[Federal Register: December 12, 2008 (Volume 73, Number 240)]
[Proposed Rules]
[Page 75887-75921]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12de08-29]
[[Page 75887]]
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Part III
Commodity Futures Trading Commission
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17 CFR Parts 15, 16, 17, et al.
Significant Price Discovery Contracts on Exempt Commercial Markets;
Proposed Rule
[[Page 75888]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 15, 16, 17, 18, 19, 21, 36, and 40
Significant Price Discovery Contracts on Exempt Commercial
Markets
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing rules to implement the CFTC Reauthorization Act
of 2008 (``Reauthorization Act'').\1\ In pertinent part, the
Reauthorization Act amends the Commodity Exchange Act to significantly
expand the CFTC's regulatory authority over exempt commercial markets
(``ECMs''), which had heretofore operated largely outside the
Commission's regulatory reach, by creating a new regulatory category--
ECMs with significant price discovery contracts (``SPDCs'')--and
directing the Commission to adopt rules to implement this expanded
authority. In addition to proposing regulations mandated by the
Reauthorization Act, the Commission is also proposing to amend existing
regulations applicable to registered entities in order to clarify that
such regulations are now applicable to ECMs with SPDCs.
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\1\ Incorporated as Title XIII of the Food, Conservation and
Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18,
2008).
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DATES: Comments must be received by February 10, 2009.
ADDRESSES: You may submit comments by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Mail/Hand Deliver: David Stawick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
E-mail: secretary@cftc.gov.
FOR FURTHER INFORMATION CONTACT: Susan Nathan, Senior Special Counsel,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. The Commodity Futures Modernization Act of 2000 Established a
New Regulatory Framework
1. Multi-Tiered Regulation
2. Exempt Commercial Markets
3. Differences Between ECMs and DCMs
B. The Changing ECM Landscape
C. The CFTC's Response to the Changing Energy Markets
1. Empirical Study of Trades on ICE and NYMEX
2. Commission Surveillance of Energy Markets
3. The Commission's ECM Hearing
4. The Commission's Findings and Legislative Recommendations
D. The Reauthorization Legislation and the Statutory Scheme
II. The Proposed Rules
A. Part 36--Exempt Markets
1. Required Information
2. Identifying Significant Price Discovery Contracts
(i) Criteria for SPDC Determination
(ii) Notification Requirement for ECMs With a SPDC
3. Procedures
4. Substantive Compliance With the Core Principles
5. Annual Commission Review
B. Market, Transaction and Large Trader Reporting Rules
C. Other Regulatory Provisions
1. Part 40--Provisions Common to Registered Entities
III. Related Matters
A. Cost Benefit Analysis
B. Regulatory Flexibility Act
C. Paperwork Reduction Act
List of Subjects: Proposed Rules
I. Background
A. The Commodity Futures Modernization Act of 2000 Established a New
Regulatory Framework
1. Multi-Tiered Regulation
On December 21, 2000, Congress enacted the Commodity Futures
Modernization Act (``CFMA''), which amended the Commodity Exchange Act
(``Act'' or ``CEA'') \2\ to replace the Act's ``one-size-fits-all''
supervisory framework for futures trading with a multi-tiered approach
to regulatory oversight of derivatives markets. The CFMA applies
different levels of regulatory oversight to markets based primarily on
the nature of the underlying commodity being traded and the
participants who are trading. In general, the more sophisticated the
traders or commercial participants, or the less susceptible a commodity
is to manipulation or other market or trading abuses, the less
regulatory oversight is required under the CFMA.
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\2\ 7 U.S.C. 1 et seq.
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Accordingly, designated contract markets (``DCMs''), are subject to
the highest level of regulatory oversight because they are open to all
participants and may offer all types of commodities.\3\ Derivatives
Transaction Execution Facilities (``DTEFs'') \4\ are subject to less
regulatory oversight than DCMs because participants must be
sophisticated investors or must be hedging risk associated with their
commercial activities. Additionally, the CFMA imposes limitations on
the types of commodities that may be traded, and the manner in which
they may be traded.\5\ Exempt Boards of Trade (``EBOTs'') are subject
to virtually no regulatory oversight and are not registered with or
designated by the Commission. EBOTs are exempt from most provisions of
the CEA other than its antifraud and anti-manipulation prohibitions,
but are subject to significant commodity and participant
restrictions.\6\ In addition to creating these three new categories of
trading facility, the CFMA created a broad array of exclusions and
exemptions from regulation for certain swaps and other derivatives
products traded either bilaterally or on electronic trading
facilities.\7\ These exclusions and exemptions reflected a view,
consistent with Congressional and Commission actions relating to the
passage of the CFMA, that transactions between sophisticated
counterparties do not necessarily require the protections that the CEA
provides for transactions on DCMs and DTEFs.
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\3\ 7 U.S.C. 7.
\4\ To qualify as a DTEF, an exchange must implement certain
restrictions on retail market participation and can only trade
certain commodities (including excluded commodities and other
commodities with very high levels of deliverable supply) and
generally must exclude retail participants. CFTC Glossary
(Glossary).
\5\ 7 U.S.C. 7a.
\6\ EBOTs may trade only ``excluded commodities'' (7 U.S.C.
1a(13); 17 CFR Sec. 36.2(a)(2)(i)), and are open only to ``eligible
contract participants'' (``ECPs'') (7 U.S.C. 1a(12)).
\7\ For example, section 2(g) created an exclusion from the CEA
for individually negotiated swaps, based on non-agricultural
commodities entered into between eligible contract participants, 7
U.S.C. 2(g). Similarly excluded are transactions between ECPs
involving excluded commodities that are not executed on a trading
facility. 7 U.S.C. 2(d)(1).
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2. Exempt Commercial Markets
The CFMA established an exemption for transactions in exempt
commodities traded on electronic trading facilities, also known as
exempt commercial markets (``ECMs'').\8\ To qualify as an ECM, a
facility must limit its transactions to principal-to-principal
transactions executed between ``eligible commercial entities''
(``ECEs'') \9\ on an ``electronic trading facility.'' \10\ Contracts
[[Page 75889]]
for all commodities except agricultural and excluded commodities
(primarily financial commodities but also commodities such as weather)
potentially are eligible to trade on an ECM. Examples of commodities
traded on ECMs are energy products, metals, chemicals, air emission
allowances, paper pulp, and barge freight rates.\11\ ECMs fall
somewhere between DTEFs and EBOTs on the regulatory oversight spectrum.
Like EBOTs, they are neither licensed nor registered with the CFTC and
are subject to the Act's antifraud and anti-manipulation
provisions.\12\ In addition, and different from EBOTs, ECMs are subject
to certain recordkeeping and reporting requirements under the CEA.\13\
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\8\ 7 U.S.C. 2(h)(3)-(5).
\9\ 7 U.S.C. 1a(11) (a subset of ECPs).
\10\ 7 U.S.C. 1a(10). For purposes of this proposed rulemaking,
the terms electronic trading facility and ECM are used
interchangeably. The term ``trading facility'' means a person or
group of persons that constitutes, maintains, or provides a physical
or electronic facility or system in which multiple participants have
the ability to execute or trade agreements, contracts or
transactions--(i) by accepting bids or offers made by other
participants that are open to multiple participants in the facility
or system; or (ii) through the interaction of multiple bids or
multiple offers within a system with a pre-determined non-
discretionary automated trade matching and execution algorithm. 7
U.S.C. 1a(34).
\11\ 7 U.S.C. 1a(14).
\12\ Sections 2(h)(4)(B) and (C) of the Act, 7 U.S.C. 2(h)(4)(B)
and (C).
\13\ For example, an ECM must maintain for five years and make
available for inspection records of its activities relating to its
business as a trading facility. 7 U.S.C. 2(h)(5)(B)(ii). More
specifically, Commission rule 36.3, 17 CFR 36.3, requires that an
ECM identify to the Commission those transactions for which it
intends to rely on the exemption in section 2(h)(3) of the CEA and
which averaged five trades per day or more over the most recent
calendar quarter. For all such transactions, the ECM must provide to
the Commission weekly reports showing certain basic trading
information, or provide the Commission with electronic access that
would allow it to compile the same information. 17 CFR
36.3(b)(1)(ii). An ECM also must provide to the Commission, upon
special call, any information relating to its business that the
Commission determines is appropriate to enforce the antifraud and
anti-manipulation provisions of the CEA, to evaluate a systemic
market event, or to obtain information on behalf of another federal
financial regulator. 7 U.S.C. 2(h)(5)(B)(iii); 17 CFR 36.3(b)(3). An
ECM must maintain a record of any allegations or complaints it
receives concerning suspected fraud or manipulation and must provide
the Commission with a copy of the record of each such complaint. 17
CFR 36.3(b)(1)(iii). Finally, an ECM is required to file an annual
certification that it continues to operate in reliance on the
exemption in section 2(h)(3) of the Act and that the information it
previously provided to the Commission remains correct. 17 CFR
36.3(c)(4).
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3. Differences Between ECMs and DCMs
ECMs are not subject to the level of transparency and Commission
oversight associated with DCMs. DCMs must satisfy specified criteria to
become designated, and then must demonstrate continuing compliance with
18 core principles set out in the Act.\14\ The Act provides flexibility
with respect to how DCMs may choose to meet the core principles'
mandate that DCMs undertake significant supervisory responsibility with
respect to trading on their markets. DCMs must, for example, establish
rules and procedures for preventing market manipulation and must adopt
necessary and appropriate position limit or accountability rules to
address the potential for manipulation or congestion. DCMs also must
establish compliance and surveillance programs, which the Commission
evaluates through rule enforcement reviews,\15\ must monitor trading on
their markets and must undertake other self-regulatory responsibilities
mandated by the CEA.
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\14\ See sections 5(d)(1)-(18) of the Act, 7 U.S.C. 7(d)(1)-
(18).
\15\ The Commission conducts regular rule enforcement reviews of
the self regulatory programs operated by DCMs for enforcing exchange
rules, preventing market manipulations and customer and market
abuses, and ensuring that trade related information is recorded and
stored in a manner consistent with the Act.
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The CFMA did not impose these obligations on ECMs. While the
Commission was given the authority to determine whether an ECM performs
a significant price discovery function for transactions in an
underlying cash market,\16\ such a determination did not trigger any
self-regulatory responsibilities for the ECM or confer any additional
oversight authority on the Commission. Rather, the presence of a
contract performing a significant price discovery function required the
ECM to publicly disseminate certain basic information, such as contract
terms and conditions and daily trading volume, open interest, and
opening and closing prices or price ranges.\17\
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\16\ In 2004, the Commission amended its part 36 rules to
include the requirement that an ECM notify the Commission when it
has reason to believe that one or more of the markets on which it is
conducting agreements, contracts or transactions in reliance on
section 2(h)(3) of the CEA has been met or if the market holds
itself out to the public as performing a price discovery function
for the cash market of a commodity. 17 CFR 36.3(c)(2)(i) and (ii).
69 FR 43285 (July 20, 2004).
\17\ Id.
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B. The Changing ECM Landscape
Following enactment of the CFMA in December 2000, the first ECMs
that notified the Commission of their intent to operate generally were
simple trading platforms, resembling in many ways business-to-business
facilities for large commercial firms. ECMs facilitate the execution of
trades between commercial counterparties by offering an anonymous and
efficient electronic matching system which many believed to be superior
to the existing voice broker system, and to provide a competitive
advantage over the bilateral OTC market, especially for energy
products. Initially, most ECMs were small operations with low trading
volumes that were small relative to DCMs. The first ECMs did not offer
centralized clearing, but sought to address counterparty risk through
the use of credit filters whereby traders could limit their potential
counterparties to a list of traders whose credit they found
satisfactory. Significantly, early ECM contracts were not linked to
contracts listed on DCMs. Over time, however, ECMs began to offer
``look-alike'' contracts that were linked to the settlement prices of
their exchange-traded counterparts, and these look-alike contracts in
one case began to garner significant volumes. In recent years, several
active ECMs began to offer the option of centralized clearing for their
contracts--an option which became widely utilized by their customers to
manage counterparty risk.
This evolution, and particularly the linkage of ECM contract
settlement prices to DCM futures contract settlement prices, began to
raise questions about whether ECM trading activity could impact trading
on DCMs and whether the CFTC had adequate authority to address that
impact and protect markets from manipulation and abuse. Of special
concern to CFTC staff was the existence of the ECM cash-settled ``look-
alike'' contracts that could provide an incentive to manipulate the
settlement price of an underlying DCM futures contract to benefit
positions in the look-alike ECM contract. As discussed more fully
below, the Commission subsequently considered and studied these
concerns in a variety of ways, culminating, in September 2007, in a
public hearing examining trading on regulated exchanges and ECMs.\18\
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\18\ See Commodity Futures Trading Commission, Report on the
Oversight of Trading on Regulated Futures Exchanges and Exempt
Commercial Markets (October 2007), http://www.cftc.gov/stellent/
groups/public/@newsroom/documents/file/pr5403-07_ecmreport.pdf for
a comprehensive report of the Commission's findings following its
September 2007 hearing (``ECM Report'').
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C. The CFTC's Response to the Changing Energy Markets
1. Empirical Study of Trades on ICE \19\ and NYMEX
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\19\ Intercontinental Exchange, or ICE, consists of four
separate entities: ICE OTC, to which this document refers, is an ECM
trading energy products. ICE Future Europe trades energy futures and
is regulated by the Financial Services Authority of Great Britain;
ICE Futures US focuses primarily on futures based on soft
commodities (e.g., coffee, sugar, cocoa, cotton) and financial
futures and is regulated by the CFTC; ICE Futures Canada trades
futures and options and is regulated by the Manitoba Securities
Commission.
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During the last several years, one ECM in particular--the
Intercontinental
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Exchange (``ICE'')--has become a major trading venue for natural gas
contracts in direct competition with the New York Mercantile Exchange
(``NYMEX'') natural gas benchmark futures contract, in addition,
Commission staff has found that the traders on ICE are virtually the
same as the traders on NYMEX. All of the top 25 natural gas traders on
NYMEX are also significant traders on ICE. For the Henry Hub natural
gas market,\20\ market participants generally view ICE and NYMEX as
essentially a single market, looking to both ICE and NYMEX when
determining where to execute a trade at the best price.
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\20\ Henry Hub is a natural gas pipeline hub in Louisiana that
serves as the delivery point for NYMEX natural gas futures contracts
and often serves as a benchmark for wholesale natural gas prices
across the U.S. Glossary.
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To assess these changes in the marketplace, the Commission's Office
of the Chief Economist (``OCE'') conducted an empirical study of the
relationship between the natural gas contracts that trade on ICE and
NYMEX. OCE collected transaction prices for ICE and NYMEX natural gas
contracts from January 3, 2006 through December 31, 2006 and evaluated
trading for 12 contract months when trading on each market was
appropriately active. OCE examined the timing of price changes on ICE
and NYMEX to draw inferences about where information arrives first. If
price changes on one venue consistently ``led'' those on the other
venue, then OCE concluded that informed traders preferred trading at
that ``leading'' venue and inferred that market to be ``discovering''
prices.\21\ OCE found that ICE exhibited price leadership with respect
to NYMEX on 20 percent of the contract-days, while NYMEX exhibited
price leadership on 63 percent of the contract-days. OCE concluded that
these results suggested that both ICE and NYMEX are significant price
discovery venues for natural gas futures contracts.
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\21\ See ECM Report at 11-12. Price discovery is the process of
determining the price level for a commodity based on supply and
demand conditions. Price discovery may occur in a futures market or
cash market. Glossary.
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2. Commission Surveillance of the Energy Markets
The Commission's surveillance of natural gas energy markets
traditionally has focused on the regulated futures markets traded on
NYMEX. Prior to the Reauthorization Act, ECMs were not subject to the
requirements of the Commission's large trader reporting system
(``LTRS'').\22\ In order to obtain analogous large trader information
from ECMs, the Commission had to issue special calls.\23\ Based on the
prominent role played by the ICE natural gas contract in the price
discovery process and the possible impact on the NYMEX natural gas
contract, the Commission determined to issue a series of special calls
for information related to ICE's cleared natural gas swap contracts
that are cash-settled based on the settlement price of the NYMEX
physical delivery natural gas contract.\24\
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\22\ The LTRS is the centerpiece of the Commission's market
surveillance system. Under the LTRS, clearing members, futures
commission merchants and foreign brokers file daily reports with the
CFTC showing futures and option positions in accounts they carry
that are above reporting levels set by the Commission. The reporting
level for the NYMEX natural gas futures market is 200 contracts.
\23\ Section 2(h)(5)(B)(iii) of the Act, 7 U.S.C.
2(h)(5)(B)(iii), requires that an electronic trading facility
relying on the exemption provided in section 2(h)(3) must, upon a
special call by the Commission, provide such information related to
its business as an electronic trading facility as the Commission may
determine appropriate to enforce the antifraud provisions of the
CEA, to evaluate a systemic market event, or to obtain information
requested by a Federal financial regulatory authority in connection
with its regulatory or supervisory responsibilities.
\24\ The special calls were issued primarily to assist the
Commission in its surveillance of the NYMEX natural gas contract.
They were not issued as part of an investigation of any particular
market participant or trading activity on either ICE or NYMEX, nor
were they issued to conduct regular market surveillance of ICE. The
first special call, issued on September 28, 2006, requested daily
clearing member position data for ICE's natural gas swap contracts,
broken out between house and aggregate customer positions, which is
similar to information that the Commission receives from NYMEX
pursuant to Commission rule 16.00. This information permits CFTC
market surveillance staff to see all cleared positions at the
clearing member level, but it is not possible to determine
individual customer positions. To obtain daily individual trader
positions, the Commission issued a second special call on December
1, 2006. While the data received is similar to large trader
reporting for DCMs, the methodology for reporting is very different.
Because ICE is a principal-to-principal market and therefore does
not receive position reporting from firms, it was necessary for ICE
to develop an algorithm to infer open positions from the sum of all
trading by each individual trader. While this approach has provided
valuable information, it is less accurate than traditional large
trader reporting. The third special call, issued on September 5,
2007, required ICE to provide all cleared transaction data for its
Henry Hub swap contracts and identify counterparties for the final
two trading sessions prior to the expiration of prompt month Henry
Hub natural gas products. This data is similar to transaction data
that the Commission receives from NYMEX for all trading days and
enables CFTC staff to monitor trading activity on ICE and obtain
more complete coverage to counter possible manipulative schemes that
could affect trading on ICE.
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3. The Commission's ECM Hearing
Following the OCE study and the special calls issued to ICE, the
Commission held a public hearing on September 18, 2007, to examine the
oversight of DCMs and ECMs. Witnesses at the hearing included
Commission staff, representatives of DCMs and ECMs, and representatives
of a broad spectrum of market users and consumer groups. The hearing
focused on a number of issues, including the tiered regulatory approach
of the CFMA and whether it was adequate; the similarities and
differences between ECMs and DCMs; the associated regulatory risks of
each market category; the types of regulatory or legislative changes
that may be appropriate to address identified risks; and the impact
that regulatory or legislative changes might have on the U.S. futures
industry and the global competitiveness of the U.S. financial industry.
In announcing the hearing, CFTC Acting Chairman Lukken observed that:
The evolution of these energy markets [ECMs] in recent years
requires our agency to address whether the level of regulatory
oversight is proper given the importance of energy prices to all
Americans.* * * This oversight hearing will provide a better
understanding of the inter-relationship of these trading venues so
policymakers can make informed decisions to protect these vital
markets.\25\
\25\ CFTC Release 5368-07, August 2, 2007 (CFTC Announces
September Hearing to Examine Trading on Regulated Exchanges and
Exempt Commercial Markets).
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4. The Commission's Findings and Legislative Recommendations
Based on information developed through various studies,
surveillance, special calls and its public hearing, the Commission
published in October 2007 a ``Report on the Oversight of Trading on
Regulated Futures Exchanges and Exempt Commercial Markets.'' (``ECM
Report'').\26\ The report was provided to the Commission's
Congressional oversight committees, which were then in the process of
considering legislation to amend the CEA and reauthorize the
Commission.
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\26\ supra n. 20.
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The ECM Report noted that while some participants disagreed, most
witnesses at the September 18 hearing generally supported the tiered
regulatory structure of the CFMA, but expressed concern regarding the
regulatory provisions governing ECMs and the regulatory disparity
between DCMs and ECMs.\27\ Witnesses suggested that this disparity made
markets more susceptible to manipulation and put regulated exchanges at
a competitive disadvantage vis-[agrave]-vis ECMs offering virtually
identical products. Generally, most witnesses felt that some changes to
the ECM provisions might be appropriate, provided those changes
[[Page 75891]]
were prudently targeted and did not adversely affect the ability of
ECMs to innovate and grow.\28\
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\27\ Id. at 15.
\28\ Id.
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Based on the hearing testimony and its own experience in
administering the Act, the Commission at that time concluded that the
tiered approach of the CFMA generally had operated effectively. ECMs
had proven popular for new start-up markets and had provided
competition for DCMs, spurring them toward innovations of their own.
The Commission further found that, to the extent that trading volume on
an ECM contract remained low and its prices were not significantly
relied upon by other markets, the current level of regulation remained
appropriate. However, when a futures contract traded on an ECM matured
and began to serve a significant price discovery function for
transactions in commodities in interstate commerce, the contract
warranted increased oversight to deter and prevent price manipulation
or other disruptions to market integrity, both on the ECM itself and in
any related futures contracts trading on DCMs. Such increased oversight
would also help to ensure fair competition among ECMs and DCMs trading
similar products and competing for the same business.
In light of these conclusions, the Commission's ECM Report
recommended that the CEA be amended to grant the Commission additional
authority over ECM contracts serving a significant price discovery
function, and that certain self-regulatory responsibilities be assigned
to ECMs offering such contracts. Specifically, the Commission advocated
that (1) An ECM contract that is determined to perform a significant
price discovery function be subject to large trader reporting
requirements comparable to those applicable to all DCM contracts; (2)
an ECM should be required to adopt position limits or accountability
levels, as appropriate, for a listed contract that serves a significant
price discovery function similar to the limits on DCMs; (3) an ECM
should be required to monitor trading of a listed contract that serves
a significant price discovery function to detect and prevent
manipulation, price distortion, and disruptions of the delivery or
cash-settlement process; and (4) the Commission and the ECM should be
provided with emergency authority to alter or supplement contract
rules, liquidate open positions, and suspend or curtail trading in any
listed contract that serves a significant price discovery function.
These authorities would be essential tools for the Commission and the
ECM to prevent manipulation and disruptions of the delivery or cash-
settlement process.
The Commission further recommended that the determination whether
an ECM contract serves a significant price discovery function should
focus on the following factors: (1) Material Liquidity--trading volume
in the ECM contract must be significant enough to affect regulated
markets or to become a pricing benchmark; and (2) Linkage/Material
Price Reference--the relevant ECM contract must either influence other
markets and transactions through this linkage or be materially
referenced by others in interstate commerce on a frequent and recurring
basis.
D. The Reauthorization Legislation and the Statutory Scheme
The CFTC Reauthorization Act of 2008 \29\ adds a new section
2(h)(7) to the CEA to govern the treatment of ``significant price
discovery contracts'' (``SPDCs'') on ECMs.\30\ The legislation, based
largely on the Commission's recommendations for improving oversight of
ECMs, provides for greater regulation of contracts traded on ECMs that
fulfill a significant price discovery function and establishes criteria
for the Commission to consider in determining whether an ECM contract
qualifies as a SPDC. The Reauthorization Act directs the CFTC to extend
its regulatory oversight to the trading of SPDCs; requires ECMs to
adopt position and accountability limits for SPDCs; authorizes the
Commission to require large traders to report their positions in SPDCs;
and establishes core principles for ECMs with contracts that are
determined to perform a significant price discovery function. Finally,
the legislation directs the Commission to issue rules implementing the
provisions of new section 2(h)(7) of the CEA and to include in such
rules the conditions under which an ECM will have the responsibility to
notify the Commission that an agreement, contract or transaction
conducted in reliance on the exemption provided in section 2(h)(3) of
the CEA may perform a price discovery function.\31\
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\29\ Public Law No. 110-246, supra. n. 1 (``Pub. L. 110-246'').
The Reauthorization Act was incorporated into the Food, Conservation
and Energy Act of 2008 as Title XIII of that legislation. Title XIII
was not the subject of Congressional hearings and the legislative
history is limited to The Joint Explanatory Statement of the
Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d Sess.
at 978-86 (2008) (Conference Committee Report).
\30\ 7 U.S.C. 2(h)(7).
\31\ Pub. L. 110-246 at sec. 12304. See also Conference
Committee Report, at 985-86; 2008 Farm Bill Commodity Futures Title:
Strengthening Oversight of Futures Markets, House Committee on
Agriculture (May 9, 2008) http://agriculture.house.gov/inside/
Legislation/110/FB/Conf/Title_XIII_fs.pdf.
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The Reauthorization Act significantly broadens the CFTC's
regulatory authority over ECMs by creating, in section 2(h)(7) of the
CEA, a new regulatory category--ECMs on which SPDCs are traded--and
treating electronic trading facilities in that category as registered
entities subject to all provisions of the CEA that are applicable to
registered entities.\32\ The legislation confers on the CFTC the
authority to designate an agreement, contract or transaction as a SPDC
if the Commission determines, in its discretion, that the agreement,
contract or transaction performs a significant price discovery function
under criteria established by section 2(h)(7). When the Commission
makes such a determination, the ECM on which the SPDC is traded must
assume, with respect to that contract or contracts, all the
responsibilities and obligations of a registered entity under the Act
and Commission regulations, and must comply with nine core principles
established by new section 2(h)(7)(C)--including the obligation to
establish position limits and/or accountability standards for
SPDCs.\33\ The Reauthorization Act separately amends section 4i of the
CEA to authorize the Commission to require large trader reports for
SPDCs listed on ECMs.\34\
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\32\ Conference Committee Report, at 985-86.
\33\ Congress has made clear that an ECM with a SPDC shall be
considered as a registered entity for purposes of the CEA. Id. at
985.
\34\ Public Law 110-246 at sec. 13202.
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Consistent with Congress' directive, the Commission is issuing this
proposed notice of rulemaking as an initial step to implementing the
amended statutory scheme for ECMs with SPDCs.\35\ These regulations are
applicable to exempt markets, but also implicate parts 16 through 21
(market, transaction and large trader reporting rules), and 40
(provisions common to contract markets, derivatives transaction
execution facilities and derivatives clearing organizations).
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\35\ Id. at sec. 13204. Congress has directed that the
Commission issue proposed rules implementing section 2(h)(7) of the
CEA not later than 180 days after the date of enactment of the
Reauthorization Act and that the Commission issue a final rule no
later than 270 days after the date of enactment. The Reauthorization
Act initially was enacted as H.R. 2419 on May 22, 2008 but was
repealed due to clerical error--and concurrently enacted--by H.R.
2164, Public Law 110-264 on June 18, 2008.
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[[Page 75892]]
II. The Proposed Rules
A. Part 36--Exempt Markets
Part 36 of the Commission's regulations contains the provisions
that apply to exempt boards of trade and to exempt commercial markets,
regardless of whether the markets are a significant source for price
discovery. Rule 36.3 imposes a number of requirements and restrictions
on ECMs--electronic trading facilities relying on the exemption in
section 2(h)(3) of the CEA--including notification of intent to rely on
the exemption; initial and ongoing information submission requirements;
prohibited representations; price discovery notification; and price
dissemination requirements. The Commission proposes to amend rule 36.3
to implement its broadened regulatory authority over ECMs with SPDCs
under section 2(h)(7) of the CEA.
1. Required Information
The notification provision in rule 36.3(a) is unchanged. The
Commission proposes to amend rule 36.3(b) to separately specify the
information submission requirements, both initially and on an ongoing
basis, for: (1) All ECMs; (2) for ECMs with respect to agreements,
contracts or transactions that have not been determined to perform a
significant price discovery function; and (3) for ECMs with SPDCs.\36\
The proposed amendment to rule 36.3(b) additionally includes provisions
related to subpoenas, special calls and the delegation of authority and
provides that an electronic trading facility relying on the exemption
in section 2(h)(3) of the Act shall not, with respect to agreements,
contracts or transactions that are not SPDCs, represent to any person
that it is registered with, designated, recognized, licensed or
approved by the Commission. This prohibition has its origin in section
2(h)(5) of the CEA, which sets forth the requirements and obligations
for ECMs. Although the Reauthorization Act did not amend the
prohibition on representation in section 2(h)(5)(7) of the Act, the
legislation did amend the statutory definition of ``registered entity''
to include, ``with respect to a contract that the Commission determines
is a significant price discovery contract, any electronic trading
facility on which the contract is executed or traded.'' \37\
Accordingly, the Commission believes that when it has determined that a
contract, agreement or transaction executed or traded on the trading
facility is a SPDC, the trading facility may represent that it is a
registered entity, provided that the representation clearly and
prominently states that the ECM is a registered entity only with
respect to its SPDCs.
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\36\ Enhanced obligations for ECMs with SPDCs apply only to the
SPDCs and need not be applied to ECM contracts, agreements or
transactions that are not SPDCs.
\37\ Public Law 110-246 at sec. 13203(b)(3).
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In general, the proposed information submission requirements for
ECMs without SPDCs are drafted to be substantively similar to the
information that all ECMs currently are required to provide.\38\ A
significant change to the submission requirements for ECMs is the
proposed requirement to file, initially and on a quarterly basis,
information about the terms and conditions as well as related
information for all contracts traded on the facility. Although the
proposed rules set forth the terms, standards and conditions under
which an ECM will be responsible to notify the Commission that it may
have a SPDC, the Commission is mindful that it must independently be
aware of ECM contracts that may develop into SPDCs. The Commission
believes that requiring ECMs to identify all agreements, contracts and
transactions and to provide basic trading information will enable it to
fulfill that obligation. To that end, the Commission proposes to retain
for non-SPDCs the requirement that ECMs submit to the Commission weekly
reports (or alternatively provide electronic access that would allow
the Commission to capture the same information) for contracts that
average five trades per day or more.\39\ In addition, the Commission is
proposing to add a quarterly reporting requirement for all non-SPDCs,
to include their terms and conditions, average daily trading volume,
and open interest. This quarterly reporting requirement also is being
proposed to provide the Commission with information that will assist it
in making prompt assessments whether ECM contracts may be SPDCs. ECMs
should note that this provision will require them to fulfill the
quarterly reporting requirement beginning with the end of the calendar
quarter following the adoption of these final rules. Under proposed
rule 36.3(b)(3), ECMs with SPDCs will be required to comply with the
daily reporting and publication requirements of regulation 16.01.\40\
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\38\ ECMs that have already filed a Notification of Operation
under section 2(h)(3) of the Act should note that proposed rule
36.3(b) will not require them to provide any additional information
to the Commission explaining how the facility meets the definition
of trading facility or with information demonstrating that the
facility requires all participants to be ECEs as long as the
operations of the facility and the participants trading on the
facility have not materially changed since the filing of the
notification or the most recent ECM Annual Certification form.
\39\ See 17 CFR 36.3(b).
\40\ Once in compliance with the core principles and daily
reporting and publication requirements applicable to ECMs with
SPDCs, ECMs will not be required to comply with proposed rule
36.3(b)(2) except in regard to non-SPDC contracts that are traded or
executed on the facility.
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2. Identifying Significant Price Discovery Contracts
The Reauthorization Act directs the Commission to consider, as
appropriate, four specific criteria when identifying whether an
agreement, contract or transaction is a SPDC: Price linkage, arbitrage,
material price reference, and material liquidity.\41\ The legislation
further directs that in its rulemaking to implement the provisions of
section 2(h)(7) of the CEA, the Commission shall include the standards,
as well as conditions under which an ECM will have the responsibility
to notify the Commission that a contract traded on the facility may
perform a significant price discovery function. Accordingly, proposed
rule 36.3(c) addresses: (i) The criteria on which the Commission will
rely in making a determination that an agreement, contract or
transaction is a SPDC; (ii) the factors that will trigger the ECM's
obligation to notify the Commission that it may have a SPDC; (iii) the
procedures the Commission will follow in reaching its determination
whether a contract is a SPDC (and in determining that a contract is no
longer a SPDC); and (iv) the procedures and standards by which an ECM
with a SPDC must demonstrate compliance with the core principles.
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\41\ Section 2(h)(7)(B)(v) also authorizes the Commission to
specify by rule other material factors relevant to a determination
whether a contract is a SPDC.
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(i) Criteria for SPDC Determination. In enacting new section
2(h)(7) of the CEA, Congress specified four criteria that the
Commission must consider in making a determination that an agreement,
contract or transaction performs a significant price discovery
function. Proposed rule 36.3(c)(1) enumerates the factors--price
linkage, arbitrage, material price reference, and material liquidity.
Because the legislation does not assign priority to any of the factors,
and neither the statutory language nor the Conference Committee Report
specifies the degree to which any of the factors must be present,
section 2(h)(7)(B) gives the Commission flexibility in applying the
criteria to a particular contract and market. The Commission is also
mindful that:
[n]ot all the listed factors must be present to make a
determination that a contract
[[Page 75893]]
performs a significant price discovery function. However, the
Managers intend that the Commission should not make a determination
that an agreement, contract or transaction performs a significant
price discovery function on the basis of the price linkage factor
unless the agreement, contract or transaction has sufficient volume
to impact other regulated contracts or to become an independent
price reference or benchmark that is regularly utilized by the
public.\42\
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\42\ Conference Committee Report at 984-85. In addition to the
four criteria established by Congress, section 2(h)(7) permits the
Commission to consider such other material factors as it may specify
by rule as relevant to a determination whether an agreement,
contract or transaction serves a significant price discovery
function. 7 U.S.C. 2(h)(7)(B)(v).
Because the criteria mandated by Congress do not lend themselves to
bright-line rules, the Commission proposes to explain, in Appendix A to
the part 36 rules, how it expects to apply the criteria in making its
determinations. This proposed guidance explains that the Commission
will make SPDC determinations on a case-by-case basis, applying and
weighing each factor as appropriate to the specific contract and
circumstances under consideration; offers examples to illustrate which
factor or combinations of factors the Commission would look to when
evaluating whether a contract is performing a significant price
discovery function; and describes the circumstances under which the
presence of a factor or factors would be sufficient to warrant such a
determination.
By way of example, for contracts that are linked to other contracts
or that may be arbitraged with other contracts, the Commission would
determine that the contract is a SPDC if the price of the contract
moves in such harmony with the other contract that the two markets
essentially become interchangeable. This co-movement of prices would be
an indication that liquidity in the contract has reached a level
sufficient for the contract to perform a significant price discovery
function. Accordingly, the proposed guidance establishes threshold
liquidity and price relationship standards that will inform the
Commission's determination. A different approach is required when
considering the price discovery potential of a contract that is serving
as a material price reference. In these circumstances, the Commission
would rely on either of two sources of evidence in making its
determination. The Commission believes that a direct indicator that a
contract is serving as a material price reference is observation that
cash market participants are actively referencing the contract price
when they enter into cash market transactions. Routine publication of
an ECM's contract price in widely distributed industry publications and
newsletters also would indicate that industry participants attach some
value to this information.
(ii) Notification requirement for ECMs with a SPDC. The
Reauthorization Act requires that as part of its rulemaking to
implement new section 2(h)(7) of the CEA, the Commission include the
standards, terms and conditions under which an ECM will have the
responsibility to notify the Commission that an agreement, contract or
transaction conducted in reliance on the exemption provided in section
2(h)(3) of the CEA may perform a significant price discovery
function.\43\ Accordingly, in proposed rule 36.3(c)(2) the Commission
has specified conditions, derived from the statutory criteria, which
signal the ECM's obligation to notify the Commission of a possible
SPDC. An ECM will be obligated to notify the Commission of a potential
SPDC when an agreement, contract or transaction is traded an average of
5 trades per day or more over the most recent calendar quarter and also
meets one of the other two reporting factors. The Commission is aware
that this requirement may result in over-reporting by ECMs, and wishes
to emphasize that the presence of one factor alone will not necessarily
result in a determination that a contract is a SPDC. This notice
requirement, however, will serve to alert the Commission to the
contracts that are most likely to be SPDCs. The Commission believes
that the benefit of having the maximum available information with which
to make its determinations outweighs the costs associated with possible
over-reporting by ECMs.
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\43\ Public Law 110-246 at sec. 13204.
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3. Procedures
When the Commission learns of a potential SPDC--whether through its
own information collection and surveillance activities,\44\
notification by an ECM pursuant to proposed rule 36.3(c)(2), or
unsolicited information from participants in the cash market underlying
a contract--the Reauthorization Act directs the Commission to implement
a process for determining whether ECM contracts are SPDCs. In proposed
rule 36.3(c)(3) the Commission establishes procedures under which the
Commission will make and announce its determination whether a
particular contract performs a significant price discovery function and
also sets forth the actions that must be taken by an ECM following such
a determination. With respect to the former, proposed rule 36.3(c)(3)
provides that when the Commission intends to undertake such a
determination in response to notice by an ECM pursuant to rule
36.3(c)(2), or upon its own initiative, it will notice its intention in
the Federal Register. The proposed rule also specifies that the
Commission, as part of its consideration, will solicit written data,
views and arguments from the ECM that lists the potential SPDC and from
any other interested parties. Generally, such written submissions must
be received within 30 calendar days of the date of publication in the
Federal Register. After consideration of all relevant matters the
Commission will issue an order explaining its determination. The
issuance of an affirmative Commission order signals the effectiveness
of the Commission's authorities with respect to ECMs with SPDCs \45\
and triggers the obligations, requirements--both procedural and
substantive--and timetables prescribed in proposed rule 36.3(c)(4) for
the ECM.\46\
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\44\ The Reauthorization Act amended the CEA to require that the
Commission review all ECM contracts at least once a year to
determine whether any contract is a SPDC. In addition to these
formal reviews, it is expected that Commission staff might also
become aware of the price discovery attributes of ECM contracts in
the ordinary course of discussion or interaction with ECM personnel
and various cash and futures market participants.
\45\ Those authorities include the emergency powers conferred by
section 8a(9) of the Act, 7 U.S.C. 12a(9), which permits the
Commission to intervene when it has reason to believe an emergency
exists and to take action necessary to maintain or restore orderly
trading or liquidation of any futures contract.
\46\ Should the Commission conclude, either formally or
informally, that a contract which demonstrates some characteristics
consistent with a SPDC nonetheless does not serve a significant
price discovery function, the Commission may continue to monitor the
contract pursuant to its special call authority under proposed rule
36.3(b)(1)(iv), and will advise the ECM as to what further reporting
it may require with respect to the contract.
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Under proposed rule 36.3(c)(4), an ECM with a SPDC must submit to
the Commission a written demonstration that it complies with the nine
core principles established in section 2(h)(7) of the CEA with respect
to the SPDC. Although status as a registered entity attaches to an ECM
as soon as the Commission issues its order determining that a
particular ECM contract performs a significant price discovery
function, the Commission has included in proposed rule 36.3(c)(4) a
grace period for achieving compliance with the core principles. As
proposed, the rule provides 90 calendar days for ECMs with a first-time
determination of a SPDC to demonstrate compliance with
[[Page 75894]]
the core principles.\47\ For each subsequent SPDC, the ECM is given 15
calendar days from the date of the Commission's order to achieve
compliance. The grace period is designed to ensure that the ECM has
sufficient time to implement its new regulatory requirements and
operations, while avoiding the market disruption that might occur by
the sudden imposition of position limits and other trading rules. The
Commission is aware that position limits that become effective at the
end of the applicable grace period may negatively impact traders who in
good faith acquired positions that are above that limit. Requiring
immediate compliance would force such traders to liquidate positions in
order to be at or below the limit. Accordingly, for the purpose of
applying limits on speculative positions in newly-determined SPDCs, the
Commission proposes to permit a grace period following the ECM's
implementation of position limits applicable to SPDCs for traders with
cleared positions in such contracts to become compliant with applicable
position limit rules. Traders who hold cleared positions on a net basis
in the electronic trading facility's SPDC must be at or below the
specified position limit no later than 90 calendar days from the date
on which the electronic trading facility implements a position limit,
unless a hedge exemption is granted by the electronic trading facility.
This grace period applies to both initial and subsequent SPDCs on an
ECM, and the ECM should promptly notify traders when it has set
position limits. This provision is outlined in the proposed Guidance to
Core Principle IV.
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\47\ Conference Committee Report at 986.
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Rule 36.3(c)(4) requires that the ECM's submission include specific
information designed to permit the Commission to evaluate whether the
ECM is indeed in compliance with the core principles. Although there
are obvious differences between them, this procedure was modeled on the
procedure required of applicants to become designated contract
markets.\48\ As with other aspects of this rulemaking, the Commission
is striving to make the procedures and requirements for ECMs with SPDCs
as close as possible to those for DCMs, and in this regard will review
the adequacy of submitted materials with the same rigor it applies to
DCM applications. Submissions that are incomplete or do not adequately
demonstrate compliance with each of the core principles may trigger
Commission proceedings under section 5c(d) of the Act and may, pursuant
to section 5e or 6 of the Act, result in the revocation of the ECM's
right to operate in reliance on the exemption set forth in section
2(h)(3) of the Act with respect to a SPDC.
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\48\ DCM applicants make submissions prior to designation as a
registered entity and prior to the listing of any contract, whereas
the Commission must review the same information for ECMs after they
are deemed registered entities and after the subject contract has
established trading volume and open interest.
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The Commission also proposes to establish a process for vacating a
SPDC determination when the contract no longer meets the criteria
specified in section 2(h)(7)(B). Under proposed regulation 36.3(c)(6),
the Commission may, on its own initiative or at the request of an ECM
with a SPDC, determine that a contract no longer performs a significant
price discovery function and vacate its previous determination. Any
subsequent determination that the contract once again is a SPDC will be
subject to the procedures proposed in regulation 36.3(c)(2). Proposed
rule 36.3(c)(6) further provides for the automatic vacation of a
significant price discovery contract determination when the SPDC has no
open interest and no trading on the contract has occurred for a period
of 12 complete calendar months. The Commission is proposing this
provision in order to reduce the administrative burden on staff and the
compliance burden on an ECM where lack of activity eliminates any
possibility that a contract performs a significant price discovery
function for the underlying cash market.
4. Substantive Compliance With the Core Principles: Guidance and
Acceptable Practices
Section 2(h)(7) of the CEA, as amended, requires that an electronic
trading facility on which significant price discovery contracts are
traded comply with nine core regulatory principles. Consistent with
Congress's intent that status as a registered entity attach to an ECM
following the Commission's determination that a particular ECM contract
serves a significant price discovery function,\49\ these core
principles have their origins in their DCM counterparts in section 5 of
the CEA and have been construed similarly.\50\ The Commission proposes
to adopt Appendix B to the part 36 rules to provide general guidance
and acceptable practices with respect to compliance with the ECM core
principles; the acceptable practices for compliance with the ECM core
principles will, where appropriate, mirror those for DCMs. The
Commission intends in the acceptable practices to provide non-exclusive
safe harbors for compliance with the core principles by ECMs with
SPDCs. As is the case with the core principles established for other
registered entities, the guidance offered for ECMs is neither mandatory
nor the only means of compliance with the core principles. Consistent
with its practice of evaluating a DCM's compliance with the core
principles during rule enforcement reviews, the Commission will conduct
regular rule enforcement reviews of ECMs with SPDCs to evaluate
compliance with the nine core regulatory principles.
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\49\ Conference Committee Report at 986.
\50\ 7 U.S.C. 7(d); Conference Committee Report at 985.
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The Guidance to Core Principle I of section 2(h)(7)(C) of the Act
requires the ECM to certify the terms and conditions of the SPDC within
90 calendar days of an ECM's initial SPDC, or 15 calendar days if the
ECM has previously traded a SPDC. The acceptable practice for this core
principle provides that Guideline No. 1 in Appendix A to the
Commission's part 40 rules may be used as guidance to satisfy this
provision. To ensure continued compliance with all elements of the
Commission's statutory and regulatory regimes for ECMs with SPDCs, the
ECM is expected to monitor the SPDC and its trading activity on a
continuous basis.
Core Principle II requires ECMs to monitor trading in SPDCs to
prevent market manipulation and participation abuses. Its guidance and
acceptable practices were derived from DCM Core Principle 4 (Monitoring
of Trading) and DCM Designation Criterion 2 (Prevention of Market
Manipulation).\51\ The proposed guidance and acceptable practices in
Appendix B to part 36 make clear that ECMs with SPDCs must demonstrate
the capacity to prevent market manipulation and have rules deterring
trading and participation abuses. Under the proposed guidance, ECMs
with SPDCs can demonstrate this capacity through either a dedicated
regulatory department or by delegation of that function to an
appropriate third party.\52\ In either case, the regulatory
[[Page 75895]]
department or third party should have an acceptable trade monitoring
program, the authority to collect information and documents, and the
ability to assess participants' market activity and power.
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\51\ 17 CFR 38, Appendices A and B to Part 38.
\52\ As is the case for DCMs and DTEFs, ECMs with SPDCs may
comply with any core principle through delegation of any relevant
function to any registered futures association or another registered
entity, but the ECM remains responsible for carrying out the
function. Section 5c(b) of the CEA, 7 U.S.C. 7a-2(b). A detailed
discussion of registered entities' responsibilities and obligations
with respect to delegated functions, as well as a discussion of the
distinctions between delegation of functions and outsourcing, or
contracting out specified core principle duties is found in the
Commission's final rulemaking implementing provisions of the CFMA
relating to trading facilities (``A New Regulatory Framework''), 66
FR 42256, 42266 (August 10, 2001).
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Core Principle III addresses the ability of an ECM with a SPDC to
obtain information necessary to perform any of the functions enumerated
in section 2(h)(7)(C) of the CEA (the core principles), to provide that
information to the Commission, and to have the capacity to carry out
any required information sharing agreements. Core Principle III's
guidance and acceptable practices have as their source the guidance and
acceptable practices of DCM Designation Criterion 8--Ability to Obtain
Information.\53\ Proposed Appendix B to part 36 makes clear that ECMs
with SPDCs must have the authority to collect information and documents
on both a routine and non-routine basis; maintain and properly store
audit trail data; maintain records in a form and manner acceptable to
the Commission; and have the capacity to carry out appropriate
information-sharing agreements. In providing guidance on compliance
with this requirement, the Commission also proposes to incorporate the
guidance and acceptable practices provided for DCM Core Principles 10
(Trade Information) and 17 (Recordkeeping).\54\ The Commission believes
that the acceptable practices outlined in Core Principle 10 should be
made applicable to ECMs with SPDCs because the ability to record full
data entry and trade details, as well as the safe storage of audit
trail data, is a necessary component in assessing potential
manipulation and conducting effective market surveillance. DCM Core
Principle 17 requires that DCMs maintain required records in a form and
manner acceptable to the Commission and establishes as guidance for
acceptable recordkeeping the standards prescribed in Commission
regulation 1.31.\55\ To ensure that all information required by the
Commission is maintained in a uniform manner, the Commission proposes
in the acceptable practices for Core Principle III to adopt the
acceptable practices for recordkeeping found in DCM Core Principle 17.
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\53\ 17 CFR 38, Appendix B to Part 38.
\54\ 17 CFR 38, Appendix B to Part 38.
\55\ 17 CFR 1.31.
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Core Principle IV requires electronic trading facilities with
significant price discovery contracts to establish position limit or
accountability rules for traders in such significant price discovery
contracts. Speculative position limits are necessary to reduce the
potential for market manipulation. The acceptable practices for Core
Principle IV were derived largely from Core Principle 5 for designated
contract markets.\56\
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\56\ 17 CFR 38, Appendix B to Part 38.
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DCMs can list for trading futures contracts on a wide range of
commodities, including enumerated agricultural products, excluded
commodities (e.g., financial products such as currencies), and exempt
commodities (e.g., metals, crude oil, natural gas and electricity).
Some of these commodities have limited deliverable supplies while
others have deep and liquid cash markets. Depending on the variety of
possible contracts listed for trading, a DCM may have a mix of position
limit and accountability rules. Specifically, futures contracts based
on commodities with limited deliverable supplies should have spot-month
speculative position limits. In contrast, financial products having
deep and liquid cash markets may be eligible for position
accountability levels in lieu of position limits since the potential
for market manipulation is minimal.
Unlike DCMs, ECMs relying on the exemption in section 2(h)(3) of
the CEA are permitted to offer for trading only contracts on exempt
commodities. Because the deliverable supplies of exempt commodities
typically are limited, the Commission believes that it will be
necessary for SPDCs to have spot-month position limits.
The acceptable practices for Core Principle IV make recommendations
with respect to how ECMs should establish spot-month speculative
position limits. For a unique SPDC,\57\ the spot-month speculative
position limit should be set in the same manner outlined for contracts
listed for trading on DCMs. In this regard, for a physically-delivered
SPDC, the level of the spot-month limit should be based upon an
analysis of the deliverable supply and the history of spot-month
liquidations. The spot-month limit for a physical-delivery market is
appropriately set at no more than 25 percent of the estimated
deliverable supply.\58\ Where a SPDC has a cash settlement provision,
the spot-month speculative position limit should be set at a level that
minimizes the potential for price manipulation or distortion in the
SPDC itself; in related futures and option contracts traded on a DCM or
DTEF; in other SPDCs; in other fungible agreements, contracts and
transactions; and in the underlying commodity.
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\57\ A unique SPDC is one that is not economically equivalent to
another SPDC or to a contract traded on a DCM or DTEF.
\58\ The Commission notes that deliverable supply typically is
less than total supply. In this regard, it is common for some
portion of the supply to be unavailable for delivery for a variety
of reasons. Deliverable supply is the amount of the underlying
commodity that reasonably can be expected to be available to short
traders and salable by long traders at its market value in normal
cash market channels.
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The Commission notes that some SPDCs may not be unique. In other
words, a SPDC may be economically equivalent to another SPDC or to a
contract traded on a DCM or DTEF. Economic equivalence can arise due to
substantial similarity among contracts' terms and conditions (e.g., two
physically-delivered contracts or two cash-settled contracts having the
same specifications). A SPDC also can be economically equivalent to
another SPDC or to a contract listed for trading on a DCM or DTEF if it
is cash settled based on a daily settlement price or the final
settlement price of the referenced contract. For economically-
equivalent SPDCs, the electronic trading facility should establish the
same spot-month speculative position limits as specified for the
equivalent contract.\59\
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\59\ Many DCMs have non-spot individual month and all-months-
combined position accountability rules for their futures contracts.
Moreover, some DCMs establish non-spot individual month and all-
months-combined position limits in lieu of the position
accountability levels. The Commission believes that the
implementation of such accountability provisions or position limits
is a good practice. Accordingly, the Commission proposes to adopt it
as an acceptable practice for ECMs.
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ECMs should establish non-spot individual month position
accountability levels and all-months-combined position accountability
levels for its SPDCs. Once a trader exceeds an established position
accountability level, the ECM should initiate an investigation to
determine whether the individual's trading activity is justified and is
not intended to manipulate the market. As part of its investigation,
the ECM should inquire about the trader's rationale for holding a net
position in excess of the accountability levels. The ECM also can
request that the trader not further increase contract positions. If a
trader fails to comply with a request for information, provides
information that does not sufficiently justify the position, or
continues to increase contract positions after a request not to do so
is issued by the ECM, then the accountability provisions should enable
the ECM to order the trader to reduce the positions.
If a SPDC is economically equivalent to another SPDC or to a
contract traded
[[Page 75896]]
on a DCM or DTEF, then the ECM should set the non-spot individual month
position accountability level and all-months-combined position
accountability level at the same level as those specified for the
economically-equivalent contract. For a unique SPDC, the ECM should
adopt non-spot individual month and all-months-combined position
accountability levels that are no greater than 10 percent of the
average combined futures and delta-adjusted option month-end open
interest for the most recent calendar year.
Position accountability levels are not necessary for SPDCs that
specify non-spot individual month position limits and all-months-
combined position limits. If a SPDC is economically equivalent to
another contract, then the non-spot individual month position limit and
all-months-combined position limit should be set at the same levels
specified for the equivalent or referenced contract. For unique SPDCs,
the non-spot individual month and all-months-combined position limits
should be set in the same manner as for position accountability levels,
i.e., levels that capture a material amount of large positions that
could threaten the market.
An ECM with a SPDC may require that all transactions in that
contract be cleared only through a DCO. Alternatively, an ECM's SPDC
may not be subject to any clearing requirement, in which case the
contract would trade on an uncleared basis. Lastly, an ECM may permit a
given SPDC to trade on either a cleared or uncleared basis depending on
the status of the counterparties involved. The amendments to the CEA
give electronic trading facilities reasonable discretion to take into
account the differences between cleared and uncleared transactions when
complying with Core Principle IV.\60\ For the purpose of applying
speculative limits to positions in SPDCs, the ECM should apply
speculative position limits to cleared positions only.
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\60\ Public Law 110-246 at sec. 13201.
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Uncleared transactions in SPDCs potentially play an important role
in risk management strategies and price formation. As a result, the
Commission believes that an ECM should monitor not only trading in
cleared transactions but also trading with respect to uncleared
transactions. However, the Commission is cognizant of the fact that
uncleared trades conducted on the ECM may be offset by trades done off
the facility. Such offsetting transactions consummated outside of an
ECM typically are not reported to the facility. Thus, the ECM likely
would find it difficult to net uncleared transactions and maintain
records of traders' uncleared positions in a given SPDC. In order to
account for this situation, the Commission proposes for ECMs with SPDCs
a new measure of trading activity called the volume accountability
level. For this measure, the ECM should keep track of each trader's
uncleared transactions in a SPDC on a net basis that are conducted on
the facility. (For the purpose of netting uncleared transactions, long
and short uncleared transactions are only offset if they are conducted
with the same counterparty.) A volume accountability level is similar
to a position accountability level in that a trader may exceed the
volume accountability level. However, if a trader's net volume of
uncleared trades exceeds the volume accountability level, the ECM
should initiate an investigation to determine whether the trading
activity is justified and is not intended to manipulate the market. As
part of its investigation, the ECM should inquire about the trader's
rationale for holding a net volume of uncleared trades in excess of the
volume accountability level. The ECM also can request that the trader
not further increase the volume of uncleared trades. If a trader fails
to comply with a request for information about the portfolio of
uncleared trades, provides information that does not sufficiently
justify the uncleared transactions conducted, or continues to increase
the volume of uncleared trades after a request not to do so is issued
by the ECM, then the volume accountability provisions should enable the
ECM to require the trader to reduce the volume of uncleared trades.
Consistent with the specific directive of Core Principle IV, the
Commission expects ECMs to impose position limit and position
accountability requirements on SPDCs as well as positions in
agreements, contracts and transactions that are fungible and cleared
together with any SPDC. This circumstance typically occurs where an ECM
lists a particular contract on its multilateral trading platform and
the resultant positions are cleared by a DCO. Separately, the ECM also
provides a non-multilateral trading platform capability for the trading
of the same contract and the resultant positions are cleared at the
same clearing organization together with positions established on the
multilateral platform. Given the fact that such arrangements allow
market participants to put on positions on the multilateral platform
and take them off away from the platform--as well as vice versa--the
Commission believes that it is appropriate for position limit
requirements to be applied to overall positions regardless of where
they originated.
With regard to compliance with a particular position limit or
position accountability rule, ECMs should aggregate on a net basis
cleared transactions, including those that are treated by a DCO
(registered or unregistered) as fungible with the SPDC. Aggregate
positions then will be compared with the applicable position limit and
position accountability rules to determine compliance. Uncleared
transactions also should be aggregated by trader on a net basis in
order to determine whether such trader's volume of uncleared trades
exceeds the spot-month volume accountability level.
An ECM with SPDCs should use an automated means of detecting
traders' violations of speculative limit rules and exemptions. An
automated system also should be used to determine whether a trader has
exceeded applicable non-spot individual month accountability levels,
all-months-combined accountability levels, and spot-month volume
accountability levels. An electronic trading facility should establish
a program for effective enforcement of position limits for SPDCs.
Lastly, ECMs should use a large trader reporting system to monitor and
enforce daily compliance with position limit rules.
The Commission recognizes that some traders with relatively large
positions may be adversely affected by newly imposed position limits
when a SPDC initially comes into compliance with the core principles.
To address this issue, the Commission proposes, for the purpose of
applying limits on speculative positions in newly-determined SPDCs, to
permit a grace period following issuance of its order for traders with
cleared positions in such contracts to become compliant with applicable
position limit rules. Traders who hold cleared positions on a net basis
in the ECMs SPDC must be at or below the specified position limit level
no later than 90 calendar days from the date of the ECM's
implementation of position limit rules, unless a hedge exemption is
granted by the ECM.
Core Principle V requires the ECM to adopt rules to provide for the
exercise of emergency authority. The proposed guidance contained in
Appendix B to part 36 is substantially similar to the guidance for DCM
Core Principle 6.\61\ However, the Commission added a
[[Page 75897]]
reference in the proposed guidance for Core Principle V to acknowledge
that calls for additional margin apply only to contracts that are
cleared through a clearinghouse, since not all contracts traded on
electronic trading facilities are cleared.
---------------------------------------------------------------------------
\61\ 17 CFR 38, Appendix B to Part 38.
---------------------------------------------------------------------------
Core Principle VI requires that an ECM with a SPDC make public
daily information on price, trading volume, and other trading data. The
Commission believes this information should include settlement prices,
price range, volume, open interest, and other related market
information, and has proposed in the acceptable practices that
compliance with Commission regulation 16.01,\62\ which the Commission
proposes to make mandatory for ECMs with SPDCs, would constitute an
acceptable practice under Core Principle VI.
---------------------------------------------------------------------------
\62\ 17 CFR 16.01.
---------------------------------------------------------------------------
Core Principle VII requires the ECM to monitor and enforce
compliance with the rules of its market. The proposed guidance and
acceptable practices provided in Appendix B to part 36 are roughly
parallel to the guidance and acceptable practices prescribed for DCM
Core Principle 2.\63\ The Commission notes that ECMs on which SPDCs are
traded are non-intermediated markets, and for this reason guidance
relating to a DCM's authority to examine the books and records of
intermediaries has not been included in the proposed guidance for Core
Principle VII.
---------------------------------------------------------------------------
\63\ 17 CFR 38, Appendix B to part 38.
---------------------------------------------------------------------------
Core Principle VIII requires the electronic trading facility to
establish and enforce rules to minimize conflicts of interest in its
decision-making processes. The Commission notes that an ECM may face
conflicts between its self-regulatory responsibilities and its
commercial interests similar to those encountered by a DCM. For this
reason the Commission proposes to insert certain general elements of
the acceptable practices for DCM Core Principle 15 \64\--specifically,
those descriptive elements that provide greater clarity and context to
particular conflicts--into paragraph (a)(2) of the guidance section for
ECM Core Principle VIII.
---------------------------------------------------------------------------
\64\ Id.
---------------------------------------------------------------------------
The acceptable practices for DCM Core Principle 15 include four
specific provisions that must be met to receive the benefit of the safe
harbor. These provisions address: (1) Board Composition; (2) Definition
of Public Director; (3) Regulatory Oversight Committee; and (4)
Disciplinary Panels. Although the Commission did not propose any
acceptable practices for Core Principle VIII, the Commission emphasizes
that the four provisions in the acceptable practices for DCM Core
Principle 15 are a clear articulation of acceptable methods for
managing conflicts of interest in decision-making. Accordingly, the
Commission encourages ECMs with SPDCs to consult the DCM Core Principle
15 acceptable practices for additional guidance as to the spirit of
Core Principle VIII.
The Commission recognizes that an electronic trading facility may
become subject to compliance with Core Principle VIII by virtue of a
single contract representing a small portion of the facility's
operations. Thus, the ECM's conflicts may be contract-specific and not
require the all-encompassing safe harbor offered for the benefit of
DCMs in Core Principle 15.\65\ The Commission also recognizes that it
may not be practicable for an ECM to implement the full panoply of the
Core Principle 15 acceptable practices. The ECM must nonetheless ensure
that appropriate measures are in place to guard against conflicts of
interest in decision-making. An electronic trading facility should
carefully consider its method of compliance, including whether
additional measures may be required as the number or importance of its
SPDCs increases. The Commission reserves the right to issue additional
guidance or specific acceptable practices for Core Principle VIII as
circumstances warrant.
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\65\ The Commission recognizes that, pursuant to the
Reauthorization Act, compliance with the core regulatory principles
is limited to ECMs with SPDCs. However, the Commission also
recognizes that all ECMs, not just ECMs with SPDCs, may face
potential conflicts of interest in their decision-making processes.
Therefore, all ECMs may want to consider implementing appropriate
measures to minimize conflicts of interests.
---------------------------------------------------------------------------
Core Principle IX requires ECMs with SPDCs to avoid adopting rules
or taking actions that result in unreasonable restraints of trade or
impose a material anticompetitive burden on trading. The Commission is
required by section 15(b) of its statute to take into consideration the
public interest to be protected by the antitrust laws and to take the
least anticompetitive means of achieving the objectives, policies and
purposes of the CEA.\66\ Consistent with the Commission's approach to
antitrust considerations with respect to DCMs,\67\ it is the
Commission's intent to be guided by section 15(b) of the Act in its
consideration of any issues arising under this core principle.
---------------------------------------------------------------------------
\66\ 7 U.S.C. 19.
\67\ 17 CFR 38, Appendix B to part 38, Guidance for Core
Principle 18.
---------------------------------------------------------------------------
5. Annual Commission Review
In accordance with section 2(h)(7) of the CEA, proposed regulation
36.3(d) provides that the Commission will review at least annually
agreements, contracts and transactions traded on ECMs to determine
whether they serve a significant price discovery function. The
Commission proposes to limit these annual reviews to those contracts
that have an average daily volume of five or more trades or that have
been brought to the attention of the Commission, through the
notification procedures of proposed regulation 36.3(c)(2) or otherwise,
as possible SPDCs. The Commission believes this approach is consistent
with Congress' intent as reflected in the Conference Committee Report:
The Managers do not intend that the Commission conduct an
exhaustive annual examination of every contract traded on an
electronic trading facility pursuant to the section 2(h)(3)
exemption, but instead to concentrate on those contracts that are
most likely to meet the criteria for performing a significant price
discovery function.\68\
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\68\ Conference Committee Report at 985.
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B. Market, Transaction and Large Trader Reporting Rules
The Commission's market and large trader reporting rules
(``reporting rules'') are contained in parts 15 through 21 of the
Commission's regulations.\69\ Collectively, the reporting rules
effectuate the Commission's market and financial surveillance
programs.\70\ The market surveillance programs analyze market data to
detect and prevent market manipulation and disruptions and to enforce
speculative position limits. The financial surveillance programs use
market data to measure the financial risks that large contract
positions may pose to Commission registrants and clearing
organizations.
---------------------------------------------------------------------------
\69\ 17 CFR parts 15 to 21.
\70\ See 69 FR 76392 (Dec. 21, 2004).
---------------------------------------------------------------------------
The Commission's reporting rules can be applied to SPDCs traded on
ECMs pursuant to the authority of sections 4a, 4c(b), 4g and 4i of the
CEA.\71\ The amendments introduced to the CEA by the Reauthorization
Act, both by defining ECMs with SPDCs as registered entities with
respect to those contracts and by making certain provisions of the
[[Page 75898]]
Act directly applicable to SPDCs, give the Commission the authority to
establish a comprehensive transaction and position reporting system for
SPDCs. Specifically, section 4a of the CEA permits the Commission to
set, approve exchange-set, and enforce speculative position limits.\72\
Section 4c(b) of the Act,\73\ which gives the Commission plenary
authority to establish the rules pursuant to which the terms and
conditions on which commodity options transactions may be conducted,
provides the basis for the Commission's authority to establish a large
trader reporting system for transactions on ECMs that involve commodity
options. Section 4g of the Act, as amended, imposes reporting and
recordkeeping obligations on registered persons and requires them to
file such reports as the Commission may require on proprietary and
customer positions executed on any board of trade and in any SPDC
traded or executed on an electronic trading facility.\74\ Finally,
section 4i of the Act requires the filing of such reports as the
Commission may require when positions made or obtained on DCMs, DTEFs
or ECMs with respect to SPDCs equal or exceed Commission-set
levels.\75\
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\71\ The Reauthorization Act amended section 2(h)(4)(B) of the
Act to subject SPDCs requiring large trader reporting to the
provisions of section 4c(b) of the Act. In addition, section
2(h)(4)(D) of the Act provides that transactions executed on ECMs
shall be subject to ``such rules, regulations, and orders as the
Commission may issue to ensure timely compliance with any of the
provisions of this Act applicable to a significant price discovery
contract traded on or executed on any electronic trading facility *
* *.'' 7 U.S.C. 2(h)(4)(D).
\72\ 7 U.S.C. 6a.
\73\ 7 U.S.C. 6c(b).
\74\ 7 U.S.C. 6g.
\75\ 7 U.S.C. 6i.
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In addition to proposing technical and conforming amendments to
parts 15 through 21 of its regulations, the Commission seeks, through
the proposed regulations, to extend to SPDCs the reporting rules that
currently apply to DCMs and DTEFs by defining clearing member and
clearing organization and amending the definition of reporting market
in Commission regulation 15.00 to apply to positions in, and the
trading and clearing of, SPDCs executed on ECMs. Under the proposed
rules, ECMs would provide clearing member reports for SPDCs to the
Commission pursuant to Commission regulation 16.00. As with DCMs,
proposed rule 16.01 would require ECMs to submit to the Commission and
publicly disseminate option deltas and aggregated trading data on a
daily basis.\76\ ECM clearing members that clear SPDCs, regardless of
their registration status with the Commission or their status as
domestic or foreign persons, would be required to file position reports
with the Commission for large SPDC positions held in accounts carried
by such brokers when customer positions exceed the contract reporting
levels of Commission regulation 15.03(b). In addition, the proposed
regulations would require clearing members to identify the owners of
reportable SPDC positions on Form 102 (Identification of Special
Accounts).\77\
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\76\ Currently, the public dissemination requirement of
Commission regulation 16.01(e) applies only to DCMs. The proposed
rules would uniformly apply the public dissemination requirement of
Commission regulation 16.01(e) to actively traded DCM contracts and
SPDCs executed on DTEFs and ECMs. 17 CFR 16.01(e).
\77\ The Commission's Division of Market Oversight increasingly
has been charged with administering the procedural requirements of
the reporting rules. Accordingly, the Commission is proposing to
shift any delegation of the Commission's authority to determine the
format of reports and the manner of reporting under parts 15 through
21 of the Commission's regulations from the Executive Director to
the Director of the Division of Market Oversight.
---------------------------------------------------------------------------
Under the proposed regulations, SPDC traders likewise would be
subject to the special call provisions of part 18 of the Commission's
regulations for reportable positions. Moreover, clearing members for
SPDCs, SPDC traders, and ECMs listing SPDCs each would be subject to
the special call provisions of part 21 of the Commission's regulations,
which establish the Commission's ability to request information on
persons that exercise trading control over commodity futures and
options accounts along with additional account-related information for
positions that may or may not be reportable under Commission regulation
15.03(b).\78\
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\78\ 17 CFR 15.03(b). The proposed rules also seek to amend
paragraphs (i)(1) and (i)(2) of Commission regulation 21.01 to
ensure that any special call to an intermediary for information that
classifies a trader as a commercial or noncommercial trader, and the
positions of the trader as speculative, spread positions, or
positions held to hedge commercial risks, can be made with respect
to both commodity futures and commodity options contracts. 17 CFR
21.02(i).
---------------------------------------------------------------------------
In order to effectively communicate with foreign clearing members
and foreign traders and to properly administer the proposed special
call provisions of parts 17, 18 and 21 of the Commission's regulations,
the Commission is also proposing to amend the designation of agent
provisions of Commission regulation 15.05. This rule relates to the
appointment of an agent for service of process for foreign persons; it
is self-effectuating and is designed to permit the Commission to
communicate expeditiously with foreign individuals and entities that
trade on domestic commodity exchanges.\79\ Similar to requirements that
currently apply to DCMs and DTEFs, the proposed amendments to
regulation 15.05 would require ECMs that list SPDCs to act as the agent
of foreign clearing members and foreign traders for the purpose of
accepting service or delivery of any communication, including special
calls, issued by the Commission to a foreign clearing member or foreign
trader.\80\
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\79\ For background on the adoption of the rule, see 45 FR 30426
(May 8, 1980).
\80\ In order to ensure that the Commission can expeditiously
communicate with all foreign individuals and entities that may
effect transactions in ECM SPDCs, the Commission is proposing to
define the term foreign clearing member in proposed regulation
15.00(g), and to use that term along with the term foreign trader as
defined in regulation 15.00(h), in proposed regulation 15.05(i).
---------------------------------------------------------------------------
The Commission is also proposing new regulation 16.02 to require
all reporting markets--a definition that currently includes DCMs and
DTEFs (unless the Commission determines otherwise) and, as proposed,
will include ECMs listing SPDCs with respect to such contracts--to
report on a daily basis trade data and related order information for
each transaction that is executed on the market. Such reports would
include time and sales data, reference files and such other information
as the Commission or its designee may require and, upon request, would
be accompanied by data that identifies or facilitates the
identification of each trader for each transaction or order included in
a submitted report. For some time, DCMs have consistently provided
transaction level data to the Commission pursuant to rule 38.5(a),
under which they must file trade data upon request by the
Commission.\81\ Recent acquisitions of technology have enabled the
Commission more effectively to integrate trade data and related order
information into its trade practice, market and financial surveillance
programs. Accordingly, the Commission proposes in new regulation 16.02
to make the submission of trade data and related order information
mandatory.
---------------------------------------------------------------------------
\81\ 17 CFR 38.5(a).
---------------------------------------------------------------------------
In this regard, and specifically with respect to SPDCs, the
Commission notes that the proposed amendments to part 17 of the
Commission's regulations do not apply to SPDC transactions that are not
cleared for the simple reason that no clearing members are involved in
clearing such transactions. For purposes of enforcing SPDC position
limits and monitoring large SPDC positions, the Commission would use
proposed regulation 16.02 to access transaction information and trader
identifications to enforce position limits and monitor large positions
for market and financial surveillance purposes.
[[Page 75899]]
C. Other Regulatory Provisions
1. Part 40--Provisions Common to Registered Entities
ECMs with SPDCs are integrated into the definition of ``registered
entity'' in section 1a(29) of the CEA, as amended. Part 40 of the
Commission's regulations applies to registered entities, and therefore,
ECMs with SPDCs. Proposed part 40 is being amended to specify which
provisions would be, or would not be, applicable to all registered
entities. In particular, rules 40.1, 40.2 and 40.5-40.8 and Appendix D
apply to ECMs with SPDCs. Although not all provisions of part 40 will
be applicable to ECMs with SPDCs,\82\ interested parties are strongly
encouraged to review all of part 40 because even those sections that
are not being amended in this rulemaking may be de facto amended by
virtue of the fact that the term ``registered entity'' now includes
ECMs with SPDCs.
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\82\ Regulation 40.3 will not apply to ECMs with SPDCs because
it addresses Commission approval of products. Regulation 40.4
applies solely to agricultural products, which cannot be traded on
ECMs.
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III. Related Matters
A. Cost Benefit Analysis
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its actions before issuing new regulations under
the Act. Section 15(a) does not require the Commission to quantify the
costs and benefits of new regulations or to determine whether the
benefits of adopted regulations outweigh their costs. Rather, section
15(a) requires the Commission to consider the cost and benefits of the
subject regulations. Section 15(a) further specifies that the costs and
benefits of the regulations shall be evaluated in light of five broad
areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of the market for listed derivatives; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission may, in its discretion, give
greater weight to any one of the five enumerated areas of concern and
may, in its discretion, determine that, notwithstanding its costs, a
particular regulation is necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
The proposed regulations implement the Reauthorization Act by
establishing an enhanced level of oversight of ECMs--including ECMs
with SPDCs and ECM market participants--as mandated by Reauthorization
Act. As a result, in certain cases, it may be more appropriate to
attribute the compliance costs imposed by the proposed regulations to
requirements that directly arise from the provisions of the
Reauthorization Act.
Under the proposed rules, all DCMs, DTEFs (unless the Commission
determines otherwise) and ECMs with SPDCs would be required to provide
daily transaction and related data reports to the Commission under
proposed rule 16.02. The costs associated with the daily transaction
and related data reporting requirements of proposed regulation 16.02,
however, may be ameliorated by the fact that DCMs have been voluntarily
providing transactional data to the Commission on a daily basis since
the mid-1980s. The Commission estimates that DCMs would account for the
substantial majority of the markets that would likely be required to
file such reports pursuant to proposed rule 16.02.
The proposed regulations would extend the market and position
reporting requirements of parts 15 to 21 of the Commission's
regulations to ECMs with SPDCs with respect to such contracts. The
requirements of the proposed regulations are substantial, would involve
the submission of daily reports, and would impose burdens on market
participants that clear and trade SPDCs. More specifically, the
proposed rules would require ECMs with SPDCs with respect to such
contracts to provide clearing member reports for SPDCs to the
Commission pursuant to Commission regulation 16.00. Proposed rule 16.01
would require ECMs to submit to the Commission and publicly disseminate
option deltas and aggregated trading data on a daily basis. Pursuant to
proposed rule 17.00 ECM clearing members that clear SPDCs would be
required to file position reports with the Commission for large SPDC
positions held in accounts carried by such brokers when customer
positions exceed contract reporting levels and would be required to
identify the owners of reportable SPDC positions on Form 102 under
proposed rule 17.01. SPDC traders likewise would be subject to the
special call provisions of part 18 of the Commission's regulations for
reportable positions, and clearing members for SPDCs, SPDC traders, and
ECMs listing SPDCs each would be subject to the special call provisions
of part 21 of the Commission's regulations.
The costs associated with the requirements of the market and
position reporting rules, should, however, be reduced in part by the
substantial overlap between the persons that are currently subject to
the reporting rules, and the persons that would be subject to the
reporting rules pursuant to the Commission's proposed regulations. For
example, there is substantial overlap between traders of the natural
gas contract on ICE OTC and traders of the same contract on NYMEX. With
respect to clearing members of ICE OTC, for example, such persons are
often clearing members or affiliates of clearing members of NYMEX.
The benefits of extending the market and reporting rules to SPDCs
are substantial. As an initial matter, it is important to note that a
significant focus of the Reauthorization Act concerned amending the CEA
with the specific intent of giving the Commission the authority to
extend the market and position reporting rules to SPDC markets and
market participants. To the extent that contracts listed on ECMs serve
a significant price discovery function, the regulatory value of
enhanced oversight, through the application of the market and position
reporting rules to such contracts, is elevated. The Commission analyzes
the information funneled to it by the requirements of the market and
position reporting rules to conduct market and financial surveillance.
Without such information, the ability of the Commission to discharge
its regulatory responsibilities, including the responsibilities of
preventing market manipulations and contract price distortions and
ensuring the financial integrity of the listed derivatives marketplace,
would be compromised.
The bulk of the costs that would be imposed by the requirements of
proposed regulation 36.3 relate to significant and increased submission
of information requirements. For example, under proposed regulation
36.3(b)(1), all ECMs would be required to file certain basic
information including contract terms and conditions with, and make
certain demonstrations related to compliance with the terms of the
section 2(h)(3) exemption to, the Commission. Proposed regulation
36.3(b)(2) would require ECMs to submit transactional information on a
weekly basis to the Commission for certain traded contracts that are
not SPDCs and would not be subject to the terms of proposed rule 16.02.
Proposed regulation 36.3(c)(4) would impose a substantial cost on ECMs
with SPDCs in terms of providing information to the Commission.
In enacting the Reauthorization Act, Congress directed the
Commission to take an active role in determining
[[Page 75900]]
whether contracts listed by ECMs could qualify as SPDCs. Accordingly,
the enhanced informational requirements that would be imposed on ECMs
with respect to contracts that have not been identified as SPDCs have
been proposed by the Commission in order to acquire the information
that it requires to discharge this newly mandated responsibility. In
addition, the substantial information submission and demonstration
requirements that would be imposed on ECMs with SPDCs have been
proposed because ECMs with SPDCs, by statute, acquire certain of the
self-regulatory responsibilities of DCMs. The submission requirements
associated with proposed regulation 36.3(c)(4) are tailored to enable
the Commission to ensure that ECMs with SPDCs, as entities with the
elevated status of a registered entity under the Act, are in compliance
with the statutory terms of the core principles of section 2(h)(7)(C)
of the Act. As with the market and position reporting rules, the
primary benefit to the public of proposed regulation 36.3 is that its
requirements give the Commission the ability to discharge its
statutorily mandated responsibility for monitoring for the presence of
SPDCs and extending its oversight to the trading of SPDCs.
B. The Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies consider the impact of their regulations on
small businesses. The requirements related to the proposed amendments
fall mainly on registered entities, exchanges, futures commission
merchants, clearing members, foreign brokers, and large traders. The
Commission has previously determined that exchanges, futures commission
merchants and large traders are not ``small entities'' for the purposes
of the RFA.\83\ Similarly, clearing members, foreign brokers and
traders would be subject to the proposed regulations only if carrying
or holding large positions. Accordingly, the Acting Chairman, on behalf
of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that
the actions proposed to be taken herein will not have a significant
economic impact on a substantial number of small entities.
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\83\ 47 FR 18618 (April 30, 1982).
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C. Paperwork Reduction Act
Certain provisions of proposed Commission regulation 36.3 would
result in new collection of information requirements within the meaning
of the Paperwork Reduction Act of 1995 (PRA).\84\ The Commission
therefore is submitting this proposal to the Office of Management and
Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The title for this collection of information is ``Regulation
36.3--Exempt Commercial Market Submission Requirements'' (OMB control
number 3038-NEW). If adopted, responses to this collection of
information would be mandatory. The Commission will protect proprietary
information according to the Freedom of Information Act and 17 CFR part
145, ``Commission Records and Information.'' In addition, section
8(a)(1) of the Act strictly prohibits the Commission, unless
specifically authorized by the Act, from making public ``data and
information that would separately disclose the business transactions or
market positions of any person and trade secrets or names of
customers.'' \85\
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\84\ 44 U.S.C. 3501-3520.
\85\ 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------
The requirements of Commission regulation 36.3 are currently
covered by OMB control number 3038-0054 which applies to both EBOTs and
ECMs. As a result of the Reauthorization Act, EBOTs and ECMs have to
comply with additional divergent regulatory requirements. Accordingly,
the Commission is seeking a new and separate control number for ECMs
operating in compliance with the requirements of regulation 36.3. Upon
OMB's approval and assignment of a separate control number specifically
for the collection of information requirements of proposed regulation
36.3, the Commission intends to submit the necessary documentation to
OMB to enable it to apply OMB control number 3038-0054 exclusively to
EBOTs.
In addition, the Commission is proposing amendments to parts 15 to
21 of the Commission's regulations, which amend two existing
collections of information titled ``Large Trader Reports'' (OMB control
number 3038-0009) and ``Futures Volume, Open Interest, Price,
Deliveries, and Exchanges of Futures'' (OMB control number 3038-0012).
Responses to this collections of information would be mandatory. Where
appropriate, the Commission will protect proprietary information
pursuant to the Freedom of Information Act \86\ and 17 CFR part 145,
``Commission Records and Information.'' In addition, section 8(a)(1) of
the Act prohibits the Commission, unless specifically authorized by the
Act, from making public ``data and information that would separately
disclose the business transactions or market positions of any person
and trade secrets or names of customers.'' \87\
---------------------------------------------------------------------------
\86\ 5 U.S.C. 552 et seq.
\87\ Id.
---------------------------------------------------------------------------
Finally, proposed regulation 16.02 would result in a new collection
of information requirement within the meaning of the PRA. The
Commission is therefore submitting the proposal for regulation 16.02 to
OMB for review. The title for the collection of information requirement
is ``Regulation 16.02--Daily Trade and Supporting Data Reports'' (OMB
control number 3038-NEW). If adopted, this collection would be
mandatory. The Commission will protect proprietary information
according to the Freedom of Information Act and 17 CFR part 145,
``Commission Records and Information.'' In addition, section 8(a)(1) of
the Act strictly prohibits the Commission, unless specifically
authorized by the Act, from making public ``data and information that
would separately disclose the business transactions or market positions
of any person and trade secrets or names of customers.'' \88\
---------------------------------------------------------------------------
\88\ Id.
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An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid control number. OMB has not yet assigned control
numbers to the new collections for proposed regulations 36.3 and 16.02.
The approved collection of information requirements associated with
parts 15 to 21, which would be revised by the proposed rules and rule
amendments, display control numbers 3038-0009 and 3038-0012.
1. Proposed Regulation 36.3
A. Regulation 36.3(a)
Regulation 36.3(a) requires that ECMs notify the Commission of the
intent to operate as an ECM in reliance of section 2(h)(3) of the Act
and further provide the information and certifications required by
section 2(h)(5)(A) of the Act. Section 2(h)(5)(A) of the Act requires
an ECM to provide the name and address of the person who is authorized
on behalf of the ECM to receive communications from the Commission, the
commodity categories that the ECM intends to offer, and certifications
that certain owners and principals of the ECM are not bad actors, that
the facility will comply with the requirements of the ECM exemption,
and that the facility will update its filings under section 2(h)(5)(A)
to account for material changes in the information submitted to the
Commission.
[[Page 75901]]
The substantive requirements of regulation 36.3(a) repeat the
requirements that are imposed by the Act as a condition of operating
pursuant to the ECM exemption. The reporting or recordkeeping burden
associated with Commission regulation 36.3(a) involves the compilation
and submission of the required information to the Commission.
Commission staff estimates that each ECM would expend approximately 4
hours of professional time annually to maintain, verify, and update the
notification and required certifications. Commission staff estimates
that 20 ECMs will be subject to the requirement resulting in an
aggregate burden of 80 hours annually.
B. Regulation 36.3(b)(1)
Under proposed regulation 36.3(b)(1), each ECM would be required to
provide contract descriptions and terms and conditions, the market's
trading conventions, and the market's trading protocols to the
Commission. Each ECM would be required to describe how it meets the
statutory definition of a trading facility and demonstrate that it
requires each participant to comply with all applicable laws; complies
with the initial statutory requirements for the ECM exemption under
section 2(h)(3) of the Act; and directs a program to monitor market
participants for compliance with the transactional requirements of the
ECM exemption. Proposed regulation 36.3(b)(1) would further require
that each ECM provide, upon the Commission's request, information that
the Commission would deem helpful to its determination as to whether a
particular contract is a SPDC. Lastly, each ECM would be required to
annually indicate on Form 205 whether it continues to operate under the
ECM exemption and certify the accuracy of the information contained in
its Notification of Operation submitted pursuant to section 2(h)(5)(A)
of the Act and regulation 36.3(a).
Based on the number of contract submissions made by DCMs, the
Commission estimates that ECMs collectively would list for trading 250
commodity futures and options contracts annually. Commission staff
estimates that compliance with the above requirements and the
transmission of descriptions and terms and conditions for such products
would take approximately 2 hours of professional time to prepare per
contract resulting in a collective burden of 500 hours annually for all
ECMs.
C. Regulation 36.3(b)(2)
Proposed regulation 36.3(b)(2) would require that ECMs, with
respect to contracts that are not SPDCs, identify contracts which
average 5 or more trades per day over a calendar quarter, and for such
contracts, compile daily transaction-based reports that include the
date of execution, the time of execution, the price of execution, the
quantity executed, the total daily trading volume, the total open
interest, option type, option strike prices for each qualifying
contract, and such other information as may be requested by the
Commission. Proposed regulation 36.3(b)(2) would require the submission
of the reports on a weekly basis. Such data is generated by ECMs in the
normal course of operation. The Commission staff estimates that ECMs
would submit weekly reports for a total of 40 contracts annually (2,080
reports). Commission staff estimates that ECMs would expend
approximately 20 minutes of professional time to compile and transmit
each weekly report to the Commission resulting in an annual burden of
approximately 693 hours.
Proposed regulation 36.3(b)(2) would give an ECM the flexibility to
choose to submit weekly transaction-based reports or, in the
alternative, give the Commission electronic access to its trading
facility to enable the Commission to create the weekly reports. Should
an ECM select this option, Commission staff believes that such access
would not result in any estimable burden on an ECM.
Proposed regulation 36.3(b)(2) also would require that ECMs, with
respect to contracts that are not SPDCs, to identify contracts which
average 1 or more trades per day over a calendar quarter, and for such
contracts, to provide to the Commission on a quarterly basis, the terms
and conditions of such contracts, the average daily trading volume, and
the most recent level of open interest. As with weekly reports, such
data is generated by ECMs in the normal course of operation. The
Commission staff estimates that ECMs would submit quarterly reports for
a total of 90 contracts annually (360 total reports). Commission staff
estimates that ECMs would expend approximately 20 minutes of
professional time to compile and transmit each quarterly report
resulting in an annual burden of 120 hours.
Furthermore, proposed regulation 36.3(b)(2) would require ECMs to
maintain an inventory of all fraud or manipulation based complaints and
submit a copy of such complaints to the Commission within 3 or 30 days,
depending on the specific facts of the complaints. ECMs should record
and retain an inventory of complaints in the normal course of
operation. Commission staff is unable to estimate the hourly burden
associated with the routine transmittal of such reports to the
Commission. However, Commission staff would presume that such
transmittal requirements should not result in any materially measurable
burden on ECMs.
Lastly, proposed regulation 36.3(b)(2) addresses the Commission's
authority to require the submission of data upon special call under
section 2(h)(5)(B)(iii) of the Act. Pursuant to that section of the
Act, the Commission has the authority to issue special calls in order
to enforce certain provisions of the Act including the anti-fraud and
anti-manipulation provisions. In addition, the Commission is authorized
to issue special calls to ECMs to facilitate its determination as to
whether certain contracts are SPDCs, to evaluate a systemic market
event, or to obtain information requested by another Federal financial
regulator. Commission staff estimates that a total of 15 special calls
would be issued to ECMs annually under section 2(h)(5)(B)(iii) of the
Act. Each ECM that has been issued a special call would expend
approximately 5 hours of professional time to respond to the call
resulting in a burden of 75 hours annually.
D. Proposed Regulation 36.3(c)(2)
Proposed regulation 36.3(c)(2) establishes for ECMs certain
requirements for notifying the Commission of possible SPDCs that may be
listed by the ECM. Specifically, an ECM's obligation to notify the
Commission would apply to contracts that average 5 trades or more per
day over the most recent calendar quarter, and may be triggered by
either the ECM's sale of contract price data or by a contract's daily
settlement price being within 2.5 percent of the contemporaneously
determined closing, settlement or daily price of another contract 95
percent or more of the days in the most recent quarter. Such
notifications would be accompanied by supporting details. Commission
staff estimates that cost of monitoring for the triggering conditions
is nominal. Commission staff estimates that collectively 10 contracts
would be the subject of the notification requirement annually. Each ECM
with a qualifying contract would expend approximately 1 hour of
professional time to compile and transmit such data to the Commission
at an aggregate annual burden of 10 hours.
[[Page 75902]]
E. Proposed Regulation 36.6(c)(4)
An ECM with a SPDC, with respect to such a contract, has
substantial regulatory responsibilities including the obligation to
comply with the core principles of section 2(h)(7)(C) of the Act and to
certify the compliance of SPDC contract terms and conditions and
exchange rules with the core principles, other applicable provisions of
the Act, and Commission regulations thereunder. To enable the
Commission to evaluate an ECM's compliance with the statutory and
regulatory provisions applicable to SPDCs and ECMs listing SPDCs,
Commission regulation 36.3(c)(4) would require ECMs with SPDCs to
submit a substantial amount of information and documentation to the
Commission including the market's rules, a description of financial
standards for members or participants, a description of the market's
trading algorithm, legal status documents, and a description of the
governance structure of the market. As proposed, such information
collectively would be filed only once upon the market's listing of a
SPDC. However, subsequent exchange rule changes, as with initial SPDC
contract terms and conditions and amendments thereto, would be required
to be certified on an ongoing basis.
Commission staff estimates that up to three new ECMs could list at
least one SPDC during the next five years. Commission staff estimates
that each new ECM listing its initial SPDC would expend approximately
200 hours of professional time providing the information and
documentation required under regulation 36.3(c)(4) for an aggregate
burden of 600 hours. Assuming that such trading facilities will operate
for ten years, the aggregated annualized cost, in terms of burden
hours, would be 60 hours. Additionally, Commission staff estimates that
the Commission would receive approximately 50 certified filings per
SPDC. For each SPDC related certified filing, an ECM would expend, in
accordance with the procedural and submission requirements of
Commission regulation 40.6, approximately 30 minutes resulting in an
aggregate annual burden of 75 hours.
F. Proposed Regulation 36.3(c)(6)
Proposed regulation 36.3(c)(6) requires an ECM listing a SPDC, upon
the Commission's request, to file a written demonstration that the ECM
is in compliance with the core principles of section 2(h)(7)(C) of the
Act. Commission staff estimates that such demonstrations of compliance
could require up to 20 hours of response time. Commission staff
anticipates issuing 2 requests annually resulting in an aggregate
burden of 40 hours.
2. Proposed Regulation 16.02
Under proposed regulation 16.02, reporting markets, a term which as
proposed would include ECMs with SPDCs with respect to SPDCs, in
addition to DCMs and DTEFs (unless determined otherwise by the
Commission), would be required to provide trade and supporting data
reports to the Commission on a daily basis. Such reports would include
transaction-level trade data and related order information for each
transaction executed on the reporting market and would be accompanied
by data that identifies traders for each transaction when reporting
markets maintain such data.
Since the mid-1980s, all DCMs have voluntarily provided the
Commission with transaction level data on a daily basis. Proposed
regulation 16.02 seeks to formalize and codify the submission process.
Commission staff estimates that each reporting market would expend 18
hours for onsite visits to the Commission, discussions with staff to
introduce the order flow process, and meetings with staff for follow-up
discussions. The proposed rules would require that reporting markets
expend approximately 2325 hours in additional start-up costs to
establish the required information technology infrastructure.
Commission staff estimates that it would receive daily trade and
supporting data reports from up to15 reporting markets annually.
Accordingly the start-up burden in terms of hours would in the
aggregate be 35,145 hours. Annualized over a useful life of ten years,
the aggregated annual burden hours would be 3,514.
It is also estimated that start-up and continuing costs may involve
product and service purchases. Commission staff estimates that
reporting markets could expend up to $5,000 annually per market on
product and service purchases to comply with proposed regulation 16.02.
This would result in an aggregated cost of $75,000 per annum (15
reporting markets x $5,000). This estimate, however, is speculative
because reporting markets must possess the ability to audit and track
transactions in the ordinary course of operations independently of
proposed regulation 16.02.
In addition to the start-up burden, proposed regulation 16.02, if
adopted, would impose certain ongoing costs. Commission staff estimates
that each reporting market would expend 30 minutes for each daily trade
and supporting data report transmitted to the Commission resulting in
an aggregate burden of 1,875 hours annually (assuming that such reports
are provided for each of 250 trading days).
3. Market and Large Trader Reporting Rules
In order to implement the CEA as amended by the Reauthorization
Act, the Commission through this rulemaking proposes to extend the
market and large trader reporting requirements that currently apply to
DCMs and DTEFs to ECMs with SPDCs with respect to such contracts.
A. Futures Volume, Open Interest, Price, Deliveries, and Exchanges of
Futures (OMB control number 3038-0012)
Twelve exchanges currently submit aggregated market data to the
Commission and are required to publicly disseminate for each of
approximately 250 trading days per year under Commission regulation
16.01. The information includes aggregate figures on a per contract
basis on total gross open contracts, open futures contracts against
which delivery notices have been stopped, volume generated from the
exchange of futures, delta factors as well as certain pricing data.
Should the proposed amendments be adopted, it is estimated that up to
15 reporting markets, including ECMs with SPDCs with respect to such
contracts, could be required to submit this data to the Commission on a
continuing basis. Commission staff estimates that such markets would
expend approximately 30 minutes per day to generate the required data
files, transmit that file to Commission offices, and publish the
required information. This would results in an annual burden of
approximately 1,875 hours.
B. Large Trader Reports (OMB Control Number 3038-0009)
1. Clearing Member Reports
Twelve designated contract markets provide clearing member reports
pursuant to Commission regulation 16.00 once on each of an estimated
250 trading days per year. Should the proposed rules be adopted, it is
estimated that up to 15 reporting markets, including ECMs with SPDCs
with respect to such contracts, would be providing this data to the
Commission on a continuing basis. The exchanges and ECMs would be
required to submit confidential information to the Commission on the
aggregate positions and trading activity of each clearing member.
Reporting markets, on a daily basis, are required under regulation
16.00 to
[[Page 75903]]
report each clearing member's open long and short positions, purchases
and sales, exchanges of futures, and futures delivery notices. The data
is reported separately by proprietary and customer accounts by futures
month and, for options, by puts and calls by expiration date and strike
price. The Commission obtains clearing member reports from the
reporting markets or the clearing organizations of each reporting
market. Reporting markets and the clearing organizations routinely
compile, analyze and provide such data to each clearing member. Since
the data is routinely provided to clearing members, the reporting
burden for this set of data is estimated at 20 minutes for each
reporting market per day. Assuming that a total of 15 entities would
provide this data on a daily basis to the Commission, the total
aggregate burden hours for reporting would be 1,250 hours (assuming
that there are 250 trading days annually).
2. Reporting Firms
Under Commission regulation 17.00, routine reports are filed only
for accounts with commodity futures and option positions that exceed
levels set by the Commission in regulation 15.03(b). As proposed,
regulation 17.00 would extend the routine reporting requirements of
regulation 17.00 to clearing members on ECMs with SPDCs with respect to
SPDCs. Should proposed regulation 17.00 be adopted, it is estimated
that up to an additional 30 respondents would be required to file
reports at any one time under regulation 17.00 increasing the total
number of respondents to 250. The reporting burden consists of staff of
reporting firms initializing their information technology systems for
new contracts and new accounts. On average it is expected that about 15
minutes per day is expended by these reporting firm staff. Over 250
trading days annually, the aggregate burden would be 15,625 hours.
3. Forms 102
Each account reported to the Commission by an FCM, clearing member,
or foreign broker must also be identified on a Form 102 pursuant to
regulation 17.01. By amending the definition of reporting market,
clearing member, and clearing organization, the notice of proposed
rulemaking would extend the requirements of regulation 17.01 to
clearing members of ECMs with SPDCs with respect to such contracts.
Forms 102 provide information that allows the Commission to combine
different accounts held or controlled by the same trader and to
identify commercial firms using the markets for hedging. Should the
notice of proposed rulemaking be adopted, the total number of Forms 102
filed with the Commission is estimated to increase by 500 to 4,500 per
year. Respondents would expend 12 minutes completing each form for a
total aggregate burden of 900 hours annually.
4. Reports From Traders
Traders provide identifying information using Forms 40 under
Commission regulation 18.04 and position data upon special call under
Commission regulations 18.00 and 18.05. The notice of proposed
rulemaking would extend the requirements of those regulations to
traders of SPDCs. Should the proposed amendments be adopted, the total
estimated number of traders filing the Form 40 under regulation 18.04
would increase by 100 to 2,500 per year with each response requiring
approximately 20 minutes, resulting in an aggregate annual burden of
833 hours.
The Commission has maintained the authority to make special calls
on traders under part 18 of the Commission's regulations when the
information obtained routinely under part 17 of the Commission's
regulations is incomplete for its market and financial surveillance
purposes. Information obtained on call under Commission regulations
18.00 and 18.05 is provided in the manner stipulated per instruction
contained in the special call. Should the proposed regulations be
adopted, the Commission estimates that 12 special calls would be issued
to each of 45 traders under Commission regulations 18.00 and 18.05 and
that each response to a call would require approximately 5 hours, for
an estimated aggregate annual burden of 2,700 hours.
5. Part 21 of the Commission Regulations
Under part 21 of the Commission's regulations, the Commission may
issue special calls for additional cash and futures data concerning
traders from FCMs, introducing broker, clearing members, foreign
brokers, and traders. In addition, under part 21 of the Commission's
regulations (17 CFR part 21), the Commission may request identifying
information regarding persons who exercise trading control over
accounts. Position information collected pursuant to special call under
part 21 of the Commission's regulations may be used to audit large
trader reports and is used to investigate potential market abuses.
Although similar to the standardized information routinely collected
under part 17 of the Commission's regulations for reportable accounts,
such data is submitted in response to customized requests for
information and may regard accounts and positions that are not
reportable. In contrast to special calls for identifying data made
under Commission regulation 18.04, special calls made under any
provision of part 21 of the Commission's regulations generally occur
only when a particular market shows a potential for disruption or when
there is an investigation of possible violations of the Act or the
regulations thereunder. The notice of proposed rulemaking would apply
the terms of part 21 to ECMs with SPDCs with respect to such contracts,
clearing members clearing SPDCs, and SPDC traders. Should the proposed
regulations be adopted, the Commission estimates that the Commission
will continue to make less than 10 special calls under all of the
provisions of part 21 of the Commission's regulations and that each
response to a call will require approximately 1 hour, resulting in an
aggregate reporting burden of 10 hours annually.
4. Information Collection Comments
The Commission invites the public and other Federal agencies to
comment on any aspect of the reporting and recordkeeping burdens
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (i) Evaluate whether the proposed
collections of information are necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collections of information;
(iii) determine whether there are ways to enhance the quality, utility,
and clarity of the information to be collected; and (iv) minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
You may submit your comments directly to the Office of Information
and Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at OIRA-
submissions@omb.eop.gov. Please provide the Commission with a copy of
your comments so that we can summarize all written comments and address
them in the final rule preamble. Refer to the Addresses section of this
notice of proposed rulemaking for comment submission instructions to
the Commission. You may obtain a copy of the supporting statements for
the
[[Page 75904]]
collections of information discussed above by visiting RegInfo.gov. OMB
is required to make a decision concerning the collections of
information between 30 and 60 days after publication of this Release.
Consequently, a comment to OMB is most assured of being fully effective
if received by OMB (and the Commission) within 30 days after
publication of this notice of proposed rulemaking.
List of Subjects
17 CFR Part 15
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
17 CFR Part 16
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 17
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
17 CFR Part 18
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 19
Commodity futures, Cottons, Grains, Reporting and recordkeeping
requirements.
17 CFR Part 21
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
17 CFR Part 36
Commodity futures, Commodity Futures Trading Commission.
17 CFR Part 40
Commodity futures, Contract markets, Designation application,
Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR parts 15, 16, 17, 18, 19,
21, 36 and 40 as follows:
PART 15--REPORTS--GENERAL PROVISIONS
1. The authority citation for part 15 is revised to read as
follows:
Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a,
9, 12a, 19, and 21, as amended by Title XIII of the Food,
Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat.
1624 (June 18, 2008).
2. Revise Sec. 15.00 to read as follows:
Sec. 15.00 Definitions of terms used in parts 15 to 21 of this
chapter.
As used in parts 15 to 21 of this chapter:
(a) Cash or Spot, when used in connection with any commodity, means
the actual commodity as distinguished from a futures or option contract
in such commodity.
(b) Clearing member means any person who is a member of, or enjoys
the privilege of clearing trades in his own name through, the clearing
organization of a designated contract market, registered derivatives
transaction execution facility, or registered entity under section
1a(29) of the Act.
(c) Clearing organization means the person or organization which
acts as a medium for clearing transactions in commodities for future
delivery or commodity option transactions, or for effecting settlements
of contracts for future delivery or commodity option transactions, for
and between members of any designated contract market, registered
derivatives transaction execution facility or registered entity under
section 1a(29) of the Act.
(d) Compatible data processing media means data processing media
approved by the Commission or its designee.
(e) Customer means ``customer'' (as defined in Sec. 1.3(k) of this
chapter) and ``option customer'' (as defined in Sec. 1.3(jj) of this
chapter).
(f) Customer trading program means any system of trading offered,
sponsored, promoted, managed or in any other way supported by, or
affiliated with, a futures commission merchant, an introducing broker,
a commodity trading advisor, a commodity pool operator, or other
trader, or any of its officers, partners or employees, and which by
agreement, recommendations, advice or otherwise, directly or indirectly
controls trading done and positions held by any other person. The term
includes, but is not limited to, arrangements where a program
participant enters into an expressed or implied agreement not obtained
from other customers and makes a minimum deposit in excess of that
required of other customers for the purpose of receiving specific
advice or recommendations which are not made available to other
customers. The term includes any program which is of the character of,
or is commonly known to the trade as, a managed account, guided
account, discretionary account, commodity pool or partnership account.
(g) Discretionary account means a commodity futures or commodity
option trading account for which buying or selling orders can be placed
or originated, or for which transactions can be effected, under a
general authorization and without the specific consent of the customer,
whether the general authorization for such orders or transactions is
pursuant to a written agreement, power of attorney, or otherwise.
(h) Exclusively self-cleared contract means a cleared contract for
which no persons, other than a reporting market and its clearing
organization, are permitted to accept any money, securities, or
property (or extend credit in lieu thereof) to margin, guarantee, or
secure any trade.
(i) Foreign clearing member means a ``clearing member'' (as defined
by paragraph (b) of this section) who resides or is domiciled outside
of the United States, its territories or possessions.
(j) Foreign trader means any trader (as defined in paragraph (o) of
this section) who resides or is domiciled outside of the United States,
its territories or possessions.
(k) Guided account program means any customer trading program which
limits trading to the purchase or sale of a particular contract for
future delivery of a commodity or a particular commodity option that is
advised or recommended to the participant in the program.
(l) Managed account program means a customer trading program which
includes two or more discretionary accounts traded pursuant to a common
plan, advice or recommendations.
(m) Open contracts means ``open contracts'' (as defined in Sec.
1.3(t) of this chapter) and commodity option positions held by any
person on or subject to the rules of a board of trade which have not
expired, been exercised, or offset.
(n) Reportable position means:
(1) For reports specified in parts 17, 18 and Sec. 19.00(a)(2) and
(a)(3) of this chapter any open contract position that at the close of
the market on any business day equals or exceeds the quantity specified
in Sec. 15.03 of this part in either:
(i) Any one future of any commodity on any one reporting market,
excluding future contracts against which notices of delivery have been
stopped by a trader or issued by the clearing organization of a
reporting market; or
(ii) Long or short put or call options that exercise into the same
future of any commodity, or long or short put or call options for
options on physicals that have identical expirations and exercise into
the same physical, on any one reporting market.
[[Page 75905]]
(2) For the purposes of reports specified in Sec. 19.00(a)(1) of
this chapter, any combined futures and futures-equivalent option open
contract position as defined in part 150 of this chapter in any one
month or in all months combined, either net long or net short in any
commodity on any one reporting market, excluding futures positions
against which notices of delivery have been stopped by a trader or
issued by the clearing organization of a reporting market, which at the
close of the market on the last business day of the week exceeds the
net quantity limit in spot, single or in all-months fixed in Sec.
150.2 of this chapter for the particular commodity and reporting
market.
(o) Reporting market means a designated contract market, registered
entity under section 1a(29)(E) of the Act, and unless determined
otherwise by the Commission with respect to the facility or a specific
contract listed by the facility, a registered derivatives transaction
execution facility.
(p) Special account means any commodity futures or option account
in which there is a reportable position.
(q) Trader means a person who, for his own account or for an
account which he controls, makes transactions in commodity futures or
options, or has such transactions made.
3. In Sec. 15.01, revise paragraph (a) to read as follows:
Sec. 15.01 Persons required to report.
* * * * *
(a) Reporting markets--as specified in parts 16, 17, and 21 of this
chapter.
* * * * *
4. In Sec. 15.05, revise the heading and paragraph (a); and add
paragraph (i) to read as follows:
Sec. 15.05 Designation of agent for foreign persons.
(a) For purposes of this section, the term ``futures contract''
means any contract for the purchase or sale of any commodity for future
delivery, or a contract identified under Sec. 36.3(b)(i) of this
chapter as traded in reliance on the exemption in section 2(h)(3) of
the Act, traded or executed on or subject to the rules of any
designated contract market or registered derivatives transaction
execution facility, or for the purposes of paragraph (i) of this
section, a reporting market; the term ``option contract'' means any
contract for the purchase or sale of a commodity option, or as
applicable, any other instrument subject to the Act pursuant to section
5a(g) of the Act, traded or executed on or subject to the rules of any
designated contract market or registered derivatives transaction
execution facility, or for the purposes of paragraph (i) of this
section, a reporting market; the term ``customer'' means any person for
whose benefit a foreign broker makes or causes to be made any futures
contract or option contract; and the term ``communication'' means any
summons, complaint, order, subpoena, special call, request for
information, or notice, as well as any other written document or
correspondence.
* * * * *
(i) Any reporting market that is a registered entity under section
1a(29)(E) of the Act that permits a foreign clearing member or foreign
trader to clear or effect contracts, agreements or transactions on the
trading facility or its clearing organization, shall be deemed to be
the agent of the foreign clearing member or foreign trader with respect
to any such contracts, agreements or transactions cleared or executed
by the foreign clearing member or the foreign trader. Service or
delivery of any communication issued by or on behalf of the Commission
to the reporting market shall constitute valid and effective service
upon the foreign clearing member or foreign trader. The reporting
market which has been served with, or to which there has been
delivered, a communication issued by or on behalf of the Commission to
a foreign clearing member or foreign trader shall transmit the
communication promptly and in a manner which is reasonable under the
circumstances, or in a manner specified by the Commission in the
communication, to the foreign clearing member or foreign trader.
(1) It shall be unlawful for any such reporting market to permit a
foreign clearing member or a foreign trader to clear or effect
contracts, agreements or transactions on the facility or its clearing
organization unless the reporting market prior thereto informs the
foreign clearing member or foreign trader of the requirements of this
section.
(2) The requirements of paragraphs (i) introductory text and (i)(1)
of this section shall not apply to any contracts, transactions or
agreements if the foreign clearing member or foreign trader has duly
executed and maintains in effect a written agency agreement in
compliance with this paragraph with a person domiciled in the United
States and has provided a copy of the agreement to the reporting market
prior to effecting or clearing any contract, agreement or transaction
on the trading facility or its clearing organization. This agreement
must authorize the person domiciled in the United States to serve as
the agent of the foreign clearing member or foreign trader for the
purposes of accepting delivery and service of all communications issued
by or on behalf of the Commission to the foreign clearing member or the
foreign trader and must provide an address in the United States where
the agent will accept delivery and service of communications from the
Commission. This agreement must be filed with the Commission by the
reporting market prior to permitting the foreign clearing member or the
foreign trader to clear or effect any transactions in futures or option
contracts. Unless otherwise specified by the Commission, the agreements
required to be filed with the Commission shall be filed with the
Secretary of the Commission at Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
(3) A foreign clearing member or a foreign trader shall notify the
Commission immediately if the written agency agreement is terminated,
revoked, or is otherwise no longer in effect. If the reporting market
knows or should know that the agreement has expired, been terminated,
or is no longer in effect, the reporting market shall notify the
Secretary of the Commission immediately. If the written agency
agreement expires, terminates, or is not in effect, the reporting
market, the foreign clearing member and the foreign trader shall be
subject to the provisions of paragraphs (i) introductory text and
(i)(1) of this section.
5. Add Sec. 15.06 to read as follows:
Sec. 15.06 Delegations.
(a) The Commission hereby delegates, until the Commission orders
otherwise, the authority to approve data processing media, as
referenced in Sec. 15.00(d), for data submissions to the Director of
the Division of Market Oversight, to be exercised by such Director or
by such other employee or employees of such Director as designated from
time to time by the Director. The Director may submit to the Commission
for its consideration any matter which has been delegated in this
paragraph. Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in this paragraph.
(b) [Reserved]
PART 16--REPORTS BY REPORTING MARKETS
6. The authority citation for part 16 is revised to read as
follows:
Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as amended
by Title XIII of the Food, Conservation and Energy Act of 2008,
[[Page 75906]]
Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008), unless
otherwise noted.
7. In Sec. 16.01, revise paragraphs (e)(1) and (e)(2) to read as
follows:
Sec. 16.01 Trading volume, open contracts, prices, and critical
dates.
* * * * *
(e) Publication of recorded information. (1) Reporting markets
shall make the information in paragraph (a) of this section readily
available to the news media and the general public without charge, in a
format that readily enables the consideration of such data, no later
than the business day following the day to which the information
pertains. The information in paragraphs (a)(4) through (a)(6) of this
section shall be made readily available in a format that presents the
information together.
(2) Reporting markets shall make the information in paragraphs
(b)(1) and (b)(2) of this section readily available to the news media
and the general public, and the information in paragraph (b)(3) of this
section readily available to the general public, in a format that
readily enables the consideration of such data, no later than the
business day following the day to which the information pertains.
* * * * *
8. Section 16.02 is added to read as follows:
Sec. 16.02 Daily trade and supporting data reports.
Reporting markets shall provide trade and supporting data reports
to the Commission on a daily basis. Such reports shall include
transaction-level trade data and related order information for each
transaction that is executed on the reporting market. Reports shall
also include time and sales data, reference files and other information
as the Commission or its designee may require. All reports must be
submitted at the time, and in the manner and format, and with the
specific content specified by the Commission or its designee. Upon
request, such information shall be accompanied by data that identifies
or facilitates the identification of each trader for each transaction
or order included in a submitted trade and supporting data report if
the reporting market maintains such data.
9. In Sec. 16.07, revise the heading and introductory text; and
add paragraph (c) to read as follows:
Sec. 16.07 Delegation of authority to the Director of the Division of
Market Oversight.
The Commission hereby delegates, until the Commission orders
otherwise, the authority set forth in paragraphs (a), (b) and (c) of
this section to the Director of the Division of Market Oversight, to be
exercised by such Director or by such other employee or employees of
such Director as may be designated from time to time by the Director.
The Director of the Division of Market Oversight may submit to the
Commission for its consideration any matter which has been delegated in
this paragraph. Nothing in this paragraph prohibits the Commission, at
its election, from exercising the authority delegated in this
paragraph.
* * * * *
(c) Pursuant to Sec. 16.02, the authority to determine the
specific content of any daily trade and supporting data report, request
that such reports be accompanied by data that identifies or facilitates
the identification of each trader for each transaction or order
included in a submitted trade and supporting data report, and the time
for the submission of and the manner and format of such reports.
PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION
MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS
10. The authority citation for part 17 is revised to read as
follows:
Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 7, 7a and 12a, as
amended by Title XIII of the Food, Conservation and Energy Act of
2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008), unless
otherwise noted.
11. Revise the heading of part 17 as set forth above.
12. In Sec. 17.00, revise paragraph (a) introductory text and
paragraphs (a)(1), (b)(1), and (f); and add and reserve paragraph (c)
to read as follows:
Sec. 17.00 Information to be furnished by futures commission
merchants, clearing members and foreign brokers.
(a) Special accounts--reportable futures and options positions,
delivery notices, and exchanges of futures. (1) Each futures commission
merchant, clearing member and foreign broker shall submit a report to
the Commission for each business day with respect to all special
accounts carried by the futures commission merchant, clearing member or
foreign broker, except for accounts carried on the books of another
futures commission merchant or clearing member on a fully-disclosed
basis. Except as otherwise authorized by the Commission or its
designee, such report shall be made in accordance with the format and
coding provisions set forth in paragraph (g) of this section. The
report shall show each futures position traded in reliance on the
exemption in section 2(h)(3) of the Act, separately for each reporting
market and for each future position traded in reliance on the exemption
in section 2(h)(3) of the Act, and each put and call options position
separately for each reporting market, expiration and strike price in
each special account as of the close of market on the day covered by
the report and, in addition, the quantity of exchanges of futures for
commodities or for derivatives positions and the number of delivery
notices issued for each such account by the clearing organization of a
reporting market and the number stopped by the account. The report
shall also show all positions in all contract months and option
expirations of that same commodity on the same reporting market for
which the special account is reportable.
* * * * *
(b) * * *
(1) Accounts of eligible entities--Accounts of eligible entities as
defined in Sec. 150.1 of this chapter that are traded by an
independent account controller shall, together with other accounts
traded by the independent account controller or in which the
independent controller has a financial interest, be considered a single
account.
* * * * *
(c) [Reserved]
* * * * *
(f) Omnibus accounts. If the total open long positions or the total
open short positions for any future of a commodity carried in an
omnibus account is a reportable position, the omnibus account is in
Special Account status and shall be reported by the futures commission
merchant or foreign broker carrying the account in accordance with
paragraph (a) of this section.
* * * * *
13. In Sec. 17.03, revise the heading, the introductory text, and
paragraphs (a) and (b) to read as follows:
Sec. 17.03 Delegation of authority to the Director of the Division of
Market Oversight.
The Commission hereby delegates, until the Commission orders
otherwise, the authority set forth in the paragraphs below to the
Director of the Division of Market Oversight to be exercised by such
Director or by such other employee or employees of such Director as
designated from time to time by the Director. The Director of the
Division of Market Oversight may submit to the Commission for its
consideration any matter which has been delegated in this paragraph.
Nothing in this paragraph prohibits the Commission, at its election,
from exercising the authority delegated in this paragraph.
[[Page 75907]]
(a) Pursuant to Sec. 17.00(a) and (h), the authority to determine
whether futures commission merchants, clearing members and foreign
brokers can report the information required under paragraphs (a) and
(h) of Sec. 17.00 on series '01 forms or using some other format upon
a determination that such person is unable to report the information
using the format, coding structure or electronic data transmission
procedures otherwise required.
(b) Pursuant to Sec. 17.02, the authority to instruct or approve
the time at which the information required under Sec. Sec. 17.00 and
17.01 must be submitted by futures commission merchants, clearing
members and foreign brokers provided that such persons are unable to
meet the requirements set forth in Sec. Sec. 17.01(g) and 17.02.
* * * * *
14. In Sec. 17.04, revise the heading, paragraph (a), and
paragraph (b)(1)(ii) to read as follows:
Sec. 17.04 Reporting omnibus accounts to reporting firms.
(a) Any futures commission merchant, clearing member or foreign
broker who establishes an omnibus account with another futures
commission merchant, clearing member or foreign broker shall report to
that futures commission merchant, clearing member or foreign broker the
total open long positions and the total open short positions in each
future of a commodity and, for commodity options transactions, the
total open long put options, the total open short put options, the
total open long call options, and the total open short call options for
each commodity options expiration date and each strike price in such
account at the close of trading each day. The information required by
this section shall be reported in sufficient time to enable the futures
commission merchant, clearing member or foreign broker with whom the
omnibus account is established to comply with the regulations of this
part and the reporting requirements established by the reporting
markets.
(b) * * *
(1) * * *
(ii) The account is an omnibus account of another futures
commission merchant, clearing member or foreign broker; or
* * * * *
PART 18--REPORTS BY TRADERS
15. The authority citation for part 18 continues to read as
follows:
Authority: 7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a
and 19, as amended by Title XIII of the Food, Conservation and
Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18,
2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.
16. Revise Sec. 18.01 to read as follows:
Sec. 18.01 Interest in or control of several accounts.
If any trader holds, has a financial interest in or controls
positions in more than one account, whether carried with the same or
with different futures commission merchants or foreign brokers, all
such positions and accounts shall be considered as a single account for
the purpose of determining whether such trader has a reportable
position and, unless instructed otherwise in the special call to report
under Sec. 18.00 for the purpose of reporting.
17. In Sec. 18.04, revise paragraphs (a)(7) and (b)(3)(i) to read
as follows:
Sec. 18.04 Statement of reporting trader.
* * * * *
(a) * * *
(7) The names and locations of all futures commission merchants,
clearing members, introducing brokers, and foreign brokers through whom
accounts owned or controlled by the reporting trader are carried or
introduced at the time of filing a Form 40, if such accounts are
carried through more than one futures commission merchant, clearing
member or foreign broker or carried through more than one office of the
same futures commission merchant, clearing member or foreign broker, or
introduced by more than one introducing broker clearing accounts
through the same futures commission merchant, and the name of the
reporting trader's account executive at each firm or office of the
firm.
(b) * * *
(3) * * *
(i) Commercial activity associated with use of the option or
futures market (such as and including production, merchandising or
processing of a cash commodity, asset or liability risk management by
depository institutions, or security portfolio risk management).
* * * * *
18. In Sec. 18.05, revise paragraphs (a)(2), (a)(3), and (a)(4) to
read as follows:
Sec. 18.05 Maintenance of books and records.
(a) * * *
(2) Over the counter or pursuant to sections 2(d), 2(g) or 2(h)(1)-
(2) of the Act or part 35 of this chapter;
(3) On exempt commercial markets operating pursuant to sections
2(h)(3)-(5) of the Act;
(4) On exempt boards of trade operating pursuant to section 5d of
the Act; and
* * * * *
PART 19--REPORTS BY PERSONS HOLDING BONA FIDE HEDGE POSITIONS
PURSUANT TO Sec. 1.3(z) OF THIS CHAPTER AND BY MERCHANTS AND
DEALERS IN COTTON
19. The authority citation for part 19 continues to read as
follows:
Authority: 7 U.S.C. 6g(a), 6i, and 12a(5), as amended by Title
XIII of the Food, Conservation and Energy Act of 2008, Pub. L. No.
110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.
20. In Sec. 19.00, revise paragraph (a) to read as follows:
Sec. 19.00 General provisions.
(a) Who must file series '04 reports. The following persons are
required to file series '04 reports:
(1) All persons holding or controlling futures and option positions
that are reportable pursuant to Sec. 15.00(n)(2) of this chapter and
any part of which constitute bona fide hedging positions as defined in
Sec. 1.3(z) of this chapter;
(2) Merchants and dealers of cotton holding or controlling
positions for futures delivery in cotton that are reportable pursuant
to Sec. 15.00(n)(1)(i) of this chapter, or
(3) All persons holding or controlling positions for future
delivery that are reportable pursuant to Sec. 15.00(n)(1) of this
chapter who have received a special call for series '04 reports from
the Commission or its designee. Filings in response to a special call
shall be made within one business day of receipt of the special call
unless otherwise specified in the call. For the purposes of this
paragraph, the Commission hereby delegates to the Director of the
Division of Market Oversight, or to such other person designated by the
Director, authority to issue calls for series '04 reports.
* * * * *
21. In Sec. 19.01, revise paragraph (b) introductory text and
paragraph (b)(1) to read as follows:
Sec. 19.01 Reports on stocks and fixed price purchases and sales
pertaining to futures positions in wheat, corn, oats, soybeans, soybean
oil, soybean meal or cotton.
* * * * *
(b) Time and place of filing reports--Except for reports filed in
response to special calls made under Sec. 19.00(a)(3), each report
shall be made monthly, as of the close of business on the last Friday
of the month, and filed at the appropriate Commission office specified
in paragraph (b)(1) or (2) of this section not later than the second
business day following the date of the report in the case of the 304
report and not later than the third business day following the
[[Page 75908]]
date of the report in the case of the 204 report. Reports may be
transmitted by facsimile or, alternatively, information on the form may
be reported to the appropriate Commission office by telephone and the
report mailed to the same office, not later than midnight of its due
date.
(1) CFTC Form 204 reports with respect to transactions in wheat,
corn, oats, soybeans, soybean meal and soybean oil should be sent to
the Commission's office in Chicago, IL, unless otherwise specifically
authorized by the Commission or its designee.
* * * * *
PART 21--SPECIAL CALLS
22. The authority citation for part 21 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,
6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food,
Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat.
1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise
noted.
23. Revise Sec. 21.01 to read as follows:
Sec. 21.01 Special calls for information on controlled accounts from
futures commission merchants, clearing members and introducing brokers.
Upon call by the Commission, each futures commission merchant,
clearing member and introducing broker shall file with the Commission
the names and addresses of all persons who, by power of attorney or
otherwise, exercise trading control over any customer's account in
commodity futures or commodity options on any reporting market.
24. In Sec. 21.02, revise the heading, introductory text, and
paragraphs (f) and (i) to read as follows:
Sec. 21.02 Special calls for information on open contracts in
accounts carried or introduced by futures commission merchants,
clearing members, members of reporting markets, introducing brokers,
and foreign brokers.
Upon special call by the Commission for information relating to
futures or option positions held or introduced on the dates specified
in the call, each futures commission merchant, clearing member, member
of a reporting market, introducing broker, or foreign broker, and, in
addition, for option information, each reporting market, shall furnish
to the Commission the following information concerning accounts of
traders owning or controlling such futures or option positions, except
for accounts carried on a fully disclosed basis by another futures
commission merchant or clearing member, as may be specified in the
call:
* * * * *
(f) The number of open futures or option positions introduced or
carried in each account, as specified in the call;
* * * * *
(i) As applicable, the following identifying information:
(1) Whether a trader who holds commodity futures or option
positions is classified as a commercial or as a noncommercial trader
for each commodity futures or option contract;
(2) Whether the open commodity futures or option contracts are
classified as speculative, spreading (straddling), or hedging; and
(3) Whether any of the accounts in question are omnibus accounts
and, if so, whether the originator of the omnibus account is another
futures commission merchant, clearing member or foreign broker.
* * * * *
25. Amend Sec. 21.03 as follows:
A. Revise the heading and paragraphs (a), (b), (c) and (d);
B. Revise paragraph (e) introductory text and paragraphs (e)(1)
introductory text , (e)(1)(iv) and (e)(1)(v); and
C. Revise paragraphs (f), (g) and (h) to read as follows:
Sec. 21.03 Selected special calls-duties of foreign brokers, domestic
and foreign traders, futures commission merchants, clearing members,
introducing brokers, and reporting markets.
(a) For purposes of this section, the term ``accounts of a futures
commission merchant, clearing member or foreign broker'' means all open
contracts and transactions in futures and options on the records of the
futures commission merchant, clearing member or foreign broker; the
term ``beneficial interest'' means having or sharing in any rights,
obligations or financial interest in any futures or options account;
the term ``customer'' means any futures commission merchant, clearing
member, introducing broker, foreign broker, or trader for whom a
futures commission merchant, clearing member or reporting market that
is a registered entity under section 1a(29)(E) of the Act makes or
causes to be made a futures or options contract. Paragraphs (e), (g)
and (h) of this section shall not apply to any futures commission
merchant, clearing member or customer whose books and records are open
at all times to inspection in the United States by any representative
of the Commission.
(b) It shall be unlawful for a futures commission merchant to open
a futures or options account or to effect transactions in futures or
options contracts for an existing account, or for an introducing broker
to introduce such an account, for any customer for whom the futures
commission merchant or introducing broker is required to provide the
explanation provided for in Sec. 15.05(c) of this chapter, or for a
reporting market that is a registered entity under section 1a(29)(E) of
the Act, to cause to open an account in a contract traded in reliance
on the exemption in section 2(h)(3) of the Act or to cause to be
effected transactions in a contract traded in reliance on the exemption
in section 2(h)(3) of the Act for an existing account for any person
that is a foreign clearing member or foreign trader, until the futures
commission merchant, introducing broker, clearing member, or reporting
market has explained fully to the customer, in any manner that such
persons deem appropriate, the provisions of this section.
(c) Upon a determination by the Commission that information
concerning accounts may be relevant information in enabling the
Commission to determine whether the threat of a market manipulation,
corner, squeeze, or other market disorder exists on any reporting
market, the Commission may issue a call for information from a futures
commission merchant, clearing member, introducing broker or customer
pursuant to the provisions of this section.
(d) In the event the call is issued to a foreign broker, foreign
clearing member or foreign trader, its agent, designated pursuant to
Sec. 15.05 of this chapter, shall, if directed, promptly transmit
calls made by the Commission pursuant to this section by electronic
mail or a similarly expeditious means of communication.
(e) The futures commission merchant, clearing member, introducing
broker, or customer to whom the special call is issued must provide to
the Commission the information specified below for the commodity,
reporting market and delivery months or option expiration dates named
in the call. Such information shall be filed at the place and within
the time specified by the Commission.
(1) For each account of a futures commission merchant, clearing
member, introducing broker, or foreign broker, including those accounts
in the name of the futures commission merchant, clearing member or
foreign broker, on the dates specified in the call issued pursuant to
this section, such persons shall provide the Commission with the
following information:
* * * * *
[[Page 75909]]
(iv) Whether the account is carried for and in the name of another
futures commission merchant, clearing member, introducing broker, or
foreign broker; and
(v) For the accounts which are not carried for and in the name of
another futures commission merchant, clearing member, introducing
broker, or foreign broker, the name and address of any other person who
controls the trading of the account, and the name and address of any
person who has a ten percent or more beneficial interest in the
account.
* * * * *
(f) If the Commission has reason to believe that any person has not
responded as required to a call made pursuant to this section, the
Commission in writing may inform the reporting market specified in the
call and that reporting market shall prohibit the execution of, and no
futures commission merchant, clearing member, introducing broker, or
foreign broker shall effect a transaction in connection with trades on
the reporting market and in the months or expiration dates specified in
the call for or on behalf of the futures commission merchant or
customer named in the call, unless such trades offset existing open
contracts of such futures commission merchant or customer.
(g) Any person named in a special call that believes he or she is
or may be adversely affected or aggrieved by action taken by the
Commission under paragraph (f) of this section shall have the
opportunity for a prompt hearing after the Commission acts. That person
may immediately present in writing to the Commission for its
consideration any comments or arguments concerning the Commission's
action and may present for Commission consideration any documentary or
other evidence that person deems appropriate. Upon request, the
Commission may, in its discretion, determine that an oral hearing be
conducted to permit the further presentation of information and views
concerning any matters by any or all such persons. The oral hearing may
be held before the Commission or any person designated by the
Commission, which person shall cause all evidence to be reduced to
writing and forthwith transmit the same and a recommended decision to
the Commission. The Commission's directive under paragraph (f) of this
section shall remain in effect unless and until modified or withdrawn
by the Commission.
(h) If, during the course of or after the Commission acts pursuant
to paragraph (f) of this section, the Commission determines that it is
appropriate to undertake a proceeding pursuant to section 6(c) of the
Act, the Commission shall issue a complaint in accordance with the
requirements of section 6(c), and, upon further determination by the
Commission that the conditions described in paragraph (c) of this
section still exist, a hearing pursuant to section 6(c) of the Act
shall commence no later than five business days after service of the
complaint. In the event the person served with the complaint under
section 6(c) of the Act has, prior to the commencement of the hearing
under section 6(c) of the Act, sought a hearing pursuant to paragraph
(g) of this section and the Commission has determined to accord him
such a hearing, the two hearings shall be conducted simultaneously.
Nothing in this section shall preclude the Commission from taking other
appropriate action under the Act or the Commission's regulations
thereunder, including action under section 6(c) of the Act, regardless
of whether the conditions described in paragraph (c) of this section
still exist, and no ruling issued in the course of a hearing pursuant
to paragraph (g) or this section shall constitute an estoppel against
the Commission in any other action.
26. Revise Sec. 21.04 to read as follows:
Sec. 21.04 Delegation of authority to the Director of the Division of
Market Oversight.
The Commission hereby delegates, until the Commission orders
otherwise, the special call authority set forth in Sec. Sec. 21.01 and
21.02 the Director of the Division of Market Oversight to be exercised
by such Director or by such other employee or employees of such
Director as designated from time to time by the Director. The Director
of the Division of Market Oversight may submit to the Commission for
its consideration any matter which has been delegated in this
paragraph. Nothing in this section shall be deemed to prohibit the
Commission, at its election, from exercising the authority delegated in
this section to the Director.
PART 36--EXEMPT MARKETS
27. The authority citation for part 36 is revised to read as
follows:
Authority: 7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by
Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L.
No. 110-246, 122 Stat. 1624 (June 18, 2008).
28-30. Section 36.3 is amended by revising paragraphs (b) and (c),
and adding paragraph (d), to read as follows:
Sec. 36.3 Exempt commercial markets.
* * * * *
(b) Required information.
(1) All electronic trading facilities. A facility operating in
reliance on the exemption in section 2(h)(3) of the Act, initially and
on an on-going basis, must:
(i) Provide the Commission with the terms and conditions, as
defined in part 40.1(i) of this chapter and product descriptions for
each agreement, contract or transaction listed by the facility in
reliance on the exemption set forth in section 2(h)(3) of the Act, as
well as trading conventions, mechanisms and practices;
(ii) Provide the Commission with information explaining how the
facility meets the definition of ``trading facility'' contained in
section 1a(33) of the Act and provide the Commission with access to the
electronic trading facility's trading protocols, in a format specified
by the Commission;
(iii) Demonstrate to the Commission that the facility requires, and
will require, with respect to all current and future agreements,
contracts and transactions, that each participant agrees to comply with
all applicable laws; that the authorized participants are ``eligible
commercial entities'' as defined in section 1a(11) of the Act; that all
agreements, contracts and transactions are and will be entered into
solely on a principal-to-principal basis; and that the facility has in
place a program to routinely monitor participants' compliance with
these requirements;
(iv) At the request of the Commission, provide any other
information that the Commission, in its discretion, deems relevant to
its determination whether an agreement, contract, or transaction
performs a significant price discovery function; and
(v) File with the Commission annually, no later than the end of
each calendar year, a completed copy of CFTC Form 205--Exempt
Commercial Market Annual Certification. The information submitted in
Form 205 shall include:
(A) A statement indicating whether the electronic trading facility
continues to operate under the exemption; and
(B) A certification that affirms the accuracy of and/or updates the
information contained in the previous Notification of Operation as an
Exempt Commercial Market.
(2) Electronic trading facilities trading or executing agreements,
contracts or transactions other than significant price discovery
contracts. In addition to the requirements of paragraph (b)(1) of this
section, a facility operating in reliance on the exemption in section
2(h)(3) of the Act, with respect to agreements, contracts or
transactions that have not been determined to perform significant
[[Page 75910]]
price discovery function, initially and on an on-going basis, must:
(i) Identify to the Commission those agreements, contracts and
transactions conducted on the electronic trading facility with respect
to which it intends, in good faith, to rely on the exemption in section
2(h)(3) of the Act, and which averaged five trades per day or more over
the most recent calendar quarter; and, with respect to such agreements,
contracts and transactions, either:
(A) Submit to the Commission, in a form and manner acceptable to
the Commission, a report for each business day, showing for each such
agreement, contract or transaction executed the following information:
(1) The underlying commodity, the delivery or price-basing location
specified in the agreement, contract or transaction maturity date,
whether it is a financially settled or physically delivered instrument,
and the date of execution, time of execution, price, and quantity;
(2) Total daily volume and, if cleared, open interest;
(3) For an option instrument, in addition to the foregoing
information, the type of option (i.e., call or put) and strike prices;
and
(4) Such other information as the Commission may determine.
Each such report shall be electronically transmitted weekly, within
such time period as is acceptable to the Commission after the end of
the week to which the data applies; or
(B) (1) Provide to the Commission, in a form and manner acceptable
to the Commission, electronic access to those transactions conducted on
the electronic trading facility in reliance on the exemption in section
2(h)(3) of the Act, and meeting the average five trades per day or more
threshold test of this section, which would allow the Commission to
compile the information described in paragraph (b)(2)(i)(A) of this
section and create a permanent record thereof;
(2) Maintain a record of allegations or complaints received by the
electronic trading facility concerning instances of suspected fraud or
manipulation in trading activity conducted in reliance on the exemption
set forth in section 2(h)(3) of the Act. The record shall contain the
name of the complainant, if provided, date of the complaint, market
instrument, substance of the allegations, and name of the person at the
electronic trading facility who received the complaint;
(3) Provide to the Commission, in the form and manner prescribed by
the Commission, a copy of the record of each complaint received
pursuant to paragraph (b)(2)(ii) of this section that alleges, or
relates to, facts that would constitute a violation of the Act or
Commission regulations. Such copy shall be provided to the Commission
no later than 30 calendar days after the complaint is received.
Provided, however, that in the case of a complaint alleging, or
relating to, facts that would constitute an ongoing fraud or market
manipulation under the Act or Commission regulations, such copy shall
be provided to the Commission within three business days after the
complaint is received; and
(4) Provide to the Commission on a quarterly basis, within 15
calendar days of the close of each quarter, a list of each agreement,
contract or transaction executed on the electronic trading facility in
reliance on the exemption set forth in section 2(h)(3) of the Act and
indicate for each such agreement, contract or transaction the contract
terms and conditions, the contract's average daily trading volume, and
the most recent open interest figures.
(3) Electronic trading facilities trading or executing significant
price discovery contracts. In addition to the requirements of paragraph
(b)(1) of this section, if the Commission determines that a facility
operating in reliance on the exemption in section 2(h)(3) of the Act
trades or executes an agreement, contract or transaction that performs
a significant price discovery function, the facility must, with respect
to any significant price discovery contract, publish and provide to the
Commission the information required by Sec. 16.01 of this chapter.
(4) Delegation of authority. The Commission hereby delegates, until
the Commission orders otherwise, the authority to determine the form
and manner of submitting the required information under paragraphs
(b)(1) through (3) of this section, to the Director of the Division of
Market Oversight and such members of the Commission's staff as the
Director may designate. The Director may submit to the Commission for
its consideration any matter that has been delegated by this paragraph.
Nothing in this paragraph prohibits the Commission, at its election,
from exercising the authority delegated in this paragraph.
(5) Special calls.
(i) All information required upon special call of the Commission
under section 2(h)(5)(B)(iii) of the Act shall be transmitted at the
time and to the office of the Commission as may be specified in the
call.
(ii) The Commission hereby delegates, until the Commission orders
otherwise, the authority to make special calls as set forth in section
2(h)(5)(B)(iii) of the Act to the Directors of the Division of Market
Oversight, the Division of Clearing and Intermediary Oversight, and the
Division of Enforcement to be exercised by each such Director or by
such other employee or employees as the Director may designate. The
Directors may submit to the Commission for its consideration any matter
that has been delegated in this paragraph. Nothing in this paragraph
prohibits the Commission, at its election, from exercising the
authority delegated in this paragraph.
(6) Subpoenas to foreign persons. A foreign person whose access to
an electronic trading facility is limited or denied at the direction of
the Commission based on the Commission's belief that the foreign person
has failed timely to comply with a subpoena as provided under section
2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt
hearing under the procedures provided in Sec. 21.03(b) and (h) of this
chapter.
(7) Prohibited representation. An electronic trading facility
relying upon the exemption in section 2(h)(3) of the Act, with respect
to agreements, contracts or transactions that are not significant price
discovery contracts, shall not represent to any person that it is
registered with, designated, recognized, licensed or approved by the
Commission.
(c) Significant price discovery contracts.
(1) Criteria for significant price discovery determination. The
Commission may determine, in its discretion, that an electronic trading
facility operating a market in reliance on the exemption in section
2(h)(3) of the Act performs a significant price discovery function for
transactions in the cash market for a commodity underlying any
agreement, contract or transaction executed or traded on the facility.
In making such a determination, the Commission shall consider, as
appropriate:
(i) Price linkage. The extent to which the agreement, contract or
transaction uses or otherwise relies on a daily or final settlement
price, or other major price parameter, of a contract or contracts
listed for trading on or subject to the rules of a designated contract
market or a derivatives transaction execution facility to value a
position, transfer or convert a position, cash or financially settle a
position, or close out a position;
(ii) Arbitrage. The extent to which the price for the agreement,
contract or transaction is sufficiently related to the price of a
contract or contracts listed for
[[Page 75911]]
trading on or subject to the rules of a designated contract market or
derivatives transaction execution facility, or a significant price
discovery contract or contracts trading on or subject to the rules of
an electronic trading facility, so as to permit market participants to
effectively arbitrage between the markets by simultaneously maintaining
positions or executing trades in the contracts on a frequent and
recurring basis;
(iii) Material price reference. The extent to which, on a frequent
and recurring basis, bids, offers, or transactions in a commodity are
directly based on, or are determined by referencing, the prices
generated by agreements, contracts or transactions being traded or
executed on the electronic trading facility;
(iv) Material liquidity. The extent to which the volume of
agreements, contracts or transactions in the commodity being traded on
the electronic trading facility is sufficient to have a material effect
on other agreements, contracts or transactions listed for trading on or
subject to the rules of a designated contract market, a derivatives
transaction execution facility, or an electronic trading facility
operating in reliance on the exemption in section 2(h)(3) of the Act;
(v) Other material factors [Reserved].
(2) Notification of possible significant price discovery contract
conditions. An electronic trading facility operating in reliance on
section 2(h)(3) of the Act shall promptly notify the Commission, and
such notification shall be accompanied by supporting information or
data concerning any contract that:
(i) Averaged five trades per day or more over the most recent
calendar quarter; and
(ii) (A) For which the exchange sells its price information
regarding the contract to market participants or industry publications;
or
(B) Whose daily closing or settlement prices on 95 percent or more
of the days in the most recent quarter were within 2.5 percent of the
contemporaneously determined closing, settlement or other daily price
of another agreement, contract or transaction.
(3) Procedure for significant price discovery determination. Before
making a final price discovery determination under this paragraph, the
Commission shall publish notice in the Federal Register that it intends
to undertake a determination with respect to whether a particular
agreement, contract or transaction performs a significant price
discovery function and to receive written data, views and arguments
relevant to its determination from the electronic trading facility and
other interested persons. Any such written data, views and arguments
shall be filed with the Secretary of the Commission, in the form and
manner specified by the Commission, within 30 calendar days of
publication of notice in the Federal Register or within such other time
specified by the Commission. After consideration of all relevant
information, the Commission shall issue an order explaining its
determination whether the agreement, contract or transaction executed
or traded by the electronic trading facility performs a significant
price discovery function under the criteria specified in paragraphs
(c)(1)(i) through (v) of this section.
(4) Compliance with Core Principles. Following the issuance of an
order by the Commission that the electronic trading facility executes
or trades an agreement, contract or transaction that performs a
significant price discovery function, the electronic trading facility
must demonstrate, with respect to that agreement, contract or
transaction, compliance with the Core Principles under section
2(h)(7)(C) of the Act and the applicable provisions of this part. If
the Commission's order represents the first time it has determined that
the electronic trading facility's agreement, contract or transaction
performs a significant price discovery function, the facility must
submit a written demonstration of compliance with the Core Principles
within 90 calendar days of the date of the Commission's order. For
subsequent determinations by the Commission that the electronic trading
facility has an additional agreement, contract or transaction that
performs a significant price discovery function, the facility must
submit a written demonstration of compliance with the Core Principles
within 15 calendar days of the date of the Commission's order.
Attention is directed to Appendix B of this part for guidance on and
acceptable practices for complying with the Core Principles.
Submissions demonstrating how the electronic trading facility complies
with the Core Principles with respect to its significant price
discovery contract must be filed with the Secretary of the Commission
at its Washington, DC headquarters. Submissions must include the
following:
(i) A written certification that the significant price discovery
contract(s) complies with the Act and regulations thereunder;
(ii) A copy of the electronic trading facility's rules (as defined
in Sec. 40.1 of this chapter) and any technical manuals, other guides
or instructions for users of, or participants in, the market, including
minimum financial standards for members or market participants.
Subsequent rule changes must be certified by the electronic trading
facility pursuant to section 5c(c) of the Act and Sec. 40.6 of this
chapter. The electronic trading facility also may request Commission
approval of any rule changes pursuant to section 5c(c) of the Act and
Sec. 40.5 of this chapter;
(iii) A description of the trading system, algorithm, security and
access limitation procedures with a timeline for an order from input
through settlement, and a copy of any system test procedures, tests
conducted, test results and contingency or disaster recovery plans;
(iv) A copy of any documents pertaining to or describing the
electronic trading system's legal status and governance structure,
including governance fitness information;
(v) An executed or executable copy of any agreements or contracts
entered into or to be entered into by the electronic trading facility,
including partnership or limited liability company, third-party
regulatory service, or member or user agreements, that enable or
empower the electronic trading facility to comply with a Core
Principle;
(vi) A copy of any manual or other document describing, with
specificity, the manner in which the trading facility will conduct
trade practice, market and financial surveillance;
(vii) To the extent that any of the items in paragraphs (c)(4)(ii)
through (vi) of this section raise issues that are novel, or for which
compliance with a core principle is not self-evident, an explanation of
how that item satisfies the applicable core principle or principles.
The electronic trading facility must identify with particularity
information in the submission that will be subject to a request for
confidential treatment pursuant to Sec. 145.09 of this chapter. The
electronic trading facility must follow the procedures specified in
Sec. 40.8 of this chapter with respect to any information in its
submission for which confidential treatment is requested.
(5) Determination of compliance with core principles. The
Commission shall take into consideration differences between cleared
and uncleared significant price discovery contracts when reviewing the
implementation of the Core Principles by an electronic trading
facility. The electronic facility also has reasonable discretion in
accounting for differences between cleared and uncleared significant
price discovery contracts when establishing the manner in which it
complies with the Core Principles.
[[Page 75912]]
(6) Information relating to compliance with core principles. Upon
request by the Commission, an electronic trading facility trading a
significant price discovery contract shall file with the Commission a
written demonstration, containing such supporting data, information and
documents, in the form and manner and within such time as the
Commission may specify, that the electronic trading facility is in
compliance with one or more core principles as specified in the
request, or that is otherwise requested by the Commission to enable the
Commission to satisfy its obligations under the Act.
(7) Enforceability. An agreement, contract or transaction entered
into on or pursuant to the rules of an electronic trading facility
trading or executing a significant price discovery contract shall not
be void, voidable, subject to rescission or otherwise invalidated or
rendered unenforceable as a result of:
(i) A violation by the electronic trading facility of the
provisions of section 2(h) of the Act or this part; or
(ii) Any Commission proceeding to alter or supplement a rule, term
or condition under section 8a(7) of the Act, to declare an emergency
under section 8a(9) of the Act, or any other proceeding the effect of
which is to alter, supplement or require an electronic trading facility
to adopt a specific term or condition, trading rule or procedure, or to
take or refrain from taking a specific action.
(8) Procedures for vacating a determination of a significant price
discovery function.
(i) By the electronic trading facility. An electronic trading
facility that executes or trades an agreement, contract or transaction
that the Commission has determined performs a significant price
discovery function under paragraph (c)(3) of this section may petition
the Commission to vacate that determination. The petition shall
demonstrate that the agreement, contract or transaction no longer
performs a significant price discovery function under the criteria
specified in paragraph (c)(1) of this section, and has not done so for
at least the prior 12 months. An electronic trading facility shall not
petition for a vacation of a significant price discovery determination
more frequently than once every 12 months.
(ii) By the Commission. The Commission may, on its own initiative,
begin vacation proceedings if it believes that an agreement, contract
or transaction has not performed a significant price discovery function
for at least the prior 12 months.
(iii) Procedure. Before making a final determination whether an
agreement, contract or transaction has ceased to perform a significant
price discovery function, the Commission shall publish notice in the
Federal Register that it intends to undertake such a determination and
to receive written data, views and arguments relevant to its
determination from the electronic trading facility and other interested
persons. Written submissions shall be filed with the Secretary of the
Commission in the form and manner specified by the Commission, within
30 calendar days of publication of notice in the Federal Register or
within such other time specified by the Commission. After consideration
of all relevant information, the Commission shall issue an order
explaining its determination whether the agreement, contract or
transaction has ceased to perform a significant price discovery
function and, if so, vacating its prior order. If such an order issues,
and the Commission subsequently determines, on its own initiative or
after notification by the electronic trading facility, that the
agreement, contract or transaction that was subject to the vacation
order again performs a significant price discovery function, the
electronic trading facility must comply with the Core Principles within
15 calendar days of the date of the Commission's order.
(iv) Automatic vacation of significant price discovery
determination. Regardless of whether a proceeding to vacate has been
initiated, any significant price discovery contract that has no open
interest and in which no trading has occurred for a period of 12
complete and consecutive calendar months shall, without further
proceedings, no longer be considered to be a significant price
discovery contract.
(d) Commission review. The Commission shall, at least annually,
evaluate as appropriate agreements, contracts or transactions conducted
on an electronic trading facility in reliance on the exemption provided
in section 2(h)(3) of the Act to determine whether they serve a
significant price discovery function as described in paragraph (c)(1)
of this section 31. Part 36 is amended by adding a new Appendix A to
read as follows:
Appendix A to Part 36--Guidance on Significant Price Discovery
Contracts
1. Section 2(h)(7) of the CEA specifies four factors that the
Commission must consider, as appropriate, in making a determination
that a contract is performing a significant price discovery
function. The four factors prescribed by the statute are: Price
Linkage; Arbitrage; Material Price Reference; and Material
Liquidity.
2. Not all listed factors must be present to support a
determination that a contract performs a significant price discovery
function. Moreover, the statutory language neither prioritizes the
factors nor specifies the degree to which a significant price
discovery contract must conform to the various factors. Congress has
indicated that it intends that the Commission should not make a
determination that an agreement, contract or transaction performs a
significant price discovery function on the basis of the Price
Linkage factor unless the agreement, contract or transaction also
has sufficient volume to impact other regulated contracts or to
become an independent price reference or benchmark that is regularly
utilized by the public. The Commission believes that the Arbitrage
and Material Price Reference factors can be considered separately
from each other. That is, the Commission could make a determination
that a contract serves a significant price discovery function based
on the presence of one of these factors and the absence of the
other. The presence of any of these factors, however, would not
necessarily be sufficient to establish the contract as a significant
price discovery contract. The fourth factor, Liquidity, would be
considered in conjunction with the arbitrage and linkage factors as
a significant amount of liquidity presumably would be necessary for
a contract to perform a significant price discovery function in
conjunction with these factors.
3. These factors do not lend themselves to a mechanical
checklist or formulaic analysis. Accordingly, this guidance is
intended to illustrate which factors, or combinations of factors,
the Commission will look to when determining that a contract is
performing a significant price discovery function, and under what
circumstances the presence of a particular factor or factors would
be sufficient to support such a determination.
(A) MATERIAL LIQUIDITY--The extent to which the volume of
agreements, contracts or transactions in the commodity being traded
on the electronic trading facility is sufficient to have a material
effect on other agreements, contracts or transactions listed for
trading on or subject to the rules of a designated contract market,
a derivatives transaction execution facility, or an electronic
trading facility operating in reliance on the exemption in section
2(h)(3) of the Act.
(1) Liquidity is a broad concept that captures the ability to
transact immediately with little or no price concession.
Traditionally, objective measures of trading such as volume or open
interest have been used as measures of liquidity. So, for example, a
market in which trades occur multiple times per minute at prices
that differ by only fractions of a cent normally would be considered
highly liquid, since presumably a trader could quickly execute a
trade at a price that was approximately the same as the price for
other recently executed trades. Other factors also will affect the
characterization of liquidity, such as whether a large trade--e.g.,
100 contracts versus 1 contract--could be executed without a
significant price concession. For example,
[[Page 75913]]
having to wait a day to sell 1000 bushels of corn may be considered
an illiquid market while waiting a day to sell a home may be
considered quite liquid. Thus, quantifying the levels of immediacy
and price concession that would define material liquidity may differ
from one market or commodity to another.
(2) The Commission believes that material liquidity
alternatively can be identified by the impact liquidity exhibits
through observed prices. In markets where material liquidity exists,
a more or less continuous stream of prices can be observed and the
prices should be similar. For example, if the trading of a contract
occurs on average five times a day, there will be on average five
observed prices for the contract per day. If the market is liquid in
terms of traders having to make little in the way of price
concessions to execute these trades, the prices of this contract
should be similar to those observed for similar or related contracts
traded in liquid markets elsewhere. Thus, in making determinations
that contracts have material liquidity, the Commission will look to
transaction prices, both in terms of how often prices are observed
and the extent to which observed prices tend to correlate with other
contemporaneous prices.
(3) The Commission anticipates that material liquidity will
frequently be a consideration in evaluating whether a contract is a
significant price discovery contract; however, there may be
circumstances in which other factors so dominate the conclusion that
a contract is serving a significant price discovery function that a
finding of material liquidity in the contract would not be
necessary. Circumstances in which this might arise are discussed
with respect to the assessment of other factors below.
(4) Finally, material liquidity itself would not be sufficient
to make a determination that a contract is a significant price
discovery contract, but combined with other factors it can serve as
a guidepost indicating which contracts are functioning as
significant price discovery contracts. As further discussed below,
material liquidity, as reflected through the prices of linked or
arbitraged contracts, will be a primary consideration in determining
whether such contracts are significant price discovery contracts.
(B) PRICE LINKAGE--The extent to which the agreement, contract
or transaction uses or otherwise relies on a daily or final
settlement price, or other major price parameter, of a contract or
contracts listed for trading on or subject to the rules of a
designated contract market or a derivatives transaction execution
facility to value a position, transfer or convert a position, cash
or financially settle a position, or close out a position.
(1) A price-linked contract is a contract that relies on a
contract traded on another trading facility to settle, value or
otherwise offset the price-linked contract. The link may involve a
one-to-one linkage, in that the value of the linked contract is
based on a single contract's price, or it may involve multiple
contracts. An example of a multiple contract linkage might be where
the settlement price is calculated as an index of prices obtained
from a basket of contracts traded on other exchanges.
(2) For a linked contract, the mere fact that a contract is
linked to another contract will not be sufficient to support a
determination that a contract performs a significant price discovery
function. To assess whether such a determination is warranted, the
Commission will examine the relationship between transaction prices
of the linked contract and the prices of the referenced contract(s).
The Commission believes that where material liquidity exists, prices
for the linked contract would be observed to be substantially the
same as or move substantially in conjunction with the prices of the
referenced contract(s). Where such price characteristics are
observed on an ongoing basis, the Commission would expect to
determine that the linked contract is a significant price discovery
contract.
(3) As an example, where the Commission has observed price
linkage, it will next consider whether transactions were occurring
on a daily basis for the linked contract in material volumes.
(Conversely, where volume has increased noticeably in a particular
contract, the Commission would look for linkage) The ultimate level
of volume that would be considered material for purposes of deeming
a contract a significant price discovery contract will likely differ
from one contract to another depending on the characteristics of the
underlying commodity and the overall size of the physical market in
which it is traded. At a minimum, however, the Commission will
consider a linked contract which has volume equal to 5% of the
volume of trading in the contract to which it is linked to have
sufficient volume potentially to be deemed a significant price
discovery contract. In combination with this volume level, the
Commission will also examine the relationship between prices of the
linked contract and the contract to which it is linked to determine
whether a contract is serving a significant price discovery
function. As a threshold, the Commission will consider a 2.5 percent
price range for 95 percent of contemporaneously determined closing,
settlement, or other daily prices over the most recent quarter to be
sufficiently close for a linked contract potentially to be deemed a
significant price discovery contract. For example, if, over the most
recent quarter, it was found that 95 percent of the closing,
settlement, or other daily prices of the contract, which have been
calculated using transaction prices, were within 2.5 percent of the
contemporaneously determined closing, settlement, or other daily
prices of a contract to which it was linked, the Commission
potentially would consider the contract to perform a significant
price discovery function.
(4) If, in the example above, the Commission determines that
material volume existed, it will examine the relationship between
the prices of the linked contracts and the referenced contracts. If
it finds that the transaction prices of the linked contract were
consistently within a small percentage of the referenced contract or
index of contracts that was being referenced, the Commission will be
likely to find the linked contract to be a significant price
discovery contract. As a threshold, the Commission will consider a
2.5 percent price range for 95 per cent of closing or settlement
prices over the most recent quarter to be sufficiently close for a
linked contract to potentially be deemed a significant price
discovery contract. For example, if, over the most recent quarter,
it was found that on 95 percent or more of the days the closing or
settlement price of the contract, which has been calculated using
transaction prices, was within 2.5 percent of the closing or
settlement price of a contract to which it was linked, the
Commission potentially will consider the contract to perform a
significant price discovery function.
(C) ARBITRAGE CONTRACTS--The extent to which the price for the
agreement, contract or transaction is sufficiently related to the
price of a contract or contracts listed for trading on or subject to
the rules of a designated contract market or derivatives transaction
execution facility, or a significant price discovery contract or
contracts trading on or subject to the rules of an electronic
trading facility, so as to permit market participants to effectively
arbitrage between the markets by simultaneously maintaining
positions or executing trades in the contracts on a frequent and
recurring basis.
(1) Arbitrage contracts are those contracts that can be combined
with other contracts to exploit expected economic relationships in
anticipation of a profit. In assessing whether a contract can be
incorporated into an arbitrage strategy, the Commission will weigh
the terms and conditions of a contract in comparison to contracts
that potentially could be used in an arbitrage strategy; will
consult with industry or other sources regarding a contract's
viability in an arbitrage strategy; and will rely on direct
observation confirming the use of a contract in arbitrage
strategies.
(2) As with linked contracts, the mere fact that a contract
could be employed in an arbitrage strategy will not be sufficient to
make a determination that a contract is a significant price
discovery contract. In addition, the level of liquidity will be
considered. To assess whether designation as a significant price
discovery contract is warranted, the Commission will examine the
relationship between transaction prices of an arbitrage contract and
the prices of the contract(s) to which it is related. The Commission
believes that where material liquidity exists, prices for the
arbitrage contract would be observed to move substantially in
conjunction with the prices of the related contract(s) to which it
is economically linked. Where such price characteristics are
observed on an ongoing basis, it is likely that the linked contract
performs a significant price discovery function.
(3) The Commission will apply the same threshold liquidity and
price relationship standards for arbitrage contracts as it does for
linked contracts. That is, the Commission will view the average of 5
trades per day or more threshold as the level of activity that would
potentially meet the material volume criterion. With respect to
prices, the Commission will consider an arbitrage
[[Page 75914]]
contract potentially to be a significant price discovery contract
if, over the most recent quarter, greater than 95 percent of the
closing or settlement prices of the contract, which have been
calculated using transaction prices, fall within 2.5 percent of the
closing or settlement price of the contract or contracts to which it
could be arbitraged.
(D) MATERIAL PRICE REFERENCE--The extent to which, on a frequent
and recurring basis, bids, offers or transactions in a commodity are
directly based on, or are determined by referencing, the prices
generated by agreements, contracts or transactions being traded or
executed on the electronic trading facility.
(1) The Commission will rely on one of two sources of evidence--
direct or indirect--to determine that the price of a contract was
being used as a material price reference and, therefore, serving a
significant price discovery function. The primary source of direct
evidence is that cash market bids, offers or transactions are
directly based on, or quoted at a differential to, the prices
generated on the market on a frequent and recurring basis. The
Commission expects that normally only contracts with material
liquidity will be referenced by the cash market; however, the
Commission notes that it may be possible for a contract to have very
low liquidity and yet still be used as a price reference. In such
cases, the simple fact that participants in the underlying cash
market broadly have elected to use the contract price as a price
reference would be a strong indicator that the contract is a
significant price discovery contract.
(2) In evaluating a contract's price discovery role as a
directly referenced price source, the Commission will perform an
analysis to determine whether cash market participants are quoting
bid or offer prices or entering into transactions at prices that are
set either explicitly or implicitly at a differential to prices
established for the contract. Cash market prices are set explicitly
at a differential to the section 2(h)(3) contract when, for
instance, they are quoted in dollars and cents above or below the
reference contract's price. Cash market prices are set implicitly at
a differential to a section 2(h)(3) contract when, for instance,
they are arrived at after adding to, or subtracting from the section
2(h)(3) contract, but then quoted or reported at a flat price. The
Commission will also consider whether cash market entities are
quoting cash prices based on a section 2(h)(3) contract on a
frequent and recurring basis.
(3) The second source of evidence is that the price of the
contract is being routinely disseminated in widely distributed
industry publications--or offered by the ECM itself for some form of
remuneration--and consulted on a frequent and recurring basis by
industry participants in pricing cash market transactions. As with
contract prices that are directly incorporated into cash market
prices, the Commission assumes that industry publications choose to
publish prices because of the value they transfer to industry
participants for the purpose of formulating prices in the cash
market.
(4) In applying this criterion, consideration will be given to
whether prices established by a section 2(h)(3) contract are
reported in a widely distributed industry publication. In making
this determination, the Commission will consider the reputation of
the publication within the industry, how frequently it is published,
and whether the information contained in the publication is
routinely consulted by industry participants in pricing cash market
transactions.
(5) Under a Material Price Reference analysis, the Commission
expects that material liquidity in the contract likely will be the
primary motivation for a publisher to publish particular prices. In
other words, the fact that the price of a contract is being used as
a reference by industry participants suggests, prima facie, that the
contract performs a significant price discovery function. But the
Commission recognizes that trading levels could nonetheless be low
for the contract while still serving a significant price discovery
function and that evidence of routine publication and consultation
by industry participants may be sufficient to establish the contract
as a significant price discovery contract. On the other hand, while
cash market participants may regularly refer to published prices of
a particular contract when establishing cash market prices, it may
be the case that the contract itself is a niche market for a
specialized grade of the commodity or for delivery at a minor
geographic location. In such cases, the Commission will look to such
measures as trading volume, open interest, and the significance of
the underlying cash market to make a determination that a contract
is functioning as a significant price discovery contract. If an
examination of trading in the contract were to reveal that true
price discovery was occurring in other more broadly defined
contracts and that this contract was itself simply reflective of
those broader contracts, it is less likely the Commission will deem
the contract a significant price discovery contract.
(6) Because price referencing normally occurs out of the view of
the electronic trading facility, the Commission may have difficulty
ascertaining the extent to which cash market participants actually
reference or consult a contract's price when transacting. The
Commission expects, however, that as a contract begins to be relied
upon to set a reference price, market participants will be
increasingly willing to purchase price information. To the extent,
then, that an electronic trading facility begins to sell its price
information regarding a contract to market participants or industry
publications, the contract will meet a threshold standard to
indicate that the contract potentially is a significant price
discovery contract.
32. Part 36 is amended by adding a new Appendix B to read as
follows:
Appendix B to Part 36--Guidance On, and Acceptable Practices in,
Compliance With Core Principles
1. This Appendix provides guidance on complying with the core
principles under section 2(h)(7)(C) of the Act and this part, both
initially and on an ongoing basis. The guidance is provided in
paragraph (a) following each core principle and can be used to
demonstrate to the Commission core principle compliance under Sec.
36.3(c)(4). The guidance for each core principle is illustrative
only of the types of matters an electronic trading facility may
address, as applicable, and is not intended to be used as a
mandatory checklist. Addressing the issues and questions set forth
in this guidance will help the Commission in its consideration of
whether the electronic trading facility is in compliance with the
core principles. A submission pursuant to Sec. 36.3(c)(4) should
include an explanation or other form of documentation demonstrating
that the electronic trading facility complies with the core
principles.
2. Acceptable practices meeting selected requirements of the
core principles are set forth in paragraph (b) following each core
principle. Electronic trading facilities on which significant price
discovery contracts are traded or executed that follow the specific
practices outlined under paragraph (b) for any core principle in
this appendix will meet the selected requirements of the applicable
core principle. Paragraph (b) is for illustrative purposes only, and
does not state the exclusive means for satisfying a core principle.
CORE PRINCIPLE I OF SECTION 2(h)(7)(C)--CONTRACTS NOT READILY
SUSCEPTIBLE TO MANIPULATION. The electronic trading facility shall
list only significant price discovery contracts that are not readily
susceptible to manipulation.
(a) Guidance. Upon determination by the Commission that a
contract listed for trading on an electronic trading facility is a
significant price discovery contract, the electronic trading
facility must self-certify the terms and conditions of the
significant price discovery contract under Sec. 36.3(c)(4) within
90 calendar days of the date of the Commission's order, if the
contract is the electronic trading facility's first significant
price discovery contract; or 15 days from the date of the
Commission's order if the contract is not the electronic trading
facility's first significant price discovery contract. Once the
Commission determines that a contract performs a significant price
discovery function, subsequent rule changes must be self-certified
to the Commission by the electronic trading facility pursuant to
Sec. 40.6 of this chapter.
(b) Acceptable practices. Guideline No. 1, 17 CFR part 40,
Appendix A may be used as guidance in meeting this core principle
for significant price discovery contracts.
CORE PRINCIPLE II OF SECTION 2(h)(7)(C)--MONITORING OF TRADING.
The electronic trading facility shall monitor trading in significant
price discovery contracts to prevent market manipulation, price
distortion, and disruptions of the delivery of cash-settlement
process through market surveillance, compliance and disciplinary
practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade
reconstructions.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded or executed should,
with respect to those contracts, demonstrate a capacity to prevent
market manipulation and
[[Page 75915]]
have trading and participation rules to detect and deter abuses. The
facility should seek to prevent market manipulation and other
trading abuses through a dedicated regulatory department or by
delegation of that function to an appropriate third party. An
electronic trading facility also should have the authority to
intervene as necessary to maintain an orderly market.
(b) Acceptable practices.
(1) An acceptable trade monitoring program. An acceptable trade
monitoring program should facilitate, on both a routine and non-
routine basis, arrangements and resources to detect and deter abuses
through direct surveillance of each significant price discovery
contract. Direct surveillance of each significant price discovery
contract will generally involve the collection of various market
data, including information on participants' market activity. Those
data should be evaluated on an ongoing basis in order to make an
appropriate regulatory response to potential market disruptions or
abusive practices. For contracts with a substantial number of
participants, an effective surveillance program should employ a much
more comprehensive large trader reporting system.
(2) Authority to collect information and documents. The
electronic trading facility should have the authority to collect
information and documents in order to reconstruct trading for
appropriate market analysis. Appropriate market analysis should
enable the electronic trading facility to assess whether each
significant price discovery contract is responding to the forces of
supply and demand. Appropriate data usually include various
fundamental data about the underlying commodity, its supply, its
demand, and its movement through market channels. Especially
important are data related to the size and ownership of deliverable
supplies--the existing supply and the future or potential supply--
and to the pricing of the deliverable commodity relative to the
futures price and relative to similar, but non-deliverable, kinds of
the commodity. For cash-settled contracts, it is more appropriate to
pay attention to the availability and pricing of the commodity
making up the index to which the contract will be settled, as well
as monitoring the continued suitability of the methodology for
deriving the index.
(3) Ability to assess participants' market activity and power.
To assess participants' activity and potential power in a market,
electronic trading facilities, with respect to significant price
discovery contracts, at a minimum should have routine access to the
positions and trading of its participants and, if applicable, should
provide for such access through its agreements with its third-party
provider of clearing services.
CORE PRINCIPLE III OF SECTION 2(h)(7)(C)--ABILITY TO OBTAIN
INFORMATION. The electronic trading facility shall establish and
enforce rules that allow the electronic trading facility to obtain
any necessary information to perform any of the functions described
in this subparagraph, provide the information to the Commission upon
request, and have the capacity to carry out such international
information-sharing agreements as the Commission may require.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded or executed should,
with respect to those contracts, have the ability and authority to
collect information and documents on both a routine and non-routine
basis, including the examination of books and records kept by
participants. This includes having arrangements and resources for
recording full data entry and trade details and safely storing audit
trail data. An electronic trading facility should have systems
sufficient to enable it to use the information for purposes of
assisting in the prevention of participant and market abuses through
reconstruction of trading and providing evidence of any violations
of the electronic trading facility's rules.
(b) Acceptable practices.
(1) The goal of an audit trail is to detect and deter market
abuse. An effective contract audit trail should capture and retain
sufficient trade-related information to permit electronic trading
facility staff to detect trading abuses and to reconstruct all
transactions within a reasonable period of time. An audit trail
should include specialized electronic surveillance programs that
identify potentially abusive trades and trade patterns. An
acceptable audit trail must be able to track an order from time of
entry into the trading system through its fill. The electronic
trading facility must create and maintain an electronic transaction
history database that contains information with respect to
transactions executed on each significant price discovery contract.
(2) An acceptable audit trail should include the following:
original source documents, transaction history, electronic analysis
capability, and safe storage capability. An acceptable audit trail
system would satisfy the following practices.
(i) Original source documents. Original source documents include
unalterable, sequentially identified records on which trade
execution information is originally recorded. For each order
(whether filled, unfilled or cancelled, each of which should be
retained or electronically captured), such records reflect the terms
of the order, an account identifier that relates back to the
account(s) owner(s), and the time of order entry.
(ii) Transaction history. A transaction history consists of an
electronic history of each transaction, including:
(A) All the data that are input into the trade entry or matching
system for the transaction to match and clear;
(B) Timing and sequencing data adequate to reconstruct trading;
and
(C) The identification of each account to which fills are
allocated.
(iii) Electronic analysis capability. An electronic analysis
capability that permits sorting and presenting data included in the
transaction history so as to reconstruct trading and to identify
possible trading violations with respect to market abuse.
(iv) Safe storage capability. Safe storage capability provides
for a method of storing the data included in the transaction history
in a manner that protects the data from unauthorized alteration, as
well as from accidental erasure or other loss. Data should be
retained in the form and manner specified by the Commission or,
where no acceptable manner of retention is specified, in accordance
with the recordkeeping standards of Commission regulation 1.31.
(3) Arrangements and resources for the disclosure of the
obtained information and documents to the Commission upon request.
To satisfy section 2(h)(7)(C)(III)(bb), the electronic trading
facility should maintain records of all information and documents
related to each significant price discovery contract in a form and
manner acceptable to the Commission. Where no acceptable manner of
maintenance is specified, records should be maintained in accordance
with the recordkeeping standards of Commission regulation 1.31.
(4) The capacity to carry out appropriate information-sharing
agreements as the Commission may require. Appropriate information-
sharing agreements could be established with other markets or the
Commission can act in conjunction with the electronic trading
facility to carry out such information sharing.
CORE PRINCIPLE IV OF SECTION 2(h)(7)(C)--POSITION LIMITATIONS OR
ACCOUNTABILITY. The electronic trading facility shall adopt, where
necessary and appropriate, position limitations or position
accountability for speculators in significant price discovery
contracts, taking into account positions in other agreements,
contracts and transactions that are treated by a derivatives
clearing organization, whether registered or not registered, as
fungible with such significant price discovery contracts to reduce
the potential threat of market manipulation or congestion,
especially during trading in the delivery month.
(a) Guidance. [Reserved]
(b) Acceptable practices.
(1) Introduction. In order to diminish potential problems
arising from excessively large speculative positions, and to
facilitate orderly liquidation of expiring contracts, an electronic
trading facility relying on the exemption in section 2(h)(3) should
adopt rules that set position limits or accountability levels on
traders' cleared positions in significant price discovery contracts.
These position limit rules specifically may exempt bona fide
hedging; permit other exemptions; or set limits differently by
market, delivery month or time period. For the purpose of evaluating
a significant price discovery contract's speculative-limit program
for cleared positions, the Commission will consider the specified
position limits or accountability levels, aggregation policies,
types of exemptions allowed, methods for monitoring compliance with
the specified limits or levels, and procedures for dealing with
violations.
(2) Accounting for cleared and uncleared trades.
(i) Speculative-limit levels typically should be set in terms of
a trader's combined position involving cleared trades in a
significant price discovery contract, plus positions in agreements,
contracts and transactions that are treated by a derivatives
clearing organization, whether registered or not registered, as
fungible with such significant price discovery contract. (This
[[Page 75916]]
circumstance typically exists where an exempt commercial market
lists a particular contract for trading but also allows for
positions in that contract to be cleared together with positions
established through bilateral or off-exchange transactions, such as
block trades, in the same contract. Essentially, both the on-
facility and off-facility transactions are considered fungible with
each other.) In this connection, the electronic trading facility
should make arrangements to ensure that it is able to ascertain
accurate position data for the market.
(ii) For significant price discovery contracts that may be
traded on either a cleared or an uncleared basis, the electronic
trading facility should apply position limits to cleared
transactions in the contract. For those transactions in the contract
that are not cleared, the electronic trading facility should
establish accountability procedures for monitoring traders' overall
positions and take that information into account when ascertaining
whether an individual trader's overall position poses a threat to
the market.
(3) Limitations on spot-month positions. Spot-month limits
should be adopted for significant price discovery contracts to
minimize the susceptibility of the market to manipulation or price
distortions, including squeezes and corners or other abusive trading
practices.
(i) Contracts economically equivalent to an existing contract.
An electronic trading facility that lists a significant price
discovery contract that is economically-equivalent to another
significant price discovery contract or to a contract traded on a
designated contract market or derivatives transaction execution
facility should set the spot-month limit for its significant price
discovery contract at the same level as that specified for the
economically-equivalent contract.
(ii) Contracts that are not economically equivalent to an
existing contract. There may not be an economically-equivalent
significant price discovery contract or economically equivalent
contract traded on a designated contract market or derivatives
transaction execution facility. In this case, the spot-month
speculative position limit should be established in the following
manner. The spot-month limit for a physical delivery market should
be based upon an analysis of deliverable supplies and the history of
spot-month liquidations. The spot-month limit for a physical-
delivery market is appropriately set at no more than 25 percent of
the estimated deliverable supply. In the case where a significant
price discovery contract has a cash settlement provision, the spot-
month limit should be set at a level that minimizes the potential
for price manipulation or distortion in the significant price
discovery contract itself; in related futures and options contracts
traded on a designated contract market or derivatives transaction
execution facility; in other significant price discovery contracts;
in other fungible agreements, contracts and transactions; and in the
underlying commodity.
(4) Position accountability for non-spot-month positions. The
electronic trading facility should establish for its significant
price discovery contracts non-spot individual month position
accountability levels and all-months-combined position
accountability levels. An electronic trading facility may establish
non-spot individual month position limits and all-months-combined
position limits for its significant price discovery contracts in
lieu of position accountability levels.
(i) Definition. Position accountability provisions provide a
means for an exchange to monitor traders' positions that may
threaten orderly trading. An acceptable accountability provision
sets target accountability threshold levels that may be exceeded,
but once a trader breaches such accountability levels, the
electronic trading facility should initiate an investigation to
determine whether the individual's trading activity is justified and
is not intended to manipulate the market. As part of its
investigation, the electronic trading facility should inquire about
the trader's rationale for holding a position in excess of the
accountability levels. An acceptable accountability provision should
provide the electronic trading facility with the authority to order
the trader not to further increase positions. If a trader fails to
comply with a request for information about positions held, provides
information that does not sufficiently justify the position, or
continues to increase contract positions after a request not to do
so is issued by the facility, then the accountability provision
should enable the electronic trading facility to require the trader
to reduce positions.
(ii) Contracts economically equivalent to an existing contract.
When an electronic trading facility lists a significant price
discovery contract that is economically equivalent to another
significant price discovery contract or to a contract traded on a
designated contract market or derivatives transaction execution
facility, the electronic trading facility should set the non-spot
individual month position accountability level and all-months-
combined position accountability level for its significant price
discovery contract at the same levels, or lower, as those specified
for the economically-equivalent contract.
(iii) Contracts that are not economically equivalent to an
existing contract. For significant price discovery contracts that
are not economically equivalent to an existing contract, the trading
facility shall adopt non-spot individual month and all-months-
combined position accountability levels that are no greater than 10
percent of the average combined futures and delta-adjusted option
month-end open interest for the most recent calendar year. For
electronic trading facilities that choose to adopt non-spot
individual month and all-months-combined position limits in lieu of
position accountability levels for their significant price discovery
contracts, the limits should be set in the same manner as the
accountability levels.
(iv) Contracts economically equivalent to an existing contract
with position limits. If a significant price discovery contract is
economically equivalent to another significant price discovery
contract or to a contract traded on a designated contract market or
derivatives transaction execution facility that has adopted non-spot
or all-months-combined position limits, the electronic trading
facility should set non-spot month position limits and all-months-
combined position limits for its significant price discovery
contract at the same (or lower) levels as those specified for the
economically-equivalent contract.
(5) Provisions for uncleared contracts. If an electronic trading
facility offers a significant price discovery contract that is
exclusively uncleared, or one that may be either cleared by a
derivatives clearing organization or uncleared at the discretion of
the trader, the trading facility should establish for the uncleared
trades a spot-month volume accountability level equal to the spot-
month speculative position limit. In this regard, the electronic
trading facility should keep track of each trader's uncleared
transactions in a significant price discovery contract on a net
basis. (For the purpose of netting uncleared transactions, long and
short uncleared transactions are only offset if they are conducted
with the same counterparty.) If a particular trader's net volume of
uncleared transactions exceeds the specified spot-month volume
accountability level, the electronic trading facility should conduct
an investigation to determine whether the trader's trading activity
is warranted and is not intended to manipulate the market.
(6) Account aggregation. An electronic trading facility should
have aggregation rules for significant price discovery contracts
that apply to accounts under common control, those with common
ownership, i.e., where there is a ten percent or greater financial
interest, and those traded according to an express or implied
agreement. Such aggregation rules should apply to cleared
transactions with respect to applicable speculative position limits,
as well as to uncleared transactions with respect to applicable
spot-month volume accountability levels. An electronic trading
facility will be permitted to set more stringent aggregation
policies. An electronic trading facility may grant exemptions to its
price discovery contracts' position limits for bona fide hedging (as
defined in Sec. 1.3(z) of this chapter) and may grant exemptions
for reduced risk positions, such as spreads, straddles and arbitrage
positions.
(7) Implementation deadlines. An electronic trading facility
with a significant price discovery contract is required to comply
with Core Principle IV as set forth in section 2(h)(7)C) of the Act
within 90 calendar days of the date of the Commission's order
determining that the contract performs a significant price discovery
function if such contract is the electronic trading facility's first
significant price discovery contract, or within 15 days of the date
of the Commission's order if such contract is not the electronic
trading facility's first significant price discovery contract. For
the purpose of applying limits on speculative positions in newly-
determined significant price discovery contracts, the Commission
will permit a grace period following issuance of its order for
traders with cleared positions in such contracts to become compliant
with applicable position limit rules. Traders who hold cleared
positions on a net basis in the
[[Page 75917]]
electronic trading facility's significant price discovery contract
must be at or below the specified position limit level no later than
90 calendar days from the date of the electronic trading facility's
implementation of position limit rules, unless a hedge exemption is
granted by the electronic trading facility. This grace period
applies to both initial and subsequent price discovery contracts.
Electronic trading facilities should notify traders of this
requirement promptly upon implementation of such rules.
(8) Enforcement provisions. The electronic trading facility
should have appropriate procedures in place to monitor its position
limit and accountability provisions and to address violations.
(i) An electronic trading facility with significant price
discovery contracts should use an automated means of detecting
traders' violations of speculative limits or exemptions,
particularly if the significant price discovery contracts have large
numbers of traders. An electronic trading facility should monitor
the continuing appropriateness of approved exemptions by
periodically reviewing each trader's basis for exemption or
requiring a reapplication. An automated system also should be used
to determine whether a trader has exceeded applicable non-spot
individual month position accountability levels, all-months-combined
position accountability levels, and spot-month volume accountability
levels.
(ii) An electronic trading facility should establish a program
for effective enforcement of position limits for significant price
discovery contracts. Electronic trading facilities should use a
large trader reporting system to monitor and enforce daily
compliance with position limit rules. The Commission notes that an
electronic trading facility may allow traders to periodically apply
to the electronic trading facility for an exemption and, if
appropriate, be granted a position level higher than the applicable
speculative limit. The electronic trading facility should establish
a program to monitor approved exemptions from the limits. The
position levels granted under such hedge exemptions generally should
be based upon the trader's commercial activity in related markets
including, but not limited to, positions held in related futures and
options contracts listed for trading on designated contract markets,
fungible agreements, contracts and transactions, as determined by
either a registered or unregistered derivatives clearing
organization. Electronic trading facilities may allow a brief grace
period where a qualifying trader may exceed speculative limits or an
existing exemption level pending the submission and approval of
appropriate justification. An electronic trading facility should
consider whether it wants to restrict exemptions during the last
several days of trading in a delivery month. Acceptable procedures
for obtaining and granting exemptions include a requirement that the
electronic trading facility approve a specific maximum higher level.
(iii) An acceptable speculative limit program should have
specific policies for taking regulatory action once a violation of a
position limit or exemption is detected. The electronic trading
facility policies should consider appropriate actions.
(9) Violation of Commission rules. A violation of position
limits for significant price discovery contracts that have been
self-certified by an electronic trading facility also a violation of
section 4a(e) of the Act.
CORE PRINCIPLE V OF SECTION 2(h)(7)(C)--EMERGENCY AUTHORITY--The
electronic trading facility shall adopt rules to provide for the
exercise of emergency authority, in consultation or cooperation with
the Commission, where necessary and appropriate, including the
authority to liquidate open positions in significant price discovery
contracts and to suspend or curtail trading in a significant price
discovery contract.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded should have clear
procedures and guidelines for decision-making regarding emergency
intervention in the market, including procedures and guidelines to
avoid conflicts of interest while carrying out such decision-making.
An electronic trading facility on which significant price discovery
contracts are executed or traded should also have the authority to
intervene as necessary to maintain markets with fair and orderly
trading as well as procedures for carrying out the intervention.
Procedures and guidelines should include notifying the Commission of
the exercise of the electronic trading facility's regulatory
emergency authority, explaining how conflicts of interest are
minimized, and documenting the electronic trading facility's
decision-making process and the reasons for using its emergency
action authority. Information on steps taken under such procedures
should be included in a submission of a certified rule and any
related submissions for rule approval pursuant to part 40 of this
chapter, when carried out pursuant to an electronic trading
facility's emergency authority. To address perceived market threats,
the electronic trading facility on which significant price discovery
contracts are executed or traded should, among other things, be able
to impose position limits in the delivery month, impose or modify
price limits, modify circuit breakers, call for additional margin
either from market participants or clearing members (for contracts
that are cleared through a clearinghouse), order the liquidation or
transfer of open positions, order the fixing of a settlement price,
order a reduction in positions, extend or shorten the expiration
date or the trading hours, suspend or curtail trading on the
electronic trading facility, order the transfer of contracts and the
margin for such contracts from one market participant to another, or
alter the delivery terms or conditions or, if applicable, should
provide for such actions through its agreements with its third-party
provider of clearing services.
(b) Acceptable practices. [Reserved]
CORE PRINCIPLE VI OF SECTION 2(h)(7)(C)--DAILY PUBLICATION OF
TRADING INFORMATION. The electronic trading facility shall make
public daily information on price, trading volume, and other trading
data to the extent appropriate for significant price discovery
contracts.
(a) Guidance. An electronic trading facility, with respect to
significant price discovery contracts, should provide to the public
information regarding settlement prices, price range, volume, open
interest, and other related market information for all applicable
contracts as determined by the Commission on a fair, equitable and
timely basis. Provision of information for any applicable contract
can be through such means as provision of the information to a
financial information service or by timely placement of the
information on the electronic trading facility's public Web site.
(b) Acceptable practices. Compliance with Sec. 16.01 of this
chapter, which is mandatory, is an acceptable practice and satisfies
the requirements of under Core Principle VI.
CORE PRINCIPLE VII OF SECTION 2(h)(7)(C)--COMPLIANCE WITH RULES.
The electronic trading facility shall monitor and enforce compliance
with the rules of the electronic trading facility, including the
terms and conditions of any contracts to be traded and any
limitations on access to the electronic trading facility.
(a) Guidance.
(1) An electronic trading facility on which significant price
discovery contracts are executed or traded should have appropriate
arrangements and resources for effective trade practice surveillance
programs, with the authority to collect information and documents on
both a routine and non-routine basis, including the examination of
books and records kept by its market participants. The arrangements
and resources should facilitate the direct supervision of the market
and the analysis of data collected. Trade practice surveillance
programs may be carried out by the electronic trading facility
itself or through delegation or contracting-out to a third party. If
the electronic trading facility on which significant price discovery
contracts are executed or traded delegates or contracts-out the
trade practice surveillance responsibility to a third party, such
third party should have the capacity and authority to carry out such
programs, and the electronic trading facility should retain
appropriate supervisory authority over the third party.
(2) An electronic trading facility on which significant price
discovery contracts are executed or traded should have arrangements,
resources and authority for effective rule enforcement. The
Commission believes that this should include the authority and
ability to discipline and limit or suspend the activities of a
market participant as well as the authority and ability to terminate
the activities of a market participant pursuant to clear and fair
standards. The electronic trading facility can satisfy this
criterion for market participants by expelling or denying such
person's future access upon a determination that such a person has
violated the electronic trading facility's rules.
(b) Acceptable practices. An acceptable trade practice
surveillance program generally would include:
(1) Maintenance of data reflecting the details of each
transaction executed on the electronic trading facility;
(2) Electronic analysis of this data routinely to detect
potential trading violations;
[[Page 75918]]
(3) Appropriate and thorough investigative analysis of these and
other potential trading violations brought to the electronic trading
facility's attention; and
(4) Prompt and effective disciplinary action for any violation
that is found to have been committed. The Commission believes that
the latter element should include the authority and ability to
discipline and limit or suspend the activities of a market
participant pursuant to clear and fair standards that are available
to market participants. See, e.g., 17 CFR part 8.
CORE PRINCIPLE VIII OF SECTION 2(h)(7)(C)--CONFLICTS OF
INTEREST. The electronic trading facility on which significant price
discovery contracts are executed or traded shall establish and
enforce rules to minimize conflicts of interest in the decision-
making process of the electronic trading facility and establish a
process for resolving such conflicts of interest.
(a) Guidance.
(1) The means to address conflicts of interest in the decision-
making of an electronic trading facility on which significant price
discovery contracts are executed or traded should include methods to
ascertain the presence of conflicts of interest and to make
decisions in the event of such a conflict. In addition, the
Commission believes that the electronic trading facility on which
significant price discovery contracts are executed or traded should
provide for appropriate limitations on the use or disclosure of
material non-public information gained through the performance of
official duties by board members, committee members and electronic
trading facility employees or gained through an ownership interest
in the electronic trading facility or its parent organization(s).
(2) All electronic trading facilities on which significant price
discovery contracts are traded bear special responsibility to
regulate effectively, impartially, and with due consideration of the
public interest, as provided in section 3 of the Act. Under Core
Principle VIII, they are also required to minimize conflicts of
interest in their decision-making processes. To comply with this
core principle, electronic trading facilities on which significant
price discovery contracts are traded should be particularly vigilant
for such conflicts between and among any of their self-regulatory
responsibilities, their commercial interests, and the several
interests of their management, members, owners, market participants,
other industry participants and other constituencies.
(b) Acceptable practices. [Reserved]
CORE PRINCIPLE IX OF SECTION 2(h)(7)(C)--ANTITRUST
CONSIDERATIONS. Unless necessary or appropriate to achieve the
purposes of this Act, the electronic trading facility, with respect
to any significant price discovery contracts, shall endeavor to
avoid adopting any rules or taking any actions that result in any
unreasonable restraints of trade or imposing any material
anticompetitive burden on trading on the electronic trading
facility.
(a) Guidance. An electronic trading facility, with respect to a
significant price discovery contract, may at any time request that
the Commission consider under the provisions of section 15(b) of the
Act any of the electronic trading facility's rules, which may be
trading protocols or policies, operational rules, or terms or
conditions of any significant price discovery contract. The
Commission intends to apply section 15(b) of the Act to its
consideration of issues under this core principle in a manner
consistent with that previously applied to contract markets.
(b) Acceptable practices. [Reserved]
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
33. The authority citation for part 40 is revised to read as
follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as
amended by Title XIII of the Food, Conservation and Energy Act of
2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008).
34. Revise the heading of part 40 as set forth above.
35. Amend Sec. 40.1 as follows:
A. Remove the term ``registered entity'' and add in its place the
term ``contract market, derivatives transaction execution facility or
derivatives clearing organization'' in paragraphs (b)(2), (b)(3), and
(f)(2); and
B. Remove the term ``contract market, derivatives transaction
execution facility or derivatives clearing organization'' and add in
its place the term ``registered entity'' in paragraph (h).
36. Amend Sec. 40.2 as follows:
A. Remove the term ``registered entity'' and add in its place
``contract market, derivatives transaction execution facility on which
significant price discovery contracts are traded or executed'' in
paragraph (a);
B. Remove the term ``registered entity'' and add in its place
``contract market, derivatives transaction execution facility or
derivatives clearing organization'' in paragraphs (a)(1) and
(a)(3)(iv); and
C. Revise paragraph (b) to read as follows:
Sec. 40.2 Listing and accepting products for trading or clearing by
certification.
* * * * *
(b) A registered entity shall provide, if requested by Commission
staff, additional evidence, information or data relating to whether any
contract meets, initially or on a continuing basis, any of the
requirements of the Act or Commission regulations or policies
thereunder which may be beneficial to the Commission in conducting a
due diligence assessment of the product and the entity's compliance
with these requirements.
* * * * *
37. In Sec. 40.3, remove the term ``registered entity'' and add in
its place the term ``designated contract market or registered
derivatives transaction execution facility'' in paragraphs (a)(1),
(c)(1), (c)(2), and (e)(2).
38. In Sec. 40.4, remove the term ``registered entity'' and add in
its place the term ``designated contract market'' in paragraph
(b)(9)(ii).
39. In Sec. 40.6, revise paragraphs (a)(2), (c)(3)(ii)(G), and
(c)(3)(ii)(H) to read as follows:
Sec. 40.6 Self-certification of rules.
(a) * * *
(2) The registered entity has filed its submission electronically
in a format specified by the Secretary of the Commission with the
Secretary of the Commission at submissions@cftc.gov, the relevant
branch chief at the regional office having local jurisdiction over the
registered entity, and, for filings submitted by a designated contract
market, registered derivatives transaction execution facility, or
electronic trading facility on which significant price discovery
contracts are traded or executed, the Division of Market Oversight at
DMOSubmissions@cftc.gov, and the Commission has received the submission
at its headquarters by the open of business on the business day
preceding implementation of the rule; provided, however, rules or rule
amendments implemented under procedures of the governing board to
respond to an emergency as defined in Sec. 40.1, shall, if
practicable, be filed with the Commission prior to the implementation
or, if not practicable, be filed with the Commission at the earliest
possible time after implementation, but in no event more than twenty-
four hours after implementation; and
* * * * *
(c) * * *
(3) * * *
(ii) * * *
(G) Option contract terms. For registered entities that are in
compliance with the daily reporting requirements of Sec. 16.01 of this
chapter, changes to option contract rules relating to the strike price
listing procedures, strike price intervals, and the listing of strike
prices on a discretionary basis.
(H) Trading months. For registered entities that are in compliance
with the daily reporting requirements of Sec. 16.01 of this chapter,
the initial listing of trading months which are within the currently
established cycle of trading months.
40. In Sec. 40.7, remove the term ``designated contract market,
registered derivatives transaction execution
[[Page 75919]]
facility or registered derivatives clearing organization'' and add in
its place the term ``registered entity'' in paragraph (b) introductory
text.
41. In Sec. 40.8, revise paragraph (a), redesignate paragraph (b)
as paragraph (c), and add new paragraph (b) to read as follows:
Sec. 40.8 Availability of public information.
(a) The following sections of all applications to become a
designated contract market, derivatives execution transaction facility
or designated clearing organization will be public: transmittal letter,
proposed rules, the applicant's regulatory compliance chart, documents
establishing the applicant's legal status, documents setting forth the
applicant's governance structure, and any other part of the application
not covered by a request for confidential treatment.
(b) The following submissions required by Sec. 36.3(c)(4) by an
electronic trading facility on which significant price discovery
contracts are traded or executed will be public: rulebook, the
facility's regulatory compliance chart, documents establishing the
facility's legal status, documents setting forth the facility's
governance structure, and any other parts of the submissions not
covered by a request for confidential treatment.
* * * * *
42. Revise Appendix D to part 40 to read as follows:
Appendix D to Part 40--Submission Cover Sheet and Instructions
A properly completed submission cover sheet must accompany all
rule submissions submitted electronically by a registered entity to
the Secretary of the Commodity Futures Trading Commission, at
submissions@cftc.gov in a format specified by the Secretary of the
Commission. Each submission should include the following:
1. Identifier Code (optional)--If applicable, the exchange or
clearing organization Identifier Code at the top of the cover sheet.
Such codes are commonly generated by the exchanges or clearing
organizations to provide an identifier that is unique to each filing
(e.g., NYMEX Submission 03-116).
2. Date--The date of the filing.
3. Organization--The name of the organization filing the
submission (e.g., CBOT).
4. Filing as a--Check the appropriate box for a designated
contract market (DCM), derivatives clearing organization (DCO),
derivatives transaction execution facility (DTEF), or electronic
trading facility with a significant price discovery contract (ECM-
SPDC).
5. Type of Filing--Indicate whether the filing is a rule
amendment or new product and the applicable category under that
heading.
6. Rule Numbers--For rule filings only, identify rule number(s)
being adopted or modified in the case of rule amendment filings.
7. Description--For rule or rule amendment filings only, enter a
brief description of the new rule or rule amendment. This narrative
should describe the substance of the submission with enough
specificity to characterize all essential aspects of the filing.
8. Other Requirements--Comply with all filing requirements for
the underlying proposed rule or rule amendment. The filing of the
submission cover sheet does not obviate the responsibility to comply
with any applicable filing requirement (e.g., rules submitted for
Commission approval under Sec. 40.5 must be accompanied by an
explanation of the purpose and effect of the proposed rule along
with a description of any substantive opposing views).
A sample of the required submission cover sheet follows.
BILLING CODE 6351-01-P
[[Page 75920]]
[GRAPHIC] [TIFF OMITTED] TP12DE08.001
[[Page 75921]]
Issued in Washington, DC, on December 2, 2008, by the
Commission.
David Stawick,
Secretary of the Commission.
[FR Doc. E8-28867 Filed 12-11-08; 8:45 am]
BILLING CODE 6351-01-C