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Exempt Markets

  • Transactions by eligible contract participants in a certain narrow list of selected commodities may be conducted on an exempt board of trade (EBOT) and be exempt from most CFTC regulation if the transactions meet the conditions for the exemption found in Section 5d of the Commodity Exchange Act (CEA), 7 USC 7a-3. Part 36.2 of the CFTC’s regulations contains further details on compliance with CEA Section 5d.

    All Exempt Boards of Trade

    Requirement to Operate an Exempt Board of Trade


    Products Eligible for Trading on an Exempt Board of Trade

    The commodities eligible to be traded on an EBOT are those based on underlying commodities that have:

    • a nearly inexhaustible deliverable supply;
    • a deliverable supply that is sufficiently large, and a cash market sufficiently liquid, to render any contract traded on the commodity highly unlikely to be susceptible to the threat of manipulation; or
    • no cash market.

    CFTC Regulation 36.2(a)(iii)(2)(i) provides that those commodities defined as "excluded commodities" in Section 1a(13) of the CEA, 7 USC 1a(13), other than a security, meet the foregoing eligibility requirements.

    Section 1a(13) defines an "excluded commodity" to mean among other things an interest rate, exchange rate, currency, credit risk or measure, debt instrument, measure of inflation, or other macroeconomic index or measure. The term “security” for purposes of this provision also includes any group or index thereof or any interest in, or instrument based on the value of, any security or group or index of securities.

    In addition to the excluded commodities in Section 1a(13) of the CEA, other commodities may be eligible for trading on an exempt board of trade pursuant to a Commission determination by rule, regulation, or order.

    Participants Eligible to Trade on an Exempt Board of Trade
    A board of trade electing to operate as an EBOT must limit trading to "eligible contract participants" as defined in Section 1a(12) of the CEA, 7 USC 1a(12).

    Clearing of Products Traded on an Exempt Board of Trade
    There is no requirement that products traded on an EBOT be cleared. However, if cleared, and if the clearing organization clearing the contracts meets the definition of a multilateral clearing organization set forth in Section 408(1) of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), and the contracts meet the definition of an Over-the-Counter Derivative Instrument in FDICIA Section 408(2), the clearing organization would be required to qualify as one of the entities set forth in FDICIA Section 409, one of which is a DCO.

    Notification Requirement


    Entities electing to operate as an EBOT must file a notification with the CFTC either via mail to its Washington, DC headquarters office or electronically via email to secretary@cftc.gov.

    The notification shall include:

      1. The label "Notification of Operation as an Exempt Board of Trade";
      2. The name and address of the exempt board of trade; and
      3. The name and telephone number of a contact person.

    An entity notifying the CFTC that it is operating as EBOT may not represent that it is registered with, designated, recognized, licensed, or approved by the Commission.

    Election to Operate an Exempt Board of Trade by a Regulated Entity
    A board of trade that has been designated by the CFTC as a contract market or registered as a derivatives transaction execution facility may operate an exempt board of trade by establishing a separate subsidiary or other legal entity.

    Operating Requirements for Exempt Boards of Trade


    Price Dissemination

    CFTC Regulation 36.2(c)(2) provides that an EBOT performs a significant price discovery function for transactions in an underlying cash market when:

    • cash market bids, offers, or transactions are directly based on, or quoted at a differential to, the prices generated on the EBOT on a more than occasional basis; or
    • the EBOT prices are routinely disseminated in a widely distributed industry publication and are routinely consulted by industry participants in pricing cash market transactions.

    An EBOT should notify the Commission if it has reason to believe that:

      1. Cash market bids, offers, or transactions are directly based on, or quoted at a differential to, the prices generated on the EBOT on a more than occasional basis;

      2. The EBOT’s prices are routinely disseminated in a widely distributed industry publication and are routinely consulted by industry participants in pricing cash market transactions; or

      3. The EBOT holds itself out to the public as performing a price discovery function for the underlying cash market.

    Following receipt of a notice that a market performs a significant price discovery function, or on its own initiative, the Commission may notify an EBOT that it appears to meet the criteria for performing a significant price discovery function. After providing the EBOT with the opportunity for a hearing through the submission of written data, views, and arguments, the Commission would then issue an order containing its determination whether the EBOT performs a significant price discovery function as described above.

    An EBOT that is determined to perform a significant price discovery function is required to disseminate publicly certain information on a daily basis. The required information for transactions on a price discovery market executed in reliance on the exemption includes:

      1. Contract terms and conditions, or a product description, and trading conventions, mechanisms, and practices;

      2. Trading volume by commodity and, if available, open interest; and

      3. The opening and closing prices or price ranges, the daily high and low prices, a volume-weighted average price representative of trading on the facility, or such other daily price information as proposed by the EBOT and approved by the Commission.

    The EBOT must make such information readily available to the news media and the general public, without charge, no later than the business day following the day to which the information pertains.

    Annual Certification


    CFTC Regulation 36.2(c)(3) requires that EBOTs continuing to operate in reliance of the exemption found in Section 5d of the CEA must file an annual certification with the Commission no later than the end of each calendar year. The notice must include a statement that the EBOT continues to operate under the exemption found in Section 5d of the CEA and a certification or correction to the information contained in the previous Notification of Operation as an Exempt Board of Trade (CFTC Form 5: Exempt Board of Trade Annual Certification).