42256 Federal Register /Vol. 66, No. 155/Friday, August 10 ... · 42256 Federal Register/Vol. 66,...

42256 Federal Register / Vol. 66, No. 155 / Friday, August 10, 2001 / Rules and Regulations

1 See also Rules Relating to Intermediaries ofCommodity Interest Transactions, 65 FR 77993(Dec. 13, 2000), and A New Regulatory Frameworkfor Clearing Organizations, 65 FR 78020 (Dec. 13,2000). These three related rule packages in theirentirety constituted the Commission’s newregulatory framework.

2 P.L. 106–554, 114 Stat. 27633 The Commission determined not to withdraw

rules concerning the investment of customer funds,but rather moved forward their effective date toDecember 28, 2000. See 65 FR 82270 (Dec. 28,2000).

4 The Commission separately proposed rulesimplementing the CFMA with respect toCommission-regulated derivatives clearingorganizations. 66 FR 24308 (May 14, 2001).Implementation of the CFMA also requires theCommission to undertake a number of rulemakingsin addition to those that were part of theCommission’s new regulatory framework, such asrules relating to security futures products. Those

rulemaking proceedings are separate from the rulesbeing adopted herein. Finally, rules relating tointermediaries that were included in the newregulatory framework withdrawn in December, butwhich are not required by the CFMA, will bereproposed by the Commission at a later date.

5 It should be noted that rules that are not beingreserved with respect to their application tocontract markets (or DTFs) will still apply tointermediaries, or clearing organizations, andcontract market members, if relevant to thoseentities. See, e.g., Commission rule 1.35.

6 Section 1a(13) of the Act defines an ‘‘excludedcommodity’’ to mean, among other things, aninterest rate, exchange rate, currency, credit risk ormeasure, debt instrument, measure of inflation, orother macroeconomic index or measure.

7 As proposed, existing contract markets needonly notify the Commission of their intent tooperate as a DTF, and file with the Commission theDTF’s rules and a certification that they meet all ofthe requirements for registration as a DTF.

8 See section 1a(14) of the Act.9 See sections 2(e)(1) and 2(h)(3) of the Act, as

added by sections 104 and 106 of the CFMA. TheAct refers to electronic commercial markets as‘‘excluded’’ from the Act’s regulatory requirementsthat are not qualifying conditions for the

COMMODITY FUTURES TRADINGCOMMISSION

17 CFR Parts 1, 5, 15, 36, 37, 38, 40,41, 100, 166, 170 and, 180

RIN 3038–AB63

A New Regulatory Framework forTrading Facilities, Intermediaries andClearing Organizations

AGENCY: Commodity Futures TradingCommission.

ACTION: Final rulemaking.

SUMMARY: The Commodity FuturesTrading Commission (Commission orCFTC) is promulgating final rules toimplement those provisions of theCommodity Futures Modernization Actof 2000 (CFMA) relating to tradingfacilities. The CFMA profoundly alteredfederal regulation of commodity futuresand option markets. The new statutoryframework establishes two categories ofmarkets subject to Commissionregulatory oversight, designated contractmarkets and registered derivativestransaction execution facilities, and twocategories of exempt markets, exemptboards of trade and exempt commercialmarkets. These rules establishadministrative procedures necessary toimplement the CFMA, interpret certainof the CFMA’s provisions and provideguidance on compliance with various ofits requirements. In addition, theCommission, under its exemptiveauthority, in a limited number ofinstances is providing relief from, orgreater flexibility than, the CFMA’sprovisions.

Rules implementing the CFMArelating to clearing organizations wererecently proposed in a separate notice ofproposed rulemaking (66 FR 24308(May 14, 2001)), and rules pertaining tointermediaries which were previouslywithdrawn will be reproposed at a latertime.

EFFECTIVE DATE: October 9, 2001.

FOR FURTHER INFORMATION CONTACT: PaulM. Architzel, Chief Counsel, Nancy E.Yanofsky, Assistant Chief Counsel,Division of Economic Analysis; Alan L.Seifert, Deputy Director, or Riva SpearAdriance, Special Counsel, Division ofTrading and Markets, CommodityFutures Trading Commission, ThreeLafayette Centre, 1155 21st Street, NW.,Washington, DC 20581. Telephone:(202) 418–5260. E-mail:[email protected],[email protected], [email protected] [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

A. OverviewThe Commission on June 22, 2000,

proposed (65 FR 38986) and onDecember 13, 2000, issued (65 FR77962) final rules promulgating a newregulatory framework to apply tomultilateral transaction executionfacilities that trade contracts of sale ofa commodity for future delivery orcommodity options.1 The final ruleswere to become effective on February12, 2001.

Before the Commission’s newregulatory framework became effective,however, Congress on December 15,2000, passed, and President Clinton onDecember 21, 2000, signed into law, theCommodity Futures Modernization Actof 2000 (CFMA) 2, which substantiallyamended the Commodity Exchange Act,7 U.S.C. 1 et seq. (Act). The Act, asamended by the CFMA, establishes twotiers of regulated markets, designatedcontract markets (contract markets) andregistered derivatives transactionexecution facilities (DTFs). In addition,the Act, as amended, provides for twocategories of markets exempt fromregulation, exempt boards of trade andexempt commercial markets.

The CFMA, in both its broad contoursand in many of its specific provisions,codified the Commission’s newregulatory framework withoutsignificant change. However, it variedfrom the rules implementing theframework in a number of details andrendered unnecessary a number of thoserules by enacting their provisions intolaw. The Commission, therefore,withdrew most of the final rules inorder to determine their consistencywith the Act as amended.3 65 FR 82272.On March 9, 2001, the Commissionproposed new rules conforming to andimplementing the amended statutoryscheme with respect to transactionexecution facilities. 66 FR 14262.4

B. The Proposed Rules

The Commission proposed a new part38 relating to contract markets that, asproposed, would exempt contractmarkets operating under part 38 from allCommission rules not specificallyreserved.5 Part 38 also proposedapplication and approval procedures fornew contract markets, including a 60-day fast-track approval procedure aswell as procedures for product listingand amendments. Proposed part 38 alsocontained a number of rules explainingthe Commission’s interpretation ofseveral statutory requirements.

Proposed part 37 construed section 5aof the Act, which provides forregistration of DTFs. The proposed rulesidentified the commodities eligible to betraded on a DTF as a matter of rightunder section 5a(b)(2)(A) through (C) ofthe Act, as those defined as ‘‘excluded’’commodities in section 1a(13) of theAct.6 Part 37 also proposed a procedureunder which a specific DTF couldpetition to list contracts on additionalcommodities. The Commission alsoproposed a number of provisionsproviding greater administrativeflexibility in the registration 7 andoversight of DTFs than provided for inthe Act, as amended. Proposedappendices to parts 37 and 38 providedgeneral guidance for complying with therules.

The Commission also proposed a newpart 36 relating to exempt boards oftrade and exempt commercial markets.Transactions entered into by eligiblecommercial entities in exemptcommodities 8 traded on an electronictrading facility, are exempt commercialmarkets under section 2(h)(3) of theAct.9 Markets that satisfy the initial and

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42257Federal Register / Vol. 66, No. 155 / Friday, August 10, 2001 / Rules and Regulations

exemption. These qualifying conditions are foundin paragraphs 2(h)(4) and (5). Moreover, it shouldbe noted that among these qualifying conditions,the Commission is authorized to promulgate rulesto ensure disclosure of prices and to specifyprocedures regarding redress by participants to anorder denying them access in response to adetermination that the participant did not complywith a subpoena issued by the Commission. Seesections 2(h)(4)(D), 2(h)(5)(C)(ii) and 2(h)(6) of theAct.

10 In this Notice of Final Rulemaking, commentletters (CL) are referenced by the letter’s file numberand page. These letters are available through theCommission’s internet web site, http://www.cftc.gov.

11 They are: United States Department of theTreasury (Treasury) (CL 14), North AmericanSecurities Administrators Association, Inc.(NASAA) (CL 2), and National Futures Association(NFA) (CL 16), respectively.

12 They are: Board of Trade of the City of NewYork, Inc. (NYBOT) (CL 5),; Chicago Board of Trade(CBT) (CL 7),; New York Mercantile Exchange(NYMEX) (CL 10), Minneapolis Grain Exchange(MGE) (CL 15), and Chicago Mercantile Exchange(CME) (CL 18).

13 Board of Trade Clearing Corporation (BOTCC)(CL 1).

14 They are: International Swaps and DerivativesAssociation, Inc. (ISDA) (CL 3), @Markets (CL 6),National Grain and Feed Association (NGFA) (CL9), Futures Industry Association (FIA) (CL 11), theSilver Users Association (SUA) (CL 12), NationalGrain Trade Council (NGTC) (CL 17), Associationof the Bar of the City of New York (NY Bar) (CL19) and Securities Industry Association (SIA) (CL20).

15 They are: Advance Trading, Inc. (CL 13),Thomas Muth, Esq. (CL 8), and Energy Group (CL4), respectively. In addition to the writtencomments, the proposed rules were discussed at aMarch 28, 2001, meeting of the Commission’sAgricultural Advisory Committee (AAC), chaired byCommissioner David D. Spears. A transcript of theAAC meeting is also included in the Commission’scomment file and is available on the Commission’swebsite.

16 In its notice of proposed rulemaking, theCommission stated that during the transition periodbetween the effective date of the CFMA and theadoption of final implementing regulations, itwould, in effect, permit applications to be filedunder the procedures as proposed. 66 FR 14268.

17 Two applicants have indicated that theypreferred for their applications to be processedmore slowly than provided for under the fast-trackrules and that the rule explicitly should permitapplicants to so indicate at the time the applicationis filed. The Commission agrees.

18 The Commission is making a similarclarification to rule 37.5(b)(5), relating toapplications for registration as a DTF.

ongoing requirements of sections 2(h)(3)through (5) of the Act, as amended, areexcluded from the Act’s otherrequirements. The Commissionproposed rules in part 36 to implementthe notification requirements of section2(h)(5)(A) of the Act, and theinformation requirements for exemptcommercial markets consistent withsection 2(h)(5)(B) of the Act.

In part 36, the Commission alsoproposed rules implementing Section5d of the Act, which establishes thecategory of ‘‘exempt board of trade.’’Commission rule 36.2 proposed todefine those commodities that areeligible to trade on an exempt board oftrade to include commodities defined insection 1a(13) of the Act as ‘‘excludedcommodities,’’ other than securities,and such other commodities as theCommission may define by rule,regulation or order. In addition, rule36.2(b) proposed the form and mannerof the notification to the Commissionprovided for under section 5d of theAct.

The Commission also proposed anantifraud provision, proposed rule 1.1,pursuant to its authority in sections 3and 8a(5) of the Act. This proposed anti-fraud rule would apply to foreigncurrency transactions described insection 2(c)(1) of the Act.

Finally, the Commission proposed todelete Part 180 of its rules governingarbitration of disputes arising oncontract markets, and reproposed itswithdrawn rule 166.5, incorporating thenew provision added by the CFMA,which permits an FCM to require aneligible contract participant to waive theright to reparations as a condition ofusing the FCM’s services.

C. Overview of Comments

The Commission received a total of 20comments 10 from a range ofcommenters, including a governmentagency, an association of state securitiesregulators, a self-regulatory

organization,11 five futures exchanges,12

a derivatives clearing organization,13

eight trade associations,14 a trading firm,an attorney and a group of energyfirms.15

Most commenters generally supportedthe proposed rules, especially thoseprovisions that offered greater flexibilitythan provided by the CFMA.Commenters also expressed support forthe guidance regarding compliance withthe core principles applicable tocontract markets and DTFs. Manycommenters offered specificrecommendations for clarification of therules or requested that the Commissionclarify how the rules would be appliedin specific circumstances.

II. The Final Rules

A. Part 38—Contract MarketsPart 38 governs trading on designated

contract markets. Under rule 38.2,contract markets operating under thispart are exempt from all Commissionrules not specifically reserved. Rule 38.3contains application and approvalprocedures for new contract markets,including a 60-day fast-track approvalprocedure. The designation procedures,which include Commission authority todesignate a contract market uponconditions, require applicants to (1)demonstrate that they satisfy the criteriafor designation under section 5(b) of theAct and the core principles foroperation under section 5(d) of the Act;(2) to include a copy of the contractmarket’s rules; and (3) to provide a briefexplanation of how the conditions fordesignation are satisfied to the extent

that compliance with the conditions fordesignation is not self-evident.

Based upon its experience inprocessing applications for designationfollowing proposal of these rules,16 theCommission is modifying final rule 38.3to make clear that an applicant mayinstruct the Commission in writing atthe time of application, to review theapplication under the procedures ofsection 6 of the Act, which provide forapproval within 180 days, rather thanunder the rule’s fast-track reviewprocedures. This is different than theproposed rule, which provided that anapplicant could instruct theCommission in writing ‘‘during thereview period’’ to review theapplication under the statutory reviewprocedure.17 Absent such a writteninstruction, the application will bereviewed under the fast-trackprocedures, as was proposed.18

The Commission is modifyingproposed rule 38.4 (also based upon itsadministrative experience) to providethat the operational rules of anapplicant for contract marketdesignation and the terms or conditionsof any products to be listed for tradingthat have been filed for voluntaryCommission approval with theapplication or while it is pending shallbe deemed approved by the Commissionno earlier than at the time that thefacility itself is deemed to bedesignated. This proviso has been addedto final rule 38.4 to conform the time forreview and approval of the rules of anapplicant—in cases where the applicantvoluntarily requests Commissionapproval of its operational or product-related rules—with the review periodfor the application for contract marketdesignation itself.

In response to a number of comments,proposed rule 38.3(b)(2) is beingmodified. The rule as proposed wouldhave interpreted the designationrequirement on fair and equitabletrading to include making available tomarket participants timely informationon prices, bids and offers. A number ofcommenters suggested that the proposedrequirement be modified to apply in a



19 The suggested revision applies equally toproposed rule 37.6(d)(3) relating to DTFs, whichhas a similar provision.

20 The Commission also is making conformingchanges to Part 38, Appendix A, Criterion 3 and toPart 37, Appendix B, Core Principle 4.

21 But see section 5(d)(16) of the Act, whichunlike the other core principles, applies only tomutually-owned contract markets.

22 Thus, directors, members of disciplinarycommittees, and members are required to meet a

fitness requirement. Section 1a(24) defines amember as a person ‘‘owning or holdingmembership in * * * the contract market, orhaving trading privileges on the contract market.’’

23 The Commission clarified the core principle’sapplication with respect to demutualized contractmarkets by making explicit that the core principleon fitness requires a demutualized contract marketto establish fitness requirements for all naturalpersons that directly or indirectly have greater thana ten percent ownership interest in the facility. Seeproposed rule 38.3(b)(4).

24 CL 7–8. See also comments of NYBOT, CL 5–4, and NY Bar, CL 19–5.

25 NY Bar also suggested that Part 38, AppendixA, clarify that ‘‘a contract market is not required toestablish minimum financial standards forcustomers of intermediaries.’’ The Commission hasmodified the text by removing the term ‘‘user,’’based on the understanding that the statutorymeaning of ‘‘member’’ includes those only havingtrading privileges on the facility.

manner ‘‘appropriate to the market.’’ 19

As the CBT suggested:while it may be expected that an electronicmarket would be able to routinely captureand disseminate bids and offers entered intothe trading system, as well as executionprices, it is difficult for an open outcrymarket to do the same.

CL 7–7. See also CL 10–3 and CL 18–3.

The Commission agrees and ismodifying the final rule by includingthe ‘‘appropriate to the market’’language that it had previously includedin the withdrawn rules.20 Currently,most open-outcry markets generallycapture price changes only. Byincluding the ‘‘appropriate to themarket’’ language, the Commissionintends to make clear that it is notapplying to open-outcry markets astandard for disseminating suchinformation that is higher than the onepresently in effect. However, theCommission expects that electronictrading systems can, and appropriatelywill, capture such information for everytransaction, not just for those involvinga price change.

CBT asked the Commission to clarifyapplication of the core principle onfitness under section 5(d)(14) of the Act.That provision of the Act requirescontract markets to apply appropriatefitness standards for ‘‘directors,members of any disciplinary committee,members of the contract market, andany other persons with direct access tothe facility.’’ Regarding ‘‘direct access,’’CBT noted:automated order routing systems may enablenumerous customers to send their ordersdirectly to a trading floor or to an electronictrading system. Such trades may beintermediated and/or guaranteed by aclearing FCM. The CBOT does not believethat the Commission intended to requiremarkets to impose fitness requirements onsuch customers.

CL 7–8. See also CL 5–4, CL 19–5.Generally, the core principles are

intended to apply to contract markets(and DTFs) regardless of the form ofbusiness organization.22 Section5(d)(14) requires persons who exercisegovernance responsibilities or control ofthe trading facility to meet a fitnessrequirement.22 In a mutually-owned

enterprise, members would exercisesuch governance authority. In ademutualized contract market, thefacility’s owner or owners would havesuch authority.23 CBT correctly observesthat customers having direct tradingaccess through an automated order entryrouting system or otherwise do notexercise a member’s governanceauthority.24 The Commission interpretsthe core principle on fitness undersection 5(d)(14) of the Act as notrequiring contract markets to establishfitness standards for customers as aconsequence of their using direct orderrouting systems to trade.

NY Bar raised a similar concern,stating that:Appendix A to Part 38 in DesignationCriterion 6 states that a contract market musthave authority to discipline ‘‘marketparticipants.’’ It should be made clear thatthis does not apply to customers of members.

CL 19–5. See also CL 5–5.The Commission does not agree.

Designation criterion 6 (Section 5(b)(6)of the Act) provides, in part, that:a board of trade shall establish and enforcedisciplinary procedures that authorize theboard of trade to discipline, suspend, orexpel members or market participants thatviolate the rules of the board of trade, orsimilar methods for performing the samefunctions.

Contract markets have the authority todeny access to persons who violate theirrules, either directly, or indirectlythrough their members. TheCommission also recognizes, however,that a contract market might encounterdifficulty in enforcing fines or othersanctions to remedy violations of itsrules by persons trading on a marketthat do not have a significant ownershipinterest in the facility. Accordingly, theCommission proposed in rule 38.3(b)(3)to make clear ‘‘that a trading facilityapplying for designation may satisfy therequirement that it have disciplinaryprocedures with respect to non-members by having the capacity tosanction non-member violations byexpelling them or by denying themfuture access.’’ 66 FR 14263, n. 7. Part38, Appendix A, reflects rule38.3(b)(3)’s interpretation of designation

criterion 6 that a contract market needonly have authority to deny access tosuch persons.

Nevertheless, the Commission ismodifying rule 38.3(b)(3) and AppendixA, in light of NY Bar’s comment, toclarify that the denial of access may beeither direct by order to the marketparticipant or indirect by order tocontract market members. TheCommission is also clarifying that thecapacity to expel or deny access to amember with trading privileges buthaving no, or only nominal equityinterest in the facility, also satisfies therequirements of designation criterion 6.In this regard, the definition of‘‘member’’ in section 1a(24) of the Actincludes persons with tradingprivileges. Such persons may havetrading privileges under a ‘‘useragreement’’ with the facility or tradingplatform or by virtue of a non-equity‘‘membership’’ of only nominal value.Levying fines or imposing other types ofsanctions against non-equity ‘‘members’’may be as difficult as imposing suchremedies against non-member marketparticipants.25

Core principle 4 requires contractmarkets to monitor trading to preventmanipulation. Part 38, Appendix B,provided that contract markets, as anacceptable practice, should have accessto clearing information. BOTCC pointsout that, because a contract market’sprovider of clearing services may be acompletely independent entity, theclearing entity should be required toprovide such information to a contractmarket ‘‘only in furtherance of thecontract market’s self-regulatoryresponsibilities and only upon ashowing of need or other good cause.’’CL 1–2. CBT disagreed, reasoning that,‘‘it is crucial to the performance of acontract market’s trade monitoringfunction that it retains such accesswithout any restrictions or any specialshowing of need.’’ CL 7–6; CL 10–3. TheCommission agrees that a contractmarket must be able to obtain suchinformation without limitation.Accordingly, contract markets, bycontract, must provide for suchunimpeded access to information fromthird-parties performing clearingfunctions for the contract market.

NYBOT asked the Commission tomodify the guidance for the designationcriterion on the financial integrity of



26 See Designation Criterion 5 of section 5(b) ofthe Act, providing that a contract market ‘‘shallestablish and enforce rules and procedures forensuring the financial integrity of transactionsentered into by or through the facilities of thecontract market.’’ See also section 5a(c) of the Act,Registration Criterion 4, governing the financialintegrity of transactions entered into on a DTF. TheCommission notes that, in conformance with itsnotice of proposed rulemaking with respect toclearing, 66 FR 24308, it has modified the guidancefor Designation Criterion 5 to reflect thattransactions executed on a contract market, ifcleared, must be cleared with a derivatives clearingorganization DCO registered with the Commission,absent Commission action pursuant to its section4(c) exemptive authority.

27 The Commission also has modified Part 38,Appendix A, Designation Criterion 5, and Part 37,Appendix A, Registration Criterion 4, by referringto the form of margin rather than to margin‘‘levels.’’ In this regard, it should be noted that theCommission is not mandating specific marginingsystems. Compare CL 18 at 3. In addition, theCommission has made a number of conforming ortechnical textual changes to Part 38, Appendix B,in response to the comments of MGE, NY Bar,NYBOT, and NYMEX. As modified, Appendix Bstates explicitly that Core Principle 7, which relatesto public disclosure of certain information, may besatisfied through timely placement of theinformation on the facility’s web site. The languagerelating to Core Principle 6 (emergency authority)now reads, ‘‘minimize the effects of conflicts ofinterest.’’ Core Principle 9 has been modified tomake clear that the qualified independentprofessional testing of a system need not beperformed by a third-party provider, and thediscussion related to Core Principle 10 (tradeinformation) now reads ‘‘transaction executed on’’rather than ‘‘effected on.’’ The Commission alsoclarified the discussion of position limits underCore Principle 5 and of trade information underCore Principle 10.

28 As noted in footnote 5 above, rules that alsohave application to intermediaries or clearingorganizations would still apply to those entitieseven though they are not being reserved withrespect to their application to DTFs.

29 Section 5a(b)(2)(A) through (C) of the Act, asamended, provides that a DTF may trade anycontract of sale of a commodity for future delivery(or option on such a contract) only if—

(A) the underlying commodity has a nearlyinexhaustible deliverable supply;

(B) the underlying commodity has a deliverablesupply that is sufficiently large that the contract ishighly unlikely to be susceptible to the threat ofmanipulation; [or]

(C) the underlying commodity has no cashmarket[.]

Section 1a(13) of the Act, as amended, defines an‘‘excluded commodity’’ to mean, among otherthings, an interest rate, exchange rate, currency,credit risk or measure, debt instrument, measure ofinflation, or other macroeconomic index ormeasure. Excluded commodities under section1a(13) of the Act include exempt securities. Unlikethe provisions governing exempt boards of trade,the CFMA imposes no specific limitations orrequirements for exempt securities to trade on aDTF.

30 Existing contract markets need not make sucha demonstration. They simply must notify theCommission of their intent to operate as a DTF, andfile with the Commission the DTF’s rules (or a listof its rules) and a certification that they meet all ofthe requirements for registration as a DTF.

transactions. NYBOT argued thatcontract market rules are not requiredby the Act and are unnecessary becausefutures commission merchants continueto be subject to the segregation andrelated recordkeeping requirements ofsection 4d of the Act and Commissionrules thereunder. CL 5–3. TheCommission disagrees. The CFMAspecifically requires contract markets(and DTFs) to establish and enforcerules addressing the financial integrityof transactions executed on or throughthe board of trade or facility.26

The Commission anticipates thatcontract markets will continue to beable to fulfill their self-regulatoryresponsibilities concerning the financialresponsibility of intermediaries throughexisting mechanisms, including auditsconducted by designated self-regulatoryorganizations. The Commission hasclarified this point in Appendix B, inthe application guidance to CorePrinciple 11, and has noted explicitlythat, ‘‘A contract market may delegate toa designated self-regulatory organizationresponsibility for receiving financialreports and for conducting complianceaudits pursuant to the guidelines setforth in rule 1.52.’’ Accordingly, rule1.52 has been added to the rulesreserved under Commission rule 38.2.27

B. Part 37—DTFs

New part 37 implements section 5a ofthe Act, which provides for registrationof DTFs. Rule 37.2 exempts DTFs fromall Commission regulations applicableto a trading facility that are notreserved,28 and makes clear that thereserved regulations apply as thoughDTFs were specifically referencedtherein. Rule 37.3 identifies thecommodities eligible to be traded on aDTF under section 5a(b)(2)(A) through(C) of the Act as those defined as‘‘excluded’’ commodities in section1a(13) of the Act.29

Rule 37.3 also establishes a procedurewhereby a specific DTF may make anindividualized showing under section5a(b)(2)(E) of the Act that a contract ishighly unlikely to be susceptible to thethreat of manipulation and should beeligible for trading on that DTF in lightof the characteristics of the commodityand the market’s surveillance history,including its self-regulatory record,capacity and undertakings. Rule37.3(a)(6) lists the factors that arerelevant in making such a showing.

New part 37 provides greateradministrative flexibility than theCFMA in the registration and oversightof DTFs, including provisions that (1)permit the Commission to register a DTFupon conditions; (2) provide a fast-trackreview procedure for applications forregistration; and (3) permit applicantsfor DTF registration voluntarily todemonstrate their capacity to complywith the core principles for operation.30

The Commission has provided twoappendices giving general guidanceregarding applying for registration andcompliance with core principles.

Rule 37.6(d) includes interpretationsof certain core principles. For example,it provides that an electronic tradingplatform used by eligible commercialentities only, may satisfy therequirement to monitor trading in amanner ‘‘appropriate to the market’’ byassuring compliance with its rulesregarding access limitation; that the coreprinciple on monitoring trading may bemet, appropriate to the market, byproviding information to theCommission as requested; and that thecore principle concerning fitnessstandards applies to natural personswho directly or indirectly have greaterthan a ten percent ownership interest ina non-member-owned facility. Rule 37.7includes several special call provisionsfor requesting information from a DTF,or its market intermediaries orparticipants. Finally, the Commissionhas used its section 4(c) exemptiveauthority to give DTFs greaterprocedural flexibility in amending theirrules.

The Commission, based uponadministrative experience in processingapplications for registration followingproposal of the rules, is modifying thetime period for voluntary approval ofthe applicant’s operating rules and forone product to be listed for trading onthe facility. Upon registration as a DTF,the facility may list products for tradingthat meet the automatic eligibility andother requirements by notification to theCommission. Alternatively, it maysubmit new products for voluntaryapproval under the forty-five day fast-track review period of rule 40.3.Although no commenter specificallyraised the issue, the Commission, afterfurther consideration occasioned byinquiries from potential applicants, ismodifying rule 37.7 by adding a newparagraph (c)(2) to provide that thefacility’s operating rules, if Commissionapproval is requested, and one initialcontract, if submitted for voluntaryapproval with an application for DTFregistration, will be deemed approved inthirty days, rather than the normal forty-five day period under rule 40.3(b). Thismodification will enable an applicantfor DTF registration to have its operatingrules and one product considered by theCommission for approval under thesame time-frame as the registrationapplication itself. Because this is anexception to the normal review period,it is being limited to one product only.Such a submission for voluntaryproduct approval must comply in all



31 Product approval is voluntary, and an applicantis not required to submit any of its products forCommission approval.

32 Several exchanges, including CBT, NYMEXand CME, require clearing guarantees for trades bynon-clearing members.

33 The enumerated agricultural commodities arethose listed in section 1a(4) of the Act, and include,among others: wheat, cotton, rice, corn, soybeansand the soybean complex, livestock, and frozenconcentrated orange juice.

34 Consistent with this provision, rule 37.1(b)includes floor brokers within the definition of‘‘eligible commercial entity’’ only when trading fortheir own account.

35 The proposed rules provided that commoditiesdefined in section 1a(13) of the Act as ‘‘excludedcommodities’’ meet the deliverable supplyeligibility test for trading on a DTF. Such excludedcommodities include interest rates, currencies,securities, security indexes, macroeconomic andother types of indexes, and occurrences associatedwith an economic consequence beyond the controlof the traders.

other respects with the requirements ofrule 40.3.31

In addition, commenters made anumber of suggestions for modificationof, or raised issues relating to, the rulesas proposed. These comments relate toeligibility of persons for trading,eligibility of commodities for trading,and interpretations regarding several ofthe registration criteria and coreprinciples. Several commenters alsosuggested a number of specific textualclarifications.

1. Trader Eligibility

The Commission proposed to includeregistered floor brokers and floor tradersas eligible for trading on a commercialDTF. See proposed rule 37.1(b). CBT,NYMEX, and @Markets supported thisproposal. NY Bar, however, opposed theproposed rule’s requirement that anFCM guarantee the trades of such aqualifying floor broker or floor trader,arguing that ‘‘[i]t should be sufficient ifthe floor trader or floor broker is simply‘qualified,’ i.e., that an FCM has agreedto accept all of the broker or trader’strades, instead of being fullyguaranteed.’’ CL 19–3; see also CL 5–3.The Commission does not agree that‘‘acceptance’’ of all trades rather than aguarantee is sufficient. A guaranteeprovides formal assurance that another’sobligation will be fulfilled, a level ofassurance not necessarily provided byacceptance.32 The Commission believesthat this higher level of assurance isboth necessary and appropriate foreligibility by floor brokers and floortraders as commercial entities, and isadopting the final rule as proposed.

The Commission also requestedcomment on whether the definition of‘‘eligible commercial entity’’ underproposed rule 37.1(b) should beamended to include individuals whosefunction in electronic markets is similarto that provided by floor traders. Anumber of commenters generallysupported including individuals whoperform market-making functions onelectronic trading facilities within thedefinition of eligible commercial entity.See CL 6–2, CL 4–2. @Markets, forexample, opined that ‘‘B2B markets arein their infancy’’; ‘‘certain markets mayfind that individual market makers area critical element in accruing necessaryliquidity’’; and ‘‘in lieu of theregistration requirement * * *. suchindividuals [should] * * * meet the

requirements for membershipestablished by the facility.’’ CL 6–3.

NYBOT and NY Bar suggested thatsuch a liquidity provider for electronicmarkets should be considered to be anyeligible contract participant that‘‘undertakes to maintain a bid and askspread pursuant to an agreement with,or the rules of, an electronic tradingfacility.’’ CL 5–1; CL 19–2. CBTsuggested that the electronic marketequivalent of a floor trader wouldsimply be a member that has its tradingguaranteed by an FCM, and that issubject to the trade practice anddisciplinary rules of exchanges. CL 7–4.However, that description would be ameaningful distinction only in thecontext of an intermediated market.Rather than attempting to establish arule at this time, NYMEX suggested thatthe Commission make suchdeterminations over time on a case-by-case basis for each facility seekingregulatory relief in this area. CL 10–5.SIA, although supporting the concept ofa functional equivalent of a floor traderfor electronic markets, noted that ‘‘mostcorporate entities in that category wouldalready fall within the statutorydefinition of eligible commercialentity.’’ CL 20–3. In light of the widerange of recommended standards, thesuggestion by at least one commenterthat existing categories already wouldcover those likely to fall within thescope of a new category for electronicmarket maker, and the lack of previoustrading experience, the Commission isof the view that the issue should beconsidered based upon a fulleradministrative record, after sometrading experience with this type ofmarket has been observed.

NY Bar suggested that theCommission clarify that ‘‘[s]ection37.3(b) is intended to permit a non-eligible commercial entity to access acommercial entity [DTF] through anyFCM or broker-dealer.’’ CL 19–3. Accessto trade on a DTF generally is limitedto eligible traders under rule 37.3(a).Eligible traders are either eligiblecontract participants or non-eligiblecontract participants trading through aregistered FCM that: (1) is a member ofa futures self-regulatory association (orfor a facility trading only securityfutures products, a national securitiesassociation); (2) is a clearing member ofa derivatives clearing organization; and(3) has at least $20 million net capital.See section 5a(b)(3) of the Act.Moreover, for transactions other thansecurity futures products, a DTF may byrule permit a broker-dealer or adepository or Farm Credit Systeminstitution to act as intermediary ‘‘onbehalf of customers’’ if such entities do

not hold customer funds for more thanone business day. See section 5a(e) ofthe Act.

In contrast to these provisions, section5a(a)(2)(F) of the Act provides that acommercial DTF may trade anycommodity (other than an enumeratedagricultural commodity)33 when accessto trade on the facility is limited toeligible commercial entities trading fortheir own account. Based upon thisstatutory language, commercial DTFsunder rule 37.3(b) are limited to eligiblecommercial entities (as defined in§ 37.1(b)) trading for their own account.Accordingly, commercials may notexecute their trades through an FCM, orany other intermediary, when trading ona commercial DTF under rule 37.3(b).34

2. Commodity Eligibility

Consistent with section 5(e)(2) of theAct, the Commission indicated in itsnotice of proposed rulemaking that itwill determine in a future rulemakingwhether to permit and, if so, theappropriate conditions for permitting,the enumerated agriculturalcommodities to trade on a DTF. 66 FR14264. A number of commentersresponded by suggesting that theenumerated agricultural commoditiesshould be permitted to trade on a DTFimmediately. See CL 3–3, CL 9–1, CL18–4. The Commission intends to turnits attention to this issue at a later datein a separate rulemaking.

As a class of excluded commodities,exempt securities are eligible to betraded on a DTF. The Commissionrequested comment on whether exemptsecurities trading on a DTF should besubject to additional requirements, suchas reporting requirements, notapplicable to other excludedcommodities.35 CBT explained that it‘‘has found large trader reporting to bea useful tool for monitoring trading offutures and options on exemptsecurities,’’ but wanted ‘‘the form, levelsand timing of any such reporting’’ left



36 In this regard, the excluded commoditiesdefined in section 1a(13) of the Act clearly meetthis standard, and may be used as a benchmark forcomparison.

37 The Commission is not modifying theprovisions relating to DTF applications forregistration. The notification procedure is anabbreviated procedure for existing contract markets.Applicants for registration generally will not havepre-existing approved or certified rulebooks.

to the discretion of individual DTFs. CL7–5.

ISDA did not object ‘‘in principle’’ tothe imposition of such requirements,but cautioned against imposingregulatory requirements in the absenceof a ‘‘compelling public interest.’’ CL 3–3. SIA suggested that any large-traderreporting requirement should beconsistent with market practice in therelevant cash market and only uponrequest of the Commission. CL 20–2.

On the other hand, the United StatesDepartment of the Treasury (Treasury)expressed the opinion that all DTFs andcontract markets should enforce a large-trader reporting system for contractsbased on Treasury instruments.Treasury ‘‘reiterate(d) its belief thatlarge trader reporting requirements* * * reveal information that is usefulto regulators, and also have a deterrenteffect.’’ CL 14–2.

In light of all of the commentsreceived, the Commission at this timehas determined not to impose routinelarge-trader requirements on DTFs ortheir users for contracts based onTreasury instruments. Should marketconditions warrant, however, theCommission will invoke its special callauthority under Rule 37.8 to requiresuch information for these contracts asthe Commission deems necessary,taking into consideration thesurveillance information routinelyavailable with the DTF. TheCommission’s special call could require,for example, ongoing reporting of large-trader positions or other appropriateinformation.

In addition to excluded commoditiesand security futures products, theCommission, under rule 37.3(a)(6), maymake an individualized determinationby rule, regulation or order, that acommodity is eligible to be traded on aDTF based on the commodity’scharacteristics and surveillance history,and the self-regulatory record andcapacity of the facility on which it is tobe traded. NYMEX questioned whethersuch determinations were includedunder the thirty-day period that appliesto applications for DTF registration. Ifnot, NYMEX requested that ‘‘theCommission specify a comparabletimeframe for such determinations thatwould provide for resolution of suchapplications in a reasonably expeditiousmanner.’’ CL 10–2.

The timing of an individualizedCommission determination ofcommodity eligibility under rule37.3(a)(6) is independent of a facility’sinitial registration as a DTF. In thisregard, the rules do not require that aproduct be submitted for approval at thetime the facility is registered as a DTF.

Accordingly, the thirty-day time periodfor registration is independent of, anddoes not control, any product-specificconsideration. Moreover, theCommission proposes to make case-by-case determinations with regard toeligibility of a commodity to trade on aDTF after notice and an opportunity forhearing through submission of writtendata, views and arguments. A number ofcommenters, including NYMEX andNYBOT, suggested that a petitioningDTF or applicant for DTF registrationshould be accorded the right to requestan opportunity to present oral viewsand testimony to the Commission. CL 5–3, CL 10–3. The Commission concursand will consider granting such requestsin appropriate instances. Such anopportunity to present views, facts andargument orally before the Commissionis not consistent with a thirty-daydeadline. Accordingly, recognizing thepotentially complex and highlyindividualistic nature of eachdetermination, the Commission is notmodifying the final rule by including adeadline. Nonetheless, the Commissionintends to make these determinationsexpeditiously.

NYMEX also requested that theCommission clarify that the relevantapproval criteria are ‘‘meaningful onlyin relative terms, i.e., in comparison toother markets’’; that ‘‘it is not necessaryfor a contract to meet all of thesefactors’’; and how these factors might beinterpreted for cash-settled or index-based contracts. CL 10–3. TheCommission believes that ademonstration that a commodity meetsthe criteria of rule 37.3(a)(6)(ii) can bemade either on an absolute basis orrelative to a market that clearly meetsthe requirement that a ‘‘commodity ishighly unlikely to be susceptible to thethreat of manipulation.’’ 36 TheCommission will consider such ademonstration based upon the totality ofthe showing, but will separatelyconsider the petitioner’s surveillancehistory and self-regulatory record fromthe commodity’s general cash marketcharacteristics. Nevertheless, theCommission would considerundertakings for enhanced surveillanceand self-regulatory measures (beyondthe required large-trader reportingsystem), such as spot-month speculativeposition limits, as an appropriate meansto address instances where cash marketcharacteristics alone may not providesufficient assurance that the commodity

is highly unlikely to be susceptible tothe threat of manipulation.

With regard to cash-settled contracts,the Commission is modifying sub-paragraph 37.3(a)(6)(ii)(G) to make clearthat the facility should be able to showthat the contract or product’s terms andconditions provide for a reliable andacceptable cash-settlement procedurethat is adequate to minimize the threatof market abuse. The other criteriaenumerated in paragraph (a)(6) applyequally to cash and physically settledcontracts.

3. Registration ProceduresProposed rule 37.5(a)(2) would have

required that a contract market filingnotice that it wishes to operate as a DTFinclude in its submission a copy of thefacility’s rules. NYBOT opined that‘‘this should not be necessary, since therules of the contract market wouldalready be on file with the Commission,unless and to the extent the DTEF rulesare different.’’ CL 5–3; see also CL 15–4 (MGE). The Commission is modifyingthe final rule to provide that thenotification need only list those rules ofthe contract market that also apply tooperation of the DTF.37

4. Interpretations of Registration Criteriaand Core Principles Guidance

The Commission proposed in itsregistration guidance in Appendix Athat ‘‘[i]f cleared, transactions executedon the facility must be cleared througha derivatives clearing organization.’’However, in a subsequent notice ofproposed rulemaking to implement theCFMA with respect to derivativesclearing organizations (DCO), theCommission clarified that,

excluded or exempted contracts, includingthose elected pursuant to section 5a(g) to betraded on a registered derivates transactionexecution facility, are not required to becleared by a DCO, although a clearingorganization that clears these contracts mayvoluntarily apply, pursuant to section 5b(b),to register with the Commission as a DCO.

66 FR 24308 (May 14, 2001).SIA, in commenting upon the

guidance in Appendix A, asserted thatthe registration guidance should bemodified to recognize that contracts thatare traded on a DTF on an ‘‘opt-in’’ basisare not required to be cleared by a DCO.CL 20 at 2. NY Bar asserted that a DTFshould be permitted to clear throughany recognized clearing organizationincluding, e.g., clearing organizations



38 NYBOT also asserted that there should not beany fitness standards for natural persons whodirectly or indirectly have greater than a ten percentinterest in the facility and are merely passiveinvestors. This issue is addressed above inconnection with comments related to a similarprovision applicable to contract markets.

39 The Commission has made similarmodifications to the guidance governing designatedcontract markets contained in Part 38, Appendix B,Core Principle 14.

40 The Commission notes that these minimumstandards are consistent with the fitness standardsthat Congress itself adopted for exempt commercialmarkets. In this regard, section 2(h)(5)(A)(iii) of theAct requires an exempt commercial market tocertify to the Commission that ‘‘no executive officeror member of the governing board of, or any holderof a 10 percent or greater equity interest in, thefacility is a person described in any ofsubparagraphs (A) through (H) of section 8a(2)[.]’’

41 The Commission has made a similarmodification to Part 38, Appendix B, Core Principle9. See comment of MGE, CL 15–3.

42 In proposing these rules, the Commission notedthat, in light of the Congressional intent toimplement the provisions of the CFMA withoutdelay, during the transition period between theeffective date of the CFMA and promulgation offinal implementing rules, the Commission wouldnot take any enforcement action against any personwho complied with the implementing rules, asproposed. 66 FR 14268.

43 CBT correctly asserted that rules listingadditional delivery months for agriculturalcontracts should not be deemed to be materialunder rule 40.4, and thus subject to the requirementof prior approval. CL 7 at 2. Pursuant to section5c(c)(B)(2) of the Act, the listing of additionaldelivery months is not subject to the prior approvalrequirement because such rules do not apply ‘‘tocontracts and delivery months which already havebeen listed for trading and have open interest.’’ 7U.S.C. 7c(c)(2)(B).

CME asserted that the Commission should notretain the distinctions between in-house changesand those made by third parties with respect todelivery standards and index constructions andcalculations. It asserted that ‘‘there are sufficientsafeguards embodied in the core principles to makerequirements at this level of detail obsolete.’’ CL 18at 5. The Commission notes that it exercised itssection 4(c) authority to excuse independent thirdparty delivery and index changes from the statutorycertification requirement for all rule changes inrecognition that such rule changes are subject to theadditional safeguard of being determined by theaction of an independent party, for purposes notsolely related to trading in derivatives contracts orto trading on the exchanges.

supervised by domestic and foreignbanking authorities. CL 19–4–5. In lightof these comments, and the fact that nocomments were submitted in responseto the Commission’s clarification in theFederal Register notice proposing rulesfor clearing organizations, theCommission is modifying the guidancein Appendix A to make clear thatagreements, contracts and transactionsin excluded or exempt commodities thatare traded on a DTF, if cleared, may becleared through clearing organizationsother than DCOs registered with theCommission.

With regard to Appendix B for DTFs,Guidance on Compliance with CorePrinciples, NYBOT and NY Barsuggested that the Commission add astatement similar to one included in theguidance for contract markets(Appendix B of part 38), that ‘‘[b]oardsof trade that follow the specificpractices outlined . . . for any coreprinciple below will meet the applicablecore principle.’’ CL 5–4, CL 19–4. Theguidance for DTFs, however, in keepingwith the less regulated nature of thosemarkets, is abbreviated and general innature, and does not include the samelevel of detail as the guidance forcontract markets. Accordingly, unlikethe guidance for contract markets, theguidance for DTFs does not outlinespecific acceptable practices.

NYBOT objected that the guidance on‘‘minimum’’ fitness standards underCore Principle 6 for persons who havemember voting privileges, governingobligations or responsibilities, or whoexercise disciplinary authority, is notprovided for in the CFMA and isunnecessarily onerous.38 CL 5–4. TheCommission agrees in part and hasmodified the guidance accordingly.39

The guidance in Appendix B relating tominimum fitness standards interpretsSection 5a(d)(6) of the Act, whichrequires DTFs to ‘‘establish and enforceappropriate fitness standards.’’ In theCommission’s view, the fitnessstandards for the named categories ofpersons that should apply ats aminimum include the statutorydisqualifications in section 8a(2) of theAct. Of course, DTFs remain free toimpose higher fitness standards,including the statutory disqualification

standards of section 8a(3) of the Act.40

Persons who have governing obligationsor responsibilities, or who exercisedisciplinary authority, should not havea significant history of seriousdisciplinary offenses, such as those thatwould be disqualifying under rule 1.63.

CME and NYMEX commented thatdisclosing information on systemsecurity, as the proposed guidance onCore Principle 4 suggests, mightcompromise a system’s integrity. CL 10–4, CL 18–4. The guidance did not intendthat detailed, proprietary information onsystem security should be disclosed,and in light of these comments, theCommission has deleted thisprovision.41

C. Product Listing and RuleAmendments

Proposed part 40 would implementthe procedural provisions of Section5c(c) of the Act for new contracts, newrules and rule amendments.42 Based onadministrative experience after the part40 rules were proposed, theCommission is amending rule 40.4 toprovide contract markets greatercertainty with respect to the approval ofrules governing contracts onenumerated agricultural commodities.First, the Commission is adding to thelist of non-material rule changes thecategory of rule changes necessary tocomply with a binding court order, orwith a rule or order of the Commission,or of another federal regulatoryauthority. Second, the Commission isadding a provision to the final rules thatpermits a contract market to submit tothe Commission any rule that thecontract market believes not to bematerial, but that is not listed as non-material in rule 40.4, and to implementthe rule ten days after submission,absent contrary notice from theCommission. This procedure givesexchanges flexibility by providing thatthe listed categories are non-exclusive

and at the same time provides a methodto obtain certainty that the Commissionagrees that the rule change is notmaterial.43

While commenters strongly endorsedthe increased flexibility of the proposedrules, see CL 7–2, CL 10–2, CL 18–1,several objected to certain specificrequirements. In response to thesecomments, the Commission has decidedto modify the proposed rules asdiscussed below.

1. ClearingBOTCC objected to the provision of

proposed rule 40.2, which would haverequired a DCO to certify, with respectto a product that it clears that is nottraded on a contract market or a DTF,that the trading product or instrumentcomplies with the Act. BOTCCquestioned the Commission’s authorityto require this certification, andquestioned how a DCO could make sucha certification ‘‘about a product orinstrument that it has not designed andfor which it is providing only a discreteset of services.’’ CL 1–5. As analternative, BOTCC suggested that theCommission could require the DCO tocertify that its clearing of the productcomplies with the Act, although itquestioned the practical utility of sucha certification.

Under section 5c(c) of the Act, aregistered entity may elect to ‘‘accept forclearing any new contract or otherinstrument, or may elect to approve andimplement any new rule or ruleamendment’’ by certifying to theCommission that ‘‘clearing of the newcontract or instrument, new rule or ruleamendment complies with [the] Act.’’The Commission is clarifying rule 40.2to provide that a DCO may accept forclearing any new contract or other



44 BOTCC objected to including clearingorganizations within the definition of ‘‘contractmarket’’ under proposed rule 40.1. BOTCC reasonedthat this definition was unnecessary and confusingsince the Act now separately regulates tradingfacilities and clearing organizations. CL 1–4. TheCommission agrees and has deleted the proposeddefinition from the final rules.

45 See proposed Commission rule 40.1, whichdefines ‘‘dormant contract’’ as any futures or optioncontract in which no trading has occurred for sixmonths beginning five years after initial listing.

46 Those procedures are also incorporated byreference in proposed rule 40.4, which implementsthe statutorily-mandated review and approvalprocedures for certain amendments to contractsinvolving enumerated agricultural commodities.

47 As suggested by NYBOT and NY Bar, theCommission is modifying rule 40.6(a) by adding aparenthetical to make explicit that the self-certification requirement of rule 40.6 applies to allnew rules or rule amendments of a contract marketor DTF other than those rules or rule amendmentsthat have been approved by the Commission underthe voluntary approval procedures of rule 40.5. SeeCL 5–6 and 19–7. This does not preclude a contractmarket or DTF from voluntarily submitting a rulefor Commission approval under rule 40.5 that it hasalready implemented by certification under rule40.6.

48 In such a proceeding, the Commission wouldbe required to satisfy the applicable legal standard.In a proceeding to alter or supplement the rules ofa registered entity, the Commission would berequired to establish that such changes ‘‘arenecessary or appropriate for the protection ofpersons producing, handling, processing, or

consuming any commodity traded for futuredelivery on such registered entity * * * or for theprotection of traders or to insure fair dealing incommodities traded for future delivery on suchregistered entity.’’ 7 U.S.C. 12a(7). In anadministrative enforcement proceeding alleging afalse certification, the Commission’s findings of factmust be supported by ‘‘the weight of the evidence.’’7 U.S.C. 8(b).

instrument by filing with theCommission: (i) the rules of the DCOthat permit it to accept the contract orother instrument for clearing (includingany rules establishing the terms andconditions of products that make themacceptable for clearing); and (ii) acertification that the clearing of the newcontract or instrument (including anyrules establishing the terms andconditions of products that make themacceptable for clearing) complies withthe Act. By so certifying, the DCO willbe certifying not only that it is incompliance with the core principlesapplicable to it, but that its rulespermitting acceptance for clearing(including any rules establishing termsof the product to be accepted forclearing) comply with the Act. Thesefiling and certification requirements, asproposed, do not apply when a DCOaccepts a new product for clearing thatis traded on a contract market or aregistered DTF.44

2. Product ListingCME objected to the requirement that

trading facilities certify to theCommission compliance with the Actwhen relisting dormant contracts fortrading. See proposed rule 40.2. CMEargued that the proposed certificationrequirement for dormant contracts is a‘‘relic of the days of more intensiveregulatory administration.’’ CL 18 at 5.The Commission disagrees. Contractsbecome dormant only after five yearsfrom initial listing 45 and cash marketsare likely to change during that period.Consequently, the product as originallycertified may no longer be incompliance with the applicable coreprinciples. The recertificationrequirement is in keeping with theCommission’s oversight role.

3. Rule SubmissionsProposed rule 40.5 would have

established procedures for the voluntarysubmission of rules for Commissionreview and approval.46 CBT objectedthat this rule would result in apotentially longer review process than

was provided for under theCommission’s fast track reviewprocedure prior to enactment of theCFMA. CL 7–2.

Proposed rule 40.5 provided for a 45-day review period of rules submitted forCommission approval, with thepossibility that the Commission couldextend the review period once, foranother 45 days, which would havecomported with the statutory reviewperiod of 90 days. On further reflection,the Commission has determined toretain the review periods of its pre-CFMA fast track procedure: one 45-dayinitial review period, with thepossibility of one 30-day extension.47

When the Commission does notapprove the rule of a registered entitysubmitted to it for voluntary approval,proposed rule 40.5(d) provided that thenon-approval notice must briefly specifythe nature of the issues raised and thespecific provision of the Act orregulations, including the form orcontent requirement of rule 40.5, thatthe facility’s rule would violate, appearsto violate, or the violation of whichcould not be ascertained from thesubmission. Notice of the Commission’srefusal to approve a registered entity’srule would have been presumptiveevidence that the registered entity couldnot truthfully certify that the same, orsubstantially the same, proposed rule orrule amendment does did not violate theAct or rules thereunder. See proposedrule 40.5(e).

BOTCC argues that the presumptionestablished by rule 40.5(e) is ill-advised,procedurally flawed, discourages rulesubmissions and should be withdrawn.CL 1–5. The Commission is notpersuaded. The presumptionestablished by rule 40.5(e) is not aconclusive, but rather, is a rebuttablepresumption. If the registered entitywere to certify such a rule followingnotice of non-approval, the burden ofproceeding would rest with theCommission.48 In any administrative

proceeding brought by the Commission,the registered entity would have anopportunity to supplement the recordwith evidence rebutting thepresumption. Moreover, as the proposedrule makes clear, nothing will prejudicea registered entity’s right to resubmit arevised rule or to supplement thesubmission. Accordingly, theCommission does not believe that thispresumption will discourage voluntaryrule submissions.

Proposed rule 40.6 provides that theCommission may stay the effectivenessof a certified rule during the pendencyof Commission proceedings for filing afalse certification or to alter or amendthe rule pursuant to section 8a(7) of theAct. CBT objected to the stay provisionon the grounds that section 8a(7) doesnot reference a stay and that it isunnecessary and potentially detrimentalfor the Commission to have suchauthority. CL 7–3; see also CL 18 at 2–3. BOTCC, while expressing sympathyfor the Commission’s concern that animproperly adopted rule not bepermitted to remain in effect pendingthe conclusion of the administrativeproceeding, suggested that theCommission modify the rule to specifythat any stay will not affect contractsand positions previously established inreliance on the disputed rule and thatthe Commission endeavor to delay theeffectiveness of any such stay in orderto give the registered entity and marketusers an opportunity to makeappropriate arrangements. CL 1–6, note4.

The Commission recognizes thepotential market implications of a stayof a previously implemented rule or ruleamendment. The Commission has notdelegated this authority to its staff. TheCommission intends to invoke its stayauthority cautiously, and only in therare instance when its use would beappropriate.

FIA requested confirmation that theCommission will solicit comment onrules submitted for voluntary approvalwhen warranted. CL 11–6–7. TheCommission confirms its intent tosolicit public comment in such casesand further confirms its intent to solicitpublic comment in appropriate cases on



49 BOTCC commented that the proceduresgoverning amendments to the terms and conditionsof contracts involving enumerated agriculturalcommodities, consistent with the Act, should applyonly when the contract is traded on a designatedcontract market, and not when traded on aregistered DTF pursuant to section 5a(g) of the Act.CL 1–5. The Commission agrees and has amendedrule 40.4 accordingly.

50 See 17 CFR 1.41(a)(4)(iv)(2001).51 Section 8a(9) of the Act vests the Commission

with emergency authority. The term emergency isdefined to include ‘‘in addition to threatened oractual market manipulations and corners, any act ofthe United States or a foreign government affectinga commodity or any other major market disturbancewhich prevents the market from accuratelyreflecting the forces of supply and demand for suchcommodity.’’

52 This is consistent with the approach taken inthe current rules regarding the timing of notificationof rules implemented pursuant to an emergency.See 17 C.F.R. 1.41(f)(2)(i).

53 See, note 9 supra.54 As proposed by rule 36.3(b), if an exempt

commercial market chooses not to satisfy itsreporting requirements by providing theCommission with electronic access to transactionsconducted on the facility, it may do so by analternative means, the form and content of whichthe Commission may determine is acceptable,pursuant to a petition to the Commission for sucha determination. Such an alternative should providethe Commission with information comparable incoverage and frequency to that provided to theCommission by its large-trader reporting system.

interpretations issued or approvedunder section 5c(a) of the Act.49

4. Emergency Rule Submissions

CME commented that the proposeddefinition of emergency in proposedrule 40.1 is too broad and particularlyobjected to including within thedefinition ‘‘any action taken by anygovernmental body, or any other boardof trade, market or facility which mayhave a direct impact on trading on thetrading facility.’’ CME argued that thisdefinition could require the‘‘declaration of an emergency if * * *the Federal Reserve changes the fedfunds rate.’’ CL 18–5. The proposedlanguage is substantially identical tolanguage included in the Commission’scurrent definition,50 and is consistentwith the Act’s definition ofemergency.51

BOTCC, CME and NYMEX objected tothe provisions of rule 40.6 that wouldrequire a contract market or registeredDCO to file emergency rules at the timeof implementation, if implementation issooner than the next business day. CL1–7–8; CL 10–4; CL 18–5. CMEcommented that this notificationrequirement ‘‘more closely resemblesmicromanagement than oversight. It hasthe effect of requiring a DTEF to concernitself with an administrative procedurerather than concentrating on theemergency itself.’’ CL 8–5

After considering these comments, theCommission has decided to modify rule40.6 to require the contract market orDCO to file rules implemented pursuantto an emergency at the earliest possibletime after implementation of the rule(but in no event later than 24 hours afterimplementation), if it is not practicablefor the contract market or DCO to filethe rule prior to implementation.52

D. Part 36—Exempt MarketsPart 36 applies to any board of trade

or electronic trading facility eligible forexemption under sections 5d and 2(h)(3)through (5) of the Act, respectively.

Section 5d of the Act establishes thecategory of ‘‘exempt board of trade.’’Commission rule 36.2 defines thosecommodities that are eligible to trade onan exempt board of trade to includecommodities defined in section 1a(13)of the Act as ‘‘excluded commodities,’’other than securities, and such othercommodities as the Commission maydefine by rule, regulation or order. Inaddition, rule 36.2(b) provides the formand manner of the notification to theCommission provided for under section5d of the Act.

Transactions by eligible commercialentities in exempt commodities tradedon an electronic trading facility areexempt commercial markets undersection 2(h)(3) of the Act.53 Markets thatsatisfy the initial and ongoingrequirements of sections 2(h)(3) through(5) of the Act as amended are excludedfrom the Act’s other requirements. Therules implement the notificationrequirements of section 2(h)(5)(A) of theAct and the information requirementsfor exempt commercial marketsconsistent with section 2(h)(5)(B) of theAct.54 Generally, the part 36 rulesincorporate by reference the statutoryconditions that pertain to theseexemptions, including the statutoryprovisions relating to eligibility.

1. Exempt Boards of TradeSeveral commenters suggested that

the Commission expand thecommodities eligible to be traded onexempt boards of trade (EBOT) tradingunder proposed rule 36.2. ISDA statedthat it ‘‘believes it is important that theCommission indicate its intention to actwith dispatch in designating additionalcommodities that may be traded on anexempt board of trade.’’ CL 3–4. SIAsuggested that the Commission ‘‘doesnot need to foreclose the determinationthat other commodities could satisfy thestatutory standard for eligibility or torequire in all cases that such adetermination be made by the CFTC,where such a determination is not

required by statute.’’ CL 20–3. TheCommission believes that thecommodities defined as excluded undersection 1a(13) of the Act clearly meetthe statutory criteria to be traded on anEBOT. The Commission has notforeclosed the possibility of findingadditional commodities eligible fortrading on an EBOT at some future timeby rule, regulation or order.

2. Exempt Commercial MarketsWith respect to the eligibility of

traders to participate in exemptcommercial markets, Energy Group‘‘suggest[ed] that the Commissionconsider clarifying the definition ofprincipal for the purposes of principal-to-principal transactions to includeeligible commercial entities enteringinto transactions on behalf of othereligible commercial entities.’’ CL 4–2.As noted above, the Commission’sproposed rules relating to exemptcommercial markets rely directly uponthe statutory definitions and conditionsrelating to the section 2(h)(3)exemption. Any interpretation by theCommission of the definition of‘‘principal’’ relating to eligiblecommercial entities necessarily wouldinclude consideration of the use andmeaning of that term as it relates toother statutory exclusions orexemptions, and is beyond the scope ofthis rulemaking.

With respect to the reportingrequirements set forth in part 36, seenote 55 supra and accompanying text,@Markets expressed the view that‘‘regular and periodic’’ reports werebeyond the scope of the Commission’sauthority under section 2(h)(5)(B) of theAct and Energy Group suggested that‘‘the focus on meeting ‘‘large trader’’requirements is unnecessary for theCommission to fulfill its responsibilitiesunder the CFMA.’’ CL 4–2. TheCommission disagrees. Section2(h)(5)(B) of the Act requires that anexempt commercial market provide theCommission with electronic access tothe market. The access requirementprovides the Commission withinformation on a routine, on-going basis,thereby serving many of the functionsthat large-trader reports serve on theregulated markets. Using this access, theCommission is able to surveiltransactions on the market in order toenforce its anti-manipulation authority.The alternative to providing electronicaccess set forth in rule 36.3(b) isintended to offer exempt markets asubstitute, but generally equivalent,means of complying with the statutoryelectronic access requirement.

Two commenters raised issuesrelating to proposed rule 36.3(c)(3),



55 The rule excludes broker-dealers, FCMs andtheir respective affiliates.

56 Rule 1.1 on its face applies only to ‘‘the extentthat the Commission exercises jurisdiction oversuch accounts, agreements, or transactions asprovided in section 2(c)(2)(B).’’

57 Separate from proposed rule 1.1, a number ofcommenters offered a range of opinion in responseto the request for comment by CommissionerThomas J. Erickson on the advisability of

Continued

under which a facility must require thateach participant agree to comply withall applicable law and must have areasonable basis for believing that itsparticipants are eligible. BOTCCsuggested that the Commission clarifythat the provision requiring eachparticipant ‘‘to agree to comply with allapplicable law is intended to be limitedto applicable provisions of the Act andCommission regulations.’’ CL 1–4; seealso CL 4–2 (Energy Group). That isindeed the intended meaning of therule.

Finally, @Markets requested that theCommission ‘‘confirm that an exemptcommercial market will be deemed to bea ‘‘board of trade’’ for purposes of theconfidentiality provisions of section 8(a)of the Act and the relevant provisions ofthe Freedom of Information Act.’’ CL 6–4. Unlike contract markets and DTFs,which are specifically referred to as‘‘boards of trade’’ in the Act, exemptcommercial markets are not specificallyreferred to by the Act as ‘‘boards oftrade.’’ Compare sections 5(a) and 5a(a)of the Act with section 2(h)(5) of theAct. Nevertheless, section 8(a) of the Actgenerally prohibits the Commissionfrom publishing ‘‘data and informationthat would separately disclose thebusiness transactions or marketpositions of any person.’’ ‘‘Person’’under section 1(a)(16) of the Actincludes individuals, associations,partnerships, corporations and trusts,and would thereby apply to an exemptcommercial market and to those tradingthereon.

3. Common ProvisionsPart 36 provides that both exempt

boards of trade and exempt commercialmarkets be required to disseminatepublicly their trading volume, openingand closing price ranges, open interestand other trading data, to the extentappropriate to that market upon aCommission finding that the facilityserves as a significant source for thediscovery of prices in the cash marketfor the underlying commodity. Rules36.2(c)(2) and 36.3(c)(2) provide that theCommission will make such adetermination after notice and anopportunity for hearing throughsubmission of written data, views andarguments.

A number of commenters suggestedmodifications to the rule. BOTCC notedthat price information is an importantsource of revenue for exchanges andsuggested that the Commission revisitthe public dissemination requirement ata future time after ‘‘a fuller opportunityto evaluate the appropriate balance ofpublic interests entailed by suchrequirement.’’ CL 1–3. @Markets noted

that although ‘‘neither the Act nor theproposed rules define the standards thatthe Commission is to employ indetermining that a market performs asignificant price discovery function, [it]would expect to have the opportunity tocomment on appropriate standards priorto or in connection with any suchdetermination by the Commission underthis section of the Act.’’ CL 6–2. Otherscommented that oral hearings shouldnot be precluded in appropriate cases.CL 5–2, CL 19–4.

The Commission agrees with theabove comments. Although theCommission has provided that itsdetermination will be made throughnotice and an opportunity for hearingthrough submission of written data,views and comments, it is not precludedfrom convening a public meeting toreceive oral comment and argument inappropriate cases. The Commission maydetermine sua sponte, or in response toa request by the affected trading facility,or any interested member of the public,that a public meeting to receive oralstatements and arguments is in thepublic interest and will assist it in itsconsideration of the relevant issues. Aspart of its inquiry, the Commissionwould set forth the standards that itwould use in making its determination.The facility, and other interestedmembers of the public, would have anopportunity to challenge thosestandards and to raise any otherobjections or defenses to the issuance ofan Order, including any possibleadverse impact on a facility’s propertyrights that may stem from the proposedorder. The Commission is of the viewthat these issues are best addressed inthe context of a fully-developedadministrative record, rather than in thecontext of this generalized rulemaking.Accordingly, the Commission isadopting the final rules on proceduresrelating to price discoverydeterminations as proposed.

The Commission invited comment onwhether exempt boards of trade andexempt commercial markets should berequired affirmatively to disclose totraders that the facility and trading onthe facility are not regulated orapproved by the Commission. 66 FR at14266. Commenters responding to thisquestion generally opposed requiringfacilities to affirmatively make suchdisclosures. But see CL 10–5 (NYMEX);CL 12–2 (SUA). For example, EnergyGroup suggested that

[a]n exempt commercial market is openonly to sophisticated market participantswho are familiar with distinctions among thedifferent facilities. Such participants wouldhave no reason to believe such a facility isregulated * * *. A representation affirming

that the facility is not regulated may causeconfusion.

CL4–2. SIA and @Markets concurredwith this view, noting respectively that‘‘[i]n light of the institutional characterof these markets * * * such disclosureis not necessary,’’ and that ‘‘theparticipants in these markets * * * canbe expected to make appropriateinquiries regarding a market beforeapplying for trading privileges on thefacility.’’ CL 20–3; CL 6–4.

The Commission agrees that eligiblecontract participants and eligiblecommercial entities can be expected tomake appropriate inquiries regardingwhether a market is regulated and is notrequiring exempt boards of trade orexempt commercial marketsaffirmatively to disclose that they arenot regulated or approved by theCommission.

E. Miscellaneous

1. Anti-FraudThe Commission additionally

proposed an anti-fraud provision,proposed rule 1.1, pursuant to itsauthority in sections 3 and 8a(5) of theAct. This proposed anti-fraud rulewould apply to retail foreign currencyagreements, contracts and transactionsdescribed in section 2(c)(1) of the Act.

A number of the commentersparticularly supported this proposedrule. SUA noted that it was the clearintent of Congress that the Commission‘‘retain broad powers to protect againstfraud and manipulation’’ (CL 12 at 1).NYMEX ‘‘strongly support[ed] theproposed new rule.’’ (CL 10 at 4). CBTcommented that the rule ‘‘addresses aregulatory gap with regard to * * *unregulated entities.’’ (CL 7 at 9). Seealso CL 11 at 6. NASAA, ‘‘welcome[d]the clarification of the Commission’santifraud jurisdiction.’’ CL 2 at 1.

ISDA, however, suggested that theCommission expand the exclusion fromthe rule to include financial institutions,insurance companies, financial holdingcompanies and investment bank holdingcompanies.55 Such entities need not beexcluded from operation of the rulebecause they are outside of its intendedscope in the first instance.56

Accordingly, the Commission isadopting the rule as proposed.57



promulgating a broader anti-fraud rule. 66 FR at14288. SUA supported a broader anti-fraud rulewithout qualification. CL 12 at 1. SIA did not object‘‘in concept’’ to clarification by the Commission ofits anti-fraud authority with respect to principal-to-principal transactions. CL 20 at 4. ISDA, however,warned that the Commission should proceed withcaution in this area to avoid creating anyuncertainty with respect to the scope of itsjurisdiction. CL 3 at 5. Finally, FIA expressed doubtwhether an anti-fraud rule of more generalapplicability would appreciably enhance theCommission’s authority to deter misconduct bypersons subject to its jurisdiction, or the public’sability to recover damages as a result of suchmisconduct. CL 11 at 6.

58 Specifically, for example, the MerchantsExchange of St. Louis contracted with a technologycompany to operate its matching engine. A criterionfor designation is that the contract market‘‘establish and enforce rules defining * * * theoperation of any electronic matching platform; anddemonstrate that the trade execution facilityoperates in accordance with the rules.’’ See section5(b)(4) of the Act. Under Core Principle (2), thecontract market must monitor and enforcecompliance with those rules. Consistent with long-standing Commission interpretation, it is reasonablefor a contract market or a DTF to outsource thesefunctions, in whole or in part, to a technologycontractor. 59 See CFMA, section 118.

2. Delegation of FunctionsNFA asked the Commission to clarify

a contract market’s and DTF’s ability todelegate functions under the coreprinciples, noting that:the CFMA specifically allows contractmarkets and [DTFs] to comply with any ofthe core principles through delegation offunctions to a registered futures associationor another registered entity * * *. TheCommission’s current proposal, however,does not specifically authorize a [DTF] todelegate these functions (although NFAbelieves that the language is sufficientlybroad to be interpreted to permit thisdelegation.)

CL 16–1.Section 5c(b) of the Act specifically

provides that both contract markets andDTFs may comply with any applicablecore principle through delegation of anyrelevant function to a registered futuresassociation or another registered entity.As NFA correctly notes, the rules asproposed are ‘‘sufficiently broad to beinterpreted to permit this delegation.’’Id.

NFA further suggests that theCommission, by rule, limit entitiesacceptable ‘‘for ‘‘outsourcing’’ offunctions to registered futuresassociations and registered entitiesbecause the statute so provides andbecause ‘‘Congress recognized that theCommission must have some authorityover any entity carrying out thesefunctions.’’ Id. Section 5c(b) of the Act,however, limits only ‘‘delegations’’ offunctions to registered futuresassociations and to registered entities; itdoes not restrict ‘‘outsourcing’’ ofspecified activities on a contract basis.

The Commission has long-recognizedthe ability of contract markets to meettheir self-regulatory obligations by usingpersons under contract to performspecified duties. The Commission hasconditioned the use of outsidecontractors to perform duties inconnection with self-regulatoryfunctions upon the contract market‘‘maintaining a sufficient degree ofcontrol over the persons undercontract,’’ and the person under contracthaving ‘‘no conflict of interest.’’ The

Commission has further provided that,when using contractors to fulfill a self-regulatory function, it is the exchange’sresponsibility to ensure that itsobligations under the Act are met.Comm. Fut. L. Rep. (CCH) ¶ 6430,CFTC, (May 13, 1975.) Accordingly,contract markets have contracted for theperformance of various services relatedto their operations and self-regulatoryresponsibilities, including compliancewith various core principles. Forexample, contract markets or DTFsreasonably may be expected tooutsource to various contractorsfunctions relating to operating theirtrading platforms or to disseminatinginformation required to be madepublic.58

In contrast to such contractingarrangements, a delegation confers uponanother the authority to act in thedelegating entity’s name. Thedistinction between delegation ofauthority and contracting for services isparticularly well-illustrated in mattersrelated to member discipline and marketsurveillance. A market that delegatesthese functions empowers the delegateeto take appropriate remedial actions,including the sanctioning of members ormarket participants for rule violations.In contrast, a market may contract withan entity to conduct trading surveillanceand to investigate the facts surroundingalleged rule infractions. Unlike adelegatee, a contractor would not havethe authority to decide on behalf of thedelegating entity whether an infractionhad occurred or to impose remedialsanctions. These decisional functionscan be exercised only by delegation ofthat authority to registered entities or aregistered futures association, asCongress has provided.

Further, although section 5c(b)(2) ofthe Act provides that the Commissionwould have oversight authority over adelegatee because it is a registeredentity, the contract market or DTF thatdelegates responsibilities under the Actalso ‘‘shall remain responsible forcarrying out the function.’’ Therefore,regardless of whether a registered entityhas delegated functions or contractedfor services, the entity must assure itself

that the delegated functions orcontracted services will enable it toremain in compliance with the Act’srequirements. Moreover, the registeredentity must have a sufficient degree ofcontrol over the persons under contractbecause it remains the registered entity’s‘‘responsibility to ensure that itsobligations under the Act are met.’’ Id.

3. Arbitration

Rule 166.5 governs the use of pre-dispute arbitration agreements. Undersubsection (g) of the proposed rule, aneligible contract participant would haveretained the right to bring a private rightof action under section 22 of the Act,but could have been required, inaccordance with an amendment tosection 14(g) of the Act,59 to waive theright to seek reparations.

Several commenters questioned theneed to retain the voluntarinessrequirement with respect to section 22of the Act. SIA reasoned that,‘‘(a)lthough the CFMA may not directlyaddress the issue,’’ the policy behindthe CFMA’s provision permitting FCMsto require eligible contract participantcustomers to waive their right toreparations, ‘‘would seem equallyapplicable in the case of pre-disputearbitration agreements generally.’’ CL20–4. NFA also ‘‘encourage[d] theCommission to provide more flexibilityregarding pre-dispute arbitrationagreements[,]’’ and reasoned that anyrestrictions on such agreements areunnecessary with respect to eligiblecontract participants because ‘‘[t]hesecustomers are capable of negotiatingfavorable terms in their agreements withintermediaries.’’ CL 16–2. Others opinedthat limiting the use of pre-disputearbitration agreements for any customercontravenes prevailing law and policyregarding dispute resolution procedures.CL 11 at 2–6, CL 18 at 5–6.

SIA, FIA, and NYMEX, advocatedincreased harmonization of theCommission’s rules governing pre-dispute arbitration agreements withthose governing pre-dispute arbitrationagreements in the securities industry,particularly in light of the availability ofsecurity futures products. CL 10 at 4–5,CL 11 at 5–6, CL 20 at 4; see also CL2–9 and CL 19–7. At a minimum, FIAsuggested, the Commission shouldexclude claims relating to securityfutures products from the rule’sapplicability, particularly with respectto notice-registered FCMs. CL 11 at 5–6. FIA further suggested that theCommission’s rules permit FCMs to usethe disclosure statement required on the



60 FIA also specifically recommended that theCommission decline to adopt proposed rule 166.5,while removing part 180. CL 11 at 6. NFAcommented that the Commission should providethat arbitration agreements bind both the customerand the intermediary equally. CL 16 at 2.

61 A number of the above comments relating togreater harmonization of account openingdisclosures to customers of dually registered FCMs/broker-dealers are outside of the scope of thisrulemaking. Nevertheless, the Commission agreesthat these issues are important and should beaddressed, including the feasibility of using thedisclosure currently mandated for securitiescustomers for commodity customers as well. See,e.g., Rule 3110(f) of the National Association ofSecurities Dealers, Inc.;. see also 64 FR 66681 (Nov.29, 1999) (Self-Regulatory Organizations; Notice ofFiling of Proposed Rule Change by the NationalAssociation of Securities Dealers, Inc. Relating toAmendments to NASD Rule 3110(f) Governing Useof Predispute Arbitration Agreements withCustomers).

62 The Commission also proposed to redesignatethe Appendix as Appendix B to Part 40. Previously,in November 1999, the Commission proposed toeliminate fees for contract market designationapplications in connection with its adoption of Rule5.3 that allowed exchanges to list new contracts by

certification (64 FR 66432, Nov. 26, 1999). TheCommission deferred action while it consideredadditional regulatory reform.

securities side of a dually registeredbroker-dealer/FCM.60

In the final rules, the Commission hasdecided to remove any limitation on theFCM’s use of account opening pre-dispute arbitration agreements foreligible contract participants. As severalcommenters noted, this is consistentwith the CFMA, which permits FCMs torequire that eligible contract participantcustomers waive their right toreparations as a condition of opening anaccount. It also should facilitate theability of an FCM that is also a broker-dealer to use a single agreement withthose customers.61 With regard tocustomers who are not eligible contractparticipants, the Commission isretaining the voluntariness requirementin its current form. However, it willfurther consider the issue as part of itsstudy on the regulation ofintermediaries and as part of its rulesimplementing the provisions of the Actrelating to security futures products.

4. Contract Approval FeesPrior to the CFMA’s amendments to

the Act, boards of trade were requiredto be designated as a contract market ineach commodity that they listed fortrading. The CFMA amended the Act, inpart, by providing that the facility mustbe designated as a ‘‘contract market’’ orregistered as a DTF, that the contractmarket or DTF may list new productsfor trading by certification, and that theymay voluntarily request Commissionapproval of those products. TheCommission proposed to amend current17 CFR part 5, Appendix B, to clarifythat applications for voluntary productapproval must be accompanied by aservice fee.62 No comments were

received and the Commission isadopting the provision as proposed. TheCommission, in a separate notice offinal rulemaking published elsewhere inthis edition of the Federal Register, isrevising the fees charged for this service.

III. Section 4(c) Findings

Some of the rules contained in thisFederal Register notice are beingadopted under section 4(c) of the Act,which grants the Commission broadexemptive authority. Section 4(c) of theAct provides that, in order to promoteresponsible economic or financialinnovation and fair competition, theCommission may by rule, regulation ororder exempt any class of agreements,contracts or transactions, eitherunconditionally or on stated terms orconditions, from any of therequirements of any provision of the Act(except certain provisions governing agroup or index of securities and securityfutures products). As relevant here,when granting an exemption pursuantto section 4(c), the Commission mustfind that the exemption would beconsistent with the public interest.

When it proposed these rules, theCommission made a preliminarydetermination that the exemptionscontained therein would be consistentwith the public interest because theyprovide registered entities with greaterprocedural flexibility than is containedin the Act. For instance, pursuant torule 38.4, contract markets may requestapproval of their contracts followingcertification of those contracts,notwithstanding the Act’s limitation ofthe Commission’s approval authority to‘‘prior’’ approval. Furthermore, the rulescontain a less burdensome certificationprocedure than that provided for in theAct. The Commission invited publiccomment on its preliminarydetermination that this exercise of itsexemptive authority would beconsistent with the public interest. Asnoted above, the commenters broadlysupported these exemptive rules.Accordingly, the Commission findsunder section 4(c) of the Act that theexemptions are consistent with thepublic interest.

IV. Cost-Benefit Analysis

Section 15 of the Act, as amended bysection 119 of the CFMA, requires theCommission, before issuing a newregulation under the Act, to consider thecosts and benefits of its action. TheCommission understands that, by itsterms, section 15 does not require the

Commission to quantify the costs andbenefits of a new regulation or todetermine whether the benefits of theproposed regulation outweigh its costs.Rather, section 15 simply requires theCommission to ‘‘consider the costs andbenefits’’ of its action.

Section 15 further specifies that costsand benefits shall be evaluated in lightof five broad areas of market and publicconcern: (1) Protection of marketparticipants and the public; (2)efficiency, competitiveness, andfinancial integrity of futures markets; (3)price discovery; (4) sound riskmanagement practices; and (5) otherpublic interest considerations.Accordingly, the Commission could inits discretion give greater weight to anyone of the five enumerated areas ofconcern and could in its discretiondetermine that, notwithstanding itscosts, a particular rule was necessary orappropriate to protect the public interestor to effectuate any of the provisions orto accomplish any of the purposes of theAct.

The Commission’s proposal containedan analysis of its consideration of thesecosts and benefits and solicited publiccomment thereon. 66 FR at 14267. TheCommission specifically invitedcommenters to submit any data thatthey had quantifying the costs andbenefits of the proposed rules with theircomment letters. Id. The Commissionhas considered all the comment lettersreceived, some of which containednarrative discussion of the costs andbenefits of specific provisions of thisrule package, but none of which setforth any data that quantified such costsand benefits.

The Commission has considered thecosts and benefits of this rule packagein light of the specific areas of concernidentified in section 15. TheCommission has endeavored in this rulepackage to impose the minimumrequirements necessary to enable theCommission to perform its oversightfunctions, to carry out its mandate ofassuring the continued existence ofcompetitive and efficient markets and toprotect the public interest in marketsfree of fraud and abuse. Afterconsidering their costs and benefits, theCommission has decided to adopt theserules as discussed above.

V. Implementation Issues; No-ActionIn light of Congress’s intent to

implement the changes of the CFMAwithout delay, the Commissiondetermined when it proposed theserules that it would not bring anyenforcement action against any personwho complied with the proposed rulesduring the transition period between the



63 47 FR 18618–21 (Apr. 30, 1982).64 47 FR 18618, 18619 (discussing contract

markets).

effective date of the amendments to theAct (generally, December 21, 2000) andthe adoption of final implementingregulations. 66 FR at 14268. At thattime, the Commission also advisedpersons relying on that no-actionposition that they would be required tobring their conduct into compliancewith the final rules to the extent that thefinal rules differ from the proposedrules. Id.

The rules being adopted today willbecome effective October 9, 2001. TheCommission will not bring anyenforcement action against any personwho complies with the final rulesduring the period between theiradoption and effective date.

VI. Related Matters

A. Regulatory Flexibility ActThe Regulatory Flexibility Act (RFA),

5 U.S.C. 601 et seq., requires federalagencies, in promulgating rules, toconsider the impact of those rules onsmall entities. The rules adopted hereinwould affect contract markets and othertrading facilities. The Commission haspreviously established certaindefinitions of ‘‘small entities’’ to be usedby the Commission in evaluating theimpact of its rules on small entities inaccordance with the RFA.63 In itsprevious determinations, theCommission has concluded thatcontract markets are not small entitiesfor the purpose of the RFA.64 TheCommission proposed to determine thatthe other trading facilities covered bythese rules, for reasons similar to thoseapplicable to contract markets, are notsmall entities for purposes of the RFA.66 FR at 14268. In its proposing release,the Commission also observed that therules authorize these trading facilities tooperate in a less regulated environmentthan may currently be the case and that,consequently, the rules should notresult in, or should result in only a deminimis, increase in the regulatoryrequirements that apply to contractmarkets and other trading facilities. TheCommission invited the public tocomment on its proposed determinationthat the new categories of tradingfacilities covered by these rules wouldnot be small entities for purposes of theRFA and on its finding of small entityimpact. The Commission received nocomments on its proposeddetermination or on its proposedfinding.

The Commission hereby determinesthat the new categories of tradingfacilities covered by these rules

(derivatives transaction executionfacilities, exempt boards of trade andexempt commercial markets) are notsmall entities for purposes of the RFA.Furthermore, the Commission does notbelieve that these rules, as adopted, willhave a significant economic impact ona substantial number of small entities.Therefore, the Acting Chairman, onbehalf of the Commission, herebycertifies, pursuant to 5 U.S.C. 605(b),that the rule amendments will not havea significant economic impact on asubstantial number of small entities.

B. Paperwork Reduction Act of 1995

This rulemaking contains informationcollection requirements. As required bythe Paperwork Reduction Act of 1995(44 U.S.C. 3501 et seq.), the Commissionhas submitted a copy of these rules tothe Office of Management and Budgetfor its review. See 44 U.S.C. 3507(d)(1).No comments were received in responseto the Commission’s invitation in thenotice of proposed rulemaking tocomment on any potential paperworkburden associated with theseregulations. See 44 U.S.C. 3507(d)(2).

The final rules contain severaldisclosure requirements. Exemptcommercial markets may not representthat they are regulated (rule 36(c)). Inaddition, DTFs and contract marketsmust disclose information related toprices, bids and offers and certaintrading information (part 37, AppendixB, Core Principles 4 and 5; part 38,Appendix B, Core Principles 7, 8 and10.)

The final rules also contain severalreporting requirements. Exempt boardsof trade and exempt commercialmarkets must notify the Commissionthat they are engaging in business (rules36.2(b) and 36.3(a)). Contract marketsand DTFs must file applications fordesignation and registration,respectively, and must certify thatcertain rules are consistent with the Act(rules 37.5, 37.7, 38.3, 38.4, 40.2 and40.7).

The final rules also require thecollection of certain information fromexempt boards of trade, exemptcommercial markets, contract marketsand DTFs. The Commission may notconduct or sponsor, and a person is notrequired to respond to an informationcollection unless it displays a currentlyvalid OMB control number. TheCommission has requested a controlnumber for these informationcollections from OMB.

List of Subjects

17 CFR Part 1

Commodity futures, Contract markets,Designation application, Reporting andrecordkeeping requirements.

17 CFR Part 5


17 CFR Part 15

Commodity futures, Contract markets,Reporting and recordkeepingrequirements.

17 CFR Part 36

Commodity futures, CommodityFutures Trading Commission.

17 CFR Part 37


17 CFR Part 38


17 CFR Part 40


17 CFR Part 41

Security Futures, Commodity FuturesTrading Commission.

17 CFR Part 100


17 CFR Part 166

Brokers, Commodity futures,Consumer protection, Reporting andrecordkeeping requirements.

17 CFR Part 170

Commodity futures, Reporting andrecordkeeping requirements.

17 CFR Part 180

Claims, Commodity futures,Consumer protection, Reporting andrecordkeeping requirements.

In consideration of the foregoing, andpursuant to the authority contained inthe Act, as amended by the CommodityFutures Modernization Act of 2000,Appendix E of Pub. L. 106–554, 114Stat. 2763 (2000), and, in particular,sections 1a, 2, 3, 4, 4c, 4i, 5, 5a, 5b, 5c,5d, 6 and 8a thereof, the Commissionhereby amends Chapter I of Title 17 ofthe Code of Federal Regulations asfollows:



PART 1—GENERAL REGULATIONSUNDER THE COMMODITY EXCHANGEACT

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

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o,6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1,16, 16a, 19, 21, 23, and 24, as amended bythe Commodity Futures Modernization Act of2000, Appendix E of Pub. L. 106–554, 114Stat. 2763 (2000).

2. Section 1.1 is revised to readfollows:

§ 1.1 Fraud in or in connection withtransactions in foreign currency subject tothe Commodity Exchange Act.

(a) Scope. The provisions of thissection shall be applicable to accounts,agreements, contracts, or transactionsdescribed in section 2(c)(1) of the Act,to the extent that the Commissionexercises jurisdiction over suchaccounts, agreements, contracts andtransactions as provided in section2(c)(2)(B) of the Act (except that thissection shall not be applicable topersons described in section2(c)(2)(B)(ii)(II) or 2(c)(2)(B)(ii)(III) of theAct).

(b) Fraudulent conduct prohibited. Itshall be unlawful for any person,directly or indirectly, in or inconnection with any account,agreement, contract or transaction thatis subject to paragraph (a) of thissection:

(1) To cheat or defraud or attempt tocheat or defraud any person;

(2) Willfully to make or cause to bemade to any person any false report orstatement or cause to be entered for anyperson any false record; or

(3) Willfully to deceive or attempt todeceive any person by any meanswhatsoever.

3. Section 1.3 is amended by revisingthe undesignated introductoryparagraph to read as follows:

§ 1.3 Definitions.

Words used in the singular form inthe rules and regulations in this chaptershall be deemed to import the pluraland vice versa, as the context mayrequire. The following terms, as used inthe Commodity Exchange Act, or in therules and regulations in this chapter,shall have the meanings hereby assignedto them, unless the context otherwiserequires:* * * * *

4. Section 1.37 is amended by addingparagraphs (c) and (d) to read as follows:

§ 1.37 Customer’s or option customer’sname, address, and occupation recorded;record of guarantor or controller ofaccount.

* * * * *(c) Each designated contract market

shall keep a record in permanent form,which shall show the true name,address, and principal occupation orbusiness of any foreign trader executingtransactions on the facility or exchange.In addition, upon request, a designatedcontract market shall provide to theCommission information regarding thename of any person guaranteeing suchtransactions or exercising any controlover the trading of such foreign trader.

(d) Paragraph (c) of this section shallnot apply to a designated contractmarket on which transactions in futuresor option contracts of foreign traders areexecuted through, or the resultingtransactions are maintained in, accountscarried by a registered futurescommission merchant or introduced bya registered introducing broker subjectto the provisions of paragraph (a) of thissection.

§§ 1.41, 1.41b, 1.43, 1.45, 1.50, and 1.51[Removed]

5. Sections 1.41, 1.41b, 1.43, 1.45,1.50 and 1.51 are removed and reserved.

PART 15—REPORTS—GENERALPROVISIONS

6. The authority citation for Part 15 isrevised to read as follows:

Authority: 7 U.S.C. 2, 5, 6(c), 6a, 6c(a)–(d),6f, 6g, 6i, 6k, 6m, 6n, 7, 9, 12a, 19 and 21,as amended by the Commodity FuturesModernization Act of 2000, Appendix E ofPub. L. 106–554, 114 Stat. 2763 (2000).

7. Section 15.05 is amended byrevising the heading and addingparagraphs (e) through (h) to read asfollows:

§ 15.05 Designation of agent for foreignbrokers, customers of a foreign broker andforeign traders.

* * * * *(e) Any designated contract market or

registered derivatives transactionexecution facility that permits a foreignbroker to intermediate contracts,agreements or transactions, or permits aforeign trader to effect contracts,agreements or transactions on thefacility or exchange, shall be deemed tobe the agent of the foreign broker andany of its customers for whom thetransactions were executed, or theforeign trader, for purposes of acceptingdelivery and service of anycommunication issued by or on behalfof the Commission to the foreign broker,any of its customers or the foreign trader

with respect to any contracts,agreements or transactions executed bythe foreign broker or the foreign traderon the designated contract market orregistered derivatives transactionexecution facility. Service or delivery ofany communication issued by or onbehalf of the Commission to adesignated contract market or registeredderivatives transaction executionfacility shall constitute valid andeffective service upon the foreignbroker, any of its customers, or theforeign trader. A designated contractmarket or registered derivativestransaction execution facility which hasbeen served with, or to which there hasbeen delivered, a communication issuedby or on behalf of the Commission to aforeign broker, any of its customers, ora foreign trader shall transmit thecommunication promptly and in amanner which is reasonable under thecircumstances, or in a manner specifiedby the Commission in thecommunication, to the foreign broker,any of its customers or the foreigntrader.

(f) It shall be unlawful for anydesignated contract market or registeredderivatives transaction executionfacility to permit a foreign broker, anyof its customers or a foreign trader toeffect contracts, agreements ortransactions on the facility unless thedesignated contract market or registeredderivatives transaction executionfacility prior thereto informs the foreignbroker, any of its customers or theforeign trader, in any reasonable mannerthe facility deems to be appropriate, ofthe requirements of this section.

(g) The requirements of paragraphs (e)and (f) of this section shall not apply toany contracts, transactions oragreements traded on any designatedcontract market or registered derivativestransaction execution facility if theforeign broker, any of its customers orthe foreign trader has duly executed andmaintains in effect a written agencyagreement in compliance with thisparagraph with a person domiciled inthe United States and has provided acopy of the agreement to the designatedcontract market or registered derivativestransaction execution facility prior toeffecting any contract, agreement ortransaction on the facility. Thisagreement must authorize the persondomiciled in the United States to serveas the agent of the foreign broker, anyof its customers or the foreign trader forpurposes of accepting delivery andservice of all communications issued byor on behalf of the Commission to theforeign broker, any of its customers orthe foreign trader and must provide anaddress in the United States where the



agent will accept delivery and service ofcommunications from the Commission.This agreement must be filed with theCommission by the designated contractmarket or registered derivativestransaction execution facility prior topermitting the foreign broker, any of itscustomers or the foreign trader to effectany transactions in futures or optioncontracts. Unless otherwise specified bythe Commission, the agreementsrequired to be filed with theCommission shall be filed with theSecretary of the Commission at ThreeLafayette Centre, 1155 21st Street, NW.,Washington, DC 20581. A foreignbroker, any of its customers or a foreigntrader shall notify the Commissionimmediately if the written agencyagreement is terminated, revoked, or isotherwise no longer in effect. If thedesignated contract market or registeredderivatives transaction executionfacility knows or should know that theagreement has expired, been terminated,or is no longer in effect, the designatedcontract market or registered derivativestransaction execution facility shallnotify the Secretary of the Commissionimmediately. If the written agencyagreement expires, terminates, or is notin effect, the designated contract marketor registered derivatives transactionexecution facility and the foreignbroker, any of its customers or theforeign trader are subject to theprovisions of paragraphs (e) and (f) ofthis section.

(h) The provisions of paragraphs (e),(f) and (g) of this section shall not applyto a designated contract market orregistered derivatives transactionexecution facility on which alltransactions of foreign brokers, theircustomers or foreign traders in futuresor option contracts, or other instrumentssubject to the Act pursuant to section5a(g) of the Act, are executed through,or the resulting transactions aremaintained in, accounts carried by aregistered futures commission merchantor introduced by a registeredintroducing broker subject to theprovisions of paragraphs (a), (b), (c) and(d) of this section.

8. Part 36 is revised to read as follows:

PART 36—EXEMPT MARKETS

Sec.36.1 Scope.36.2 Exempt boards of trade.36.3 Exempt commercial markets.

Authority: 7 U.S.C. 2, 5, 6, 6c, and 12a, asamended by the Commodity FuturesModernization Act of 2000, Appendix E ofPub. L. 106–554, 114 Stat. 2763 (2000).

§ 36.1 Scope.The provisions of this part apply to

any board of trade or electronic tradingfacility eligible for exemption undersections 5d and 2(h)(3) through (5) ofthe Act, respectively.

§ 36.2 Exempt boards of trade.(a) Eligible commodities.

Commodities eligible under section5d(b)(1) of the Act to be traded by anexempt board of trade are:

(1) Commodities having—(i) A nearly inexhaustible deliverable

supply;(ii) A deliverable supply that is

sufficiently large, and a cash marketsufficiently liquid, to render anycontract traded on the commodityhighly unlikely to be susceptible to thethreat of manipulation; or

(iii)No cash market.(2) The commodities that meet the

criteria of paragraph (a)(1) of thissection are:

(i) The commodities defined insection 1a(13) of the Act as ‘‘excludedcommodities’’ (other than a security,including any group or index thereof orany interest in, or based on the value of,any security or group or index ofsecurities); and

(ii) Such other commodity orcommodities as the Commission maydetermine by rule, regulation or order.

(b) Notification. Boards of tradeoperating under section 5d of the Act asexempt boards of trade shall so notifythe Commission. This notification shallbe filed with the Secretary of theCommission at its Washington, DCheadquarters, in either electronic orhard copy form, shall be labeled as‘‘Notification of Operation as ExemptBoard of Trade,’’ and shall include:

(1) The name and address of theexempt board of trade; and

(2) The name and telephone numberof a contact person.

(c) Additional requirements. (1) Aboard of trade notifying the Commissionthat it meets the criteria of section 5d ofthe Act and elects to operate as anexempt board of trade shall notrepresent to any person that it isregistered with, designated, recognized,licensed or approved by theCommission.

(2) If the Commission finds by order,after notice and an opportunity for ahearing through submission of writtendata, views and arguments, that thefacility serves as a significant source forthe discovery of prices in the cashmarket for the underlying commodity,the facility must on a daily basisdisseminate publicly trading volume,opening and closing price ranges, openinterest and other trading data to the

extent appropriate to that market withrespect to transactions executed inreliance on the exemption as specifiedin the order.

§ 36.3 Exempt commercial markets.

(a) Notification. An electronic tradingfacility relying upon the exemption insection 2(h)(3) of the Act shall notify theCommission of its intention to do so.This notification, and subsequentnotification of any material changes inthe information initially provided, shallbe filed with the Secretary of theCommission at its Washington, DCheadquarters, in either electronic orhard copy form, shall be labeled as‘‘Notification of Operation as ExemptCommercial Market,’’ and shall includethe information and certificationsspecified in section 2(h)(5)(A) of theAct.

(b) Required information. (1) Afacility operating in reliance on theexemption in section 2(h)(3) of the Act,initially and on an on-going basis, must:

(i) Provide the Commission withaccess to the facility’s trading protocolsand electronic access to transactionsconducted on the facility in reliance onsuch exemption; or

(ii) Attach its initial trading protocolsand any amendments thereto in hardcopy form to the notification required inparagraph (a) of this section and providein a form and manner acceptable to theCommission, as determined by theCommission in response to a petition bythe exempt market relying upon theexemption in section 2(h)(3) of the Act,information regarding transactions bylarge traders on the facility.

(2) Special calls. (i) All informationrequired upon special call of theCommission under section 2(h)(5)(B)(iii)of the Act shall be prepared in the formand manner and in accordance with theinstructions, and shall be transmitted atthe time and to the office of theCommission, as may be specified in thecall.

(ii) The Commission hereby delegates,until the Commission orders otherwise,the authority to make special calls as setforth in section 2(h)(5)(B)(iii) of the Actto the Director of the Division ofTrading and Markets and to the Directorof Economic Analysis to be exercised byeither Director or by such otheremployee or employees as the Directormay designate. The directors maysubmit to the Commission for itsconsideration any matter that has beendelegated in this paragraph. Nothing inthis paragraph prohibits theCommission, at its election, fromexercising the authority delegated inthis paragraph.



(3) Subpoenas to foreign persons. Aforeign person whose access to a tradingfacility is limited or denied at thedirection of the Commission based onthe Commission’s belief that the foreignperson has failed timely to comply witha subpoena as provided under section2(h)(5)(C)(ii) of the Act shall have anopportunity for a prompt hearing underthe procedures provided in §§ 21.03(g)and (h) of this chapter.

(c) Additional requirements. (1) Anelectronic trading facility relying uponthe exemption in section 2(h)(3) of theAct shall not represent to any personthat it is registered with, designated,recognized, licensed or approved by theCommission.

(2) If the Commission finds by order,after notice and an opportunity for ahearing through submission of writtendata, views and arguments, that thefacility performs a significant pricediscovery function for transactions inthe cash market for the underlyingcommodity, the facility mustdisseminate publicly price, tradingvolume and other trading data to theextent appropriate with respect totransactions executed in reliance on theexemption as specified in the order.

(3) The facility must represent in thenotification provided under paragraph(a) of this section that it requires, andrequire, that each participant agree tocomply with all applicable law and thefacility must have a reasonable basis forbelieving that authorized participantsare ‘‘eligible commercial entities’’ asdefined in section 1a(11) of the Act.

9. Part 37 is added to read as follows:

PART 37—DERIVATIVESTRANSACTION EXECUTIONFACILITIES

Sec.37.1 Scope and definition.37.2 Exemption.37.3 Requirements for underlying

commodities.37.4 Election to trade excluded and exempt

commodities.37.5 Procedures for registration.37.6 Compliance with core principles.37.7 Additional requirements.37.8 Information relating to transactions on

derivative transaction executionfacilities.

37.9 Enforceability.

Appendix A to Part 37—ApplicationGuidance

Appendix B to Part 37—Guidance onCompliance with Core Principles

Authority: 7 U.S.C. 2, 5, 6, 6c, 6(c), 7a and12a, as amended by the Commodity FuturesModernization Act of 2000, Appendix E ofPub. L. 106–554, 114 Stat. 2763 (2000).

§ 37.1 Scope and definition.(a) Scope. The provisions of this part

apply to any board of trade or tradingfacility operating as a registeredderivatives transaction executionfacility.

(b) Definition. As used in this part, theterm ‘‘eligible commercial entity’’means, and shall include, in addition toa party or entity so defined in section1a(11) of the Act, a registered floortrader or floor broker trading for its ownaccount, whose trading obligations areguaranteed by a registered futurescommission merchant.

§ 37.2 Exemption.Contracts, agreements or transactions

traded on a derivatives transactionexecution facility registered as suchwith the Commission under section 5aof the Act, the facility and the facility’soperator are exempt from allCommission regulations for suchactivity, except for the requirements ofthis part 37 and §§ 1.3, 1.31, 1.59(d),1.63(c), 15.05, 33.10, part 40 and part190 of this chapter, and as applicable tothe market, parts 15 through 21 of thischapter, which are applicable to aregistered derivatives transactionexecution facility as though they wereset forth in this section and includedspecific reference to derivativestransaction execution facilities.

§ 37.3 Requirements for underlyingcommodities.

(a) Trading facilities limited to eligibletraders. Trading facilities limited toeligible traders as defined by section5a(b)(3) of the Act, may trade anycontract of sale of a commodity forfuture delivery (or option on such acontract) on any of the followingunderlying commodities:

(1) Commodities having—(i) A nearly inexhaustible deliverable

supply;(ii) A deliverable supply that is

sufficiently large that the contract ishighly unlikely to be susceptible to thethreat of manipulation; or

(iii) No cash market;(2) Commodities that are a security

futures product, and the registeredderivatives transaction executionfacility is a national securities exchangeregistered under the SecuritiesExchange Act of 1934;

(3) Commodities for which theCommission has determined, based onthe market characteristics andsurveillance history, and the self-regulatory record and capacity of thefacility, that trading in the contract (oroption) based on that commodity ishighly unlikely to be susceptible to thethreat of manipulation; or

(4) Commodities that are agriculturalcommodities enumerated in section1a(4) of the Act that have been soapproved by the Commission under theprocedures of paragraph (c) of thissection.

(5) The commodities that meet thecriteria of paragraph (a)(1) of thissection are the commodities defined insection 1a(13) of the Act as ‘‘excludedcommodities.’’

(6) The Commission may make thedetermination described in paragraph(a)(3) of this section by rule, regulationor order, after notice and an opportunityfor a hearing through submission ofwritten data, views and arguments. Aregistered derivatives transactionexecution facility may request that theCommission make such anindividualized determination by filingwith the Secretary of the Commission atits Washington, DC headquarters apetition that includes:

(i) The terms and conditions of theproduct to be listed; and

(ii) A demonstration, supported bydata, that the underlying commodity hasa sufficiently liquid and deep cashmarket and a surveillance history basedon actual trading experience and in lightof any self-regulatory undertakings ofthe facility, to provide assurance thatthe contract or product is highlyunlikely to be manipulated. Thedemonstration should address thefollowing specific factors to the extentthat the factor is not self-evident:

(A) A high level of cash-marketliquidity;

(B) Cash-market bid-ask spreads thatare narrow relative to traded values;

(C) Relatively frequent cash markettransactions involving participants thatrepresent major segments of theindustry;

(D) The absence of materialimpediments to participation in thecash market by commercial entities;

(E) Transfer of ownership of the cashcommodity that is easily and readilyaccomplished at minimal cost;

(F) A pattern of cash market pricingthat exhibits continuity and the absenceof frequent, sharp price changes suchthat a person cannot readily movematerially the price of the product innormal cash market channels;

(G) A history of actual tradingexperience that the contract or product’sterms and conditions provide for adeliverable supply, or a reliable andacceptable cash-settlement procedure,that is adequate to minimize the threatof market abuses such as pricemanipulation and distortions,congestion, and defaults; and

(H) Procedures to effectively overseethe market, including a large trader



reporting system, as well as a history ofactive surveillance to prevent ormitigate market problems.

(b) Trading facilities limited to eligiblecommercial entities. Any commodity,other than the agricultural commoditiesenumerated in section 1a(4) of the Act,is eligible under section 5a(b)(2)(F) ofthe Act to be traded on a derivativestransaction execution facility that limitsparticipants on the facility to eligiblecommercial entities as defined by§ 37.1(b) trading for their own account.Provided, however, an agriculturalcommodity enumerated in section 1a(4)of the Act may be so approved by theCommission under the procedures ofparagraph (c) of this section.

(c) Enumerated agriculturalcommodities. [Reserved]

§ 37.4 Election to trade excluded andexempt commodities.

A board of trade that is or elects tobecome a registered derivativestransaction execution facility may,pursuant to section 5a(g) of the Act,trade agreements, contracts, ortransactions that are excluded or exemptfrom the Act pursuant to sections 2(c),2(d), 2(g), or 2(h).

§ 37.5 Procedures for registration.(a) Notification by contract markets.

To operate as a registered derivativestransaction execution facility pursuantto section 5a of the Act, a board of trade,facility or entity that is designated as acontract market, must:

(1) Comply with the core principlesfor operation under section 5a(d) of theAct and the provisions of this part 37;and

(2) Notify the Commission of its intentto so operate by filing with the Secretaryof the Commission at its Washington,DC headquarters a copy of the facility’srules (which may be trading protocols)or a list of the designated contractmarket’s rules that apply to operation ofthe derivatives transaction executionfacility, and a certification by thecontract market that it meets:

(i) The requirements for trading ofsection 5a(b) of the Act; and

(ii) The criteria for registration undersection 5a(c) of the Act.

(b) Registration by application. Aboard of trade, facility or entity shall bedeemed to be registered as a derivativestransaction execution facility thirty daysafter receipt by the Commission of anapplication for registration as aderivatives transaction executionfacility unless notified otherwise duringthat period, or, as determined byCommission order, registered uponconditions, if:

(1) The application demonstrates thatthe applicant satisfies the requirements

for trading and the criteria forregistration of sections 5a(b) and 5a(c) ofthe Act, respectively;

(2) The submission is labeled‘‘Application for DTF Registration’’;

(3) The submission includes:(i) The derivatives transaction

execution facility’s rules, which may betrading protocols;

(ii) Any agreements entered into or tobe entered into between or among thefacility, its operator or its participants,technical manuals and other guides orinstructions for users of such facility,descriptions of any system testprocedures, tests conducted or testresults, and descriptions of the tradingmechanism or algorithm used or to beused by such facility, to the extent suchdocumentation was otherwise prepared;and

(iii) To the extent that compliancewith the requirements for trading or thecriteria for recognition is not self-evident, a brief explanation of how therules or trading protocols satisfy each ofthe conditions for registration;

(4) The applicant does not amend orsupplement the application forrecognition, except as requested by theCommission or for correction oftypographical errors, renumbering orother nonsubstantive revisions, duringthat period;

(5) The applicant identifies withparticularity information in theapplication that will be subject to arequest for confidential treatment andsupports that request for confidentialtreatment with reasonable justification;and

(6) The applicant has not instructedthe Commission in writing at the timeof submission of the application orduring the review period to review theapplication pursuant to the timeprovisions of and procedures undersection 6 of the Act.

(c) Guidance for applicants.Appendix A to this part providesguidance to applicants for registration asa derivatives transaction executionfacility on how the conditions forregistration in sections 5a(b) and 5a(c) ofthe Act could be satisfied.

(d) Termination of fast track review.During the thirty-day period for reviewpursuant to paragraph (b) of this section,the Commission shall notify theapplicant seeking registration that theCommission is terminating reviewunder this section and will review theproposal under the time period andprocedures of section 6 of the Act, if itappears that the application’s form orsubstance fails to meet the requirementsof this part. This terminationnotification will state the nature of theissues raised and the specific condition

of registration that the applicant wouldviolate, appears to violate, or theviolation of which cannot be ascertainedfrom the application. Within ten days ofreceipt of this termination notification,the applicant seeking registration mayrequest that the Commission render adecision whether to register thederivatives transaction executionfacility or to institute a proceeding todeny the proposed application underprocedures specified in section 6 of theAct by notifying the Commission thatthe applicant seeking registration viewsits submission as complete and final assubmitted.

(e) Request for withdrawal ofapplication for registration orwithdrawal of registration. An applicantto be registered, or a registeredderivatives transaction executionfacility may withdraw its application orits registration by filing with theCommission at its Washington, DC,headquarters such a request.Withdrawal from registration shall notaffect any action taken or to be taken bythe Commission based upon actions,activities or events occurring during thetime that the application for registrationwas pending with, or that the facilitywas registered by, the Commission.

(f) Delegation of authority.(1) The Commission hereby delegates,

until it orders otherwise, to the Directorof the Division of Trading and Marketsand separately to the Director ofEconomic Analysis or such otheremployee or employees as the Directorsmay designate from time to time, withthe concurrence of the General Counselor the General Counsel’s delegatee,authority to exercise the functionsprovided under paragraph (b) of thissection.

(2) The directors may submit to theCommission for its consideration anymatter that has been delegated in thisparagraph.

(3) Nothing in this paragraphprohibits the Commission, at itselection, from exercising the authoritydelegated in paragraph (f)(1) of thissection.

§ 37.6 Compliance with core principles.(a) In general. To maintain

registration as a derivatives transactionexecution facility upon commencingoperations by listing products fortrading or otherwise and on acontinuing basis thereafter, thederivatives transaction executionfacility must have the capacity to be,and be, in compliance with the coreprinciples of section 5a(d) of the Act.

(b) New derivatives transactionexecution facilities. (1) Certification ofcompliance. Unless an applicant for



registration has chosen to make avoluntary demonstration underparagraph (b)(2) of this section, a newlyregistered derivatives transactionexecution facility at the time itcommences operations must certify tothe Commission that it has the capacityto, and will, operate in compliance withthe core principles under section 5a(d)of the Act.

(2) Voluntary demonstration ofcompliance. An applicant forregistration may choose to make avoluntary demonstration of its capacityto operate in compliance with the coreprinciples as follows:

(i) At least thirty days prior tocommencing operations, the applicantfor registration must file with theSecretary of the Commission at itsWashington, DC headquarters, eitherseparately or with the applicationrequired by § 37.4, a submission thatincludes:

(A) The label, ‘‘Demonstration ofCompliance with Core Principles forOperation’’;

(B) The derivatives transactionexecution facility’s rules, which may betrading protocols, that enable orempower the facility to comply with thecore principles;

(C) Any agreements entered into or tobe entered into between or among thefacility, its operator or its participantsthat enable or empower the facility tocomply with the core principles,including where applicable, technicalmanuals and other guides orinstructions for users of the facility; and

(D) To the extent that capacity tocomply with a core principle is not self-evident, a brief explanation of how thefacility has the capacity to meet the coreprinciple.

(ii) Unless the applicant requests anextension of time, the applicant shall bedeemed to have demonstrated itscapacity to comply with the coreprinciples thirty days after receipt bythe Commission, unless notifiedotherwise.

(iii) If it appears that the applicant hasfailed to make the requisite showing, theCommission will so notify the applicantat the end of that period. Uponcommencement of operations by thederivatives transaction executionfacility, such a notice may beconsidered by the Commission in adetermination to issue a notice ofviolation of core principles undersection 5c(d) of the Act.

(c) Existing derivatives transactionexecution facilities. Upon request by theCommission, a registered derivativestransaction execution facility shall filewith the Commission such data,documents and other information as the

Commission may specify in its requestthat demonstrates that the registeredderivatives transaction executionfacility is in compliance with one ormore core principles as specified in therequest or that is requested by theCommission to enable the Commissionto satisfy its obligations under the Act.

(d) Guidance regarding compliancewith core principles. A derivativestransaction execution facility may meetthe following core principles of section5a(d) of the Act as specified in thisparagraph:

(1) Compliance with rules. The coreprinciple regarding compliance withrules under section 5a(d)(2) of the Actmay be met, as appropriate to thefacility, through the effective monitoringof limitations on access to the facility;

(2) Monitoring of trading. The coreprinciple regarding monitoring oftrading under section 5a(d)(3) of the Actmay be met, as appropriate to themarket and the products traded thereon,by providing information to theCommission as requested to satisfy theCommission’s obligations under the Act;

(3) Disclosure of general information.The core principle regarding disclosureof general information relevant toparticipation in trading on the facilityunder section 5a(d)(4)(D) of the Act alsoincludes providing to marketparticipants on a fair, equitable andtimely basis information regarding, asappropriate to the market, prices, bidsand offers, and such other informationthat the Commission may determine byrule, regulation or order, after noticeand an opportunity for a hearingthrough submission of written data,views and arguments;

(4) Daily publication of tradinginformation. The Commission willdetermine by order, after notice and anopportunity for a hearing throughsubmission of written data, views andarguments, whether the requirement ofthe core principle on publication oftrading information under section5a(d)(5) of the Act applies to a particularproduct or products traded on a facility;

(5) Fitness. Appropriate minimumstandards for participants having directaccess to the facility under the coreprinciple on fitness pursuant to section5a(d)(6) of the Act also includes naturalpersons that directly or indirectly havegreater than a ten percent ownershipinterest in the facility; and

(6) In general. Appendix B to this partprovides guidance to registeredderivatives transaction executionfacilities on how the core principlesunder section 5a(d) of the Act could besatisfied.

§ 37.7 Additional requirements.(a) Products. Notwithstanding the

provisions of section 5c(c) of the Actand § 40.2 of this chapter, derivativestransaction execution facilities needonly notify the Commission of thelisting of new products for trading,posting of new product descriptions,terms and conditions or tradingprotocols or providing for a new systemproduct functionality, by filing with theSecretary of the Commission at itsWashington, D.C. headquarters, asubmission labeled ‘‘DTF Notice ofProduct Listing’’ that includes the textof the product’s terms or conditions,product description, trading protocol ordescription of the system functionalityor by electronic notification of theforegoing at the time traders orparticipants in the market are notified,but in no event later than the close ofbusiness on the business day precedinginitial listing, posting orimplementation of the trading protocolor system functionality.

(b) Material modifications.Notwithstanding the provisions ofsection 5c(c) of the Act, registeredderivatives transaction executionfacilities need not certify rules or ruleamendments under § 40.6 of thischapter, and must only notify theCommission prior to placing into effector amending such a rule, whichincludes trading protocols, by:

(1) Filing with the Secretary of theCommission at its Washington, D.C.headquarters at the time traders orparticipants in the market are notified,but (unless taken as an emergencyaction) in no event later than the closeof business on the business daypreceding implementation of the rule, asubmission labeled, ‘‘DTF Rule Notice.’’The submission shall include the text ofthe rule or rule amendment (deletionsand additions must be indicated); or

(2) By electronic notification to theCommission of the rule to be placed intoeffect or to be changed, in a formatapproved by the Secretary of theCommission, at the time traders orparticipants in the market are notified,but (unless taken as an emergencyaction) in no event later than the closeof business on the business daypreceding implementation. Provided,however, the derivatives transactionexecution facility need not notify theCommission of rules or ruleamendments for which no certificationis required under § 40.6(c) of thischapter.

(3) The derivatives transactionexecution facility must maintaindocumentation regarding all changes torules, terms and conditions or tradingprotocols.



(c) Voluntary request for Commissionapproval of rules or products. (1) Aboard of trade or trading facility seekingto be registered as, or registered as, aderivatives transaction executionfacility, may request that theCommission approve under section5c(c) of the Act, any or all of its rulesand subsequent amendments thereto,including both operational rules and theterms or conditions of products listedfor trading on the facility, prior to theirimplementation or, notwithstanding theprovisions of section 5c(c)(2) of the Act,at anytime thereafter, under theprocedures of §§ 40.5 or 40.3 of thischapter, as applicable. A derivativestransaction execution facility may labela product in its rules as, ‘‘Listed fortrading pursuant to Commissionapproval,’’ if the product and its termsor conditions have been approved bythe Commission and it may label as,‘‘Approved by the Commission,’’ onlythose rules that have been so approved.

(2) Notwithstanding the forty-five dayreview period for voluntary approvalunder § 40.3(b) of this chapter, theoperating rules and the terms andconditions of one product submitted forvoluntary Commission approval under§ 40.3 of this chapter, that has beensubmitted with, and at the same time as,an application for registration as aderivatives transaction executionfacility, will be deemed approved by theCommission thirty days after receipt bythe Commission, or at the conclusion ofsuch extended period as provided under§ 40.3(c) of this chapter.

(3) An applicant for registration, or aregistered derivatives transactionexecution facility may request that theCommission consider under theprovisions of section 15(b) of the Actany of the derivatives transactionexecution facility’s rules or policies,including both operational rules and theterms or conditions of products listedfor trading, at the time of registration orthereafter.

(d) Identify participants. Registeredderivatives transaction executionfacilities must keep a record inpermanent form, which shall show thetrue name, address, and principaloccupation or business of any foreigntrader executing transactions on thefacility. In addition, upon request, aderivatives transaction executionfacility shall provide to the Commissioninformation regarding the name of anyperson exercising control over thetrading of such foreign trader. Provided,however, this paragraph shall not applyto a derivatives transaction executionfacility insofar as transactions in futuresor option contracts of foreign traders areexecuted through, or the resulting

transactions are maintained in accountscarried by, a registered futurescommission merchant or introduced byan introducing broker subject to § 1.37of this chapter.

(e) Identify persons subject to fitnessrequirement. Upon request by anyrepresentative of the Commission, aregistered derivatives transactionexecution facility shall furnish to theCommission’s representative a currentlist of persons subject to the fitnessrequirements of section 5a(d)(6) of theAct.

§ 37.8 Information relating to transactionson derivatives transaction executionfacilities.

(a) Special calls for information fromderivatives transaction executionfacilities. Upon special call by theCommission, a registered derivativestransaction execution facility shallprovide to the Commission suchinformation related to its business as aderivatives transaction executionfacility, including information relatingto data entry and trade details, in theform and manner and within the time asspecified by the Commission in thespecial call.

(b) Special calls for information fromfutures commission merchants. Uponspecial call by the Commission, eachperson registered as a futurescommission merchant that carries or hascarried an account for a customer on aderivatives transaction executionfacility shall provide information to theCommission concerning such accountsor related positions carried for thecustomer on that or other facilities ormarkets, in the form and manner andwithin the time specified by theCommission in the special call.

(c) Special calls for information fromparticipants. Upon special call by theCommission, any person who entersinto or has entered into an agreement,contract or transaction on a derivativestransaction execution facility shallprovide information to the Commissionconcerning such agreements, contractsor transactions or related agreements,contracts or transactions, or concerningrelated positions on other facilities ormarkets, in the form and manner andwithin the time specified by theCommission in the special call.

(d) Delegation of authority. TheCommission hereby delegates, until theCommission orders otherwise, theauthority set forth in paragraphs (a)through (c) of this section to theDirectors of the Division of Trading andMarkets and separately to the Director ofEconomic Analysis or such otheremployee or employees as the Directorsmay designate from time to time. The

Directors may submit to theCommission for its consideration anymatter that has been delegated in thisparagraph. Nothing in this paragraphprohibits the Commission, at itselection, from exercising the authoritydelegated in this paragraph.

§ 37.9 Enforceability.An agreement, contract or transaction

entered into on, or pursuant to the rulesof, a registered derivatives transactionexecution facility shall not be void,voidable, subject to rescission orotherwise invalidated or renderedunenforceable as a result of:

(a) A violation by the registeredderivatives transaction executionfacility of the provisions of section 5a ofthe Act or this part 37; or

(b) Any Commission proceeding toalter or supplement a rule, term orcondition under section 8a(7) of the Actor any other proceeding the effect ofwhich is to disapprove, alter,supplement, or require a registeredderivatives transaction executionfacility to adopt a specific term orcondition, trading rule or procedure, orto take or refrain from taking a specificaction.


This appendix provides guidance toapplicants for registration as derivativestransaction execution facilities undersections 5a(c) and 6 of the Act and § 37.5, onmeeting the criteria for registration bothinitially and on an ongoing basis. Theguidance following each registration criterionis illustrative only of the types of matters anapplicant may address, as applicable, and isnot intended to be a mandatory checklist.Addressing the issues and questions set forthin this appendix would help the Commissionin its consideration of whether theapplication has met the criteria forregistration. To the extent that compliancewith, or satisfaction of, a criterion forregistration is not self-explanatory from theface of the derivatives transaction executionfacility’s rules, which may be terms andconditions or trading protocols, theapplication should include an explanation orother form of documentation demonstratingthat the applicant meets the registrationcriteria of section 5a(c) of the Act and § 37.5.

Registration Criterion 1 of section 5a(c) ofthe Act: IN GENERAL—To be registered as aregistered derivatives transaction executionfacility, the board of trade shall be requiredto demonstrate to the Commission only thatthe board of trade meets the criteria specifiedin § 37.5(b).

A board of trade preparing to submit to theCommission an application to operate as aregistered derivatives transaction executionfacility is encouraged to contact Commissionstaff for guidance and assistance in preparingits application. Applicants may submit adraft application for review prior to thesubmission of an actual application without



triggering the application review proceduresof § 37.5.

Registration Criterion 2 of section 5a(c) ofthe Act: DETERRENCE OF ABUSES—Theboard of trade shall establish and enforcetrading and participation rules that will deterabuses and has the capacity to detect,investigate, and enforce those rules,including means to—(A) obtain informationnecessary to perform the functions requiredunder this section; or (B) use technologicalmeans to—(i) provide market participantswith impartial access to the market; and (ii)capture information that may be used inestablishing whether rule violations haveoccurred.

An application of a board of trade tooperate as a registered derivatives transactionexecution facility should includearrangements and resources to deter abusesby effective and affirmative rule enforcement,including documentation of the facility’sauthority to do so; such trading andparticipation rules should be designed withadequate specificity. The submission shouldinclude documentation on the ability of thefacility either to obtain necessary informationor to provide market participants withimpartial access and capture information foruse in establishing possible rule violations.

Registration Criterion 3 of section 5a(c) ofthe Act: TRADING PROCEDURES—Theboard of trade shall establish and enforcerules or terms and conditions defining, orspecifications detailing, trading proceduresto be used in entering and executing orderstraded on the facilities of the board of trade.The rules may authorize—(A) transfer tradesor office trades; (B) an exchange of—(i)futures in connection with a cash commoditytransaction; (ii) futures for cash commodities;or (iii) futures for swaps; or (C) a futurescommission merchant, acting as principal oragent, to enter into or confirm the executionof a contract for the purchase or sale of acommodity for future delivery if the contractis reported, recorded, or cleared inaccordance with the rules of the registeredderivatives transaction execution facility or aderivatives clearing organization.

(a) A submission of a board of trade tooperate as an electronic registered derivativestransaction execution facility should includethe system’s trade-matching algorithm andorder entry procedures. A submissioninvolving a trade-matching algorithm that isbased on order priority factors other than ona best price/earliest time basis shouldinclude a brief explanation of the alternativealgorithm.

(b) A board of trade’s specifications oninitial and periodic objective testing andreview of proper system functioning,adequate capacity, and security for anyautomated systems should be included in itssubmission. The Commission believes thatthe guidelines issued by the InternationalOrganization of Securities Commissions(IOSCO) in 1990 (which have been referredto as the ‘‘Principles for Screen-BasedTrading Systems’’), and adopted by theCommission on November 21, 1990 (55 FR48670), as supplemented in October 2000, areappropriate guidelines for an electronictrading facility to apply to electronic tradingsystems. Any program of objective testing

and review of the system should beperformed by a qualified independentprofessional (but not necessarily a third-partycontractor).

(c) A registered derivatives transactionexecution facility that authorizes transfertrades or office trades, an exchange of futuresfor physicals or futures for swaps, or anyother non-competitive transactions,including block trades, should have rulesparticularly authorizing such transactionsand establishing appropriate recordkeepingrequirements. Block trading rules shouldensure that the block trading does not operatein a manner that compromises the integrityof the prices or price discovery on therelevant market.

Registration Criterion 4 of section 5a(c) ofthe Act: FINANCIAL INTEGRITY OFTRANSACTIONS—The board of trade shallestablish and enforce rules or terms andconditions providing for the financialintegrity of transactions entered on orthrough the facilities of the board of trade,and rules or terms and conditions to ensurethe financial integrity of any futurescommission merchants and introducingbrokers and the protection of customer funds.

(a) A board of trade operating as aregistered derivatives transaction executionfacility should provide for the financialintegrity of transactions by settingappropriate minimum financial standards formembers and non-intermediated marketparticipants, appropriate margin forms, andappropriate default rules and procedures. Ifcleared, agreements, contracts andtransactions in excluded or exemptcommodities that are traded on a DTF maybe cleared through clearing organizationsother than DCOs registered with theCommission. The Commission believesensuring and enforcing the financial integrityof transactions and intermediaries, and theprotection of customer funds should includemonitoring compliance with the facility’sminimum financial standards. In order tomonitor for minimum financial requirements,a facility should routinely receive andpromptly review financial and relatedinformation.

(b) A registered derivatives transactionexecution facility that allows customers thatqualify as ‘‘eligible traders’’ under thedefinition found in section 5a(b)(3) of the Actonly by trading through a registered futurescommission merchant pursuant to section5a(b)(3)(B), should have rules concerning theprotection of customer funds that addressappropriate minimum financial standards forintermediaries, the segregation of customerand proprietary funds, the custody ofcustomer funds, the investment standards forcustomer funds, related recordkeepingprocedures and related intermediary defaultprocedures.

Appendix B to Part 37—Guidance onCompliance With Core Principles

1. This appendix provides guidanceconcerning the core principles with which aregistered derivatives transaction executionfacility must comply to maintain registrationunder section 5a(d) of the Act and § 37.5(a).This guidance is illustrative only and is notintended to be a mandatory checklist.

2. If a registered derivatives transactionexecution facility chooses to certify that ithas the capacity to, and upon initiation will,operate in compliance with the coreprinciples under section 5a(d) of the Act and§ 37.6, it should consider the issues set forthin this appendix prior to certification.

3. Alternatively, if a registered derivativestransaction execution facility choosespursuant to § 37.6(b)(2) to provide theCommission with a demonstration of itscompliance with core principles, addressingthe issues set forth in this appendix wouldhelp the Commission in its consideration ofsuch compliance. To the extent thatcompliance with, or satisfaction of, the coreprinciples is not self-explanatory from theface of the derivatives transaction executionfacility’s rules, which may be terms andconditions or trading protocols, a submissionunder § 37.6(b)(2) should include anexplanation or other form of documentationdemonstrating that the derivativestransaction execution facility complies withthe core principles.

Core Principle 1 of section 5a(d) of the Act:IN GENERAL—To maintain the registrationof a board of trade as a derivativestransaction execution facility, a board oftrade shall comply with the core principlesspecified in this appendix.

The board of trade shall have reasonablediscretion in establishing the manner inwhich the board of trade complies with thecore principles. A board of trade newlyregistered to operate as a derivativestransaction execution facility must certify orsatisfactorily demonstrate its capacity tooperate in compliance with the coreprinciples under section 5a(d) of the Actprior to the commencement of its operations.The Commission also may require that aboard of trade operating as a registeredderivatives transaction execution facilitydemonstrate to the Commission that it isoperating in compliance with one or morecore principles.

Core Principle 2 of section 5a(d) of the Act:COMPLIANCE WITH RULES—The board oftrade shall monitor and enforce the rules ofthe facility, including any terms andconditions of any contracts traded on orthrough the facility and any limitations onaccess to the facility.

(a) A board of trade operating as aregistered derivatives transaction executionfacility should have arrangements, resourcesand authority to detect and deter abuses byeffectively and affirmatively enforcing itsrules (which, in the case of a facility thatrestricts traders to eligible commercialentities, may be the effective monitoring oflimitations on access to the facility),including the authority and ability to collector capture information and documents onboth a routine and non-routine basis and toinvestigate effectively possible ruleviolations.

(b) This should include the authority andability to discipline, limit or suspend, and/or terminate activities or access of a member,including members with trading privilegesbut having no, or only nominal equity, in thefacility and non-member market participantsor, in the case of a derivatives transactionexecution facility restricting its traders to



eligible commercial entities, the authorityand ability to terminate activities or access ofsuch a member. In either case, anytermination should be carried out pursuant toclear and fair standards that are available andtransparent to the member or marketparticipant.

Core Principle 3 of section 5a(d) of the Act:MONITORING OF TRADING—The board oftrade shall monitor trading in the contractsof the facility to ensure orderly trading in thecontract and to maintain an orderly marketwhile providing any necessary tradinginformation to the Commission to allow theCommission to discharge the responsibilitiesof the Commission under the Act.

(a) Arrangements and resources to detectand deter abuses through effective trademonitoring programs should facilitate, onboth a routine and nonroutine basis, directsupervision of the market. Appropriateobjective testing and review of anyautomated systems should occur initially andperiodically to ensure proper systemfunctioning, adequate capacity and security.The analysis of data collected should besuitable for the type of information collectedand should occur in a timely fashion. Aboard of trade operating as a registeredderivatives transaction execution facilityshould have the authority to collect theinformation and documents necessary toreconstruct trading for appropriate marketanalysis as it carries out its programs toensure orderly trading and to maintain anorderly market. The facility also should havethe authority to intervene as necessary tomaintain an orderly market.

(b) Alternatively, if a board of tradeoperating as a registered derivativestransaction execution facility restrictscontracts traded to those under §§ 37.3(a)(1)and 37.3(b), it may choose to satisfy this coreprinciple by providing information to theCommission as requested by the Commissionto satisfy its obligations under the Act. Thefacility should have the authority to collector capture and retrieve all necessaryinformation.

Core Principle 4 of section 5a(d) of the Act:DISCLOSURE OF GENERALINFORMATION—The board of trade shalldisclose publicly and to the Commissioninformation concerning—(A) contract termsand conditions; (B) trading conventions,mechanisms, and practices; (C) financialintegrity protections; and (D) otherinformation relevant to participation intrading on the facility.

The Commission considers that the publicdisclosure of information required under thecore principle refers to disclosure to marketparticipants, where the facility’s useragreement requires all market participants tokeep such information confidential. A boardof trade operating as a registered derivativestransaction execution facility should havearrangements and resources for thedisclosure and explanation of contract termsand conditions, trading conventions, tradingmechanisms, trading practices, systemfunctioning, system capacity, and financialintegrity protections, including whethereligible contract participants will have theright to opt out of segregation of customerfunds. Such information may be made

publicly available through the derivativestransaction execution facility’s website. Thefacility should also, as appropriate to themarket, make information regarding prices,bids and offers, or other information asdetermined by the Commission, readilyavailable to market participants on a fair,equitable and timely basis. Furthermore, thefacility should make available informationconcerning steps taken by the facility inresponse to an emergency.

Core Principle 5 of section 5a(d) of the Act:DAILY PUBLICATION OF TRADINGINFORMATION—The board of trade shallmake public daily information on settlementprices, volume, open interest, and openingand closing ranges for contracts traded onthe facility if the Commission determines thatthe contracts perform a significant pricediscovery function for transactions in thecash market for the commodity underlyingthe contracts.

A board of trade operating as a registeredderivatives transaction execution facilityshould provide to the public informationregarding settlement prices, price range,trading volume, open interest and otherrelated market information for all applicablecontracts, as determined by the Commission.The Commission will determine by order,after notice and an opportunity for a hearingthrough submission of written data, viewsand arguments, whether the requirement ofthe core principle on publication of tradinginformation under section 5a(d)(5) of the Actapplies to a particular product or productstraded on a facility. Provision of informationfor any applicable contract could be throughsuch means as providing the information toa financial information service or by timelyplacing the information on a facility’swebsite.

Core Principle 6 of section 5a(d): FITNESSSTANDARDS—The board of trade shallestablish and enforce appropriate fitnessstandards for directors, members of anydisciplinary committee, members, and anyother persons with direct access to thefacility, including any parties affiliated withany of the persons described in this coreprinciple.

A derivatives transaction execution facilityshould have appropriate eligibility criteriafor the categories of persons set forth in thecore principle that would include standardsfor fitness and for the collection andverification of information supportingcompliance with such standards. Minimumstandards of fitness for persons who havemember voting privileges, governingobligations or responsibilities, or whoexercise disciplinary authority are thosebases for refusal to register a person undersection 8a(2) of the Act. In addition, personswho have governing obligations orresponsibilities, or who exercise disciplinaryauthority, should not have a significanthistory of serious disciplinary offenses, suchas those that would be disqualifying under§ 1.63 of this chapter. Eligible contractparticipants or eligible commercial entitieswho are members but do not have theseprivileges, obligations, responsibilities ordisciplinary authority could satisfy minimumfitness standards by meeting the standardsthat they must meet to qualify under the

Act’s respective definitions of eligiblecontract participants or eligible commercialentities. Natural persons who directly orindirectly have greater than a ten percentownership interest in a facility should meetthe fitness standards applicable to memberswith voting rights. A demonstration of thefitness of the applicant’s directors, members,or natural persons who directly or indirectlyhave greater than a ten percent ownershipinterest in a facility may include providingthe Commission with registrationinformation for such persons, certification tothe fitness of such persons, an affidavit ofsuch persons’ fitness by the facility’s counselor other information substantiating thefitness of such persons.

Core Principle 7 of section 5a(d) of the Act:CONFLICTS OF INTEREST—The board oftrade shall establish and enforce rules tominimize conflicts of interest in the decisionmaking process of the derivatives transactionexecution facility and establish a process forresolving such conflicts of interest.

The means to address conflicts of interestin decision-making of a board of tradeoperating as a registered derivativestransaction execution facility should includemethods to ascertain the presence of conflictsof interest and to make decisions in the eventof such a conflict. The Commission alsobelieves that a board of trade operating as aregistered derivatives transaction executionfacility should provide for appropriatelimitations on the use or disclosure ofmaterial non-public information gainedthrough the performance of official duties byboard members, committee members andfacility employees or gained through anownership interest in the facility.

Core Principle 8 of section 5a(d) of the Act:RECORDKEEPING—The board of trade shallmaintain records of all activities related tothe business of the derivatives transactionexecution facility in a form and manneracceptable to the Commission for a period of5 years.

Section 1.31 of this chapter governsrecordkeeping obligations under the Act andthe Commission’s regulations thereunder. Inorder to provide broad flexible performancestandards for recordkeeping, § 1.31 wasupdated and amended by the Commission in1999. Accordingly, § 1.31 itself establishesthe guidance regarding the form and mannerfor keeping records.

Core Principle 9 of section 5a(d) of the Act:ANTITRUST CONSIDERATIONS—Unlessnecessary or appropriate to achieve thepurposes of this Act, the board of trade shallendeavor to avoid—(A) adopting any rules ortaking any actions that result in anyunreasonable restraint of trade; or (B)imposing any material anticompetitiveburden on trading on the derivativestransaction execution facility.

A board of trade seeking to operate as aregistered derivatives transaction executionfacility may request that the Commissionconsider under the provisions of section15(b) of the Act any of the board of trade’srules, which may be trading protocols orpolicies, and including both operational rulesand the terms or conditions of products listedfor trading, at the time it submits itsregistration application or thereafter. The



Commission intends to apply section 15(b) ofthe Act to its consideration of issues underthis core principle in a manner consistentwith that previously applied to contractmarkets.

10. Chapter I of 17 CFR is amendedby adding new Part 38 as follows:

PART 38—DESIGNATED CONTRACTMARKETS

Sec.38.1 Scope.38.2 Exemption.38.3 Procedures for designation by

application.38.4 Procedures for listing products and

implementing contract market rules.38.5 Information relating to contract market

compliance.38.6 Enforceability.


Appendix B to Part 38—Guidance on, andAcceptable Practices in, Compliance withCore Principles

Authority: 7 U.S.C. 2, 5, 6, 6c, 7 and 12a,as amended by the Commodity FuturesModernization Act of 2000, Appendix E ofPub. L. 106–554, 114 Stat. 2763 (2000).

§ 38.1 Scope.The provisions of this part 38 shall

apply to every board of trade or tradingfacility that has been designated as acontract market in a commodity undersection 6 of the Act. Provided, however,nothing in this provision affects theeligibility of designated contractmarkets to operate under the provisionsof parts 36 or 37 of this chapter.

§ 38.2 Exemption.Agreements, contracts, or transactions

traded on a designated contract marketunder section 6 of the Act, the contractmarket and the contract market’soperator are exempt from allCommission regulations for suchactivity, except for the requirements ofthis part 38 and §§ 1.3, 1.12(e), 1.31,1.38, 1.52, 1.59(d), 1.63(c), 1.67, 33.10,part 9, parts 15 through 21, part 40, andpart 190 of this chapter.

§ 38.3 Procedures for designation byapplication.

(a) Application. A board of trade ortrading facility shall be deemed to bedesignated as a contract market sixtydays after receipt by the Commission ofan application for designation unlessnotified otherwise during that period,or, as determined by Commission order,designated upon conditions, if:

(1) The application demonstrates thatthe applicant satisfies the criteria fordesignation of section 5(b) of the Act,the core principles for operation undersection 5(d) of the Act and theprovisions of this part 38;

(2) The application is labeled as beingsubmitted pursuant to this part 38;

(3) The application includes a copy ofthe applicant’s rules and, to the extentthat compliance with the conditions fordesignation is not self-evident, a briefexplanation of how the rules satisfyeach of the conditions for designation;

(4) The applicant does not amend orsupplement the designation application,except as requested by the Commissionor for correction of typographical errors,renumbering or other nonsubstantiverevisions, during that period;

(5) The applicant identifies withparticularity information in theapplication that will be subject to arequest for confidential treatment andsupports that request for confidentialtreatment with reasonable justification;and

(6) The applicant has not instructedthe Commission in writing at the timeof submission of the application orduring the review period to review theapplication pursuant to proceduresunder section 6 of the Act.

(b) Guidance regarding application fordesignation. An applicant for contractmarket designation may meet thefollowing conditions for designation asspecified in this paragraph:

(1) Prevention of marketmanipulation. The designation criterionto prevent market manipulation undersection 5(b)(2) of the Act also includesthe requirement that the designatedcontract market have a dedicatedregulatory department, or delegation ofthat function;

(2) Fair and equitable trading. Thedesignation criterion requiring fair andequitable trading rules under section5(b)(3) of the Act also includes fair,equitable and timely availability tomarket participants of informationregarding, as appropriate to the market,prices, bids and offers;

(3) Disciplinary procedures. Thedesignation criterion to enforcedisciplinary procedures under section5(b)(6) of the Act may be satisfied by anorganized exchange or a trading facilitywith respect to members with tradingprivileges but having no, or onlynominal, equity, in the facility and non-member market participants of thecontract market by expelling or bydenying future access, either directly orindirectly, to such a person found tohave violated the contract market’srules;

(4) Governance fitness standards. Therequirement to establish appropriateminimum fitness standards forparticipants having direct access to thefacility, under the core principle onfitness pursuant to section 5(d)(14) ofthe Act, includes natural persons that

directly or indirectly have greater thana ten percent ownership interest in thefacility; and

(5) In general. Appendix A to this partprovides guidance to applicants fordesignation as contract markets on howthe criteria for designation undersection 5(b) of the Act can be satisfied,and Appendix B to this part providesguidance to applicants for designationand designated contract markets on howthe core principles of section 5(d) of theAct can be satisfied;

(c) Termination of fast track review.During the sixty-day period for reviewpursuant to paragraph (a) of this section,the Commission shall notify theapplicant seeking designation that theCommission is terminating reviewunder this section and will review theproposal under the time period andprocedures of section 6 of the Act, if itappears that the application’s form orsubstance fails to meet the requirementsof this part. This terminationnotification will state the nature of theissues raised and the specific conditionof designation that the applicant wouldviolate, appears to violate, or theviolation of which cannot be ascertainedfrom the application. Within ten days ofreceipt of this termination notification,the applicant seeking designation mayrequest that the Commission render adecision whether to designate thecontract market or to institute aproceeding to deny the proposedapplication under procedures specifiedin section 6 of the Act by notifying theCommission that the applicant views itssubmission as complete and final assubmitted.

(d) Request for withdrawal ofapplication for designation or vacationof designation. An applicant to bedesignated, or a designated contractmarket, may withdraw its application orvacate its designation under section 7 ofthe Act by filing with the Secretary ofthe Commission at its Washington, DC,headquarters such a request.Withdrawal of an application fordesignation or vacation of designationshall not affect any action taken or to betaken by the Commission based uponactions, activities or events occurringduring the time that the application fordesignation was pending with, or thatthe facility was designated by, theCommission.

(e) Delegation of authority. (1) TheCommission hereby delegates, until itorders otherwise, to the Director of theDivision of Division of Trading andMarkets and separately to the Director ofEconomic Analysis or such otheremployee or employees as the Directorsmay designate from time to time, withthe concurrence of the General Counsel



or the General Counsel’s delegatee,authority to notify the entity seekingdesignation under paragraph (a) of thissection that review under thoseprocedures is being terminated or todesignate the entity as a contract marketupon conditions.

(2) The Directors may submit to theCommission for its consideration anymatter that has been delegated in thisparagraph.

(3) Nothing in this paragraphprohibits the Commission, at itselection, from exercising the authoritydelegated in paragraph (e)(1) of thissection.

§ 38.4 Procedures for listing products andimplementing contract market rules.

(a) Request for Commission approvalof rules and products. (1) An applicantfor designation, or a designated contractmarket, may request that theCommission approve under section5c(c) of the Act, any or all of its rulesand subsequent amendments thereto,including both operational rules and theterms or conditions of products listedfor trading on the facility, prior to theirimplementation or, notwithstanding theprovisions of section 5c(c)(2) of the Act,at anytime thereafter, under theprocedures of §§ 40.5 or 40.3 of thischapter, as applicable. A designatedcontract market may label a product inits rules as, ‘‘Listed for trading pursuantto Commission approval,’’ if the productand its terms or conditions have beenapproved by the Commission and it maylabel as, ‘‘Approved by theCommission,’’ only those rules that havebeen so approved.

(2) Notwithstanding the forty-five dayreview period for voluntary approvalunder §§ 40.3(b) and 40.5(b) of thischapter, the operating rules and theterms and conditions of productssubmitted for voluntary Commissionapproval under §§ 40.3 or 40.5 of thischapter that have been submitted at thesame time as, or while an applicationfor contract market designation ispending, will be deemed approved bythe Commission no earlier than thefacility is deemed to be designated.

(b) Self-certification of rules andproducts. Rules of a designated contractmarket and subsequent amendmentsthereto, including both operational rulesand the terms or conditions of productslisted for trading on the facility, notvoluntarily submitted for priorCommission approval pursuant toparagraph (a) of this section must besubmitted to the Commission with acertification that the rule, ruleamendment or product complies withthe Act or rules thereunder pursuant tothe procedures of §§ 40.6 and 40.2 of

this chapter, as applicable. Provided,however, any rule or rule amendmentthat would, for a delivery month havingopen interest, materially change a termor condition of a contract for futuredelivery in an agricultural commodityenumerated in section 1a(4) of the Act,or of an option on such a contract orcommodity, must be submitted to theCommission prior to its implementationfor review and approval under § 40.4 ofthis chapter.

(c) An applicant for designation, or adesignated contract market, may requestthat the Commission consider under theprovisions of section 15(b) of the Actany of the contract market’s rules orpolicies, including both operationalrules and the terms or conditions ofproducts listed for trading.

§ 38.5 Information relating to contractmarket compliance.

(a) Upon request by the Commission,a designated contract market shall filewith the Commission such informationrelated to its business as a contractmarket, including information relatingto data entry and trade details, in theform and manner and within the time asspecified by the Commission in therequest.

(b) Upon request by the Commission,a designated contract market shall filewith the Commission a writtendemonstration, containing suchsupporting data, information anddocuments, in the form and manner andwithin such time as the Commissionmay specify, that the designatedcontract market is in compliance withone or more core principles as specifiedin the request.

§ 38.6 Enforceability.An agreement, contract or transaction

entered into on or pursuant to the rulesof a designated contract market shall notbe void, voidable, subject to rescissionor otherwise invalidated or renderedunenforceable as a result of:

(a) A violation by the designatedcontract market of the provisions ofsection 5 of the Act or this part 38; or

(b) Any Commission proceeding toalter or supplement a rule, term orcondition under section 8a(7) of the Act,to declare an emergency under section8a(9) of the Act, or any other proceedingthe effect of which is to alter,supplement, or require a designatedcontract market to adopt a specific termor condition, trading rule or procedure,or to take or refrain from taking aspecific action.


This appendix provides guidance forapplicants for designation as a contract

market under sections 5(b) and 6 of the Actand § 38.3, on meeting the criteria fordesignation both initially and on an ongoingbasis. The guidance following eachdesignation criterion is illustrative only ofthe types of matters an applicant mayaddress, as applicable, and is not intended tobe a mandatory checklist. Addressing theissues and questions set forth in thisappendix would help the Commission in itsconsideration of whether the application hasmet the criteria for designation. To the extentthat compliance with, or satisfaction of, acriterion for designation is not self-explanatory from the face of the contractmarket’s rules, which may be tradingprotocols or terms and conditions, theapplication should include an explanation orother form of documentation demonstratingthat the applicant meets the designationcriteria of section 5(b) of the Act.

Designation Criterion 1 of section 5(b) ofthe Act: IN GENERAL—To be designated asa contract market, the board of trade shalldemonstrate to the Commission that theboard of trade meets the criteria specified inthis appendix.

A board of trade preparing to submit to theCommission an application for designation asa contract market is encouraged to contactCommission staff for guidance and assistancein preparing an application. Applicants maysubmit a draft application for review andfeedback prior to the submission of an actualapplication without triggering the applicationreview procedures of § 38.3.

Designation Criterion 2 of section 5(b) ofthe Act: PREVENTION OF MARKETMANIPULATION—The board of trade shallhave the capacity to prevent marketmanipulation through market surveillance,compliance, and enforcement practices andprocedures, including methods forconducting real-time monitoring of tradingand comprehensive and accurate tradereconstructions.

A designation application shoulddemonstrate a capacity to prevent marketmanipulation, including that the contractmarket has trading and participation rulesdeterring abuses and a dedicated regulatorydepartment, or an effective delegation of thatfunction.

Designation Criterion 3 of section 5(b) ofthe Act: FAIR AND EQUITABLE TRADING—The board of trade shall establish andenforce trading rules to ensure fair andequitable trading through the facilities of thecontract market, and the capacity to detect,investigate, and discipline any person thatviolates the rules. The rules may authorize—(A) transfer trades or office trades; (B) anexchange of—(i) futures in connection with acash commodity transaction; (ii) futures forcash commodities; or (iii) futures for swaps;or (C) a futures commission merchant, actingas principal or agent, to enter into or confirmthe execution of a contract for the purchaseor sale of a commodity for future delivery ifthe contract is reported, recorded, or clearedin accordance with the rules of the contractmarket or a derivatives clearing organization.

(a) Establishing and enforcing trading rulesto ensure fair and equitable trading on acontract market, among other things,includes providing to market participants, on



a fair, equitable and timely basis, informationregarding, prices, bids and offers, asapplicable to the market.

(b) Such trading rules should be designedwith adequate specificity.

(c) A contract market that authorizestransfer trades or office trades; an exchangeof futures for physicals or futures for swaps;or any other non-competitive transactions,including block trades, should have rulesparticularly authorizing such transactionsand establishing appropriate recordkeepingrequirements.

Designation Criterion 4 of section 5(b) ofthe Act: TRADE EXECUTION FACILITY—The board of trade shall—(A) establish andenforce rules defining, or specificationsdetailing, the manner of operation of thetrade execution facility maintained by theboard of trade, including rules orspecifications describing the operation of anyelectronic matching platform; and (B)demonstrate that the trade execution facilityoperates in accordance with the rules orspecifications.

(a) An application of a board of trade to bedesignated as a contract market shouldinclude the system’s trade-matchingalgorithm and order entry procedures. Anapplication involving a trade-matchingalgorithm that is based on order priorityfactors other than price and time shouldinclude a brief explanation of the algorithm.

(b) A designated contract market’sspecifications on initial and periodicobjective testing and review of proper systemfunctioning, adequate capacity and securityfor any automated systems should beincluded in its application. A board of tradeshould submit in the contract marketapplication, information on the objectivetesting and review carried out on itsautomated system. The Commission believesthat the guidelines issued by theInternational Organization of SecuritiesCommissions (IOSCO) in 1990 (which havebeen referred to as the ‘‘Principles for Screen-Based Trading Systems’’), and adopted by theCommission on November 21, 1990 (55 FR48670), as supplemented in October, 2000,are appropriate guidelines for an electronictrading facility to apply to electronic tradingsystems. Any program of objective testingand review of the system should beperformed by a qualified independentprofessional (but not necessarily a third-partycontractor).

Designation Criterion 5 of section 5(b) ofthe Act: FINANCIAL INTEGRITY OFTRANSACTIONS—The board of trade shallestablish and enforce rules and proceduresfor ensuring the financial integrity oftransactions entered into by or through thefacilities of the contract market, includingthe clearance and settlement of thetransactions with a derivatives clearingorganization.

(a) A designated contract market shouldprovide for the financial integrity oftransactions by setting appropriate minimumfinancial standards for members and non-intermediated market participants, marginingsystems, appropriate margin forms andappropriate default rules and procedures.Absent Commission action pursuant to itsexemptive authority under section 4(c) of the

Act, transactions executed on the contractmarket (other than stock futures products), ifcleared, must be cleared through aderivatives clearing organization registered assuch with the Commission. The Commissionbelieves ensuring and enforcing the financialintegrity of transactions and intermediaries,and the protection of customer funds shouldinclude monitoring compliance with thecontract market’s minimum financialstandards. In order to monitor for minimumfinancial requirements, a contract marketshould routinely receive and promptlyreview financial and related information.

(b) A designated contract market shouldhave rules concerning the protection ofcustomer funds that address appropriateminimum financial standards forintermediaries, the segregation of customerand proprietary funds, the custody ofcustomer funds, the investment standards forcustomer funds, related recordkeepingprocedures and related intermediary defaultprocedures.

Designation Criterion 6 of section 5(b) ofthe Act: DISCIPLINARY PROCEDURES—Theboard of trade shall establish and enforcedisciplinary procedures that authorize theboard of trade to discipline, suspend, orexpel members or market participants thatviolate the rules of the board of trade, orsimilar methods for performing the samefunctions, including delegation of thefunctions to third parties.

The disciplinary procedures established bya designated contract market should give thecontract market both the authority and abilityto discipline and limit or suspend amember’s activities as well as the authorityand ability to terminate a member’s activitiespursuant to clear and fair standards. Theauthority to discipline or limit or suspendthe activities of a member or of a marketparticipant could be established in a contractmarket’s rules, user agreements or othermeans. An organized exchange or a tradingfacility could satisfy this criterion for amember with trading privileges but havingno, or only nominal, equity, in the facilityand for a non-member market participant byexpelling or denying future access to suchpersons upon a finding that such a personhas violated the board of trade’s rules.

Designation Criterion 7 of section 5(b) ofthe Act: PUBLIC ACCESS—The board oftrade shall provide the public with access tothe rules, regulations, and contractspecifications of the board of trade.

A board of trade operating as a contractmarket may provide information to thepublic by placing the information on its website.

Designation Criterion 8 of section 5(b) ofthe Act: ABILITY TO OBTAININFORMATION—The board of trade shallestablish and enforce rules that will allow theboard of trade to obtain any necessaryinformation to perform any of the functionsdescribed in this appendix, including thecapacity to carry out such internationalinformation-sharing agreements as theCommission may require.

A designated contract market should havethe authority to collect information anddocuments on both a routine and non-routinebasis including the examination of books and

records kept by the contract market’smembers and by non-intermediated marketparticipants. Appropriate information-sharing agreements could be established withother boards of trade or the Commissioncould act in conjunction with the contractmarket to carry out such information sharing.

Appendix B to Part 38—Guidance on,and Acceptable Practices in,Compliance with Core Principles

1. This appendix provides guidanceconcerning the core principles with which aboard of trade must comply to maintaindesignation under section 5(d) of the Act and§§ 38.3 and 38.5. The guidance is providedin paragraph (a) following each coreprinciple and it can be used to demonstrateto the Commission core principlecompliance, under §§ 38.3(a) and 38.5. Theguidance for each core principle isillustrative only of the types of matters aboard of trade may address, as applicable,and is not intended to be a mandatorychecklist. Addressing the issues andquestions set forth in this appendix wouldhelp the Commission in its consideration ofwhether the board of trade is in compliancewith the core principles. To the extent thatcompliance with, or satisfaction of, a coreprinciple is not self-explanatory from the faceof the board of trade’s rules, which may beterms and conditions or trading protocols, anapplication pursuant to § 38.3, or asubmission pursuant to § 38.5 should includean explanation or other form ofdocumentation demonstrating that the boardof trade complies with the core principles.

2. Acceptable practices meeting therequirements of the core principles are setforth in paragraph (b) following each coreprinciple. Boards of trade that follow thespecific practices outlined under paragraph(b) for any core principle in this appendixwill meet the applicable core principle.Paragraph (b) is for illustrative purposesonly, and does not state the exclusive meansfor satisfying a core principle.

Core Principle 1 of section 5(d) of the Act:IN GENERAL—To maintain the designationof a board of trade as a contract market, theboard of trade shall comply with the coreprinciples specified in this subsection. Theboard of trade shall have reasonablediscretion in establishing the manner inwhich it complies with the core principles.

A board of trade applying for designationas a contract market must satisfactorilydemonstrate its capacity to operate incompliance with the core principles undersection 5(d) of the Act and § 38.3. TheCommission may require that a board of tradeoperating as a contract market demonstrate tothe Commission that it is in compliance withone or more core principles.

Core Principle 2 of section 5(d) of the Act:COMPLIANCE WITH RULES—The board oftrade shall monitor and enforce compliancewith the rules of the contract market,including the terms and conditions of anycontracts to be traded and any limitations onaccess to the contract market.

(a) Application guidance. (1) A designatedcontract market should have arrangementsand resources for effective trade practicesurveillance programs, with the authority to



collect information and documents on both aroutine and non-routine basis including theexamination of books and records kept by thecontract market’s members and by non-intermediated market participants. Thearrangements and resources should facilitatethe direct supervision of the market and theanalysis of data collected. Trade practicesurveillance programs could be carried outby the contract market itself or throughdelegation to a third party. If the contractmarket delegates the responsibility ofcarrying out a trade practice surveillanceprogram to a third party, such third partyshould have the capacity and authority tocarry out such program, and the contractmarket should retain appropriate supervisoryauthority over the third party.

(2) A designated contract market shouldhave arrangements, resources and authorityfor effective rule enforcement. TheCommission believes that this should includethe authority and ability to discipline andlimit, or suspend the activities of a memberor market participant as well as the authorityand ability to terminate the activities of amember or market participant pursuant toclear and fair standards. An organizedexchange or a trading facility could satisfythis criterion for members with tradingprivileges but having no, or only nominal,equity, in the facility and non-membermarket participants, by expelling or denyingsuch persons future access upon adetermination that such a person has violatedthe board of trade’s rules.

(b) Acceptable practices. An acceptabletrade practice surveillance program generallywould include:

(1) Maintenance of data reflecting thedetails of each transaction executed on thecontract market;

(2) Electronic analysis of this dataroutinely to detect potential tradingviolations;

(3) Appropriate and thorough investigativeanalysis of these and other potential tradingviolations brought to the contract market’sattention; and

(4) Prompt and effective disciplinary actionfor any violation that is found to have beencommitted. The Commission believes thatthe latter element should include theauthority and ability to discipline and limitor suspend the activities of a member ormarket participant pursuant to clear and fairstandards that are available to marketparticipants. See, e.g. 17 CFR part 8.

Core Principle 3 of section 5(d) of the Act:CONTRACTS NOT READILY SUBJECT TOMANIPULATION—The board of trade shalllist on the contract market only contracts thatare not readily susceptible to manipulation.

(a) Application guidance. Contract marketsmay list new products for trading by self-certification under § 40.2 of this chapter ormay submit products for Commissionapproval under § 40.3 and part 40, AppendixA, of this chapter.

(b) Acceptable practices. Guideline No. 1,17 CFR part 40, Appendix A may be used asguidance in meeting this core principle forboth new product listings and existing listedcontracts.

Core Principle 4 of section 5(d) of the Act:MONITORING OF TRADING—The board of

trade shall monitor trading to preventmanipulation, price distortion, anddisruptions of the delivery or cash-settlementprocess.

(a) Application guidance. A contractmarket could prevent market manipulationthrough a dedicated regulatory department,or by delegation of that function to anappropriate third party.

(b) Acceptable practices. (1) An acceptableprogram for monitoring markets willgenerally involve the collection of variousmarket data, including information ontraders’ market activity. Those data should beevaluated on an ongoing basis in order tomake an appropriate regulatory response topotential market disruptions or abusivepractices.

(2) The designated contract market shouldcollect data in order to assess whether themarket price is responding to the forces ofsupply and demand. Appropriate datausually include various fundamental dataabout the underlying commodity, its supply,its demand, and its movement throughmarketing channels. Especially important aredata related to the size and ownership ofdeliverable supplies—the existing supplyand the future or potential supply, and to thepricing of the deliverable commodity relativeto the futures price and relative to similar,but nondeliverable, kinds of the commodity.For cash-settled markets, it is moreappropriate to pay attention to theavailability and pricing of the commoditymaking up the index to which the marketwill be settled, as well as monitoring thecontinued suitability of the methodology forderiving the index.

(3) To assess traders’ activity and potentialpower in a market, at a minimum, everycontract market should have routine access tothe positions and trading of its marketparticipants and, if applicable, shouldprovide for such access through itsagreements with its third-party provider ofclearing services. Although clearing memberdata may be sufficient for some contractmarkets, an effective surveillance program forcontract markets with substantial numbers ofcustomers trading through intermediariesshould employ a much more comprehensivelarge-trader reporting system (LTRS).

Core Principle 5 of section 5(d) of the Act:POSITION LIMITATIONS ORACCOUNTABILITY—To reduce the potentialthreat of market manipulation or congestion,especially during trading in the deliverymonth, the board of trade shall adoptposition limitations or positionaccountability for speculators, wherenecessary and appropriate.

(a) Application guidance. [Reserved](b) Acceptable practices.(1) In order to diminish potential problems

arising from excessively large speculativepositions, and to facilitate orderly liquidationof expiring futures contracts, markets mayneed to set limits on traders’ positions forcertain commodities. These position limitsspecifically may exempt bona fide hedging,permit other exemptions, or set limitsdifferently by markets, by delivery months,or by time periods. For purposes ofevaluating a contract market’s speculative-limit program, the Commission considers the

specified limit levels, aggregation policies,types of exemptions allowed, methods formonitoring compliance with the specifiedlevels, and procedures for enforcement todeal with violations.

(2) Provisions concerning speculativeposition limits are set forth in part 150. Ingeneral, position limits are not necessary formarkets where the threat of excessivespeculation or manipulation is nonexistent orvery low. Thus, contract markets do not needto adopt speculative position limits forfutures markets on major foreign currencies,contracts based on certain financialinstruments having very liquid and deepunderlying cash markets, and contractsspecifying cash settlement where thepotential for distortion of such price isnegligible. Where speculative position limitsare necessary, acceptable speculative-limitlevels typically should be set in terms of atrader’s combined position in the futurescontract plus its position in the relatedoption contract (on a delta-adjusted basis).

(3) A contract market may provide forposition accountability provisions in lieu ofposition limits for contracts on financialinstruments, intangible commodities, orcertain tangible commodities. Marketsappropriate for position accountability rulesinclude those with large open-interest, highdaily trading volumes and liquid cashmarkets.

(4) Spot-month limits should be adoptedfor markets based on commodities havingmore limited deliverable supplies or whereotherwise necessary to minimize thesusceptibility of the market to manipulationor price distortions. The level of the spotlimit for physical-delivery markets should bebased upon an analysis of deliverablesupplies and the history of spot-monthliquidations. Spot-month limits for physical-delivery markets are appropriately set at nomore than 25 percent of the estimateddeliverable supply. For cash-settled markets,spot-month position limits may be necessaryif the underlying cash market is small orilliquid such that traders can disrupt the cashmarket or otherwise influence the cash-settlement price to profit on a futuresposition. In these cases, the limit should beset at a level that minimizes the potential formanipulation or distortion of the futurescontract’s or the underlying commodity’sprice. Markets may elect not to provide all-months-combined and non-spot monthlimits.

(5) Contract markets should haveaggregation rules that apply to those accountsunder common control, those with commonownership, i.e., where there is a ten percentor greater financial interest, and those tradedaccording to an express or impliedagreement. Contract markets will bepermitted to set more stringent aggregationpolicies. For example, one major board oftrade has adopted a policy of automaticallyaggregating the position of members of thesame household, unless they were granted aspecific waiver. Contract markets may grantexemptions to their position limits for bonafide hedging (as defined in § 1.3(z) of thischapter) and may grant exemptions forreduced risk positions, such as spreads,straddles and arbitrage positions.



(6) Contract markets with many productswith large numbers of traders should have anautomated means of detecting traders’violations of speculative limits orexemptions. Contract markets shouldmonitor the continuing appropriateness ofapproved exemptions by periodicallyreviewing each trader’s basis for exemptionor requiring a reapplication.

(7) Contract markets should establish aprogram for effective enforcement of theselimits Contract markets should use theirLTRS to monitor and enforce dailycompliance with position limit rules. TheCommission notes that a contract market mayallow traders to periodically apply to thecontract market for an exemption and, ifappropriate, be granted a position levelhigher than the applicable speculative limit.The contract market should establish aprogram to monitor approved exemptionsfrom the limits. The position levels grantedunder such hedge exemptions generally arebased upon the trader’s commercial activityin related markets. Contract markets mayallow a brief grace period where a qualifyingtrader may exceed speculative limits or anexisting exemption level pending thesubmission and approval of appropriatejustification. A contract market shouldconsider whether it wants to restrictexemptions during the last several days oftrading in a delivery month. Acceptableprocedures for obtaining and grantingexemptions include a requirement that thecontract market approve a specific maximumhigher level.

(8) Finally, an acceptable speculative limitprogram should have specific policies fortaking regulatory action once a violation of aposition limit or exemption is detected. Thecontract market policy should considerappropriate actions, regardless of whether theviolation is by a non-member or member, andshould address traders carrying accountsthrough more than one intermediary.

(9) A violation of contract market positionlimits that have been approved by theCommission is also a violation of section4a(e) of the Act. The Commission willconsider for approval all contract marketposition limit rules.

Core Principle 6 of section 5(d) of the Act:EMERGENCY AUTHORITY—The board oftrade shall adopt rules to provide for theexercise of emergency authority, inconsultation or cooperation with theCommission, where necessary andappropriate, including the authority to—(A)liquidate or transfer open positions in anycontract; (B) suspend or curtail trading inany contract; and (C) require marketparticipants in any contract to meet specialmargin requirements.

(a) Application guidance. A designatedcontract market should have clear proceduresand guidelines for contract market decision-making regarding emergency intervention inthe market, including procedures andguidelines to avoid conflicts of interest whilecarrying out such decision-making. Acontract market should also have theauthority to intervene as necessary tomaintain markets with fair and orderlytrading as well as procedures for carrying outthe intervention. Procedures and guidelines

should also include notifying theCommission of the exercise of a contractmarket’s regulatory emergency authority,minimizing conflicts of interest, anddocumenting the contract market’s decision-making process and the reasons for using itsemergency action authority. Information onsteps taken under such procedures should beincluded in a submission of a certified ruleunder § 40.6 of this chapter and any relatedsubmissions for rule approval pursuant to§ 40.5 of this chapter, when carried outpursuant to a contract market’s emergencyauthority.

(b) Acceptable practices. As is necessary toaddress perceived market threats, thecontract market, among other things, shouldbe able to impose position limits in particularin the delivery month, impose or modifyprice limits, modify circuit breakers, call foradditional margin either from customers orclearing members, order the liquidation ortransfer of open positions, order the fixing ofa settlement price, order a reduction inpositions, extend or shorten the expirationdate or the trading hours, suspend or curtailtrading on the market, order the transfer ofcustomer contracts and the margin for suchcontracts from one member including non-intermediated market participants of thecontract market to another, or alter thedelivery terms or conditions, or, ifapplicable, should provide for such actionsthrough its agreements with its third-partyprovider of clearing services.

Core Principle 7 of section 5(d) of the Act:AVAILABILITY OF GENERALINFORMATION—The board of trade shallmake available to market authorities, marketparticipants, and the public informationconcerning—(A) the terms and conditions ofthe contracts of the contract market; and (B)the mechanisms for executing transactionson or through the facilities of the contractmarket.

(a) Application guidance. A designatedcontract market should have arrangementsand resources for the disclosure of contractterms and conditions and tradingmechanisms to the Commission, marketparticipants and the public. Proceduresshould also include providing information onlisting new products, rule amendments orother changes to previously disclosedinformation to the Commission, marketparticipants and the public. Provision of allsuch information to market participants andthe public could be by timely placement ofthe information on a contract market’s website.

(b) Acceptable practices. [Reserved]Core Principle 8 of section 5(d) of the Act:

DAILY PUBLICATION OF TRADINGINFORMATION—The board of trade shallmake public daily information on settlementprices, volume, open interest, and openingand closing ranges for actively tradedcontracts on the contract market.

(a) Application guidance. A contractmarket should provide to the publicinformation regarding settlement prices,price range, volume, open interest and otherrelated market information for all activelytraded contracts, as determined by theCommission, on a fair, equitable and timelybasis. The Commission believes that section

5(d)(8) requires contract markets to publicizetrading information for any non-dormantcontract. Provision of information for anyapplicable contract could be through suchmeans as provision of the information to afinancial information service and by timelyplacement of the information on a contractmarket’s web site.


EXECUTION OF TRANSACTIONS—Theboard of trade shall provide a competitive,open, and efficient market and mechanismfor executing transactions.

(a) Application guidance. (1) Acompetitive, open and efficient market andmechanism for executing transactionsincludes a board of trade’s methodology forentering orders and executing transactions.

(2) Appropriate objective testing andreview of any automated systems shouldoccur initially and periodically to ensureproper system functioning, adequate capacityand security. A designated contract market’sanalysis of its automated system shouldaddress appropriate principles for theoversight of automated systems, ensuringproper system function, adequate capacityand security. The Commission believes thatthe guidelines issued by the InternationalOrganization of Securities Commissions(IOSCO) in 1990 (which have been referredto as the ‘‘Principles for Screen-BasedTrading Systems’’), and adopted by theCommission on November 21, 1990 (55 FR48670), as supplemented in October 2000, areappropriate guidelines for a designatedcontract market to apply to electronic tradingsystems. Any program of objective testingand review of the system should beperformed by a qualified independentprofessional. The Commission believes thatinformation gathered by analysis, oversightor any program of objective testing andreview of any automated systems regardingsystem functioning, capacity and securityshould be made available to the Commission.

(3) A designated contract market thatdetermines to allow block trading shouldensure that the block trading does not operatein a manner that compromises the integrityof prices or price discovery on the relevantmarket.

(b) Acceptable practices. A professionalthat is a certified member of the InformationSystems Audit and Control Associationexperienced in the industry would be anexample of an acceptable party to carry outtesting and review of an electronic tradingsystem.

Core Principle 10 of section 5(d) of the Act:TRADE INFORMATION—The board of tradeshall maintain rules and procedures toprovide for the recording and safe storage ofall identifying trade information in a mannerthat enables the contract market to use theinformation for purposes of assisting in theprevention of customer and market abusesand providing evidence of any violations ofthe rules of the contract market.

(a) Application guidance. A designatedcontract market should have arrangementsand resources for recording of full data entryand trade details and the safe storage of audittrail data. A designated contract marketshould have systems sufficient to enable the



contract market to use the information forpurposes of assisting in the prevention ofcustomer and market abuses throughreconstruction of trading.

(b) Acceptable practices. (1) The goal of anaudit trail is to detect and deter customer andmarket abuse. An effective contract marketaudit trail should capture and retainsufficient trade-related information to permitcontract market staff to detect trading abusesand to reconstruct all transactions within areasonable period of time. An audit trailshould include specialized electronicsurveillance programs that would identifypotentially abusive trades and trade patterns,including, for instance, withholding ordisclosing customer orders, trading ahead,and preferential allocation. An acceptableaudit trail must be able to track a customerorder from time of receipt through fillallocation or other disposition. The contractmarket must create and maintain anelectronic transaction history database thatcontains information with respect totransactions executed on the designatedcontract market.

(2) An acceptable audit trail shouldinclude the following: original sourcedocuments, transaction history, electronicanalysis capability, and safe storagecapability. A contract market whose audittrail satisfies the following acceptablepractices would satisfy Core Principle 10.

(i) Original source documents. Originalsource documents include unalterable,sequentially identified records on whichtrade execution information is originallyrecorded, whether recorded manually orelectronically. For each customer order(whether filled, unfilled or cancelled, each ofwhich should be retained or electronicallycaptured), such records reflect the terms ofthe order, an account identifier that relatesback to the account(s) owner(s), and the timeof order entry. (For floor-based contractmarkets, the time of report of execution of theorder should also be captured.)

(ii) Tansaction history. A transactionhistory which consists of an electronichistory of each transaction, including (a) alldata that are input into the trade entry ormatching system for the transaction to matchand clear; (b) the categories of participantsfor which such trades are executed, includingwhether the person executing a trade wasexecuting it for his/her own account or anaccount for which he/she has discretion, his/her clearing member’s house account, theaccount of another member, including marketparticipants present on the floor, or theaccount of any other customer; (c) timing andsequencing data adequate to reconstructtrading; and (d) the identification of eachaccount to which fills are allocated.

(iii) Electronic analysis capability. Anelectronic analysis capability that permitssorting and presenting data included in thetransaction history so as to reconstructtrading and to identify possible tradingviolations with respect to both customer andmarket abuse.

(iv) Safe storage capability. Safe storagecapability provides for a method of storingthe data included in the transaction historyin a manner that protects the data fromunauthorized alteration, as well as from

accidental erasure or other loss. Data shouldbe retained in accordance with therecordkeeping standards of Core Principle 17.

Core Principle 11 of section 5(d) of the Act:FINANCIAL INTEGRITY OF CONTRACTS—The board of trade shall establish andenforce rules providing for the financialintegrity of any contracts traded on thecontract market (including the clearance andsettlement of the transactions with aderivatives clearing organization), and rulesto ensure the financial integrity of anyfutures commission merchants andintroducing brokers and the protection ofcustomer funds.

(a) Application guidance. Clearing oftransactions executed on a designatedcontract market other than transactions insecurity futures products, should be providedthrough a Commission-registered derivativesclearing organization. In addition, adesignated contract market should maintainthe financial integrity of its transactions bymaintaining minimum financial standards forits members and non-intermediated marketparticipants and by having default rules andprocedures. The minimum financialstandards should be monitored forcompliance purposes. The Commissionbelieves that in order to monitor forminimum financial requirements, adesignated contract market should routinelyreceive and promptly review financial andrelated information from its members. Rulesconcerning the protection of customer fundsshould address the segregation of customerand proprietary funds, the custody ofcustomer funds, the investment standards forcustomer funds, related recordkeeping andrelated intermediary default procedures. Thecontract market should audit its membersthat are intermediaries for compliance withthe foregoing rules as well as applicableCommission rules. These audits should beconducted consistent with the guidance setforth in Division of Trading and MarketsInterpretations 4–1 and 4–2. A contractmarket may delegate to a designated self-regulatory organization responsibility forreceiving financial reports and forconducting compliance audits pursuant tothe guidelines set forth in § 1.52 of thischapter.

(b) Acceptable Practices. [Reserved]Core Principle 12 of section 5(d) of the Act:

PROTECTION OF MARKETPARTICIPANTS—The board of trade shallestablish and enforce rules to protect marketparticipants from abusive practicescommitted by any party acting as an agentfor the participants.

(a) Application guidance. A designatedcontract market should have rulesprohibiting conduct by intermediaries that isfraudulent, noncompetitive, unfair, or anabusive practice in connection with theexecution of trades and a program to detectand discipline such behavior. The contractmarket should have methods and resourcesappropriate to the nature of the tradingsystem and the structure of the market todetect trade practice abuses.


DISPUTE RESOLUTION—The board of tradeshall establish and enforce rules regarding

and provide facilities for alternative disputeresolution as appropriate for marketparticipants and any market intermediaries.

(a) Application guidance. A designatedcontract market should provide customerdispute resolution procedures that are fairand equitable and make them available on avoluntary basis, either directly or throughanother self-regulatory organization, tocustomers that are non-eligible contractparticipants.

(b) Acceptable practices. (1) Under CorePrinciple 13, a designated contract market isrequired to provide for dispute resolutionmechanisms that are appropriate to thenature of the market.

(2) In order to satisfy acceptable standards,a designated contract market should providea customer dispute resolution mechanismthat is fundamentally fair and is equitable.An acceptable customer dispute resolutionmechanism would:

(i) Provide the customer with anopportunity to have his or her claim decidedby an objective and impartial decision-maker,

(ii) Provide each party with the right to berepresented by counsel, at the party’s ownexpense,

(iii) Provide each party with adequatenotice of the claims presented against him orher, an opportunity to be heard on all claims,defenses and permitted counterclaims, andan opportunity for a prompt hearing,

(iv) Authorize prompt, written, finalsettlement awards that are not subject toappeal within the contract market, and

(v) Notify the parties of the fees and coststhat may be assessed.

(3) The use of such procedures should bevoluntary for customers who are not eligiblecontract participants, and could permitcounterclaims as provided in § 166.5 of thischapter.

(4) If the designated contract market alsoprovides a procedure for the resolution ofdisputes that do not involve customers (i.e.,member-to-member disputes), the procedurefor resolving such disputes must beindependent of and shall not interfere withor delay the resolution of customers’ claimsor grievances.

(5) A designated contract market maydelegate to another self-regulatoryorganization or to a registered futuresassociation its responsibility to provide forcustomer dispute resolution mechanisms,provided, however, that, if the designatedcontract market does delegate thatresponsibility, the contract market shall in allrespects treat any decision issued by suchother organization or association as if thedecision were its own including providingfor the appropriate enforcement of any awardissued against a delinquent member.

Core Principle 14 of section 5(d) of the Act:GOVERNANCE FITNESS STANDARDS—Theboard of trade shall establish and enforceappropriate fitness standards for directors,members of any disciplinary committee,members of the contract market, and anyother persons with direct access to the facility(including any parties affiliated with any ofthe persons described in this core principle).

(a) Application guidance. (1) A designatedcontract market should have appropriateeligibility criteria for the categories of



persons set forth in the Core Principle thatshould include standards for fitness and forthe collection and verification of informationsupporting compliance with such standards.Minimum standards of fitness for personswho have member voting privileges,governing obligations or responsibilities, orwho exercise disciplinary authority are thosebases for refusal to register a person undersection 8a(2) of the Act. In addition, personswho have governing obligations orresponsibilities, or who exercise disciplinaryauthority, should not have a significanthistory of serious disciplinary offenses, suchas those that would be disqualifying under§ 1.63 of this chapter. Members with tradingprivileges but having no, or only nominal,equity, in the facility and non-membermarket participants who are notintermediated and do not have theseprivileges, obligations, responsibilities ordisciplinary authority could satisfy minimumfitness standards by meeting the standardsthat they must meet to qualify as a ‘‘marketparticipant.’’ Natural persons who directly orindirectly have greater than a ten percentownership interest in a designated contractmarket should meet the fitness standardsapplicable to members with voting rights.

(2) The Commission believes that suchstandards should include providing theCommission with fitness information forsuch persons, whether registrationinformation, certification to the fitness ofsuch persons, an affidavit of such persons’fitness by the contract market’s counsel orother information substantiating the fitness ofsuch persons. If a contract market providescertification of the fitness of such a person,the Commission believes that suchcertification should be based on verifiedinformation that the person is fit to be in hisor her position.


CONFLICTS OF INTEREST—The board oftrade shall establish and enforce rules tominimize conflicts of interest in the decisionmaking process of the contract market andestablish a process for resolving suchconflicts of interest.

(a) Application guidance. The means toaddress conflicts of interest in decision-making of a contract market should includemethods to ascertain the presence of conflictsof interest and to make decisions in the eventof such a conflict. In addition, theCommission believes that the contract marketshould provide for appropriate limitations onthe use or disclosure of material non-publicinformation gained through the performanceof official duties by board members,committee members and contract marketemployees or gained through an ownershipinterest in the contract market.


COMPOSITION OF BOARDS OF MUTUALLYOWNED CONTRACT MARKETS—In the caseof a mutually owned contract market, theboard of trade shall ensure that thecomposition of the governing board reflectsmarket participants.

(a) Application guidance. The compositionof a mutually-owned contract market shouldfairly represent the diversity of interests ofthe contract market’s market participants.


RECORDKEEPING—The board of trade shallmaintain records of all activities related tothe business of the contract market in a formand manner acceptable to the Commissionfor a period of 5 years.

(a) Application guidance. [Reserved](b) Acceptable practices. Section 1.31 of

this chapter governs recordkeepingobligations under the Act and theCommission’s regulations thereunder. Inorder to provide broad flexible performancestandards for recordkeeping, § 1.31 wasupdated and amended by the Commission in1999. Accordingly, § 1.31 itself establishesthe guidance regarding the form and mannerfor keeping records.

Core Principle 18 of section 5(d) of the Act:ANTITRUST CONSIDERATIONS—Unlessnecessary or appropriate to achieve thepurposes of this Act, the board of trade shallendeavor to avoid—(A) adopting any rules ortaking any actions that result in anyunreasonable restraints of trade; or (B)imposing any material anticompetitiveburden on trading on the contract market.

(a) Application guidance. An entity seekingdesignation as a contract market may requestthat the Commission consider under theprovisions of section 15(b) of the Act any ofthe entity’s rules, including trading protocolsor policies, and including both operationalrules and the terms or conditions of productslisted for trading, at the time of designationor thereafter. The Commission intends toapply section 15(b) of the Act to itsconsideration of issues under this coreprinciple in a manner consistent with thatpreviously applied to contract markets.

(b) Acceptable practices. [Reserved]


PART 40—PROVISIONS COMMON TOCONTRACT MARKETS, DERIVATIVESTRANSACTION EXECUTIONFACILITIES AND DERIVATIVESCLEARING ORGANIZATIONS

Sec.40.1 Definitions.40.2 Listing products for trading by

certification.40.3 Voluntary submission of new products

for Commission review and approval.40.4 Amendments to terms or conditions of

enumerated agricultural contracts.40.5 Voluntary submission of rules for

Commission review and approval.40.6 Self-certification of rules by designated

contract markets and registeredderivatives clearing organizations.

40.7 Delegations.

Appendix A to Part 40 [Reserved]

Appendix B to Part 40—Schedule of fees.

Appendix C to Part 40 [Reserved]

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a,8 and 12a, as amended by the CommodityFutures Modernization Act of 2000,Appendix E of Pub. L. No. 106–554, 114 Stat.2763 (2000).

§ 40.1 Definitions.As used in this part:Dormant contract means any

commodity futures or option contract orother instrument in which no tradinghas occurred in any future or optionexpiration for a period of six completecalendar months; provided, however, nocontract or instrument shall beconsidered to be dormant until the endof sixty complete calendar monthsfollowing initial listing.

Emergency means any occurrence orcircumstance which, in the opinion ofthe governing board of the contractmarket or derivatives transactionexecution facility, requires immediateaction and threatens or may threatensuch things as the fair and orderlytrading in, or the liquidation of ordelivery pursuant to, any agreements,contracts or transactions on such atrading facility, including anymanipulative or attempted manipulativeactivity; any actual, attempted, orthreatened corner, squeeze, congestion,or undue concentration of positions; anycircumstances which may materiallyaffect the performance of agreements,contracts or transactions traded on thetrading facility, including failure of thepayment system or the bankruptcy orinsolvency of any participant; anyaction taken by any governmental body,or any other board of trade, market orfacility which may have a direct impacton trading on the trading facility; andany other circumstance which may havea severe, adverse effect upon thefunctioning of a designated contractmarket or derivatives transactionexecution facility.

Rule means any constitutionalprovision, article of incorporation,bylaw, rule, regulation, resolution,interpretation, stated policy, term andcondition, trading protocol, agreementor instrument corresponding thereto, inwhatever form adopted, and anyamendment or addition thereto or repealthereof, made or issued by a contractmarket, derivatives transactionexecution facility or derivatives clearingorganization or by the governing boardthereof or any committee thereof.

Terms and conditions mean anydefinition of the trading unit or thespecific commodity underlying acontract for the future delivery of acommodity or commodity optioncontract, specification of settlement ordelivery standards and procedures, andestablishment of buyers’ and sellers’rights and obligations under thecontract. Terms and conditions includeprovisions relating to the following:

(1) Quality or quantity standards for acommodity and any applicablepremiums or discounts;



(2) Trading hours, trading months andthe listing of contracts;

(3) Minimum and maximum pricelimits and the establishment ofsettlement prices;

(4) Position limits and positionreporting requirements;

(5) Delivery points and locationalprice differentials;

(6) Delivery standards andprocedures, including alternatives todelivery and applicable penalties orsanctions for failure to perform;

(7) Settlement of the contract; and(8) Payment or collection of

commodity option premiums ormargins.

§ 40.2 Listing products for trading bycertification.

To list a new product for trading, tolist a product for trading that hasbecome dormant, or to accept forclearing a product (not traded on adesignated contract market or aregistered derivatives transactionexecution facility), a registered entitymust file with the Secretary of theCommission at its Washington, D.C.,headquarters no later than the close ofbusiness of the business day precedingthe product’s listing or acceptance forclearing, either in electronic or hard-copy form, a copy of the product’s rules,including its terms and conditions, orthe rules establishing the terms andconditions of products that make themacceptable for clearing, and acertification by the registered entity thatthe trading product or other instrument,or the clearing of the trading product orother instrument including any rulesestablishing the terms and conditions ofproducts that make them acceptable forclearing), complies with the Act andrules thereunder.

§ 40.3 Voluntary submission of newproducts for Commission review andapproval.

(a) Request for approval. A designatedcontract market or registered derivativestransaction execution facility mayrequest under section 5c(c)(2) of the Actthat the Commission approve newproducts under the followingprocedures:

(1) The submitting entity labels therequest as ‘‘Request for CommissionProduct Approval’’;

(2) The request for product approvalis for a commodity other than a securityfuture or a security futures product asdefined in sections 1a(31) or 1a(32) ofthe Act, respectively;

(3) The submission complies with therequirements of Appendix A to thispart—Guideline No. 1;

(4) The submission includes the feerequired under Appendix B to this part.

(b) Forty-five day review. All productssubmitted for Commission approvalunder this paragraph shall be deemedapproved by the Commission forty-fivedays after receipt by the Commission, orat the conclusion of such extendedperiod as provided under paragraph (c)of this section, unless notified otherwisewithin the applicable period, if:

(1) The submission complies with therequirements of paragraph (a) of thissection; and

(2) The submitting entity does notamend the terms or conditions of theproduct or supplement the request forapproval, except as requested by theCommission or for correction oftypographical errors, renumbering orother such nonsubstantive revisions,during that period. Any voluntary,substantive amendment by thesubmitting entity will be treated as anew submission under this section.

(c) Extension of time. TheCommission may extend the forty-fiveday review period in paragraph (b) ofthis section for:

(1) An additional forty-five days, ifwithin the initial forty-five day reviewperiod, the Commission notifies thesubmitting entity that the product raisesnovel or complex issues that requireadditional time for review or is of majoreconomic significance. This notificationshall briefly describe the nature of thespecific issues for which additional timefor review is required; or

(2) Such period as the submittingentity so instructs the Commission inwriting.

(d) Notice of non-approval. TheCommission at any time during itsreview under this section may notify thesubmitting entity that it will not, or isunable to, approve the product orinstrument. This notification will brieflyspecify the nature of the issues raisedand the specific provision of the Act orregulations, including the form orcontent requirements of paragraph (a) ofthis section, that the product wouldviolate, appears to violate or theviolation of which cannot be ascertainedfrom the submission.

(e) Effect of non-approval. (1)Notification to a submitting entity underparagraph (d) of this section of theCommission’s refusal to approve aproduct or instrument does notprejudice the entity from subsequentlysubmitting a revised version of theproduct or instrument for Commissionapproval or from submitting the productor instrument as initially proposedpursuant to a supplemented submission.

(2) Notification to a submitting entityunder paragraph (d) of this section ofthe Commission’s refusal to approve aproduct shall be presumptive evidence

that the entity may not truthfully certifyunder § 40.2 that the same, orsubstantially the same, product does notviolate the Act or rules thereunder.

§ 40.4 Amendments to terms or conditionsof enumerated agricultural contracts.

(a) Designated contract markets mustsubmit for Commission approval underthe procedures of § 40.5, prior to itsimplementation, any rule or ruleamendment that, for a delivery monthhaving open interest, would materiallychange a term or condition as defined in§ 40.1(f), of a contract for future deliveryin an agricultural commodityenumerated in section 1a(4) of the Act,or of an option on such a contract orcommodity.

(b) The following rules or ruleamendments are not material changes:

(1) Changes in trading hours;(2) Changes in lists of approved

delivery facilities pursuant topreviously set standards or criteria;

(3) Changes to terms and conditions ofoptions on futures other than thoserelating to last trading day, expirationdate, option strike price delistings, andspeculative position limits;

(4) Reductions in the minimum pricefluctuation (or ‘‘tick’’);

(5) Changes required to comply witha binding order of a court of competentjurisdiction, or of a rule, regulation ororder of the Commission or of anotherFederal regulatory authority; and

(6) Any other rule, the text of whichhas been submitted to the Secretary ofthe Commission at least ten days priorto its implementation at its Washington,D.C. headquarters and that has beenlabeled ‘‘Non-material Agricultural RuleChange,’’ and with respect to which theCommission has not notified thecontract market during that period thatthe rule appears to require or doesrequire prior approval under thissection.

§ 40.5 Voluntary submission of rules forCommission review and approval.

(a) Request for approval of rules. Aregistered entity may request pursuantto section 5c(c) of the Act that theCommission approve any rule orproposed rule or rule amendment underthe following procedures:

(1) Three copies of each rule or ruleamendment submission under thissection shall be furnished in hard copyform to the Secretary of the CommodityFutures Trading Commission, ThreeLafayette Centre, 1155 21st Street NW.,Washington, DC 20581 or electronicallyin a format specified by the Secretary ofthe Commission. One copy of eachsubmission shall be transmitted by theregistered entity to the regional office of



the Commission having localjurisdiction over the registered entity.Each request for approval under thissection shall be in the following orderand shall:

(i) Label the submission as ‘‘Requestfor Commission rule approval’’;

(ii) Set forth the text of the rule orproposed rule (in the case of a ruleamendment, deletions and additionsmust be indicated);

(iii) Describe the proposed effectivedate of a proposed rule and any actiontaken or anticipated to be taken to adoptthe proposed rule by the registeredentity or by its governing board or byany committee thereof, and cite therules of the entity that authorize theadoption of the proposed rule;

(iv) Explain the operation, purpose,and effect of the proposed rule,including, as applicable, a descriptionof the anticipated benefits to marketparticipants or others, any potentialanticompetitive effects on marketparticipants or others, how the rule fitsinto the registered entity’s framework ofself-regulation, and any otherinformation which may be beneficial tothe Commission in analyzing theproposed rule. If a proposed rule affects,directly or indirectly, the application ofany other rule of the submitting entity,set forth the pertinent text of any suchrule and describe the anticipated effect;

(v) Note and briefly describe anysubstantive opposing views expressedwith respect to the proposed rule thatwere not incorporated into the proposedrule prior to its submission to theCommission; and

(vi) Identify any Commissionregulation that the Commission mayneed to amend, or sections of the Act orCommission regulations that theCommission may need to interpret inorder to approve or allow into effect theproposed rule. To the extent that suchan amendment or interpretation isnecessary to accommodate a proposedrule, the submission should include areasoned analysis supporting theamendment or interpretation of theCommission’s regulation.

(2) [Reserved](b) Forty-five day review. All rules

submitted for Commission approvalunder paragraph (a) of this section shallbe deemed approved by the Commissionunder section 5c(c) of the Act, forty-fivedays after receipt by the Commission, orat the conclusion of such extendedperiod as provided under paragraph (c)of this section, unless notified otherwisewithin the applicable period, if:

(1) The submission complies with therequirements of paragraphs (a)(1)(i)through (vi) of this section, and

(2) The submitting entity does notamend the proposed rule or supplementthe submission, except as requested bythe Commission, during the pendencyof the review period. Any amendmentor supplementation not requested by theCommission will be treated as thesubmission of a new filing under thissection.

(c) Extensions of time. TheCommission may extend the reviewperiod in paragraph (b) of this sectionfor:

(1) An additional thirty days, if theCommission, within the initial forty-fiveday review period, notifies thesubmitting entity that the proposed ruleraises novel or complex issues thatrequire additional time for review or isof major economic significance. Thisnotification shall briefly describe thenature of the specific issues for whichadditional time for review is required;or

(2) Such additional period as thesubmitting entity has so instructed theCommission in writing.

(d) Notice of non-approval. TheCommission at any time during itsreview under this section may notify thesubmitting entity that it will not, or isunable to, approve the proposed rule orrule amendment. This notification willbriefly specify the nature of the issuesraised and the specific provision of theAct or regulations, including the form orcontent requirements of this section,that the proposed rule would violate,appears to violate or the violation ofwhich cannot be ascertained from thesubmission.

(e) Effect of non-approval. (1)Notification to a registered entity underparagraph (d) of this section of theCommission’s refusal to approve aproposed rule or rule amendment of aregistered entity does not prejudice theentity from subsequently submitting arevised version of the proposed rule orrule amendment for Commissionapproval or from submitting the rule orrule amendment as initially proposedpursuant to a supplemented submission.

(2) Notification to a registered entityunder paragraph (d) of this section ofthe Commission’s refusal to approve aproposed rule or rule amendment of aregistered entity shall be presumptiveevidence that the entity may nottruthfully certify that the same, orsubstantially the same, proposed rule orrule amendment does not violate theAct or rules thereunder.

(f) Expedited approval.Notwithstanding the provisions ofparagraph (b) of this section, changes toterms and conditions of a product thatare consistent with the Act andCommission regulations and with

standards approved or established bythe Commission in a written notificationto the registered entity of theapplicability of this paragraph (f) shallbe deemed approved by the Commissionat such time and under such conditionsas the Commission shall specify in thenotice, provided, however, that theCommission may, at any time, alter orrevoke the applicability of such a noticeto any particular product.

§ 40.6 Self-certification of rules bydesignated contract markets and registeredderivatives clearing organizations.

(a) Required certification. Adesignated contract market or aregistered derivatives clearingorganization may implement any newrule or rule amendment (other than arule or rule amendment approved ordeemed approved by the Commissionunder § 40.5) only if:

(1) The rule or rule amendment is nota rule or rule amendment of adesignated contract market thatmaterially changes a term or conditionof a contract for future delivery of anagricultural commodity enumerated insection 1a(4) of the Act or an option onsuch a contract or commodity in adelivery month having open interest;

(2) The designated contract market orregistered derivatives clearingorganization has filed a submission forthe rule or rule amendment with theCommission at its Washington, D.C.headquarters and at the regional officehaving local jurisdiction, and theCommission has received thesubmission at its headquarters by closeof business on the business daypreceding implementation of the rule;provided, however, rules or ruleamendments implemented underprocedures of the governing board torespond to an emergency as defined in§ 40.1(d), shall, if practicable, be filedwith the Commission prior to theimplementation or, if not practicable, befiled with the Commission at the earliestpossible time after implementation butin no event more than 24 hours afterimplementation; and

(3) The rule submission includes:(i) The label, ‘‘Rule Certification’’ or,

in the case of a rule or rule amendmentthat responds to an emergency,‘‘Emergency Rule Certification’’;

(ii) The text of the rule (in the case ofa rule amendment, deletions andadditions must be indicated);

(iii) The date of implementation;(iv) A brief explanation of any

substantive opposing views notincorporated into the rule; and

(v) A certification by the entity thatthe rule complies with the Act andregulations thereunder.



(b) Stay. The Commission may staythe effectiveness of a rule implementedpursuant to paragraph (a) of this sectionduring the pendency of Commissionproceedings for filing a falsecertification or to alter or amend therule pursuant to section 8a(7) of the Act.The decision to stay the effectiveness ofa rule in such circumstances shall notbe delegable to any employee of theCommission.

(c) Notification of rule amendments.Notwithstanding the rule certificationrequirement of section 5c(c)(1) of theAct, and paragraphs (a)(2) and (a)(3) ofthis section, a designated contractmarket or a registered derivativesclearing organization may place thefollowing rules or rule amendments intoeffect without certification to theCommission if the following conditionsare met:

(1) The designated contract market orregistered derivatives clearingorganization provides to theCommission at least weekly a summarynotice of all rule changes made effectivepursuant to this paragraph during thepreceding week. Such notice must belabeled ‘‘Weekly Notification of RuleChanges’’ and need not be filed forweeks during which no such actionshave been taken. One copy of each suchsubmission shall be furnished in hardcopy to the Commodity Futures TradingCommission, Three Lafayette Centre,1155 21st Street NW., Washington, DC20581, or electronically in a formatspecified by the Secretary of theCommission; and

(2) The rule governs:(i) Nonmaterial revisions. Corrections

of typographical errors, renumbering,periodic routine updates to identifyinginformation about approved entities andother such nonsubstantive revisions of aproduct’s terms and conditions thathave no effect on the economiccharacteristics of the product;

(ii) Delivery standards set by thirdparties. Changes to grades or standardsof commodities deliverable on a productthat are established by an independentthird party and that are incorporated byreference as product terms, providedthat the grade or standard is notestablished, selected or calculated solelyfor use in connection with futures oroption trading and such changes do notaffect deliverable supplies or the pricingbasis for the product;

(iii) Index products. Routine changesin the composition, computation, ormethod of selection of componententities of an index (other than a stockindex) referenced and defined in theproduct’s terms, that do not affect thepricing basis of the index, which aremade by an independent third party

whose business relates to the collectionor dissemination of price informationand that was not formed solely for thepurpose of compiling an index for usein connection with a futures or optionproduct; or

(iv) Option contract terms. Changes tooption contract rules relating to thestrike price listing procedures, strikeprice intervals, and the listing of strikeprices on a discretionary basis.

(3) Notification of rule amendmentsnot required. Notwithstanding the rulecertification requirements of section5c(c)(1) of the Act and of paragraphs(a)(2) and (a)(3) of this section,designated contract markets andregistered derivatives clearingorganizations may place the followingrules or rule amendments into effectwithout certification or notice to theCommission if the following conditionsare met:

(i) The designated contract market orregistered derivatives clearingorganization maintains documentationregarding all changes to rules; and

(ii) The rule governs:(A) Transfer of membership or

ownership. Procedures and forms for thepurchase, sale or transfer of membershipor ownership, but not includingqualifications for membership orownership, any right or obligation ofmembership or ownership or dues orassessments;

(B) Administrative procedures. Theorganization and administrativeprocedures of a contract market’sgoverning bodies such as a Board ofDirectors, Officers and Committees, butnot voting requirements, Board ofDirectors or Committee compositionrequirements, or procedures orrequirements relating to conflicts ofinterest;

(C) Administration. The routine, dailyadministration, direction and control ofemployees, requirements relating togratuity and similar funds, but notguaranty, reserves, or similar funds;declaration of holidays, and changes tofacilities housing the market, tradingfloor or trading area; and

(D) Standards of decorum. Standardsof decorum or attire or similarprovisions relating to admission to thefloor, badges, or visitors, but not theestablishment of penalties for violationsof such rules.

§ 40.7 Delegations.(a) Procedural matters.(1) Review of products or rules. The

Commission hereby delegates, until itorders otherwise, to the Director of theDivision of Trading and Markets andseparately to the Director of EconomicAnalysis or to the Director’s delegatee

with the concurrence of the GeneralCounsel or the General Counsel’sdelegatee, authority to request under§ 40.3(b)(2) or § 40.5(b)(2) that the entityrequesting approval amend theproposed product, rule or ruleamendment or supplement thesubmission, to notify a submitting entityunder § 40.3(c) or § 40.5(c) that the timefor review has been extended, and tonotify the submitting entity under§ 40.3(d) or § 40.5(d) that theCommission is not approving, or isunable to approve, the proposedproduct, rule or rule amendment.

(2) Emergency rules. The Commissionhereby delegates authority to theDirector of the Division of Trading andMarkets, or the delegatees of theDirector, authority to receivenotification and the requiredcertification of emergency rules under§ 40.6(a)(2).

(b) Approval authority. TheCommission hereby delegates, until theCommission orders otherwise, to theDirector of the Division of Trading andMarkets and separately to the Director ofEconomic Analysis, with theconcurrence of the General Counsel orthe General Counsel’s delegatee, to beexercised by either of such Directors orby such other employee or employees ofthe Commission under the supervisionof such Directors as may be designatedfrom time to time by the Directors, theauthority to approve, pursuant tosection 5c(c)(3) of the Act and § 40.5,rules or rule amendments of adesignated contract market, registeredderivatives transaction executionfacility or registered derivatives clearingorganization that:

(1) Relate to, but do not materiallychange, the quantity, quality, or otherdelivery specifications, procedures, orobligations for delivery, cash settlement,or exercise under an agreement, contractor transaction approved for trading bythe Commission; daily settlementprices; clearing position limits;requirements or procedures forgovernance of a registered entity;procedures for transfer trades; tradinghours; minimum price fluctuations; andmaximum price limit and tradingsuspension provisions;

(2) Reflect routine modifications thatare required or anticipated by the termsof the rule of a registered entity;

(3) [Reserved].(4) Are in substance the same as a rule

of the same or another registered entitywhich has been approved previously bythe Commission pursuant to section5c(c)(3) of the Act;

(5) Are consistent with a specific,stated policy or interpretation of theCommission; or



(6) Relate to the listing of additionaltrading months of approved contracts.

(c) The Directors may submit to theCommission for its consideration anymatter that has been delegated pursuantto paragraph (a) or (b) of this section.

(d) Nothing in this section shall bedeemed to prohibit the Commission, atits election, from exercising theauthority delegated in paragraph (a) or(b) of this section to the Directors.

Appendix A to Part 40 [Reserved]

Appendix B to Part 40—Schedule ofFees

(a) Applications for product approval. Eachapplication for product approval under § 40.3must be accompanied by a check or moneyorder made payable to the CommodityFutures Trading Commission in an amount tobe determined annually by the Commissionand published in the Federal Register.

(b) Checks and applications should be sentto the attention of the Office of theSecretariat, Commodity Futures TradingCommission, Three Lafayette Centre, 115521st Street, NW., Washington, DC 20581. Nochecks or money orders may be accepted bypersonnel other than those in the Office ofthe Secretariat.

(c) Failure to submit the fee with anapplication for product approval will resultin return of the application. Fees will not bereturned after receipt.

Appendix C to Part 40 [Reserved]

Appendix A to Part 5 [Redesignated as]Appendix A to Part 40

Appendix E to Part 5 [Redesignated as]Appendix C to Part 40

PART 5—[REMOVED AND RESERVED]

12. Appendix A to Part 5 isredesignated as Appendix A to Part 40and the heading is revised; Appendix Eto Part 5 is redesignated as Appendix Cto Part 40; and Part 5 is removed andreserved. The revised heading reads asfollows:

Appendix A to Part 40—Guideline No.1


PART 41—SECURITY FUTURES

41.1 [Reserved]

PART 166—CUSTOMER PROTECTIONRULES

14. The authority citation for Part 166is revised to read as follows:

Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h,6k, 6l, 6o, 7, 12a, 21, and 23, as amended bythe Commodity Futures Modernization Act of2000, Appendix E of Pub. L. 106–554, 114Stat. 2763 (2000).

15. Section 166.5 is added to read asfollows:

§ 166.5 Dispute settlement procedures.(a) Definitions. (1) The term claim or

grievance as used in this section shallmean any dispute that:

(i) Arises out of any transactionexecuted on or subject to the rules of adesignated contract market,

(ii) Is executed or effected through amember of such facility, a participanttransacting on or through such facilityor an employee of such facility, and

(iii) Does not require for adjudicationthe presence of essential witnesses orthird parties over whom the facilitydoes not have jurisdiction and who arenot otherwise available.

(iv) The term claim or grievance doesnot include disputes arising from cashmarket transactions that are not a partof or directly connected with anytransaction for the purchase or sale ofany commodity for future delivery orcommodity option.

(2) The term customer as used in thissection includes an option customer (asdefined in § 1.3(jj) of this chapter) andany person for or on behalf of whom amember of a designated contract market,or a participant transacting on orthrough such designated contractmarket, effects a transaction on suchcontract market, except another memberof or participant in such designatedcontract market. Provided, however, aperson who is an ‘‘eligible contractparticipant’’ as defined in section 1a(12)of the Act shall not be deemed to be acustomer within the meaning of thissection.

(3) The term Commission registrant asused in this section means a personregistered under the Act as a futurescommission merchant, introducingbroker, floor broker, commodity pooloperator, commodity trading advisor, orassociated person.

(b) Voluntariness. The use bycustomers of dispute settlementprocedures shall be voluntary asprovided in paragraphs (c) and (g) ofthis section.

(c) Customers. No Commissionregistrant shall enter into any agreementor understanding with a customer inwhich the customer agrees, prior to thetime a claim or grievance arises, tosubmit such claim or grievance to anysettlement procedure except as follows:

(1) Signing the agreement must not bemade a condition for the customer toutilize the services offered by theCommission registrant.

(2) If the agreement is contained as aclause or clauses of a broaderagreement, the customer mustseparately endorse the clause or clausescontaining the cautionary language andprovisions specified in this section. Afutures commission merchant orintroducing broker may obtain such

endorsement as provided in § 1.55(d) ofthis chapter for the following classes ofcustomers only:

(i) A plan defined as a governmentplan or church plan in section 3(32) orsection 3(33) of title I of the EmployeeRetirement Income Security Act of 1974or a foreign person performing a similarrole or function subject as such tocomparable foreign regulation; and

(ii) A person who is a ‘‘qualifiedeligible participant’’ or a ‘‘qualifiedeligible client’’ as defined in § 4.7 of thischapter.

(3) The agreement may not requireany customer to waive the right to seekreparations under section 14 of the Actand part 12 of this chapter. Accordingly,such customer must be advised inwriting that he or she may seekreparations under section 14 of the Actby an election made within 45 days afterthe Commission registrant notifies thecustomer that arbitration will bedemanded under the agreement. Thisnotice must be given at the time whenthe Commission registrant notifies thecustomer of an intention to arbitrate.The customer must also be advised thatif he or she seeks reparations undersection 14 of the Act and theCommission declines to institutereparations proceedings, the claim orgrievance will be subject to the pre-existing arbitration agreement and mustalso be advised that aspects of the claimor grievance that are not subject to thereparations procedure (i.e., do notconstitute a violation of the Act or rulesthereunder) may be required to besubmitted to the arbitration or otherdispute settlement procedure set forthin the pre-existing arbitrationagreement.

(4) The agreement must advise thecustomer that, at such time as he or shemay notify the Commission registrantthat he or she intends to submit a claimto arbitration, or at such time as suchperson notifies the customer of its intentto submit a claim to arbitration, thecustomer will have the opportunity toelect a qualified forum for conductingthe proceeding.

(5) Election of forum. (i) Within tenbusiness days after receipt of noticefrom the customer that he or she intendsto submit a claim to arbitration, or at thetime a Commission registrant notifiesthe customer of its intent to submit aclaim to arbitration, the Commissionregistrant must provide the customerwith a list of organizations whoseprocedures meet Acceptable Practicesestablished by the Commission fordispute resolution, together with a copyof the rules of each forum listed. The listmust include:



1 See Commodity Futures Modernization Act of2000, Appendix E, Pub. L. No. 106–554, 114 Stat.2763 (2000).

(A) The designated contract market, ifavailable, upon which the transactiongiving rise to the dispute was executedor could have been executed;

(B) A registered futures association;and

(C) At least one other organizationthat will provide the customer with theopportunity to select the location of thearbitration proceeding from amongseveral major cities in diversegeographic regions and that will providethe customer with the choice of a panelor other decision-maker composed of atleast one or more persons, of which atleast a majority are not members orassociated with a member of thedesignated contract market or employeethereof, and that are not otherwiseassociated with the designated contractmarket (mixed panel): Provided,however, that the list of qualifiedorganizations provided by aCommission registrant that is a floorbroker need not include a registeredfutures association unless a registeredfutures association has been authorizedto act as a decision-maker in suchmatters.

(ii) The customer shall, within forty-five days after receipt of such list, notifythe opposing party of the organizationselected. A customer’s failure to providesuch notice shall give the opposingparty the right to select an organizationfrom the list.

(6) Fees. The agreement mustacknowledge that the Commissionregistrant will pay any incremental feesthat may be assessed by a qualifiedforum for provision of a mixed panel,unless the arbitrators in a particularproceeding determine that the customerhas acted in bad faith in initiating orconducting that proceeding.

(7) Cautionary Language. Theagreement must include the followinglanguage printed in large boldface type:

Three Forums Exist for the Resolution ofCommodity Disputes: Civil Court litigation,reparations at the Commodity FuturesTrading Commission (CFTC) and arbitrationconducted by a self-regulatory or otherprivate organization.

The CFTC recognizes that the opportunityto settle disputes by arbitration may in somecases provide many benefits to customers,including the ability to obtain an expeditiousand final resolution of disputes withoutincurring substantial costs. The CFTCrequires, however, that each customerindividually examine the relative merits ofarbitration and that your consent to thisarbitration agreement be voluntary.

By signing this agreement, you: (1) May bewaiving your right to sue in a court of law;and (2) are agreeing to be bound byarbitration of any claims or counterclaimswhich you or [name] may submit toarbitration under this agreement. You are not,

however, waiving your right to elect insteadto petition the CFTC to institute reparationsproceedings under Section 14 of theCommodity Exchange Act with respect to anydispute that may be arbitrated pursuant tothis agreement. In the event a dispute arises,you will be notified if [name] intends tosubmit the dispute to arbitration. If youbelieve a violation of the CommodityExchange Act is involved and if you preferto request a section 14 ‘‘Reparations’’proceeding before the CFTC, you will have45 days from the date of such notice in whichto make that election.

You need not sign this agreement to openor maintain an account with [name]. See 17CFR 166.5.

(d) Enforceability. A disputesettlement procedure may requireparties utilizing such procedure toagree, under applicable state law,submission agreement or otherwise, tobe bound by an award rendered in theprocedure, provided that the agreementto submit the claim or grievance to theprocedure was made in accordance withparagraph (c) or (g) of this section orthat the agreement to submit the claimor grievance was made after the claim orgrievance arose. Any award so renderedshall be enforceable in accordance withapplicable law.

(e) Time limits for submission ofclaims. The dispute settlementprocedure established by a designatedcontract market shall not include anyunreasonably short limitation periodforeclosing submission of customers’claims or grievances or counterclaims.

(f) Counterclaims. A procedureestablished by a designated contractmarket under the Act for the settlementof customers’ claims or grievancesagainst a member or employee thereofmay permit the submission of acounterclaim in the procedure by aperson against whom a claim orgrievance is brought. The designatedcontract market may permit such acounterclaim where the counterclaimarises out of the transaction oroccurrence that is the subject of thecustomer’s claim or grievance and doesnot require for adjudication thepresence of essential witnesses, parties,or third persons over whom thedesignated contract market does nothave jurisdiction. Other counterclaimsarising out of a transaction subject to theAct and rules promulgated thereunderfor which the customer utilizes theservices of the registrant may bepermissible where the customer and theregistrant have agreed in advance torequire that all such submissions beincluded in the proceeding, and if theaggregate monetary value of thecounterclaims is capable of calculation.

(g) Eligible contract participants. Aperson who is an ‘‘eligible contract

participant’’ as defined in section 1a(12)of the Act may negotiate any term of anagreement or understanding with aCommission registrant in which theeligible contract participant agrees, priorto the time a claim or grievance arises,to submit such claim or grievance to anysettlement procedure provided for in theagreement.

PART 170—REGISTERED FUTURESASSOCIATIONS

16. The authority citation for Part 170is revised to read as follows:

Authority: 7 U.S.C. 6p, 12a, and 21, asamended by the Commodity FuturesModernization Act of 2000, Appendix E ofPub. L. 106–554, 114 Stat. 2763 (2000).

17. Section 170.8 is revised to read asfollows:

§ 170.8 Settlement of customer disputes(section 17(b)(10) of the Act).

A futures association must be able todemonstrate its capacity to promulgaterules and to conduct proceedings thatprovide a fair, equitable and expeditiousprocedure, through arbitration orotherwise, for the voluntary settlementof a customer’s claim or grievancebrought against any member of theassociation or any employee of amember of the association. Such rulesshall conform to and be consistent withsection 17(b)(10) of the Act and beconsistent with the guidelines andacceptable practices for disputeresolution found within Appendix Aand Appendix B to Part 38 of thischapter.

PART 180—ARBITRATION OR OTHERDISPUTE SETTLEMENT PROCEDURES

18. Part 180 is removed.Issued in Washington, DC, this 30th day of

July, 2001, by the Commission.Jean A. Webb,Secretary of the Commission.

Dissent of Commissioner Thomas J. EricksonRules Implementing the Commodity FuturesModernization Act (CFMA) With Respect toTransaction Execution Facilities

I dissent from the publication of these finalrules because they fall well short of theminimum standards necessary to maintainintegrity of markets and protect customersfrom trade practice abuses. Today, theCommission promulgates final rules intendedto implement the Commodity FuturesModernization Act of 2000.1 While theCommission’s rules reflect the thrust of theCFMA, they fail to recognize the discretionafforded the agency to ensure that the



2 Throughout the process of developing andimplementing a new regulatory framework for theoversight of derivatives markets, the Commission,in my estimation, has not adequately taken intoaccount the public interest by failing to requestcomment on issues salient to our ability to carry outour primary regulatory obligations. I have takenexception with the Commission’s process in thisregard. The resulting public record, in this case,lacks serious consideration of the public interestand has resulted in rules that require little andexpect even less.

3 Certainly, for example, the Commission has thediscretion to require large trader reporting in DTFmarkets. In fact, the U.S. Department of theTreasury requested as much in comments submittedto the Commission on April 9, 2001. Treasuryrecommended ‘‘that there be large trader reportingrequirements for any exempt security futures thattrade on a DTF as well as on a regulated contractmarket.’’ Even with such a direct request from afellow regulator, the Commission has failed toexercise its discretion to insist upon greatertransparency.

1 See Section 237 of the Futures Trading Act of1982, 7 U.S.C. 16a and 31 U.S.C. 9701. For abroader discussion of the history of Commissionfees, see 52 FR 46070 (Dec. 4, 1987).

markets it oversees remain open, fair andtransparent.

I am confident that the new regulatoryregime will foster the competitiveness of U.S.derivatives marketplaces, and that is good. Iam less confident that the regulationsimplementing this new regime will fosteropen and competitive bids and offers fortransactions in markets, which for customersand commercial participants is bad. Thus, Ihave repeatedly requested comment on thoseissues that would enable this agency to beconfident that its regulatory frameworkretains tools necessary to detect and determanipulation, detect and deter abusive tradepractices, and vigorously enforce our fraudauthority.2 Where this Commission has aregulatory interest, it should be demandingthe maximum transparency allowed by law.3

Today’s rules, I fear, leave enormous gaps inour regulatory oversight regime.

The longstanding tradition of public, openmarkets in the United States seems to havegiven way to the notion that private, closedmarkets are superior in every respect.Perhaps private, closed markets are moreexpedient for their participants. But it will beincumbent on industry participants to see toit that the public interest in open, fair andtransparent markets is not compromised.

In the end, public confidence in ourmarkets will depend upon how the industryadapts to and carries out its newresponsibilities under the law and theseregulations. I sincerely hope that thederivatives markets will find self-interest tobe a powerful motivator and that marketparticipants will reward those marketsadhering to the highest standards of marketintegrity./S/ lllllllllllllllllllCommissioner Thomas J. Erickson

Date: 7/26/01[FR Doc. 01–19496 Filed 8–9–01; 8:45 am]

BILLING CODE 6351–01–P

COMMODITY FUTURES TRADINGCOMMISSION

17 CFR Part 40

Fees for Product Review and Approval

AGENCY: Commodity Futures TradingCommission.ACTION: Establishment of a newschedule of fees.

SUMMARY: The Commission charges feesto designated contract markets andregistered derivatives transactionexecution facilities to recover the costsof its review of requests for productreview and approval. The calculation ofthe fee amounts to be charged for theupcoming year is based on an average ofactual program costs incurred in themost recent three full fiscal years, asexplained below. The new fee scheduleis set forth below.EFFECTIVE DATE: August 10, 2001.FOR FURTHER INFORMATION CONTACT:Richard A. Shilts, Acting Director,Division of Economic Analysis,Commodity Futures TradingCommission, Three Lafayette Centre,1155 21st Street, NW., Washington, DC20581, (202) 418–5260.SUPPLEMENTARY INFORMATION:

I. Summary of FeesFees charged for processing requests

for product review and approval:Single Applications:• A single futures contract or an

option on a physical—$6,000• A single option on a previously-

approved futures contract—$1,100• A combined submission of a futures

contract and an option on the samefutures contract—$6,500.

Multiple Applications:For multiple contract filings

containing related contracts, the productreview and approval fees are:

• A submission of multiple relatedfutures contracts—$6,000 for the firstcontract, plus $600 for each additionalcontract;

• A submission of multiple relatedoptions on futures contracts—$1,100 forthe first contract, plus $110 for eachadditional contract;

• A combined submission of multiplefutures contracts and options on thosefutures contracts—$6,500 for the firstcombined futures and option contract,plus $650 for each additional futuresand option contract.

II. Background Information

1. General

The Commission recalculates the feescharged each year with the intention ofrecovering the costs of operating certain

programs.1 All costs are accounted forby the Commission’s ManagementAccounting Structure Codes (MASC)system operated according to agovernment-wide standard establishedby the Office of Management andBudget. The fees are set each year basedon direct program costs, plus anoverhead factor.

2. Overhead RateThe fees charged by the Commission

are designed to recover program costs,including direct labor costs andoverhead. The overhead rate iscalculated by dividing totalCommission-wide direct program laborcosts into the total amount of theCommission-wide overhead pool. Forthis purpose, direct program labor costsare the salary costs of personnelworking in all Commission programs.Overhead costs consist generally of thefollowing Commission-wide costs:indirect personnel costs (leave andbenefits), rent, communications,contract services, utilities, equipment,and supplies. This formula has resultedin the following overhead rates for themost recent three years (rounded to thenearest whole percent): 104 percent forfiscal year 1998, 105 percent for fiscalyear 1999, and 105 percent for fiscalyear 2000. These overhead rates areapplied to the direct labor costs tocalculate the costs of reviewing contractapproval requests.

3. Processing Requests for ContractApproval

Calculations of the fees for processingrequests for product review andapproval have become more refinedover the years as the types of contractsbeing reviewed have changed.

On August 23, 1983, the Commissionestablished a fee for Contract MarketDesignation (48 FR 38214). Prior to itsrecent amendment, the CommodityExchange Act (Act) provided for‘‘designation’’ of each new contract as a‘‘contract market.’’ The CommodityFutures Modernization Act (CFMA)amended the Act to limit the concept of‘‘contract market designation’’ toapproval of certain markets or tradingfacilities on which futures and optionsare traded, as opposed to approval of theproduct. The Commission has adoptedrules, published elsewhere in thisedition of the Federal Register, thatimplement the CFMA and theCommission’s new regulatoryframework. The implementing rulescharge a fee for product review where


42256 Federal Register /Vol. 66, No. 155/Friday, August 10 ... · 42256 Federal Register/Vol. 66,...

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