Economic and Public Interest Requirements for Contract Market Designation

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 5

Economic and Public Interest Requirements for Contract Market

Designation

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rulemaking.

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

proposing revisions to its Guideline on Economic and Public Interest

Requirements for Contract Market Designation, 17 CFR Part 5, Appendix A

(``Guideline No. 1''). Guideline No. 1 details the information that an

application for contract market designation should include in order to

demonstrate that the contract market meets the economic requirements

for designation. The Commission recently promulgated fast-track review

procedures to reduce the time for Commission review of such

applications. In furtherance of these streamlining efforts, the

Commission is proposing that Guideline No. 1 itself be revised to

reduce any unnecessary burdens associated with the designation

application.

Specifically, the Commission is proposing to reorganize Guideline

No. 1 into several specific application forms, making use to the extent

possible of a checklist or chart format. Moreover, the Commission is

clarifying that a portion of the application may make use of third-

party generated materials. In addition, the Commission is clarifying

the review standards for several of the designation requirements. The

Commission is also proposing that a new appendix be added to Part 5

that would specify the information that should be included by a foreign

board of trade seeking no-action relief to offer and to sell in the

United States a futures contract on a securities index traded on that

exchange.

DATES: Comments must be received by September 15, 1998.

ADDRESSES: Comments should be sent to the Commodity Futures Trading

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

D.C. 20581, attention: Office of the Secretariat. Comments may be sent

by facsimile transmission to (202) 418-5521 or, by e-mail to

[email protected]. Reference should be made to ``Revisions to

Guideline No. 1.''

FOR FURTHER INFORMATION CONTACT:

Paul M. Architzel, Chief Counsel, Division of Economic Analysis,

Richard A. Shilts, Director, Market Analysis Section or Kimberly A.

Browning, Attorney/Advisor, Division of Economic analysis, Commodity

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,

N.W., Washington, D.C. 20581. Telephone: (202) 418-5260. E-mail:

[PA[email protected]], [[email protected],gov] or [KB[email protected]].

SUPPLEMENTARY INFORMATION:

I. Background

The requirement that boards of trade demonstrate that they meet

specified conditions in order to be designated as a contract market has

been a fundamental tool of federal regulation of commodity futures

exchanges since the Futures Trading Act of 1921, Pub. L. No. 67-66, 42

Stat. 187 (1921).\1\ Currently, the statutory requirements for

designation are found in Sections 5 and 5a of the Commodity Exchange

Act (Act) and, additionally, for indexes of securities, in Section

2(a)(1)(B) of the Act. Designated contract markets must provide for the

prevention of dissemination of false information (Section 5(3) of the

Act); must provide for the prevention of price manipulation (Section

5(4) of the Act); must provide for delivery periods which will prevent

market congestion (Section 5A(a)(4) of the Act); and must permit

delivery on the contract of such grades, at such points and at such

quality and locational differentials as will tend to prevent or to

diminish market manipulation (Section 5a(a)(10) of the Act).\2\

Included among these provisions is the general requirement of Section

5(7) of the Act that trading in a proposed contract not be contrary to

the public interest. The contract market must meet these requirements

both initially and on a continuing basis.\3\

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

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

manipulative activity and the prevention of dissemination of false

information, upon providing for certain types of recordkeeping and

for admission into exchange membership of cooperative producer

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

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

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

successfully challenged as an improper use of the Congressional

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

legislation regulating the futures industry was patterned after this

statutory scheme.

\2\ The Act further requires, as a condition for contract market

designation that the contract market, inter alia: be located at a

terminal cash market or provide for terms and conditions as approved

by the Commission (Section 5(1) of the Act); provide for various

forms of recordkeeping (Sections 5(2) and 5a(a)(2) of the Act);

permit the membership of cooperative associations (Section 5(5) of

the Act); provide for compliance with Commission orders (Section

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

5a(a)(1) and 5a(a)(12) of the Act); provide that the terms of the

contracts conform to United States commodity standards or those

adopted by the Commission (Section 5a(a)(6) of the Act); accept

warehouse receipts issued under United States law (Section 5a(a)(3)

of the Act); and enforce exchange rules (Section 5a(a)(8) of the

Act).

\3\ Generally, the burden of demonstrating compliance rests with

the contract market. Section 6 of the Act provides, in part, that:

Any board of trade desiring to be designated a ``contract

market'' shall make application to the Commission for such

designation and accompany the same with a showing that it complies

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

will continue to comply with the above requirements.

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The Commission, as an aid to the exchanges, has provided guidance

in meeting these statutory requirements. In 1975 the newly formed

Commission, in one of its earliest actions, issued its Guideline on

Economic and Public Interest Requirements for Contract Market

Designation, 40 FR 25849 (1975) (``Guideline No. 1'').

Subsequently, the Commission revised this guideline, publishing it

as Appendix A to Part 5 of the Code of Federal Regulations. 47 FR 49832

(November 3, 1982). As revised in 1982, Guideline No. 1 was updated to

address proposed innovations in the trading of futures contracts,

including in particular, futures contracts on financial instruments and

on various indexes and cash-settled futures contracts. Experience has

demonstrated that the guideline has been adaptable and flexible,

facilitating the designation of a wide range of innovative products.

Guideline No. 1 was again revised in 1992. 57 FR 3518 (January 30,

1992). The 1992 revisions streamlined the designation application for

both futures and option contract markets. Under the 1992 revisions, the

standard of review for specified terms and conditions of proposed

contract market designations under Sections 5 and 5a of the Act was

clarified. Moreover, the 1992 revisions eliminated unnecessary and

redundant materials by requiring that an application for designation of

a futures contract include a cash-market description only when the

proposed contract differs from a currently designated contract and that

it need justify only individual contract terms that are different from

terms which

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previously have been approved by the Commission. 57 FR 3521.\4\

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\4\ In conjunction with these revisions to the application for

contract market designation, the Commission also modified many of

its internal procedures to expedite the review and approval of new

contracts and proposed amendments to existing contracts. These

include, for example, 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. The review

and approval of new contracts usually is completed shortly after the

Federal Register public comment period ends or as soon as the

exchange makes the modifications necessary to address a proposed

contract's deficiencies. With these changes, the total review time

for new contracts declined significantly.

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In addition, the 1992 revisions introduced the use of a new

checklist-style format for applications for designation of option

contracts. The checklist application for option contracts has reduced

the required filing of redundant or otherwise unnecessary information,

resulting in designation applications which are clearer and more

concise. Presumably, the exchanges have thereby realized savings in

both the time and costs associated with filing an application.

Moreover, the uniform format has enabled the Commission to review such

checklist applications in a more timely and efficient manner.

Applications for designation of options on futures contracts, however,

are uniquely amenable to such a checklist format because option

contract terms tend to be highly uniform and the majority of issues

arise in connection with the designation of the underlying futures

contract.

In April 1997, new Commission Rule 5.1 establishing fast-track

procedures for Commission review and approval of applications for

contract market designation became effective. 62 FR 10434 (March 7,

1997). That rule creates a streamlined and speedy alternative review

process for Commission consideration of designation applications,

reducing unnecessary regulatory burdens on exchanges while also

preserving the opportunity for public participation where needed and

fulfillment of the Commission's oversight responsibilities. Under the

fast-track review procedures, applications for designation of certain

cash-settled futures and option contracts are deemed to be approved ten

days after receipt, unless the exchange is notified otherwise. Certain

other applications are deemed approved 45 days after receipt absent

contrary notification. Since implementing fast-track review procedures

in April 1997, 45 contracts have been approved by the Commission under

this rule, 18 under the 10-day procedure and 27 under the 45-day

procedure.\5\

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\5\ An additional 10 contracts were approved under non-fast-

track review procedures. These included five equity index contracts,

which were not eligible for fast-track approval because of the

statutory requirement of review by the U.S. Securities and Exchange

Commission (SEC), one contract that was approved under regular

procedures before the end of the fast-track period, and four

contracts that were processed under regular procedures at the

request of the submitting exchange.

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The Commission, in promulgating the fast-track review rules,

indicated its intent broadly to reexamine the form and content

requirements of Guideline No. 1, including consideration of the

possible applicability of an option-style checklist to applications for

designation of proposed futures contracts.\6\ The Commission has noted

that ``[i]mplementation 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,'' 62 FR

10435, and that these initiatives should permit the exchanges greater

flexibility to compete with foreign exchange-traded products and with

both foreign and domestic over-the-counter transactions while

maintaining the basic protection embedded in the Act. 61 FR 59390

(November 22, 1996).

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\6\ Guideline No. 1 applies only to the economic requirements

that must be met in order to be designated as a contract market.

Additional requirements are found in the Commission's Guideline No.

2, 1 Comm. Fut. L. Rep (CCH) para.6430. These relate to the contract

market's program for compliance with its self-regulatory

responsibilities. Generally, the review of these issues is most

significant in connection with the first application for contract

designation from a particular board of trade.

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II. Proposed Revisions to Guideline

A. Proposed Changes to the Guideline's Format

Based upon its experience in administering the current guideline

and the new fast-track procedures, the Commission is proposing to

revise Guideline No. 1 in several important respects. First, the

Commission is proposing to streamline Guideline No. 1 by further

reducing the required paperwork and by further clarifying the

information required to be included. In this regard, as discussed

above, the Commission has observed the success of the checklist

application for option contracts implemented in 1992 and believes that

a similar, but modified, framework using a chart rather than a

checklist can be used for applications for designation of futures

contracts.

Specifically, the Commission is proposing to reorganize the

contents of the current guideline to address applications for four

different types of contracts: (1) physical delivery futures; (2) cash-

settled futures; (3) options on futures; and (4) options on physicals.

Except for options on physicals, the requirements for each separate

application are self-contained and include the information relevant to

demonstrating compliance with the designation standards for that type

of contract. The information required is largely the same as under the

current guideline, but is presented in a clearer, more focussed format

which includes the use of charts. Information for option contracts will

continue to be provided by checklist. Moreover, the Commission is

proposing to clarify certain standards for review which have envolved

based upon administrative experience and to clarify that exchanges may

fulfill the required cash-market description with information developed

by third parties. The Commission intends to make this format available

to the exchanges electronically and to encourage exchanges to file

electronically to reduce further the paperwork burden associated with

the application process. These proposed revisions are discussed in

greater detail below.

1. Cash Market Overview

Currently, exchanges are required to include a cash market

description in their designation application. 17 CFR Part 5, Appendix

A(a)(1). The Commission is not proposing to amend this requirement--

each application (except for options on futures) would still require

the inclusion of such an overview. However, the Commission is proposing

to amend Guideline No. 1 to recognize explicitly the acceptability of a

variety of materials in fulfillment of this requirement. Under current

practices, exchanges typically produce their own specific cash-market

descriptions. The Commission notes, however, that the exchanges

presently are not precluded from doing otherwise and that exchanges

have on occasion submitted cash market descriptions which included

third-party materials.\7\

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\7\ For example, some exchanges have submitted background

studies on proposed contracts that were prepared by outside

consultants.

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To reduce the burden on the exchanges in satisfying the guideline's

cash-market overview standards, the Commission is proposing to clarify

that exchanges need not submit staff-prepared documents and that they

may

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submit cash-market descriptions based not only on materials generated

by their staffs, but also on materials obtained from other sources.

Such materials may be developed for an exchange by outside sources

during a feasibility study of a proposed contract, as part of the

exchange's development and consideration of a proposal or as part of

its new product marketing effort. In this regard, as proposed to be

revised, Guideline No. 1 explicitly would state that a cash-market

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description may include:

Existing studies by industry trade groups, academics,

governmental bodies or other entities; reports of consultations; or

other materials which provide a description of the underlying cash

market. These materials may be submitted in addition to, or in lieu

of, information developed by the board of trade.

2. Charts Relating to Individual Contract Terms and Conditions

The current guideline requires exchanges to explain how each major

term of a proposed contract, except for those identical to terms

already approved by the Commission, is consistent with cash market

practices or to justify the reason why the contract term appropriately

is inconsistent with such practices. Exchanges submit this explanation

or justification in narrative form. To further streamline the

application process, the Commission is proposing that, in lieu of such

a narrative description, an exchange may complete a chart to provide

the required information. The proposed chart format will reduce the

amount of verbiage and the overall length of designation applications.

The proposed chart is a template enumerating the significant

contract terms and conditions typically contained in most contracts. In

view of the diverse nature of commodities for which futures contracts

may be developed, however, the template may be modified as necessary to

reflect the nature of the particular commodity or the contract's

specific terms and conditions. Also, to the extent that a proposed

contract includes additional terms and conditions defining the economic

characteristics of the underlying commodity, the board of trade may

modify the form as appropriate. For example, if a contract provides for

more than one quality specification under commodity characteristics

(e.g., a grade standard as well as a weight specification), the board

of trade may add a separate line item to address each commodity

characteristic separately. For line items in the chart that are not

applicable to the proposed contract, the board of trade should simply

indicate ``N.A.''

The proposed chart would require that an exchange include a brief

description of the contract's major terms and conditions. Where the

term is consistent with prevailing cash market practices, column 4 may

be completed by providing a very brief statement as to how the term or

condition comports with cash practices. However, where the term or

condition does not comport with cash market practices, a more extensive

discussion is required showing why the provision is necessary or

appropriate for the hedging or pricing utility of the contract and the

overall effect of the provision on deliverable supplies. Consistent

with current requirements, no such justification of an individual term

or condition would be required when that term or condition is the same

as one already approved by the Commission. For such contract terms, the

board of trade should reference in column 2 of the chart the rule

number or other description of the original approved provision.

In keeping with current requirements, the application also requires

an exchange to specify and to justify speculative position limits as

required under the criteria of Commission rule 1.61, 17 CFR 1.61. The

Commission is proposing that this requirement also be fulfilled by

completion of a chart. However, the Commission is reviewing generally

its speculative position limit policies and may propose further

revisions to this section of Guideline No. 1 if it becomes appropriate

in light of subsequent revisions to its speculative position limit

policies.

3. Clarification of Review Standards

Central to an application for designation is an exchange's

demonstration that the proposed contract will not be susceptible to

price manipulation or distortion. For physical delivery contracts, this

requires a demonstration that the deliverable supplies provided under

the contract's terms are adequate, and for cash-settled contracts, this

requires that the cash price series to be used for settlement is

reliable. In light of the importance of these issues to a designation

application, the Commission is proposing clarification of these

requirements in the guideline.

i. Adequacy of deliverable supply. Exchanges are required to

demonstrate that proposed contracts provide for deliverable supplies

that will not be conducive to price manipulation or distortion. A

requirement that an exchange include in its designation application an

analysis of the adequacy of deliverable supply including an estimate of

the deliverable supplies for the delivery months specified in the

proposed contract is implicit under the current guideline. The

Commission is proposing to clarify this requirement by requiring

explicitly designation applications include an estimate of deliverable

supplies for the specified delivery months of a proposed contract.

Specifically, the Commission is proposing that applications for

designation of physical delivery futures contracts include within a

separate chart of quantitative estimate of expected deliverable

supplies and a description of the methodology used to derive the

estimate. For commodities with seasonal supply or demand

characteristics, the deliverable supply analysis should be based on the

delivery month(s) when potential supplies typically are at their lowest

levels. The estimate should be based on statistical data when

reasonably available covering an historical period that is

representative of actual patterns of production and consumption of the

commodity. If data are taken from publicly available sources, the board

of trade should reference the source material used. If the estimates

are derived independently by the board of trade based on information

not readily verifiable or on trade interviews, the Commission may

request that the board of trade provide the workpapers or other source

materials used in the analysis.

This estimate would be required to be made taking into

consideration the terms and conditions specified for the deliverable

product and the economic realities of the cash market underlying the

futures contract.\8\ For a physical-delivery futures contract,

therefore, this estimate represents product which is in store at the

delivery point(s) specified in the futures contract or economically can

be moved into or through such points within a short period of time

after a request for delivery and which is available for sale on a spot

basis within the marketing channels that normally are tributary to the

delivery point(s).

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\8\ Obviously, only product meeting the specified quality

standards (e.g., the grade, age, purity, weight, etc. for tangible

commodities or the issue, maturity, rating, etc. for financial

instruments) is eligible for delivery on a futures contract and

should be considered as part of the deliverable supply.

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For financial instrument contracts, deliverable supply consists of

available supplies of the instrument meeting the contract's delivery

standards that are available, at prevailing cash market values, to

traders wishing to make future delivery. For example, significant

quantities of off-the-run notes and

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bonds typically may be held by the Federal Reserve System and long-term

investment portfolios (e.g., pension funds) and would not be readily

available for delivery on proposed futures contracts on U.S. government

debt instruments except at distorted prices. Recognizing this and based

on the opinions of knowledgeable industry participants, Commission

staff historically has used a rule-of-thumb that only 50 percent of the

on-the-run U.S. Treasury bond and 10 percent of each of the next two

off-the-run bonds are economically available for delivery.

The spot-month speculative position limits should be set in

relation to this deliverable supply estimate. Such spot-month

speculative position limits should be no greater than one-quarter of

the deliverable supply estimate for that month.\9\

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\9\ The Commission believes that spot-month speculative position

limits are not an ideal substitute for deliverable supplies. In this

respect, the fact that an exchange may specify a spot-month

speculative position limit that equals or is less than the ``rule-

of-thumb'' standard of one-fourth of a low deliverable supply

estimate does not mean that deliverable supplies are at adequate

levels. The Commission has approved new futures contracts or amended

existing futures contracts with low deliverable supplies only after

an exchange has exhausted potential sources of deliverable supplies

and, if necessary, adopted low spot-month speculative limits to give

it the ability to limit potential delivery demand. The preferred

approach under the Act if deliverable supplies are inadequate is for

the exchange to modify the delivery specifications to enhance

deliverable supplies. See, section 5a(a)(10) of the Act.

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ii. Justification of cash settlement price. The adequacy of the

procedures for determining the cash settlement price is central to the

Commission's review of proposed cash-settled contracts. Applications

for such proposed futures contracts would continue to be required to

demonstrate that those procedures will result in a cash settlement

price which reflects the underlying cash market and is not subject to

manipulation or distortion. In order to provide additional guidance to

exchanges in meeting this requirement, the Commission is clarifying two

of the criteria which it has identified through past experience for

meeting these requirements. In this regard, any cash settlement price

which is determined by an exchange through a survey method to elicit

price quotes should include a number of polled entities which is

representative of the underlying cash market. In no event, however, may

the polling sample include fewer than four unrelated entities that do

not take positions for their own account in the futures, option or

underlying cash markets. Where the entities to be polled may trade in

such markets for their own accounts, a minimum of eight unrelated

entities would be required. These rule-of-thumb criteria have been

included in the relevant chart.

B. Effect on Pending Applications

The proposed revision to Guideline No. 1 streamline the application

process for designation of contract markets and clarify existing

requirements and Commission practice. Because the Commission is not

proposing any new substantive requirements, however, the Commission is

permitting exchanges immediately to begin filing applications

consistent with the proposed format. Moreover, because the Commission

is permitting exchanges to continue providing the required information

in a narrative format if they prefer, no application filed or already

under development and nearing completion which complies with the

existing guideline would have to be revised.

C. Foreign Futures Markets

The offer or sale in the United States of futures contracts traded

on or subject to the rules of a foreign exchange is subject to the

Commission's exclusive jurisdiction.\10\ Although Section

2(a)(1)(B)(ii) of the Act provides that the Commission shall not

designate a board of trade as a contract market in a futures on a

securities index unless the Commission finds that the board of trade

meets three enumerated criteria,\11\ Congress understood that a foreign

exchange might lawfully offer futures contracts on stock indexes absent

designation. Thus, the House Committee on Agriculture suggested that a

foreign board of trade could apply for ``certification'' that its stock

index contract meets all applicable Commission requirements. H.R. Rep.

No. 565, Part 1, 97th Cong., 2d Sess. 85 (1982). That Committee further

explained that a foreign exchange seeking to offer in the United States

a futures contract based upon an index of United States securities must

demonstrate that the proposed futures contract meets the requirements

set forth in Section 2(a)(1)(B)(ii). Id. With regard to a foreign stock

index contract based on ``foreign securities,'' the House Committee

suggested that the Commission use such criteria as it deems

appropriate.

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\10\ Section 2(a)(1)(A), 7 U.S.C. 2 (1982); 120 Cong. Rec. 34497

(1974) (Statement of Senator Talmadge) (the terms ``any other board

of trade, exchange, or market'' in Section 2(a)(1)(A) make clear the

Commission's exclusive jurisdiction includes futures contracts

executed on a foreign board of trade, exchange or market).

\11\ These three criteria are contained in Section

2(a)(1)(B)(ii). They are:

(1) The contract must provide for cash settlement;

(2) The proposed contract will not be readily susceptible to

manipulation or to being used to manipulate any underlying security;

and

(3) The index is predominately composed of the securities of

unaffiliated issuers and reflects the market for all publicly traded

securities or a substantial segment thereof.

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The Commission has not promulgated procedures for the filing of

requests by foreign boards of trade for ``certification'' to offer or

to sell such contracts, but instead has issued through its Office of

the General Counsel, several `` no-action'' letters \12\ regarding

foreign stock index contracts based on foreign securities using the

criteria set forth in Section 2(a)(1)(B)(ii) of the Act. As of June 4,

1998, such action has been taken for 24 stock index contracts for offer

or sale in the United States that were submitted by 15 foreign boards

of trade.\13\

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\12\ A no-action letter is a written statement that staff of a

specific division will not recommend enforcement action to the

Commission if a proposed transaction is undertaken or a proposed

activity is conducted. A no-action letter represents the position of

only the division issuing it and is binding upon that division and

not on the Commission or other divisions. Further, a no-action

letter is only effective with respect to the person or persons to

whom it was issued and has no precedential effect.

\13\ These 15 foreign boards of trade include: (1) Osaka

Securities Exchange; (2) Tokyo Stock Exchange; (3) Hong Kong Futures

Exchange; (4) Singapore International Monetary Exchange, Ltd.; (5)

Toronto Futures Exchange; (6) International Futures Exchange

(Bermuda), Ltd.; (7) London International Financial Futures Exchange

Limited; (8) Marche a Terme International de France; (9) Sydney

Futures Exchange Limited; (10) Meff Sociedad Rectora de Productos

Financieros Derivados de Renta Variable, S.A. (Spain); (11) Deutsche

Terminborse; (12) Italian Stock Exchange; (13) The Amsterdam

Exchanges; (14) OMLX, The London Securities and Derivatives

Exchange, Ltd; and (15) OM Stockholm AB.

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Generally, the staff has analyzed such requests for a ``no-action''

opinion under the requirements of Section 2(a)(1)(B)(ii) of the Act.

Accordingly, the staff has requested that the foreign board of trade

file information which they deem relevant to those criteria. 57 FR

3518. To facilitate the staff's review of such requests by foreign

boards of trade, the Commission is proposing that a separate appendix

be added to Part 5 that would enumerate the information that foreign

boards of trade should file with the Commission to assist in the

staff's analysis of such requests. This information is the same as that

previously requested to be filed. Id. Some of the data which should be

included are: the terms and conditions of the contract and all other

relevant rules of the exchange; information on information sharing

arrangements or any legal obstacles to such sharing of information; and

specific information related to the composition and computation of the

index. All

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information should be submitted in English, including any supplemental

material such as explanatory notes, appended tables or charts. It

should be noted that the Commission consults with the SEC regarding

these procedures. When such consultation occurs, additional information

may be requested by the SEC.

III. 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 propose to establish alternative streamlined procedures for

Commission review and approval of applications by contract markets for

designations and of amendments to contract terms and conditions.

Accordingly, the Chairperson, on behalf of the Commission, hereby

certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein

will not have a significant economic impact on a substantial number of

small entities. However, the Commission invites comments from any firms

or other persons which believe that the promulgation of these rules

might have a significant impact upon their activities.

B. Paperwork Reduction Act

When publishing proposed rules, the Paperwork Reduction Act

(``PRA'') of 1995 {Pub. L. 104-13 (May 1, 1995)} 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. In compliance with the Act, the

Commission, through this rule proposal, solicits comments to:

(1) Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including the validity of the methodology and assumptions used; (2)

evaluate the accuracy of the agency's estimate of the burden of the

proposed collection of information including the validity of the

methodology and assumptions used; (3) enhance the quality, utility, and

clarity of the information to be collected; and minimize the burden of

the collection of the information on those who are to respond,

including through the use of appropriate automated, electronic,

mechanical, or other technological collection techniques or other forms

of information technology, e.g., permitting electronic submission of

responses.

The Commission has submitted this proposed rule and its associated

information collection requirements to the Office of Management and

Budget. The burden associated with this entire collection (3038-0022),

including this proposed rule, is as follows:

Average burden hours per response: 3,609

Number of Respondents: 15,693

Frequency of response: On Occasion

The burden associated with this specific proposed rule is as

follows:

Average burden hours per response: 58

Number of Respondents: 11

Frequency of response: On Occasion

Persons wishing to comment on the information which would be

required by this proposed rule should contact the Desk Officer, CFTC,

Office of Management and Budget, Room 10202, NEOB, Washington, DC

20503, (202) 395-7340. Copies of the information collection submission

to OMB are available from the CFTC Clearance Officer, 1155 21st Street,

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

Copies of the OMB-approved information collection package

associated with this rulemaking may be obtained from the Desk Officer,

Commodity Futures Trading Commission, Office of Management and Budget,

Room 10202, NEOB Washington, D.C. 20503, (202) 395-7340.

List of Subjects in 17 CFR Part 5

Commodity futures, Contract markets, Designation application,

Reporting and recordkeeping requirements.

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, 7 U.S.C. 6c, 7, 7a, 8, and 12a, the Commission hereby

proposes to amend Chapter I of Title 17 of the Code of Federal

Regulations by amending Part 5 as follows:

PART 5--DESIGNATON OF AND CONTINUING COMPLIANCE BY CONTRACT MARKET

1. The authority citation for Part 5 continues to read as follows:

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

2. In part 5, Appendix A is proposed to be revised to read as

follows:

Appendix A to Part 5--Guideline No. 1; Interpretative Statement

Regarding Economic and Public Interest Requirements for Contract Market

Designation

(a) Application for Designation of Physical Delivery Futures

Contracts

A board of trade shall submit:

(1) The rules setting forth the terms and conditions of the

proposed futures contract.

(2) A description of the cash market for the commodity on which

the contract is based.

(i) The description may include, in addition to or in lieu of

materials prepared by the board of trade, existing studies by

industry trade groups, academics, governmental bodies or other

entities, reports of consultants, or other materials which provide a

description of the underlying cash market.

(ii) Where the same, or a closely related commodity, is already

designated as a contract market which is not dormant, the cash

market description can be confined to those aspects relevant to

particular term(s) or conditions(s) which differ from such existing

contract.

(3) A demonstration that the terms and conditions, as a whole,

will result in a deliverable supply such that the contract will not

be conducive to price manipulation or distortion and that the

deliverable supply reasonably can be expected to be available to

short traders and salable by long traders at its market value in

normal cash marketing channels.

For purposes of this demonstration, provide the following

information in chart or narrative form.

[[Page 38542]]

Contract Terms and Conditions

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

Explanation as to

Rule number of consistency with, or

Term or condition Exchange proposal identical approved reason for variance

provision, if any* from, cash market

practice

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

1. Commodity characteristics (e.g., grade,

quality, weight, class, growth, issuer,

origin, maturity, source, rating, etc.).

2. Any quality differentials for nonpar

deliveries, or lack thereof, consistent

with the Commission's Policy on Price

Differentials.

3. Delivery Points/Region.

4. Any locational differentials for nonpar

deliveries, or lack thereof, consistent

with the Commission's Policy on Price

Differentials.

5. Delivery facilities (type, number,

capacity, ownership).

6. Contract size and/or trading unit.

7. Delivery pack or composition of delivery

units.

8. Delivery instrument (e.g., warehouse

receipt, shipping certificate, bill of

lading).

9. Transportation terms (e.g., FOB, CIF,

prepay frieght to destination).

10. Delivery procedures.

11. Delivery months.

12. Delivery period and last trading day.

13. Inspection/certification procedures

(verification of delivery eligibility, any

discounts applied for age).

14. Minimum price change (tick) equal to or

less than cash market minimum price

increment.

15. Daily price limit provisions (note

relationship to cash market price

movements).

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

*If an identical provision has been approved for a nondormant contract in the same commodity, there is no need

to provide an explanation in the next column.

Deliverable Supplies

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

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

Estimate of Deliverable Supplies for Trading Month(s) With Lowest

Supplies

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

EstimationMethodology:

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

Speculative Limits

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

Level (exchange

Speculative limit Standard rule)

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

1. Spot month............... No greater than one-

fourth of estimated

deliverable supply

2. Nonspot individual month 5,000 contracts

and all months combined

(financial and energy

contracts)

3. Nonspot individual month 1,000 contracts

and all months combined

(tangible commodity

contracts)

4. Reporting level.......... Equal to or less

than levels

specified in CFTC

rule 15.03

5. Aggregation rule......... Same as CFTC rule

150.5(g) or

previously approved

language

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

(4) As specifically requested, such additional evidence,

information or data relating to whether the contract meets,

initially or on a continuing basis, any of the specific requirements

of the Act, including the public interest standard contained in

Section 5(7) of the Act, and whether the contract reasonably can be

expected to be, or has been, used for hedging and/or price basing on

more than an occasional basis, or any other requirement for

designation under the Act or Commission rules and policies.

(b) Application for Cash Settled Futures Contracts

A board of trade shall submit:

(1) The rules setting forth the terms and conditions of the

proposed futures contract.

(b) A description of the cash market for the commodity on which

the contract is based.

(i) The description may include, in addition to or in lieu of

materials prepared by the board of trade, existing studies by

industry trade groups, academics, governmental bodies or other

entities, reports of consultants, or other materials which provide a

description of the underlying cash market.

(ii) Where the same, or a closely related commodity, is already

designated as a contract market which is not dormant, the cash

market description can be confined to those aspects relevant to

particular term(s) or conditions(s) which differ from such existing

contract.

(3) A demonstration that cash settlement of the contract is at a

price relfecting the underlying cash market, will not be subject to

manipulation or distortion, and is based on a cash price series that

is reliable, acceptable, publicly available and timely.

For purposes of this demonstration, provide the following

information in chart or narrative form.

[[Page 38543]]

Contract Terms

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

Explanation as to

Rule number of consistency with, or

Term or condition Proposal identical approved reason for variance

provision, if any* from, cash market

practice

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

1. Commodity characterisics (e.g., grade,

quality, weight, class, growth, issuer,

maturity, source, rating, etc.).

2. Delivery months, noting any cyclical

variations in trading activity that may

affect the potential for manipulating the

cash settlement price.

3. Last trading day.

4. Contract size.

5. Minimum price change (tick).

6. Daily price limit provisions, relative to

cash market price movements.

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

*If an identical provision has been approved for a nondormant contract in the same commodity, there is no need

to provide an explanation in the next column.

Cash Settlement Price Series

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

Rule number of identical

Requirement approved provision Explanation or justification

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

1. Where an independent third party calculates the

cash settlement price series, evidence that the

third party does not object to its use and

provides safeguards against its susceptibility to

manipulation.

2. Where board of trade generates cash settlement

price series, specification of calculation

procedure and safeguards in cash settlement

process to protect against susceptibility to

manipulation (e.g., if self-generated survey,

polling sample representative of cash market, but

with a minimum of 4 nontrading entities or 8

entities that trade for own account).

3. Procedure for, and timeliness of, dissemination

to public.

4. Evidence that price is reliable indicator of

cash market values and is acceptable for hedging.

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

Speculative Limits

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

Level (exchange

Speculative limit Standard rule)

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

1. Spot month............... Needed to minimize

potential for

manipulation if

underlying cash

market is small or

trading is not

highly liquid.

2. Nonspot individual month 5,000 contracts

and all months combined

(financial and energy

contracts).

3. Nonspot individual month 1,000 contracts

and all months combined

(tangible commodity

contracts).

4. Reporting level.......... Equal to or less

than levels

specified in CFTC

rule 15.03.

5. Aggregation rule......... Same as CFTC rule

150.5(g) or

previously approved

language.

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

(4) As specifically requested, such additional evidence,

information or data relating to whether the contract meets,

initially or on a continuing basis, any of the specific requirements

of the Act, including the public interest standard contained in

Section 5(7) of the Act, and whether the contract reasonably can be

expected to be, or has been, used for hedging and/or price basing on

more than an occasional basis, or any other requirement for

designation under the Act or Commission rules and policies.

(c) Application for Option Contracts

A board of trade shall submit:

(1) The rules setting forth the terms and conditions of the

proposed option contract.

(2)(i) For options on future contracts, the terms and conditions

of the proposed or existing underlying futures contract.

(2)(ii) For options on physical commodities:

(A) A description of the cash market for the commodity on which

the contract is based.

(1) The description may include, in addition to or in lieu of

materials prepared by the board of trade: existing studies by

industry trade groups, academics, governmental bodies or other

entities; promotional or marketing materials prepared by or for the

board of trade; reports of consultants; or other materials which

provide a description of the underlying cash market.

(2) Where the same, or a closely related commodity, is already

designated and is not dormant, the cash market description can be

confined to those aspects relevant to particular term(s) or

conditions(s) which differ from such existing contract.

(B) Depending on the method of settling the option, the relevant

chart for either a physical delivery or cash settled futures

contract.

(3) The following completed chart.

[[Page 38544]]

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

Justification

Met by for not meeting

Applicable CFTC rule exchange standard, or

Criterion (17 CFR) Standard rule rule number of

number identical

approved rule

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

Speculative limits........... 150.5................ Combined net position in

futures and options on a

futures-equivalent basis at

the futures position levels,

with inter-month spread

exemptions that are

consistent with those of the

futures contract.

2. Aggregation rule.......... 150.4................ Same as Rule 150.5(g) or

previously approved language.

3. Reporting level........... 15.00(b)(2).......... 50 contracts or fewer.

4. Strike prices (number 33.4(b)(1)........... Procedures for listing strikes

listed & increments). are specified and automatic.

5. Option expiration & last 33.4(d)(1)........... Except for options on cash-

trading day. settled futures contracts,

expiration is not less than

one business day before the

earlier of the last trading

day or the first notice day

of the underlying future.

6. Minimum tick.............. 33.4(d).............. Equal to, or less than, the

underlying futures tick.

7. Daily price limit, if 33.4(d).............. Equal to, or greater than, the

specified. underlying futures price

limit.

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

(4) As specifically requested, such additional evidence,

information or data relating to whether the contract meets,

initially or on a continuing basis, any of the specific requirements

of the Act, including the public interest standard contained in

Section 5(7) of the Act or any other requirement for designation

under the Act or Commission rules and policies.

3. Part 5 is proposed to be amended by adding new Appendix E to

read as follows:

Appendix E--Information That a Foreign Board of Trade Should Submit

When Seeking No-Action Relief To Offer and Sell in the United States a

Futures Contract on a Foreign Securities Index Traded on That Exchange

A foreign board of trade seeking no-action relief to offer and

to sell in the United States a futures contract on a foreign

securities index traded on that exchange should submit the following

information in English:

(1) The terms and conditions of the contract and all other

relevant rules of the exchange and, if applicable, of the exchange

on which the underlying securities are traded, which have an effect

on the overall trading of the contract, including circuit breakers,

price limits, position limits or other controls on trading;

(2) Surveillance agreements between the foreign boards of trade

and the exchange(s) on which the underlying securities are traded;

(3) Information sharing agreements between the host regulator

and the Commission or assurances of ability and willingness to share

and assurances from the foreign exchange of its ability and

willingness to share information with the Commission.

(4) When applicable, information regarding foreign blocking

statutes and their impact on the ability of United States government

agencies to obtain information concerning the trading of such

contracts; and

(5) Information and data, denoted in U.S. dollars, relating to:

(i) The method of computation, availability, and timeliness of

the index;

(ii) The total capitalization, number of stocks (including the

number of unafiliated issuers if different from the number of

stocks), and weighting of the stocks by capitalization and if

applicable by price, in the index;

(iii) Breakdown of the index by industry segment including the

capitalization and weight of each industry segment;

(iv) Procedures and criteria for selection of individual

securities for inclusion in, or removal from, the index, how often

the index is regularly reviewed, and any procedures for changes in

the index between regularly scheduled reviews;

(v) Method of calculation of the cash-settlement price and the

timing of its public release; and

(vi) Average daily volume of trading by calendar month, measured

by share turnover and dollar value, in each of the underlying

securities for a six-month period of time and, separately, the daily

volume in each underlying security for six expirations (cash-

settlement dates) or for the six days of that period on which cash-

settlement would have occurred had each month of the period been an

expiration month.

Issued in Washington, D.C. this 13th day of July, 1998 by the

Commodity Futures Trading Commission.

Jean Webb,

Secretary of the Commission.

[FR Doc. 98-19113 Filed 7-16-98; 8:45 am]

BILLING CODE 6351-01-M