
    (b) Monitors the supply of the commodity and its adequacy to 
satisfy the delivery requirements and make a good-faith effort to 
resolve conditions that threaten the adequacy of supplies or the 
delivery process.


Sec.  38.253  Additional requirements for cash-settled contracts.

    (a) For cash-settled contracts, the designated contract market must 
demonstrate that it:
    (1) Monitors the pricing of the index to which the contract will be 
settled; and
    (2) Monitors the continued appropriateness of the methodology for 
deriving the index and makes a good-faith effort to resolve conditions, 
including amending contract terms where necessary, where there is a 
threat of market manipulation, disruptions, or distortions.
    (b) If a contract listed on a designated contract market is settled 
by reference to

[[Page 36703]]

the price of a contract or commodity traded in another venue, including 
a price or index derived from prices on another designated contract 
market, the designated contract market must have rules or agreements 
that allow the designated contract market access to information on the 
activities of its traders in the reference market.


Sec.  38.254  Ability to obtain information.

    (a) The designated contract market must have rules that require 
traders in its contracts to keep records of their trading, including 
records of their activity in the underlying commodity and related 
derivatives markets, and make such records available, upon request, to 
the designated contract market.
    (b) A designated contract market with participants trading through 
intermediaries must either use a comprehensive large-trader reporting 
system (LTRS) or be able to demonstrate that it can obtain position 
data from other sources in order to conduct an effective surveillance 
program.


Sec.  38.255  Risk controls for trading.

    The designated contract market must establish and maintain risk 
control mechanisms to prevent and reduce the potential risk of price 
distortions and market disruptions, including, but not limited to, 
market restrictions that pause or halt trading in market conditions 
prescribed by the designated contract market.


Sec.  38.256  Trade reconstruction.

    The designated contract market must have the ability to 
comprehensively and accurately reconstruct all trading on its trading 
facility. All audit-trail data and reconstructions must be made 
available to the Commission in a form, manner, and time that is 
acceptable to the Commission.


Sec.  38.257  Regulatory service provider.

    A designated contract market must comply with the regulations in 
this subpart through a dedicated regulatory department, or by 
delegation of that function to a registered futures association or a 
registered entity (collectively, ``regulatory service provider''), as 
such terms are defined in the Act and over which the designated 
contract market has supervisory authority.


Sec.  38.258  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and acceptable practices in appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.250 of this part.

Subpart F--Position Limitations or Accountability


Sec.  38.300  Core Principle 5.

    To reduce the potential threat of market manipulation or congestion 
(especially during trading in the delivery month), the board of trade 
shall adopt for each contract of the board of trade, as is necessary 
and appropriate, position limitations or position accountability for 
speculators. For any contract that is subject to a position limitation 
established by the Commission, pursuant to section 4a(a), the board of 
trade shall set the position limitation of the board of trade at a 
level not higher than the position limitation established by the 
Commission.


Sec.  38.301  Position limitations and accountability.

    A designated contract market must meet the requirements of parts 
150 and 151 of this chapter, as applicable.

Subpart G--Emergency Authority


Sec.  38.350  Core Principle 6.

    The board of trade, in consultation or cooperation with the 
Commission, shall adopt rules to provide for the exercise of emergency 
authority, as is necessary and appropriate, including the authority:
    (a) To liquidate or transfer open positions in any contract;
    (b) To suspend or curtail trading in any contract; and
    (c) To require market participants in any contract to meet special 
margin requirements.


Sec.  38.351  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and/or acceptable practices in appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.350.

Subpart H--Availability of General Information


Sec.  38.400  Core Principle 7.

    The board of trade shall make available to market authorities, 
market participants, and the public accurate information concerning:
    (a) The terms and conditions of the contracts of the contract 
market; and
    (b)(1) The rules, regulations and mechanisms for executing 
transactions on or through the facilities of the contract market, and
    (2) The rules and specifications describing the operation of the 
contract market's:
    (i) Electronic matching platform, or
    (ii) Trade execution facility.


Sec.  38.401  General requirements.

    (a) General. (1) A designated contract market must have procedures, 
arrangements and resources for disclosing to the Commission, market 
participants and the public accurate information pertaining to:
    (i) Contract terms and conditions;
    (ii) Rules and regulations pertaining to the trading mechanisms; 
and
    (iii) Rules and specifications pertaining to operation of the 
electronic matching platform or trade execution facility.
    (2) Through the procedures, arrangements and resources required in 
paragraph (a) of this section, the designated contract market must 
ensure public dissemination of information pertaining to new product 
listings, new rules, rule amendments or other changes to previously-
disclosed information, in accordance with the timeline provided in 
paragraph (c) of this section.
    (3) A designated contract market shall meet the requirements of 
this paragraph (a), by placing the information described in this 
paragraph (a) on the designated contract market's Web site within the 
time prescribed in paragraph (c) of this section.
    (b) Accuracy requirement. With respect to any communication with 
the Commission, and any information required to be transmitted or made 
available to market participants and the public, including on its Web 
site or otherwise, a designated contract market must provide 
information that it believes, to the best of its knowledge, is accurate 
and complete, and must not omit material information.
    (c) Notice of regulatory submissions. (1) A designated contract 
market, in making available on its Web site information pertaining to 
new product listings, new rules, rule amendments or other changes to 
previously-disclosed information, must place such information and 
submissions on its Web site concurrent with the filing of such 
information or submissions with the Secretary of the Commission.
    (2) To the extent that a designated contract market requests 
confidential treatment of any information filed with the Secretary of 
the Commission, the designated contract market must post on its Web 
site the public version of such filing or submission.
    (d) Rulebook. A designated contract market must ensure that the 
rulebook posted on its Web site is accurate,

[[Page 36704]]

complete, current and readily accessible to the public. A designated 
contract market must publish or post in its rulebook all new or amended 
rules, both substantive and non-substantive, on the date of 
implementation of such new or amended rule, on the date a new product 
is listed, or on the date any changes to previously-disclosed 
information take effect.

Subpart I--Daily Publication of Trading Information


Sec.  38.450  Core Principle 8.

    The board of trade shall make public daily information on 
settlement prices, volume, open interest, and opening and closing 
ranges for actively traded contracts on the contract market.


Sec.  38.451  Reporting of trade information.

    A designated contract market must meet the reporting requirements 
set forth in part 16 of this chapter.

Subpart J--Execution of Transactions


Sec.  38.500  Core Principle 9.

    The board of trade shall provide a competitive, open, and efficient 
market and mechanism for executing transactions that protects the price 
discovery process of trading in the centralized market of the board of 
trade. The rules of the board of trade may authorize, for bona fide 
business purposes:
    (a) Transfer trades or office trades;
    (b) An exchange of:
    (1) Futures in connection with a cash commodity transaction;
    (2) Futures for cash commodities; or
    (3) Futures for swaps; or
    (c) A futures commission merchant, acting as principal or agent, to 
enter into or confirm the execution of a contract for the purchase or 
sale of a commodity for future delivery if the contract is reported, 
recorded, or cleared in accordance with the rules of the contract 
market or a derivatives clearing organization.

Subpart K--Trade Information


Sec.  38.550  Core Principle 10.

    The board of trade shall maintain rules and procedures to provide 
for the recording and safe storage of all identifying trade information 
in a manner that enables the contract market to use the information:
    (a) To assist in the prevention of customer and market abuses; and
    (b) To provide evidence of any violations of the rules of the 
contract market.


Sec.  38.551  Audit trail required.

    A designated contract market must capture and retain all audit 
trail data necessary to detect, investigate, and prevent customer and 
market abuses. Such data must be sufficient to reconstruct all 
transactions within a reasonable period of time and to provide evidence 
of any violations of the rules of the designated contract market. An 
acceptable audit trail must also permit the designated contract market 
to track a customer order from the time of receipt through fill, 
allocation, or other disposition, and must include both order and trade 
data.


Sec.  38.552  Elements of an acceptable audit trail program.

    (a) Original source documents. A designated contract market's audit 
trail must include original source documents. Original source documents 
include unalterable, sequentially identified records on which trade 
execution information is originally recorded, whether recorded manually 
or electronically. Records for customer orders (whether filled, 
unfilled, or cancelled, each of which shall be retained or 
electronically captured) must reflect the terms of the order, an 
account identifier that relates back to the account(s) owner(s), and 
the time of order entry. For open-outcry trades, the time of report of 
execution of the order shall also be captured.
    (b) Transaction history database. A designated contract market's 
audit trail program must include an electronic transaction history 
database. An adequate transaction history database includes a history 
of all trades executed via open outcry or via entry into an electronic 
trading system, and all orders entered into an electronic trading 
system, including all order modifications and cancellations. An 
adequate transaction history database also includes:
    (1) All data that are input into the trade entry or matching system 
for the transaction to match and clear;
    (2) The customer type indicator code;
    (3) Timing and sequencing data adequate to reconstruct trading; and
    (4) Identification of each account to which fills are allocated.
    (c) Electronic analysis capability. A designated contract market's 
audit trail program must include electronic analysis capability with 
respect to all audit trail data in the transaction history database. 
Such electronic analysis capability must ensure that the designated 
contract market has the ability to reconstruct trading and identify 
possible trading violations with respect to both customer and market 
abuse.
    (d) Safe storage capability. A designated contract market's audit 
trail program must include the capability to safely store all audit 
trail data retained in its transaction history database. Such safe 
storage capability must include the capability to store all data in the 
database in a manner that protects it from unauthorized alteration, as 
well as from accidental erasure or other loss. Data must be retained in 
accordance with the recordkeeping requirements of Core Principle 18 and 
the associated regulations in subpart S of this part.


Sec.  38.553  Enforcement of audit trail requirements.

    (a) Annual audit trail and recordkeeping reviews. A designated 
contract market must enforce its audit trail and recordkeeping 
requirements through at least annual reviews of all members and persons 
and firms subject to designated contract market recordkeeping rules to 
verify their compliance with the contract market's audit trail and 
recordkeeping requirements. Such reviews must include, but are not 
limited to, the following:
    (1) For electronic trading, audit trail and recordkeeping reviews 
must include reviews of randomly selected samples of front-end audit 
trail data for order routing systems; a review of the process by which 
user identifications are assigned and user identification records are 
maintained; a review of usage patterns associated with user 
identifications to monitor for violations of user identification rules; 
and reviews of account numbers and customer type indicator codes in 
trade records to test for accuracy and improper use.
    (2) For open outcry trading, audit trail and recordkeeping reviews 
must include reviews of members' and market participants' compliance 
with the designated contract market's trade timing, order ticket, and 
trading card requirements.
    (b) Enforcement program required. A designated contract market must 
establish a program for effective enforcement of its audit trail and 
recordkeeping requirements for both electronic and open-outcry trading, 
as applicable. An effective program must identify members and persons 
and firms subject to designated contract market recordkeeping rules 
that have failed to maintain high levels of compliance with such 
requirements, and levy meaningful sanctions when deficiencies are 
found. Sanctions must be sufficient to deter recidivist behavior. No 
more than one warning letter may be issued to the

[[Page 36705]]

same person or entity found to have committed the same rule violation 
within a rolling twelve month period.

Subpart L--Financial Integrity of Transactions


Sec.  38.600  Core Principle 11.

    The board of trade shall establish and enforce:
    (a) Rules and procedures for ensuring the financial integrity of 
transactions entered into on or through the facilities of the contract 
market (including the clearance and settlement of the transactions with 
a derivatives clearing organization); and
    (b) Rules to ensure:
    (1) The financial integrity of any:
    (i) Futures commission merchant, and
    (ii) Introducing broker; and
    (2) The protection of customer funds.


Sec.  38.601  Mandatory clearing.

    (a) Transactions executed on or through the designated contract 
market must be cleared through a Commission-registered derivatives 
clearing organization, in accordance with the provisions of part 39 of 
this chapter. Notwithstanding the foregoing, transactions in security 
futures products executed on or through the designated contract market 
may alternatively be cleared through a clearing agency, registered 
pursuant to section 17A of the Securities Exchange Act of 1934.
    (b) [Reserved]


Sec.  38.602  General financial integrity.

    A designated contract market must provide for the financial 
integrity of its transactions by establishing and maintaining 
appropriate minimum financial standards for its members and non-
intermediated market participants.


Sec.  38.603  Protection of customer funds.

    A designated contract market must have rules concerning the 
protection of customer funds. These rules shall address appropriate 
minimum financial standards for intermediaries, the segregation of 
customer and proprietary funds, the custody of customer funds, the 
investment standards for customer funds, intermediary default 
procedures and related recordkeeping. A designated contract market must 
review the default rules and procedures of the derivatives clearing 
organization that clears for such designated contract market to wind 
down operations, transfer customers, or otherwise protect customers in 
the event of a default of a clearing member or the derivatives clearing 
organization.


Sec.  38.604  Financial surveillance.

    A designated contract market must monitor members' compliance with 
the designated contract market's minimum financial standards and, 
therefore, must routinely receive and promptly review financial and 
related information from its members, as well as continuously monitor 
the positions of members and their customers. A designated contract 
market must have rules that prescribe minimum capital requirements for 
member futures commission merchants and introducing brokers. A 
designated contract market must:
    (a) Continually survey the obligations of each futures commission 
merchant created by the positions of its customers;
    (b) As appropriate, compare those obligations to the financial 
resources of the futures commission merchant; and
    (c) Take appropriate steps to use this information to protect 
customer funds.


Sec.  38.605  Requirements for financial surveillance program.

    A designated contract market's financial surveillance program for 
futures commission merchants, retail foreign exchange dealers, and 
introducing brokers must comply with the requirements of Sec.  1.52 of 
this chapter to assess the compliance of such entities with applicable 
contract market rules and Commission regulations.


Sec.  38.606  Financial regulatory services provided by a third party.

    A designated contract market may comply with the requirements of 
Sec.  38.604 (Financial Surveillance) and Sec.  38.605 (Requirements 
for Financial Surveillance Program) of this part through the regulatory 
services of a registered futures association or a registered entity 
(collectively, ``regulatory service provider''), as such terms are 
defined under the Act. A designated contract market must ensure that 
its regulatory service provider has the capacity and resources 
necessary to provide timely and effective regulatory services, 
including adequate staff and appropriate surveillance systems. A 
designated contract market will at all times remain responsible for 
compliance with its obligations under the Act and Commission 
regulations, and for the regulatory service provider's performance on 
its behalf. Regulatory services must be provided under a written 
agreement with a regulatory services provider that shall specifically 
document the services to be performed as well as the capacity and 
resources of the regulatory service provider with respect to the 
services to be performed.


Sec.  38.607  Direct access.

    A designated contract market that permits direct electronic access 
by customers (i.e., allowing customers of futures commission merchants 
to enter orders directly into a designated contract market's trade 
matching system for execution) must have in place effective systems and 
controls reasonably designed to facilitate the FCM's management of 
financial risk, such as automated pre-trade controls that enable member 
futures commission merchants to implement appropriate financial risk 
limits. A designated contract market must implement and enforce rules 
requiring the member futures commission merchants to use the provided 
systems and controls.

Subpart M--Protection of Markets and Market Participants


Sec.  38.650  Core Principle 12.

    The board of trade shall establish and enforce rules:
    (a) To protect markets and market participants from abusive 
practices committed by any party, including abusive practices committed 
by a party acting as an agent for a participant; and
    (b) To promote fair and equitable trading on the contract market.


Sec.  38.651  Protection of markets and market participants.

    A designated contract market must have and enforce rules that are 
designed to promote fair and equitable trading and to protect the 
market and market participants from abusive practices including 
fraudulent, noncompetitive or unfair actions, committed by any party. 
The designated contract market must have methods and resources 
appropriate to the nature of the trading system and the structure of 
the market to detect trade practice and market abuses and to discipline 
such behavior, in accordance with Core Principles 2 and 4, and the 
associated regulations in subparts C and E of this part, respectively. 
The designated contract market also must provide a competitive, open 
and efficient market and mechanism for executing transactions in 
accordance with Core Principle 9 and the associated regulations under 
subpart J of this part.

Subpart N--Disciplinary Procedures


Sec.  38.700  Core Principle 13.

    The board of trade shall establish and enforce disciplinary 
procedures that authorize the board of trade to discipline, suspend, or 
expel members or market participants that violate the rules of the 
board of trade, or similar methods for performing the same functions, 
including delegation of the functions to third parties.

[[Page 36706]]

Sec.  38.701  Enforcement staff.

    A designated contract market must establish and maintain sufficient 
enforcement staff and resources to effectively and promptly prosecute 
possible rule violations within the disciplinary jurisdiction of the 
contract market. A designated contract market must also monitor the 
size and workload of its enforcement staff annually, and ensure that 
its enforcement resources and staff are at appropriate levels. The 
enforcement staff may not include either members of the designated 
contract market or persons whose interests conflict with their 
enforcement duties. A member of the enforcement staff may not operate 
under the direction or control of any person or persons with trading 
privileges at the contract market. A designated contract market's 
enforcement staff may operate as part of the designated contract 
market's compliance department.


Sec.  38.702  Disciplinary panels.

    A designated contract market must establish one or more 
disciplinary panels that are authorized to fulfill their obligations 
under the rules of this subpart. Disciplinary panels must meet the 
composition requirements of part 40 of this chapter, and must not 
include any members of the designated contract market's compliance 
staff or any person involved in adjudicating any other stage of the 
same proceeding.


Sec.  38.703  Notice of charges.

    If compliance staff authorized by a designated contract market or a 
designated contract market disciplinary panel determines that a 
reasonable basis exists for finding a violation and that adjudication 
is warranted, it must direct that the person or entity alleged to have 
committed the violation be served with a notice of charges and must 
proceed in accordance with the rules of this section. A notice of 
charges must adequately state the acts, conduct, or practices in which 
the respondent is alleged to have engaged; state the rule, or rules, 
alleged to have been violated (or about to be violated); and prescribe 
the period within which a hearing on the charges may be requested. The 
notice must also advise that the charged respondent is entitled, upon 
request, to a hearing on the charges.


Sec.  38.704  Right to representation.

    Upon being served with a notice of charges, a respondent must have 
the right to be represented by legal counsel or any other 
representative of its choosing in all succeeding stages of the 
disciplinary process, except any member of the designated contract 
market's board of directors or disciplinary panel, any employee of the 
designated contract market, or any person substantially related to the 
underlying investigations, such as material witness or respondent.


Sec.  38.705  Answer to charges.

    A respondent must be given a reasonable period of time to file an 
answer to a notice of charges. The rules of a designated contract 
market governing the requirements and timeliness of a respondent's 
answer to charges must be fair, equitable, and publicly available.


Sec.  38.706  Denial of charges and right to hearing.

    In every instance where a respondent has requested a hearing on a 
charge that is denied, or on a sanction set by the disciplinary panel, 
the respondent must be given an opportunity for a hearing in accordance 
with the requirements of Sec.  38.707 of this part.


Sec.  38.707  Hearings.

    (a) A designated contract market must adopt rules that provide for 
the following minimum requirements for any hearing conducted pursuant 
to a notice of charges:
    (1) The hearing must be fair, must be conducted before members of 
the disciplinary panel, and must be promptly convened after reasonable 
notice to the respondent. The formal rules of evidence need not apply; 
nevertheless, the procedures for the hearing may not be so informal as 
to deny a fair hearing. No member of the disciplinary panel for the 
matter may have a financial, personal, or other direct interest in the 
matter under consideration.
    (2) In advance of the hearing, the respondent must be entitled to 
examine all books, documents, or other evidence in the possession or 
under the control of the designated contract market. The designated 
contract market may withhold documents that are privileged or 
constitute attorney work product, documents that were prepared by an 
employee of the designated contract market but will not be offered in 
evidence in the disciplinary proceedings, documents that may disclose a 
technique or guideline used in examinations, investigations, or 
enforcements proceedings, and documents that disclose the identity of a 
confidential source.
    (3) The designated contract market's enforcement and compliance 
staffs must be parties to the hearing, and the enforcement staff must 
present their case on those charges and sanctions that are the subject 
of the hearing.
    (4) The respondent must be entitled to appear personally at the 
hearing, must be entitled to cross-examine any persons appearing as 
witnesses at the hearing, and must be entitled to call witnesses and to 
present such evidence as may be relevant to the charges.
    (5) The designated contract market must require persons within its 
jurisdiction who are called as witnesses to participate in the hearing 
and to produce evidence. It must make reasonable efforts to secure the 
presence of all other persons called as witnesses whose testimony would 
be relevant.
    (6) If the respondent has requested a hearing, a copy of the 
hearing must be made and must become a part of the record of the 
proceeding. The record must be one that is capable of being accurately 
transcribed; however, it need not be transcribed unless the transcript 
is requested by Commission staff or the respondent, the decision is 
appealed pursuant to the rules of the designated contract market, or is 
reviewed by the Commission pursuant to section 8c of the Act or part 9 
of this chapter. In all other instances a summary record of a hearing 
is permitted.
    (b) [Reserved]


Sec.  38.708  Decisions.

    Promptly following a hearing conducted in accordance with Sec.  
38.707 of this part, the disciplinary panel must render a written 
decision based upon the weight of the evidence contained in the record 
of the proceeding and must provide a copy to the respondent. The 
decision must include:
    (a) The notice of charges or a summary of the charges;
    (b) The answer, if any, or a summary of the answer;
    (c) A summary of the evidence produced at the hearing or, where 
appropriate, incorporation by reference of the investigation report;
    (d) A statement of findings and conclusions with respect to each 
charge, and a complete explanation of the evidentiary and other basis 
for such findings and conclusions with respect to each charge;
    (e) An indication of each specific rule that the respondent was 
found to have violated; and
    (f) A declaration of all sanctions imposed against the respondent, 
including the basis for such sanctions and the effective date of such 
sanctions.


Sec.  38.709  Final decisions.

    Each designated contract market must establish rules setting forth 
when a decision rendered pursuant to this

[[Page 36707]]

section will become the final decision of such designated contract 
market.


Sec.  38.710  Disciplinary sanctions.

    All disciplinary sanctions imposed by a designated contract market 
or its disciplinary panels must be commensurate with the violations 
committed and must be clearly sufficient to deter recidivism or similar 
violations by other market participants. All disciplinary sanctions, 
including sanctions imposed pursuant to an accepted settlement offer, 
must take into account the respondent's disciplinary history. In the 
event of demonstrated customer harm, any disciplinary sanction must 
also include full customer restitution, except where the amount of 
restitution, or to whom it should be provided, cannot be reasonably 
determined.


Sec.  38.711  Warning letters.

    Where a rule violation is found to have occurred, no more than one 
warning letter may be issued per rolling 12-month period for the same 
violation.


Sec.  38.712  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance in appendix B of this part to demonstrate to the Commission 
compliance with the requirements of Sec.  38.700 of this part.

Subpart O--Dispute Resolution


Sec.  38.750  Core Principle 14.

    The board of trade shall establish and enforce rules regarding, and 
provide facilities for alternative dispute resolution as appropriate 
for, market participants and any market intermediaries.


Sec.  38.751  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and acceptable practices in appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.750 of this part.

Subpart P--Governance Fitness Standards


Sec.  38.800  Core Principle 15.

    The board of trade shall establish and enforce appropriate fitness 
standards for directors, members of any disciplinary committee, members 
of the contract market, and any other person with direct access to the 
facility (including any party affiliated with any person described in 
this paragraph).


Sec.  38.801  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance in appendix B of this part to demonstrate to the Commission 
compliance with the requirements of Sec.  38.800 of this part.

Subpart Q--Conflicts of Interest


Sec.  38.850  Core Principle 16.

    The board of trade shall establish and enforce rules:
    (a) To minimize conflicts of interest in the decision-making 
process of the contract market; and
    (b) To establish a process for resolving conflicts of interest 
described in paragraph (a) of this section.


Sec.  38.851  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and/or acceptable practices in appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.850 of this part.

Subpart R--Composition of Governing Boards of Contract Markets


Sec.  38.900  Core Principle 17.

    The governance arrangements of the board of trade shall be designed 
to permit consideration of the views of market participants.

Subpart S--Recordkeeping


Sec.  38.950  Core Principle 18.

    The board of trade shall maintain records of all activities 
relating to the business of the contract market:
    (a) In a form and manner that is acceptable to the Commission; and
    (b) For a period of at least 5 years.


Sec.  38.951  Additional sources for compliance.

    A designated contract market must maintain such records, including 
trade records and investigatory and disciplinary files, in accordance 
with the requirements of Sec.  1.31 of this chapter, and in accordance 
with part 45 of this chapter, if applicable.

Subpart T--Antitrust Considerations


Sec.  38.1000  Core Principle 19.

    Unless necessary or appropriate to achieve the purposes of this 
Act, the board of trade shall not:
    (a) Adopt any rule or taking any action that results in any 
unreasonable restraint of trade; or
    (b) Impose any material anticompetitive burden on trading on the 
contract market.


Sec.  38.1001  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and acceptable practices in appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.1000 of this part.

Subpart U--System Safeguards


Sec.  38.1050  Core Principle 20.

    Each designated contract market shall:
    (a) Establish and maintain a program of risk analysis and oversight 
to identify and minimize sources of operational risk, through the 
development of appropriate controls and procedures, and the development 
of automated systems, that are reliable, secure, and have adequate 
scalable capacity;
    (b) Establish and maintain emergency procedures, backup facilities, 
and a plan for disaster recovery that allow for the timely recovery and 
resumption of operations and the fulfillment of the responsibilities 
and obligations of the board of trade; and
    (c) Periodically conduct tests to verify that backup resources are 
sufficient to ensure continued order processing and trade matching, 
transmission of matched orders to a designated clearing organization 
for clearing, price reporting, market surveillance, and maintenance of 
a comprehensive and accurate audit trail.


Sec.  38.1051  General requirements.

    (a) A designated contract market's program of risk analysis and 
oversight with respect to its operations and automated systems must 
address each of the following categories of risk analysis and 
oversight:
    (1) Information security;
    (2) Business continuity-disaster recovery planning and resources;
    (3) Capacity and performance planning;
    (4) Systems operations;
    (5) Systems development and quality assurance; and
    (6) Physical security and environmental controls.
    (b) In addressing the categories of risk analysis and oversight 
required under paragraph (a) of this section, a designated contract 
market should follow generally accepted standards and best practices 
with respect to the development, operation, reliability, security, and 
capacity of automated systems.
    (c) A designated contract market must maintain a business 
continuity-disaster recovery plan and business continuity-disaster 
recovery resources, emergency procedures, and backup facilities

[[Page 36708]]

sufficient to enable timely recovery and resumption of its operations 
and resumption of its ongoing fulfillment of its responsibilities and 
obligations as a designated contract market following any disruption of 
its operations. Such responsibilities and obligations include, without 
limitation, order processing and trade matching; transmission of 
matched orders to a designated clearing organization for clearing; 
price reporting; market surveillance; and maintenance of a 
comprehensive audit trail. The designated contract market's business 
continuity-disaster recovery plan and resources generally should enable 
resumption of trading and clearing of the designated contract market's 
products during the next business day following the disruption. 
Designated contract markets determined by the Commission to be critical 
financial markets are subject to more stringent requirements in this 
regard, set forth in Sec.  40.9 of this chapter. Electronic trading is 
an acceptable backup for open outcry trading in the event of a 
disruption.
    (d) A designated contract market that is not determined by the 
Commission to be a critical financial market satisfies the requirement 
to be able to resume trading and clearing during the next business day 
following a disruption by maintaining either:
    (1) Infrastructure and personnel resources of its own that are 
sufficient to ensure timely recovery and resumption of its operations 
and resumption of its ongoing fulfillment of its responsibilities and 
obligations as a designated contract market following any disruption of 
its operations; or
    (2) Contractual arrangements with other designated contract markets 
or disaster recovery service providers, as appropriate, that are 
sufficient to ensure continued trading and clearing of the designated 
contract market's products, and ongoing fulfillment of all of the 
designated contract market's responsibilities and obligations with 
respect to those products, in the event that a disruption renders the 
designated contract market temporarily or permanently unable to satisfy 
this requirement on its own behalf.
    (e) A designated contract market must notify Commission staff 
promptly of all:
    (1) Electronic trading halts and significant systems malfunctions;
    (2) Cyber security incidents or targeted threats that actually or 
potentially jeopardize automated system operation, reliability, 
security, or capacity; and
    (3) Activation of the designated contract market's business 
continuity-disaster recovery plan.
    (f) A designated contract market must give Commission staff timely 
advance notice of all material:
    (1) Planned changes to automated systems that may impact the 
reliability, security, or adequate scalable capacity of such systems; 
and
    (2) Planned changes to the designated contract market's program of 
risk analysis and oversight.
    (g) A designated contract market must provide to the Commission 
upon request current copies of its business continuity-disaster 
recovery plan and other emergency procedures, its assessments of its 
operational risks, and other documents requested by Commission staff 
for the purpose of maintaining a current profile of the designated 
contract market's automated systems.
    (h) A designated contract market must conduct regular, periodic, 
objective testing and review of its automated systems to ensure that 
they are reliable, secure, and have adequate scalable capacity. It must 
also conduct regular, periodic testing and review of its business 
continuity-disaster recovery capabilities. Both types of testing should 
be conducted by qualified, independent professionals. Such qualified 
independent professionals may be independent contractors or employees 
of the designated contract market, but should not be persons 
responsible for development or operation of the systems or capabilities 
being tested. Pursuant to Core Principle 18 (Recordkeeping) and 
Sec. Sec.  38.950 and 38.951 of this part, the designated contract 
market must keep records of all such tests, and make all test results 
available to the Commission upon request.
    (i) To the extent practicable, a designated contract market should:
    (1) Coordinate its business continuity-disaster recovery plan with 
those of the members and other market participants upon whom it depends 
to provide liquidity, in a manner adequate to enable effective 
resumption of activity in its markets following a disruption causing 
activation of the designated contract market's business continuity-
disaster recovery plan;
    (2) Initiate and coordinate periodic, synchronized testing of its 
business continuity-disaster recovery plan and the business continuity-
disaster recovery plans of the members and other market participants 
upon whom it depends to provide liquidity; and
    (3) Ensure that its business continuity-disaster recovery plan 
takes into account the business continuity-disaster recovery plans of 
its telecommunications, power, water, and other essential service 
providers.
    (j) Part 46 of this chapter governs the obligations of those 
registered entities that the Commission has determined to be critical 
financial markets, with respect to maintenance and geographic dispersal 
of disaster recovery resources sufficient to meet a same-day recovery 
time objective in the event of a wide-scale disruption. Section 40.9 of 
this chapter establishes the requirements for core principle compliance 
in that respect.

Subpart V--Financial Resources


Sec.  38.1100  Core Principle 21.

    (a) In General. The board of trade shall have adequate financial, 
operational, and managerial resources to discharge each responsibility 
of the board of trade.
    (b) Determination of adequacy. The financial resources of the board 
of trade shall be considered to be adequate if the value of the 
financial resources exceeds the total amount that would enable the 
contract market to cover the operating costs of the contract market for 
a 1-year period, as calculated on a rolling basis.


Sec.  38.1101  General requirements.

    (a) General rule. (1) A designated contract market must maintain 
financial resources sufficient to enable it to perform its functions in 
compliance with the core principles set forth in section 5 of the Act 
and regulations thereunder.
    (2) Financial resources shall be considered sufficient if their 
value is at least equal to a total amount that would enable the 
designated contract market, or applicant for designation as such, to 
cover its operating costs for a period of at least one year, calculated 
on a rolling basis.
    (3) An entity that is registered with the Commission as both a 
designated contract market and a derivatives clearing organization also 
shall comply with the financial resource requirements of Sec.  39.11 of 
this chapter, demonstrating that it has sufficient financial resources 
to operate the single, combined entity as both a designated contract 
market and a derivatives clearing organization. In lieu of filing 
separate quarterly reports under paragraph (a)(2) of this section and 
Sec.  39.11(f) of this chapter, such entity shall file single quarterly 
reports in accordance with Sec.  39.11.
    (b) Types of financial resources. Financial resources available to 
satisfy the requirements of paragraph (a) of this section may include:
    (1) The designated contract market's own capital, calculated in 
accordance with U.S. generally accepted accounting principles; and

[[Page 36709]]

    (2) Any other financial resource deemed acceptable by the 
Commission.
    (c) Computation of financial resource requirement. A designated 
contract market must, on a quarterly basis, based upon its fiscal year, 
make a reasonable calculation of its projected operating costs over a 
12-month period in order to determine the amount needed to meet the 
requirements of paragraph (a) of this section. The designated contract 
market shall have reasonable discretion in determining the methodology 
used to compute such projected operating costs. The Commission may 
review the methodology and require changes as appropriate.
    (d) Valuation of financial resources. At appropriate intervals, but 
not less than quarterly, a designated contract market must compute the 
current market value of each financial resource used to meet its 
obligations under paragraph (a) of this section. Reductions in value to 
reflect market and credit risk (``haircuts'') must be applied as 
appropriate.
    (e) Liquidity of financial resources. The financial resources 
allocated by the designated contract market to meet the requirements of 
paragraph (a) of this section must include unencumbered, liquid 
financial assets (i.e., cash and/or highly liquid securities) equal to 
at least six months' operating costs. If any portion of such financial 
resources is not sufficiently liquid, the designated contract market 
may take into account a committed line of credit or similar facility 
for the purpose of meeting this requirement.
    (f) Reporting requirements. (1) Each fiscal quarter, or at any time 
upon Commission request, a designated contract market must:
    (i) Report to the Commission:
    (A) The amount of financial resources necessary to meet the 
requirements of paragraph (a) of this section; and
    (B) The value of each financial resource available, computed in 
accordance with the requirements of paragraph (d) of this section; and
    (ii) Provide the Commission with a financial statement, including 
the balance sheet, income statement, and statement of cash flows of the 
designated contract market or of its parent company.
    (2) The calculations required by this paragraph shall be made as of 
the last business day of the designated contract market's fiscal 
quarter.
    (3) The designated contract market must provide the Commission 
with:
    (i) Sufficient documentation explaining the methodology used to 
compute its financial requirements under paragraph (a) of this section;
    (ii) Sufficient documentation explaining the basis for its 
determinations regarding the valuation and liquidity requirements set 
forth in paragraphs (d) and (e) of this section; and
    (iii) Copies of any agreements establishing or amending a credit 
facility, insurance coverage, or other arrangement evidencing or 
otherwise supporting the designated contract market's conclusions.
    (4) The reports shall be filed not later than 40 calendar days 
after the end of the designated contract market's first three fiscal 
quarters, and not later than 60 calendar days after the end of the 
designated contract market's fourth fiscal quarter, or at such later 
time as the Commission may permit, in its discretion, upon request by 
the designated contract market.
    (g) Delegation of authority. (1) The Commission hereby delegates, 
until it orders otherwise, the authority to the Director of the 
Division of Market Oversight or such other employee or employees as the 
Director may designate from time to time, to:
    (i) Determine whether a particular financial resource under 
paragraph (b)(2) may be used to satisfy the requirements of paragraph 
(a)(1) and (2) of this section;
    (ii) Review and make changes to the methodology used to compute the 
requirements of paragraph (c) of this section;
    (iii) Request financial reporting from a designated contract market 
(in addition to quarterly reports) under paragraph (f)(1) of this 
section; and
    (iv) Grant an extension of time for a designated contract market to 
file its quarterly financial report under paragraph (f)(4) of this 
section.
    (2) The Director 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.

Subpart W--Diversity of Board of Directors


Sec.  38.1150  Core Principle 22.

    The board of trade, if a publicly traded company, shall endeavor to 
recruit individuals to serve on the board of directors and the other 
decision-making bodies (as determined by the Commission) of the board 
of trade from among, and to have the composition of the bodies reflect, 
a broad and culturally diverse pool of qualified candidates.

Subpart X--Securities and Exchange Commission


Sec.  38.1200  Core Principle 23.

    The board of trade shall keep any such records relating to swaps 
defined in section 1a(47)(A)(v) of the Act open to inspection and 
examination by the Securities and Exchange Commission.


Sec.  38.1201  Additional sources for compliance.

    Applicants and designated contract markets may refer to the 
guidance and/or acceptable practices in appendix B of this part to 
demonstrate to the Commission compliance with the requirements of Sec.  
38.1200 of this part.

0
18. Revise appendix A to part 38 to read as follows:
BILLING CODE 6351-01-P

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0
19. Revise appendix B to part 38 to read as follows:

Appendix B to Part 38--Guidance on, and Acceptable Practices in, 
Compliance With Core Principles

    1. This appendix provides guidance on complying with core 
principles, both initially and on an ongoing basis, to obtain and 
maintain designation under section 5(d) of the Act and this part 38. 
Where provided, guidance is set forth in paragraph (a) following the 
relevant heading and can be used to demonstrate to the Commission 
compliance with the selected requirements of a core principle, under 
Sec. Sec.  38.3 and 38.5 of this part. The guidance for the core 
principle is illustrative only of the types of matters a designated 
contract market may address, as applicable, and is not intended to 
be used as a mandatory checklist. Addressing the issues set forth in 
this appendix would help the Commission in its consideration of 
whether the designated contract market is in compliance with the 
selected requirements of a core principle; provided however, that 
the guidance is not intended to diminish or replace, in any event, 
the obligations and requirements of applicants and designated 
contract markets to comply with the regulations provided under this 
part.
    2. Where provided, acceptable practices meeting selected 
requirements of core principles are set forth in paragraph (b) 
following guidance. Designated contract markets that follow specific 
practices outlined in the acceptable practices for a core principle 
in this appendix will meet the selected requirements of the 
applicable core principle; provided however, that the acceptable 
practice is not intended to diminish or replace, in any event, the 
obligations and requirements of applicants and designated contract 
markets to comply with the regulations provided under this part 38. 
The acceptable practices are for illustrative purposes only and do 
not state the exclusive means for satisfying a core principle.
    Core Principle 1 of section 5(d) of the Act: DESIGNATION AS 
CONTRACT MARKET.--(A) IN GENERAL.--To be designated, and maintain a 
designation, as a contract market, a board of trade shall comply 
with--
    (i) Any core principle described in this subsection; and
    (ii) Any requirement that the Commission may impose by rule or 
regulation pursuant to section 8a(5).
    (B) REASONABLE DISCRETION OF CONTRACT MARKET.--Unless otherwise 
determined by the Commission by rule or regulation, a board of trade 
described in subparagraph (A) shall have reasonable discretion in 
establishing the manner in which the board of trade complies with 
the core principles described in this subsection.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 2 of section 5(d) of the Act: COMPLIANCE WITH 
RULES--(A) IN GENERAL.--The board of trade shall establish, monitor, 
and enforce compliance with the rules of the contract market, 
including--
    (i) Access requirements;
    (ii) The terms and conditions of any contracts to be traded on 
the contract market; and
    (iii) Rules prohibiting abusive trade practices on the contract 
market.
    (B) CAPACITY OF CONTRACT MARKET.--The board of trade shall have 
the capacity to detect, investigate, and apply appropriate sanctions 
to any person that violates any rule of the contract market.
    (C) REQUIREMENT OF RULES.--The rules of the contract market 
shall provide the board of trade with the ability and authority to 
obtain any necessary information to perform any function described 
in this subsection, including the capacity to carry out such 
international information-sharing agreements as the Commission may 
require.
    (a) Guidance. (1) Investigations and investigation reports--
Warning letters. The rules of a designated contract market may 
authorize compliance staff to issue a warning letter to a person or 
entity under investigation or to recommend that a disciplinary panel 
take such an action.
    (2) Additional rules required. A designated contract market 
should adopt and enforce any additional rules that it believes are 
necessary to comply with the requirements of subpart C of this 
chapter
    (b) Acceptable Practices. [Reserved.]
    Core Principle 3 of section 5(d) of the Act: CONTRACTS NOT 
READILY SUBJECT TO MANIPULATION.--The board of trade shall list on 
the contract market only contracts that are not readily susceptible 
to manipulation.
    (a) Guidance. (1) Designated contract markets may list new 
products for trading by self-certification under Sec.  40.2 of this 
chapter or may submit products for Commission approval under Sec.  
40.3 of this chapter.
    (2) Guidance in appendix C to this part may be used as guidance 
in meeting this core principle for both new products listings and 
existing listed contracts.
    (b) Acceptable Practices. [Reserved.]
    Core Principle 4 of section 5(d) of the Act: PREVENTION OF 
MARKET DISRUPTION.--The board of trade shall have the capacity and 
responsibility to prevent manipulation, price distortion, and 
disruptions of the delivery or cash-settlement process through 
market surveillance, compliance, and enforcement practices and 
procedures, including--
    (A) Methods for conducting real-time monitoring of trading; and
    (B) Comprehensive and accurate trade reconstructions.
    (a) Guidance. The detection and prevention of market 
manipulation, disruptions, and distortions should be incorporated 
into the design of programs for monitoring trading activity. 
Monitoring of intraday trading should include the capacity to detect 
developing market anomalies, including abnormal price movements and 
unusual trading volumes, and position-limit violations. The 
designated contract market should have rules in place that allow it 
broad powers to intervene to prevent or reduce market disruptions. 
Once a threatened or actual disruption is detected, the designated 
contract market should take steps to prevent the disruption or 
reduce its severity.
    (2) Additional rules required. A designated contract market 
should adopt and enforce any additional rules that it believes are 
necessary to comply with the requirements of subpart E of this part.
    (b) Acceptable Practices. (1) General Requirements. Real-time 
monitoring for market anomalies and position-limit violations are 
the most effective, but the designated contract market may also 
demonstrate that it has an acceptable program if some of the 
monitoring is accomplished on a T+1 basis. An acceptable

[[Page 36718]]

program must include automated trading alerts to detect market 
anomalies and position-limit violations as they develop and before 
market disruptions occur or become more serious. In some cases, a 
designated contract market may demonstrate that its manual processes 
are effective.
    (2) Physical-delivery contracts. For physical-delivery 
contracts, the designated contract market must demonstrate that it 
is monitoring the adequacy and availability of the deliverable 
supply, which, if such information is available, includes the size 
and ownership of those supplies and whether such supplies are likely 
to be available to short traders and saleable by long traders at the 
market value of those supplies under normal cash marketing 
conditions. Further, for physical-delivery contracts, the designated 
contract market must continually monitor the appropriateness of a 
contract's terms and conditions, including the delivery instrument, 
the delivery locations and location differentials, and the commodity 
characteristics and related differentials. The designated contract 
market must demonstrate that it is making a good-faith effort to 
resolve conditions that are interfering with convergence of its 
physical-delivery contract to the price of the underlying commodity 
or causing price distortions or market disruptions, including, when 
appropriate, changes to contract terms.
    (3) Cash-settled contracts. At a minimum, an acceptable program 
for monitoring cash-settled contracts must include access, either 
directly or through an information-sharing agreement, to traders' 
positions and transactions in the reference market for traders of a 
significant size in the designated contract market near the 
settlement of the contract.
    (4) Ability to obtain information. With respect to the 
designated contract market's ability to obtain information, a 
designated contract market may limit the application of the 
requirement to keep and provide such records only to those that are 
reportable under its large-trader reporting system or otherwise hold 
substantial positions.
    (5) Risk controls for trading. An acceptable program for 
preventing market disruptions must demonstrate appropriate trade 
risk controls, in addition to pauses and halts. Such controls must 
be adapted to the unique characteristics of the markets to which 
they apply and must be designed to avoid market disruptions without 
unduly interfering with that market's price discovery function. The 
designated contract market may choose from among controls that 
include: pre-trade limits on order size, price collars or bands 
around the current price, message throttles, and daily price limits, 
or design other types of controls. Within the specific array of 
controls that are selected, the designated contract market also must 
set the parameters for those controls, so long as the types of 
controls and their specific parameters are reasonably likely to 
serve the purpose of preventing market disruptions and price 
distortions. If a contract is linked to, or is a substitute for, 
other contracts, either listed on its market or on other trading 
venues, the designated contract market must, to the extent 
practicable, coordinate its risk controls with any similar controls 
placed on those other contracts. If a contract is based on the price 
of an equity security or the level of an equity index, such risk 
controls must, to the extent practicable, be coordinated with any 
similar controls placed on national security exchanges.
    Core Principle 5 of section 5(d) of the Act: POSITION 
LIMITATIONS OR ACCOUNTABILITY--(A) IN GENERAL.--To reduce the 
potential threat of market manipulation or congestion (especially 
during trading in the delivery month), the board of trade shall 
adopt for each contract of the board of trade, as is necessary and 
appropriate, position limitations or position accountability for 
speculators.
    (B) MAXIMUM ALLOWABLE POSITION LIMITATION.--For any contract 
that is subject to a position limitation established by the 
Commission pursuant to section 4a(a), the board of trade shall set 
the position limitation of the board of trade at a level not higher 
than the position limitation established by the Commission.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 6 of section 5(d) of the Act: EMERGENCY 
AUTHORITY--The board of trade, in consultation or cooperation with 
the Commission, shall adopt rules to provide for the exercise of 
emergency authority, as is necessary and appropriate, including the 
authority--
    (A) To liquidate or transfer open positions in any contract;
    (B) To suspend or curtail trading in any contract; and
    (C) To require market participants in any contract to meet 
special margin requirements.
    (a) Guidance. In consultation and cooperation with the 
Commission, a designated contract market should have the authority 
to intervene as necessary to maintain markets with fair and orderly 
trading and to prevent or address manipulation or disruptive trading 
practices, whether the need for intervention arises exclusively from 
the DCM's market or as part of a coordinated, cross-market 
intervention. DCM rules should include procedures and guidelines to 
avoid conflicts of interest in accordance with the provisions of 
Sec.  40.9 of this chapter, and include alternate lines of 
communication and approval procedures to address emergencies 
associated with real-time events. To address perceived market 
threats, the designated contract market should have rules that allow 
it to take certain actions in the event of an emergency, as defined 
in Sec.  40.1(h) of this chapter, including: imposing or modifying 
position limits, price limits, and intraday market restrictions; 
imposing special margin requirements; ordering the liquidation or 
transfer of open positions in any contract; ordering the fixing of a 
settlement price; extending or shortening the expiration date or the 
trading hours; suspending or curtailing trading in any contract; 
transferring customer contracts and the margin or altering any 
contract's settlement terms or conditions; and, where applicable, 
providing for the carrying out of such actions through its 
agreements with its third-party provider of clearing or regulatory 
services. In situations where a contract is fungible with a contract 
on another platform, emergency action to liquidate or transfer open 
interest must be as directed, or agreed to, by the Commission or the 
Commission's staff. The DCM has the authority to independently 
respond to emergencies in an effective and timely manner consistent 
with the nature of the emergency, as long as all such actions taken 
by the DCM are made in good faith to protect the integrity of the 
markets. The Commission should be notified promptly of the DCM's 
exercise of emergency action, explaining how conflicts of interest 
were minimized, including the extent to which the DCM considered the 
effect of its emergency action on the underlying markets and on 
markets that are linked or referenced to the contract market and 
similar markets on other trading venues. Information on all 
regulatory actions carried out pursuant to a DCM's emergency 
authority should be included in a timely submission of a certified 
rule pursuant to part 40 of this chapter.
    (b) Acceptable Practices. A designated contract market must have 
procedures and guidelines for decision-making and implementation of 
emergency intervention in the market. At a minimum, the DCM must 
have the authority to liquidate or transfer open positions in the 
market, suspend or curtail trading in any contract, and require 
market participants in any contract to meet special margin 
requirements. In situations where a contract is fungible with a 
contract on another platform, emergency action to liquidate or 
transfer open interest must be directed, or agreed to, by the 
Commission or the Commission's staff. The DCM must promptly notify 
the Commission of the exercise of its emergency authority, 
documenting its decision-making process, including how conflicts of 
interest were minimized, and the reasons for using its emergency 
authority. The DCM must also have rules that allow it to take such 
market actions as may be directed by the Commission.
    Core Principle 7 of section 5(d) of the Act: AVAILABILITY OF 
GENERAL INFORMATION.--The board of trade shall make available to 
market authorities, market participants, and the public accurate 
information concerning--
    (A) The terms and conditions of the contracts of the contract 
market; and
    (B)(i) The rules, regulations, and mechanisms for executing 
transactions on or through the facilities of the contract market; 
and
    (ii) The rules and specifications describing the operation of 
the contract market's--
    (I) Electronic matching platform; or
    (II) Trade execution facility.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 8 of section 5(d) of the Act: DAILY PUBLICATION 
OF TRADING INFORMATION.--The board of trade shall make public daily 
information on settlement prices, volume, open interest, and opening 
and closing ranges for actively traded contracts on the contract 
market.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 9 of section 5(d) of the Act: EXECUTION OF 
TRANSACTIONS.--``(A) IN

[[Page 36719]]

GENERAL.--The board of trade shall provide a competitive, open, and 
efficient market and mechanism for executing transactions that 
protects the price discovery process of trading in the centralized 
market of the board of trade.
    (B) RULES.--The rules of the board of trade may authorize, for 
bona fide business purposes--
    (i) Transfer trades or office trades;
    (ii) An exchange of--
    (I) Futures in connection with a cash commodity transaction;
    (II) Futures for cash commodities; or
    (III) Futures for swaps; or
    (iii) A futures commission merchant, acting as principal or 
agent, to enter into or confirm the execution of a contract for the 
purchase or sale of a commodity for future delivery if the contract 
is reported, recorded, or cleared in accordance with the rules of 
the contract market or a derivatives clearing organization.
    (a) Guidance. [Reserved]
    (b) Acceptable Practices. [Reserved]
    Core Principle 10 of section 5(d) of the Act: TRADE 
INFORMATION.--The board of trade shall maintain rules and procedures 
to provide for the recording and safe storage of all identifying 
trade information in a manner that enables the contract market to 
use the information--
    (A) To assist in the prevention of customer and market abuses; 
and
    (B) To provide evidence of any violations of the rules of the 
contract market.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 11 of section 5(d) of the Act: FINANCIAL 
INTEGRITY OF TRANSACTIONS.--The board of trade shall establish and 
enforce--
    (A) Rules and procedures for ensuring the financial integrity of 
transactions entered into on or through the facilities of the 
contract market (including the clearance and settlement of the 
transactions with a derivatives clearing organization); and
    (B) Rules to ensure--
    (i) The financial integrity of any--
    (I) Futures commission merchant; and
    (II) Introducing broker; and
    (ii) The protection of customer funds.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 12 of section 5(d) of the Act: PROTECTION OF 
MARKETS AND MARKET PARTICIPANTS--The board of trade shall establish 
and enforce rules--
    (A) To protect markets and market participants from abusive 
practices committed by any party, including abusive practices 
committed by a party acting as an agent for a participant; and
    (B) To promote fair and equitable trading on the contract 
market.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 13 of section 5(d) of the Act: DISCIPLINARY 
PROCEDURES.--The board of trade shall establish and enforce 
disciplinary procedures that authorize the board of trade to 
discipline, suspend, or expel members or market participants that 
violate the rules of the board of trade, or similar methods for 
performing the same functions, including delegation of the functions 
to third parties.
    (a) Guidance. (1) Notice of charges. If the rules of the 
designated contract market so provide, a notice may also advise: (i) 
That failure to request a hearing within the period prescribed in 
the notice, except for good cause, may be deemed a waiver of the 
right to a hearing; and (ii) That failure to answer or to deny 
expressly a charge may be deemed to be an admission of such charge.
    (2) Admission or failure to deny charges. The rules of a 
designated contract market may provide that if a respondent admits 
or fails to deny any of the charges, a disciplinary panel may find 
that the violations alleged in the notice of charges for which the 
respondent admitted or failed to deny any of the charges have been 
committed. If the designated contract market's rules so provide, 
then:
    (i) The disciplinary panel should impose a sanction for each 
violation found to have been committed;
    (ii) The disciplinary panel should promptly notify the 
respondent in writing of any sanction to be imposed pursuant to 
paragraph (2)(i) of this section and shall advise the respondent 
that it may request a hearing on such sanction within the period of 
time, which shall be stated in the notice;
    (iii) The rules of a designated contract market may provide that 
if a respondent fails to request a hearing within the period of time 
stated in the notice, the respondent will be deemed to have accepted 
the sanction.
    (3) Settlement offers. (i) The rules of a designated contract 
market may permit a respondent to submit a written offer of 
settlement at any time after an investigation report is completed. 
The disciplinary panel presiding over the matter may accept the 
offer of settlement, but may not alter the terms of a settlement 
offer unless the respondent agrees.
    (ii) The rules of a designated contract market may provide that, 
in its discretion, a disciplinary panel may permit the respondent to 
accept a sanction without either admitting or denying the rule 
violations upon which the sanction is based.
    (iii) If an offer of settlement is accepted, the panel accepting 
the offer should issue a written decision specifying the rule 
violations it has reason to believe were committed, including the 
basis or reasons for the panel's conclusions, and any sanction to be 
imposed, which should include full customer restitution where 
customer harm is demonstrated, except where the amount of 
restitution and to whom it should be provided cannot be reasonably 
determined. If an offer of settlement is accepted without the 
agreement of the enforcement staff, the decision should adequately 
support the disciplinary panel's acceptance of the settlement. Where 
applicable, the decision should also include a statement that the 
respondent has accepted the sanctions imposed without either 
admitting or denying the rule violations.
    (iv) The respondent may withdraw his or her offer of settlement 
at any time before final acceptance by a disciplinary panel. If an 
offer is withdrawn after submission, or is rejected by a 
disciplinary panel, the respondent should not be deemed to have made 
any admissions by reason of the offer of settlement and should not 
be otherwise prejudiced by having submitted the offer of settlement.
    (4) Hearings. The rules of a designated contract market may 
provide that a sanction may be summarily imposed upon any person 
within its jurisdiction whose actions impede the progress of a 
hearing.
    (5) Right to appeal. The rules of a designated contract market 
may permit the parties to a proceeding to appeal promptly an adverse 
decision of a disciplinary panel in all or in certain classes of 
cases. Such rules may require a party's notice of appeal to be in 
writing and to specify the findings, conclusions, or sanctions to 
which objection are taken. If the rules of a designated contract 
market permit appeals, then both the respondent and the enforcement 
staff should have the opportunity to appeal and the designated 
contract market should provide for the following:
    (i) The designated contract market should establish an appellate 
panel that should be authorized to hear appeals of respondents. In 
addition, the rules of a designated contract market may provide that 
the appellate panel may, on its own initiative, order review of a 
decision by a disciplinary panel within a reasonable period of time 
after the decision has been rendered.
    (ii) The composition of the appellate panel should be consistent 
with the requirements set forth in part 40 of this chapter and 
paragraph (4) of the acceptable practices for Core Principle 16, and 
should not include any members of the designated contract market's 
compliance staff, or any person involved in adjudicating any other 
stage of the same proceeding. The rules of a designated contract 
market should provide for the appeal proceeding to be conducted 
before all of the members of the appellate panel or a panel thereof.
    (iii) Except for good cause shown, the appeal or review should 
be conducted solely on the record before the disciplinary panel, the 
written exceptions filed by the parties, and the oral or written 
arguments of the parties.
    (iv) Promptly following the appeal or review proceeding, the 
appellate panel should issue a written decision and should provide a 
copy to the respondent. The decision issued by the appellate panel 
should adhere to all the requirements of Sec.  38.708 of this part, 
to the extent that a different conclusion is reached from that 
issued by the disciplinary panel.
    (6) Summary fines for violations of rules regarding timely 
submission of records, decorum, or other similar activities. A 
designated contract market may adopt a summary fine schedule for 
violations of rules relating to the timely submission of accurate 
records required for clearing or verifying each day's transactions, 
decorum, attire, or other similar activities. A designated contract 
market may permit its compliance staff, or a designated panel of 
contract market officials, to summarily impose minor sanctions 
against persons within the designated contract market's jurisdiction 
for violating such rules. A designated contract market's summary 
fine schedule may allow for warning letters to be issued for first-
time violations or violators. If

[[Page 36720]]

adopted, a summary fine schedule should provide for progressively 
larger fines for recurring violations.
    (7) Emergency disciplinary actions. (i) A designated contract 
market may impose a sanction, including suspension, or take other 
summary action against a person or entity subject to its 
jurisdiction upon a reasonable belief that such immediate action is 
necessary to protect the best interest of the marketplace.
    (ii) Any emergency disciplinary action should be taken in 
accordance with a designated contract market's procedures that 
provide for the following:
    (A) If practicable, a respondent should be served with a notice 
before the action is taken, or otherwise at the earliest possible 
opportunity. The notice should state the action, briefly state the 
reasons for the action, and state the effective time and date, and 
the duration of the action.
    (B) The respondent should have the right to be represented by 
legal counsel or any other representative of its choosing in all 
proceedings subsequent to the emergency action taken. The respondent 
should be given the opportunity for a hearing as soon as reasonably 
practicable and the hearing should be conducted before the 
disciplinary panel pursuant to the requirements of Sec.  38.707 of 
this part.
    (C) Promptly following the hearing provided for in this rule, 
the designated contract market should render a written decision 
based upon the weight of the evidence contained in the record of the 
proceeding and should provide a copy to the respondent. The decision 
should include a description of the summary action taken; the 
reasons for the summary action; a summary of the evidence produced 
at the hearing; a statement of findings and conclusions; a 
determination that the summary action should be affirmed, modified, 
or reversed; and a declaration of any action to be taken pursuant to 
the determination, and the effective date and duration of such 
action.
    (b) Acceptable Practices. [Reserved.]
    Core Principle 14 of section 5(d) of the Act: DISPUTE 
RESOLUTION.--The board of trade shall establish and enforce rules 
regarding, and provide facilities for alternative dispute resolution 
as appropriate for, market participants and any market 
intermediaries.
    (a) Guidance. A designated contract market should provide 
customer dispute resolution procedures that are: appropriate to the 
nature of the market; fair and equitable; and available on a 
voluntary basis, either directly or through another self-regulatory 
organization, to customers that are non-eligible contract 
participants.
    (b) Acceptable Practices.
    (1) Fair and equitable procedure. Every contract market shall 
provide customer dispute resolution procedures that are fair and 
equitable. An acceptable customer dispute resolution mechanism 
would:
    (i) Provide the customer with an opportunity to have his or her 
claim decided by an objective and impartial decisionmaker;
    (ii) Provide each party with the right to be represented by 
counsel at the commencement of the procedure, at the party's own 
expense;
    (iii) Provide each party with adequate notice of the claims 
presented against such party, an opportunity to be heard on all 
claims, defenses and permitted counterclaims, and an opportunity for 
a prompt hearing;
    (iv) Authorize prompt, written, final settlement awards that are 
not subject to appeal within the designated contract market; and
    (v) Notify the parties of the fees and costs that may be 
assessed.
    (2) Voluntary Procedures. The use of dispute settlement 
procedures shall be voluntary for customers other than eligible 
contract participants as defined in section 1a(18) of the Dodd-Frank 
Act, and may permit counterclaims as provided in Sec.  166.5 of this 
chapter.
    (3) Member-to-Member Procedures. If the designated contract 
market also provides procedures for the resolution of disputes that 
do not involve customers (i.e., member-to-member disputes), the 
procedures for resolving such disputes must be independent of and 
shall not interfere with or delay the resolution of customers' 
claims or grievances.
    (4) Delegation. A designated contract market may delegate to 
another self-regulatory organization or to a registered futures 
association its responsibility to provide for customer dispute 
resolution mechanisms, provided, however, that in the event of such 
delegation, the designated contract market shall in all respects 
treat any decision issued by such other organization or association 
with respect to such dispute as if the decision were its own, 
including providing for the appropriate enforcement of any award 
issued against a delinquent member.
    Core Principle 15 of section 5(d) of the Act: GOVERNANCE FITNESS 
STANDARDS.--The board of trade shall establish and enforce 
appropriate fitness standards for directors, members of any 
disciplinary committee, members of the contract market, and any 
other person with direct access to the facility (including any party 
affiliated with any person described in this paragraph).
    (a) Guidance. (1) A designated contract market should have 
appropriate eligibility criteria for the categories of persons set 
forth in the Core Principle that should include standards for 
fitness and for the collection and verification of information 
supporting compliance with such standards. Minimum standards of 
fitness for persons who have member voting privileges, governing 
obligations or responsibilities, or who exercise disciplinary 
authority are those bases for refusal to register a person under 
section 8a(2) of the Act. In addition, persons who have governing 
obligations or responsibilities, or who exercise disciplinary 
authority, should not have a significant history of serious 
disciplinary offenses, such as those that would be disqualifying 
under Sec.  1.63 of this chapter. Members with trading privileges 
but having no, or only nominal, equity, in the facility and non-
member market participants who are not intermediated and do not have 
these privileges, obligations, responsibilities or disciplinary 
authority could satisfy minimum fitness standards by meeting the 
standards that they must meet to qualify as a ``market 
participant.'' Natural persons who directly or indirectly have 
greater than a ten percent ownership interest in a designated 
contract market should meet the fitness standards applicable to 
members with voting rights.
    (2) The Commission believes that such standards should include 
providing the Commission with fitness information for such persons, 
whether registration information, certification to the fitness of 
such persons, an affidavit of such persons' fitness by the contract 
market's counsel or other information substantiating the fitness of 
such persons. If a contract market provides certification of the 
fitness of such a person, the Commission believes that such 
certification should be based on verified information that the 
person is fit to be in his or her position.
    (b) Applicable Practices. [Reserved.]
    Core Principle 16 of section 5(d) of the Act: CONFLICTS OF 
INTEREST.--The board of trade shall establish and enforce rules--
    (A) to minimize conflicts of interest in the decisionmaking 
process of the contract market; and
    (B) to establish a process for resolving conflicts of interest 
described in subparagraph (A).
    (a) Guidance. The means to address conflicts of interest in 
decisionmaking of a contract market 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 contract market 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 contract market employees or 
gained through an ownership interest in the contract market.
    (b) Acceptable Practices. All designated contract markets 
(``DCMs'' or ``contract markets'') bear special responsibility to 
regulate effectively, impartially, and with due consideration of the 
public interest, as provided for in section 3 of the Act. Under Core 
Principle 15, they are also required to minimize conflicts of 
interest in their decisionmaking processes. To comply with this Core 
Principle, contract markets 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, customers and market 
participants, other industry participants, and other constituencies. 
Acceptable practices for minimizing conflicts of interest shall 
include the following elements:
    (1) Board composition for contract markets
    (i) At least thirty-five percent of the directors on a contract 
market's board of directors shall be public directors; and
    (ii) The executive committees (or similarly empowered bodies) 
shall be at least thirty-five percent public.
    (2) Public director
    (i) To qualify as a public director of a contract market, an 
individual must first be found, by the board of directors, on the 
record, to have no material relationship with the contract market. A 
``material relationship'' is one that reasonably could

[[Page 36721]]

affect the independent judgment or decisionmaking of the director.
    (ii) In addition, a director shall be considered to have a 
``material relationship'' with the contract market if any of the 
following circumstances exist:
    (A) The director is an officer or employee of the contract 
market or an officer or employee of its affiliate. In this context, 
``affiliate'' includes parents or subsidiaries of the contract 
market or entities that share a common parent with the contract 
market;
    (B) The director is a member of the contract market, or an 
officer or director of a member. ``Member'' is defined according to 
section 1a(34) of the Commodity Exchange Act and Commission 
Regulation 1.3(q);
    (C) The director, or a firm with which the director is an 
officer, director, or partner, receives more than $100,000 in 
combined annual payments from the contract market, or any affiliate 
of the contract market (as defined in subsection (2)(ii)(A)), for 
legal, accounting, or consulting services. Compensation for services 
as a director of the contract market or as a director of an 
affiliate of the contract market does not count toward the $100,000 
payment limit, nor does deferred compensation for services prior to 
becoming a director, so long as such compensation is in no way 
contingent, conditioned, or revocable;
    (D) Any of the relationships above apply to a member of the 
director's ``immediate family,'' i.e., spouse, parents, children and 
siblings.
    (iii) All of the disqualifying circumstances described in 
subsection (2)(ii) shall be subject to a one-year look back.
    (iv) A contract market's public directors may also serve as 
directors of the contract market's affiliate (as defined in 
subsection (2)(ii)(A)) if they otherwise meet the definition of 
public director in this section (2).
    (v) A contract market shall disclose to the Commission which 
members of its board are public directors, and the basis for those 
determinations.
    (3) Regulatory oversight committee
    (i) A board of directors of any contract market shall establish 
a Regulatory Oversight Committee (``ROC'') as a standing committee, 
consisting of only public directors as defined in section (2), to 
assist it in minimizing actual and potential conflicts of interest. 
The ROC shall oversee the contract market's regulatory program on 
behalf of the board. The board shall delegate sufficient authority, 
dedicate sufficient resources, and allow sufficient time for the ROC 
to fulfill its mandate.
    (ii) The ROC shall:
    (A) Monitor the contract market's regulatory program for 
sufficiency, effectiveness, and independence;
    (B) Oversee all facets of the program, including trade practice 
and market surveillance; audits, examinations, and other regulatory 
responsibilities with respect to member firms (including ensuring 
compliance with financial integrity, financial reporting, sales 
practice, recordkeeping, and other requirements); and the conduct of 
investigations;
    (C) Review the size and allocation of the regulatory budget and 
resources; and the number, hiring and termination, and compensation 
of regulatory personnel;
    (D) Supervise the contract market's chief regulatory officer, 
who will report directly to the ROC;
    (E) Prepare an annual report assessing the contract market's 
self-regulatory program for the board of directors and the 
Commission, which sets forth the regulatory program's expenses, 
describes its staffing and structure, catalogues disciplinary 
actions taken during the year, and reviews the performance of 
disciplinary committees and panels;
    (F) Recommend changes that would ensure fair, vigorous, and 
effective regulation; and
    (G) Review regulatory proposals and advise the board as to 
whether and how such changes may impact regulation.
    (4) Disciplinary panels
    All contract markets shall minimize conflicts of interest in 
their disciplinary processes through disciplinary panel composition 
rules that preclude any group or class of industry participants from 
dominating or exercising disproportionate influence on such panels. 
Contract markets can further minimize conflicts of interest by 
including in all disciplinary panels at least one person who would 
qualify as a public director, as defined in subsections (2)(ii) and 
(2)(iii) above, except in cases limited to decorum, attire, or the 
timely submission of accurate records required for clearing or 
verifying each day's transactions. If contract market rules provide 
for appeal to the board of directors, or to a committee of the 
board, then that appellate body shall also include at least one 
person who would qualify as a public director as defined in 
subsections (2)(ii) and (2)(iii) above.
    Core Principle 17 of section 5(d) of the Act: COMPOSITION OF 
GOVERNING BOARDS OF CONTRACT MARKETS.--The governance arrangements 
of the board of trade shall be designed to permit consideration of 
the views of market participants.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 18 of section 5(d) of the Act: RECORDKEEPING.--
The board of trade shall maintain records of all activities relating 
to the business of the contract market--
    (A) In a form and manner that is acceptable to the Commission; 
and
    (B) For a period of at least 5 years.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 19 of section 5(d) of the Act: ANTITRUST 
CONSIDERATIONS.--Unless necessary or appropriate to achieve the 
purposes of this Act, the board of trade shall not--
    (A) Adopt any rule or taking any action that results in any 
unreasonable restraint of trade; or
    (B) Impose any material anticompetitive burden on trading on the 
contract market.
    (a) Guidance. An entity seeking designation as a contract market 
may request that the Commission consider under the provisions of 
section 15(b) of the Act, any of the entity's rules, including 
trading protocols or policies, and including both operational rules 
and the terms or conditions of products listed for trading, at the 
time of designation or thereafter. 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.]
    Core Principle 20 of section 5(d) of the Act: SYSTEM 
SAFEGUARDS.--The board of trade shall--
    (A) Establish and maintain a program of risk analysis and 
oversight to identify and minimize sources of operational risk, 
through the development of appropriate controls and procedures, and 
the development of automated systems, that are reliable, secure, and 
have adequate scalable capacity;
    (B) Establish and maintain emergency procedures, backup 
facilities, and a plan for disaster recovery that allow for the 
timely recovery and resumption of operations and the fulfillment of 
the responsibilities and obligations of the board of trade; and
    (C) Periodically conduct tests to verify that backup resources 
are sufficient to ensure continued order processing and trade 
matching, price reporting, market surveillance, and maintenance of a 
comprehensive and accurate audit trail.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 21 of section 5(d) of the Act: FINANCIAL 
RESOURCES.--
    (A) IN GENERAL.--The board of trade shall have adequate 
financial, operational, and managerial resources to discharge each 
responsibility of the board of trade.
    (B) DETERMINATION OF ADEQUACY.--The financial resources of the 
board of trade shall be considered to be adequate if the value of 
the financial resources exceeds the total amount that would enable 
the contract market to cover the operating costs of the contract 
market for a 1-year period, as calculated on a rolling basis.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 22 of section 5(d) of the Act: DIVERSITY OF BOARD 
OF DIRECTORS.--The board of trade, if a publicly traded company, 
shall endeavor to recruit individuals to serve on the board of 
directors and the other decision-making bodies (as determined by the 
Commission) of the board of trade from among, and to have the 
composition of the bodies reflect, a broad and culturally diverse 
pool of qualified candidates.
    (a) Guidance. [Reserved.]
    (b) Acceptable Practices. [Reserved.]
    Core Principle 23 of section 5(d) of the Act: SECURITIES AND 
EXCHANGE COMMISSION.--The board of trade shall keep any such records 
relating to swaps defined in section 1a(47)(A)(v) open to inspection 
and examination by the Securities and Exchange Commission.
    (a) Guidance. A designated contract market should have 
arrangements and resources for collecting and maintaining accurate 
records pertaining to any swaps agreements defined in section 
1a(47)(A)(v) of the Act, and should leave them open to inspection 
and examination for a period of five years.
    (b) Acceptable Practices. [Reserved.]

[[Page 36722]]

Appendix C--Demonstration of Compliance That a Contract Is Not Readily 
Susceptible to Manipulation

    (a) Futures Contracts--General Information. When a designated 
contract market certifies or submits for approval contract terms and 
conditions for a new futures contract, that submission should 
include the following information:
    (1) A narrative describing the contract, including data and 
information to support the contract's terms and conditions, as set 
by the designated contract market. When designing a futures 
contract, the designated contract market should conduct market 
research so that the contract design meets the risk management needs 
of prospective users and promotes price discovery of the underlying 
commodity. The designated contract market should consult with market 
users to obtain their views and opinions during the contract design 
process to ensure the contract's term and conditions reflect the 
underlying cash market and that the futures contract will perform 
the intended risk management and/or price discovery functions. A 
designated contract market should provide a statement indicating 
that it took such steps to ensure the usefulness of the submitted 
contract.
    (2) A detailed cash market description for physical and cash-
settled contracts. Such descriptions should be based on government 
and/or other publicly-available data whenever possible and be 
formulated for both the national and regional/local market relevant 
to the underlying commodity. For tangible commodities, the cash 
market descriptions for the relevant market (i.e., national and 
regional/local) should incorporate at least three full years of data 
that may include, among other factors, production, consumption, 
stocks, imports, exports, and prices. Each of those cash market 
variables should be fully defined and the data sources should be 
fully specified and documented to permit Commission staff to 
replicate the estimates of deliverable supply (defined in paragraph 
(b)(1)(A) of this appendix C). Whenever possible, the Commission 
requests that monthly or daily prices (depending on the contract) 
underlying the cash settlement index be submitted for the most 
recent three full calendar years and for as many of the current 
year's months for which data are available. For contracts that are 
cash settled to an index, the index's methodology should be provided 
along with supporting information showing how the index is 
reflective of the underlying cash market, is not readily subject to 
manipulation or distortion, and is based on a cash price series that 
is reliable, acceptable, publicly available and timely (defined in 
paragraphs (c)(2) and (c)(3) of this appendix C). The Commission 
recognizes that the data necessary for accurate and cogent cash 
market analyses for an underlying commodity vary with the nature of 
the underlying commodity. The Commission may require that the 
designated contract market submit a detailed report on commodity 
definitions and uses.
    (b) Futures Contracts Settled by Physical Delivery. (1) For 
listed contracts that are settled by physical delivery, the terms 
and conditions of the contract should conform to the most common 
commercial practices and conditions in the cash market for the 
commodity underlying the futures contract. The terms and conditions 
should be designed to avoid any impediments to the delivery of the 
commodity so as to promote convergence between the price of the 
futures contract and the cash market value of the commodity at the 
expiration of a futures contract.
    (i) Estimating Deliverable Supplies.
    (A) General definition. The specified terms and conditions, 
considered as a whole, should result in a ``deliverable supply'' 
that is sufficient to ensure that the contract is not susceptible to 
price manipulation or distortion. In general, the term ``deliverable 
supply'' means the quantity of the commodity meeting the contract's 
delivery specifications that reasonably can be expected to be 
readily available to short traders and salable by long traders at 
its market value in normal cash marketing channels at the contract's 
delivery points during the specified delivery period, barring 
abnormal movement in interstate commerce. Typically, deliverable 
supply reflects the quantity of the commodity that potentially could 
be made available for sale on a spot basis at current prices at the 
contract's delivery points. For a non-financial physical-delivery 
commodity contract, this estimate might represent product which is 
in storage at the delivery point(s) specified in the futures 
contract or can be moved economically into or through such points 
consistent with the delivery procedures set forth in the contract 
and which is available for sale on a spot basis within the marketing 
channels that normally are tributary to the delivery point(s). 
Furthermore, an estimate of deliverable supply would not include 
supply that is committed for long-term agreements (i.e., the amount 
of deliverable supply that would not be available to fulfill the 
delivery obligations arising from current trading). The size of 
commodity supplies that are committed to long-term agreements may be 
estimated by consulting with market participants. However, if the 
estimated deliverable supply that is committed for long-term 
agreements, or significant portion thereof, can be demonstrated by 
the designated contract market to be consistently and regularly made 
available to the spot market for shorts to acquire at prevailing 
economic values, then those ``available'' supplies committed for 
long-term contracts may be included in the designated contract 
market's estimate of deliverable supply for that commodity. An 
adequate measure of deliverable supply would be an amount of the 
commodity that would meet the normal or expected range of delivery 
demand without causing futures prices to become distorted relative 
to cash market prices. Given the availability of acceptable data, 
deliverable supply should be estimated on a monthly basis for at 
least the most recent three years for which data are available. To 
the extent possible and that data resources permit, deliverable 
supply estimates should be constructed such that the data reflect, 
as close as possible, the market defined by the contract's terms and 
conditions, and should be formulated, whenever possible, with 
government or publicly available data. All deliverable supply 
estimates should be fully defined, have all underlying assumptions 
explicitly stated, and have documentation of all data/information 
sources in order to permit estimate replication by Commission staff.
    (B) Accounting for variations in deliverable supplies. To assure 
the availability of adequate deliverable supplies and acceptable 
levels of commercial risk management utility, contract terms and 
conditions should account for variations in the patterns of 
production, consumption and supply over a period of years of 
sufficient length to assess adequately the potential range of 
deliverable supplies. This assessment also should consider 
seasonality, growth, and market concentration in the production/
consumption of the underlying cash commodity. Deliverable supply 
implications of seasonal effects are more straightforwardly 
delineated when deliverable supply estimates are calculated on a 
monthly basis and when such monthly estimates are provided for at 
least the most recent three years for which data resources permit. 
In addition, consideration should be given to the relative roles of 
producers, merchants, and consumers in the production, distribution, 
and consumption of the cash commodity and whether the underlying 
commodity exhibits a domestic or international export focus. Careful 
consideration also should be given to the quality of the cash 
commodity and to the movement or flow of the cash commodity in 
normal commercial channels and whether there exist external factors 
or regulatory controls that could affect the price or supply of the 
cash commodity.
    (C) Calculation of deliverable supplies. Designated contract 
markets should derive a quantitative estimate of the deliverable 
supplies for the delivery period specified in the proposed contract. 
For commodities with seasonal supply or demand characteristics, the 
deliverable supply analysis should include that period when 
potential supplies typically are at their lowest levels. The 
estimate should be based on statistical data, when reasonably 
available, covering a period of time that is representative of the 
underlying commodity's actual patterns of production, patterns of 
consumption, and patterns of seasonal effects (if relevant). Often, 
such a relevant time period should include at least three years of 
monthly deliverable supply estimates permitted by available data 
resources. Deliverable supply estimates should also exclude the 
amount of the commodity that would not be otherwise deliverable on 
the futures contract. For example, deliverable supplies should 
exclude quantities that at current price levels are not economically 
obtainable or deliverable or were previously committed for long-term 
agreements.
    (2) Contract terms and conditions requirements for futures 
contracts settled by physical delivery.
    (i) For physical delivery contracts, an acceptable specification 
of terms and conditions would include, but may not be limited to, 
rules that address, as appropriate,

[[Page 36723]]

the following criteria and comply with the associated standards:
    (A) Quality Standards. The terms and conditions of a commodity 
contract should describe or define all of the economically 
significant characteristics or attributes of the commodity 
underlying the contract. In particular, the quality standards should 
be described or defined so that such standards reflect those used in 
transactions in the commodity in normal cash marketing channels. 
Documentation establishing that the quality standards of the 
contract's underlying commodity comply with those accepted/
established by the industry, by government regulations, and/or by 
relevant laws should also be submitted. For any particular commodity 
contract, the specific attributes that should be enumerated depend 
upon the individual characteristics of the underlying commodity. 
These may include, for example, the following items: grade, quality, 
purity, weight, class, origin, growth, issuer, originator, maturity 
window, coupon rate, source, hours of trading, etc. If the terms of 
the contract provide for the delivery of multiple qualities of a 
specific attribute of the commodity having different cash market 
values, then a ``par'' quality should be specified with price 
differentials applicable to the ``non-par'' qualities that reflect 
discounts or premiums commonly observed or expected to occur in the 
cash market for that commodity.
    (B) Delivery Points and Facilities. Delivery point/area 
specifications should provide for futures delivery at a single 
location or at multiple locations where the underlying cash 
commodity is normally transacted or stored and where there exists a 
viable cash market(s). If multiple delivery points are specified and 
the value of the commodity differs between these locations, contract 
terms should include price differentials that reflect usual 
differences in value between the different delivery locations. If 
the price relationships among the delivery points are unstable and a 
designated contract market chooses to adopt fixed locational price 
differentials, such differentials should fall within the range of 
commonly observed or expected commercial price differences. In this 
regard, any price differentials should be supported with cash price 
data for the delivery location(s). The terms and conditions of the 
contracts also should specify, as appropriate, any conditions the 
delivery facilities and/or delivery facility operators should meet 
in order to be eligible for delivery. Specification of any 
requirements for delivery facilities also should consider the extent 
to which ownership of such facilities is concentrated and whether 
the level of concentration would be susceptible to manipulation of 
the futures contract's prices. Commodity contracts also should 
specify appropriately detailed delivery procedures that describe the 
responsibilities of deliverers, receivers and any required third 
parties in carrying out the delivery process. Such responsibilities 
could include allocation between buyer and seller of all associated 
costs such as load-out, document preparation, sampling, grading, 
weighing, storage, taxes, duties, fees, drayage, stevedoring, 
demurrage, dispatch, etc. Required accreditation for third-parties 
also should be detailed. These procedures should seek to minimize or 
eliminate any impediments to making or taking delivery by both 
deliverers and takers of delivery to help ensure convergence of cash 
and futures at the expiration of a futures delivery month.
    (C) Delivery Period and Last Trading Day. An acceptable 
specification of the delivery period would allow for sufficient time 
for deliverers to acquire the deliverable commodity and make it 
available for delivery, considering any restrictions or requirements 
imposed by the designated contract market. Specification of the last 
trading day for expiring contracts should consider whether adequate 
time remains after the last trading day to allow for delivery on the 
contract.
    (D) Contract Size and Trading Unit. An acceptable specification 
of the delivery unit and/or trading unit would be a contract size 
that is consistent with customary transactions, transportation or 
storage amounts in the cash market (e.g., the contract size may be 
reflective of the amount of the commodity that represents a 
pipeline, truckload or railcar shipment). For purposes of increasing 
market liquidity, a designated contract market may elect to specify 
a contract size that is smaller than the typical commercial 
transaction size, storage unit or transportation size. In such 
cases, the commodity contract should include procedures that allow 
futures traders to easily take or make delivery on such a contract 
with a smaller size, or, alternatively, the designated contract 
market may adopt special provisions requiring that delivery be made 
only in multiple contracts to accommodate reselling the commodity in 
the cash market. If the latter provision is adopted, contract terms 
should be adopted to minimize the potential for default in the 
delivery process by ensuring that all contracts remaining open at 
the close of trading in expiring delivery months can be combined to 
meet the required delivery unit size. Generally, contract sizes and 
trading units should be determined after a careful analysis of 
relevant cash market trading practices, conditions and deliverable 
supply estimates, so as to ensure that the underlying market 
commodity market and available supply sources are able to support 
the contract sizes and trading units at all times.
    (E) Delivery Pack. The term ``delivery pack'' refers to the 
packaging standards (e.g., product may be delivered in burlap or 
polyethylene bags stacked on wooden pallets) or non-quality related 
standards regarding the composition of commodity within a delivery 
unit (e.g., product must all be imported from the same country or 
origin). An acceptable specification of the delivery pack or 
composition of a contract's delivery unit should reflect, to the 
extent possible, specifications commonly applied to the commodity 
traded or transacted in the cash market.
    (F) Delivery Instrument. An acceptable specification of the 
delivery instrument (e.g., warehouse receipt, depository certificate 
or receipt, shipping certificate, bill of lading, in-line transfer, 
book transfer of securities, etc.) would provide for its conversion 
into the cash commodity at a commercially-reasonable cost. 
Transportation terms (e.g., FOB, CIF, freight prepaid to 
destination) as well as any limits on storage or certificate daily 
premium fees should be specified. These terms should reflect cash 
market practices and the customary provision for allocating delivery 
costs between buyer and seller.
    (G) Inspection Provisions. Any inspection/certification 
procedures for verifying compliance with quality requirements or any 
other related delivery requirements (e.g., discounts relating to the 
age of the commodity, etc.) should be specified in the contract 
rules. An acceptable specification of inspection procedures would 
include the establishment of formal procedures that are consistent 
with procedures used in the cash market. To the extent that formal 
inspection procedures are not used in the cash market, an acceptable 
specification would contain provisions that assure accuracy in 
assessing the commodity, that are available at a low cost, that do 
not pose an obstacle to delivery on the contract and that are 
performed by a reputable, disinterested third party or by qualified 
designated contract market employees. Inspection terms also should 
detail which party pays for the service, particularly in light of 
the possibility of varying inspection results.
    (H) Delivery (Trading) Months. Delivery months should be 
established based on the risk management needs of commercial 
entities as well as the availability of deliverable supplies in the 
specified months.
    (I) Minimum Price Fluctuation (Minimum Tick). The minimum price 
increment (tick) should be set at a level that is equal to, or less 
than, the minimum price increment commonly observed in cash market 
transactions for the underlying commodity. Specifying a futures' 
minimum tick that is greater than the minimum price increment in the 
cash market can undermine the risk management utility of the futures 
contract by preventing hedgers from efficiently establishing and 
liquidating futures positions that are used to hedge anticipated 
cash market transactions or cash market positions.
    (J) Maximum Price Fluctuation Limits. Designated contract 
markets may adopt price limits to: (1) Reduce or constrain price 
movements in a trading day that may not be reflective of true market 
conditions but might be caused by traders overreacting to news; (2) 
Allow additional time for the collection of margins in times of 
large price movements; and (3) Provide a ``cooling-off'' period for 
futures market participants to respond to bona fide changes in 
market supply and demand fundamentals that would lead to large cash 
and futures price changes. If price limit provisions are adopted, 
the limits should be set at levels that are not overly restrictive 
in relation to price movements in the cash market for the commodity 
underlying the futures contract.
    (K) Speculative Limits. Specific information regarding the 
establishment of speculative position limits are set forth in part 
150, and/or part 151, as applicable, of the Commission's 
regulations.
    (L) Reportable Levels. Refer to Sec.  15.03 of the Commission's 
regulations.

[[Page 36724]]

    (M) Trading Hours. Should be set by the designated contract 
market to delineate each trading day.
    (c) Futures Contracts Settled by Cash Settlement. (1) Cash 
settlement is a method of settling certain futures or option 
contracts whereby, at contract expiration, the contract is settled 
by cash payment in lieu of physical delivery of the commodity or 
instrument underlying the contract. An acceptable specification of 
the cash settlement price for commodity futures and option contracts 
would include rules that fully describe the essential economic 
characteristics of the underlying commodity (e.g., grade, quality, 
weight, class, growth, issuer, maturity, source, rating, description 
of the underlying index and index's calculation methodology, etc.), 
as well as how the final settlement price is calculated. In 
addition, the rules should clearly specify the trading months and 
hours of trading, the last trading day, contract size, minimum price 
change (tick size) and any limitations on price movements (e.g., 
price limits or trading halts).
    (2) Cash settled contracts may be susceptible to manipulation or 
price distortion. In evaluating the susceptibility of a cash-settled 
contract to manipulation, a designated contract market should 
consider the size and liquidity of the cash market that underlies 
the listed contract in a manner that follows the determination of 
deliverable supply as noted above in (b)(1). In particular, 
situations susceptible to manipulation include those in which the 
volume of cash market transactions and/or the number of participants 
contacted in determining the cash-settlement price are very low. 
Cash-settled contracts may create an incentive to manipulate or 
artificially influence the data from which the cash-settlement price 
is derived or to exert undue influence on the cash-settlement 
price's computation in order to profit on a futures position in that 
commodity. The utility of a cash-settled contract for risk 
management and price discovery would be significantly impaired if 
the cash settlement price is not a reliable or robust indicator of 
the value of the underlying commodity or instrument. Accordingly, 
careful consideration should be given to the potential for 
manipulation or distortion of the cash settlement price, as well as 
the reliability of that price as an indicator of cash market values. 
Appropriate consideration also should be given to the commercial 
acceptability, public availability, and timeliness of the price 
series that is used to calculate the cash settlement price. 
Documentation demonstrating that the settlement price index is a 
reliable indicator of market values and conditions and is commonly 
used as a reference index by industry/market agents should be 
provided. Such documentation may take on various forms, including 
carefully documented interview results with knowledgeable agents.
    (3) Where an independent, private-sector third party calculates 
the cash settlement price series, a designated contract market 
should consider the need for a licensing agreement that will ensure 
the designated contract market's rights to the use of the price 
series to settle the listed contract.
    (i) Where an independent, private-sector third party calculates 
the cash settlement price series, the designated contract market 
should verify that the third party utilizes business practices that 
minimize the opportunity or incentive to manipulate the cash-
settlement price series. Such safeguards may include lock-downs, 
prohibitions against derivatives trading by employees, or public 
dissemination of the names of sources and the price quotes they 
provide. Because a cash-settled contract may create an incentive to 
manipulate or artificially influence the underlying market from 
which the cash-settlement price is derived or to exert undue 
influence on the cash-settlement computation in order to profit on a 
futures position in that commodity, a designated contract market 
should, whenever practicable, enter into an information-sharing 
agreement with the third-party provider which would enable the 
designated contract market to better detect and prevent manipulative 
behavior.
    (ii) Where a designated contract market itself generates the 
cash settlement price series, the designated contract market should 
establish calculation procedures that safeguard against potential 
attempts to artificially influence the price. For example, if the 
cash settlement price is derived by the designated contract market 
based on a survey of cash market sources, the designated contract 
market should maintain a list of such entities which all should be 
reputable sources with knowledge of the cash market. In addition, 
the sample of sources polled should be representative of the cash 
market, and the poll should be conducted at a time when trading in 
the cash market is active.
    (iii) The cash-settlement calculation should involve 
computational procedures that eliminate or reduce the impact of 
potentially unrepresentative data.
    (iv) The cash settlement price should be an accurate and 
reliable indicator of prices in the underlying cash market. The cash 
settlement price also should be acceptable to commercial users of 
the commodity contract. The registered entity should fully document 
that the settlement price is accurate, reliable, highly regarded by 
industry/market agents, and fully reflects the economic and 
commercial conditions of the relevant designated contract market.
    (v) To the extent possible, the cash settlement price should be 
based on cash price series that are publicly available and available 
on a timely basis for purposes of calculating the cash settlement 
price at the expiration of a commodity contract. A designated 
contract market should make the final cash settlement price and any 
other supporting information that is appropriate for release to the 
public, available to the public when cash settlement is accomplished 
by the derivatives clearing organization. If the cash settlement 
price is based on cash prices that are obtained from non-public 
sources (e.g., cash market surveys conducted by the designated 
contract market or by third parties on behalf of the designated 
contract market), a designated contract market should make available 
to the public as soon as possible after a contract month's 
expiration the final cash settlement price as well as any other 
supporting information that is appropriate or feasible to make 
available to the public.
    (4) Contract terms and conditions requirements for futures 
contracts settled by cash settlement.
    (i) An acceptable specification of the terms and conditions of a 
cash-settled commodity contract will also set forth the trading 
months, last trading day, contract size, minimum price change (tick 
size) and daily price limits, if any.
    (A) Commodity Characteristics: The terms and conditions of a 
commodity contract should describe the commodity underlying the 
contract.
    (B) Contract Size and Trading Unit: An acceptable specification 
of the trading unit would be a contract size that is consistent with 
customary transactions in the cash market. A designated contract 
market may opt to set the contract size smaller than that of 
standard cash market transactions.
    (C) Cash Settlement Procedure: The cash settlement price should 
be reliable, acceptable, publicly available, and reported in a 
timely manner as described in paragraphs (c)(3)(iv) and (c)(3)(v) of 
this appendix C.
    (D) Pricing Basis and Minimum Price Fluctuation (Minimum Tick): 
The minimum price increment (tick) should be set a level that is 
equal to, or less than, the minimum price increment commonly 
observed in cash market transactions for the underlying commodity. 
Specifying a futures' minimum tick that is greater than the minimum 
price increment in the cash market can undermine the risk management 
utility of the futures contract by preventing hedgers from 
efficiently establishing and liquidating futures positions that are 
used to hedge anticipated cash market transactions or cash market 
positions.
    (E) Maximum Price Fluctuation Limits: Designated contract 
markets may adopt price limits to: (1) Reduce or constrain price 
movements in a trading day that may not be reflective of true market 
conditions but might be caused by traders overreacting to news; (2) 
Allow additional time for the collection of margins in times of 
large price movements; and (3) Provide a ``cooling-off'' period for 
futures market participants to respond to bona fide changes in 
market supply and demand fundamentals that would lead to large cash 
and futures price changes. If price-limit provisions are adopted, 
the limits should be set at levels that are not overly restrictive 
in relation to price movements in the cash market for the commodity 
underlying the futures contract. For broad-based stock index futures 
contracts, rules should be adopted that coordinate with New York 
Stock Exchange (``NYSE'') declared Circuit Breaker Trading Halts (or 
other market coordinated Circuit Breaker mechanism) and would 
recommence trading in the futures contract only after trading in the 
majority of the stocks underlying the index has recommenced.
    (F) Last Trading Day: Specification of the last trading day for 
expiring contracts should be established such that it occurs before 
publication of the underlying third-party price index or 
determination of the final settlement price. If the designated 
contract market chooses to allow trading to occur through the 
determination of the final

[[Page 36725]]

settlement price, then the designated contract market should show 
that futures trading would not distort the final settlement price 
calculation.
    (G) Trading Months: Trading months should be established based 
on the risk management needs of commercial entities as well as the 
availability of price and other data needed to calculate the cash 
settlement price in the specified months. Specification of the last 
trading day should take into consideration whether the volume of 
transactions underlying the cash settlement price would be unduly 
limited by occurrence of holidays or traditional holiday periods in 
the cash market. Moreover, a contract should not be listed past the 
date for which the designated contract market has access to use a 
proprietary price index for cash settlement.
    (H) Speculative Limits: Specific rules and policies for 
speculative position limits are set forth in part 150 and/or part 
151, as applicable, of the Commission's regulations.
    (I) Reportable Levels: Refer to Sec.  15.03 of the Commission's 
regulations.
    (J) Trading Hours: Should be set by the designated contract 
market to delineate each trading day.
    (d) Options on a Futures Contract. (1) The Commission's 
experience with the oversight of trading in futures option contracts 
indicates that most of the terms and conditions associated with such 
trading do not raise any regulatory concerns or issues. The 
Commission has found that the following terms do not affect an 
option contract's susceptible to manipulation or its utility for 
risk management. Thus, the Commission believes that, in most cases, 
any specification of the following terms would be acceptable; the 
only requirement is that such terms be specified in an automatic and 
objective manner in the option contract's rules:
    [cir] Exercise method;
    [cir] Exercise procedure (if positions in the underlying futures 
contract are established via book entry);
    [cir] Strike price listing provisions, including provisions for 
listing strike prices on a discretionary basis;
    [cir] Strike price intervals;
    [cir] Automatic exercise provisions;
    [cir] Contract size (unless not set equal to the size of the 
underlying futures contract); and
    [cir] Option minimum tick should be equal to or smaller than 
that of the underlying futures contract.
    (2) Option Expiration & Last Trading Day. For options on futures 
contracts, specification of expiration dates should consider the 
relationship of the option expiration date to the delivery period 
for the underlying futures contract. In particular, an assessment 
should be made of liquidity in the underlying futures market to 
assure that any futures contracts acquired through exercise can be 
liquidated without adversely affecting the orderly liquidation of 
futures positions or increasing the underlying futures contract's 
susceptibility to manipulation. When the underlying futures contract 
exhibits a very low trading activity during an expiring delivery 
month's final trading days or has a greater risk of price 
manipulation than other contracts, the last trading day and 
expiration day of the option should occur prior to the delivery 
period or the settlement date of the underlying future. For example, 
the last trading day and option expiration day might appropriately 
be established prior to first delivery notice day for option 
contracts with underlying futures contracts that have very limited 
deliverable supplies. Similarly, if the futures contract underlying 
an option contract is cash settled using cash prices from a very 
limited number of underlying cash market transactions, the last 
trading and option expiration days for the option contract might 
appropriately be established prior to the last trading day for the 
futures contract.
    (3) Speculative Limits. In cases where the terms of an 
underlying futures contract specify a spot-month speculative 
position limit and the option contract expires during, or at the 
close of, the futures contract's delivery period, the option 
contract should include a spot-month speculative position limit 
provision that requires traders to combine their futures and option 
position and be subject to the limit established for the futures 
contract. Specific rules and policies for speculative position 
limits are set forth in part 150 and/or part 151, as applicable, of 
the Commission's regulations.
    (4) Options on Physicals Contracts.
    (i) Under the Commission's regulations, the term ``option on 
physicals'' refers to option contracts that do not provide for 
exercise into an underlying futures contract. Upon exercise, options 
on physicals can be settled via physical delivery of the underlying 
commodity or by a cash payment. Thus, options on physicals raise 
many of the same issues associated with trading in futures contracts 
regarding adequacy of deliverable supplies or acceptability of the 
cash settlement price series. In this regard, an option that is cash 
settled based on the settlement price of a futures contract would be 
considered an ``option on physicals'' and the futures settlement 
price would be considered the cash price series.
    (ii) In view of the above, acceptable practices for the terms 
and conditions of options on physicals contracts include, as 
appropriate, those practices set forth above for physical-delivery 
or cash-settled futures contracts plus the practices set forth for 
options on futures contracts.
    (e) Security Futures Products. The listing of security futures 
products are governed by the special requirements of part 41 of the 
Commission's regulations.
    (f) Non-Price Based Futures Contracts. (1) Non-price based 
contracts are typically construed as binary options, but also may be 
designed to function similar to traditional futures or option 
contracts.
    (2) Where the contract is settled to a third party cash-
settlement series, the designated contract market should consider 
the nature and sources of the data comprising the cash-settlement 
calculation, the computational procedures, and the mechanisms in 
place to ensure the accuracy and reliability of the index value. The 
evaluation also considers the extent to which the third party has, 
or will adopt, safeguards against unauthorized or premature release 
of the index value itself or any key data used in deriving the index 
value.
    (3) The designated contract market should follow the guidance in 
paragraph (c)(4) (Contract Terms and Conditions Requirements for 
Futures Contracts Settled by Cash Settlement) of this appendix C to 
meet compliance.
    (g) Swap Contracts. (1) In general, swap contracts are an 
agreement to exchange a series of cash flows over a period of time 
based on reference price indices. When listing a swap for trading, a 
swap execution facility or designated contract market should 
determine that the reference price indices used for its contracts 
are not readily susceptible to manipulation. Accordingly, careful 
consideration should be given to the potential for manipulation or 
distortion of the cash settlement price, as well as the reliability 
of that price as an indicator of cash market values. Appropriate 
consideration also should be given to the commercial acceptability, 
public availability, and timeliness of the price series that is used 
to calculate the cash settlement price. Documentation demonstrating 
that the settlement price index is a reliable indicator of market 
values and conditions and is highly regarded by industry/market 
agents should be provided. Such documentation may take on various 
forms, including carefully documented interviews with principal 
market trading agents, pricing experts, marketing agents, etc. 
Appropriate consideration also should be given to the commercial 
acceptability, public availability, and timeliness of the price 
series that is used to calculate the cash flows of the swap.
    (i) Where an independent, private-sector third party calculates 
the referenced price index, the designated contract market should 
verify that the third party utilizes business practices that 
minimize the opportunity or incentive to manipulate the cash-
settlement price series. Such safeguards may include lock-downs, 
prohibitions against derivatives trading by employees, or public 
dissemination of the names of sources and the price quotes they 
provide. Because a cash-settled contract may create an incentive to 
manipulate or artificially influence the underlying market from 
which the cash-settlement price is derived or to exert undue 
influence on the cash-settlement computation in order to profit on a 
futures position in that commodity, a designated contract market 
should, whenever practicable, enter into an information-sharing 
agreement with the third-party provider which would enable the 
designated contract market to better detect and prevent manipulative 
behavior.
    (ii) Where a designated contract market itself generates the 
cash settlement price series, the designated contract market should 
establish calculation procedures that safeguard against potential 
attempts to artificially influence the price. For example, if the 
cash settlement price is derived by the designated contract market 
based on a survey of cash market sources, the designated contract 
market should maintain a list of such entities which all should be 
reputable sources with knowledge of the cash market. In addition, 
the sample of sources polled should be representative of the cash 
market, and the poll should be conducted at a time when trading in 
the cash market is active.

[[Page 36726]]

    (iii) The cash-settlement calculation should involve appropriate 
computational procedures that eliminate or reduce the impact of 
potentially unrepresentative data.
    (2) Speculative Limits: Specific rules and policies for 
speculative position limits are set forth in part 151 and/or part 
151, as applicable, of the Commission's regulations.
    (3) Intraday Market Restrictions: Designated contract markets or 
swap execution facilities should have in place intraday market 
restrictions that pause or halt trading in the event of 
extraordinary price moves that may result in distorted prices. Such 
restrictions need to be coordinated with other markets that may be a 
proxy or a substitute for the contracts traded on their facility. 
For example, coordination with NYSE rule 80.B Circuit Breaker 
Trading Halts. The designated contract market or swap execution 
facility should adopt rules to specifically address who is 
authorized to declare an emergency; how the designated contract 
market or swap execution facility will notify the Commission of its 
decision that an emergency exists; how it will address conflicts of 
interest in the exercise of emergency authority; and how it will 
coordinate trading halts with markets that trade the underlying 
price reference index or product.
    (4) Settlement Method. The designated contract market or swap 
execution facility should follow the guidance in paragraph (c)(4) 
(Contract Terms and Conditions Requirements for Futures Contracts 
Settled by Cash Settlement) of this appendix C to meet compliance, 
or paragraph (b)(2) (Contract Terms and Conditions Requirements for 
Futures Contracts Settled by Physical Delivery) of this appendix C, 
as appropriate.

    Issued in Washington, DC, on May 10, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Core Principles and Other Requirements for Designated 
Contract Markets--Commission Voting Summary and Statements of 
Commissioners

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers, 
Chilton, O'Malia and Wetjen voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rulemaking on designated contract markets 
DCMs, which includes rules, guidance and acceptable practices. It 
advances important Dodd-Frank transparency reforms. The Dodd-Frank 
Act squarely addresses the historically opaque swaps market though 
its strong transparency provisions. A critical element is pre-trade 
transparency--requiring standardized swaps between financial firms--
those that are cleared, made available for trading and not blocks--
to be traded on exchanges, such as DCMs, swap execution facilities 
(SEFs) or foreign boards of trade (FBOTs). When markets are open and 
transparent, prices are more competitive, markets are more efficient 
and liquid, and costs are lowered for companies and their customers.
    DCMs have long demonstrated the value of open and competitive 
trading. DCMs, for the first time, will be able to list and trade 
swaps, helping to bring the benefit of pre-trade transparency to the 
swaps marketplace.
    In addition, the Dodd-Frank Act incorporated the previously 
existing eight statutory designation criteria for DCMs into the DCM 
core principles and expanded the principles from 18 to 23. The final 
rulemaking the Commission will consider today conforms to the Dodd-
Frank transparency reforms.
    The final rulemaking benefits from extensive public comment and 
provides exchanges rules, guidance and acceptable practices on 
complying with Dodd-Frank's 23 core principles. In many instances, 
we're codifying industry practices that the Commission has observed 
and found appropriate to comply with these core principles. While 
preserving a principles-based regime, these regulations will provide 
greater legal certainty and transparency to DCMs in determining 
their compliance obligations, and to market participants in 
determining their obligations as DCM members, and will facilitate 
the enforcement of such provisions.
    The final rulemaking is consistent with the core principles-
based regime of the Commodity Exchange Act. It provides each DCM 
with the flexibility to employ additional measures to address core 
principle requirements.
    As an example, the final rulemaking requires DCMs to put in 
place effective pre-trade risk filters, including pauses and/or 
trading halts to address extraordinary price movements that may 
result in distorted prices or trigger market disruptions. The 
rulemaking, though, also recognizes that pauses and halts comprise 
only one category of risk controls, and that additional controls may 
be necessary to be put in place by exchanges to reduce the potential 
for market disruptions. The final guidance included in today's 
rulemaking lists that exchanges may possibly implement price collars 
or bands, maximum order size limits, and message throttles.
    This rulemaking does not yet finalize the Commission's proposal 
relating to core principle 9--which requires DCMs to provide an 
open, competitive and efficient market and mechanism for 
transactions that protects the price discovery process of the DCM's 
central marketplace. I expect the Commission to consider a final 
rule on this matter when it takes up the SEF rule this summer. The 
additional time will allow the Commission to more fully analyze the 
many public comments on these provisions, including comments on the 
implications of exchange of futures for swap transactions, or so-
called ``EFS transactions,'' in relation to the transparency reforms 
of Dodd-Frank, as well as the requirement for non-discriminatory 
open access to clearing.


[FR Doc. 2012-12746 Filed 6-18-12; 8:45 am]
BILLING CODE 6351-01-P