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Exempt Markets

  • Agreements, contracts, and transactions in exempt commodities that are traded on a principal-to-principal basis on electronic trading facilities between eligible commercial entities may be traded on an exempt commercial market (ECM) and be exempt from most CFTC regulation if the market satisfies the conditions for the exemption found in Sections 2(h)(3)-(5) of the Commodity Exchange Act (CEA), 7 USC 2(h)(3)-(5), including a requirement that the exempt commercial market notify the CFTC. CFTC Regulation 36.3, 17 CFR 36.3, contains further details on compliance with CEA Sections 2(h)(3)-(5).

    A facility that elects to operate as an ECM must give notice to the Commission and comply with certain informational, recordkeeping, and other requirements.

    An ECM is prohibited from claiming that the facility is registered with, or recognized, designated, licensed, or approved by, the Commission.

    All Exempt Commercial Markets

    Participants Eligible to Trade on an Exempt Commercial Market


    A facility operating as an ECM must limit trading to persons that are eligible commercial entities (ECEs) at the time they enter a trade. Persons qualifying as ECEs include those entities enumerated in Section 1a(11) of the CEA, 7 USC 1a(11).

    The facility must require that each participant agree to comply with all applicable laws, and the facility must have a reasonable basis for believing that its participants are ECEs.

    The CFTC determined by order to expand the ECE definition to include professional brokers and traders when acting in a proprietary trading capacity that are either:

    1. CFTC-registered floor brokers or floor traders that either:

      a. are eligible contract participants (ECPs) as defined in Section 1a(12) of the CEA, 7 USC 1a(12); or

      b. have their trades on the ECM guaranteed by a clearing member that is a member of a CFTC-registered derivative clearing organization and is an ECP; or

    2. International Petroleum Exchange (IPE) brokers and traders that are either authorized by the U.K. Financial Services Authority (FSA) or registered with the IPE and that either:

      a. are ECPs as defined in Section 1a(12) of the CEA, 7 USC 1a(12); or

      b. have their trades on the ECM guaranteed by a clearing member that is a member of a FSA-recognized derivatives clearing organization and is an ECP.

    Products Eligible for Trading on an Exempt Commercial Market


    Only exempt commodities (any commodity other than an excluded commodity or an agricultural commodity), as defined by Sections 1a(13) and (14) of the CEA are eligible to be traded on an ECM in reliance on this exemption.

    Exempt commodities include, among other things, energy products and metals.

    Clearing of Products Traded on an Exempt Commercial Market
    There is no requirement that products traded on an ECM be cleared; if such trades are cleared, however, they must be cleared on a derivatives clearing organization registered with the Commission, or on another multilateral clearing organization meeting the requirements set out in Sections 408 and 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991.

    Notification Requirement


    Entities electing to operate as an ECM under Section 2(h)(3) of the CEA, 7 USC 2(h)(3), 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 Commercial Market";

    2. The name and address of the facility;

    3. The name and telephone number of a contact person to receive CFTC communications;

    4. The commodity categories that the facility intends to list or otherwise make available for trading on the facility in reliance on the exemption;

    5. The identity of any derivatives clearing organization (DCO) to which the facility transmits or intends to transmit transaction data for the purpose of facilitating the clearance and settlement of transactions conducted on the facility in reliance on the exemption;

    6. Representations that the facility requires each participant to agree to comply with all applicable laws and that the facility has a reasonable basis for believing that authorized participants are eligible commercial entities as defined in Section 1a(11) of the CEA, 7 USC 1a(11); and

    7. Certifications that:

      a. No executive officer or member of the governing board of, or any holder of a 10 percent or greater equity interest in, the facility is a person described in any of subparagraphs (A) through (H) of Section 8a(2) of the CEA, 7 USC 12a(2);

      b. The facility will comply with the conditions for the exemption under Section 2(h)(5) of the CEA, 7 USC 2(h)(5); and

      c. The facility will notify the Commission of any material change in the information previously provided by the facility to the Commission pursuant to Section 2(h)(5) of the CEA, 7 USC 2(h)(5).

    Operating Requirements for Exempt Commercial Markets


    Provision of Information
    Part 36 of the CFTC’s regulations requires a facility that operates in reliance on the exemption in Section 2(h)(3) of the CEA to, initially and on an ongoing basis, identify to the Commission those transactions with respect to which it intends, in good faith, to rely on the exemption and which averaged five trades per day or more over the most recent calendar quarter.

    For all such transactions, the ECM must submit to the Commission, electronically, on a weekly basis, a report for each business day, showing for each such transaction the following information:

    • the commodity;
    • the location;
    • the maturity date;
    • whether it is a financially settled or physically delivered instrument;
    • the date of execution;
    • the time of execution;
    • the price;
    • the quantity, and
    • such other information as the Commission may determine.

    For an option instrument, in addition to the foregoing information, the ECM must include:

    • the type of option (call or put); and
    • the strike price.

    As an alternative to filing the foregoing reports, the ECM may provide the Commission with electronic access to transactions conducted in reliance on the exemption and meeting the five trades per day threshold test, which access would allow the Commission to compile the information described in the previous sentence and create a permanent record thereof.

    Part 36 of the CFTC’s regulations requires an ECM to maintain a record of allegations or complaints it received concerning instances of suspected fraud or manipulation, and to provide the Commission with a copy of the record of each complaint that alleges facts that would constitute a violation of the CEA or Commission regulations no later than 30 calendar days after it is received. Complaints relating to an ongoing fraud or manipulation must be reported within three business days.

    Special Call
    The CFTC may make a special call to the ECM under Section 2(h)(5)(B)(iii) of the CEA, 7 USC 2(h)(5)(B)(iii). Any information required by the special call shall be prepared in the form and manner and in accordance with the CFTC's instructions as specified in the call.

    Price Dissemination
    CFTC Regulation 36.3(c)(2) provides that an ECM 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 ECM on a more than occasional basis; or
    • the ECM’s prices are routinely disseminated in a widely distributed industry publication and are routinely consulted by industry participants in pricing cash market transactions.

    An ECM shall notify the Commission when 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 ECM on a more than occasional basis;

      2. the ECM’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 market holds itself out to the public as performing a price discovery function for the underlying cash market.

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

    An ECM that is determined to perform a significant price discovery function shall disseminate publicly, on a daily basis, the following information with respect to transactions executed in reliance on the exemption:

      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 ECM and approved by the Commission.

    The ECM shall 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 36.3(b)(1)(v) requires an electronic trading facility that operates as an ECM in reliance of the exemption found in Section 2(h)(3) 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 whether the ECM continues to operate under the exemption found in Section 2(h)(3) of the CEA and a certification affirming the accuracy and/or updating the information contained in the previous Notification of Operation as an Exempt Commercial Market (CFTC Form 205: Exempt Commercial Market Annual Certification).