# A New Regulatory Framework for Trading Facilities, Intermediaries and Clearing Organizations > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A01-19496 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** August 10, 2001 - **Citation:** 66 FR 42256 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 5, 15, 36, 37, 38, 40, 41, 100, 166, 170 and, 180 RIN 3038-AB63 A New Regulatory Framework for Trading Facilities, Intermediaries and Clearing Organizations AGENCY: Commodity Futures Trading Commission. ACTION: Final rulemaking. SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) is promulgating final rules to implement those provisions of the Commodity Futures Modernization Act of 2000 (CFMA) relating to trading facilities. The CFMA profoundly altered federal regulation of commodity futures and option markets. The new statutory framework establishes two categories of markets subject to Commission regulatory oversight, designated contract markets and registered derivatives transaction execution facilities, and two categories of exempt markets, exempt boards of trade and exempt commercial markets. These rules establish administrative procedures necessary to implement the CFMA, interpret certain of the CFMA's provisions and provide guidance on compliance with various of its requirements. In addition, the Commission, under its exemptive authority, in a limited number of instances is providing relief from, or greater flexibility than, the CFMA's provisions. Rules implementing the CFMA relating to clearing organizations were recently proposed in a separate notice of proposed rulemaking (66 FR 24308 (May 14, 2001)), and rules pertaining to intermediaries which were previously withdrawn will be reproposed at a later time. EFFECTIVE DATE: October 9, 2001. FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel, Nancy E. Yanofsky, Assistant Chief Counsel, Division of Economic Analysis; Alan L. Seifert, Deputy Director, or Riva Spear Adriance, Special Counsel, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5260. E-mail: PArchitzel@cftc.gov, NYanofsky@cftc.gov, ASeifert@cftc.gov or RAdriance@cftc.gov. SUPPLEMENTARY INFORMATION: I. Background A. Overview The Commission on June 22, 2000, proposed (65 FR 38986) and on December 13, 2000, issued (65 FR 77962) final rules promulgating a new regulatory framework to apply to multilateral transaction execution facilities that trade contracts of sale of a commodity for future delivery or commodity options. 1 The final rules were to become effective on February 12, 2001. 1 See also Rules Relating to Intermediaries of Commodity Interest Transactions, 65 FR 77993 (Dec. 13, 2000), and A New Regulatory Framework for Clearing Organizations, 65 FR 78020 (Dec. 13, 2000). These three related rule packages in their entirety constituted the Commission's new regulatory framework. Before the Commission's new regulatory framework became effective, however, Congress on December 15, 2000, passed, and President Clinton on December 21, 2000, signed into law, the Commodity Futures Modernization Act of 2000 (CFMA) 2 , which substantially amended the Commodity Exchange Act, 7 U.S.C. 1 et seq. (Act). The Act, as amended by the CFMA, establishes two tiers of regulated markets, designated contract markets (contract markets) and registered derivatives transaction execution facilities (DTFs). In addition, the Act, as amended, provides for two categories of markets exempt from regulation, exempt boards of trade and exempt commercial markets. 2 P.L. 106-554, 114 Stat. 2763 The CFMA, in both its broad contours and in many of its specific provisions, codified the Commission's new regulatory framework without significant change. However, it varied from the rules implementing the framework in a number of details and rendered unnecessary a number of those rules by enacting their provisions into law. The Commission, therefore, withdrew most of the final rules in order to determine their consistency with the Act as amended. 3 65 FR 82272. On March 9, 2001, the Commission proposed new rules conforming to and implementing the amended statutory scheme with respect to transaction execution facilities. 66 FR 14262. 4 3 The Commission determined not to withdraw rules concerning the investment of customer funds, but rather moved forward their effective date to December 28, 2000. See 65 FR 82270 (Dec. 28, 2000). 4 The Commission separately proposed rules implementing the CFMA with respect to Commission-regulated derivatives clearing organizations. 66 FR 24308 (May 14, 2001). Implementation of the CFMA also requires the Commission to undertake a number of rulemakings in addition to those that were part of the Commission's new regulatory framework, such as rules relating to security futures products. Those rulemaking proceedings are separate from the rules being adopted herein. Finally, rules relating to intermediaries that were included in the new regulatory framework withdrawn in December, but which are not required by the CFMA, will be reproposed by the Commission at a later date. B. The Proposed Rules The Commission proposed a new part 38 relating to contract markets that, as proposed, would exempt contract markets operating under part 38 from all Commission rules not specifically reserved. 5 Part 38 also proposed application and approval procedures for new contract markets, including a 60-day fast-track approval procedure as well as procedures for product listing and amendments. Proposed part 38 also contained a number of rules explaining the Commission's interpretation of several statutory requirements. 5 It should be noted that rules that are not being reserved with respect to their application to contract markets (or DTFs) will still apply to intermediaries, or clearing organizations, and contract market members, if relevant to those entities. See, e.g., Commission rule 1.35. Proposed part 37 construed section 5a of the Act, which provides for registration of DTFs. The proposed rules identified the commodities eligible to be traded on a DTF as a matter of right under section 5a(b)(2)(A) through (C) of the Act, as those defined as “excluded” commodities in section 1a(13) of the Act. 6 Part 37 also proposed a procedure under which a specific DTF could petition to list contracts on additional commodities. The Commission also proposed a number of provisions providing greater administrative flexibility in the registration 7 and oversight of DTFs than provided for in the Act, as amended. Proposed appendices to parts 37 and 38 provided general guidance for complying with the rules. 6 Section 1a(13) of the Act defines an “excluded commodity” to mean, among other things, an interest rate, exchange rate, currency, credit risk or measure, debt instrument, measure of inflation, or other macroeconomic index or measure. 7 As proposed, existing contract markets need only notify the Commission of their intent to operate as a DTF, and file with the Commission the DTF's rules and a certification that they meet all of the requirements for registration as a DTF. The Commission also proposed a new part 36 relating to exempt boards of trade and exempt commercial markets. Transactions entered into by eligible commercial entities in exempt commodities 8 traded on an electronic trading facility, are exempt commercial markets under section 2(h)(3) of the Act. 9 Markets that satisfy the initial and ongoing requirements of sections 2(h)(3) through (5) of the Act, as amended, are excluded from the Act's other requirements. The Commission proposed rules in part 36 to implement the notification requirements of section 2(h)(5)(A) of the Act, and the information requirements for exempt commercial markets consistent with section 2(h)(5)(B) of the Act. 8 See section 1a(14) of the Act. 9 See sections 2(e)(1) and 2(h)(3) of the Act, as added by sections 104 and 106 of the CFMA. The Act refers to electronic commercial markets as “excluded” from the Act's regulatory requirements that are not qualifying conditions for the exemption. These qualifying conditions are found in paragraphs 2(h)(4) and (5). Moreover, it should be noted that among these qualifying conditions, the Commission is authorized to promulgate rules to ensure disclosure of prices and to specify procedures regarding redress by participants to an order denying them access in response to a determination that the participant did not comply with a subpoena issued by the Commission. See sections 2(h)(4)(D), 2(h)(5)(C)(ii) and 2(h)(6) of the Act. In part 36, the Commission also proposed rules implementing Section 5d of the Act, which establishes the category of “exempt board of trade.” Commission rule 36.2 proposed to define those commodities that are eligible to trade on an exempt board of trade to include commodities defined in section 1a(13) of the Act as “excluded commodities,” other than securities, and such other commodities as the Commission may define by rule, regulation or order. In addition, rule 36.2(b) proposed the form and manner of the notification to the Commission provided for under section 5d of the Act. The Commission also proposed an antifraud provision, proposed rule 1.1, pursuant to its authority in sections 3 and 8a(5) of the Act. This proposed anti-fraud rule would apply to foreign currency transactions described in section 2(c)(1) of the Act. Finally, the Commission proposed to delete Part 180 of its rules governing arbitration of disputes arising on contract markets, and reproposed its withdrawn rule 166.5, incorporating the new provision added by the CFMA, which permits an FCM to require an eligible contract participant to waive the right to reparations as a condition of using the FCM's services. C. Overview of Comments The Commission received a total of 20 comments 10 from a range of commenters, including a government agency, an association of state securities regulators, a self-regulatory organization, 11 five futures exchanges, 12 a derivatives clearing organization, 13 eight trade associations, 14 a trading firm, an attorney and a group of energy firms. 15 10 In this Notice of Final Rulemaking, comment letters (CL) are referenced by the letter's file number and page. These letters are available through the Commission's internet web site, http://www.cftc.gov. 11 They are: United States Department of the Treasury (Treasury) (CL 14), North American Securities Administrators Association, Inc. (NASAA) (CL 2), and National Futures Association (NFA) (CL 16), respectively. 12 They are: Board of Trade of the City of New York, Inc. (NYBOT) (CL 5),; Chicago Board of Trade (CBT) (CL 7),; New York Mercantile Exchange (NYMEX) (CL 10), Minneapolis Grain Exchange (MGE) (CL 15), and Chicago Mercantile Exchange (CME) (CL 18). 13 Board of Trade Clearing Corporation (BOTCC) (CL 1). 14 They are: International Swaps and Derivatives Association, Inc. (ISDA) (CL 3), @Markets (CL 6), National Grain and Feed Association (NGFA) (CL 9), Futures Industry Association (FIA) (CL 11), the Silver Users Association (SUA) (CL 12), National Grain Trade Council (NGTC) (CL 17), Association of the Bar of the City of New York (NY Bar) (CL 19) and Securities Industry Association (SIA) (CL 20). 15 They are: Advance Trading, Inc. (CL 13), Thomas Muth, Esq. (CL 8), and Energy Group (CL 4), respectively. In addition to the written comments, the proposed rules were discussed at a March 28, 2001, meeting of the Commission's Agricultural Advisory Committee (AAC), chaired by Commissioner David D. Spears. A transcript of the AAC meeting is also included in the Commission's comment file and is available on the Commission's website. Most commenters generally supported the proposed rules, especially those provisions that offered greater flexibility than provided by the CFMA. Commenters also expressed support for the guidance regarding compliance with the core principles applicable to contract markets and DTFs. Many commenters offered specific recommendations for clarification of the rules or requested that the Commission clarify how the rules would be applied in specific circumstances. II. The Final Rules A. Part 38—Contract Markets Part 38 governs trading on designated contract markets. Under rule 38.2, contract markets operating under this part are exempt from all Commission rules not specifically reserved. Rule 38.3 contains application and approval procedures for new contract markets, including a 60-day fast-track approval procedure. The designation procedures, which include Commission authority to designate a contract market upon conditions, require applicants to (1) demonstrate that they satisfy the criteria for designation under section 5(b) of the Act and the core principles for operation under section 5(d) of the Act; (2) to include a copy of the contract market's rules; and (3) to provide a brief explanation of how the conditions for designation are satisfied to the extent that compliance with the conditions for designation is not self-evident. Based upon its experience in processing applications for designation following proposal of these rules, 16 the Commission is modifying final rule 38.3 to make clear that an applicant may instruct the Commission in writing at the time of application, to review the application under the procedures of section 6 of the Act, which provide for approval within 180 days, rather than under the rule's fast-track review procedures. This is different than the proposed rule, which provided that an applicant could instruct the Commission in writing “during the review period” to review the application under the statutory review procedure. 17 Absent such a written instruction, the application will be reviewed under the fast-track procedures, as was proposed. 18 16 In its notice of proposed rulemaking, the Commission stated that during the transition period between the effective date of the CFMA and the adoption of final implementing regulations, it would, in effect, permit applications to be filed under the procedures as proposed. 66 FR 14268. 17 Two applicants have indicated that they preferred for their applications to be processed more slowly than provided for under the fast-track rules and that the rule explicitly should permit applicants to so indicate at the time the application is filed. The Commission agrees. 18 The Commission is making a similar clarification to rule 37.5(b)(5), relating to applications for registration as a DTF. The Commission is modifying proposed rule 38.4 (also based upon its administrative experience) to provide that the operational rules of an applicant for contract market designation and the terms or conditions of any products to be listed for trading that have been filed for voluntary Commission approval with the application or while it is pending shall be deemed approved by the Commission no earlier than at the time that the facility itself is deemed to be designated. This proviso has been added to final rule 38.4 to conform the time for review and approval of the rules of an applicant—in cases where the applicant voluntarily requests Commission approval of its operational or product-related rules—with the review period for the application for contract market designation itself. In response to a number of comments, proposed rule 38.3(b)(2) is being modified. The rule as proposed would have interpreted the designation requirement on fair and equitable trading to include making available to market participants timely information on prices, bids and offers. A number of commenters suggested that the proposed requirement be modified to apply in a manner “appropriate to the market.” 19 As the CBT suggested: 19 The suggested revision applies equally to proposed rule 37.6(d)(3) relating to DTFs, which has a similar provision. while it may be expected that an electronic market would be able to routinely capture and disseminate bids and offers entered into the trading system, as well as execution prices, it is difficult for an open outcry market to do the same. CL 7-7. See also CL 10-3 and CL 18-3. The Commission agrees and is modifying the final rule by including the “appropriate to the market” language that it had previously included in the withdrawn rules. 20 Currently, most open-outcry markets generally capture price changes only. By including the “appropriate to the market” language, the Commission intends to make clear that it is not applying to open-outcry markets a standard for disseminating such information that is higher than the one presently in effect. However, the Commission expects that electronic trading systems can, and appropriately will, capture such information for every transaction, not just for those involving a price change. 20 The Commission also is making conforming changes to Part 38, Appendix A, Criterion 3 and to Part 37, Appendix B, Core Principle 4. CBT asked the Commission to clarify application of the core principle on fitness under section 5(d)(14) of the Act. That provision of the Act requires contract markets to apply appropriate fitness standards for “directors, members of any disciplinary committee, members of the contract market, and any other persons with direct access to the facility.” Regarding “direct access,” CBT noted: automated order routing systems may enable numerous customers to send their orders directly to a trading floor or to an electronic trading system. Such trades may be intermediated and/or guaranteed by a clearing FCM. The CBOT does not believe that the Commission intended to require markets to impose fitness requirements on such customers. CL 7-8. See also CL 5-4, CL 19-5. Generally, the core principles are intended to apply to contract markets (and DTFs) regardless of the form of business organization. 22 Section 5(d)(14) requires persons who exercise governance responsibilities or control of the trading facility to meet a fitness requirement. 22 In a mutually-owned enterprise, members would exercise such governance authority. In a demutualized contract market, the facility's owner or owners would have such authority. 23 CBT correctly observes that customers having direct trading access through an automated order entry routing system or otherwise do not exercise a member's governance authority. 24 The Commission interprets the core principle on fitness under section 5(d)(14) of the Act as not requiring contract markets to establish fitness standards for customers as a consequence of their using direct order routing systems to trade. 21 But see section 5(d)(16) of the Act, which unlike the other core principles, applies only to mutually-owned contract markets. 22 Thus, directors, members of disciplinary committees, and members are required to meet a fitness requirement. Section 1a(24) defines a member as a person “owning or holding membership in * * * the contract market, or having trading privileges on the contract market.” 23 The Commission clarified the core principle's application with respect to demutualized contract markets by making explicit that the core principle on fitness requires a demutualized contract market to establish fitness requirements for all natural persons that directly or indirectly have greater than a ten percent ownership interest in the facility. See proposed rule 38.3(b)(4). 24 CL 7-8. See also comments of NYBOT, CL 5-4, and NY Bar, CL 19-5. NY Bar raised a similar concern, stating that: Appendix A to Part 38 in Designation Criterion 6 states that a contract market must have authority to discipline “market participants.” It should be made clear that this does not apply to customers of members. CL 19-5. See also CL 5-5. The Commission does not agree. Designation criterion 6 (Section 5(b)(6) of the Act) provides, in part, that: a board of trade shall establish and enforce disciplinary procedures that authorize the board of trade to discipline, suspend, or expel members or market participants that violate the rules of the board of trade, or similar methods for performing the same functions. Contract markets have the authority to deny access to persons who violate their rules, either directly, or indirectly through their members. The Commission also recognizes, however, that a contract market might encounter difficulty in enforcing fines or other sanctions to remedy violations of its rules by persons trading on a market that do not have a significant ownership interest in the facility. Accordingly, the Commission proposed in rule 38.3(b)(3) to make clear “that a trading facility applying for designation may satisfy the requirement that it have disciplinary procedures with respect to non-members by having the capacity to sanction non-member violations by expelling them or by denying them future access.” 66 FR 14263, n. 7. Part 38, Appendix A, reflects rule 38.3(b)(3)'s interpretation of designation criterion 6 that a contract market need only have authority to deny access to such persons. Nevertheless, the Commission is modifying rule 38.3(b)(3) and Appendix A, in light of NY Bar's comment, to clarify that the denial of access may be either direct by order to the market participant or indirect by order to contract market members. The Commission is also clarifying that the capacity to expel or deny access to a member with trading privileges but having no, or only nominal equity interest in the facility, also satisfies the requirements of designation criterion 6. In this regard, the definition of “member” in section 1a(24) of the Act includes persons with trading privileges. Such persons may have trading privileges under a “user agreement” with the facility or trading platform or by virtue of a non-equity “membership” of only nominal value. Levying fines or imposing other types of sanctions against non-equity “members” may be as difficult as imposing such remedies against non-member market participants. 25 25 NY Bar also suggested that Part 38, Appendix A, clarify that “a contract market is not required to establish minimum financial standards for customers of intermediaries.” The Commission has modified the text by removing the term “user,” based on the understanding that the statutory meaning of “member” includes those only having trading privileges on the facility. Core principle 4 requires contract markets to monitor trading to prevent manipulation. Part 38, Appendix B, provided that contract markets, as an acceptable practice, should have access to clearing information. BOTCC points out that, because a contract market's provider of clearing services may be a completely independent entity, the clearing entity should be required to provide such information to a contract market “only in furtherance of the contract market's self-regulatory responsibilities and only upon a showing of need or other good cause.” CL 1-2. CBT disagreed, reasoning that, “it is crucial to the performance of a contract market's trade monitoring function that it retains such access without any restrictions or any special showing of need.” CL 7-6; CL 10-3. The Commission agrees that a contract market must be able to obtain such information without limitation. Accordingly, contract markets, by contract, must provide for such unimpeded access to information from third-parties performing clearing functions for the contract market. NYBOT asked the Commission to modify the guidance for the designation criterion on the financial integrity of transactions. NYBOT argued that contract market rules are not required by the Act and are unnecessary because futures commission merchants continue to be subject to the segregation and related recordkeeping requirements of section 4d of the Act and Commission rules thereunder. CL 5-3. The Commission disagrees. The CFMA specifically requires contract markets (and DTFs) to establish and enforce rules addressing the financial integrity of transactions executed on or through the board of trade or facility. 26 26 See Designation Criterion 5 of section 5(b) of the Act, providing that a contract market “shall establish and enforce rules and procedures for ensuring the financial integrity of transactions entered into by or through the facilities of the contract market.” See also section 5a(c) of the Act, Registration Criterion 4, governing the financial integrity of transactions entered into on a DTF. The Commission notes that, in conformance with its notice of proposed rulemaking with respect to clearing, 66 FR 24308, it has modified the guidance for Designation Criterion 5 to reflect that transactions executed on a contract market, if cleared, must be cleared with a derivatives clearing organization DCO registered with the Commission, absent Commission action pursuant to its section 4(c) exemptive authority. The Commission anticipates that contract markets will continue to be able to fulfill their self-regulatory responsibilities concerning the financial responsibility of intermediaries through existing mechanisms, including audits conducted by designated self-regulatory organizations. The Commission has clarified this point in Appendix B, in the application guidance to Core Principle 11, and has noted explicitly that, “A contract market may delegate to a designated self-regulatory organization responsibility for receiving financial reports and for conducting compliance audits pursuant to the guidelines set forth in rule 1.52.” Accordingly, rule 1.52 has been added to the rules reserved under Commission rule 38.2. 27 27 The Commission also has modified Part 38, Appendix A, Designation Criterion 5, and Part 37, Appendix A, Registration Criterion 4, by referring to the form of margin rather than to margin “levels.” In this regard, it should be noted that the Commission is not mandating specific margining systems. Compare CL 18 at 3. In addition, the Commission has made a number of conforming or technical textual changes to Part 38, Appendix B, in response to the comments of MGE, NY Bar, NYBOT, and NYMEX. As modified, Appendix B states explicitly that Core Principle 7, which relates to public disclosure of certain information, may be satisfied through timely placement of the information on the facility's web site. The language relating to Core Principle 6 (emergency authority) now reads, “minimize the effects of conflicts of interest.” Core Principle 9 has been modified to make clear that the qualified independent professional testing of a system need not be performed by a third-party provider, and the discussion related to Core Principle 10 (trade information) now reads “transaction executed on” rather than “effected on.” The Commission also clarified the discussion of position limits under Core Principle 5 and of trade information under Core Principle 10. B. Part 37—DTFs New part 37 implements section 5a of the Act, which provides for registration of DTFs. Rule 37.2 exempts DTFs from all Commission regulations applicable to a trading facility that are not reserved, 28 and makes clear that the reserved regulations apply as though DTFs were specifically referenced therein. Rule 37.3 identifies the commodities eligible to be traded on a DTF under section 5a(b)(2)(A) through (C) of the Act as those defined as “excluded” commodities in section 1a(13) of the Act. 29 28 As noted in footnote 5 above, rules that also have application to intermediaries or clearing organizations would still apply to those entities even though they are not being reserved with respect to their application to DTFs. 29 Section 5a(b)(2)(A) through (C) of the Act, as amended, provides that a DTF may trade any contract of sale of a commodity for future delivery (or option on such a contract) only if— (A) the underlying commodity has a nearly inexhaustible deliverable supply; (B) the underlying commodity has a deliverable supply that is sufficiently large that the contract is highly unlikely to be susceptible to the threat of manipulation; [or] (C) the underlying commodity has no cash market[.] Section 1a(13) of the Act, as amended, defines an “excluded commodity” to mean, among other things, an interest rate, exchange rate, currency, credit risk or measure, debt instrument, measure of inflation, or other macroeconomic index or measure. Excluded commodities under section 1a(13) of the Act include exempt securities. Unlike the provisions governing exempt boards of trade, the CFMA imposes no specific limitations or requirements for exempt securities to trade on a DTF. Rule 37.3 also establishes a procedure whereby a specific DTF may make an individualized showing under section 5a(b)(2)(E) of the Act that a contract is highly unlikely to be susceptible to the threat of manipulation and should be eligible for trading on that DTF in light of the characteristics of the commodity and the market's surveillance history, including its self-regulatory record, capacity and undertakings. Rule 37.3(a)(6) lists the factors that are relevant in making such a showing. New part 37 provides greater administrative flexibility than the CFMA in the registration and oversight of DTFs, including provisions that (1) permit the Commission to register a DTF upon conditions; (2) provide a fast-track review procedure for applications for registration; and (3) permit applicants for DTF registration voluntarily to demonstrate their capacity to comply with the core principles for operation. 30 The Commission has provided two appendices giving general guidance regarding applying for registration and compliance with core principles. 30 Existing contract markets need not make such a demonstration. They simply must notify the Commission of their intent to operate as a DTF, and file with the Commission the DTF's rules (or a list of its rules) and a certification that they meet all of the requirements for registration as a DTF. Rule 37.6(d) includes interpretations of certain core principles. For example, it provides that an electronic trading platform used by eligible commercial entities only, may satisfy the requirement to monitor trading in a manner “appropriate to the market” by assuring compliance with its rules regarding access limitation; that the core principle on monitoring trading may be met, appropriate to the market, by providing information to the Commission as requested; and that the core principle concerning fitness standards applies to natural persons who directly or indirectly have greater than a ten percent ownership interest in a non-member-owned facility. Rule 37.7 includes several special call provisions for requesting information from a DTF, or its market intermediaries or participants. Finally, the Commission has used its section 4(c) exemptive authority to give DTFs greater procedural flexibility in amending their rules. The Commission, based upon administrative experience in processing applications for registration following proposal of the rules, is modifying the time period for voluntary approval of the applicant's operating rules and for one product to be listed for trading on the facility. Upon registration as a DTF, the facility may list products for trading that meet the automatic eligibility and other requirements by notification to the Commission. Alternatively, it may submit new products for voluntary approval under the forty-five day fast-track review period of rule 40.3. Although no commenter specifically raised the issue, the Commission, after further consideration occasioned by inquiries from potential applicants, is modifying rule 37.7 by adding a new paragraph (c)(2) to provide that the facility's operating rules, if Commission approval is requested, and one initial contract, if submitted for voluntary approval with an application for DTF registration, will be deemed approved in thirty days, rather than the normal forty-five day period under rule 40.3(b). This modification will enable an applicant for DTF registration to have its operating rules and one product considered by the Commission for approval under the same time-frame as the registration application itself. Because this is an exception to the normal review period, it is being limited to one product only. Such a submission for voluntary product approval must comply in all other respects with the requirements of rule 40.3. 31 31 Product approval is voluntary, and an applicant is not required to submit any of its products for Commission approval. In addition, commenters made a number of suggestions for modification of, or raised issues relating to, the rules as proposed. These comments relate to eligibility of persons for trading, eligibility of commodities for trading, and interpretations regarding several of the registration criteria and core principles. Several commenters also suggested a number of specific textual clarifications. 1. Trader Eligibility The Commission proposed to include registered floor brokers and floor traders as eligible for trading on a commercial DTF. See proposed rule 37.1(b). CBT, NYMEX, and @Markets supported this proposal. NY Bar, however, opposed the proposed rule's requirement that an FCM guarantee the trades of such a qualifying floor broker or floor trader, arguing that “[i]t should be sufficient if the floor trader or floor broker is simply ‘qualified,’ i.e., that an FCM has agreed to accept all of the broker or trader's trades, instead of being fully guaranteed.” CL 19-3; see also CL 5-3. The Commission does not agree that “acceptance” of all trades rather than a guarantee is sufficient. A guarantee provides formal assurance that another's obligation will be fulfilled, a level of assurance not necessarily provided by acceptance. 32 The Commission believes that this higher level of assurance is both necessary and appropriate for eligibility by floor brokers and floor traders as commercial entities, and is adopting the final rule as proposed. 32 Several exchanges, including CBT, NYMEX and CME, require clearing guarantees for trades by non-clearing members. The Commission also requested comment on whether the definition of “eligible commercial entity” under proposed rule 37.1(b) should be amended to include individuals whose function in electronic markets is similar to that provided by floor traders. A number of commenters generally supported including individuals who perform market-making functions on electronic trading facilities within the definition of eligible commercial entity. See CL 6-2, CL 4-2. @Markets, for example, opined that “B2B markets are in their infancy”; “certain markets may find that individual market makers are a critical element in accruing necessary liquidity”; and “in lieu of the registration requirement * * *. such individuals [should] * * * meet the requirements for membership established by the facility.” CL 6-3. NYBOT and NY Bar suggested that such a liquidity provider for electronic markets should be considered to be any eligible contract participant that “undertakes to maintain a bid and ask spread pursuant to an agreement with, or the rules of, an electronic trading facility.” CL 5-1; CL 19-2. CBT suggested that the electronic market equivalent of a floor trader would simply be a member that has its trading guaranteed by an FCM, and that is subject to the trade practice and disciplinary rules of exchanges. CL 7-4. However, that description would be a meaningful distinction only in the context of an intermediated market. Rather than attempting to establish a rule at this time, NYMEX suggested that the Commission make such determinations over time on a case-by-case basis for each facility seeking regulatory relief in this area. CL 10-5. SIA, although supporting the concept of a functional equivalent of a floor trader for electronic markets, noted that “most corporate entities in that category would already fall within the statutory definition of eligible commercial entity.” CL 20-3. In light of the wide range of recommended standards, the suggestion by at least one commenter that existing categories already would cover those likely to fall within the scope of a new category for electronic market maker, and the lack of previous trading experience, the Commission is of the view that the issue should be considered based upon a fuller administrative record, after some trading experience with this type of market has been observed. NY Bar suggested that the Commission clarify that “[s]ection 37.3(b) is intended to permit a non-eligible commercial entity to access a commercial entity [DTF] through any FCM or broker-dealer.” CL 19-3. Access to trade on a DTF generally is limited to eligible traders under rule 37.3(a). Eligible traders are either eligible contract participants or non-eligible contract participants trading through a registered FCM that: (1) is a member of a futures self-regulatory association (or for a facility trading only security futures products, a national securities association); (2) is a clearing member of a derivatives clearing organization; and (3) has at least $20 million net capital. See section 5a(b)(3) of the Act. Moreover, for transactions other than security futures products, a DTF may by rule permit a broker-dealer or a depository or Farm Credit System institution to act as intermediary “on behalf of customers” if such entities do not hold customer funds for more than one business day. See section 5a(e) of the Act. In contrast to these provisions, section 5a(a)(2)(F) of the Act provides that a commercial DTF may trade any commodity (other than an enumerated agricultural commodity) 33 when access to trade on the facility is limited to eligible commercial entities trading for their own account. Based upon this statutory language, commercial DTFs under rule 37.3(b) are limited to eligible commercial entities (as defined in § 37.1(b)) trading for their own account. Accordingly, commercials may not execute their trades through an FCM, or any other intermediary, when trading on a commercial DTF under rule 37.3(b). 34 33 The enumerated agricultural commodities are those listed in section 1a(4) of the Act, and include, among others: wheat, cotton, rice, corn, soybeans and the soybean complex, livestock, and frozen concentrated orange juice. 34 Consistent with this provision, rule 37.1(b) includes floor brokers within the definition of “eligible commercial entity” only when trading for their own account. 2. Commodity Eligibility Consistent with section 5(e)(2) of the Act, the Commission indicated in its notice of proposed rulemaking that it will determine in a future rulemaking whether to permit and, if so, the appropriate conditions for permitting, the enumerated agricultural commodities to trade on a DTF. 66 FR 14264. A number of commenters responded by suggesting that the enumerated agricultural commodities should be permitted to trade on a DTF immediately. See CL 3-3, CL 9-1, CL 18-4. The Commission intends to turn its attention to this issue at a later date in a separate rulemaking. As a class of excluded commodities, exempt securities are eligible to be traded on a DTF. The Commission requested comment on whether exempt securities trading on a DTF should be subject to additional requirements, such as reporting requirements, not applicable to other excluded commodities. 35 CBT explained that it “has found large trader reporting to be a useful tool for monitoring trading of futures and options on exempt securities,” but wanted “the form, levels and timing of any such reporting” left to the discretion of individual DTFs. CL 7-5. 35 The proposed rules provided that commodities defined in section 1a(13) of the Act as “excluded commodities” meet the deliverable supply eligibility test for trading on a DTF. Such excluded commodities include interest rates, currencies, securities, security indexes, macroeconomic and other types of indexes, and occurrences associated with an economic consequence beyond the control of the traders. ISDA did not object “in principle” to the imposition of such requirements, but cautioned against imposing regulatory requirements in the absence of a “compelling public interest.” CL 3-3. SIA suggested that any large-trader reporting requirement should be consistent with market practice in the relevant cash market and only upon request of the Commission. CL 20-2. On the other hand, the United States Department of the Treasury (Treasury) expressed the opinion that all DTFs and contract markets should enforce a large-trader reporting system for contracts based on Treasury instruments. Treasury “reiterate(d) its belief that large trader reporting requirements * * * reveal information that is useful to regulators, and also have a deterrent effect.” CL 14-2. In light of all of the comments received, the Commission at this time has determined not to impose routine large-trader requirements on DTFs or their users for contracts based on Treasury instruments. Should market conditions warrant, however, the Commission will invoke its special call authority under Rule 37.8 to require such information for these contracts as the Commission deems necessary, taking into consideration the surveillance information routinely available with the DTF. The Commission's special call could require, for example, ongoing reporting of large-trader positions or other appropriate information. In addition to excluded commodities and security futures products, the Commission, under rule 37.3(a)(6), may make an individualized determination by rule, regulation or order, that a commodity is eligible to be traded on a DTF based on the commodity's characteristics and surveillance history, and the self-regulatory record and capacity of the facility on which it is to be traded. NYMEX questioned whether such determinations were included under the thirty-day period that applies to applications for DTF registration. If not, NYMEX requested that “the Commission specify a comparable timeframe for such determinations that would provide for resolution of such applications in a reasonably expeditious manner.” CL 10-2. The timing of an individualized Commission determination of commodity eligibility under rule 37.3(a)(6) is independent of a facility's initial registration as a DTF. In this regard, the rules do not require that a product be submitted for approval at the time the facility is registered as a DTF. Accordingly, the thirty-day time period for registration is independent of, and does not control, any product-specific consideration. Moreover, the Commission proposes to make case-by-case determinations with regard to eligibility of a commodity to trade on a DTF after notice and an opportunity for hearing through submission of written data, views and arguments. A number of commenters, including NYMEX and NYBOT, suggested that a petitioning DTF or applicant for DTF registration should be accorded the right to request an opportunity to present oral views and testimony to the Commission. CL 5-3, CL 10-3. The Commission concurs and will consider granting such requests in appropriate instances. Such an opportunity to present views, facts and argument orally before the Commission is not consistent with a thirty-day deadline. Accordingly, recognizing the potentially complex and highly individualistic nature of each determination, the Commission is not modifying the final rule by including a deadline. Nonetheless, the Commission intends to make these determinations expeditiously. NYMEX also requested that the Commission clarify that the relevant approval criteria are “meaningful only in relative terms, i.e., in comparison to other markets”; that “it is not necessary for a contract to meet all of these factors”; and how these factors might be interpreted for cash-settled or index-based contracts. CL 10-3. The Commission believes that a demonstration that a commodity meets the criteria of rule 37.3(a)(6)(ii) can be made either on an absolute basis or relative to a market that clearly meets the requirement that a “commodity is highly unlikely to be susceptible to the threat of manipulation.” 36 The Commission will consider such a demonstration based upon the totality of the showing, but will separately consider the petitioner's surveillance history and self-regulatory record from the commodity's general cash market characteristics. Nevertheless, the Commission would consider undertakings for enhanced surveillance and self-regulatory measures (beyond the required large-trader reporting system), such as spot-month speculative position limits, as an appropriate means to address instances where cash market characteristics alone may not provide sufficient assurance that the commodity is highly unlikely to be susceptible to the threat of manipulation. 36 In this regard, the excluded commodities defined in section 1a(13) of the Act clearly meet this standard, and may be used as a benchmark for comparison. With regard to cash-settled contracts, the Commission is modifying sub-paragraph 37.3(a)(6)(ii)(G) to make clear that the facility should be able to show that the contract or product's terms and conditions provide for a reliable and acceptable cash-settlement procedure that is adequate to minimize the threat of market abuse. The other criteria enumerated in paragraph (a)(6) apply equally to cash and physically settled contracts. 3. Registration Procedures Proposed rule 37.5(a)(2) would have required that a contract market filing notice that it wishes to operate as a DTF include in its submission a copy of the facility's rules. NYBOT opined that “this should not be necessary, since the rules of the contract market would already be on file with the Commission, unless and to the extent the DTEF rules are different.” CL 5-3; see also CL 15-4 (MGE). The Commission is modifying the final rule to provide that the notification need only list those rules of the contract market that also apply to operation of the DTF. 37 37 The Commission is not modifying the provisions relating to DTF applications for registration. The notification procedure is an abbreviated procedure for existing contract markets. Applicants for registration generally will not have pre-existing approved or certified rulebooks. 4. Interpretations of Registration Criteria and Core Principles Guidance The Commission proposed in its registration guidance in Appendix A that “[i]f cleared, transactions executed on the facility must be cleared through a derivatives clearing organization.” However, in a subsequent notice of proposed rulemaking to implement the CFMA with respect to derivatives clearing organizations (DCO), the Commission clarified that, excluded or exempted contracts, including those elected pursuant to section 5a(g) to be traded on a registered derivates transaction execution facility, are not required to be cleared by a DCO, although a clearing organization that clears these contracts may voluntarily apply, pursuant to section 5b(b), to register with the Commission as a DCO. 66 FR 24308 (May 14, 2001). SIA, in commenting upon the guidance in Appendix A, asserted that the registration guidance should be modified to recognize that contracts that are traded on a DTF on an “opt-in” basis are not required to be cleared by a DCO. CL 20 at 2. NY Bar asserted that a DTF should be permitted to clear through any recognized clearing organization including, e.g., clearing organizations supervised by domestic and foreign banking authorities. CL 19-4-5. In light of these comments, and the fact that no comments were submitted in response to the Commission's clarification in the Federal Register notice proposing rules for clearing organizations, the Commission is modifying the guidance in Appendix A to make clear that agreements, contracts and transactions in excluded or exempt commodities that are traded on a DTF, if cleared, may be cleared through clearing organizations other than DCOs registered with the Commission. With regard to Appendix B for DTFs, Guidance on Compliance with Core Principles, NYBOT and NY Bar suggested that the Commission add a statement similar to one included in the guidance for contract markets (Appendix B of part 38), that “[b]oards of trade that follow the specific practices outlined . . . for any core principle below will meet the applicable core principle.” CL 5-4, CL 19-4. The guidance for DTFs, however, in keeping with the less regulated nature of those markets, is abbreviated and general in nature, and does not include the same level of detail as the guidance for contract markets. Accordingly, unlike the guidance for contract markets, the guidance for DTFs does not outline specific acceptable practices. NYBOT objected that the guidance on “minimum” fitness standards under Core Principle 6 for persons who have member voting privileges, governing obligations or responsibilities, or who exercise disciplinary authority, is not provided for in the CFMA and is unnecessarily onerous. 38 CL 5-4. The Commission agrees in part and has modified the guidance accordingly. 39 The guidance in Appendix B relating to minimum fitness standards interprets Section 5a(d)(6) of the Act, which requires DTFs to “establish and enforce appropriate fitness standards.” In the Commission's view, the fitness standards for the named categories of persons that should apply ats a minimum include the statutory disqualifications in section 8a(2) of the Act. Of course, DTFs remain free to impose higher fitness standards, including the statutory disqualification standards of section 8a(3) of the Act. 40 Persons who have governing obligations or responsibilities, or who exercise disciplinary authority, should not have a significant history of serious disciplinary offenses, such as those that would be disqualifying under rule 1.63. 38 NYBOT also asserted that there should not be any fitness standards for natural persons who directly or indirectly have greater than a ten percent interest in the facility and are merely passive investors. This issue is addressed above in connection with comments related to a similar provision applicable to contract markets. 39 The Commission has made similar modifications to the guidance governing designated contract markets contained in Part 38, Appendix B, Core Principle 14. 40 The Commission notes that these minimum standards are consistent with the fitness standards that Congress itself adopted for exempt commercial markets. In this regard, section 2(h)(5)(A)(iii) of the Act requires an exempt commercial market to certify to the Commission that “no executive officer or member of the governing board of, or any holder of a 10 percent or greater equity interest in, the facility is a person described in any of subparagraphs (A) through (H) of section 8a(2)[.]” CME and NYMEX commented that disclosing information on system security, as the proposed guidance on Core Principle 4 suggests, might compromise a system's integrity. CL 10-4, CL 18-4. The guidance did not intend that detailed, proprietary information on system security should be disclosed, and in light of these comments, the Commission has deleted this provision. 41 41 The Commission has made a similar modification to Part 38, Appendix B, Core Principle 9. See comment of MGE, CL 15-3. C. Product Listing and Rule Amendments Proposed part 40 would implement the procedural provisions of Section 5c(c) of the Act for new contracts, new rules and rule amendments. 42 Based on administrative experience after the part 40 rules were proposed, the Commission is amending rule 40.4 to provide contract markets greater certainty with respect to the approval of rules governing contracts on enumerated agricultural commodities. First, the Commission is adding to the list of non-material rule changes the category of rule changes necessary to comply with a binding court order, or with a rule or order of the Commission, or of another federal regulatory authority. Second, the Commission is adding a provision to the final rules that permits a contract market to submit to the Commission any rule that the contract market believes not to be material, but that is not listed as non-material in rule 40.4, and to implement the rule ten days after submission, absent contrary notice from the Commission. This procedure gives exchanges flexibility by providing that the listed categories are non-exclusive and at the same time provides a method to obtain certainty that the Commission agrees that the rule change is not material. 43 42 In proposing these rules, the Commission noted that, in light of the Congressional intent to implement the provisions of the CFMA without delay, during the transition period between the effective date of the CFMA and promulgation of final implementing rules, the Commission would not take any enforcement action against any person who complied with the implementing rules, as proposed. 66 FR 14268. 43 CBT correctly asserted that rules listing additional delivery months for agricultural contracts should not be deemed to be material under rule 40.4, and thus subject to the requirement of prior approval. CL 7 at 2. Pursuant to section 5c(c)(B)(2) of the Act, the listing of additional delivery months is not subject to the prior approval requirement because such rules do not apply “to contracts and delivery months which already have been listed for trading and have open interest.” 7 U.S.C. 7c(c)(2)(B). CME asserted that the Commission should not retain the distinctions between in-house changes and those made by third parties with respect to delivery standards and index constructions and calculations. It asserted that “there are sufficient safeguards embodied in the core principles to make requirements at this level of detail obsolete.” CL 18 at 5. The Commission notes that it exercised its section 4(c) authority to excuse independent third party delivery and index changes from the statutory certification requirement for all rule changes in recognition that such rule changes are subject to the additional safeguard of being determined by the action of an independent party, for purposes not solely related to trading in derivatives contracts or to trading on the exchanges. While commenters strongly endorsed the increased flexibility of the proposed rules, see CL 7-2, CL 10-2, CL 18-1, several objected to certain specific requirements. In response to these comments, the Commission has decided to modify the proposed rules as discussed below. 1. Clearing BOTCC objected to the provision of proposed rule 40.2, which would have required a DCO to certify, with respect to a product that it clears that is not traded on a contract market or a DTF, that the trading product or instrument complies with the Act. BOTCC questioned the Commission's authority to require this certification, and questioned how a DCO could make such a certification “about a product or instrument that it has not designed and for which it is providing only a discrete set of services.” CL 1-5. As an alternative, BOTCC suggested that the Commission could require the DCO to certify that its clearing of the product complies with the Act, although it questioned the practical utility of such a certification. Under section 5c(c) of the Act, a registered entity may elect to “accept for clearing any new contract or other instrument, or may elect to approve and implement any new rule or rule amendment” by certifying to the Commission that “clearing of the new contract or instrument, new rule or rule amendment complies with [the] Act.” The Commission is clarifying rule 40.2 to provide that a DCO may accept for clearing any new contract or other instrument by filing with the Commission: (i) the rules of the DCO that permit it to accept the contract or other instrument for clearing (including any rules establishing the terms and conditions of products that make them acceptable for clearing); and (ii) a certification that the clearing of the new contract or instrument (including any rules establishing the terms and conditions of products that make them acceptable for clearing) complies with the Act. By so certifying, the DCO will be certifying not only that it is in compliance with the core principles applicable to it, but that its rules permitting acceptance for clearing (including any rules establishing terms of the product to be accepted for clearing) comply with the Act. These filing and certification requirements, as proposed, do not apply when a DCO accepts a new product for clearing that is traded on a contract market or a registered DTF. 44 44 BOTCC objected to including clearing organizations within the definition of “contract market” under proposed rule 40.1. BOTCC reasoned that this definition was unnecessary and confusing since the Act now separately regulates trading facilities and clearing organizations. CL 1-4. The Commission agrees and has deleted the proposed definition from the final rules. 2. Product Listing CME objected to the requirement that trading facilities certify to the Commission compliance with the Act when relisting dormant contracts for trading. See proposed rule 40.2. CME argued that the proposed certification requirement for dormant contracts is a “relic of the days of more intensive regulatory administration.” CL 18 at 5. The Commission disagrees. Contracts become dormant only after five years from initial listing 45 and cash markets are likely to change during that period. Consequently, the product as originally certified may no longer be in compliance with the applicable core principles. The recertification requirement is in keeping with the Commission's oversight role. 45 See proposed Commission rule 40.1, which defines “dormant contract” as any futures or option contract in which no trading has occurred for six months beginning five years after initial listing. 3. Rule Submissions Proposed rule 40.5 would have established procedures for the voluntary submission of rules for Commission review and approval. 46 CBT objected that this rule would result in a potentially longer review process than was provided for under the Commission's fast track review procedure prior to enactment of the CFMA. CL 7-2. 46 Those procedures are also incorporated by reference in proposed rule 40.4, which implements the statutorily-mandated review and approval procedures for certain amendments to contracts involving enumerated agricultural commodities. Proposed rule 40.5 provided for a 45-day review period of rules submitted for Commission approval, with the possibility that the Commission could extend the review period once, for another 45 days, which would have comported with the statutory review period of 90 days. On further reflection, the Commission has determined to retain the review periods of its pre-CFMA fast track procedure: one 45-day initial review period, with the possibility of one 30-day extension. 47 When the Commission does not approve the rule of a registered entity submitted to it for voluntary approval, proposed rule 40.5(d) provided that the non-approval notice must briefly specify the nature of the issues raised and the specific provision of the Act or regulations, including the form or content requirement of rule 40.5, that the facility's rule would violate, appears to violate, or the violation of which could not be ascertained from the submission. Notice of the Commission's refusal to approve a registered entity's rule would have been presumptive evidence that the registered entity could not truthfully certify that the same, or substantially the same, proposed rule or rule amendment does did not violate the Act or rules thereunder. See proposed rule 40.5(e). 47 As suggested by NYBOT and NY Bar, the Commission is modifying rule 40.6(a) by adding a parenthetical to make explicit that the self-certification requirement of rule 40.6 applies to all new rules or rule amendments of a contract market or DTF other than those rules or rule amendments that have been approved by the Commission under the voluntary approval procedures of rule 40.5. See CL 5-6 and 19-7. This does not preclude a contract market or DTF from voluntarily submitting a rule for Commission approval under rule 40.5 that it has already implemented by certification under rule 40.6. BOTCC argues that the presumption established by rule 40.5(e) is ill-advised, procedurally flawed, discourages rule submissions and should be withdrawn. CL 1-5. The Commission is not persuaded. The presumption established by rule 40.5(e) is not a conclusive, but rather, is a rebuttable presumption. If the registered entity were to certify such a rule following notice of non-approval, the burden of proceeding would rest with the Commission. 48 In any administrative proceeding brought by the Commission, the registered entity would have an opportunity to supplement the record with evidence rebutting the presumption. Moreover, as the proposed rule makes clear, nothing will prejudice a registered entity's right to resubmit a revised rule or to supplement the submission. Accordingly, the Commission does not believe that this presumption will discourage voluntary rule submissions. 48 In such a proceeding, the Commission would be required to satisfy the applicable legal standard. In a proceeding to alter or supplement the rules of a registered entity, the Commission would be required to establish that such changes “are necessary or appropriate for the protection of persons producing, handling, processing, or consuming any commodity traded for future delivery on such registered entity * * * or for the protection of traders or to insure fair dealing in commodities traded for future delivery on such registered entity.” 7 U.S.C. 12a(7). In an administrative enforcement proceeding alleging a false certification, the Commission's findings of fact must be supported by “the weight of the evidence.” 7 U.S.C. 8(b). Proposed rule 40.6 provides that the Commission may stay the effectiveness of a certified rule during the pendency of Commission proceedings for filing a false certification or to alter or amend the rule pursuant to section 8a(7) of the Act. CBT objected to the stay provision on the grounds that section 8a(7) does not reference a stay and that it is unnecessary and potentially detrimental for the Commission to have such authority. CL 7-3; see also CL 18 at 2-3. BOTCC, while expressing sympathy for the Commission's concern that an improperly adopted rule not be permitted to remain in effect pending the conclusion of the administrative proceeding, suggested that the Commission modify the rule to specify that any stay will not affect contracts and positions previously established in reliance on the disputed rule and that the Commission endeavor to delay the effectiveness of any such stay in order to give the registered entity and market users an opportunity to make appropriate arrangements. CL 1-6, note 4. The Commission recognizes the potential market implications of a stay of a previously implemented rule or rule amendment. The Commission has not delegated this authority to its staff. The Commission intends to invoke its stay authority cautiously, and only in the rare instance when its use would be appropriate. FIA requested confirmation that the Commission will solicit comment on rules submitted for voluntary approval when warranted. CL 11-6-7. The Commission confirms its intent to solicit public comment in such cases and further confirms its intent to solicit public comment in appropriate cases on interpretations issued or approved under section 5c(a) of the Act. 49 49 BOTCC commented that the procedures governing amendments to the terms and conditions of contracts involving enumerated agricultural commodities, consistent with the Act, should apply only when the contract is traded on a designated contract market, and not when traded on a registered DTF pursuant to section 5a(g) of the Act. CL 1-5. The Commission agrees and has amended rule 40.4 accordingly. 4. Emergency Rule Submissions CME commented that the proposed definition of emergency in proposed rule 40.1 is too broad and particularly objected to including within the definition “any action taken by any governmental body, or any other board of trade, market or facility which may have a direct impact on trading on the trading facility.” CME argued that this definition could require the “declaration of an emergency if * * * the Federal Reserve changes the fed funds rate.” CL 18-5. The proposed language is substantially identical to language included in the Commission's current definition, 50 and is consistent with the Act's definition of emergency. 51 50 See 17 CFR 1.41(a)(4)(iv)(2001). 51 Section 8a(9) of the Act vests the Commission with emergency authority. The term emergency is defined to include “in addition to threatened or actual market manipulations and corners, any act of the United States or a foreign government affecting a commodity or any other major market disturbance which prevents the market from accurately reflecting the forces of supply and demand for such commodity.” BOTCC, CME and NYMEX objected to the provisions of rule 40.6 that would require a contract market or registered DCO to file emergency rules at the time of implementation, if implementation is sooner than the next business day. CL 1-7-8; CL 10-4; CL 18-5. CME commented that this notification requirement “more closely resembles micromanagement than oversight. It has the effect of requiring a DTEF to concern itself with an administrative procedure rather than concentrating on the emergency itself.” CL 8-5 After considering these comments, the Commission has decided to modify rule 40.6 to require the contract market or DCO to file rules implemented pursuant to an emergency at the earliest possible time after implementation of the rule (but in no event later than 24 hours after implementation), if it is not practicable for the contract market or DCO to file the rule prior to implementation. 52 52 This is consistent with the approach taken in the current rules regarding the timing of notification of rules implemented pursuant to an emergency. See 17 C.F.R. 1.41(f)(2)(i). D. Part 36—Exempt Markets Part 36 applies to any board of trade or electronic trading facility eligible for exemption under sections 5d and 2(h)(3) through (5) of the Act, respectively. Section 5d of the Act establishes the category of “exempt board of trade.” Commission rule 36.2 defines those commodities that are eligible to trade on an exempt board of trade to include commodities defined in section 1a(13) of the Act as “excluded commodities,” other than securities, and such other commodities as the Commission may define by rule, regulation or order. In addition, rule 36.2(b) provides the form and manner of the notification to the Commission provided for under section 5d of the Act. Transactions by eligible commercial entities in exempt commodities traded on an electronic trading facility are exempt commercial markets under section 2(h)(3) of the Act. 53 Markets that satisfy the initial and ongoing requirements of sections 2(h)(3) through (5) of the Act as amended are excluded from the Act's other requirements. The rules implement the notification requirements of section 2(h)(5)(A) of the Act and the information requirements for exempt commercial markets consistent with section 2(h)(5)(B) of the Act. 54 Generally, the part 36 rules incorporate by reference the statutory conditions that pertain to these exemptions, including the statutory provisions relating to eligibility. 53 See, note 9 supra. 54 As proposed by rule 36.3(b), if an exempt commercial market chooses not to satisfy its reporting requirements by providing the Commission with electronic access to transactions conducted on the facility, it may do so by an alternative means, the form and content of which the Commission may determine is acceptable, pursuant to a petition to the Commission for such a determination. Such an alternative should provide the Commission with information comparable in coverage and frequency to that provided to the Commission by its large-trader reporting system. 1. Exempt Boards of Trade Several commenters suggested that the Commission expand the commodities eligible to be traded on exempt boards of trade (EBOT) trading under proposed rule 36.2. ISDA stated that it “believes it is important that the Commission indicate its intention to act with dispatch in designating additional commodities that may be traded on an exempt board of trade.” CL 3-4. SIA suggested that the Commission “does not need to foreclose the determination that other commodities could satisfy the statutory standard for eligibility or to require in all cases that such a determination be made by the CFTC, where such a determination is not required by statute.” CL 20-3. The Commission believes that the commodities defined as excluded under section 1a(13) of the Act clearly meet the statutory criteria to be traded on an EBOT. The Commission has not foreclosed the possibility of finding additional commodities eligible for trading on an EBOT at some future time by rule, regulation or order. 2. Exempt Commercial Markets With respect to the eligibility of traders to participate in exempt commercial markets, Energy Group “suggest[ed] that the Commission consider clarifying the definition of principal for the purposes of principal-to-principal transactions to include eligible commercial entities entering into transactions on behalf of other eligible commercial entities.” CL 4-2. As noted above, the Commission's proposed rules relating to exempt commercial markets rely directly upon the statutory definitions and conditions relating to the section 2(h)(3) exemption. Any interpretation by the Commission of the definition of “principal” relating to eligible commercial entities necessarily would include consideration of the use and meaning of that term as it relates to other statutory exclusions or exemptions, and is beyond the scope of this rulemaking. With respect to the reporting requirements set forth in part 36, see note 55 supra and accompanying text, @Markets expressed the view that “regular and periodic” reports were beyond the scope of the Commission's authority under section 2(h)(5)(B) of the Act and Energy Group suggested that “the focus on meeting “large trader” requirements is unnecessary for the Commission to fulfill its responsibilities under the CFMA.” CL 4-2. The Commission disagrees. Section 2(h)(5)(B) of the Act requires that an exempt commercial market provide the Commission with electronic access to the market. The access requirement provides the Commission with information on a routine, on-going basis, thereby serving many of the functions that large-trader reports serve on the regulated markets. Using this access, the Commission is able to surveil transactions on the market in order to enforce its anti-manipulation authority. The alternative to providing electronic access set forth in rule 36.3(b) is intended to offer exempt markets a substitute, but generally equivalent, means of complying with the statutory electronic access requirement. Two commenters raised issues relating to proposed rule 36.3(c)(3), under which a facility must require that each participant agree to comply with all applicable law and must have a reasonable basis for believing that its participants are eligible. BOTCC suggested that the Commission clarify that the provision requiring each participant “to agree to comply with all applicable law is intended to be limited to applicable provisions of the Act and Commission regulations.” CL 1-4; see also CL 4-2 (Energy Group). That is indeed the intended meaning of the rule. Finally, @Markets requested that the Commission “confirm that an exempt commercial market will be deemed to be a “board of trade” for purposes of the confidentiality provisions of section 8(a) of the Act and the relevant provisions of the Freedom of Information Act.” CL 6-4. Unlike contract markets and DTFs, which are specifically referred to as “boards of trade” in the Act, exempt commercial markets are not specifically referred to by the Act as “boards of trade.” Compare sections 5(a) and 5a(a) of the Act with section 2(h)(5) of the Act. Nevertheless, section 8(a) of the Act generally prohibits the Commission from publishing “data and information that would separately disclose the business transactions or market positions of any person.” “Person” under section 1(a)(16) of the Act includes individuals, associations, partnerships, corporations and trusts, and would thereby apply to an exempt commercial market and to those trading thereon. 3. Common Provisions Part 36 provides that both exempt boards of trade and exempt commercial markets be required to disseminate publicly their trading volume, opening and closing price ranges, open interest and other trading data, to the extent appropriate to that market upon a Commission finding that the facility serves as a significant source for the discovery of prices in the cash market for the underlying commodity. Rules 36.2(c)(2) and 36.3(c)(2) provide that the Commission will make such a determination after notice and an opportunity for hearing through submission of written data, views and arguments. A number of commenters suggested modifications to the rule. BOTCC noted that price information is an important source of revenue for exchanges and suggested that the Commission revisit the public dissemination requirement at a future time after “a fuller opportunity to evaluate the appropriate balance of public interests entailed by such requirement.” CL 1-3. @Markets noted that although “neither the Act nor the proposed rules define the standards that the Commission is to employ in determining that a market performs a significant price discovery function, [it] would expect to have the opportunity to comment on appropriate standards prior to or in connection with any such determination by the Commission under this section of the Act.” CL 6-2. Others commented that oral hearings should not be precluded in appropriate cases. CL 5-2, CL 19-4. The Commission agrees with the above comments. Although the Commission has provided that its determination will be made through notice and an opportunity for hearing through submission of written data, views and comments, it is not precluded from convening a public meeting to receive oral comment and argument in appropriate cases. The Commission may determine sua sponte, or in response to a request by the affected trading facility, or any interested member of the public, that a public meeting to receive oral statements and arguments is in the public interest and will assist it in its consideration of the relevant issues. As part of its inquiry, the Commission would set forth the standards that it would use in making its determination. The facility, and other interested members of the public, would have an opportunity to challenge those standards and to raise any other objections or defenses to the issuance of an Order, including any possible adverse impact on a facility's property rights that may stem from the proposed order. The Commission is of the view that these issues are best addressed in the context of a fully-developed administrative record, rather than in the context of this generalized rulemaking. Accordingly, the Commission is adopting the final rules on procedures relating to price discovery determinations as proposed. The Commission invited comment on whether exempt boards of trade and exempt commercial markets should be required affirmatively to disclose to traders that the facility and trading on the facility are not regulated or approved by the Commission. 66 FR at 14266. Commenters responding to this question generally opposed requiring facilities to affirmatively make such disclosures. But see CL 10-5 (NYMEX); CL 12-2 (SUA). For example, Energy Group suggested that [a]n exempt commercial market is open only to sophisticated market participants who are familiar with distinctions among the different facilities. Such participants would have no reason to believe such a facility is regulated * * *. A representation affirming that the facility is not regulated may cause confusion. CL4-2. SIA and @Markets concurred with this view, noting respectively that “[i]n light of the institutional character of these markets * * * such disclosure is not necessary,” and that “the participants in these markets * * * can be expected to make appropriate inquiries regarding a market before applying for trading privileges on the facility.” CL 20-3; CL 6-4. The Commission agrees that eligible contract participants and eligible commercial entities can be expected to make appropriate inquiries regarding whether a market is regulated and is not requiring exempt boards of trade or exempt commercial markets affirmatively to disclose that they are not regulated or approved by the Commission. E. Miscellaneous 1. Anti-Fraud The Commission additionally proposed an anti-fraud provision, proposed rule 1.1, pursuant to its authority in sections 3 and 8a(5) of the Act. This proposed anti-fraud rule would apply to retail foreign currency agreements, contracts and transactions described in section 2(c)(1) of the Act. A number of the commenters particularly supported this proposed rule. SUA noted that it was the clear intent of Congress that the Commission “retain broad powers to protect against fraud and manipulation” (CL 12 at 1). NYMEX “strongly support[ed] the proposed new rule.” (CL 10 at 4). CBT commented that the rule “addresses a regulatory gap with regard to * * * unregulated entities.” (CL 7 at 9). See also CL 11 at 6. NASAA, “welcome[d] the clarification of the Commission's antifraud jurisdiction.” CL 2 at 1. ISDA, however, suggested that the Commission expand the exclusion from the rule to include financial institutions, insurance companies, financial holding companies and investment bank holding companies. 55 Such entities need not be excluded from operation of the rule because they are outside of its intended scope in the first instance. 56 Accordingly, the Commission is adopting the rule as proposed. 57 55 The rule excludes broker-dealers, FCMs and their respective affiliates. 56 Rule 1.1 on its face applies only to “the extent that the Commission exercises jurisdiction over such accounts, agreements, or transactions as provided in section 2(c)(2)(B).” 57 Separate from proposed rule 1.1, a number of commenters offered a range of opinion in response to the request for comment by Commissioner Thomas J. Erickson on the advisability of promulgating a broader anti-fraud rule. 66 FR at 14288. SUA supported a broader anti-fraud rule without qualification. CL 12 at 1. SIA did not object “in concept” to clarification by the Commission of its anti-fraud authority with respect to principal-to-principal transactions. CL 20 at 4. ISDA, however, warned that the Commission should proceed with caution in this area to avoid creating any uncertainty with respect to the scope of its jurisdiction. CL 3 at 5. Finally, FIA expressed doubt whether an anti-fraud rule of more general applicability would appreciably enhance the Commission's authority to deter misconduct by persons subject to its jurisdiction, or the public's ability to recover damages as a result of such misconduct. CL 11 at 6. 2. Delegation of Functions NFA asked the Commission to clarify a contract market's and DTF's ability to delegate functions under the core principles, noting that: the CFMA specifically allows contract markets and [DTFs] to comply with any of the core principles through delegation of functions to a registered futures association or another registered entity * * *. The Commission's current proposal, however, does not specifically authorize a [DTF] to delegate these functions (although NFA believes that the language is sufficiently broad to be interpreted to permit this delegation.) CL 16-1. Section 5c(b) of the Act specifically provides that both contract markets and DTFs may comply with any applicable core principle through delegation of any relevant function to a registered futures association or another registered entity. As NFA correctly notes, the rules as proposed are “sufficiently broad to be interpreted to permit this delegation.” Id. NFA further suggests that the Commission, by rule, limit entities acceptable “for “outsourcing” of functions to registered futures associations and registered entities because the statute so provides and because “Congress recognized that the Commission must have some authority over any entity carrying out these functions.” Id. Section 5c(b) of the Act, however, limits only “delegations” of functions to registered futures associations and to registered entities; it does not restrict “outsourcing” of specified activities on a contract basis. The Commission has long-recognized the ability of contract markets to meet their self-regulatory obligations by using persons under contract to perform specified duties. The Commission has conditioned the use of outside contractors to perform duties in connection with self-regulatory functions upon the contract market “maintaining a sufficient degree of control over the persons under contract,” and the person under contract having “no conflict of interest.” The Commission has further provided that, when using contractors to fulfill a self-regulatory function, it is the exchange's responsibility to ensure that its obligations under the Act are met. Comm. Fut. L. Rep. (CCH) ¶ 6430, CFTC, (May 13, 1975.) Accordingly, contract markets have contracted for the performance of various services related to their operations and self-regulatory responsibilities, including compliance with various core principles. For example, contract markets or DTFs reasonably may be expected to outsource to various contractors functions relating to operating their trading platforms or to disseminating information required to be made public. 58 58 Specifically, for example, the Merchants Exchange of St. Louis contracted with a technology company to operate its matching engine. A criterion for designation is that the contract market “establish and enforce rules defining * * * the operation of any electronic matching platform; and demonstrate that the trade execution facility operates in accordance with the rules.” See section 5(b)(4) of the Act. Under Core Principle (2), the contract market must monitor and enforce compliance with those rules. Consistent with long-standing Commission interpretation, it is reasonable for a contract market or a DTF to outsource these functions, in whole or in part, to a technology contractor. In contrast to such contracting arrangements, a delegation confers upon another the authority to act in the delegating entity's name. The distinction between delegation of authority and contracting for services is particularly well-illustrated in matters related to member discipline and market surveillance. A market that delegates these functions empowers the delegatee to take appropriate remedial actions, including the sanctioning of members or market participants for rule violations. In contrast, a market may contract with an entity to conduct trading surveillance and to investigate the facts surrounding alleged rule infractions. Unlike a delegatee, a contractor would not have the authority to decide on behalf of the delegating entity whether an infraction had occurred or to impose remedial sanctions. These decisional functions can be exercised only by delegation of that authority to registered entities or a registered futures association, as Congress has provided. Further, although section 5c(b)(2) of the Act provides that the Commission would have oversight authority over a delegatee because it is a registered entity, the contract market or DTF that delegates responsibilities under the Act also “shall remain responsible for carrying out the function.” Therefore, regardless of whether a registered entity has delegated functions or contracted for services, the entity must assure itself that the delegated functions or contracted services will enable it to remain in compliance with the Act's requirements. Moreover, the registered entity must have a sufficient degree of control over the persons under contract because it remains the registered entity's “responsibility to ensure that its obligations under the Act are met.” Id. 3. Arbitration Rule 166.5 governs the use of pre-dispute arbitration agreements. Under subsection (g) of the proposed rule, an eligible contract participant would have retained the right to bring a private right of action under section 22 of the Act, but could have been required, in accordance with an amendment to section 14(g) of the Act, 59 to waive the right to seek reparations. 59 See CFMA, section 118. Several commenters questioned the need to retain the voluntariness requirement with respect to section 22 of the Act. SIA reasoned that, “(a)lthough the CFMA may not directly address the issue,” the policy behind the CFMA's provision permitting FCMs to require eligible contract participant customers to waive their right to reparations, “would seem equally applicable in the case of pre-dispute arbitration agreements generally.” CL 20-4. NFA also “encourage[d] the Commission to provide more flexibility regarding pre-dispute arbitration agreements[,]” and reasoned that any restrictions on such agreements are unnecessary with respect to eligible contract participants because “[t]hese customers are capable of negotiating favorable terms in their agreements with intermediaries.” CL 16-2. Others opined that limiting the use of pre-dispute arbitration agreements for any customer contravenes prevailing law and policy regarding dispute resolution procedures. CL 11 at 2-6, CL 18 at 5-6. SIA, FIA, and NYMEX, advocated increased harmonization of the Commission's rules governing pre-dispute arbitration agreements with those governing pre-dispute arbitration agreements in the securities industry, particularly in light of the availability of security futures products. CL 10 at 4-5, CL 11 at 5-6, CL 20 at 4; see also CL 2-9 and CL 19-7. At a minimum, FIA suggested, the Commission should exclude claims relating to security futures products from the rule's applicability, particularly with respect to notice-registered FCMs. CL 11 at 5-6. FIA further suggested that the Commission's rules permit FCMs to use the disclosure statement required on the securities side of a dually registered broker-dealer/FCM. 60 60 FIA also specifically recommended that the Commission decline to adopt proposed rule 166.5, while removing part 180. CL 11 at 6. NFA commented that the Commission should provide that arbitration agreements bind both the customer and the intermediary equally. CL 16 at 2. In the final rules, the Commission has decided to remove any limitation on the FCM's use of account opening pre-dispute arbitration agreements for eligible contract participants. As several commenters noted, this is consistent with the CFMA, which permits FCMs to require that eligible contract participant customers waive their right to reparations as a condition of opening an account. It also should facilitate the ability of an FCM that is also a broker-dealer to use a single agreement with those customers. 61 With regard to customers who are not eligible contract participants, the Commission is retaining the voluntariness requirement in its current form. However, it will further consider the issue as part of its study on the regulation of intermediaries and as part of its rules implementing the provisions of the Act relating to security futures products. 61 A number of the above comments relating to greater harmonization of account opening disclosures to customers of dually registered FCMs/broker-dealers are outside of the scope of this rulemaking. Nevertheless, the Commission agrees that these issues are important and should be addressed, including the feasibility of using the disclosure currently mandated for securities customers for commodity customers as well. See, e.g., Rule 3110(f) of the National Association of Securities Dealers, Inc.;. see also 64 FR 66681 (Nov. 29, 1999) (Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Amendments to NASD Rule 3110(f) Governing Use of Predispute Arbitration Agreements with Customers). 4. Contract Approval Fees Prior to the CFMA's amendments to the Act, boards of trade were required to be designated as a contract market in each commodity that they listed for trading. The CFMA amended the Act, in part, by providing that the facility must be designated as a “contract market” or registered as a DTF, that the contract market or DTF may list new products for trading by certification, and that they may voluntarily request Commission approval of those products. The Commission proposed to amend current 17 CFR part 5, Appendix B, to clarify that applications for voluntary product approval must be accompanied by a service fee. 62 No comments were received and the Commission is adopting the provision as proposed. The Commission, in a separate notice of final rulemaking published elsewhere in this edition of the Federal Register , is revising the fees charged for this service. 62 The Commission also proposed to redesignate the Appendix as Appendix B to Part 40. Previously, in November 1999, the Commission proposed to eliminate fees for contract market designation applications in connection with its adoption of Rule 5.3 that allowed exchanges to list new contracts by certification (64 FR 66432, Nov. 26, 1999). The Commission deferred action while it considered additional regulatory reform. III. Section 4(c) Findings Some of the rules contained in this Federal Register notice are being adopted under section 4(c) of the Act, which grants the Commission broad exemptive authority. Section 4(c) of the Act provides that, in order to promote responsible economic or financial innovation and fair competition, the Commission may by rule, regulation or order exempt any class of agreements, contracts or transactions, either unconditionally or on stated terms or conditions, from any of the requirements of any provision of the Act (except certain provisions governing a group or index of securities and security futures products). As relevant here, when granting an exemption pursuant to section 4(c), the Commission must find that the exemption would be consistent with the public interest. When it proposed these rules, the Commission made a preliminary determination that the exemptions contained therein would be consistent with the public interest because they provide registered entities with greater procedural flexibility than is contained in the Act. For instance, pursuant to rule 38.4, contract markets may request approval of their contracts following certification of those contracts, notwithstanding the Act's limitation of the Commission's approval authority to “prior” approval. Furthermore, the rules contain a less burdensome certification procedure than that provided for in the Act. The Commission invited public comment on its preliminary determination that this exercise of its exemptive authority would be consistent with the public interest. As noted above, the commenters broadly supported these exemptive rules. Accordingly, the Commission finds under section 4(c) of the Act that the exemptions are consistent with the public interest. IV. Cost-Benefit Analysis Section 15 of the Act, as amended by section 119 of the CFMA, requires the Commission, before issuing a new regulation under the Act, to consider the costs and benefits of its action. The Commission understands that, by its terms, section 15 does not require the Commission to quantify the costs and benefits of a new regulation or to determine whether the benefits of the proposed regulation outweigh its costs. Rather, section 15 simply requires the Commission to “consider the costs and benefits” of its action. Section 15 further specifies that costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. Accordingly, the Commission could in its discretion give greater weight to any one of the five enumerated areas of concern and could in its discretion determine that, notwithstanding its costs, a particular rule was necessary or appropriate to protect the public interest or to effectuate any of the provisions or to accomplish any of the purposes of the Act. The Commission's proposal contained an analysis of its consideration of these costs and benefits and solicited public comment thereon. 66 FR at 14267. The Commission specifically invited commenters to submit any data that they had quantifying the costs and benefits of the proposed rules with their comment letters. Id. The Commission has considered all the comment letters received, some of which contained narrative discussion of the costs and benefits of specific provisions of this rule package, but none of which set forth any data that quantified such costs and benefits. The Commission has considered the costs and benefits of this rule package in light of the specific areas of concern identified in section 15. The Commission has endeavored in this rule package to impose the minimum requirements necessary to enable the Commission to perform its oversight functions, to carry out its mandate of assuring the continued existence of competitive and efficient markets and to protect the public interest in markets free of fraud and abuse. After considering their costs and benefits, the Commission has decided to adopt these rules as discussed above. V. Implementation Issues; No-Action In light of Congress's intent to implement the changes of the CFMA without delay, the Commission determined when it proposed these rules that it would not bring any enforcement action against any person who complied with the proposed rules during the transition period between the effective date of the amendments to the Act (generally, December 21, 2000) and the adoption of final implementing regulations. 66 FR at 14268. At that time, the Commission also advised persons relying on that no-action position that they would be required to bring their conduct into compliance with the final rules to the extent that the final rules differ from the proposed rules. Id. The rules being adopted today will become effective October 9, 2001. The Commission will not bring any enforcement action against any person who complies with the final rules during the period between their adoption and effective date. VI. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq. , requires federal agencies, in promulgating rules, to consider the impact of those rules on small entities. The rules adopted herein would affect contract markets and other trading facilities. The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its rules on small entities in accordance with the RFA. 63 In its previous determinations, the Commission has concluded that contract markets are not small entities for the purpose of the RFA. 64 The Commission proposed to determine that the other trading facilities covered by these rules, for reasons similar to those applicable to contract markets, are not small entities for purposes of the RFA. 66 FR at 14268. In its proposing release, the Commission also observed that the rules authorize these trading facilities to operate in a less regulated environment than may currently be the case and that, consequently, the rules should not result in, or should result in only a de minimis , increase in the regulatory requirements that apply to contract markets and other trading facilities. The Commission invited the public to comment on its proposed determination that the new categories of trading facilities covered by these rules would not be small entities for purposes of the RFA and on its finding of small entity impact. The Commission received no comments on its proposed determination or on its proposed finding. 63 47 FR 18618-21 (Apr. 30, 1982). 64 47 FR 18618, 18619 (discussing contract markets). The Commission hereby determines that the new categories of trading facilities covered by these rules (derivatives transaction execution facilities, exempt boards of trade and exempt commercial markets) are not small entities for purposes of the RFA. Furthermore, the Commission does not believe that these rules, as adopted, will have a significant economic impact on a substantial number of small entities. Therefore, the Acting Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the rule amendments will not have a significant economic impact on a substantial number of small entities. B. Paperwork Reduction Act of 1995 This rulemaking contains information collection requirements. As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ), the Commission has submitted a copy of these rules to the Office of Management and Budget for its review. See 44 U.S.C. 3507(d)(1). No comments were received in response to the Commission's invitation in the notice of proposed rulemaking to comment on any potential paperwork burden associated with these regulations. See 44 U.S.C. 3507(d)(2). The final rules contain several disclosure requirements. Exempt commercial markets may not represent that they are regulated (rule 36(c)). In addition, DTFs and contract markets must disclose information related to prices, bids and offers and certain trading information (part 37, Appendix B, Core Principles 4 and 5; part 38, Appendix B, Core Principles 7, 8 and 10.) The final rules also contain several reporting requirements. Exempt boards of trade and exempt commercial markets must notify the Commission that they are engaging in business (rules 36.2(b) and 36.3(a)). Contract markets and DTFs must file applications for designation and registration, respectively, and must certify that certain rules are consistent with the Act (rules 37.5, 37.7, 38.3, 38.4, 40.2 and 40.7). The final rules also require the collection of certain information from exempt boards of trade, exempt commercial markets, contract markets and DTFs. The Commission may not conduct or sponsor, and a person is not required to respond to an information collection unless it displays a currently valid OMB control number. The Commission has requested a control number for these information collections from OMB. List of Subjects 17 CFR Part 1 Commodity futures, Contract markets, Designation application, Reporting and recordkeeping requirements. 17 CFR Part 5 Commodity futures, Contract markets, Designation application, Reporting and recordkeeping requirements. 17 CFR Part 15 Commodity futures, Contract markets, Reporting and recordkeeping requirements. 17 CFR Part 36 Commodity futures, Commodity Futures Trading Commission. 17 CFR Part 37 Commodity futures, Commodity Futures Trading Commission. 17 CFR Part 38 Commodity futures, Commodity Futures Trading Commission. 17 CFR Part 40 Commodity futures, Contract markets, Designation application, Reporting and recordkeeping requirements. 17 CFR Part 41 Security Futures, Commodity Futures Trading Commission. 17 CFR Part 100 Commodity futures, Commodity Futures Trading Commission. 17 CFR Part 166 Brokers, Commodity futures, Consumer protection, Reporting and recordkeeping requirements. 17 CFR Part 170 Commodity futures, Reporting and recordkeeping requirements. 17 CFR Part 180 Claims, Commodity futures, Consumer protection, Reporting and recordkeeping requirements. In consideration of the foregoing, and pursuant to the authority contained in the Act, as amended by the Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000), and, in particular, sections 1a, 2, 3, 4, 4c, 4i, 5, 5a, 5b, 5c, 5d, 6 and 8a thereof, the Commission hereby amends Chapter I of Title 17 of the Code of Federal Regulations as follows: PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT 1. The authority citation for Part 1 is revised to read as follows: Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000). 2. Section 1.1 is revised to read follows: § 1.1 Fraud in or in connection with transactions in foreign currency subject to the Commodity Exchange Act. (a) Scope. The provisions of this section shall be applicable to accounts, agreements, contracts, or transactions described in section 2(c)(1) of the Act, to the extent that the Commission exercises jurisdiction over such accounts, agreements, contracts and transactions as provided in section 2(c)(2)(B) of the Act (except that this section shall not be applicable to persons described in section 2(c)(2)(B)(ii)(II) or 2(c)(2)(B)(ii)(III) of the Act). (b) Fraudulent conduct prohibited. It shall be unlawful for any person, directly or indirectly, in or in connection with any account, agreement, contract or transaction that is subject to paragraph (a) of this section: (1) To cheat or defraud or attempt to cheat or defraud any person; (2) Willfully to make or cause to be made to any person any false report or statement or cause to be entered for any person any false record; or (3) Willfully to deceive or attempt to deceive any person by any means whatsoever. 3. Section 1.3 is amended by revising the undesignated introductory paragraph to read as follows: § 1.3 Definitions. Words used in the singular form in the rules and regulations in this chapter shall be deemed to import the plural and vice versa, as the context may require. The following terms, as used in the Commodity Exchange Act, or in the rules and regulations in this chapter, shall have the meanings hereby assigned to them, unless the context otherwise requires: 4. Section 1.37 is amended by adding paragraphs (c) and (d) to read as follows: § 1.37 Customer's or option customer's name, address, and occupation recorded; record of guarantor or controller of account. (c) Each designated contract market shall keep a record in permanent form, which shall show the true name, address, and principal occupation or business of any foreign trader executing transactions on the facility or exchange. In addition, upon request, a designated contract market shall provide to the Commission information regarding the name of any person guaranteeing such transactions or exercising any control over the trading of such foreign trader. (d) Paragraph (c) of this section shall not apply to a designated contract market on which transactions in futures or option contracts of foreign traders are executed through, or the resulting transactions are maintained in, accounts carried by a registered futures commission merchant or introduced by a registered introducing broker subject to the provisions of paragraph (a) of this section. §§ 1.41, 1.41b, 1.43, 1.45, 1.50, and 1.51 [Removed] 5. Sections 1.41, 1.41b, 1.43, 1.45, 1.50 and 1.51 are removed and reserved. PART 15—REPORTS—GENERAL PROVISIONS 6. The authority citation for Part 15 is revised to read as follows: Authority: 7 U.S.C. 2, 5, 6(c), 6a, 6c(a)-(d), 6f, 6g, 6i, 6k, 6m, 6n, 7, 9, 12a, 19 and 21, as amended by the Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000). 7. Section 15.05 is amended by revising the heading and adding paragraphs (e) through (h) to read as follows: § 15.05 Designation of agent for foreign brokers, customers of a foreign broker and foreign traders. (e) Any designated contract market or registered derivatives transaction execution facility that permits a foreign broker to intermediate contracts, agreements or transactions, or permits a foreign trader to effect contracts, agreements or transactions on the facility or exchange, shall be deemed to be the agent of the foreign broker and any of its customers for whom the transactions were executed, or the foreign trader, for purposes of accepting delivery and service of any communication issued by or on behalf of the Commission to the foreign broker, any of its customers or the foreign trader with respect to any contracts, agreements or transactions executed by the foreign broker or the foreign trader on the designated contract market or registered derivatives transaction execution facility. Service or delivery of any communication issued by or on behalf of the Commission to a designated contract market or registered derivatives transaction execution facility shall constitute valid and effective service upon the foreign broker, any of its customers, or the foreign trader. A designated contract market or registered derivatives transaction execution facility 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 broker, any of its customers, or a 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 broker, any of its customers or the foreign trader. (f) It shall be unlawful for any designated contract market or registered derivatives transaction execution facility to permit a foreign broker, any of its customers or a foreign trader to effect contracts, agreements or transactions on the facility unless the designated contract market or registered derivatives transaction execution facility prior thereto informs the foreign broker, any of its customers or the foreign trader, in any reasonable manner the facility deems to be appropriate, of the requirements of this section. (g) The requirements of paragraphs (e) and (f) of this section shall not apply to any contracts, transactions or agreements traded on any designated contract market or registered derivatives transaction execution facility if the foreign broker, any of its customers or the 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 designated contract market or registered derivatives transaction execution facility prior to effecting any contract, agreement or transaction on the facility. This agreement must authorize the person domiciled in the United States to serve as the agent of the foreign broker, any of its customers or the foreign trader for purposes of accepting delivery and service of all communications issued by or on behalf of the Commission to the foreign broker, any of its customers 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 designated contract market or registered derivatives transaction execution facility prior to permitting the foreign broker, any of its customers or the foreign trader to 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. A foreign broker, any of its customers 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 designated contract market or registered derivatives transaction execution facility knows or should know that the agreement has expired, been terminated, or is no longer in effect, the designated contract market or registered derivatives transaction execution facility shall notify the Secretary of the Commission immediately. If the written agency agreement expires, terminates, or is not in effect, the designated contract market or registered derivatives transaction execution facility and the foreign broker, any of its customers or the foreign trader are subject to the provisions of paragraphs (e) and (f) of this section. (h) The provisions of paragraphs (e), (f) and (g) of this section shall not apply to a designated contract market or registered derivatives transaction execution facility on which all transactions of foreign brokers, their customers or foreign traders in futures or option contracts, or other instruments subject to the Act pursuant to section 5a(g) of the Act, are executed through, or the resulting transactions are maintained in, accounts carried by a registered futures commission merchant or introduced by a registered introducing broker subject to the provisions of paragraphs (a), (b), (c) and (d) of this section. 8. Part 36 is revised to read as follows: PART 36—EXEMPT MARKETS Sec. 36.1 Scope. 36.2 Exempt boards of trade. 36.3 Exempt commercial markets. Authority: 7 U.S.C. 2, 5, 6, 6c, and 12a, as amended by the Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000). § 36.1 Scope. The provisions of this part apply to any board of trade or electronic trading facility eligible for exemption under sections 5d and 2(h)(3) through (5) of the Act, respectively. § 36.2 Exempt boards of trade. (a) Eligible commodities. Commodities eligible under section 5d(b)(1) of the Act to be traded by an exempt board of trade are: (1) Commodities having— (i) A nearly inexhaustible deliverable supply; (ii) A deliverable supply that is sufficiently large, and a cash market sufficiently liquid, to render any contract traded on the commodity highly unlikely to be susceptible to the threat of manipulation; or (iii)No cash market. (2) The commodities that meet the criteria of paragraph (a)(1) of this section are: (i) The commodities defined in section 1a(13) of the Act as “excluded commodities” (other than a security, including any group or index thereof or any interest in, or based on the value of, any security or group or index of securities); and (ii) Such other commodity or commodities as the Commission may determine by rule, regulation or order. (b) Notification. Boards of trade operating under section 5d of the Act as exempt boards of trade shall so notify the Commission. This notification shall be filed with the Secretary of the Commission at its Washington, DC headquarters, in either electronic or hard copy form, shall be labeled as “Notification of Operation as Exempt Board of Trade,” and shall include: (1) The name and address of the exempt board of trade; and (2) The name and telephone number of a contact person. (c) Additional requirements. (1) A board of trade notifying the Commission that it meets the criteria of section 5d of the Act and elects to operate as an exempt board of trade shall not represent to any person that it is registered with, designated, recognized, licensed or approved by the Commission. (2) If the Commission finds by order, after notice and an opportunity for a hearing through submission of written data, views and arguments, that the facility serves as a significant source for the discovery of prices in the cash market for the underlying commodity, the facility must on a daily basis disseminate publicly trading volume, opening and closing price ranges, open interest and other trading data to the extent appropriate to that market with respect to transactions executed in reliance on the exemption as specified in the order. § 36.3 Exempt commercial markets. (a) Notification. An electronic trading facility relying upon the exemption in section 2(h)(3) of the Act shall notify the Commission of its intention to do so. This notification, and subsequent notification of any material changes in the information initially provided, shall be filed with the Secretary of the Commission at its Washington, DC headquarters, in either electronic or hard copy form, shall be labeled as “Notification of Operation as Exempt Commercial Market,” and shall include the information and certifications specified in section 2(h)(5)(A) of the Act. (b) Required information. (1) 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 access to the facility's trading protocols and electronic access to transactions conducted on the facility in reliance on such exemption; or (ii) Attach its initial trading protocols and any amendments thereto in hard copy form to the notification required in paragraph (a) of this section and provide in a form and manner acceptable to the Commission, as determined by the Commission in response to a petition by the exempt market relying upon the exemption in section 2(h)(3) of the Act, information regarding transactions by large traders on the facility. (2) Special calls. (i) All information required upon special call of the Commission under section 2(h)(5)(B)(iii) of the Act shall be prepared in the form and manner and in accordance with the instructions, and 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 Director of the Division of Trading and Markets and to the Director of Economic Analysis to be exercised by either 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. (3) Subpoenas to foreign persons. A foreign person whose access to a 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 §§ 21.03(g) and (h) of this chapter. (c) Additional requirements. (1) An electronic trading facility relying upon the exemption in section 2(h)(3) of the Act shall not represent to any person that it is registered with, designated, recognized, licensed or approved by the Commission. (2) If the Commission finds by order, after notice and an opportunity for a hearing through submission of written data, views and arguments, that the facility performs a significant price discovery function for transactions in the cash market for the underlying commodity, the facility must disseminate publicly price, trading volume and other trading data to the extent appropriate with respect to transactions executed in reliance on the exemption as specified in the order. (3) The facility must represent in the notification provided under paragraph (a) of this section that it requires, and require, that each participant agree to comply with all applicable law and the facility must have a reasonable basis for believing that authorized participants are “eligible commercial entities” as defined in section 1a(11) of the Act. 9. Part 37 is added to read as follows: PART 37—DERIVATIVES TRANSACTION EXECUTION FACILITIES Sec. 37.1 Scope and definition. 37.2 Exemption. 37.3 Requirements for underlying commodities. 37.4 Election to trade excluded and exempt commodities. 37.5 Procedures for registration. 37.6 Compliance with core principles. 37.7 Additional requirements. 37.8 Information relating to transactions on derivative transaction execution facilities. 37.9 Enforceability. Appendix A to Part 37—Application Guidance Appendix B to Part 37—Guidance on Compliance with Core Principles Authority: 7 U.S.C. 2, 5, 6, 6c, 6(c), 7a and 12a, as amended by the Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000). § 37.1 Scope and definition. (a) Scope. The provisions of this part apply to any board of trade or trading facility operating as a registered derivatives transaction execution facility. (b) Definition. As used in this part, the term “eligible commercial entity” means, and shall include, in addition to a party or entity so defined in section 1a(11) of the Act, a registered floor trader or floor broker trading for its own account, whose trading obligations are guaranteed by a registered futures commission merchant. § 37.2 Exemption. Contracts, agreements or transactions traded on a derivatives transaction execution facility registered as such with the Commission under section 5a of the Act, the facility and the facility's operator are exempt from all Commission regulations for such activity, except for the requirements of this part 37 and §§ 1.3, 1.31, 1.59(d), 1.63(c), 15.05, 33.10, part 40 and part 190 of this chapter, and as applicable to the market, parts 15 through 21 of this chapter, which are applicable to a registered derivatives transaction execution facility as though they were set forth in this section and included specific reference to derivatives transaction execution facilities. § 37.3 Requirements for underlying commodities. (a) Trading facilities limited to eligible traders. Trading facilities limited to eligible traders as defined by section 5a(b)(3) of the Act, may trade any contract of sale of a commodity for future delivery (or option on such a contract) on any of the following underlying commodities: (1) Commodities having— (i) A nearly inexhaustible deliverable supply; (ii) A deliverable supply that is sufficiently large that the contract is highly unlikely to be susceptible to the threat of manipulation; or (iii) No cash market; (2) Commodities that are a security futures product, and the registered derivatives transaction execution facility is a national securities exchange registered under the Securities Exchange Act of 1934; (3) Commodities for which the Commission has determined, based on the market characteristics and surveillance history, and the self-regulatory record and capacity of the facility, that trading in the contract (or option) based on that commodity is highly unlikely to be susceptible to the threat of manipulation; or (4) Commodities that are agricultural commodities enumerated in section 1a(4) of the Act that have been so approved by the Commission under the procedures of paragraph (c) of this section. (5) The commodities that meet the criteria of paragraph (a)(1) of this section are the commodities defined in section 1a(13) of the Act as “excluded commodities.” (6) The Commission may make the determination described in paragraph (a)(3) of this section by rule, regulation or order, after notice and an opportunity for a hearing through submission of written data, views and arguments. A registered derivatives transaction execution facility may request that the Commission make such an individualized determination by filing with the Secretary of the Commission at its Washington, DC headquarters a petition that includes: (i) The terms and conditions of the product to be listed; and (ii) A demonstration, supported by data, that the underlying commodity has a suffi [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A01-19496. Public record. Not legal advice.