Font Size: AAA // Print // Bookmark

e9-6044

  • FR Doc E9-6044[Federal Register: March 23, 2009 (Volume 74, Number 54)]

    [Rules and Regulations]

    [Page 12177-12203]

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

    [DOCID:fr23mr09-12]

    [[Page 12177]]

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

    Part II

    Commodity Futures Trading Commission

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

    17 CFR Parts 15, 16, 17 et al.

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

    Significant Price Discovery Contracts on Exempt Commercial Markets;

    Final Rule

    [[Page 12178]]

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

    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 15, 16, 17, 18, 19, 21, 36, 40

    RIN 3038-AC76

    Significant Price Discovery Contracts on Exempt Commercial

    Markets

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final Rules.

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

    SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') is promulgating final rules to implement those

    provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization

    Act'') \1\ relating to exempt commercial markets (``ECMs'') on which

    significant price discovery contracts (``SPDCs'') are traded or

    executed. In addition to promulgating regulations mandated by the

    Reauthorization Act, the Commission also is amending existing

    regulations applicable to registered entities in order to clarify that

    such regulations are now applicable to ECMs with SPDCs.

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

    \1\ Incorporated as Title XIII of the Food, Conservation and

    Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

    2008).

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

    DATES: Effective Date: April 22, 2009.

    FOR FURTHER INFORMATION CONTACT: Susan Nathan, Senior Special Counsel,

    Division of Market Oversight, Commodity Futures Trading Commission,

    Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

    Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Overview

    The Commodity Futures Modernization Act of 2000 (``CFMA'') amended

    the Commodity Exchange Act (``CEA'' or the ``Act'') \2\ to replace the

    Act's ``one-size-fits-all'' supervisory framework for futures trading

    with a multi-tiered approach to oversight of derivatives markets. The

    CFMA applies different levels of oversight to markets based primarily

    on the nature of the underlying commodity being traded, the

    participants who are trading, and the manner in which trading is

    conducted. In general, the more sophisticated the traders or commercial

    participants, or the less susceptible a commodity is to manipulation or

    other market or trading abuses, the less regulatory oversight is

    required under the CFMA. In addition to creating three new categories

    of trading facility,\3\ the CFMA created a number of exemptions and

    exclusions from regulation for certain swaps and other derivative

    products traded either bilaterally or on electronic trading facilities-

    including an exemption for transactions in exempt commodities traded on

    electronic trading facilities, also known as exempt commercial markets

    (``ECMs'').\4\

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

    \2\ 7 U.S.C. 1 et seq.

    \3\ Designated Contract Markets (``DCMs'') are open to all

    participants and may offer all types of commodities; Derivatives

    Transaction Execution Facilities (``DTEFs'') generally are open only

    to sophisticated participants and are limited as to the types of

    commodities that may be traded; and Exempt Boards of Trade

    (``EBOTs'') may trade only excluded commodities and are open only to

    eligible contract participants and are subject to no regulatory

    oversight, exempt from most provisions of the CEA and not registered

    with or designated by the CFTC.

    \4\ The CFMA established the ECM exemption in section 2(h)(3) of

    the CEA, 7 U.S.C. 2(h)(3).

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

    Since the adoption of the CFMA, ECMs have evolved such that some no

    longer are simple trading platforms with low trading volumes relative

    to DCMs. Also over time, these facilities began to offer ``look-alike''

    contracts that are linked to the settlement prices of their exchange-

    traded counterparts, and in at least one case these look-alike

    contracts began to garner significant volumes. More recently, several

    active ECMs began to offer the option of centralized clearing for their

    contracts--an option which became widely utilized by their customers to

    manage counterparty risk. This evolution, particularly the linkage of

    ECM contract settlement prices to DCM futures contract settlement

    prices, began to raise questions about whether ECM trading activity

    could impact trading on DCMs and whether the CFTC had adequate

    authority to address that impact and protect markets from manipulation

    and abuse.

    The Commission responded to these changing markets in a variety of

    ways. Its Office of the Chief Economist (``OCE'') conducted a study of

    the relationship between the natural gas contracts that trade on the

    New York Mercantile Exchange (``NYMEX''), a DCM, and the

    InterContinental Exchange (``ICE''), an ECM. Concurrently, the

    Commission's Division of Market Oversight issued a series of special

    calls \5\ for information related to ICE's cleared natural gas swap

    contracts that are cash-settled based on the settlement price of the

    NYMEX physical delivery natural gas contract. Following the OCE study

    and the special calls, the Commission held a public hearing in

    September 2007 to further explore a number of issues, including the

    adequacy of the CFMA's regulatory approach; the similarities and

    differences between ECMs and DCMs; the associated regulatory risks of

    each market category; the types of regulatory changes that might be

    appropriate to address identified risks; and the impact that regulatory

    or legislative changes might have on the U.S. futures industry and the

    global competitiveness of the U.S. financial industry. Based on

    information developed as a result of these efforts, the Commission

    published its October 2007 ``Report on the Oversight of Trading on

    Regulated Futures Exchanges and Exempt Commercial Markets'' (``ECM

    Report''). The ECM Report, which was provided to the Commission's

    Congressional oversight committees, recommended, among other things,

    that the CEA be amended to grant the CFTC additional authority over ECM

    contracts serving a significant price discovery function and that

    certain self-regulatory responsibilities be assigned to ECMs offering

    such contracts.

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

    \5\ Section 2(h)(5)(B)(iii) of the Act, 7 U.S.C.

    2(h)(5)(B)(iii), requires that an ECM relying on the exemption

    provided in section 2(h)(3) must, upon a special call by the

    Commission, provide such information related to its business as the

    Commission may determine appropriate to enforce the antifraud

    provisions of the Act, to evaluate a systemic market event, or to

    obtain information requested by a Federal financial regulatory

    authority in connection with its regulatory or supervisory

    responsibilities.

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

    The Reauthorization Act's provisions regarding ECMs were based

    largely on the Commission's recommendations for improving oversight of

    ECMs whose contracts perform a significant price discovery function.

    The legislation significantly expanded the CFTC's regulatory authority

    over ECMs by adding a new section 2(h)(7) to the CEA establishing

    criteria for the Commission to consider in determining whether a

    particular ECM contract performs a significant price discovery function

    and providing for greater regulation of SPDCs traded on ECMs. In

    addition to extending the CFTC's regulatory oversight to the trading of

    SPDCs, the Reauthorization Act requires ECMs to adopt position limit

    and accountability level provisions for SPDCs; authorizes the

    Commission to require the reporting of large trader positions in SPDCs;

    and establishes core principles governing ECMs with SPDCs. The core

    principles applicable to ECMs with SPDCs are derived from selected DCM

    core principles and designation criteria set forth in the CEA, and

    Congress intended that they be construed in a like manner.\6\

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

    \6\ Joint Explanatory Statement of the Committee of Conference,

    H.R. Rep. No. 110-627, 110 Cong., 2d Sess. at 985 (2008)

    (``Conference Committee Report''). The core principles and

    designation criteria for DCMs are contained in section 5 of the CEA,

    7 U.S.C. 7.

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

    [[Page 12179]]

    The legislation directed the Commission to issue rules implementing

    the provisions of new section 2(h)(7) and to include in such rules the

    conditions under which an ECM will have the responsibility to notify

    the Commission that an agreement, contract or transaction conducted in

    reliance on section 2(h)(3) of the Act may perform a significant price

    discovery function. The Reauthorization Act mandated that the

    ``significant price discovery standards'' rules be proposed not later

    than 180 days after the date of enactment of the Reauthorization Act,

    and that the Commission issue final rules not later than 270 days after

    the date of implementation of that Act.\7\

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

    \7\ Public Law 110-246, sec. 13204(b)(1).

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

    Consistent with Congress' directive, the Commission on December 12,

    2008 issued a notice of proposed rulemaking (``NPRM'' or ``proposing

    release'') to substantially amend rule 36.3 \8\ of the Commission's

    rules applicable to ECMs to implement the broadened regulatory

    authority conferred by section 2(h)(7) of the CEA over ECMs with SPDCs.

    In addition, the proposed rules implicated parts 16 through 21 (market,

    transaction and large trader reporting rules) and part 40 (provisions

    common to contract markets, derivatives transaction execution

    facilities and derivatives clearing organizations). In promulgating

    these final rules, the Commission recognizes that these are rapidly

    evolving markets. We are mindful that, as we carry out Congressional

    directives in the present context, we continue to maintain careful

    scrutiny of the marketplace with regard to new products and trading

    platforms in the future. As markets evolve, we acknowledge our

    obligation to continue to adapt our regulatory oversight to protect

    consumers and ensure the integrity of the core risk management and

    price discovery functions of our markets.

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

    \8\ Part 36 of the Commission's rules contains the provisions

    that apply to exempt markets regardless of whether the markets are a

    significant source for price discovery. Rule 36.3 imposes a number

    of requirements on ECMs, including required notification of intent

    to rely on the exemption in section 2(h)(3) of the Act; initial and

    ongoing information submission requirements; prohibited

    representations; required price discovery notification; and price

    dissemination requirements.

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

    B. The Proposed Rules

    1. Part 36: Exempt Markets--Rules Applicable to ECMs

    The Commission proposed to amend rule 36.3(b) to: (1) Specify the

    information submission requirements, both initially and on an ongoing

    basis, for all ECMs and also for ECMs with respect to agreements,

    contracts or transactions that have not been determined to perform a

    significant price discovery function; and (2) to enumerate separately

    the enhanced information submission obligations for ECMs with SPDCs.

    Consistent with the Reauthorization Act's directive that the

    Commission's rulemaking address specific statutory criteria for

    identifying a SPDC and the conditions under which an ECM will be

    responsible for notifying the Commission of a possible SPDC, proposed

    rule 36.3(c) addressed (1) The criteria on which the Commission will

    rely in making a determination that an agreement, contract or

    transaction performs a significant price discovery function; (2) the

    factors that will trigger an ECM's obligation to notify the Commission

    of a possible SPDC; (3) the procedures the Commission will follow in

    reaching its determination whether a contract is a SPDC; and (4) the

    procedures, standards and timetables by which an ECM with a SPDC must

    demonstrate compliance with the core principles. Because the criteria

    mandated by Congress for determining the existence of a SPDC do not

    lend themselves to bright-line rules or formulas, proposed Appendix A

    to Part 36 explains how the Commission anticipates applying the

    criteria, on a case-by-case basis, to the facts and circumstances under

    consideration.

    Consistent with the Reauthorization Act, the CFTC's proposed rules

    required ECMs with SPDCs to establish a self-regulatory regime with

    respect to those contracts. Those responsibilities generally are set

    forth in nine core principles, largely derived from counterpart

    provisions for DCMs, including core principles that require the ECM to

    implement an acceptable trade monitoring program; to develop an audit

    trail in order to detect and deter market abuses; to adopt position

    limitations or position accountability levels for speculators in SPDCs;

    to develop and implement procedures for the exercise of emergency

    authority; to make public daily trading information; to develop a

    program to monitor compliance with the ECM's rules; to establish rules

    to minimize conflicts of interest in the decision-making process of the

    ECM; and to avoid taking any actions or adopting any rules that result

    in any unreasonable restraints of trade or impose any material

    anticompetitive burden on trading on the ECM. Proposed Appendix B to

    Part 36 offers guidance and non-exclusive safe harbors for compliance

    with the core principles. In proposing this guidance, the Commission

    made every effort to construe the ECM core principles in a like manner

    as it construes the DCM core principles.

    Parts 15-21: Market, Transaction and Large Trader Reporting Rules

    Collectively, the Commission's market, transaction, and large

    trader reporting rules (``reporting rules'') effectuate the

    Commission's market and financial surveillance programs. The market

    surveillance program analyzes market data to detect and prevent market

    manipulation and disruptions and to enforce speculative position

    limits. The financial surveillance program uses market data to measure

    the financial and systemic risks that large contract positions may pose

    to Commission registrants and clearing organizations. The

    Reauthorization Act authorized the Commission to establish a

    comprehensive transaction and position reporting system for SPDCs when

    it defined ECMs with SPDCs as registered entities and made certain

    provisions of the Act directly applicable to SPDCs.\9\ In addition to

    proposing technical and conforming amendments to parts 15 through 21 of

    its rules, the Commission sought in the proposed rules to extend to

    SPDCs the reporting rules that currently apply to DCMs and DTEFs by

    defining clearing member and clearing organization and amending the

    definition of reporting market in Commission rule 15.00 to apply to

    positions in, and the trading and clearing of, SPDCs.\10\

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

    \9\ Specifically, section 4a of the CEA permits the Commission

    to set, approve exchange-set, and enforce speculative position

    limits. 7 U.S.C. 6a. Section 4c(b) of the Act, 7 U.S.C. 6c(b), gives

    the Commission plenary authority to establish rules pursuant to

    which the terms and conditions on which commodity options

    transactions may be conducted and provides the basis for the

    Commission's authority to establish a large trader reporting system

    for transactions on ECMs that involve commodity options. Section 4g

    of the Act imposes reporting and recordkeeping obligations on

    registered persons and requires them to file reports on positions

    executed on any board of trade and in any SPDC traded or executed on

    an ECM. 7 U.S.C. 6g. Finally, section 4i of the Act requires the

    filing of such reports as the Commission may require when positions

    made or obtained on DCMs, DTEFs or ECMs with respect to SPDCs equal

    or exceed Commission-set levels. 7 U.S.C. 6i.

    \10\ Consistent with ECM Core Principle IV's directive that ECMs

    take into account contracts that are treated by DCOs as fungible

    with a SPDC when establishing position limits or accountability

    levels for SPDCs, in this section the term SPDC will include any

    contracts that are fungible and cleared by DCOs together with SPDCs.

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

    Specifically, the NPRM proposed that ECMs be required to provide

    clearing member reports for SPDCs pursuant to rule16.00. Under proposed

    rule 16.01, ECMs, like DCMs, would be required to

    [[Page 12180]]

    submit to the Commission and publicly disseminate option deltas and

    aggregated trading data on a daily basis.\11\ ECM clearing members that

    clear SPDCs would, regardless of their registration status with the

    Commission or their status as domestic or foreign persons, be required

    to file reports for large SPDC positions when the positions meet or

    exceed the contract reporting levels of Commission rule 15.03(b). In

    addition, the NPRM proposed to require clearing members to identify the

    owners of reportable SPDC positions on Form 102.\12\ Under the proposed

    rules, SPDC traders likewise would be subject to the special call

    provisions of the Commission's part 18 rules for reportable positions.

    Furthermore, the Commission proposed that clearing members clearing

    SPDCs, SPDC traders, and ECMs listing SPDCs would each be subject to

    the special call provisions of the part 21 rules.\13\

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

    \11\ The NPRM also proposed to uniformly apply the public

    dissemination requirement of Commission rule 16.01(e) to DCMs,

    DTEFs, and ECMs with SPDCs.

    \12\ The Commission's Division of Market Oversight (``DMO'')

    increasingly has been charged with administering the procedural

    requirements of the reporting rules. Accordingly, the Commission

    proposed to shift the delegation of the Commission's authority to

    determine the format of reports and the manner of reporting under

    parts 15 to 21 of the Commission's rules from the Executive Director

    to the Director of DMO.

    \13\ Part 21 of the Commission's rules establishes the

    Commission's ability to request information on persons that exercise

    trading control over commodity futures and options accounts along

    with additional account-related information for positions that may

    or may not be reportable under Commission rule 15.03(b). The final

    rules amend paragraphs (i)(1) and (i)(2) of rule 21.02 to ensure

    that any special call to an intermediary for information that

    classifies a trader as commercial or noncommercial, and the

    positions of the trader as speculative, spread positions, or

    positions held to hedge commercial risks, can be made with respect

    to both commodity futures and commodity options contracts. 17 CFR

    21.02)(i).

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

    In order to communicate effectively with foreign clearing members

    and foreign traders and to properly administer the proposed special

    call provisions of parts 17, 18 and 21 of the Commission's rules, the

    Commission also proposed to amend the designation of agent provisions

    of rule 15.05 to require ECMs that list SPDCs to act as the agent of

    foreign clearing members and foreign traders for the purpose of

    accepting service or delivery of any communication, including special

    calls, issued by the Commission to a foreign clearing member or trader.

    The Commission also proposed new rule 16.02 to require all reporting

    markets, including ECMs listing SPDCs, to report on a daily basis trade

    data and related order information for each transaction that is

    executed on the market,\14\ and to specify the information to be

    included in such reports.\15\ In this regard, while the Commission

    proposed amendments to its part 17 rules dealing with reportable

    positions, it did not extend those proposals to SPDC transactions that

    are not cleared for the simple reason that no clearing members are

    involved in clearing such transactions. For purposes of enforcing SPDC

    position limits and monitoring large SPDC positions, the Commission

    anticipated using proposed rule 16.02 to access transaction information

    and trader identification to enforce position limits and monitor large

    positions for market and financial surveillance purposes.

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

    \14\ For some time, DCMs consistently have provided transaction

    level data on request by the Commission pursuant to rule 38.5(a).

    Proposed rule 16.02 would make such submissions mandatory.

    \15\ Such reports would include time and sales data, reference

    files and other information as the Commission or its designee may

    request; upon request, this information could be accompanied by data

    that identifies or facilitates the identification of each trader for

    each transaction or order included in a submitted report. The

    Commission noted in the NPRM that recent acquisitions of technology

    have enabled the agency to more effectively integrate trade data and

    related orders into its trade practice, market, and financial

    surveillance programs. Accordingly, new rule 16.02 would make the

    submission of such information mandatory.

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

    Part 40: Provisions Common to Registered Entities

    The Reauthorization Act amended the definition of ``registered

    entity'' in section 1a(29) of the CEA to include ECMs with SPDCs.

    Because certain provisions in part 40 of the Commission's rules apply

    to registered entities--and, accordingly, to ECMs with SPDCs--the

    Commission proposed to amend part 40 to specify the provisions which

    would be applicable to all registered entities.\16\ The Commission

    emphasized in its NPRM that although not all provisions of part 40 will

    be applicable to ECMs with SPDCs, even sections that are not being

    amended in this rulemaking may be de facto amended by virtue of the

    fact that the term ``registered entity'' now includes ECMs with SPDCs.

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

    \16\ In particular, the proposed amendments to part 40 made

    rules 40.1, 40.2 and 40.5-40.8 and Appendix D specifically

    applicable to ECMs with SPDCs.

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

    C. Overview of Comments Received \17\

    General. The Commission received a total of eleven comments from a

    range of commenters, including a government agency,\18\ several trade

    associations,\19\ two ECMs,\20\ an interdealer broker in over-the-

    counter (``OTC'') energy markets,\21\ and a DCM.\22\ Most commenters

    expressed support for the proposed rules and several particularly

    commended the Commission's adherence to the letter and spirit of the

    Reauthorization Act. Several commenters offered specific

    recommendations for clarification or modification of certain

    provisions. These comments will be addressed more fully below. The

    Commission notes that some commenters requested that particular rules

    and core principle guidance proposed for ECMs be modified to mirror

    analogous provisions for DCMs. In this regard, the Commission reminds

    interested parties that the Reauthorization Act did not mandate

    identical rules for ECMs and DCMs, and the Commission has attempted to

    craft rules tailored to the special concerns raised by SPDCs. In that

    same vein, interested parties should bear in mind that Commission

    acceptable practices for all core principles do not denote requirements

    under the Act; rather, they offer safe harbors. Registered entities

    always have the option of crafting alternate means of complying with

    core principles than those set forth in the Commission's acceptable

    practices.

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

    \17\ In this NPRM, comment letters (``CL'') are referenced by

    the letter's author and/or file number and page. These letters are

    available through the Commission's Internet Web site: http://

    www.cftc.gov/lawandregulation/federalregister/

    federalregistercomments/2008/08-012.html.

    \18\ The Federal Energy Regulatory Commission (``FERC'') (CL 05)

    responded to the CFTC's request for comments but did not comment on

    the particulars of the proposed rules.

    \19\ American Feed Industry Association (``AFIA'') (CL 04)

    (representing animal feed interests); International Swaps and

    Derivatives Association, Inc. (``ISDA'') (CL 06) (representing

    participants in the privately negotiated derivatives industry);

    American Public Gas Association (``APGA'') (CL 07) (the national

    association for publicly-owned natural gas distribution systems);

    Society of Independent Gasoline Marketers of America (``SIGMA'') (CL

    08) (a national trade association representing independent chain

    retailers and marketers of motor fuel); Air Transport Association of

    America, Inc. (``ATA'') (CL 09) (airline trade association); Managed

    Funds Association (``MFA'') (CL 10) (representing the global

    alternative investment community).

    \20\ HoustonStreet Exchange (CL 01); InterContinental Exchange,

    Inc. (``ICE'') (CL 03).

    \21\ OTC Global Holdings, Inc. (CL 11) OTC Global Holdings has

    submitted notification to the Commission of its intent to operate a

    market pursuant to the exemption found in section 2(h)(3) of the

    Act.

    \22\ CME Group (CL 02).

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

    Core Principle IV. Several commenters expressed substantive

    concerns with respect to the Commission's proposed guidance and

    acceptable practices for compliance with Core Principle IV (Position

    Limitations or Accountability). Specifically, these commenters objected

    to the Commission's proposal that ECM market surveillance programs

    account

    [[Page 12181]]

    for uncleared transactions through volume accountability levels (based

    on a measure of net uncleared trading calculated by netting each

    trader's long and short uncleared transactions against the same

    counterparty). As more fully discussed below, the Commission believes

    the issues and recommendations raised by these commenters merit further

    attention and study. The Commission is mindful, however, that the time

    constraints imposed by the Reauthorization Act for issuing final rules

    implementing section 2(h)(7) do not permit the level of study necessary

    to properly address and resolve these issues.\23\ Moreover, even if the

    Commission was prepared immediately to adopt some or all of the

    suggested changes, they reflect a substantial departure from the

    proposed guidance that might warrant re-proposal under the

    Administrative Procedure Act.\24\

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

    \23\ Congress has directed that the Commission issue proposed

    rules implementing section 2(h)(7) of the CEA not later than 180

    days after the date of enactment of the Reauthorization Act (June

    18, 2008), and that the Commission issue final rules no later than

    270 days after the date of enactment. Public Law 110-246 at section

    13204.

    \24\ 5 U.S.C. 553.

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

    For these reasons, the Commission, in an abundance of caution, has

    determined not to make final its Core Principle IV proposed guidance

    and acceptable practices relating to uncleared trades pending a full

    and complete evaluation of the issues raised in these comments.

    Accordingly, upon publication of this notice of final rulemaking, the

    Commission intends to immediately examine these issues and to issue a

    notice of proposed rulemaking that specifically addresses appropriate

    guidance and acceptable practices for uncleared trades on ECMs.

    Like all core principles, Core Principle IV is statutory, and the

    Commission's decision not to provide particular guidance or safe

    harbors with respect to ECM uncleared trades at this time does not

    diminish an ECM's obligation to comply with the core principle itself.

    In that regard, the Commission reminds interested parties that section

    2(h)(7)(C)(ii) of the CEA gives an electronic trading facility explicit

    discretion to take into account differences between cleared and

    uncleared SPDCs in applying the position limits and accountability core

    principle.\25\ Likewise, the Commission will take these differences

    into account when reviewing an ECM's implementation of a core

    principle, as directed by section 2(h)(7)(D)(i).

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

    \25\ See also Conference Committee Report at 985-86.

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

    II. The Final Rules

    A. Part 36--Exempt Markets

    Part 36 of the Commission's rules governs both exempt boards of

    trade and ECMs, regardless of whether any individual contract traded

    thereon is a significant source for price discovery. As described

    infra, Rule 36.3 more particularly imposes a number of requirements and

    restrictions on ECMs, including notification of the ECM's intent to

    rely on the section 2(h)(3) exemption; initial and ongoing information

    submission requirements; prohibited representations; price discovery

    notification; and price dissemination requirements. The Commission is

    adopting as proposed the provisions of Rule 36.3(b) that separately

    specify the information submission requirements, both initially and on

    an ongoing basis, for all ECMs and for ECMs with respect to agreements,

    contracts or transactions that have not been determined to perform a

    significant price discovery function.

    The Commission is adopting as proposed the substance of that

    provision's enhanced reporting requirements for ECMs with SPDCs.

    However, the final rules will correct an error in numbering in rule

    36.3(b)(2). As proposed, rule 36.3(b)(2)(i) provided that ECMs, with

    respect to contracts that have not been determined to be SPDCs, must

    identify to the CFTC those contracts that averaged five trades per day

    or more over the most recent calendar quarter, and for each such

    contract, either: pursuant to subparagraph (A), submit a weekly report

    to the CFTC showing specific information; or, pursuant to subparagraph

    (B)(1), provide the Commission with electronic access sufficient to

    allow it to compile the same information. The rule then also required

    in subparagraph (B)(2) through (B)(4) that the ECM maintain and provide

    the CFTC with other records.\26\ These last three requirements were

    incorrectly numbered. Because they apply regardless of whether the ECM

    has elected the weekly reporting path of rule 36.3(b)(2)(i)(A) or to

    provide access to the CFTC pursuant to rule 36.3(b)(2)(i)(B), these

    requirements properly are numbered as 36.3(b)(2)(ii)-(iv) rather than

    as 36.3(b)(2)(i)(B)(2)-(4).\27\

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

    \26\ Subparagraph (B)(2) required that the ECM maintain a record

    of allegations and complaints; subparagraph (B)(3) direct the ECM to

    provide the CFTC with a copy of the record of each complaint

    relating to violations of the CEA; pursuant to subparagraph (B)(4)

    the ECM must provide the Commission with a quarterly list of

    transactions executed in reliance on the section 2(h)(3) exemption

    and indicate the terms and conditions, average daily trading volume,

    and most recent open interest figures for each such transaction.

    \27\ To complete this technical correction, proposed rule

    36.3(b)(2)(i)(B)(1) is properly numbered as 36.3(b)(2)(i)(B) in the

    final rules.

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

    Proposed rule 36.3(c) and Appendix A to Part 36 set forth the

    procedures and guidance, respectively, which the Commission will use in

    determining whether an ECM agreement, contract or transaction is a

    SPDC. The Commission is adopting, substantially as proposed, Appendix A

    and its general guidance as to how the Commission expects flexibly to

    apply the four criteria specified in section 2(h)(7) of the CEA for

    determining a SPDC--price linkage, arbitrage, material price reference

    and material liquidity. Although much of rule 36.3(c) and its SPDC-

    determination procedures are being adopted as proposed, some provisions

    have been modified in response to comments and some have been modified

    to reflect technical and clarifying changes.

    The Commission has made a technical correction to proposed new rule

    36.3(c)(1)(i). This rule is intended to track the statutory language

    added to the CEA by the Reauthorization Act as section 2(h)(7)(B)(i),

    which provides that in determining a SPDC, the Commission shall

    consider, as appropriate,

    PRICE LINKAGE--The extent to which the agreement, contract, or

    transaction uses or otherwise relies on a daily or final settlement

    price, or other major price parameter, of a contract or contracts

    listed for trading on or subject to the rules of a designated

    contract market or a derivatives transaction execution facility, or

    a significant price discovery contract traded on an electronic

    trading facility, to value a position, transfer or convert a

    position, cash or financially settle a position, or close out a

    position.

    As proposed, section 36.3(c)(1)(i) inadvertently dropped a portion

    of the statutory language. The final rules have been corrected to

    reflect the complete statutory provision.

    As proposed, rule 36.3(c)(3) provides that the Commission will

    issue an order determining whether a contract is a SPDC after

    consideration of all relevant information, including any ``data, views

    and arguments'' submitted to the Commission in response to Federal

    Register notification of the Commission's intent to so evaluate the

    contract. The proposed rule did not include a timeframe for issuance of

    such an order. CME Group suggests that the public interests underlying

    the regulatory oversight requirements for

    [[Page 12182]]

    SPDCs dictate that such determinations be issued within a reasonable

    timeframe following the close of the comment period for the Federal

    Register notification.\28\ The Commission is committed to the prompt

    and thorough processing of SPDC determinations and agrees, as CME Group

    suggests, that absent special circumstances, its order generally should

    issue within 60 days of the closing of the comment period. We are

    aware, however, that the term ``special circumstances'' may take its

    meaning from the particular context, including but not limited to the

    volume of work before the agency and the complexity of the submission

    under review, and we are reluctant to define those circumstances by

    rule. The Commission instead has modified rule 36.3(c)(3) to specify

    that the Commission shall promptly consider relevant information and

    shall issue an order explaining its determination within a reasonable

    period of time after the close of the comment period.\29\

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

    \28\ CME Group CL 02 at 7-8.

    \29\ The ATA urged the Commission to revise proposed rule

    36.3(c)(3) ``to provide 14 calendar days notice, not 30, of its

    intention to designate a contract as an SPDC.'' CL 09 at 5. The

    Commission wishes to clarify that rule 36.3(c)(3) establishes a 30-

    day notice and comment period following the Commission's notice of

    its intention to undertake a determination whether a particular

    contract is a SPDC. ATA further urges the Commission to specify that

    it will issue a final determination no later than 14 days from the

    end of the comment period. As discussed supra, while the Commission

    is committed to reviewing potential SPDCs as expeditiously as

    possible, in our view 14 days is inadequate to review and issue a

    determination on any SPDC and in most cases would preclude an

    adequate evaluation of complex matters.

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

    Proposed rule 36.3(c)(4) established the timetables for compliance

    with the core principles by ECMs that have been determined to have a

    SPDC, providing a 90-day grace period for an ECM's initial SPDC and a

    15-day grace period for subsequently-identified SPDCs traded on the

    same ECM. CME Group suggests that the passage of the Reauthorization

    Act put ECMs on notice that one or more of their contracts may become a

    SPDC at some future date; in its view, a 45-day grace period should be

    sufficient for all ECMs. ATA also views a 90-day grace period as

    excessive in light of ECMs' sophistication and suggests that ECMs can

    demonstrate compliance with the core principles in 60 days. With due

    regard for the market integrity interests associated with the core

    principles, we disagree that all ECMs will be able, in every

    circumstance, to demonstrate compliance with all the core principles

    within 45 or 60 days. While larger, established ECMs may be prepared to

    develop core principle compliance strategies in anticipation of a SPDC

    determination, the grace period must also permit ECMs that are less

    well-established sufficient time to develop and implement programs

    responsive to the core principles. Accordingly, the Commission has

    adopted as final the 90-day grace period for initial compliance with

    the core principles.

    Although ISDA found the 90-day time frame reasonable, noting that

    it allows market participants to make necessary changes to their

    trading system to ensure compliance with the core principles,\30\ it

    objected to the 15-day grace period for subsequently-identified SPDCs

    and urged the Commission to extend the timeframe in recognition of the

    additional obligations compliance imposes and the likely system changes

    required of ECMs.\31\ ICE noted that both the 90-day and 15-day grace

    periods generally allow sufficient time for an ECM to comply with the

    core principles, but warned that 15 calendar days may not be sufficient

    time for clearing firms that outsource large trader reporting to meet

    the reporting requirements. The Commission has considered these

    suggestions and believes that 30 calendar days should be sufficient to

    ensure that clearing firms can meet the reporting requirements and

    avoid market disruptions. Rule 36.3(c)(4) has been modified accordingly

    to grant a 30-day period for ECMs to come into core principle

    compliance for their subsequent SPDCs. In addition to this change, the

    Commission has determined to clarify rule 36.3(c)(4) by changing the

    second sentence of this provision \32\ to read ``* * * one of the

    electronic trading facility's agreements, contracts or transactions

    performs a significant price discovery function* * *''

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

    \30\ ISDA CL 06 at 3.

    \31\ Id. ISDA's comment did not recommend a specific time

    period.

    \32\ As proposed, the relevant phrase reads as follows: ``* * *

    the electronic trading facility's agreement, contract or transaction

    performs a significant price discovery function* * *'' See 73 FR

    75888 at 75911.

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

    In order to clarify its intent and eliminate a redundancy in

    paragraph (B)(4) of Appendix A, the Commission is amending Appendix A

    to part 36 as follows: Paragraph (B)(4) is deleted in its entirety as

    repetitive of paragraph (B)(3). In paragraph (B)(3), the language

    beginning with ``In combination with this volume level'' will become

    new paragraph (B)(4).

    B. Substantive Compliance With Core Principle IV: Guidance and

    Acceptable Practices

    Although comments addressing the nine ECM SPDC core principles

    generally expressed satisfaction with the Commission's proposed

    guidance and acceptable practices, the Commission's guidance for

    substantive compliance with Core Principle IV--particularly with

    respect to speculative position limits and the treatment of uncleared

    contracts--was a cause for concern among several commenters. Their

    comments are summarized below.

    1. The Commission's authority with respect to uncleared trades. In

    its comment letter, ISDA questioned the Commission's authority under

    the Reauthorization Act to address limits for uncleared SPDC

    transactions in its Core Principle IV acceptable practices.\33\ In

    support, ISDA cites Core Principle IV's direction that ECMs take into

    account positions in other ``agreements, contracts, and transactions

    that are treated by a derivatives clearing organization, whether

    registered or not registered, as fungible'' with a SPDC when

    determining appropriate position limitations or accountability for the

    SPDC.\34\ The Commission believes that Congress did not so limit the

    Commission's authority with respect to uncleared SPDC transactions; on

    the contrary, both the statutory language and the legislative history

    make plain that Congress intended for new CEA section 2(h)(7) to apply

    to all SPDCs, whether cleared or uncleared. The Conference Committee

    report emphasizes that the legislation gives electronic trading

    facilities ``the explicit discretion to take into account differences

    between cleared and uncleared SPDCs in applying the position limits or

    accountability core principle.'' \35\ And CEA section 2(h)(7)(D)

    directs the Commission to ``take into consideration the differences''

    between cleared and uncleared trades in reviewing an ECM's

    implementation of the core principles. Under principles of statutory

    construction, Congress must be presumed to have said what it meant.\36\

    The Commission believes that the ECM SPDC Core Principle IV clause

    cited by ISDA in support of its argument stands for a different

    proposition altogether. Specifically, the clause pertains to

    [[Page 12183]]

    transactions in ``other agreements, contracts and transactions.''

    Accordingly, Congress directed ECMs to include certain non-SPDC

    transactions when applying position limitations and/or accountability

    levels to a SPDC. So, for example, if another non-SPDC ECM contract or

    even a contract executed off of a trading facility pursuant to CEA

    Section 2(h)(1) is fungible and cleared together with a SPDC, the

    subject ECM should take those non-SPDC positions ``into account'' when

    administering the SPDC's position limit or accountability regime.

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

    \33\ ISDA CL 06 at 2.

    \34\ Id.

    \35\ Conference Committee Report at 985-86; Public Law 110-246

    at 13201.

    \36\ Where the plain language of a statute is clear, courts

    generally will presume that Congress meant precisely what it said

    absent a showing that ``as a matter of historical fact, Congress did

    not mean what it appears to have said, or that, as a matter of logic

    and statutory structure, it almost surely could not have meant it.''

    Engine Mfrs. Ass'n v. EPA, 88 F.3d 1075, 1089 (D.C. Cir. 1996),

    quoted in National Public Radio, Inc. et al. v. FCC, 254 F.3d 226,

    230 (D.C. Cir. 2001).

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

    2. Grace period for open positions. As proposed, the acceptable

    practices for Core Principle IV permitted a grace period of 90 calendar

    days from the ECM's implementation of speculative position limit rules

    for traders to comply with those rules unless a hedge exemption is

    granted by the ECM. MFA has recommended that the Commission, rather

    than creating a new grace period applicable only to SPDCs, should rely

    on the existing standards of section 4a(b)(2) of the CEA\37\ and the

    standards applied to exchange-set speculative position limits under

    rule 150.5(f).\38\ The Commission believes that this recommendation is

    premised on a misunderstanding of the statutory and regulatory

    structures governing exchange-set speculative position limits. As MFA

    notes, section 4a(b)(2) applies to Commission-set speculation limits,

    not exchange-set limits.\39\

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

    \37\ 7 U.S.C. 6a(b)(2).

    \38\ MFA CL 10 at 6.

    \39\ Id.

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

    Furthermore, Rule 150.5(f) no longer has direct application to DCM-

    set position limits. The statutory authority governing DCM-set limits

    is found in CEA section 5(d)(5)-- DCM Core Principle 5.\40\ That core

    principle does not contain any aspect of the exemptive language found

    in either CEA section 4a or Rule 150.5(f). Moreover, it should be noted

    that the part 38 rules explicitly exempt agreements, contracts or

    transactions traded on a DCM from all Commission rules other than those

    specifically referenced in Rule 38.2. That provision did not retain

    Rule 150.5(f).\41\ Further, although the acceptable practices for Core

    Principle 5 (which are found in Appendix B to part 38) contain many of

    rule 150.5's provisions, they do not specify the rule 150.5(f) good

    faith exemption. Accordingly, the part 150 rules essentially constitute

    guidance for DCMs administering position limit regimes, Commission

    staff in overseeing such regimes has not required that position limits

    include an exemption for positions acquired in good faith.

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

    \40\ ``(5) Position Limitations or Accountability.--To reduce

    the potential threat of market manipulation or congestion,

    especially during trading in the delivery month, the board of trade

    shall adopt position limitations or position accountability for

    speculators, where necessary and appropriate.'' 7 U.S.C. 7(d)(5).

    \41\ 17 CFR 38.2.

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

    The Reauthorization Act established Core Principle IV as part of

    new CEA section 2(h)(7) to require the establishment of position

    limitations or accountability levels for SPDCs listed on ECMs. As with

    DCM Core Principle 5, ECM Core Principle IV does not contain the

    exemptive provision for positions established in good faith--nor do its

    acceptable practices rely for authority on section 4a of the CEA. For

    this reason, the Commission was not obliged to adopt such a good faith

    exemption.\42\ In the Commission's view, the primary goal for an ECM

    with a SPDC should be to ensure that large positions not be disruptive

    to the market. Indeed, a sudden decrease in a position to meet an ECM's

    newly-adopted position limit could itself be disruptive. The

    Commission's proposed acceptable practice was crafted to permit market

    participants to make any necessary adjustments to their positions in an

    orderly fashion, thus reducing market disruptions and avoiding, as much

    as possible, an unfair impact on position holders. For the reasons

    discussed in these sections, the Commission has determined to adopt the

    acceptable practice as proposed (except with respect to uncleared

    trades, as discussed infra), and reminds interested parties that

    acceptable practices serve as a safe harbor and do not represent the

    only means of compliance with the core principles.

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

    \42\ In part for the reasons discussed in this section, the

    Commission expects in the near future to revisit and clarify Core

    Principle 5 for DCMs.

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

    3. Position Accountability

    MFA also encourages the Commission to bring its Core Principle IV

    acceptable practices with respect to position accountability into

    closer alignment with its acceptable practices for DCMs. Although

    perfect symmetry between the DCM and ECM core principles and acceptable

    practices was not mandated by the Reauthorization Act and is not a

    primary goal of this rulemaking, it is the Commission's view that its

    expectations for DCMs and ECMs in this regard are not significantly

    different. MFA argues that ``DCMs are not mandated to conduct an

    inquiry in response to every breach of a position accountability level.

    Rather, DCMs have the discretion to determine whether to open an

    inquiry in particular cases.'' \43\ So, too, do ECMs under the Core

    Principle IV acceptable practices.\44\ Unlike position limits,

    accountability levels are not limitations on position sizes, as traders

    are permitted to take positions in excess of the established

    accountability levels. ECMs are obliged to monitor trading in their

    markets and to discourage manipulative activity in the spot month as

    well as in back months; the purpose of accountability levels is to

    provide the ECM with additional information and authority to address

    positions that threaten to create disorderly trading or market abuses.

    For positions that exceed a position accountability level, appropriate

    action by the ECM may be dictated by a number of factors, including

    characteristics of the market and the size of the position relative to

    the market. For smaller positions that exceed the accountability level,

    the ECM may find that placing such positions on a ``close watch'' is

    appropriate. For larger positions, depending on the potential threat to

    the market, it may be appropriate for the ECM to request that the

    trader not further increase (or even reduce) a position. Market

    liquidity also should be considered when monitoring traders with

    positions above the accountability level; an ECM may find it

    appropriate to more aggressively limit positions in markets that are

    relatively illiquid. In any event, ECMs are reminded that the

    acceptable practices serve as safe harbors; alternative methods to

    monitor trading may be sufficient.

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

    \43\ MFA CL 10 at 4.

    \44\ MFA points to the directive in the Core Principle IV

    acceptable practices that an ECM ``should initiate'' an inquiry once

    a trader exceeds a position accountability level as an indication

    that action is mandated in every case. The Commission does not view

    this language as a mandate; as noted above, acceptable practices

    serve as safe harbors and do not represent the only means of

    compliance with the core principles.

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

    Also in connection with the ECM's monitoring of positions, the

    Commission has considered MFA's concern that the term ``investigation''

    may connote a level of wrongdoing which, in turn, might inadvertently

    render a commodity pool ineligible to receive investor funds\45\ or

    otherwise have an adverse effect on a trader's business. Although the

    Commission believes such a misimpression is unlikely, we have modified

    the acceptable practice to replace the word ``investigation'' with

    ``inquiry.''

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

    \45\ MFA CL 10 at 4.

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

    With regard to establishing position accountability levels in non-

    spot months and all months combined, MFA questioned why ECMs are given

    specific guidance--that is, the ``10% of open

    [[Page 12184]]

    interest'' standard--while DCMs are free to determine their own

    methodology.\46\ Again, the Commission wishes to emphasize that its

    guidance for ECMs need not follow precisely the guidance it has

    offered--or not offered--for DCMs. The Commission believes it is sound

    practice for DCMs and ECMs to adopt non-spot month and all-months-

    combined position accountability levels or position limits and believes

    the specific guidance offered in this acceptable practice will be

    beneficial to ECMs wishing to take advantage of the safe harbor.

    Moreover, the Commission intends shortly to revisit DCM Core Principle

    5 with a view to providing more specific guidance with respect to non-

    spot month and all-months-combined position accountability levels.

    Finally, the Commission wishes to remind interested parties that the

    ``10% of open interest'' standard for determining position

    accountability levels applies to unique SPDCs (i.e., cleared ECM

    contracts that are determined to be SPDCs based on material price

    reference grounds, rather than on the basis of economic equivalence

    \47\ with another contract through a price linkage or arbitrage

    relationship). The acceptable practices for non-unique, economically-

    equivalent SPDCs provide that the ECM may adopt the accountability

    levels adopted by the DCM for the underlying contract.\48\ As noted,

    the Commission expects to further consider the treatment of uncleared

    trades and anticipates proposing rule amendments as well as guidance

    and acceptable practices in the near future.

    Speculative Position Limits: Accountability Levels for Uncleared

    Trades.

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

    \46\ Id. at 4-5.

    \47\ With regard to ICE and ISDA's concern that economic

    equivalence is subjective (ICE CL 03 at 5; ISDA CL 06 at 2-3); the

    Commission believes the concept of economic equivalence is

    relatively straightforward. Essentially, the concept is designed to

    capture SPDCs that replicate or serve as a close substitute for a

    corresponding DCM, DTEF or second ECM SPDC contract. In this regard,

    any SPDC that is cash settled based on another contract's settlement

    price will be considered economically equivalent, assuming

    sufficient volume. In addition, SPDCs that can be used to arbitrage

    price discrepancies may be considered economically equivalent to DCM

    contracts. For arbitragable contracts to be considered economically

    equivalent, both the prices and the contract terms would have to be

    highly correlated. As part of its determination whether a particular

    contract is an SPDC, the Commission will indicate whether it

    considers the SPDC economically equivalent to another contract.

    \48\ ICE and ISDA warned that requiring an ECM to adopt a DCM's

    position limits for its economically-equivalent SPDCs may have

    anticompetitive implications for trading on an ECM (ICE CL 03 at 6;

    ISDA CL 06 at 3): a DCM could set an artificially low position limit

    for its own contract in order to squeeze out an ECM. The Commission

    does not believe this is a likely consequence of its acceptable

    practice. First, assuming that the DCM contract is the dominant

    market, setting the spot-month limit at an extraordinarily low level

    would limit trading in its own contract, which would be self-

    defeating. Secondly, the instant procedures are acceptable practices

    that provide a safe harbor; they are not rules or requirements, and

    they do not comprise all possible means of satisfying Core Principle

    IV. If an ECM believes that a DCM is engaging in anticompetitive

    behavior (which is itself the subject of a core principle for both

    ECMs and DCMs), it should notify the Commission and should propose

    alternative position limits and/or accountability levels that are

    reasonable and based on economic analysis.

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

    Both ISDA\49\ and ICE \50\ opined that requiring ECMs to adopt the

    same speculative position limits as an ``unaffiliated'' DCM would be

    anticompetitive since the DCM would have the authority to dictate the

    ECM's position limits even where an ECM is the dominant, more liquid

    market. CME Group and APGA suggest that the Commission should propose

    comprehensive, industry-wide speculative position limits that would

    apply to both cleared and uncleared transactions.\51\ Similarly, MFA

    suggested that SPDCs should be incorporated into the existing

    regulatory framework because a separate category for uncleared trades

    could impede a trader's ability to reflect the true net economic

    exposure of a position and could chill legitimate economic

    activity.\52\

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

    \49\ ISDA CL 06 at 3.

    \50\ ICE CL 03 at 5-6.

    \51\ CME Group CL 02 at 6; APGA CL 07 at 3-4.

    \52\ MFA CL 10 at 6. AFIA requests that as part of the final

    rule the Commission exercise its authority to remove the exemption

    for position limits that has been given to Index Speculator Funds.

    CL 04 at 2-3. The Commission appreciates AFIA's concern but notes

    that such an action is beyond the scope of the instant rulemaking.

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

    APGA supports the use of spot month speculative position limits as

    an effective tool for addressing contracts on commodities--such as

    natural gas--with constrained deliverable supplies.\53\ It urges,

    however, that the Commission modify its proposed guidance such that an

    ECM must account for positions that may be held on another registered

    entity in economically-related SPDCs in setting such limits. Without

    such a revision, APGA believes that traders will be able to amass a far

    larger speculative position in the spot month by dividing its position

    among several markets or market segments for SPDCs.\54\ Accordingly

    APGA urges that the volume accountability level for uncleared contracts

    should be included in calculating the size of a trader's position for

    speculative position limits purposes. APGA expresses similar concerns

    with respect to the Commission's proposal in the Core Principle IV

    guidance, and similarly suggests the establishment of separate

    accountability levels for cleared and uncleared trades and a separate

    volume accountability level in the spot month.\55\ CME Group agrees

    that the proposed guidance should be reconsidered, and pointed out that

    the disparate standards provided by the acceptable practices make it

    possible for a trader to maintain double the position permitted for an

    economically equivalent contract on a DCM. CME Group believes that

    there should be one position limit and one associated set of

    accountability levels for non-spot contracts that apply across all

    activities for a SPDC, including cleared and uncleared trades.\56\

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

    \53\ APGA CL 07 at 2-3. APGA also suggested that the Commission

    set federal speculative limits for exempt commodities and that such

    limits should be applied to a given trader's aggregate position in

    economically-equivalent contracts across all registered entities.

    While innovative and worthy of further consideration in the future,

    the Commission believes these recommendations are beyond the scope

    of the instant rulemaking.

    \54\ APGA CL 07 at 2-3.

    \55\ Id. at 5-6. APGA argues that the separate volume

    accountability category potentially would enable speculative traders

    to amass a larger position before prompting an inquiry by the ECM.

    More critically, where there is a separate volume accountability

    level in the spot-month, APGA stated that a trader can readily avoid

    a spot month speculative position limit by holding a combination of

    cleared and uncleared positions, even on the same market.

    \56\ CME Group CL 02 at 6.

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

    As noted above, these and other recommendations related to the

    proposed guidance and acceptable practices for Core Principle IV with

    respect to uncleared trades raise complex issues which, in the

    Commission's view, warrant further serious consideration before a

    decision can be made whether, and to what extent, they should be

    implemented. For this reason, the Commission has determined not to make

    final those aspects of the Core Principle IV guidance and acceptable

    practices relating to uncleared trades pending additional study of

    these comments and consultation with the commenters and others,

    culminating in a subsequent rulemaking proposing guidance and

    acceptable practices applicable to uncleared trades. As part of this

    process, and in the course of formulating that proposed guidance, the

    Commission will consider the issues raised in the comments received in

    connection with the instant rulemaking.

    C. Market, Transaction and Large Trader Reporting Rules

    Reporting Rules. With the three substantive exceptions noted below,

    the

    [[Page 12185]]

    Commission is promulgating the reporting rules as proposed.\57\ Five

    commenters addressed the proposed reporting rules. ATA expresses

    support for the extension of the reporting rules to SPDCs--

    specifically, ATA endorses the application of the reporting

    requirements to ECM clearing members that clear SPDCs, regardless of

    their registration status with the Commission or their status as

    foreign or domestic persons.\58\ ATA additionally expressed support for

    the use of transaction and trader identification data that would be

    collected under new rule 16.02 to monitor large SPDC positions. Four

    commenters expressed general concerns or recommended the adoption of

    additional or alternative amendments to the reporting rules.

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

    \57\ 17 CFR parts 15 through 21.

    \58\ ATA CL 09 at 8.

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

    CME Group, for example, observes that while the acceptable

    practices for Core Principle IV advise ECMs to establish an effective

    program for enforcement of SPDC position limits that should include a

    large trader reporting system to monitor and enforce daily compliance

    with position limit rules, Appendix B to Part 36 does not establish

    similar acceptable practices that tie large trader reporting

    requirements to the daily monitoring of volume accountability levels

    for uncleared SPDCs.\59\ As noted above, the Commission intends

    expeditiously to propose rules and acceptable practices that will focus

    on position limit and accountability rules for uncleared SPDCs. The

    Commission intends to address CME Group's concern at that time.

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

    \59\ CME Group CL 02 at 5.

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

    HoustonStreet, an ECM, opined that voice brokers must be subject to

    the same reporting requirements as ECMs to ensure a level playing field

    in the OTC energy markets and to prevent market participants from

    avoiding transparency and disclosure obligations.\60\ The Commission

    does not have authority under the CEA to directly extend the reporting

    rules to voice-brokered transactions which are not entered into in

    reliance on a section 2(h)(3) exemption and are not otherwise fungible

    with SPDCs for clearing purposes. Although the Commission does have the

    authority to require the reporting of all OTC and cash market positions

    (including voice-brokered transactions) under section 4i of the Act

    when traders' positions in contracts executed on or subject to the

    rules of a registered entity exceeds fixed thresholds, such an

    extension of the reporting rules is beyond the scope of this

    rulemaking.\61\

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

    \60\ HoustonStreet, CL 01 at 1.

    \61\ A routine trader reporting requirement, including the

    routine reporting of OTC positions, is not a current requirement for

    any contract traded on or subject to the rules of a DCM.

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

    ISDA comments that the reporting rules' references to clearing

    members ``carrying'' large positions may be inappropriate in the

    context of transactions that are executed on ECMs, which by definition

    are principal-to-principal markets that do not permit some forms of

    intermediation.\62\ With respect to ECMs, the Commission reiterates

    that the large trader reporting requirements of part 17 place the

    burden of routine position reporting on clearing members that clear

    positions for market participants or clear proprietary transactions.

    The term ``carry'' is used in the reporting rules to refer to and

    encompass both positions that are cleared for market positions and

    those that are cleared for the benefit of proprietary accounts. In

    either instance, the reporting rules view the clearing member to be

    carrying positions that, when in excess of the levels delineated in

    rule 15.03, would be reportable as part of a special account under part

    17 of the Commission's rules. The continued use of the term ``carry''

    in the reporting rules is consistent with the nature of ECM

    transactions. In coming to this determination, the Commission

    understands that clearing members that clear transactions for ECM

    market participants, although not executing SPDC or SPDC-fungible

    transactions on behalf of market participants, are in part providing

    clearing intermediation and taking on certain responsibilities that may

    be associated with executing brokers. In addition, the reporting rules

    generally need a working vocabulary that is flexible enough to cover

    transactions that are executed on disparate market structures and

    subject to different clearing methods. Because the reporting rules

    heretofore have not been applied to ECM transactions, the Commission

    will be mindful of the potential for ambiguities in the application of

    the rules to SPDCs and SPDC-fungible transactions, will monitor for the

    specific concerns raised by ISDA, and will implement appropriate

    amendments should they be required.

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

    \62\ ISDA CL 06 at 3-4.

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

    APGA raises a number of concerns and offered several

    recommendations. APGA noted that as proposed, the reporting rules would

    not routinely provide information on a SPDC trader's large uncleared

    positions and thus would leave a gap in the Commission's ability to

    collect necessary trader and market data. APGA initially notes that the

    transaction reporting requirements of new rule 16.02, which the

    Commission intends to use in part for market surveillance purposes, may

    not significantly improve the Commission's surveillance capability

    because of the possible inability to link the transaction-based

    information collected under the rule with a particular trader.\63\ The

    language of new rule 16.02 requires all reporting markets, including

    ECMs with SPDCs, to report trade data and related order information for

    each transaction executed on the market, and upon request to accompany

    such data with information that identifies or facilitates the

    identification of each trader for each reported transaction. Since rule

    16.02 only extends the identification requirement to markets that

    independently maintain such data, APGA is concerned that unless ECMs

    are explicitly required to maintain identifying information, the

    Commission will be unable to obtain the data it needs to construct an

    accurate picture of a trader's large positions in SPDCs.

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

    \63\ APGA CL 07 at 7-8.

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

    Section 2(h)(5)(B)(ii)(I) of the Act requires all ECMs to maintain

    current records that include the name and address of each participant

    that is authorized to enter into transactions on the facility in

    reliance on section 2(h)(3) of the Act. In addition, final rule

    36.3(b)(1) mandates that ECMs demonstrate that they require each

    authorized market participant to be an eligible commercial entity and

    that all contracts will be entered into solely on a principal-to-

    principal basis. The rule also requires that ECMs have in place a

    program to routinely monitor participants' compliance with these

    requirements. The Commission believes that the nature of the section

    2(h)(3) qualified exemption itself, along with the above-mentioned

    statutory and regulatory requirements, mandates that ECMs know the

    identity of each trader for each transaction effected by such trader on

    or subject to the rules of the electronic trading facility regardless

    of whether such transactions are subject to centralized clearing or

    settled bilaterally by the executing traders. New rule 16.02 applies to

    all reporting markets, including DCMs. DCMs do not, as a matter of

    routine practice, collect detailed trader identifying data.\64\

    [[Page 12186]]

    Accordingly, rule 16.02 has been drafted to take into consideration

    current DCM practice while permitting the Commission to collect

    detailed trader identification data--which ECMs are required to

    maintain--from ECMs that are reporting markets.

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

    \64\ Unlike SPDCs traded on ECMs, however, all contracts on DCMs

    are funneled through clearing members that are subject to the large

    trader reporting rules. Therefore, the Commission need not rely on

    new rule 16.02 to conduct DCM market surveillance.

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

    APGA also argues that even if the Commission did collect

    identifying data under rule 16.02 from ECMs that are reporting markets,

    it still would be unable to determine a particular trader's ability to

    impact market prices without routinely obtaining information with

    respect to uncleared contracts that are economically related to SPDCs

    but effectuated off of a registered entity. Accordingly, APGA urges the

    Commission to use its authority under section 4i of the Act to require

    that large traders routinely report such transactions.\65\

    Alternatively, APGA recommends that the Commission at a minimum adopt a

    formal policy of aggressively using its special call authority under

    rule 18.05 to request information with respect to such uncleared

    transactions. APGA describes this policy as one that could require

    staff to issue special calls for information regarding uncleared

    positions for all traders that hold positions that are below

    speculative position limits but which are large enough to be

    significant.\66\

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

    \65\ APGA CL 07 at 10.

    \66\ Id. at 9-10.

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

    As discussed above in connection with HoustonStreet's comment

    letter, the Commission does have the authority, under section 4i of the

    CEA and the special call provisions of part 18 of its rules, to require

    traders that hold reportable SPDC positions to report their OTC

    (cleared and uncleared) and cash market positions. An extension of

    routine reporting requirements to such positions is, however, beyond

    the scope of this rulemaking and at odds with a long-established large

    trader reporting system that places the initial burden of reporting on

    intermediaries that are typically regulated and well-versed in

    complying with routine reporting requirements. Any routine reporting

    requirement imposed on traders as a class would represent a substantial

    departure from the Commission's current reporting system and would

    necessitate careful study and consideration prior to a final

    determination.

    Lastly, APGA recommends that for the purpose of regulatory clarity

    the Commission's special call authority under rule 18.05 be amended to

    refer directly to traders that hold or control reportable futures or

    option SPDC positions on ECMs operating under sections 2(h)(3) through

    2(h)(5) of the Act.\67\ The language of rule 18.05 applies directly to

    traders with reportable positions. A reportable position, in turn, is

    defined in rule 15.00 to include commodity futures and options

    positions on reporting markets--including, with respect to a contract

    that the Commission determines to be a SPDC--that exceeds the reporting

    levels established by Commission rule 15.03. Accordingly, the

    Commission believes that the plain language of rule 18.05, as proposed,

    is directly applicable to traders that hold or control reportable

    futures or options SPDC positions on ECMs operating pursuant to

    sections 2(h)(3) through 2(h)(5) of the Act.

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

    \67\ Id.

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

    Changes to the Final Rules. For the purpose of regulatory clarity

    and to address generally the concerns raised by the commenters with

    respect to the scope of the reporting rules, the Commission is defining

    the terms futures and options contract solely for the purpose of the

    reporting rules as contracts executed on or subject to the rules of a

    reporting market, and all agreements, contracts and transactions that

    are treated by DCOs as fungible with such contracts.\68\ The new

    definition impacts all of the operative provisions of parts 15 through

    21 and reinforces and clarifies the applicability of the reporting

    rules, as proposed and adopted, to ECMs that list SPDCs, to SPDCs and

    to transactions that are treated as fungible with SPDCs by DCOs.

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

    \68\ As noted in text, the Commission is utilizing these

    definitions solely to clarify the scope of its reporting rules. It

    does not intend these definitions to have any bearing on determining

    the boundaries of futures and options transactions over which it has

    jurisdiction under the CEA.

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

    Rule 16.02 as adopted substitutes for the phrase ``for each

    transaction executed on the reporting market,'' the phrase ``for each

    futures or options contract.'' The Commission recognizes that certain

    transactions that are treated as fungible with SPDCs by DCOs may not

    clearly be executed on a reporting market, and this change is intended

    to address that point. In addition, final rule 15.05, which

    independently defines futures and options transactions, differs from

    the proposed rule in that it includes a conforming amendment to account

    for defining the terms futures and options contract in final rule

    15.00. Lastly, the final definition of reportable position in rule

    15.00 and final rule 19.00 differ from the proposed definitions in that

    they include nonsubstantive editorial amendments.

    III. Related Matters

    A. Cost Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the

    costs and benefits of its actions before issuing new regulations under

    the Act. Section 15(a) does not require the Commission to quantify the

    costs and benefits of new regulations or to determine whether the

    benefits of adopted rules outweigh their costs. Rather, section 15(a)

    requires the Commission to consider the costs and benefits of the

    subject rules. Section 15(a) further specifies that the costs and

    benefits of the rules 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

    the market for listed derivatives; (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 is

    necessary and appropriate to protect the public interest or to

    effectuate any of the provisions or to accomplish any of the purposes

    of the Act.

    The final rules implement the Reauthorization Act by establishing

    an enhanced level of oversight of ECMs and ECM market participants. As

    a result, in certain cases, it is more appropriate to attribute the

    compliance costs imposed by the proposed rules to requirements that

    directly arise from the provisions of the Reauthorization Act.

    Under the final rules, all DCMs, DTEFs (unless the Commission

    determines otherwise) and ECMs with SPDCs are required to provide daily

    transaction and related data reports to the Commission under rule

    16.02. The costs associated with the daily transaction and related data

    reporting requirements of final rule 16.02, however, are ameliorated by

    the fact that DCMs have voluntarily provided transactional data to the

    Commission on a daily basis since the mid-1980s. The Commission

    estimates that DCMs would account for the substantial majority of the

    markets that likely would be required to file such reports under final

    rule 16.02.

    The final rules extend the reporting requirements of parts 15 to 21

    of the Commission's rules to ECMs with SPDCs and to transactions in

    SPDCs and SPDC-fungible contracts. The

    [[Page 12187]]

    requirements of the adopted rules are substantial, involve the

    submission of daily reports, and impose burdens on market participants

    that clear and trade SPDCs and SPDC-fungible contracts. More

    specifically, the adopted rules require ECMs with SPDCs to provide

    clearing member reports for SPDCs and SPDC-fungible contracts to the

    Commission pursuant to CFTC rule 16.00. Final rule 16.01 requires ECMs

    to submit to the Commission and publicly disseminate option deltas and

    aggregated trading data on a daily basis for such transactions.

    Pursuant to rule 17.00, ECM clearing members that clear SPDCs and SPDC-

    fungible contracts are required to file reports with the Commission for

    large positions when such positions meet or exceed the contract

    reporting levels of rule 15.03. Under rule 17.01, clearing members also

    must identify the owners of reportable positions on Form 102. SPDC

    traders likewise are subject to the special call provisions of final

    part 18 of the Commission's rules for reportable positions, and

    clearing members, SPDC traders, and ECMs listing SPDCs are each subject

    to the special call provisions of final part 21 of the Commission's

    rules.

    The costs associated with the requirements of the reporting rules

    should be reduced in part by the substantial overlap between the

    persons that already are subject to the reporting rules and the persons

    that are subject to the reporting rules pursuant to the Commission's

    final rules. For example, there is substantial overlap between traders

    of the natural gas contract on ICE and traders of the same contract on

    NYMEX. With respect to clearing members of ICE, for example, such

    persons often are clearing members or affiliates of clearing members of

    NYMEX.

    The benefits of extending the reporting rules to SPDCs and SPDC-

    fungible contracts are substantial. As an initial matter, it is

    important to note that a significant focus of the Reauthorization Act

    concerned amending the CEA with the specific intent of giving the CFTC

    authority to extend its reporting rules to SPDC markets and market

    participants. To the extent that contracts listed on ECMs serve a

    significant price discovery function, the regulatory value of enhanced

    oversight, through the application of the reporting rules to such

    contracts, is elevated. The Commission analyzes the information

    funneled to it by the requirements of the reporting rules to conduct

    financial, market and trade practice surveillance. Without such

    information, the ability of the Commission to discharge its regulatory

    responsibilities--including the responsibilities to prevent market

    manipulations and commodity price distortions and ensure the financial

    integrity of the listed derivatives marketplace--would be compromised.

    The bulk of the costs that are imposed by the requirements of final

    rule 36.3 relate to significant and increased submission of information

    requirements. For example, under final rule 36.3(b)(1), all ECMs are

    required to file certain basic information (including contract terms

    and conditions) with, and to make certain demonstrations related to

    compliance with the terms of the CEA section 2(h)(3) exemption to, the

    Commission. Final rule 36.3(b)(2) requires ECMs to submit transactional

    information on a weekly basis to the Commission for certain traded

    contracts that are not SPDCs and would not be subject to the terms of

    final rule 16.02. Likewise, final rule 36.3(c)(4) imposes a substantial

    cost on ECMs with SPDCs as a result of the information that such

    markets are required to submit to the Commission.

    In enacting the Reauthorization Act, Congress directed the

    Commission to take an active role in determining whether contracts

    listed by ECMs qualify as SPDCs. Accordingly, the Commission has

    adopted enhanced informational requirements for ECMs with respect to

    contracts that have not been identified as SPDCs specifically for the

    purpose of acquiring the information that it needs to discharge this

    newly-mandated responsibility. In addition, the substantial information

    submission and demonstration requirements that are imposed on ECMs with

    SPDCs have been adopted because ECMs with SPDCs, by statute, acquire

    certain of the self-regulatory responsibilities of fully regulated

    DCMs. The submission requirements associated with final rule 36.3(c)(4)

    are therefore tailored to enable the Commission to ensure that ECMs

    with SPDCs, as entities with the elevated status of a registered entity

    under the Act, are in compliance with the statutory terms of the core

    principles of section 2(h)(7)(C) of the Act. As with the final

    reporting rules, the primary benefit to the public of final rule 36.3

    is that its requirements enable the Commission to discharge its

    statutory responsibility for monitoring for the presence of SPDCs and

    extending its oversight to the trading of SPDCs.

    B. Regulatory Flexibility Act

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

    requires that agencies consider the impact of their rules on small

    businesses. As noted in the proposing release, the requirements related

    to the proposed amendments fall mainly on registered entities,

    exchanges, futures commission merchants, clearing members, foreign

    brokers and large traders. The Commission previously has determined

    that exchanges, futures commission merchants and large traders are not

    ``small entities'' for purposes of the RFA.\69\ Similarly, clearing

    members, foreign brokers and traders would be subject to the final

    rules only if clearing, carrying or holding large positions.

    Accordingly, the Acting Chairman, on behalf of the Commission,

    certified in the NPRM pursuant to 5 U.S.C. 605(b) that the actions to

    be taken herein will not have a significant economic impact on a

    substantial number of small entities.\70\

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

    \69\ 47 FR 18618 (April 30, 1982).

    \70\ 73 FR 75888 at 75900.

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

    C. Paperwork Reduction Act

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

    to respond to, a collection of information unless it displays a

    currently valid control number. Final rule 16.02, the Commission's

    reporting rules, and certain provisions of final rule 36.3 result in

    information collection requirements within the meaning of the Paperwork

    Reduction Act of 1995 (``PRA'').\71\ The Commission submitted the

    proposing release along with supporting documentation to the Office of

    Management and Budget (``OMB'') for review in accordance with 44 U.S.C.

    3507(d) and 5 CFR 1320.11. The Commission requested that OMB approve,

    and with respect to rules 36.3 and 16.02 assign a new control number

    for, the collections of information covered by the proposing release.

    The information collection burdens created by the Commission's proposed

    rules, which were discussed in detail in the proposing release, are

    identical to the collective information collection burdens of the final

    rules.

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

    \71\ 44 U.S.C. 3501-3520.

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

    The Commission invited the public and other Federal agencies to

    comment on any aspect of the information collection requirements

    discussed above.\72\ Pursuant to 44 U.S.C. 3506(c)(2)(B), the

    Commission solicited comments in order to: (i) Evaluate whether the

    proposed collections of information were necessary for the proper

    performance of the functions of the Commission, including whether the

    information will have practical utility; (ii) evaluate the accuracy of

    the Commission's estimates of the burden of

    [[Page 12188]]

    the proposed collections of information; (iii) determine whether there

    are ways to enhance the quality, utility and clarity of the information

    to be collected; and (iv) minimize the burden of the collections of

    information on those who are to respond, including through the use of

    automated collection techniques or other forms of information

    technology. The Commission received no comment on its burden estimates

    or on any other aspect of the information collection requirements

    contained in its proposing release.

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

    \72\ 73 FR 75888 at 75903.

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

    The title for the collection of information under rule 36.3 is

    ``Regulation 36.3--Exempt Commercial Market Submission Requirements.''

    OMB has approved and assigned OMB control number 3038-0060 to this

    collection of information. The requirements of Commission rule 36.3

    were covered previously by OMB control number 3038-0054 which applied

    to both EBOTs and ECMs. As a result of the Reauthorization Act, EBOTs

    and ECMs must comply with additional, divergent regulatory

    requirements. Accordingly, the Commission sought a new and separate

    control number for ECMs operating in compliance with the requirements

    of rule 36.3. As a result of OMB's approval of a control number

    specifically for ECMs, the Commission intends to submit the necessary

    documentation to OMB to enable it to apply OMB control number 3038-0054

    exclusively to EBOTs.

    The final amendments to parts 15 to 21 of the Commission's rules

    affect two existing collections of information titled ``Large Trader

    Reports'' (OMB control number 3038-0009) and ``Futures Volume, Open

    Interest, Price, Deliveries, and Exchanges of Futures'' (OMB control

    number 3038-0012). OMB has approved the amendments made to these two

    collections of information.

    Finally, the title for the collection of information of new rule

    16.02 is ``Regulation 16.02--Daily Trade and Supporting Data Reports.''

    OMB has approved assigned OMB control number 3038-0061 to this

    collection of information.

    List of Subjects

    17 CFR Part 15

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements

    17 CFR Part 16

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 17

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements

    17 CFR Part 18

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 19

    Commodity futures, Cottons, Grains, Reporting and recordkeeping

    requirements.

    17 CFR Part 21

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements.

    17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission

    17 CFR Part 40

    Commodity futures, Contract markets, Designation application,

    Reporting and recordkeeping requirements.

    In consideration of the foregoing, and pursuant to the authority

    contained in the Act, as amended by the Reauthorization Act of 2008,

    Title XIII of Public Law 110-246, 122 Stat. 1624 (2008), and in

    particular sections 2, 5, 6, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 9,

    12a, 19, and 21, the Commodity Futures Trading Commission hereby amends

    17 CFR parts 15, 16, 17, 18, 19, 21, 36 and 40 as follows:

    PART 15--REPORTS--GENERAL PROVISIONS

    0

    1. The authority citation for part 15 is revised to read as follows:

    Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a,

    9, 12a, 19, and 21, as amended by Title XIII of the Food,

    Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.

    1624 (June 18, 2008).

    0

    2. Section 15.00 is revised to read as follows:

    Sec. 15.00 Definitions of terms used in parts 15 to 21 of this

    chapter.

    As used in parts 15 to 21 of this chapter:

    (a) Cash or Spot, when used in connection with any commodity, means

    the actual commodity as distinguished from a futures or options

    contract in such commodity.

    (b) Clearing member means any person who is a member of, or enjoys

    the privilege of clearing trades in his own name through, the clearing

    organization of a designated contract market, registered derivatives

    transaction execution facility, or registered entity under section

    1a(29) of the Act.

    (c) Clearing organization means the person or organization which

    acts as a medium for clearing transactions in commodities for future

    delivery or commodity option transactions, or for effecting settlements

    of contracts for future delivery or commodity option transactions, for

    and between members of any designated contract market, registered

    derivatives transaction execution facility or registered entity under

    section 1a(29) of the Act.

    (d) Compatible data processing media means data processing media

    approved by the Commission or its designee.

    (e) Customer means ``customer'' (as defined in Sec. 1.3(k) of this

    chapter) and ``options customer'' (as defined in Sec. 1.3(jj) of this

    chapter).

    (f) Customer trading program means any system of trading offered,

    sponsored, promoted, managed or in any other way supported by, or

    affiliated with, a futures commission merchant, an introducing broker,

    a commodity trading advisor, a commodity pool operator, or other

    trader, or any of its officers, partners or employees, and which by

    agreement, recommendations, advice or otherwise, directly or indirectly

    controls trading done and positions held by any other person. The term

    includes, but is not limited to, arrangements where a program

    participant enters into an expressed or implied agreement not obtained

    from other customers and makes a minimum deposit in excess of that

    required of other customers for the purpose of receiving specific

    advice or recommendations which are not made available to other

    customers. The term includes any program which is of the character of,

    or is commonly known to the trade as, a managed account, guided

    account, discretionary account, commodity pool or partnership account.

    (g) Discretionary account means a commodity futures or commodity

    option trading account for which buying or selling orders can be placed

    or originated, or for which transactions can be effected, under a

    general authorization and without the specific consent of the customer,

    whether the general authorization for such orders or transactions is

    pursuant to a written agreement, power of attorney, or otherwise.

    (h) Exclusively self-cleared contract means a cleared contract for

    which no persons, other than a reporting market and its clearing

    organization, are permitted to accept any money, securities, or

    property (or extend credit in lieu thereof) to margin, guarantee, or

    secure any trade.

    (i) Foreign clearing member means a ``clearing member'' (as defined

    by

    [[Page 12189]]

    paragraph (b) of this section) who resides or is domiciled outside of

    the United States, its territories or possessions.

    (j) Foreign trader means any trader (as defined in paragraph (s) of

    this section) who resides or is domiciled outside of the United States,

    its territories or possessions.

    (k) Futures, futures contract, future delivery or contract for

    future delivery, means any contract for the purchase or sale of any

    commodity for future delivery that is executed on or subject to the

    rules of a reporting market, including all agreements, contracts and

    transactions that are treated by a clearing organization as fungible

    with such contracts.

    (l) Guided account program means any customer trading program which

    limits trading to the purchase or sale of a particular contract for

    future delivery of a commodity or a particular commodity option that is

    advised or recommended to the participant in the program.

    (m) Managed account program means a customer trading program which

    includes two or more discretionary accounts traded pursuant to a common

    plan, advice or recommendations.

    (n) Open contracts means ``open contracts'' (as defined in Sec.

    1.3(t) of this chapter) and commodity option positions held by any

    person on or subject to the rules of a board of trade which have not

    expired, been exercised, or offset.

    (o) Option, options, option contract, or options contract, unless

    specifically provided otherwise, means any contract for the purchase or

    sale of a commodity option that is executed on or subject to the rules

    of a reporting market, including all agreements, contracts and

    transactions that are treated by a clearing organization as fungible

    with such contracts.

    (p) Reportable position means:

    (1) For reports specified in parts 17, 18 and Sec. 19.00(a)(2) and

    (a)(3) of this chapter any open contract position that at the close of

    the market on any business day equals or exceeds the quantity specified

    in Sec. 15.03 of this part in either:

    (i) Any one futures of any commodity on any one reporting market,

    excluding futures contracts against which notices of delivery have been

    stopped by a trader or issued by the clearing organization of a

    reporting market; or

    (ii) Long or short put or call options that exercise into the same

    future of any commodity, or long or short put or call options for

    options on physicals that have identical expirations and exercise into

    the same physical, on any one reporting market.

    (2) For the purposes of reports specified in Sec. 19.00(a)(1) of

    this chapter, any combined futures and futures-equivalent option open

    contract position as defined in part 150 of this chapter in any one

    month or in all months combined, either net long or net short in any

    commodity on any one reporting market, excluding futures positions

    against which notices of delivery have been stopped by a trader or

    issued by the clearing organization of a reporting market, which at the

    close of the market on the last business day of the week exceeds the

    net quantity limit in spot, single or in all-months fixed in Sec.

    150.2 of this chapter for the particular commodity and reporting

    market.

    (q) Reporting market means a designated contract market, registered

    entity under section 1a(29) of the Act, and unless determined otherwise

    by the Commission with respect to the facility or a specific contract

    listed by the facility, a registered derivatives transaction execution

    facility.

    (r) Special account means any commodity futures or option account

    in which there is a reportable position.

    (s) Trader means a person who, for his own account or for an

    account which he controls, makes transactions in commodity futures or

    options, or has such transactions made.

    0

    3. Section 15.01 is amended by revising paragraph (a) to read as

    follows:

    Sec. 15.01 Persons required to report.

    * * * * *

    (a) Reporting markets--as specified in parts 16, 17, and 21 of this

    chapter.

    * * * * *

    0

    4. Section 15.05 is amended by revising the heading and paragraph (a);

    and by adding paragraph (i) to read as follows:

    Sec. 15.05 Designation of agent for foreign persons.

    (a) For purposes of this section, the term ``futures contract''

    means any contract for the purchase or sale of any commodity for future

    delivery, or a contract identified under section 36.3(b)(1)(i) as

    traded in reliance on the exemption in section 2(h)(3) of the Act,

    traded or executed on or subject to the rules of any designated

    contract market or registered derivatives transaction execution

    facility, or for the purposes of paragraph (i) of this section, a

    reporting market (including all agreements, contracts and transactions

    that are treated by a clearing organization as fungible with such

    contracts); the term ``option contract'' means any contract for the

    purchase or sale of a commodity option, or as applicable, any other

    instrument subject to the Act pursuant to section 5a(g) of the Act,

    traded or executed on or subject to the rules of any designated

    contract market or registered derivatives transaction execution

    facility, or for the purposes of paragraph (i) of this section, a

    reporting market (including all agreements, contracts and transactions

    that are treated by a clearing organization as fungible with such

    contracts); the term ``customer'' means any person for whose benefit a

    foreign broker makes or causes to be made any futures contract or

    option contract; and the term ``communication'' means any summons,

    complaint, order, subpoena, special call, request for information, or

    notice, as well as any other written document or correspondence.

    * * * * *

    (i) Any reporting market that is a registered entity under section

    1a(29)(E) of the Act that permits a foreign clearing member or foreign

    trader to clear or effect contracts, agreements or transactions on the

    trading facility or its clearing organization, shall be deemed to be

    the agent of the foreign clearing member or foreign trader with respect

    to any such contracts, agreements or transactions cleared or executed

    by the foreign clearing member or the foreign trader. Service or

    delivery of any communication issued by or on behalf of the Commission

    to the reporting market shall constitute valid and effective service

    upon the foreign clearing member or foreign trader. The reporting

    market which has been served with, or to which there has been

    delivered, a communication issued by or on behalf of the Commission to

    a foreign clearing member or foreign trader shall transmit the

    communication promptly and in a manner which is reasonable under the

    circumstances, or in a manner specified by the Commission in the

    communication, to the foreign clearing member or foreign trader.

    (1) It shall be unlawful for any such reporting market to permit a

    foreign clearing member or a foreign trader to clear or effect

    contracts, agreements or transactions on the facility or its clearing

    organization unless the reporting market prior thereto informs the

    foreign clearing member or foreign trader of the requirements of this

    section.

    (2) The requirements of paragraphs (i) and (i)(1) of this section

    shall not apply to any contracts, transactions or agreements if the

    foreign clearing member or foreign trader has duly executed and

    maintains in effect a

    [[Page 12190]]

    written agency agreement in compliance with this paragraph with a

    person domiciled in the United States and has provided a copy of the

    agreement to the reporting market prior to effecting or clearing any

    contract, agreement or transaction on the trading facility or its

    clearing organization. This agreement must authorize the person

    domiciled in the United States to serve as the agent of the foreign

    clearing member or foreign trader for the purposes of accepting

    delivery and service of all communications issued by or on behalf of

    the Commission to the foreign clearing member or the foreign trader and

    must provide an address in the United States where the agent will

    accept delivery and service of communications from the Commission. This

    agreement must be filed with the Commission by the reporting market

    prior to permitting the foreign clearing member or the foreign trader

    to clear or effect any transactions in futures or option contracts.

    Unless otherwise specified by the Commission, the agreements required

    to be filed with the Commission shall be filed with the Secretary of

    the Commission at Three Lafayette Centre, 1155 21st Street, NW.,

    Washington, DC 20581.

    (3) A foreign clearing member or a foreign trader shall notify the

    Commission immediately if the written agency agreement is terminated,

    revoked, or is otherwise no longer in effect. If the reporting market

    knows or should know that the agreement has expired, been terminated,

    or is no longer in effect, the reporting market shall notify the

    Secretary of the Commission immediately. If the written agency

    agreement expires, terminates, or is not in effect, the reporting

    market, the foreign clearing member and the foreign trader shall be

    subject to the provisions of paragraphs (i) and (i)(1) of this section.

    * * * * *

    0

    5. Section 15.06 is added to read as follows:

    Sec. 15.06 Delegations.

    (a) The Commission hereby delegates, until the Commission orders

    otherwise, the authority to approve data processing media, as

    referenced in Sec. 15.00(d), for data submissions to the Director of

    the Division of Market Oversight, to be exercised by such Director or

    by such other employee or employees of such Director as designated from

    time to time by the Director. The Director may submit to the Commission

    for its consideration any matter which has been delegated in this

    paragraph. Nothing in this paragraph prohibits the Commission, at its

    election, from exercising the authority delegated in this paragraph.

    (b) [Reserved]

    PART 16--REPORTS BY REPORTING MARKETS

    0

    6. The authority citation for part 16 is revised to read as follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as amended

    by Title XIII of the Food, Conservation and Energy Act of 2008,

    Public Law 110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise

    noted.

    0

    7. Section 16.01 is amended by revising paragraph (e) to read as

    follows:

    Sec. 16.01 Trading volume, open contracts, prices, and critical

    dates.

    * * * * *

    (e) Publication of recorded information. (1) Reporting markets

    shall make the information in paragraph (a) of this section readily

    available to the news media and the general public without charge, in a

    format that readily enables the consideration of such data, no later

    than the business day following the day to which the information

    pertains. The information in paragraphs (a)(4) through (a)(6) of this

    section shall be made readily available in a format that presents the

    information together.

    (2) Reporting markets shall make the information in paragraphs

    (b)(1) and (b)(2) of this section readily available to the news media

    and the general public, and the information in paragraph (b)(3) of this

    section readily available to the general public, in a format that

    readily enables the consideration of such data, no later than the

    business day following the day to which the information pertains.

    * * * * *

    0

    8. Section 16.02 is added to read as follows:

    Sec. 16.02 Daily trade and supporting data reports.

    Reporting markets shall provide trade and supporting data reports

    to the Commission on a daily basis. Such reports shall include

    transaction-level trade data and related order information for each

    futures or options contract. Reports shall also include time and sales

    data, reference files and other information as the Commission or its

    designee may require. All reports must be submitted at the time, and in

    the manner and format, and with the specific content specified by the

    Commission or its designee. Upon request, such information shall be

    accompanied by data that identifies or facilitates the identification

    of each trader for each transaction or order included in a submitted

    trade and supporting data report if the reporting market maintains such

    data.

    0

    9. Section 16.07 is amended by revising the heading and introductory

    text; and by adding paragraph (c) to read as follows:

    Sec. 16.07 Delegation of authority to the Director of the Division of

    Market Oversight.

    The Commission hereby delegates, until the Commission orders

    otherwise, the authority set forth in paragraphs (a), (b) and (c) of

    this section to the Director of the Division of Market Oversight, to be

    exercised by such Director or by such other employee or employees of

    such Director as may be designated from time to time by the Director.

    The Director of the Division of Market Oversight may submit to the

    Commission for its consideration any matter which has been delegated in

    this paragraph. Nothing in this paragraph prohibits the Commission, at

    its election, from exercising the authority delegated in this

    paragraph.

    * * * * *

    (c) Pursuant to Sec. 16.02, the authority to determine the

    specific content of any daily trade and supporting data report, request

    that such reports be accompanied by data that identifies or facilitates

    the identification of each trader for each transaction or order

    included in a submitted trade and supporting data report, and establish

    the time for the submission of and the manner and format of such

    reports.

    PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION

    MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS

    0

    10. The authority citation for part 17 is revised to read as follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 7, 7a and 12a, as

    amended by Title XIII of the Food, Conservation and Energy Act of

    2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008), unless

    otherwise noted.

    0

    11. Revise the heading of part 17 as set forth above.

    0

    12. Section 17.00 is amended by the heading of paragraph (a) and

    paragraphs (a)(1), (b)(1), and (f); and by adding and reserving

    paragraph (c) to read as follows:

    Sec. 17.00 Information to be furnished by futures commission

    merchants, clearing members and foreign brokers.

    (a) Special accounts--reportable futures and options positions,

    delivery notices, and exchanges of futures. (1) Each futures commission

    merchant, clearing member and foreign broker shall submit a report to

    the Commission

    [[Page 12191]]

    for each business day with respect to all special accounts carried by

    the futures commission merchant, clearing member or foreign broker,

    except for accounts carried on the books of another futures commission

    merchant or clearing member on a fully-disclosed basis. Except as

    otherwise authorized by the Commission or its designee, such report

    shall be made in accordance with the format and coding provisions set

    forth in paragraph (g) of this section. The report shall show each

    futures position, separately for each reporting market and for each

    future, and each put and call options position separately for each

    reporting market, expiration and strike price en each special account

    as of the close of market on the day covered by the report and, in

    addition, the quantity of exchanges of futures for commodities or for

    derivatives positions and the number of delivery notices issued for

    each such account by the clearing organization of a reporting market

    and the number stopped by the account. The report shall also show all

    positions in all contract months and option expirations of that same

    commodity on the same reporting market for which the special account is

    reportable.

    * * * * *

    (b) * * *

    (1) Accounts of eligible entities--Accounts of eligible entities as

    defined in Sec. 150.1 of this chapter that are traded by an

    independent account controller shall, together with other accounts

    traded by the independent account controller or in which the

    independent controller has a financial interest, be considered a single

    account.

    * * * * *

    (c) [Reserved]

    * * * * *

    (f) Omnibus accounts. If the total open long positions or the total

    open short positions for any future of a commodity carried in an

    omnibus account is a reportable position, the omnibus account is in

    Special Account status and shall be reported by the futures commission

    merchant or foreign broker carrying the account in accordance with

    paragraph (a) of this section.

    * * * * *

    0

    13. Section 17.03 is amended by revising the heading, the introductory

    text, and paragraphs (a) and (b) to read as follows:

    Sec. 17.03 Delegation of authority to the Director of the Division of

    Market Oversight.

    The Commission hereby delegates, until the Commission orders

    otherwise, the authority set forth in the paragraphs below to the

    Director of the Division of Market Oversight to be exercised by such

    Director or by such other employee or employees of such Director as

    designated from time to time by the Director. The Director of the

    Division of Market Oversight may submit to the Commission for its

    consideration any matter which has been delegated in this paragraph.

    Nothing in this paragraph prohibits the Commission, at its election,

    from exercising the authority delegated in this paragraph.

    (a) Pursuant to Sec. 17.00(a) and (h), the authority to determine

    whether futures commission merchants, clearing members and foreign

    brokers can report the information required under paragraphs (a) and

    (h) of Sec. 17.00 on series '01 forms or using some other format upon

    a determination that such person is unable to report the information

    using the format, coding structure or electronic data transmission

    procedures otherwise required.

    (b) Pursuant to Sec. 17.02, the authority to instruct or approve

    the time at which the information required under Sec. Sec. 17.00 and

    17.01 must be submitted by futures commission merchants, clearing

    members and foreign brokers provided that such persons are unable to

    meet the requirements set forth in Sec. Sec. 17.01(g) and 17.02.

    * * * * *

    0

    14. Section 17.04 is amended by revising the heading, paragraph (a),

    and paragraph (b)(1)(ii) to read as follows:

    Sec. 17.04 Reporting omnibus accounts to reporting firms.

    (a) Any futures commission merchant, clearing member or foreign

    broker who establishes an omnibus account with another futures

    commission merchant, clearing member or foreign broker shall report to

    that futures commission merchant, clearing member or foreign broker the

    total open long positions and the total open short positions in each

    future of a commodity and, for commodity options transactions, the

    total open long put options, the total open short put options, the

    total open long call options, and the total open short call options for

    each commodity options expiration date and each strike price in such

    account at the close of trading each day. The information required by

    this section shall be reported in sufficient time to enable the futures

    commission merchant, clearing member or foreign broker with whom the

    omnibus account is established to comply with the regulations of this

    part and the reporting requirements established by the reporting

    markets.

    (b) * * *

    (1) * * *

    (ii) The account is an omnibus account of another futures

    commission merchant, clearing member or foreign broker; or

    * * * * *

    PART 18--REPORTS BY TRADERS

    0

    15. The authority citation for part 18 is revised to read as follows:

    Authority: 7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a

    and 19, as amended by Title XIII of the Food, Conservation and

    Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

    2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.

    0

    16. Section 18.01 is revised to read as follows:

    Sec. 18.01 Interest in or control of several accounts.

    If any trader holds, has a financial interest in or controls

    positions in more than one account, whether carried with the same or

    with different futures commission merchants or foreign brokers, all

    such positions and accounts shall be considered as a single account for

    the purpose of determining whether such trader has a reportable

    position and, unless instructed otherwise in the special call to report

    under Sec. 18.00 for the purpose of reporting.

    0

    17. Section 18.04 is amended by revising paragraphs (a)(7) and

    (b)(3)(i) to read as follows:

    Sec. 18.04 Statement of reporting trader.

    * * * * *

    (a) * * *

    (7) The names and locations of all futures commission merchants,

    clearing members, introducing brokers, and foreign brokers through whom

    accounts owned or controlled by the reporting trader are carried or

    introduced at the time of filing a Form 40, if such accounts are

    carried through more than one futures commission merchant, clearing

    member or foreign broker or carried through more than one office of the

    same futures commission merchant, clearing member or foreign broker, or

    introduced by more than one introducing broker clearing accounts

    through the same futures commission merchant, and the name of the

    reporting trader's account executive at each firm or office of the

    firm.

    * * * * *

    (b) * * *

    (3) * * *

    (i) Commercial activity associated with use of the option or

    futures market (such as and including production, merchandising or

    processing of a cash commodity, asset or liability risk management by

    depository institutions, or security portfolio risk management).

    * * * * *

    [[Page 12192]]

    0

    18. Section 18.05 is amended by revising paragraphs (a)(2), (a)(3), and

    (a)(4) to read as follows:

    Sec. 18.05 Maintenance of books and records.

    (a) * * *

    (2) Over the counter or pursuant to sections 2(d), 2(g) or 2(h)(1)-

    (2) of the Act or part 35 of this chapter;

    (3) On exempt commercial markets operating pursuant to sections

    2(h)(3)-(5) of the Act;

    (4) On exempt boards of trade operating pursuant to section 5d of

    the Act; and

    * * * * *

    PART 19--REPORTS BY PERSONS HOLDING BONA FIDE HEDGE POSITIONS

    PURSUANT TO Sec. 1.3(z) OF THIS CHAPTER AND BY MERCHANTS AND

    DEALERS IN COTTON

    0

    19. The authority citation for part 19 is revised to read as follows:

    Authority: 7 U.S.C. 6g(a), 6i, and 12a(5), as amended by Title

    XIII of the Food, Conservation and Energy Act of 2008, Public Law

    110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.

    0

    20. Section 19.00 is amended by revising paragraph (a) to read as

    follows:

    Sec. 19.00 General provisions.

    (a) Who must file series '04 reports. The following persons are

    required to file series '04 reports:

    (1) All persons holding or controlling futures and option positions

    that are reportable pursuant to Sec. 15.00(p)(2) of this chapter and

    any part of which constitute bona fide hedging positions as defined in

    Sec. 1.3(z) of this chapter;

    (2) Merchants and dealers of cotton holding or controlling

    positions for futures delivery in cotton that are reportable pursuant

    to Sec. 15.00(p)(1)(i) of this chapter, or

    (3) All persons holding or controlling positions for future

    delivery that are reportable pursuant to Sec. 15.00(p)(1) of this

    chapter who have received a special call for series '04 reports from

    the Commission or its designee. Filings in response to a special call

    shall be made within one business day of receipt of the special call

    unless otherwise specified in the call. For the purposes of this

    paragraph, the Commission hereby delegates to the Director of the

    Division of Market Oversight, or to such other person designated by the

    Director, authority to issue calls for series '04 reports.

    * * * * *

    0

    21. Section 19.01 is amended by revising paragraph (b) introductory

    text and paragraph (b)(1) to read as follows:

    Sec. 19.01 Reports on stocks and fixed price purchases and sales

    pertaining to futures positions in wheat, corn, oats, soybeans, soybean

    oil, soybean meal or cotton.

    * * * * *

    (b) Time and place of filing reports--Except for reports filed in

    response to special calls made under Sec. 19.00(a)(3), each report

    shall be made monthly, as of the close of business on the last Friday

    of the month, and filed at the appropriate Commission office specified

    in paragraph (b)(1) or (2) of this section not later than the second

    business day following the date of the report in the case of the 304

    report and not later than the third business day following the date of

    the report in the case of the 204 report. Reports may be transmitted by

    facsimile or, alternatively, information on the form may be reported to

    the appropriate Commission office by telephone and the report mailed to

    the same office, not later than midnight of its due date.

    (1) CFTC Form 204 reports with respect to transactions in wheat,

    corn, oats, soybeans, soybean meal and soybean oil should be sent to

    the Commission's office in Chicago, IL, unless otherwise specifically

    authorized by the Commission or its designee.

    * * * * *

    PART 21--SPECIAL CALLS

    0

    22. The authority citation for part 21 is revised 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, as amended by Title XIII of the Food,

    Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.

    1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise

    noted.

    0

    23. Section 21.01 is revised to read as follows:

    Sec. 21.01 Special calls for information on controlled accounts from

    futures commission merchants, clearing members and introducing brokers.

    Upon call by the Commission, each futures commission merchant,

    clearing member and introducing broker shall file with the Commission

    the names and addresses of all persons who, by power of attorney or

    otherwise, exercise trading control over any customer's account in

    commodity futures or commodity options on any reporting market.

    0

    24. Section 21.02 is amended by revising the heading, introductory

    text, and paragraphs (f) and (i) to read as follows:

    Sec. 21.02 Special calls for information on open contracts in

    accounts carried or introduced by futures commission merchants,

    clearing members, members of reporting markets, introducing brokers,

    and foreign brokers.

    Upon special call by the Commission for information relating to

    futures or option positions held or introduced on the dates specified

    in the call, each futures commission merchant, clearing member, member

    of a reporting market, introducing broker, or foreign broker, and, in

    addition, for option information, each reporting market, shall furnish

    to the Commission the following information concerning accounts of

    traders owning or controlling such futures or option positions, except

    for accounts carried on a fully disclosed basis by another futures

    commission merchant or clearing member, as may be specified in the

    call:

    * * * * *

    (f) The number of open futures or option positions introduced or

    carried in each account, as specified in the call;

    * * * * *

    (i) As applicable, the following identifying information:

    (1) Whether a trader who holds commodity futures or option

    positions is classified as a commercial or as a noncommercial trader

    for each commodity futures or option contract;

    (2) Whether the open commodity futures or option contracts are

    classified as speculative, spreading (straddling), or hedging; and

    (3) Whether any of the accounts in question are omnibus accounts

    and, if so, whether the originator of the omnibus account is another

    futures commission merchant, clearing member or foreign broker.

    * * * * *

    0

    25. Section 21.03 is amended as follows:

    0

    A. By revising the heading and paragraphs (a), (b), (c) and (d);

    0

    B. By revising paragraph (e) introductory text and paragraphs (e)(1)

    introductory text, (e)(1)(iv) and (e)(1)(v); and

    0

    C. By revising paragraphs (f), (g) and (h) to read as follows:

    Sec. 21.03 Selected special calls-duties of foreign brokers, domestic

    and foreign traders, futures commission merchants, clearing members,

    introducing brokers, and reporting markets.

    (a) For purposes of this section, the term ``accounts of a futures

    commission merchant, clearing member or foreign broker'' means all open

    contracts and transactions in futures and options on the records of the

    futures commission merchant, clearing member or foreign

    [[Page 12193]]

    broker; the term ``beneficial interest'' means having or sharing in any

    rights, obligations or financial interest in any futures or options

    account; the term ``customer'' means any futures commission merchant,

    clearing member, introducing broker, foreign broker, or trader for whom

    a futures commission merchant, clearing member or reporting market that

    is a registered entity under section 1a(29) of the Act makes or causes

    to be made a futures or options contract. Paragraphs (e), (g) and (h)

    of this section shall not apply to any futures commission merchant,

    clearing member or customer whose books and records are open at all

    times to inspection in the United States by any representative of the

    Commission.

    (b) It shall be unlawful for a futures commission merchant to open

    a futures or options account or to effect transactions in futures or

    options contracts for an existing account, or for an introducing broker

    to introduce such an account, for any customer for whom the futures

    commission merchant or introducing broker is required to provide the

    explanation provided for in Sec. 15.05(c) of this chapter, or for a

    reporting market that is a registered entity under section 1a(29)(E) of

    the Act, to cause to open an account in a contract traded in reliance

    on the exemption in section 2(h)(3) of the Act or to cause to be

    effected transactions in a contract traded in reliance on the exemption

    in section 2(h)(3) of the Act for an existing account for any person

    that is a foreign clearing member or foreign trader, until the futures

    commission merchant, introducing broker, clearing member, or reporting

    market has explained fully to the customer, in any manner that such

    persons deem appropriate, the provisions of this section.

    (c) Upon a determination by the Commission that information

    concerning accounts may be relevant information in enabling the

    Commission to determine whether the threat of a market manipulation,

    corner, squeeze, or other market disorder exists on any reporting

    market, the Commission may issue a call for information from a futures

    commission merchant, clearing member, introducing broker or customer

    pursuant to the provisions of this section.

    (d) In the event the call is issued to a foreign broker, foreign

    clearing member or foreign trader, its agent, designated pursuant to

    Sec. 15.05 of this chapter, shall, if directed, promptly transmit

    calls made by the Commission pursuant to this section by electronic

    mail or a similarly expeditious means of communication.

    (e) The futures commission merchant, clearing member, introducing

    broker, or customer to whom the special call is issued must provide to

    the Commission the information specified below for the commodity,

    reporting market and delivery months or option expiration dates named

    in the call. Such information shall be filed at the place and within

    the time specified by the Commission.

    (1) For each account of a futures commission merchant, clearing

    member, introducing broker, or foreign broker, including those accounts

    in the name of the futures commission merchant, clearing member or

    foreign broker, on the dates specified in the call issued pursuant to

    this section, such persons shall provide the Commission with the

    following information:

    * * * * *

    (iv) Whether the account is carried for and in the name of another

    futures commission merchant, clearing member, introducing broker, or

    foreign broker; and

    (v) For the accounts which are not carried for and in the name of

    another futures commission merchant, clearing member, introducing

    broker, or foreign broker, the name and address of any other person who

    controls the trading of the account, and the name and address of any

    person who has a ten percent or more beneficial interest in the

    account.

    * * * * *

    (f) If the Commission has reason to believe that any person has not

    responded as required to a call made pursuant to this section, the

    Commission in writing may inform the reporting market specified in the

    call and that reporting market shall prohibit the execution of, and no

    futures commission merchant, clearing member, introducing broker, or

    foreign broker shall effect a transaction in connection with trades on

    the reporting market and in the months or expiration dates specified in

    the call for or on behalf of the futures commission merchant or

    customer named in the call, unless such trades offset existing open

    contracts of such futures commission merchant or customer.

    (g) Any person named in a special call that believes he or she is

    or may be adversely affected or aggrieved by action taken by the

    Commission under paragraph (f) of this section shall have the

    opportunity for a prompt hearing after the Commission acts. That person

    may immediately present in writing to the Commission for its

    consideration any comments or arguments concerning the Commission's

    action and may present for Commission consideration any documentary or

    other evidence that person deems appropriate. Upon request, the

    Commission may, in its discretion, determine that an oral hearing be

    conducted to permit the further presentation of information and views

    concerning any matters by any or all such persons. The oral hearing may

    be held before the Commission or any person designated by the

    Commission, which person shall cause all evidence to be reduced to

    writing and forthwith transmit the same and a recommended decision to

    the Commission. The Commission's directive under paragraph (f) of this

    section shall remain in effect unless and until modified or withdrawn

    by the Commission.

    (h) If, during the course of or after the Commission acts pursuant

    to paragraph (f) of this section, the Commission determines that it is

    appropriate to undertake a proceeding pursuant to section 6(c) of the

    Act, the Commission shall issue a complaint in accordance with the

    requirements of section 6(c), and, upon further determination by the

    Commission that the conditions described in paragraph (c) of this

    section still exist, a hearing pursuant to section 6(c) of the Act

    shall commence no later than five business days after service of the

    complaint. In the event the person served with the complaint under

    section 6(c) of the Act has, prior to the commencement of the hearing

    under section 6(c) of the Act, sought a hearing pursuant to paragraph

    (g) of this section and the Commission has determined to accord him

    such a hearing, the two hearings shall be conducted simultaneously.

    Nothing in this section shall preclude the Commission from taking other

    appropriate action under the Act or the Commission's regulations

    thereunder, including action under section 6(c) of the Act, regardless

    of whether the conditions described in paragraph (c) of this section

    still exist, and no ruling issued in the course of a hearing pursuant

    to paragraph (g) or this paragraph shall constitute an estoppel against

    the Commission in any other action.

    * * * * *

    0

    26. Section 21.04 is revised 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, the special call authority set forth in Sec. Sec. 21.01 and

    21.02 to the Director of the Division of Market Oversight to be

    exercised by such Director or by such other employee or employees of

    such Director as designated from time to time

    [[Page 12194]]

    by the Director. The Director of the Division of Market Oversight may

    submit to the Commission for its consideration any matter which has

    been delegated in this paragraph. 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.

    PART 36--EXEMPT MARKETS

    0

    27. The authority citation for part 36 is revised to read as follows:

    Authority: 7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by

    Title XIII of the Food, Conservation and Energy Act of 2008, Public

    Law 110-246, 122 Stat. 1624 (June 18, 2008).

    0

    28. Section 36.3 is amended by revising paragraph (b) to read as

    follows:

    Sec. 36.3 Exempt commercial markets.

    * * * * *

    (b) Required information.

    (1) All electronic trading facilities. A facility operating in

    reliance on the exemption in section 2(h)(3) of the Act, initially and

    on an on-going basis, must:

    (i) Provide the Commission with the terms and conditions, as

    defined in Sec. 40.1(i) of this chapter and product descriptions for

    each agreement, contract or transaction listed by the facility in

    reliance on the exemption set forth in section 2(h)(3) of the Act, as

    well as trading conventions, mechanisms and practices;

    (ii) Provide the Commission with information explaining how the

    facility meets the definition of ``trading facility'' contained in

    section 1a(33) of the Act and provide the Commission with access to the

    electronic trading facility's trading protocols, in a format specified

    by the Commission;

    (iii) Demonstrate to the Commission that the facility requires, and

    will require, with respect to all current and future agreements,

    contracts and transactions, that each participant agrees to comply with

    all applicable laws; that the authorized participants are ``eligible

    commercial entities'' as defined in section 1a(11) of the Act; that all

    agreements, contracts and transactions are and will be entered into

    solely on a principal-to-principal basis; and that the facility has in

    place a program to routinely monitor participants' compliance with

    these requirements;

    (iv) At the request of the Commission, provide any other

    information that the Commission, in its discretion, deems relevant to

    its determination whether an agreement, contract, or transaction

    performs a significant price discovery function; and

    (v) File with the Commission annually, no later than the end of

    each calendar year, a completed copy of CFTC Form 205--Exempt

    Commercial Market Annual Certification. The information submitted in

    Form 205 shall include:

    (A) A statement indicating whether the electronic trading facility

    continues to operate under the exemption; and

    (B) A certification that affirms the accuracy of and/or updates the

    information contained in the previous Notification of Operation as an

    Exempt Commercial Market.

    (2) Electronic trading facilities trading or executing agreements,

    contracts or transactions other than significant price discovery

    contracts. In addition to the requirements of paragraph (b)(1) of this

    section, a facility operating in reliance on the exemption in section

    2(h)(3) of the Act, with respect to agreements, contracts or

    transactions that have not been determined to perform significant price

    discovery function, initially and on an on-going basis, must:

    (i) Identify to the Commission those agreements, contracts and

    transactions conducted on the electronic trading facility with respect

    to which it intends, in good faith, to rely on the exemption in section

    2(h)(3) of the Act, and which averaged five trades per day or more over

    the most recent calendar quarter; and, with respect to such agreements,

    contracts and transactions, either:

    (A) Submit to the Commission, in a form and manner acceptable to

    the Commission, a report for each business day. Each such report shall

    be electronically transmitted weekly, within such time period as is

    acceptable to the Commission after the end of the week to which the

    data applies, and shall show for each such agreement, contract or

    transaction executed the following information:

    (1) The underlying commodity, the delivery or price-basing location

    specified in the agreement, contract or transaction maturity date,

    whether it is a financially settled or physically delivered instrument,

    and the date of execution, time of execution, price, and quantity;

    (2) Total daily volume and, if cleared, open interest;

    (3) For an option instrument, in addition to the foregoing

    information, the type of option (i.e., call or put) and strike prices;

    and

    (4) Such other information as the Commission may determine; or

    (B) Provide to the Commission, in a form and manner acceptable to

    the Commission, electronic access to those transactions conducted on

    the electronic trading facility in reliance on the exemption in section

    2(h)(3) of the Act, and meeting the average five trades per day or more

    threshold test of this section, which would allow the Commission to

    compile the information described in paragraph (b)(2)(i)(A) of this

    section and create a permanent record thereof.

    (ii) Maintain a record of allegations or complaints received by the

    electronic trading facility concerning instances of suspected fraud or

    manipulation in trading activity conducted in reliance on the exemption

    set forth in section 2(h)(3) of the Act. The record shall contain the

    name of the complainant, if provided, date of the complaint, market

    instrument, substance of the allegations, and name of the person at the

    electronic trading facility who received the complaint;

    (iii) Provide to the Commission, in the form and manner prescribed

    by the Commission, a copy of the record of each complaint received

    pursuant to paragraph (b)(2)(ii) of this section that alleges, or

    relates to, facts that would constitute a violation of the Act or

    Commission regulations. Such copy shall be provided to the Commission

    no later than 30 calendar days after the complaint is received.

    Provided, however, that in the case of a complaint alleging, or

    relating to, facts that would constitute an ongoing fraud or market

    manipulation under the Act or Commission rules, such copy shall be

    provided to the Commission within three business days after the

    complaint is received; and

    (iv) Provide to the Commission on a quarterly basis, within 15

    calendar days of the close of each quarter, a list of each agreement,

    contract or transaction executed on the electronic trading facility in

    reliance on the exemption set forth in section 2(h)(3) of the Act and

    indicate for each such agreement, contract or transaction the contract

    terms and conditions, the contract's average daily trading volume, and

    the most recent open interest figures.

    (3) Electronic trading facilities trading or executing significant

    price discovery contracts. In addition to the requirements of paragraph

    (b)(1) of this section, if the Commission determines that a facility

    operating in reliance on the exemption in section 2(h)(3) of the Act

    trades or executes an agreement, contract or transaction that performs

    a significant price discovery function, the facility must, with respect

    to any significant price discovery contract, publish and provide to the

    Commission the information required by Sec. 16.01 of this chapter.

    (4) Delegation of authority. The Commission hereby delegates, until

    the

    [[Page 12195]]

    Commission orders otherwise, the authority to determine the form and

    manner of submitting the required information under paragraphs (b)(1)

    through (3) of this section, to the Director of the Division of Market

    Oversight and such members of the Commission's staff as the Director

    may designate. The Director may submit to the Commission for its

    consideration any matter that has been delegated by this paragraph.

    Nothing in this paragraph prohibits the Commission, at its election,

    from exercising the authority delegated in this paragraph.

    (5) Special calls. (i) All information required upon special call

    of the Commission under section 2(h)(5)(B)(iii) of the Act shall be

    transmitted at the time and to the office of the Commission as may be

    specified in the call.

    (ii) The Commission hereby delegates, until the Commission orders

    otherwise, the authority to make special calls as set forth in section

    2(h)(5)(B)(iii) of the Act to the Directors of the Divisions of Market

    Oversight, the Division of Clearing and Intermediary Oversight, and the

    Division of Enforcement to be exercised by each such Director or by

    such other employee or employees as the Director may designate. The

    Directors may submit to the Commission for its consideration any matter

    that has been delegated in this paragraph. Nothing in this paragraph

    prohibits the Commission, at its election, from exercising the

    authority delegated in this paragraph.

    (6) Subpoenas to foreign persons. A foreign person whose access to

    an electronic trading facility is limited or denied at the direction of

    the Commission based on the Commission's belief that the foreign person

    has failed timely to comply with a subpoena as provided under section

    2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt

    hearing under the procedures provided in Sec. 21.03(b) and (h) of this

    chapter.

    (7) Prohibited representation. An electronic trading facility

    relying upon the exemption in section 2(h)(3) of the Act, with respect

    to agreements, contracts or transactions that are not significant price

    discovery contracts, shall not represent to any person that it is

    registered with, designated, recognized, licensed or approved by the

    Commission.

    * * * * *

    0

    29. Section 36.3 is amended by revising paragraph (c) to read as

    follows:

    Sec. 36.3 Exempt commercial markets.

    * * * * *

    (c) Significant price discovery contracts--(1) Criteria for

    significant price discovery determination. The Commission may

    determine, in its discretion, that an electronic trading facility

    operating a market in reliance on the exemption in section 2(h)(3) of

    the Act performs a significant price discovery function for

    transactions in the cash market for a commodity underlying any

    agreement, contract or transaction executed or traded on the facility.

    In making such a determination, the Commission shall consider, as

    appropriate:

    (i) Price linkage. The extent to which the agreement, contract or

    transaction uses or otherwise relies on a daily or final settlement

    price, or other major price parameter, of a contract or contracts

    listed for trading on or subject to the rules of a designated contract

    market or a derivatives transaction execution facility, or a

    significant price discovery contract traded on an electronic trading

    facility, to value a position, transfer or convert a position, cash or

    financially settle a position, or close out a position;

    (ii) Arbitrage. The extent to which the price for the agreement,

    contract or transaction is sufficiently related to the price of a

    contract or contracts listed for trading on or subject to the rules of

    a designated contract market or derivatives transaction execution

    facility, or a significant price discovery contract or contracts

    trading on or subject to the rules of an electronic trading facility,

    so as to permit market participants to effectively arbitrage between

    the markets by simultaneously maintaining positions or executing trades

    in the contracts on a frequent and recurring basis;

    (iii) Material price reference. The extent to which, on a frequent

    and recurring basis, bids, offers, or transactions in a commodity are

    directly based on, or are determined by referencing, the prices

    generated by agreements, contracts or transactions being traded or

    executed on the electronic trading facility;

    (iv) Material liquidity. The extent to which the volume of

    agreements, contracts or transactions in the commodity being traded on

    the electronic trading facility is sufficient to have a material effect

    on other agreements, contracts or transactions listed for trading on or

    subject to the rules of a designated contract market, a derivatives

    transaction execution facility, or an electronic trading facility

    operating in reliance on the exemption in section 2(h)(3) of the Act;

    (v) Other material factors [Reserved].

    (2) Notification of possible significant price discovery contract

    conditions. An electronic trading facility operating in reliance on

    section 2(h)(3) of the Act shall promptly notify the Commission, and

    such notification shall be accompanied by supporting information or

    data concerning any contract that:

    (i) Averaged five trades per day or more over the most recent

    calendar quarter; and

    (ii) (A) For which the exchange sells its price information

    regarding the contract to market participants or industry publications;

    or

    (B) Whose daily closing or settlement prices on 95 percent or more

    of the days in the most recent quarter were within 2.5 percent of the

    contemporaneously determined closing, settlement or other daily price

    of another agreement, contract or transaction.

    (3) Procedure for significant price discovery determination. Before

    making a final price discovery determination under this paragraph, the

    Commission shall publish notice in the Federal Register that it intends

    to undertake a determination with respect to whether a particular

    agreement, contract or transaction performs a significant price

    discovery function and to receive written data, views and arguments

    relevant to its determination from the electronic trading facility and

    other interested persons. Any such written data, views and arguments

    shall be filed with the Secretary of the Commission, in the form and

    manner specified by the Commission, within 30 calendar days of

    publication of notice in the Federal Register or within such other time

    specified by the Commission. After prompt consideration of all relevant

    information, the Commission shall, within a reasonable period of time

    after the close of the comment period, issue an order explaining its

    determination whether the agreement, contract or transaction executed

    or traded by the electronic trading facility performs a significant

    price discovery function under the criteria specified in paragraph

    (c)(1)(i) through (v) of this section.

    (4) Compliance with core principles. Following the issuance of an

    order by the Commission that the electronic trading facility executes

    or trades an agreement, contract or transaction that performs a

    significant price discovery function, the electronic trading facility

    must demonstrate, with respect to that agreement, contract or

    transaction, compliance with the Core Principles under section

    2(h)(7)(C) of the Act and the applicable provisions of this part. If

    the Commission's order represents the first time it has determined that

    one of the electronic trading facility's agreements, contracts or

    transactions performs a significant price discovery function, the

    facility must submit a

    [[Page 12196]]

    written demonstration of compliance with the Core Principles within 90

    calendar days of the date of the Commission's order. For each

    subsequent determination by the Commission that the electronic trading

    facility has an additional agreement, contract or transaction that

    performs a significant price discovery function, the facility must

    submit a written demonstration of compliance with the Core Principles

    within 30 calendar days of the date of the Commission's order.

    Attention is directed to Appendix B of this part for guidance on and

    acceptable practices for complying with the Core Principles.

    Submissions demonstrating how the electronic trading facility complies

    with the Core Principles with respect to its significant price

    discovery contract must be filed with the Secretary of the Commission

    at its Washington, DC headquarters. Submissions must include the

    following:

    (i) A written certification that the significant price discovery

    contract(s) complies with the Act and regulations thereunder;

    (ii) A copy of the electronic trading facility's rules (as defined

    in Sec. 40.1 of this chapter) and any technical manuals, other guides

    or instructions for users of, or participants in, the market, including

    minimum financial standards for members or market participants.

    Subsequent rule changes must be certified by the electronic trading

    facility pursuant to section 5c(c) of the Act and Sec. 40.6 of this

    chapter. The electronic trading facility also may request Commission

    approval of any rule changes pursuant to section 5c(c) of the Act and

    Sec. 40.5 of this chapter;

    (iii) A description of the trading system, algorithm, security and

    access limitation procedures with a timeline for an order from input

    through settlement, and a copy of any system test procedures, tests

    conducted, test results and contingency or disaster recovery plans;

    (iv) A copy of any documents pertaining to or describing the

    electronic trading system's legal status and governance structure,

    including governance fitness information;

    (v) An executed or executable copy of any agreements or contracts

    entered into or to be entered into by the electronic trading facility,

    including partnership or limited liability company, third-party

    regulatory service, or member or user agreements, that enable or

    empower the electronic trading facility to comply with a Core

    Principle;

    (vi) A copy of any manual or other document describing, with

    specificity, the manner in which the trading facility will conduct

    trade practice, market and financial surveillance;

    (vii) To the extent that any of the items in paragraphs (c)(4)(ii)

    through (vi) of this section raise issues that are novel, or for which

    compliance with a Core Principle is not self-evident, an explanation of

    how that item satisfies the applicable Core Principle or Principles.

    The electronic trading facility must identify with particularity

    information in the submission that will be subject to a request for

    confidential treatment pursuant to Sec. 145.09 of this chapter. The

    electronic trading facility must follow the procedures specified in

    Sec. 40.8 of this chapter with respect to any information in its

    submission for which confidential treatment is requested.

    (5) Determination of compliance with core principles. The

    Commission shall take into consideration differences between cleared

    and uncleared significant price discovery contracts when reviewing the

    implementation of the Core Principles by an electronic trading

    facility. The electronic facility also has reasonable discretion in

    accounting for differences between cleared and uncleared significant

    price discovery contracts when establishing the manner in which it

    complies with the Core Principles.

    (6) Information relating to compliance with core principles. Upon

    request by the Commission, an electronic trading facility trading a

    significant price discovery contract shall file with the Commission a

    written demonstration, containing such supporting data, information and

    documents, in the form and manner and within such time as the

    Commission may specify, that the electronic trading facility is in

    compliance with one or more Core Principles as specified in the

    request, or that is otherwise requested by the Commission to enable the

    Commission to satisfy its obligations under the Act.

    (7) Enforceability. An agreement, contract or transaction entered

    into on or pursuant to the rules of an electronic trading facility

    trading or executing a significant price discovery contract shall not

    be void, voidable, subject to rescission or otherwise invalidated or

    rendered unenforceable as a result of:

    (i) A violation by the electronic trading facility of the

    provisions of section 2(h) of the Act or this part; or

    (ii) Any Commission proceeding to alter or supplement a rule, term

    or condition under section 8a(7) of the Act, to declare an emergency

    under section 8a(9) of the Act, or any other proceeding the effect of

    which is to alter, supplement or require an electronic trading facility

    to adopt a specific term or condition, trading rule or procedure, or to

    take or refrain from taking a specific action.

    (8) Procedures for vacating a determination of a significant price

    discovery function--(i) By the electronic trading facility. An

    electronic trading facility that executes or trades an agreement,

    contract or transaction that the Commission has determined performs a

    significant price discovery function under paragraph (c)(3) of this

    section may petition the Commission to vacate that determination. The

    petition shall demonstrate that the agreement, contract or transaction

    no longer performs a significant price discovery function under the

    criteria specified in paragraph (c)(1), and has not done so for at

    least the prior 12 months. An electronic trading facility shall not

    petition for a vacation of a significant price discovery determination

    more frequently than once every 12 months for any individual contract.

    (ii) By the Commission. The Commission may, on its own initiative,

    begin vacation proceedings if it believes that an agreement, contract

    or transaction has not performed a significant price discovery function

    for at least the prior 12 months.

    (iii) Procedure. Before making a final determination whether an

    agreement, contract or transaction has ceased to perform a significant

    price discovery function, the Commission shall publish notice in the

    Federal Register that it intends to undertake such a determination and

    to receive written data, views and arguments relevant to its

    determination from the electronic trading facility and other interested

    persons. Written submissions shall be filed with the Secretary of the

    Commission in the form and manner specified by the Commission, within

    30 calendar days of publication of notice in the Federal Register or

    within such other time specified by the Commission. After consideration

    of all relevant information, the Commission shall issue an order

    explaining its determination whether the agreement, contract or

    transaction has ceased to perform a significant price discovery

    function and, if so, vacating its prior order. If such an order issues,

    and the Commission subsequently determines, on its own initiative or

    after notification by the electronic trading facility, that the

    agreement, contract or transaction that was subject to the vacation

    order again performs a significant price discovery function, the

    electronic trading facility must comply with the Core Principles within

    30 calendar days of the date of the Commission's order.

    [[Page 12197]]

    (iv) Automatic vacation of significant price discovery

    determination. Regardless of whether a proceeding to vacate has been

    initiated, any significant price discovery contract that has no open

    interest and in which no trading has occurred for a period of 12

    complete and consecutive calendar months shall, without further

    proceedings, no longer be considered to be a significant price

    discovery contract.

    0

    30. Section 36.3 is amended by adding new paragraph (d) to read as

    follows:

    (d) Commission Review. The Commission shall, at least annually,

    evaluate as appropriate agreements, contracts or transactions conducted

    on an electronic trading facility in reliance on the exemption provided

    in section 2(h)(3) of the Act to determine whether they serve a

    significant price discovery function as described in Sec. (d)(1)

    above.

    0

    31. Add a new Appendix A to Part 36 to read as follows:

    Appendix A to Part 36--Guidance on Significant Price Discovery

    Contracts

    1. Section 2(h)(7) of the CEA specifies four factors that the

    Commission must consider, as appropriate, in making a determination

    that a contract is performing a significant price discovery

    function. The four factors prescribed by the statute are: Price

    Linkage; Arbitrage; Material Price Reference; and Material

    Liquidity.

    2. Not all listed factors must be present to support a

    determination that a contract performs a significant price discovery

    function. Moreover, the statutory language neither prioritizes the

    factors nor specifies the degree to which a significant price

    discovery contract must conform to the various factors. Congress has

    indicated that it intends that the Commission should not make a

    determination that an agreement, contract or transaction performs a

    significant price discovery function on the basis of the Price

    Linkage factor unless the agreement, contract or transaction also

    has sufficient volume to impact other regulated contracts or to

    become an independent price reference or benchmark that is regularly

    utilized by the public. The Commission believes that the Arbitrage

    and Material Price Reference factors can be considered separately

    from each other. That is, the Commission could make a determination

    that a contract serves a significant price discovery function based

    on the presence of one of these factors and the absence of the

    other. The presence of any of these factors, however, would not

    necessarily be sufficient to establish the contract as a significant

    price discovery contract. The fourth factor, Liquidity, would be

    considered in conjunction with the arbitrage and linkage factors as

    a significant amount of liquidity presumably would be necessary for

    a contract to perform a significant price discovery function in

    conjunction with these factors.

    3. These factors do not lend themselves to a mechanical

    checklist or formulaic analysis. Accordingly, this guidance is

    intended to illustrate which factors, or combinations of factors,

    the Commission will look to when determining that a contract is

    performing a significant price discovery function, and under what

    circumstances the presence of a particular factor or factors would

    be sufficient to support such a determination.

    (A) MATERIAL LIQUIDITY--The extent to which the volume of

    agreements, contracts or transactions in the commodity being traded

    on the electronic trading facility is sufficient to have a material

    effect on other agreements, contracts or transactions listed for

    trading on or subject to the rules of a designated contract market,

    a derivatives transaction execution facility, or an electronic

    trading facility operating in reliance on the exemption in section

    2(h)(3) of the Act.

    1. Liquidity is a broad concept that captures the ability to

    transact immediately with little or no price concession.

    Traditionally, objective measures of trading such as volume or open

    interest have been used as measures of liquidity. So, for example, a

    market in which trades occur multiple times per minute at prices

    that differ by only fractions of a cent normally would be considered

    highly liquid, since presumably a trader could quickly execute a

    trade at a price that was approximately the same as the price for

    other recently executed trades. Other factors also will affect the

    characterization of liquidity, such as whether a large trade--e.g.,

    100 contracts versus 1 contract--could be executed without a

    significant price concession. For example, having to wait a day to

    sell 1000 bushels of corn may be considered an illiquid market while

    waiting a day to sell a home may be considered quite liquid. Thus,

    quantifying the levels of immediacy and price concession that would

    define material liquidity may differ from one market or commodity to

    another.

    2. The Commission believes that material liquidity alternatively

    can be identified by the impact liquidity exhibits through observed

    prices. In markets where material liquidity exists, a more or less

    continuous stream of prices can be observed and the prices should be

    similar. For example, if the trading of a contract occurs on average

    five times a day, there will be on average five observed prices for

    the contract per day. If the market is liquid in terms of traders

    having to make little in the way of price concessions to execute

    these trades, the prices of this contract should be similar to those

    observed for similar or related contracts traded in liquid markets

    elsewhere. Thus, in making determinations that contracts have

    material liquidity, the Commission will look to transaction prices,

    both in terms of how often prices are observed and the extent to

    which observed prices tend to correlate with other contemporaneous

    prices.

    3. The Commission anticipates that material liquidity will

    frequently be a consideration in evaluating whether a contract is a

    significant price discovery contract; however, there may be

    circumstances in which other factors so dominate the conclusion that

    a contract is serving a significant price discovery function that a

    finding of material liquidity in the contract would not be

    necessary. Circumstances in which this might arise are discussed

    with respect to the assessment of other factors below.

    4. Finally, material liquidity itself would not be sufficient to

    make a determination that a contract is a significant price

    discovery contract, but combined with other factors it can serve as

    a guidepost indicating which contracts are functioning as

    significant price discovery contracts. As further discussed below,

    material liquidity, as reflected through the prices of linked or

    arbitraged contracts, will be a primary consideration in determining

    whether such contracts are significant price discovery contracts.

    (B) PRICE LINKAGE--The extent to which the agreement, contract

    or transaction uses or otherwise relies on a daily or final

    settlement price, or other major price parameter, of a contract or

    contracts listed for trading on or subject to the rules of a

    designated contract market or a derivatives transaction execution

    facility, or a significant price discovery contract traded on an

    electronic trading facility, to value a position, transfer or

    convert a position, cash or financially settle a position, or close

    out a position.

    1. A price-linked contract is a contract that relies on a

    contract traded on another trading facility to settle, value or

    otherwise offset the price-linked contract. The link may involve a

    one-to-one linkage, in that the value of the linked contract is

    based on a single contract's price, or it may involve multiple

    contracts. An example of a multiple contract linkage might be where

    the settlement price is calculated as an index of prices obtained

    from a basket of contracts traded on other exchanges.

    2. For a linked contract, the mere fact that a contract is

    linked to another contract will not be sufficient to support a

    determination that a contract performs a significant price discovery

    function. To assess whether such a determination is warranted, the

    Commission will examine the relationship between transaction prices

    of the linked contract and the prices of the referenced contract(s).

    The Commission believes that where material liquidity exists, prices

    for the linked contract would be observed to be substantially the

    same as or move substantially in conjunction with the prices of the

    referenced contract(s). Where such price characteristics are

    observed on an ongoing basis, the Commission would expect to

    determine that the linked contract is a significant price discovery

    contract.

    3. As an example, where the Commission has observed price

    linkage, it will next consider whether transactions were occurring

    on a daily basis for the linked contract in material volumes.

    (Conversely, where volume has increased noticeably in a particular

    contract, the Commission would look for linkage) The ultimate level

    of volume that would be considered material for purposes of deeming

    a contract a significant price discovery contract will likely differ

    from one contract to another depending on the characteristics of the

    underlying commodity and the overall size of the physical market in

    which it is traded. At a minimum, however, the Commission will

    consider a linked contract which has volume

    [[Page 12198]]

    equal to 5% of the volume of trading in the contract to which it is

    linked to have sufficient volume potentially to be deemed a

    significant price discovery contract.

    4. In combination with this volume level, the Commission will

    also examine the relationship between prices of the linked contract

    and the contract to which it is linked to determine whether a

    contract is serving a significant price discovery function. As a

    threshold, the Commission will consider a 2.5 percent price range

    for 95 percent of contemporaneously determined closing, settlement,

    or other daily prices over the most recent quarter to be

    sufficiently close for a linked contract potentially to be deemed a

    significant price discovery contract. For example, if, over the most

    recent quarter, it was found that 95 percent of the closing,

    settlement, or other daily prices of the contract, which have been

    calculated using transaction prices, were within 2.5 percent of the

    contemporaneously determined closing, settlement, or other daily

    prices of a contract to which it was linked, the Commission

    potentially would consider the contract to perform a significant

    price discovery function.

    (C) ARBITRAGE CONTRACTS--The extent to which the price for the

    agreement, contract or transaction is sufficiently related to the

    price of a contract or contracts listed for trading on or subject to

    the rules of a designated contract market or derivatives transaction

    execution facility, or a significant price discovery contract or

    contracts trading on or subject to the rules of an electronic

    trading facility, so as to permit market participants to effectively

    arbitrage between the markets by simultaneously maintaining

    positions or executing trades in the contracts on a frequent and

    recurring basis.

    1. Arbitrage contracts are those contracts that can be combined

    with other contracts to exploit expected economic relationships in

    anticipation of a profit. In assessing whether a contract can be

    incorporated into an arbitrage strategy, the Commission will weigh

    the terms and conditions of a contract in comparison to contracts

    that potentially could be used in an arbitrage strategy; will

    consult with industry or other sources regarding a contract's

    viability in an arbitrage strategy; and will rely on direct

    observation confirming the use of a contract in arbitrage

    strategies.

    2. As with linked contracts, the mere fact that a contract could

    be employed in an arbitrage strategy will not be sufficient to make

    a determination that a contract is a significant price discovery

    contract. In addition, the level of liquidity will be considered. To

    assess whether designation as a significant price discovery contract

    is warranted, the Commission will examine the relationship between

    transaction prices of an arbitrage contract and the prices of the

    contract(s) to which it is related. The Commission believes that

    where material liquidity exists, prices for the arbitrage contract

    would be observed to move substantially in conjunction with the

    prices of the related contract(s) to which it is economically

    linked. Where such price characteristics are observed on an ongoing

    basis, it is likely that the linked contract performs a significant

    price discovery function.

    3. The Commission will apply the same threshold liquidity and

    price relationship standards for arbitrage contracts as it does for

    linked contracts. That is, the Commission will view the average of

    five trades per day or more threshold as the level of activity that

    would potentially meet the material volume criterion. With respect

    to prices, the Commission will consider an arbitrage contract

    potentially to be a significant price discovery contract if, over

    the most recent quarter, greater than 95 percent of the closing or

    settlement prices of the contract, which have been calculated using

    transaction prices, fall within 2.5 percent of the closing or

    settlement price of the contract or contracts to which it could be

    arbitraged.

    (D) MATERIAL PRICE REFERENCE--The extent to which, on a frequent

    and recurring basis, bids, offers or transactions in a commodity are

    directly based on, or are determined by referencing, the prices

    generated by agreements, contracts or transactions being traded or

    executed on the electronic trading facility.

    1. The Commission will rely on one of two sources of evidence--

    direct or indirect--to determine that the price of a contract was

    being used as a material price reference and, therefore, serving a

    significant price discovery function. The primary source of direct

    evidence is that cash market bids, offers or transactions are

    directly based on, or quoted at a differential to, the prices

    generated on the market on a frequent and recurring basis. The

    Commission expects that normally only contracts with material

    liquidity will be referenced by the cash market; however, the

    Commission notes that it may be possible for a contract to have very

    low liquidity and yet still be used as a price reference. In such

    cases, the simple fact that participants in the underlying cash

    market broadly have elected to use the contract price as a price

    reference would be a strong indicator that the contract is a

    significant price discovery contract.

    2. In evaluating a contract's price discovery role as a directly

    referenced price source, the Commission will perform an analysis to

    determine whether cash market participants are quoting bid or offer

    prices or entering into transactions at prices that are set either

    explicitly or implicitly at a differential to prices established for

    the contract. Cash market prices are set explicitly at a

    differential to the section 2(h)(3) contract when, for instance,

    they are quoted in dollars and cents above or below the reference

    contract's price. Cash market prices are set implicitly at a

    differential to a section 2(h)(3) contract when, for instance, they

    are arrived at after adding to, or subtracting from the section

    2(h)(3) contract, but then quoted or reported at a flat price. The

    Commission will also consider whether cash market entities are

    quoting cash prices based on a section 2(h)(3) contract on a

    frequent and recurring basis.

    3. The second source of evidence is that the price of the

    contract is being routinely disseminated in widely distributed

    industry publications--or offered by the ECM itself for some form of

    remuneration--and consulted on a frequent and recurring basis by

    industry participants in pricing cash market transactions. As with

    contract prices that are directly incorporated into cash market

    prices, the Commission assumes that industry publications choose to

    publish prices because of the value they transfer to industry

    participants for the purpose of formulating prices in the cash

    market.

    4. In applying this criterion, consideration will be given to

    whether prices established by a section 2(h)(3) contract are

    reported in a widely distributed industry publication. In making

    this determination, the Commission will consider the reputation of

    the publication within the industry, how frequently it is published,

    and whether the information contained in the publication is

    routinely consulted by industry participants in pricing cash market

    transactions.

    5. Under a Material Price Reference analysis, the Commission

    expects that material liquidity in the contract likely will be the

    primary motivation for a publisher to publish particular prices. In

    other words, the fact that the price of a contract is being used as

    a reference by industry participants suggests, prima facie, that the

    contract performs a significant price discovery function. But the

    Commission recognizes that trading levels could nonetheless be low

    for the contract while still serving a significant price discovery

    function and that evidence of routine publication and consultation

    by industry participants may be sufficient to establish the contract

    as a significant price discovery contract. On the other hand, while

    cash market participants may regularly refer to published prices of

    a particular contract when establishing cash market prices, it may

    be the case that the contract itself is a niche market for a

    specialized grade of the commodity or for delivery at a minor

    geographic location. In such cases, the Commission will look to such

    measures as trading volume, open interest, and the significance of

    the underlying cash market to make a determination that a contract

    is functioning as a significant price discovery contract. If an

    examination of trading in the contract were to reveal that true

    price discovery was occurring in other more broadly defined

    contracts and that this contract was itself simply reflective of

    those broader contracts, it is less likely the Commission will deem

    the contract a significant price discovery contract.

    6. Because price referencing normally occurs out of the view of

    the electronic trading facility, the Commission may have difficulty

    ascertaining the extent to which cash market participants actually

    reference or consult a contract's price when transacting. The

    Commission expects, however, that as a contract begins to be relied

    upon to set a reference price, market participants will be

    increasingly willing to purchase price information. To the extent,

    then, that an electronic trading facility begins to sell its price

    information regarding a contract to market participants or industry

    publications, the contract will meet a threshold standard to

    indicate that the contract potentially is a significant price

    discovery contract.

    0

    32. Add a new Appendix B to Part 36 to read as follows:

    [[Page 12199]]

    Appendix B to Part 36--Guidance on, and Acceptable Practices in,

    Compliance With Core Principles

    1. This Appendix provides guidance on complying with the core

    principles under section 2(h)(7)(C) of the Act and this part, both

    initially and on an ongoing basis. The guidance is provided in

    paragraph (a) following each core principle and can be used to

    demonstrate to the Commission core principle compliance under Sec.

    36.3(c)(4). The guidance for each core principle is illustrative

    only of the types of matters an electronic trading facility may

    address, as applicable, and is not intended to be used as a

    mandatory checklist. Addressing the issues and questions set forth

    in this guidance will help the Commission in its consideration of

    whether the electronic trading facility is in compliance with the

    core principles. A submission pursuant to Sec. 36.3(c)(4) should

    include an explanation or other form of documentation demonstrating

    that the electronic trading facility complies with the core

    principles.

    2. Acceptable practices meeting selected requirements of the

    core principles are set forth in paragraph (b) following each core

    principle. Electronic trading facilities on which significant price

    discovery contracts are traded or executed that follow the specific

    practices outlined under paragraph (b) for any core principle in

    this appendix will meet the selected requirements of the applicable

    core principle. Paragraph (b) is for illustrative purposes only, and

    does not state the exclusive means for satisfying a core principle.

    CORE PRINCIPLE I OF SECTION 2(h)(7)(C)--CONTRACTS NOT READILY

    SUSCEPTIBLE TO MANIPULATION. The electronic trading facility shall

    list only significant price discovery contracts that are not readily

    susceptible to manipulation.

    (a) Guidance. Upon determination by the Commission that a

    contract listed for trading on an electronic trading facility is a

    significant price discovery contract, the electronic trading

    facility must self-certify the terms and conditions of the

    significant price discovery contract under Sec. 36.3(c)(4) within

    90 calendar days of the date of the Commission's order, if the

    contract is the electronic trading facility's first significant

    price discovery contract; or 30 days from the date of the

    Commission's order if the contract is not the electronic trading

    facility's first significant price discovery contract. Once the

    Commission determines that a contract performs a significant price

    discovery function, subsequent rule changes must be self-certified

    to the Commission by the electronic trading facility pursuant to

    Sec. 40.6 or submitted to the Commission for review and approval

    pursuant to Sec. 40.5.

    (b) Acceptable practices. Guideline No. 1, 17 CFR part 40,

    Appendix A may be used as guidance in meeting this core principle

    for significant price discovery contracts.

    CORE PRINCIPLE II OF SECTION 2(h)(7)(C)--MONITORING OF TRADING.

    The electronic trading facility shall monitor trading in significant

    price discovery contracts to prevent market manipulation, price

    distortion, and disruptions of the delivery of cash-settlement

    process through market surveillance, compliance and disciplinary

    practices and procedures, including methods for conducting real-time

    monitoring of trading and comprehensive and accurate trade

    reconstructions.

    (a) Guidance. An electronic trading facility on which

    significant price discovery contracts are traded or executed should,

    with respect to those contracts, demonstrate a capacity to prevent

    market manipulation and have trading and participation rules to

    detect and deter abuses. The facility should seek to prevent market

    manipulation and other trading abuses through a dedicated regulatory

    department or by delegation of that function to an appropriate third

    party. An electronic trading facility also should have the authority

    to intervene as necessary to maintain an orderly market.

    (b) Acceptable practices--(1) An acceptable trade monitoring

    program. An acceptable trade monitoring program should facilitate,

    on both a routine and non-routine basis, arrangements and resources

    to detect and deter abuses through direct surveillance of each

    significant price discovery contract. Direct surveillance of each

    significant price discovery contract will generally involve the

    collection of various market data, including information on

    participants' market activity. Those data should be evaluated on an

    ongoing basis in order to make an appropriate regulatory response to

    potential market disruptions or abusive practices. For contracts

    with a substantial number of participants, an effective surveillance

    program should employ a much more comprehensive large trader

    reporting system.

    (2) Authority to collect information and documents. The

    electronic trading facility should have the authority to collect

    information and documents in order to reconstruct trading for

    appropriate market analysis. Appropriate market analysis should

    enable the electronic trading facility to assess whether each

    significant price discovery contract is responding to the forces of

    supply and demand. Appropriate data usually include various

    fundamental data about the underlying commodity, its supply, its

    demand, and its movement through market channels. Especially

    important are data related to the size and ownership of deliverable

    supplies--the existing supply and the future or potential supply--

    and to the pricing of the deliverable commodity relative to the

    futures price and relative to similar, but non-deliverable, kinds of

    the commodity. For cash-settled contracts, it is more appropriate to

    pay attention to the availability and pricing of the commodity

    making up the index to which the contract will be settled, as well

    as monitoring the continued suitability of the methodology for

    deriving the index.

    (3) Ability to assess participants' market activity and power.

    To assess participants' activity and potential power in a market,

    electronic trading facilities, with respect to significant price

    discovery contracts, at a minimum should have routine access to the

    positions and trading of its participants and, if applicable, should

    provide for such access through its agreements with its third-party

    provider of clearing services.

    CORE PRINCIPLE III OF SECTION 2(h)(7)(C)--ABILITY TO OBTAIN

    INFORMATION. The electronic trading facility shall establish and

    enforce rules that allow the electronic trading facility to obtain

    any necessary information to perform any of the functions described

    in this subparagraph, provide the information to the Commission upon

    request, and have the capacity to carry out such international

    information-sharing agreements as the Commission may require.

    (a) Guidance. An electronic trading facility on which

    significant price discovery contracts are traded or executed should,

    with respect to those contracts, have the ability and authority to

    collect information and documents on both a routine and non-routine

    basis, including the examination of books and records kept by

    participants. This includes having arrangements and resources for

    recording full data entry and trade details and safely storing audit

    trail data. An electronic trading facility should have systems

    sufficient to enable it to use the information for purposes of

    assisting in the prevention of participant and market abuses through

    reconstruction of trading and providing evidence of any violations

    of the electronic trading facility's rules.

    (b) Acceptable practices--(1) The goal of an audit trail is to

    detect and deter market abuse. An effective contract audit trail

    should capture and retain sufficient trade-related information to

    permit electronic trading facility staff to detect trading abuses

    and to reconstruct all transactions within a reasonable period of

    time. An audit trail should include specialized electronic

    surveillance programs that identify potentially abusive trades and

    trade patterns. An acceptable audit trail must be able to track an

    order from time of entry into the trading system through its fill.

    The electronic trading facility must create and maintain an

    electronic transaction history database that contains information

    with respect to transactions executed on each significant price

    discovery contract.

    (2) An acceptable audit trail should include the following:

    original source documents, transaction history, electronic analysis

    capability, and safe storage capability. An acceptable audit trail

    system would satisfy the following practices.

    (i) Original source documents. Original source documents include

    unalterable, sequentially identified records on which trade

    execution information is originally recorded. For each order

    (whether filled, unfilled or cancelled, each of which should be

    retained or electronically captured), such records reflect the terms

    of the order, an account identifier that relates back to the

    account(s) owner(s), and the time of order entry.

    (ii) Transaction history. A transaction history consists of an

    electronic history of each transaction, including (a) all the data

    that are input into the trade entry or matching system for the

    transaction to match and clear; (b) timing and sequencing data

    adequate to reconstruct trading; and (c) the identification of each

    account to which fills are allocated.

    (iii) Electronic analysis capability. An electronic analysis

    capability that permits

    [[Page 12200]]

    sorting and presenting data included in the transaction history so

    as to reconstruct trading and to identify possible trading

    violations with respect to market abuse.

    (iv) Safe storage capability. Safe storage capability provides

    for a method of storing the data included in the transaction history

    in a manner that protects the data from unauthorized alteration, as

    well as from accidental erasure or other loss. Data should be

    retained in the form and manner specified by the Commission or,

    where no acceptable manner of retention is specified, in accordance

    with the recordkeeping standards of Commission rule 1.31.

    (3) Arrangements and resources for the disclosure of the

    obtained information and documents to the Commission upon request.

    To satisfy section 2(h)(7)(C)(III)(bb), the electronic trading

    facility should maintain records of all information and documents

    related to each significant price discovery contract in a form and

    manner acceptable to the Commission. Where no acceptable manner of

    maintenance is specified, records should be maintained in accordance

    with the recordkeeping standards of Commission rule 1.31.

    (4) The capacity to carry out appropriate information-sharing

    agreements as the Commission may require. Appropriate information-

    sharing agreements could be established with other markets or the

    Commission can act in conjunction with the electronic trading

    facility to carry out such information sharing.

    CORE PRINCIPLE IV OF SECTION 2(h)(7)(C)--POSITION LIMITATIONS OR

    ACCOUNTABILITY. The electronic trading facility shall adopt, where

    necessary and appropriate, position limitations or position

    accountability for speculators in significant price discovery

    contracts, taking into account positions in other agreements,

    contracts and transactions that are treated by a derivatives

    clearing organization, whether registered or not registered, as

    fungible with such significant price discovery contracts to reduce

    the potential threat of market manipulation or congestion,

    especially during trading in the delivery month.

    (a) Guidance. [Reserved]

    (b) Acceptable practices for uncleared trades [Reserved]

    (c) Acceptable practices for cleared trades--(1) Introduction.

    In order to diminish potential problems arising from excessively

    large speculative positions, and to facilitate orderly liquidation

    of expiring contracts, an electronic trading facility relying on the

    exemption in section 2(h)(3) should adopt rules that set position

    limits or accountability levels on traders' cleared positions in

    significant price discovery contracts. These position limit rules

    specifically may exempt bona fide hedging; permit other exemptions;

    or set limits differently by market, delivery month or time period.

    For the purpose of evaluating a significant price discovery

    contract's speculative-limit program for cleared positions, the

    Commission will consider the specified position limits or

    accountability levels, aggregation policies, types of exemptions

    allowed, methods for monitoring compliance with the specified limits

    or levels, and procedures for dealing with violations.

    (2) Accounting for cleared trades--(i) Speculative-limit levels

    typically should be set in terms of a trader's combined position

    involving cleared trades in a significant price discovery contract,

    plus positions in agreements, contracts and transactions that are

    treated by a derivatives clearing organization, whether registered

    or not registered, as fungible with such significant price discovery

    contract. (This circumstance typically exists where an exempt

    commercial market lists a particular contract for trading but also

    allows for positions in that contract to be cleared together with

    positions established through bilateral or off-exchange

    transactions, such as block trades, in the same contract.

    Essentially, both the on-facility and off-facility transactions are

    considered fungible with each other.) In this connection, the

    electronic trading facility should make arrangements to ensure that

    it is able to ascertain accurate position data for the market. (ii)

    For significant price discovery contracts that are traded on a

    cleared basis, the electronic trading facility should apply position

    limits to cleared transactions in the contract.

    (3) Limitations on spot-month positions. Spot-month limits

    should be adopted for significant price discovery contracts to

    minimize the susceptibility of the market to manipulation or price

    distortions, including squeezes and corners or other abusive trading

    practices.

    (i) Contracts economically equivalent to an existing contract.

    An electronic trading facility that lists a significant price

    discovery contract that is economically-equivalent to another

    significant price discovery contract or to a contract traded on a

    designated contract market or derivatives transaction execution

    facility should set the spot-month limit for its significant price

    discovery contract at the same level as that specified for the

    economically-equivalent contract.

    (ii) Contracts that are not economically equivalent to an

    existing contract. There may not be an economically-equivalent

    significant price discovery contract or economically-equivalent

    contract traded on a designated contract market or derivatives

    transaction execution facility. In this case, the spot-month

    speculative position limit should be established in the following

    manner. The spot-month limit for a physical delivery market should

    be based upon an analysis of deliverable supplies and the history of

    spot-month liquidations. The spot-month limit for a physical-

    delivery market is appropriately set at no more than 25 percent of

    the estimated deliverable supply. In the case where a significant

    price discovery contract has a cash settlement provision, the spot-

    month limit should be set at a level that minimizes the potential

    for price manipulation or distortion in the significant price

    discovery contract itself; in related futures and options contracts

    traded on a designated contract market or derivatives transaction

    execution facility; in other significant price discovery contracts;

    in other fungible agreements, contracts and transactions; and in the

    underlying commodity.

    (4) Position accountability for non-spot-month positions. The

    electronic trading facility should establish for its significant

    price discovery contracts non-spot individual month position

    accountability levels and all-months-combined position

    accountability levels. An electronic trading facility may establish

    non-spot individual month position limits and all-months-combined

    position limits for its significant price discovery contracts in

    lieu of position accountability levels.

    (i) Definition. Position accountability provisions provide a

    means for an exchange to monitor traders' positions that may

    threaten orderly trading. An acceptable accountability provision

    sets target accountability threshold levels that may be exceeded,

    but once a trader breaches such accountability levels, the

    electronic trading facility should initiate an inquiry to determine

    whether the individual's trading activity is justified and is not

    intended to manipulate the market. As part of its investigation, the

    electronic trading facility may inquire about the trader's rationale

    for holding a position in excess of the accountability levels. An

    acceptable accountability provision should provide the electronic

    trading facility with the authority to order the trader not to

    further increase positions. If a trader fails to comply with a

    request for information about positions held, provides information

    that does not sufficiently justify the position, or continues to

    increase contract positions after a request not to do so is issued

    by the facility, then the accountability provision should enable the

    electronic trading facility to require the trader to reduce

    positions.

    (ii) Contracts economically equivalent to an existing contract.

    When an electronic trading facility lists a significant price

    discovery contract that is economically equivalent to another

    significant price discovery contract or to a contract traded on a

    designated contract market or derivatives transaction execution

    facility, the electronic trading facility should set the non-spot

    individual month position accountability level and all-months-

    combined position accountability level for its significant price

    discovery contract at the same levels, or lower, as those specified

    for the economically-equivalent contract.

    (iii) Contracts that are not economically equivalent to an

    existing contract. For significant price discovery contracts that

    are not economically equivalent to an existing contract, the trading

    facility shall adopt non-spot individual month and all-months-

    combined position accountability levels that are no greater than 10

    percent of the average combined futures and delta-adjusted option

    month-end open interest for the most recent calendar year. For

    electronic trading facilities that choose to adopt non-spot

    individual month and all-months-combined position limits in lieu of

    position accountability levels for their significant price discovery

    contracts, the limits should be set in the same manner as the

    accountability levels.

    (iv) Contracts economically equivalent to an existing contract

    with position limits. If a significant price discovery contract is

    economically equivalent to another significant price discovery

    contract or to a contract traded on a designated contract

    [[Page 12201]]

    market or derivatives transaction execution facility that has

    adopted non-spot or all-months-combined position limits, the

    electronic trading facility should set non-spot month position

    limits and all-months-combined position limits for its significant

    price discovery contract at the same (or lower) levels as those

    specified for the economically-equivalent contract.

    (5) Account aggregation. An electronic trading facility should

    have aggregation rules for significant price discovery contracts

    that apply to accounts under common control, those with common

    ownership, i.e., where there is a ten percent or greater financial

    interest, and those traded according to an express or implied

    agreement. Such aggregation rules should apply to cleared

    transactions with respect to applicable speculative position limits.

    An electronic trading facility will be permitted to set more

    stringent aggregation policies. An electronic trading facility may

    grant exemptions to its price discovery contracts' position limits

    for bona fide hedging (as defined in Sec. 1.3(z) of this chapter)

    and may grant exemptions for reduced risk positions, such as

    spreads, straddles and arbitrage positions.

    (6) Implementation deadlines. An electronic trading facility

    with a significant price discovery contract is required to comply

    with Core Principle IV as set forth in section 2(h)(7)C) of the Act

    within 90 calendar days of the date of the Commission's order

    determining that the contract performs a significant price discovery

    function if such contract is the electronic trading facility's first

    significant price discovery contract, or within 30 days of the date

    of the Commission's order if such contract is not the electronic

    trading facility's first significant price discovery contract. For

    the purpose of applying limits on speculative positions in newly-

    determined significant price discovery contracts, the Commission

    will permit a grace period following issuance of its order for

    traders with cleared positions in such contracts to become compliant

    with applicable position limit rules. Traders who hold cleared

    positions on a net basis in the electronic trading facility's

    significant price discovery contract must be at or below the

    specified position limit level no later than 90 calendar days from

    the date of the electronic trading facility's implementation of

    position limit rules, unless a hedge exemption is granted by the

    electronic trading facility. This grace period applies to both

    initial and subsequent price discovery contracts. Electronic trading

    facilities should notify traders of this requirement promptly upon

    implementation of such rules.

    (7) Enforcement provisions. The electronic trading facility

    should have appropriate procedures in place to monitor its position

    limit and accountability provisions and to address violations.

    (i) An electronic trading facility with significant price

    discovery contracts should use an automated means of detecting

    traders' violations of speculative limits or exemptions,

    particularly if the significant price discovery contracts have large

    numbers of traders. An electronic trading facility should monitor

    the continuing appropriateness of approved exemptions by

    periodically reviewing each trader's basis for exemption or

    requiring a reapplication. An automated system also should be used

    to determine whether a trader has exceeded applicable non-spot

    individual month position accountability levels and all-months-

    combined position accountability levels.

    (ii) An electronic trading facility should establish a program

    for effective enforcement of position limits for significant price

    discovery contracts. Electronic trading facilities should use a

    large trader reporting system to monitor and enforce daily

    compliance with position limit rules. The Commission notes that an

    electronic trading facility may allow traders to periodically apply

    to the electronic trading facility for an exemption and, if

    appropriate, be granted a position level higher than the applicable

    speculative limit. The electronic trading facility should establish

    a program to monitor approved exemptions from the limits. The

    position levels granted under such hedge exemptions generally should

    be based upon the trader's commercial activity in related markets

    including, but not limited to, positions held in related futures and

    options contracts listed for trading on designated contract markets,

    fungible agreements, contracts and transactions, as determined by

    either a registered or unregistered derivatives clearing

    organization. Electronic trading facilities may allow a brief grace

    period where a qualifying trader may exceed speculative limits or an

    existing exemption level pending the submission and approval of

    appropriate justification. An electronic trading facility should

    consider whether it wants to restrict exemptions during the last

    several days of trading in a delivery month. Acceptable procedures

    for obtaining and granting exemptions include a requirement that the

    electronic trading facility approve a specific maximum higher level.

    (iii) An acceptable speculative limit program should have

    specific policies for taking regulatory action once a violation of a

    position limit or exemption is detected. The electronic trading

    facility policies should consider appropriate actions.

    (8) Violation of Commission rules. A violation of position

    limits for significant price discovery contracts that have been

    self-certified by an electronic trading facility is also a violation

    of section 4a(e) of the Act.

    CORE PRINCIPLE V OF SECTION 2(h)(7)(C)--EMERGENCY AUTHORITY--The

    electronic trading facility shall adopt rules to provide for the

    exercise of emergency authority, in consultation or cooperation with

    the Commission, where necessary and appropriate, including the

    authority to liquidate open positions in significant price discovery

    contracts and to suspend or curtail trading in a significant price

    discovery contract.

    (a) Guidance. An electronic trading facility on which

    significant price discovery contracts are traded should have clear

    procedures and guidelines for decision-making regarding emergency

    intervention in the market, including procedures and guidelines to

    avoid conflicts of interest while carrying out such decision-making.

    An electronic trading facility on which significant price discovery

    contracts are executed or traded should also have the authority to

    intervene as necessary to maintain markets with fair and orderly

    trading as well as procedures for carrying out the intervention.

    Procedures and guidelines should include notifying the Commission of

    the exercise of the electronic trading facility's regulatory

    emergency authority, explaining how conflicts of interest are

    minimized, and documenting the electronic trading facility's

    decision-making process and the reasons for using its emergency

    action authority. Information on steps taken under such procedures

    should be included in a submission of a certified rule and any

    related submissions for rule approval pursuant to part 40 of this

    chapter, when carried out pursuant to an electronic trading

    facility's emergency authority. To address perceived market threats,

    the electronic trading facility on which significant price discovery

    contracts are executed or traded should, among other things, be able

    to impose position limits in the delivery month, impose or modify

    price limits, modify circuit breakers, call for additional margin

    either from market participants or clearing members (for contracts

    that are cleared through a clearinghouse), order the liquidation or

    transfer of open positions, order the fixing of a settlement price,

    order a reduction in positions, extend or shorten the expiration

    date or the trading hours, suspend or curtail trading on the

    electronic trading facility, order the transfer of contracts and the

    margin for such contracts from one market participant to another, or

    alter the delivery terms or conditions or, if applicable, should

    provide for such actions through its agreements with its third-party

    provider of clearing services.

    (b) Acceptable practices. [Reserved]

    CORE PRINCIPLE VI OF SECTION 2(h)(7)(C)--DAILY PUBLICATION OF

    TRADING INFORMATION. The electronic trading facility shall make

    public daily information on price, trading volume, and other trading

    data to the extent appropriate for significant price discovery

    contracts.

    (a) Guidance. An electronic trading facility, with respect to

    significant price discovery contracts, should provide to the public

    information regarding settlement prices, price range, volume, open

    interest, and other related market information for all applicable

    contracts as determined by the Commission on a fair, equitable and

    timely basis. Provision of information for any applicable contract

    can be through such means as provision of the information to a

    financial information service or by timely placement of the

    information on the electronic trading facility's public Web site.

    (b) Acceptable practices. Compliance with Sec. 16.01 of this

    chapter, which is mandatory, is an acceptable practice that

    satisfies the requirements of Core Principle VI.

    CORE PRINCIPLE VII OF SECTION 2(h)(7)(C)--COMPLIANCE WITH RULES.

    The electronic trading facility shall monitor and enforce compliance

    with the rules of the electronic trading facility, including the

    terms and conditions of any contracts to be traded and any

    limitations on access to the electronic trading facility.

    [[Page 12202]]

    (a) Guidance--(1) An electronic trading facility on which

    significant price discovery contracts are executed or traded should

    have appropriate arrangements and resources for effective trade

    practice surveillance programs, with the authority to collect

    information and documents on both a routine and non-routine basis,

    including the examination of books and records kept by its market

    participants. The arrangements and resources should facilitate the

    direct supervision of the market and the analysis of data collected.

    Trade practice surveillance programs may be carried out by the

    electronic trading facility itself or through delegation or

    contracting-out to a third party. If the electronic trading facility

    on which significant price discovery contracts are executed or

    traded delegates or contracts-out the trade practice surveillance

    responsibility to a third party, such third party should have the

    capacity and authority to carry out such programs, and the

    electronic trading facility should retain appropriate supervisory

    authority over the third party.

    (2) An electronic trading facility on which significant price

    discovery contracts are executed or traded should have arrangements,

    resources and authority for effective rule enforcement. The

    Commission believes that this should include the authority and

    ability to discipline and limit or suspend the activities of a

    market participant as well as the authority and ability to terminate

    the activities of a market participant pursuant to clear and fair

    standards. The electronic trading facility can satisfy this

    criterion for market participants by expelling or denying such

    person's future access upon a determination that such a person has

    violated the electronic trading facility's rules.

    (b) Acceptable practices. An acceptable trade practice

    surveillance program generally would include:

    (1) Maintenance of data reflecting the details of each

    transaction executed on the electronic trading facility;

    (2) Electronic analysis of this data routinely to detect

    potential trading violations;

    (3) Appropriate and thorough investigative analysis of these and

    other potential trading violations brought to the electronic trading

    facility's attention; and

    (4) Prompt and effective disciplinary action for any violation

    that is found to have been committed. The Commission believes that

    the latter element should include the authority and ability to

    discipline and limit or suspend the activities of a market

    participant pursuant to clear and fair standards that are available

    to market participants. See, e.g., 17 CFR part 8.

    CORE PRINCIPLE VIII OF SECTION 2(h)(7)(C)--CONFLICTS OF

    INTEREST. The electronic trading facility on which significant price

    discovery contracts are executed or traded shall establish and

    enforce rules to minimize conflicts of interest in the decision-

    making process of the electronic trading facility and establish a

    process for resolving such conflicts of interest.

    (a) Guidance.

    (1) The means to address conflicts of interest in the decision-

    making of an electronic trading facility on which significant price

    discovery contracts are executed or traded should include methods to

    ascertain the presence of conflicts of interest and to make

    decisions in the event of such a conflict. In addition, the

    Commission believes that the electronic trading facility on which

    significant price discovery contracts are executed or traded should

    provide for appropriate limitations on the use or disclosure of

    material non-public information gained through the performance of

    official duties by board members, committee members and electronic

    trading facility employees or gained through an ownership interest

    in the electronic trading facility or its parent organization(s).

    (2) All electronic trading facilities on which significant price

    discovery contracts are traded bear special responsibility to

    regulate effectively, impartially, and with due consideration of the

    public interest, as provided in section 3 of the Act. Under Core

    Principle VIII, they are also required to minimize conflicts of

    interest in their decision-making processes. To comply with this

    core principle, electronic trading facilities on which significant

    price discovery contracts are traded should be particularly vigilant

    for such conflicts between and among any of their self-regulatory

    responsibilities, their commercial interests, and the several

    interests of their management, members, owners, market participants,

    other industry participants and other constituencies.

    (b) Acceptable practices. [Reserved]

    CORE PRINCIPLE IX OF SECTION 2(h)(7)(C)--ANTITRUST

    CONSIDERATIONS. Unless necessary or appropriate to achieve the

    purposes of this Act, the electronic trading facility, with respect

    to any significant price discovery contracts, shall endeavor to

    avoid adopting any rules or taking any actions that result in any

    unreasonable restraints of trade or imposing any material

    anticompetitive burden on trading on the electronic trading

    facility.

    (a) Guidance. An electronic trading facility, with respect to a

    significant price discovery contract, may at any time request that

    the Commission consider under the provisions of section 15(b) of the

    Act any of the electronic trading facility's rules, which may be

    trading protocols or policies, operational rules, or terms or

    conditions of any significant price discovery contract. The

    Commission intends to apply section 15(b) of the Act to its

    consideration of issues under this core principle in a manner

    consistent with that previously applied to contract markets.

    (b) Acceptable practices. [Reserved]

    PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

    0

    33. The authority citation for part 40 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as

    amended by Title XIII of the Food, Conservation and Energy Act of

    2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008).

    0

    34. Revise the heading of part 40 as set forth above.

    Sec. 40.1 [Amended]

    0

    35. Section 40.1 is amended as follows:

    0

    A. The term ``registered entity'' is removed and the term ``designated

    contract market, derivatives transaction execution facility or

    derivatives clearing organization'' is added in its place in paragraphs

    (b)(2), (b)(3), and (f)(2); and

    0

    B. The term ``contract market, derivatives transaction execution

    facility or derivatives clearing organization'' is removed and the term

    ``registered entity'' is added in its place in paragraph (h).

    0

    36. Section 40.2 is amended as follows:

    0

    A. The term ``registered entity'' is removed and ``designated contract

    market, derivatives transaction execution facility or derivatives

    clearing organization'' is added in its place in paragraph (a)

    introductory text;

    0

    B. The term ``registered entity'' is removed and ``designated contract

    market or derivatives transaction execution facility'' is added in its

    place in paragraphs (a)(1) and (a)(3)(iv); and

    0

    C. Paragraph (b) is revised to read as follows:

    Sec. 40.2 Listing and accepting products for trading or clearing by

    certification.

    * * * * *

    (b) A registered entity shall provide, if requested by Commission

    staff, additional evidence, information or data relating to whether any

    contract meets, initially or on a continuing basis, any of the

    requirements of the Act or Commission rules or policies thereunder

    which may be beneficial to the Commission in conducting a due diligence

    assessment of the product and the entity's compliance with these

    requirements.

    * * * * *

    Sec. 40.3 [Amended]

    0

    37. Section 40.3 is amended by removing the term ``registered entity''

    and adding in its place the term ``designated contract market or

    registered derivatives transaction execution facility'' in paragraphs

    (a)(1), (c)(1), (c)(2), and (e)(2).

    Sec. 40.6 [Amended]

    0

    38. Section 40.4 is amended by removing the term ``registered entity''

    and adding in its place the term ``designated contract market'' in

    paragraph (b)(9)(ii).

    0

    39. Section 40.6 is amended by revising paragraphs (a)(2),

    (c)(3)(ii)(G), and (c)(3)(ii)(H) to read as follows:

    Sec. 40.6 Self-certification of rules.

    (a) * * *

    [[Page 12203]]

    (2) The registered entity has filed its submission electronically

    in a format specified by the Secretary of the Commission with the

    Secretary of the Commission at submissions@cftc.gov, the relevant

    branch chief at the regional office having local jurisdiction over the

    registered entity, and, for filings submitted by a designated contract

    market, registered derivatives transaction execution facility, or

    electronic trading facility on which significant price discovery

    contracts are traded or executed, the Division of Market Oversight at

    DMOSubmissions@cftc.gov, and the Commission has received the submission

    at its headquarters by the open of business on the business day

    preceding implementation of the rule; provided, however, rules or rule

    amendments implemented under procedures of the governing board to

    respond to an emergency as defined in Sec. 40.1, shall, if

    practicable, be filed with the Commission prior to the implementation

    or, if not practicable, be filed with the Commission at the earliest

    possible time after implementation, but in no event more than twenty-

    four hours after implementation; and

    * * * * *

    (c) * * *

    (3) * * *

    (ii) * * *

    (G) Option contract terms. For registered entities that are in

    compliance with the daily reporting requirements of Sec. 16.01 of this

    chapter, changes to option contract rules relating to the strike price

    listing procedures, strike price intervals, and the listing of strike

    prices on a discretionary basis.

    (H) Trading Months. For registered entities that are in compliance

    with the daily reporting requirements of Sec. 16.01 of this chapter,

    the initial listing of trading months which are within the currently

    established cycle of trading months.

    * * * * *

    Sec. 40.7 [Amended]

    0

    40. Section 40.7 is amended by removing the term ``designated contract

    market, registered derivatives transaction execution facility or

    registered derivatives clearing organization'' and adding in its place

    the term ``registered entity'' in paragraph (b).

    0

    41. Section 40.8 is amended by revising paragraph (a), redesignating

    paragraph (b) as paragraph (c), and adding new paragraph (b) to read as

    follows:

    Sec. 40.8 Availability of public information.

    (a) The following sections of all applications to become a

    designated contract market, derivatives execution transaction facility

    or designated clearing organization will be public: transmittal letter,

    proposed rules, the applicant's regulatory compliance chart, documents

    establishing the applicant's legal status, documents setting forth the

    applicant's governance structure, and any other part of the application

    not covered by a request for confidential treatment.

    (b) The following submissions required by Sec. 36.3(c)(4) of this

    chapter by an electronic trading facility on which significant price

    discovery contracts are traded or executed will be public: rulebook,

    the facility's regulatory compliance chart, documents establishing the

    facility's legal status, documents setting forth the facility's

    governance structure, and any other parts of the submissions not

    covered by a request for confidential treatment.

    * * * * *

    0

    42. Appendix D to part 40 is revised to read as follows:

    Appendix D to Part 40--Submission Cover Sheet and Instructions

    A properly completed submission cover sheet must accompany all

    rule submissions submitted electronically by a registered entity to

    the Secretary of the Commodity Futures Trading Commission, at

    submissions@cftc.gov in a format specified by the Secretary of the

    Commission.

    Each submission should include the following:

    1. Identifier Code (optional)--If applicable, the exchange or

    clearing organization Identifier Code at the top of the cover sheet.

    Such codes are commonly generated by the exchanges or clearing

    organizations to provide an identifier that is unique to each filing

    (e.g., NYMEX Submission 03-116).

    2. Date--The date of the filing.

    3. Organization--The name of the organization filing the

    submission (e.g., CBOT).

    4. Filing as a--Check the appropriate box for a designated

    contract market (DCM), derivatives clearing organization (DCO),

    derivatives transaction execution facility (DTEF), or electronic

    trading facility with a significant price discovery contract (ECM-

    SPDC).

    5. Type of Filing--Indicate whether the filing is a rule

    amendment or new product and the applicable category under that

    heading.

    6. Rule Numbers--For rule filings only, identify rule number(s)

    being adopted or modified in the case of rule amendment filings.

    7. Description--For rule or rule amendment filings only, enter a

    brief description of the new rule or rule amendment. This narrative

    should describe the substance of the submission with enough

    specificity to characterize all essential aspects of the filing.

    8. Other Requirements--Comply with all filing requirements for

    the underlying proposed rule or rule amendment. The filing of the

    submission cover sheet does not obviate the responsibility to comply

    with any applicable filing requirement (e.g., rules submitted for

    Commission approval under Sec. 40.5 must be accompanied by an

    explanation of the purpose and effect of the proposed rule along

    with a description of any substantive opposing views). Rules

    submitted for Commission approval under Sec. 40.5 must be

    accompanied by an explanation of the purpose and effect of the

    proposed rule along with a description of any substantive opposing

    views).

    Issued in Washington, DC, this 16th day of March, 2009, by the

    Commission.

    David Stawick,

    Secretary of the Commission.

    [FR Doc. E9-6044 Filed 3-20-09; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: November 23, 2009



See Also:

OpenGov Logo

CFTC's Commitment to Open Government

Gavel and Book

Follow the Status of Enforcement Actions