Final Rulemaking Concerning Contract Market Rule Review Procedures

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

Final Rulemaking Concerning Contract Market Rule Review

Procedures

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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

adopted amendments to Commission Regulation 1.41(c) that establish

procedures for the Commission's review of contract market rules that do

not relate to contract terms and conditions. The amendments shorten the

Commission's time frame for reviewing complex rules and streamline the

rule review process such that rule changes generally can be deemed

approved or permitted to be put into effect without Commission

approval.

Specifically, all non-term and condition rule changes that meet the

form and content requirements will be deemed approved or be permitted

to be put into effect without approval ten days after Commission

receipt, unless the Commission takes action to commence review of the

proposal for a 45-day period (or a 75-day period in the case of rules

published for comment in the Federal Register) or the contract market

agrees to another, specified review period. At the end of the 45-day

(or 75-day) review period, a proposed rule meeting the form and content

requirements will be deemed approved or become effective without

approval unless the Commission informs the submitting contract market

of its intention to initiate disapproval proceedings, the contract

market withdraws the proposal, or the contract market requests that the

review period be extended to the current 180-day period.

EFFECTIVE DATE: April 7, 1997.

FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Special Counsel,

Division of Trading and Markets, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

Telephone: (202) 418-5490.

SUPPLEMENTARY INFORMATION:

I. Introduction

On December 17, 1996, the Commission published for public comment

in the Federal Register 1 proposed amendments to Commission

Regulation 1.41 revising the Commission's procedures for the review of

contract market rules that do not relate to terms and conditions.2

The original comment period was scheduled to end on January 16, 1997,

but was extended by the Commission until January 31, 1997.3

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\1\ 61 FR 66241 (December 17, 1996).

\2\ On November 22, 1996, the Commission published a separate

proposed rulemaking establishing similar ``fast-track'' review

procedures for contract market designation applications and proposed

rules relating to contract terms and conditions under Regulation

1.41(b). (61 FR 59386.) The Commission also is adopting that

rulemaking today in a separate Federal Register release with slight

modifications from the original proposed rulemaking (the ``fast-

track'' rulemaking). The two rulemakings establish similar rule

review procedures and any differences between the two schemes

generally reflect differences set forth in the statute with respect

to term and condition rule proposals and non-term and condition rule

proposals.

\3\ 62 FR 2334 (January 16, 1997).

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[[Page 10428]]

II. Comments Received

The Commission received seven comment letters. The comment letters

were submitted by four futures exchanges (the Chicago Board of Trade

(``CBT''), the Chicago Mercantile Exchange (``CME''), the Coffee, Sugar

& Cocoa Exchange, Inc. (``CSC''), and the New York Mercantile Exchange

(``NYMEX'')); two futures trade associations (the Futures Industry

Association (``FIA'') and the Managed Futures Association (``MFA''));

and, a registered futures association (the National Futures Association

(``NFA'').

The Commission has carefully reviewed the comments received and has

decided to issue amended Regulation 1.41(c) as final with three

modifications from the original proposal.4 The comments and an

explanation of the Commission's decision to adopt amended Regulation

1.41(c) are discussed below.

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\4\ The Commission's original proposal regarding non-term and

condition rule changes also proposed to revise the heading to

Commission Regulation 1.41(b) so that it expressly applied to term

and condition rule changes. That revision has been incorporated in

the Commission's separate fast-track rulemaking for term and

condition rule changes.

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III. Commission Regulation 1.41(c)

A. Overview

The following description consists of a section-by-section analysis

of the Commission's final rulemaking. Each section describes a

provision of the Commission's proposed rulemaking, discusses relevant

suggestions made by the commenters, and indicates how the provision has

been adopted in the final rulemaking.

In addition to commenting on specific sections of proposed

Regulation 1.41(c), several commenters questioned the necessity for

Regulation 1.41's basic requirement that contract market rules receive

Commission review before being put into effect. As discussed in more

detail in the fast-track rulemaking, the Commission believes that prior

review of proposed contract market rule changes can be essential to

ensuring the financial integrity of the markets and to protecting the

public interest. Contract market actions can affect the interests of a

large number of non-member market participants and the general public.

As self-regulatory organizations, contract markets have a

responsibility to comply with and enforce the requirements of the Act

and the Commission's regulations. As member organizations, however,

contract markets may not always be cognizant of, or sensitive to, the

impact of particular rule changes on the general public or on market

participants who are not contract market members and who are not

involved directly in the contract markets' formulation of such rules.

The Commission believes that its prior review procedures help to ensure

that contract markets meet their self-regulatory responsibilities with

respect to all market participants and that rule changes are not

inconsistent with the public interest.

The Commission's prior review procedures also ensure that the

Commission is able to solicit the views of market users, other

regulators, and other interested parties with respect to rule

proposals. These parties often provide valuable insights concerning the

impact of rule proposals that are essential to the Commission's

completing meaningful analyses of contract market submissions. The

Commission believes such oversight also provides additional incentives

for the contract markets to take market users' needs and the public

interest into account in the first instance, thereby improving the

functioning of the self-regulatory process.

The Commission concurs with FIA's comment that Commission

disapproval of contract market rule changes after their implementation

is not a viable alternative to prior Commission review and approval.

The Commission believes that this approach would be inefficient and

could impact market users or the public adversely during the pendency

of a disapproval proceeding by increasing uncertainty in the

marketplace.

Several commenters contended that the Commission's current rule

review procedures cause unwarranted delays in the implementation of

contract market rule changes and put the contract markets at a

competitive disadvantage to foreign futures exchanges and over-the-

counter markets. No evidence was provided, however, to suggest that the

time frames provided for by the proposed rulemaking would create

competitive disadvantages. Notably, all of the commenters conceded that

the Commission's proposed rulemaking would further the goal of

implementing contract market rule changes more promptly. The commenters

differed, however, on whether contract markets would be able to

implement their rule changes promptly enough under the proposed

rulemaking. The Commission believes that its streamlined procedures

will allow contract markets to implement their rule proposals in an

expeditious manner, while still ensuring that the public is protected

from rules that are discriminatory, anti-competitive, or illegal or

that create serious concerns with respect to financial or market

integrity.

NFA stated in its comment letter that the need for timely rule

review and approval is as important to registered futures associations

as it is to contract markets. Accordingly, NFA recommended that the

Commission extend proposed Regulation 1.41(c)'s rule review procedures

to cover the rule changes of registered futures associations. While the

Commission agrees with NFA that it should adopt a streamlined rule

review scheme for registered futures associations, it does not believe

that it would be appropriate to include registered futures associations

within the terms of this rulemaking. Regulation 1.41 was established

expressly for contract market rule proposals and includes procedures

that are inapplicable to registered futures association rules. However,

although the Commission has determined not to make amended Regulation

1.41(c) applicable to registered futures associations, the Commission

will propose a rulemaking in the near future to establish similar rule

review procedures tailored to the types of rules adopted by registered

futures associations. In the interim, the Commission intends to follow

Regulation 1.41(c)'s basic review procedures and deadlines when

reviewing registered futures association rule changes.

B. Regulation 1.41(c)(1)(i)--Form and Content of Submissions

Proposed Commission Regulation 1.41(c)(1)(i) established form and

content requirements for all rules submitted to the Commission pursuant

to Regulation 1.41(c). That proposal preserved the form and content

requirements that currently apply to rules submitted to the Commission

pursuant to Regulation 1.41(b) and Regulation 1.41(c). Proposed

Regulation 1.41(c)(1)(i) also required that Regulation 1.41(c)

submissions include certain other information to help expedite the

Commission's review of such submissions.

Under the current form and content requirements of Commission

Regulation 1.41, contract markets must include in their rule

submissions any substantive views expressed by their members or others

in opposition to a proposed rule.5 As a clarification of this

requirement, proposed amended Regulation 1.41(c)(1)(i)(E) specified

that the views

[[Page 10429]]

of opposing governing board members also must be included in proposed

rule submissions. In addition, proposed amended Regulation

1.41(c)(1)(i)(E) provided that the currently-required description of

opposing views must indicate the membership interest categories 6

of persons who were opposed to the proposed contract market rule.

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\5\ Current Commission Regulation 1.41(b)(5) requires that rule

submissions ``[n]ote and briefly describe any substantive opposing

views expressed by the members of the contract market or others with

respect to the proposed rule.''

\6\ See Section 5a(a)(14)(A) of the Act and Commission

Regulation 1.64(a)(4).

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Proposed Regulation 1.41(c)(1)(i)(F) required that contract markets

specify in their submissions any sections of the Act or the

Commission's regulations that relate to a proposed rule, particularly

citing any such provisions that require Commission approval of the

rule. To the extent a submission was potentially inconsistent with a

provision of the Act or the Commission's regulations, the proposal

required that the submission contain a reasoned analysis addressing

that issue and supporting adoption of the rule. Proposed Regulation

1.41(c)(1)(i)(G) required that contract markets indicate in their

submissions whether they were requesting Commission approval for a

proposed rule.

The CBT, CME, and CSC each objected to proposed amended Regulation

1.41(c)(1)(i)(E)'s requirement that contract market rule submissions

identify the membership interest categories of persons who opposed a

rule proposal. They contended that the provision intruded upon their

internal decision making processes without providing any information

that would be useful to the Commission in its rule review process. CME

and CSC particularly stated that the proposal would force revisions to

their boards' deliberative and voting procedures.

FIA supported the proposed amendment to Commission Regulation

1.41(c)(1)(i)(E). The FIA believed that opposing view information is

especially important given the fact that contract market rules that are

submitted to the Commission pursuant to Regulation 1.41(c) are rarely

published for public comment.

The Commission believes that information about the views and

categories of persons who oppose rule proposals will help the

Commission to ascertain whether others believe that a proposal raises

important issues and to identify rules that should be published for

comment and, thus, will generally benefit the rule review process

overall. Upon receipt, Commission staff now often requests contract

markets submitting rule proposals to supplement their submissions with

information about the views and identities of persons who have

expressed opposition to rule proposals, whether they be board members

or members of the contract market. This information helps alert

Commission staff to potential regulatory issues that are not apparent

from the text of a proposed rule and, thus, helps to focus the staff's

analysis of the proposal. In addition, this information allows the

Commission to avoid the time-consuming process of publishing rule

proposals for public comment, since Commission staff can contact

representative members of the appropriate membership interest category

to obtain their views on particular rule proposals.7

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\7\ For example, there have been a number of occasions when

contract market submissions have indicated that a rule proposal was

the subject of a membership vote and that a substantial minority of

members opposed the measure. Based on this information, Commission

staff made further inquiries to determine the views of those

opposing members and took those views into account while reviewing

the rule proposal.

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The Commission agrees with the CME's comment that board members do

not necessarily vote on issues based upon the membership interest

categories they represent. However, the Commission's experience has

been that persons from the same membership interest category often have

common business circumstances which influence their views on contract

market regulatory matters. Accordingly, contract market directors and

members who oppose new rule proposals often express views that reflect

their membership interest categories. The fact that a contract market

member might have views on rule proposals that are particular to his or

her membership interest category is recognized in section 5a(a)(14)(A)

of the Act and Regulation 1.64 which require that contract markets

provide board representation for a diversity of membership interests.

The provision will ensure that the Commission will have opposing

view information when it initiates its review of a rule proposal, thus

obviating the need for Commission staff to obtain such information from

the submitting contract market during the course of a rule's review,

which will be especially helpful to assuring that the Commission will

meet the compressed time frames established by the proposed rulemaking.

The CME contended that proposed amended Regulation 1.41(c)(1)(i)(E)

will put an additional burden on contract market staffs to speak with

each board member who votes against a proposed rule to determine the

reasons for his or her opposition. To clarify, the proposed rulemaking

only will require contract markets to record the views of board members

opposing a rule proposal when such views are openly expressed during

board deliberations. Contract market staffs will not be required to

ascertain the views of an opposing board member when the member does

not express any rationale for his or her opposition.

In its comment letter, NYMEX characterized proposed amended

Regulation 1.41(c)(1)(i) (E) through (G) as informational burdens that

will add to the length of time expended by contract market staff to

prepare a submission and will provide Commission staff with additional

reasons for remitting a rule submission for failing to meet form and

content requirements.

As indicated above, each of these provisions will require contract

markets to include in their initial submissions to the Commission

information which Commission staff often requests of contract markets

during the course of rule reviews. Including this information in

Regulation 1.41(c)'s form and content requirements should speed up the

rule review process considerably by reducing the need to request such

information after a rule is submitted.

For the reasons stated above, the Commission has determined to

adopt amended Regulation 1.41(c)(1)(i) (A) through (E) as proposed. The

Commission has determined, however, to adopt a revised version of

proposed amended Regulation 1.41(c)(1)(F) and not to adopt proposed

amended Regulation 1.41(c)(1)(i)(G).

In its final rulemaking, the Commission has revised Regulation

1.41(c)(1)(i)(F) to require that contract markets identify in their

submissions any provisions of the Act or the Commission's regulations

that may require amendment or interpretation in order to implement a

proposed rule change. Under this requirement, contract markets must

provide the Commission with a reasoned analysis of why such an

amendment or interpretation is necessary. The requirement will permit

the Commission to focus on and to address speedily rules which may

violate provisions of the Act or regulations or require their amendment

or interpretation. The Commission believes that this requirement not

only will facilitate its consideration of various contract market rule

proposals, but also will enable it, to the extent consistent with the

Act and the public interest, to amend its regulations as needed to

permit contract market innovation in an evolving marketplace.

The Commission also believes that proposed amended Regulation

[[Page 10430]]

1.41(c)(1)(i)(G), which required a contract market to indicate

expressly whether it was requesting approval of a proposed rule, is not

necessary and may be deleted from the final rulemaking. Commission

staff will review each rule proposal to determine whether or not it

requires Commission approval under any provision of the Act or the

regulations and will treat it accordingly. Of course, to the extent

that a proposed rule does not require Commission approval, but the

submitting contract market desires approval, the contract market must

clearly request approval in its submission.

C. Regulation 1.41(c)(1)(ii)--Failure To Meet Form and Content

Requirements

Proposed Regulation 1.41(c)(1)(ii) permitted the Commission to

remit rule proposals that did not comply with the form and content

requirements of Regulation 1.41(c)(1)(i). This provision simply

replicated the remittal authority set forth in current Regulation

1.41(b) and Regulation 1.41(c). The CBT, CME, and CSC each objected to

this provision on the grounds that the Commission uses its remittal

authority to delay and to prevent the implementation of contract market

rule proposals. The CBT in particular stated that Commission staff uses

its remittal authority to raise questions that are unrelated to the

threshold question of whether a rule proposal would violate the Act or

the Commission's regulations.

The Commission believes that retaining the authority to remit

incomplete submissions is essential to its ability to make reasoned

analyses as to whether proposed contract market rules are consistent

with the Act and the Commission's regulations. The Commission believes

that it is sometimes impossible to determine the operation, purpose and

effect of proposed rules based solely on their text. Regulation 1.41's

form and content requirements have been formulated accordingly. The

Commission believes that reserving the authority to remit incomplete

submissions disciplines the submission process by assuring that

contract markets adequately explain their proposals at the outset. This

discipline is even more essential under the proposed rulemaking's

compressed time frames.

As previously noted, the public comment process frequently

identifies or focuses issues. The Commission's remittal authority also

helps to ensure that contract markets will supplement their submissions

where necessary to address issues identified by commenters during the

comment process.

For the reasons stated above, the Commission has determined to

adopt amended Regulation 1.41(c)(1)(ii) as proposed.

D. Regulation 1.41(c)(1)(iii)--Extension of Review Period

Proposed Regulation 1.41(c)(2) provided that proposed non-term and

condition rule changes would be deemed approved or be allowed to go

into effect without approval, as appropriate, ten days after their

receipt by the Commission unless they were retained by the Commission

for further review. Proposed Regulation 1.41(c)(1)(iii) specified that

the Commission could extend the ten-day review period to 45 days (75

days when a rule was published for public comment), if the Commission

determined within ten days of receipt that the rule ``raises novel or

complex issues which require additional time for review or is of major

economic significance'' and so notified the submitting contract market.

Such types of rule proposals might include:

(1) Rules relating to the financial integrity of markets or their

participants (e.g., CME establishment of Globex Foreign Exchange

Facility to serve as market maker for certain CME foreign currency

futures contracts traded through the Globex system (approved by the

Commission on August 9, 1996)); (2) rules establishing novel trading

procedures or providing for non-competitive trading (e.g., CME LOX

program which substitutes an electronic order execution facility for

open outcry execution of large lot currency contracts (approved by the

Commission on March 18, 1993), CME rule amendment restricting exchange

for physical transactions in Eurodollar futures contracts (approved by

the Commission on November 29, 1995), CME rule amendment establishing

all-or-none order-filling procedures whereby certain designated orders

can only be executed in their entirety (approved by the Commission on

May 2, 1996)); (3) rules providing for the differential treatment of

different classes of market participants (e.g., broker incentive

programs at various contract markets); (4) rules establishing linkages

among exchanges (e.g., establishment of mutual offset system between

CME and Singapore Monetary Exchange (approved by the Commission on

August 28, 1989)); (5) rules relating to the application of new

technology to the marketplace (e.g., CME's Globex trading system

(approved by the Commission on February 8, 1989), CBT's Project A

trading system (approved by the Commission on October 19, 1992),

NYMEX's ACCESS trading system (approved by the Commission on December

17, 1992)); and, (6) rules raising customer protection issues (e.g.,

CME rules allocating liability in connection with the operation of the

Globex trading system (allowed to go into effect without approval by

the Commission on September 27, 1991), CBT rule establishing post

settlement trading sessions (allowed to go into effect without approval

by the Commission on April 14, 1992)).

CME commented that the proposed bases for extending Commission

review of a rule proposal would not necessarily have any nexus with a

determination of whether the proposal would violate the Act or the

Commission's regulations. To the contrary, Commission review always is

directed towards making such a determination. The Commission believes

that these are the types of rules that the Commission may require

additional time to review carefully.8 Indeed, FIA pointed out in

its comment letter that the types of rules listed in the Commission's

proposed rulemaking release as possibly needing more than ten days of

review are precisely the types of rules that FIA saw as raising

sufficiently important issues to require it to submit comments to the

Commission in the past. Similarly, MFA commented that Commission

retention of rule proposals that raise novel or complex issues for

further review would be beneficial as it would enable the Commission to

focus its inquiries, while still permitting the contract markets to

implement rule changes in an efficient manner.

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\8\ Of course, proposed Regulation 1.41(c)(1)(iii) would not

mandate Commission retention of all rules that raise such novel or

complex issues or that are of major economic significance. The

Commission would only have the discretion to retain such rules for

further review.

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As the CBT pointed out in its comment letter, under section

5a(a)(12)(A) of the Act, Commission staff may not itself extend the

ten-day review period for non-term and condition rule changes that do

not require approval. Absent the consent of the submitting contract

market, the Commission may only retain such rule proposals for further

review if ``the Commission notifies such contract market in writing of

its determination to review such rules for approval.'' This

determination is not delegable to Commission staff.

For the reasons stated above, the Commission has determined to

adopt amended Regulation 1.41(c)(1)(iii) as proposed.

[[Page 10431]]

E. Regulation 1.41(c)(2)--Action Within Ten Days

Proposed Regulation 1.41(c)(2) provided that proposed non-term and

condition rule changes that required approval or that could be placed

into effect without approval would ``be deemed approved or be placed

into effect, as appropriate, ten days after Commission receipt,''

unless the Commission notified the submitting contract market

otherwise.

NFA in its comment letter requested clarification as to the meaning

of ``as appropriate'' in this provision. Rule changes submitted to the

Commission pursuant to proposed Regulation 1.41(c) generally would be

deemed approved or be allowed to go into effect without approval, as

requested in the contract market's submission, at the conclusion of the

ten-day review period. In those instances where a submitting contract

market did not request particular treatment for a rule proposal or

requested improper treatment (i.e., requested that the Commission allow

into effect without approval a rule change that required Commission

approval), the Commission would determine what treatment would be

appropriate for the submission and would deem approved those rules that

required approval and allow into effect those rules that did not

require approval.9 The Commission's use of the term ``as

appropriate'' in proposed Regulation 1.41(c)(2) is intended to cover

these various possible applications.

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\9\ Regulation 1.41(c) would apply to all non-term and condition

rule changes. Accordingly, the provision would cover: (1) Rule

changes that do not require Commission approval under section

5a(a)(12)(A) of the Act and may be placed into effect ten days after

Commission receipt; (2) rule changes that require approval under a

provision of the Act other than section 5a(a)(12)(A); (3) rule

changes as to which the submitting contract market requests

approval; and (4) changes which the Commission determines to review

for approval.

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The Commission has determined to adopt amended Regulation

1.41(c)(2) as proposed.

F. Regulation 1.41(c)(3)--Action Within 45 or 75 days

Under proposed Regulation 1.41(c)(3), any proposed rule that the

Commission retained for further review under Regulation 1.41(c)(1)(iii)

generally would be ``deemed approved or placed into effect, as

determined by the Commission,'' 45 days after Commission receipt (or 75

days in the case of rules that were published for comment in the

Federal Register).

NFA requested clarification as to the meaning of ``as determined by

the Commission'' in proposed Regulation 1.41(c)(3). Any rule proposal

that was retained for the extended 45-day (or 75-day) review period

would necessarily be considered for Commission approval.10 Under

section 5a(a)(12)(A) of the Act, rule proposals that are being

considered for approval must either be approved by the Commission or be

subjected to a disapproval proceeding within 180 days of Commission

receipt.11 If the Commission does not take either course of action

within 180 days, the proposed rule ``may be made effective by the

contract market until such time as the Commission disapproves such

rule.''

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\10\ As indicated in footnote 9 above, the Commission would

consider two types of rules under proposed Regulation 1.41(c)--rules

which would receive Commission approval (based upon either the

submitter's request, the Commission's discretion, or a statutory

requirement) and rules which could be placed into effect without

Commission approval. Under section 5a(a)(12)(A) of the Act, the

Commission must act upon rules which may be placed into effect

without Commission approval within ten days of receipt. Absent the

consent of the submitting contract market, the only way to extend

the review period for such types of rule submissions is if the

Commission itself decides to review the submission for approval, in

which case the Commission has 180 days to act on the rule proposal.

\11\ Under section 5a(a)(12)(A), the Commission must

``institute'' disapproval proceedings within 180 days of receipt.

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By providing the Commission with the discretion to ``determine''

either to approve a proposed rule or to allow it into effect at the end

of the 45-day (or 75-day) review period, proposed Regulation 1.41(c)(3)

would replicate the options currently available to the Commission under

section 5a(a)(12)(A) of the Act at the end of the 180-day review

period. The proposed rulemaking would simply compress the time frame

for this determination from 180 to 45 (or 75) days.

The CBT suggested in its comment letter that the Commission does

not need to use the public comment process for exchange rule proposals

and, therefore, the Commission's proposed rulemaking need not provide

for an extended review period for rules published in the Federal

Register. By contrast, FIA stated that it was essential to retain this

process to provide an opportunity for the public to comment on rule

proposals that raise novel or complex issues.

The Commission notes that, under section 5a(a)(12)(A) of the Act,

it is required to publish in the Federal Register for public comment

any proposed rule of major economic significance. The Commission also

publishes significant rule changes, from time to time, when it believes

that it is in the public interest to do so.

The Commission rarely publishes Regulation 1.41(c) proposals for

comment.12 Nonetheless, the Commission believes that it is

important for it to solicit the views of persons and entities that

might be affected by significant contract market rule proposals. By

providing a 30-day extension of the review period for rules that are

published in the Federal Register, the proposed rulemaking would

provide the Commission with a reasonable amount of time to review and

analyze contract market rule proposals in light of any comments

received. The Commission believes that the ability to extend review to

accommodate public comment should balance the need of contract markets

to adapt to new circumstances with the Commission's need to assure that

the public's concerns and views are considered in appropriate cases.

Under revised Regulation 1.41(c), the review period for proposed rules

which are published for comment would still be considerably shorter

than the current 180-day statutory review period.

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\12\ Since January 1, 1995, the Commission has published only

the following three Regulation 1.41(c) submissions for public

comment in the Federal Register: (1) A CME proposal to revise margin

requirements for certain CME members (60 FR 54339 (October 23,

1995)); (2) a CME proposal to establish a wholly-owned subsidiary

which would function as a market maker for certain CME foreign

exchange currency futures contracts traded through the Globex system

(61 FR 9678 (March 11, 1996)); and (3) a CME proposal to permit

commodity trading advisors to obtain Globex terminals to trade for

their proprietary accounts and the accounts that they manage (61 FR

21162 (May 9, 1996)).

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For the reasons stated above, the Commission has determined to

adopt amended Regulation 1.41(c)(3) as proposed.

G. Regulation 1.41(c)(4)--Disapproval Proceedings

Under proposed Regulation 1.41(c)(4), any Commission notice to a

contract market that the Commission intended to commence disapproval

proceedings with respect to a proposed rule change would be required to

specify the nature of the issues raised by the proposal and the

sections of the Act or the Commission's regulations that the rule

appeared to violate. Under the provision, the submitting contract

market would have 15 days from the issuance of the notification either

to withdraw the proposal or to request that the Commission consider the

proposal pursuant to the regular 180-day review procedures of section

5a(a)(12)(A) of the Act. If the submitting contract market chose

neither of these options, the Commission would commence disapproval

proceedings no later than

[[Page 10432]]

30 days after its issuance of the notification. Thus, under the

proposed rulemaking, disapproval proceedings would commence no later

than 75 days after a rule's submission (or 105 days in the case of

rules that were published for comment in the Federal Register).

The Commission received a number of comments asking for

clarifications of how proposed Regulation 1.41(c)(4) would be applied.

NFA questioned whether a Commission notice to a contract market to

institute disapproval proceedings under Regulation 1.41(c)(4) should be

issued publicly. NFA believed that public notification at this stage

would be inappropriate given that the submitting contract market might

withdraw its proposal or grant the Commission additional review time.

Under Regulation 1.41(c)(3), if the Commission decided to institute a

disapproval proceeding for a rule proposal, it would notify the

submitting contract market no later than 45 days after the rule's

submission (or 75 days if the rule was published for comment). While

the Commission would not publicize this notice in the Federal Register,

it would be a matter of public record under Regulation 145.2 and

Appendix A to the Part 145 Regulations, unless subject to the

confidentiality restrictions of Regulation 145.5. If the contract

market did not withdraw its proposal or extend the proposal's review

period within 15 days of the issuance of such notice, the Commission

would commence formal disapproval proceedings consistent with the

procedures required by the Act and the Commission's regulations.13

When commencing such proceedings, the Commission would provide the

submitting contract market and any other possibly interested parties

with an opportunity to present their views on the matter to the

Commission. However, if the submitting contract market withdrew the

rule and offered to amend it, the Commission would not commence such a

proceeding while the contract market attempted to resolve any

regulatory issues.

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\13\ A contract market also could choose to amend its rule

proposal and have it considered pursuant to the 180-day review

procedures of section 5a(a)(12)(A) of the Act. A contract market

could, of course, choose to withdraw its proposal and re-submit an

amended version, thereby resetting the time for review.

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NFA also commented that the Commission and submitting contract

markets may want to extend any of proposed Regulation 1.41(c)(4)'s

various deadlines for disapproval proceedings in order to reach

compromise agreements on the disposition of rule proposals. The

Commission agrees with NFA and believes that Regulation 1.41(c)'s

deadlines, including disapproval proceeding deadlines, could be

extended upon the mutual agreement of the Commission and the subject

contract market.

FIA asked for clarification on Regulation 1.41(c)(4)'s deadline for

the conclusion of a disapproval proceeding. Upon the commencement of a

disapproval proceeding under this provision, the Commission would

follow the procedures currently mandated by section 5a(a)(12)(A) of the

Act. That provision states that the Commission must ``conclude a

disapproval proceeding with respect to any rule within one year after

receipt or within such longer period as the contract market may agree

to.'' If such a proceeding is not concluded within the prescribed time,

the rule proposal may be deemed effective until such time as the

Commission disapproves the rule.

For the reasons stated above, the Commission has determined to

adopt Regulation 1.41(c)(4) with one clarification. Under the final

rulemaking, a contract market would have 15 days from the receipt of a

disapproval proceedings notice to withdraw or to extend the review

period for its proposal. Under the proposed rulemaking, a contract

market had to respond within 15 days from the date of issuance of such

a notice.

IV. Conclusion

The Commission has determined to adopt Regulation 1.41(c) with

three modifications from the original proposed rulemaking.

Specifically, Regulation 1.41(c)(1)(i)(F) has been revised to require

that contract markets identify any provisions of the Act or the

Commission's regulations that may require amendment or interpretation

in order to implement a proposed rule change. In addition, the

Commission has deleted proposed Regulation 1.41(c)(1)(i)(G) and its

requirement that contract markets expressly indicate in their

submissions whether they are requesting rule approval. Finally,

Regulation 1.41(c)(4) has been revised to clarify when contract markets

must respond to notices to institute disapproval proceedings.

Although Commission Regulation 1.41(c), by its own terms, applies

only to Commission review of contract market rule proposals, the

Commission will propose a regulation with similar rule review

procedures for registered futures associations in the near future. In

the interim, the Commission will abide by the requirements of

Regulation 1.41(c) when reviewing rule proposals from registered

futures associations.

In formulating these new rule amendments, the Commission has

attempted to balance the objective of meaningful review of contract

market rule proposals under the Act with the contract markets'

reasonable desire to implement their proposals as expeditiously as

possible. Upon the implementation of amended Regulation 1.41(c), the

Commission will continue to monitor the rule review process closely

and, based upon its experience, may consider further refinements to

these procedures in the future.

Amended Commission Regulation 1.41(c) will become effective 30 days

after its publication in the Federal Register. All contract market rule

proposals submitted to the Commission after that date will be subject

to Regulation 1.41(c)'s new review procedures. Contract market rules

that are pending with the Commission at the time of amended Regulation

1.41(c)'s effective date will continue to be subject to Regulation

1.41's current review 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

those rules on small businesses. The Commission has previously

determined that contract markets are not ``small entities'' for

purposes of the RFA.14 This rulemaking establishes streamlined

procedures for the review of contract market proposed non-term and

condition rule changes. Accordingly, the Chairperson, on behalf of the

Commission, hereby certifies, pursuant to section 3(a) of the RFA, 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.

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\14\ See 47 FR 18618, 18619 (April 30, 1982).

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B. Agency Information Activities: Proposed Collection; Comment Request

The Paperwork Reduction Act of 1980 (``PRA''), 44 U.S.C. 3501 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

has no burden, the group of rules (3038-0022) of which it is a part has

the following burden:

Average burden hours per response--3,546.26

Number of respondents--10,971.00

[[Page 10433]]

Frequency of response--On Occasion

Copies of the information collection submission to Office of

Management and Budget are available from Gerald P. Smith, Clearance

Officer, Commodity Futures Trading Commission, Three Lafayette Centre,

1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5160.

List of Subjects in 17 CFR Part 1

Commodity exchanges, Contract markets, Rule review procedures.

In consideration of the foregoing, and based on 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 title 17, chapter I, part 1 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. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,

6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 8, 9, 12, 12a, 12c,

13a, 13a-1, 16, 16a, 19, 21, 23, and 24.

2. Section 1.41(c) is revised to read as follows:

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

Commission; exemption of certain rules.

* * * * *

(c) Rules that do not relate to terms and conditions. (1)(i) Except

as provided in paragraphs (d) and (f) of this section (exempt or

temporary emergency rules), each contract market shall submit to the

Commission pursuant to section 5a(a)(12)(A) of the Act prior to the

proposed effective dates all proposed rules that do not relate to terms

and conditions. One copy of the rule shall be furnished to the

Commission at its Washington, DC headquarters, and one copy shall be

transmitted by the contract market to the regional office of the

Commission having local jurisdiction over the contract market. Each

such submission under this paragraph (c) shall, in the following order:

(A) State that it is being submitted pursuant to Commission

regulation 1.41(c);

(B) Set forth the text of the proposed rule (in the case of any

change in, addition to, or deletion from any current rule of the

contact market, the current rule shall be fully set forth, with

brackets used to indicate words to be deleted and underscoring used to

indicate words to be added);

(C) Describe the proposed effective date of the proposed rule and

any action taken or anticipated to be taken to adopt the proposed rule

by the contract market, or by the governing board thereof or any

committee thereof, and cite the rules of the contract market which

authorize the adoption of the proposed rule;

(D) Explain the operation, purpose, and effect of the proposed

rule, including, as applicable, a description of the anticipated

benefits to market participants or others, any potential

anticompetitive effects on market participants, or others, how the rule

fits into the contract market's scheme of self-regulation, information

which demonstrates that the proposed rule is not inconsistent with the

policies and purposes of the Act, and any other information which may

be beneficial to the Commission in analyzing the proposed rule. If a

proposed rule affects, directly or indirectly, the application of any

other rule of the contract market, set forth the pertinent text of any

such rule and describe the anticipated effect;

(E) Note and briefly describe any substantive opposing views

expressed by governing board members, members of the contract market,

or others with respect to the proposed rule which were not incorporated

into the proposed rule prior to its submission to the Commission. Any

such description also should identify the membership interest

categories, as that term is defined by Commission regulation

1.64(a)(4), of persons who were opposed to the proposed rule; and,

(F) Identify any sections of the Act or the Commission's

regulations that the Commission may need to amend or interpret in order

to approve or allow into effect the proposed rule. To the extent that

such an amendment or interpretation is necessary to accommodate a

proposed rule, the contract market must provide a reasoned analysis

supporting its submission.

(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 (c)(1)(i) (A) through (F) of this section.

(iii) The Commission may notify the contract market within ten days

after receipt of a submission filed pursuant to paragraph (c)(1) of

this section, that the proposed rule raises novel or complex issues

which require additional time for review or is of major economic

significance and therefore that the review period has been extended as

specified in paragraph (c)(3) of this section. This notification will

briefly specify the nature of the issues for which additional time for

review is required.

(2) All proposed contract market rules submitted for review under

paragraph (c) of this section may be deemed approved or be placed into

effect, as appropriate, ten days after Commission receipt (or at such

earlier time as may be determined by the Commission) unless:

(i) The Commission notifies the contract market that the submission

does not comply with the form and content requirements of paragraph

(c)(1)(i) of this section;

(ii) The Commission notifies the contract market that the review

period for the submission has been extended pursuant to paragraph

(c)(1)(iii) of this section; or

(iii) The contract market agrees to another, specified review

period.

(3) Any rule for which the Commission extends the review period

pursuant to paragraph (c)(1)(iii) of this section may be deemed

approved or be placed into effect, as determined by the Commission,

forty-five days after Commission receipt of such rule or seventy-five

days after Commission receipt in the case of rules that have been

published for comment in the Federal Register (or at such earlier time

as may be determined by the Commission) unless the Commission notifies

the contract market that:

(i) The submission, including any supplementary materials and in

consideration of any comments from the public or other government

agencies, does not comply with the form and content requirements of

paragraph (c)(1)(i) of this section; or

(ii) The Commission intends to institute a proceeding to disapprove

the rule pursuant to the procedures specified in section 5a(a)(12)(A)

of the Act.

(4) A notice of intention to commence a disapproval proceeding

issued pursuant to paragraph (c)(3) of this section will:

(i) Identify the nature of the issues raised by the proposed rule

and the specific sections of the Act or the Commission's regulations

that the rule appears to violate; and,

(ii) State that the Commission may commence disapproval proceedings

for the proposed rule within thirty days after the Commission's

issuance of the notification, unless within fifteen days of receipt of

such notice the contract market:

(A) Withdraws the rule, or

(B) Requests the Commission to review the rule pursuant to the one

[[Page 10434]]

hundred and eighty day review procedures set forth in section

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

* * * * *

Issued in Washington, D.C. on February 27, 1997, by the

Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97-5568 Filed 3-6-97; 8:45 am]

BILLING CODE 6351-01-P