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2011-31637

  • Federal Register, Volume 76 Issue 247 (Friday, December 23, 2011)[Federal Register Volume 76, Number 247 (Friday, December 23, 2011)]

    [Rules and Regulations]

    [Pages 80674-80723]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2011-31637]

    [[Page 80673]]

    Vol. 76

    Friday,

    No. 247

    December 23, 2011

    Part VI

    Commodity Futures Trading Commission

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    17 CFR Part 48

    Registration of Foreign Boards of Trade; Final Rule

    Federal Register / Vol. 76, No. 247 / Friday, December 23, 2011 /

    Rules and Regulations

    [[Page 80674]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 48

    RIN 3038-AD19

    Registration of Foreign Boards of Trade

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

    is issuing final rules to implement new statutory provisions enacted by

    Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection

    Act (Dodd-Frank Act). On November 19, 2010, the Commission requested

    comment on proposed rules that would establish a registration

    requirement that applies to foreign boards of trade (FBOT) that wish to

    provide their identified members or other participants located in the

    United States with direct access to their electronic trading and order

    matching systems. After reviewing the comments submitted in response to

    the proposed rules, the Commission has determined to issue these final

    FBOT registration rules substantially as originally proposed, with

    certain modifications.

    DATES: Effective Date--February 21, 2012.

    FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Senior Special

    Counsel, (202) 418-5492, dandresen@cftc.gov, or David Steinberg,

    Special Counsel, (202) 418-5102, dsteinberg@cftc.gov, Division of

    Market Oversight, Commodity Futures Trading Commission, Three Lafayette

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

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Introduction

    B. Foreign Boards of Trade and Direct Access

    1. History of the No-action Process

    2. Commission Determination To Adopt Formal Registration Rules

    3. Overview of NPRM

    II. Summary of Comments

    A. General Comments

    B. Specific Comments

    1. Application for Registration

    a. Treatment of FBOTs With Existing No-action Relief

    (i). Grandfathering and the Scope of the Limited Application

    (ii). 120 Days To File Limited Application

    (iii). Treatment of FBOTs That Have Not Obtained No-action

    Relief

    b. Timeliness of Commission Review of an Application

    2. Standard of Review

    a. Need for Registration

    b. Foreign Supervision and the Comparable, Comprehensive

    Determination

    (i). Consideration of the Totality of Regulation

    (ii). Comparability Reviews

    (iii). Limitations of Comparability Reviews

    (iv). Reconfirmation and Withdrawal of Registration

    c. International Standards

    d. Clearing Standards

    (i). DCOs

    (ii). RCCPs Standards for Non-DCOs

    e. Foreign Regulation of FBOT Participants

    3. Contracts

    a. Linked Contracts

    (i) Definition

    (ii). Conditions

    b. Swaps and Other Contracts

    (i). Swaps

    (ii). Clearing of Swaps

    (iii). Swaps Data Reporting

    (iv). Contracts Other Than Futures, Options and Swaps

    (v). Review of Contracts

    4. Direct Access Definition

    5. Scope of Registration (i.e., CEA Sections 5 and 5a)

    6. Registration Requirements and Conditions

    a. Trading Rules

    b. Information Sharing

    c. Submission of U.S.-Domiciled Entities to Service of Process

    7. Modification of Registration Requirements

    8. Other Concerns

    a. Prescriptive Nature of the Regulations

    b. Alternative Trading Platforms

    c. Impact of FBOT Registration Rules

    9. On-going Review of Registered FBOTs

    10. The Appendix

    III. Conclusion and Effective Date

    A. Conclusion

    B. Effective Date

    IV. Related Matters

    A. Paperwork Reduction Act

    B. Cost Benefit Considerations

    C. Regulatory Flexibility Act

    I. Background

    A. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

    Title VII of the Dodd-Frank Act \2\ amended the Commodity Exchange Act

    (CEA or the Act) \3\ to establish a comprehensive new regulatory

    framework for swaps and security-based swaps. The legislation was

    enacted to reduce risk, increase transparency, and promote market

    integrity within the financial system by, among other things: (1)

    Providing for the registration and comprehensive regulation of swap

    dealers and major swap participants; (2) imposing clearing and trade

    execution requirements on standardized derivative products; (3)

    creating robust recordkeeping and real-time reporting regimes; and (4)

    enhancing the Commission's rulemaking and enforcement authorities with

    respect to, among others, all registered entities and intermediaries

    subject to the Commission's oversight.

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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov./

    LawRegulation/OTCDERIVATIVES/index.htm.

    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \3\ 7 U.S.C. 1 et seq.

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    Section 738 of the Dodd-Frank Act amended CEA section 4(b) to

    provide that the Commission may adopt rules and regulations requiring

    FBOTs that wish to provide their members or other participants located

    in the United States with direct access to the FBOT's electronic

    trading and order matching system to register with the Commission.

    Direct access is defined in the statute as an explicit grant of

    authority by an FBOT to an identified member or other participant

    located in the U.S. to enter trades directly into the FBOT's trade

    matching system.\4\ CEA section 4(b) also authorizes the Commission to

    promulgate rules and regulations prescribing procedures and

    requirements applicable to the registration of such FBOTs.

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    \4\ Direct access is defined in CEA section 4(b)(1)(A).

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    Accordingly, on November 19, 2010, the Commission published a

    notice of proposed rulemaking that set forth proposed regulations that

    would establish a registration requirement and related registration

    procedures and conditions applicable to FBOTs that wish to provide

    their members or other participants located in the United States with

    direct access to their electronic trading and order matching system

    (NPRM).\5\ The Commission requested comment on all aspects of the

    proposed regulations. After thoroughly reviewing the comments submitted

    in response to the NPRM, the Commission has determined to issue these

    final rules which are substantially the same as those proposed, with

    some modifications made in response to certain of the comments received

    and with a partially revised format, as discussed below.

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    \5\ See Registration of Foreign Boards of Trade, 75 FR 70974

    (November 19, 2010).

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    B. Foreign Boards of Trade and Direct Access

    1. History of the No-action Process

    Since 1996, FBOT requests to provide members and other participants

    that are located in the U.S. with direct access to their electronic

    trading and order matching systems have been addressed

    [[Page 80675]]

    by Commission staff in accordance with the no-action process set forth

    in Commission regulation 140.99.\6\ Specifically, such FBOTs seeking to

    provide direct access to members and participants located in the U.S.

    have requested, and, where appropriate, received from the relevant

    division of the Commission, a no-action letter in which division staff

    represents that, provided the FBOT satisfies the conditions set forth

    therein, the division will not recommend that the Commission institute

    enforcement action against the FBOT for failure to register as a

    designated contract market (DCM) or derivatives transaction facility

    (DTEF). Since 1996, Commission staff has issued 24 direct access no-

    action relief letters (formerly referred to as foreign terminal no-

    action relief letters) to FBOTs, 20 of which remain active.\7\ A

    detailed discussion of the history and evolution of the FBOT no-action

    process and the scope of the relief provided can be found in the

    NPRM.\8\

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    \6\ See, e.g., CFTC Letter No. 96-28 (February 29, 1996).

    Commission regulation 140.99 defines the term ``no-action letter''

    as a written statement issued by the staff of a Division of the

    Commission or of the Office of the General Counsel that it will not

    recommend enforcement action to the Commission for failure to comply

    with a specific provision of the Act or of a Commission rule,

    regulation or order if a proposed transaction is completed or a

    proposed activity is conducted by the beneficiary.

    \7\ One no-action relief letter was superseded and three were

    revoked when the FBOTs ceased operations as regulated or recognized

    markets. Currently, 14 of the FBOTs with active no-action relief

    report volume originating from the U.S. via direct access.

    \8\ 75 FR 70974-76.

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    While the no-action process has served a useful purpose, the

    Commission, given the new authority provided by Congress in the Dodd-

    Frank Act to promulgate registration requirements applicable to FBOTs

    that provide direct access, has determined to replace the staff no-

    action process with generally applicable Commission regulations.

    2. Commission Determination To Adopt Formal Registration Rules

    In determining to adopt formal registration rules for FBOTs, the

    Commission has also considered that the no-action process is generally

    better suited for discrete, unique factual circumstances and for

    situations where neither the CEA nor the Commission's regulations

    address the issue presented. The Commission has determined that, where

    the same type of relief is being granted on a regular and recurring

    basis, as it has been with respect to permitting FBOTs to provide

    direct access to their trading systems to specified members and other

    participants that are located in the U.S., it is no longer appropriate

    to handle requests for the relief through the no-action process.

    Rather, such matters should be addressed in generally applicable

    registration regulations.

    By implementing uniform application procedures and registration

    requirements and conditions, the process by which FBOTs are permitted

    to provide members and other participants located in the United States

    with direct access to their trading systems will become more

    standardized and more transparent to both registration applicants and

    the general public and will promote fair and consistent treatment of

    all applicants. Further, generally applicable regulations will provide

    greater legal certainty for FBOTs providing direct access than the no-

    action relief process because no-action letters are issued by the staff

    and are not binding on the Commission. The Commission also notes that

    an FBOT registration regime will be more consistent with the statutory

    authority pursuant to which other countries, including the United

    Kingdom, Australia, Singapore, Japan and Germany, among others, permit

    U.S.-based DCMs to provide direct access internationally.

    Accordingly, for the reasons noted above and pursuant to the new

    authority provided by amended CEA section 4(b), the Commission has

    determined to adopt FBOT registration regulations. The final rules will

    replace the existing policy of accepting and reviewing requests for no-

    action relief to permit an FBOT to provide for direct access to its

    trading system with a requirement that an FBOT seeking to provide such

    access must apply for and be granted registration with the

    Commission.\9\

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    \9\ In 2006, the Commission issued a Policy Statement in which

    it endorsed the no-action process for FBOTs that want to provide

    direct access to their trading systems to U.S.-based participants.

    Boards of Trade Located Outside of the United States and No-Action

    Relief From the Requirement To Become A Designated Contract Market

    or Derivatives Transaction Execution Facility, 71 FR 64843 (Nov. 2,

    2006) (Policy Statement). With the exception of the Commission's

    endorsement of the use of no-action relief to permit direct access,

    which is superseded by this final rule, the Policy Statement remains

    effective.

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    3. Overview of NPRM

    As noted above, on November 19, 2010, the Commission published a

    NPRM in which it proposed regulations that would require FBOTs that

    wish to provide their members or other participants located in the U.S.

    with direct access to the FBOT's electronic trading and order matching

    system to become registered with the Commission. The proposed rules

    described the types of FBOTs that would be eligible for registration

    under the proposed regulations and prescribed the application

    procedures, requirements, and conditions that would be applicable to

    such registration. The rules were proposed to be codified in new Part

    48 of the Commission's regulations. The proposed regulations provided

    that it would be unlawful for an FBOT to permit direct access to

    members and other participants in the U.S. unless the FBOT was

    registered with the Commission. The proposed requirements for

    registration were divided into the same seven general categories

    evaluated during the course of a review of a request for FBOT no-action

    relief: membership criteria, trading system, contracts, settlement and

    clearing, regulatory authorities, rules and rule enforcement, and

    information sharing. Pursuant to the proposed regulations, whether the

    registration requirements are successfully met would be determined by

    review of the information and documentation submitted by the applicant

    and, if appropriate, a staff on-site visit to the FBOT and clearing

    organization and their regulatory authorities to observe and discuss

    procedures and policies described in the information submitted by the

    applicant. The proposal also contained the conditions that a registered

    FBOT would be required to meet to retain its registration, including

    continued satisfaction of the registration requirements; conditions

    related to the FBOT's regulation in its home country; satisfaction of

    comparable international standards; restrictions upon the FBOT's

    provision of direct access; acknowledgement and agreement to Commission

    jurisdiction; information-sharing requirements; monitoring for and

    enforcing compliance with the conditions of registration; conditions

    specifically applicable to swap trading; reporting obligations; and

    special conditions that would apply to linked contracts.\10\ As

    proposed, the rules provided for a ``limited'' application process for

    FBOTs currently operating pursuant to existing no-action relief.\11\

    [[Page 80676]]

    The proposal also set forth the procedures to be followed should an

    FBOT wish to list additional contracts for trading by direct access

    after being registered. Finally, the proposal identified certain events

    that may trigger the revocation of an FBOT's registration.

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    \10\ CEA section 4(b)(1)(B) defines a linked contract as an

    agreement, contract, or transaction that settles against any price

    (including the daily or final settlement price) of one or more

    contracts listed for trading on a registered entity.

    \11\ The proposed rules would have required that FBOTs operating

    under existing no-action relief submit a limited application for

    registration within 120 days of the effective date of the

    registration rules. An FBOT would be permitted to continue to

    operate pursuant to the no-action relief during the 120-day period

    and until the Commission notified the FBOT that the application was

    approved or denied.

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    II. Summary of Comments

    A. General Comments

    The Commission received 147 comments in response to the NPRM.\12\

    The comments included 24 comment letters that addressed a variety of

    substantive issues raised by the proposal. Those 24 comment letters

    came from entities representing a broad range of interests, including

    eleven letters representing fourteen FBOTs currently providing direct

    access to members or other participants in the U.S. pursuant to staff

    direct access no-action relief letters \13\ and three letters from

    FBOTs that were not currently providing direct access to U.S.

    participants.\14\ The Commission also received comments from a U.S.

    derivatives marketplace,\15\ three industry or trade associations,\16\

    a non-profit organization,\17\ a natural gas company,\18\ a foreign

    regulator,\19\ a United States Senator,\20\ and the Commodity Market

    Oversight Coalition.\21\

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    \12\ The comment file is available on the Commission's Web site

    at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=902.

    \13\ Dubai Mercantile Exchange (DME), London Metal Exchange

    (LME), Australian Securities Exchange (ASX), Montreal Exchange Inc.

    (MX), Intercontinental Exchange (ICE) (owner of ICE Futures Europe

    and ICE Futures Canada), European Energy Exchange AG (EEX), Hong

    Kong Futures Exchange Limited (HKFE), BM&F Bovespa (BM&F), Nasdaq

    OMX Oslo ASA (OMX), NYSE Euronext (NYX) (operator of three FBOTs,

    Liffe Administration and Management, Euronext Paris SA, and Euronext

    Amsterdam N.V.), and Eurex Deutschland (Eurex).

    \14\ Osaka Securities Exchange (OSE), Natural Gas Exchange, Inc.

    (NGX), and Bursa Malaysia Derivatives Exchange (Bursa Derivatives).

    A direct access no-action letter was issued to OSE on June 1, 2011.

    NGX is currently operating as an exempt commercial market (ECM), and

    will continue to do so under the ECM grandfather relief provided for

    in the Dodd-Frank Act.

    \15\ CME Group, which includes four CFTC-registered DCMs: The

    Chicago Mercantile Exchange Inc. (CME), the Board of Trade of the

    City of Chicago, Inc. (CBOT), the New York Mercantile Exchange, Inc.

    (NYMEX), and the Commodity Exchange, Inc. (COMEX).

    \16\ Futures and Options Association (FOA), Air Transport

    Association of America (ATA) (two comment letters), and Petroleum

    Marketers Association of America and the New England Fuel Institute

    (Petroleum Marketers).

    \17\ Better Markets, Inc. (Better Markets). Better Markets

    describes themselves as a non-profit organization that promotes the

    public interest in capital and commodity markets.

    \18\ BG Americas & Global LNG (BG Americas).

    \19\ European Securities and Markets Authority (ESMA).

    \20\ Senator Carl Levin, Chairman of the United States Senate

    Permanent Subcommittee on Investigations.

    \21\ The Commodity Market Oversight Coalition (CMOC) states that

    it represents an array of interests, including the interests of

    commodity producers, processors, distributors, retailers, commercial

    and industrial end-users, and average American consumers and that it

    was established to promote government policy and regulation in the

    commodity trading markets that preserve the interests of bona fide

    hedgers and consumers and the health of the broader economy.

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

    The Commission also received 94 virtually identical comment letters

    from self-identified small business owners in the oil and gas industry

    and/or grocery industry. Each of these letters presented a range of

    comments spanning several provisions of the Dodd-Frank Act and, with

    respect to the proposed FBOT regulations, included nearly identical

    text in which the commenters generally expressed support for the

    requirement that FBOTs register with the Commission and for the

    requirements that FBOTs adopt position limits, implement prohibitions

    on manipulation and excessive speculation, and be subject to ownership

    caps.\22\

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    \22\ Each of these letters contained a similar short paragraph

    specifically addressing the proposed FBOT rules. A representative

    letter stated: ``I support the requirement that FBOTs register with

    the CFTC and make their trading data available as well as requiring

    that they adopt position limits and implement prohibitions on

    manipulation and excessive speculation. They should also be subject

    to ownership caps.'' The Commission also received a brief comment

    from a private citizen. In addition, the comment file includes 26

    comments submitted in response to the Commission's reopening of the

    comment period for several Dodd-Frank related rulemakings. See

    Reopening and Extension of Comment Periods for Rulemakings

    Implementing the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, 76 FR 25274 (May 4, 2011) (extending the comment

    deadline for multiple Dodd-Frank Act rulemakings to June 3, 2011).

    None of the comments submitted in response to the reopening of the

    comment period specifically addressed the proposed FBOT registration

    regulations and, therefore, they are not addressed in this document.

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    Of the 24 comment letters addressing various substantive FBOT

    registration issues in the proposed regulations, 17 letters voiced

    general support for the proposed rules and for the adoption of an FBOT

    registration process.\23\ For example, OMX stated:

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    \23\ See letters from ASX, BM&F, Bursa Derivatives, Eurex, EEX,

    LME, MX, OMX, NGX, OSE, FOA, ATA, BG Americas, Petroleum Marketers,

    CMOC and Senator Levin. ICE commented that the CFTC ``generally

    strikes the right balance with the proposed rulemaking.''

    Our overall impression of the proposed rules is that they will

    create a more transparent and standardized process that will provide

    a greater legal certainty for FBOTs. We are thus under the

    impression that the new rules will represent an improvement of the

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

    legal process related to FBOTs.

    Similarly, Eurex commented:

    Eurex supports the proposed regulations as set forth in the

    [NPRM] and it values the legal certainty that registration by the

    Commission will provide. Eurex looks forward to being registered by

    the Commission as an FBOT and to the fuller participation in the

    development of the U.S. derivatives industry that it expects will

    accompany registration.

    Each of the generally supportive comments, however, also offered

    varying critiques that focused on specific issues. These are discussed

    in greater detail below.

    Four of these comment letters generally did not support the

    proposed rules \24\ and one comment letter raised concerns with respect

    to the impact of FBOT registration on the effectiveness of the Dodd-

    Frank Act.\25\ For example, NYX and ESMA questioned whether a

    registration regime was superior to the existing no-action process.

    Specifically, NYX noted, ``[W]e are not convinced that a move from the

    existing regime to a more formal, rules-based solution is either

    necessary or desirable.'' ESMA noted that, ``It seems to us that there

    is no legal provision that would require the CFTC to depart from the

    present practice of issuing no-action relief letters. [* * *] [T]he new

    registration procedure and the mandatory application of very

    comprehensive, ongoing requirements to all FBOTs would be burdensome

    and costly without any apparent improvements for the safeguard of

    public interests such as the maintenance of fair and orderly markets,

    investor protection and the resilience of the market.'' Similarly, LME,

    while supporting the Commission's desire to establish a standardized

    regulatory framework for FBOTs that wish to provide direct access to

    U.S.-domiciled market participants, commented that the approach of

    requiring FBOTs to register with the Commission would constitute an

    unnecessary burden on the CFTC and FBOT applicant resources and stated

    its preference for a comparability-based exemptive approach, which

    would accomplish the same objectives, rather than a registration

    regime. HKFE commented that creating unnecessary obstacles to cross-

    border trading will affect all markets and market participants and

    limit the use of risk mitigating instruments traded in global markets.

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    \24\ NYX, HKFE, ESMA, and CME Group.

    \25\ Better Markets.

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    The CME Group expressed concern that the prescriptive nature of the

    rules

    [[Page 80677]]

    may result in retaliatory, anti-competitive action by foreign

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    regulators. CME Group commented that:

    [W]e have significant concern that the proposed rules are overly

    prescriptive and will have the effect of engendering retaliatory

    action by foreign regulators that will inhibit our ability to

    continue to grow our business and compete effectively in the current

    global environment.

    CME Group also argued that since the Dodd-Frank Act did not intend to

    grant the Commission general regulatory authority over FBOTs, the

    imposition of an information gathering process with limited utility

    would do little more than stretch already limited Commission resources.

    Better Markets argued that enabling FBOTs to provide direct access

    to members and other participants in the U.S. would ``undercut[] the

    effectiveness of the Dodd-Frank Act'' unless FBOTs were subject to

    regulatory requirements that are ``the same as or equivalent to the

    Dodd-Frank Act structure.'' Better Markets expressed concern that, even

    if there are parallel systems that are adequately structured in foreign

    jurisdictions, there is a risk that the regulatory regime will not be

    administered similarly to the markets subject to Commission oversight.

    B. Specific Comments

    The specific issues raised by commenters can be grouped generally

    into nine categories and include the following: Application for

    registration; standard of review; contracts; direct access definition;

    scope of registration; registration requirements and conditions;

    modification of registration requirements; other concerns; and ongoing

    review of registered FBOTs. These concerns and the Commission's

    conclusions with respect to them are discussed below.

    1. Application for Registration

    a. Treatment of FBOTs With Existing No-Action Relief

    Proposed regulation 48.6 provides that FBOTs currently providing

    direct access pursuant to a Commission staff no-action letter would be

    required to apply for registration within 120 days of the effective

    date of the FBOT registration regulations, but would permit them to

    file a limited application, as described in the proposed regulation.

    Eurex expressly supported the proposed limited application process; ASX

    welcomed the formalization of the registration requirements. Twelve of

    the comment letters, however, were in favor of either further narrowing

    the scope of the limited application process or completely

    grandfathering FBOTs currently operating pursuant to no-action relief.

    Several commenters also requested that the time period for submitting a

    limited application be expanded.

    (i) Grandfathering and the Scope of the Limited Application

    Eight of the twelve commenters, including commenters representing

    11 FBOTs providing direct access to their trading systems pursuant to

    existing no-action relief \26\ and the CME Group and FOA, specifically

    requested that the CFTC significantly narrow proposed Sec. 48.6 to

    either provide grandfathered registration to FBOTs operating under

    existing no-action relief or to require FBOTs applying for registration

    to supply only that information which (1) has materially changed since

    the time the FBOT's no-action relief was granted, (2) was not

    previously filed with the Commission or (3) relates to newly imposed

    registration requirements. The commenters generally argued that the

    limited application process set forth in proposed Sec. 48.6 is too

    burdensome and is unnecessary given that FBOTs and their regulatory

    regimes were reviewed by Commission staff during the process of issuing

    a no-action letter.

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    \26\ BM&F, DME, EEX, HKFE, ICE, MX, OMX, and NYX.

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

    FOA commented that FBOTs currently operating under no-action relief

    should not have to reapply for approval to allow direct access to their

    markets and recommended that the CFTC should principally rely on

    information previously provided by the FBOT and its regulator to

    satisfy the proposed registration requirements and should identify for

    each FBOT operating under a no-action letter what specific additional

    information is required. NYX generally agreed with this recommendation

    and further suggested that, if a limited application for registration

    is necessary, the FBOTs should be required to consult with the

    Commission in order to identify which specific information not

    previously submitted would be necessary to demonstrate compliance with

    the registration requirements. BM&F commented that where an FBOT had

    been granted no-action relief following adoption by the Commission of

    the 2006 Policy Statement, that FBOT should only be required to certify

    that there have been no material changes to the information or

    representations in its request for no-action relief or, if there have

    been changes, to identify those changes and demonstrate how they would

    be in compliance with the registration rule. ICE commented that the

    FBOT should only be required to submit additional relevant information

    necessary to update the Commission's understanding of the foreign

    regulatory regime.

    The Commission does not believe that it would be prudent to

    grandfather FBOTs that are operating under existing no-action relief

    without any further review to determine that the registration

    requirements set forth in Sec. 48.7 are being met. FBOT requests for

    no-action relief were assessed based upon the information and

    documentation presented at the particular time of the request (some as

    early as 1999), were based upon a comparison of the regulatory regimes

    in the U.S. and the applicable foreign jurisdiction that existed at the

    time, were subject to varying standards of review that applied at the

    time (which have changed as statutes and policies have evolved), and

    were reviewed on a case-by-case basis. Just as the Dodd-Frank Act

    represents a significant change in the regulatory approach in the U.S.,

    many foreign jurisdictions have changed their approaches since the time

    the existing no-action letters were granted as well.

    The Commission also does not believe that it would be either

    feasible or appropriate for the Commission staff to ascertain for each

    FBOT operating under existing no-action relief the precise information

    or documentation in its individual no-action request submission that

    would need to be updated or revised in order to satisfy registration

    requirements. The FBOTs are in a better position to recognize their own

    particular circumstances and to identify any information and

    documentation that may require updating in light of those changes. This

    is especially true of information regarding the relevant foreign

    regulations to which the FBOT is presently subject, as these may have

    differing applicability depending upon the FBOT's particular business

    model. The FBOT should be afforded the opportunity to provide materials

    demonstrating that the foreign regime currently is comparable and

    comprehensive to the regulatory regime in the United States.

    In response to the comments received, the Commission has determined

    to modify the limited application documentation requirements in one

    aspect. The proposed limited application process required that, to the

    extent an FBOT operating under existing no-action relief intends to

    rely upon previously submitted information or documentation to

    demonstrate that it satisfies the registration requirements,

    [[Page 80678]]

    the FBOT must resubmit the information or documentation, identify the

    specific requirements for registration set forth in proposed Sec. 48.7

    that are satisfied by the resubmitted information, and certify that the

    information remains current and true. The Commission has determined to

    streamline the Sec. 48.6 application requirements for any FBOT whose

    original no-action relief request was submitted electronically and

    remains on file with the Commission staff.\27\ In lieu of re-

    transmitting to the Commission previously submitted information and

    documentation, such FBOTs would be permitted to simply refer to each

    portion of their original submission that satisfies a particular

    registration requirement, identify the specific registration

    requirement that is fulfilled by that section, and certify that the

    information or documentation originally provided remains current and

    true. The FBOT would continue to be required to submit new information

    or documentation, to the extent that its original application would not

    adequately demonstrate that the FBOT would be in compliance with one or

    more of the registration requirements. This typically would be

    necessary where one of the registration requirements, such as a

    requirement applicable to clearing and settlement, imposes a standard

    that was not applied at the time of the original application for no-

    action relief.

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

    \27\ Documents submitted electronically can be more easily

    identified and located and can be retransmitted quickly and at less

    cost than documents in hard copy. It is also easier to identify and

    highlight those segments of an electronically submitted document

    that would satisfy a current requirement of registration.

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

    (ii) 120 Days To File Limited Application

    Seven commenters, including six FBOTs and one industry association,

    requested that the proposed 120-day time period within which an FBOT

    operating under existing no-action relief would be required to file a

    limited application be extended. Four specifically asked that the

    period be lengthened to 180 days,\28\ while another asked for a

    year.\29\ Two entities commented that the registration rules should

    provide that FBOTs with existing no-action relief may continue to

    operate as such as long as they submit an application within the 120-

    day period, which is determined in good faith by the applicant to be

    complete.\30\ Such commenters expressed concern that there may be an

    extended period of legal uncertainty after the 120-day period, but

    before the Commission acted upon the application.

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

    \28\ BM&F, EEX, LME, and MX.

    \29\ ICE.

    \30\ NYX and FOA.

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

    In response to these comments the Commission has determined to

    adopt the proposal with certain modifications. The final regulations

    provide that the required timeframe within which an FBOT operating

    pursuant to existing no-action relief is required to submit a limited

    application for registration, determined in good faith by the applicant

    to be complete, is 180 days from the effective date of the FBOT

    registration rules.\31\ The final rule also provides legal certainty in

    that Sec. 48.6 provides that an FBOT ``may continue to operate

    pursuant to the existing no-action relief, subject to the terms and

    conditions contained therein, during the 180-day period, while the

    Commission is reviewing its application, and until the Commission

    approves or disapproves the application or otherwise withdraws the

    existing no-action relief.'' Thus, FBOTs could continue to provide for

    direct access pursuant to the no-action relief during the 180-day

    period and, if they submitted timely and complete applications for

    registration, until such time as the Commission acts upon the

    registration applications.

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

    \31\ If, at any time after the 180-day deadline but before a

    limited application is approved or disapproved, the Commission

    determines that the application is materially incomplete, the

    Commission may, after providing the FBOT with notice and an

    opportunity to respond to the determination of incompleteness,

    withdraw the existing no-action relief if the Commission determines

    that the application cannot be made complete in a timely manner.

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

    (iii) Treatment of FBOTs That Have Not Obtained No-action Relief

    NGX asked whether FBOTs with pending applications could file a

    limited application and stated that, if so, the review of such

    applications should take precedence over the review of applications of

    FBOTs currently operating under existing no-action relief. Bursa

    Derivatives asked if the Commission would take into consideration any

    Regulation 30.10 relief granted by the Commission to an FBOT or any

    visit made to an FBOT in the Regulation 30.10 review when evaluating

    such FBOT's application under the proposed registration process.\32\

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

    \32\ A Rule 30.10 order permits firms that are members of a

    self-regulatory organization and subject to regulation by a foreign

    regulator to conduct business from locations outside of the U.S. for

    U.S. persons on non-U.S. boards of trade without registering under

    the CEA, based upon the firm's substituted compliance with a foreign

    regulatory structure found comparable to that administered by the

    Commission under the CEA. Among the issues considered by the

    Commission in determining whether to grant Rule 30.10 relief based

    on a foreign regulatory or self-regulatory authority are the

    authority's: (i) Requirements relating to the registration,

    authorization, or other form of licensing, fitness review, or

    qualification of persons through whom customer orders are solicited

    and accepted; (ii) minimum financial requirements for those persons

    that accept customer funds; (iii) minimum sales practice standards,

    including risk disclosures, and the risk of transactions undertaken

    outside of the United States; (iv) procedures for auditing

    compliance with the requirements of the regulatory program,

    including recordkeeping and reporting requirements; (v) standards

    for the protection of customer funds from misapplication; and (vi)

    arrangements for the sharing of information with the United States.

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

    In consideration of the comments concerning limited applications

    for registration, the Commission has determined that an FBOT with a

    pending request for direct access no-action relief should be permitted

    to file a limited application for registration, recognizing that some

    of the required information and documentation is likely to have been

    recently submitted and, therefore, up-to-date. Thus, Sec. 48.6 has

    been modified to provide that an FBOT that has submitted a complete

    application for no-action relief that is pending as of the effective

    date of the final rule could, as part of its application for

    registration, identify information or documents provided in its request

    for no-action relief that would satisfy particular registration

    requirements. Those aspects of the registration requirements that were

    not addressed in the materials submitted in connection with the no-

    action request would have to be addressed directly in the FBOT's

    registration application. With respect to the question of precedence of

    review, the Commission is not assigning precedence to any group of

    applicants. The Commission does, however, anticipate that the

    applications of FBOTs with pending relief requests generally will be

    submitted, and acted upon, before those of FBOTs which have no-action

    relief, largely because the latter FBOTs can continue to operate

    pursuant to the existing no-action relief during the 180-day timeframe

    for submission of an application and so long as a complete and timely

    application is submitted. In contrast, those FBOTs with pending relief

    requests cannot provide for direct access until they submit an

    application and receive an Order of Registration.

    With respect to consideration of any regulation 30.10 relief

    granted by the Commission to an FBOT or related visits in evaluating

    the FBOT's application for registration, the Commission believes it

    would be appropriate to consider such information only to the extent

    that it is

    [[Page 80679]]

    relevant to particular registration requirements (e.g., requirements

    that members be fit and proper and other foreign regulatory regime

    standards applicable to market participants) and is identified as such

    by the FBOT. The Commission notes that there is limited overlap between

    the factors considered when granting regulation 30.10 relief and those

    that will be examined in connection with FBOT registration. Regulation

    30.10 review primarily is focused on the foreign regulatory standards

    applicable to market participants. While regulation 30.10 relief could

    inform the Commission's decision to register an FBOT, it would not be

    an appropriate substitute for the comparability and comprehensiveness

    analysis required under the FBOT registration regulations.

    b. Timeliness of Commission Review of an Application

    The proposed regulations did not include a proposed timeline for

    completion of Commission staff review of an application. Bursa

    Derivatives suggested that the Commission adopt a timeline of 180 days

    for the Commission to notify FBOTs whether an application has been

    approved or denied. The commenter noted that this would be consistent

    with the 180 days allotted for reviewing a designated contract market

    application.

    The Commission has determined not to adopt a firm timeline for

    completion of Commission staff review of an application. The Commission

    is committed to completing its review of applications for FBOT

    registration within a year or in as timely a manner as circumstances

    and resources will allow. However, the Commission can neither predict

    the total number of applications for registration that will be

    submitted nor whether such applications will be received simultaneously

    or over a period of time and, thus, cannot be assured that it would

    have sufficient resources at all times to meet such a self-imposed

    deadline. The Commission is likely to receive applications from most of

    the 20 FBOTs currently operating under existing no-action relief in

    addition to applications from other FBOTs that wish to register. The

    Commission notes that the lack of a specific deadline for the review of

    FBOT registration applications will not have a significant impact on

    those FBOTs currently able to provide direct access pursuant to a staff

    no-action letter that submit timely applications for registration. As

    previously noted, the final regulations permit such FBOTs to continue

    to provide direct access to FBOT members and other participants located

    in the U.S. during the review period, subject to compliance with the

    terms and conditions of their no-action relief letters.

    2. Standard of Review

    a. Need for Registration

    One foreign regulator, ESMA, questioned whether replacing the

    practice of issuing no-action letters with a process whereby FBOTs

    would register with, and become subject to, the jurisdiction of the

    Commission would provide sufficiently enhanced public safeguards to

    outweigh the burdens imposed. Noting that section 738 of the Dodd-Frank

    Act seems to provide the Commission full flexibility on whether and how

    to implement the rules on registration, ESMA stated that: ``Since the

    CFTC has also verified in the past that a FBOT and its clearing

    organisation are subject to comprehensive regulation and comparable

    oversight by the home regulatory authority, * * * the creation of new

    US regulatory measures with extra-territorial application should be

    avoided as far as possible and replaced by effective co-operation

    between the home and host regulatory authorities. Jurisdiction should

    indeed generally be exercised by the home country alone. The necessary

    cooperation could be ensured by an MoU determining how the home and the

    host authority should collaborate, exchange information and conduct

    common reviews and inspections.'' \33\

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

    \33\ ESMA.

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

    HKFE and MX commented that the CFTC has already determined that

    FBOTs currently allowed to operate in the U.S. are subject to

    comprehensive and comparable regulation in their home jurisdictions

    under the no-action relief regime. HKFE further stated that, therefore,

    a substantive or a rule-by-rule review by the CFTC for the purposes of

    FBOT registration may not be necessary or appropriate except where the

    CFTC has fundamental concerns about a jurisdiction's regulations,

    regulatory objectives or practices.

    As previously noted, requests for no-action relief were submitted

    to and reviewed by Commission staff and not by the Commission itself

    and the letters granting no-action relief are not binding upon the

    Commission. Moreover, in analyzing requests for no-action relief, staff

    did not review the requests under the same standards that will be

    universally applied under the final regulations. For example, staff did

    not specifically consider whether an FBOT or its clearing organization

    was subject to ``comprehensive regulation and comparable oversight by

    the home regulatory authority.'' Rather, staff's standard of review has

    ranged from determining that the FBOT is regulated by a legitimate

    regulatory authority to determining that the FBOT and its regulatory

    authority support and enforce standards for trading and customer and

    market protection that are equivalent to those supported by the CFTC

    and its regulated DCMs.

    The Commission believes that the application procedures contained

    in the final registration regulation would provide for appropriate

    review. While the rule would create a new registration category, that

    category would operate pursuant to open and transparent standards and

    procedures that may not have been uniformly applied with respect to

    FBOT no-action letters. The proposed regulatory measures are applicable

    only to FBOTs that choose to provide for direct access to their trading

    systems to persons located in the U.S. In addition, the Commission

    believes that the rule, as proposed, would encourage effective co-

    operation between the home and host regulatory authorities in that it,

    among other things, provides for expanded information sharing between

    the regulatory authorities. Finally, with respect to the comment that

    the proposal is creating new U.S. regulatory measures with extra-

    territorial application, the Commission notes that Congress has

    authorized the registration of FBOTs in the Dodd-Frank Act. Moreover,

    the FBOT registration process relies significantly upon the

    Commission's determination that the FBOT's home country regulatory

    authority provides for comparable, comprehensive supervision and

    regulation. The Commission finds it particularly noteworthy that other

    countries that permit direct access, including the UK, Japan,

    Singapore, Hong Kong, Germany and Australia, among others, do so under

    a registration or licensing scheme. Accordingly, the Commission

    believes that the establishment of the FBOT registration regime in the

    final rule is generally consistent with international practices.

    b. Foreign Supervision and the Comparable, Comprehensive Determination

    As required by CEA section 4(b)(1)(A)(i), proposed Sec. 48.5(d)(2)

    provided that the Commission, when reviewing an application for FBOT

    registration, will consider whether the FBOT and its clearing

    organization are subject to comprehensive supervision

    [[Page 80680]]

    and regulation by the appropriate governmental authorities in their

    home country that is comparable to the comprehensive supervision and

    regulation to which DCMs and derivatives clearing organizations (DCO),

    respectively, are subject in the United States. Seven commenters

    specifically addressed this provision, offering critiques of the

    Commission's approach to evaluating an FBOT's home regulatory

    regime.\34\

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

    \34\ Eurex, FOA, LME, EEX, OMX, Better Markets, and CME Group.

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

    Two commenters recommended that the Commission make a determination

    as to whether an FBOT is subject to a comparable comprehensive

    regulatory regime on a jurisdiction-by-jurisdiction basis where

    appropriate.\35\ For example, if more than one FBOT is subject to the

    regulatory regime in the United Kingdom, the Commission could make a

    single determination as to the comparability and comprehensiveness of

    the regulatory regime in the United Kingdom.

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

    \35\ LME and EEX. EEX commented that all trading venues

    recognized as a ``Regulated Market'' under the European Union's (EU)

    Markets in Financial Instruments Directive (MiFID) should be deemed

    fit to meet the regulatory standards of a registered FBOT. LME

    commented that the Commission should take the same jurisdictional

    approach with respect to the review of clearing organizations.

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

    In consideration of these comments, the final regulation, in the

    application form for registration, Form FBOT,\36\ provides for a

    jurisdiction-based review of the comparability of the foreign

    regulatory regime when multiple FBOTs that are subject to the same

    regulatory regime are applying for registration. Specifically, the

    regulation, through the Form FBOT, provides that multiple FBOTs that

    are subject to the same regulatory regime and that are applying for

    registration at the same time may collectively provide information

    regarding the regulatory regime under which they operate. The

    information may be provided by the FBOTs themselves, or by the

    applicable foreign regulatory authority.

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

    \36\ The proposed rules included an appendix that identified the

    information required in, and provided guidelines for submitting, an

    application for registration as an FBOT. That appendix included

    detailed descriptions of the minimum required documentation and

    information that should be included in an application. In these

    final rules, the Commission has revised the proposed appendix to

    include the submission requirements identified therein in

    standardized application forms, Form FBOT and Supplement S-1 to Form

    FBOT. Form FBOT is to be completed by an FBOT applying for

    registration and Supplement S-1 is to be completed by the clearing

    organization affiliated with the FBOT. The substance and content of

    Form FBOT and Supplement S-1 are parallel to those requirements and

    guidelines that were originally included in the appendix to the

    proposed rules.

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

    The Commission does not agree, however, that a determination that

    an FBOT operating in one jurisdiction should be registered eliminates

    the need to conduct a subsequent inquiry into the laws and regulations

    applicable to a different FBOT in the same jurisdiction that applies

    for registration at a different time. Additionally, a single

    jurisdictional analysis of comprehensiveness and comparability may not

    be able to take into account the fact that different FBOTs operating in

    the same jurisdiction may be subject to different regulations,

    depending upon a host of factors including, among other things, their

    business structure, the participants they accept, the products they

    trade and the exceptions and exemptions provided in the relevant

    regulatory regime. Accordingly, two FBOTs operating in the same country

    may be subject to regulation that differs in substantive ways.

    Moreover, financial markets worldwide are currently in an enhanced

    state of regulatory flux, making it a particularly inopportune time to

    state that once a jurisdiction is deemed comparable, it will be deemed

    comparable for the purpose of all future applications.\37\

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

    \37\ Notwithstanding the above, in a situation where an FBOT

    applying for registration is located in the same jurisdiction and

    subject to the same regulatory regime as a registered FBOT, the

    Commission believes that it would be acceptable for the FBOT

    applying for registration to include by reference, as part of its

    application, information about the regulatory regime that is posted

    on the Commission's Web site. The FBOT applying for registration

    must specifically identify the applicable information and certify

    that the information thus included in the application is directly

    applicable to it and remains current and valid.

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

    (i) Consideration of the Totality of Regulation

    Eurex, noting that in many jurisdictions the concept of self-

    regulation is not as established as in the U.S. and that foreign

    exchanges are not empowered in the same way as DCMs, recommended that,

    in considering the comparability of regulation, the CFTC explicitly

    incorporate that it may rely on the totality of the regulation--self

    and governmental--of the FBOT in evaluating the FBOT for comparable

    comprehensive supervision and regulation. The Commission has determined

    to adopt the rule as proposed, but notes that consistent with this

    Eurex comment, the Commission will rely on the totality of the

    regulation of the FBOT and its clearing organization in evaluating

    whether they are subject to comparable comprehensive supervision and

    regulation.

    (ii) Comparability Reviews

    FOA expressed concern that the proposed registration regulations

    would change the approach to comparability used under the existing no-

    action review process into what is effectively a rules-equivalence

    approach and that this could lead to a ``line by line'' examination of

    the European Union's approach to the regulation of derivatives

    transactions, central counterparties and trade repositories. FOA

    commented that a ``line by line'' examination of the foreign

    regulator's approach would complicate cross-border business and

    increase the risk of inadvertent breaches.

    The Commission has determined to adopt the rule as proposed. As in

    the case of the review performed under the no-action review process,

    the Commission's determination of the comparability of the foreign

    regulatory regime to which the FBOT applying for registration is

    subject will not be a ``line by line'' examination of the foreign

    regulator's approach to supervision of the FBOTs it regulates. Rather,

    it will be a principles-based review conducted in a manner consistent

    with the part 48 regulations pursuant to which the Commission will look

    to determine if that regime supports and enforces regulatory objectives

    in the oversight of the FBOT and the clearing organization that are

    substantially equivalent to the regulatory objectives supported and

    enforced by the Commission in its oversight of DCMs and DCOs.

    (iii) Limitations of Comparability Reviews

    CME Group suggested that the Commission's analysis should be more

    narrowly tailored and that the Commission should limit its inquiry to

    questions regarding the comparability of the regulatory regime in the

    FBOT's home jurisdiction, focusing on (1) the regulatory regime in the

    FBOT's home jurisdiction, (2) the FBOT's status in its home

    jurisdiction and its rules and enforcement thereof, and (3) any

    existing information-sharing agreements between the FBOT, the

    Commission, and the home jurisdiction regulator. CME Group argued that

    such an approach would focus the Commission's attention on the

    legitimacy of the home regulator rather than on the broader inquiries

    that have informed the no-action process.

    The Commission has determined to adopt the rule as proposed. The

    Commission does not believe that its review of an FBOT seeking to

    provide direct access to its trading system to persons located in the

    U.S. should be

    [[Page 80681]]

    restricted to the three areas suggested by the commenter. The

    Commission believes that the broader review contemplated by the

    proposed regulations, which is an outgrowth of the review conducted

    during the no-action process, is necessary to ensure the protection of

    persons located in the U.S. that will be trading by direct access on

    the FBOT. Accordingly, the final regulations continue to require the

    FBOT to provide sufficient information and to demonstrate that the

    registration requirements set forth in Sec. 48.7 are satisfied (e.g.,

    information and documentation on the relevant membership standards, the

    contracts to be made available in the U.S. and the automated trading

    and clearing and settlement systems). The Commission believes that its

    review of the information and documentation provided in these areas is

    necessary to provide greater assurance that, among other things, the

    members of the FBOT and its clearing organization members are subject

    to appropriate standards, the contracts to be made available are not

    readily susceptible to manipulation, all linked contracts are

    identified, the trading system complies with the Principles for Screen-

    Based Trading developed by the Technical Committee of the International

    Organization of Securities Commissions (IOSCO Principles) \38\ and

    produces an adequate audit trail, and the clearing and settlement

    systems satisfy appropriate standards.

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

    \38\ The IOSCO Principles were formulated by eight jurisdictions

    which comprised Working Party 7 (Working Party) of the Technical

    Committee of IOSCO under the chairmanship of the Commission. The

    Working Party's mandate included, among other things, the

    identification of issues related to screen-based trading systems for

    derivative products. In considering the special concerns for screen-

    based trading systems, the Working Party identified and addressed

    the following issues: transparency, order execution algorithms,

    operational issues, security and system vulnerability, access,

    financial integrity, disclosure, and the role of system providers,

    and articulated for each issue a broad principle to assist

    regulatory authorities in overseeing screen-based trading systems.

    The IOSCO Principles were adopted by IOSCO on November 15, 1990 and

    set out in broad terms the international consensus as to the

    regulatory considerations to be addressed in reviewing mechanisms

    for cross-border screen-based trading. The Commission adopted the

    IOSCO Principles as a statement of regulatory policy for the

    oversight of screen-based trading systems for derivative products.

    Policy Statement Concerning the Oversight of Screen-Based Trading

    Systems. 55 FR 48670 (Nov. 21, 1990).

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

    (iv) Reconfirmation and Withdrawal of Registration

    Better Markets commented that proposed Sec. 48.8(a)(2)(iii), which

    would impose continuing requirements on the foreign regulatory

    structure to maintain its laws governing the FBOT, was too narrow and

    too focused on the letter of the law, rather than the realities of the

    marketplace. Better Markets proposed an annual reconfirmation and

    demonstration of the appropriateness of the FBOT's regulatory regime

    and, further, that an FBOT's registration should be discontinued if the

    foreign regulatory regime changes in ways such that the FBOT would not

    be able to qualify for initial registration.

    The Commission has determined to adopt the rule as proposed, with

    slight modifications. The Commission notes that the regulations contain

    multiple provisions designed to demonstrate that the FBOT continues to

    be subject to an appropriate regulatory regime. For example, Sec.

    48.8(a)(1) conditions continued FBOT registration upon the FBOT's and

    its clearing organization's satisfaction of all of the registration

    requirements set forth in Sec. 48.7; Sec. 48.8(a)(2)(i) conditions

    registration upon the FBOT continuing to satisfy the criteria for a

    regulated market or licensed exchange pursuant to the regulatory regime

    described in its application and continuing to be subject to oversight

    by the regulatory authorities described in the registration

    application; Sec. 48.8(a)(2)(ii) imposes a similar condition with

    respect to the FBOT's clearing organization; Sec. 48.8(a)(2)(iii)

    conditions registration upon the laws, systems, rules, and compliance

    mechanisms of the regulatory regime applicable to the FBOT continuing

    to require the FBOT to maintain fair and orderly markets, prohibit

    fraud, abuse, and market manipulation, and provide that such

    requirements are subject to the oversight of appropriate regulatory

    authorities; and Sec. 48.8(a)(3) conditions continued registration

    upon the FBOT's and, if the FBOT's clearing organization is not a DCO,

    the clearing organization's satisfaction of certain internationally

    recognized standards.

    In addition, Sec. 48.8(b)(1)(iii)(G) requires that the FBOT and

    its clearing organization, or their respective regulatory authorities,

    as applicable, provide to the Commission annually a written description

    of any material changes to the regulatory regime to which the foreign

    board of trade or the clearing organization is subject that have not

    been previously disclosed or a certification that no material changes

    have occurred. Further, proposed Sec. 48.9(b)(2) provides that the

    Commission may revoke an FBOT's registration, after appropriate notice

    and an opportunity for a hearing, if there is a material change in the

    regulatory regime applicable to the FBOT or its clearing organization.

    The Commission has modified Sec. 48.9(b)(2) to provide that the

    Commission may revoke an FBOT's registration, after appropriate notice

    and an opportunity to respond, if there is a material change in the

    regulatory regime applicable to the FBOT or its clearing organization

    such that the regulatory regime no longer satisfies any registration

    requirement or condition for registration applicable to the regulatory

    regime. The Commission believes that in this instance, as in other

    instances in the final rule where the FBOT is provided appropriate

    notice by the Commission of an issue about which it is expected to

    communicate with the Commission, an opportunity to respond is adequate

    for the purpose of addressing the issue.

    c. International Standards

    The requirements for and conditions of registration set forth in

    proposed Sec. 48.7 and Sec. 48.8, respectively, would require an FBOT

    and its clearing organization to observe specified international

    standards. In order to become registered, an FBOT would be required to

    successfully demonstrate that its trading system complied with the

    current IOSCO Principles.\39\ Unless the FBOT's clearing organization

    is registered with the Commission as a DCO, the FBOT also would be

    required to demonstrate that the clearing organization observed: (1)

    The current Recommendations for Central Counterparties jointly issued

    by the Committee on Payment and Settlement Systems (CPSS) and the

    Technical Committee of IOSCO, as updated, revised or otherwise amended,

    or (2) successor standards, principles and guidance for central

    counterparties or financial market infrastructures adopted jointly by

    CPSS and IOSCO's Technical Committee (RCCPs). OMX commented that, in

    order to provide more flexibility, the registration requirements should

    refer to ``recognized international standards,'' rather than specific

    international regulations.

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

    \39\ A review of the FBOT requests for no-action relief to

    permit direct access reveals that most of the applicants stated that

    their regulatory authority has endorsed the IOSCO Principles.

    Several of the FBOTs indicated that that their regulatory authority,

    in its review of the FBOT's trading system during development and/or

    on an ongoing basis, specifically took into account the IOSCO

    Principles.

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

    The Commission has determined to adopt Sec. Sec. 48.7(b)(1) and

    (d)(1) and Sec. 48.8(a)(3) substantially as proposed. The use of a

    singular set of internationally recognized standards provides clarity,

    consistency and certainty to the application requirements and the

    standards

    [[Page 80682]]

    identified in the proposal are directly relevant to the review to be

    afforded FBOTs and their clearing organizations. In addition, due to

    the breadth of participation by sponsoring organizations \40\ and the

    approval of the standards by IOSCO and CPSS, these principles are

    considered the premier standards in the industry and are likely to have

    greater global recognition than similar regional standards.

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

    \40\ The current RCCPs were finalized in 2004 by a CPSS-IOSCO

    Task Force that included representatives from the following

    entities: National Bank of Belgium; Comiss[atilde]o de Valores

    Mobili[aacute]rios, Brazil; People's Bank of China; Czech National

    Bank; European Central Bank; Autorit[eacute] des March[eacute]s

    Financiers, France; Bank of France; Deutsche Bundesbank; BaFin

    (German Financial Services Authority); Securities and Futures

    Commission, Hong Kong; Reserve Bank of India; Securities and

    Exchange Board of India; Commissione Nazionale per le Societ[agrave]

    e la Borsa, Italy; Bank of Japan, Financial Services Authority,

    Japan; Malaysian Securities Commission; Bank of Mexico; Netherlands

    Authority for Financial Markets; Saudi Arabian Monetary Agency;

    Comisi[oacute]n Nacional del Mercado de Valores, Spain; Monetary

    Authority of Singapore; Bank of England; Financial Services

    Authority, United Kingdom; Securities and Exchange Commission; CFTC;

    Board of Governors of the Federal Reserve System; Federal Reserve

    Bank of New York; International Monetary Fund; and the World Bank.

    The recommendations were initially released in a consultative

    document that requested public comment. The final version

    incorporates consideration of the comments received from central

    banks, regulators and the operators of and participants in central

    counterparties.

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

    The Commission did not receive comments specifically related to the

    requirement that an FBOT's clearing organization observe any

    ``successor standards, principles and guidance'' to the current RCCPs

    that may be jointly issued by CPSS and IOSCO in the future. The

    Commission wishes to clarify, however, that such standards would

    include, to the extent applicable, the ``Principles for Financial

    Market Infrastructures'' (FMI Principles) \41\ that CPSS and the IOSCO

    Technical Committee intend to finalize in early 2012 and that, when

    effective, would replace the current RCCPs as the CPSS/IOSCO standards

    applicable to central counterparties. In March 2011, CPSS and the IOSCO

    Technical Committee publicly issued a ``Consultative Report'' that

    included the then-current draft of the FMI Principles and that

    requested comment upon the draft by July 29, 2011. CPSS and the IOSCO

    Technical Committee are in the process of reviewing the comments

    received and finalizing the FMI Principles. The Commission would not

    expect an FBOT's clearing organization to observe the FMI Principles

    until the effective date thereof established by CPSS and IOSCO.

    However, because it is anticipated that several FBOTs may wish to apply

    for registration between the time that the final FMI Principles are

    published and the time that the FMI Principles become effective and

    that clearing organizations for FBOTs may find that they already

    observe the FMI Principles, an FBOT that applies for registration after

    the FMI Principles are published in final form may demonstrate that its

    clearing organization observes those principles in lieu of

    demonstrating observance of the RCCPs.

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

    \41\ Not all of the FMI Principles are applicable to central

    counterparties.

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

    d. Clearing Standards

    The FBOT registration requirements set forth in proposed Sec. 48.7

    include certain substantive standards that would have to be satisfied

    by an FBOT's clearing organization or the FBOT itself, if it is

    performing its own clearing functions. Among other things, an FBOT

    would be required to demonstrate that the members of its clearing

    organization are fit and proper and meet appropriate financial and

    professional standards; that the clearing organization is registered

    with the Commission as a DCO or observes the RCCPs or successor

    standards; that the clearing organization is in good regulatory

    standing in its home country jurisdiction; that the regulatory

    authorities governing the activities of the clearing organization

    provide comprehensive supervision and regulation comparable to that

    provided by the Commission to DCOs and engage in ongoing supervision

    and oversight of the clearing organization; that the clearing

    organization has the capacity to detect, investigate and sanction

    persons who violate its rules; and that the clearing organization has

    sufficient compliance staff and resources.

    (i) DCOs

    LME and CME Group commented that if an FBOT's clearing organization

    is registered with the Commission as a DCO, the FBOT should not be

    required to establish that the clearing organization satisfies the

    remaining criteria set forth in the proposed regulation. The Commission

    has determined to adopt the approach suggested by the commenters. Much

    of the criteria set forth in Sec. 48.7 are likely to have been

    reviewed in connection with the clearing organization's application for

    a registration as a DCO and any additional review would be redundant.

    Accordingly, proposed Sec. 48.7 has been modified to reflect that the

    registration requirements applicable to an FBOT's clearing

    organizations may alternatively be demonstrated by a statement from the

    clearing organization that it is registered and in good standing with

    the Commission as a DCO.

    (ii) RCCPs Standards for Non-DCOs

    Certain commenters questioned the appropriateness of the proposal's

    requirement that clearing organizations that are not CFTC-registered

    DCOs would have to demonstrate compliance with the RCCPs. MX suggested

    that the Commission should instead require the clearing organization to

    demonstrate that the regulations, standards, and policies of the

    applicable foreign regulator are comparable to those of the Commission;

    ICE suggested that the CFTC should rely on the expertise of the foreign

    regulator to regulate its own clearing organizations. As noted above,

    OMX recommended that the registration requirements permit clearing

    firms to demonstrate that they satisfy certain recognized international

    standards for central counterparties, rather than referring

    specifically to the RCCPs. By contrast, Eurex suggested that the

    inquiry into a firm's clearing organization should be restricted to a

    demonstration that the RCCPs are satisfied.

    NYX suggested that if the proposed RCCP standard is adopted, the

    CFTC should obtain confirmation of that fact from the firm's home

    country regulator, in lieu of requiring the information from the

    clearing organization itself. Bursa Derivatives suggested that the

    Commission should clarify that a clearing organization's reasons for

    non-compliance with certain RCCPs would be considered by the Commission

    and asked whether a time period would be specified for the clearing

    organization to comply with all of the RCCPs in such instance.

    The Commission has determined to adopt Sec. Sec. 48.7(d)(1) and

    48.8(a)(3)(ii) substantially as proposed. As noted above, the

    Commission believes that requiring an FBOT's clearing organization to

    demonstrate that it observes a singular set of internationally

    recognized standards provides clarity, consistency and certainty to the

    application requirements. Such representations also enable the

    Commission to obtain assurance that the clearing organizations used by

    the FBOTs observe, among other things, appropriate criteria for

    participation; measurement and management of credit exposures;

    management of custody, investment and operational risk; margin;

    financial resources; default procedures; governance; and transparency

    without specifically requiring the clearing organizations to

    demonstrate compliance with requirements that are identical to those

    that would be

    [[Page 80683]]

    imposed upon a DCO. The use of an international standard that is

    substantially similar, though not identical, to the requirements

    imposed upon U.S. registrants is consistent with the directive in CEA

    section 4(b)(1)(A)(i) that the Commission consider whether the relevant

    regulatory regime is ``comparable'' and ``comprehensive.'' It is also

    consistent with section 752 of the Dodd-Frank Act, which seeks to

    promote consistency in global regulation of swaps and futures contracts

    and the requirement set forth in Sec. Sec. 48.7(b)(1) and

    48.8(a)(3)(i) that the FBOT itself comply with the IOSCO Principles.

    The RCCPs were developed with broad participation and comment from

    entities from multiple nations and have been approved by both IOSCO's

    Technical Committee and the CPSS. The same will be true of the FMI

    Principles, when finalized. Accordingly, the Commission believes that

    the RCCPs and their successor standards are the appropriate criteria to

    use when reviewing an FBOT's clearing organization that is not

    registered as a DCO.

    The Commission notes that the RCCPs consist of recommendations that

    are expressed as general principles, explanations thereof, and key

    issues and questions to be considered when assessing observance of the

    recommendations, rather than a checklist of obligations to be reviewed.

    The Commission recognizes that the generality of the recommendations

    and the explanations thereof afford some flexibility in assessing a

    clearing organization's observance thereto. The Commission anticipates

    that, for purposes of an FBOT registration application, clearing

    organizations may demonstrate observance of individual RCCPs, as well

    as observance of the RCCPs as a whole, in a variety of ways.\42\

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

    \42\ The Commission expects to take a similar approach with

    respect to the FMI Principles, when finalized. As currently drafted,

    the FMI Principles will include general principles, key

    considerations that explain the general principle, and explanatory

    notes that discuss the objective and rationale behind the principle

    and that provide guidance on how the standards expressed therein can

    be implemented. In some cases, annexes will provide additional

    information and guidance. When published, the document also will be

    accompanied by an assessment methodology.

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

    CPSS and IOSCO encourage relevant national authorities to assess

    observance of the RCCPs by the central counterparties in their

    jurisdictions as well as RCCP assessments by international financial

    institutions (i.e., the International Monetary Fund and the World Bank)

    as part of their Financial Sector Assessment Programs. The Commission

    anticipates that a similar approach will be taken with regard to the

    FMI Principles. The Commission encourages FBOT registration applicants

    to submit with their registration applications any such assessments

    that have been made of their clearing organizations and any other

    information from their home country regulator(s) (provided that

    submitting such assessments to the Commission is not inconsistent with

    any applicable laws of the home country) that would be relevant to a

    determination that the clearing organization observes the RCCPs. Such

    assessments will inform the Commission's review of the clearing portion

    of the application. Due to the generality of the RCCPs, however, the

    Commission believes that a certification from a regulatory authority

    that the clearing organization observes the RCCPs, without more, would

    not provide it with sufficient information as to the relevant clearing

    operations to adequately assess the FBOT application and, thus, would

    not be sufficient to demonstrate that the RCCP requirement is met.

    With respect to Bursa Derivatives' request that the Commission

    consider a clearing organization's reasons for non-compliance with

    certain RCCPs, the Commission generally believes that a registered

    FBOT's clearing organization should be able to represent that it

    observes the RCCPs or successor standards. However, the Commission

    recognizes that a clearing organization may have very unique factual

    circumstances that may warrant an exception to the requirement with

    respect to a limited scope of RCCPs. Accordingly, the Commission would,

    where circumstances warrant, entertain applications from FBOT's whose

    clearing organizations do not observe all of the RCCPs.

    e. Foreign Regulation of FBOT Participants

    In the proposed rules, the Commission specifically asked for

    comment as to whether, to the extent an FBOT is permitted to list

    swaps, the Commission should examine the regulatory oversight of

    relevant market participants (e.g., the functional equivalents of swap

    dealers (SD) and major swap participants (MSP)) in the applicable

    foreign jurisdictions when making a determination as to the

    comparability and comprehensiveness of the supervision and regulation

    of the relevant regulatory regime. Three commenters addressed the

    issues related to market participants. Better Markets commented that

    ``[s]uch examination is critical * * * [and must include an assessment

    of] rules relating to collateral, business conduct and trading

    behavior.'' It noted that ``SDs and MSPs are subject to rigorous

    standards because safeguards for these important market participants

    enhance the continued financial integrity of the marketplace.'' Better

    Markets further argued that the requirements for the foreign

    equivalents of SDs and MSPs should be the same as or equivalent to

    those imposed by the Dodd-Frank Act. In contrast, ICE commented that

    requiring equivalent or comparable regulation of foreign swap dealers

    or major swap participants is premature, positing that the proper

    course is for the CFTC to ``work with foreign regulators to ensure

    high-level comparable regulation of market participants.'' As

    previously noted, FOA expressed concern that this type of analysis

    could easily lead to a ``line by line'' examination of the EU's

    approach to the regulation of derivatives transactions, central

    counterparties and trade repositories, which would complicate cross-

    border business and increase the risk of inadvertent breaches of rules.

    The Commission has determined that it would not be appropriate, in

    the context of this rulemaking, when making a determination as to the

    comparability and comprehensiveness of the supervision and regulation

    of the relevant regulatory regime with respect to the registration of

    an FBOT, to require examination of the regulatory oversight of SDs and

    MSPs in the applicable home country jurisdictions. CEA section 4(b)

    applies with respect to FBOTs that wish to provide for direct access

    and the CEA section 4(b)(1)(A)(i) standard of review to be applied is

    ``whether any such foreign board of trade is subject to comparable,

    comprehensive supervision and regulation by the appropriate

    governmental authorities in the foreign board of trade's home

    country.'' The Commission believes that the review standard is thereby

    appropriately focused on an FBOT's operations, including its clearing

    organization, and its regulatory authority. Thus, the appropriate

    review here is to examine the FBOT's membership and trading participant

    standards as they relate to trading on the FBOT. If such membership

    and/or trading participant standards have been determined to be

    adequate by the FBOT's regulatory authority, which has been determined

    to provide comparable, comprehensive supervision and regulation of the

    FBOT, any further participant review would be beyond the scope of CEA

    section 4(b).

    [[Page 80684]]

    3. Contracts

    a. Linked Contracts

    (i) Definition

    Proposed Sec. 48.2(d) defined a linked contract as ``a futures or

    option or swap contract made available for direct access from the

    United States by a registered foreign board of trade that settles

    against any price (including the daily or final settlement price) of

    one or more contracts listed for trading on a registered entity as

    defined in section 1a(40) of the Act.'' \43\ Three commenters requested

    clarification with respect to this definition.\44\ NGX requested that

    the Commission clarify the definition of linked contract to take into

    account the nuanced distinction between (1) contracts which are settled

    against the settlement price of a contract listed for trading on a U.S.

    contract market and (2) basis contracts, the prices of which are merely

    quoted with reference to another market. Better Markets commented that

    the definition of linked contract is far too narrow, and argued that it

    should include contracts that are reasonably likely to influence prices

    of the DCM/SEF-traded contracts as well as contracts that directly

    reference the prices of DCM/SEF-traded contracts. LME requested

    clarification on the scope of the definition of linked contract,

    commenting that LME did not believe the definition captured any

    contract of the type traded on LME.

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

    \43\ Registered entity is defined in CEA section 1a(40) to mean:

    (A) A board of trade designated as a contract market under section 5

    of the Act; (B) a derivatives clearing organization registered under

    section 5b of the Act; (C) a board of trade designated as a contract

    market under section 5f of the Act; (D) a swap execution facility

    registered under section 5h of the Act; (E) a swap data repository

    registered under section 21 of the Act; and (F) with respect to a

    contract that the Commission determines is a significant price

    discovery contract, any electronic trading facility on which the

    contract is executed or traded.

    \44\ NGX, Better Markets, and LME.

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

    The Commission has determined to adopt the definition in Sec.

    48.2(d) substantially as proposed. The definition of linked contract

    leading to the requirement to impose additional conditions on such

    contracts is based upon the statutory description of linked contracts

    found in CEA section 4(b)(1)(B).\45\ With respect to contracts that do

    not meet the definition of linked contracts, the proposal provided that

    applicants must identify contracts that share any other commonality

    (changed to relationship in the final rule) with a contract listed for

    trading on a registered entity-- for example, if both the FBOT's and

    the registered entity's contracts settle to the price of the same third

    party-constructed index. With respect to these types of contracts, as

    with all conditions of registration, the final rule provides that the

    Commission, in its discretion and after appropriate notice and

    opportunity to respond, may impose additional conditions on the

    registered FBOT. Such additional conditions would be imposed if deemed

    necessary by the Commission to maintain its ability to carry out its

    market surveillance responsibilities when faced with contract

    relationships that essentially create a single market for the contracts

    listed by the FBOT and the registered entity and could include, among

    others, the conditions applicable to the listing of a linked contract.

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

    \45\ The Commission does not believe that any LME contract

    currently made available for direct access under LME's no-action

    relief, all of which settle against prices generated by the LME,

    would fall into that definition.

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

    (ii) Conditions

    Proposed Sec. 48.8(c) applied certain additional specified

    conditions for FBOTs that make linked contracts available by direct

    access. \46\ The conditions included in Sec. 48.8(c)(1), as set forth

    in CEA section 4(b)(1)(B), included: (1) Making public daily trading

    information regarding the linked contract that is comparable to the

    daily trading information published for the contract to which it is

    linked; (2) adopting position limits for the linked contract that are

    comparable to the position limits adopted by the registered entity for

    the contract to which it is linked; (3) having the authority to require

    or direct any market participant to limit, reduce, or liquidate any

    position; (4) agreeing to promptly notify the Commission of certain

    changes with respect to the linked contract; (5) providing information

    to the Commission regarding large trader positions in the linked

    contract that is comparable to the large trader position information

    collected by the Commission for the contract to which it is linked; and

    (6) providing the Commission such information as is necessary to

    publish reports on aggregate trader positions for the linked contract

    that are comparable to such reports on aggregate trader positions for

    the contract to which it is linked.

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

    \46\ Under the proposed regulations, the requirements to

    register and to comply with the conditions for making available

    linked contracts are applicable only to those FBOTs which make such

    contracts available through direct access. The registration and

    linked contract provisions of the final rule do not extend to FBOTs

    that do not provide direct access to the FBOT's trade matching

    system from the U.S.

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

    The other conditions on linked contracts, set forth in Sec.

    48.8(c)(2), are based on the second set of additional conditions the

    Commission imposed on the no-action relief issued to ICE Futures Europe

    when that exchange made available for trading by direct access certain

    contracts in energy commodities linked to the prices of contracts

    traded on NYMEX.\47\ The conditions would require that the FBOT, among

    other things, (1) inform the Commission in a quarterly report of any

    member that had positions in a linked contract above the applicable

    FBOT position limit, (2) provide trade execution and audit trail data

    for input to the CFTC's Trade Surveillance System (TSS), (3) provide

    for CFTC on-site visits for the purpose of overseeing the FBOT's and

    the clearing organization's ongoing compliance with registration

    requirements and conditions, (4) provide, at least one day prior to the

    effective date, copies of, or hyperlinks to, all rules, rule

    amendments, circulars and other notices published by the FBOT with

    respect to all linked contracts, (5) provide copies of all disciplinary

    notices involving the FBOT's linked contracts, and (6) promptly take

    similar action with respect to its linked contract in the event that

    the CFTC, pursuant to its emergency powers authority, directs that the

    U.S. registered entity which lists the contract to which the FBOT's

    contract is linked to take emergency action with respect to a linked

    contract (e.g., to reduce positions in or cease trading in the

    contract).

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

    \47\ See CFTC Letter No. 09-37 (August 20, 2009).

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

    Five commenters addressed these additional conditions.\48\ With

    respect to linked contracts and position limits, LME, noting that

    foreign markets may well implement restrictions that could be more

    effective than position limits in addressing the regulatory objectives

    to be addressed by position limits, suggested that FBOTs should be

    permitted to adopt the position limits of a linked market as a safe

    harbor, but that the CFTC should also permit applicants to submit for

    approval any alternative approach that the Commission determines to be

    comparable in result. OSE argued that the proposed additional

    conditions for linked contracts are only necessary when an FBOT has

    more than a de minimis amount of trading in a linked contract.

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

    \48\ LME, OSE, Senator Carl Levin, CMOC and ATA.

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

    OSE also noted that the burdens associated with proposed Sec.

    48.8(c)(2) may be overly costly and could be narrowed. Specifically,

    OSE commented on proposed Sec. 48.8(c)(2)(ii), which would require

    that the FBOT provide trade execution and audit trail data on

    [[Page 80685]]

    a linked contract for input into the TSS on a routine basis by the day

    following the trade date. OSE suggested that the Commission assess the

    relative burdens of the requirement and whether it could achieve the

    regulatory purpose through a more targeted requirement, such as

    requiring the data on an ``as necessary'' rather than on a daily basis.

    OSE also expressed concern about proposed Sec. 48.8(c)(2)(vi), which

    would require the FBOT, in the event that the Commission directs that

    the registered entity that lists the contract to which the FBOT's

    contract is linked take emergency action with respect to a linked

    contract, subject to information-sharing arrangements between the

    Commission and its regulatory authority, to promptly take similar

    action with respect to the its linked contract. OSE suggested that it

    is preferable for the Commission to coordinate the actions that the

    FBOT should take in response to a market disruption or event through

    the FBOT's regulator, in recognition of international comity.

    Two commenters, Senator Carl Levin and ATA, strongly supported the

    proposed linked contract conditions, both specifically identifying the

    requirement that the FBOT share its trade execution and audit trail

    data, as well as the position limit provisions. Senator Levin commented

    that sharing trading data is vital for the Commission to detect price

    manipulation and excessive speculation involving U.S. futures traded on

    foreign exchanges. Further, Senator Levin noted that he believed the

    linked contract provisions would help to close the ``London loophole''

    (a scheme, whereby, according to Senator Levin, traders move their

    trading activity to foreign markets to avoid position limits set by

    U.S. exchanges) by ensuring that the Commission is able to police FBOT

    trading in U.S. commodities to stop excessive speculation, price

    manipulation, and market disruptions. CMOC encouraged the CFTC to

    require that the FBOT impose position limits that are at least equal to

    or lower than the limits to be imposed in the U.S. on registered

    entities under the Dodd-Frank Act.

    The Commission has determined to adopt Sec. 48.8(c) substantially

    as proposed. The first set of conditions for linked contracts, found in

    Sec. 48.8(c)(1) are statutory-based conditions which are specifically

    required by the CEA section 4(b)(1)(B). The second set of conditions

    for linked contracts, found in Sec. 48.8(c)(2), as previously noted,

    represent the second group of additional conditions the Commission

    imposed on the no-action relief issued to ICE Futures Europe when that

    exchange made available for trading by direct access contracts linked

    to the prices of contracts traded on NYMEX. These conditions remain

    necessary because such linkages create a single market for the subject

    contracts and, in the absence of certain preventive measures at the

    FBOT, could compromise the Commission's ability to carry out its market

    surveillance responsibilities. Because of the linkage, the trading of

    the linked contracts on an FBOT potentially affects the pricing of

    contracts traded on registered entities.

    With respect to the proposed Sec. 48.8(c)(2)(ii) trade execution

    and audit trail data on a linked contract reporting requirement, the

    Commission has considered comments urging the Commission to require the

    data on an ``as necessary'' rather than on a daily basis and has

    determined that the timely provision of such information is essential

    if the Commission is to adequately carry out its trade practice and

    market surveillance responsibilities with respect to the linked

    contract listed on the registered entity. Commission staff conducts

    surveillance and reviews the trading data on a daily basis, and the

    trade data from the FBOT's linked contract are a critical component of

    this surveillance. With respect to the proposed Sec. 48.8(c)(2)(vi)

    coordinated emergency action requirement, the Commission believes that

    the timeliness of any required emergency action, which would be taken

    only if necessary to protect the market and the public, is critical and

    outweighs the benefit that would be derived from coordinating actions

    through the FBOT's regulator. The Commission notes that the requirement

    to take emergency action is an extremely rare event and, in the normal

    course of business, the Commission would, time permitting, coordinate

    with the FBOT's regulator regarding critical actions to be taken

    concerning a linked contract.

    The Commission has determined to modify the second set of

    conditions on linked contracts by moving the requirement in proposed

    Sec. 48.8(c)(2)(iii), which provided for CFTC on-site visits for the

    purpose of overseeing the FBOT's and the clearing organization's

    ongoing compliance with registration requirements and conditions, to

    Sec. 48.8(a)(8), thus making it a general condition for maintaining

    registration.

    b. Swaps and Other Contracts

    (i) Swaps

    Under proposed Sec. 48.7(c)(1)(i), a registered FBOT would be

    permitted to provide direct access to futures, options, and swap

    contracts that would be eligible to be listed for trading on a DCM.

    Five commenters supported permitting the execution of swaps on an FBOT

    by persons located in the U.S. by direct access.\49\ Eurex, for

    instance, commented that the Commission should permit FBOTs to provide

    trading access to qualified U.S. persons for trading swaps that are

    listed on the FBOT, noting that the currently proposed conditions on

    FBOTs would be sufficient for them to comply with the purposes of the

    Dodd-Frank Act regarding swap trading.

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

    \49\ Eurex, ICE, NGX, MX, and BG.

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

    The Commission has determined to adopt the rule as proposed. The

    Commission notes, however, that the regulations would only permit an

    FBOT to make swaps available to persons located in the U.S. for trading

    by direct access after the FBOT, its clearing organization, and the

    swaps to be made available by direct access have been determined by the

    Commission to be subject to comparable, comprehensive supervision and

    regulation by the appropriate governmental authorities in the FBOT's

    home country. Moreover, only swaps that would be permitted to be traded

    on a DCM could be made available, all such traded swaps would be

    required to be cleared, and the parties trading such swaps would be

    required to satisfy FBOT membership/trading participant standards that

    would have been reviewed and approved by the FBOT's regulatory

    authority.\50\

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

    \50\ The Commission notes that its decision to permit registered

    FBOTs to make swaps available via direct access to persons located

    in the U.S. is guided in part by the fact that the Dodd-Frank Act

    permits swaps to be listed for trading on a DCM and the FBOTs that

    are eligible to be registered are defined by Sec. 48.2(b) as FBOTs

    that possess the attributes of an established, organized exchange.

    This definition was intended to restrict FBOT registration

    eligibility to entities similar in nature to those that received

    direct access no-action relief in the past (e.g., entities that are

    comparable in operation and regulation to registered DCMs).

    Moreover, there is nothing in the Dodd-Frank Act, including section

    738 of the Dodd-Frank Act amending section 4(b) of the Act, which

    expressly precludes a registered FBOT from offering swaps through

    direct access. However, the Commission also believes that the terms

    and conditions of any swap contract to be made available to persons

    located in the United States through direct access must demonstrate

    that such contract would meet review standards similar to those of a

    swap to be listed on a DCM and must demonstrate that the contract is

    not one that a U.S. person would be prohibited from trading.

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

    Registered FBOTs that permit swaps to be traded by direct access

    would also be subject to additional conditions, including the

    requirement to ensure that all swap transaction data, including price

    and volume, are timely reported as soon as technologically practicable

    after execution of the swap transaction to a

    [[Page 80686]]

    swap data repository (SDR) that is either registered with the

    Commission or has an information-sharing arrangement with the

    Commission. Additionally, the FBOT must agree to coordinate with the

    Commission with respect to arrangements established to address cross

    market oversight issues involving swaps trading, including

    surveillance, emergency actions, and the monitoring of trading.

    Finally, based on its experience in administering these FBOT

    registration provisions and other rules related to swaps trading, the

    Commission may, in its discretion and after notice and an opportunity

    to respond, impose additional conditions upon the FBOT's registration

    with respect to the listing of swaps contracts.

    (ii) Clearing of Swaps

    Under proposed Sec. 48.7(c)(1)(ii), all contracts that could be

    made available to be traded by direct access, including swaps, would be

    required to be cleared. ICE, BG Americas, and NGX opposed the mandatory

    clearing requirement for swaps. ICE commented that the clearing mandate

    contained in the proposed regulations differed from the clearing

    requirements applicable to swaps transactions on U.S. markets.

    Specifically, transactions executed on a swap execution facility (SEF)

    would not be required to be cleared if such transactions were not

    subject to the mandatory clearing requirements set forth in the Act.

    NGX noted that end users executing swaps on SEFs would be exempt from

    the mandatory clearing requirements pursuant to section 2(h)(7) of the

    Act. Similarly, BG Americas commented that the mandatory clearing

    standard applicable to transactions executed on an FBOT would be higher

    than that applicable to U.S. exchanges, in light of the available

    exemptions from the clearing requirement in the CEA, and recommended

    that the Commission clarify in the final rule that the mandatory

    clearing requirements on FBOTs will be no different from the clearing

    requirements on U.S. exchanges.

    The Commission has determined to adopt Sec. 48.7(c)(1)(ii) as

    proposed. All three commenters supported their view by referencing the

    clearing standards applicable to transactions executed on SEFs, not on

    DCMs. As stated above, both the proposed and final Sec. 48.2(b)

    restrict the universe of FBOTs that are eligible to be registered under

    part 48 to those that possess ``the attributes of an established,

    organized exchange or other trading facility.'' This provision is

    intended to limit FBOT registration eligibility to the types of

    entities to which direct access no-action relief has been granted in

    the past (e.g., entities that are comparable in operation and

    regulation to registered DCMs). Accordingly, the Commission believes

    that the treatment of swaps that registered FBOTs will make available

    for trading to members and other participants located in the U.S.

    through direct access should parallel the treatment afforded to swaps

    transactions that may be traded on DCMs.

    The CEA requires swaps transactions that are traded on a DCM to be

    cleared. Specifically, CEA section 5(d)(11) includes DCM Core Principle

    11, ``Financial Integrity of Transactions,'' which requires a board of

    trade to establish and enforce rules and procedures for ensuring the

    financial integrity of transactions entered into on or through the

    facilities of the contract market (including the clearing and

    settlement of transactions with a DCO). Accordingly, the Commission

    believes that it is appropriate to require that all transactions

    (including swaps) that are eligible to be traded by direct access

    pursuant to an FBOT registration be cleared.

    (iii) Swaps Data Reporting

    Under proposed Sec. 48.8(a)(9)(i), a registered FBOT permitting

    swaps to be traded by direct access would be required to report to the

    public, on a real-time basis, data relating to each swap transaction,

    including price and volume, as soon as technologically practicable

    after execution of the swap transaction. Under proposed Sec.

    48.8(a)(9)(ii), a registered FBOT permitting swaps to be traded by

    direct access would be required to ensure that all swap transaction

    data is timely reported to an SDR that is either registered with the

    Commission or has an information-sharing arrangement with the

    Commission.

    Two commenters addressed these reporting requirements. ATA

    expressed concern about the effect of real-time reporting on their

    members' ability to hedge and recommended that this requirement be

    revised to allow delayed reporting to permit counterparties to close

    their related transactions. ICE expressed the view that the CFTC should

    not require all FBOTs to report swaps transactions to an SDR.\51\

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

    \51\ ICE noted that the SDR rules for domestic markets have not

    been finalized and SDRs are not yet operational and that,

    accordingly, the CFTC should delay implementation of this

    requirement until SDR rules are finalized and SDRs are operational.

    Further, the CFTC could rely on reporting to the CFTC from the FBOT,

    its clearing organization, or the foreign regulatory authority under

    an information-sharing arrangement.

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

    The Commission has determined to retain both reporting

    requirements, but to modify the proposed rule with respect to the

    responsibility for real-time reporting of swaps transaction information

    to the public. The Commission recognizes that the real-time reporting

    of swaps information to the public and the reporting of swaps

    transactions to an SDR are key objectives of the Dodd-Frank Act. Real-

    time reporting enhances price discovery. Reporting swaps transactions

    is necessary to permit the Commission and other regulatory authorities

    to view the market as a whole. As previously stated, Sec. 48.2 is

    intended to restrict the universe of FBOTs that are eligible to be

    registered under part 48 to those entities that are comparable in

    operation and regulation to registered DCMs. The Commission anticipates

    that DCMs will be required to ensure that all swap transaction data,

    including price and volume, are timely reported to an SDR after

    execution of the swap transaction. Real-time swap transaction and

    pricing data will then, in turn, be publicly disseminated by the SDR.

    Accordingly, the Commission has determined to limit the registered FBOT

    reporting requirements contained in Sec. 48.8(a)(9)(i) to an

    obligation to ensure that all transaction data relating to each swap

    transaction, including price and volume, be reported to an SDR that is

    registered with the Commission or has an information sharing

    arrangement with the Commission.

    The Commission is aware that no SDRs are either registered or

    operational at this time. Accordingly, until such time as appropriate

    SDR operations are in place, the conditions contained in Orders of

    Registration issued to FBOTs that wish to permit members and other

    participants to trade swaps via direct access will indicate that the

    FBOT may list such swaps for direct access but will be required to

    comply with Sec. 48.8(a)(9)(i) as soon as practicable following the

    licensing or registration of a SDR that meets applicable requirements.

    (iv) Contracts Other Than Futures, Options, and Swaps

    Proposed Sec. 48.7(c)(1)(i) provided that contracts that may be

    made available by direct access by a registered FBOT must be futures,

    option, or swaps contracts. LME and NGX requested clarification with

    respect to whether the proposed rules would permit an FBOT to offer

    spot and forward contracts and other similar physically-settled

    transactions. NGX also asked the Commission to clarify that, although

    the proposed regulations would permit a registered FBOT to list for

    trading through direct access any contract that is legally

    [[Page 80687]]

    offered in the U.S., only those contracts that are regulated under the

    Act would be within the scope of the FBOT registration provision.

    The Commission has determined to adopt the rule as proposed. As

    stated in the proposal, those types of contracts subject to the CFTC's

    jurisdiction are within the ambit of the FBOT registration rules. The

    registration provisions do not preclude an FBOT from making available

    to participants located in the U.S. other products (e.g., spot

    contracts and forward contracts) to the extent applicable law otherwise

    allows. The Commission also has determined to remove any reference to

    products from the FBOT definition set forth in Sec. 48.2(a).

    (v) Review of Contracts

    Proposed Sec. 48.7(c) would require that an FBOT, as part of its

    application for registration, provide, among other things, the terms

    and conditions of the futures, option and swaps contracts intended to

    be made available for direct access. Additionally, proposed Sec. 48.10

    would require a registered FBOT that wishes to offer new contracts

    subsequent to registration to submit such contracts to the CFTC for

    review prior to making the additional contracts available for trading

    by direct access. LME commented that the Commission should adopt an

    exemptive, rather than a registration, regime and require contract

    designation, similar to that applied by the Commission when a DCM

    submits a new contract for listing, only with respect to linked

    contracts.

    The Commission has determined to adopt Sec. Sec. 48.7(c) and 48.10

    as proposed, modified to reflect newly adopted procedures, discussed

    below, applicable to the offer or sale, to persons in the U.S., of non-

    narrow-based security index futures and option contracts. The

    Commission believes that it is necessary to review the terms and

    specifications of all contracts before they are made available for

    trading by direct access to ensure that the contracts would be legally

    permitted to be traded on a DCM and otherwise conform to the

    requirements and conditions applicable to contracts listed on the FBOT

    for trading by direct access by persons located in the U.S. The

    Commission also believes that it is necessary and appropriate to review

    new contracts in order to, among other things, determine that the

    contracts are actually futures, option, or swap contracts; ensure that

    they are not contracts determined by the Commission pursuant to CEA

    section 5c(c)(5)(C)(i) to be contrary to the public interest; ensure

    that they are not contracts on such products as security futures or

    narrow-based stock indexes or other securities regulated by the U.S.

    Securities and Exchange Commission; and determine whether the contract

    is linked to or may otherwise have some impact on a contract traded on

    a CFTC-regulated entity. The Commission notes that the treatment of new

    products set forth in the proposed and final rules is consistent with

    the existing practice under the no-action regime. The Commission

    further notes that, in the past, Commission staff has attempted to

    complete its review of additional contracts proposed to be made

    available for direct access promptly. Thus, an FBOT's ability to bring

    such contracts to market quickly generally has not been impaired.

    With respect to the listing of additional non-narrow-based security

    index futures and option contracts to be made available by direct

    access, proposed Sec. 48.10 provided that a registered FBOT could list

    for trading such an additional futures contract pursuant to the

    procedures set forth in Appendix D to Part 30. Proposed Sec. 48.10

    also provided that a registered FBOT could, without further action by

    either the FBOT or the Commission, list for trading an additional

    option contract on a non-narrow-based security index futures contract

    which could be offered or sold in the United States pursuant to a no-

    action letter issued by the Commission's Office of the General Counsel.

    HKFE requested clarification with respect to any interrelationship

    between the proposed rules and the approval process for the offer and

    sale of index products to persons in the U.S.

    The Commission has revised its procedures applicable to the offer

    or sale, to persons in the U.S., of a non-narrow-based security index

    futures contract traded on an FBOT to conform to recent amendments to

    its regulations.\52\ Generally, the new procedures involve the issuance

    of a Commission certification rather than a no-action letter.

    Accordingly, Sec. 48.7(c)(2) has been added and provides that foreign

    futures (and option contracts) on non-narrow-based security indexes

    must have been certified by the Commission pursuant to the procedures

    set forth in Sec. 30.13, and Sec. 48.10 has been updated and now

    provides that a registered FBOT may list for trading by direct access

    an additional futures (or option contract) on a non-narrow-based

    security index pursuant to the Commission certification procedures set

    forth in Sec. 30.13(d) and Appendix D to Part 30. Further, with

    respect to option contracts, if the option is on a non-narrow-based

    security index futures contract which may be offered or sold in the

    United States pursuant to a Commission certification issued pursuant to

    Sec. 30.13, the option contract may be listed for trading by direct

    access without further action by either the registered FBOT or the

    Commission.\53\ In response to HKFE's query, the Commission notes that

    the Commission certification procedures for non-narrow-based security

    indexes and the FBOT registration procedures are independent of each

    other, with the exception that a registered FBOT applying for

    Commission certification to offer or sell to persons located within the

    U.S. a non-narrow-based security index contract may, in that same

    request, pursuant to Sec. 30.13(k), request that such contract be made

    available for trading by direct access.

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

    \52\ See Foreign Futures and Options Contracts on a Non-Narrow-

    Based Security Index; Commission Certification Procedures, 76 FR

    59241 (September 26, 2011).

    \53\ Upon the implementation date, regulations 48.7(c) and 48.10

    supersede and replace the provisions included in the ``Notice of

    Revision of Commission Policy Regarding the Listing of New Futures

    and Option Contracts by Foreign Boards of Trade That Have Received

    Staff No-Action Relief to Provide Direct Access to Their Automated

    Trading Systems from Locations in the United States'' (71 FR 19877;

    April 18, 2006; corrected at 71 FR 21003, April 24, 2006) and the

    ``Notice of Additional Conditions on the No-Action Relief When

    Foreign Boards of Trade That Have Received Staff No-Action Relief To

    Permit Direct Access to Their Automated Trading Systems from

    Locations in the United States List for Trading from the U.S. Linked

    Futures and Option Contracts and a Revision of Commission Policy

    Regarding the Listing of Certain New Option Contracts,'' 74 FR 3570

    (January 21, 2009).

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

    4. Direct Access Definition

    Proposed Sec. 48.2(c) defines direct access to mean ``an explicit

    grant of authority by a foreign board of trade to an identified member

    or other participant located in the United States to enter trades

    directly into the trade matching system of the foreign board of

    trade,'' which is identical to the definition provided in CEA section

    4(b)(1)(A). LME and HKFE requested clarification of the definition.

    LME requested clarification of the degree to which the definition

    covers access to application programming interfaces (API) developed by

    members to interface with exchange systems. LME indicated that it

    understood the direct access definition to include access to the

    graphical user interface of an FBOT, and not indirect access via an

    API. HKFE asked the Commission to clarify the meaning of ``explicit

    grant of authority'' and to provide examples of the kind of conduct or

    actions on the part of an FBOT that would be regarded

    [[Page 80688]]

    as ``an explicit grant of authority.'' HKFE also requested that the

    CFTC clarify the position taken previously in connection with the

    granting of a direct access no-action letter that an automatic order

    routing connection from the U.S. to an FBOT would not be considered as

    ``direct access.'' Similarly, in relation to proposed Sec. 48.8(a)(4),

    which addresses restrictions on direct access, ASX requested that the

    placement of terminals in non-exchange participant offices, and the

    conditions thereof, be specified in the new rules.

    The Commission has determined to adopt the rule as proposed. Direct

    access is defined in the CEA and in the proposed and final regulations

    to mean an explicit grant of authority by an FBOT to an identified

    member or other participant located in the U.S. to enter trades

    directly into the trade matching system of the foreign board of trade.

    This means that the FBOT itself, and not its members or participants,

    has identified and permitted a member or participant to enter trades

    directly into the FBOT's order matching and trade entry system from the

    U.S. The electronic means of entry to the trading system may be through

    the internet, a dedicated closed electronic system, an API, or other

    type of electronic interface--the dispositive factor is that the order

    is transmitted by an identified member or other participant located in

    the U.S. and the order is entered directly into the trade matching

    system. Thus, it does not constitute direct access if the order is sent

    by a person in the U.S. by means of an automated order routing system

    (AORS) to an intermediary located outside of the U.S. for further

    action or to pass through an order entry or risk management filter at

    the intermediary prior to reaching the trade matching engine.

    Proposed Sec. 48.8(a)(4), which addresses restrictions on direct

    access, requires that the FBOT not provide, and take reasonable steps

    to prevent, third parties from providing direct access to the FBOT.

    This provision is intended to restrict direct access to FBOT-authorized

    persons by such methods as restricted access to hardware, password

    control, and other similar physical or electronic security measures. It

    is not intended to prohibit a registered FBOT from authorizing its

    member firms or other participants eligible to handle U.S. customer

    orders to permit their customers in the U.S. to access the trading

    system using the member firm's or participant's member ID (mnemonic) or

    password. In other words, a registered FBOT's member or participant

    located outside of the U.S. may, if so authorized by the FBOT, permit

    customers in the U.S. to transmit orders directly to the trade matching

    engine. The Commission is aware that two FBOTs currently operating with

    direct access no-action relief--ASX \54\ and HKFE \55\--permit their

    exchange participants to allow non-exchange participants in the U.S. to

    have access to the exchanges' trading systems, subject to a guarantee

    from an exchange participant firm.

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

    \54\ CFTC Letters No. 01-75 (July 30, 2001) and No. 04-32

    (October 25, 2004).

    \55\ CFTC Letter No. 01-74 (July 30, 2001).

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

    5. Scope of Registration (i.e., CEA Sections 5 and 5a)

    HKFE commented that there is no express provision in the proposed

    rules stating that registration under Part 48 would relieve an FBOT

    from compliance with CEA section 5 or 5a (that is, registering as

    either a DCM or DTEF). HKFE asked for clarification as to whether

    registration would relieve an FBOT from compliance with CEA section 5

    or 5a.

    The Commission has determined to adopt the rule as proposed.

    Registration with the Commission under the Part 48 regulations would

    relieve an FBOT from compliance with CEA section 5 and its requirement

    to register with the Commission as a DCM and comply with the core

    principles and regulations associated with DCMs to the extent that its

    activity within the U.S. is limited to permitting members and other

    participants located in the U.S. to have direct access to its trade

    matching system, subject to the terms and conditions of registration,

    and so long as it remains an FBOT. Of course, the registered FBOT

    could, alternatively, choose to comply with CEA section 5 and become a

    registered DCM, subject to the regulatory requirements applicable

    thereto. The Commission notes that CEA section 5a was repealed by the

    Dodd-Frank Act.

    6. Registration Requirements and Conditions

    Proposed Sec. 48.7 identified certain requirements that must be

    satisfied by an FBOT seeking to register with the Commission. Proposed

    Sec. 48.8 imposed various continuing conditions on registered FBOTs.

    Several commenters raised issues related to the proposed requirements

    and conditions.

    a. Trading Rules

    Proposed Sec. 48.7(b) identified the attributes of the automated

    trading system that would be required to be met by any FBOT seeking to

    register with the Commission. In response to the proposal's request for

    comment with respect to whether the Commission should require FBOTs to

    adopt additional conditions to promote orderly markets and customer

    protection, such as automated safety features to protect against errors

    in the entry of orders, price-banding mechanisms, maximum order size

    limitations, or trading pauses to prevent cascading stop-loss orders,

    ICE commented that the Commission should not issue prescriptive trading

    rules for FBOTs and that the foreign regulator, not the CFTC, has the

    primary interest in adopting rules in this area. Further, ICE noted

    that the CFTC should work through international regulatory groups like

    IOSCO to implement consistent controls, instead of prescriptive rules.

    The Commission has determined not to require, as a requirement for,

    or a condition of, registration, that FBOTs adopt such automated safety

    features. The Commission believes that the primary interest in adopting

    rules in this area remains with the foreign regulatory authority. The

    Commission believes that the trading system attributes described in and

    required by Sec. 48.7(b), which include compliance with the IOSCO

    Principles for Screen-Based Trading, are adequate to ensure the FBOT's

    trading system, among other things, is fair, reliable, capable of

    responding to emergencies, provides an adequate audit trail, and

    provides for reporting of trade data. They are features common to all

    automated trading systems that staff has reviewed in the context of the

    no-action process.

    b. Information Sharing

    Proposed Sec. 48.8(a)(6) imposed certain information sharing

    obligations on a registered FBOT and its clearing organization. NYX

    asserted that the CFTC should not seek to obtain information directly

    from a clearing organization. Rather, the CFTC should look to the

    exchange--which should always be able to provide all the information

    held by the clearing organization in relation to business conducted on

    that exchange. NYX also commented that some European clearing

    organizations have the status of banks (e.g., LCH Clearnet SA), and so

    may find it difficult to share information directly with the Commission

    rather than through their regulators.

    The Commission continues to believe that it would be appropriate

    and expedient to obtain information regarding the clearing function

    directly from the clearing organization, in lieu of relying upon

    intermediation by another entity. Nonetheless, with respect to the FBOT

    being better able to provide

    [[Page 80689]]

    information requested of the clearing organization, the Commission

    notes that Sec. 48.8(a)(6)(iii) provides that the FBOT and its

    clearing organization, as applicable, will provide information for

    certain purposes directly to the Commission. Accordingly, an FBOT could

    provide the information directly to the Commission, if it were better

    able to do so. Such information also could be provided by the

    applicable regulatory authority, although the FBOT and its clearing

    organization remain ultimately responsible to provide the information

    directly to the Commission under the final rule.

    c. Submission of U.S.-Domiciled Entities to Service of Process

    As a condition of registration, proposed Sec. 48.8(a)(5) would

    require that certain members or other participants granted direct

    access by a registered FBOT (1) file a written representation with the

    Commission submitting to the CFTC's jurisdiction, (2) file a valid and

    binding appointment with the FBOT of an agent for service of process in

    the U.S., and (3) maintain a written representation with the FBOT that

    it will provide the Commission and other U.S. authorities with access

    to books and records and to the premises where the FBOT's trading

    system is made available in the U.S. LME questioned the need to require

    U.S.-based persons with direct access to foreign markets (FBOTs) that

    trade from the U.S. to comply with these three conditions. LME argued

    that in terms of personal jurisdiction, a U.S.-based person with direct

    access to an FBOT raises no more jurisdictional issues than a U.S.-

    based person trading on a U.S. market, as long as both traders are

    conducting their trading from the U.S.

    Upon further review and consideration of the comments received, the

    Commission has determined that Sec. 48.8(a)(5)(iii), which obligated a

    registered FBOT to require that each current and prospective member or

    other participant that is granted direct access pursuant to the FBOT's

    registration and that is not registered with the Commission as a FCM, a

    CTA or a CPO file with the FBOT a valid and binding appointment of a

    U.S. agent for service of process in the U.S., is not necessary.

    Accordingly, that section has been deleted from the final rule.

    However, the Commission has determined that the remaining two

    conditions applicable to members and participants should be adopted as

    proposed. The Commission believes these conditions remain necessary to

    ensure that the FBOT members and other participants that have been

    granted direct access to an FBOT's trading system knowingly consent to

    submit to the CFTC's jurisdiction and to provide the Commission and

    other appropriate U.S. authorities with access to relevant books,

    records and trading premises in the U.S.

    7. Modification of Registration Requirements

    Proposed Sec. 48.5(e) provided that the Commission may, after

    appropriate notice and an opportunity for hearing, amend, suspend,

    terminate or otherwise restrict the terms of an Order of Registration.

    ASX noted that the proposed rules refer to the ability to modify

    relief, and asked whether the Commission would provide any clarity with

    respect to applying for modification and the criteria for modification.

    The Commission believes it is not necessary to promulgate a

    specific procedure for applying for modification of FBOT registration

    requirements or to delineate the circumstances under which modification

    might be granted. While the Commission would consider a request for

    modification of specified registration requirements or conditions if

    such request is supported by adequate justification and appropriate

    documentation, the Commission does not anticipate that modifications

    would be granted unless particularly unique factual circumstances are

    presented. Given that such requests would involve a unique set of facts

    and circumstances, the Commission believes that a case-by-case approach

    is appropriate and thus, is adopting Sec. 48.5(e) substantially as

    proposed, except that the rule now provides for appropriate notice and

    an opportunity to respond.

    8. Other Concerns

    a. Prescriptive Nature of the Regulations

    Three commenters voiced concern regarding the risk of protectionism

    by foreign regulators that might arise in the event that the Commission

    adopts overly prescriptive registration regulations for FBOTs.\56\ FOA

    noted that the standards set in the U.S. for recognition of foreign

    regulators would impact, for example, the European approach to the

    recognition of U.S. market infrastructures. CME Group expressed concern

    that the proposed rules were overly prescriptive and noted that the

    Commission should be cognizant of the ``realistic possibility'' that

    enacting the proposed rules might encourage foreign regulators to adopt

    a reactive regulatory stance toward U.S.-based exchanges. HKFE asserted

    that the adoption of the proposed rules would be a departure from the

    CFTC's long-standing policy of mutual recognition and comity and that

    this could lead to the diminution rather than the expansion of global

    connectivity.

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

    \56\ HKFE, FOA, and CME Group.

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

    The Commission has determined to adopt the rule as proposed. The

    Commission believes that its final regulations properly standardize the

    process by which FBOTs are permitted to provide direct access to U.S.-

    located persons, enhance the transparency of that process, ensure

    consistency and fairness to all applicants for registration, provide

    greater legal certainty to registered FBOTs, and are more consistent

    with the manner in which other countries permit U.S. DCMs to provide

    direct access to their trading systems from within their borders. As

    previously noted, the Commission believes that the registration

    requirements in the final rule represent a principles-based approach to

    limited oversight and are not overly prescriptive. FBOTs will be

    required to demonstrate, in a manner consistent with the part 48

    regulations, that they operate under supervision and regulation that is

    comparable to that provided by the Commission's regulatory regime for

    DCMs, but will not be required to comply with the core principles

    applicable to DCMs under the CEA and the Commission's regulations.

    b. Alternative Trading Platforms

    HKFE questioned whether the proposal's definition of FBOT would

    cover alternative trading platforms such as non-U.S.-based dark pools.

    Further, HKFE questioned whether, if the intention of the proposed

    rules is to not cover non-U.S. based dark pools or is designed with

    such threshold requirements as to effectively affect only traditional

    exchanges in overseas jurisdictions (as not all FBOTs (as defined) are

    eligible for registration under the proposed rules), an uneven playing

    field may be created in favor of these dark pools if access to them is

    available from the U.S.\57\

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

    \57\ The definition of ``board of trade'' as set forth in CEA

    section 1a(2) refers to ``any organized exchange or other trading

    facility.'' As such, the statutory definition of ``board of trade''

    does not preclude the possibility of alternative trading platforms

    being covered by the FBOT registration scheme.

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

    The Commission has determined to adopt the rule as proposed. The

    proposal generally limited the markets eligible for FBOT registration

    to bona fide exchanges that satisfy the eligibility standards set forth

    in Sec. 48.2(b). The Commission expects that such exchanges might

    include, for example,

    [[Page 80690]]

    exchanges recognized in the EU as Regulated Markets, in the UK as

    Recognized Investment Exchanges (RIE), or in Japan as Licensed

    Financial Instruments Exchanges. Of course, even if deemed a ``foreign

    board of trade eligible to be registered'' under Sec. 48.2(b), the

    FBOT would still have to satisfy all of the requirements and conditions

    for registration set forth in the regulations. Foreign SEFs and similar

    entities likely would not be eligible for FBOT registration unless they

    could demonstrate they are operated and regulated in a manner that is

    comparable and comprehensive to the manner in which DCMs (not U.S.

    SEFs), are regulated by the Commission. The FBOT registration rule

    should not create an uneven playing field in favor of dark pools since

    such pools are not likely to qualify for registration and, thus, could

    not provide for direct access under the FBOT registration rules.

    c. Impact of FBOT Registration Rules

    ICE suggested that the CFTC should consider the impact of its

    registration scheme against the broader impact of the Dodd-Frank Act

    and similar financial reform measures taken by other countries. The

    Commission has determined to adopt the rule as proposed. The proposed

    FBOT rules were considered against the international implications of

    the Dodd-Frank Act and similar financial reform measures being taken by

    other countries. Relevant financial reform measures taken by other

    countries will be reviewed as part of the examination of the FBOT's

    application for registration and, to the extent that such relevant

    reform measures support regulatory objectives that are consistent with

    those supported by the CFTC, will be favorably considered. The

    Commission notes that the historical process of examining whether the

    FBOT is subject to comparable and comprehensive regulation in its home

    country has been, and will continue to be, the proper approach to

    maintaining this balance between reliance upon a foreign regulatory

    regime and ensuring that an FBOT whose trading and order matching

    system can be accessed by U.S. customers provides adequate protections.

    9. On-Going Review of Registered FBOTs

    Three commenters indicated that under their interpretation of the

    NPRM, the Commission would conduct on-going surveillance and

    examination of FBOTs and their clearing organizations.\58\ For example,

    Better Markets expressed the view that it is important to continuously

    monitor both the structure of the foreign regulatory regime to which an

    FBOT is subject and the quality of the administration of that structure

    and that FBOTs should be required to annually re-affirm and demonstrate

    the appropriateness of their foreign regulatory regimes, based upon the

    standards relevant to their initial application for registration.

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

    \58\ Better Markets, CME Group, and Senator Levin.

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

    As previously discussed, CME Group suggested that the Commission's

    analysis of the FBOT and its regulatory regime should be more narrowly

    tailored and that the Commission should limit its inquiry to questions

    regarding the comparability of the regulatory regime in the FBOT's home

    jurisdiction. If this approach were adopted, CME Group indicated that

    it would expect that the Commission would continue to vigorously

    monitor compliance with the core regulatory principles and ensure that

    the process is not being abused to avoid legitimate CFTC regulation.

    Senator Levin similarly commented that, to ensure market integrity,

    the Commission must effectively police U.S.-based trading in FBOTs and

    incorporate that activity into its regular surveillance and enforcement

    efforts. He also noted that the proposed rules would need a robust

    program of FBOT supervision, as well as surveillance and examination

    programs that include an integrated review of the FBOT's U.S. trading

    activity, asserting that the Commission also would need to bring

    enforcement cases against individuals who engage in manipulative or

    abusive trading practices that affect U.S. futures and cash markets and

    market users and attempt to avoid detection by trading in foreign

    markets in order to deter such activity.

    The Commission has determined to adopt the rule as proposed. As

    previously discussed, FBOTs will be required, prior to being

    registered, to submit information and documentation demonstrating that

    they are subject to comprehensive supervision and regulation by the

    appropriate governmental authorities in their home country that is

    comparable to the comprehensive supervision and regulation to which

    DCMs are subject in the U.S. While the regulations require the FBOT and

    its regulatory authority to provide critical information on an ongoing

    basis to the Commission, any on-going review of the FBOT and its

    clearing organization by the Commission generally will be limited to

    reviewing the required information and documentation that the FBOT must

    submit periodically to the CFTC and will not include direct

    surveillance of trading activity. Staff may conduct periodic on-site

    visits to validate information submitted as part of the registration

    application and/or required to be submitted as a condition of

    registration. Staff will, however, conduct additional review with

    respect to linked contracts, and will monitor these contracts pursuant

    to the additional conditions levied upon the FBOT for listing such

    contracts, e.g., large trader and TSS reporting and comparable position

    limits. The Commission believes that these provisions are adequate to

    monitor the activities of the FBOT conducted pursuant to an Order of

    Registration.

    10. The Appendix

    For purposes of enhanced clarity and standardization, the

    Commission has elected to revise the proposed Appendix to Part 48 to

    include the submission requirements identified therein in the proposal

    in a standardized application form, Form FBOT and Supplement S-1 (for

    the clearing organization) to Form FBOT. The Commission believes that

    the use of this form will make it easier to guide applicants in the

    organization and presentation of information and documentation and to

    ensure that all required information is included in the application.

    Use of the form also will improve the staff's ability to organize and

    review the information in a timely manner.

    III. Conclusion and Effective Date

    A. Conclusion

    For the reasons stated above and in the NPRM and after considering

    the complete record in this matter, including all comments, the

    Commission is adopting part 48 substantially as proposed, subject to

    the revisions to the proposed rules identified above in response to

    comments submitted or otherwise initiated by the Commission. This new

    part 48 provides the rules and procedures to be followed by FBOTs that

    wish to register in order to provide identified members and other

    participants that are located in the U.S. with direct access to the

    FBOT's order entry and trade matching system. Part 48 replaces the

    practice, used since 1996, of issuing staff direct access no-action

    relief letters to permit FBOTs to provide their members and other

    participants located in the U.S. with direct access to their trading

    systems and provides a transitional period for

    [[Page 80691]]

    those FBOTs that have received staff no-action relief.

    B. Effective Date

    This rule shall become 60 days after publication in the Federal

    Register.

    IV. Related Matters

    A. The Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \59\ imposes certain

    requirements on federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. 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. The

    final Part 48 rules impose new collection of information requirements

    within the meaning of the PRA. Accordingly, the Commission requested,

    but the Office of Management and Budget (OMB) has not yet assigned a

    control number for the new collection of information. However, OMB has

    assigned the reference number 201011-3038-003 in the interim. The

    Commission has submitted this final rule along with supporting

    documentation for OMB's review in accordance with 44 U.S.C. 3507(d) and

    5 CFR 1320.11. The information collection burdens in the final rules

    are identical to the collection burdens estimated by the Commission in

    the proposing release, subject to the modifications discussed

    below.\60\

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    \59\ 44 U.S.C. 3501 et seq.

    \60\ See the Commission's Paperwork Reduction Act analysis at 75

    FR 70984-86 (Nov. 19, 2010).

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

    The Commission protects proprietary information according to the

    Freedom of Information Act and 17 CFR part 145, ``Commission Records

    and Information.'' In addition, section 8(a)(1) of the Act strictly

    prohibits the Commission, unless specifically authorized by the Act,

    from making public ``data and information that would separately

    disclose the business transactions or market positions of any person

    and trade secrets or names of customers.'' The Commission is also

    required to protect certain information contained in a government

    system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.

    The Commission invited the public and other Federal agencies to

    comment on any aspect of the information collection requirements

    discussed in the NPRM. 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 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.

    In response to the Commission's request in the NPRM for comments on

    any potential paperwork burden associated with the final rules, two

    commenters provided substantive comments addressing the merits of the

    Commission's proposed PRA calculations with respect to Sec. 48.6 and

    the ``limited'' application. DME argued that limited applications by

    FBOTs operating under no-action relief could easily take 200 to 300

    hours to complete rather than the Commission's proposed estimate of 50

    hours. Similarly, HKFE contended that the work involved in submitting a

    limited application under the proposed regime would be substantially

    more than the 50 hours estimated by the Commission.

    The Commission estimated in the NPRM that a total of 20 FBOTs would

    file a registration application with the Commission pursuant to the

    limited application procedures in Sec. 48.6. The Commission notes that

    the final rules governing the limited application differentiate between

    those FBOTs whose original no-action relief request was submitted

    electronically and remains on file with Commission staff and those

    FBOTs whose original no-action relief request was not submitted

    electronically to the Commission. The Commission estimates that ten

    FBOTs would be able to take advantage of the streamlined application

    procedures in final Sec. 48.6. Indeed, the ten FBOTs would be

    permitted to simply refer to each portion of their original submissions

    that satisfies a particular registration requirement, identify the

    specific registration requirement that is fulfilled by that section,

    and certify that the information or documentation originally provided

    remains current and true. After considering the comments from DME and

    HKFE, in conjunction with the streamlined application requirements

    adopted by the Commission in the final rules, the Commission has

    determined that it is not amending its estimate of 50 burden hours for

    the FBOTs whose original no-action relief request was submitted

    electronically. However, with respect to the ten FBOTs that would need

    to submit the complete limited application because Commission staff

    does not have the original no-action relief request on file in an

    electronic format, the Commission finds some merit in the comments from

    DME and HKFE and the Commission is revising its estimates accordingly.

    Specifically, the Commission estimates that the effect of the final

    rules on these FBOTs will be to increase the information collection

    burden by approximately 200 hours, and result in approximately 250

    hours per FBOT. Consequently, it is anticipated that ten FBOTs will

    incur an aggregate of 2,500 burden hours compared to the 500 burden

    hours estimated in the NPRM for such FBOTs.

    The Commission is also revising its information burden collection

    estimate for FBOTs with pending requests for direct access no-action

    relief. In the NPRM, the Commission estimated that seven FBOTs,

    including one new FBOT and six FBOTs that currently have pending

    requests for no-action relief, would submit a full FBOT registration

    application. The Commission estimated that the seven FBOTs would expend

    1,000 burden hours per FBOT to satisfy the registration requirement.

    However, the Commission has determined to amend its proposal to

    substantially reduce the information collection requirements for the

    six FBOTs with pending requests for no-action relief. Specifically, the

    final rules provide that an FBOT with a pending no-action request as of

    the effective date of the rule could, as part of its application for

    registration, identify information or documents provided in its

    original no-action submission that would satisfy particular

    registration requirements. In light of the amendments to the

    Commission's final rules, the Commission is revising its previous

    estimate by reducing the information collection burden for the six

    FBOTs from 1,000 burden hours to 250 hours for each FBOT. Thus, it is

    anticipated that the six FBOTs will incur an aggregate reduction of

    4,500 burden hours than what was stated in the NPRM.

    Finally, the Commission estimated in the NPRM that four registered

    FBOTs would permit swaps to be traded by direct access. Proposed Sec.

    48.8(a)(8)(i) required a registered FBOT to report to the public, on a

    real-time basis, data relating to each swap transaction, including

    price and volume, as soon as technologically practicable after

    execution of the swap transaction. In the final rules, the Commission

    is eliminating the real-time reporting

    [[Page 80692]]

    requirement for FBOTs because that requirement is being placed on swap

    data repositories. The Commission previously estimated that each of the

    four FBOTs would incur an annual reporting burden of 2,080 hours to

    comply with the real-time reporting requirement. Therefore, the

    Commission has determined that this rule modification will result in an

    aggregate reduction of 8,320 burden hours.

    Accordingly, the Commission has submitted to the OMB an amended

    calculation of the annual burden hours for FBOTs.

    B. Cost Benefit Considerations

    Section 15(a) of the CEA requires the Commission to ``consider the

    costs and benefits'' of its actions in light of five broad areas of

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

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

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

    practices; and (5) other public interest considerations.\61\ The

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

    the five enumerated areas and may determine that, notwithstanding

    costs, a particular rule protects the public interest.

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

    \61\ 7 U.S.C. 19(a).

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

    1. Background

    (a) Description of the Statutory Registration Authority per the Dodd-

    Frank Act

    Section 738 of the Dodd-Frank Act amended CEA section 4(b) to

    provide that the Commission may adopt rules and regulations requiring

    FBOTs that wish to provide their members or other participants located

    in the United States with direct access to register with the

    Commission.\62\ Section 738 also authorizes the Commission to

    promulgate rules and regulations prescribing procedures and

    requirements applicable to the registration of such FBOTs. Accordingly,

    on November 19, 2010, the Commission published a notice of proposed

    rulemaking that set forth proposed regulations that would establish a

    registration requirement and related registration procedures and

    conditions applicable to FBOTs that wish to provide their members or

    other participants located in the United States with direct access to

    the FBOT's electronic trading and order matching system (NPRM).\63\

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

    \62\ Direct access is defined in section 4(b) of the CEA, as

    amended by section 738 of the Dodd-Frank Act, to refer to an

    explicit grant of authority by an FBOT to an identified member or

    other participant located in the U.S. to enter trades directly into

    the FBOT's trade matching system.

    \63\ See Registration of Foreign Boards of Trade, 75 FR 70974

    (Nov. 19, 2010).

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

    (b) Prior No-Action Regime

    Since 1996, FBOT requests to provide members and other participants

    with direct access to their electronic trading and order matching

    systems from within the U.S. have been addressed by Commission staff

    pursuant to the no-action process set forth in Commission regulation

    140.99.\64\ Specifically, such FBOTs have requested, and, where

    appropriate, received from the relevant Commission division, a no-

    action letter. As part of the no-action letter, division staff would

    represent that the division will not recommend that the Commission

    institute enforcement action against the FBOT for failure to register

    as a DCM or DTEF if the FBOT provides direct access to members and

    participants located in the U.S, provided the FBOT satisfies the

    conditions set forth therein. A no-action request from an FBOT was

    required to include representations and supporting documentation from

    the FBOT regarding, among other things, its organization, presence in

    the U.S., participants, the products it wishes to list for direct

    access, its trading system and the regulatory regime and information-

    sharing arrangements to which the FBOT is subject. As noted above,

    since 1996, Commission staff has issued 24 direct access no-action

    relief letters to FBOTs, 20 of which remain active.\65\ A detailed

    discussion of the history and evolution of the FBOT no-action process

    and the scope of the relief provided can be found in the NPRM.\66\

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

    \64\ See, e.g., CFTC Letter No. 96-28 (Feb. 29, 1996).

    Commission regulation 140.99 defines the term ``no-action letter''

    as a written statement issued by the staff of a Division of the

    Commission or of the Office of the General Counsel that it will not

    recommend enforcement action to the Commission for failure to comply

    with a specific provision of the Act or of a Commission rule,

    regulation or order if a proposed transaction is completed or a

    proposed activity is conducted by the beneficiary.

    \65\ One no-action relief letter was superseded and three were

    revoked when the FBOTs ceased operations as regulated or recognized

    markets. Currently, 14 of the FBOTs with active no-action relief

    report volume originating from the U.S. via direct access.

    \66\ 75 FR 70974-76.

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

    (c) Replacing No-Action Regime With Registration Requirement

    (i) Overview. As described in detail in the preamble, the

    registration regime established in new part 48 will replace the direct

    access no-action relief process. That registration regime is being

    established pursuant to the Commission's authority found in section

    4(b) of the CEA, as amended by section 738 of the Dodd-Frank Act, as

    described above. Based on the nature of the directives in CEA section

    4(b), this final rulemaking contains certain statutorily mandated

    components as well as other discretionary components.

    (ii) Mandatory components of statute. The adoption of a

    registration regime applicable to FBOTs that desire to provide their

    members or other participants located in the U.S. with direct access to

    their trading systems is discretionary. However, if the Commission

    determines to adopt such a registration regime, certain non-

    discretionary guidelines are mandated in the statute. Specifically, CEA

    section 4(b)(1)(A) provides that:

    In adopting such rules and regulations, the Commission shall

    consider--

    (i) Whether any such foreign board of trade is subject to

    comparable, comprehensive supervision and regulation by the

    appropriate governmental authorities in the foreign board of trade's

    home country; and

    (ii) Any previous commission findings that the foreign board of

    trade is subject to comparable comprehensive supervision and

    regulation by the appropriate government authorities in the foreign

    board of trade's home country.

    Because the Commission is promulgating an FBOT registration scheme,

    the Commission is required to incorporate these two guidelines in

    issuing the final rules. In accordance with these two guidelines, part

    48 includes certain requirements, procedures, and conditions for FBOT

    registration. While there are some costs inherent in a FBOT

    registration scheme that follows the scope of review mandated by

    Congress, the Commission considers the costs and benefits associated

    with implementing the discretionary components of this FBOT

    registration scheme below.

    Several provisions applicable to a linked contract are mandatory

    regardless of whether the Commission adopts FBOT registration

    rules.\67\ Specifically, CEA section 4(b)(1)(B), as amended by the

    Dodd-Frank Act, mandates that the Commission may not permit an FBOT to

    make a linked contract available via direct access absent several

    statutorily specified conditions. These conditions, set forth

    [[Page 80693]]

    in Sec. 48.8(c)(1), address (1) making public daily trading

    information regarding the linked contract that is comparable to the

    daily trading information published for the contract to which it is

    linked; (2) adopting position limits for the linked contract that are

    comparable to the position limits adopted by the registered entity for

    the contract to which it is linked; (3) having the authority to require

    or direct any market participant to limit, reduce, or liquidate any

    position; (4) agreeing to promptly notify the Commission of certain

    changes with respect to the linked contract; (5) providing information

    to the Commission regarding large trader positions in the linked

    contract that is comparable to the large trader position information

    collected by the Commission for the contract to which it is linked; and

    (6) providing the Commission such information as is necessary to

    publish reports on aggregate trader positions for the linked contract

    that are comparable to such reports on aggregate trader positions for

    the contract to which it is linked.

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

    \67\ Based upon the statutory provision regarding linked

    contracts in CEA section 4(b)(1)(B), Sec. 48.2(d) defines a linked

    contract as a futures, option or swap contract that is made

    available for trading by direct access by a registered FBOT that

    settles against any price (including the daily or final settlement

    price) of one or more contracts listed for trading on a registered

    entity as defined in section 1a(40) of the Act.

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

    Congress mandated these linked-contract conditions on FBOTs. To the

    extent that these new rules reflect the statutory provisions of the

    Dodd-Frank Act, such rules will not create costs and benefits in

    addition to the costs and benefits that already will result from the

    action of Congress in passing the Dodd-Frank Act. However, such rules

    may generate costs and benefits that are attributable to the

    determinations made by the Commission regarding the manner in which

    statutory provisions in the Dodd-Frank Act should be implemented. The

    costs and benefits of these Commission determinations are considered in

    light of the five factors set forth in CEA section 15(a).

    (d) Purpose of the Final Rules

    As described in the preamble, the purpose of these final rules is

    to formalize and standardize the process by which an FBOT may provide

    traders located in the U.S. with direct access to its trading system.

    By implementing uniform application procedures and registration

    requirements and conditions, the process will become more standardized

    and more transparent to both registration applicants and the general

    public and will promote fair and consistent treatment of all

    applicants. Further, generally applicable regulations will provide

    greater legal certainty for FBOTs providing direct access than the no-

    action relief process because no-action letters are issued by the staff

    and are not binding on the Commission.

    In determining to adopt formal registration rules for FBOTs, the

    Commission has considered that the no-action process is generally

    better suited for discrete, unique factual circumstances and for

    situations where neither the CEA nor the Commission's regulations

    directly address the issue presented. The Commission has determined

    that, where the same type of relief is being granted on a regular and

    recurring basis, as it has been with respect to permitting FBOTs to

    provide direct access to their trading systems to specified members and

    other participants that are located in the U.S., it is no longer

    appropriate to handle requests for the relief through the no-action

    process. Rather, such matters should be addressed in generally

    applicable regulations. The Commission also notes that a statutory-

    based regulatory FBOT registration regime will be more consistent with

    the statutory-based framework under which other countries, including

    the UK, Australia, Singapore, Japan and Germany, among others, permit

    DCMs to provide direct access internationally.

    (e) Public Comment

    As described in detail in the preamble, the Commission, in

    preparing these final rules, sought and incorporated comment from the

    public. In the NPRM, the Commission specifically requested comment on

    the cost benefit section and invited commenters to provide data

    quantifying the costs and benefits of the proposed regulations. The

    Commission received 14 comments discussing the costs and benefits of

    the proposed rules, but none that provided quantitative data. These

    comments included 10 letters from entities representing thirteen FBOTs

    operating under existing no-action relief,\68\ one letter from another

    exchange,\69\ and one letter each from FOA, CME Group, and ESMA. Those

    comments are specifically addressed in the context of the extended cost

    benefit consideration discussion below.

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

    \68\ DME, LME, MX, ICE (owner of ICE Futures Europe and ICE

    Futures Canada), HKFE, BM&F, OMX, NYX (operator of Liffe, Euronext

    Paris SA, and Euronext Amsterdam N.V.), Eurex, and OSE.

    \69\ NGX.

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

    2. Summary of the Final Rules

    As described in detail in section III of the preamble, new part 48

    provides the procedures, requirements, and conditions to be met by

    FBOTs that seek to provide their members and other participants in the

    U.S. with direct access to the FBOT's order entry and trade matching

    system. The final rules set forth, among other things, procedures an

    FBOT must follow in applying for registration, requirements that an

    FBOT must meet in order to obtain registration, conditions that an FBOT

    must satisfy on a continuing basis upon obtaining registration, and

    provisions for the termination of registration.

    Specifically, Sec. 48.1 sets forth the scope of the rules and

    Sec. 48.2 provides definitions applicable to the registration

    provisions. Section 48.3 makes it clear that registration is required

    if an FBOT wishes to provide for direct access. Section 48.4

    establishes registration eligibility and identifies the entities to

    which an FBOT can permit direct access once it is registered. Pursuant

    to Sec. 48.5, FBOTs wishing to provide direct access to their trading

    systems to members and other participants located in the U.S. will be

    required to file an application for registration with the Commission

    that contains all of the information and documentation necessary to

    successfully demonstrate that the FBOT satisfies the registration

    requirements contained in Sec. 48.7. In addition, Sec. 48.5 describes

    the procedures for applying for registration, notices the applicant

    that the Commission will be considering the two statutorily-mandated

    guidelines, among other things, in its review of the application, and

    describes the Commission response following approval or disapproval of

    the application. Section 48.6 provides a limited application procedure

    for FBOTs currently operating under existing no-action relief and FBOTs

    that have submitted a complete application for no-action relief that is

    pending as of the effective date of this regulation. Section 48.7,

    previously mentioned, includes the requirements that must be met before

    an FBOT can be registered. Once registered, all FBOTs will have to

    maintain continuing compliance with the conditions listed in Sec. 48.8

    of the final rules, including the statutorily-mandated conditions on

    linked contracts. Section 48.9 provides the rules for the revocation of

    registration. Finally, Sec. 48.10 establishes the process for an FBOT

    to make additional contracts available for direct access following an

    initial registration.

    3. Factors Affecting the Scope of the Final Rules

    The costs that the rules impose on FBOTs seeking registration will

    vary depending on various factors including the size of the FBOT and

    whether the FBOT's clearing organization is a DCO. Larger FBOTs are

    more likely to have the means to hire U.S. counsel or sufficient staff

    expertise to submit a complete registration application in an

    [[Page 80694]]

    efficient manner than smaller FBOTs. It may be less costly to

    demonstrate that a clearing organization is a DCO than that it complies

    with the RCCPs. Another factor that could affect costs is demonstrating

    the comparability of the supervision by the FBOT's home regulator,

    since regulatory structures in different countries vary. Moreover, the

    cost of filing a limited application for FBOTs operating under the no-

    action regime will vary, depending on whether or not the FBOT's

    original request was filed electronically and remains on file with the

    Commission.

    The Commission's consideration of costs and benefits contains

    discussions of three general aspects of the rulemaking: the

    requirements for filing a new registration application; the limited

    application requirement for FBOTs operating under the current no-action

    regime; and compliance costs. The Commission is only considering the

    marginal costs and benefits of the proposed regulations that are in

    addition to, or in lieu of, the costs and benefits associated with the

    current no-action regime.

    4. Filing a New Application for Registration

    Costs: The Commission estimates that it will cost approximately

    $46,310 for an FBOT to submit a new registration application. This is

    based on an average wage for a compliance staffer and a compliance

    attorney of $46.31 per hour \70\ and a total burden of 1,000 hours. The

    Commission recognizes that some FBOTs hire outside counsel based in the

    U.S. with expertise in the FBOT registration process. While the

    Commission is uncertain about the billing rates that FBOTs pay for U.S.

    counsel, the Commission believes that such counsel may bill at a rate

    of several hundred dollars per hour. U.S. counsel may be able to

    leverage its expertise to substantially reduce the number of hours

    needed to fill out an application, but an FBOT that utilizes outside

    counsel may incur higher costs than an FBOT that does not use outside

    counsel. The Commission notes that any determination to use outside

    counsel is at the discretion of the FBOT.

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

    \70\ As noted on page six of the Paperwork Reduction Act

    Supporting Statement (PRA Supporting Statement) for the final FBOT

    registration rules, this number is derived from SIFMA's ``Report on

    Management & Professional Earnings in the Securities Industry--

    2010'' and represents the estimated average wage of a compliance

    attorney and a compliance staffer in the U.S. While wages in the

    home countries of FBOTs may differ, the Commission does not have

    access to data on the compensation of compliance staffers in other

    countries and is using the information in the SIFMA report as a best

    available estimate. The PRA Supporting Statement can be accessed at

    http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201011-3038-003.

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

    The Commission notes that the proposed registration process is an

    outgrowth of the existing policy of allowing FBOTs to provide U.S.-

    based traders with direct access to their trading systems through staff

    no-action letters and that most of the costs associated with this rule

    also are associated with applying for no-action relief. The costs that

    will be incurred by an FBOT as a result of the registration

    requirements and the conditions contained in the proposed regulations,

    with certain exceptions (e.g., additional submission requirements

    related to the FBOTs regulatory authority and clearing and settlement

    policies and procedures), substantially replicate the costs that would

    otherwise be incurred by an FBOT applying for no-action relief under

    the existing process. For example, FBOTs requesting no-action relief

    under existing procedures are required to provide the Commission staff

    with similar information and documentation to that which would be

    required for registration under the proposed regulations (e.g.,

    information regarding the FBOT's trading system, terms and conditions

    of contracts to be made available by direct access in the U.S., and the

    regulatory regime governing the FBOT in its home country). The

    Commission believes that these costs, for the most part, do not

    represent a substantial increased burden, but rather reflect the

    continuation of an existing process--which is now proposed to be

    formalized. The Commission estimates that the increase in costs for new

    FBOTs to register rather than obtain a no-action letter is within a

    range between 100 hours or $4,631 per FBOT and 200 hours or $9,262 per

    FBOT.\71\

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

    \71\ This increase in costs reflects the registration

    requirements that were not required in the no-action process,

    including additional submission requirements related to the FBOTs

    regulatory authority and clearing and settlement policies and

    procedures.

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

    There may be some costs for certain FBOTs if they need to upgrade

    their systems or procedures to meet the registration requirements. For

    example, an FBOT electing to offer linked contracts that did not

    previously impose position limits may need to establish a procedure for

    enforcing position limits. The Commission is unable to quantify these

    costs since it does not know what particular changes future FBOTs may

    need to make in their systems or procedures to comply with the

    registration requirements. However, the Commission anticipates that

    FBOTs applying for registration in the future, like FBOTs that applied

    for no-action relief in the past, generally will be compliant with the

    requirements before submitting their applications, so the cost of

    upgrading their systems and procedures should be minimal for most

    FBOTs. As discussed in the preamble, the FBOT requirements generally

    reflect existing industry practice and FBOTs are required to be subject

    to a comparable regulatory regime. Therefore, the Commission expects

    that FBOTs that meet the requirements of their home regulator and

    follow industry practice will meet the registration requirements and

    that most FBOTs will not need to make any upgrades to their systems or

    procedures.

    As noted above, the Commission has determined to amend its proposal

    to substantially reduce the information collection requirements for the

    six FBOTs with pending requests for no-action relief. Specifically, the

    final rules provide that an FBOT with a pending no-action request as of

    the effective date of the rule could, as part of its application for

    registration, identify information or documentation provided in its

    original no-action submission that would satisfy particular

    registration requirements. As noted in the PRA section, the Commission

    estimates that each of these FBOTs will have to devote 250 hours to

    converting the no-action request to a registration application at a

    cost of about $11,578 per FBOT for a cumulative cost of $69,468.

    Benefits: The Commission notes that the no-action process has been

    effective in permitting FBOTs to provide for direct access while

    protecting U.S. persons trading by direct access by seeking to ensure

    that the FBOT's rules and procedures are adequate and that the

    regulatory regime of its home regulatory authority supports regulatory

    objectives that are substantially similar to those supported by the

    CFTC. The Commission believes that formalizing the registration process

    will provide the additional benefits of increased standardization for

    filing requirements and greater levels of legal certainty for operating

    FBOTs. In addition, formalized registration rules, including the

    application form, will create an efficient application process with

    enhanced visibility to ensure fair and consistent treatment of

    applicants. In particular, the registration procedure and application

    form will also assist applicants in determining what information needs

    to be provided to obtain registration, which may reduce costs by making

    it more likely that the application will be complete upon initial

    submission. These benefits, which are not readily quantifiable, are

    [[Page 80695]]

    not, for the most part, currently available under the no-action

    process.

    Public Comments: The Commission received comments about the

    registration system in general as well as about specific aspects,

    including the regulatory comparability and clearing requirements.

    Registration System: Five commenters \72\ stated that the proposed

    registration system was overly burdensome, overly prescriptive, or that

    it unnecessarily subjected FBOTs to duplicative regulation without

    corresponding benefit. OMX stated: ``Our main concern related to the

    proposed rules is that they will involve a quite extensive process in

    order to obtain and maintain registration. [* * *] [E]xtensive and

    detailed requirements * * * may be deemed to impose an unreasonable

    burden on the applicants.'' ESMA said, ``[T]he new registration

    procedure and the mandatory application of very comprehensive, ongoing

    requirements to all FBOTs would be burdensome and costly without any

    apparent improvements for the safeguard of public interests such as the

    maintenance of fair and orderly markets, investor protection and the

    resilience of the market.''

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

    \72\ OMX, NYX, FOA, ESMA, and CME.

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

    As discussed above, the Commission notes that the proposed

    registration process is an outgrowth of the existing policy of issuing

    no-action letters and that it entails costs that are similar to that of

    the existing no-action process.

    In connection with commenters criticizing the ``overly

    prescriptive'' nature of the proposed rules, the Commission has

    identified, based upon its experience with its regulation of DCMs and

    the Commission staff experience in reviewing and evaluating FBOTs for

    purposes of no-action relief, several areas which it considers critical

    in determining if the FBOT has established its ability to provide on an

    ongoing basis, adequate protection to U.S. participants who trade and

    clear on the FBOT. These areas include, among others, compliance of the

    trading system with the IOSCO Principles, adequate trade practice and

    market surveillance programs, and a clearing and settlement

    organization that meets universally recognized standards. Moreover,

    amended CEA section 4(b) requires the Commission to consider whether

    the relevant FBOT is subject to comparable, comprehensive supervision

    and regulation by appropriate governmental authorities in the FBOT's

    home country. The Commission believes that, in these instances, rules

    are necessary in order to ensure that the Commission receives

    sufficient information and documentation to make these assessments and

    to ensure that registration applicants are subject to standardized and

    transparent obligations. The Commission also notes that the proposed

    regulations were drafted to provide flexibility where possible and

    warranted. For example, the final rules require the FBOT's clearing

    organization to successfully demonstrate that it satisfies the RCCPs,

    but do not mandate the manner in which the clearing organization must

    fulfill those principles.

    Nonetheless, the Commission has identified specific areas in which

    it is able to set forth the FBOT registration requirements in a less-

    prescriptive manner. For example, the Commission is modifying the

    proposed regulations to clarify that an FBOT whose clearing

    organization is registered with the Commission as a DCO would not be

    required to separately establish that it satisfies the requirements

    contained in proposed Sec. 48.7 (e.g., a clearing organization that is

    registered as a DCO would not be required to demonstrate that its

    participants are fit and proper and meet appropriate financial and

    professional standards).

    Finally, in an effort to avoid unnecessary duplication in the text

    of the rule, the Commission has removed the appendix from the rules and

    is replacing it with a standardized application form.

    Regulatory Comparability: Two comment letters stated that the

    comparability analysis in conjunction with the broad set of

    requirements and conditions described in the proposed rules was overly

    burdensome. LME suggested that it would be better if the Commission

    made a single comparability determination for FBOTs residing in the

    same jurisdiction. CME suggested that the proposed comparability

    evaluation by the Commission was too burdensome on both FBOTs and the

    Commission. As an alternative, CME suggested that the Commission should

    limit its assessment to whether an FBOT is subject to a comparable

    regulatory regime by its home country regulator. This commenter said,

    ``[W]e have a significant concern that the proposed rules are too

    prescriptive and would impose significant burdens without corresponding

    benefit.''

    The Commission reiterates that the statute requires that if the

    Commission implements a formal registration system, it must review

    whether any applicant ``is subject to comparable, comprehensive

    supervision and regulation by the appropriate governmental authorities

    in the foreign board of trade's home country.'' The Commission does

    have discretion on how to implement this requirement and is using that

    discretion to revise the final rule to provide an option for evaluation

    of the regulatory authority when multiple FBOTs that are subject to the

    same regulatory regime are applying for registration at the same time.

    In other words, the rule, as adopted, would permit multiple FBOTs that

    are subject to the same regulatory regime that are applying for

    registration at the same time to collectively provide information

    regarding their regulatory regime and would permit a foreign regulator

    (rather than the FBOT) to provide the required information regarding

    the regulatory regime to which those multiple FBOTs may be subject.

    This should significantly reduce the cost burden to FBOTs when there

    are multiple FBOTs under the same regulatory regime. However, the

    Commission notes that any evaluation will not begin and end with a

    review of the FBOT's regulatory authority. The nature of the FBOT's

    trading and clearing systems, rule enforcement, surveillance practices,

    and information-sharing ability, among other things, are critical to

    any pre-registration review.

    Clearing: As discussed in section II.B.2.d. above, Eurex stated

    that extending the Commission's review to FBOT clearing would impose

    increased burdens on the Commission's limited resources. This commenter

    suggested that the Commission should rather require than an FBOT simply

    demonstrate that, if its clearing organization is not a DCO, the

    clearing organization complies with the RCCPs.

    The Commission notes that consideration of a foreign board of

    trade's clearing and settlement function, to a certain extent, is

    already incorporated into the existing no-action process and,

    accordingly, is not itself a totally new requirement. In this respect,

    the final rules seek to provide transparency and standardization with

    respect to the necessary clearing organization attributes by requiring

    that the clearing firm either satisfy an internationally recognized

    standard for central counterparties or be registered as a DCO. This

    will benefit U.S. persons trading on the FBOT by providing an added

    level of security in knowing that the FBOT's clearing organization has

    represented that it meets internationally recognized standards or is a

    DCO. The Commission, however, has streamlined the regulation in the

    final rule to eliminate the requirements contained in Sec. 48.7 if the

    clearing firm is registered

    [[Page 80696]]

    with the Commission as a DCO. The cost of demonstrating that a clearing

    organization is a DCO is de minimus. Because the manner of satisfying

    the RCCPs or their successor standards is at the discretion of the

    FBOT's clearing organization, the Commission is unable to quantify the

    costs of demonstrating that the clearing organization observes the

    RCCPs or their successor standards.

    ICE stated that ``the CFTC should not place a greater burden on

    FBOTs than it does on U.S. regulated markets,'' in particular by

    imposing mandatory clearing requirements on swaps executed on FBOTs.

    ICE noted that SEFs are not subject to mandatory clearing requirements.

    However, the Commission notes that under the Dodd-Frank Act, swaps

    traded on DCMs will be subject to mandatory clearing requirements. The

    Commission believes that the treatment of swaps registered FBOTs will

    make available for trading to members and other participants located in

    the U.S. through direct access should parallel the treatment afforded

    to swaps transactions that may be traded on DCMs and, thus, they must

    be cleared. It is not clear whether a foreign SEF-equivalent would meet

    the FBOT eligibility requirements outlined in Rule 48.2(b) or be

    eligible for FBOT registration, but it is unlikely that such an entity

    would be eligible unless the entity could demonstrate that it is

    operated and regulated in a manner that is comparable and comprehensive

    to the manner in which DCMs (not U.S. SEFs), are regulated by the

    Commission. An FBOT could still offer non-cleared swaps to its market

    participants, but would be unable to offer such contracts via direct

    access in the U.S. The Commission is unable to quantify the costs of

    mandatory clearing of swaps on FBOT market participants, but such costs

    would approximate the costs of clearing futures since any listed swap

    contracts would have standardized terms and would resemble futures

    contracts. The Commission also cannot predict, at this time, whether

    FBOTs will elect to list swap contracts for direct access and, if so,

    how many FBOTs will make available how many swaps contracts.

    5. Filing a Limited Application

    Costs: As noted, the Commission is requiring the 20 FBOTs currently

    operating under no-action relief to register, but is permitting them to

    file a limited application for registration. This is an additional cost

    being imposed on these FBOTs as a consequence of this rule. The ten

    FBOTs that filed their no-action requests electronically will be able

    to simply refer to each portion of their original submissions that

    satisfies each particular registration requirement and certify that the

    information or documentation originally provided remains current and

    true. The Commission estimates that the cost of filing a limited

    application for each of these FBOTs will be approximately $2,316 (50

    hours at $46.31 per hour) for a cumulative cost of $23,160. The

    remaining 10 FBOTs that did not file electronically will have to

    resubmit much of the material and therefore will each incur higher

    costs of approximately $11,578 (250 hours at $46.31 per hour) for a

    cumulative cost of $115,780. The cumulative cost across 20 FBOTs will

    be $138,940.

    Benefits: FBOTs using the limited application process will receive

    the benefits noted above of receiving a formal Commission registration

    order rather than a staff no-action letter (which provided for less

    legal certainty). These FBOTs will be operating on firmer legal ground

    and the Commission, market participants, and the public will benefit

    from the knowledge that all FBOTs offering direct access in the U.S.

    meet the registration requirements. There are also benefits that accrue

    to registering all FBOTs under the same transparent requirements, thus

    ensuring a ``level playing field'' going forward and ensuring that the

    Commission has the same set of information on file regarding each

    registered FBOT.

    Public Comments: As discussed above, several commenters \73\

    addressed the proposed ``limited application'' scheme, suggesting that

    the limited application was overly burdensome, of limited value, or

    even unnecessary--preferring a grandfather provision for FBOTs

    operating under existing no-action relief. They commented in the

    context of the cost benefit section that the limited application

    process was too burdensome in its entirety for an FBOT that had

    previously obtained no-action relief. And at least two of the

    commenters, DME and CME, noted that, in the context of evaluating the

    burdens imposed by the proposed registration process, providing

    grandfather registration for FBOTs with existing no-action relief would

    be the better course. Finally, as addressed above, multiple commenters

    requested that the time-frame within which a limited application must

    be filed should be extended to at least 180 days following the

    effective date of final registration rules in order to ease the

    administrative burden of preparing and filing the proper documentation.

    Specifically, NYX stated:

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

    \73\ BM&F, OMX, NYX, DME, CME, and MX.

    Under the [p]roposal, an FBOT with an existing no-action relief

    letter is required to submit a completed limited application for

    registration within 120 days of the effective date of the Proposal.

    The Proposal, however, would create a burdensome process requiring

    re-submission of voluminous materials, information and data that was

    previously provided to the Commission--a time-consuming and

    expensive exercise for FBOTs that previously have invested

    considerable resources to receive and maintain no-action relief

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

    letters.

    In the context of the burdens of preparing documentation for the

    limited application, MX argues that, ``Placing greater reliance on [the

    Commission's] past findings [of comparability] under the no-action

    process will not only lessen the burden on FBOTs, but it will conserve

    constrained Commission resources with no diminution of protections to

    the public or any increase in systemic risk.'' NGX stated that an FBOT

    with a pending no-action request should be considered to be eligible to

    file a limited application rather than a complete application.

    As discussed above, the Commission is extending the time for filing

    a limited application to 180 days from 120 after the effective date of

    this final rule. This change will address comments that the 120 day

    timeline placed an excessive burden on applicants. The Commission also

    is revising the rule to permit an FBOT with a pending no-action request

    to file a limited application rather than a complete application.

    The limited application procedure will, as noted, benefit market

    participants, and the public by ensuring that all FBOTs offering direct

    access in the U.S. meet the current registration requirements. This

    benefit would be foregone if the Commission were to grandfather FBOTs

    that are operating under existing no-action relief without any further

    review. FBOT requests for no-action relief were assessed based upon the

    information and documentation presented at the particular time of the

    request (as early as 1999) and the assessments were based upon a

    comparison of the regulatory regimes in the U.S. and the applicable

    foreign jurisdiction that existed at the time. In addition, early no-

    action letters included only a limited analysis of the FBOT's clearing

    system because the current regulatory structure applicable to U.S.

    clearing organizations did not exist at that time of issuance.

    The Commission also does not believe that it would be either

    feasible or appropriate for the Commission staff to ascertain for each

    FBOT operating under

    [[Page 80697]]

    existing no-action relief the precise information in its individual no-

    action request that would need to be updated or revised to satisfy

    registration requirements. The FBOTs are in a better position to

    recognize their own particular circumstances and to identify the

    additional information and documentation that may require updating in

    light of those changes. The FBOT should be afforded the opportunity to

    provide materials demonstrating that the foreign regime is comparable

    and comprehensive to the regulatory regime in the U.S.

    6. Complying With Conditions Applicable to Registration

    Once registered, an FBOT will be required to file a number of

    reports with the Commission. Most of these reports are required under

    the current no-action regime and therefore requiring these reports of

    registrants will not impose additional costs on FBOTs that are

    currently providing direct access pursuant to no-action letters.

    Specific reporting requirements that are currently required under the

    no-action regime include Sec. 48.8(b)(1)(i)(A) and (B) regarding

    trading volume information, Sec. 48.8(b)(1)(ii)(A)-(F) regarding

    material changes to registration information (except where requirements

    specifically address the FBOT's clearing organization), and Sec. 48.10

    regarding the listing of additional futures and options contracts. New

    requirements include Sec. 48.8(b)(1)(iii)(B)-(G) regarding annual

    submission of information and Sec. 48.9 regarding demonstration of

    compliance with conditions for registration, as well as the requirement

    regarding material changes to the clearing organization. In the PRA

    section of the NPRM, it was estimated that the total annual burden of

    all reporting requirements for all registered FBOTs combined was 972

    hours.\74\ The Commission estimates that approximately 150 of these 972

    hours represent the new reporting requirements that were not required

    under the no-action regime and the cumulative annual cost of complying

    with these new requirements will be $6,947 (150 hours at $46.31 per

    hour).

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

    \74\ See 75 FR 70984-85 (Nov. 19, 2010) and PRA Supporting

    Statement at 12 (Nov. 23, 2010).

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

    There are also a number of provisions that apply to contracts that

    are linked to U.S. futures contracts. These provisions, set forth in

    Sec. 48.8(c)(1) and described above, and their associated costs

    generally are required under the CEA as amended by Dodd-Frank and the

    Commission lacks discretion regarding their implementation. Other

    provisions, set forth in Sec. 48.8(c)(2), are also currently imposed

    on FBOTs with linked contracts operating under no-action relief.\75\

    Therefore, the costs associated with the linked contract provisions

    required by Sec. 48.8(c)(2) are not increased relative to those

    incurred by FBOTs currently.

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

    \75\ See CFTC Letter No. 09-37 (August 20, 2009).

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

    Benefits: The new recordkeeping requirements in Regulation

    48.8(b)(1)(iii)(B)-(G) regarding annual submission of information and

    Regulation 48.9 regarding demonstration of compliance with conditions

    for registration will provide the Commission, market participants and

    the public with the benefit of knowing that registered FBOTs are

    continuing to meet the requirements for registration, including

    providing fair and equitable trading platforms, and that the contracts

    available for direct access are not readily susceptible to

    manipulation.

    Public comments: The Commission received cost-benefit related

    comments regarding the linked contract provisions.

    Linked contract provisions: In connection with the burdens imposed

    by the proposed linked contract provisions, OSE stated that extra

    conditions were only necessary for FBOTs offering linked contracts in

    which there is more than a de minimis amount of trading. OSE

    specifically highlighted the imposition of speculative position limits

    on linked contracts as an example of a condition which would create an

    excessive burden. OSE also objected to the requirement that trade

    execution and audit trail data for linked contracts be submitted to the

    Commission on a daily basis. They suggested that the benefit of such a

    condition, in comparison to the costs, may be more useful if FBOTs were

    only required to submit trade execution and audit trail data for linked

    contracts on an ``as necessary'' basis--rather than on a daily basis.

    The Commission notes that some of the linked contract conditions/

    requirements in the final rule are mandated by the Dodd-Frank Act,

    including the position limit requirements. Other provisions, such as

    the requirement that trade execution and audit trail data for linked

    contracts be submitted to the Commission on a daily basis, have been

    imposed by Commission staff on FBOTs that list linked contracts and

    have been found to be useful in accomplishing the Commission's market

    surveillance responsibilities. Commission staff conducts surveillance

    and reviews the trading data on a daily basis, and the trade data

    submitted daily from the FBOT's linked contract are a critical

    component of this surveillance. The Commission is of the opinion that

    the linked contract provisions serve to enhance the Commission's market

    surveillance capabilities because such linkages create a single market

    for the subject contracts and, in the absence of certain preventive

    measures at the FBOT, could compromise the Commission's ability to

    carry out its market surveillance responsibilities. Because of the

    linkage, the trading of the linked contracts on an FBOT potentially

    affects the pricing of contracts traded on U.S.-registered entities.

    Section 15(a) Factors

    1. Protection of Market Participants and the Public

    The final rules will further the protection of market participants

    and the public in numerous ways, including ensuring that FBOTs'

    automated trading systems comply with the IOSCO principles, match

    trades fairly and timely with a proper audit trail, and meet other

    requirements as described in Rule 48.7(b) and that the clearing

    organizations are DCOs or observe the RCCPs or their successor

    standards. The rules requiring that contracts offered by FBOTs are not

    readily susceptible to manipulation and the rules regarding linked

    contracts, including the requirement that linked contracts have

    appropriate position limits, will also further the protection of market

    participants and the public. Further protection is provided by the

    requirement that FBOTs offering direct access to U.S. participants and

    their clearing organizations have proper rule enforcement procedures

    and are subject to comprehensive supervision and regulation by the

    appropriate government authorities in their home country that is

    comparable to the Commission's comprehensive supervision and regulation

    and that information sharing agreements are in place. Finally, the

    examination of FBOT and clearing organization membership standards will

    also further the protection of market participants and the public.

    2. Efficiency, Competitiveness, and Financial Integrity of the Markets

    The requirements that the FBOTs' automated trading systems contain

    a trade matching algorithm that matches trades in a fair and timely

    manner and that trading data be made available to users and the public

    will further the efficiency and competitiveness of the markets. The

    financial integrity of the markets will be furthered by the rules

    [[Page 80698]]

    requiring that clearing organizations be DCOs and meet DCO requirements

    or specifically represent that they observe each of the RCCPs (or their

    successor standards) and by the examination of FBOT and clearing

    organization membership standards. The rules requiring that contracts

    offered by FBOTs not be readily susceptible to manipulation will also

    further these considerations. The linked contract rules, including the

    position limit requirement, will also further the efficiency,

    competitiveness, and financial integrity of markets.

    3. Price Discovery

    The rules regarding the automated trading systems, including the

    trade matching rule, will further the price discovery process in FBOT

    contracts. The linked contract provisions will protect the price

    discovery process for linked contracts and the U.S. contracts that they

    are linked to by ensuring that the linked contracts have position

    limits and accountability provisions comparable to the corresponding

    U.S.-based contracts and that the price and volume data for linked

    contracts are disseminated in a comparable manner to their U.S.

    counterparts. The rules requiring that contracts offered by FBOTs for

    direct access not be readily susceptible to manipulation will also help

    protect the price discovery process.

    4. Sound Risk Management Procedures

    The requirement that FBOTs' clearing organizations be DCOs or

    demonstrate observance of the RCCPs or their successor standards will

    further sound risk management procedures by ensuring that clearing

    organizations represent that they use risk management procedures that

    are consistent either with Commission regulations or internationally

    recognized standards.

    5. Other Public Interest Considerations

    The Commission believes that adopting formal registration

    provisions will further other public interest considerations by

    replacing the no-action procedure with a standardized and transparent

    application process and providing enhanced legal certainty to

    registered FBOTs and their clearing organizations.

    C. The Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies

    to consider the impact of its rules on ``small entities.'' \76\ A

    regulatory flexibility analysis or certification typically is required

    for ``any rule for which the agency publishes a general notice of

    proposed rulemaking pursuant to'' the notice-and-comment provisions of

    the Administrative Procedure Act, 5 U.S.C. 553(b).\77\ The Commission

    noted in the proposing release that although it has established certain

    definitions of ``small entity'' to be used in evaluating the impact of

    its rules under the RFA, it had not previously addressed the question

    of whether FBOTs are small entities for purposes of the RFA.\78\ The

    Commission previously determined that DCMs are not small entities for

    purposes of the RFA.\79\ In the proposing release, the Commission

    determined that because FBOTs and DCMs are functionally equivalent

    entities, FBOTs like DCMs are not ``small entities'' for purposes of

    the RFA.

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

    \76\ 5 U.S.C. 601 et seq.

    \77\ 5 U.S.C. 601(2), 603, 604 and 605.

    \78\ See 75 FR 70987 (Nov. 19, 2010).

    \79\ See 47 FR 18618, 18619, Apr. 30, 1982.

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

    In response to the Proposed Rules, the Not-For-Profit Electric End

    User Coalition (Coalition) submitted a comment generally criticizing

    the Commission's ``rule-makings [as] an accumulation of interrelated

    regulatory burdens and costs on non-financial small entities like the

    NFP Electric End Users, who seek to transact in Energy Commodity Swaps

    and ``referenced contracts'' only to hedge the commercial risks of

    their not-for-profit public service activities.'' \80\ In addition, the

    Coalition requested ``that the Commission streamline the use of the

    bona fide hedging exemption for non-financial entities, especially for

    those that engage in CFTC-regulated transactions as `end user only/bona

    fide hedger only' market participants.''

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

    \80\ See Coalition at 29.

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

    After further consideration in light of this comment, the

    Commission has determined that this final rulemaking, which is

    applicable only to FBOTs, will not have a substantial economic effect

    on a substantial number of small businesses. Accordingly, for the

    reasons stated in the proposal and the fact that the Coalition does not

    represent bodies that will be registering with the Commission as FBOTs,

    the Chairman, on behalf of the Commission, hereby certifies pursuant to

    5 U.S.C. 605(b) that these rules will not have a significant economic

    impact on a substantial number of small entities. The Chairman made the

    same certification in the NPRM, and the Commission did not receive any

    comments on the RFA in relation to the proposed rulemaking.

    List of Subjects in 17 CFR Part 48

    Foreign Boards of Trade, Commodity futures, Options, Swaps, Direct

    Access, Linked Contract, Registration, Existing No-action Relief,

    Conditions of Registration.

    In consideration of the foregoing, and pursuant to the authority

    contained in the Act, and, in particular, sections 3, 4 and 8a of the

    Act, the Commission hereby amends Chapter I of Title 17 of the Code of

    Federal Regulations by adding part 48 to read as follows:

    PART 48--REGISTRATION OF FOREIGN BOARDS OF TRADE

    Sec.

    48.1 Scope.

    48.2 Definitions.

    48.3 Registration required.

    48.4 Registration eligibility and scope.

    48.5 Registration procedures.

    48.6 Foreign boards of trade providing direct access pursuant to

    existing no-action relief.

    48.7 Requirements for registration.

    48.8 Conditions of registration.

    48.9 Revocation of registration.

    48.10 Additional contracts.

    Appendix--Part 48--Form FBOT

    Authority: 7 U.S.C. 5, 6 and 12a, unless otherwise noted.

    Sec. 48.1 Scope.

    The provisions of this part apply to any foreign board of trade

    that is registered, required to be registered, or applying to become

    registered with the Commission in order to provide its identified

    members or other participants located in the United States with direct

    access to its electronic trading and order matching system.

    Sec. 48.2 Definitions.

    For purposes of this part:

    (a) Foreign board of trade. Foreign board of trade means any board

    of trade, exchange or market located outside the United States, its

    territories or possessions, whether incorporated or unincorporated.

    (b) Foreign board of trade eligible to be registered. A foreign

    board of trade eligible to be registered means a foreign board of trade

    that satisfies the requirements for registration specified in Sec.

    48.7 and:

    (1) Possesses the attributes of an established, organized exchange,

    (2) Adheres to appropriate rules prohibiting abusive trading

    practices,

    (3) Enforces appropriate rules to maintain market and financial

    integrity,

    (4) Has been authorized by a regulatory process that examines

    customer and market protections, and

    (5) Is subject to continued oversight by a regulator that has power

    to intervene in the market and the authority to share information with

    the Commission.

    [[Page 80699]]

    (c) Direct access. Direct access means an explicit grant of

    authority by a foreign board of trade to an identified member or other

    participant located in the United States to enter trades directly into

    the trade matching system of the foreign board of trade.

    (d) Linked contract. Linked contract means a futures, option or

    swap contract that is made available for trading by direct access by a

    registered foreign board of trade that settles against any price

    (including the daily or final settlement price) of one or more

    contracts listed for trading on a registered entity as defined in

    section 1a(40) of the Act.

    (e) Communications. Communications means any written or electronic

    documentation or correspondence issued by or on behalf of the

    Commission, the United States Department of Justice, or the National

    Futures Association.

    (f) Material change. Material change means a material change in the

    information provided to the Commission in support of an application for

    registration under this part. Subsequent to registration, material

    change also includes a material change in the operations of the foreign

    board of trade or its clearing organization and, without limitation, a

    change in any of the following: The membership or participant criteria

    of the foreign board of trade or its clearing organization; the

    location of the management, personnel or operations of the foreign

    board of trade or its clearing organization; the structure, nature, or

    operation of the trading or clearing systems; the regulatory or self-

    regulatory regime applicable to the foreign board of trade, its

    clearing organization, or their respective members and other

    participants; the authorization, licensure, registration or recognition

    of the foreign board of trade or clearing organization; and the ability

    of the clearing organization to observe the Recommendations for Central

    Counterparties.

    (g) Clearing organization. Clearing organization means the foreign

    board of trade, affiliate of the foreign board of trade or any third

    party clearing house, clearing association, clearing corporation or

    similar entity, facility or organization that, with respect to any

    agreement, contract or transaction executed on or through the foreign

    board of trade, would be:

    (1) Defined as a derivatives clearing organization under section

    1a(15) of the Act; or

    (2) Defined as a central counterparty by the Recommendations for

    Central Counterparties.

    (h) Existing no-action relief. Existing no-action relief means a

    no-action letter issued by a division of the Commission to the foreign

    board of trade in which the division informs the foreign board of trade

    that it will not recommend that the Commission institute enforcement

    action against the foreign board of trade if the foreign board of trade

    does not seek designation as either a designated contract market

    pursuant to section 5 of the Act or a derivatives transaction execution

    facility pursuant to section 5a of the Act in connection with the

    granting of direct access.

    (i) Swap. Swap means a swap as defined in section 1a(47) of the Act

    and any Commission regulation further defining the term adopted

    thereunder.

    (j) Recommendations for Central Counterparties. Recommendations for

    Central Counterparties means:

    (1) The current Recommendations for Central Counterparties issued

    jointly by the Committee on Payment and Settlement Systems and the

    Technical Committee of the International Organization of Securities

    Commissions as updated, revised or otherwise amended; or

    (2) Successor standards, principles and guidance for central

    counterparties or financial market infrastructures adopted jointly by

    the Technical Committee of the International Organization of Securities

    Commissions and the Committee on Payment and Settlement Systems.

    (k) Affiliate. An affiliate of a registered foreign board of trade

    member or other participant means any person, as that term is defined

    in section 1a(38) of the Act, that:

    (1) Owns 50% or more of the member or other participant;

    (2) Is owned 50% or more by the member or other participant; or

    (3) Is owned 50% or more by a third person that also owns 50% or

    more of the member or other participant.

    (l) Member or other participant. Member or other participant means

    a member or other participant of a foreign board of trade that is

    registered under this part and any affiliate thereof that has been

    granted direct access by the foreign board of trade.

    Sec. 48.3 Registration required.

    (a) Except as specified in this part, it shall be unlawful for a

    foreign board of trade to permit direct access to its electronic

    trading and order matching system unless and until the Commission has

    issued a valid and current Order of Registration to the foreign board

    of trade pursuant to the provisions of this part.

    (b) It shall be unlawful for a foreign board of trade or the

    clearing organization to make false or misleading statements in or in

    connection with any application for registration under this part.

    Sec. 48.4 Registration eligibility and scope.

    (a) Only foreign boards of trade eligible to be registered, as

    defined in Sec. 48.2(b) of this part, are eligible for registration

    with the Commission pursuant to this part.

    (b) A foreign board of trade may apply for registration under this

    part in order to permit the members and other participants of the

    foreign board of trade that are located in the United States to enter

    trades directly into the trading and order matching system of the

    foreign board of trade, to the extent that such members or other

    participants are:

    (1) Entering orders for the member's or other participant's

    proprietary accounts;

    (2) Registered with the Commission as futures commission merchants

    and are submitting customer orders to the trading system for execution;

    or

    (3) Registered with the Commission as a commodity pool operator or

    commodity trading advisor, or are exempt from such registration

    pursuant to Sec. 4.13 or Sec. 4.14 of this chapter, and are

    submitting orders for execution on behalf of a United States pool that

    the member or other participant operates or an account of a United

    States customer for which the member or other participant has

    discretionary authority, respectively, provided that a futures

    commission merchant or a firm exempt from such registration pursuant to

    Sec. 30.10 of this chapter acts as clearing firm and guarantees,

    without limitation, all such trades of the commodity pool operator or

    commodity trading advisor effected through submission of orders to the

    trading system.

    Sec. 48.5 Registration procedures.

    (a) A foreign board of trade seeking registration with the

    Commission pursuant to this part must electronically file an

    application for registration with the Secretary of the Commission at

    its Washington DC headquarters at FBOTapplications@cftc.gov.

    (b) A complete application for registration must include:

    (1) A completed Form FBOT and Form Supplement S-1, as set forth in

    the Appendix to this part, or any successor forms, and all information

    and documentation described in such forms; and

    (2) Any additional information and documentation necessary, in the

    discretion of the Commission, to supplement the application including,

    but not limited to, documentation and

    [[Page 80700]]

    information provided during the course of an on-site visit, as

    applicable, to the foreign board of trade, the clearing organization

    and the regulatory authority or authorities, to effectively demonstrate

    that the foreign board of trade and its clearing organization satisfy

    the registration requirements set forth in Sec. 48.7.

    (c) An applicant for registration must identify with particularity

    any information in the application that will be subject to a request

    for confidential treatment and must provide support for any request for

    confidential treatment pursuant to the procedures set forth in Sec.

    145.9 of this chapter.

    (d) If, upon review, the Commission finds the application for

    registration to be complete, the Commission may approve or deny the

    application. In reviewing the application, the Commission will

    consider, among other things:

    (1) Whether the foreign board of trade is eligible to be registered

    as defined in Sec. 48.2(b) and;

    (2) Whether the foreign board of trade and its clearing

    organization are subject to comprehensive supervision and regulation by

    the appropriate governmental authorities in their home country or

    countries that is comparable to the comprehensive supervision and

    regulation to which designated contract markets and derivatives

    clearing organizations are respectively subject under the Act,

    Commission regulations, and other applicable United States laws and

    regulations, if any, and;

    (3) Any previous Commission findings that the foreign board of

    trade and its clearing organization are subject to comprehensive

    supervision and regulation by the appropriate government authorities in

    their home country or countries that is comparable to the comprehensive

    supervision and regulation to which designated contract markets and

    derivatives clearing organizations are subject under the Act,

    Commission regulations, and other applicable United States laws and

    regulations, if any; and

    (4) Whether the foreign board of trade and its clearing

    organization have adequately demonstrated that they meet the

    requirements for registration specified in Sec. 48.7.

    (5) The Commission's determination that the foreign board of trade

    and its clearing organization are subject to comprehensive supervision

    and regulation by the appropriate government authorities in their home

    country or countries that is comparable to the comprehensive

    supervision and regulation to which designated contract markets and

    derivatives clearing organizations are subject will be based upon a

    principles-based review conducted in a manner consistent with this part

    48 pursuant to which the Commission will look to determine if the

    government authorities support and enforce regulatory objectives in the

    oversight of the foreign board of trade and the clearing organization

    that are substantially equivalent to the regulatory objectives

    supported and enforced by the Commission in its oversight of designated

    contract markets and derivatives clearing organizations.

    (e) If the Commission approves the application, the Commission will

    issue an Order of Registration. If the Commission does not approve the

    application, the Commission will, after appropriate notice and an

    opportunity to respond, issue a Notice of Action specifying that the

    application was not approved and setting forth the reasons therefor.

    The Commission, in its discretion, may impose conditions in the Order

    of Registration and may, after appropriate notice and an opportunity to

    respond, amend, suspend, or otherwise restrict the terms of an issued

    Order of Registration or issue an Order revoking registration.

    (f) A foreign board of trade whose application is not approved may

    reapply for registration 360 days after the issuance of the Notice of

    Action if the foreign board of trade has addressed any deficiencies in

    its original application or facts and circumstances relevant to the

    Commission's review of the application have changed.

    Sec. 48.6 Foreign boards of trade providing direct access pursuant to

    existing no-action relief.

    (a) A foreign board of trade operating pursuant to existing no-

    action relief as of the effective date of this Part 48 must register

    with the Commission pursuant to this part in order to continue to

    provide direct access to its electronic trading and order matching

    system from the United States.

    (b)(1) The application of a foreign board of trade operating

    pursuant to existing no-action relief must include a complete Form FBOT

    and Supplement S-1, as set forth in the Appendix to this part. If the

    foreign board of trade, as part of its application for registration,

    wishes to rely on information and documentation previously submitted

    electronically in connection with its request for no-action relief in

    order to demonstrate that it satisfies the registration requirements

    set forth in Sec. 48.7, (limited application) the foreign board of

    trade must:

    (i) Specifically identify the information or documentation

    previously submitted;

    (ii) Identify the specific registration requirements set forth in

    Sec. 48.7 that are satisfied by such information or documentation; and

    (iii) Certify that the information remains accurate and current.

    (2) If the foreign board of trade wishes to rely on information and

    documentation previously submitted in hard copy in connection with its

    application for no-action relief, the foreign board of trade must also

    resubmit the identified information or documentation. A foreign board

    of trade that has submitted a complete application for no-action relief

    that is pending as of February 21, 2012 may also apply for registration

    pursuant to these limited application procedures.

    (c) A foreign board of trade operating pursuant to existing no-

    action relief must submit a limited application for registration,

    determined in good faith by the applicant to be complete, within 180

    days of February 21, 2012. If, at any time after August 20, 2012 but

    before a limited application is approved or disapproved, the Commission

    determines that the application is materially incomplete, the

    Commission may, after providing the foreign board of trade with notice

    and an opportunity to respond to the determination of incompleteness,

    withdraw the existing no-action relief if the Commission determines

    that the application cannot be made complete in a timely manner. The

    foreign board of trade may continue to operate pursuant to the existing

    no-action relief, subject to the terms and conditions contained

    therein, August 20, 2012, while the Commission is reviewing its

    application, and until the Commission approves or disapproves the

    application or otherwise withdraws the existing no-action relief. The

    no-action relief is automatically withdrawn upon issuance of an Order

    of Registration or upon disapproval.

    Sec. 48.7 Requirements for registration.

    An applicant for registration must demonstrate that it and, where

    applicable, its clearing organization meet the following requirements.

    The registration requirements applicable to clearing organizations may

    alternatively be met by demonstrating that the clearing organization is

    registered and in good standing with the Commission as a derivatives

    clearing organization. The Commission, in its discretion, may request

    additional information and documentation in connection with an

    application for registration and an applicant for registration must

    provide

    [[Page 80701]]

    promptly any such additional information or documentation. The

    Commission, in its discretion, also may impose additional registration

    requirements that the Commission deems necessary after appropriate

    notice and opportunity to respond.

    (a) Foreign Board of Trade and Clearing Membership:

    (1) The members and other participants of the foreign board of

    trade and its clearing organization are fit and proper and meet

    appropriate financial and professional standards;

    (2) The foreign board of trade and its clearing organization have

    and enforce provisions to minimize and resolve conflicts of interest;

    and

    (3) The foreign board of trade and its clearing organization have

    and enforce rules prohibiting the disclosure, both during and

    subsequent to service on a board or committee, of material non-public

    information obtained as a result of a member's or other participant's

    performance of duties as a member of their respective governing boards

    and significant committees.

    (b) The Automated Trading System:

    (1) The trading system complies with Principles for the Oversight

    of Screen-Based Trading Systems for Derivative Products developed by

    the Technical Committee of the International Organization of Securities

    Commissions,

    (2) The trade matching algorithm matches trades fairly and timely,

    (3) The audit trail captures all relevant data, including changes

    to orders, and audit trail data is securely maintained and available

    for an adequate time period,

    (4) Adequate and appropriate trade data is made available to users

    and the public,

    (5) The trading system has demonstrated reliability,

    (6) Access to the trading system is secure and protected,

    (7) There are adequate provisions for emergency operations and

    disaster recovery,

    (8) Trading data is backed up to prevent loss of data, and

    (9) Only those futures, option or swap contracts that have been

    identified to the Commission in the foreign board of trade's

    application for registration or permitted to be made available for

    trading by direct access pursuant to the procedures set forth in Sec.

    48.10 of this part are made available for trading by direct access.

    (c) Terms and Conditions of Contracts to Be Made Available in the

    United States.

    (1) Contracts must meet the following standards:

    (i) Contracts must be futures, option or swap contracts that would

    be eligible to be traded on a designated contract market;

    (ii) Contracts must be cleared;

    (iii) Contracts must not be prohibited from being traded by United

    States persons; and

    (iv) Contracts must not be readily susceptible to manipulation.

    (2) Foreign futures and option contracts on non-narrow-based

    security indexes must have been certified by the Commission pursuant to

    the procedures set forth in Sec. 30.13 of this chapter.

    (3) Contracts that have the following characteristics must be

    specifically identified as having such characteristics:

    (i) Contracts that are linked to a contract listed for trading on a

    registered entity as defined in section 1a(40) of the Act, and

    (ii) Contracts that have any other relationship with a contract

    listed for trading on a registered entity (for example, if both the

    foreign board of trade's and the registered entity's contract settle to

    the price of the same third party-constructed index).

    (d) Settlement and Clearing:

    (1) The clearing organization observes the Recommendations for

    Central Counterparties or is registered with the Commission as a

    derivatives clearing organization, and

    (2) The clearing organization is in good regulatory standing in its

    home country jurisdiction.

    (e) The Regulatory Regimes Governing the Foreign Board of Trade and

    the Clearing Organization:

    (1) The regulatory authorities provide comprehensive supervision

    and regulation of the foreign board of trade, the clearing

    organization, and the type of contracts to be made available through

    direct access that is comparable to the comprehensive supervision and

    regulation provided by the Commission to designated contract markets,

    derivatives clearing organizations and such contracts. That is, the

    regulatory authorities support and enforce regulatory objectives in the

    oversight of the foreign board of trade, clearing organization and the

    type of contracts that the foreign board of trade wishes to make

    available through direct access that are substantially equivalent to

    the regulatory objectives supported and enforced by the Commission in

    its oversight of designated contract markets, derivatives clearing

    organizations, and such products.

    (2) The regulatory authorities engage in ongoing regulatory

    supervision and oversight of the foreign board of trade and its trading

    system, the clearing organization and its clearing system, and the

    members, intermediaries and other participants of the foreign board of

    trade and clearing organization, with respect to, among other things,

    market integrity, customer protection, clearing and settlement and the

    enforcement of the rules of the foreign board of trade and the clearing

    organization.

    (3) The regulatory authorities have the power to share information

    directly with the Commission, upon request, including information

    necessary to evaluate the continued eligibility of the foreign board of

    trade for registration and to audit for compliance with the terms and

    conditions of the registration.

    (4) The regulatory authorities have the power to intervene in the

    market.

    (f) The Rules of the Foreign Board of Trade and the Clearing

    Organization and Enforcement Thereof:

    (1) The foreign board of trade and its clearing organization have

    implemented and enforce rules to ensure compliance with the

    requirements of registration contained in this part;

    (2) The foreign board of trade and its clearing organization have

    the capacity to detect, investigate, and sanction persons who violate

    their respective rules;

    (3) The foreign board of trade and the clearing organization (or

    their respective regulatory authorities) have implemented and enforce

    disciplinary procedures that empower them to recommend and prosecute

    disciplinary actions for suspected rule violations, impose adequate

    sanctions for such violations, and provide adequate protections to

    charged parties pursuant to fair and clear standards;

    (4) The foreign board of trade and its clearing organization are

    authorized by rule or by contractual agreement to obtain, from members

    and other participants, any information and cooperation necessary to

    conduct investigations, to effectively enforce their respective rules,

    and to ensure compliance with the conditions of registration;

    (5) The foreign board of trade and its clearing organization have

    sufficient compliance staff and resources, including by delegation and/

    or outsourcing to a third party, to fulfill their respective regulatory

    responsibilities, including appropriate trade practice surveillance,

    real time market monitoring, market surveillance, financial

    surveillance, protection of customer funds, enforcement of clearing and

    settlement provisions and other compliance and regulatory

    responsibilities;

    (6) The foreign board of trade has implemented and enforces rules

    with respect to access to the trading system

    [[Page 80702]]

    and the means by which the connection thereto is accomplished;

    (7) The foreign board of trade's audit trail captures and retains

    sufficient order and trade-related data to allow its compliance staff

    to detect trading and market abuses and to reconstruct all transactions

    within a reasonable period of time;

    (8) The foreign board of trade has implemented and enforces rules

    prohibiting fraud and abusive trading practices including, but not

    limited to, wash sales and trading ahead;

    (9) The foreign board of trade has the capacity to detect and

    deter, and has implemented and enforces rules relating to, market

    manipulation, attempted manipulation, price distortion, and other

    disruptions of the market; and

    (10) The foreign board of trade has and enforces rules and

    procedures that ensure a competitive, open and efficient market and

    mechanism for executing transactions.

    (g) Information Sharing:

    (1) The regulatory authorities governing the activities of the

    foreign board of trade and the clearing organization are signatories to

    the International Organization of Securities Commissions Multilateral

    Memorandum of Understanding, or otherwise ensure that substitute

    information sharing arrangements that are satisfactory to the

    Commission are in place;

    (2) The regulatory authorities governing the activities of the

    foreign board of trade and the clearing organization are signatories to

    the Declaration on Cooperation and Supervision of International Futures

    Exchanges and Clearing Organizations or otherwise commit, in writing,

    to share the types of information contemplated by the International

    Information Sharing Memorandum of Understanding and Agreement with the

    Commission;

    (3) The foreign board of trade has executed the International

    Information Sharing Memorandum of Understanding and Agreement; and

    (4) Pursuant to the conditions described in Sec. 48.8(a)(6), the

    foreign board of trade and clearing organization agree to provide

    directly to the Commission, upon request, any information necessary, in

    the discretion of the Commission, to evaluate the continued eligibility

    and appropriateness of the foreign board of trade and the clearing

    organization, or their respective members or other participants for

    registration, to audit for and enforce compliance with the requirements

    and conditions of the registration, or to enable the Commission to

    carry out its duties under the Act and Commission regulations.

    Sec. 48.8 Conditions of registration.

    Upon registration under this part, and on an ongoing basis

    thereafter, the foreign board of trade and the clearing organization

    shall comply with the applicable conditions of registration set forth

    in this section and any additional conditions that the Commission deems

    necessary and may impose, in its discretion, and after appropriate

    notice and opportunity to respond. Such conditions could include, but

    are not limited to, additional conditions applicable to the listing of

    swap contracts. Continued registration is expressly conditioned upon

    satisfaction of these conditions.

    (a) Specified Conditions for Maintaining Registration

    (1) Registration Requirements: The foreign board of trade and its

    clearing organization shall continue to satisfy all of the requirements

    for registration set forth in Sec. 48.7.

    (2) Regulatory Regime:

    (i) The foreign board of trade will continue to satisfy the

    criteria for a regulated market or licensed exchange pursuant to the

    regulatory regime described in its application and will continue to be

    subject to oversight by the regulatory authorities described in its

    application.

    (ii) The clearing organization will continue to satisfy the

    criteria for a regulated clearing organization pursuant to the

    regulatory regime described in the application for registration and

    will continue to be in good standing with the relevant regulatory

    authority.

    (iii) The laws, systems, rules, and compliance mechanisms of the

    regulatory regime applicable to the foreign board of trade will

    continue to require the foreign board of trade to maintain fair and

    orderly markets; prohibit fraud, abuse, and market manipulation and

    other disruptions of the market; and provide that such requirements are

    subject to the oversight of appropriate regulatory authorities.

    (3) Satisfaction of International Standards:

    (i) The foreign board of trade will continue to comply with the

    Principles for the Oversight of Screen-Based Trading Systems for

    Derivative Products developed by the Technical Committee of the

    International Organization of Securities Commissions, as updated,

    revised, or otherwise amended, to the extent such principles do not

    contravene United States law.

    (ii) The clearing organization will continue to:

    (A) Be registered with the Commission as a derivatives clearing

    organization and be in compliance with the laws and regulations related

    thereto; or

    (B) Observe the Recommendations for Central Counterparties.

    (4) Restrictions on Direct Access:

    (i) Only the foreign board of trade's identified members or other

    participants will have direct access to the foreign board of trade's

    trading system from the United States and the foreign board of trade

    will not provide, and will take reasonable steps to prevent, third

    parties from providing direct access to persons other than the

    identified members or other participants.

    (ii) All orders that are transmitted to the foreign board of

    trade's trading system by a foreign board of trade's identified member

    or other participant that is operating pursuant to the foreign board of

    trade's registration will be solely for the member's or trading

    participant's own account unless such member or other participant is

    registered with the Commission as a futures commission merchant or such

    member or other participant is registered with the Commission as a

    commodity pool operator or commodity trading advisor, or is exempt from

    such registration pursuant to Sec. 4.13 or Sec. 4.14 of this chapter,

    provided that a futures commission merchant or a firm exempt from such

    registration pursuant to Sec. 30.10 of this chapter acts as clearing

    firm and guarantees, without limitation, all such trades of the

    commodity pool operator or commodity trading advisor effected through

    submission of orders on the trading system.

    (5) Submission to Commission Jurisdiction:

    (i) Prior to operating pursuant to registration under this part and

    on a continuing basis thereafter, a registered foreign board of trade

    will require that each current and prospective member or other

    participant that is granted direct access to the foreign board of

    trade's trading system and that is not registered with the Commission

    as a futures commission merchant, a commodity trading advisor or a

    commodity pool operator, file with the foreign board of trade a written

    representation, executed by a person with the authority to bind the

    member or other participant, stating that as long as the member or

    other participant is authorized to enter orders directly into the trade

    matching system of the foreign board of trade, the member or other

    participant agrees to and submits to the jurisdiction of the Commission

    with respect to activities conducted pursuant to the registration.

    [[Page 80703]]

    (ii) The foreign board of trade and its clearing organization will

    file with the Commission a valid and binding appointment of an agent

    for service of process in the United States pursuant to which the agent

    is authorized to accept delivery and service of communications, as

    defined in Sec. 48.2(e) issued by or on behalf of the Commission, the

    United States Department of Justice, or the National Futures

    Association.

    (iii) The foreign board of trade, clearing organization, and each

    current and prospective member or other participant that is granted

    direct access to the foreign board of trade's trading system and that

    is not registered with the Commission as a futures commission merchant,

    a commodity trading advisor, or a commodity pool operator will maintain

    with the foreign board of trade written representations, executed by

    persons with the authority to bind the entity making them, stating that

    as long as the foreign board of trade is registered under this

    regulation, the foreign board of trade, the clearing organization or

    member of either or other participant granted direct access pursuant to

    this regulation will provide, upon the request of the Commission, the

    United States Department of Justice and, if appropriate, the National

    Futures Association, prompt access to the entity's, member's, or other

    participant's original books and records or, at the election of the

    requesting agency, a copy of specified information containing such

    books and records, as well as access to the premises where the trading

    system is available in the United States.

    (iv) The foreign board of trade will maintain all representations

    required pursuant to Sec. 48.8(a)(5) as part of its books and records

    and make them available to the Commission upon request.

    (6) Information Sharing:

    (i) Information-sharing arrangements satisfactory to the

    Commission, including but not limited to those set forth in Sec.

    48.7(g), are in effect between the Commission and the regulatory

    authorities that govern the activities of both the foreign board of

    trade and the clearing organization.

    (ii) The Commission is, in fact, able to obtain sufficient

    information regarding the foreign board of trade, the clearing

    organization, their respective members and participants and the

    activities related to the foreign board of trade's registration.

    (iii) The foreign board of trade and its clearing organization, as

    applicable, will provide directly to the Commission any information

    necessary to evaluate the continued eligibility and appropriateness of

    the foreign board of trade for registration, the capability and

    determination to enforce compliance with the requirements and

    conditions of the registration, or to enable the Commission to carry

    out its duties under the Act and Commission regulations and to provide

    adequate protection to the public or United States registered entities.

    (iv) In the event that the foreign board of trade and the clearing

    organization are separate entities, the foreign board of trade will

    require the clearing organization to enter into a written agreement in

    which the clearing organization is contractually obligated to promptly

    provide any and all information and documentation that may be required

    of the clearing organization under this regulation and such agreement

    shall be made available to the Commission, upon request.

    (7) Monitoring for Compliance: The foreign board of trade and the

    clearing organization will employ reasonable procedures for monitoring

    and enforcing compliance with the specified conditions of its

    registration.

    (8) On-Site Visits: The foreign board of trade and the clearing

    organization will permit and will cooperate with Commission staff with

    respect to on-site visits for the purpose of overseeing ongoing

    compliance of the foreign board of trade and the clearing organization

    with registration requirements and conditions of registration.

    (9) Conditions Applicable to Swap Trading:

    (i) The foreign board of trade will ensure that all transaction

    data relating to each swap transaction, including price and volume, are

    reported as soon as technologically practicable after execution of the

    swap transaction to a swap data repository that is either registered

    with the Commission or has an information sharing arrangement with the

    Commission.

    (ii) The foreign board of trade will agree to coordinate with the

    Commission with respect to arrangements established to address cross

    market oversight issues involving swap trading, including surveillance,

    emergency actions and the monitoring of trading.

    (b) Other Continuing Obligations.

    (1) Registered foreign boards of trade and their clearing

    organizations will continue to comply with the following obligations on

    an ongoing basis:

    (i) The foreign board of trade will maintain the following updated

    information and submit such information to the Commission on at least a

    quarterly basis, not later than 30 days following the end of the

    quarter, and at any time promptly upon the request of a Commission

    representative, computed based upon separating buy sides and sell

    sides, in a format as determined by the Commission:

    (A) For each contract available to be traded through the foreign

    board of trade's trading system;

    (1) The total trade volume originating from electronic trading

    devices providing direct access;

    (2) The total trade volume for such contracts traded through the

    trading system worldwide;

    (3) The total trade volume for such contracts traded on the foreign

    board of trade generally; and

    (B) A listing of the names, National Futures Association

    identification numbers (if applicable), and main business addresses in

    the United States of all members and other participants that have

    direct access.

    (ii) The foreign board of trade will promptly provide to the

    Commission written notice of the following:

    (A) Any material change to the information provided in the foreign

    board of trade's registration application.

    (B) Any material change in the rules of the foreign board of trade

    or clearing organization or the laws, rules, or regulations in the home

    country jurisdictions of the foreign board of trade or clearing

    organization relevant to futures, option or swap contracts made

    available by direct access.

    (C) Any matter known to the foreign board of trade, the clearing

    organization or its representatives that, in the judgment of the

    foreign board of trade or clearing organization, may affect the

    financial or operational viability of the foreign board of trade or its

    clearing organization with respect to contracts traded by direct

    access, including, but not limited to, any significant system failure

    or interruption.

    (D) Any default, insolvency, or bankruptcy of any foreign board of

    trade member or other participant that is or should be known to the

    foreign board of trade or its representatives or the clearing

    organization or its representatives that may have a material, adverse

    impact upon the condition of the foreign board of trade as it relates

    to trading by direct access, its clearing organization or upon any

    United States customer or firm or any default, insolvency or bankruptcy

    of any member of the foreign board of trade's clearing organization.

    (E) Any violation of any specified conditions of the foreign board

    of trade's registration or failure to satisfy the requirements for

    registration under this part that is known or should be known by the

    foreign board of trade, the

    [[Page 80704]]

    clearing organization or any of their respective members or

    participants.

    (F) Any disciplinary action by the foreign board of trade or its

    clearing organization, or any regulatory authority that governs their

    respective activities, taken against any of their respective members or

    participants with respect to any contract available to be traded by

    direct access that involves any market manipulation, abuse, fraud,

    deceit, or conversion or that results in suspension or expulsion.

    (iii) The foreign board of trade and the clearing organization, or

    their respective regulatory authorities, as applicable, will provide

    the following to the Commission annually as of June 30 and not later

    than July 31.

    (A) A certification from the foreign board of trade's regulatory

    authority confirming that the foreign board of trade retains its

    authorization, licensure or registration, as applicable, as a regulated

    market and/or exchange under the authorization, licensing, recognition

    or other registration methodology used by the foreign board of trade's

    regulatory authority and that the foreign board of trade is in

    continued good standing.

    (B) If the clearing organization is not a derivatives clearing

    organization registered with the Commission, a certification from the

    clearing organization's regulatory authority confirming that the

    clearing organization retains its authorization, licensure or

    registration, as applicable, as a clearing organization under the

    authorization, licensing or other registration methodology used by the

    clearing organization's regulatory authority and is in continued good

    standing.

    (C) If the clearing organization is not a derivatives clearing

    organization registered with the Commission, a recertification of the

    clearing organization's observance of the Recommendations for Central

    Counterparties.

    (D) A certification that affiliates, as defined in Sec. 48.2(k),

    continue to be required to comply with the rules of the foreign board

    of trade and clearing organization and that the members or other

    participants to which they are affiliated remain responsible to the

    foreign board of trade for ensuring their affiliates' compliance.

    (E) A description of any material changes regarding the foreign

    board of trade or clearing organization that have not been previously

    disclosed, in writing, to the Commission, or a certification that no

    such material changes have occurred.

    (F) A description of any significant disciplinary or enforcement

    actions that have been instituted by or against the foreign board of

    trade or the clearing organization or the senior officers of either

    during the prior year.

    (G) A written description of any material changes to the regulatory

    regime to which the foreign board of trade or the clearing organization

    are subject that have not been previously disclosed, in writing, to the

    Commission, or a certification that no material changes have occurred.

    (2) The above-referenced annual reports must be signed by an

    officer of the foreign board of trade or the clearing organization who

    maintains the authority to bind the foreign board of trade or clearing

    organization, as applicable, and must be based on the officer's

    personal knowledge.

    (c) Additional Specified Conditions for Foreign Boards of Trade

    with Linked Contacts. If a registered foreign board of trade grants

    members or other participants direct access and makes available for

    trading a linked contract, the following additional conditions apply:

    (1) Statutory Conditions.

    (i) The foreign board of trade will make public daily trading

    information regarding the linked contract that is comparable to the

    daily trading information published by the registered entity for the

    contract to which the foreign board of trade's contract is linked, and

    (ii) The foreign board of trade (or its regulatory authority) will:

    (A) Adopt position limits (including related hedge exemption

    provisions) applicable to all market participants for the linked

    contract that are comparable to the position limits (including related

    hedge exemption provisions) adopted by the registered entity for the

    contract to which it is linked;

    (B) Have the authority to require or direct any market participant

    to limit, reduce, or liquidate any position the foreign board of trade

    (or its regulatory authority) determines to be necessary to prevent or

    reduce the threat of price manipulation, excessive speculation as

    described in section 4a of the Act, price distortion, or disruption of

    delivery on the cash settlement process;

    (C) Agree to promptly notify the Commission, with regard to the

    linked contract, of any change regarding--

    (1) The information that the foreign board of trade will make

    publicly available,

    (2) The position limits that foreign board of trade or its

    regulatory authority will adopt and enforce,

    (3) The position reductions required to prevent manipulation,

    excessive speculation as described in section 4a of the Act, price

    distortion, or disruption of delivery or the cash settlement process,

    and

    (4) Any other area of interest expressed by the Commission to the

    foreign board of trade or its regulatory authority;

    (D) Provide information to the Commission regarding large trader

    positions in the linked contract that is comparable to the large trader

    position information collected by the Commission for the contract to

    which it is linked; and

    (E) Provide the Commission such information as is necessary to

    publish reports on aggregate trader positions for the linked contract

    that are comparable to such reports on aggregate trader positions for

    the contract to which it is linked.

    (2) Other Conditions on Linked Contracts.

    (i) The foreign board of trade will inform the Commission in a

    quarterly report of any member that had positions in a linked contract

    above the applicable foreign board of trade position limit, whether a

    hedge exemption was granted, and if not, whether a disciplinary action

    was taken.

    (ii) The foreign board of trade will provide the Commission, either

    directly or through its agent, with trade execution and audit trail

    data for the Commission's Trade Surveillance System on a trade-date

    plus one basis and in a form, content and manner acceptable to the

    Commission for all linked contracts.

    (iii) The foreign board of trade will provide to the Commission, at

    least one day prior to the effective date thereof, except in the event

    of an emergency market situation, copies of, or hyperlinks to, all

    rules, rule amendments, circulars and other notices published by the

    foreign board of trade with respect to all linked contracts.

    (iv) The foreign board of trade will provide to the Commission

    copies of all reports of disciplinary action involving the foreign

    board of trade's linked contracts upon closure of the action. Such

    reports should include the reason the action was undertaken, the

    results of the investigation that led to the disciplinary action, and

    any sanctions imposed.

    (v) In the event that the Commission, pursuant to its emergency

    powers authority, directs that the registered entity which lists the

    contract to which the foreign board of trade's contract is linked to

    take emergency action with respect to a linked contract (for example,

    to cease trading in the contract), the foreign board of trade, subject

    to information-sharing

    [[Page 80705]]

    arrangements between the Commission and its regulatory authority, will

    promptly take similar action with respect to the its linked contract.

    Sec. 48.9 Revocation of registration.

    (a) Failure to Satisfy Registration Requirements or Conditions:

    (1) If the Commission determines that a registered foreign board of

    trade or the clearing organization has failed to satisfy any

    registration requirements or conditions for registration, the

    Commission shall notify the foreign board of trade of such

    determination, including the particular requirements or conditions that

    are not being satisfied, and shall afford the foreign board of trade or

    clearing organization an opportunity to make appropriate changes to

    bring it into compliance.

    (2) If, not later than 30 days after receiving a notification under

    paragraph (a)(1) of this section, the foreign board of trade or

    clearing organization fails to make changes that, in the opinion of the

    Commission, are necessary to comply with the registration requirements

    or conditions of registration, the Commission may revoke the foreign

    board of trade's registration, after appropriate notice and an

    opportunity to respond, by issuing an Order Revoking Registration which

    sets forth the reasons therefor.

    (3) A foreign board of trade whose registration has been revoked

    for failure to satisfy a registration requirement or condition of

    registration may apply for re-registration 360 days after the issuance

    of the Order Revoking Registration if the deficiency causing the

    revocation has been cured or relevant facts and circumstances have

    changed.

    (b) Other Events that Could Result in Revocation. Notwithstanding

    Sec. 48.9(a), revocation under these circumstances will be handled by

    the Commission as relevant facts or circumstances warrant.

    (1) The Commission may revoke a foreign board of trade's

    registration, after appropriate notice and an opportunity to respond,

    if the Commission determines that a representation made in the foreign

    board of trade's application for registration is found to be untrue or

    materially misleading or if the foreign board of trade failed to

    include information in the application that would have been material to

    the Commission's determination as to whether to issue an Order of

    Registration.

    (2) The Commission may revoke a foreign board of trade's

    registration, after appropriate notice and an opportunity to respond,

    if there is a material change in the regulatory regime applicable to

    the foreign board of trade or clearing organization such that the

    regulatory regime no longer satisfies any registration requirement or

    condition for registration applicable to the regulatory regime.

    (3) The Commission may revoke a foreign board of trade's

    registration in the event of an emergency or in a circumstance where

    the Commission determines that revocation would be necessary or

    appropriate in the public interest. Following revocation, the

    Commission will provide notice and an opportunity to respond.

    (4) The Commission may revoke a foreign board of trade's

    registration in the event the foreign board of trade or the clearing

    organization is no longer authorized, licensed or registered, as

    applicable, as a regulated market and/or exchange or clearing

    organization or ceases to operate as a foreign board of trade or

    clearing organization, subject to notice and an opportunity to respond.

    (c) Upon request by the Commission, a registered foreign board of

    trade must file with the Commission a written demonstration, containing

    such supporting data, information, and documents, in such form and

    manner and within such timeframe as the Commission may specify, that

    the foreign board of trade or clearing organization is in compliance

    with the registration requirements and/or conditions for registration.

    Sec. 48.10 Additional contracts.

    (a) Generally. A registered foreign board of trade that wishes to

    make an additional futures, option or swap contract available for

    trading by identified members or other participants located in the

    United States with direct access to its electronic trading and order

    matching system must submit a written request prior to offering the

    contracts from within the United States. Such a written request must

    include the terms and conditions of the additional futures, option or

    swap contracts and a certification that the additional contracts meet

    the requirements of Sec. 48.8(c), if applicable, and that the foreign

    board of trade and the clearing organization continue to satisfy the

    requirements and conditions of registration. The foreign board of trade

    can make available for trading by direct access the additional

    contracts ten business days after the date of receipt by the Commission

    of the written request, unless the Commission notifies the foreign

    board of trade that additional time is needed to complete its review of

    policy or other issues pertinent to the additional contracts. A

    registered foreign board of trade may list for trading by direct access

    an additional futures or option contract on a non-narrow-based security

    index pursuant to the Commission certification procedures set forth in

    Sec. 30.13(d) and Appendix D to Part 30 of this chapter.

    (b) Option contracts on previously approved futures contracts. (1)

    If the option is on a futures contract that is not a linked contract,

    the option contract may be made available for trading by direct access

    by filing with the Commission no later than the business day preceding

    the initial listing of the contract:

    (i) A copy of the terms and conditions of the additional contract

    and

    (ii) A certification that the foreign board of trade and the

    clearing organization continue to satisfy the conditions of its

    registration.

    (2) If the option is on a futures contract that is a linked

    contract, the option contract may be made available for trading by

    direct access by filing with the Commission no later than the business

    day preceding the initial listing of the contract:

    (i) A copy of the terms and conditions of the additional contract;

    and

    (ii) A certification that the foreign board of trade and the

    clearing organization continue to satisfy the conditions of its

    registration, including the conditions specifically applicable to

    linked contracts set forth in Sec. 48.8(c).

    (3) If the option is on a non-narrow-based security index futures

    contract which may be offered or sold in the United States pursuant to

    a Commission certification issued pursuant to Sec. 30.13 of this

    chapter, the option contract may be listed for trading by direct access

    without further action by either the registered foreign board of trade

    or the Commission.

    Appendix to Part 48--Form FBOT

    COMMODITY FUTURES TRADING COMMISSION

    FORM FBOT

    FOREIGN BOARD OF TRADE APPLICATION FOR REGISTRATION (IN ORDER TO PERMIT

    DIRECT ACCESS TO MEMBERS AND OTHER PARTICIPANTS)

    APPLICATION INSTRUCTIONS

    DEFINITIONS

    1. Unless the context requires otherwise, all terms used in this

    application have the same meaning as in the Commodity Exchange Act, as

    [[Page 80706]]

    amended (CEA or Act),\1\ and in the regulations of the Commodity

    Futures Trading Commission (Commission or CFTC).\2\

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

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

    \2\ 17 CFR chapter I.

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

    2. For the purposes of this Form FBOT, the term ``applicant''

    refers to the foreign board of trade applying for registration pursuant

    to CEA section 4(b) and part 48 of the Commission's regulations. The

    term ``clearing organization'' refers to the clearing organization that

    will be clearing trades executed on the trading system of such foreign

    board of trade.

    GENERAL INSTRUCTIONS

    1. A Form FBOT (including exhibits) shall be completed by any

    foreign board of trade applying for registration with the Commission

    pursuant to CEA section 4(b) and part 48 of the Commission's

    regulations.

    2. Form FBOT (including exhibits and any supplement thereto)

    (collectively, the ``application'' or ``application for registration'')

    must be filed electronically with the Secretary of the Commission at

    FBOTapplications@cftc.gov. Applicants may prepare their own Form FBOT,

    but must follow the format prescribed herein.

    3. The name of any individual listed in Form FBOT shall be provided

    in full (Last Name, First Name and Middle Name or Initial).

    4. Form FBOT must be signed by the Chief Executive Officer (or the

    functional equivalent) of the foreign board of trade who must possess

    the authority to bind the foreign board of trade.

    5. If this Form FBOT is being filed as a new application for

    registration, all applicable items on the Form FBOT must be answered in

    full. Non-applicable items should be indicated by marking ``none'' or

    ``N/A.''

    6. Submission of a complete Form FBOT (including all information,

    documentation and exhibits requested therein, and any required

    supplement) is mandatory and must be received by the Commission before

    it will begin to process a foreign board of trade's application for

    registration. The information provided with a Form FBOT (including

    exhibits and any supplement thereto) will be used to determine whether

    the Commission should approve or deny registration to an applicant.

    Pursuant to its regulations, the Commission may determine that

    information and/or documentation in addition to that requested in the

    Form FBOT is required from the applicant in order to process the

    application for registration or to determine whether registration is

    appropriate.

    7. Pursuant to Commission regulations, an applicant or its clearing

    organization must identify with particularity any information in the

    application (including, but not limited to, any information contained

    in this Form FBOT) that will be the subject of a request for

    confidential treatment and must provide support for any request for

    confidential treatment pursuant to the procedures set forth in

    Commission regulation 145.9.\3\ Except in cases where confidential

    treatment is granted by the Commission pursuant to the Freedom of

    Information Act and Commission regulations, information supplied in the

    Form FBOT (including exhibits and any supplement thereto) will be

    included routinely in the public files of the Commission and will be

    available for inspection and comment by any interested person.

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

    \3\ 17 CFR 145.9.

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

    8. A Form FBOT that is not prepared and executed in compliance with

    applicable requirements and instructions may be returned as not

    acceptable for filing.\4\ Acceptance of a Form FBOT by the Commission,

    however, shall not constitute a finding that the Form FBOT has been

    filed as required or that the information submitted is verified to be

    true, current, or complete. The Commission may revoke a foreign board

    of trade's registration, after appropriate notice and an opportunity to

    respond, if the Commission determines that a representation made in

    this Form FBOT is found to be untrue or materially misleading or if the

    foreign board of trade failed to include information in this Form FBOT

    that would have been material to the Commission's determination as to

    whether to issue an Order of Registration.

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

    \4\ Applicants and their clearing organizations are encouraged

    to correspond with the Commission's Division of Market Oversight

    regarding any content, procedural, or formatting questions

    encountered in connection with the preparation of a Form FBOT, or

    any exhibits or supplements thereto, prior to formally submitting

    those documents to the Commission. When appropriate, potential

    applicants and clearing organizations, as applicable, may provide a

    complete draft Form FBOT (including exhibits and any required

    supplement) to the Division of Market Oversight for early review to

    minimize the risk of having a submission returned or otherwise

    denied as not acceptable for filing. Review of draft submissions by

    any division of the Commission and any comments provided by a

    division of the Commission are for consultation purposes only and do

    not bind the Commission. To obtain instructions for submitting

    drafts, please contact the Division of Market Oversight.

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

    9. In addition to this Form FBOT, the clearing organization

    associated with the foreign board of trade must complete and submit

    Supplement S-1 to this Form FBOT in accordance with the instructions

    thereto. To the extent a single document or description is responsive

    to more than one request for the same information in either the Form

    FBOT or the Supplement S-1, the document or description need only be

    provided once and may be cross-referenced elsewhere.

    10. All documents submitted as part of this Form FBOT (or exhibits

    thereto) must be written in English or accompanied by a certified

    English translation.

    UPDATING INFORMATION ON THE FORM FBOT

    Pursuant to the Commission's regulations, if any information or

    documentation contained in this Form FBOT (including exhibits or any

    supplement or amendment thereto) is or becomes inaccurate for any

    reason prior to the issuance of an Order of Registration, an amendment

    correcting such information must be filed promptly with the Commission.

    A registered foreign board of trade also may submit an amendment to

    this Form FBOT to correct information that has become inaccurate

    subsequent to the receipt of an Order of Registration.

    BILLING CODE 6351-01-P

    [[Page 80707]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.051

    [[Page 80708]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.052

    [[Page 80709]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.053

    [[Page 80710]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.054

    BILLING CODE 6351-01-C

    INSTRUCTIONS FOR EXHIBITS TO FORM FBOT

    1. The following exhibits must be filed with the Commission by any

    foreign board of trade (1) seeking registration for purposes of

    granting direct access to its members and other participants or (2)

    amending a

    [[Page 80711]]

    previously submitted application, pursuant to CEA section 4(b) and part

    48 of the Commission's regulations. The information and documentation

    requested relates to the activities of the foreign board of trade,

    unless otherwise stated.

    2. The exhibits should be filed in accordance with the General

    Instructions to this Form FBOT and labeled as specified herein. If any

    exhibit is not applicable, please specify the exhibit letter and number

    and indicate by marking ``none'' or ``N/A.'' If any exhibit may be

    satisfied by documentation or information submitted in a different

    exhibit, the documentation or information need not be submitted more

    than once--please use internal cross-references where appropriate.

    GENERAL REQUIREMENTS

    A foreign board of trade applying for registration must submit

    sufficient information and documentation to successfully demonstrate to

    Commission staff that the foreign board of trade and its clearing

    organization satisfy all of the requirements of Commission regulation

    48.7. With respect to its review of the foreign board of trade, the

    Commission anticipates that such information and documentation would

    necessarily include, but not be limited to, the following:

    EXHIBIT A--GENERAL INFORMATION AND DOCUMENTATION

    Attach, as Exhibit A-1, a description of the following for the

    foreign board of trade: Location, history, size, ownership and

    corporate structure, governance and committee structure, current or

    anticipated presence of offices or staff in the United States, and

    anticipated volume of business emanating from members and other

    participants that will be provided direct access to the foreign board

    of trade's trading system.

    Attach, as Exhibit A-2, the following:

    Articles of association, constitution, or other similar

    organizational documents.

    Attach, as Exhibit A-3, the following:

    (1) Membership and trading participant agreements.

    (2) Clearing agreements.

    Attach, as Exhibit A-4, the following:

    Terms and conditions of contracts to be available through direct

    access (as specified in Exhibit E).

    Attach, as Exhibit A-5, the following:

    The national statutes, laws and regulations governing the

    activities of the foreign board of trade and its respective

    participants.

    Attach, as Exhibit A-6, the following:

    The current rules, regulations, guidelines and bylaws of the

    foreign board of trade.

    Attach, as Exhibit A-7, the following:

    Evidence of the authorization, licensure or registration of the

    foreign board of trade pursuant to the regulatory regime in its home

    country jurisdiction and a representation by its regulator(s) that it

    is in good regulatory standing in the capacity in which it is

    authorized, licensed or registered.

    Attach, as Exhibit A-8, the following document:

    A summary of any disciplinary or enforcement actions or proceedings

    that have been brought against the foreign board of trade, or any of

    the senior officers thereof, in the past five years and the resolution

    of those actions or proceedings.

    Attach, as Exhibit A-9, the following document:

    An undertaking by the chief executive officer(s) (or functional

    equivalent[s]) of the foreign board of trade to notify Commission staff

    promptly if any of the representations made in connection with or

    related to the foreign board of trade's application for registration

    cease to be true or correct, or become incomplete or misleading.

    EXHIBIT B--MEMBERSHIP CRITERIA

    Attach, as Exhibit B, the following, separately labeling each

    description:

    (1) A description of the categories of membership and participation

    in the foreign board of trade and the access and trading privileges

    provided by the foreign board of trade. The description should include

    any restrictions applicable to members and other participants to which

    the foreign board of trade intends to grant direct access to its

    trading system.

    (2) A description of all requirements for each category of

    membership and participation on the trading system and the manner in

    which members and other participants are required to demonstrate their

    compliance with these requirements. The description should include, but

    not be limited to, the following:

    (i) Professional Qualification. A description of the specific

    professional requirements, qualifications, and/or competencies required

    of members or other participants and/or their staff and a description

    of the process by which the foreign board of trade confirms compliance

    with such requirements.

    (ii) Authorization, Licensure and Registration. A description of

    any regulatory and self-regulatory authorization, licensure or

    registration requirements that the foreign board of trade imposes upon,

    or enforces against, its members and other participants including, but

    not limited to any authorization, licensure or registration

    requirements imposed by the regulatory regime/authority in the home

    country jurisdiction(s) of the foreign board of trade. Please also

    include a description of the process by which the foreign board of

    trade confirms compliance with such requirements.

    (iii) Financial Integrity. A description of the following:

    (A) The financial resource requirements, standards, guides or

    thresholds required of members and other participants.

    (B) The manner in which the foreign board of trade evaluates the

    financial resources/holdings of its members or participants.

    (C) The process by which applicants demonstrate compliance with

    financial requirements for membership or participation including, as

    applicable:

    (i) Working capital and collateral requirements, and

    (ii) Risk management mechanisms for members allowing customers to

    place orders.

    (iv) Fit and Proper Standards. A description of how the foreign

    board of trade ensures that potential members/other participants meet

    fit and proper standards.

    EXHIBIT C--BOARD AND/OR COMMITTEE MEMBERSHIP

    Attach, as Exhibit C, the following:

    (1) A description of the requirements applicable to membership on

    the governing board and significant committees of the foreign board of

    trade.

    (2) A description of the process by which the foreign board of

    trade ensures that potential governing board and committee members/

    other participants meet these standards.

    (3) A description of the provisions to minimize and resolve

    conflicts of interest with respect to membership on the governing board

    and significant committees of the foreign board of trade.

    (4) A description of the rules with respect to the disclosure of

    material non-public information obtained as a result of a member's or

    other participant's performance on the governing board or significant

    committee.

    EXHIBIT D--THE AUTOMATED TRADING SYSTEM

    Attach, as Exhibit D-1, a description of (or where appropriate,

    documentation addressing) the following, separately labeling each

    description:

    (1) The order matching/trade execution system, including a complete

    [[Page 80712]]

    description of all permitted ways in which members or other

    participants (or their customers) may connect to the trade matching/

    execution system and the related requirements (for example,

    authorization agreements).

    (2) The architecture of the systems, including hardware and

    distribution network, as well as any pre- and post-trade risk-

    management controls that are made available to system users.

    (3) The security features of the systems.

    (4) The length of time such systems have been operating.

    (5) Any significant system failures or interruptions.

    (6) The nature of any technical review of the order matching/trade

    execution system performed by the foreign board of trade, the home

    country regulator, or a third party.

    (7) Trading hours.

    (8) Types and duration of orders accepted.

    (9) Information that must be included on orders.

    (10) Trade confirmation and error trade procedures.

    (11) Anonymity of participants.

    (12) Trading system connectivity with clearing system.

    (13) Response time.

    (14) Ability to determine depth of market.

    (15) Market continuity provisions.

    (16) Reporting and recordkeeping requirements.

    Attach, as Exhibit D-2, a description of the manner in which the

    foreign board of trade assures the following with respect to the

    trading system, separately labeling each description:

    (1) Algorithm. The trade matching algorithm matches trades fairly

    and timely.

    (2) IOSCO Principles. The trading system complies with the

    Principles for the Oversight of Screen-Based Trading Systems for

    Derivative Products developed by the Technical Committee of the

    International Organization of Securities Commissions (IOSCO

    Principles). Provide a copy of any independent certification received

    or self-certification performed and identify any system deficiencies

    with respect to the IOSCO Principles.

    (3) Audit Trail.

    (i) The audit trail timely captures all relevant data, including

    changes to orders.

    (ii) Audit trail data is securely maintained and available for an

    adequate time period.

    (4) Public Data. Adequate and appropriate trade data is available

    to users and the public.

    (5) Reliability. The trading system has demonstrated reliability.

    (6) Secure Access. Access to the trading system is secure and

    protected.

    (7) Emergency Provisions. There are adequate provisions for

    emergency operations and disaster recovery.

    (8) Data Loss Prevention. Trading data is backed up to prevent loss

    of data.

    (9) Contracts Available. Mechanisms are available to ensure that

    only those futures, option or swap contracts that have been identified

    to the Commission as part of the application or permitted to be made

    available for trading by direct access pursuant to the procedures set

    forth in Sec. 48.10 are made available for trading by direct access.

    (10) Predominance of the Centralized Market. Mechanisms are

    available that ensure a competitive, open, and efficient market and

    mechanism for executing transactions.

    EXHIBIT E--THE TERMS AND CONDITIONS OF CONTRACTS PROPOSED TO BE MADE

    AVAILABLE IN THE UNITED STATES

    Attach, as Exhibit E-1, a description of the terms and conditions

    of futures, option or swap contracts intended to be made available for

    direct access. With respect to each contract, indicate whether the

    contract is regulated or otherwise treated as a futures, option or swap

    contract in the regulatory regime(s) of the foreign board of trade's

    home country.

    As Exhibit E-2, demonstrate that the contracts are not prohibited

    from being traded by United States persons, i.e., the contracts are not

    prohibited security futures or single stock contracts or narrow-based

    index contracts. For non-narrow based stock index futures contracts,

    demonstrate that the contracts have received Commission certification

    pursuant to the procedures set forth in Sec. 30.13 and Appendix D to

    part 30 of this chapter.

    As Exhibit E-3, demonstrate that the contracts are required to be

    cleared.

    As Exhibit E-4, identify any contracts that are linked to a

    contract listed for trading on a United States-registered entity, as

    defined in section 1a(40) of the Act. A linked contract is a contract

    that settles against any price (including the daily or final settlement

    price) of one or more contracts listed for trading on such registered

    entity.

    As Exhibit E-5, identify any contracts that have any other

    relationship with a contract listed for trading on a registered entity,

    i.e., both the foreign board of trade's and the registered entity's

    contract settle to the price of the same third party-constructed index.

    As Exhibit E-6, demonstrate that the contracts are not readily

    susceptible to manipulation. In addition, for each contract to be

    listed, describe each investigation, action, proceeding or case

    involving manipulation and involving such contract in the three years

    preceding the application date, whether initiated by the foreign board

    of trade, a regulatory or self-regulatory authority or agency or other

    government or prosecutorial agency. For each such action, proceeding or

    case, describe the alleged manipulative activity and the current status

    or resolution thereof.

    EXHIBIT F--THE REGULATORY REGIME GOVERNING THE FOREIGN BOARD OF TRADE

    IN ITS HOME COUNTRY \5\ OR COUNTRIES

    With respect to each relevant regulatory regime or authority

    governing the foreign board of trade, attach, as Exhibit F, the

    following (including, where appropriate, an indication as to whether

    the applicable regulatory regime is dependent on the home country's

    classification of the product being traded on the foreign board of

    trade as a future, option, swap, or otherwise, and a description of any

    difference between the applicable regulatory regime for each product

    classification type):

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

    \5\ Where multiple foreign boards of trade subject to the same

    regulatory regime/authority and are similarly regulated are applying

    for registration at the same time, a single Exhibit E-1 may be

    submitted as part of the application for all such foreign boards of

    trade either by one of the applicant foreign boards of trade or by

    the regulatory regime/authority with responsibility to oversee each

    of the multiple foreign boards of trade applying for registration.

    Where an FBOT applying for registration is located in the same

    jurisdiction and subject to the same regulatory regime as a

    registered FBOT, the FBOT applying for registration may include by

    reference, as part of its application, information about the

    regulatory regime that is posted on the Commission's Web site. The

    FBOT applying for registration must certify that the information

    thus included in the application is directly applicable to it and

    remains current and valid.

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

    (1) A description of the regulatory regime/authority's structure,

    resources, staff, and scope of authority; the regulatory regime/

    authority's authorizing statutes, including the source of its authority

    to supervise the foreign board of trade; the rules and policy

    statements issued by the regulator with respect to the authorization

    and continuing oversight of markets, electronic trading systems, and

    clearing organizations; and the financial protections afforded customer

    funds.

    (2) A description of and, where applicable, copies of the laws,

    rules, regulations and policies applicable to: \6\

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

    \6\ To the extent that any such laws, rules, regulations or

    policies were provided as part of Exhibit A-5, they need not be

    duplicated. They may be cross-referenced.

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

    [[Page 80713]]

    (i) The authorization, licensure or registration of the foreign

    board of trade.

    (ii) The regulatory regime/authority's program for the ongoing

    supervision and oversight of the foreign board of trade and the

    enforcement of its trading rules.

    (iii) The financial resource requirements applicable to the

    authorization, licensure or registration of the foreign board of trade

    and the continued operations thereof.

    (iv) The extent to which the IOSCO Principles are used or applied

    by the regulatory regime/authority in its supervision and oversight of

    the foreign board of trade or are incorporated into its rules and

    regulations and the extent to which the regulatory regime/authority

    reviews the applicable trading systems for compliance therewith.

    (v) The extent to which the regulatory regime/authority reviews

    and/or approves the trading rules of the foreign board of trade prior

    to their implementation.

    (vi) The extent to which the regulatory regime/authority reviews

    and/or approves futures, option or swap contracts prior to their being

    listed for trading.

    (vii) The regulatory regime/authority's approach to the detection

    and deterrence of abusive trading practices, market manipulation, and

    other unfair trading practices or disruptions of the market.

    (3) A description of the laws, rules, regulations and policies that

    govern the authorization and ongoing supervision and oversight of

    market intermediaries who may deal with members and other participants

    located in the United States participants, including:

    (i) Recordkeeping requirements.

    (ii) The protection of customer funds.

    (iii) Procedures for dealing with the failure of a market

    intermediary in order to minimize damage and loss to investors and to

    contain systemic risk.

    (4) A description of the regulatory regime/authority's inspection,

    investigation and surveillance powers; and the program pursuant to

    which the regulatory regime/authority uses those powers to inspect,

    investigate, and enforce rules applicable to the foreign board of

    trade.

    (5) For both the foreign board of trade and the clearing

    organization (unless addressed in Supplement S-1), a report confirming

    that the foreign board of trade and clearing organization are in

    regulatory good standing, which report should be prepared subsequent to

    consulting with the regulatory regime/authority governing the

    activities of the foreign board of trade and any associated clearing

    organization. The report should include:

    (i) Confirmation of regulatory status (including proper

    authorization, licensure and registration) of the foreign board of

    trade and clearing organization.

    (ii) Any recent oversight reports generated by the regulatory

    regime/authority that are, in the judgment of the regulatory regime/

    authority, relevant to the foreign board of trade's status as a

    registered foreign board of trade.

    (iii) Disclosure of any significant regulatory concerns, inquiries

    or investigations by the regulatory regime/authority, including any

    concerns, inquiries or investigations with regard to the foreign board

    of trade's arrangements to monitor trading by members or other

    participants located in the United States or the adequacy of the risk

    management controls of the trading or of the clearing system.

    (iv) A description of any investigations (formal or informal) or

    disciplinary actions initiated by the regulatory regime/authority or

    any other self-regulatory, regulatory or governmental entity against

    the foreign board of trade, the clearing organization or any of their

    respective senior officers during the past year.

    (6) For both the foreign board of trade and the clearing

    organization (unless addressed in Supplement S-1), a confirmation that

    the regulatory regime/authority governing the activities of the foreign

    board of trade and the clearing organization agree to cooperate with a

    Commission staff visit subsequent to submission of the application on

    an ``as needed basis,'' the objectives of which will be to, among other

    things, familiarize Commission staff with supervisory staff of the

    regulatory regime/authority; discuss the laws, rules and regulations

    that formed the basis of the application and any changes thereto;

    discuss the cooperation and coordination between the authorities,

    including, without limitation, information sharing arrangements; and

    discuss issues of concern as they may develop from time to time (for

    example, linked contracts or unusual trading that may be of concern to

    Commission surveillance staff).

    EXHIBIT G--THE RULES OF THE FOREIGN BOARD OF TRADE AND ENFORCEMENT

    THEREOF

    Attach, as Exhibit G-1, the following:

    A description of the foreign board of trade's regulatory or

    compliance department, including its size, experience level,

    competencies, duties and responsibilities.

    Attach, as Exhibit G-2, the following:

    A description of the foreign board of trade's trade practice rules,

    including but not limited to rules that address the following--

    (1) Capacity of the foreign board of trade to detect, investigate,

    and sanction persons who violate foreign board of trade rules.

    (2) Prohibition of fraud and abuse, as well as abusive trading

    practices including, but not limited to, wash sales and trading ahead,

    and other market abuses.

    (3) A trade surveillance system appropriate to the foreign board of

    trade and capable of detecting and investigating potential trade

    practice violations.

    (4) An audit trail that captures and retains sufficient order and

    trade-related data to allow the compliance staff to detect trading and

    market abuses and to reconstruct all transactions within a reasonable

    period of time.

    (5) Appropriate resources to conduct real-time supervision of

    trading.

    (6) Sufficient compliance staff and resources, including those

    outsourced or delegated to third parties, to fulfill regulatory

    responsibilities.

    (7) Rules that authorize compliance staff to obtain, from market

    participants, information and cooperation necessary to conduct

    effective rule enforcement and investigations.

    (8) Staff investigations and investigation reports demonstrating

    that the compliance staff investigates suspected rule violations and

    prepares reports of their finding and recommendations.

    (9) Rules determining access requirements with respect to the

    persons that may trade on the foreign board of trade, and the means by

    which they connect to it.

    (10) The requirement that market participants submit to the foreign

    board of trade's jurisdiction as a condition of access to the market.

    Attach, as Exhibit G-3, the following:

    A description of the foreign board of trade's disciplinary rules,

    including but not limited to rules that address the following--

    (1) Disciplinary authority and procedures that empower staff to

    recommend and prosecute disciplinary actions for suspected rule

    violations and that provide the authority to fine, suspend, or expel

    any market participant pursuant to fair and clear standards.

    (2) The issuance of warning letters and/or summary fines for

    specified rule violations.

    (3) The review of investigation reports by a disciplinary panel or

    other authority for issuance of charges or

    [[Page 80714]]

    instructions to investigate further, or findings that an insufficient

    basis exists to issue charges.

    (4) Disciplinary committees of the foreign board of trade that take

    disciplinary action via formal disciplinary processes.

    (5) Whether and how the foreign board of trade articulates its

    rationale for disciplinary decisions.

    (6) The sanctions for particular violations and a discussion of the

    adequacy of sanctions with respect to the violations committed and

    their effectiveness as a deterrent to future violations.

    Attach, as Exhibit G-4, the following:

    A description of the market surveillance program (and any related

    rules), addressing the following--

    The dedicated market surveillance department or the delegation or

    outsourcing of that function, including a general description of the

    staff; the data collected on traders' market activity; data collected

    to determine whether prices are responding to supply and demand; data

    on the size and ownership of deliverable supplies; a description of the

    manner in which the foreign board of trade detects and deters market

    manipulation; for cash-settled contracts, methods of monitoring the

    settlement price or value; and any foreign board of trade position

    limit, position management, large trader or other position reporting

    system.

    EXHIBIT H--INFORMATION SHARING AGREEMENTS AMONG THE COMMISSION, THE

    FOREIGN BOARD OF TRADE, THE CLEARING ORGANIZATION, AND RELEVANT

    REGULATORY AUTHORITIES

    Attach, as Exhibit H, the following:

    (1) A description of the arrangements among the Commission, the

    foreign board of trade, the clearing organization, and the relevant

    foreign regulatory authorities that govern the sharing of information

    regarding the transactions that will be executed pursuant to the

    foreign board of trade's registration with the Commission and the

    clearing and settlement of those transactions. This description should

    address or identify whether and how the foreign board of trade,

    clearing organization, and the regulatory authorities governing the

    activities of the foreign board of trade and clearing organization

    agree to provide directly to the Commission information and

    documentation requested by Commission staff that Commission staff

    determines is needed:

    (i) To evaluate the continued eligibility of the foreign board of

    trade for registration.

    (ii) To enforce compliance with the specified conditions of the

    registration.

    (iii) To enable the CFTC to carry out its duties under the Act and

    Commission regulations and to provide adequate protection to the public

    or registered entities.

    (iv) To respond to potential market abuse associated with trading

    by direct access on the registered foreign board of trade.

    (v) To enable Commission staff to effectively accomplish its

    surveillance responsibilities with respect to a registered entity where

    Commission staff, in its discretion, determines that a contract traded

    on a registered foreign board of trade may affect such ability.

    (2) A statement as to whether and how the foreign board of trade

    has executed the International Information Sharing Memorandum of

    Understanding and Agreement.

    (3) A statement as to whether the regulatory authorities governing

    the activities of the foreign board of trade and clearing organization

    are signatories to the International Organization of Securities

    Commissions Multilateral Memorandum of Understanding. If not, describe

    any substitute information-sharing arrangements that are in place.

    (4) A statement as to whether the regulatory authorities governing

    the activities of the foreign board of trade and clearing organization

    are signatories to the Declaration on Cooperation and Supervision of

    International Futures Exchanges and Clearing Organizations. If not, a

    statement as to whether and how they have committed to share the types

    of information contemplated by the International Information Sharing

    Memorandum of Understanding and Agreement with the Commission, whether

    pursuant to an existing memorandum of understanding or some other

    arrangement.

    EXHIBIT I--ADDITIONAL INFORMATION AND DOCUMENTATION

    Attach, as Exhibit I, any additional information or documentation

    necessary to demonstrate that the requirements for registration

    applicable to the foreign board of trade set forth in Commission

    regulation 48.7 are satisfied.

    Continuation of Appendix to Part 48--Supplement S-1 to Form FBOT

    COMMODITY FUTURES TRADING COMMISSION

    SUPPLEMENT S-1 to FORM FBOT

    CLEARING ORGANIZATION SUPPLEMENT TO FOREIGN BOARD OF TRADE APPLICATION

    FOR REGISTRATION

    SUPPLEMENT INSTRUCTIONS

    DEFINITIONS

    1. Unless the context requires otherwise, all terms used in this

    supplement have the same meaning as in the Commodity Exchange Act, as

    amended (CEA or Act),\7\ and in the regulations of the Commodity

    Futures Trading Commission (Commission or CFTC).\8\

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

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

    \8\ 17 CFR chapter I.

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

    2. For the purposes of this Supplement S-1, the term ``applicant''

    refers to the foreign board of trade applying for registration pursuant

    to CEA section 4(b) and part 48 of the Commission's regulations. The

    term ``clearing organization'' refers to the clearing organization that

    will be clearing trades executed on the trading system of such foreign

    board of trade.

    GENERAL INSTRUCTIONS

    1. A Supplement S-1 (including exhibits) shall be completed by each

    clearing organization that will be clearing trades executed on the

    trading system of a foreign board of trade applying for registration

    with the Commission pursuant to CEA section 4(b) and part 48 of the

    Commission's regulations. Each clearing organization shall submit a

    separate Supplement S-1.

    2. In the event that the clearing functions of the foreign board of

    trade applying for registration will be performed by the foreign board

    of trade itself, the foreign board of trade shall complete this

    Supplement S-1, but need not duplicate information provided on its Form

    FBOT. Specific reference to or incorporation of information or

    documentation (including exhibits) on the associated Form FBOT, where

    appropriate, is acceptable. To the extent a singular document or

    description is responsive to more than one request for information in

    this Supplement S-1, the document or description need only be provided

    once and may be cross-referenced elsewhere.

    3. Supplement S-1, including exhibits, should accompany the foreign

    board of trade's Form FBOT and must

    [[Page 80715]]

    be filed electronically with the Secretary of the Commission at

    FBOTapplications@cftc.gov. Clearing organizations may prepare their own

    Supplement S-1, but must follow the format prescribed herein.

    4. The name of any individual listed in Supplement S-1 shall be

    provided in full (Last Name, First Name and Middle Name or Initial).

    5. Supplement S-1 must be signed by the Chief Executive Officer (or

    the functional equivalent) of the clearing organization who must

    possess the authority to bind the clearing organization.

    6. If this Supplement S-1 is being filed in connection with a new

    application for registration, all applicable items must be answered in

    full. If any item is not applicable, indicate by marking ``none'' or

    ``N/A.''

    7. Submission of a complete Form FBOT and Supplement S-1 (including

    all information, documentation and exhibits requested therein) is

    mandatory and must be received by the Commission before it will begin

    to process a foreign board of trade's application for registration. The

    information provided with a Form FBOT and Supplement S-1 will be used

    to determine whether the Commission should approve or deny registration

    to an applicant. Pursuant to its regulations, the Commission may

    determine that information and/or documentation in addition to that

    requested in the Form FBOT and Supplement S-1 is required from the

    applicant and/or its clearing organization(s) in order to process the

    application for registration or to determine whether registration is

    appropriate.

    8. Pursuant to Commission regulations, an applicant or its clearing

    organization must identify with particularity any information in the

    application (including, but not limited to, any information contained

    in this Supplement S-1), that will be the subject of a request for

    confidential treatment and must provide support for any request for

    confidential treatment pursuant to the procedures set forth in

    Commission regulation 145.9.\9\ Except in cases where confidential

    treatment is granted by the Commission, pursuant to the Freedom of

    Information Act and Commission regulations, information supplied in the

    Supplement S-1 will be included routinely in the public files of the

    Commission and will be available for inspection by any interested

    person.

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

    \9\ 17 CFR 145.9.

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

    9. A Supplement S-1 that is not prepared and executed in compliance

    with applicable requirements and instructions may be returned as not

    acceptable for filing.\10\ Acceptance of either a Form FBOT or

    Supplement S-1 by the Commission, however, shall not constitute a

    finding that the either have been filed as required or that the

    information submitted is verified to be true, current, or complete. The

    Commission may revoke a foreign board of trade's registration, after

    appropriate notice and an opportunity to respond, if the Commission

    determines that a representation made in this Supplement S-1 is found

    to be untrue or materially misleading or if the foreign board of trade

    and/or clearing organization failed to include information in this

    Supplement S-1 that would have been material to the Commission's

    determination as to whether to issue an Order of Registration.

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

    \10\ Applicants and their clearing organizations are encouraged

    to correspond with the Commission's Division of Market Oversight

    regarding any content, procedural, or formatting questions

    encountered in connection with the preparation of a Form FBOT,

    Supplement S-1, or exhibits thereto prior to formally submitting

    those documents to the Commission. When appropriate, potential

    applicants and clearing organizations, as applicable, may provide a

    complete draft Form FBOT and Supplement S-1 to the Division of

    Market Oversight for early review to minimize the risk of having a

    submission returned or otherwise denied as not acceptable for

    filing. Review of draft submissions by any division of the

    Commission and any comments provided by a division of the Commission

    are for consultation purposes only and do not bind the Commission.

    To obtain instructions for submitting drafts, please contact the

    Division of Market Oversight.

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

    10. All documents submitted as part of this Supplement S-1 (or

    exhibits thereto) must be written in English or accompanied by a

    certified English translation.

    UPDATING INFORMATION

    Pursuant to the Commission's regulations, if any information or

    documentation contained in this Supplement S-1 (including exhibits) is

    or becomes inaccurate for any reason prior to the issuance of an Order

    of Registration, an amendment correcting such information must be filed

    promptly with the Commission. A clearing organization also may submit

    an amendment to this Supplement S-1 to correct information that has

    become inaccurate subsequent to the issuance of an Order of

    Registration.

    BILLING CODE 6351-01-P

    [[Page 80716]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.055

    [[Page 80717]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.056

    [[Page 80718]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.057

    [[Page 80719]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.058

    [[Page 80720]]

    [GRAPHIC] [TIFF OMITTED] TR23DE11.059

    BILLING CODE 6351-01-C

    INSTRUCTIONS FOR EXHIBITS TO SUPPLEMENT S-1

    1. The following exhibits must be filed with the Commission by the

    clearing organization(s) that will be clearing trades executed on the

    trading system of a foreign board of trade applying for registration

    with the Commission pursuant to CEA section 4(b) and part 48 of

    Commission's regulations. The information and documentation requested

    relates to the activities of the clearing organization.

    2. The exhibits should be filed in accordance with the General

    Instructions to this Supplement S-1 and labeled as specified herein. If

    any exhibit is not applicable, please specify the exhibit letter and

    number and indicate by marking ``none'' or ``N/A.'' If any exhibit may

    be satisfied by documentation or information submitted in a different

    exhibit, the documentation or information need not be submitted more

    than once--please use internal cross-references where appropriate.

    [[Page 80721]]

    GENERAL REQUIREMENTS

    A foreign board of trade applying for registration must submit

    sufficient information and documentation to successfully demonstrate to

    Commission staff that the foreign board of trade and its clearing

    organization satisfy all of the requirements of Commission regulation

    48.7. With respect to its review of the foreign board of trade's

    clearing organization, the Commission anticipates that such information

    and documentation would necessarily include, but not be limited to, the

    following:

    EXHIBIT A--GENERAL INFORMATION AND DOCUMENTATION

    Attach, as Exhibit A-1, a description of the following for the

    clearing organization:

    Location, history, size, ownership and corporate structure,

    governance and committee structure, and current or anticipated presence

    of staff in the United States.

    Attach, as Exhibit A-2, the following:

    Articles of association, constitution, or other similar

    organizational documents.

    Attach, as Exhibit A-3, the following:

    (1) Membership and participation agreements.

    (2) Clearing agreements.

    Attach, as Exhibit A-4, the following:

    The national statutes, laws and regulations governing the

    activities of the clearing organization and its members.

    Attach, as Exhibit A-5, the following:

    The current rules, regulations, guidelines and bylaws of the

    clearing organization.

    Attach, as Exhibit A-6, the following:

    Evidence of the authorization, licensure or registration of the

    clearing organization pursuant to the regulatory regime in its home

    country jurisdiction(s) and a representation by its regulator(s) that

    it is in good regulatory standing in the capacity in which it is

    authorized, licensed or registered.

    Attach, as Exhibit A-7, the following document:

    A summary of any disciplinary or enforcement actions or proceedings

    that have been brought against the clearing organization, or any of the

    senior officers thereof, in the past five years and the resolution of

    those actions or proceedings.

    Attach, as Exhibit A-8, the following document:

    An undertaking by the chief executive officer(s) (or functional

    equivalent[s]) of the clearing organization to notify Commission staff

    promptly if any of the representations made in connection with this

    supplement cease to be true or correct, or become incomplete or

    misleading.

    EXHIBIT B--MEMBERSHIP CRITERIA

    Attach, as Exhibit B, the following, separately labeling each

    description:

    (1) A description of the categories of membership and participation

    in the clearing organization and the access and clearing privileges

    provided to each by the clearing organization.

    (2) A description of all requirements for each category of

    membership and participation and the manner in which members and other

    participants are required to demonstrate their compliance with these

    requirements. The description should include, but not be limited to,

    the following:

    (i) Professional Qualification. A description of the specific

    professional requirements, qualifications, and/or competencies required

    of members or other participants and/or their staff and a description

    of the process by which the clearing organization confirms compliance

    with such requirements.

    (ii) Authorization, Licensure and Registration. A description of

    any regulatory or self-regulatory authorization, licensure or

    registration requirements that the clearing organization imposes upon,

    or enforces against, its members and other participants including, but

    not limited to any authorization, licensure or registration

    requirements imposed by the regulatory regime/authority in the home

    country jurisdiction(s) of the clearing organization, and a description

    of the process by which the clearing organization confirms compliance

    with such requirements.

    (iii) Financial Integrity. A description of the following:

    (A) The financial resource requirements, standards, guides or

    thresholds required of members and other participants.

    (B) The manner in which the clearing organization evaluates the

    financial resources/holdings of its members or other participants.

    (C) The process by which applicants for clearing membership or

    participation demonstrate compliance with financial requirements

    including:

    (1) Working capital and collateral requirements, and

    (2) Risk management mechanisms.

    (iv) Fit and Proper Standards. A description of any other ways in

    which the clearing organization ensures that potential members/other

    participants meet fit and proper standards.

    EXHIBIT C--BOARD AND/OR COMMITTEE MEMBERSHIP

    Attach, as Exhibit C, the following:

    (1) A description of the requirements applicable to membership on

    the governing board and significant committees of the clearing

    organization.

    (2) A description of how the clearing organization ensures that

    potential governing board and committee members meet these standards.

    (3) A description of the clearing organization's provisions to

    minimize and resolve conflicts of interest with respect to membership

    on the governing board and significant committees of the clearing

    organization.

    (4) A description of the clearing organization's rules with respect

    to the disclosure of material non-public information obtained as a

    result of a member's performance on the governing board or on a

    significant committee.

    EXHIBIT D--SETTLEMENT AND CLEARING

    Attach, as Exhibit D-1, the following:

    A description of the clearing and settlement systems, including,

    but not limited to, the manner in which such systems interface with the

    foreign board of trade's trading system and its members and other

    participants.

    Attach, as Exhibit D-2, the following:

    A certification, signed by the chief executive offer (or functional

    equivalent) of the clearing organization, that the clearing system

    observes (1) the current Recommendations for Central Counterparties

    that have been issued jointly by the Committee on Payment and

    Settlement Systems and the Technical Committee of the International

    Organization of Securities Commissions, as updated, revised or

    otherwise amended, or (2) successor standards, principles and guidance

    for central counterparties or financial market infrastructures adopted

    jointly by the Committee on Payment and Settlement Systems or the

    International Organization of Securities Commissions (RCCPs).

    Attach, as Exhibit D-3, the following:

    A detailed description of the manner in which the clearing

    organization observes each of the RCCPs or successor standards and

    documentation supporting the representations made, including any

    relevant rules or written policies or procedures of the clearing

    organization. Each RCCP should be addressed separately within the

    exhibit.

    [[Page 80722]]

    EXHIBIT E--THE REGULATORY REGIME GOVERNING THE CLEARING ORGANIZATION IN

    ITS HOME COUNTRY OR COUNTRIES

    With respect to each relevant regulatory regime or authority

    governing the clearing organization, attach, as Exhibit E, the

    following:

    (1) A description of the regulatory regime/authority's structure,

    resources, staff and scope of authority.

    (2) The regulatory regime/authority's authorizing statutes,

    including the source of its authority to supervise the clearing

    organization.

    (3) A description of and, where applicable, copies of the laws,

    rules, regulations and policies applicable to: \11\

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

    \11\ To the extent that any such laws, rules, regulations or

    policies were provided as part of Exhibit A-4, they need not be

    duplicated. They may be cross-referenced.

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

    (i) The authorization, licensure or registration of the clearing

    organization.

    (ii) The financial resource requirements applicable to the

    authorization, licensure or registration of the clearing organization

    and the continued operations thereof.

    (iii) The regulatory regime/authority's program for the ongoing

    supervision and oversight of the clearing organization and the

    enforcement of its clearing rules.

    (iv) The extent to which the current RCCPs are used or applied by

    the regulatory regime/authority in its supervision and oversight of the

    clearing organization or are incorporated into its rules and

    regulations and the extent to which the regulatory regime/authority

    reviews the clearing systems for compliance therewith.

    (v) The extent to which the regulatory regime/authority reviews

    and/or approves the rules of the clearing organization prior to their

    implementation.

    (vi) The regulatory regime/authority's inspection, investigation

    and surveillance powers; and the program pursuant to which the

    regulatory regime/authority uses those powers to inspect, investigate,

    sanction, and enforce rules applicable to the clearing organization.

    (vii) The financial protection afforded customer funds.

    EXHIBIT F--THE RULES OF THE CLEARING ORGANIZATION AND ENFORCEMENT

    THEREOF

    Attach, as Exhibit F-1, the following:

    A description of the clearing organization's regulatory or

    compliance department, including its size, experience level,

    competencies, duties and responsibilities of staff.

    Attach, as Exhibit F-2, the following:

    A description of the clearing organization's rules and how they are

    enforced, with reference to any rules provided as part of Exhibit A-5

    that require the clearing organization to comply with one or more of

    the RCCPs.

    Attach, as Exhibit F-3, the following, to the extent not included

    in Exhibit F-2:

    A description of the clearing organization's disciplinary rules,

    including but not limited to rules that address the following--

    (1) Disciplinary authority and procedures that empower staff to

    recommend and prosecute disciplinary actions for suspected rule

    violations and that provide the authority to fine, suspend, or expel

    any clearing participant pursuant to fair and clear standards.

    (2) The issuance of warning letters and/or summary fines for

    specified rule violations.

    (3) The review of investigation reports by a disciplinary panel or

    other authority for issuance of charges or instructions to investigate

    further, or findings that an insufficient basis exists to issue

    charges.

    (4) Disciplinary committees of the clearing organization that take

    disciplinary action via formal disciplinary processes.

    (5) Whether and how the clearing organization articulates its

    rationale for disciplinary decisions.

    (6) The sanctions for particular violations and a discussion of the

    adequacy of sanctions with respect to the violations committed and

    their effectiveness as deterrents to future violations.

    Attach, as Exhibit F-4, the following, to the extent not provided

    in Exhibit F-2:

    A demonstration that the clearing organization is authorized by

    rule or contractual agreement to obtain, from members and other

    participants, any information and cooperation necessary to conduct

    investigations, to effectively enforce its rules, and to ensure

    compliance with the conditions of registration.

    EXHIBIT G--INFORMATION SHARING AGREEMENTS AMONG THE COMMISSION, THE

    FOREIGN BOARD OF TRADE, THE CLEARING ORGANIZATION, AND RELEVANT

    REGULATORY AUTHORITIES

    Attach, as Exhibit G, the following:

    (1) A description of the arrangements among the Commission, the

    foreign board of trade, the clearing organization, and the relevant

    foreign regulatory authorities that govern the sharing of information

    regarding the transactions that will be executed pursuant to the

    foreign board of trade's registration with the Commission and the

    clearing and settlement of those transactions. This description should

    address or identify whether and how the foreign board of trade,

    clearing organization, and the regulatory authorities governing the

    activities of the foreign board of trade and clearing organization

    agree to provide directly to the Commission information and

    documentation requested by Commission staff that Commission staff

    determines is needed:

    (i) To evaluate the continued eligibility of the foreign board of

    trade for registration.

    (ii) To enforce compliance with the specified conditions of the

    registration.

    (iii) To enable the CFTC to carry out its duties under the Act and

    Commission regulations and to provide adequate protection to the public

    or registered entities.

    (iv) To respond to potential market abuse associated with trading

    by direct access on the registered foreign board of trade.

    (v) To enable Commission staff to effectively accomplish its

    surveillance responsibilities with respect to a registered entity where

    Commission staff, in its discretion, determines that a contract traded

    on a registered foreign board of trade may affect such ability.

    (2) A statement as to whether the regulatory authorities governing

    the activities of the foreign board of trade and clearing organization

    are signatories to the International Organization of Securities

    Commissions Multilateral Memorandum of Understanding. If not, describe

    any substitute information-sharing arrangements that are in place.

    (3) A statement as to whether the regulatory authorities governing

    the activities of the foreign board of trade and clearing organization

    are signatories to the Declaration on Cooperation and Supervision of

    International Futures Exchanges and Clearing Organizations. If not, a

    statement as to whether and how they have committed to share the types

    of information contemplated by the International Information Sharing

    Memorandum of Understanding and Agreement with the Commission, whether

    pursuant to an existing memorandum of understanding or some other

    arrangement.

    EXHIBIT H--ADDITIONAL INFORMATION AND DOCUMENTATION

    Attach, as EXHIBIT H, any additional information or documentation

    necessary to demonstrate that the requirements for registration

    applicable to the clearing

    [[Page 80723]]

    organization or clearing system set forth in Commission regulation 48.7

    are satisfied.

    Issued in Washington, DC, December 5, 2011, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note: The following appendices will not appear in the Code of

    Federal Regulations

    Appendices to Final Rule--Registration of Foreign Boards of

    Trade--Commission Voting Summary and Statements of Commissioners

    Appendix 1--Commission Voting Summary

    In this matter, Chairman Gensler and Commissioners Sommers,

    Chilton, O'Malia and Wetjen voted in the affirmative; no

    Commissioner noted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule to implement a registration system for

    Foreign Boards of Trade (FBOTs) seeking to make futures and swaps

    contracts directly available to U.S. market participants. This

    registration system replaces the Commodity Futures Trading

    Commission's current practice of staff issuing no-action letters to

    FBOTs to permit them to provide such direct access for futures

    contracts. Importantly, the registration system will bring

    consistency, standardization and transparency--both for applicants

    and the public--to the process. In order to directly access U.S.

    market participants, the FBOTs and their clearing organizations must

    be subject to comparable and comprehensive supervision and

    regulation in their home countries and meet certain standards in the

    rule.

    [FR Doc. 2011-31637 Filed 12-22-11; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 23, 2011



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