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: Final rulemaking.

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

SUMMARY: The Commodity Futures Trading Commission (Commission) is

revising 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.

Previously, the Commission promulgated fast-track review procedures to

reduce its review time to review designation applications. To

streamline the application process further, the Commission is revising

Guidelines No. 1, reducing any unnecessary burdens associated with the

designation application itself.

Specifically, the Commission is organizing Guideline No. 1 into

several specific application forms, making use of a chart format for

applications for designation of futures and options contracts to the

extent possible. 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 also is adding a new

appendix Part 5 specifying the information that a foreign board of

trade should submit to the Commission when seeking no-action relief to

offer and to sell, to persons located in the United States, a futures

contract on a foreign securities index traded on that foreign board of

trade.

EFFECTIVE DATE: August 2, 1999.

FOR FURTHER INFORMATION CONTACT:

Paul M. Architzel, Chief Counsel, Richard H. Shilts, Director, Market

Analysis Section, or Kimberly A. Browning, Attorney/Advisor, Division

of Economic Analysis, Commodity Futures Trading Commission, Three

Lafayette Centre, 1125 21st Street, NW, Washington, DC 20581. Telephone

(202) 418-5260. E-mail: [PA[email protected]], [RS[email protected]] or

[KB[email protected]].

SUPPLEMENTARY INFORMATION:

I. Background

The requirement that contract markets meet specified conditions 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 Act).\1\ Currently, the statutory requirements for

contract market 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\

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

\1\ A more complete description of the contract market approval

process under the 1921 Act is provided in the proposed rulemaking,

63 FR 38537, n. 1 (July 17, 1998).

\2\ A further listing of contract market approval requirements

under the Act is provided in the proposed rulemaking, 63 FR 38537,

n. 2.

\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.

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

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). 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. In addition,

the 1992 revisions introduced the use of a new checklist-style format

for applications for designation of option contracts.\4\

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

\4\ For a more complete discussion of the revisions made to

Guideline No. 1 in 1982 and 1992, see 63 FR 38537-38538.

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

In 1997, the Commission began a far-reaching program of regulatory

reform. Its first initiative was to establish fast-track procedures for

Commission review and approval of applications for contract market

designation. See, Commission Rule 5.1, 62 FR 10434 (March 7, 1997). The

fast-track procedure 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 and

[[Page 29218]]

fulfillment of the Commission's oversight responsibilities.\5\

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

\5\ Under the fast-track review procedures, applications for

designation of certain cash-settled futures and option contracts are

deemed to be approved in as few as ten days after receipt. Other

applications are deemed approved 45 days after receipt, absent

contrary notification. Since implementing the fast-track review rule

in April 1997, 59 contracts have been approved by the Commission

under this rule, 26 under the 10-day procedure and 33 under the 45-

day procedure. An additional 55 contracts were approved under non-

fast-track review procedures.

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

The Commission, in addition to 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 protections embedded in the Act. 61 FR 59390

(November 22, 1996). In this regard, the Commission's approval process

for new contracts, as well as its designation application process, also

is in keeping with a 1998 International Organization of Securities

Commissions' (IOSCO) publication entitled ``Applicability of the

Surveillance Guidance to Other Exchange-Traded Derivatives Products.''

That IOSCO report makes general recommendations to market authorities

concerning what a market surveillance program should contain to monitor

effectively exchange derivatives markets without unnecessarily

affecting market innovation.

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

\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.

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

A. Proposed Amendments

Based upon its experience in administering the current Guideline

and the fast track procedures, the Commission proposed to revise

Guideline No. 1 in several important respects. 63 FR 38537 (July 17,

1998). First, the Commission proposed to streamline the Guideline by

reorganizing its contents to present applications for designation of

futures contracts in a clearer, more focused format including the use

of charts. Specifically, the Commission proposed to reorganize the

contents of the 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, each separate application was proposed to be

self-contained. Under the proposed amendments, information for option

contracts would continue to be provided by checklist. In addition, the

Commission proposed to clarify certain standards for review which have

evolved based upon administrative experience and to clarify that

exchanges may use information developed by third parties in the

application.

Finally, the Commission proposed that a new appendix be added to

Part 5 specifying the information that a foreign board of trade should

file with the Commission when seeking no-action relief to offer and to

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

index traded on that foreign board of trade.

B. Comments

Two commenters, the Chicago Board of Trade (CBT) and the

Minneapolis Grain Exchange (MGE), responded to the notice of proposed

rulemaking. Both CBT and MGE favored strongly the Commission's proposed

revisions to streamline Guideline No. 1. However, although MGE

supported the proposed revisions clarifying the review standards for

several of the designation requirements, CBT opposed the proposed

clarification of the review standards. The MGE's and the CBT's comments

are discussed more fully below.

II. Final Revisions to the Guideline

Based upon thorough and careful consideration of the comments to

the proposed rulemaking and its experience in administering the current

Guideline as well as the fast-track procedures, the Commission has

determined to revise Guideline No. 1.

A. Final Changes to the Guideline's Format

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). To reduce the burden on the exchanges in satisfying the

Guideline's cash-market overview standards, the Commission is amending

Guideline No. 1, as proposed, to recognize explicitly the acceptability

of a variety of materials in fulfillment of this requirement. This

final revision permits exchanges to submit cash-market descriptions

based not only on material their staffs generate, but also on materials

obtained from other sources.\7\ An exchange may develop such material

through 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. The two

commenters, CBT and MGE, both supported this proposed revision. In

particular, CBT was of the view that contracts markets using third

party materials in support of their designation applications will

experience financial and staff resource savings. Specifically, CBT

stated that:

\7\ In allowing the submission of such third party materials,

the Commission is not amending the requirement that each application

(except for options on futures) must include a cash-market overview.

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

[T]hird-party material is often times readily available to

contract markets from sources such as trade groups and consultants

[and] can prove less expensive to obtain than having a contract

market's own staff, which may have limited resources, do the

research and compile the data [in support of the application].

Moreover, this data from third parties can prove beneficial in that

certain trade groups and consultants may possess a high level of

expertise and knowledge of the subject matter in question.\8\

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

\8\ See, CBT's comment letter submitted to the Commission in

response to the proposed rulemaking dated September 15, 1998 at p.

2.

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

2. Charts Relating to Individual Contract Terms and Conditions

Guideline No. 1 requires exchanges to explain how each major term

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

Commission already has approved, is consistent with cash market

practices or to justify the reason why the contract terms appropriately

are inconsistent with such practices. Under the former Guideline,

exchanges submitted this explanation or justification in narrative

form. Further to streamline the application process, the Commission is

clarifying, as proposed, that an exchange, in lieu of a

[[Page 29219]]

narrative description, may complete a chart to provide the required

information.\9\ The revised chart format reduces the amount of verbiage

and the overall length of designation applications. Both of the

commenters agreed that the proposed chart format would benefit contract

markets by reducing the amount of paperwork, costs and time necessary

to satisfy designation application requirements.

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

\9\ Exchanges still have the option of submitting the required

explanation or justification in narrative form if they perfer.

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

As the Commission noted in the notice of proposed rulemaking, the

chart is a template enumerating the significant contract terms and

conditions typically contained in most contracts. That template may be

modified as necessary to reflect the nature of the particular

commodity, the economic characteristics of the commodity or the

contract's specific terms and conditions.\10\

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

\10\ 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 designation application includes 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

is required when that term or condition is the same as one the

Commission already approved. For such contract terms, the board of

trade should refer in column 2 of the chart to the rule number or other

description of the original approved provision.

In keeping with current requirements, the application also requires

an exchange to specify exchange speculative position limits. The

Commission on April 27, 1999, amended its speculative position limit

rules and recodified the provisions of rule 1.61 as rule 150.5. 64 FR

24038 (May 5, 1999). Guideline No. 1 has been amended to conform to the

requirements of new rule 150.5. The Guideline No. 1 application forms

set out the operative requirements for exchange speculative position

limits at the time of initial designation. Specifically, the spot-month

position limits for physical delivery contracts should be set in

relation to the contract's deliverable supply estimate \11\ and for

cash-settled contracts should be no greater than necessary to minimize

the potential for manipulation or distortion of the contract's or the

underlying commodity's price.

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

\11\ However, it should be noted that spot-month speculative

position limits are not a substitute for inadequate 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.

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

Guideline No. 1 incorporates the operative provisions of rule

150.5(a) and (b) that establish the requirements for speculative

position limits at the time of initial contract designation. Subsequent

amendments to exchange-set speculative position limits which are

permitted under other provisions of Commission rule 150.5 are not

included on the application form. For example, adjustments to the

initial speculative position limits are permitted under Commission rule

1505(c) as open interest in a contract grows, and various forms of

position accountability rules may be substituted for speculative

position limits under Commission rule 150.5(e). In addition, exchange

speculative position limits are not required for contracts on a ``major

foreign currency'' under Commission rule 1505(a), and applications for

designation of such a contract may simply leave that box of the

application blank.

To facilitate the submission of cash-market description data, the

Commission is providing, through its Division of Economic Analysis Web

Site (www.cftc.gov/dea/dea.html), the charts relating to individual

contract terms and conditions, as described above. The exchanges will

be able to download these charts onto their own computer systems for

completion. The Commission believes that using such electronic charts

will reduce the amount of paperwork generated during the designation

application process. In addition, the use of these charts will foster

more uniform exchange designation application submissions, aiding

Commission staff in performing expeditious application reviews.

B. Clarification of Review Standards

As explained in the proposed rulemaking, 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 clarifying as proposed, these requirements in the Guideline.

The two commenters gave differing views concerning these proposed

clarifications. Specifically, MGE favored them and stated that

``clarifying the [designation application] information required [is a]

welcomed improvement to the application process.'' \12\ CBT, however,

opposed the proposed clarifications. In particular, CBT expressed the

view that adoption of the proposed revisions would inhibit necessary

flexibility during the designation application process.

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

\12\ See MGE's comment letter to the proposed rulemaking dated

September 15, 1998.

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

1. 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. The Commission is clarifying, as proposed,

the 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. Under the former Guideline, the requirement

of an estimate of deliverable supplies was implicit. This final

clarification explicitly requires that applications for designation of

a physical delivery futures contract include within a separate chart a

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 that period when

potential supplies typically are at their lowest

[[Page 29220]]

levels. The estimate should be based on statistical data when

reasonably available covering a period of time 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 board of trade

independently derives the estimate 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.

As mentioned above, CBT did not favor the proposed clarifications.

In particular, CBT argued that the Commission should provide a more

definitive description of deliverable supply for the relevant cash

market, as well as explain its ``rule-of-thumb'' formula for

determining spot month speculative limits.\13\ However, the Guideline

does provide such guidance on deriving an estimate of deliverable

supplies. The estimate of deliverable supplies should 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.\14\ Thus, for example, it should take

into account the deliverable supply which is available when quality and

price differentials are applied. For a physical-delivery futures

contract, 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 consistent with the delivery

procedures set forth in the contract and which is available for sale on

a spot basis within the marketing channels that normally are tributary

to the delivery point(s). For contracts that utilize a shipping

certificate or similar delivery instrument, the estimate of deliverable

supply should reflect the fact that the underlying commodity may not

have to be moved into or through the delivery point(s) prior to

delivery of the shipping certificate in the futures market.

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

\13\ In its comments to the proposed rulemaking, CBT reasserts

the arguments it made in a proceeding instituted by the Commission

under Section 5a(a)(10) of the Act concerning the delivery

specifications for CBT's corn and soybeans futures contracts. See,

62 FR 60831 (November 13, 1997) (Commission Order changing and

supplementing under Section 5a(a)(10) of the Act delivery terms of

the CBT's corn and soybeans futures contracts). The Commission's

determination in that proceeding was based on the application of the

standards of Guideline No. 1 and Section 5a(a)(10) of the Act to the

particular facts of those markets. The clarification of Guideline

No. 1 as proposed is independent of its specific determination in

that proceeding.

\14\ 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.

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

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 bonds typically may be held by the

Federal Reserve 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.

2. 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 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, as proposed, two of the criteria, which it has identified

through past experience for meeting these requirements. In this regard,

any cash settlement price which an exchange determines 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 is required.

After thoroughly considering all the comments received and based

upon its own analysis, the Commission believes that the Guideline

strikes the appropriate balance of providing greater clarification and

specificity of the review standards without impeding the flexibility

necessary for an effective designation application review process.

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 board of trade is subject to

the Commission's exclusive jurisdiction.\15\ 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,\16\ Congress understood that a foreign

board of trade would not necessarily have to obtain contract

designation in order to offer futures contracts on stock indexes. 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 board of trade seeking to offer and to sell, to persons

located 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 exchange traded futures contract based on

`` foreign securities,'' the House Committee suggested that the

Commission use such criteria as it deems appropriate.

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

\15\ 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).

\16\ These three criteria in Section 2(a)(1)(B)(ii) 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.

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

The Commission has not promulgated procedures for foreign boards of

trade filng requests to offer or to sell such contracts, but instead

its staff has issued ``no-action'' letters \17\ regarding foreign

[[Page 29221]]

stock index contracts based on foreign securities using the criteria

set forth in Section 2(a)(1)(B)(ii) of the Act. As of March 16, 1999,

such action has been taken for 24 stock index contracts for offer or

sale to persons located in the U.S. submitted by 15 foreign boards of

trade.\18\

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

\17\ A no-action letter is a written statement issued by the

staff of a specific division of the Commission or the Office of the

General Counsel that it will not recommend enforcement action to the

Commission if a proposed transaction is completed or a proposed

activity is conducted by the beneficiary. A no-action letter

represents the position only of the division that issued it, or the

Office of the General Counsel if issued thereby. A no-action letter

binds only the issuing division or the Office of the General

Counsel, as applicable, and not the Commission or other Commission

staff. Further, a no-action letter is only effective with respect to

the person or persons to whom it was issued. Commission Rule 140.99.

See, 63 FR 68175 (December 10, 1998).

\18\ 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 and

Options 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.

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

As detailed in the notice of proposed rulemaking at 63 FR 38540,

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

that the staff deems relevant to those criteria. To facilitate the

staff's review of such requests by foreign boards of trade, the

Commission is adding, as proposed, a separate appendix to Part 5

enumerating the information that foreign boards of trade should file

with the Commission to assist in the staff's analysis of such requests.

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 information should be

submitted in English, including any supplemental material such as

explanatory notes, appended tables or charts. It should be noted that,

in particular instances, the Commission consults with the Securities

and Exchange Commission (SEC) regarding these contracts. When such

consultation occurs, the SEC may request additional information.

III. Related Matters

A. Regulatory Flexibility Act

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

requires that agencies consider the impact of those 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 final amendments

establish alternative streamlined procedures for Commission review and

approval of contract market designation applications and of amendments

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

behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.

605(b), that the action taken herein will not have a significant

economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

When publishing final rules, the Paperwork Reduction Act (``PRA'')

of 1995 {Pub. L. 104-13 (May 13, 1995)} imposes certain requirements on

federal agencies (including the Commission) in connection with their

conducting or sponsoring any collection of information as the PRA

defines. In compliance with the Act, these final rules inform the

public of:

(1) The reason the information is planned to be and/or has been

collected; (2) the way such information is planned to be and/or has

been used to further the proper performance of the functions of the

agency; (3) an estimate, to the extent practicable, of the average

burden of the collection (together with a request that the public

direct to the agency any comments concerning the accuracy of this

burden estimate and any suggestions for reducing this burden); (4)

whether responses to the collection of information are voluntary,

required to obtain or retain a benefit or mandatory; (5) the nature and

extent of confidentiality to be provided, if any; and (6) the fact that

any agency may not conduct or sponsor, and a person is not required to

response to, a collection of information unless it displays a currently

valid OMB control number.

The Commission previously submitted this rule and its associated

information collection requirements to the Office of Management and

Budget. The Office of Management and Budget approved the collection of

information associated with this rule on October 24, 1998, and assigned

OMB control number 3038-0022 to the rule. The burden associated with

this entire collection (3038-0022) including this final 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 rule is as follows:

Average burden hours per response: 58.

Number of Respondents: 11.

Frequency of response: on Occasion.

Person wishing to comment on the information this final rule

requires 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 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 particular sections 4c, 5,

5a, 6 and 8a, 7 U.S.C. 6c, 7, 7a, 8, and 12a, the Commission hereby

amends Chapter I of Title 17 of the Code of Federal Regulations by

amending Part 5 as follows:

PART 5--DESIGNATION OF AND CONTINUING COMPLIANCE BY CONTRACT

MARKETS

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 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 froth the terms and conditions of the

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 and is not dormant, the cash

market description can be confined to those aspects relevant to

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

contract.

[[Page 29222]]

(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.

Contract Terms and Conditions

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

Explanation as to

Rule number of consistency with,

Exchange identical or reason for

Term or condition proposal approved variance from

provision, if any cash market

\1\ 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..........................................

3. Delivery points/region.............................. ................. ................. .................

4. Any locational differentials for nonpar deliveries, ................. ................. .................

or lack thereof.......................................

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 freight ................. ................. .................

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)..........................

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

DELIVERABLE SUPPLIES \2\--ESTIMATE OF DELIVERABLE SUPPLIES FOR TRADING MONTH(S) WITH LOWEST SUPPLIES

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

ESTIMATION METHODOLOGY................................. ................. ................. .................

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

\1\ 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.

\2\ No estimate of deliverable supply is needed if a previously designated nondormant contract is trading. Also,

no justification of the spot month limit is needed if the limit is the same as that approved by the Commission

for an identical contract in that commodity (relative to the quantity or value of the identical contract).

Where more than one contract is based on the same underlying commodity or instrument, positions should be

combined for purposes of applying speculative limits.

Terms and Conditions Related to Speculative Limits

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

Level (exchange

Speculative limit Standard rule)

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

1. Spot month................................. No greater than one-fourth of estimated .................

deliverable supply.

2. Nonspot individual month or all months 5,000 contract............................... .................

combined (financial and energy contract).

3. Nonspot individual month or all months 1,000 contracts.............................. .................

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.

(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 cash settlement of the contract is at a

price reflecting 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 29223]]

Contract Terms and Conditions

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

Explanation as to

Rule number of consistency with,

identical or reason for

Term or condition approved variance from,

provision, if cash market

any\1\ practice

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

1. Commodity characteristics (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................................

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

\1\ If an identical provision has been approved for a nondormant contract in the same commodity, there is not

need to provide an explanation in the next column.

Terms and Conditions Related to Cash Settlement Price Series

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

Rule number of

identical Explanation or

Requirement approved justification

provision

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

1. Where an independent third ................. .................

party calculate the cash

settlement price series, evidence

that the third party does not

object to its use and provides

safeguards against susceptibility

to manipulation..................

2. Where board of trade generates ................. .................

cash settlement rice series,

specifications 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 acceptable for hedging.......

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

Terms and Conditions Related to Speculative Limits

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

Level (exchange

Speculative limit Standard rule)

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

1. Spot month................................. Must be no greater than necessary to minimize .................

the potential for manipulation or distortion

of the contract's or the underlying

commodity's price.

2. Nonspot individual month or all months 5,000 contracts.............................. .................

combined (financial and energy contracts).

3. Nonspot individual month or all months 1,000 contracts.............................. .................

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 futures 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

material 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

condition(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 29224]]

Terms and Conditions

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

Justification for

not meeting

Applicable CFTC Rule (17 Met by exchange standard, or rule

Criterion CFR) Standard rule number number of

identical

approved rule

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

1. 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

contracts or consistent with Commission

Rule 150.5(e) for underlying future.

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 listed & 33.4(b)(1)................. Procedures for routine listing of strikes ................. .................

increments). are specified and automatic, provisions

for listing discretionary strikes are

specified.

5. Option expiration & last trading day.. 33.4(b)(2)................. Except for options on cash-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 specified....... 33.4(d).................... Equal to, or greater than, the 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 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, to Persons Located in

the United States, a Futures Contract on a Foreign Securities Index

Traded on That Foreign Board of Trade

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

to sell, to persons located in the U.S., a futures contract on a

foreign securities index traded on that foreign board of trade

should submit the following 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 over-all trading of the contract, including circuit breakers,

price limits, position limits or other controls on trading;

(2) Surveillance agreements between the foreign board 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

information with the Commission and assurances from the foreign

board of trade of its ability and willingness to share information

with the Commission, either directly or indirectly.

(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 unaffiliated 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;

(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; and

(vii) If applicable, average daily futures trading volume.

Issued in Washington, D.C. this 25th day of May, 1999, by the

Commodity Futures Trading Commission.

Jean Webb,

Secretary of the Commission.

[FR Doc. 99-13780 Filed 5-28-99; 8:45 am]

BILLING CODE 6351-01-M