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: Final rulemaking.

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

SUMMARY: On November 22, 1996, the Commodity Futures Trading Commission

(``Commission'') proposed rules amending its procedures relating to the

review and approval of applications for contract market designation and

proposed exchange rule amendments relating to contract terms and

conditions. Based upon its consideration of the comments received in

response to its Notice of Proposed Rulemaking, 61 FR 59386 (November

22, 1996), and upon its independent analysis, the Commission is

promulgating new rule 5.1.

Rule 5.1 establishes fast-track procedures for Commission review of

exchange applications for contract market designation as an alternative

to the current review procedures. Under these alternative procedures,

applications for designation of cash-settled and other specified

futures and option contracts will be deemed to be approved ten days--

and all others, forty-five days--after receipt, unless the exchange is

notified otherwise. The final rules have been modified, in response to

public comment, by including within the ten-day category proposed

option contracts based upon futures contracts that are already

designated and by confirming explicitly within the rule that exchanges

may modify applications nonsubstantively under the fast-track review

procedures.

The Commission also is amending rule 1.41, as proposed, to provide

an alternative fast-track review of proposed amendments to contract

terms or conditions. These procedures are similar to those for contract

market designations and include both ten-day and forty-five-day review

periods. These review periods can be extended for one thirty-day period

in appropriate instances. In a companion notice published separately in

the Federal Register, the Commission also is adopting fast-track

procedures relating to the review of proposed exchange rules which do

not relate to contract terms or conditions.

EFFECTIVE DATE: April 7, 1997.

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 for the past

seventy-five years.1 Prior to the 1974 amendments to the Commodity

Exchange Act, 7 U.S.C. 1 et seq. (``Act''), however, the statutory

scheme did not require the Commodity Exchange Authority (``CEA''), the

Commission's predecessor agency, to approve in advance the trading of

all new futures contracts,2 nor did it require agency approval of

exchange rules before they became effective. Rather, exchange rules

amending the terms and conditions of futures contracts were subject

only to disapproval after becoming effective. See, Pub. L. 90-258, sec.

23, 82 Stat. 33 (1968).

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

\1\ See, Futures Trading Act of 1921, Pub. L. 67-66, 42 Stat.

187 (1921). Designation as a contract market under the 1921 Act was

contingent upon a board of trade's meeting specified statutory

criteria, including providing for the prevention of manipulative

activity. 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 followed this pattern.

\2\ Prior to 1974, the Act defined ``commodity'' by specific

enumeration. Accordingly, new contracts that were not so enumerated

were unregulated. The definition of commodity periodically would be

updated to include additional commodities in which trading had

commenced on those exchanges which traded other regulated contracts.

For example, livestock and livestock products were added to the

Act's definition of ``commodity'' as part of the 1968 amendments to

the Act, after such contracts had already begun trading on the

Chicago Mercantile Exchange. Pub. L. 90-258 section 1(a), 49 Stat.

1491 (1968).

Other futures exchanges, including the Commodity Exchange, Inc.

and the former Coffee and Sugar and Cocoa exchanges, operated wholly

outside of the regulatory scheme.

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

The 1974 amendments to the Act rejected that approach. Instead, as

part of Congress' overall intent to strengthen federal regulatory

oversight of the futures industry, the 1974 amendments provided for a

meaningful government review of all new futures contracts before

trading could begin and of proposed amendments to the terms or

conditions of existing contracts. See, H. Rep. No. 93-975, 93d Cong.,

2d Sess. at 78, 82 (1974).

Subsequently, Congress reinforced this determination by enhancing

the opportunity for public participation in the Commission's review

procedures. As part of the 1978 amendments to the Act, Congress added

the provision requiring a public comment period for economically

significant proposed exchange rules. That amendment to section

5a(a)(12) of the Act was offered from the floor during debate in the

House of Representatives. In offering this amendment, Representative

AuCoin reasoned that

[m]any of the notifications [of changes to exchange rules] approved

by this Commission are technical and rather noncontroversial.

However, there are a number of proposed rule changes that are

controversial because of their expected impact on the way a

particular commodity is traded or on the broader effects that a

change may bring about in the production and distribution of that

commodity.

124 Cong. Rec. H7312 (July 26, 1978).

Over the years, the Commission has demonstrated flexibility in

implementing its regulatory mandate to review and approve new contracts

and amendments to existing contracts. Based upon its administrative

experience, the Commission periodically has 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, 17 CFR part 5, appendix A, which

provides guidance on the information to be included in designation

applications and on the criteria for meeting the statutory designation

requirements, was last amended in January 1992. The 1992 amendment

substantially reduced and streamlined the guideline's

[[Page 10435]]

requirements. Indeed, much of the application for option contracts has

been reduced to the form of a checklist. Moreover, under the 1992

amendments, applications for designation of futures contracts need not

duplicate any of the analysis or justification of contract terms which

have been previously approved, reducing greatly the length of the

justification or analysis required in a typical application for

designation.

Despite the progress already made in reducing the paperwork

requirements associated with designation applications, the Commission,

in proposing these fast-track review rules, gave notice of its

intention broadly to reexamine the form and content requirements of

Guideline No. 1. This would include consideration of the possible

applicability of an option-style checklist to applications for

designation of proposed futures contracts. 61 FR 5991.3

Implementation of fast-track review and approval procedures, separately

and together with the planned revision of the format and content

requirements for designation applications, should result in

significantly streamlining the procedures and regulatory requirements

associated with the current contract designation process.4

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

\3\ Several commenters questioned the Commission's commitment to

undertake this review expeditiously, citing the Commission's

determination to propose these fast-track review rules separately.

Rather than indicating a lack of commitment to its expressed

intention, this statement accurately assessed the relative

complexity of the undertaking and demonstrated an intention to put

improvements to its review and approval procedures in place as soon

as possible.

\4\ The Commission has also modified many of its internal

procedures to expedite further the review and approval of new

contracts and proposed amendments to existing contracts. In 1992,

the Commission established a policy to notify the public of the

availability of proposed contract terms for comment by publication

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 a prompt resolution.

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

II. The Proposed Rules

The Commission proposed rules streamlining the procedures for the

review of applications for contract market designation and of proposed

exchange rule amendments relating to the terms and conditions of

existing contracts. The thirty-day comment period ended on December 23,

1996, but was extended at the request of several exchanges until

January 16, 1997, 61 FR 68175 (December 27, 1996).5

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

\5\ By Petition dated December 17, 1996, the New York Mercantile

Exchange, joined by the Chicago Board of Trade and the Chicago

Mercantile Exchange, requested that the thirty-day comment period on

fast-track designation procedures be extended.

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

Although the Commission proposed rules whereby the overall time to

review and act on exchange submissions could be significantly

shortened, the proposed rules did not alter the underlying legal

requirement that these rules be subject to Commission review and prior

approval before becoming effective. The Commission reasoned that prior

Commission approval of proposed contracts remains in the public

interest because,

[i]n 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. 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.

61 FR 59386 (footnote deleted).

Specifically, the Commission proposed a new rule 5.1 providing for

a ten-day review period, after which--absent any contrary action by the

Commission--the contracts would be automatically deemed to be approved.

The Commission proposed that this procedure be applicable to all cash-

settled futures and option contracts, except those for the domestic

agricultural commodities enumerated in section 1a(3) of the Act or

subject to the special procedures of the Johnson-Shad jurisdictional

accord, 6 and to all futures and option contracts on foreign

currency. This is the same time period as provided under the Commission

Part 36 exemptive rules. See, Commission rule 36.4, 17 CFR 36.4 (1996).

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

\6\ See, section 2(a)(1)(B) of the Act. Proposed contracts

subject to this provision of the Act are not eligible for fast-track

treatment generally, under either the ten-day review provision or

the forty-five day review period discussed below.

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

For all other contracts, the Commission proposed to reduce by half

the average time now required for contract market designation. These

applications for contract market designation would be deemed to be

approved by the Commission forty-five days after receipt. As proposed,

both the ten-day and forty-five-day review periods could be extended

for one thirty-day period, in appropriate instances. The fast-track

review periods would be available only for applications for designation

that are complete and not substantively amended after filing, except as

requested by the Commission. The Commission would continue to publish

for public comment notice of the availability of the terms of those

applications for designation subject to the forty-five-day review

period, but proposed to reduce the public comment period for such fast-

track applications from thirty days, as currently provided under

appendix D to part 5, to fifteen days.

The Commission proposed to amend its procedures for reviewing

proposed exchange rule amendments to the terms and conditions of

existing contracts consistent with the proposed changes to its review

of applications for new designations. 7 Thus, in light of the

existing provisions for ten-day review of many categories of such

proposed exchange rule amendments, the Commission proposed to add to

Commission rule 1.41(b) a fast-track review procedure consistent with

the proposed forty-five-day fast-track review for designation

applications.

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

\7\ In general, only contract terms and conditions, with the

exception of rules setting margin, are required to be submitted for

Commission review and approval. See, section 5a(a)(12)(A) of the

Act. Changes to contract specifications, which can modify a contract

significantly, are given the same type of review they would receive

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

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

With regard to publication for public comment, the Commission

proposed to reduce the comment period to fifteen days for those rules

published as a matter of discretion based upon a finding that

``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). The Commission determined to maintain

a thirty-day comment period for those rules that are published because

they are determined to be of major economic significance. See, section

5a(a)(12)(A) of the Act.

III. Comments Received and Final Rules

The Commission received seven comment letters from eight

commenters. The commenters included four futures exchanges, a

securities exchange, an industry association, and two academics. All

but two of the commenters advanced the position that the proposed

rulemaking, although well-intentioned, did not go far enough to relieve

the exchanges from the perceived competitive burden which they argued

the approval process entails. These commenters argued that only through

amendment of the Act can the exchanges' competitiveness be restored.

Those comments are best

[[Page 10436]]

addressed by Congress. Nevertheless, it may be instructive to respond

to those comments here, particularly insofar as they are likely based

upon assumptions and premises common to those comments which respond to

the proposed rules.

a. Competitiveness as the Impetus for Fundamental Restructuring of the

Process for Contract and Rule Amendment Approval

The Commission, from its inception, has always been careful to

consider the effect of its actions on competition in, and the

competitiveness of, the U.S. futures industry. It routinely strives to

impose the least restrictive regulatory approach necessary to

accomplish the goals and objectives of the Act. 8 After carefully

considering the comments, the Commission believes that streamlining the

current procedures, while maintaining the current prior approval

standards, offers the best balance between protection of the public and

cost reduction, as well as best conserving both Commission and exchange

staff resources.

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

\8\ See, section 15 of the Act.

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

In this regard, the Commission carefully and fully analyzed the

nature of global competition in the futures industry in a major 1994

study mandated by Congress as part of the 1992 amendments to the Act.

That study analyzed the growth of futures trading in non-U.S. markets

and the relative decline in the global market share of U.S. exchanges

and concluded that U.S. exchanges remain leaders in innovation and

generally have reached the global market first with new products.

The Commission is supportive, in general, of initiatives of U.S.

exchanges to become more competitive. 9 However, fundamentally

restructuring the process for listing new products as advocated by many

of the commenters will not address the real factors which explain the

growth of foreign markets. Foreign exchanges, by and large, have

succeeded by developing products similar to those offered on U.S.

exchanges but tailored to their home markets. 10 A second strength

enjoyed by foreign competitors arises from time-zone advantages,

whereby foreign futures exchanges are open for trading at the same time

as important centers for trading in the underlying cash market.

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

\9\ The Commission has encouraged industry-wide innovation and

modernization in trading systems. In this regard, for example, the

Commission sponsored a round-table on October 16, 1996, to highlight

issues relating to electronic order routing and trading systems.

\10\ For example, many foreign exchanges trade interest-rate

contracts based upon the sovereign debt of the nation in which they

are located.

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

The Commission found no evidence, however, that disparities in the

regulatory frameworks of various jurisdictions, and of the procedures

for listing new contracts in particular, were a major factor explaining

the success of various exchanges in the global market. Moreover, in

general, the trend among foreign authorities has been to strengthen

their regulatory regimes, rather than to weaken them. This is a process

supported and advanced by the Commission. 11 Thus, the

appropriateness of the Commission's proposed rules for fast-track

review should be analyzed solely on their own merit, and not measured

against a vague notion that restructuring the approval process will

address the competitive challenges faced by the exchanges.

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

\11\ The Commission has been a world-leader in promoting the

strengthening of regulatory oversight as futures trading becomes

more global in nature. This process has accelerated in light of

developments in connection with the Barings, Plc. and Sumitomo Corp.

situations. See, Windsor Declaration issued May 17, 1995, and London

Communique on Supervision of Commodity Futures Markets (November 26,

1996).

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

b. The General Role of Self-Regulation in the Rule Approval Process

In addition to their arguments based on competitiveness, several

exchanges also reject the fast-track approach on general philosophical

grounds concerning the appropriate scope of government oversight of

self-regulatory organizations (``SROs''). The Chicago Board of Trade

(``CBT''), for example, argues that the Act's current preapproval

framework is premised upon the erroneous presumption that ``exchanges

are either incapable of acting or cannot be trusted to act as

responsible SROs in compliance with (their) obligations under the

CEA.'' The CBT therefore advocates a fundamental legislative

restructuring of the Act's review provisions.

The CBT maintains that Commission oversight can, and should, be

relaxed because market incentives, such as avoidance of damage to its

valuable reputation, will guide exchanges to take appropriate self-

regulatory actions. The CBT, in its view, already provides sufficient

opportunity for public input into its design of contracts and rule

changes as a matter of business self-interest; public participation at

a later stage of review under the aegis of government oversight is

unnecessary because ``business judgment tells * * * (the CBT) (to) be

careful and diligent in the exercise of (its) regulatory judgment * * *

. `` CBT Comment Letter dated January 16, 1997, at 9 (emphasis in

original).

The Commission agrees that market incentives, enlightened business

judgment and the desire to protect reputation are strong motivations

which can lead to a high degree of self-regulation. Far from having a

presumption that exchanges are either incapable of acting responsibly

or not to be trusted, the Commission presumes that the exchanges will,

in fact, act responsibly. Nevertheless, experience demonstrates that

there have been instances when government oversight and action have

been required to address particular instances where business judgments

by the exchange membership did not appear to offer sufficient guidance

to inform fully an SRO's regulatory judgment. 12

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

\12\ Often, the Commission receives few or no public comments on

contract market designations or on exchange rule changes. This is to

be expected. It indicates that the exchange has indeed received and

considered input from interested outside sources in connection with

a proposal. However, there are more than a few designation

applications or proposed exchange rule changes every year that

elicit a significant number of comments, casting doubt upon the

exchange's theory that its business self-interest will reliably

inform all of its regulatory judgements. See e.g., Notification to

the CBT to Amend Delivery Specifications, 61 FR 68175 (December 12,

1995).

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

The exchanges also argue that replacing prior approval with post-

introduction intervention in troubled markets is a superior approach to

these issues. For example, although the CBT agrees that ``[n]o one

questions that contract design flaws could make a contract susceptible

to manipulation,'' it disagrees with the Commission's assessment that

review of contracts before they begin to trade is one of the most

effective market surveillance tools. The CBT states that, based on its

experience, the exchange's ``comprehensive market surveillance program

is the most effective way to protect our markets.''

The Commission advocates careful preapproval review in order to

reduce the need to intervene in markets which are trading. The

Commission agrees that futures exchanges generally have adequate

programs of market surveillance, as is required by the current

provisions of the Act and Commission rules. Where contract terms are

appropriately set, however, market forces will respond to factors of

supply and demand, without the need for regulatory intervention--by

either the SRO or the government. Thus, the hand of regulation may be

heaviest where preapproval review is lessened in favor of the more

drastic forms of intervention necessary to address problems after

[[Page 10437]]

trading begins. Accordingly, the Commission remains convinced that the

current structure of the Act best serves the public interest.

In addition to opposition to the rulemaking in favor of legislative

action, certain exchanges raised objections to specific provisions of

the proposed rules. For example, the New York Mercantile Exchange

(``NYMEX'') opined that the ten-day review provision should be applied

more broadly, stating that, ``if Commission staff can review (cash-

settled) contracts within ten days, the same time frame also should

apply to contracts involving physical delivery.'' As explained in the

Notice of Proposed Rulemaking, the Commission afforded ten-day

treatment to foreign currency and cash-settled contracts based on its

many years of administrative experience reviewing applications for

designation from all of the nation's futures exchanges. In the

Commission's experience, contracts for foreign currency and (with the

exception of those agricultural commodities which are enumerated in

section 1a(3) of the Act) contracts providing for cash-settlement for

the most part raise fewer issues requiring careful analysis than do

contracts for physical delivery. This is especially true where the

cash-settlement price is determined by a reputable third-party for

commercial purposes other than solely for settlement of the futures

contract.13

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

\13\ Many of the exchange commenters complain, as does the CBT,

that cash-settled contracts raise issues which are not inherently

more or less complicated than those raised by contracts for physical

delivery. The Commission agrees that some cash-settled contracts do

raise issues which would require more than ten days to analyze. That

is why it proposed to maintain a degree of flexibility in the

process by permitting the Commission to extend the ten-day review

period for those cash-settled contracts that raise novel or complex

issues. In this way, the Commission has sought to balance the need

for speedy, yet meaningful contract review.

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

NYMEX also questions why the ten-day review period is available

only to options on those foreign currency and cash-settled futures

contracts eligible for ten-day review. Although options on physicals

may raise issues regarding delivery and deliverable supplies, options

on futures contracts generally raise few issues independent of the

underlying futures contracts. Accordingly, as NYMEX's question

suggests, options on futures typically could be included under the ten-

day review period.

However, applications for designation of new futures contracts and

options on those futures contracts generally are submitted

together.14 Because such an option is exercised into the futures

contract, the underlying futures contract must be approved for trading

as well. See, rule 33.41(a)(1)(ii). Accordingly, both the futures

contract and its associated option should be assigned the same review

period, notwithstanding the fact that an option on a futures contract

raises few independent issues. Nevertheless, there have been rare

instances where an option has been proposed to trade subsequent to

designation of its underlying futures contract. In those instances, a

ten-day review period is appropriate. The final rules reflect this

modification.

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

\14\ The fees associated with applications for contract market

designation recognize the efficiency of reviewing and designating an

option and its underlying futures contract together and are set at a

lower rate than are fees for a futures contract and a related option

contract that are submitted separately.

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

In addition, all of the exchanges question inclusion in the fast-

track procedures of any extension of time, even for novel or complex

contracts. The Chicago Mercantile Exchange (CME) complains that the

Commission could extend the time because a contract is novel or complex

without ``any necessary nexus between the nature of such issues and the

provisions of the Act and regulations.''

This proposed provision was not intended by the Commission to be a

means of enlarging the time for review routinely or merely because a

contract is novel. The Commission has a laudable record of encouraging

innovation and of removing regulatory hurdles to novel contract

proposals. However, where more time is needed to determine whether an

application meets the requirements for designation because there are

questions remaining on complex or novel issues, it would be ill-advised

not to provide for a short extension.

Of course, the Commission agrees that extensions of the review

period should not be frivolous or unwarranted. Accordingly, it proposed

to notify exchanges of such extensions, specifying the particular

``issues for which additional time for review is required.'' Such a

requirement is intended to assure against unnecessary extensions of

time for review. If after actual experience with this rule, however,

the exchanges believe that it has been abused, they can petition the

Commission to amend it. Such flexibility is a primary benefit of an

agency's establishing such procedures by rule, rather than through

congressional statutory amendment.

Several exchanges also commented negatively on including as a

proposed ground for terminating fast-track review an application's

failure to comply with the applicable form or content requirements. The

CME argues that Guideline No. 1 asks for a great deal of information,

``much of which may not be relevant to the ultimate question of whether

the contract should be disapproved for violating a statutory or

regulatory condition of designation.'' The CBT argues that, ``given the

level and extent of detail required by Guideline No. 1, coupled with

the open-ended obligation Guideline No. 1 imposes * * * the

determination of whether an application is `complete upon submission'

is highly subjective and open to misuse.'' CBT Comment Letter at 11.

The facts, however, do not justify such fears. The informational

requirements of Guideline No. 1 are in fact related to whether the

terms of a proposed contract violate a provision of the Act or

Commission rules. The vast majority of the information required to be

provided under Guideline No. 1 relates to consistency of the delivery

terms of the proposed contract to the underlying cash market, based

upon the statutory requirements that delivery terms be set so that

contracts are not readily susceptible to manipulation. Compare, Part 5,

Appendix A(a)(2)(i)-(v) and (3) to sections 5 and 5a of the Act.

Moreover, the number of times that proposed contracts are formally

deemed to be materially incomplete are relatively few.15

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

\15\ The Commission rarely deems a contract application to be

incomplete on the basis that additional information is needed.

Rather, the typical practice is for staff to make targeted requests

to exchanges for additional information which is necessary to make

clear whether particular terms or conditions violate or may violate

a provision of the Act or Commission rules. Generally, applications

for designation are found to be ``materially incomplete'' only when

actual modifications to the specific terms that have been submitted

for review are required to bring the proposed contract into

compliance with the Act or Commission regulations.

Similarly, few proposed amendments to contract terms are

remitted for failure to comply with the applicable form or content

requirements. No such rule amendments have been remitted in the

current fiscal year or in fiscal year 1996.

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

The CME concedes that it ``can sympathize with the CFTC's position

that it should not be required to give expedited review to an

application that contains material deficiencies.'' It suggests that

where such deficiencies exist, rather than the proposed contract's

becoming ineligible for fast-track review, the exchange

should be afforded an opportunity to correct the deficiency and then

resume the fast-track

[[Page 10438]]

review process. The statement in the CFTC proposal that an amendment

or supplement to an exchange's application renders the application

ineligible for fast-track review seems overly harsh. At worst, an

amendment or supplement to the application should cause the clock

for the fast-track process to be reset.

CME Comment Letter, dated January 16, 1997, at 7.

A careful reading of the proposed rules reveals that the

Commission, under proposed rule 5.1(a)(ii)(6), did indeed leave open

the possibility that in appropriate circumstances the Commission could

request that exchanges substantively amend the terms of a proposed

contract under the fast-track procedures. The Commission anticipates

that such requests would be made to exchanges where a term or condition

of a proposed contract appears to violate a provision of the Act or

Commission rules, but could be cured readily within the time

remaining.16

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

\16\ For example, where a contract for foreign currency called

for delivery in a manner contrary to the law of the issuing

sovereign, but the delivery provisions could be modified to make

delivery legal, the Commission could request that the modification

be made, provided that there were sufficient time in the ten-day

review period for the exchange to comply.

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

In this regard, the thirty-day extension available for certain

novel or complex applications should not be viewed by the exchanges as

an additional period within which to cure defects in otherwise

straightforward applications. Nor is the Commission modifying the

proposed rule to provide that in such instances the time for fast-track

review be reset. This would add an unnecessary level of complexity to

the fast-track review procedures, particularly in light of the

relatively prompt review and approval of submissions under current

procedures.17 Where Commission staff identify serious defects in

the contract terms that cannot be cured within the time remaining for

fast-track review and which would result in a recommendation that the

Commission disapprove a proposal, the Commission will terminate fast-

track review. Because disapproving applications for designation or

proposed exchange amendments requires significant staff resources, this

termination provision is intended to offer exchanges the opportunity to

supplement an incomplete record or cure a defect in a proposed

application for contract designation or amendment of a contract term

without engaging in a disapproval proceeding.

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

\17\ Of course, where an exchange wishes to cure a defect in a

proposed contract after submission, it is free to withdraw the

original submission and submit a new, amended application for fast-

track review. This, in essence, is a mechanism within the contours

of the rules as proposed by which an exchange can ``reset'' the

review period simply, without adding undue complexity to these

rules.

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

Although the Commission would prefer to permit exchanges an

opportunity to supplement an incomplete record or to cure a potential

defect and then to move forward toward approval of the application,

rather than to initiate disapproval proceedings, the final

determination in such instances of whether disapproval proceedings

should be initiated will rest with the exchange. As the Commission

explained in the Notice of Proposed Rulemaking, an exchange may require

the Commission to decide either to approve or to initiate disapproval

of a contract or proposed exchange rule at the time that fast-track

review is terminated. It stated that,

[w]here 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 * * *.

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.

61 FR 59389 (footnote omitted).

Finally, several of the exchanges complained that not permitting

them substantively to revise their applications or rule submissions

penalized them for trying to improve the proposed contract or

rule.18 This argument is somewhat at odds with the exchanges'

other arguments that, because they expend such great resources in

perfecting their proposed contracts, Commission review is unnecessary

and wasteful. The CME argues, somewhat more consistently, that

substantive revisions are made to proposed contracts during the review

period, but only because exchanges ``currently have an incentive to

rush new contract applications in as soon as possible to `start the

clock.' ''

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

\18\ Both NYMEX and the Coffee, Sugar and Cocoa Exchange noted

that, although the preamble stated that exchanges would be permitted

to make non-substantive amendments to their submissions, such as

correcting typographical errors, the proposed rule did not

explicitly include such a provision. The final rule has been

modified so to provide.

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

The exchanges have maintained that, as a consequence of business

incentives, new contracts are thoroughly analyzed by the exchanges. If

so, one would expect new contract applications to be complete when

submitted. Moreover, to the extent that the time period for review at

the outset is known to be brief, the incentive to submit incomplete

applications for review prematurely should be diminished. In either

case, these fast-track procedures will realign the contract approval

process along the lines advocated by the exchanges. Complete, well-

thought-out proposed contracts, even novel or complex ones, should

speed through the review process, validating the quality of the

exchanges' proposals and conserving scarce Commission resources.

One commenter, the Futures Industry Association (``FIA''),

supported the Commission's proposed fast-track rules as ``an essential

next step in the evolution of the Commission's rule review

procedures.'' The FIA ``estimates that its members effect more than

eighty percent of all customer transactions executed on United States

contract markets.'' It notes that ``although exchanges have the

obligation to act in the public interest and may be expected to do so,

the determination with respect to whether a particular contract or rule

is in the public interest is properly vested in the Commission.''

Moreover, the FIA agrees with the Commission's concern that the

procedures applicable to contract market designation and approval of

rules retain a measure of flexibility, stating:

The vast majority of exchange rule submissions, whether in the form

of an initial application for designation as a contract market or a

subsequent amendment have been approved without controversy, and

such rules will benefit from the expedited review procedures.

However, * * * from time to time certain exchange rules relating to

the terms and conditions of contracts have raised significant

concerns for FIA members as well as other market participants.

Moreover, the impact of a particular rule has not always been

evident on its face, either to the Commission, industry participants

or, in some cases, the submitting exchange. It is essential,

therefore, that the Commission retain the flexibility inherent in

the proposed rules to assure the opportunity for thoughtful analysis

and comment in appropriate circumstances.

FIA Comment Letter, dated January 21, 1997 at 3.19

\19\ An additional commenter, the New York Stock Exchange, while

not commenting on the fast-track review procedures, noted its

interest in preserving the public's ability to comment on particular

rule amendments. The NYSE requested that the Commission publish all

proposals to amend circuit breakers. It is the Commission's current

policy, which it will continue, to publish for public comment all

proposed amendments affecting circuit breakers coordinated among

markets. See, e.g., 61 FR 68722 (December 30, 1996).

In addition, the FIA notes that membership organizations, and the

exchanges themselves, will have difficulty in responding within the

time frames provided under these rules.

[[Page 10439]]

Indeed, several exchanges requested an extension of the comment period

in this very proposed rulemaking.20 Accordingly, the FIA requests

that the Commission consider taking steps in addition to publication in

the Federal Register to disseminate more quickly information regarding

matters pending under these fast-track procedures. It suggests, in

particular, that the Commission use its internet web site to do so.

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

\20\ As noted above, the thirty-day comment period on these

proposed rules was extended pursuant to a petition for extension by

NYMEX, joined by several of the exchanges.

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

The Commission agrees with the FIA's assessment that all interested

parties--the Commission, the exchanges, industry member associations

and other interested membership organizations or individuals--will have

difficulty meeting the shortened time frames of these fast-track

procedures and will endeavor to find ways to ease this burden on

interested parties. The Commission intends to implement FIA's

suggestion and will post notice on the internet of the filing of all

proposed designation applications and amendments to contract terms,

including the dates when the review period terminates. The Commission

also encourages the use of electronic filing of comments and other

submissions in order to reduce the time burdens imposed by these rules.

IV. Implementation

These rules constitute a necessary first step in a potentially

profound restructuring of the relationship between the Commission and

the exchanges with respect to the Commission's oversight and review and

approval of contract market applications and proposed rule amendments.

Applications for contract market designation that have been submitted

in advance of the effective date of these rules may not have been

prepared by the exchanges with this new relationship and timetable in

mind, with the expectation that adjustments to the pending submissions

would be made during the review process.

The Commission, in implementing these rules will offer the

exchanges the maximum regulatory relief and flexibility possible.

Accordingly, when these rules become effective, the Commission will

treat all pending contracts and proposed rule amendments as having been

submitted under the fast-track procedures as of the rules' effective

date, unless instructed otherwise by the exchange. However, where

approval of pending contract applications or proposed rule amendments

would be accelerated by using existing procedures, the Commission will

continue to process those designation applications or proposed rule

amendments under those existing procedures.

V. 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

RFA, 5 U.S.C. 601 et seq. 47 FR 18618 (April 30, 1982). These

amendments 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.

B. Paperwork Reduction Act

The Paperwork Reduction Act (``PRA'') 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 PRA. While this rulemaking

imposes no burden, the group of rules (3038-0022) of which these are a

part has the following burden:

Average burden hours per response--3,546,26.

Number of respondents--10,971.

Frequency of response--on occasion.

Copies of the OMB-approved information collection package

associated with this rule may be obtained from Gerald P. Smith,

Clearance Officer, Commodity Futures Trading Commission, Three

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

Telephone: (202) 418-5160.

List of Subjects

17 CFR Part 1

Commodity exchanges, Contract market rules, Rule review procedures.

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

4c, 5, 5a, 6 and 8a thereof, 7 U.S.C. 6c, 7, 7a, 8, and 12a, 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 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 Sec. 1.41(b), the introductory text, paragraphs (b)(1),

(b)(2), (b)(3), (b)(4), (b)(5) and the concluding text are 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; the first sentence of newly

redesignated paragraph (b)(1)(i) and newly redesignated paragraph

(b)(1)(ii) are revised; and paragraphs (b)(2) through (b)(4) are added,

to read as follows:

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

Commission; exemption of certain rules.

* * * * *

(b) Rules that relate to terms and conditions. (1)(i) Except as

provided herein and in paragraph (f) of this section, all proposed

contract market rules that relate to terms and conditions must be

submitted to the Commission for approval pursuant to section

5a(a)(12)(A) of the Act prior to their proposed effective dates. * * *

(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

[[Page 10440]]

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 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 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 revised it to read as

follows:

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

4. Part 5 is amended by adding a new Sec. 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 option contract that is itself cash-settled, is for

delivery of a foreign currency which meets the requirements of

paragraph (a)(2)(i) of this section or is to be exercised into a

futures contract which has already been designated as a contract

market;

(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 or for correction of

typographical errors, renumbering or other such nonsubstantive

revisions, 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 or for correction of

typographical errors, renumbering or

[[Page 10441]]

other such nonsubstantive revisions, 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 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 the paragraph prohibits the Commission, at its

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

of this section.

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 27th day of February, 1997, by

the Commodity Futures Trading Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97-5567 Filed 3-6-97; 8:45 am]

BILLING CODE 6351-01-P