Proposed Revision of the Commission's Procedure for the Review of Contract Market Rules

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-ZA01

Proposed Revision of the Commission's Procedure for the Review of

Contract Market Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comment.

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[[Page 66429]]

SUMMARY: As part of an ongoing program of regulatory reform, the

Commodity Futures Trading Commission (``CFTC'' or ``Commission'') is

proposing to revise its procedures for the review of contract market

rules and rule amendments. Subject to stated conditions, the proposed

rulemaking would permit contract markets to place new rules and rule

amendments into effect on the business day following their submission

to and receipt by the Commission.

DATES: Comments must be received on or before Janaury 25, 2000.

ADDRESSES: Comments should be mailed to Jean A. Webb, Secretary,

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

Street, NW, Washington, DC 20581; transmitted by facsimile to (202)

418-5521; or transmitted electronically to [[email protected]].

FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Associate

Director, Division of Trading and Markets, Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington,

DC 20581. Telephone: (202) 418-5490.

SUPPLEMENTARY INFORMATION

I. Statutory and Regulatory Background

Section 5a(a)(12)(A) of the Commodity Exchange Act (``Act'')

provides, among other things, that all rules \1\ of a contract market

that relate to terms and conditions \2\ in futures or option contracts

traded on or subject to the rules of a contract market must be

submitted to the Commission for its prior approval. Section

5a(a)(12)(A) further requires that contract markets submit all other

rules to the Commission for prior review. Other sections of the Act

require rules addressing specified matters to be explicitly approved by

the Commission.\3\

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\1\ Commission Regulation 1.41(a)(1) defines ``rule'' of a

contract market to mean ``any constitutional provision, article of

incorporation, bylaw, rule, regulation, resolution, interpretation,

stated policy, or instrument corresponding thereto, in whatever form

adopted, and any amendment or addition thereto or repeal thereof,

made or issued by a contract market, or by the governing board

thereof or any committee thereof.''

\2\ Commission Regulation 1.41(a)(2) defines ``terms and

conditions'' to mean ``any definition of the trading unit or the

specific commodity underlying a contract for the future delivery of

a commodity or commodity option contract, specification of

settlement or delivery standards and procedures, and establishment

of buyers' and sellers' rights and obligations under the contract.''

\3\ For example, Section 4f(b) of the Act requires that contract

markets must receive Commission approval for any minimum financial

standards that they establish for futures commission merchants and

introducing brokers.

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Pursuant to Section 5a(a)(12)(A), the Commission adopted Regulation

1.41 which sets forth procedures for the submission and review of

proposed contract market rules. These procedures vary depending on the

type of rule that the contract market seeks to implement. Paragraph (b)

of Regulation 1.41 establishes review procedures for rules that relate

to terms and conditions of a contract. Paragraph (c) of the regulation

establishes review procedures for most rules that do not relate to

terms and conditions.\4\ Commission Regulation 1.41 also contains

procedures for the filing of other types of exchange rules that may be

implemented before or simultaneous to filing with the Commission. These

include, among others, rules that are exempt from the requirements of

Section 5a(a)(12)(A) of the Act (Regulation 1.41(d)), temporary

emergency rules (Regulation 1.41(f)), and physical emergency rules

(Regulation 1.41(g)).

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\4\ In Federal Register releases published on March 7, 1997, (62

FR 10434 and 62 FR 10427), the Commission adopted amendments to

streamline and to expedite the procedures contained in Regulations

1.41 (b) and (c). Those amendments established alternative

procedures that shortened the Commission's timeframe for reviewing

contract market rules. Under these ``fast track'' review procedures,

rule changes generally can be deemed approved, or permitted to be

put into effect without Commission approval, ten days after

Commission receipt, unless the Commission takes action to commence

review of the rule for a 45-day period (or 75-day period in the case

of rules published for comment in the Federal Register). The rules

of certain non-cash settled contracts may be deemed approved forty-

five days after receipt by the Commission.

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Section 4(c) of the Act provides that ``[i]n order to promote

responsible economic or financial innovation and fair competition,''

the Commission may exempt any agreement, contract, or transaction (or

class thereof) that is otherwise subject to Section 4(a) of the Act \5\

from any of the requirements of that provision or from any other

provision of the Act except Section 2(a)(1)(B). The Commission may not

grant such an exemption unless it determines that the agreement,

contract, or transaction would be consistent with the public interest.

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\5\ Among other things, Section 4(a) of the Act prohibits any

person from executing, confirming the execution of, or otherwise

dealing in any transaction in, or in connection with, a contract for

the purchase or sale of a commodity for future delivery, unless such

transaction is conducted subject to the rules of a board of trade

which has been designed by the Commission as a contract market for

such commodity.

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Pursuant to this authority, the Commission is proposing to exempt

contract markets from the rule review requirements of Section

5a(a)(12)(A) of the Act and from the regulations adopted thereunder.

The Commission would continue to pursue vigorously its surveillance and

enforcement activities. The Commission intends that this proposed

rulemaking, and the manner in which the Commission would conduct

oversight of contract market rules adopted pursuant to such a

provision, should ``promote responsible economic or financial

innovation and fair competition.''

II. The Proposed Amendments

A. Description of the Procedure

Proposed Commission Regulation 1.41(z) would permit contract

markets \6\ to place a new rule into effect the business day after the

Commission has received submission of the rule. There would be no

requirement, as under current regulations, to allow for prior

Commission review of the rule. The submission would have to include a

brief explanation of the rule and a description of any substantive

opposing views expressed by members of the contract market or others

with respect to the rule. In addition, the contract market would be

required to certify that the rule submitted neither violates nor is

inconsistent with any provision of the Act or the Commission's

regulations. Although the form and content requirements for Regulation

1.41(z) rule filings would be more abbreviated than those for rule

filings pursuant to Regulations 1.41(b) or 1.41(c), the Commission

would retain its authority under Section 4(d) of the Act and other

relevant provisions to conduct investigations, to gather information,

and generally to oversee the contract market's adherence with the

requirements and conditions of the Act.

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\6\ For the purposes of Regulation 1.41, the term ``contract

market'' includes a clearing organization that clears futures

contract transactions. Regulation 1.41(a)(3).

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B. Eligibility for the Procedure

1. Previous Designation as a Contract Market

In a companion Federal Register release (the ``Companion

Release''), the Commission is adopting today a new Regulation 5.3 that

establishes a similar streamlined procedure for the listing of

contracts, and their subsequent amendment, without Commission prior

review and approval.\7\ That procedure will be available solely to

boards of trade that are designated as contract markets in at least one

contract that is not dormant.\8\ In its comment letter on that

proposal, the Chicago Mercantile Exchange supported this provision,

[[Page 66430]]

noting that start-up exchanges are not appropriate for this procedure,

as ``the initial designation of a board of trade as a contract market

entails a more lengthy review and analysis of its trading and clearing

systems and its self-regulatory programs.'' The Commission believes

that this rationale is equally applicable to the review of rules from

inactive contract markets. Accordingly, the Commission is proposing to

make the Regulation 1.41(z) process available solely to contract

markets which are designated in at least one non-dormant contract.

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\7\ The new designation procedure was proposed on July 20, 1999.

64 FR 40528 (July 27, 1999).

\8\ See Commission Regulation 5.2.

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2. Consistency with the Act and the Commission Regulations

A contract market would be required to submit a certification that

the rule being implemented neither violated nor was inconsistent with

any provision of the Act or the Commission regulations. This is the

standard used by the Commission in determining whether to disapprove a

rule.\9\ Thus, the Regulation 1.41(z) procedure would not be available

for contract market rules that, in the absence of some type of

Commission exemption, would violate, or be inconsistent with the Act or

the Commission regulations. For example, under Regulation 1.38(a),

transactions are required to be executed in an open and competitive

manner. Regulation 1.38(a), however, also permits exchanges to adopt

rules for the execution of non-competitive transactions so long as such

rules are submitted to and approved by the Commission. Thus, Regulation

1.38(a) reserves to the Commission the authority to determine what

types of trading procedures need not meet the open and competitive

requirement. Accordingly, non-competitive trading rules, such as

certain block trading procedures, would not qualify for the Regulation

1.41(z) process because, absent affirmative Commission approval under

Regulation 1.38, they would violate a provision of the regulations.

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\9\ See Standard to be Applied by the Commission in Disapproving

Contract Market Rules. 45 FR 34873 (May 23, 1980).

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C. Legal Certainty

In the Companion Release, the Commission is adopting a provision

that makes clear that, among other things, contracts listed pursuant to

Rule 5.3 are not void or voidable in the event the Commission initiates

a proceeding to disapprove, to alter, to amend, or to require a

contract market to adopt a specific trading rule or procedure or to

refrain from taking a specific action. The Commission is including a

similar provision in proposed Regulation 1.41(z)(2) to ensure legal

certainty for transactions effected subject to rules implemented

pursuant to Regulation 1.41(z). Although the Commission would not

approve, affirmatively allow into effect, or deem approved any contract

market rules that were implemented pursuant to this proposed

rulemaking, Regulation 1.41(z)(3) would expressly state that the

submitting contract market would not be exempt from any provision of

the Act or the Commission's regulations other than the rule review

requirements of Section 5a(a)(12) of the Act and related Commission

regulations. Therefore, for example, contract markets implementing

rules pursuant to Regulation 1.41(z) would continue to be subject to

the rule enforcement obligations of Section 5a(a)(8) of the Act.

III. Request for Comments

The Commission is requesting comment on any aspect of the proposed

procedure, including, but not limited to, the following.

A. Exclusivity of Regulation 14.1(z) Process

Under the current rule review process of Regulation 1.41(b), rules

relating to terms and conditions must be submitted for Commission

approval. Rules that do not relate to terms and conditions must be

submitted for Commission review pursuant to other provisions of

Regulation 1.41. Unless the Commission determines otherwise, such rules

may be deemed approved or placed into effect, as appropriate.

Contract markets on occasion specifically request that the

Commission approve a rule that otherwise did not require Commission

approval under any provision of the Act or the Commission Regulations.

Contract markets rules processed under Regulation 1.41(z) would simply

be placed into effect and would not be considered to have been

``approved'' by the Commission. The Commission is proposing the

Regulation 1.41(z) procedure as an alternative to the existing

Regulation 1.41 process. Under this proposal, contract markets could

still submit a rule pursuant to Regulation 1.41(b) or 1.41(c), even if

that rule qualified for the Regulation 1.41(z) process. However, the

existence of these various rule review procedures may create confusion

for market participants with respect to the regulatory history of rules

and may lead to the inaccurate impression that rules adopted pursuant

to Regulation 1.41(z) or 5.3 have been reviewed by the Commission.\10\

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\10\ So, for example, rules that were adopted pursuant to

Regulation 1.41(z) or 5.3 would not have been reviewed by the

Commission for possible antitrust implications.

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As a means of avoiding this possible confusion, the Commission

requests comment on whether it should preserve the current approval

process for rules that would qualify for the Regulation 1.41(z) process

or whether the proposed Regulation 1.41(z) process should be the only

process available. Similarly, should the Commission make the Regulation

5.3 procedure adopted today the sole means of listing new contracts and

of amending their terms and conditions?

B. Suspension of Effectiveness of a Rule

The Act requires notice and opportunity for hearing before a rule

may be disapproved or altered. This process can be lengthy. Market

participants and others adversely affected by a rule change could incur

harm during this period. The Commission requests comment on whether it

should reserve the authority, under Regulation 1.41(z), to stay or to

suspend the operation of an exchange rule once it has initiated a

proceeding under Section 5a(a)(10), 5a(a)(12), 8a(7) or 8a(9) of the

Act.

C. Contracts with Open Interest

The Commission is requesting comment on whether the Regulation

1.41(z) process should be available for rule amendments relating to

contracts that have open interest at the time the rule is implemented.

Could the rights of such position holders be impacted by a rule change

affecting their contracts? How could the Commission and/or a contract

market ensure that traders are not harmed by the adoption of a rule

amendment for a contract with open positions?

D. Emergency Rules

In Section 5a(a)(12)(B) of the Act, Congress mandated that the

Commission create a special process for the implementation of contract

market rules on an emergency basis without Commission approval. Section

5a(a)(12)(B) was adopted in the Futures Trading Practices Act of 1992.

The legislative history for this provision indicates that ``the

Committee [on Agriculture] was concerned that the Commission might not

be actively engaged in decisions by exchanges to invoke their emergency

powers.'' \11\ The Commission notes that proposed

[[Page 66431]]

Regulation 1.41(z) may obviate the need for a contract market to follow

Section 5a(a)(12)(B), and its implementing regulatory provision,

Regulation 1.41(f), when adopting emergency rules. The Commission

requests comment on how to differentiate an emergency rule provision

from any other rule that could be adopted pursuant to proposed

Regulation 1.41(z).

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\11\ See Reported No. 101-236 to accompany H.R. 2869, 101st

Cong., 1st Sess. at 20.

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E. New Electronic Trading Systems

As noted, the Regulation 1.41(z) process would not be available to

a board of trade that is not designated as a contract market in at

least one non-dormant contract. The implementation of a new electronic

trading system and adoption of related rules could be viewed as being

analogous to the organization of a new exchange in many respects. The

Commission requests comment on whether proposed rules implementing a

new electronic trading system at an existing contract market should be

processed under for Regulation 1.41(z).

IV. Related Matters

A. Regulatory Flexibility Act

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

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

these rules on small entities. The Commission has previously determined

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

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

establishes streamlined procedures for the review of contract market

rules and rule amendments. Accordingly, the Chairman, on behalf of the

Commission, hereby certifies, pursuant to section 3(a) of the RFA, 5

U.S.C. 605(b), that the action taken herein will not have a significant

economic impact on a substantial number of small entities.

B. Agency Information Activites: Proposed Collection; Comment Request

Proposed Regulation 1.41(z) contains information collection

requirements. As required by the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)), the Commission has submitted a copy of this section to

the Office of Management and Budget (``OMB'') for its review.

Collection of Information: Rules Pertaining to Contract Markets and

Their Members, OMB Control Number 3038-0022.

The effect of the proposed Regulation 1.41(z) will be to reduce the

burden previously approved by OMB for Regulations 1.41(b) and (c) by

4290 hours because the predominant number of rule submissions will be

made pursuant to new proposed Regulation 1.41(z) instead of either

Regulation 1.41(b) or (c). The burden associated with the proposed new

Regulation 141(z) is estimated to be 858 hours which will result from

compliance with the requirements for information required for

Regulation 1.41(z) submissions.

The estimated burden of new Regulation 1.41(z) was calculated as

follows:

Number of respondents: 11.

Annual responses by each respondent: 26.

Total annual responses: 286.

Estimated average hours per response: 3.

Annual Reporting Burden: 858 hours.

The revised estimated burden of Regulations 1.41(b) and (c) (which

was 4,125 hours and 825 hours, respectively) is:

Regulation 1.41(b).

Number of respondents: 11.

Annual responses by each respondent: 2.

Total annual responses: 22.

Estimated average hours per response: 25.

Annual Reporting burden: 550 hours.

Regulation 1.41(c).

Number of respondents: 11.

Annual responses by each respondent: 2.

Total annual responses: 22.

Estimated average hours per response: 5.

Annual Reporting burden: 110.

The burden associated with the entire collection (3038-0022)

including this proposed rule is as follows:

Number of respondents: 15,893.

Number of responses per year: 434,052.

Estimated average hours per response: 1.8095.

Annual Reporting Burden: 785,443 hours.

This annual reporting burden of 785,443 hours represents a

reduction of 3,432 hours as a result of proposed new Regulation

1.41(z).

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

Information and Regulatory Affairs, OMB, Room 10235, New Executive

Office Building, Washington, DC 20503; Attention: Desk Officer for the

Commodity Futures Trading Commission.

The Commission considers comments by the public on this proposed

collection of information in--

Evaluating whether the proposed collection of information

is necessary for the proper performance of the functions of the

Commission, including whether the information will have a practical

use;

Evaluating the accuracy of the Commission's estimate of

the burden of the proposed collection of information, including the

validity of the methodology and assumptions used;

Enhancing the quality, usefulness, and clarity of the

information to be collected; and

Minimizing the burden of collection of 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.

OMB is required to make a decision concerning the collection of

information contained in these proposed regulations between 30 and 60

days after publication of this document in the Federal Register.

Therefore, a comment to OMB is best assured of having its full effect

if OMB receives it within 30 days of publication. This does not affect

the deadline for the public to comment to the Commission on the

proposed regulations.

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.

List of Subjects in 17 CFR Part 1

Brokers, Commodity exchanges, Commodity futures, Contract markets,

Reporting and recordkeeping requirements, Rule review procedures.

In consideration of the foregoing, and pursuant to the authority

contained in the Commodity Exchange Act and, in particular, sections 4,

4c, 5, 5a, 6 and 8a thereof, 7 U.S.C. 6, 6c, 7, 7a, 8, and 12a, the

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

Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT 1

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

Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,

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

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

2. Section 1.41 is amended by adding a paragraph (z) to read as

follows:

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

Commission; exemption of certain rules.

* * * * *

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(z) Exemption from the rule review procedure requirements of

Section 5a(a)(12) of the Act and related regulations. (1)

Notwithstanding the rule filing requirements of Section 5a(a)(12) of

the Act and related Commission regulations, a contract market may place

a rule into effect without prior Commission review or approval provided

that:

(i) The contract market has filed a submission for the rule, and

the Commission has received the submission at its Washington, D.C.

headquarters and at the regional office having jurisdiction over the

contract market by close of business on the business day preceding

implementation of the rule;

(ii) The contract market is designated in, or clears, at least one

commodity contract, under Sections 4c, 5, 5a(a) and 6 of the Act, which

is not dormant within the meaning of Sec. 5.2 of part 5 of the

Commission's regulations; and

(iii) The rule submission includes:

(A) The text of the rule (in the case of a rule amendment, brackets

must indicate words deleted and underscoring must indicate words

added);

(B) A brief explanation of the rule;

(C) A description of any substantive opposing views expressed by

members of the contract market or others with respect to the rule; and

(D) A certification by the contract market that the rule neither

violates nor is inconsistent with any provision of the Act or of the

regulations thereunder.

(2) A transaction effected subject to a rule implemented under this

paragraph shall not be void or voidable as a result of:

(i) A violation by the contract market of the provisions of this

section; or

(ii) The initiation, conduct or disposition of any Commission

proceeding to disapprove the rule or require the contract market to

revise the rule.

(3) This paragraph does not exempt contract markets from any

provision of the Act or the Commission's regulations, except for the

rule review requirements of Section 5a(a)(12) of the Act and related

Commission regulations.

Issued in Washington, DC on November 17, 1999, by the

Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 99-30512 Filed 11-24-99; 8:45 am]

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