Revised Procedures for Commission Review and Approval of Applications for Contract Market Designation and of Exchange Rules Relating to Contract Terms and Conditions

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 5

Revised Procedures for Commission Review and Approval of

Applications for Contract Market Designation and of Exchange Rules

Relating to Contract Terms and Conditions

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

proposing to amend its procedures relating to its review and approval

of applications for contract market designation and proposed exchange

rules relating to contract terms and conditions. These fast-track

review procedures are intended further to streamline Commission review

of applications for contract market designation and proposed exchange

rule amendments of contract terms and conditions.

Specifically, the Commission is proposing a new rule 5.1, providing

that exchanges which have already been designated as a contract market

may request fast-track review for additional designation applications

as an alternative to the current review procedures. Under proposed rule

5.1, applications for designation of certain cash-settled contracts

will be deemed to be approved ten days after receipt, unless the

exchange is notified otherwise. All other fast-track designation

applications will be deemed to be approved, unless the exchange is

notified otherwise, forty-five days after receipt.

The Commission also is proposing to amend rule 1.41 to provide an

alternative fast-track review of proposed amendments to contract terms

or conditions. Similar to the fast-track designation procedures, many

categories of exchange rules relating to contract terms already are

deemed to be approved ten days after receipt. The Commission is

proposing that all other proposed exchange rules relating to contract

terms be deemed to be approved forty-five days after receipt by the

Commission, unless the exchange is notified otherwise. Notification by

the Commission that a contract application or proposed exchange rule

relating to a contract term or condition may not be made effective will

extend the applicable period for review for an additional thirty days.

DATE: Comments must be received by December 23, 1996.

ADDRESS: Comments should be mailed to the Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington,

D.C. 20581, attention: Office of the Secretariat; transmitted by

facsimile at (202) 418-5521; or transmitted electronically at

[[email protected]]. Reference should be made to ``Fast-track

Designation and Rule Approval Procedures.''

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,

Division of Economic Analysis, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581,

(202) 418-5260, or electronically, [PA[email protected]].

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Requirements for Commission Designation of

Proposed Contract Markets

The requirement that boards of trade meet specified conditions in

order to be designated as contract markets has been a fundamental tool

of federal regulation of commodity futures exchanges since the Futures

Trading Act of 1921, Public Law No. 67-66, 42 Stat. 187 (1921).1

Currently, the statutory requirements for designation are found in

Sections 5 and 5a of the Commodity Exchange Act, 7 U.S.C. Sec. 1 et

seq. (``Act''), and additionally, for indexes of equities, in Section

2(a)(1)(B) of the Act. In the Commission's experience, problems of

possible price manipulation, cornering or other market distortions are

most readily avoided when the terms of a futures contract are properly

designed, reflecting closely the underlying cash market. Thus, one of

the most effective market surveillance tools has proven to be

prophylactic, close examination of the terms of a contract before it

begins to trade.

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\1\ Designation as a contract market under the 1921 Act was

contingent upon a board of trade's providing for the prevention of

manipulative activity and the prevention of dissemination of false

information, upon providing for certain types of recordkeeping, for

admission into exchange membership of cooperative producer

associations, and upon location of the contract market at a terminal

cash market. See, Secs. 5(a), (b), (c), (d) and (e) of the Future

Trading Act of 1921. Although the constitutionality of this Act was

successfully challenged as an improper use of the Congressional

taxing power in Hill v. Wallace, 259 U.S. 44 (1922), all subsequent

legislation regulating the futures industry was patterned after this

statutory scheme.

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In the absence of properly designed contract terms, damage to

hedgers or industry pricing may result before corrections to the

contract can be made. The impact of a market manipulation or other

disruption in a newly introduced futures contract potentially could be

far wider than the futures market itself, adversely affecting the

underlying cash market, as well.2 Correcting this type of problem

after trading has already begun may require extraordinary measures such

as emergency action. At a minimum, such an occurrence would probably

result in diminished credibility for futures trading in that contract,

and possibly for futures trading, generally.

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\2\ Section 3 of the Act recognizes the national interest in

properly functioning futures markets, noting that

The prices involved in such transactions are generally quoted

and disseminated throughout the United States and in foreign

countries as a basis for determining the prices to the producer and

the consumer of commodities and the products and byproducts thereof

and to facilitate the movements thereof in interstate commerce.

[P]rices of commodities on such boards of trade are susceptible to

excessive speculation and can be manipulated, controlled, cornered

or squeezed, to the detriment of the producer or the consumer * * *

rendering regulation imperative for the protection of such commerce

and the national public interest therein.

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The designation process yields important benefits by ensuring a

mechanism for public input relating to contract design before trading

commences. Thus, in addition to independently evaluating the proposal

through its own research, Commission staff identifies and interviews

knowledgeable trade sources regarding a proposed contract's terms.

Moreover, a notice of the public availability of the terms of proposed

contracts is published in the Federal Register along with a request for

public comment. The proposed contract is also sent by the Commission to

its sister agencies having a regulatory interest in the underlying

commodity for analysis and possible comment. Not infrequently, this

process has identified deficiencies in proposed contracts, many of them

serious, which have been corrected before trading has begun. Exchanges

have also determined with some frequency to modify proposed contracts

in response to suggestions by Commission staff, other government

agencies or the public.

The goals of the designation process are reflected in the Act's

requirements that, to be designated, contract markets provide for

delivery periods which will prevent market congestion (Section 5a(a)(4)

of the Act); permit delivery on

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the contract of such qualities, at such points and at such

differentials as will minimize market disruptions (Sections 5a(a)(10)

and 5(1) of the Act); provide for the prevention of dissemination of

false information (Section 5(3) of the Act); provide for the prevention

of price manipulation (Section 5(4) of the Act); and in general, that

trading in a proposed contract not be contrary to the public interest

(Section 5(7) of the Act).3 Contract markets must meet these

requirements both initially and on a continuing basis.4

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\3\ In addition to these contract-specific requirements, boards

of trade, to be designated, must also meet several general

conditions. These, for example, require the board of trade to:

provide for various forms of recordkeeping (Section 5(2) and

5a(a)(2) of the Act); provide for compliance with Commission orders

(Section 5(6) of the Act); submit its rules to the Commission

(Sections 5a(a)(1) and 5a(a)(12)(A) of the Act); and enforce

exchange rules (Section 5a(a)(8) of the Act).

\4\ Section 6 of the Act provides, in part, that:

[a]ny board of trade desiring to be designated a `contract

market' shall make application to the Commission for such

designation and accompany the same with a showing that it complies

with the above conditions, and with a sufficient assurance that it

will continue to comply with the above requirements.

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To provide guidance to the exchanges in meeting the designation

requirements of the statute, in 1975 the newly formed CFTC issued its

Guideline No. 1, now codified at 17 CFR Part 5, Appendix A. Guideline

No. 1 sets forth the information which must be submitted by an exchange

to demonstrate that a proposed contract meets the statutory

requirements for designation. It requires that the application for

designation include information demonstrating the conformity of

contract terms with commercial practices, the adequacy of deliverable

supplies or, if applicable, the appropriateness of the cash settlement

procedure, and other information as requested.

The Commission, based upon its administrative experience, has

periodically revised and updated its procedures to provide exchanges

with more specific criteria for meeting the contract market designation

requirements; to reflect new developments in futures trading--such as

the introduction of financial futures, futures on aggregates or indices

of securities and cash settlement as a substitute for physical

delivery; and, where appropriate, to lessen the burden on applicants by

reducing the information required and streamlining the form of

application. In this regard, Guideline No. 1 was last amended in

January 1992, substantially reducing and streamlining its requirements.

Indeed, much of the application for options contracts has been reduced

to the form of a checklist. Moreover, under the Commission's internal

procedures established in 1992, notification of the public availability

of proposed contract terms normally appears in the Federal Register

within one week of receipt of an application. In addition, under these

procedures, substantive issues are identified and communicated

informally to the exchange very shortly after receipt, permitting their

prompt resolution.

With the changes noted above, the total review time for new

contracts has declined significantly. The review and approval of new

contracts generally is completed shortly after the Federal Register

public comment period ends or as soon as the exchange makes the

modifications necessary to address a proposed contract's deficiencies.

Over the last five years, the average total review time has been

reduced to about three months. Strikingly, this reduction in processing

time coincides with the submission of record numbers of new contract

proposals.5

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\5\ About 230 new contracts have been approved in the four years

since Guideline No. 1 was last amended in 1992. These included

entirely new products, such as contracts on electricity, air

pollution allowances, insurance, cross-currency rates, fertilizers,

shrimp, dairy products, and various broad-based or commodity-

specific indexes of emerging markets.

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II. The Proposed Rules

A. Fast-Track Contract Market Designation--Cash-Settled Contracts

As part of its continuing effort to impose the least costly means

necessary to achieve the regulatory objectives of the contract

designation review process, the Commission previously established a

very abbreviated, ten-day review procedure for the designation of

contracts that are eligible to be listed for trading under its Part 36

exemptive rules. See, Commission rule 36.4, 17 CFR 36.4 (1996). Such a

highly abbreviated review process was appropriate for those contracts,

the Commission reasoned, because Part 36 contracts are required to be

cash-settled and may not be based on the agricultural commodities

enumerated in Section 1a(3) of the Act, thus avoiding issues related to

delivery terms. ``Notice of Proposed Rulemaking,'' 59 FR 54139, 54148

(Oct. 28, 1994).

Despite determining to provide this highly abbreviated procedure

initially only in the context of the pilot program for Part 36

transactions, the Commission nevertheless indicated that, based upon

its administrative experience and consistent with the views expressed

by several commenters, such procedures might be appropriately expanded

to some additional categories of applications for designation.6

Thus, in promulgating these rules, the Commission noted that it would

``evaluate whether * * * the ten-day notification provision should be

extended to certain non-section 4(c) contract market transactions when

it evaluates trading experience under the pilot program.'' (60 FR at

51338.)

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\6\ In this regard, several commenters suggested that the ten-

day review process ``apply to all exchange-traded contracts or to

certain categories of such contracts, such as financial futures and

options.'' 60 FR at 51338.

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Although it may have preferred to test these procedures first in

the context of Part 36 markets that are by rule limited to the

relatively more sophisticated trader, there has been no trading

experience in connection with the pilot program for Part 36

transactions.7 Moreover, the degree of pre-approval scrutiny

appropriate for particular types of proposed contracts is not

necessarily based upon restrictions on the nature of the traders who

may trade in the market. Accordingly, in light of the increasing

expertise of both the exchange and Commission staffs over the years,

the Commission has determined to propose a ten-day fast-track review of

applications for designation of certain cash-settled contracts for non-

Part 36 markets.

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\7\ The three-year pilot program to test the operation of the

Part 36 rules begins the date when the first contract trades

pursuant to them. No exchange has yet listed for trading such

contracts.

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This highly-abbreviated, ten-day fast-track procedure is intended

only to speed the review and to provide for automatic approval of new

contract applications; it does not modify the regulatory protections

currently provided under the Act. Accordingly, under the fast-track

review procedures, only applications for contract market designation

which are complete upon submission; which are not amended, except upon

request of the Commission; which do not raise novel or complex issues;

and which do not appear, on their face, to contravene a statutory or

regulatory requirement, would be automatically deemed to be approved

ten days after receipt. The Commission can extend fast-track review for

one thirty-day period. This will permit fast-track review to remain

available even for those applications which do raise novel or complex

issues.

As noted above, because cash-settled contracts avoid issues

regarding delivery terms, the ten-day fast-track review is proposed to

be available only for cash-settled contracts.8 Moreover,

[[Page 59388]]

applications for designation for those agricultural commodities which

are enumerated in section 1a(3) of the Act are not eligible for ten-day

fast-track treatment, even if the proposed contracts are cash-settled.

In the Commission's administrative experience, cash-price series of

agricultural commodities to be used for the purpose of cash-settlement

often have raised issues requiring careful analysis.

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\8\ Although they may be settled by physical delivery, futures

contracts for foreign currencies generally do not raise the types of

issues common to physical delivery markets. Accordingly, the

Commission determined to include contracts for foreign currency

within the Part 36 exemption along with cash-settled contracts.

Commission rule 36.2(a)(1), 17 CFR 36.2(a)(1). Consistent with that

determination, the Commission is also including foreign currency

contracts within the ten-day fast-track review procedures, providing

there is no legal impediment to delivery of the currency and there

exists a liquid cash market in the currency.

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In addition, fast-track review would not be available for

applications for contract market designation for those commodities

which are subject to the procedural requirements of section 2(a)(1)(B)

of the Act--securities, including any group or index of securities. The

procedures specified under that section of the Act provide that the

Securities and Exchange Commission make a determination regarding those

proposed contracts subject to its provisions.

A separate provision of the Act, section 2(a)(8)(B)(ii), 7 U.S.C.

4a(g), provides forty-five days for the Department of the Treasury and

the Board of Governors of the Federal Reserve System to comment on any

application by a board of trade for designation as a contract market

involving transactions for the future delivery of any security issued

or guaranteed by the United States or any agency thereof. It does not,

however, require that the two agencies make a determination regarding

such contracts. A ten-day fast-track review period, even if extended

for an additional thirty days, is inconsistent with the time generally

permitted those agencies for comment, and unless such contracts were

exempted therefrom, they would likely have to be excluded from this

provision of the proposed rule.9

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\9\ The forty-five day comment period of section 2(a)(8)(B)(ii)

may also conflict with the review procedures of a second fast-track

procedure discussed below. That procedure provides for a forty-five

day fast-track review. Although the other regulators generally have

filed comments, if any, in fewer than forty-five days, the full

period for comment would be inconsistent with a forty-five day fast-

track review if the Commission were unable to provide notice of an

application on the very same day of its receipt.

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The agencies did not comment adversely on inclusion of the section

2(a)(8)(B)(ii) commodities under the similar, ten-day automatic listing

procedures of the Commission's Part 36 rules. Accordingly, the

Commission finds that it is in the public interest, and is proposing,

that these commodities also be eligible for the comparable fast-track

procedures proposed herein. The Commission, therefore, is proposing to

exempt these transactions under section 4(c) of the Act from the

statutory time permitted the agencies for filing comments provided in

section 2(a)(8)(B)(ii) of the Act. Of course, the Commission will

continue to provide notice to the other regulators of applications and

would be responsive to their requests for additional time to review

complex or novel issues raised by an application. Accordingly, the

Commission seeks comment on whether the section 2(a)(8)(B)(ii)

commodities should be exempted from the forty-five day time for comment

and thus be eligible for fast-track treatment, and particularly, for

ten-day fast-track review.10

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\10\ Because no regulatory requirement other than the time

period for comment by other agencies is being waived, for purposes

of this exemption ``appropriate persons'' eligible to enter into the

exempted instruments include all those who may otherwise trade

designated futures or option contracts. The Commission believes that

this exercise of its exemptive authority will not have a material

adverse effect on the ability of the Commission, the other

regulators, or any contract market to discharge its, or their,

duties under the Act.

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B. Fast-Track Contract Market Designation--Other Contracts

Use of a ten-day review process is not appropriate for every type

of contract. Because many cash agricultural markets are widely

dispersed, cash price series for certain of them may be less reliable,

available or timely, than for other types of commodities. Moreover, in

contracts requiring physical delivery, convergence of the futures and

cash market prices is dependent upon properly aligned delivery terms.

Accordingly, for these types of contracts, careful analysis and review

of contract terms in advance of trading will likely remain an important

market surveillance tool. This is particularly true for those

commodities which are characterized by seasonal variation in their

production or other factors which, from time to time, may impinge on

deliverable supplies.

Although a ten-day review period for such contracts might be

inconsistent with accomplishing the regulatory objectives embodied in

the Act's designation requirements, in light of the increasing

expertise and experience of both the Commission and exchange staffs,

the Commission believes that, even for these contracts, substantial

reductions in the time currently needed to review such applications for

designation can be made. The Commission believes that these savings can

be achieved by further streamlining its procedures. This would also

preserve the opportunity for public participation in the designation of

those contracts. After a thorough review of its present procedures, the

Commission believes that for these contracts the current review period

can be cut in half.

The Commission, therefore, is proposing an additional fast-track

procedure available for applications for designation of contracts for

physical delivery or for cash-settlement on the agricultural

commodities enumerated in the Act.11 Under this additional fast-

track review procedure, applications for contract market designation

would be deemed to be approved by the Commission forty-five days after

receipt, unless the exchange is notified otherwise. As under the ten-

day process, the forty-five day review process would be available only

for applications for designation that are complete when filed and not

subsequently amended, except as requested by the Commission.

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\11\ However, designation applications for commodities which are

subject to the procedural requirements of Section 2(a)(1)(B) of the

Act would not be eligible for this fast-track review, either.

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As part of the forty-five day fast-track procedures, the Commission

will continue its current practice of publishing in the Federal

Register, within a few days of an application's receipt, notice of the

public availability of the proposed contract's terms and a request for

public comment thereon. The Commission will also continue its practice

of interviewing knowledgeable sources regarding cash market practices

and whether the proposed contract's terms are consistent with those

practices.

However, in order to meet the very compressed time for review, the

Commission is proposing to reduce the public comment period for fast-

track applications from thirty days, as currently provided under

Appendix D to Part 5, to fifteen days. The Commission is aware that

some of those entities which have commented in the past on contract

applications, particularly membership organizations, may have

difficulty in meeting this deadline. However, the proposed reduction in

the comment period is necessary to provide the Commission with an

opportunity to assess comments which have been filed before the end of

the review period and is proportional to

[[Page 59389]]

the overall reduction in time for Commission review of an application.

Moreover, the Commission's recent initiatives to accept public comment

for filing through facsimile and electronic mail transmissions should

assist commenters in complying with this condensed comment period.

Both the ten-day and forty-five day fast-track periods can be

extended by the Commission for one thirty-day period. In those

instances where issues raised by the application are complex or novel,

where there is an inadequate basis in the application upon which to

review the contract terms, or where a contract term raises the issue of

whether it violates a statutory or regulatory requirement, the

Commission, by notifying the exchange, can extend the review period and

halt automatic approval of the application for thirty days. The

notification must specify briefly the reason for the extension,

including the contract term or terms that are in issue.

If at any time during the review period, the Commission believes

that a contract term raises serious issues, such that it may violate a

statutory or regulatory requirement, it will so notify the exchange.

This notification will halt the automatic approval of the designation,

terminate the fast-track procedures and convert the application from

fast-track to the current review and approval procedures. Because the

fast-track procedures are intended to be used only for those

applications for designation which do not raise complex or novel

issues, contracts that include such issues which have not been

susceptible to ready resolution during the fast-track review period are

not appropriate candidates for this automatic approval process.

The exchange, if it disagrees with the Commission's determination

to terminate fast-track consideration, may request within ten days of

the termination notification that the Commission either approve the

application or initiate disapproval procedures, rather than continuing

with its review and approval of the application under its current

procedures. Historically, the Commission has never disapproved an

application for contract market designation. Rather, it has offered

exchanges an opportunity to cure defects in applications, including

instances where a contract term as initially proposed was in conflict

with statutory or regulatory requirements.12

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\12\ Similarly, when public comments identify deficiencies or

raise concerns regarding contract terms, exchanges at times have

responded by modifying the proposed contract, sometimes

substantially.

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Proposed rule 5.1 builds on this long-time administrative practice,

applying it in the context of fast-track designation review, as well.

Where a proposed contract originally filed for fast-track review

appears to violate a statutory or regulatory requirement, the

Commission presumes that the exchange would prefer to convert the

application to one for review under current procedures, thus having an

opportunity to cure the defect, rather than to face disapproval.

However, when exchanges prefer that the Commission render a decision

whether to disapprove the application as filed, the Commission will

institute a formal disapproval proceeding upon notification that the

exchange views its application as complete and final as submitted.

Moreover, at any time during the fast-track review period, the

exchange may instruct the Commission to consider the application under

the current, rather than the fast-track, review procedures. Current

procedures for review and approval of designation applications have

developed into an iterative process whereby the dialogue between

Commission and exchange staff may result in modifications being made by

the exchange to the proposed contract's terms after submission of the

application. In contrast, the fast-track procedure is intended to be an

automatic process and is based on the supposition that designation

applications submitted for fast-track review are complete and final, as

filed. Accordingly, because amending the terms of a pending contract

submitted for fast-track review after its initial submission--other

than correcting typographical mistakes, renumbering, or such other

nonsubstantive revisions--make an application ineligible for further

fast-track consideration, exchanges are free at any time to instruct

that the application be converted to current review procedures. This

ensures exchanges the freedom and flexibility to amend contracts after

submission by voluntarily converting the review procedure, rather than

mandating that they continue with the application in a form that they

no longer desire.

By providing an alternative mechanism for reviewing a designation

application, the Commission does not intend to affect the standard of

review for such contracts. Under Section 5 of the Act, the Commission

is ``directed to designate any board of trade as a `contract market'

when * * *. [it] complies with * * * the [specified] conditions.'' The

Commission has been, and will continue to be, mindful that the

requirements for designation are performance, rather than design,

standards. In this regard, a number of different contract terms or

approaches may meet a particular statutory or regulatory designation

requirement. Choosing among these acceptable alternatives is a business

decision of the exchange. Commission staff will not use either the

current designation procedures or the fast-track procedure as a means

of expressing any view regarding exchange business decisions.

Accordingly, both the current procedures and the fast-track review

procedures ultimately impose the same standard of review--that is,

should the contract be disapproved because it violates a statutory or

regulatory condition of designation.

C. Fast-Track Review of Amendments to Contract Terms and Conditions

In general, exchange rule amendments currently are required by

section 5a(a)(12)(A) of the Act to be submitted to the Commission for

review and may be made effective after ten-days.\13\ The primary

exception to this automatic ten-day provision is contract terms and

conditions (other than rules setting margin) which are required to be

submitted for Commission review and approval. See, section 5a(a)(12)(A)

of the Act.\14\ If the Commission does not act to approve or disapprove

such a rule within 180 days of submission, the exchange may make the

rule effective.

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\13\ See also, section 5a(a)(1) of the Act (requiring notice to

the Commission of all contract market bylaws, rules, regulations and

resolutions).

\14\ The Commission routinely reviews for approval certain other

categories of exchange rules that must be approved under other

sections of the Act or Commission regulations, such as exchange

rules relating to exchange-of-futures-for-physical transactions.

See, e.g., Section 4c(a) of the Act and Commission rule 1.38(a).

Additionally, an exchange may request Commission approval of a rule

amendment which, absent this request, would be subject to the

automatic ten-day review process.

It should also be noted that there is an entirely separate

procedure for exchange rules that are temporary in nature and which

have been adopted in response to emergency conditions. None of the

existing or proposed procedures discussed above apply to exchange

emergency rules.

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Contract terms are treated differently from other exchange rules so

that changes to contract specifications, which can modify a contract

significantly, can be given the same type of review they would have

received if submitted as part of an application for a new designation.

Indeed, several exchanges have used the rule amendment process to

transform a contract completely, for example, substituting cash

settlement for physical

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delivery. Such a profound change is virtually identical to seeking a

new designation and raises the same regulatory concerns.

However, not all proposed exchange amendments to contract terms and

conditions are subject to a single procedure for review. Based upon its

regulatory experience, the Commission, by rule, has created various

categories of exchange amendments to contract terms that are subject to

automatic approval for both futures and option contracts. See,

Commission rule 1.41(h)-(t). For example, among other categories of

amendments to contract terms, changes in the composition of a stock or

other index are approved upon adoption by the exchange (rules 1.41 (h)

and (i)), as are changes to survey lists (rule 1.41(j)) and changes to

trading hours, if within a specified window (rule 1.41(k)). Other

categories of rule amendments, such as changes to trading months (rule

1.41(l)) and changes to contract terms established by independent third

parties (rule 1.41(m)) are deemed to be approved ten days after receipt

by the Commission. Indeed, rule 1.41(n) enables the Commission to

establish such automatic approval procedures for any rule for which

such treatment is appropriate.

The exchange rule amendments eligible for such automatic approval

procedures typically involve changes to exchange rules which are

recurring, predictable, clearly defined and subject to conditions which

can be specified in advance. As new commodities or types of contracts

are listed for trading, the Commission, based upon its experience, has

added new categories of automatic rule approvals, as appropriate. Thus,

in addition to the vast majority of exchange rule submissions that are

not contract terms and therefore are subject only to a ten-day review,

many if not a majority of amendments to contract terms and conditions

are already eligible for automatic approval.

In light of the Commission's determination to propose two fast-

track periods to review applications for contract market designation,

the Commission believes that two similar fast-track periods for

amendments to contract terms should be provided as well. Accordingly,

the Commission is proposing to add to Commission rule 1.41(b) a fast-

track review procedure consistent with the proposed forty-five day

fast-track review of designation applications. The current provisions

of rule 1.41 providing for ten-day review and automatic approval of

many categories of amendments to contract terms would remain unchanged.

The existing procedures for review of designation applications and

amendments to contract terms differ in their treatment of requests for

public comment. Similar to applications for designation, request for

public comment on certain amendments to contract terms and conditions

is discretionary. Thus, the Commission may, as a matter of discretion,

publish proposed amendments of contract terms for comment ``when

publication * * * is in the public interest and will assist the

Commission in considering the views of interested persons.'' Commission

rule 140.96(b), 17 CFR 140.96(b). For amendments to contract terms

published for public comment as a matter of Commission discretion, the

Commission will provide a fifteen-day comment period consistent with

its proposed practice for fast-track designation applications.

However, Section 5a(a)(12)(A) of the Act requires amendments to

contract terms, when determined to be of major economic significance,

to be published in the Federal Register. That section of the Act also

requires that the comment period be for thirty days. If all proposed

amendments to contract terms required a full thirty-day comment period,

the Commission's ability to meet a forty-five day deadline would be

impossible with its present staff resources. However, only a limited

percentage of exchange rule amendments are of major economic

significance and would therefore be required to be published for public

comment for the thirty-day period. Although acting on even this limited

number of submissions within forty-five days will be difficult when a

thirty-day comment period is required, the Commission is proposing a

forty-five day review period for all proposed amendments of contract

terms and designation applications in order to achieve the most

consistent and simplest procedures for fast-track review.

D. Implementation

The Commission is proposing these automatic approval procedures to

streamline further Commission review of applications for contract

market designation and proposed exchange rules relating to contract

terms and conditions. It believes that the proposed procedures, by

providing the exchanges an alternative means of achieving greater

certainty and ease in listing new products, will permit them greater

flexibility to compete with foreign exchange-traded products and with

both foreign and domestic over-the-counter transactions, while

maintaining the Commission's authority to review proposed contracts and

proposed exchange rules relating to existing contracts for their

consistency with the Act and Commission regulations and maintaining the

public's ability to participate in the process.

To streamline comprehensively the designation and rule approval

procedures, the Commission must also examine the form and content of

the required submissions. The Commission last amended Guideline No. 1

in 1992. The Commission's 1992 revisions were undertaken with the view

of removing duplication of effort between its staff and the exchanges,

streamlining procedures, reducing paperwork, and refining the

requirements for designation.

As noted above, one of the significant innovations of the 1992

revision was to reduce the form of application for designation of

option contracts to a checklist. Although the designation application

for futures contracts may be less susceptible to a checklist format,

the Commission believes that the concept of an extended checklist may

have value in the context of applications for designation of futures

contracts, as well. In this regard, to the extent that the required

information can be provided in a format requiring less verbiage, both

the exchanges and the Commission may save additional staff resources.

Because the Commission believes that significant potential benefits

will accrue from the proposed fast-track revisions to its contract

designation procedures, it does not wish to delay public consideration

of such revisions in order to formulate a proposal concerning Guideline

No. 1. Accordingly, the Commission is currently proposing fast-track

procedures at this time and will undertake separately the time-

consuming task of reviewing the form and content requirements relating

to applications for designation contained in Guideline No. 1. Despite

this determination to proceed on these proposed fast-track rules

separately, the Commission nevertheless is committed to review the

broader Guideline No. 1 issues expeditiously. In addition to these

proposals regarding fast-track procedures for contract market

designation and amendments to contract terms and conditions, the

Commission is also considering separately procedures to streamline the

review and approval of contract market rules other than contract terms

and conditions.

[[Page 59391]]

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,

requires that agencies, in promulgating rules, consider the impact of

these rules on small entities. The Commission has previously determined

that contract markets are not ``small entities'' for purposes of the

Regulatory Flexibility Act, 5 U.S.C. 601 et seq. 47 FR 18618 (April 30,

1982). These amendments propose to establish alternative streamlined

procedures for Commission review and approval of applications by

contract markets for additional designations and of amendments to

contract terms and conditions. Accordingly, the Chairperson, on behalf

of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that

the action taken herein will not have a significant economic impact on

a substantial number of small entities. However, the Commission invites

comments from any firms or other persons which believe that the

promulgation of these rules might have a significant impact upon their

activities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1980 (Act), 44 U.S.C. 501 et. seq.,

imposes certain requirements on federal agencies (including the

Commission) in connection with their conducting or sponsoring any

collection of information as defined by the Paperwork Reduction Act.

While this proposed rule has no burden, the group of rules (3038-0022)

of which this is a part has the following burden:

Average burden hours per response--3,546.26

Number of Respondents--10,971

Frequency of response--on occasion

Persons wishing to comment on the information which would be

required by this proposed/amended rule should contact Jeff Hill, Office

of Management and Budget, Room 3228, NEOB, Washington, DC 20503, (202)

395-7340. Copies of the information collection submission to OMB are

available from Gerald P. Smith, CFTC Clearance Officer, 1155 21st

Street NW, Washington, DC 20581, (202) 418-5160.

List of Subjects in 17 CFR Part 1

Commodity exchanges, Contract market rules, Rule review procedures.

List of Subjects in 17 CFR Part 5

Contract markets, Designation application.

In consideration of the foregoing, and pursuant to the authority

contained in the Commodity Exchange Act and, in particular, sections

4(c), 4c, 5, 5a, 6 and 8a of thereof, 7 U.S.C. 6(c), 6c, 7, 7a, 8, and

12a, the Commission hereby proposes to amend 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 continues to read as follows:

Authority: 7 U.S.C. 2, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 9, 12, 12a, 12c, 13a-1, 13a-2,

16, 19, 21, 23 and 24.

2. In Section 1.41(b), the introductory text, paragraphs (b)(1),

(b)(2), (b)(3), (b)(4), (b)(5) and the concluding text are proposed to

be redesignated as (b)(1)(i), (b)(1)(i)(A), (b)(1)(i)(B), (b)(1)(i)(C),

(b)(1)(i)(D), (b)(1)(i)(E), and (b)(1)(ii), respectively; newly

redesignated paragraph (b)(1)(ii) is proposed to be revised; and

paragraphs (b)(2) through (b)(4) are proposed to be added, to read as

follows:

Sec. 1.41 Contract market rules; submission of rules to the

Commission; exemption of certain rules.

* * * * *

(b) Submission of rules for prior Commission approval. (1)(i) * * *

(ii) The Commission may remit to the contract market, with an

appropriate explanation where practicable, and not accept for review

any rule submission that does not comply with the form and content

requirements of paragraphs (b)(1)(i) (A) through (E) of this section.

(2) All proposed contract market rules that relate to terms and

conditions submitted for review under paragraph (b)(1) shall be deemed

approved by the Commission under section 5a(a)(12)(A) of the Act,

forty-five days after receipt by the Commission, unless notified

otherwise within that period, if:

(i) The contract market labels the submission as being submitted

pursuant to Commission rule 1.41(b)--Fast Track Review;

(ii) The submission complies with the requirements of paragraphs

(b)(1)(i) (A) through (E) of this section, or for dormant contracts,

the requirements of Sec. 5.2 of this chapter;

(iii) The contract market does not amend the proposed rule or

supplement the submission, except as requested by the Commission,

during the pendency of the review period; and

(iv) The contract market has not instructed the Commission in

writing during the review period to review the proposed rule under the

usual procedures under section 5a(a)(12)(A) of the Act and paragraph

(b)(1) of this section.

(3) The Commission, within forty-five days after receipt of a

submission filed pursuant to paragraph (b)(2) of this section, may

notify the contract market making the submission that the review period

has been extended for a period of thirty days where the proposed rule

raises novel or complex issues which require additional time for

review. This notification will briefly specify the nature of the

specific issues for which additional time for review is required. Upon

such notification, the period for fast-track review of paragraph (b)(2)

of this section shall be extended for a period of thirty days.

(4) During the forty-five day period for fast-track review, or the

thirty-day extension when the period has been enlarged under paragraph

(b)(3) of this section, the Commission shall notify the contract market

that the Commission is terminating fast-track review procedures and

will review the proposed rule under the usual procedures of section

5a(a)(12)(A) of the Act and paragraph (b)(1) of this section, if it

appears that the proposed rule may violate a specific provision of the

Act, regulation, or form or content requirement of this section. This

termination notification will briefly specify the nature of the issues

raised and the specific provision of the Act, regulation, or form or

content requirement of this section that the proposed rule appears to

violate. Within ten days of receipt of this termination notification,

the contract market may request that the Commission render a decision

whether to approve the proposed rule or to institute a proceeding to

disapprove the proposed rule under the procedures specified in section

5a(a)(12)(A) of the Act by notifying the Commission that the contract

market views its submission as complete and final as submitted.

* * * * *

3. Section 1.41b is proposed to be amended by revising paragraph

(b) to read as follows:

Sec. 1.41b. Delegation of authority to the Director of the Division of

Trading and Markets and Director of the Division of Economic Analysis.

* * * * *

(b) The Commission hereby delegates, until the Commission orders

otherwise:

(1) To the Director of the Division of Economic Analysis, with the

concurrence of the General Counsel or the General Counsel's delegatee,

to be exercised by such Director or by such other employee or employees

of the Commission under the supervision of

[[Page 59392]]

such Director as may be designated from time to time by the Director,

the authority to approve, pursuant to section 5a(a)(12)(A) of the Act

and Sec. 1.41(b), contract market proposals, submitted pursuant to

Sec. 5.2, to list additional trading months or expiration for, or to

otherwise recommence trading in, a contract that is dormant within the

meaning of Sec. 5.2; and

(2) To the Director of the Division of Economic Analysis, and to

the Director of the Division of Trading and Markets, with the

concurrence of the General Counsel or the General Counsel's delegatee,

to be exercised by such Director or by such other employee or employees

of the Commission under the supervision of such Director as may be

designated from time to time by the Director, authority to request

under Sec. 1.41(b)(2)(iii) that the contract market amend the proposed

rule or supplement the submission, to notify a contract market under

Sec. 1.41(b)(3) that the time for review of a proposed contract term

submitted under that section for fast-track review has been extended,

and to notify the contract market under Sec. 1.41(b)(4) that fast-track

procedures are being terminated.

* * * * *

PART 5--DESIGNATION OF AND CONTINUING COMPLIANCE BY CONTRACT

MARKETS

3. The authority citation for Part 5 is proposed to be amended by

revising it to read as follows:

Authority: 7 U.S.C. 6(c), 6c, 7, 7a, 8 and 12a.

4. Part 5 is proposed to be amended by adding a new section 5.1,

and in Appendix D, by revising the second sentence, to read as follows:

Sec. 5.1 Fast-track designation review.

(a) Cash-settled contracts. Boards of trade seeking designation as

a contract market under sections 4c, 5, 5a, and 6 of the Act, and

regulations thereunder, shall be deemed to be designated as a contract

market under section 6 of the Act ten days after receipt by the

Commission of the application for designation, unless notified

otherwise within that period, if:

(1) The board of trade labels the submission as being submitted

pursuant to Commission rule 5.1--Fast Track Ten-Day Review;

(2) (i) The application for designation is for a futures contract

providing for cash settlement or for delivery of a foreign currency for

which there is no legal impediment to delivery and for which there

exists a liquid cash market; or

(ii) For an options contract that is itself cash-settled, is

exercised into a futures contract which meets the requirements of

paragraph (a)(2)(i) of this section, or is for delivery of a foreign

currency which meets the requirements of paragraph (a)(2)(i) of this

section;

(3) The application for designation is for a commodity other than

those enumerated in section 1a(3) of the Act or subject to the

procedures of section 2(a)(1)(B) of the Act;

(4) The board of trade currently is designated as a contract market

for at least one contract which is not dormant within the meaning of

this part;

(5) The submission complies with the requirements of Appendix A of

this part--Guideline No. 1 and Sec. 1.61 of this chapter;

(6) The board of trade does not amend the terms or conditions of

the proposed contract or supplement the application for designation,

except as requested by the Commission, during that period; and

(7) The board of trade has not instructed the Commission in writing

during the review period to review the application for designation

under the usual procedures under section 6 of the Act.

(b) Contracts for physical delivery. Boards of trade seeking

designation as a contract market under sections 4c, 5, 5a, and 6 of the

Act, and regulations thereunder, shall be deemed to be designated as a

contract market under section 6 of the Act forty-five days after

receipt by the Commission of the application for designation, unless

notified otherwise within that period, if:

(1) The board of trade labels the submission as being submitted

pursuant to Commission rule 5.1--Fast Track Forty-five Day Review;

(2) The application for designation is for a commodity other than

those subject to the procedures of section 2(a)(1)(B) of the Act;

(3) The board of trade currently is designated as a contract market

for at least one contract which is not dormant within the meaning of

this part;

(4) The submission complies with the requirements of Appendix A of

this part--Guideline No. 1 and Sec. 1.61 of this chapter;

(5) The board of trade does not amend the terms or conditions of

the proposed contract or supplement the application for designation,

except as requested by the Commission, during that period; and

(6) The board of trade has not instructed the Commission in writing

during the forty-five day review period to review the application for

designation under the usual procedures under section 6 of the Act.

(c) Notification of extension of time. The Commission, within ten

days after receipt of a submission filed under paragraph (a) of this

section, or forty-five days after receipt of a submission filed under

paragraph (b) of this section, may notify the board of trade making the

submission that the review period has been extended for a period of

thirty days where the designation application raises novel or complex

issues which require additional time for review. This notification will

briefly specify the nature of the specific issues for which additional

time for review is required. Upon such notification, the period for

fast-track review of paragraphs (a) and (b) of this section shall be

extended for a period of thirty days.

(d) Notification of termination of fast-track procedures. During

the fast-track review period provided under paragraphs (a) or (b) of

this section, or of the thirty-day extension when the period has been

enlarged under paragraph (c) of this section, the Commission shall

notify the board of trade that the Commission is terminating fast-track

review procedures and will review the proposed rule under the usual

procedures of section 6 of the Act, if it appears that the proposed

contract may violate a specific provision of the Act, regulation, or

form or content requirement of Appendix A of this part. This

termination notification will briefly specify the nature of the issues

raised and the specific provision of the Act, regulation, or form or

content requirement of Appendix A of this part that the proposed

contract appears to violate. Within ten days of receipt of this

termination notification, the board of trade may request that the

Commission render a decision whether to approve the designation or to

institute a proceeding to disapprove the proposed application for

designation under the procedures specified in section 6 of the Act by

notifying the Commission that the exchange views its application as

complete and final as submitted.

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

until it orders otherwise, to the Director of the Division of Economic

Analysis or to the Director's delegatee, with the concurrence of the

General Counsel or the General Counsel's delegatee, authority to

request under paragraphs (a)(6) and (b)(5) of this section that the

contract market amend the proposed contract or supplement the

application, to notify a board of trade under paragraph (c) of this

section that the time for review of a proposed contract term submitted

for review under paragraphs (a) or (b) of this section has

[[Page 59393]]

been extended, and to notify the contract market under paragraph (d) of

this section that the fast-track procedures of this section are being

terminated.

(2) The Director of the Division of Economic Analysis may submit to

the Commission for its consideration any matter which has been

delegated in paragraph (e)(1) of this section.

(3) Nothing in this paragraph prohibits the Commission, at its

election, from exercising the authority delegated in paragraph (e)(1).

Appendix D--Internal Procedure Regarding Period for Public Comment

* * * Generally, the Commission will provide for a public

comment period of thirty days on such applications for designation;

provided, however, that the public comment period will be fifteen

days for those applications submitted for review under the fast-

track procedures of Sec. 5.1(b) of this part. * * *

Issued in Washington, D.C. this 18th day of November, 1996, by

the Commodity Futures Trading Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 96-29835 Filed 11-21-96; 8:45 am]

BILLING CODE 6351-01-P