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e7-17100

  • [Federal Register: August 31, 2007 (Volume 72, Number 169)]

    [Rules and Regulations]

    [Page 50209-50211]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr31au07-4]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 21

    Special Calls

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rules.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'') has

    adopted amendments to Part 21 of its regulations relating to special

    calls for information. The amendments will: Add to the types of

    information specified in Sec. 21.02, which must be furnished upon

    special call, information regarding exchanges of futures for physical

    commodities or for derivatives positions, and information regarding

    delivery notices issued and stopped; and delegate to the Director of

    the Division of Market Oversight and the Director's delegatees, the

    ability to issue special calls pursuant to sections 21.01 and 21.02.

    EFFECTIVE DATE: August 31, 2007.

    FOR FURTHER INFORMATION CONTACT: Don Heitman, Senior Special Counsel

    (telephone 202-418-5041, e-mail dheitman@cftc.gov), Division of Market

    Oversight, Commodity Futures Trading Commission, Three Lafayette

    Center, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    The Commodity Exchange Act (``Act''), as amended by the Commodity

    Futures Modernization Act of 2000 (``CFMA''), Pub. L. No. 106-554, is

    intended, among other things, to ``deter and prevent price manipulation

    or any other disruptions to market integrity.'' \1\ To that end, the

    Commission, through its Division of Market Oversight (``Division''),

    conducts a comprehensive program of market surveillance. A centerpiece

    of this program is the large-trader reporting system, under which all

    large futures and option positions are reported to the Commission. Each

    day, for every active futures or option market, Division surveillance

    staff monitors the activities of large traders, key price

    relationships, and all relevant supply and demand factors in a

    continuous review for potential market problems. An essential element

    of the Commission's market surveillance program is the ability to make

    special calls for information from Commission registrants and other

    market participants.

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    \1\ Commodity Exchange Act Sec. 3(b), 7 U.S.C. Sec. 5(b).

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    A. Information To Be Furnished Upon Special Call

    Part 17 of the Commission's regulations sets forth the routine

    reports that futures commission merchants, members of contract markets

    and foreign brokers (collectively, ``reporting firms'') are required to

    submit to the Commission.\2\ These reports provide the information for

    the Commission's large trader reporting system. The Commission uses

    that information in its market surveillance program to detect and

    prevent market manipulation or other disruptions to market integrity in

    markets subject to Commission oversight.

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    \2\ The Commission has recently proposed amendments to its

    definition of the term, ``foreign broker.'' The amended definition

    would also be relocated, from its current location at Sec. 15.00(g)

    to Sec. 1.3(xx). See 72 FR 15637 (April 2, 2007). If such

    amendments were to be adopted, there would be no change in a foreign

    broker's obligations to comply with the Commission's large trader or

    special call regulations set forth in 17 CFR Parts 15-21.

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    By contrast, the purpose of the Commission's special call authority

    in Part 21 of the Commission's regulations is to provide the Commission

    with relevant information that is not routinely supplied to the

    Commission pursuant to other parts of the

    [[Page 50210]]

    Commission's regulations such as Part 17. For example, the Commission

    may need to know about futures positions that are below the routine

    reporting levels specified in Part 15 of the Commission's regulations.

    Among possible reasons for such special needs for information may be a

    particular market situation that warrants unusually close Commission

    market surveillance, or when Commission staff is conducting an audit of

    reporting firms to ensure complete and accurate reporting.

    The amendments to Part 21 require reporting firms to retain and

    make available to the Commission, upon a special call, information

    similar to that which they are required to report to the Commission

    pursuant to Part 17 of the Commission's regulations. Specifically, the

    amendments add two additional categories of information to the types of

    information specified in Sec. 21.02, which must be furnished upon

    special call. The first additional category of information subject to

    special call under the amended rules includes information regarding

    futures contracts exchanged for physical commodities (``EFPs''), as

    well as futures contracts exchanged for other derivatives contracts,

    including exchanges of futures for options (``EFOs'') and exchanges of

    futures for swaps (``EFSs''). The second additional category of

    information includes the amount of futures contracts where actual

    delivery of the underlying commodity has been initiated (i.e., delivery

    notices have been issued or received).

    Section 21.02 applies to futures commission merchants (``FCMs''),

    introducing brokers (``IBs''), members of contract markets and foreign

    brokers. However, the first three of the foregoing categories are

    already subject to substantial reporting and recordkeeping requirements

    under Sec. 1.35 of the Commission's regulations, which, among other

    things, requires FCMs, IBs and contract market members to maintain, and

    produce on request, the records that are also the subject of these

    rules. Therefore, as a practical matter, the amended rules impose new

    requirements only on foreign brokers (who are not subject to Sec.

    1.35).

    Foreign brokers and other persons receiving a special call pursuant

    to Sec. 21.02 are required by that regulation to furnish the

    information requested. Since such persons cannot comply with the legal

    requirement to furnish information pursuant to a special call without

    maintaining records from which to generate the information requested,

    it follows that persons subject to special calls under Sec. 21.02 are

    required, by the Commission's regulations, to maintain such records.

    Therefore, such records--including both those previously listed in

    Sec. 21.02, and those that are added by this rule amendment--are

    subject to the five-year record retention requirements of Sec.

    1.31(a)(1) of the regulations, which provides in relevant part that:

    All books and records required to be kept by the Act or by these

    regulations shall be kept for a period of five years from the date

    thereof and shall be readily accessible during the first two years of

    the five-year period.

    B. Delegation of Authority

    The amendments adopted herein also delegate to the Director of the

    Division of Market Oversight, and the Director's delegatees, the power

    to issue special calls pursuant to sections 21.01 and 21.02. Consistent

    with other delegations of authority to Commission senior staff, the

    delegation of the Part 21 special call authority allows the Director to

    submit to the Commission for its consideration any matter that has been

    delegated pursuant to the new section. The amendment also preserves the

    Commission's ultimate authority over the special calls by providing

    that, ``nothing in this section shall be deemed to prohibit the

    Commission, at its election, from exercising the authority delegated *

    * * to the Director.''

    C. The Proposed Rules

    These amendments were published for comment at 72 FR 34417, June

    22, 2007, with a 30-day comment period. No comments were received in

    response to the notice of proposed rulemaking. Accordingly, the

    amendments have been adopted as proposed.

    II. Cost Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA,

    requires the Commission to consider the costs and benefits of its

    action before issuing a new regulation or order under the Act. By its

    terms, Sec. 15(a) does not require the Commission to quantify the

    costs and benefits of its action or to determine whether the benefits

    of the action outweigh its costs. Rather, Sec. 15(a) simply requires

    the Commission to ``consider the costs and benefits'' of the subject

    rule or order.

    Section 15(a) further specifies that the costs and benefits of the

    proposed rule or order shall be evaluated in light of five broad areas

    of market and public concern: (1) Protection of market participants and

    the public; (2) efficiency, competitiveness, and financial integrity of

    futures markets; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations. The Commission

    may, in its discretion, give greater weight to any one of the five

    enumerated areas of concern and may, in its discretion, determine that,

    notwithstanding its costs, a particular rule or order is necessary or

    appropriate to protect the public interest or to effectuate any of the

    provisions or to accomplish any of the purposes of the Act.

    The amendments supplement the Commission's rules regarding its

    market surveillance program. That program supports one of the

    Commission's most critical statutory responsibilities, deterring and

    preventing price manipulation or any other disruptions to market

    integrity. Effective surveillance activities are crucial not only to

    protecting market participants and the public from price manipulation,

    but also to: Promoting market efficiency, competitiveness and financial

    integrity; protecting the futures markets' price discovery function;

    and promoting sound risk management practices.

    In addition, the records that are subject to special call under

    these amendments are the type of basic transaction records that any

    foreign broker would create as a matter of sound business practices.

    Because these records would be created in any event, independently of

    any regulatory requirements, the rules impose no additional costs on

    foreign brokers in that area. There would be minimal costs associated

    with providing the records in answer to a special call, but such costs

    would be far outweighed by the benefits of protecting the markets and

    the public. Finally, with respect to the five-year record retention

    requirement that applies to these records, the cost of retaining the

    records will be minimal because Commission rules allow such records to

    be maintained electronically. Those minimal costs would, again, be far

    outweighed by the benefits of protecting the marketplace and the

    public.

    The Commission has considered the costs and benefits of the

    amendments to Part 21 regarding special calls in light of the above-

    noted specific areas of concern identified in section 15. The

    Commission believes that the amended rules impose the minimum

    requirements necessary to enable it to perform its oversight functions

    and to carry out its mandate to protect the public interest in markets

    that are free of fraud, abuse and manipulation.

    After considering these factors, the Commission has determined to

    adopt the rule amendments set forth below.

    In the notice of proposed rulemaking, the Commission specifically

    invited

    [[Page 50211]]

    public comment on its application of the criteria contained in the Act.

    Commenters were also invited to submit any quantifiable data that they

    might have concerning the costs and benefits of the proposed rules with

    their comment letter. As noted above, no comments were received.

    III. Related Matters

    A. Regulatory Flexibility Act

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

    requires federal agencies, in promulgating rules, to consider the

    impact of those rules on small entities. The amendment to Sec. 21.02

    applies to FCMs, IBs, members of contract markets and foreign brokers.

    However, as noted above, the first three of these categories are

    already subject to substantial reporting and recordkeeping requirements

    under Sec. 1.35 of the Commission's regulations. Among other things,

    that section requires FCMs, IBs and contract market members to

    maintain, and produce on request, the records that are also the subject

    of these rules. Therefore, as a practical matter, the rules impose new

    requirements only on foreign brokers (who are not subject to Sec.

    1.35).

    With respect to such foreign brokers, the Commission recently

    published proposed rules to exempt from registration certain foreign

    persons (including foreign brokers).\3\ In reviewing the applicability

    of the RFA to such foreign persons, the Commission noted that it has

    previously established certain definitions of ``small entities'' to be

    used in evaluating the impact of its regulations on such entities in

    accordance with the RFA.\4\ The Commission has previously determined

    that FCMs are not small entities for purposes of the RFA because each

    FCM has an underlying fiduciary relationship with its customers,

    regardless of the size of the FCM.\5\ The Commission notes that the

    foreign brokers affected by these amendments to the Commission's

    regulations would be required to be registered as FCMs if not for

    certain exemptions provided in Commission regulations. As such, they

    would maintain a fiduciary relationship with customers similar to the

    relationship maintained by each registered FCM. Therefore, in this

    context foreign brokers, like FCMs, are not appropriately categorized

    as small entities. Accordingly, the Acting Chairman, on behalf of the

    Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rules

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

    small entities.

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    \3\ 72 FR 15673 (April 2, 2007).

    \4\ 47 FR 18618, at 18621 (April 30, 1982).

    \5\ Id. at 18619.

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    B. Paperwork Reduction Act

    These rules contain information collection requirements. As

    required by the Paperwork Reduction Act of 1995 (``PRA''),\6\ the

    Commission submitted a copy of the rules to the Office of Management

    and Budget (``OMB'') for its review.

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    \6\ Pub. L. 104-13 (May 13, 1995).

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    The amended rules have been reviewed and approved by OMB pursuant

    to the PRA, under control number 3038-0009. An agency may not conduct

    or sponsor, and a person is not required to respond to, a collection of

    information unless it displays a valid control number. In the Notice of

    Proposed Rulemaking, the Commission estimated the paperwork burden that

    could be imposed by the amendments and solicited comments thereon.\7\

    No comments were received.

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    \7\ 72 FR 34417 (June 22, 2007).

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    Copies of the information collection submission to OMB are

    available from the Commission Clearance Officer, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581, (202) 418-5160.

    List of Subjects

    Commodity futures, Commodity Futures Trading Commission.

    0

    In consideration of the foregoing, and pursuant to the authority in the

    Commodity Exchange Act, the Commission hereby amends Part 21 of Title

    17 of the Code of Federal Regulations as follows:

    PART 21--SPECIAL CALLS

    0

    1. The authority section for Part 21 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,

    6n, 7, 7a, 12a, 19 and 21; 5 U.S.C. 552 and 552(b).

    0

    2. Section 21.02 is amended by removing the word, ``and,'' at the end

    of paragraph (f), by redesignating paragraph (g) as paragraph (i), and

    by adding new paragraphs (g) and (h).

    The additions read as follows:

    Sec. 21.02 Special calls for information on open contracts in

    accounts carried or introduced by futures commission merchants, members

    of contract markets, introducing brokers, and foreign brokers.

    * * * * *

    (g) The total number of futures contracts exchanged for commodities

    or for derivatives positions;

    (h) The total number of futures contracts against which delivery

    notices have been issued or received; and

    * * * * *

    0

    3. Section 21.04 is added to read as follows:

    Sec. 21.04 Delegation of authority to the Director of the Division of

    Market Oversight.

    The Commission hereby delegates, until the Commission orders

    otherwise, to the Director of the Division of Market Oversight, or to

    the Director's delegates, the authority set forth in section 21.01 of

    this Part to make special calls for information on controlled accounts

    from futures commission merchants and from introducing brokers and the

    authority set forth in section 21.02 of this Part to make special calls

    for information on open contracts in accounts carried or introduced by

    futures commission merchants, members of contract markets, introducing

    brokers, and foreign brokers. The Director may submit to the Commission

    for its consideration any matter that has been delegated pursuant to

    this section. Nothing in this section shall be deemed to prohibit the

    Commission, at its election, from exercising the authority delegated in

    this section to the Director.

    Issued in Washington, DC, on August 23, 2007, by the Commission.

    David Stawick,

    Secretary of the Commission.

    [FR Doc. E7-17100 Filed 8-30-07; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: August 31, 2007



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