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2012-12746

  • Federal Register, Volume 77 Issue 118 (Tuesday, June 19, 2012)[Federal Register Volume 77, Number 118 (Tuesday, June 19, 2012)]

    [Rules and Regulations]

    [Pages 36611-36726]

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

    [FR Doc No: 2012-12746]

    [[Page 36611]]

    Vol. 77

    Tuesday,

    No. 118

    June 19, 2012

    Part II

    Commodity Futures Trading Commission

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    17 CFR Parts 1, 16, and 38

    Core Principles and Other Requirements for Designated Contract Markets;

    Final Rule

    Federal Register / Vol. 77, No. 118 / Tuesday, June 19, 2012 / Rules

    and Regulations

    [[Page 36612]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1, 16, and 38

    RIN 3038-AD09

    Core Principles and Other Requirements for Designated Contract

    Markets

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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

    ``CFTC'') is adopting new and amended rules, guidance, and acceptable

    practices to implement certain statutory provisions enacted by Title

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

    (``Dodd-Frank Act''). The final rules, guidance and acceptable

    practices, which apply to the designation and operation of contract

    markets, implement the Dodd-Frank Act's new statutory framework that,

    among other things, amends section 5 of the Commodity Exchange Act

    (``the Act'' or ``CEA'') concerning designation and operation of

    contract markets, and adds a new CEA section 2(h)(8) to mandate the

    listing, trading and execution of certain swaps on designated contract

    markets (``DCMs'').

    DATES: Effective date: The rules will become effective August 20, 2012.

    Compliance date: The compliance date for contract markets that have

    obtained designation on, or prior to, the date of publication of this

    release: Designated contract markets must comply with the rules adopted

    in this release (except Sec. 38.151(a)) by October 17, 2012; and must

    comply with Sec. 38.151(a) in accordance with the timeline described

    in SUPPLEMENTARY INFORMATION.

    FOR FURTHER INFORMATION CONTACT: Nancy Markowitz, Deputy Director, 202-

    418-5453, nmarkowitz@cftc.gov, Nadia Zakir, Special Counsel, 202-418-

    5720, nzakir@cftc.gov, or Aaron Brodsky, Attorney-Advisor, 202-418-

    5349, abrodsky@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. Title VII of the Dodd-Frank Act

    B. The Dodd-Frank Act Amendments Applicable to Designated

    Contract Markets

    II. Final Rules

    A. Repeal of Designation Criteria

    B. Adoption of Rules and Revised Guidance and Acceptable

    Practices

    C. General Regulations (Subpart A)

    1. Sec. 38.1-Scope

    2. Sec. 38.2-Exempt Provisions

    3. Sec. 38.3--Procedures for Designation

    4. Sec. 38.4--Procedures for Listing Products and Implementing

    Designated Contract Market Rules

    5. Sec. 38.5--Information Relating to Contract Market

    Compliance

    6. Sec. 38.7--Prohibited Use of Data Collected for Regulatory

    Purposes

    7. Sec. 38.8--Listing of Swaps on a Designated Contract Market

    8. Sec. 38.9--Boards of Trade Operating Both a Designated

    Contract Market and a Swap Execution Facility

    9. Sec. 38.10--Reporting of Swaps Traded on a Designated

    Contract Market

    D. Core Principles

    1. Subpart B--Designation as Contract Market

    2. Subpart C--Compliance With Rules

    i. Sec. 38.150--Core Principle 2

    ii. Sec. 38.151--Access Requirements

    iii. Sec. 38.152--Abusive Trading Practices Prohibited

    iv. Sec. 38.153--Capacity to Detect and Investigate Rule

    Violations

    v. Sec. 38.154--Regulatory Services Provided by a Third Party

    vi. Sec. 38.155--Compliance Staff and Resources

    vii. Sec. 38.156--Automated Trade Surveillance System

    viii. Sec. 38.157--Real-Time Market Monitoring

    ix. Sec. 38.158--Investigations and Investigation Reports

    x. Sec. 38.159--Ability to Obtain Information

    xi. Sec. 38.160--Additional Sources for Compliance

    3. Subpart D--Contracts Not Readily Subject to Manipulation

    4. Subpart E--Prevention of Market Disruption

    i. Sec. 38.251--General Requirements

    ii. Sec. 38.252--Additional Requirements for Physical-Delivery

    Contracts

    iii. Sec. 38.253--Additional Requirements for Cash-Settled

    Contracts

    iv. Sec. 38.254--Ability to Obtain Information

    v. Sec. 38.255--Risk Controls for Trading

    vi. Sec. 38.256--Trade Reconstruction

    vii. Sec. 38.257--Regulatory Service Provider

    viii. Sec. 38.258--Additional Sources for Compliance

    5. Subpart F--Position Limitations or Accountability

    6. Subpart G--Emergency Authority

    7. Subpart H--Availability of General Information

    i. Sec. 38.401(a)--General

    ii. Sec. 38.401(b)--Accuracy Requirement

    iii. Sec. 38.401(c)--Notice of Regulatory Submissions

    iv. Sec. 38.401(d)--Rulebook

    8. Subpart I--Daily Publication of Trading Information

    9. Subpart J--Execution of Transactions

    10. Subpart K--Trade Information

    i. Sec. 38.551--Audit Trail Required

    ii. Sec. 38.552--Elements of an Acceptable Audit Trail Program

    iii. Sec. 38.553--Enforcement of Audit Trail Requirements

    11. Subpart L--Financial Integrity of Transactions

    i. Sec. 38.601--Mandatory Clearing

    ii. Sec. 38.602--General Financial Integrity

    iii. Sec. 38.603--Protection of Customer Funds

    iv. Sec. 38.604--Financial Surveillance

    v. Sec. 38.605--Requirements for Financial Surveillance Program

    vi. Sec. 38.606--Financial Regulatory Services Provided by a

    Third Party

    vii. Sec. 38.607--Direct Access

    12. Subpart M--Protection of Markets and Market Participants

    i. Sec. 38.651--Additional Sources for Compliance

    13. Subpart N--Disciplinary Procedures

    i. Sec. 38.701--Enforcement Staff

    ii. Sec. 38.702--Disciplinary Panels

    iii. Sec. 38.703--Review of Investigation Report

    iv. Sec. 38.704--Notice of Charges

    v. Sec. 38.705--Right to Representation

    vi. Sec. 38.706--Answer to Charges

    vii. Sec. 38.707--Admission or Failure To Deny Charges

    viii. Sec. 38.708--Denial of Charges and Right to Hearing

    ix. Sec. 38.709--Settlement Offers

    x. Sec. 38.710--Hearings

    xi. Sec. 38.711--Decisions

    xii. Sec. 38.712--Right To Appeal

    xiii. Sec. 38.713--Final Decisions

    xiv. Sec. 38.714--Disciplinary Sanctions

    xv. Sec. 38.715--Summary Fines

    xvi. Sec. 38.716--Emergency Disciplinary Actions

    14. Subpart O--Dispute Resolution

    15. Subpart P--Governance Fitness Standards

    16. Subpart Q--Conflicts of Interest

    17. Subpart R--Composition of Governing Boards of Contract

    Markets

    18. Subpart S--Recordkeeping

    i. Sec. 38.951--Additional Sources for Compliance

    19. Subpart T--Antitrust Considerations

    20. Subpart U--System Safeguards

    i. Sec. 38.1051--General Requirements

    21. Subpart V--Financial Resources

    i. Sec. 38.1100(a)--Core Principle 21, and Sec. 38.1101(a) and

    (c)--General Rule and Computation of Financial Resources Requirement

    ii. Sec. 38.1101(b)--Types of Financial Resources

    iii. Sec. 38.1101(d)--Valuation of Financial Resources

    iv. Sec. 38.1101(e)--Liquidity of Financial Resources

    v. Sec. 38.1101(f)--Reporting Requirements

    22. Subpart W--Diversity of Boards of Directors

    23. Subpart X--Securities and Exchange Commission

    i. Sec. 38.1200 (Core Principle 23), Sec. 38.1201 (Additional

    Sources for Compliance), and Guidance in Appendix B.

    III. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    C. Cost Benefit Considerations

    IV. Text of Final Rules

    I. Background

    A. Title VII of the Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    [[Page 36613]]

    Reform and Consumer Protection Act.\1\ Title VII of the Dodd-Frank Act

    \2\ amended the CEA\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) (``Dodd-Frank Act'').

    \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. (amended 2010).

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    B. The Dodd-Frank Act Amendments Applicable to Designated Contract

    Markets

    In this final rulemaking, the Commission is establishing the

    regulatory obligations that each DCM must meet in order to comply with

    section 5 of the CEA, as amended by the Dodd-Frank Act, initially upon

    designation and thereafter on an ongoing basis.

    Section 735 of the Dodd-Frank Act amended section 5 of the CEA

    pertaining to the designation and operation of contract markets, by:

    (i) Eliminating the eight criteria that must be met for designation as

    a contract market, contained in former section 5(b) of the CEA; (ii)

    amending most of the core principles, including incorporating most of

    the substantive elements of the former designation criteria, and

    requiring that all DCMs demonstrate compliance with each of the core

    principles as a condition of obtaining and maintaining designation as a

    contract market; and (iii) adding five new core principles, including

    Core Principle 13 (Disciplinary Procedures), Core Principle 20 (System

    Safeguards), Core Principle 21 (Financial Resources), Core Principle 22

    (Diversity of Boards of Directors), and Core Principle 23 (Securities

    and Exchange Commission).\4\

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    \4\ New Core Principle 13 is verbatim of former Designation

    Criterion 6.

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    In addition, section 723(a)(3) of the Dodd-Frank Act added section

    2(h)(8) of the CEA to require, among other things, that swaps that are

    required to be cleared must be executed either on a DCM or on a Swap

    Execution Facility (``SEF''),\5\ unless no DCM or SEF makes the swap

    ``available to trade.'' \6\ Section 5h(a)(1) of the CEA, as amended by

    the Dodd-Frank Act, also prohibits any person from operating a facility

    for the trading and processing of swaps unless the facility is

    registered as a SEF or a DCM. Accordingly, unless otherwise specified

    in this release, each of the 23 core principles and the final

    implementing regulations, guidance and acceptable practices, apply to

    all ``contracts'' listed on a DCM, which will include swaps, futures

    and options contracts. The rules adopted in this release also implement

    relevant provisions related to the trading and execution of swaps on

    DCMs.

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    \5\ The Commission proposed rules governing the registration and

    operation of SEFs in a separate, rulemaking titled ``Core Principles

    and Other Requirements for Swap Execution Facilities.'' 76 FR 1214,

    Jan. 7, 2011. The core principles applicable to DCMs pursuant to

    section 5 of the Act and the core principles applicable to swap

    execution facilities pursuant to section 5h of the Act include, in a

    number of instances, similar or identical language. Although the

    Commission's interpretation of specific language in section 5 of the

    Act may inform its interpretation of similar or identical language

    in section 5h of the Act, and vice versa, the Commission may

    interpret the core principles applicable to each category of

    registered entity in light of that category's unique market

    characteristics and regulatory functions and responsibilities.

    \6\ See section 723(a) of the Dodd-Frank Act. The Commission

    separately proposed rules implementing the ``made available to

    trade'' mandate. See 76 FR 77728, Dec. 14, 2011.

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    On December 22, 2010, the Commission published proposed regulations

    to implement the statutory provisions of the Dodd-Frank Act relevant to

    the designation and operation of DCMs (``DCM NPRM''), under part 38 of

    the Commission's regulations.\7\

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    \7\ 75 FR 80572, Dec. 22, 2010 (``DCM NPRM''). The DCM NPRM also

    proposed revisions to related regulations under parts 1 and 16.

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    The proposed rulemaking was subject to an initial 60-day comment

    period, which closed on February 22, 2011. The comment period was

    subsequently reopened on two separate occasions, each time for an

    additional 30 days.\8\ The Commission received numerous written

    comments from members of the public, and Commission staff participated

    in several meetings with market participants, including representatives

    of both currently-designated and prospective contract markets.\9\

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    \8\ See 76 FR 14825, Mar. 18, 2011; see also 76 FR 25274, May 4,

    2011.

    \9\ The Commission received comment letters from numerous

    parties, including the following: ACM Capital Management; Alice

    Corporation; Alternative Investment Management Association; American

    Bankers Association and ABA Securities Association; American Gas

    Association; Argus Media, Inc. (``Argus''); Better Markets, Inc.

    (``Better Markets''); BJ D'Milli; BlackRock, Inc. (``BlackRock'');

    Bloomberg; CBOE Futures Exchanges (``CFE''); CME Group Inc.

    (``CME'') (CME's comments were submitted on behalf of its four DCMs:

    the Chicago Mercantile Exchange, Inc., the Board of Trade of the

    City of Chicago, Inc., the New York Mercantile Exchange, Inc., and

    the Commodity Exchange, Inc.); Citadel; Committee on Capital Markets

    Regulation; Committee on Futures and Derivatives Regulation of the

    New York City Bar Association; DC Energy; The Depository Trust &

    Clearing Corporation; East Coast Petroleum; ELX Futures, L.P.

    (``ELX''); Eris Exchange, LLC (``Eris''); Electric Trade

    Association; FIA/FSR/IIB/IRI/ISDA/SIFMA/US Chamber of Commercial

    (jointly); Green Exchange LLC (``GreenX''); ICAP;

    IntercontinentalExchange, Inc. (``ICE'') (ICE's comments were

    submitted on behalf of its four regulated futures exchanges: ICE

    Future US, Chicago Climate Futures Exchange, ICE Futures Europe, and

    ICE Futures Canada); International Swaps and Derivatives Association

    (``ISDA''); Kansas City Board of Trade (``KCBT''); Markit;

    MarkitSERV; Minneapolis Grain Exchange, Inc. (``MGEX''); Noble

    Energy; NYSE Liffe US LLC (``NYSE Liffe''); Nodal Exchange, LLC

    (``Nodal''); Todd Petzel; OneChicago LLC Futures Exchange (``OCX'');

    Swaps and Derivatives Market Association; Tradeweb; Trading

    Technologies International, Inc. (``Trading Technologies'');

    Wholesale Markets Brokers' Association; Working Group of Commercial

    Energy Firms (Hunton and Williams); and joint letter from CME, NYSE

    Liffe, GreenX, Eris Exchange, CBOE Futures Exchange, KCBT and MGEX

    (``CME Joint Comment Letter''). A number of comment letters solely

    addressed the implementation phasing for Dodd-Frank rulemakings.

    Those comments are outside the scope of this rulemaking and are more

    appropriate to the recent rulemaking pertaining to ``Swap

    Transaction Compliance and Implementation Schedule: Clearing and

    Trade Execution Requirements under section 2(h) of the CEA.'' See 76

    FR 58186, Sep. 20, 2011.

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    In this notice of final rulemaking, the Commission is adopting many

    of the proposed rules, guidance, and acceptable practices. However, as

    a result of the written comments received and dialogue with market

    participants, the Commission has revised and/or eliminated a number of

    regulations that were proposed in the DCM NPRM, and in a number of

    instances, has codified guidance and/or acceptable practices in lieu of

    the proposed rules.

    The Commission also received a number of comments pertaining to the

    costs and/or benefits of certain proposed regulations. The Commission

    has undertaken an extensive review of the costs and benefits of the

    regulations being adopted in this release pursuant to section 15(a) of

    the CEA,\10\ as is further discussed in the cost benefit consideration

    section of this final rulemaking. As discussed in that section, the

    Commission has determined that the final rules appropriately balance

    the costs and benefits associated with oversight of DCMs pursuant to

    the

    [[Page 36614]]

    CEA, as amended by the Dodd-Frank Act.

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    \10\ 7 U.S.C. 19.

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    The Commission is hereby adopting final regulations to implement

    section 5 of the CEA, as well as the requirements of sections 2(h)(8)

    and 5h(a)(1) of the CEA, as amended by the Dodd-Frank Act, as

    applicable to DCMs. The final regulations will eliminate the guidance

    on compliance with the designation criteria for DCMs, implement new and

    revised regulations for the core principles, and codify certain

    requirements and practices that have evolved over the years and are

    commonly accepted in the industry.

    The final regulations adopted herein will become effective 60 days

    after publication in the Federal Register. Contract markets that have

    obtained designation prior to or at the time of the publication of this

    release must comply with the new and revised rules adopted in this

    release, except Sec. 38.151(a), within 60 days of the effective date

    of this release; and must comply with Sec. 38.151(a) in accordance

    with the timeline described in the discussion of that rule below.

    II. Final Rules

    A. Repeal of Designation Criteria

    Section 735 of the Dodd-Frank Act eliminated the eight DCM

    designation criteria in former CEA section 5(b), and largely

    incorporated the substance of those criteria into the core principles.

    Accordingly, the Commission is eliminating the guidance on compliance

    with the designation criteria for DCMs contained in appendix A to part

    38.\11\

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    \11\ As proposed in the DCM NPRM, appendix A to part 38 will

    contain the application form for contract market designation.

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    B. Adoption of Rules and Revised Guidance and Acceptable Practices

    To implement section 735 of the Dodd-Frank Act, the Commission

    proposed a number of new and revised rules, guidance, and acceptable

    practices to implement the new and revised core principles. As

    described in the DCM NPRM, the Commission evaluated the preexisting

    regulatory framework for overseeing DCMs, which consisted largely of

    guidance and acceptable practices, in order to update those provisions

    and to determine which core principles would benefit from having new or

    revised derivative regulations. Based on that review, and in view of

    the Dodd-Frank Act's amendments to section 5(d)(1) of the CEA,\12\

    which specifically provides the Commission with discretion to

    determine, by rule or regulation, the manner in which boards of trade

    comply with the core principles, the Commission proposed revised

    guidance and acceptable practices for some core principles and, for

    several core principles, proposed to codify rules in lieu of guidance

    and acceptable practices.\13\

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    \12\ Former Core Principle 1 stated, among other things, that

    boards of trade ``shall have reasonable discretion in establishing

    the manner in which they comply with the core principles.'' This

    ``reasonable discretion'' provision underpinned the Commission's use

    of core principle guidance and acceptable practices. Section 735 of

    the Dodd-Frank Act amended this provision to include the proviso

    that ``[u]nless otherwise determined by the Commission by rule or

    regulation * * *,'' boards of trade shall have reasonable discretion

    in establishing the manner in which they comply with the core

    principles. See 7 U.S.C. 7(d)(1)(amended 2010).

    \13\ Guidance provides DCMs and DCM applicants with contextual

    information regarding the core principles, including important

    concerns which the Commission believes should be taken into account

    in complying with specific core principles. In contrast, the

    acceptable practices are more specific than guidance and provide

    examples of how DCMs may satisfy particular requirements of the core

    principles; they do not, however, establish mandatory means of

    compliance. Acceptable practices are intended to assist DCMs by

    establishing non-exclusive safe harbors. The safe harbors apply only

    to compliance with specific aspects of the core principle, and do

    not protect the contract market with respect to charges of

    violations of other sections of the CEA or other aspects of the core

    principle.

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    Summary of Comments

    The Commission received a number of comments generally pertaining

    to the proposed codification of rules in lieu of guidance and/or

    acceptable practices. Several commenters contended that the principles-

    based regime has permitted the U.S. futures markets to prosper and keep

    pace with rapidly changing technology and market needs, and that a

    rules-based regime will stifle growth, innovation, and competition.\14\

    Others noted that the futures markets' resilience throughout the

    financial crisis is evidence in support of the effectiveness of a

    principles-based regime.\15\ Commenters also argued that the

    prescriptive nature of the rules will result in increased costs for

    DCMs and for the Commission \16\ and that current industry best

    practices are subject to change and are only able to evolve through

    continuous improvement and innovation, which is only possible under a

    flexible regime.\17\ Several commenters provided comments on the

    codification of specific rules in lieu of guidance and/or acceptable

    practices, which are addressed below, in the discussion of the

    respective rules.

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    \14\ CME Comment Letter at 3-4 (Feb. 22, 2011); Eris Comment

    Letter at 1-2 (Feb. 22, 2011); GreenX Comment Letter at 1 (Feb. 22,

    2011); ICE Comment Letter at 3 (Feb. 22, 2011); KCBT Comment Letter

    at 1, 9 (Feb. 22, 2011).

    \15\ CME Comment Letter at 3 (Feb. 22, 2011); ICE Comment Letter

    at 2 (Feb. 22, 2011); KCBT Comment Letter at 9 (Feb. 22, 2011); Eris

    Comment Letter at 3 (June 3, 2011).

    \16\ CME Comment Letter at 3 (Feb. 22, 2011); GreenX Comment

    Letter at 2 (Feb. 2, 2011); MGEX Comment Letter at 2 (Feb. 22,

    2011).

    \17\ CME Comment Letter at 3 (Feb. 22, 2011); GreenX Comment

    Letter at 2, 11 (Feb. 22, 2011).

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    Discussion

    This final rulemaking largely adopts the framework of rules,

    guidance and acceptable practices that was proposed in the DCM NPRM,

    with certain substantive revisions to the regulations, as described in

    this release. For several core principles, the Commission is

    maintaining the rules, guidance and acceptable practices, as proposed,

    with appropriate revisions arising from the Commission's consideration

    of comments. In several instances, this final rulemaking converts

    proposed rules to guidance and/or acceptable practices for various DCM

    compliance practices.

    In determining whether to codify a compliance practice in the form

    of a rule or guidance/acceptable practice, the Commission was guided by

    whether the practice consisted of a commonly-accepted industry

    practice. Where there is a standard industry practice that the

    Commission has determined to be an acceptable compliance practice, the

    Commission believes that the promulgation of clear-cut regulations will

    provide greater legal certainty and transparency to DCMs in determining

    their compliance obligations, and to market participants in determining

    their obligations as DCM members, and will facilitate the enforcement

    of such provisions. Several of the rules adopted in this notice of

    final rulemaking largely codify practices that are commonly accepted in

    the industry and are currently being undertaken by most, if not all,

    DCMs.

    In the context of each individual rule, the Commission also was

    guided by comments that provided a basis for greater flexibility or, in

    some instances, for greater specificity, in respect to the stated

    compliance obligation.

    In addition, the Commission's determination to codify certain

    compliance practices as rules, rather than as guidance/acceptable

    practices, is based on its long experience in regulating DCMs. In

    numerous instances, the rules codify practices that have evolved from

    the Division of Market Oversight's (``DMO'') recommendations in the

    context of Rule Enforcement Reviews (``RERs'').\18\

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    \18\ As noted in the DCM NPRM, the RERs are the cornerstone of

    the Commission's oversight program, serving as a key tool for

    monitoring a DCM's compliance with the core principles, and also as

    a primary means for identifying industry trends and DCM best

    practices for self-regulation. See DCM NPRM at 80574-75 for a more

    detailed discussion of RERs.

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    [[Page 36615]]

    Some commenters claimed that the Commission's approach was overly

    prescriptive and inconsistent with the core principle framework.\19\

    While maintaining the core principle framework as part of the Dodd-

    Frank Act, Congress revised DCM Core Principle 1 to specifically

    provide the Commission with discretion to determine, by rule or

    regulation, the manner in which boards of trade are to comply with the

    core principles.\20\ Accordingly, in circumstances where a standard

    industry practice has developed, the Commission is adopting rules in

    order to provide greater legal certainty and transparency to DCMs and

    market participants. In other circumstances, the Commission is

    maintaining the guidance and acceptable practices framework,

    particularly where the Commission experienced that a standard

    compliance approach has not evolved within the industry over the years.

    In those instances, the final regulations maintain the flexibility for

    DCMs to determine the specific manner in which they choose to satisfy

    their compliance obligations.

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    \19\ See e.g., CME Comment Letters (Feb. 22, 2011, Apr. 18,

    2011, Jun. 3, 2011 and Aug. 3, 2011); MGEX Comment Letter (Jun. 3,

    2011); GreenX Comment Letter (Feb. 22, 2011).

    \20\ 7 U.S.C. 7(d)(1)(amended 2010).

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

    Several commenters claimed that the codification of additional

    rules will increase the Commission's costs of regulating DCMs. The

    Commission believes that a regulatory framework consisting of a higher

    proportion of rules, in addition to guidance and acceptable practices,

    may in fact be less costly to administer, as DCMs will have a clear

    understanding of what is required in order to demonstrate compliance

    with the core principles. The costs and benefits of this final

    rulemaking are described further in the Cost Benefit Consideration

    discussion of this release.

    C. General Regulations (Subpart A)

    The regulations in this final rulemaking are codified in a series

    of subparts under part 38. The general regulations consisting of

    Sec. Sec. 38.1 through 38.10 \21\ are codified in subpart A, and the

    regulations applicable to each of the 23 core principles are codified

    in subparts B through X, respectively.\22\

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    \21\ The DCM NPRM did not propose any revisions to Sec. 38.6 of

    the Commission's regulations.

    \22\ Each of these subparts begins with a regulation containing

    the language of the core principle.

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    1. Sec. 38.1--Scope

    The Commission proposed non-substantive revisions to Sec. 38.1

    that corrected cross-references to other sections of the Commission's

    regulations. Section 38.1 is adopted as proposed.

    2. Sec. 38.2--Applicable Provisions

    Proposed Sec. 38.2 specified the Commission regulations that are

    applicable to DCMs. In addition to revising the heading, the proposed

    revisions to Sec. 38.2 updated the list of Commission regulations that

    are applicable to DCMs, including the relevant regulations that have

    been codified, or are proposed to be codified, upon the Commission's

    finalization of the relevant rulemakings that culminated upon enactment

    of the Dodd-Frank Act. These included regulations relating to real-time

    reporting of swaps and the determination of appropriate block size for

    swaps under part 43, requirements for swap data recordkeeping and

    reporting under part 45, designation requirements for swap data

    repositories under part 49, and position limits under part 150 and/or

    part 151, as applicable.

    Discussion

    The Commission is revising Sec. 38.2 to specify the Commission

    regulations from which DCMs will be exempt. The original intent of

    Sec. 38.2 was to exempt DCMs from various Commission regulations under

    Title 17 that were codified prior to the CFMA. Proposed Sec. 38.2

    listed the specific regulations with which DCMs were required to

    comply, with the understanding that the DCM was exempt from those not

    listed. In this final rulemaking, to add clarity, the Commission is

    revising the title of the rule to ``Exempt Provisions'' and is

    modifying Sec. 38.2 to reflect the list of regulations from which DCMs

    are exempt. Those regulations include: Sec. 1.35(e)-(j), Sec.

    1.39(b), Sec. 1.44, Sec. 1.53, Sec. 1.54, Sec. 1.59(b) and (c),

    Sec. 1.62, Sec. 1.63(a) and (b) and (d) and(f), Sec. 1.64, Sec.

    1.69, part 8, Sec. 100.1, Sec. 155.2, and part 156. While Sec. 38.2

    likely will be amended if and when the referenced rules are eliminated

    from the regulations or modified, this revised approach will eliminate

    the need for the Commission to continually update Sec. 38.2 when new

    regulations with which DCMs must comply are codified.

    3. Sec. 38.3--Procedures for Designation

    Sec. 38.3(a)--Application Procedures

    Among the proposed revisions to Sec. 38.3, which contains the

    application and designation procedures for DCM applicants, the

    Commission proposed to eliminate the 90-day expedited review procedures

    for DCM applications, which currently are codified in Sec. 38.3(a)(2).

    The proposed modification would result in all DCM applications being

    subject to the statutory 180-day review procedures provided under

    section 6(a) of the CEA and Sec. 38.3(a)(1) of the Commission's

    regulations.\23\

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

    \23\ 7 U.S.C. 8(a).

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

    As noted above, the Dodd-Frank Act eliminated the standalone DCM

    designation criteria. Accordingly, the Commission proposed re-

    designating appendix A to include a new DCM application form (``Form

    DCM'') that contains comprehensive instructions and a list of necessary

    information and documentation required to initiate a DCM designation

    proceeding. All new applicants seeking designation would submit to the

    Commission a completed form, including the information required in each

    exhibit.\24\

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

    \24\ Form DCM would also be used by applicants amending a

    pending application and existing DCMs applying for an amendment to

    their order of designation.

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

    The DCM NPRM also proposed certain revisions to Sec. 38.3 that

    would require DCM applications and certain related DCM filings to be

    filed with the Secretary of the Commission in an electronic format, via

    the Internet, email, or other means of direct electronic submission as

    approved by the Commission.\25\

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

    \25\ The proposed electronic filing requirements would

    specifically apply to DCM applications, reinstatements, requests for

    transfer of designations, requests for withdrawal of application for

    designation, and vacation of designations. As explained in the DCM

    NPRM, the proposed revisions would make the DCM application filing

    process consistent with the electronic process used for filing rule

    and product submissions under parts 39 and 40 of the Commission's

    regulations. See 17 CFR parts 39 and 40. In addition to these

    substantive revisions, many of the proposed revisions to Sec. 38.3

    were non-substantive and were intended to clarify the rule.

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

    Summary of Comments

    Two commenters discussed the proposed elimination of the 90-day

    expedited review process for DCM applications in Sec. 38.3(a)(1).

    Nodal expressed support for the proposed elimination of the 90-day

    review procedures.\26\ Eris opposed the proposed elimination and

    commented, among other things, that Form DCM should result in a

    streamlined and standardized review process and that eliminating the

    90-day accelerated review process would place new entities at a

    competitive disadvantage because it

    [[Page 36616]]

    would delay their time to market, which is critical for new

    entrants.\27\

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    \26\ Nodal Comment Letter at 5 (Feb. 22, 2011).

    \27\ Eris Comment Letter at 4 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting proposed Sec. 38.3(a) with one

    modification.

    As described in the DCM NPRM, the Commission proposed eliminating

    the 90-day accelerated review process based on its experience in

    processing DCM applications. Specifically, the Commission has found

    that in the interest of meeting the expedited approval timeline,

    applicants seeking expedited review often filed incomplete or draft

    applications without adequate supporting materials. Accordingly, the

    90-day review process required the expenditure of significant

    Commission resources as well as the applicant's resources, and often

    resulted in placing the DCM designation requests on the 180-day review

    track. It is the Commission's view that the 180-day review period is a

    more reasonable timeframe for the review of designation requests and

    will result in more efficient use of the applicant's and the

    Commission's resources.

    In regards to Eris' specific claim that elimination of the 90-day

    accelerated review process would place new entities at a competitive

    disadvantage by delaying their time to market, the Commission notes

    that eliminating the 90-day review process will not prevent Commission

    staff from reviewing and/or rendering a determination on a DCM

    application before the 180-day period ends, particularly in instances

    where a DCM application is substantially complete, does not raise novel

    issues, and/or where a DCM applicant timely provides supplemental or

    follow-up responses or documentation necessary for a designation

    determination.\28\ Similarly, while the Commission recognizes that Form

    DCM will provide the added benefit of a more streamlined and

    standardized procedure for submitting and reviewing DCM applications,

    such benefits will not necessarily result in an expedited Commission

    determination. Rather, the completeness of the application and timely

    response to Commission staff's requests will determine the timeframe

    within which the Commission reviews a DCM application.

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

    \28\ Section 6(a) of the Act provides that ``the Commission

    shall approve or deny an application for designation or registration

    as a contract market * * * within 180 days of the filing of the

    application.'' 7 U.S.C. 8(a).

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

    To account for potential changes in the Commission's prospective

    technological capabilities, the Commission is slightly modifying the

    proposed text of Sec. 38.3(a) to clarify that a board of trade must

    file Form DCM electronically ``in a format and manner specified by the

    Secretary of the Commission.''

    The Commission is also making several minor non-substantive and

    organizational revisions to Form DCM. Additionally, the Commission is

    clarifying that the exhibits submitted in connection with Form DCM

    should include a description of how the applicant meets the definition

    of ``board of trade'' (as defined in section 1a(2) of the CEA).

    Applicants must submit all applicable exhibits simultaneous with the

    submission of completed Form DCM. Form DCM and all exhibits must be

    substantially complete prior to submission.

    Sec. 38.3(b)--Reinstatement of Dormant Designation

    Proposed Sec. 38.3(b) required that a dormant DCM, prior to

    listing or relisting products for trading, must reinstate its

    designation under the procedures of paragraphs (a)(1) and (2) of Sec.

    38.3. The proposed rule provided that applications for reinstatement of

    designation may rely upon previously-submitted materials that pertain

    to, and accurately describe, current conditions. The Commission did not

    receive any comments on Sec. 38.3(b) and is adopting this provision as

    proposed.

    Sec. 38.3(c)--Delegation of Authority

    Proposed Sec. 38.3(c) delegated authority to the Director of the

    Division of Market Oversight (or such other employees as the Director

    may designate) to notify an applicant seeking designation in the event

    that the application is materially incomplete and that the 180-day

    review period is stayed. The Commission did not receive any comments on

    Sec. 38.3(c) and is adopting this provision as proposed.

    Sec. 38.3(d)--Request for Transfer of Designation

    The Commission proposed new Sec. 38.3(d) to formalize the

    procedures that a DCM must follow when requesting the transfer of its

    DCM designation and positions comprising open interest, in anticipation

    of a corporate event (e.g., a merger, corporate reorganization, or

    change in corporate domicile) which results in the transfer of all or

    substantially all of the DCM's assets to another legal entity. Proposed

    Sec. 38.3(d)(2) required a DCM to submit to the Commission a request

    for transfer of designation no later than three months prior to the

    anticipated corporate change. If a DCM did not know or could not

    reasonably have known of the anticipated change three months prior to

    the change, it was required to immediately file the request as soon as

    it did know of such change. The proposed rule required, that in either

    case, the request must include a series of submissions, including,

    among other things, the underlying agreement that governs the corporate

    change, a narrative description of the corporate change that includes

    the reason for the change and its impact on the DCM, a discussion of

    the transferee's ability to comply with the CEA and the Commission's

    regulations, the governing documents of the transferee, and a list of

    contracts, agreements, transactions or swaps for which the DCM requests

    transfer of open interest.

    Proposed Sec. 38.3(d) also required, as a condition of approval,

    that the DCM submit a representation that it is in compliance with the

    CEA, including the DCM core principles, and the Commission's

    regulations. In addition, the proposed rule required a DCM to submit

    various representations by the transferee, including, but not limited

    to, a representation that the transferee will assume responsibility for

    complying with all applicable provisions of the CEA and the

    Commission's regulations and that none of the proposed rule changes

    will affect the rights and obligations of any participant to which open

    positions are transferred.

    Summary of Comments

    CME contended that the proposed rule is overly prescriptive because

    it applies a ``one-size-fits-all approach'' even though the

    circumstances of each transfer are likely to be unique.\29\ While CME

    did not oppose the three-month advance notification requirement, it did

    oppose what it believed to be the broad scope of the additional

    documentation required to be submitted simultaneously with such

    notification.\30\ CME stated that the required information is

    unnecessary and is likely to result in later notification to the

    Commission.\31\ As an alternative, CME recommended that the Commission

    tailor the information it requires based on the nature of the requested

    transfer.\32\

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

    \29\ CME Comment Letter at 11 (Feb. 22, 2011).

    \30\ Id.

    \31\ Id.

    \32\ Id.

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

    CME also contended that if a DCM could not have reasonably known of

    an anticipated change three months in advance, then it cannot

    ``immediately'' file both the request and all of the required

    submissions once it does know, because preparing the

    [[Page 36617]]

    submissions takes time. CME suggested that the rule be amended to

    require that the documentation be filed ``promptly'' as soon as the DCM

    knows of the change, rather than ``immediately.'' \33\

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

    \33\ Id.

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

    Discussion

    In response to CME's contention that each transfer is likely to be

    unique, and its opposition to some of the documentation required by the

    rule, the Commission notes that the specific information requirements

    contained in the proposed rule are necessary to enable the Commission

    to determine that the transfer is in compliance with the CEA. The

    required documents, such as the transfer agreement, governing

    documents, list of contracts to be transferred, and compliance

    representations, are relevant to the Commission's determination of the

    DCM's ongoing compliance with the CEA. Such documentation is also

    relatively standard in transfer transactions. The Commission

    recognizes, however, that there may be some variations in the form of

    governance documents or underlying agreements for each transfer.

    Accordingly, DCMs may provide the substance of the required information

    in the form available to them.

    In response to CME's suggestion that the rule be amended to require

    that the documentation be filed ``promptly'' as soon as the DCM knows

    of the change, rather than ``immediately,'' the Commission notes that

    the proposed rule specifically stated that in situations where a DCM

    could not have reasonably known of an anticipated change three months

    in advance, the DCM must immediately file the request as soon as it

    knows of such change, with an explanation as to the timing of the

    request. The Commission believes that in the context of this rule, use

    of the term ``promptly'' rather than ``immediately'' would not provide

    a meaningful distinction, as the rule simply requires DCMs to provide

    the documentation as soon as they know of the change.

    As described in connection with Sec. 38.3(a), the Commission is

    slightly modifying the proposed text to clarify that a DCM must file a

    request for transfer of designation electronically ``in a format and

    manner specified by the Secretary of the Commission.'' The Commission

    is adopting the remainder of the rule as proposed.

    Sec. 38.3(e)--Request for Withdrawal of Application for Designation

    Proposed Sec. 38.3(e) specified the procedures that a DCM must

    follow for withdrawing an application for designation. The Commission

    did not receive any comments on this provision. The Commission is

    slightly modifying the proposed text to clarify that an applicant must

    file a request for withdrawal of application for designation

    electronically ``in a format and manner specified by the Secretary of

    the Commission.'' The Commission is adopting the remainder of the rule

    as proposed.

    Sec. 38.3(f)--Request for Vacation of Designation

    Proposed Sec. 38.3(f) specified the procedures that a DCM must

    follow for vacating its designation. The Commission did not receive any

    comments on this provision. The Commission is adopting it as proposed,

    with a slight modification to the proposed text to clarify that a DCM

    must file a request for vacation of designation electronically ``in a

    format and manner specified by the Secretary of the Commission.''

    Sec. 38.3(g)--Requirements for Existing Designated Contract Markets

    Proposed Sec. 38.3(g) required that each existing DCM provide the

    Commission with a signed certification of its compliance with each of

    the 23 core principles and the Commission's regulations under part 38,

    within 60 days of the effective date of the publication of the final

    rules proposed in the DCM NPRM. The failure of any existing DCM to

    provide such certification would be grounds for revocation of the DCM's

    designation status. The Commission requested comments on whether the 60

    day period is sufficient, and if not, what period of time may be more

    appropriate, and why.

    Summary of Comments

    Multiple commenters opposed the proposed 60-day timeframe for

    existing DCMs to certify compliance with the core principles and

    associated regulations. Commenters suggested several alternative

    timeframes, including 90 days,\34\ 120 days,\35\ 180 days,\36\ 12

    months,\37\ and 18 months.\38\ KCBT argued that the proposed effective

    date is unreasonable and would be burdensome for DCMs, and suggested

    that the Commission work with each DCM to create a reasonable

    compliance timeframe.\39\

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

    \34\ Nodal Comment Letter at 4 (Feb. 22, 2011).

    \35\ CFE Comment Letter at 6-7 (Feb. 22, 2011).

    \36\ GreenX Comment Letter at 21 (Feb. 22, 2011).

    \37\ MGEX Comment Letter at 2 (Feb. 22, 2011), and at 1 (June 3,

    2011).

    \38\ NYSE Liffe Comment Letter at 14 (Feb. 22, 2011).

    \39\ KCBT Comment Letter at 2 (Feb. 22, 2011).

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

    Commenters stated that a 60-day timeframe would be unreasonable

    given the expenditure of resources and detailed analysis required as a

    result of significant changes to existing core principles and the

    addition of new core principles. GreenX stated that Core Principle 21

    (Financial Resources) may require DCMs to obtain new investment or

    financing arrangements.\40\ KCBT stated that it will take DCMs time to

    convert programs and processes from current acceptable practices to

    adherence to what it sees as prescriptive objectives and deadlines.\41\

    Nodal, which is currently operating as an exempt commercial market

    (``ECM''), stated that 60 days is an unnecessarily harsh timeframe for

    an existing business to transform its operations and demand changes

    from its support providers.\42\ Finally, NYSE Liffe claimed that even

    90 or 120 days would be insufficient because certain proposals, such as

    Core Principles 2 (Compliance with Rules), 4 (Prevention of Market

    Disruption), and 20 (System Safeguards), will require the

    implementation of automated systems that require significant time to

    implement coding and conduct testing.\43\ NYSE Liffe further claimed

    that the DCM's management and boards will have to review and approve

    rule changes before they can be implemented, and that the DCM will also

    have to negotiate and execute changes to contracts with third-party

    service providers.\44\ CME disagreed with the assertion that the

    proposed new regulations simply codify practices that are commonly

    accepted in the industry, and argued that the rules will necessitate

    strategic, operational, system, and rule changes.\45\ CME claimed that

    it would need a minimum of 180 days just to assess the impact of the

    new regulations and to identify, design, and plan the projects

    necessary to implement them.\46\

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

    \40\ GreenX Comment Letter at 21 (Feb. 22, 2011).

    \41\ KCBT Comment Letter at 2 (Feb. 22, 2011).

    \42\ Nodal Comment Letter at 4 (Feb. 22, 2011).

    \43\ NYSE Liffe Comment Letter at 14 (Feb. 22, 2011).

    \44\ Id.

    \45\ CME Comment Letter at 12 (Feb. 22, 2011).

    \46\ Id.

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

    MGEX stated that a ``catch all'' certification is of limited value

    given that DCMs spend ``countless hours and dollars'' demonstrating

    that they are in compliance with core principles through RERs and

    responding to other

    [[Page 36618]]

    Commission inquiries.\47\ MGEX also questioned whether it can conclude

    with any certainty that it is in compliance with the new and revised

    core principles and regulations.\48\ MGEX requested that the

    certification requirement be stricken, or if the requirement is deemed

    necessary, that the process be limited to providing a signed letter

    attesting to compliance (and that all application forms and

    documentation that are required with a formal application should be

    waived for existing DCMs).\49\ MGEX also requested that current DCMs

    that are already compliant with the existing core principles should be

    grandfathered.\50\

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

    \47\ MGEX Comment Letter at 2 (Feb. 22, 2011).

    \48\ Id.

    \49\ Id.

    \50\ MGEX Comment Letter at 1 (June 3, 2011).

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

    Nodal stated that the proposed rules do not address how a DCM

    applicant that is operating as an ECM pursuant to a grandfathering

    order can comply with the DCM requirements, and suggested that the

    Commission stagger certain compliance timeframes to accommodate

    entities that are operating pursuant to grandfather relief and that may

    potentially seek to operate as a DCM.\51\

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

    \51\ Nodal Comment Letter at 4 (Feb. 22, 2011).

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

    Discussion

    The Commission acknowledges commenters' concerns regarding the 60-

    day time frame for existing DCMs to certify compliance with the core

    principles and is eliminating this requirement from the final rules. In

    addition, the Commission has determined that existing DCMs may need

    additional time to comply with the rules being adopted in this release,

    and is therefore allowing DCMs an additional 60 days after the

    effective date of this release to comply with all of the new and

    revised final rules, except for Sec. 38.151(a), as described in this

    release. All DCMs are expected to be in compliance with the final rules

    by that date. Albeit, the new and revised core principles, as amended

    by the Dodd-Frank Act, took effect on July 16, 2011, and all DCMs were

    required to be in compliance with each of the new and revised core

    principles as of that date. The Commission further notes that all DCMs

    will continue to be subject to compliance reviews by the Commission,

    including RERs.

    With respect to Nodal's comments regarding the impact of the

    effective date of the DCM and SEF rules on ECMs, the Commission issued

    orders whereby entities operating as exempt commercial markets pursuant

    to section 2(h)(3)-(7) of the CEA, or as exempt boards of trade

    pursuant to section 5d of the CEA, could receive grandfather relief to

    continue to operate in accordance with those provisions notwithstanding

    their deletion from the CEA effective July 15, 2011, by the Dodd-Frank

    Act.\52\ The continued operation and compliance timeframes for exempt

    boards of trade and exempt commercial markets are addressed by those

    orders, and accordingly, are outside the scope of this rulemaking.

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

    \52\ See 75 FR 56513, Sept. 16, 2010; see also 76 FR 42508, Jul.

    14, 2011.

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

    4. Sec. 38.4--Procedures for Listing Products and Implementing

    Designated Contract Market Rules

    The proposed amendments to Sec. 38.4 were largely intended to

    conform the rule to Sec. Sec. 40.3 (Voluntary submission of new

    products for Commission review and approval) and 40.5(b) (Voluntary

    submission of rules for Commission review and approval).\53\ Those

    rules were recently revised in the separate release pertaining to

    ``Provisions Common to Registered Entities.'' \54\

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

    \53\ Section 40.3 was amended to require additional information

    to be provided by registered entities submitting new products for

    the Commission's review and approval. Section 40.5(b) codified a new

    standard for the review of new rules or rule amendments as

    established under the Dodd-Frank Act. 75 FR 44776, Jul. 27, 2011.

    \54\ Id.

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

    Summary of Comments

    In comments submitted both in connection with this rulemaking and

    with the proposed rulemaking for ``Provisions Common to Registered

    Entities,'' \55\ CME stated that the proposed procedures for listing

    products would increase the burdens associated with new product

    submissions and rule changes and would create new and costly

    bureaucratic inefficiencies, competitive disadvantages in the global

    marketplace, and impediments to innovation.\56\ CME stated that there

    has been no showing that the current streamlined process undermines

    market integrity, and that the process in fact has facilitated growth

    and innovation.\57\

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

    \55\ Id.

    \56\ CME Comment Letter at 10, 13 (Feb. 22, 2011).

    \57\ Id.

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

    CFE stated that a number of the regulations proposed in the DCM

    NPRM require DCMs to provide notification and reports to the

    Commission, but that the proposed regulations do not specify the manner

    in which the required notifications and reports should be submitted to

    the Commission.\58\ CFE requested that the Commission designate a

    single email address for the submission of all DCM notifications and

    reports.\59\

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

    \58\ CFE Comment Letter at 7 (Feb. 22, 2011).

    \59\ Id.

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

    Discussion

    The Commission is adopting the rule as proposed. The rule conforms

    to revisions to part 40 that were made in a separate rulemaking for

    ``Provisions Common to Registered Entities.'' \60\ In that rulemaking,

    the Commission, among other things, revised and eliminated several

    proposed documentation provisions in order to respond to comments that

    the submission of documentation in connection with new rules and rule

    amendments would be burdensome. The Commission also noted that the

    final rules will conserve both Commission and registered entity

    resources and will be less burdensome than existing practice. CME's

    comments on these provisions were addressed in the part 40 rulemaking,

    and are outside the scope of this rulemaking.'' \61\

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

    \60\ 75 FR 44776, July 27, 2011.

    \61\ Id.

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

    In response to CFE's comment, the Commission notes that all filings

    submitted pursuant to part 38 should be filed electronically with the

    Secretary of the Commission, in a format and manner determined by the

    Secretary, at submissions@cftc.gov and the Division of Market Oversight

    at DMOSubmissions@cftc.gov.

    5. Sec. 38.5--Information Relating to Contract Market Compliance

    Sec. 38.5(a)--Requests for Information; Sec. 38.5(b)--Demonstration of

    Compliance; and, Sec. 38.5(d)--Delegation of Authority

    The provisions in Sec. 38.5 address requirements for DCMs to

    provide information relating to contract market compliance. Proposed

    Sec. 38.5(a) required that a DCM must file with the Commission

    information related to its business as a DCM, including information

    relating to data entry and trade details, upon Commission request.

    Proposed Sec. 38.5(b) required that a DCM must file with the

    Commission a written demonstration that the DCM is in compliance the

    core principles, upon Commission request. Proposed Sec. 38.5(d)

    delegates the Commission's authority to seek information as set forth

    in paragraph Sec. 38.5(b) to the Director of the Division of Market

    Oversight, or such other employees as the Director may designate. As

    noted in the DCM NPRM, except for technical revisions, the

    aforementioned proposed rules were not substantively modified from

    their current versions. The Commission did

    [[Page 36619]]

    not receive any comments on these rules and adopts them as proposed.

    Sec. 38.5(c)--Equity Interest Transfers

    Proposed Sec. 38.5(c) required DCMs to file with the Commission a

    notice of the transfer of ten percent or more of its equity, no later

    than the business day following the date on which the DCM enters into a

    firm obligation to transfer the equity interest.\62\ The proposed rule

    required that the notification include several submissions, including

    any relevant agreements (including preliminary agreements), changes to

    relevant corporate documents, a chart outlining any new ownership or

    corporate or organizational structure, a brief description of the

    purpose and any impact of the equity interest transfer, and a

    representation from the DCM that it meets all of the requirements of

    section 5(d) of the Act and Commission regulations thereunder. The

    proposed rule also required that DCMs notify the Commission of the

    consummation of the transaction on the day in which it occurs. Proposed

    Sec. 38.5(c)(3) \63\ required that when there is a change in

    ownership, the DCM must certify, no later than two business days

    following the date on which the change in ownership occurs, that the

    DCM meets all of the requirements of section 5(d) of the CEA, as

    amended by the Dodd-Frank Act, and the provisions of part 38 of the

    Commission's regulations. The proposed rule also required that the DCM

    include, as part of its certification, an explanation of whether any

    aspects of the DCM's operations will change as a result of the change

    in ownership and, if so, that the DCM must provide a description of the

    changes.

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

    \62\ See generally, DCM NPRM for an explanation of the proposed

    10 percent threshold.

    \63\ The Commission proposed redesignating Sec. 38.5(d) as

    Sec. 38.5(c).

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

    Summary of Comments

    Two commenters stated that they do not object to the general

    notification requirement, but contended that the submissions required

    to be simultaneously filed with the initial notification do not lend

    themselves to preparation within the 24-hour time frame proposed in the

    rules.\64\ NYSE Liffe proposed that a period of ten business days to

    provide the additional information would allow more time for the DCM to

    provide accurate and meaningful information.\65\ NYSE Liffe also

    requested clarification that the requirement to provide ``preliminary

    agreements'' only pertains to agreements that have been executed, and

    not to drafts that may have been exchanged for purposes of

    discussion.\66\

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

    \64\ CME Comment Letter at 13 (Feb. 22, 2011) (noting that

    associated changes to relevant corporate documents are unlikely to

    be finalized until closer to the transfer date); NYSE Liffe Comment

    Letter at 13 (Feb. 22, 2011) (noting that the information will have

    to be collected and formatted).

    \65\ NYSE Liffe Comment Letter at 14 (Feb. 22, 2011).

    \66\ Id.

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

    CME stated that a representation from a DCM that it meets all of

    the requirements of section 5(d) of the CEA is more appropriate as a

    requirement upon consummation of the equity interest transfer, rather

    than with the initial notification.\67\

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

    \67\ CME Comment Letter at 13 (Feb. 22, 2011).

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

    MGEX stated that as a mutual association with a membership-based

    ownership structure, it frequently experiences changes in membership

    and ownership.\68\ MGEX stated that notice to the Commission seems

    reasonable for single event situations where a new party obtains a ten

    percent or more interest at one time, but disagreed with the rationale

    for the requirement to recertify again as part of such event.\69\

    Instead, MGEX suggested that the Commission should inquire only if

    there is a concern over such an event.\70\

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

    \68\ MGEX Comment Letter at 2 (Feb. 22, 2011).

    \69\ Id. at 3.

    \70\ Id.

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

    Discussion

    The Commission is adopting the proposed rule with certain

    revisions.

    The Commission is revising the rule to provide that the DCM must

    submit to the Commission a notification of each transaction involving

    the transfer of ten percent or more of the equity interest in the

    designated contract market, and that such notification must be provided

    at the earliest possible time but in no event later than ten business

    days following the date upon which the designated contract market

    enters into a legally binding obligation to transfer the equity

    interest.

    The Commission acknowledges NYSE Liffe and CME's concerns regarding

    the timing of the submission filing requirement and therefore has

    extended the time period to up to ten business days for a DCM to file

    notification with the Commission upon entering into an agreement to

    transfer an equity interest of ten percent or more. While DCMs may take

    up to ten business days to submit a notification, the DCM must provide

    Commission staff with sufficient time, prior to consummating the equity

    interest transfer, to review and consider the implications of the

    change in ownership, including whether the change in ownership will

    adversely impact the operations of the DCM or the DCM's ability to

    comply with the core principles and the Commission's regulations

    thereunder. The rule further reminds DCMs that any aspect of an equity

    interest transfer described that necessitates the filing of a rule as

    defined in part 40 of the Commission regulations must comply with the

    rule submission requirements, including timing of filing, of section

    5c(c) of the CEA and part 40, and all other applicable Commission

    regulations.

    In response to CME's comment that the representation from a DCM

    that it meets all of the requirements of section 5(d) of the CEA is

    more appropriate as a requirement upon consummation of the equity

    interest transfer, and NYSE Liffe's comment that the Commission clarify

    that ``preliminary agreements'' do not include draft documents, the

    Commission is revising the rule to eliminate references to the specific

    documents that must be provided with the notification. Rather, the

    Commission may upon receiving a notification of the equity interest

    transfer, where necessary, request appropriate documentation pursuant

    to its authority under Sec. 38.5 of the Commission's regulations. Such

    documentation may include: (i) Relevant agreement(s), including any

    preliminary agreements (not including draft documents); (ii) associated

    changes to relevant corporate documents; (iii) chart outlining any new

    ownership or corporate or organizational structure, if available; (iv)

    a brief description of the purpose and any impact of the equity

    interest transfer; and, (v) a certification, upon consummation of the

    equity interest transfer that the designated contract market continues

    to meet all of the requirements of section 5(d) of the Act and

    Commission regulations adopted thereunder.

    The Commission acknowledges MGEX's comment but believes that the

    rule is necessary. The Commission must oversee and ensure the continued

    compliance of all DCMs with the core principles and the Commission's

    regulations. In order to fulfill its oversight obligations, and to

    ensure that DCMs maintain compliance with their self-regulatory

    obligations, the Commission must undertake an effective due diligence

    review of the impact of ownership transfers. Accordingly, the

    Commission adopts the proposed rule, with the aforementioned

    modifications.

    [[Page 36620]]

    6. Sec. 38.7--Prohibited Use of Data Collected for Regulatory Purposes

    Proposed Sec. 38.7 \71\ prohibited DCMs from using proprietary

    data or personal information submitted by any person to the DCM for

    regulatory purposes, for business or marketing purposes. In the DCM

    NPRM, the Commission noted that nothing in the proposed provision

    should be viewed as prohibiting a DCM from sharing such information

    with another DCM or SEF for regulatory purposes, where necessary.

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

    \71\ The DCM NPRM did not propose any revisions to current Sec.

    38.6 (Enforceability), and this provision remains unchanged.

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

    Summary of Comments

    Several commenters argued that the restriction on the use of

    proprietary or personal information is too broad. CME stated that the

    proposed rules should distinguish between proprietary and personal

    information that is provided to a DCM exclusively for regulatory

    purposes and information that is provided to a DCM for both regulatory

    and non-regulatory purposes.\72\ CME claimed that a DCM should be

    permitted to use the latter type of information for business or

    marketing purposes, provided that the DCM has transparent rules and

    policies which disclose what information collected by the DCM will be

    used exclusively for the furtherance of its self-regulatory obligations

    and how such confidential information will be protected.\73\ CME also

    contended that a DCM should not be precluded from using proprietary or

    personal information that is provided for regulatory purposes for

    business or marketing purposes where the market participant has

    specifically agreed to such use.\74\ MGEX agreed with the underlying

    purpose of the proposed rule but suggested allowing market participants

    to opt-out of having their information used for business or marketing

    purposes.\75\

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

    \72\ CME Comment Letter at 13-14 (Feb. 22, 2011).

    \73\ Id.

    \74\ Id.

    \75\ MGEX Comment Letter at 3 (Feb. 22, 2011).

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

    ELX stated that the standard should rest on whether the use and

    manner of use of the information violates the reasonable expectation of

    confidentiality on the part of the disclosing firm.\76\ For example,

    ELX stated that senior officers of the exchange should have access to

    such data to understand the markets they are responsible for overseeing

    even if they don't have a ``compliance'' moniker in their title.\77\

    ELX also stated that an exchange should be able to consolidate

    proprietary data in an anonymous fashion to explain its markets without

    running afoul of the proposed rule.\78\ ELX also claimed that a DCM

    should be able to use its discretion to convey proprietary information

    for business or marketing purposes back to employees of the firm that

    supplied the data.\79\ For example, ELX stated that a DCM should be

    permitted to explain to a trading desk how the activities of its firm

    have changed or could be conducted more cost-effectively.\80\

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

    \76\ ELX Comment Letter at 3 (Feb. 22, 2011).

    \77\ Id.

    \78\ Id.

    \79\ Id.

    \80\ Id.

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

    Discussion

    The Commission has considered the comments and is amending proposed

    Sec. 38.7 to allow DCMs to use proprietary or personal information for

    business or marketing purposes if the person from whom they collect or

    receive such information clearly consents to the use of its information

    in such a manner. In response to CME and ELX's comments, the Commission

    notes that a DCM could use information that it receives for both

    regulatory and non-regulatory purposes for business or marketing

    purposes (or could convey proprietary information back to employees of

    the firm that supplied the data) if the source of the information

    clearly consents to the use in such a manner. The Commission is also

    amending the proposed rule to prohibit a DCM from conditioning access

    to its trading facility based upon such consent.

    Finally, as stated in the preamble to the proposed rule and

    amplified above, the Commission notes that Sec. 38.7 is intended to

    protect regulatory information provided by market participants to DCMs

    from unauthorized commercial use.\81\ The Commission notes consistent

    with the requirements of the final rule, DCMs should have rules to

    safeguard regulatory information from misuse. The Commission would

    expect such rules, among other things, to restrict access to such

    information within the DCM to avoid improper use of such information

    for commercial purposes.

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

    \81\ See 75 FR 80572, 80577, note 37, Dec. 22, 2010.

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

    7. Sec. 38.8--Listing of Swaps on a Designated Contract Market

    Proposed Sec. 38.8(a) required a DCM to notify the Commission,

    prior to or upon listing its first swap contract, of the manner in

    which it will fulfill each of the requirements under the amended CEA

    and part 38 with respect to the listing, trading, execution and

    reporting of swap transactions.

    Proposed Sec. 38.8(b) required a DCM, before it lists swaps, to

    request from the Commission a unique, alphanumeric code for the purpose

    of identifying the DCM. The rule required a DCM to do so pursuant to

    the swap recordkeeping and reporting requirements under then-proposed

    part 45 of the Commission's regulations. Proposed Sec. 38.8(b) also

    codified the obligations of DCMs to comply with the provisions of part

    45, which set forth the recordkeeping and reporting requirements for

    DCMs with respect to swaps.\82\

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

    \82\ See ``Swap Data Recordkeeping and Reporting Requirements,''

    Proposed Rule, 75 FR 76573, Dec. 8, 2010.

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

    Summary of Comments

    CFE argued that a DCM should be allowed to offer trading in swaps

    in the same manner that a SEF is permitted to do so, and that it would

    be costly and unnecessary to require a DCM to create a separate SEF in

    order to offer trading in swaps instead of just permitting the DCM to

    adopt separate rules that permit the trading of swaps on the DCM

    consistent with the SEF requirements.\83\ CFE argued that a DCM should

    not have to create a separate entity, board, board committees,

    membership application and approval process, and rule set in order to

    offer trading in swaps in the same manner that a SEF can do when it

    already has all of those components in place and can simply add any

    required components for SEFs.\84\

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

    \83\ CFE Comment Letter at 1 (Feb. 22, 2011).

    \84\ Id. at 2.

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

    ELX stated that the DCM NPRM did not make clear what criteria will

    be used to distinguish between a swap contract and a futures contract,

    and claimed that this ambiguity will cause uncertainty and redundant

    costs for boards of trade that would prefer to follow a DCM model

    without having to adopt a parallel set of rules and procedures.\85\ ELX

    cited compliance with section 727 of the Dodd-Frank Act and Sec. 38.10

    as one area where clarity is needed.\86\

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

    \85\ ELX Comment Letter at 4 (Feb. 22, 2011).

    \86\ Id. at 5.

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

    Discussion

    The Commission is adopting the rule as proposed, with one

    clarification. CFE's comments take issue with provisions in the Dodd-

    Frank Act that are not within the Commission's discretion to revise.

    Swaps are permitted to be traded on a SEF or a DCM, pursuant to rules

    promulgated for each entity.\87\ Accordingly, swaps

    [[Page 36621]]

    traded on a DCM must be traded pursuant to DCM rules. As noted in the

    Final Exemptive Order issued July 14, 2011,\88\ DCMs may list and trade

    swaps after July 16, 2011 without further exemptive relief. In that

    Order, the Commission noted that if a DCM intends to trade swaps

    pursuant to the rules, processes, and procedures currently regulating

    trading on its DCM, the DCM may need to amend or otherwise update its

    rules, processes, and procedures in order to address the trading of

    swaps.\89\ In response to ELX, the determining factors in

    distinguishing between swaps and futures are outside of the scope of

    this proceeding. The CEA provided a definition for swaps under section

    1a(47), and the Commission published proposed rules and interpretive

    guidance to further define the term on May 23, 2011.\90\

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

    \87\ See CEA section 2(h)(8), 7 U.S.C. 2(h)(8). See also 17 CFR

    38.9 (``A board of trade that operates a designated contract market

    and that intends to also operate a swap execution facility must

    separately register[hellip]and on an ongoing basis, comply with the

    core principles under Section 5h of the Act, and the swap execution

    facility rules under part 37 of this chapter'').

    \88\ 76 FR 42508, Jul. 14, 2011.

    \89\ Id. at 42,518, n. 131. On July 27, 2011, DMO staff sent a

    notification letter to all existing DCMs stating that if the DCM

    intends to list swaps prior to the effective date of the final rules

    implementing part 38, it must include with its initial submission of

    the terms and conditions of a swap contract (pursuant to section

    5c(c) of the CEA, as amended by the Dodd-Frank Act) any amendments

    to its rules that are necessary to provide for the trading of swaps,

    including a concise explanation and analysis of any systems and

    oversight procedures that the DCM proposes to revise in order to

    accommodate the trading of swaps. The information requested in the

    July 27 letter is separate from the request in proposed section

    38.8(a); however, information provided in response to the July 27

    letter may support, in part, the requirement under section 38.8(a)

    to provide a written demonstration detailing how the DCM is

    addressing its self-regulatory obligations with respect to swap

    transactions.

    \90\ 76 FR 29818, May 23, 2011.

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

    The Commission is modifying Sec. 38.8(b), consistent with the

    Commission's final Swap Data Recordkeeping and Reporting Requirements

    Rule,\91\ to require DCMs to generate and assign a unique swap

    identifier at, or as soon as technologically practicable following, the

    time of execution of the swap. The unique swap identifier (``USI'')

    must have two alphanumeric components. The first component is the

    unique alphanumeric code assigned to the DCM by the Commission for the

    purpose of identifying the DCM with respect to USI creation. DCMs must

    obtain this first alphanumeric component from the Commission prior to

    executing any swap on its facility.\92\ The second component is an

    alphanumeric code generated and assigned to that swap by the automated

    systems of the DCM, which shall be unique to that swap and different

    with respect to all such codes generated and assigned by that DCM to

    all other swaps. Each DCM must generate and assign a USI at, or as soon

    as technologically practicable, following the time of execution of the

    swap. The DCM is required to transmit the USI to the SDR, each swap

    counterparty, and the registered derivative clearing organization

    (``DCO'') (if the swap is cleared). The DCM, similar to all registered

    entities and counterparties, is required to use the USI to identify the

    swap in ``all recordkeeping and all swap data reporting pursuant to

    [part 45].'' This clarification is based upon the final rulemaking that

    implements swap data recordkeeping and reporting requirements under

    part 45 of the Commission's regulations.\93\

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

    \91\ 77 FR 2136, Jan. 13, 2012.

    \92\ The Commission will establish a formal process by which

    DCMs can obtain a USI identifier.

    \93\ 77 FR 2136, Jan. 13, 2012.

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

    8. Sec. 38.9--Boards of Trade Operating Both a Designated Contract

    Market and a Swap Execution Facility

    Proposed Sec. 38.9(a) codified the requirement that a board of

    trade that operates a DCM and that intends to operate a SEF must

    separately register pursuant to the SEF registration requirements and,

    on an ongoing basis, must separately comply with the SEF core

    principles under section 5h of the CEA, as amended by the Dodd-Frank

    Act, and the applicable Commission regulations to be codified under

    part 37 of the Commission regulations.\94\

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

    \94\ See notice of proposed rulemaking pertaining to ``Core

    Principles and Other Requirements for Swap Execution Facilities.''

    76 FR 1214, Jan. 7, 2011.

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

    Proposed Sec. 38.9(b) codified the statutory requirement that any

    board of trade that is a DCM and intends to operate as an independent

    SEF may use the same electronic trade execution system for listing and

    executing swaps, provided that the board of trade makes it clear to

    market participants whether the electronic trading of such swaps is

    taking place on or through the DCM or the SEF.\95\

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

    \95\ Section 5h(c) of the CEA, as amended by the Dodd-Frank Act,

    provides:

    IDENTIFICATION OF FACILITY USED TO TRADE SWAPS BY CONTRACT

    MARKETS.--A board of trade that operates a contract market shall, to

    the extent that the board of trade also operates a swap execution

    facility and uses the same electronic trade execution system for

    listing and executing trades of swaps on or through the contract

    market and the swap execution facility, identify whether the

    electronic trading of such swaps is taking place on or through the

    contract market or the swap execution facility.

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

    Summary of Comments

    CME requested clarification as to whether the regulation is

    intended to create a more substantive obligation on the part of DCMs

    and SEFs given that market participants typically interface with

    electronic platforms through proprietary or third-party front end

    systems that are not controlled by the DCM.\96\

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

    \96\ CME Comment Letter at 14 (Feb. 22, 2011).

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

    ICE noted that while the proposed rule prescribed how a DCM can

    list swaps, it did not describe how the core principles, written for

    futures contracts, apply to a DCM listing swaps. ICE requested

    clarification that a swap can be executed on a DCM using the same

    execution methods as on a SEF, such as a request for quote (``RFQ'')

    mechanism.\97\ Finally, ICE stated that, like a SEF, a DCM should be

    able to allow the bilateral execution of swaps where there is no

    clearing mandate.\98\ ICE claimed that without these clarifications,

    there will be a bias away from the trading of swaps on DCMs in favor of

    SEFs, and that the rulemaking would frustrate Congress' intention of

    also having swaps trade on DCMs.\99\

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

    \97\ ICE Comment Letter at 10 (Feb. 22, 2011).

    \98\ Id.

    \99\ Id.

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

    Alice Corporation states that organizations that choose to operate

    both a SEF and DCM should be able to meet the requirements of both

    entities with a single organization.\100\ Alice Corporation also stated

    that it offers the ability to fill a large size order with multiple

    contracts on an all-or-nothing basis, as customers with large orders

    sometimes wish to execute with a single contracts.\101\ Alice stated

    that this design would enable automatic execution of block size trades,

    and questioned whether an impartially offered price discount for volume

    would be acceptable to the Commission.\102\

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

    \100\ Alice Corporation Comment Letter at 3 (May 31, 2011).

    \101\ Id.

    \102\ Id.

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

    Discussion

    The Commission is adopting the rule as proposed. In response to

    CME's comment, the Commission notes that it would not be sufficient for

    a board of trade that operates both a DCM and a SEF to simply have DCM

    rules that might identify whether a transaction is being executed on a

    DCM or a SEF. Instead, a consolidated DCM/SEF trading screen must

    identify whether the execution is occurring on the DCM or the SEF,

    irrespective of how proprietary or third-party front end

    [[Page 36622]]

    systems eventually present that data to market participants. Section

    5h(c) of the CEA, as amended by the Dodd-Frank Act, clearly requires

    that a board of trade that operates both a DCM and SEF identify to

    market participants whether each swap is being executed on the DCM or

    the SEF.

    With respect to comments requesting clarification that a swap can

    be executed on a DCM using execution methods other than a central limit

    order book \103\ the Commission notes that swaps executed on a DCM are

    subject to all rules and requirements applicable to futures and options

    traded on DCMs.\104\ In particular, all swaps traded on a DCM must be

    executed through the DCM's trading facility, except as otherwise

    expressly permitted by Core Principle 9,\105\ and are subject to the

    Commission's rules pertaining to DCMs. Only certain Commission rules,

    for example, those relating to the real-time and regulatory reporting

    of swaps, will be different for swaps in relation to futures. In

    response to ICE's comment that a DCM, like a SEF, should be able to

    allow the bilateral execution of swaps where there is no clearing

    mandate, the Commission notes that ICE's position is based on the

    proposed SEF rules, which are not yet finalized.\106\ Moreover, the

    Commission further notes that under the CEA, a DCM must be a board of

    trade, which is defined under section 1a(2) of the CEA, 7 U.S.C. 1a(2),

    as an organized exchange or other trading facility.\107\ As defined

    under the CEA, both an organized exchange,\108\ and other trading

    facility \109\ require, among other things, multiple participants to

    execute or trade contracts or transactions, by accepting bids or offers

    made by other participants that are open to multiple participants in

    the facility or system, or through the interaction of multiple bids or

    offers within a system with a pre-determined nondiscretionary automated

    trade matching and execution algorithm.

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

    \103\ ICE Comment Letter at 2-3 (Feb. 22, 2011); Alice

    Corporation Comment Letter at 3 (May 31, 2011).

    \104\ Section 723 of the Dodd-Frank Act provides that the

    execution of swaps subject to the clearing requirement of section

    2(h)(1) of the CEA must occur either on a DCM or on a SEF, unless no

    DCM or SEF makes the swap available to trade.

    \105\ Core Principle 9 provides, in relevant part, that ``[t]he

    rules of the board of trade may authorize, for bona fide business

    purposes:

    (i) Transfer trades or office trades;

    (ii) An exchange of--

    (I) Futures in connection with a cash commodity transaction;

    (II) Futures for cash commodities; or

    (III) Futures for swaps; or

    (iii) A futures commission merchant, acting as principal or

    agent, to enter into or confirm the execution of a contract for the

    purchase or sale of a commodity for future delivery if the contract

    is reported, recorded, or cleared in accordance with the rules of

    the contract market or a derivatives clearing organization. 7 U.S.C.

    5(d)(9).

    \106\ The Commission further notes that pursuant to Core

    Principle 21, all contracts traded on a DCM must be cleared through

    a registered DCO, irrespective of the clearing mandate.

    \107\ The CEA requires that DCMs must be boards of trade, as

    defined under the CEA. See, e.g., 7 U.S.C. 7(a) (stating the a board

    of trade may apply for designation as a contract market); see also 7

    U.S.C. 7(d) (core principles apply to board of trade).

    \108\ As defined in section 1a(37) of the CEA, the term

    ``organized exchange'' means a trading facility that: (A) Permits

    trading: (i) By or on behalf of a person that is not an eligible

    contract participant; or (ii) by persons other than on a principal-

    to-principal basis; or (B) has adopted (directly or through another

    nongovernmental entity) rules that: (i) Govern the conduct of

    participants, other than rules that govern the submission of orders

    or execution of transactions on the trading facility; and (ii)

    include disciplinary sanctions other than the exclusion of

    participants from trading.

    \109\ As defined in section 1a(51) (A) of the CEA, the term

    ``trading facility'' means a person or group of persons that

    constitutes, maintains, or provides a physical or electronic

    facility or system in which multiple participants have the ability

    to execute or trade agreements, contracts, or transactions--(i) by

    accepting bids or offers made by other participants that are open to

    multiple participants in the facility or system; or (ii) through the

    interaction of multiple bids or multiple offers within a system with

    a pre-determined nondiscretionary automated trade matching and

    execution algorithm. See section 1a(51)(B) and (C) for exclusions

    and special rules application to trading facility.

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

    The Commission has considered Alice Corporation's comments, and

    notes that while a board of trade that is a single corporate entity may

    operate both a DCM and a SEF, DCMs and SEFs have separate core

    principles and requirements, and any entity that operates both must

    separately meet the statutory and regulatory requirements of each

    facility. In response to Alice Corporation's further comment that

    counterparties on a DCM should be able to offer volume-based quotes, it

    is unclear whether Alice Corporation's comment is being offered in the

    context of acceptable methods of trading on a DCM's central marketplace

    or in the context of off-exchange transactions. If the former, the

    Commission reiterates that the acceptable methods of trading on a DCM's

    central marketplace are specifically determined under the CEA, which

    requires at a minimum that DCMs must be ``trading facilities,'' though

    even in that context the Commission has accepted trading systems beyond

    pure price-and-time algorithms. If Alice Corporation's reference to

    volume-based quotes is some sort of off-exchange trading methodology,

    the Commission reiterates that its analysis of such a proposal would be

    conducted under Core Principle 9. The comment does not offer sufficient

    information to analyze the suggestion at this time.

    9. Sec. 38.10--Reporting of Swaps Traded on a Designated Contract

    Market

    Proposed Sec. 38.10 codified the compliance obligations of DCMs

    with respect to real-time reporting of swap transactions and swap data

    recordkeeping and reporting obligations, as was required under then-

    proposed parts 43 \110\ and 45 \111\ of the Commission's regulations,

    respectively.

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

    \110\ See ``Real Time Public Reporting of Swap Transaction

    Data,'' Proposed Rule, 75 FR 76139, Dec. 7, 2010.

    \111\ See ``Swap Data Recordkeeping and Reporting

    Requirements,'' Proposed Rule, 75 FR 76573, Dec. 8, 2010.

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

    Summary of Comments and Discussion

    CME referred the Commission to comments it submitted on February 7,

    2011 with respect to proposed rulemakings under part 43 (real-time

    public reporting of swap transaction data) and part 45 (swap data

    recordkeeping and reporting requirements).\112\

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

    \112\ CME Comment Letter at 14 (Feb. 22, 2011).

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

    Rule 38.10 references the reporting requirements contained under

    parts 43 and 45, but does not contain the substantive obligations

    associated with the requirements. Accordingly, CME's comments were

    considered in connection with the final rulemakings under parts 43 and

    45.

    The Commission is adopting this provision as proposed, with certain

    clarifications to conform the rule to the regulations under parts 43

    and 45. Specifically, proposed Sec. 38.10 required that each DCM, with

    respect to swaps traded on or through the DCM, report specified swap

    data to an SDR. The Commission is modifying Sec. 38.10 to clarify that

    DCMs must maintain and report specified swap data for swaps traded ``on

    or pursuant'' to the rules of the DCM. The clarification is consistent

    with the rulemakings that implement real-time reporting of swap

    transaction data and swap data recordkeeping and reporting requirements

    under parts 43 and 45 of the Commission's regulations.\113\

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

    \113\ 75 FR 76140, Dec. 7, 2010; 75 FR 76574, Dec. 8, 2010.

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

    D. Core Principles

    As noted above, this release reorganizes part 38 to include

    subparts A through X. Each of subparts B through X includes relevant

    regulations applicable to the 23 core principles. This final rulemaking

    codifies within each subpart the statutory language of the respective

    core principle.\114\

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

    \114\ As noted in the DCM NPRM, in two instances the language of

    the core principle, as codified, was slightly revised to add

    references to the CEA where the statutory language simply cited to

    the CEA section without citing to the statute. These non-substantive

    edits were made to sections 38.100 and 38.1200.

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

    [[Page 36623]]

    1. Subpart B--Designation as Contract Market

    In the DCM NPRM, the Commission proposed to codify the statutory

    text of Core Principle 1 in Sec. 38.100.\115\ The Commission is

    adopting Sec. 38.100 as proposed.

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

    \115\ Section 735 of the Dodd-Frank Act amended Core Principle 1

    by adding that compliance with the core principles, and any other

    rule or regulation that the Commission may impose under section

    8a(5) of the CEA, is a necessary condition to obtain and maintain

    designation as a contract market, and by adding the condition that

    ``unless otherwise determined by the Commission by rule or

    regulation,'' DCMs have reasonable discretion in establishing the

    manner in which they comply with the core principles. 7 U.S.C.

    7(d)(1).

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

    2. Subpart C--Compliance With Rules

    Section 5(d)(2) of the CEA, as amended by the Dodd-Frank Act,

    requires that a DCM establish, monitor, and enforce compliance with its

    rules, including rules regarding access requirements and the terms and

    conditions of any contract to be traded on the contract market, and

    rules prohibiting abusive trade practices.\116\ A DCM must also have

    the capacity to detect and investigate potential rule violations and to

    sanction any person that violates its rules. In addition, a DCM's rules

    must provide it with the ability and authority to perform the

    obligations and responsibilities required under Core Principle 2,

    including the capacity to carry out such international information

    sharing agreements that the Commission may require.

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

    \116\ Section 735 of the Dodd-Frank Act amended section 5 of the

    CEA to eliminate DCM designation criteria and amends several core

    principles, including Core Principle 2. Core Principle 2 was amended

    to include language formerly found in Designation Criterion 8--

    Ability to Obtain Information, and to specifically require that a

    DCM have the ability to detect, investigate, and sanction rule

    violations.

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

    The Commission proposed several rules implementing amended Core

    Principle 2, as further described below.

    i. Sec. 38.150--Core Principle 2

    Proposed Sec. 38.150 codified the text of section 5(d)(2) of the

    CEA.

    CME commented that a DCM cannot be expected to carry out

    international or other informational sharing agreements to which it is

    not a party, and should not be compelled by regulation to enter into

    such agreements.\117\ KCBT opposed the requirement that a DCM establish

    rules and enter into informational-sharing agreements, particularly

    when such agreements contain specific requirements that are unsuitable

    to a DCM or conditions with which the DCM is unable to comply.\118\

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

    \117\ CME Comment Letter at 15 (Feb. 22, 2011).

    \118\ KCBT Comment Letter at 3 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting Sec. 38.150 as proposed. Section 38.150

    simply codifies the statutory language of the core principle. The

    Commission, therefore, does not have discretion to amend the

    requirements or obligations imposed by the statute.\119\

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

    \119\ Section 5(d)(2)(C) of the CEA, as amended by the Dodd-

    Frank Act, states that ``[t]he rules of the contract market shall

    provide the board of trade with the ability and authority to obtain

    any necessary information to perform any function described in this

    subsection, including the capacity to carry out such international

    information sharing agreements as the Commission may require.'' 7

    U.S.C. 7(d)(2).

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

    ii. Sec. 38.151--Access Requirements

    Sec. 38.151(a)--Jurisdiction

    Proposed Sec. 38.151(a) required that prior to granting a member

    or market participant access to its markets, the DCM must require the

    member or market participant to consent to its jurisdiction.

    Summary of Comments

    CFE stated that the term ``market participant'' used in the

    proposed rule should be limited to non-members of a DCM that have the

    ability to enter orders directly into a DCM's trade matching system for

    execution, and that the term should not include non-members that do not

    have this ability.\120\ CFE further commented that the proposed rule

    should not apply to customers whose orders pass through a member's

    system before receipt by a DCM because, according to CFE, in that

    instance the customer order is being received by the DCM from the

    member.\121\ CFE also asserted that customers that submit orders

    through a member do not have the privilege of trading on a DCM and thus

    the proposed rule should not apply to them.\122\

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

    \120\ CFE Comment Letter at 2 (Feb. 22, 2011).

    \121\ Id.

    \122\ Id.

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

    CME recommended that the Commission withdraw the proposed

    rule.\123\ It contended that requiring clearing firms to obtain every

    customer's consent to the regulatory jurisdiction of each DCM would be

    costly.\124\ Moreover, CME commented that even if such consent were

    obtained, the proposed rule would be entirely ineffective in achieving

    the Commission's desired outcome.\125\ CME explained that if a non-

    member who had consented to the exchange's jurisdiction under the

    proposed rule committed a rule violation and subsequently elected not

    to cooperate in the investigation or disciplinary process, the

    exchange's only recourse would be to deny the non-member access and, if

    appropriate, refer the matter to the Commission.\126\ CME further

    explained that a DCM's enforcement options, and the regulatory

    outcomes, do not change based on whether or not there is a record of

    the non-member consenting to jurisdiction, but rather depend on whether

    the non-member chooses to participate in the DCM's investigative and

    disciplinary processes.\127\

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

    \123\ CME Comment Letter at 17 (Feb. 22, 2011).

    \124\ Id. at 16.

    \125\ Id.

    \126\ Id.

    \127\ Id.

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

    ICE contended that the proposed rule should distinguish between

    direct-access and intermediated market participants.\128\ Furthermore,

    ICE stated that a trader should be specifically subject to the

    jurisdiction and the disciplinary process of the DCM only when the

    privilege of trading on a DCM is specifically granted by the DCM.\129\

    Likewise, KCBT explained that even if a non-member consents to KCBT

    jurisdiction, but later fails to abide by such consent, KCBT's only

    recourse would be to revoke such participant's market access.\130\

    Therefore, KCBT questioned the benefit of implementing the proposed

    rule.\131\

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

    \128\ ICE Comment Letter at 12-13 (Feb. 22, 2011).

    \129\ Id. at 15.

    \130\ KCBT Comment Letter at 2 (Feb. 22, 2011).

    \131\ Id.

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

    NYSE Liffe sought clarification regarding the type of market

    participant covered by the proposed rule.\132\ NYSE Liffe requested

    that the Commission confirm that, unless NYSE Liffe permits market

    participants direct access to its trading platform, it would not

    consider a DCM to be ``granting'' market participants access to its

    markets, thus necessitating that it require market participants to

    consent to the DCM's jurisdiction.\133\

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

    \132\ NYSE Liffe Comment Letter at 11 (Feb. 22, 2011).

    \133\ Id.

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

    Discussion

    The Commission is adopting Sec. 38.151(a) as proposed. While

    acknowledging the comments described above, the Commission believes

    that Sec. 38.151(a) codifies jurisdictional requirements necessary to

    effectuate the statutory mandate of Core Principle 2 that a board of

    trade ``shall have the capacity to detect, investigate, and apply

    appropriate sanctions to any person that violates any rule of the

    [[Page 36624]]

    contract market.'' In the Commission's view, settled jurisdiction--

    established by a DCM prior to granting members and market participants

    access to its markets--is necessary to effectively investigate and

    sanction persons that violate DCM rules. In particular, a DCM should

    not be in the position of asking market participants to voluntarily

    submit to jurisdiction and cooperate in investigatory proceedings after

    a potential rule violation has been found. Similarly, market

    participants should be clear that their trading practices are subject

    to the rules of a DCM, including rules that require cooperation in

    investigatory and disciplinary processes. For the avoidance of doubt,

    the Commission notes that the scope of Sec. 38.151(a) is not limited

    to market participants with direct market access, or limited as

    otherwise suggested by CFE, ICE and NYSE Liffe. To the contrary,

    persons whose trades are intermediated, persons who are customers of

    member firms, and persons whose access to the exchange is granted by or

    through member firms are within the scope of Sec. 38.151(a).

    The Commission notes commenters' suggestion that a DCM's ultimate

    recourse against non-members who fail to cooperate in investigations or

    disciplinary proceedings is to deny such non-members access to the

    exchange and, if appropriate, refer them to the Commission. The

    Commission confirms that denial of access and referral to the

    Commission are the appropriate steps for a DCM to take when a market

    participant fails to cooperate in an investigation or disciplinary

    proceedings. The Commission expects that DCMs will in fact follow these

    steps. However, the Commission does not agree that this absolves DCMs

    from their responsibility to establish jurisdiction over members and

    market participants as an initial condition of trading. Finally, the

    Commission recognizes that DCMs may need additional time to secure

    existing market participants' agreements to jurisdiction. Accordingly,

    the Commission is granting DCMs up to 180 days following the applicable

    effective date of the rules being adopted in this release to comply

    with the requirements of Sec. 38.151(a) with respect to existing

    members and market participants. Each DCM may determine for itself how

    it will secure such agreements. For example, a DCM could utilize its

    clearing firms to secure the agreement. With respect to new members and

    market participants, DCMs will be subject to Sec. 38.151(a) on the

    effective date of the rules being adopted in this release.

    Sec. 38.151(b)--Impartial Access by Members, Market Participants and

    Independent Software Vendors

    Proposed Sec. 38.151(b) required that a DCM provide its members,

    market participants and independent software vendors (``ISVs'') with

    impartial access to its markets and services, including: (1) access

    criteria that are impartial, transparent, and applied in a non-

    discriminatory manner, and (2) comparable fee structures for members,

    market participants and ISVs, receiving equal access to, or services

    from, the DCM. In regards to the proposed rule's comparable fee

    structure requirement, the DCM NPRM preamble discussion of proposed

    Sec. 38.151(b) stated that ``[f]ee structures may differ among

    categories if such fee structures are reasonably related to the cost of

    providing access or services to a particular category.''\134\

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

    \134\ See DCM NPRM at 80579. As an example, the preamble further

    stated that ``if a certain category required greater information

    technology or administrative expenses on the part of the DCM, then a

    DCM may recoup those costs in establishing fees for that category or

    member or market participant.'' Id.

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

    Summary of Comments

    Chris Barnard supported this requirement, stating that the only

    reason for charging different fee structure would relate to differing

    costs of providing access or service to a particular category.\135\ CFE

    commented that the Commission's application of the requirement to have

    comparable fee structures is too narrow.\136\ CFE stated that it is in

    a DCM's best interest to set fees at levels that encourage

    participation on the DCM (rather than to exclude participants) because

    having greater participation leads to greater contract volume and thus

    more transaction revenue for the DCM.\137\ CFE agreed that a DCM should

    be able to have fee structures that differ among categories and did not

    believe that the only permitted differentiation should be based on

    cost.\138\

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

    \135\ Barnard Comment Letter at 2 (Feb. 22, 2011).

    \136\ CFE Comment Letter at 3 (Feb. 22, 2011).

    \137\ Id.

    \138\ Id.

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

    CME stated that the fee restrictions imposed by the proposed rule

    exceed the Commission's authority under the Dodd-Frank Act, and

    questioned the basis for the proposed rule.\139\ In particular, CME

    argued that the agency lacks authority to set or limit fees charged by

    DCMs.\140\

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

    \139\ CME Comment Letter at 8-9 (Feb. 22, 2011).

    \140\ Id.

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

    ELX stated that exchanges must have some flexibility in

    implementing fees in order to allow new markets to effectively build a

    customer base.\141\ According to ELX, not all customers ``receive the

    same commission'' from their FCM, IB or executing broker, and it is

    artificial to require exchanges to forego their flexibility in pricing

    to build a marketplace.\142\ ELX further stated that competition should

    not be rigidly regulated at the exchange level while other regulated

    entities doing business with customers are permitted to use competitive

    pricing.\143\

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

    \141\ ELX Comment Letter at 3 (Feb. 22, 2011).

    \142\ Id. at 4.

    \143\ Id.

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

    ICE noted that the discriminatory conduct prohibited by the

    proposed rule would be subject to review by the Commission as an

    ``access denial'' issue under part 9 of the Commission's

    regulations.\144\ Moreover, ICE asserted that in its view, there has

    been no pattern of DCMs denying access to their markets that warrants

    the proposed rule.\145\ ICE added that the proposed rule should not

    require access requirements for traders who do not apply for, and are

    not granted access to, the trading platform by the DCM.\146\

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

    \144\ ICE Comment Letter at 15 (Feb. 22, 2011).

    \145\ Id. at 15.

    \146\ Id.

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

    KCBT objected to the Commission's mandate of access and fee

    equality, stating that the mandate may not take into consideration all

    aspects of an exchange's varying fee or access structures, including

    beneficial rate structures for high-volume traders or market maker

    programs.\147\ Consequently, KCBT urged the Commission to withdraw from

    its attempt to impose fee restrictions on DCMs.\148\

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

    \147\ KCBT Comment Letter at 3 (Feb. 22, 2011).

    \148\ Id.

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

    MGEX stated that in general, it is in the best interest of the DCM

    to have open and available markets and services.\149\ Therefore, MGEX

    argued that the proposed rule is unnecessary and infringes on the

    business judgment of the DCM.\150\

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

    \149\ MGEX Comment Letter at 3 (Feb. 22, 2011).

    \150\ Id.

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

    Trading Technologies stated that the Commission should modify its

    proposed impartial access rules to require that DCM co-location service

    fees be reasonably related to the cost of providing such services.\151\

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

    \151\ Trading Technologies Comment Letter at 4 (Jun. 3, 2011).

    The Commission recently addressed co-location fees in a separate

    proposed rulemaking for ``Co-location/Proximity Hosting Services.''

    See notice of proposed rulemaking, 75 FR 33198, Jun. 11, 2010.

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

    [[Page 36625]]

    Discussion

    The Commission is adopting the rule as proposed, with the

    modifications and clarifications described below.

    The Commission believes that the proposed rule falls within the

    Commission's authority under the Dodd-Frank Act. As an initial matter,

    Congress, under the Dodd-Frank Act, expressly authorized the Commission

    to promulgate rules implementing requirements for DCMs, including

    access requirements.\152\ Moreover, the statutory language of Core

    Principle 2 expressly requires that DCMs ``establish, monitor and

    enforce compliance with the rules of the contract market, including:

    (1) Access requirements[.]'' \153\ Though the CEA does not specify that

    DCMs provide ``impartial'' access, the Commission believes that a

    reasonable reading of the CEA is that it permits rules that would

    promote impartial access.

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

    \152\ See CEA section 5(d)(1)(A)(ii) (Core Principle 1), 7

    U.S.C. 7(d)(1).

    \153\ CEA section 5(d)(2)(A)(i) (Core Principle 2), 7 U.S.C.

    7(d)(2).

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

    The Commission has considered comments that claimed that the rule

    is unnecessary, and believes that impartial access rules are necessary

    in order to prevent the use of discriminatory access requirements as a

    competitive tool against certain participants. In particular, access to

    a DCM should be based on the financial and operational soundness of a

    participant, not on factors that could bar access and result in

    discriminatory access or act as a barrier to entry. Any participant

    should be able to demonstrate financial soundness by showing either

    that it is a clearing member of a DCO that clears products traded on

    that DCM, or that it has clearing arrangements in place with such a

    clearing member. Furthermore, granting impartial access to participants

    that satisfy a DCM's access requirements will likely enhance the DCM's

    liquidity and the overall transparency of the swaps and futures

    markets.

    In regards to comments pertaining to the proposed rule's treatment

    of fees, the Commission believes that commenters have misinterpreted

    the proposed requirement for comparable fee structures for categories

    of market participants receiving equal access to the DCM. The

    requirement in proposed Sec. 38.151(b) neither sets nor limits fees

    charged by DCMs. Rather, it states only that the DCM set non-

    discriminatory fee classes for those receiving access to the DCM as a

    way to implement the requirement of impartial access to DCMs. DCMs may

    establish different categories of market participants, but may not

    discriminate within a particular category. Accordingly, contrary to

    CME's comment claiming that the fee restrictions imposed by the

    proposed rule exceed the Commission's authority under the Dodd-Frank

    Act, the rule does not set or impose fees on DCMs.

    To clarify the DCM NPRM preamble discussion of the proposed rule's

    fee requirement, and in response to CFE and KCBT's comment that a DCM

    should be able to differentiate among categories by using factors other

    than cost, the Commission notes that when a DCM determines its fee

    structure, it may consider other factors in addition to the cost of

    providing a member, market participant or ISV with access. The proposed

    requirement that DCMs have a comparable fee structure for categories of

    market participants was not designed to be a rigid requirement that

    fails to take into account legitimate business justifications for

    offering different fees to different categories of entities seeking

    access. The Commission recognizes that DCMs may also consider services

    they receive from members, market participants or ISVs (in addition to

    costs) when determining their fee structure. Market making is an

    example of one type of service that could merit a fee discount.

    To address comments submitted in connection with proposed Sec.

    38.151(a) pertaining to the uncertainty of the term ``market

    participant,'' the Commission is replacing the term ``market

    participant'' in proposed Sec. 38.151(b) with the phrase ``persons

    with trading privileges.''

    The Commission is adopting the remainder of the rule as proposed.

    Sec. 38.151(c)--Limitations on Access

    Proposed Sec. 38.151(c) required a DCM to establish and

    impartially enforce rules governing any decision by the DCM to deny,

    suspend, or permanently bar a member's or market participant's access

    to the contract market. Any decision by a DCM to deny, suspend, or

    permanently bar a member's or market participant's access to the DCM

    must be impartial and applied in a non-discriminatory manner.

    Summary of Comments

    CFE, ICE, and NYSE Liffe commented on the uncertainty of the term

    ``market participant'' as used in paragraphs (a), (b), and (c) of

    proposed Sec. 38.151.\154\

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

    \154\ CFE Comment Letter at 2 (Feb. 22, 2011); ICE Comment

    Letter at 14 (Feb. 22, 2011); NYSE Liffe Comment Letter at 11 (Feb.

    22, 2011).

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

    Discussion

    To address comments pertaining to the uncertainty of the term

    ``market participant,'' the Commission is replacing the term ``market

    participant'' in proposed Sec. 38.151(c) with the phrase ``persons

    with trading privileges.''

    iii. Sec. 38.152--Abusive Trading Practices Prohibited

    As proposed, Sec. 38.152 required a DCM to prohibit the following

    abusive trading practices: front-running, wash trading, pre-arranged

    trading, fraudulent trading, money passes, and any other trading

    practices that the DCM deems to be abusive. Additionally, a DCM

    permitting intermediation would be required to prohibit additional

    trading practices, including trading ahead of customer orders, trading

    against customer orders, accommodation trading, and improper cross-

    trading. The proposal also required a DCM to prohibit any other

    manipulative or disruptive trading practices prohibited by the Act or

    by the Commission pursuant to regulation.\155\

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

    \155\ Section 747 of the Dodd-Frank Act amended section 4c(a) of

    the CEA, 7 U.S.C. 6c(a), by adding three disruptive practices which

    make it: unlawful for any person to engage in any trading, practice,

    or conduct on or subject to the rules of a registered entity that--

    (A) Violate bids or offers;

    (B) Demonstrates intentional or reckless disregard for the

    orderly execution of transactions during the closing period; or

    (C) Is, is of the character of, or is commonly known as the

    trade as `spoofing' (bidding or offering with the intent to cancel

    the bid or offer before execution).

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

    Summary of Comments

    CME and MGEX stated that the proposed rule is too vague because it

    does not specifically define the enumerated prohibited trade

    practices.\156\ CME also stated that DCMs should have reasonable

    discretion to establish rules appropriate to their markets that are

    consistent with the CEA and that satisfy the core principles.\157\ CME

    additionally commented that prearranged trading, which is identified in

    the proposed rule as a prohibited trade practice, may be permissible at

    DCMs that allow for block trading, exchange for related position

    transactions, and pre-execution communications, subject to specified

    conditions.\158\

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

    \156\ CME Comment Letter at 17 (Feb. 22, 2011) (CME also argued

    that the proposed regulation was superfluous given that Core

    Principle 12 already requires a DCM to establish and enforce rules

    to protect markets and market participants from abusive practices);

    MGEX Comment Letter at 3 (Feb. 22, 2011).

    \157\ CME Comment Letter at 17 (Feb. 22, 2011).

    \158\ Id. at 17-18.

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

    Chris Barnard commented that the proposed rule refers to the

    prohibition of ``any other manipulative or disruptive trading practices

    prohibited by the Act

    [[Page 36626]]

    or by the Commission,'' which is important in order to cover new

    disruptive practices as they emerge, including spoofing.\159\ Better

    Markets commented that it is unclear whether any of the practices

    associated with high frequency trading will be prohibited by the

    Commission.\160\ Better Markets recommended that the Commission expand

    its list of prohibited trade practices to include exploiting a large

    quantity or block trade, price spraying, rebate harvesting, and

    layering the market, as all four of those practices involve fraudulent

    trading.\161\

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

    \159\ Barnard Comment Letter at 3 (May 20, 2011).

    \160\ Better Markets Comment Letter at 5 (Feb. 22, 2011).

    \161\ Id. at 5-8.

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

    Discussion

    The Commission is adopting Sec. 38.152 as proposed, subject to the

    modification described below.

    In response to CME and MGEX's concerns regarding the perceived

    vagueness of the enumerated trading practices, the Commission notes

    that the definitions of the respective abusive trading practices are

    commonly known within the industry. Moreover, the enumerated practices

    in the proposed rule are commonly prohibited within the industry and

    are typically already prohibited in DCM rulebooks.\162\ Although the

    Commission believes, as noted by CME, that a DCM should have reasonable

    discretion to establish rules for their markets, the Commission

    believes that, at a minimum, a DCM must prohibit the abusive trading

    practices identified in the rule. Indeed, in the RERs conducted by

    Commission staff to examine DCMs' core principle compliance, Commission

    staff has found that it is essential for a DCM to be able to

    demonstrate the capacity to detect, investigate, and enforce the

    trading violations prohibited under the rule. Consistent with CME's

    comments on this issue, the Commission clarifies that in certain

    limited circumstances, as provided under the CEA and the Commission

    regulations, pre-arranged trading, including block trading and exchange

    for related position transactions, are permissible at DCMs.

    Accordingly, the Commission is amending proposed Sec. 38.152 to

    clarify that a DCM must prohibit pre-arranged trading except as

    otherwise permitted in part 38 of this chapter. The Commission confirms

    that pre-execution communications are permissible if allowed by a DCM's

    rules that have been certified to or approved by the Commission.

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

    \162\ See e.g., CME Rule 534 (Wash Trades Prohibited), and MGEX

    Rule 743.00 (Accommodation or Wash Trades Forbidden).

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

    In response to Chris Barnard's comment about the inclusion of

    ``spoofing'' as a prohibited trade practice, the Commission notes that

    section 747 of the Dodd-Frank Act amended section 4c(a) of the CEA and

    includes spoofing as a disruptive trading practice. In the final rule,

    DCMs are required to prohibit any other manipulative or disruptive

    trading practices prohibited by the Act. Additionally, the Commission

    notes that Better Markets' comments regarding Core Principle 2 and high

    frequency trading are addressed in the context of Core Principle 4.

    iv. Sec. 38.153--Capacity To Detect and Investigate Rule Violations

    Proposed Sec. 38.153 required that a DCM have arrangements and

    resources for effective rule enforcement.\163\ This included the

    authority to collect information and examine books and records of

    members and market participants. Additionally, the proposed rule

    required a DCM to have, in addition to appropriate resources for trade

    practice surveillance programs, appropriate resources to enforce all of

    its rules.

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

    \163\ As noted in the DCM NPRM, proposed regulation 38.153 was

    based on the former application guidance for Core Principle 2.

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

    Summary of Comments

    CFE requested that the Commission clarify the term ``market

    participant.'' \164\ CFE claimed that if the term ``market

    participant'' were to be interpreted to apply to all customers and not

    just those customers with direct electronic access to the DCM, then the

    rule would greatly expand a DCM's regulatory responsibilities over

    participants with whom it has no direct relationship or

    connection.\165\ CFE further asserted that the rule would greatly

    increase costs for the DCM and that it would be very difficult for a

    DCM to undertake the same examination responsibilities for customers

    that do not have a direct relationship with the DCM that are applicable

    to a DCM member.

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

    \164\ CFE Comment Letter at 2 (Feb. 2, 2011).

    \165\ Id.

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

    CME stated that the proposed rule appears to imply that the entire

    class of non-member, non-registered market participants will be subject

    to the panoply of recordkeeping requirements currently applicable only

    to members, registrants, and direct access clients of CME.\166\

    Additionally, CME commented that the proposed rule does not detail

    which books, records and information the DCM must be able to obtain

    from non-member market participants.\167\

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

    \166\ CME Comment Letter at 18 (Feb. 22, 2011).

    \167\ Id.

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

    Discussion

    The Commission is adopting this provision as proposed, subject to

    the modification described below.

    The Commission is cognizant that a broad interpretation of the term

    ``market participant'' could significantly increase the regulatory

    responsibilities for DCMs. As noted above, the use of ``market

    participant'' may be interpreted to capture a wider range of persons

    than the Commission intended. Therefore, in response to the commenters'

    concerns, the Commission is replacing the term ``market participant''

    with ``persons under investigation'' in the final rule. Thus, a DCM

    must have the authority to collect books and records from its members,

    and from any persons under investigation, for effective enforcement of

    its rules. The books and records collected by the DCM should encompass

    all information and documents that are necessary to detect and

    prosecute rule violations.

    v. Sec. 38.154--Regulatory Services Provided by a Third Party

    As the Commission stated in the DCM NPRM, the CEA ``provides that a

    DCM may comply with applicable core principles by delegating relevant

    functions to a registered futures association or another registered

    entity'' (collectively, a ``regulatory service provider'').\168\

    Proposed Sec. 38.154(a) required that a DCM that contracts with a

    regulatory service provider ensure that its regulatory service provider

    has sufficient capacity and resources to provide timely and effective

    regulatory services. The proposed rule also made clear that a DCM

    ``will at all times remain responsible for the performance of any

    regulatory services received, for compliance with the [DCM's]

    obligations under the CEA and Commission regulations, and for the

    regulatory service provider's performance on its behalf.'' \169\

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

    \168\ Id. at 80580.

    \169\ 75 FR 80572, 80612, Dec. 22, 2010.

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

    Proposed Sec. 38.154(b) required that a DCM maintain adequate

    compliance staff to supervise any services performed by a regulatory

    service provider. The proposed rule also required that the DCM hold

    regular meetings with its regulatory service provider to discuss

    current work and other matters of regulatory concern. The DCM must also

    conduct periodic reviews of the adequacy and

    [[Page 36627]]

    effectiveness of services provided on its behalf.

    Proposed Sec. 38.154(c) required a DCM that utilizes a regulatory

    service provider to retain exclusive authority over certain areas,

    including the cancellation of trades, issuance of disciplinary charges

    against members or market participants, and denials of access to the

    trading platform for disciplinary reasons. While the proposed rule

    permitted a DCM to retain exclusive authority in other areas of its

    choosing, it required that the decision to open an investigation into a

    possible rule violation reside with the regulatory service provider.

    Summary of Comments

    MGEX, KCBT and CME asserted that the proposed rule was overly

    burdensome or unnecessary.\170\ MGEX expressed general opposition to

    proposed Sec. 38.154, stating that if a service has been delegated to

    another registered entity pursuant to a Commission-approved agreement,

    then this ``should be sufficient and no other formal agreement is

    necessary.'' \171\ KCBT contended that proposed Sec. 38.154 is overly

    burdensome and duplicative, particularly when a DCM contracts with a

    regulatory service provider that is also a DCM required to comply with

    the same core principles.\172\ KCBT noted that it currently is a party

    to a services agreement with another DCM and that it will be costly and

    unnecessary to perform periodic reviews and hold regular meetings with

    this regulatory service provider.\173\

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

    \170\ MGEX Comment Letter at 3 (Feb. 22, 2011); KCBT Comment

    Letter at 3 (Feb. 22, 2011); CME Comment Letter at 19 (Feb. 22,

    2011).

    \171\ MGEX Comment Letter at 3 (Feb. 22, 2011).

    \172\ KCBT Comment Letter at 3 (Feb. 22, 2011).

    \173\ Id.

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

    Similarly, CME contended that the proposed rule was overly

    prescriptive and suggested that the rules would better serve as

    guidance and acceptable practices.\174\ In particular, CME pointed to

    the requirements that a DCM conduct periodic reviews of the services

    provided and hold regular meetings with the regulatory service provider

    to discuss ongoing investigations, trading patterns, market

    participants, and any other matters of regulatory concern.\175\ CME

    stated that ``[w]hile it may well be that it is constructive for the

    DCM to hold regular meetings with its service provider and `discuss

    market participants,' the core principle should stand on its own and

    the DCM should have the flexibility to determine how best to

    demonstrate compliance with the core principle.'' \176\

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

    \174\ CME Comment Letter at 18-19 (Feb. 22, 2011).

    \175\ Id.

    \176\ CME Comment Letter at 19 (Feb. 22, 2011).

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

    CME further objected to the requirement that exclusive authority to

    open investigations remain with the regulatory service provider.\177\

    While it argued that the regulatory service provider ``should have the

    independence to open an investigation at its discretion, [CME] sees no

    reason why the DCM cannot also direct the regulatory service provider

    to open an investigation.'' \178\ Additionally, CME and KCBT both

    objected to the requirement in proposed Sec. 38.154(c) that all

    decisions concerning the cancellation of trades remain within the

    exclusive authority of the DCM.\179\ CME and KCBT argued that a DCM may

    be better served by granting such authority to a regulatory service

    provider.\180\

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

    \177\ Id.

    \178\ Id.

    \179\ CME Comment Letter at 19 (Feb. 22, 2011); KCBT Comment

    Letter at 3 (Feb. 22, 2011).

    \180\ Id.

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

    NYSE Liffe expressed support for the idea that a DCM will remain

    ultimately responsible for meeting its regulatory obligations even when

    it contracts with a regulatory service provider.\181\ However, NYSE

    Liffe requested clarification regarding what authority must be

    maintained by a DCM when it uses a third-party regulatory service

    provider.\182\ NYSE Liffe pointed to the requirement in proposed Sec.

    38.154(c) that a DCM must retain ``exclusive authority'' in certain

    areas and requested further clarification as to the definition of

    ``exclusive authority.'' \183\ In particular, NYSE Liffe requested

    guidance as to whether a DCM retains ``exclusive authority'' if its

    regulatory service provider prepares and presents an investigation

    report to a DCM's review panel, or assists DCM staff in presenting the

    matter, as long as the ultimate decision to bring a disciplinary action

    remains with the DCM's review panel.\184\ Additionally, NYSE Liffe

    sought guidance as to whether a regulatory service provider would be

    permitted to ``prosecute a disciplinary proceeding * * * so long as the

    ultimate decision to impose a penalty on a respondent, including a

    possible denial of access to the trading platform, resides with a

    hearing panel formed pursuant to the DCM's rules?'' \185\

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

    \181\ NYSE Liffe Comment Letter at 9 (Feb. 22, 2011).

    \182\ Id.

    \183\ Id.

    \184\ Id.

    \185\ Id. at 10.

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

    Discussion

    The Commission is adopting Sec. 38.154(a) and (b), as proposed,

    and is adopting Sec. 38.154(c) with certain modifications.

    In the past, the Commission has described acceptable

    ``contracting'' and ``delegating'' arrangements for the performance of

    core principle functions by third-parties.\186\ The Commission proposed

    Sec. 38.154 to clarify its previous guidance on such arrangements. In

    particular, the Commission does not draw substantive distinctions

    between ``contracting'' and ``delegating'' arrangements as they pertain

    to core principle compliance functions. Regardless of the term by which

    a DCM may refer to its utilization of a third-party, the Commission

    believes that the same regulatory requirements are applicable for

    purposes of part 38. For purposes of part 38, the Commission refers to

    such arrangements as ``delegation.'' The Commission also notes that

    DCMs must remain responsible for carrying out any function delegated to

    a third party, and that DCMs must ensure that the services received

    will enable the DCM to remain in compliance with the CEA's

    requirements. The Commission believes that proposed Sec. 38.154

    effectively establishes a system for administering regulatory services

    provided to DCMs by third party regulatory service providers. The

    Commission is of the view that the rule generally provides an

    appropriate balance between flexibility and ensuring that a DCM

    properly oversees the actions of its regulatory service provider to

    ensure accountability and effective performance.

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

    \186\ See 66 FR 42256, 42266, Aug. 10, 2001.

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

    The Commission acknowledges comments asserting that the rule is

    overly burdensome or unnecessary but believes that a DCM that elects to

    use a regulatory service provider must properly supervise the quality

    and effectiveness of the regulatory services provided on its behalf.

    The Commission believes that proper supervision will require that a DCM

    have complete and timely knowledge of relevant work performed by the

    DCM's regulatory service provider on its behalf. The Commission also

    believes that such knowledge can only be acquired through the periodic

    reviews and regular meetings required under proposed Sec. 38.154.

    Additionally, the Commission acknowledges CME and KCBT's comments

    regarding the cancellation of trades but believes that the potential

    economic consequences of trade

    [[Page 36628]]

    cancellations on a DCM's members and market participants are such that

    a DCM should retain exclusive authority over the cancellation of

    trades.

    The Commission has considered CME's comment regarding the

    importance of allowing a DCM to open investigations into possible rule

    violations. The Commission believes that a DCM should have the ability

    to request that its regulatory service provider conduct an

    investigation on a market participant or to conduct such an

    investigation on its own. Consequently, the Commission is modifying

    Sec. 38.154(c) by removing the requirement that the decision to open

    an investigation into possible rule violations reside exclusively with

    the regulatory service provider.

    Lastly, in response to the request by NYSE Liffe for additional

    guidance regarding whether certain regulatory decisions must be

    retained by a DCM, the Commission believes that a DCM would retain

    ``exclusive authority'' under Sec. 38.154(c) if it permits a

    regulatory service provider to present, or assist DCM staff to present,

    an investigation report or evidence to a disciplinary panel as long as

    the decisions to bring a disciplinary action and impose a disciplinary

    penalty on a respondent, including the decision to deny access, remains

    with the DCM or the DCM's disciplinary bodies.

    vi. Sec. 38.155--Compliance Staff and Resources

    In proposed Sec. 38.155(a), the Commission required that a DCM

    establish and maintain sufficient compliance staff and resources to

    conduct a number of enumerated tasks, such as audit trail reviews,

    trade practice surveillance, market surveillance, and real time market

    monitoring. The proposed rule also required that the DCM have

    sufficient compliance staff to address unusual market or trading events

    and to conduct and complete any investigations in a timely manner.

    In proposed Sec. 38.155(b), the Commission required a DCM to

    monitor the size and workload of its compliance staff annually to

    ensure that staff and resources are adequate. In the preamble to the

    proposed rule, the Commission clarified that it was not proposing that

    compliance staff size be determined based on a specific formula.

    Rather, the Commission intended ``to leave to the discretion of each

    individual DCM to determine the size of the staff it needs to

    effectively perform its self-regulatory responsibilities.'' \187\ In

    making this determination, the proposed rule also set forth certain

    factors that should be considered in determining the appropriate level

    of compliance resources and staff.

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

    \187\ DCM NPRM at 80580.

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

    Summary of Comments

    NYSE Liffe noted that in proposed Sec. 38.154(b), ``a DCM that

    contracts with a regulatory service provider must still maintain

    sufficient compliance staff.'' \188\ NYSE Liffe suggested that Sec.

    38.155 take into consideration whether a DCM has contracted with a

    regulatory service provider in determining the appropriate level of

    compliance staff and resources.\189\ NYSE Liffe also requested that the

    Commission ``make clear that a DCM meets its requirement to have

    sufficient compliance staff to address unusual market or trading events

    where its regulatory services provider has sufficient resources for

    addressing these unusual events.'' \190\

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

    \188\ NYSE Liffe Comment Letter at 10 (Feb. 22, 2011). See also

    DCM NPRM at 80612.

    \189\ NYSE Comment Letter at 10 (Feb. 22, 2011).

    \190\ Id.

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

    Chris Barnard requested that the Commission amend Sec. 38.155 to

    require DCMs to have a chief compliance officer ``working within a job

    description, structures, rules and procedures that act to maintain its

    independence.'' \191\

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

    \191\ Barnard Comment Letter at 3 (May 20, 2011).

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

    Discussion

    The Commission believes that proposed Sec. 38.155 effectively sets

    forth the requirement that DCMs must establish and maintain sufficient

    compliance staff to enforce compliance with its rules as required under

    Core Principle 2, and accordingly, the Commission is adopting Sec.

    38.155 as proposed.

    The Commission is of the view that having adequate staff to perform

    a DCM's compliance and enforcement responsibilities is essential to the

    effectiveness of its self-regulatory programs, including market

    surveillance, audit trail, trade practice surveillance, and

    disciplinary programs. The Commission believes (as noted by NYSE Liffe)

    that the staff of a regulatory service provider may be taken into

    consideration when determining whether a DCM has sufficient compliance

    staff. However, the Commission notes that pursuant to Sec. 38.154(b),

    each DCM must still retain sufficient compliance staff to supervise the

    quality and effectiveness of any services provided by a regulatory

    service provider on its behalf.

    The Commission acknowledges Chris Barnard's comment that a DCM

    should be required to designate a chief compliance officer but notes

    that the Dodd-Frank Act mandates that certain regulated entities, such

    as SEFs, swap data repositories, and derivatives clearing

    organizations, designate chief compliance officers. There is no

    explicit statutory requirement for DCMs. Therefore, the Commission does

    not believe it is appropriate to require DCMs to appoint a chief

    compliance officer. However, it is current industry practice for DCMs

    to designate an individual as chief regulatory officer, and it will be

    difficult for a DCM to meet the requirements of Sec. 38.155 without a

    chief regulatory officer or similar individual to supervise its

    regulatory program, including any services rendered to the DCM by a

    regulatory service provider.

    vii. Sec. 38.156--Automated Trade Surveillance System

    Proposed Sec. 38.156 required a DCM to maintain an automated trade

    surveillance system capable of detecting and investigating potential

    trade practice violations. The automated trade surveillance would be

    required to maintain all data reflecting the details of each order

    entered into the trading system, including order modifications and

    cancellations, and data reflecting transactions executed on the DCM.

    The proposed rule required the automated surveillance system to process

    this data on a trade date plus one day basis (``T+1 basis'').

    Additionally, according to the rule, the automated trade surveillance

    system would be required to provide users with the ability to compute,

    retain and compare trading statistics; compute profit and loss; and

    reconstruct the sequence of trading activity.

    Summary of Comments

    CME commented that an exchange does not capture order details,

    modifications or cancellations for open-outcry orders in an automated

    manner unless such orders are transmitted to the floor via the

    exchange's order routing system, or with respect to privately

    negotiated transactions.\192\ CME asserted that it has been unable to

    design a system that automates the actual investigation of potential

    trade practice violations, and that it would not be able to do so

    within 60 days of the final rules taking effect.\193\ CME further

    argued that it is unclear whether the regulation applies to electronic

    trading or open outcry trading.\194\ CME challenged the use of what it

    deems as ``broad and ambiguous'' terms to describe

    [[Page 36629]]

    capabilities that a DCM's automated trade surveillance system is

    required to have, including the capability to detect and flag specific

    trade execution patterns and anomalies; compute, retain and compare

    trading statistics; and compute trade gains, losses, and futures-

    equivalent positions.\195\ CME recommended that the Commission

    reconsider the requirements of this regulation and consider a more

    flexible, core principles-based approach.\196\

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

    \192\ CME Comment Letter at 20 (Feb. 22, 2011).

    \193\ Id.

    \194\ Id.

    \195\ Id.

    \196\ Id.

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

    MGEX agreed with the proposed requirement that a DCM's automated

    surveillance system must maintain all trade data and order data on a

    T+1 basis, but opposed the proposed requirement that a DCM compute,

    retain and compare trading statistics.\197\ MGEX contended that this

    information is not a trade data item and requested that this

    requirement be removed from the final rule.\198\

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

    \197\ MGEX Comment Letter at 4 (Feb. 22, 2011).

    \198\ Id.

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

    NYSE Liffe commented that it would take significant time to

    determine the types of changes to existing automated systems required

    to implement the proposed rules, including Sec. 38.156, and

    recommended that the Commission provide existing DCMs with at least 18

    months from the effective date of the rule to certify compliance with

    the final regulations.\199\

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

    \199\ NYSE Liffe Comment Letter at 14 (Feb. 22, 2011).

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

    Better Markets commented that an automated trade surveillance

    system, which records orders, modifications of orders, and

    cancellations, must allow for such data to be time-stamped at intervals

    consistent with the capabilities of high frequency traders that use the

    DCM's systems to transact.\200\

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

    \200\ Better Markets Comment Letter at 9 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting proposed Sec. 38.156, with one

    modification.

    The requirement that an automated trade surveillance system

    maintain all data reflecting the details of each order entered into the

    trading system is being moved to Sec. 38.552 (Elements of an

    acceptable audit trail program). Specifically, the Commission believes

    that Sec. 38.552(b) is the more logical place in the Commission's

    rules to address this aspect of a DCM's automated surveillance system

    because paragraph (b) specifies the requirements for a DCM's audit

    trail program, including a history of all orders and trades.

    In response to CME's comment regarding a system that automates the

    actual investigation, the Commission notes that CME has misinterpreted

    the proposed rule, as Sec. 38.156 applies to a DCM's automated

    surveillance system and not to the actual investigation which the

    Commission expects would be carried out by a DCM's compliance staff

    with the assistance of automated surveillance tools. The Commission

    confirms that the speed and timing of capturing information through an

    automated trade surveillance system is different for open-outcry than

    for electronic trading, as CME stated in its comments; this is

    addressed in the discussion concerning Sec. 38.552.

    In regards to CME's comment pertaining to the breadth of the rule,

    while the Commission acknowledges that computing, retaining, and

    comparing trading statistics may not specifically be a trade data item,

    the Commission believes that these analytical tools are a necessary

    component of an effective trade surveillance system. The Commission

    notes that timing concerns raised by NYSE Liffe regarding compliance

    with the final rules are addressed above in the Sec. 38.3 discussion.

    Additionally, the Commission notes that Better Markets' comments

    regarding Core Principle 2 and high frequency trading are addressed in

    the context of Core Principle 4.

    viii. Sec. 38.157--Real-Time Market Monitoring

    Proposed Sec. 38.157 codified existing practices at DCMs for real-

    time monitoring of electronic trading, and reflected the growth of

    electronic trading in the U.S. futures markets, as well as the

    Commission's experience in designating new contract markets since

    passage of the CFMA.\201\ Proposed Sec. 38.157 required a DCM to

    conduct real-time market monitoring of all trading activity on its

    electronic trading platform to ensure orderly trading and identify

    market or system anomalies. The proposed rule further required a DCM to

    have the authority to cancel trades and adjust trade prices when

    necessary, and that any price adjustments or trade cancellations must

    be transparent to the market and subject to clear, fair and publicly-

    available standards.

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

    \201\ See DCM NPRM at 80581.

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

    Summary of Comments

    In its comments, CME reiterated its belief that the proposed rules

    are overly prescriptive.\202\ CME argued that the standards set in the

    proposed rule are unreasonably high.\203\ CME pointed to the

    requirement that a DCM ``conduct real-time market monitoring of all

    trading activity on its electronic trading platform(s) to ensure

    orderly trading and identify any market or system anomalies'' and

    argued that it is not clear whether any DCM could comply with these

    standards.\204\

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

    \202\ CME Comment Letter at 20-21 (Feb. 22, 2011).

    \203\ Id.

    \204\ CME Comment Letter at 20-21 (Feb. 22, 2011) (citing DCM

    NPRM at 80613, with emphasis added by CME).

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

    Better Markets stated that when conducting real-time market

    monitoring, DCMs should have the capability to monitor high frequency

    trading.\205\ Better Markets argued that this process should include

    ``monitoring of orders and cancellations, each time-stamped at

    intervals consistent with the capabilities of [high frequency

    traders].'' \206\

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

    \205\ Better Markets Comment Letter at 9 (Feb. 22, 2011).

    \206\ Id.

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

    Discussion

    The Commission is adopting Sec. 38.157, as proposed, subject to

    the modification described below.

    In regard to the CME's comment, the Commission believes that Sec.

    38.157, as proposed, enables a DCM to effectively monitor its

    electronic markets and grants a DCM the flexibility to determine the

    best way to conduct real-time market monitoring. The Commission also

    believes that the proposed rule correctly mandates that a DCM conduct

    real-time market monitoring of all trading activity that occurs on its

    electronic trading platform(s) in order to detect disorderly trading

    and market or system anomalies, and take appropriate regulatory action.

    The Commission recognizes that real-time market monitoring cannot

    ensure orderly trading at all times, but it should be able to identify

    disorderly trading when it occurs. Therefore, the Commission is

    modifying the first sentence of proposed Sec. 38.157 to remove the

    requirement to ``ensure orderly trading'' and instead state that ``a

    designated contract market must conduct real-time market monitoring of

    all trading activity on its electronic trading platform(s) to identify

    disorderly trading and any market or system anomalies.'' In response to

    Better Markets' comments, the Commission believes that Sec. 38.157 is

    sufficient to establish a DCM's obligations with respect to real-time

    market monitoring of all trading on a DCM's electronic trading

    platform, including high frequency trading. The Commission will

    continue to assess the impact of high

    [[Page 36630]]

    frequency trading on the markets regulated by the Commission.

    The Commission believes that Sec. 38.157 effectively establishes a

    DCM's obligations with respect to real-time market monitoring of

    trading activity on its electronic trading platforms. Accordingly, the

    Commission is adopting Sec. 38.157 as modified above.

    ix. Sec. 38.158--Investigations and Investigation Reports

    Sec. 38.158(a)--Procedures

    Proposed paragraph (a) of Sec. 38.158 required that a DCM have

    procedures to conduct investigations of possible rule violations. The

    proposed rule required that an investigation must be commenced upon

    Commission staff's request or upon discovery of information by the DCM

    indicating a possible basis for finding that a violation has occurred

    or will occur.

    Summary of Comments

    CME argued that the proposed rule diminishes any discretion on

    behalf of DCMs to determine the matters that warrant a formal

    investigation, because at the time of discovery or upon receipt of

    information, and before a review occurs, there always may be a possible

    basis that a violation has occurred or will occur.\207\ CME agreed that

    written referrals from the Commission, law enforcement authorities,

    other regulatory agencies, or other SROs should result in a formal

    investigation in every instance.\208\ However, CME contended that the

    DCM should have reasonable discretion to determine how it responds to

    complaints and other referrals, including the discretion to follow-up

    with a less formal inquiry in certain situations.\209\

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

    \207\ CME Comment Letter at 21 (Feb. 22, 2011).

    \208\ Id.

    \209\ Id.

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

    Discussion

    The Commission is adopting Sec. 38.158(a) as proposed, subject to

    a minor modification. The Commission confirms that in certain

    circumstances a DCM should have reasonable discretion regarding whether

    or not to open an investigation, as noted by CME. Consequently, the

    Commission is revising paragraph (a) of Sec. 38.158 to reflect that an

    investigation must be commenced upon receipt of a request from

    Commission staff or upon the discovery or receipt of information by the

    DCM that indicates a ``reasonable basis'' for finding that a violation

    ``may have'' occurred or will occur.

    Sec. 38.158(b)--Timeliness

    Proposed Sec. 38.158(b) required that an investigation be

    completed in a timely manner, which is defined in the proposed rule as

    12 months after an investigation is opened, absent mitigating factors.

    The mitigating factors identified in the proposed rule included the

    complexity of the investigation, the number of firms or individuals

    involved as potential wrongdoers, the number of potential violations to

    be investigated, and the volume of documents and data to be examined by

    compliance staff.

    Summary of Comments

    CME expressed general support for the proposed rule, but

    recommended that the list of possible mitigating circumstances also

    include the domicile of the subjects and cooperative enforcement

    matters with the Commission, since the DCM may not have independent

    control over the pace of the investigation.\210\ CME also requested

    that the Commission make clear that the time period necessary to

    prosecute an investigation once it is referred for enforcement action

    is independent of the 12-month period referenced in the

    regulation.\211\

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

    \210\ Id.

    \211\ Id. at 22.

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

    Discussion

    The Commission is adopting the rule as proposed.

    The Commission believes that a 12-month period to complete an

    investigation is appropriate and timely. Although the Commission

    believes, as noted by CME, that additional mitigating factors could

    justifiably contribute to a delay in completing an investigation within

    a 12-month period the Commission notes that the factors included in the

    proposed rule were not intended to be an exhaustive list of mitigating

    circumstances. In the Commission's view, the factors listed in the

    proposed rule represent some of the more common examples that could

    delay completing an investigation within the 12-month period. The

    Commission also confirms that Sec. 38.158 only applies to the

    investigation phase of a matter.

    Sec. 38.158(c)--Investigation Reports When a Reasonable Basis Exists

    for Finding a Violation

    Proposed Sec. 38.158(c) sets forth the elements and information

    that must be included in an investigation report when there is a

    reasonable basis for finding a rule violation, including: (i) The

    reason for the investigation; (ii) a summary of the complaint, if any;

    (iii) the relevant facts; (iv) compliance staff's analysis and

    conclusions; (v) a recommendation as to whether disciplinary action

    should be pursued; and (vi) the member or market participant's

    disciplinary history.

    Summary of Comments

    CME commented that rule violations can range from very minor to

    egregious and not every rule violation merits formal disciplinary

    action.\212\ CME argued that minor transgressions can effectively be

    addressed by the issuance of a warning letter by CME compliance staff,

    and that the Commission should amend the rule accordingly to account

    for this possibility.\213\

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

    \212\ Id.

    \213\ Id.

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

    CME and ICE opposed the requirement that a DCM include a

    respondent's disciplinary history in the investigative report that is

    submitted to a review panel.\214\ CME commented that a respondent's

    disciplinary history is not relevant to the consideration of whether

    that respondent has committed a further violation of the DCM's

    rules.\215\ However, CME noted that an exception would be where the

    prior disciplinary offense is an element of proof for the rule

    violations for which compliance staff is asking the review panel to

    issue charges, such as a violation of a previously issued ``cease and

    desist'' order.\216\ ICE stated that unless the rule violations that

    are the subject of the investigative report involve pervasive

    recordkeeping violations, only substantive violations in the

    respondent's history would be relevant to the review panel's

    deliberations.\217\

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

    \214\ CME Comment Letter at 21-22 (Feb. 22, 2011); ICE Comment

    Letter at 15 (Feb. 22, 2011).

    \215\ CME Comment Letter at 35 (Feb. 22, 2011).

    \216\ Id.

    \217\ ICE Comment Letter at 15 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting the rule as proposed, subject to one

    modification to address the comments from CME and ICE.

    The Commission confirms, as CME noted, that ``minor

    transgressions'' can be addressed by a DCM's compliance staff with the

    issuance of warning letters and this is discussed below in Sec.

    38.158(e). However, as further discussed below in Sec. Sec. 38.158(d)

    and (e), no more than one warning letter may be issued to the same

    person or entity found to have committed the same rule violation within

    a rolling 12-month period.

    The Commission also agrees with CME and ICE that a respondent's

    disciplinary history is not always

    [[Page 36631]]

    relevant to the consideration of whether a respondent has committed a

    further violation of a DCM's rules. As a result, this requirement is

    being eliminated from the final rule. The Commission notes, however,

    that all disciplinary sanctions, including sanctions imposed pursuant

    to an accepted settlement offer, must take into account the

    respondent's disciplinary history.

    Sec. 38.158(d)--Investigation Reports When No Reasonable Basis Exists

    for Finding a Violation

    Proposed Sec. 38.158(d) sets forth the elements and information

    that must be included in an investigation report when it has been

    determined that no reasonable basis exists for finding a rule

    violation, including: (i) The reason the investigation was initiated;

    (ii) a summary of the complaint, if any; (iii) the relevant facts; and

    (iv) compliance staff's analysis and conclusions. The proposed rule

    also required that if a DCM's compliance staff recommends that a

    warning letter be issued, the investigation report must also include

    the potential wrongdoer's disciplinary history.

    Summary of Comments

    CME recommended that the Commission amend the proposed rule to

    account for a DCM's ability to close a case administratively and still

    issue a warning letter without disciplinary committee approval, as the

    CME Market Regulation Department currently has such authority.\218\

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

    \218\ CME Comment Letter at 22 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting Sec. 38.158(d) as proposed, subject to

    one modification.

    The Commission is eliminating the provision in paragraph (d) that

    discussed the concept of warning letters because the Commission does

    not believe that a DCM would need to limit the number of warning

    letters that can be issued when a rule violation has not been found.

    For example, Commission staff has found in its RERs that some DCMs

    issue warning letters as reminders or for educational purposes. The

    Commission notes, however, that this modification does not impact the

    limitation on the number of warning letters that may be issued--by a

    disciplinary panel or by compliance staff--to the same person for the

    same violation in a rolling 12-month period when a rule violation is

    found to have been committed.

    Sec. 38.158(e)--Warning Letters

    Proposed Sec. 38.158(e) provided that a DCM may authorize its

    compliance staff to issue a warning letter or to recommend that a

    disciplinary committee issue a warning letter. The proposed rule also

    provided that no more than one warning letter for the same potential

    violation may be issued to the same person or entity during a rolling

    12-month period.

    Summary of Comments

    CME and MGEX opposed the requirement that a DCM may only issue one

    warning letter to the same person for the same rule violation in a

    rolling 12-month period.\219\ CME stated that the rule is unduly

    prescriptive and fails to take into consideration important factors

    that are relevant to a DCM when evaluating potential sanctions in a

    disciplinary matter.\220\ CME stated that the DCM should have

    discretion to determine the appropriate sanctions in all cases.\221\

    MGEX contended that the requirement will effectively prohibit a DCM

    from using warning letters as an educational tool or reminder.\222\

    According to MGEX, the proposed rule forces DCMs to adopt summary fines

    and prevents them from pursuing minor infractions, which may lead to

    additional unintended consequences outside of the purpose of the Dodd-

    Frank Act.\223\ MGEX recommended that the Commission remove this

    requirement and provide the DCM more flexibility in determining the

    proper methodology for enforcing rules, regulations, and

    procedures.\224\

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

    \219\ CME Comment Letter at 22-23 (Feb. 22, 2011); MGEX Comment

    Letter at 4 (Feb. 22, 2011).

    \220\ CME Comment Letter at 22 (Feb. 22, 2011).

    \221\ Id.

    \222\ MGEX Comment Letter at 4 (Feb. 22, 2011).

    \223\ Id.

    \224\ Id.

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

    Discussion

    The Commission is adopting Sec. 38.158(e) with certain

    modifications, including to convert a portion of the rule to guidance.

    The Commission acknowledges the comments from CME and MGEX

    concerning the issuance of warning letters but believes that in order

    to ensure that warning letters serve as effective deterrents, and to

    preserve the value of disciplinary sanctions, the Commission believes

    that no more than one warning letter may be issued to the same person

    or entity found to have committed the same rule violation within a

    rolling 12-month period.\225\ As discussed in the DCM NPRM, while a

    warning letter may be appropriate for a first-time violation, the

    Commission does not believe that more than one warning letter in a

    rolling 12-month period for the same violation is ever

    appropriate.\226\ This provision will remain as a rule. A policy of

    issuing repeated warning letters, rather than issuing meaningful

    sanctions, to members and market participants who repeatedly violate

    the same or similar rules denigrates the effectiveness of a DCM's rule

    enforcement program.\227\ Furthermore, the section of the proposed rule

    governing warning letters is consistent with what Commission staff has

    advised DCM applicants in the past and with recommendations made in

    prior RERs.\228\

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

    \225\ For purposes of this rule, the Commission does not

    consider a ``reminder letter'' or such other similar letter to be

    any different than a warning letter.

    \226\ See DCM NPRM at 80581.

    \227\ See id. at 80581.

    \228\ See 1998 Rule Enforcement Review of Kansas City Board of

    Trade; and Rule Enforcement Review of the Minneapolis Grain Exchange

    (Aug. 27, 2009).

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

    The Commission notes that the final rule does not include the

    reference that a warning letter issued in accordance with this section

    is not a penalty or an indication that a finding of a violation has

    been made because paragraph (e) only addresses warning letters that are

    issued for a finding of a violation. Also, the provision requiring a

    copy of a warning letter issued by compliance staff to be included in

    the investigation report is being eliminated from the final rule

    because the Commission has determined that such a requirement is

    unnecessary.

    As noted above, the Commission believes that minor transgressions

    can be addressed by the issuance of a warning letter by a DCM's

    compliance staff. Accordingly, in order to provide a DCM with

    flexibility in this regard, the Commission is moving this provision of

    the rule to the guidance section of Core Principle 2. The text of the

    guidance provides that the rules of a DCM may authorize compliance

    staff to issue a warning letter to a person or entity under

    investigation or to recommend that a disciplinary panel take such

    action.

    x. Sec. 38.159--Ability To Obtain Information

    Proposed Sec. 38.159 required a DCM to have the ability and

    authority to obtain any necessary information to perform any function

    required under proposed subpart C (Compliance with rules) of the

    Commission's regulations. This would include the capacity to carry out

    any international information sharing agreements required by the

    [[Page 36632]]

    Commission. Proposed Sec. 38.159 also provided ``that information

    sharing agreements can be established with other designated contract

    markets and swap execution facilities, or the Commission can act in

    conjunction with a DCM to carry out such information sharing.'' \229\

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

    \229\ DCM NPRM at 80614.

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

    Summary of Comments

    CME and KCBT stated that a DCM should not be mandated to carry out

    international or other informational sharing agreements to which it is

    not a party and should not be compelled by Commission regulation to

    enter into agreements, particularly when such agreements contain terms

    determined by other parties, which conceivably could include terms or

    conditions unsuitable to a DCM or conditions that a DCM is unable to

    comply with.\230\

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

    \230\ CME Comment Letter at 15 (Feb. 22, 2011); KCBT Comment

    Letter at 3 (Feb. 22, 2012).

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

    Discussion

    The Commission is adopting Sec. 38.159 as proposed. In response to

    CME and KCBT's comments, Sec. 38.159 clarifies and codifies the Core

    Principle 2 requirement that a DCM have the ability and authority to

    obtain necessary information to perform its rule enforcement

    obligations. The core principle specifically requires that the rules of

    the DCM provide it with the ability and authority to perform any

    function described in the core principle, including capacity to carry

    out such international information sharing agreements, as the

    Commission may require. The rule provides that information sharing

    agreements can be established with other DCMs or SEFs, or that the

    Commission can act in conjunction with a DCM to carry out such

    information sharing.\231\ The Commission notes that the language of

    Sec. 38.159, including the language to which CME objects, is

    substantially similar to the language of Core Principle 2. The

    Commission also notes that while the rule requires DCMs to have the

    capacity to carry out such information sharing agreements, as is

    required by the statute, the rule does not mandate or prescribe the

    specific terms of such agreements, and thus, DCMs would have the

    ability to collaborate on the terms of such agreements. The Commission

    believes that Sec. 38.159 appropriately implements the requirements of

    section 5(d)(2)(C) of the CEA and is adopting Sec. 38.159 as proposed.

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

    \231\ As noted in the DCM NPRM, this proposed language is

    virtually identical to the language found in the guidance for former

    Designation Criterion 8.

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

    xi. Sec. 38.160--Additional Rules Required

    Proposed Sec. 38.160 required a DCM to adopt and enforce any

    additional rules that it believes are necessary to comply with the

    requirements of this subpart C.

    The Commission has determined to codify proposed Sec. 38.160 as

    guidance for Core Principle 2 in appendix B, rather than a rule, in

    order to provide DCMs with added flexibility in adopting rules that

    they believe are necessary to comply with this core principle.

    Consistent with this determination, the Commission is replacing

    proposed Sec. 38.160 with new Sec. 38.160 (titled ``Additional

    sources for compliance'') that simply permits DCMs to rely upon the

    guidance in appendix B of this part to demonstrate to the Commission

    compliance with Sec. 38.150 of this part.

    3. Subpart D--Contracts Not Readily Subject To Manipulation

    The Dodd-Frank Act did not revise the statutory text of Core

    Principle 3 (Contracts Not Readily Subject to Manipulation). DCMs

    historically have complied with the requirements of Core Principle 3

    through the guidance provided in Guideline No. 1, which was codified in

    former appendix A to part 40, which is now superseded by appendix C

    under part 38 of this final rulemaking. In the DCM NPRM, the Commission

    proposed to maintain the guidance under former Guideline No. 1 in new

    appendix C, but with certain proposed revisions, as the central mode of

    compliance for DCMs under Core Principle 3. In addition to the

    guidance, the DCM NPRM proposed two rules under Core Principle 3.

    Proposed Sec. 38.200 codified the statutory language of Core Principle

    3, and proposed Sec. 38.201 referred applicants and DCMs to the

    guidance in appendix C to part 38 for purposes of demonstrating to the

    Commission their compliance with the requirements of Sec. 38.200.

    In the DCM NPRM, the Commission proposed certain revisions to

    former Guideline No. 1, including: (1) Codifying the provision in

    appendix C of part 38, and eliminating it from part 40; (2) re-titling

    the guidance as ``Demonstration of Compliance That a Contract is not

    Readily Susceptible to Manipulation;'' and (3) amending and updating

    the guidance to expand the provision to include swap transactions.

    Proposed appendix C to part 38 was intended to act as a source for

    new and existing DCMs to reference for best practices when developing

    products to list for trading. The amended guidance provided greater

    detail to DCMs regarding the relevant considerations in demonstrating

    compliance with Core Principle 3 when designing a contract and

    submitting supporting documentation and data to the Commission at the

    time the DCM submits: (1) The terms and conditions of a new contract

    under Sec. Sec. 40.2 or 40.3, or (2) amendments to terms and

    conditions under Sec. Sec. 40.5 or 40.6. Specifically, proposed

    appendix C to part 38 provided guidance regarding: (1) The forms of

    supporting information a new contract submission should include; (2)

    how to estimate deliverable supplies; (3) the contract terms and

    conditions that should be specified for physically delivered contracts;

    (4) how to demonstrate that a cash-settled contract is reflective of

    the underlying cash market, is not readily subject to manipulation or

    distortion, and is based on a cash price series that is reliable,

    acceptable, publicly available and timely; (5) the contract terms and

    conditions that should be specified for cash-settled contracts; (6) the

    requirements for options on futures contracts; (7) the terms and

    conditions for non-price based futures contracts; and (8) the terms and

    conditions for swap contracts.

    Estimating Deliverable Supply

    Summary of Comments

    CME commented on the proposed guidance pertaining to estimating

    deliverable supply in paragraph (b)(1)(i)(A) of proposed appendix

    C.\232\ CME contended that the proposed definition of deliverable

    supply is restrictive and inconsistent with long-standing industry

    practice.\233\ Specifically, CME objected to the proposed provision

    that states that ``an appropriate estimate of deliverable supply

    excludes supplies that are committed to some commercial use.'' \234\

    CME stated that DCMs have historically estimated deliverable supplies

    by including in their calculations all supplies that are stored in the

    delivery territory or that move through the

    [[Page 36633]]

    delivery territory, including a determination of amounts committed to

    commercial use.\235\ CME asserted that the proposed rulemaking does not

    identify any problems with continuing to use the current methodology in

    these markets, and claimed that if the proposed standard is adopted, it

    will impose additional costs on exchanges and market participants,

    including requiring exchanges to survey market participants annually

    with no defined benefit.\236\

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

    \232\ CME Comment Letter at 38 (Feb. 22, 2011). Proposed

    paragraph (b)(1)(i)(A) of appendix C provided guidance on how to

    estimate the deliverable supply of a commodity that underlies a

    futures contract. The estimated deliverable supply should reflect

    the amount of that commodity that can reasonably be expected to be

    readily available to long traders to take delivery and short traders

    to make delivery at the expiration of a futures contract. This

    information is used by Commission staff when considering a

    contract's terms and conditions in determining whether a contract is

    readily susceptible to manipulation. DCM NPRM at 80631.

    \233\ CME Comment Letter at 38 (Feb. 22, 2011).

    \234\ See proposed paragraph (b)(1)(i)(A), appendix C. DCM NPRM

    at 80631.

    \235\ CME Comment Letter at 38 (Feb. 22, 2011).

    \236\ Id.

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

    Moreover, CME argued that the requirement that DCMs submit monthly

    deliverable supply estimates ``for at least the most recent five years

    for which data sources permit'' to be used by the Commission to review

    a DCM's certification or approval request for a new contract or related

    rule amendment is onerous for DCMs.\237\ Instead, CME suggested that

    the Commission require monthly estimates of deliverable supply for the

    most recent three years.\238\

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

    \237\ Id.

    \238\ Id.

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

    Discussion

    The Commission acknowledges CME's comments regarding the proposed

    guidance for estimating deliverable supply but notes that a DCM has

    historically been required to estimate deliverable supplies, which has

    required that a DCM consult with market participants on a regular

    basis. In that regard, contrary to CME's claim, the proposed guidance

    stating that exchanges should survey market participants should not

    impose additional costs on exchanges. As noted above, Commission staff

    will continue to work with exchange staff to determine how the

    deliverable supply for a certain commodity should be estimated.

    Moreover, the Commission confirms, as noted by CME, that the term

    ``commercial use'' may not be appropriate and could cause confusion.

    Accordingly, the Commission is eliminating the sentence in proposed

    paragraph (b)(1)(i)(A) that references the term ``commercial use,'' and

    is replacing it with the term ``long-term agreement.'' Specifically,

    the Commission will clarify in paragraph (b)(1)(i)(A) that an estimate

    of deliverable supply would not include supply that is committed for

    long-term agreements (i.e., the amount of supply that would not be

    available to fulfill the delivery obligations arising from current

    trading).

    The Commission is further clarifying in paragraph (b)(1)(i)(A) of

    the guidance that an exchange may include all or a portion of the

    supply that is committed for long-term agreements if it can demonstrate

    that those supplies are consistently and regularly made available to

    the spot market for traders to acquire at prevailing economic values.

    Specifically, the Commission is adding language to paragraph

    (b)(1)(i)(A) to provide that if the estimated deliverable supply that

    is committed for long-term agreements, or a significant portion

    thereof, can be demonstrated by the exchange to be consistently and

    regularly made available to the spot market for short traders to

    acquire at prevailing economic values, then those ``available''

    supplies committed for long-term contracts may be included in the

    exchange's estimate of deliverable supply for that commodity.\239\

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

    \239\ In adding this language, the Commission is responding to

    CME's March 28, 2011 comment letter which stated that the Commission

    should define what it understands as ``long-term agreement,''

    stating that requiring DCMs to consult with market participants to

    estimate deliverable supply on a monthly basis would be a

    substantial burden.

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

    Similarly, in paragraph (b)(1)(i)(C) of the guidance, the

    Commission is eliminating the term ``commercial use'' and replacing it

    with the term ``committed for long-term agreements.''

    The Commission further agrees with CME that three years of monthly

    estimates of deliverable supply is sufficient for the Commission to use

    to determine whether or not a contract is readily susceptible to

    manipulation or distortion. In this regard, the Commission is amending

    paragraphs (a)(2), (b)(1)(i)(A), (b)(1)(i)(B), and (b)(1)(i)(C) to

    reflect a three year obligation.

    Calculation of Price Indices

    Summary of Comments

    CME commented on the proposed guidance for calculating price

    indices in paragraphs (c)(3)(ii) and (g)(ii) of appendix C.\240\ CME

    stated that the guidance may not be applicable for some markets where

    there may not be eight independent entities in the entire industry, and

    that in those situations, the cash settlement survey should include

    transactions representing at least 51 percent of the total production

    of the commodity in question.\241\

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

    \240\ CME Comment Letter at 38-39 (Feb. 22, 2011). Proposed

    paragraphs (c)(3)(ii) and (g)(ii) of appendix C addressed

    calculation procedures for safeguarding against potential attempts

    to artificially influence a cash settlement price for futures

    contracts settled by cash settlement. The guidance provided that if

    the cash price is determined by a survey of cash market sources, the

    survey should include either: (1) at least four independent entities

    (if such sources do not take a position); or (2) eight entities (if

    such sources trade for their own accounts).

    \241\ CME Comment Letter at 38 (Feb. 22, 2011). Proposed

    c(3)(ii) and (g)(ii) of appendix C provided that: ``Where a

    designated contract market itself generates the cash settlement

    price series, the designated contract market should establish

    calculation procedures that safeguard against potential attempts to

    artificially influence the price. For example, if the cash

    settlement price is derived by the designated contract market based

    on a survey of cash market sources, the designated contract market

    should maintain a list of such entities which all should be

    reputable sources with knowledge of the cash market. In addition,

    the sample of sources polled should be representative of the cash

    market, and the poll should be conducted at a time when trading in

    the cash market is active. The cash-settlement survey should include

    a minimum of four independent entities if such sources do not take

    positions in the commodity (e.g., if the survey list is comprised

    exclusively of brokers) or at least eight independent entities if

    such sources trade for their own accounts (e.g., if the survey list

    is comprised of dealers or merchants).''

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

    Argus stated that it is important that the examination of a

    referenced index price should recognize the differences in markets and

    instrument types, and that the methodologies used to determine an index

    price may vary depending on the characteristics of the market in

    question.\242\ Accordingly, Argus recommended that any review of the

    integrity of a price index should be flexible enough to account for

    differences in markets and instrument types.\243\ Argus also requested

    that the Commission clarify that the proposed guidance for calculation

    of prices is applicable only to DCMs or SEFs, and does not apply to

    independent price data providers of price indices.\244\ Argus stated

    that as a market data price provider it obtains price data that is

    voluntarily provided to it by market participants, and that it has no

    means of requiring participants to provide that data.\245\ In that

    regard, Argus contended that for less liquid markets, there may only be

    a few market participants willing to provide data to Argus to use to

    determine a price series for a commodity.\246\ Argus noted that, in

    contrast, a DCM or SEF has the ability to use market transactions

    traded on its platform, or to survey market participants that trade on

    its platform, to determine a cash settlement price.\247\ Thus, Argus

    stated that the guidance in paragraph (c)(3)(ii) should not apply to

    market data price providers.\248\

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

    \242\ Argus Comment Letter at 4 (Feb. 22, 2011).

    \243\ Id.

    \244\ Id. at 4-6.

    \245\ Id.

    \246\ Id.

    \247\ Id.

    \248\ Id.

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

    Discussion

    In light of the concerns raised in the comments above, the

    Commission is

    [[Page 36634]]

    eliminating the last sentence of paragraphs (c)(3)(ii) and (g)(ii),

    which provides that ``[t]he cash-settlement survey should include a

    minimum of four independent entities if such sources do not take

    positions in the commodity (e.g., if the survey list is comprised

    exclusively of brokers) or at least eight independent entities if such

    sources trade for their own accounts (e.g., if the survey list is

    comprised of dealers or merchants).'' The Commission notes that the

    guidance in appendix C to part 38 is not a restrictive list of

    acceptable methodologies. The Commission will continue to review a

    contract's susceptibility to manipulation on a contract-by-contract

    basis, including taking into account the characteristics of the

    underlying market with respect to the price methodology used by

    independent price data providers.

    The Commission is also making several clarifying amendments to

    appendix C to part 38. The Commission is amending the guidance in

    paragraph (c)(2) pertaining to a DCM's evaluation of the susceptibility

    of a cash-settled contract to manipulation. Specifically, the

    Commission is adding the phrase ``[i]n a manner that follows the

    determination of deliverable supply as noted above in b(1)'' to the

    first sentence in paragraph (c)(2). This will clarify that for cash-

    settled contracts based on physical commodities, an exchange should

    analyze the size and liquidity of the cash market that underlies the

    listed contract as it would if the contract were settled through

    physical delivery.

    The Commission also is amending paragraph (c)(4)(i)(E) regarding

    Maximum Price Fluctuations Limits for cash-settled contracts, to

    clarify that for broad-based stock index futures contracts, rules

    should be adopted to coordinate with New York Stock Exchange (``NYSE'')

    declared Circuit Breaker Trading Halts.\249\ However, because there are

    proposals for alternative market coordination currently being

    considered (other than the Circuit Breaker Trading Halt), the guidance

    will be amended to add the proviso ``or other market coordinated

    Circuit Breaker mechanism.'' \250\

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

    \249\ See discussion of NYSE circuit breakers, available at:

    http://usequities.nyx.com/markets/nyse-equities/circuit-breakers.

    \250\ See supra discussion of section 38.255.

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

    Finally, the Commission is amending paragraph (e)(1), regarding

    Security Futures Contracts, to eliminate the sentence that states ``[a]

    designated contract market should follow the appropriate guidance

    regarding physically delivered security futures products that are

    settled through physical delivery or cash settlement.'' The sentence

    was included in the guidance and is being eliminated because part 41

    Security Futures Products governs trading in those contracts including

    the minimum requirements that an underlying security or security index

    must have and maintain to be listed for trading on a DCM.

    4. Subpart E--Prevention of Market Disruption

    The Dodd-Frank Act amended current Core Principle 4 by: (i)

    Changing the title of the core principle from ``Monitoring of Trading''

    to ``Prevention of Market Disruption;'' and (ii) specifying the methods

    and procedures DCMs must employ in discharging their obligations under

    Core Principle 4. The amendments to Core Principle 4 emphasize that

    DCMs must take an active role not only in monitoring trading activities

    within their markets, but in preventing market disruptions. The rules

    proposed for this core principle largely codified the relevant

    provisions of the existing Application Guidance and Acceptable

    Practices for Core Principle 4, as contained in appendix B to part 38,

    and included new requirements that clarified and strengthened certain

    DCM obligations arising under the amended core principle.

    i. Sec. 38.251--General Requirements

    Core Principle 4 requires DCMs to conduct real-time monitoring of

    trading and have the ability to comprehensively and accurately

    reconstruct trading.\251\ Accordingly, these requirements are set forth

    in proposed Sec. 38.251. Further, the proposed rule required that

    intraday trade monitoring must include the capacity to detect abnormal

    price movements, unusual trading volumes, impairments to market

    liquidity, and position-limit violations. Proposed Sec. 38.251 also

    required that, where the DCM cannot reasonably demonstrate that its

    manual processes are effective in detecting and preventing abuses, the

    DCM must implement automated trading alerts to detect potential

    problems.

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

    \251\ 7 U.S.C. 7(d)(4).

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

    The Commission invited comment on whether DCMs should be required

    to monitor the extent of high frequency trading, and whether automated

    trading systems should include the ability to detect and flag high

    frequency trading anomalies.

    Summary of Comments

    Several commenters asserted that their current regulatory systems

    do not allow for effective real-time monitoring of position limits. CME

    opined that requiring real-time monitoring capabilities across every

    instrument for vague terms such as ``abnormal price movements,''

    ``unusual trading volumes,'' and ``impairments to market liquidity''

    does not provide DCMs with sufficient clarity with respect to what

    specific capabilities satisfy the standard.\252\ CME specifically

    stated that the Commission should clarify and appreciate the unique

    aspects of different types of trading venues and distinguish where

    requirements are different.\253\ CME also stated that the regulations

    should distinguish between trading conducted on an electronic venue and

    trading conducted in an open-outcry venue.\254\ MGEX stated that the

    automated trading alert requirement of proposed Sec. 38.251 ``seems to

    add more burden and cost than potentially providing any real value.''

    \255\ KCBT requested that the Commission remove this requirement and

    stated that customer reportable positions are received once daily on a

    T+1 basis and that it is impractical to require DCMs to monitor for

    intraday compliance with position limits.\256\

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

    \252\ CME Comment Letter at 24 (Feb. 22, 2011).

    \253\ Id.

    \254\ Id.

    \255\ MGEX Comment Letter at 4 (Feb. 22, 2011). MGEX also stated

    that the Commission should adopt a more flexible core principle

    approach. See MGEX Comment Letter at 2 (June 3, 2011).

    \256\ KCBT Comment Letter at 4 (Feb. 22, 2011).

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

    ICE stated that it has previously made the Commission aware of the

    difficulties inherent in trying to monitor positions on a real-time

    basis, and that the only way to accurately determine whether an

    intraday position limit violation has occurred is on the basis of

    information available on a T+1 basis.\257\ ICE also requested that the

    Commission delete the phrase ``impairments to market liquidity'' from

    the rule, arguing that the wording is vague and has ``no foundation''

    in the core principle.\258\

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

    \257\ ICE Comment Letter at 11 (Feb. 22, 2011).

    \258\ Id.

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

    With respect to the monitoring of high frequency trading, several

    commenters stated that such monitoring would be problematic.\259\ MGEX

    and CME raised concerns over the absence of a definition for high

    frequency trading, which CME claimed can include many

    [[Page 36635]]

    different trading strategies.\260\ CME questioned whether the

    Commission had unique concerns about high frequency traders, and

    further remarked that the Commission has not articulated what purpose

    would be served by singling out high frequency trading for special

    monitoring.\261\ CME further stated that empirical studies have

    consistently demonstrated that high frequency trading fosters tighter

    markets, greater liquidity and enhanced market efficiency.\262\

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

    \259\ KCBT Comment Letter at 4 (Feb. 22, 2011); MGEX Comment

    Letter at 4 (Feb. 22, 2011); CME Comment Letter at 24-25 (Feb. 22,

    2011).

    \260\ MGEX Comment Letter at 4 (Feb. 22, 2011); CME Comment

    Letter at 24-25 (Feb. 22, 2011).

    \261\ CME Comment Letter at 25 (Feb. 22, 2011).

    \262\ Id.

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

    CME stated that ``[a]s a practical matter, however, CME Group, and

    we imagine other DCMs, certainly have the capability to monitor the

    messaging frequency of participants in their markets and can quickly

    and easily identify which participants generate high messaging

    traffic.'' \263\ CME also stated that it requires registered users who

    predominantly enter orders via an automated trading system to be

    identified as automated traders and that their orders are identified in

    the audit trail as originating from automated systems.\264\ Finally,

    CME noted that its systems were designed to identify anomalies or

    transaction patterns that violate their rules or might otherwise be

    indicative of some other risk to the orderly functioning of the

    markets.\265\

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

    \263\ Id.

    \264\ Id.

    \265\ Id.

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

    Better Markets opined that the Dodd-Frank Act provides the

    Commission with an opportunity to get ahead of high frequency and

    algorithmic trading and that, while hedgers undoubtedly need market

    liquidity, high frequency traders generate volume that does not

    reliably generate liquidity for market participants.\266\ In addition,

    Better Markets commented that many widely used tactics of high

    frequency traders are specifically designed to influence pricing

    decisions by providing false signals of market price levels and depth,

    and, as a result, the Commission must take an expressly restrictive

    approach to high frequency trading.\267\

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

    \266\ Better Markets Comment Letter at 7 (Jun. 3, 2011).

    \267\ Id.

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

    Discussion

    The Commission is adopting proposed Sec. 38.251, with certain

    modifications, including converting portions of the rule to guidance.

    The Commission is modifying Sec. 38.251 to eliminate the

    obligation to monitor, on an intraday basis, for ``impairments to

    market liquidity.'' The Commission is also revising the rule to clarify

    what must be included in real-time monitoring as compared to monitoring

    of intraday trading that may not need to be done in real time.

    Monitoring of market conditions, price movements and trading volumes in

    order to detect and attempt to resolve abnormalities must be

    accomplished in real time in order to achieve, as much as is possible,

    the statute's new emphasis on preventive actions. It is acceptable,

    however, to have a program that detects, on a T+1 basis, trading abuses

    and position-limit violations that occur intraday.

    In addition, the rule is now being supplemented with guidance and

    acceptable practices in appendix B to part 38. The Commission believes

    that monitoring for market anomalies is a key part of a DCM's ability

    to demonstrate its ``capacity and responsibility to prevent

    manipulation, price distortion, and disruptions of the delivery or

    cash-settlement process,'' as required by the statute. Moreover, given

    the number of listed contracts and the volumes of trading on any

    particular DCM, the Commission believes that automated trading alerts,

    preferably in real time, are the most effective means of detecting

    market anomalies. While having an effective automated alerts regime

    will be set forth as a method of monitoring in guidance, a DCM will

    maintain flexibility in meeting the requirement of the rule by, for

    example, demonstrating the effectiveness of an alternate method of

    monitoring.

    With respect to position-limit monitoring, the DCM NPRM did not

    require that such limits necessarily be monitored in real time.

    However, DCMs must have the ability to monitor such limits, including

    for intraday violations, at a minimum on a T+1 basis. Therefore, the

    requirement to monitor for position-limit violations is clarified in

    the rule and further described in the guidance and acceptable practices

    in appendix B, giving the DCM some flexibility in meeting the

    requirement.

    As for the Commission's inquiry about requiring additional

    monitoring of high-frequency trading, the Commission recognizes that

    DCMs should be capable of monitoring for the types of trading that may

    be characterized as ``high frequency,'' but has decided not to

    implement, in this rulemaking, further rules pertaining to the

    monitoring of high frequency trading. The Commission is encouraged that

    there are efforts underway, both within and outside the Commission, to

    define and develop approaches for better monitoring of high-frequency

    and algorithmic trading. This is particularly evident from recent work

    done at the behest of the Commission's Technology Advisory Committee

    (TAC).\268\ Further, the United Kingdom government's Foresight Project

    also commissioned a recently released report on the future of computer

    trading in financial markets, which aims to assess the risks and

    benefits of automated buying and selling. This project may assist the

    Commission's further development of a regulatory framework for high

    frequency trading activities.\269\

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

    \268\ See, e.g., reports associated with the TAC available at

    http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.

    \269\ See ``The Future of Computer Trading in Financial

    Markets'' available at http://www.bis.gov.uk/foresight/our-work/projects/current-projects/computer-trading.

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

    ii. Sec. 38.252--Additional Requirements for Physical-Delivery

    Contracts

    Proposed Sec. 38.252 required, among other things, that for

    physical-delivery contracts, DCMs must monitor each contract's terms

    and conditions as to whether there is convergence of the futures price

    to the cash price of the underlying commodity and must take meaningful

    corrective action, including addressing conditions that interfere with

    convergence, or if appropriate, change contract terms and conditions,

    when lack of convergence impacts the ability to use the markets for

    making hedging decisions and for price discovery.

    The Commission requested comments on what other factors, in

    addition to the delivery mechanism, a DCM should be required to

    consider in determining whether convergence is occurring.

    Summary of Comments

    CME, MGEX and KCBT all opposed what they deemed to be a

    prescriptive rule, and noted that most of the requirements in proposed

    Sec. 38.252 are currently acceptable practices under appendix B for

    the monitoring of trading.\270\ These commenters contended that the

    requirements in proposed Sec. 38.252 should remain as acceptable

    practices.\271\

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

    \270\ CME Comment Letter at 25 (Feb. 22, 2011); MGEX Comment

    Letter at 5 (Feb. 22, 2011); KCBT Comment Letter at 4-5 (Feb. 22,

    2011).

    \271\ Id.

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

    ICE also noted that for certain products it is inherently more

    difficult to statistically determine convergence of futures to cash

    market prices.\272\

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

    \272\ ICE Comment Letter at 12 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting Sec. 38.252, with certain

    modifications, including

    [[Page 36636]]

    converting a portion of the rule to acceptable practices.

    The Commission is retaining as a rule the general obligation that

    DCMs monitor physical-delivery contracts with respect to their terms

    and conditions as they relate to the underlying market and monitor the

    adequacy of deliverable supplies to meet futures delivery requirements.

    The DCM must also make a good-faith effort to resolve conditions that

    threaten reasonable convergence or the adequacy of deliverable

    supplies. While the Commission acknowledges ICE's comment that for

    certain products it may be more difficult to ascertain convergence

    because of the absence of reliable cash prices, the Commission is of

    the view that a DCM must monitor the performance of its contracts to

    ensure they continue to perform their economic functions.

    In order to provide DCMs with additional flexibility in meeting

    their monitoring obligations associated with physical-delivery

    contracts, the specific elements of such monitoring that were initially

    included in the proposed rule are now included in acceptable practices

    under appendix B of part 38, rather than in the rule.

    iii. Sec. 38.253--Additional Requirements for Cash-Settled Contracts

    In addition to requirements that DCMs monitor the pricing and

    methodologies for settling cash-settled contracts, proposed Sec.

    38.253 required that, where a DCM contract is settled by reference to

    the price of a contract or instrument traded in another venue,

    including a price or index derived from prices on another exchange, the

    DCM must have rules that require the traders on the DCM's market to

    provide the DCM with their positions in the reference market as the

    traders' contracts approach settlement. In the alternative, Sec.

    38.253 provided that the DCM may have an information sharing agreement

    with the other venue or designated contract market.

    Summary of Comments

    Argus commented that it is inappropriate to require DCMs to monitor

    the ``availability and pricing of the commodity making up the index to

    which the contract will be settled'' where the index price is generated

    based upon transactions that are executed off the DCM's market.\273\

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

    \273\ Argus Comment Letter at 6 (Feb. 22, 2011).

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

    CME disagreed with what it contended was the prescriptive nature of

    the proposed rule, and noted that many of the requirements in proposed

    Sec. 38.253 are currently acceptable practices for trade

    monitoring.\274\ CME suggested that the requirements in Sec. 38.253

    remain as acceptable practices.\275\ CME further stated that the

    Commission is uniquely situated to add regulatory value to the industry

    by reviewing for potential cross-venue rule violations, and noted that

    the Commission is the central repository for position information

    delivered to it on a daily basis and in a common format, across all

    venues.\276\ CME also asserted that the Commission would be imposing an

    onerous burden on DCMs and their customers by requiring the reporting

    of information that the Commission already receives or will be

    receiving.\277\ CME also stated that the alternative proposal, that the

    DCM enter into an information-sharing agreement with the other venue,

    also will result in additional costs to both entities, and that it may

    not be practical or prudent for a DCM to enter into such an agreement

    with the other venue.\278\ CME noted that its rules already allow it to

    request such information from market participants on an as-needed

    basis.\279\

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

    \274\ CME Comment Letter at 26 (Feb. 22, 2011).

    \275\ Id.

    \276\ Id.

    \277\ Id.

    \278\ Id.

    \279\ Id.

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

    Nodal stated that DCMs that are a party to an industry agreement

    (such as the International Information Sharing Memorandum of

    Understanding & Agreement) should satisfy the information sharing

    requirement in this rule by virtue of such agreement.\280\

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

    \280\ Nodal Comment Letter at 5 (Feb. 22, 2011).

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

    Discussion

    The Commission is codifying proposed Sec. 38.253, with certain

    modifications, including to convert a portion of the rule to acceptable

    practices. The Commission removed from the rule the requirement that

    DCMs monitor the availability and pricing of the commodity making up

    the index to which the contract will be settled. Section 38.253(a)

    requires that DCMs monitor the pricing of the index to which the

    contract is settled, and that DCMs monitor the continued

    appropriateness of the index to which the contract is settled and take

    steps to resolve conditions, including amending contract terms where

    necessary, where there is a threat of manipulation, disruptions, or

    distortions. For cash-settled contracts, the Commission believes that a

    DCM must have the ability to determine whether a trader in its market

    is manipulating the instrument or index to which the DCM contract

    settles.

    In regards to Sec. 38.253(b), as the CME noted, the Commission

    does obtain certain position information in the large-trader reporting

    systems for futures and swaps. However, the Commission may not

    routinely obtain such position information, including where a DCM

    contract settles to the price of a non-U.S. futures contract or a cash

    index. Notwithstanding the continued importance of a DCM's obligation

    to monitor across other venues in such circumstances, the Commission

    believes that the rule need not set forth the specific methods to

    accomplish such monitoring. Accordingly, the Commission sets forth the

    specific methods of accomplishing the cross-venue monitoring under

    acceptable practices. Specifically, the rule requires that the

    monitoring of cash-settled contracts must include access to information

    on the activities of its traders' in the reference market. The

    acceptable practices for this rule provides that a DCM, at a minimum,

    gather such information, either directly or through information sharing

    agreements, to traders' position and transactions in the reference

    market for traders of a significant size in the DCM contract, near the

    settlement of the contract.

    iv. Sec. 38.254--Ability To Obtain Information

    To ensure that DCMs have the ability to properly assess the

    potential for price manipulation, price distortions, and the disruption

    of the delivery or cash-settlement process, proposed Sec. 38.254

    provided that each DCM require that traders in their market keep

    records, including records of their activity in the underlying

    commodity and related derivative markets and contracts, and make such

    records available, upon request, to the designated contract

    market.\281\ The proposed rule further required that DCMs with

    participants trading through intermediaries must either use a

    comprehensive large-trader reporting system or be able to demonstrate

    that it can obtain position data from other sources in order to conduct

    an effective surveillance program.

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

    \281\ The pre-existing acceptable practice for Core Principle 4

    provides that DCMs, at a minimum, should have routine access to the

    positions and trading of their market participants.

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

    Summary of Comments

    CME opposed the proposed rule and recommended that the types of

    records that the DCM should require traders to keep should be covered

    in acceptable

    [[Page 36637]]

    practices.\282\ KCBT contended that it is unnecessary and burdensome

    for a DCM to require traders to keep such records.\283\ Similarly, MGEX

    raised concerns about the burden that will be placed on its traders as

    a result of the proposed record-keeping obligation, and noted that, for

    contracts not traded on the DCM, it is unclear what records a DCM must

    tell its trader to keep.\284\

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

    \282\ CME Comment Letter at 26 (Feb. 22, 2011).

    \283\ KCBT Comment Letter at 5 (Feb. 22, 2011).

    \284\ MGEX Comment Letter at 5 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting Sec. 38.254 as proposed, but is

    allowing, as an acceptable practice in appendix B, that DCMs limit the

    requirement of Sec. 38.254(b) to those transactions or positions that

    are reportable under the DCM's large-trader reporting system or where

    the market participant otherwise holds substantial positions.

    The Commission has considered the comments, but does not believe

    that this rule is unnecessary or that the requirements should instead

    be codified as acceptable practices. The Commission notes that a

    trader's burden to keep such records is sound commercial practice, and

    that a trader of a reportable size is already required, under

    Commission's regulations Sec. 18.05 for futures and options and Sec.

    20.6 for swaps, to keep records of such activity and to make them

    available to the Commission upon request. In addition, the Commission

    has found trader records to be an invaluable tool in its surveillance

    efforts, and believes that the DCM, as a self-regulatory organization,

    should have direct access to such information in order to discharge its

    obligations under the DCM core principles, and in particular Core

    Principle 4.

    v. Sec. 38.255--Risk Controls for Trading

    Proposed Sec. 38.255 required DCMs to have in place effective risk

    controls including, but not limited to, pauses and/or halts to trading

    in the event of extraordinary price movements that may result in

    distorted prices or trigger market disruptions. Additionally, the rule

    provided that where a DCM's contract is linked to, or a substitute for,

    other contracts on the DCM or on other trading venues, including where

    a contract is based on the price of an equity security or the level of

    an equity index, risk controls should, to the extent possible, be

    coordinated with those other contracts or trading venues. In the

    preamble of the DCM NPRM, the Commission requested comments on what

    types of pauses and halts are necessary and appropriate for particular

    market conditions. The preamble of the DCM NPRM also recognized that

    pauses and halts comprise only one category of risk controls, and that

    additional controls may be necessary to reduce the potential for market

    disruptions. The preamble specifically listed several risk controls

    that the Commission had in mind, including price collars or bands,

    maximum order size limits, stop-loss order protections, kill buttons,

    and any others that may be suggested by commenters. The Commission

    invited comments on the appropriateness of the listed risk controls,

    and posed the following questions: What other DCM risk controls are

    appropriate or necessary to reduce the risk of market disruptions?

    Which risk controls should be mandated, and how?

    Summary of Comments

    Several commenters asserted that DCMs should have discretion to

    determine the specific risk controls that should be implemented within

    their markets.\285\ CME commented that the marketplace would benefit

    from some standardization of the types of pre-trade risk controls

    employed by DCMs and other trading venues, and expressed support for an

    acceptable practice framework that includes pre-trade quantity limits,

    price banding, and messaging throttles, but argued that the specific

    parameters of such controls should be determined by the DCMs.\286\

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

    \285\ CME Comment Letter at 26 (Feb. 22, 2011); KCBT Comment

    Letter at 5 (Feb. 22, 2011); ICE Comment Letter at 11-12 (Feb. 22,

    2011); CFE Comment Letter at 4 (Feb. 22, 2011); NYSE Liffe Comment

    Letter at 11 (Feb. 22, 2011); ELX Comment Letter at 4 (Feb. 22,

    2011); MGEX Comment Letter at 5 (Feb. 22, 2011); ICE Comment Letter

    at 12 (Feb. 22, 2011); Barnard Comment Letter at 3 (Feb. 22, 2011).

    \286\ CME Comment Letter at 27 (Feb. 22, 2011).

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

    Various commenters also stated that there are effective ways to

    prevent market disruptions other than pauses and halts, and that the

    appropriate controls may depend on a number of factors, such as the

    product, number of market participants, and the market's liquidity. CME

    contended that the Commission should not impose rules that mandate

    coordination of such risk controls.\287\ NYSE Liffe argued that a DCM

    should be able to take into account other controls, but should not be

    required to adopt identical controls.\288\ MGEX stated that forcing

    market coordination of trading pauses and halts is unnecessary, and

    that if market instability moves from one contract market to another,

    the next market should be able to pause or halt trading as it

    determines necessary.\289\ ICE stated that a temporary price floor or

    ceiling can work better than a pause or halt since trading can continue

    uninterrupted, thereby offering the earliest opportunity for price

    reversal should the market deem a sudden large move to be an

    overreaction or error.\290\ ICE also stated that pauses and halts are

    not the only effective way to prevent market disruption, and that by

    being prescriptive, the Commission is freezing innovation in preventing

    market disruptions.\291\

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

    \287\ Id.

    \288\ NYSE Liffe Comment Letter at 11 (Feb. 22, 2011).

    \289\ MGEX Comment Letter at 5 (Feb. 22, 2011).

    \290\ ICE Comment Letter at 12 (Feb. 22, 2011).

    \291\ Id.

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

    Finally, Better Markets asserted that the proposed rules are

    extremely useful, but incomplete.\292\ Better Markets stated that there

    should be a ``speed limit'' to serve as a buffer against the potential

    for an uncontrolled spiral of disruption fueled by HFTs, and that the

    rule should require that bids be kept open for minimum durations and

    that positions be held for minimum durations.\293\

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

    \292\ Better Markets Comment Letter at 9 (Feb. 22, 2011).

    \293\ Id.

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

    Discussion

    The Commission is adopting proposed Sec. 38.255, with certain

    modifications, including converting a portion of the rule to acceptable

    practices. As stated in the DCM NPRM, the Commission believes that

    pauses and halts are effective risk management tools that must be

    implemented by DCMs to facilitate orderly markets. As the Commission

    noted in the DCM NPRM, risk controls such as trading pauses and halts,

    among other things, can allow time for participants to analyze the

    market impact of new information that may have caused a sudden market

    move, allow new orders to come into a market that has moved

    dramatically, and allow traders to assess and secure their capital

    needs in the face of potential margin calls. Automated risk control

    mechanisms, including pauses and halts, have proven to be effective and

    necessary in preventing market disruptions and, therefore, will remain

    as part of the rule.

    The Commission notes that the pauses and halts are intended to

    apply in the event of extraordinary price movements that may trigger or

    propagate systemic disruptions. Accordingly, in response to ICE and

    other commenters that question the necessity of pauses and halts over

    other forms of risk controls, the Commission notes that a DCM's ability

    to pause or halt trading in extraordinary

    [[Page 36638]]

    circumstances and, importantly, to re-start trading through the

    appropriate re-opening procedures, will allow DCMs to mitigate the

    propagation of shocks that are of a systemic nature and to facilitate

    orderly markets. Furthermore, DCMs must ensure that such pauses and

    halts are effective for their specific order-routing and trading

    environment and are adapted to the specific types of products traded.

    Following the DCM NPRM's publication, the Pre-Trade Functionality

    Subcommittee of the CFTC Technology Advisory Committee (``TAC'') issued

    a report that recommended the implementation of several trade risk

    controls at the exchange level.\294\ The controls recommended in the

    Subcommittee report were consistent, in large part, with the trade

    controls referenced in the preamble to the DCM NPRM, and which are

    being adopted in this final rulemaking.\295\ The TAC accepted the

    Subcommittee report, which specifically recommended that exchanges

    implement pre-trade limits on order size, price collars around the

    current price, intraday position limits (of a type that represent

    financial risk to the clearing member), message throttles, and clear

    error-trade and order-cancellation policies.\296\ The Subcommittee

    report noted that ``[s]ome measure of standardization of pre-trade risk

    controls at the exchange level is the cheapest, most effective and most

    robust path to addressing the Commission's concern [for preserving

    market integrity].'' \297\

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

    \294\ ``Recommendations on Pre-Trade practices for Trading

    Firms, Clearing Firms and Exchanges involved in Direct Market

    Access,'' March 1, 2011, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.

    \295\ The DCM NPRM specifically mentioned position limits that

    must be monitored for intraday violations, daily price limits,

    trading pauses, reasonability tests for order price and size, stop

    logic functionality, and trade-cancellation policies in the form of

    ``no-bust'' ranges.

    \296\ See ``Pre-Trade Functionality Subcommittee of the CFTC

    Technology Advisory Committee report, ``Recommendations on Pre-Trade

    Practices for Trading Firms, Clearing Firms, and Exchanges Involved

    in Direct Market Access,'' at 4-5 (March 1, 2011), accepted by the

    TAC and available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.

    \297\ Id. at 4.

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

    The Commission believes that the implementation of the specific

    automated trade risk controls listed in the DCM NPRM is generally

    desirable, but also recognizes that such controls should be adapted to

    the unique characteristics of the markets to which they apply. Indeed,

    any controls should consider the delicate balance between avoiding a

    market disruption while not impeding a market's price discovery

    function. Controls that unduly restrict a market's ability to respond

    to legitimate market events will interfere with price discovery.

    Accordingly, consistent with many of the comments on this subject,

    the Commission is enumerating specific types of automated risk

    controls, in addition to pauses and halts, that may be implemented by

    DCMs in the acceptable practices rather than in the rule, in order to

    give DCMs greater discretion to select among the enumerated risk

    controls, or to create new risk controls that may be more appropriate

    or necessary for their markets. DCMs also will have discretion in

    determining the parameters for the selected controls. Specifically, the

    acceptable practices for Core Principle 4 provide that DCMs should have

    appropriate trade risk controls adapted to the unique characteristics

    of the markets to which they apply that are designed to prevent market

    disruptions without unduly interfering with that market's price

    discovery function. The acceptable practices also enumerate several of

    the pre-trade controls cited by the Joint CFTC/Securities and Exchange

    Commission (``SEC'') Advisory Committee, specifically: Pre-trade limits

    on order size, price collars or bands around the current price, message

    throttles, and daily price limits.\298\

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

    \298\ The DCM NPRM did not specifically address whether DCMs

    should require market participants to certify that their electronic

    systems were adequately tested before trading on a DCM, nor did it

    specifically address pre-trade, post trade or emergency controls and

    supervision of electronic systems. The Commission may address

    electronic system testing, controls, and supervision-related issues

    in a subsequent proceeding.

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

    Additionally, in response to commenters' concerns, the Commission

    is moving the language in the proposed rule concerning the coordination

    of risk controls among other markets or exchanges to the acceptable

    practices. Specifically, a DCM with a contract that is linked to, or is

    a substitute for, other contracts, either on its market or on other

    trading venues, must, to the extent practicable, coordinate its risk

    controls with any similar controls placed on those other contracts. If

    a contract is based on the price of an equity security or the level of

    an equity index, such risk controls must, to the extent practicable, be

    coordinated with any similar controls placed on national security

    exchanges.

    Independent of this rulemaking, the Joint CFTC/SEC Advisory

    Committee recommended that the SEC and CFTC require that the pause

    rules of the exchanges and FINRA be expanded to cover all but the most

    inactively traded and listed equity securities, ETFs, and options and

    single stock futures on those securities.\299\

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

    \299\ The Joint CFTC-SEC Advisory Committee on Emerging

    Regulatory Issues was established a few days after the dramatic

    securities market events of May 6, 2010, called by some the ``Flash

    Crash.'' The Committee is charged with addressing regulatory issues

    of mutual concern to the CFTC and SEC. See ``Recommendations

    Regarding Regulatory Responses to the Market Events of May 6,

    2010,'' (Feb. 18, 2011) available at http://www.cftc.gov/MarketReports/StaffReportonMay6MarketEvents/index.htm.

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

    vi. Sec. 38.256--Trade Reconstruction

    The Dodd-Frank Act added language to Core Principle 4 providing

    that a DCM must have the ability to comprehensively and accurately

    reconstruct all trading on its trading facility. These audit-trail data

    and reconstructions must also be made available to the Commission in a

    form, manner, and time as determined by the Commission. Proposed Sec.

    38.256 codified these requirements.

    Summary of Comments

    CME argued that audit trial data is extremely detailed and

    voluminous and that the DCMs should be given adequate time to prepare

    the trading data before it is supplied to the Commission.\300\ CME

    suggested that the wording ``in a form, manner, and time as determined

    by the Commission'' be replaced with ``such reasonable time as

    determined by the Commission.\301\

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

    \300\ CME Comment Letter at 27 (Feb. 22, 2011).

    \301\ Id.

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

    Chris Barnard expressed support for the trade reconstruction

    requirement but requested that the rule be clarified to ensure that the

    trade reconstruction requirement includes all trading events, including

    the entry of bids and offers in the order of their occurrence, as well

    as executed trades in order.\302\

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

    \302\ Barnard Comment Letter at 2 (May 20, 2011).

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

    Discussion

    The Commission is clarifying the rule slightly so that the audit

    trail data must be available to the Commission ``in a form, manner, and

    time that is acceptable to the Commission.'' The revised wording is

    consistent with Sec. 38.950(a), which requires that DCMs maintain

    records in a form and manner that is acceptable to the Commission.

    The Commission believes that the DCM audit-trail requirements

    contained in Sec. 38.551 and Sec. 38.552 clarify the DCM's obligation

    for reconstruction of trading and are sufficient to meet Mr. Barnard's

    concerns.

    [[Page 36639]]

    vii. Sec. 38.257--Regulatory Service Provider

    Proposed Sec. 38.257 provided that a DCM must comply with the

    regulations in subpart E through a dedicated regulatory department, or

    by delegation of that function to a regulatory service provider over

    which the DCM has supervisory authority.

    Discussion

    The Commission did not receive any comments on the proposed rule,

    and is adopting the rule as proposed.

    viii. Sec. 38.258--Additional Rules Required

    Proposed Sec. 38.258 required a DCM to adopt and enforce any

    additional rules that it believed were necessary to comply with the

    requirements of subpart E.

    Discussion

    Though the Commission did not receive any comments on the proposed

    rule, the Commission is of the view that the obligations in the

    proposed rule are more appropriate in the guidance. Accordingly, the

    proposed rule is moved to guidance. Consistent with this determination,

    the Commission is replacing proposed Sec. 38.258 with new Sec. 38.258

    (titled ``Additional sources for compliance'') that simply permits DCMs

    to rely upon the guidance and acceptable practices in appendix B of

    this part to demonstrate to the Commission compliance with Core

    Principle 4.

    5. Subpart F--Position Limitations or Accountability

    Core Principle 5 under section 5(d)(5) of the CEA requires that

    DCMs adopt for each contract, as is necessary and appropriate, position

    limitations or position accountability. The Dodd-Frank Act amended Core

    Principle 5 by adding that for any contract that is subject to a

    position limitation established by the Commission pursuant to section

    4a(a) of the CEA, the DCM shall set the position limitation of the

    board of trade at a level not higher than the position limitation

    established by the Commission. At the time of the publication of the

    DCM NPRM, the federal position limits established by the Commission

    were codified in part 150 of the Commission's regulations, and the

    Commission had proposed rules to replace part 150 with new requirements

    in part 151, consistent with the requirements of the Dodd-Frank Act.

    The Commission published the final rules for ``Position Limits for

    Futures and Swaps'' on November 18, 2011.\303\ That final rulemaking

    requires DCMs to comply with part 150 (Limits on Positions) until such

    time that the Commission replaces part 150 with the new part 151

    (Limits on Positions).\304\ In that final release, the Commission

    requires that exchanges adopt their own position limits for 28 physical

    commodity contracts subject to federal limits, and provides acceptable

    practices for establishing position limits in other commodity

    contracts. The Commission also established alternative acceptable

    practices of adopting position accountability rules in lieu of position

    limits for non-spot months in those other commodity contracts. Proposed

    Sec. 38.301 required that each DCM must comply with the requirements

    of part 151 as a condition of its compliance with Core Principle 5.

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

    \303\ See ``Position Limits for Futures and Swaps,'' 76 FR

    71626, Nov. 18, 2011.

    \304\ Id. at 71632.

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

    Summary of Comments

    CME stated that the proposed position limits in the part 151

    rulemaking may affect the price discovery mechanism of the U.S. futures

    markets and asked that the Commission give careful consideration to the

    comments it submitted in the part 151 rulemaking.\305\

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

    \305\ CME Comment Letter at 27 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting the rule, with one modification. The

    rule is being revised to add an additional clause that requires DCMs to

    continue to meet the requirements of part 150 of the Commission's

    regulations--the current position limit regulations--until such time

    that compliance is required under part 151. This clarification will

    ensure that DCMs are in compliance with the Commission's regulations

    under part 150 in the interim period--until the compliance date for the

    new position limits regulations takes effect. CME's comments were more

    appropriate to the Position Limit rulemaking proceeding, and they were

    addressed in that rulemaking.\306\

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

    \306\ 76 FR 71626, Nov. 18, 2011.

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

    6. Subpart G--Emergency Authority

    The Dodd-Frank Act made minor, non-substantive changes to Core

    Principle 6 under section 5(d)(6) of the CEA. In implementing the core

    principles, the Commission proposed to retain most of the former

    Application Guidance associated with Core Principle 6 (found in

    appendix B to part 38 of the Commission's regulations) with some

    revisions and additions.

    Proposed Sec. 38.350 codified the statutory text of the core

    principle. Proposed Sec. 38.351 referred applicants and DCMs to the

    guidance and acceptable practices in appendix B to part 38 for purposes

    of demonstrating to the Commission their compliance with the

    requirements of subpart G. The proposed guidance provided that a DCM

    should have the authority to intervene as necessary to maintain fair

    and orderly trading and to prevent or address manipulation or

    disruptive trading practices, whether the need for intervention arises

    exclusively from the DCM's own market or as part of a coordinated,

    cross-market intervention. The proposed guidance also provided that the

    DCM rules should include procedures and guidelines to avoid conflicts

    of interest in accordance with new provisions proposed in Sec. 40.9

    and to include alternate lines of communication and approval procedures

    in order to be able to address, in real time, emergencies that may

    arise. The proposed guidance also clarified that the DCM must have

    rules that allow it to take such market actions as may be directed by

    the Commission.

    The proposed rulemaking also proposed certain acceptable practices,

    including that the DCM have: (i) Procedures and guidelines for

    decision-making and implementation of emergency intervention in the

    market, and (ii) the authority to: Liquidate or transfer open positions

    in the market,\307\ suspend or curtail trading in any contract, require

    market participants in any contract to meet special margin

    requirements, and allow it to take such market actions as the

    Commission may direct.

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

    \307\ In situations where a swap is traded on more than one

    platform, emergency action to liquidate or transfer open interest

    must be directed, or agreed to, by the Commission or Commission

    staff.

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

    Summary of Comments

    KCBT contended that liquidation of positions and special margin

    requirements are more appropriately addressed in the rules and

    procedures relevant to Derivatives Clearing Organizations.\308\ CME

    commented that the Commission should revise the proposed guidance to

    make clear that DCMs have the flexibility and independence necessary to

    address market emergencies.\309\

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

    \308\ KCBT Comment Letter at 6 (Feb. 22, 2011); see also 76 FR

    69334, Nov. 8, 2011.

    \309\ CME Comment Letter at 28 (Feb. 22, 2011).

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

    Discussion

    The Commission adopts proposed Sec. Sec. 38.350 and 38.351,

    without modification.

    In response to the comments pertaining to the proposed guidance,

    the

    [[Page 36640]]

    Commission is making slight revisions to the guidance to clarify that

    DCMs retain the authority to independently respond to emergencies in an

    effective and timely manner consistent with the nature of the

    emergency, as long as all such actions taken by the DCM are made in

    good faith to protect the integrity of the markets.

    In response to KCBT's comments, the Commission notes that the

    statute requires DCMs, in consultation and cooperation with the

    Commission, to adopt rules permitting them to liquidate open positions

    and impose special margin requirements under their emergency authority.

    7. Subpart H--Availability of General Information

    Core Principle 7 requires that DCMs make available to the public

    accurate information concerning the contract market's rules and

    regulations, contracts and operations. The Dodd-Frank Act amended Core

    Principle 7 by adding a provision requiring the board of trade to make

    public the rules and specifications describing the operation of the

    DCM's electronic matching platform or trade execution facility.\310\

    Since passage of the CFMA, the types of information and the various

    practices for providing information have become standardized across the

    industry as DCMs have adopted practices that comply with the current

    guidance and acceptable practices for Core Principle 7. Accordingly,

    proposed Sec. 38.401 in subpart H codified these practices. In

    addition, the Commission proposed several additional provisions to

    ensure that pertinent information is available to the Commission,

    market participants and the public, as described below.

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

    \310\ This requirement, while new to the text of Core Principle

    7, was previously required as part of former Designation Criteria 4.

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

    The Commission also proposed to codify the statutory text of the

    core principle in Sec. 38.400, and is adopting the rule, as proposed.

    i. Sec. 38.401(a)--General

    Proposed Sec. 38.401(a) required DCMs to have in place procedures,

    arrangements and resources for disclosing to market authorities, market

    participants, and the public accurate and relevant information

    pertaining to: (i) Contract terms and conditions, (ii) rules and

    regulations applicable to the trading mechanism; and (iii) rules and

    specifications pertaining to the operation of the electronic matching

    platform or trade execution facility. Under the proposed rule, DCMs are

    required to ensure that market authorities, market participants, and

    the public have available all material information pertaining to new

    product listings, new or amended governance, trading and product rules,

    or other changes to information previously disclosed by the DCM, within

    the time period prescribed in proposed Sec. 38.401(c). Section

    38.401(a) of the proposed regulation required that DCMs provide the

    required information to market participants and the public by posting

    such information on their Web site, as set forth in proposed Sec.

    38.401(c).

    Discussion

    The Commission did not receive comments on the proposed rule, and

    is adopting the proposed rule with minor, non-substantive

    modifications.\311\

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

    \311\ The Commission is revising Sec. 38.401(a) to clarify

    several internal references.

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

    ii. Sec. 38.401(b)--Accuracy Requirement

    Proposed Sec. 38.401(b) required that each DCM have procedures in

    place to ensure that any information or communication with the

    Commission is accurate and complete, and further that no false or

    misleading information is submitted and that no material information is

    omitted. Similarly, the proposed rule required that each DCM have

    procedures in place to ensure the accuracy and completeness of any

    information made available to market participants and the public,

    including information that is made available on its Web site.

    Summary of Comments

    NYSE Liffe expressed concern that the requirement to provide

    ``accurate and complete'' information in ``any communication'' with the

    Commission would chill dialogue between DCMs and Commission staff.\312\

    NYSE Liffe argued that in addition to submitting formal filings with

    the Commission, DCM staff frequently interact with Commission staff on

    a more informal basis, and in some cases DCM staff may speak without

    complete information.\313\ NYSE Liffe asserted that a DCM may feel

    constrained from directly responding to Commission inquiries or from

    reaching out to Commission staff if it is concerned that the

    information it provides to the Commission may later prove to be

    inaccurate or incomplete.\314\ Accordingly, NYSE Liffe requested

    clarification that the proposed rule will only apply to formal filings

    made with the Commission.\315\ NYSE Liffe also noted that while it

    makes every effort to accurately post information required to be made

    public, for several data elements, it must rely on data sent to it by

    clearing service providers and member firms.\316\ NYSE Liffe argued

    that it would be inappropriate to set a strict liability standard over

    aggregated data that part 16 of the Commission's rules requires the DCM

    to make public when it does not entirely control the generation of

    component parts of that data.\317\

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

    \312\ NYSE Liffe Comment Letter at 12 (Feb. 22, 2011).

    \313\ Id.

    \314\ Id.

    \315\ Id.

    \316\ Id. at 13.

    \317\ Id.

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

    Discussion

    The Commission is adopting proposed Sec. 38.401(b), with certain

    revisions. While DCMs must provide the Commission with accurate and

    complete information, the Commission recognizes that the proposed rule

    text may raise concerns with DCMs in freely communicating with

    Commission staff in certain instances. Accordingly, the Commission is

    revising the rule to clarify that a DCM must ``provide information that

    it believes, to the best of its knowledge, is accurate and complete,

    and must not omit material information'' with respect to any

    communication with the Commission, and any information required to be

    transmitted or made available to market participants and the public,

    including on its Web site or otherwise. The requirements of Sec.

    38.401(b) are intended to be, and should be interpreted as being,

    consistent with the false reporting provision under section 9(a)(3) of

    the CEA, 7 U.S.C. 13. The amended rule accommodates the possibility

    that DCMs may not exercise complete control over all of the information

    that they receive from third-parties and later make public.

    iii. Sec. 38.401(c)--Notice of Regulatory Submissions

    The Commission historically has required DCMs to update their

    rulebooks upon the effectiveness of a rule amendment, product listing

    or rule certification that has been filed with the Commission. While

    proposed Sec. 38.401(c) maintained the general requirement for posting

    rules in the DCM rulebook upon their effectiveness, the Commission

    believed that market participants and the public would benefit from

    notifications of proposed rule amendments, product listing (or de-

    listings) and rule certifications in advance of their taking

    effect.\318\

    [[Page 36641]]

    Accordingly, proposed Sec. 38.401(c) required each DCM to post on its

    Web site all rule filings and submissions that it makes to the

    Secretary of the Commission. The proposed rule required that this

    information be posted on the DCM's Web site simultaneous with the

    filing of such information with the Commission. The DCM NPRM stated

    that, where applicable, the DCM Web site should make clear that the

    posted submissions are pending before the Commission.\319\ This

    requirement was designed to provide market participants with advance

    notice of rule amendments and certifications, consistent with the goal

    of Core Principle 7 to make pertinent information available to market

    participants and the public. This proposed posting requirement was in

    addition to the obligation of DCMs to update their rulebooks upon the

    effectiveness of a rule submission or certification.

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

    \318\ This is especially relevant when the Commission determines

    to stay the certification of a DCM submission, as provided by the

    Dodd-Frank Act, for a 90-day review period, thereby triggering a

    public comment period.

    \319\ The DCM NPRM noted, for example, that a DCM's Web site may

    contain a separate web page for ``regulatory filings'' or ``rule

    certifications'' for posting submissions or certifications

    pertaining to new product listings, new rules, rule amendments or

    changes to previously-disclosed information. DCM NPRM at 80586.

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

    To the extent that a DCM requests confidential treatment of certain

    information filed or submitted to the Commission, the proposed rule

    required the DCM to post the public portions of the filing or

    submission on its Web site.

    Summary of Comments

    CME and KCBT both contended that the requirement that DCMs post

    regulatory submissions on their Web site simultaneously with their

    filing with the Commission is duplicative, as the Commission already

    posts these submissions on the CFTC Web site.\320\ CME and KCBT further

    argued that they use other methods to communicate regulatory changes to

    the public, including bulletins, email notifications, and press

    releases.\321\ CME requested that if the Commission does choose to

    retain this requirement, that a DCM be given a minimum of one business

    day to post such filings, rather than having to post ``simultaneously''

    with the Commission filing.\322\ CME noted that even a one-day standard

    would be a significantly higher standard than the Commission holds

    itself to with respect to posting the filings it receives from DCMs

    today.\323\

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

    \320\ CME Comment Letter 28-29 (Feb. 22, 2011); KCBT Comment

    Letter at 6 (Feb. 22, 2011).

    \321\ CME Comment Letter at 29 (Feb. 22, 2011); KCBT Comment

    Letter at 6 (Feb. 22, 2011).

    \322\ CME Comment Letter at 29 (Feb. 22, 2011).

    \323\ Id.

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

    Discussion

    The Commission is adopting the proposed rule, with certain

    modifications. The Commission believes it is important for market

    participants and the public to have advance notice of rule amendments

    and certifications prior to their taking effect, consistent with the

    goal of Core Principle 7 to make pertinent information available to

    market participants and the public. Where applicable, the DCM Web site

    should make clear that the posted submissions have been submitted to

    the Commission, but are not yet in effect. For example, a DCM could

    post its submissions or information filed with the Commission on a

    separate web page that is designated as ``regulatory filings'' or

    ``proposed rulebook amendments.'' The Commission notes that the

    requirement to make information available to the public necessitates

    that such information can be accessed by visitors to the Web site

    without the need to register, log in, provide a user name or obtain a

    password, as is the current practice under Commission regulations.\324\

    In response to CME, the Commission notes that it adopted a similar

    requirement in the final rulemaking pertaining to Provisions Common to

    Registered Entities.\325\ In that final rulemaking, the Commission

    codified in Sec. 40.5(a)(6) the requirement that a registered entity

    submitting a voluntary rule submission post such submission on its Web

    site concurrent with the filing of such submission with the

    Commission.\326\ Consistent with Sec. 40.5, the Commission is revising

    the posting requirement in the proposed rule from ``simultaneous'' to

    ``concurrently'' with the filing of the information with the

    Commission. The proposed rule is also being revised to clarify that the

    posting requirement applies to any information or ``submission''

    provided to the Commission.

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

    \324\ See former acceptable practices to Core Principle 7. 17

    CFR part 38, appendix B (2010).

    \325\ See 76 FR 44776, 44794, July 27, 2011.

    \326\ Id.

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

    iv. Sec. 38.401(d)--Rulebook

    Proposed Sec. 38.401(d) codified the pre-existing DCM practices

    pertaining to updating DCM rulebooks.\327\ The proposed rule required

    that DCMs post and routinely update, their rulebooks, which appear on

    their Web sites. The proposed rule required that each DCM update its

    rulebook the day that a new product is listed or a new or amended rule

    takes effect. The proposed rule further required that DCM Web sites be

    readily accessible to the public, and that the information posted

    therein be available to visitors to the Web site without requiring

    registration, log-in, or user name or password.

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

    \327\ As noted above, the requirement to maintain an accurate

    and updated rulebook does not relieve DCMs of their obligations

    under proposed paragraph (c) to post on their Web sites all rule

    filings and submissions submitted to the Commission.

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

    Discussion

    The Commission did not receive comments regarding this proposed

    rule and is adopting the rule as proposed. As noted in the DCM NPRM,

    the vast majority of DCMs maintain Web sites that comply with the

    requirements in the rule.

    8. Subpart I--Daily Publication of Trading Information

    Core Principle 8 requires that DCMs make available to the public

    accurate information on settlement prices, volume, open interest, and

    opening and closing ranges for actively traded contracts on the

    contract market. The Dodd-Frank Act did not amend Core Principle 8.

    Accordingly, proposed Sec. 38.451 codified the pre-existing acceptable

    practices, which largely required that DCMs comply with Sec. 16.01

    (Trading volume, open contracts, prices and critical dates) of the

    Commission's regulations.

    In addition, the Commission proposed certain revisions to Sec.

    16.01, consistent with the Dodd-Frank Act amendments to the CEA,

    including revisions regarding the information a reporting market must

    record and publish on futures, swap, and options contracts on a

    commodity.\328\ Specifically, the proposed amendments to part 16

    specified the type of information that DCMs or SEFs must publish daily

    regarding the swaps contracts traded. The proposed rule required that

    DCMs and SEFs publish specified information for each trading day, for

    each swap, class of swaps, option on a swap, or class of options on a

    swap, as appropriate. For swap contracts that are standard-sized

    contracts (i.e., contracts that have a set contract size for all

    contracts), the proposed rule required the reporting of volume and open

    interest for swaps and options on swaps in terms of number of contracts

    traded, similar to how futures contracts currently are reported. For

    swap contracts that are non-standard-sized (i.e., contracts whose

    contract size can

    [[Page 36642]]

    vary for each transaction), the proposed rule required that the volume

    and open interest be reported in terms of total notional value traded

    for that trading day.

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

    \328\ The term commodity also includes ``excluded commodities.''

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

    The Commission also proposed to amend Sec. 16.01(b) to require

    each DCM or SEF to publish for each trading day, by commodity and

    contract month or by tenor of the swap, the opening price, high price,

    low price and settlement price of the swap or option on swap contract.

    The Commission requested comments on end-of-day price reporting for

    swaps. Specifically, the Commission requested comments on the following

    issues:

    For interest rate swaps, because the tenor on an interest

    rate swap can be one of thousands of possible periods, what would be an

    appropriate manner to display end-of-day prices for each interest rate

    swap?

    Would certain end-of-day swap price reporting be more

    meaningful than others? If so, which methods of price reporting would

    be more meaningful and why?

    Would certain end-of-day swap price reporting be

    misleading? If so, which methods of price reporting would be misleading

    and why?

    The Commission also proposed to revise Sec. 16.01 to require

    reporting markets to report directly to the Commission pursuant to the

    requirements of 16.01(d), information pertaining to the total volume of

    block trades that are included in the total volume of trading.

    Finally, the Commission also proposed to codify the statutory text

    of the core principle in Sec. 38.450, and is adopting the rule, as

    proposed.

    Summary of Comments

    Several commenters discussed the revised reporting requirements

    that were proposed in Sec. 16.01. Eris stated that DCMs and SEFs

    should be held to the same reporting standards for interest rate

    swaps.\329\ In particular, Eris commented that a DCM or SEF should

    report real-time, intraday prices for par swaps at standard maturities,

    publish open interest grouped in maturity buckets based on the

    remaining tenor of each instrument, and publish at the end of day the

    settlement curve from the clearinghouse as well as the specific

    settlement values applied to each cleared swap.\330\ Specifically, Eris

    recommended: (1) That daily open interest should be published publicly

    in a summary fashion with open interest grouped in maturity buckets

    based on the remaining tenor of each instrument, (2) that end of day

    pricing should be based upon a market-driven curve where the

    clearinghouse's methodology to generate the daily settlement curve, as

    well as all of the inputs and components of the settlement curve, are

    made transparent to the full trading community, and (3) the

    clearinghouse should publish the specific daily settlement values

    applied to each cleared swap, without revealing open interest at a

    granular level.\331\

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

    \329\ Eris Comment Letter at 4 (Feb. 22, 2011).

    \330\ Id. at 4-5.

    \331\ Id.

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

    Better Markets recommended that proposed Sec. 16.01 also require

    the daily publication of the number of orders and order cancellations

    separately for futures, options and swaps.\332\ According to Better

    Markets, that data would indicate the levels of high frequency trading

    activity within market segments.\333\

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

    \332\ Better Markets Comment Letter at 9 (Feb. 22, 2011).

    \333\ Id.

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

    CME stated that while it does not object to reporting block trades

    that are included in the daily volume of trading, this new requirement

    will require it to ascertain what systems changes will be necessary and

    how long such changes will take to implement.\334\ CME also stated that

    the end of day price reporting of interest rate swaps should be

    addressed as a separate initiative outside of the DCM and SEF

    rulemakings given the state of change in the swaps markets and how the

    market is expected to evolve as a result of regulatory reforms

    underway.\335\

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

    \334\ CME Comment Letter at 29 (Feb. 22, 2011).

    \335\ Id.

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

    Discussion

    The Commission is codifying Sec. 16.01 as proposed, with a

    technical revision to renumber paragraph (a).

    The Commission recognizes that the end-of-day reporting for

    interest rate swaps by each DCM and SEF may require a more flexible

    reporting scheme to take into account the venue in which the interest-

    rate swap is cleared. In this respect, the daily settlement curve (the

    yield curve for particular interest rate (e.g., LIBOR, TIBOR, Euribor,

    etc.)) at each clearinghouse may differ based on the assumptions of the

    curve. The Commission has considered the proposed reporting standard

    put forth by Eris, however, in light of the novelty of swaps trading on

    DCMs, the Commission believes that the more detailed reporting

    obligations under Sec. 16.01 are warranted at this time. The

    Commission did not receive any objections to the additional reporting

    of block trades or to the swaps reporting standards. The Commission

    further clarifies that in making information available to the general

    public, as required in 16.01(e), DCMs should ensure that such

    information can be accessed by visitors to the Web site without the

    need to register, log in, provide a user name or obtain a

    password.\336\

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

    \336\ See e.g., former acceptable practices to Core Principle 7

    (imposing similar requirement with respect to rulebooks). 17 CFR

    part 38, appendix B (2010).

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

    Better Markets' comments pertaining to high frequency trading are

    addressed under the general discussion in Core Principle 4 pertaining

    to HFTs.

    9. Subpart J--Execution of Transactions

    The Dodd-Frank Act revised Core Principle 9 to read as follows:

    The board of trade shall provide a competitive, open and

    efficient market and mechanism for executing transactions that

    protects the price discovery process of trading in the centralized

    market of the board of trade. * * * The rules of the board of trade

    may authorize, for bona fide business purposes:

    (a) Transfer trades or office trades;

    (b) An exchange of:

    (1) Futures in connection with a cash commodity transaction;

    (2) Futures for cash commodities; or

    (3) Future for swaps; or

    (c) A futures commission merchant, acting as principal or agent,

    to enter into or confirm the execution of a contract for the

    purchase or sale of a commodity for future delivery if the contract

    is reported, recorded, or cleared in accordance with the rules of

    the contract market or a derivatives clearing organization.\337\

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

    \337\ 7 U.S.C. 7(d)(9). The language that provides that off-

    exchange transactions are permitted for bona fide business purposes

    if authorized by the board of trade's rules was formerly contained

    in Designation Criteria 3.

    In view of Congress' revisions to Core Principle 9, and the

    Commission's own experience over the past decade in overseeing

    compliance with former Core Principle 9 \338\ and related regulation

    1.38,\339\ the Commission proposed a number of new and revised rules,

    guidance and acceptable practices in order to implement the revised

    core principle, which requires DCMs to

    [[Page 36643]]

    provide a competitive, open and efficient market and mechanism for

    executing transactions that protects the price discovery process of

    trading in the centralized market of the board of trade.

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

    \338\ Former Core Principle 9 provided as follows: ``[T]he board

    of trade shall provide a competitive, open and efficient market and

    mechanism for executing transactions.''

    \339\ As described in the DCM NPRM, regulation 1.38 (Execution

    of Transactions) of the Commission's regulations requires, among

    other things, that all purchases and sales of a commodity for future

    delivery or a commodity option on or subject to the rules of a DCM

    be executed by open and competitive methods, with certain exceptions

    for transactions that are executed noncompetitively pursuant to a

    DCM's rules. See DCM NPRM, 75 FR at 80588 (discussing regulation

    1.38).

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

    Proposed Sec. 38.500 codified the statutory text of Core Principle

    9.\340\ Proposed Sec. 38.501 specified the manner in which

    transactions on the DCM's centralized market must be executed, and set

    forth the requirements applicable to transactions that are executed off

    of the DCM's centralized market, and incorporated certain

    clarifications pertaining to the allowable types of off-exchange

    transactions. Proposed Sec. 38.502 implemented the core principle's

    requirement that DCMs provide a market and mechanism for executing

    transactions that protects the price discovery process of trading in

    its centralized market. The rule proposed a centralized market trading

    requirement for all contracts listed on a DCM.

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

    \340\ The Commission is finalizing regulation 38.500 in this

    release.

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

    Proposed Sec. 38.503 set forth revised rules and related guidance

    pertaining to block transactions in futures contracts, including the

    appropriate size, price and reporting of block trades; proposed Sec.

    38.504 set forth rules pertaining to block transactions in swap

    contracts. Finally, the DCM NPRM proposed new and revised rules under

    Core Principle 9 that clarified other off-exchange transactions,

    referred to collectively as ``exchanges of derivatives for related

    positions'' and office trades and transfer trades.

    Summary of Comments and Discussion

    The Commission received a significant number of comments on all

    aspects of the proposed rules under Core Principle 9, comprising both

    general and specific comments pertaining to the Commission's

    interpretation of Core Principle 9 and various other aspects of the

    proposed rules.

    In particular, commenters raised numerous questions pertaining to

    the centralized market trading requirement rule's delisting requirement

    for non-compliant contracts and the available alternatives for trading

    such contracts.\341\ Commenters also raised questions pertaining to

    certain aspects of the proposed rules for block transactions and

    exchanges of derivatives for related position transactions.\342\ The

    Commission has considered these comments, along with comments

    pertaining to other aspects of the proposed rules under Core Principle

    9, and believes that additional time is appropriate before finalizing

    the proposed rules for Core Principle 9. In particular, the Commission

    plans and expects to take up the proposed rules under Core Principle 9

    when it considers the final SEF rulemaking. The additional time will

    allow the Commission to consider the available alternatives for

    contracts that may not comply with the proposed centralized market

    trading requirement (including listing contracts on a SEF), as well as

    the related implications of the rules for off-exchange transactions,

    including block transactions and exchange of derivatives for relates

    position transactions (``EDRPs''). At that time, the Commission will

    address the comments received in connection with proposed Sec. Sec.

    38.501-38.506.

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

    \341\ See, e.g., CME Comment Letter at 4-8, 29-30 (Feb. 22,

    2011); CME Comment Letter at 2-6 (April 18, 2011); CME Joint Comment

    Letter at 2-6 (June 3, 2011); CME Comment Letter (Aug. 3, 2011);

    BlackRock Comment Letter at 2-3 (Feb. 22, 2011); ICE Comment Letter

    at 3-6 (Feb. 22, 2011); CFE Comment Letter at 4-7 (Feb. 22, 2011);

    CFE Comment Letter (June 3, 2011); OCX Comment Letter at 2-5 (Feb.

    22, 2011); Eris Comment Letter at 1-3 (Feb. 22, 2011); Eris Comment

    Letter at 3 (June 3, 2011); GreenX Comment Letter at 8-11 (Feb. 22,

    2011); GreenX Comment Letter at 4 (April 18, 2011); and, GreenX

    Comment Letter (June 3, 2011).

    \342\ See, e.g., ICE Comment Letter at 7 (Feb. 22, 2011); CME

    Comment Letter at 31 (Feb. 22, 2011); ELX Comment Letter at 3 (Feb.

    22, 2011); and, KCBT Comment Letter at 6 (Feb. 22, 2011).

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

    10. Subpart K--Trade Information

    Section 5(d)(10) of the CEA (Core Principle 10), as amended by the

    Dodd-Frank Act, requires DCMs to capture, verify, and retain detailed

    trade information (i.e., audit trail data) for all transactions in

    their markets. The core principle requires DCMs to maintain rules and

    procedures that provide for the recording and safe storage of all

    identifying trade information in a manner that enables the DCM to

    assist in the prevention of customer and market abuses and to provide

    evidence of any rule violations. The Dodd-Frank Act did not

    substantively revise Core Principle 10, and therefore, the application

    guidance and acceptable practices for former Core Principle 10 provided

    the basis for the Commission's proposed audit trail regulations in

    subpart K.\343\ In addition, the Commission also looked to the issues

    that arose in the context of RERs pertaining to Core Principle 10.

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

    \343\ The Commission previously expressed the regulatory

    requirements of former Core Principle 10 through its application

    guidance for that core principle. See 17 CFR part 38, app. B,

    Application Guidance and Acceptable Practices for Core Principle 10.

    It also provided additional insight regarding the core principle

    through detailed acceptable practices that all DCMs could use to

    demonstrate compliance with former Core Principle 10. The acceptable

    practices explained that ``the goal of an audit trail is to detect

    and deter customer and market abuse.'' Id. at (b)(1). It also

    outlined the elements of an effective audit trail. Those elements

    included original source documents, which help to establish the

    accuracy and authenticity of an audit trail. Also included is a

    transaction history database and electronic analysis capability,

    which allow a DCM to more easily access and review audit trail data

    to identify possible trading abuses and rule violations. Finally,

    the acceptable practices pointed to a DCM's safe storage capability,

    emphasizing that audit trail data must be stored in a manner that

    protects it from unauthorized alteration, accidental erasure, or

    other loss.

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

    The Commission proposed to codify the statutory text of Core

    Principle 10 in proposed Sec. 38.550, and is adopting that rule as

    proposed.

    i. Sec. 38.551--Audit Trail Required

    Proposed Sec. 38.551 is based on the application guidance and

    acceptable practices for former Core Principle 10.\344\ Proposed Sec.

    38.551 established the overarching requirement that a DCM's audit trail

    program must help to ensure that the DCM can appropriately monitor and

    investigate any potential customer and market abuse. The proposed rule

    also provided that the audit trail data captured by a DCM must be

    sufficient to reconstruct all transactions within a reasonable period

    of time, and to provide evidence of any rule violations that may have

    occurred. The proposed rule further provided that audit trails must be

    sufficient to track customer orders from the time of receipt through

    fill, allocation, or other disposition. Proposed Sec. 38.551 applied

    equally to open-outcry and electronic trading.\345\

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

    \344\ 17 CFR part 38, app. B, Core Principle 10, Application

    Guidance and Acceptable Practices.

    \345\ 75 FR 80572, 80617-80618, Dec. 22, 2010.

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

    Summary of Comments

    Two commenters stated that the proposed rule is too

    prescriptive.\346\ CME argued that the proposals were a departure from

    a principles-based regulatory regime and would stifle growth and

    innovation.\347\ Similarly, MGEX argued that prescriptive rules would

    impose additional burdens and costs upon DCMs.\348\

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

    \346\ CME Comment Letter at 33-34 (Feb. 22, 2011); and MGEX

    Comment Letter at 7 (Feb. 22, 2011).

    \347\ CME Comment Letter at 34 (Feb. 22, 2011).

    \348\ MGEX Comment Letter at 7 (Feb. 22, 2011).

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

    Chris Barnard agreed with the proposed requirement that all DCMs

    have the ability to reconstruct all trading.\349\ Mr. Barnard suggested

    that the requirement that an exchange be able to reconstruct trading

    should include ``all trading events, including the entry of bids and

    offers in the order of their occurrence, as well as executed trades * *

    *'' in order to permit

    [[Page 36644]]

    exchanges to fully reconstruct and verify all trading activities.\350\

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

    \349\ Barnard Comment Letter at 2 (May 20, 2011).

    \350\ Id.

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

    Discussion

    The Commission is adopting Sec. 38.551 as proposed. While the

    Commission acknowledges CME and MGEX's comments, the Commission does

    not believe that requiring an exchange to capture and retain all audit

    trail data--to ensure that the exchange can reconstruct all

    transactions on its markets--places an undue burden on exchanges or

    stifles innovation. As noted above, the requirement that DCMs capture

    and retain all audit trail data is central to ensuring that the DCM can

    appropriately monitor and investigate any potential customer and market

    abuse, as required by the core principle. The Commission is not

    persuaded that this requirement would unduly burden DCMs, as these

    requirements are the same as the responsibilities currently outlined in

    the Acceptable Practices and Application Guidance for Core Principle

    10. In addition, exchanges are free to decide the manner and the

    technology they use to capture and retain audit trail data. The

    Commission is not prescribing how this should be done and therefore

    does not believe that this requirement will stifle innovation.

    The Commission also notes that the text of Sec. 38.551 defines

    certain regulatory outcomes that exchanges must achieve, but does not

    prescribe a specific means by which exchanges must achieve those

    outcomes. Accordingly, the rule is not prescriptive as it permits an

    exchange to achieve the required outcome in a number of ways.

    Proposed Sec. 38.551 required that a DCM ``must capture and retain

    all audit trail data necessary to detect, investigate, and prevent

    customer and market abuses.'' \351\ The creation and retention of a

    comprehensive audit trail enables exchanges to properly reconstruct any

    and all trading events and to conduct a thorough forensic review of all

    trade information. The Commission believes that the ability to

    reconstruct trading is a fundamental element of a DCM's surveillance

    and rule enforcement programs.

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

    \351\ DCM NPRM at 80617-18.

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

    ii. Sec. 38.552--Elements of an Acceptable Audit Trail Program

    Proposed Sec. 38.552 established the four elements of an

    acceptable audit trail program. First, proposed Sec. 38.552(a)

    required a DCM's audit trail to include original source documents,

    defined to include unalterable, sequentially-identified records on

    which trade execution information is originally recorded, whether

    manually or electronically. Additionally, the proposal required that

    customer order records indicate the terms of the order, the account

    identifier that relates to the account owner, and the time of the order

    entry. Finally, proposed Sec. 38.552(a) required that, for open-outcry

    trades, the time of report of order execution also be captured in the

    audit trail.

    Second, proposed Sec. 38.552(b) required that a DCM's audit trail

    program must include a transaction history database. Proposed Sec.

    38.552(b) specified the trade information required to be included in a

    transaction history database, including a history of all orders and

    trades; all data input in the trade matching system for clearing; the

    categories of participants for which trades were executed (i.e.,

    customer type indicator or ``CTI'' codes); timing and sequencing data

    sufficient to reconstruct trading; and identification of each account

    to which fills were allocated.

    Third, proposed Sec. 38.552(c) required that a DCM's audit trail

    program have electronic analysis capability for all data in its

    transaction history database, and that such electronic analysis

    capability allow the exchange to reconstruct trades in order to

    identify possible rule violations.

    Finally, proposed Sec. 38.552(d) required that a DCM's audit trail

    program include the ability to safely store all audit trail data, and

    to retain data in accordance with the recordkeeping requirements of DCM

    Core Principle 18 and associated regulations. Safe storage capability

    required a DCM to protect its audit trail data from unauthorized

    alteration, accidental erasure, or other loss.

    Summary of Comments

    In addition to submitting general comments asserting that the

    proposed rules are overly prescriptive, CME stated that while it

    currently maintains a database that includes a history of all orders

    and trades for electronic trading, the open outcry trading venue ``does

    not support an electronic transaction history database that captures

    the history of all orders, including orders that may be cancelled prior

    to execution.'' \352\ CME requested that, in the event that open-outcry

    orders are not entered into an electronic order routing system, the

    Commission clarify the requirements to take into account the

    distinctions between electronic and open-outcry trading.\353\

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

    \352\ CME Comment Letter at 33 (Feb. 22, 2011).

    \353\ Id.

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

    Better Markets requested that the Commission consider the impact

    that high-frequency traders may have on creation and maintenance of an

    exchange's audit trail data.\354\ Specifically, Better Markets

    commented that each of the elements of an exchange's audit trail,

    including all customer orders, should be ``time-stamped at intervals

    consistent with the capabilities of [high-frequency traders] * * *''

    \355\

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

    \354\ Better Markets Comment Letter at 9 (Feb. 22, 2011).

    \355\ Id. at 10.

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

    Discussion

    The Commission is adopting Sec. 38.552 as proposed, with certain

    revisions in response to comments received, and additional

    clarifications as explained below.

    First, in response to CME's comment that the Commission's audit

    trail rules should recognize the distinctions between electronic

    trading and open outcry trading, the Commission is revising Sec.

    38.552(b) to specify that a transaction history database must include a

    history of all trades, whether executed electronically or via open-

    outcry. However, order information must be included in the database

    only to the extent that such orders are entered into an electronic

    trading system. In addition, Sec. 38.552(b) also clarifies that order

    data includes modifications and cancellations of such orders. This

    reflects a regulatory requirement previously proposed as part of Sec.

    38.156, but moved to Sec. 38.552(b) in the final rules. The final

    rules further revise Sec. 38.552(b)(2) by replacing the customer type

    indicators listed in the proposed rule with the term ``customer type

    indicator code.''

    The final rules also revise Sec. 38.552(c) to include the

    requirement that an exchange's electronic analysis capability must

    provide it with the ability to reconstruct trading and identify

    possible trading violations.\356\

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

    \356\ The text added to regulation 38.552(c) is language

    originally proposed in regulation 38.156 and has now been deleted

    from regulation 38.156.

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

    The Commission acknowledges Better Markets' comments regarding

    audit trail data with respect to high-frequency trading. However, the

    Commission believes that the audit trail rules adopted herein,

    particularly the requirements that an exchange retain and maintain all

    data necessary to permit it to reconstruct trading, will help ensure

    that information and trades entered into an electronic trading system

    by high-frequency traders will be collected and retained as any other

    [[Page 36645]]

    audit trail data would be collected and retained.

    The Commission believes that the four elements set forth in Sec.

    38.552 are necessary to ensure that a DCM can capture and retain

    sufficient trade-related information, can reconstruct trading promptly,

    and has the necessary tools to detect and deter potential customer and

    market abuses through its audit trail. Specifically, original source

    documents must include all necessary trade information to reconstruct

    trading on the DCM. The transaction history database facilitates rapid

    access and analysis of all original source documents, thereby aiding

    DCMs in monitoring for customer and market abuses, while electronic

    analysis capability helps ensure effective use of audit trail data by

    requiring appropriate tools to use in conjunction with a DCM's

    transaction history database. Safe storage capability enables a DCM to

    properly preserve and protect the audit trail data so that it is

    readily available for the DCM to use in any future investigation or

    inquiry into possible violations of DCM rules.

    With the clarifications and revisions discussed above, the

    Commission adopts Sec. 38.552 as the elements required of an

    acceptable audit trail program.

    iii. Sec. 38.553--Enforcement of Audit Trail Requirements

    Proposed Sec. 38.553 established the elements of an effective

    audit trail enforcement program. The proposed rule was organized in two

    parts. First, proposed Sec. 38.553(a) required a DCM to develop an

    effective audit trail enforcement program. The proposed rule provided

    that an effective enforcement program must, at a minimum, review all

    members and market participants annually to verify their compliance

    with all applicable audit trail requirements.

    Proposed Sec. 38.553(a) was further divided into two paragraphs.

    Paragraph (a)(1) set forth minimum review criteria for an electronic

    trading audit trail, including annual examinations by DCMs of randomly

    selected samples of front-end audit trail data from order routing

    systems to ensure the presence and accuracy of required audit trail

    data. In addition, paragraph (a)(1) required that exchanges: Review the

    processes used by members and market participants to assign and

    maintain exchange user identifications; review usage patterns

    associated with user identifications; and review account numbers and

    CTI codes in trade records to test for accuracy and improper usage.

    Paragraph (a)(2) of proposed Sec. 38.553 established minimum review

    criteria for open-outcry trading, requiring DCMs to conduct annual

    reviews of all members and market participants to verify their

    compliance with their trade timing, order ticket, and trading card

    requirements.

    Second, proposed Sec. 38.553(b) required DCMs to develop programs

    to ensure effective enforcement of their audit trail and recordkeeping

    requirements. This requirement applied equally to both open-outcry and

    electronic trading. Proposed Sec. 38.553(b) required exchanges'

    enforcement programs to identify members and market participants that

    routinely failed to comply with the requirements of Core Principle 10

    and to levy meaningful sanctions when deficiencies were found. Such

    sanctions could not include more than one warning letter or other non-

    financial penalty for the same violation within a rolling 12 month

    period.

    Summary of Comments

    As noted above with respect to other rules, several commenters

    requested clarification of the term ``market participant'' in Sec.

    38.553(a) and Sec. 38.553(b), including questioning who qualifies as a

    ``market participant.'' \357\ Specifically, MGEX and NYSE Liffe

    suggested that the term ``market participant'' should be limited to

    only those participants who have direct access to the trading

    platform.\358\ CME commented that the Commission should limit the

    requirement for annual audit trail reviews to the ``clearing firm level

    rather than the market participant level'' because conducting an annual

    audit trail and recordkeeping review of ``every participant who enters

    an order into [a trading system would be] exceptionally onerous, costly

    and unproductive.'' \359\ Additionally, MGEX argued that exchanges

    should be permitted to conduct annual reviews by testing a sample of

    market participants in order to make the annual reviews of audit trail

    and recordkeeping requirements ``more efficient, adequate and less

    burdensome.'' \360\

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

    \357\ CME Comment Letter (Feb. 22, 2011); NYSE Liffe Comment

    Letter (Feb. 22, 2011); MGEX Comment Letter (Feb. 22, 2011).

    \358\ MGEX Comment Letter at 7 (Feb. 22, 2011); NYSE Liffe

    Comment Letter at 12 (Feb. 22, 2011).

    \359\ CME Comment Letter at 33(Feb. 22, 2011).

    \360\ MGEX Comment Letter at 7 (Feb. 22, 2011).

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

    In response to the proposed Sec. 38.553(b)'s requirement for

    sufficient sanctions for violations of audit trail and recordkeeping

    requirements, MGEX argued that such a requirement is ``arbitrary and

    counterproductive.'' \361\ MGEX proposed that the Commission should

    simply require exchanges to have an adequate audit trail program,

    including adequate enforcement of the audit trail requirements.\362\

    MGEX argued that such an approach would allow an exchange to develop

    ``what works best for their business while meeting intended audit trail

    requirements.'' \363\

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

    \361\ Id.

    \362\ Id.

    \363\ Id.

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

    Discussion

    The Commission adopts proposed Sec. 38.553, with certain

    amendments.

    The Commission has considered the comments pertaining to this rule

    and believes that the term ``market participants,'' as used in

    Sec. Sec. 38.553(a) and 38.553(b), requires clarification.

    Accordingly, ``market participants'' is amended to instead state

    ``persons and firms subject to designated contract market recordkeeping

    rules'' throughout Sec. 38.553. The Commission recognizes that the

    term ``market participants'' may be viewed to capture a wider range of

    persons than the Commission intended to subject to the proposed

    regulation. Therefore, this amendment to Sec. 38.553 clarifies that

    its requirements apply to those individuals and firms that are subject

    to DCM recordkeeping rules.

    The Commission does not believe that sampling-based reviews of

    audit trail and recordkeeping requirements are adequate to reasonably

    ensure compliance with audit trail rules. Sections 38.553(a) and

    38.553(b) require audit trail enforcement programs that will yield some

    certainty with respect to exchanges' accurate and consistent access to

    all data necessary to reconstruct all transactions in their markets and

    provide evidence of customer and market abuses. Absent reliable audit

    trail data, an exchange's ability to detect or investigate customer or

    market abuses may be severely diminished.

    The Commission does not believe that requiring exchanges to issue

    no more than one warning letter for the same violation within a rolling

    12-month time period is arbitrary and counterproductive. The proposed

    requirement to limit DCMs to no more than one warning letter for the

    same violation within a rolling 12-month time period helps ensure that

    exchanges levy meaningful fines and sanctions to deter recidivist

    behavior. However, the Commission is amending Sec. 38.553(b) to

    clarify that its requirements with respect to warning letters only

    apply where exchange compliance staff finds an actual rule violation,

    rather than just the suspicion of a violation.

    [[Page 36646]]

    The Commission notes that Sec. 38.553 reflects staff's findings

    and recommendations in recent RERs regarding DCMs' audit trail

    enforcement programs, including recommendations regarding more frequent

    audit trail reviews and larger sanctions for audit trail violations.

    The proposed rule also reflects the Commission's directive to DCMs in

    recent RERs to develop audit trail programs for electronic trading that

    are comparable in rigor and scope to their audit trail programs for

    open-outcry trading.\364\ Accordingly, the Commission is adopting Sec.

    38.553 with the aforementioned modifications.

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

    \364\ See Rule Enforcement Review of the Minneapolis Grain

    Exchange (August 27, 2009), and Rule Enforcement Review of ICE

    Futures U.S. (Feb. 2, 2010).

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

    11. Subpart L--Financial Integrity of Transactions

    The Dodd-Frank Act amended the text of Core Principle 11 largely to

    incorporate the language from former Designation Criteria 5.\365\

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

    \365\ Former Designation Criterion 5 stated that ``the board of

    trade shall establish and enforce rules and procedures for ensuring

    the financial integrity of transactions entered into by or through

    the facilities of the contract market, including the clearance and

    settlement of the transactions with a derivatives clearing

    organization.'' 17 CFR Part 38, app. A (2010).

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

    This core principle requires that a DCM 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 the transactions with a DCO.

    Core Principle 11 also requires that a DCM establish and enforce rules

    to ensure: (i) The financial integrity of any futures commission

    merchant (``FCM'') and introducing broker (``IB''); and (ii) the

    protection of customer funds. Because the substance of this core

    principle is unchanged, the Commission interpreted the statutory

    provisions in the same manner as they are currently interpreted. The

    Commission proposed to codify current practices carried out by the

    industry, as well as practices listed in the application guidance for

    Core Principle 11 and former Designation Criterion 5. In addition,

    based upon its experience, the Commission proposed some new practices

    and requirements for DCMs in implementing Core Principle 11.\366\ Among

    other rules, the Commission proposed to codify the statutory text of

    Core Principle 11 in Sec. 38.600, and is adopting the rule as

    proposed.

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

    \366\ The Commission received five comment letters that

    discussed proposed regulations 38.600 through 38.607. The comments

    were received from ICE Comment Letter (Feb. 22, 2011), ELX Comment

    Letter (Feb. 22, 2011), MGEX Comment Letter (Feb. 22, 2011), KCBT

    Comment Letter (Feb. 22, 2011), and CME Comment Letter (Feb. 22,

    2011).

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

    i. Sec. 38.601--Mandatory Clearing

    Proposed Sec. 38.601 provided that all transactions executed on or

    through a DCM, other than transactions in security futures products, be

    cleared through a Commission-registered DCO.

    Summary of Comments

    CME commented that the mandatory clearing requirement should not

    apply to swaps traded on a DCM because not all swap contracts will be

    required to be cleared, such as foreign exchange swaps and swaps for

    end users.\367\ CME further stated that this requirement would put a

    DCM at a competitive disadvantage to a SEF without justification, and

    recommended that the Commission revise proposed Sec. 38.601 to exclude

    swaps from the clearing rule.\368\

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

    \367\ CME Comment Letter at 34 (Feb. 22, 2011).

    \368\ Id.

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

    Discussion

    The Commission is adopting the proposed rule, with certain

    amendments. The Commission believes that the language of the core

    principle specifically imposes a clearing obligation for all

    transactions executed on a DCM (as is the current practice) and has

    therefore not revised the rule to exclude swaps.\369\

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

    \369\ Although the DCM and SEF Financial Integrity Core

    Principles are similar, the SEF core principle contains the language

    ``including the clearance and settlement of the swaps pursuant to

    section 2(h)(1).'' Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-2(f)(7),

    as added by section 733(f) of the Dodd-Frank Act. The DCM core

    principle states ``including the clearance and settlement of the

    transactions with a derivatives clearing organization.'' The

    Commission reads section 2(h)(1) as a limitation on the clearing

    obligation for SEFs, and as a result, proposed regulation 37.701

    requires all transactions executed on a SEF to be cleared unless the

    transaction is exempted from clearing under section 2(h)(7) of the

    CEA or the Commission determines that the clearing requirement under

    section 2(h)(1) of the CEA is inapplicable. Since Congress did not

    provide for a limitation on the clearing obligation in the DCM core

    principle, all transactions executed on or through a DCM must be

    cleared through a Commission-registered DCO.

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

    However, the Commission has revised the rule to make clear that

    transactions in security futures products that are executed on or

    through a DCM are also subject to the mandatory clearing requirement.

    Such products may be cleared either through a DCO or through a clearing

    agency registered pursuant to section 17A of the Securities Exchange

    Act of 1934.\370\

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

    \370\ 15 U.S.C. 78a et seq. (2010)

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

    ii. Sec. 38.602--General Financial Integrity

    Proposed Sec. 38.602 provided that DCMs must adopt rules

    establishing minimum financial standards for both member FCMs and IBs

    and non-intermediated market participants.

    Summary of Comments

    ICE contended that the Commission has expanded the standard in Core

    Principle 11 by requiring DCMs to establish minimum financial standards

    for all of their members and non-intermediated market

    participants.\371\ ICE further stated that many DCMs eliminated

    specific financial standards for their non-FCM members and instead

    require that non-FCM member transactions be guaranteed by a clearing

    member.\372\ As a result, ICE requested confirmation that a DCM rule

    requiring such clearing arrangements to be in place would satisfy

    proposed Sec. 38.602.\373\ ICE also requested confirmation that a DCM

    rule requiring an FCM to maintain capital in accordance with applicable

    Commission regulations would satisfy the DCM's duty to set financial

    requirements for its FCM members.\374\

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

    \371\ ICE Comment Letter at 12 (Feb. 22, 2011).

    \372\ Id. at 13.

    \373\ Id.

    \374\ Id.

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

    Discussion

    The Commission is adopting the rule as proposed. In response to

    ICE's comments, the Commission confirms that a DCM rule requiring that

    transactions by a non-FCM member be guaranteed by a clearing member

    will satisfy Sec. 38.602.\375\

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

    \375\ The Commission notes that this requirement does not speak

    to DCO requirements under, for example, Core Principle D (Risk

    Management) for its clearing members.

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

    However, a DCM rule requiring an FCM to maintain capital in

    accordance with applicable Commission regulations will not, in itself,

    satisfy the DCM's duty to set minimum financial standards for its FCM

    members. The term ``minimum financial standards'' used in Sec. 38.602

    is not intended to cover only capital requirements. Rather, Sec.

    38.602 should be read in conjunction with Sec. 38.604, which requires

    surveillance by a DCM of financial and related information from each of

    its members. The Commission notes that a DCM's duty to set financial

    standards for its FCM members involves setting capital requirements,

    conducting surveillance of the potential future exposure of each FCM as

    compared to its capital, and taking appropriate action in light of the

    results of such surveillance.

    [[Page 36647]]

    iii. Sec. 38.603--Protection of Customer Funds

    Proposed Sec. 38.603 provided that DCMs must adopt rules for the

    protection of customer funds, including the segregation of customer and

    proprietary funds, the custody of customer funds, the investment

    standards for customer funds, intermediary default procedures and

    related recordkeeping.

    Summary of Comments

    KCBT stated that because its rules incorporate by reference the

    requirements of the CEA, the requirement to implement exchange rules

    that mirror Commission regulations is duplicative, unnecessary and

    burdensome.\376\ In addition, KCBT noted that its clearing corporation

    already has rules in place to address intermediary default

    procedures.\377\

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

    \376\ KCBT Comment Letter at 7 (Feb. 22, 2011).

    \377\ Id.

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

    Discussion

    The Commission is adopting the rule as proposed. In response to the

    comments, the Commission confirms that DCMs must adopt rules as

    required under Sec. 38.603. Establishing such rules is important

    because it will provide evidence: (i) that each DCM has focused

    attention on the specific regulations promulgated under the CEA; and

    (ii) that such regulations are appropriately implemented. Section

    38.603 does not specify the exact rules to be implemented by each DCM,

    but sets forth the substance of what the rules of each DCM must

    address.

    In response to KCBT's comment that its clearing corporation already

    has rules in place to address intermediary default procedures, the

    Commission notes that DCO rules protect the DCO, not fellow customers.

    Nonetheless, the performance of the functions required by Sec. 38.603

    may be allocated between a DCO and DCM pursuant to appropriate written

    agreements. Such agreements would have to include an arrangement

    between the DCO and DCM that the DCO would undertake the responsibility

    to protect the individual customers of the DCM.

    iv. Sec. 38.604--Financial Surveillance

    Proposed Sec. 38.604 required that a DCM must routinely receive

    and promptly review financial and related information from its members,

    and conduct ongoing financial surveillance of the risk created by the

    positions taken by an FCM's customers. To meet this requirement, the

    DCM must have rules pertaining to minimum financial standards of

    intermediaries that include, among other things, rules prescribing

    minimum capital requirements for member FCMs and IBs.\378\ The DCM must

    also have rules pertaining to the protection of customer funds that

    must include, among other things, that each DCM must continually survey

    the obligations of each FCM created by its customers' positions and, as

    appropriate, compare those obligations to the financial resources of

    the FCM. If the obligations of a member FCM appear excessive as

    compared to the FCM's capital, a DCM should take appropriate action,

    including contacting the FCM or the FCM's designated self-regulatory

    organization (``DSRO'').

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

    \378\ An FCM that is a clearing member will also have additional

    obligations to the DCO as a result of its clearing membership.

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

    Summary of Comments

    KCBT commented that it already reviews on a daily basis the open

    positions and percentage of open interest held by each clearing member,

    and ``pay/collect information'' based upon open positions and

    reportable positions.\379\ KCBT is concerned that the use of the terms

    ``continually'' and ``excessive'' in the proposed regulation is

    vague.\380\ In addition, KCBT noted that the DSRO should continue to

    review the obligations of each firm for which it is the DSRO because

    the DSRO has access to all customer positions being carried by the FCM

    in all markets and thus is in a better position to ensure that the FCM

    has sufficient capital for the overall positions being carried by the

    FCM.\381\

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

    \379\ See KCBT Comment Letter at 7 (Feb. 22, 2011).

    \380\ Id.

    \381\ Id.

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

    Discussion

    The Commission is adopting the rule as proposed and notes that the

    rule codifies existing industry practice. In response to comments

    raised by KCBT, the Commission notes that the term ``continually'' in

    the proposed rule requires that a DCM survey the obligations of each

    FCM created by the positions of its customers throughout the trading

    day, not just based upon end-of-day positions. Financial risk can shift

    dramatically throughout the day as a result of the combination of price

    move and new trades, making it difficult for a DCM to fulfill its

    obligations to establish and enforce rules to ensure: (i) the financial

    integrity of FCMs and IBs and (ii) the protection of customer funds

    pursuant to Core Principle 11, if such DCM limited its monitoring to

    daily. FCMs and IBs could be exposed to excessive risk if they are

    taking on risky positions during the day with the expectation that

    those risks will be offset prior to the daily review period set by the

    DCM. The Commission also notes that an arrangement between a DCO and a

    DCM, whereby the DCO is responsible to a DCM for the performance of

    certain functions, including the monitoring required pursuant to Sec.

    38.604, will continue to be permitted by the Commission.

    In response to KCBT's comment regarding the vagueness of the word

    ``excessive,'' the Commission expects a DCM to exercise professional

    judgment in monitoring the risks of its FCMs as compared to their

    available capital, and to take follow-up action to inquire into and

    address any exceptional situations. This monitoring should occur in

    addition to any DSRO review.

    v. Sec. 38.605--Requirements for Financial Surveillance Program

    Proposed Sec. 38.605 required DCMs, as self-regulatory

    organizations (``SROs''), to comply with the standards of amended Sec.

    1.52 to ensure the financial integrity of intermediaries by

    establishing and carrying out an SRO program for the examination and

    financial supervision of intermediaries. Section 1.52, as proposed to

    be amended, sets forth the required elements of SRO supervisory

    programs and permits one or more SROs to establish, subject to

    Commission approval, a joint audit plan to provide for the SRO

    supervision of members of more than one SRO. As noted in the DCM NPRM,

    proposed amendments to Sec. 1.52 included references to existing

    guidance to SROs contained in the Financial and Segregation

    Interpretation No. 4-1 (Advisory Interpretation for Self-Regulatory

    Organization Surveillance Over Members' Compliance with Minimum

    Financial, Segregation, Reporting, and Related Recordkeeping

    Requirements), and Addendums A and B to Financial and Segregation

    Interpretation No. 4-1, and Financial and Segregation Interpretation

    No. 4-2 (Risk-Based Auditing), which guided the practices of members of

    the Joint Audit Committee (``JAC'') operating a joint audit plan that

    had been approved by the Commission.\382\

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

    \382\ See 73 FR 52832, Sept. 11, 2008 (requesting comments prior

    to the Commission's approval of the most recent Joint Audit

    Committee agreement, which approval was granted March 18, 2009). See

    also, DCM NPRM, 75 FR at 80596.

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

    Discussion

    No comments were received pertaining to the proposed rules, and the

    Commission is adopting proposed

    [[Page 36648]]

    Sec. 38.605 and Sec. 1.52 without modification.

    The Commission notes that the staff guidance contained in Division

    of Trading and Markets Financial and Segregation Interpretations 4-1

    and 4-2, and related Addendums A and B to Financial and Segregation

    Interpretations 4-1, remains effective. Accordingly, while the revised

    Sec. 1.52(b)(4) provides that an SRO's financial surveillance program

    must include the onsite examination of each member FCM no less

    frequently than once every 18 months, Financial and Segregation

    Interpretation No. 4-2 provides that FCMs should generally be subject

    to an onsite examination at least once every 9 to 18 months, with

    examination cycles exceeding 15 months only for registrants with a

    demonstrated history of strong compliance and risk management in order

    to provide flexibility for unexpected events or to vary examination

    dates.

    While Sec. 1.52 now codifies long established staff positions, and

    SRO practice, with respect to the manner in which SROs execute their

    financial surveillance and supervisory programs with respect to member

    intermediaries, the Commission will continue to evaluate options to

    further enhance the manner in which intermediaries are supervised and

    to strengthen the protection of customer funds.

    vi. Sec. 38.606--Financial Regulatory Services Provided by a Third

    Party

    Proposed Sec. 38.606 provided that DCMs may satisfy their

    financial surveillance responsibilities under proposed Sec. Sec.

    38.604 and 38.605 by outsourcing such responsibilities to a registered

    futures association or other regulated entity, including, for example,

    a DCO. Proposed Sec. 38.606 provided that a DCM must ensure that the

    regulatory service provider has the capacity and resources to conduct

    the necessary financial surveillance and, notwithstanding the use of a

    regulatory service provider, the DCM remains responsible for compliance

    with its financial surveillance obligations.

    Summary of Comments

    MGEX commented that the proposed requirements seem reasonable, and

    stated that the requirements could be satisfied under the current

    delegation and information sharing agreements such as the Commission-

    approved JAC Agreement for Services.\383\ MGEX also commented that DCMs

    should not be required to audit third party regulatory providers

    because that would frustrate the purpose, efficiency, and economic

    value of outsourcing to a third party.\384\

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

    \383\ MGEX Comment Letter at 8 (Feb. 22, 2011).

    \384\ Id.

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

    Discussion

    The Commission is adopting the proposed rule without modification.

    In response to MGEX's comments, the Commission notes that Sec. 38.606

    would not be satisfied solely by relying on a DCM's JAC Agreement. The

    current JAC Agreement does not cover the type of financial surveillance

    specified in Sec. 38.604, nor does it, by its terms, serve as an

    outsourcing regulatory services agreement for the type of outsourcing

    contemplated under Sec. 38.606. Accordingly, in order to satisfy the

    requirements of both Sec. Sec. 38.604 and 38.605, a regulatory

    services agreement must specifically include the following: (i) the

    regulatory services to be performed, which to satisfy Sec. 38.604 must

    include intraday monitoring of FCM obligations and positions; (ii) to

    whom and for whom such services are to be provided; and (iii) a

    statement or representation that the provider of the services has the

    capacity and resources to perform the identified services.

    vii. Sec. 38.607--Direct Access

    Proposed Sec. 38.607 required a DCM that allows customers direct

    access to its contract market to implement certain direct access

    controls and procedures in order to provide member FCMs with tools to

    manage their financial risk. The proposed rule contemplated that an FCM

    would continue to have primary responsibility for overall risk

    management, but that the DCM would be required to establish an

    automated risk management system permitting an FCM to set appropriate

    risk limits for each customer with direct access to the contract

    market.

    Summary of Comments

    CME supports risk controls at both the DCM and DCO levels, and also

    at clearing firm and direct access client levels.\385\ CME supports the

    discretion that the proposed rules provide a DCM in terms of the

    control model for access, and recommended a level of standardization

    with respect to the types of DCM pre-trade controls in the form of

    acceptable practices.\386\ ELX recommended that the Commission consider

    allowing an FCM to bypass use of DCM-provided controls if an FCM has

    its own controls that a DCM tests and deems to be sufficient.\387\ MGEX

    commented that the Commission should not mandate that a DCM provide the

    technology as a prescriptive rule, and further claimed that such tools

    are the FCM's responsibility and DCMs should not be required to assume

    these responsibilities.\388\

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

    \385\ CME Comment Letter at 34 (Feb. 22, 2011).

    \386\ Id.

    \387\ ELX Comment Letter at 5 (Feb. 22, 2011).

    \388\ MGEX Comment Letter at 8 (Feb. 22, 2011).

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

    Discussion

    After reviewing the comments discussed above, the Commission is

    adopting the proposed rule without modification and believes that risk

    controls are appropriate at the FCM, DCO and DCM levels. The Commission

    notes that it is impossible for an FCM to protect itself without the

    aid of the DCM when a customer has direct access to a DCM and thus

    completes trades that are the financial responsibility of such

    customer's FCM before the FCM's systems have an opportunity to prevent

    the execution of such trades. As a result, DCMs allowing customers

    direct access to their markets must implement certain controls and

    procedures to allow FCMs to manage their risk. As stated in the

    proposed rule, these controls would not be required for a DCM that

    permits only intermediated transactions and does not permit direct

    access.

    The responsibility to utilize these controls and procedures remains

    with the FCM. Each FCM permitting direct access must use DCM-provided

    controls, regardless of the purported efficacy of an FCM's

    controls.\389\ This principle is supported by CME's comment letter, the

    Commission's Technology Advisory Committee report (the ``DMA

    Report''),\390\ and the FIA Report on Market Access Risk Management

    [[Page 36649]]

    Recommendations (the ``FIA Report'').\391\

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

    \389\ The efficacy of these controls also hinge, in part, on the

    proper functioning of the electronic systems of DCMs, FCMs and

    direct access market participants, and thus, necessitates that such

    electronic systems are routinely tested and monitored. Accordingly,

    the Commission may address additional electronic system testing and

    supervision-related issues in the future.

    \390\ See Pre-Trade Functionality Subcommittee of the CFTC

    Technology Advisory Committee report, ``Recommendations on Pre-Trade

    Practices for Trading Firms, Clearing Firms, and Exchanges Involved

    in Direct Market Access'' (March 1, 2011), accepted by the TAC and

    available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf. The DMA

    Report recommends specific controls that should be adopted by each

    FCM and DCM and notes that ``the exchanges are the point furthest

    downstream, so coordination at this level has the greatest leverage

    to impact the industry as a whole.'' DMA Report at p. 4. The

    controls provided by the DCM serve as the backstop, in the event

    that an FCM's controls are insufficient. The DMA Report notes that,

    although the recommendations may seem redundant, it ``strongly

    believes that an approach of multiple, redundant checks across the

    supply chain offers the most robust protection to markets.'' Id. at

    p. 5.

    \391\ See FIA report on ``Market Access Risk Management

    Recommendations'' (April 2010), available at: http://www.futuresindustry.org/downloads/Market_Access-6.pdf. (``FIA

    Report'').

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

    As discussed in the DCM NPRM, the Technical Committee of the

    International Organization of Security Commissions (``IOSCO'')

    published a final report on principles for direct electronic access in

    August of 2010 (the ``IOSCO DEA Report'') stating that, in an automated

    trading environment, the only controls that can effectively enforce

    limitations on risk are automated controls.\392\ Further, the IOSCO DEA

    Report noted that a market should not permit direct electronic access

    unless effective systems and controls are in place to enable risk

    management, including automated pre-trade controls enabling

    intermediaries to implement appropriate trading limits.\393\ The IOSCO

    DEA Report stated that ``[t]here is no convincing rationale for not

    using automated credit limit system filters * * * it will be critical

    for intermediaries, third party vendors and markets to cooperate in

    putting into place appropriate systems and controls.'' \394\ One

    example provided in the report was that a market could provide and

    operate an automated system (i.e., software and hardware) that would be

    used by the intermediary and clearing firm.\395\

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

    \392\ IOSCO, Final Report of the IOSCO Technical Committee,

    ``Principles for Direct Electronic Access to Markets,'' at 20, IOSCO

    Doc. FR08/10 (August 12, 2010), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD332.pdf.

    \393\ Id.

    \394\ Id. at p. 22.

    \395\ Id.

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

    Further, the FIA's working group, consisting of DCMs, clearing

    firms, and trading firms, recommended that pre-trade controls be set at

    the exchange level, and that the controls be mandatory to ensure that

    there are no latency disadvantages.\396\ In a publication in January

    2011, the FIA reported that the majority of exchanges have policies and

    tools in place that comply with those recommendations.\397\ The DMA

    Report also discussed the latency for an FCM that elects to use a DCM's

    controls as compared to an FCM that does not.\398\ This disadvantage is

    eliminated if each DCM requires all FCMs to use the DCM-provided

    protections.

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

    \396\ See e.g., FIA Report.

    \397\ See Leslie Sutphen, ``Exchange Survey Finds Wide Range of

    Risk Controls in Place'' (January 2011), at 28, available at: http://www.futuresindustry.org/downloads/RC-survey.pdf.

    \398\ See DMA Report at p. 4.

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

    12. Subpart M--Protection of Markets and Market Participants

    Core Principle 12, as amended by the Dodd-Frank Act, requires that

    DCMs establish and enforce rules to protect markets and market

    participants from abusive practices committed by any party, including

    abusive practices committed by a party acting as an agent for a

    participant, and promote fair and equitable trading on the contract

    market.

    The Commission proposed to codify the statutory text of the core

    principle in Sec. 38.650, and is adopting the rule as proposed.

    i. Sec. 38.651--Additional Sources for Compliance

    Proposed Sec. 38.651 required that a DCM have and enforce rules

    that are designed to promote fair and equitable trading and to protect

    the market and market participants from abusive practices including

    fraudulent, noncompetitive or unfair actions, committed by any party.

    The rule also required that DCMs must have methods and resources

    appropriate to the nature of the trading system and the structure of

    the market to detect trade practice and market abuses and to discipline

    such behavior, in accordance with Core Principles 2 and 4, and the

    associated regulations in subparts C and E of this part, respectively.

    The proposed rule required that DCMs also must provide a competitive,

    open and efficient market and mechanism for executing transactions in

    accordance with Core Principle 9 and the associated regulations under

    subpart J of this part.

    Summary of Comments

    Chris Barnard and Better Markets referenced a discussion from the

    DCM NPRM preamble that provided that a DCM must establish rules that

    require the fair, equitable, and timely provision of information

    regarding prices, bids, and offers to market participants.\399\ Mr.

    Barnard requested that the Commission amend the wording of proposed

    Sec. Sec. 38.650 and 38.651 to include this language and Better

    Markets requested that the proposed rules prohibit privileged access to

    data feeds, arguing that the practice is disruptive of fair and

    equitable trading.\400\

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

    \399\ Better Markets Comment Letter at 10 (Feb. 22, 2011) and

    Barnard Comment Letter at 4 (May 20, 2011) (citing DCM NPRM at

    80597).

    \400\ Id.

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

    Discussion

    The Commission is adopting the rule with a technical modification

    to revise the heading of the rule from ``Additional sources for

    compliance'' to the more appropriate ``Protection of markets and market

    participants.'' All other aspects of the proposed rule will remain

    unchanged.

    The Commission believes that Mr. Barnard's concerns are adequately

    addressed by the rules adopted in this release. As an initial matter,

    Sec. 38.650 simply codifies the language of Core Principle 12 and thus

    cannot be amended by the Commission. Additionally, the broad

    requirement to promote ``fair and equitable trading'' contained in

    Sec. Sec. 38.650 and 38.651, as well as the Core Principle 9

    requirement to provide a ``competitive, open, and efficient market and

    mechanism for executing transactions,'' are sufficient to capture the

    obligation to provide fair, equitable, and timely information regarding

    prices, bids, and offers. With respect to Better Markets' comment, the

    Commission notes that the language from the DCM NPRM cited by Better

    Markets was not intended to preclude co-location. Instead, the DCM NPRM

    provides that a market should be fair and equitable in its information

    distribution, meaning all participants in co-location agreements should

    pay the same price for a given level of service and access. This does

    not mean that everyone in the market is required to get information at

    the same time, but rather that every member of a connection or access

    type class must be treated equally in terms of service and cost. The

    faster access to price, bid, and offer information afforded by co-

    location is no different than the faster access to information afforded

    to traders in the pits prior to the markets becoming electronic. The

    Commission believes that prohibiting co-location, or requiring that co-

    location services be throttled to a point that all participants are

    able to consume information or access the matching engine at the same

    speed, would not be practical or reasonable. The Commission also notes

    that it recently addressed co-location fees in a separate proposed

    rulemaking for ``Co-location/Proximity Hosting Services.'' \401\

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

    \401\ See, Notice of proposed rulemaking, 75 FR 33198, Jun. 11,

    2010.

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

    13. Subpart N--Disciplinary Procedures

    Core Principle 13 is a new core principle, created by section 735

    of the Dodd-Frank Act. The core principle incorporates the concepts

    from former Designation Criterion 6 (Disciplinary Procedures) and

    former DCM Core Principle 2.\402\ The core principle

    [[Page 36650]]

    specifically requires that DCMs establish and enforce disciplinary

    procedures that authorize the DCM to discipline, suspend or expel

    market participants and members that violate the DCM's rules, or

    delegate the function to third parties.

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

    \402\ Compare former CEA section 5(b)(6) and section 5(d)(2)

    with CEA section 5(d)(13) as amended by the Dodd-Frank Act. Prior to

    the passage of the Dodd-Frank Act, the standards for DCMs'

    disciplinary practices were found in Designation Criterion 6 and the

    statutory language, guidance, and acceptable practices for former

    Core Principle 2. Designation Criterion 6 required that a DCM

    establish and enforce disciplinary procedures that authorized it to

    discipline, suspend, or expel members or market participants that

    violated the rules of the DCM, or similar methods for performing the

    same functions, including delegation of the functions to third

    parties. Paragraph (a)(2) of the application guidance for former

    Core Principle 2 required DCMs to have the ``arrangements,

    resources, and authority [necessary] for effective rule

    enforcement,'' and the ``authority and ability to discipline and

    limit, or suspend the activities of a member or market participant

    pursuant to clear and fair standards.'' 17 CFR part 38, app. B,

    Application Guidance for Core Principle 2 at (a)(2) (2010). In

    addition, paragraph (b)(4) of the former core principle's acceptable

    practices required any DCM that wished to take advantage of the

    acceptable practice's safe harbor to have ``prompt and effective

    disciplinary action for any violation * * * found to have been

    committed.'' 17 CFR part 38, app. B, Acceptable Practices for Core

    Principle 2 at (b)(4) (2010). Paragraph (b)(4) also referenced part

    8 of the Commission's regulations as an example that DCMs could

    follow to comply with Core Principle 2. 17 CFR 8.01 et seq. In its

    experience, the Commission has found that many DCMs' disciplinary

    programs do in fact model the disciplinary structures and processes

    in part 8. While the acceptable practices for former Core Principle

    2 offered the disciplinary procedures in part 8 as an example of

    appropriate disciplinary procedures, DCMs were exempt from part 8

    pursuant to regulation 38.2. The disciplinary procedures proposed

    herein do not re-subject DCMs to part 8 of the Commission's

    regulations, but rather propose new disciplinary procedures for

    inclusion in part 38.

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

    Summary of Comments

    Several commenters submitted letters discussing the disciplinary

    procedures contained in subpart N. While the comments were generally

    supportive of the Commission's objectives, commenters expressed a

    general desire for the Commission to rely on a more principles-based

    approach, and argued that the proposed rules were overly prescriptive.

    Some commenters also articulated specific concerns regarding several

    rules that they believed would adversely impact DCMs.

    Discussion

    The Commission thoroughly reviewed and considered all comments

    received and, where appropriate, made modifications to the proposed

    rules, including converting some proposed rules into guidance. These

    modifications, explained further below, have resulted in changes to the

    numbering of the proposed regulations and in a reduction in the number

    of separately-enumerated rules, from 16 proposed rules to 12 final

    rules.

    The Commission proposed to codify the statutory text of the core

    principle in proposed Sec. 38.700, and adopts the rule as proposed.

    The Commission is also adding Sec. 38.712 to refer applicants and DCMs

    to the guidance in appendix B to part 38.

    i. Sec. 38.701--Enforcement Staff

    Proposed Sec. 38.701 required that a DCM establish and maintain

    sufficient enforcement staff and resources to effectively and promptly

    prosecute possible rule violations within the jurisdiction of the

    contract market. The proposed rule also required a DCM to monitor the

    size and workload of its enforcement staff annually and increase its

    resources and staff as appropriate. The Commission recognized that at

    some DCMs, compliance staff also serves as enforcement staff. That is,

    they both investigate cases and present them before disciplinary

    panels. These proposed rules were not intended to prohibit that

    practice.

    The Commission believes that adequate staff and resources are

    essential to the effective performance of a DCM's disciplinary program.

    This has repeatedly been reflected in Commission staff's findings and

    recommendations in recent RERs, in which DMO staff recommended that

    DCMs increase their compliance and/or enforcement staff levels and

    monitor the size of their staff and increase the number of staff

    appropriately as trading volume increases, new responsibilities are

    assigned to staff, or internal reviews demonstrate that work is not

    completed in an effective or timely manner.

    Proposed Sec. 38.701 also provided that a DCM's enforcement staff

    may not include members of the exchange or persons whose interests

    conflict with their enforcement duties. Moreover, the proposed rule

    prohibited a member of the enforcement staff from operating under the

    direction or control of any person or persons with trading privileges

    at the contract market. These provisions sought to ensure the

    independence of enforcement staff, and help promote disciplinary

    procedures that are free of potential conflicts of interest.

    Summary of Comments

    MGEX noted that, as a combined DCM/DCO, it interprets the rule to

    allow staff to serve as enforcement and review staff for both the DCM

    and DCO divisions of MGEX, and any other entities that become a

    combined DCM/DCO.\403\

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

    \403\ MGEX Comment Letter at 8 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting the rule as proposed. The Commission

    believes that adequate staff and resources are essential to the

    effective performance of a DCM's disciplinary program. This has

    repeatedly been reflected in Commission staff's findings and

    recommendations in recent RERs, in which Commission staff recommended

    that DCMs increase their compliance and/or enforcement staff levels and

    monitor the size of their staff and increase the number of staff

    appropriately as trading volume increases, new responsibilities are

    assigned to staff, or internal reviews demonstrate that work is not

    completed in an effective or timely manner.\404\

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

    \404\ See Rule Enforcement Review of the Minneapolis Grain

    Exchange (Aug. 27, 2009), Rule Enforcement Review of ICE Futures

    U.S. (Feb. 2, 2010), Rule Enforcement Review of the Chicago Board of

    Trade and the Chicago Mercantile Exchange (Sep. 13, 2010), and Rule

    Enforcement Review of New York Mercantile Exchange and Commodity

    Exchange (August 30, 2011) for findings and recommendations

    pertaining to the adequate size of DCM compliance and enforcement

    staffs.

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

    The Commission notes that MGEX's interpretation regarding the

    sharing of compliance staff across a combined DCM/DCO is acceptable,

    provided that the combined DCM/DCO has sufficient staff to meet the

    DCM's regulatory compliance needs in an effective and timely manner. In

    addition, with respect to DCM matters, staff must be accountable to the

    DCM and its Regulatory Oversight Committee. The Commission also notes,

    however, that its a priori acceptance of integrated compliance staff is

    limited to the unique circumstances of a fully integrated exchange and

    clearing house.

    ii. Sec. 38.702--Disciplinary Panels

    Proposed Sec. 38.702 required a DCM to establish one or more

    Review Panels and one or more hearing panels (together, ``disciplinary

    panels'') to fulfill its obligations under this section. The

    composition of both panels was required to meet the composition

    requirements of proposed Sec. 40.9(c)(3)(ii) \405\ and could not

    include

    [[Page 36651]]

    any members of the DCM's compliance staff, or any person involved in

    adjudicating any other stage of the same proceeding. Paragraph (b) of

    the proposed rule provided that a Review Panel must be responsible for

    determining whether a reasonable basis exists for finding a violation

    of contract market rules, and for authorizing the issuance of a notice

    of charges against persons alleged to have violated exchange rules. If

    a notice of charges is issued, then paragraph (c) of the proposed rule

    helped to ensure an impartial hearing by requiring a separate hearing

    panel to adjudicate the matter and issue sanctions. While proposed

    Sec. 38.702 required DCMs to empanel distinct bodies to issue charges

    and to adjudicate charges in a particular matter, the rule permitted

    DCMs to determine for themselves whether their review and hearing

    panels are separate standing panels or ad hoc bodies whose members are

    chosen from a larger ``disciplinary committee'' to serve in one

    capacity or the other for a particular disciplinary matter.

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

    \405\ Section 40.9(c)(3)(ii), as proposed in the separate

    release titled ``Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities Regarding the Mitigation of Conflicts of Interest'',

    provided that ``Each Disciplinary Panel shall include at least one

    person who would not be disqualified from serving as a Public

    Director by regulation 1.3(ccc)(1)(i)-(vi) and (2) of this chapter

    (a ``Public Participant''). Such Public Participant shall chair each

    Disciplinary Panel. In addition, any registered entity specified in

    paragraph (c)(3)(i) of this section shall adopt rules that would, at

    a minimum: (A) Further preclude any group or class of participants

    from dominating or exercising disproportionate influence on a

    Disciplinary Panel and (B) Prohibit any member of a Disciplinary

    Panel from participating in deliberations or voting on any matter in

    which the member has a financial interest.'' See 75 FR 63732, Oct.

    18, 2010.

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

    Summary of Comments

    A number of commenters opposed the two-panel approach described in

    proposed Sec. 38.702. CME stated that the Commission should rely on

    core principles, rather than what it sees as a prescriptive approach,

    as DCMs may have an established structure or may develop new structures

    that clearly satisfy the objective of the core principle, but that may

    not precisely comply with the language.\406\ CME illustrated two

    practices it believed may be precluded by the text of proposed Sec.

    38.702: (1) CME's Market Regulation staff determines whether certain

    non-egregious rule violations merit referral to a Review Panel and they

    issue warning letters on an administrative basis; and (2) CME's hearing

    panel adjudicates a disciplinary case prior to the issuance of charges

    pursuant to a supported settlement agreement.\407\

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

    \406\ CME Comment Letter at 35 (Feb. 22, 2011).

    \407\ Id.

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

    ELX contended that the proposed rule would impose the need to

    create processes and procedures for certain functions already carried

    out by its Compliance Director, who is supervised by the Regulatory

    Oversight Committee.\408\ ELX suggested that a DCM should be able to

    obtain a waiver from the two-panel requirement if it already has been

    designated as a contract market and currently operates under an

    alternative structure with respect to disciplinary procedures that have

    sufficient controls.\409\

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

    \408\ ELX Comment letter at 5 (Feb. 22, 2011).

    \409\ Id.

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

    MGEX argued that the rule is overly prescriptive, that there is no

    reasonable basis for the distinction between the two panels, and that

    one panel would maximize resources and streamline the process for all

    involved.\410\ MGEX argued that staff is able to differentiate between

    the roles, and that the Commission should simply have the right to

    inquire if it has a question surrounding disciplinary panels or

    processes.\411\

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

    \410\ MGEX Comment Letter at 9 (Feb. 22, 2011).

    \411\ Id.

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

    Discussion

    The Commission is adopting the proposed rule with certain

    modifications to address comments. The Commission considered

    commenters' views and believes that the proposed rule can be modified

    to address concerns without diminishing the purpose of the proposed

    rule. Accordingly, the final rule will require DCMs to have one or more

    disciplinary panels, without imposing a specific requirement for DCMs

    to maintain a ``review panel'' and a ``hearing panel.'' The final rules

    replace specific panel names (i.e. ``review panel'' and ``hearing

    panel'') with a generic reference to the ``disciplinary panel''

    throughout part 38. However, even under a single-panel approach,

    individuals who determine to issue charges in a particular disciplinary

    matter may not also adjudicate the matter. The final text of Sec.

    38.702 permits flexibility in the structure of DCMs' disciplinary

    bodies, but not in the basic prohibition against vesting the same

    individuals with the authority to both issue and adjudicate charges in

    the same matter. The modifications reflected in the final text of Sec.

    38.702, together with the revisions made to the final text of Sec.

    38.703, permit DCMs to rely on their senior-most compliance officer

    (i.e., a DCM's Chief Regulatory Officer), rather than on a disciplinary

    panel, to issue disciplinary charges, as suggested by ELX. However, the

    Commission notes that the adjudication of charges must still be

    performed by a disciplinary panel. Finally, the composition and

    conflicts requirements for disciplinary panels will be adopted with one

    modification, by replacing the reference to Sec. 40.9(c)(3)(ii) with a

    reference to the more general ``part 40.''

    iii. Sec. 38.703--Review of Investigation Report

    The introductory paragraph of proposed Sec. 38.703 required a

    Review Panel to promptly review an investigation report received

    pursuant to proposed Sec. 38.158(c), and to take action on any

    investigation report received within 30 days of such receipt. Under

    paragraph (a) of the proposed rule, after receipt of the investigation

    report, if a Review Panel determined that additional investigation or

    evidence was needed, it would be required to promptly direct the

    compliance staff to conduct further investigation. In the alternative,

    under paragraph (b) of the proposed rule, if a Review Panel determined

    that no reasonable basis existed for finding a violation, or that

    prosecution was unwarranted, it would be permitted to direct that no

    further action be taken, and that a written statement be provided

    setting forth the facts and analysis supporting the decision.

    Finally, under paragraph (c) of the proposed rule, if a Review

    Panel determined that a reasonable basis existed for finding a

    violation and adjudication was warranted, it was required to direct

    that the person or entity alleged to have committed the violation be

    served with a notice of charges.

    Summary of Comments

    While CME agreed that an investigation report should include the

    subject's disciplinary history, CME disagreed with the requirement in

    proposed Sec. 38.158 that the disciplinary history be included in the

    version of the investigation report sent to the Review Panel.\412\ CME

    believed that the disciplinary history should not be considered by the

    Review Panel at all when determining whether to issue formal charges,

    arguing that a market participant's disciplinary history is not

    relevant to the consideration of whether it committed a further

    violation of DCM rules.\413\

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

    \412\ CME Comment Letter at 35 (Feb. 22, 2011).

    \413\ Id. While the Commission largely agrees with CME's

    comment, the Commission directs interested parties to regulation

    38.158 for a further discussion of the required components of

    investigation reports.

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

    Discussion

    Consistent with revisions to proposed Sec. 38.702, the Commission

    is modifying proposed Sec. 38.703 to provide greater flexibility to

    market participants in determining an approach to disciplinary panels.

    The Commission is eliminating

    [[Page 36652]]

    all but paragraph (c) of the proposed rule, and is moving paragraph (c)

    to Sec. 38.704 (Notice of charges), which the Commission is

    renumbering as Sec. 38.703. The revisions to proposed rules Sec.

    38.702 and Sec. 38.703 will provide DCMs with the flexibility to

    follow a single-panel approach, provided that a single panel does not

    perform the function of issuing and adjudicating the same charges. In

    addition, a DCM will have the flexibility to allow its senior-most

    regulatory officer, such as its Chief Regulatory Officer, to review an

    investigation report and determine whether a notice of charges should

    be issued in a particular matter.

    iv. Sec. 38.704--Notice of Charges

    Proposed Sec. 38.704 described the minimally acceptable contents

    of a notice of charges (``notice'') issued by a Review Panel. The rule

    required that the notice adequately state the acts, conduct, or

    practices in which the respondent is alleged to have engaged; state the

    rule, or rules, alleged to have been violated; and prescribe the period

    within which a hearing on the charges may be requested. Further, the

    proposed rule also required that the notice advise the respondent

    charged that he is entitled, upon request, to a hearing on the charges.

    Paragraphs (a) and (b) of the proposed rule provided that a DCM may

    adopt rules providing that: (1) The failure to request a hearing within

    the time prescribed in the notice, except for good cause, may be deemed

    a waiver of the right to a hearing; and (2) the failure to answer or

    expressly deny a charge may be deemed to be an admission of such

    charge.

    Discussion

    No comments were received regarding proposed Sec. 38.704, and the

    Commission is adopting the proposed rule with certain modifications.

    Given that paragraphs (a) and (b) of proposed Sec. 38.704 allowed,

    but did not require, a DCM to issue rules regarding failures to request

    a hearing and expressly answer or deny a charge, the Commission

    believes that the language in these paragraphs is better suited as

    guidance rather than a rule. The Commission will adopt this language as

    guidance in appendix B to part 38.

    In addition to the aforementioned revisions, and as described

    above, the Commission is moving paragraph (c) of proposed Sec. 38.703

    to proposed Sec. 38.704, and is renumbering proposed Sec. 38.704 as

    Sec. 38.703.

    v. Sec. 38.705--Right to Representation

    Proposed Sec. 38.705 required that, upon being served with a

    notice of charges, a respondent must have the right to be represented

    by counsel or any other representative of his or her choosing in all

    succeeding stages of the disciplinary process. Together with proposed

    Sec. Sec. 38.704 (requiring an adequate notice of charges to the

    respondent), 38.708 (conferring the right to hearing), and 38.710

    (hearing procedures), Sec. 38.705 helped ensure basic fairness for

    respondents in disciplinary proceedings.

    Summary of Comments

    CME commented that the language of this rule should be limited to

    avoid conflicts in representation and, accordingly, requested that the

    rule be revised to clarify that a respondent may not be represented by:

    (1) A member of the DCM's disciplinary committees; (2) a member of the

    DCM's Board of Directors; (3) an employee of the DCM; and (4) a person

    substantially related to the underlying investigation, such as a

    material witness or other respondent.\414\

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

    \414\ CME Comment Letter at 35 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting the proposed rule with certain

    modifications. The Commission acknowledges CME's concern and is

    amending the proposed rule to incorporate CME's suggestion to clarify

    that a respondent must have the right to be represented by legal

    counsel or any other representative of its choosing in all succeeding

    stages of the disciplinary process, except any member of the designated

    contract market's board of directors or disciplinary panel, any

    employee of the designated contract market, or any person substantially

    related to the underlying investigations, such as material witness or

    respondent. Additionally, as a result of the rule deletions and

    modifications discussed above, proposed Sec. 38.705 as modified is

    being adopted as Sec. 38.704.

    vi. Sec. 38.706--Answer to Charges

    Proposed Sec. 38.706 provided that a respondent must be given a

    reasonable period of time to file an answer to a charge. In general,

    paragraphs (a) through (c) of the proposed rule provided that the rules

    of the DCM may require that: (1) The answer must be in writing and

    include a statement that the respondent admits, denies or does not have

    and is unable to obtain sufficient information to admit or deny each

    allegation; (2) failure to file an answer on a timely basis shall be

    deemed an admission of all allegations in the notice of charges; and

    (3) failure in an answer to deny expressly a charge shall be deemed to

    be an admission of such charge.

    Discussion

    Although no specific comments were received on proposed Sec.

    38.706, commenters generally requested greater flexibility to establish

    their own disciplinary procedures.\415\ The Commission believes that

    proposed Sec. 38.706 is a rule where greater flexibility can

    reasonably be accorded. Accordingly, the Commission is maintaining as a

    rule the requirement that a respondent must be given a reasonable

    period of time to file an answer to a notice of charges, and is

    condensing the remainder of the proposed rule by replacing

    subparagraphs (a), (b), and (c) with a requirement that any rules

    adopted by a DCM governing the requirements and timeliness of a

    respondent's answer to charges must be ``fair, equitable, and publicly

    available.'' Finally, as a result of the rule deletions and

    modifications discussed above, proposed Sec. 38.706 as modified is

    being adopted as Sec. 38.705.

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

    \415\ See generally, CME Comment Letter (Feb. 22, 2011); and

    MGEX Comment Letter (Feb. 22, 2011).

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

    vii. Sec. 38.707--Admission or Failure To Deny Charges

    Proposed Sec. 38.707 provided that, if a respondent admits or

    fails to deny any of the violations alleged in a notice of charges,

    then a hearing panel may find that the violations admitted or not

    denied have in fact been committed. If a DCM adopted a rule concerning

    the admission or failure to deny charges, then paragraphs (a) through

    (c) of the proposed rule provided that: (1) The hearing panel must

    impose a sanction for each violation found to have been committed; (2)

    the DCM must promptly notify the respondent in writing of any sanction

    to be imposed and advise the respondent that they may request a hearing

    on such sanction within the period of time stated in the notice; and

    (3) the rules of the DCM may provide that if the respondent fails to

    request a hearing within the period of time stated in the notice, then

    the respondent will be deemed to have accepted the sanction.

    Discussion

    Although the Commission did not receive specific comments

    pertaining to the proposed rule, the Commission is moving the entire

    rule, with certain modifications, to the guidance in appendix B. Given

    that proposed Sec. 38.707 allowed, but did not require, a DCM to issue

    rules regarding a respondent's admission or failure to

    [[Page 36653]]

    deny charges, the Commission believes that the proposed rule is better

    suited as guidance in appendix B to part 38 rather than a rule. The

    Commission believes adopting the proposed rule as guidance, rather than

    a rule, will grant DCMs greater flexibility in administering their

    obligations, consistent with the general comments seeking the same.

    Furthermore, the text that will now be included as guidance is being

    modified to reflect the single-panel approach adopted in Sec. 38.702,

    replacing specific panel names with a generic reference to the

    ``disciplinary panel.''

    viii. Sec. 38.708--Denial of Charges and Right to Hearing

    Proposed Sec. 38.708 provided that in every instance where a

    respondent has requested a hearing on a charge that he or she denies,

    or on a sanction set by the hearing panel pursuant to proposed Sec.

    38.707, the respondent must be given the opportunity for a hearing in

    accordance with the requirements of proposed Sec. 38.710. The DCM's

    rules were permitted to provide that, except for good cause, the

    hearing must be concerned only with those charges denied or sanctions

    set by the hearing panel under proposed Sec. 38.707 for which a

    hearing has been requested.

    Discussion

    The Commission did not receive comments pertaining to this rule,

    but is adopting the proposed rule with modifications.

    The Commission is revising the proposed rule to reflect the single-

    panel approach adopted in Sec. 38.702, replacing specific panel names

    with a generic reference to the ``disciplinary panel.'' In order to

    provide DCMs with greater flexibility in establishing disciplinary

    procedures, the Commission also is removing the section of the proposed

    rule which was optional--allowing a DCM's rules to provide that, except

    for good cause, a hearing must be concerned only with those charges

    denied or sanctions set by the panel for which a hearing has been

    requested. Finally, as a result of the withdrawal of certain preceding

    rules discussed above, proposed Sec. 38.708 as modified is being

    adopted as Sec. 38.706.

    ix. Sec. 38.709--Settlement Offers

    Proposed Sec. 38.709 provided the procedures a DCM must follow if

    it permits the use of settlements to resolve disciplinary cases.

    Paragraph (a) of the proposed rule stated that the rules of a DCM may

    permit a respondent to submit a written offer of settlement any time

    after an investigation report is completed. The proposed rule permitted

    the disciplinary panel presiding over the matter to accept the offer of

    settlement, but prohibited the panel from altering the terms of the

    offer unless the respondent agreed. In addition, paragraph (b) of the

    proposed rule provided that the rules of the DCM may allow a

    disciplinary panel to permit the respondent to accept a sanction

    without admitting or denying the rule violations upon which the

    sanction is based.

    Paragraph (c) of proposed Sec. 38.709 stated that a disciplinary

    panel accepting a settlement offer must issue a written decision

    specifying the rule violations it has reason to believe were committed,

    and any sanction imposed, including any order of restitution where

    customer harm has been demonstrated. Importantly, paragraph (c) also

    provided that if an offer of settlement is accepted without the

    agreement of a DCM's enforcement staff, the decision must carefully

    explain the disciplinary panel's acceptance of the settlement. Finally,

    paragraph (d) of proposed Sec. 38.709 allowed a respondent to withdraw

    his or her offer of settlement at any time before final acceptance by a

    disciplinary panel. If an offer is withdrawn after submission, or is

    rejected by a disciplinary panel, the respondent must not be deemed to

    have made any admissions by reason of the offer of settlement and must

    not be otherwise prejudiced by having submitted the offer of

    settlement.

    Discussion

    Although no specific comments were received in regards to this

    proposed rule, the Commission is adopting the provisions of the

    proposed rule as guidance in appendix B. The Commission believes that

    adopting the proposed rule as guidance rather than a rule will grant

    DCMs greater flexibility in administering their obligations, consistent

    with the general comments seeking the same. Furthermore, the Commission

    is revising the guidance text to make it consistent with its

    modifications regarding the single-panel approach adopted in Sec.

    38.702 and the customer restitution revisions adopted below with

    respect to proposed Sec. 38.714.

    x. Sec. 38.710--Hearings

    Proposed Sec. 38.710 required a DCM to adopt rules that provide

    certain minimum requirements for any hearing conducted pursuant to a

    notice of charges. In general, sections (a)(1) through (a)(7) of the

    proposed rule required the following: (1) A fair hearing; (2) authority

    for a respondent to examine evidence relied on by enforcement staff in

    presenting the charges contained in the notice of charges; (3) the

    DCM's enforcement and compliance staffs must be parties to the hearing

    and the enforcement staff must present its case on those charges and

    sanctions that are the subject of the hearing; (4) the respondent must

    be entitled to appear personally at the hearing, have the authority to

    cross-examine persons appearing as witnesses at the hearing, and call

    witnesses and present evidence as may be relevant to the charges; (5)

    the DCM must require persons within its jurisdiction who are called as

    witnesses to participate in the hearing and produce evidence; (6) a

    copy of the hearing must be made and become a record of the proceeding

    if the respondent has requested a hearing; and (7) the rules of the DCM

    may provide that the cost of transcribing the record must be borne by a

    respondent who requests a transcript. Additionally, proposed paragraph

    (b) specified that the rules of the DCM may provide that a sanction be

    summarily imposed upon any person within its jurisdiction whose actions

    impede the progress of a hearing.

    Summary of Comments

    Two commenters requested that the Commission revise proposed Sec.

    38.710(a)(2). CFE commented that proposed Sec. 38.710(a)(2) should

    limit a respondent's access only to evidence a DCM plans to introduce

    at a hearing.\416\ CFE further requested the exclusion of evidence

    covered under attorney-client privilege, attorney work product

    privilege, or other confidential reports and methodologies, including

    the disclosure of the name of a confidential complainant.\417\ CFE also

    argued that investigation and examination materials prepared by a DCM

    should be protected from disclosure as internal work product unless the

    DCM intends to introduce them at the hearing.\418\

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

    \416\ CFE Comment Letter at 5 (Feb. 22, 2011).

    \417\ Id.

    \418\ Id.

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

    CME similarly argued that proposed Sec. 38.710(a)(2) should be

    revised so that a respondent may not access protected attorney work

    product, attorney-client communications, and investigative work product

    (such as investigation and exception reports).\419\

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

    \419\ CME Comment Letter at 36 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting paragraph (a) of the proposed rule with

    certain modifications, and is converting paragraph (b) of the proposed

    rule to guidance in appendix B.

    [[Page 36654]]

    The Commission has considered CFE and CME's comments, and believes

    that a DCM should be permitted to withhold certain documents from a

    respondent in certain circumstances, and thus, is revising proposed

    Sec. 38.710(a)(2) (now Sec. 38.707(a)(2)) accordingly. Because

    proposed Sec. 38.710(b) (which provided that the DCMs' rules may

    provide that a sanction may be summarily imposed upon any person whose

    actions impede the progress of a hearing) was an optional requirement

    for DCMs, the Commission is adopting this language as guidance in

    appendix B to part 38. Furthermore, the Commission is eliminating

    proposed Sec. 38.710(a)(7), an optional rule that in certain cases

    allowed for the cost of transcribing the record of the hearing to be

    borne by the respondent. The Commission also is revising the rule text

    to make it consistent with its modifications regarding the single-panel

    approach adopted in Sec. 38.702 and its modifications to proposed

    Sec. 38.712 discussed below. Finally, as a result of the withdrawal

    and renumbering of the rules discussed above, proposed Sec. 38.710 as

    modified is being adopted as Sec. 38.707.

    xi. Sec. 38.711--Decisions

    Proposed Sec. 38.711 detailed the procedures that a hearing panel

    must follow in rendering disciplinary decisions. The proposed rule

    required that all decisions include: (1) A notice of charges or a

    summary of the charges; (2) the answer, if any, or a summary of the

    answer; (3) a summary of the evidence produced at the hearing or, where

    appropriate, incorporation by reference in the investigation report;

    (4) a statement of findings and conclusions with respect to each

    charge, and a careful explanation of the evidentiary and other basis

    for such findings and conclusions with respect to each charge; (5) an

    indication of each specific rule with which the respondent was found to

    have violated; and (6) a declaration of any penalty imposed against the

    respondent, including the basis for such sanctions and the effective

    date of such sanctions.

    Discussion

    No comments were received on proposed Sec. 38.711. The Commission

    is adopting Sec. 38.711 as proposed with minor modifications to

    reflect the single-panel approach adopted in Sec. 38.702, and

    replacing specific panel names with a generic reference to the

    ``disciplinary panel.'' In addition, as a result of the withdrawal and

    renumbering of preceding rules discussed above, proposed Sec. 38.711

    as modified is being adopted as Sec. 38.708.

    xii. Sec. 38.712--Right To Appeal

    Proposed Sec. 38.712 provided the procedures that a DCM must

    follow in the event that the DCM's rules authorize an appeal of adverse

    decisions in all or in certain classes of cases. Notably, the proposed

    rule required a DCM that permits appeals by disciplinary respondents to

    also permit appeals by its enforcement staff. For DCMs that permit

    appeals, the language in paragraphs (a) through (d) of proposed Sec.

    38.712 generally required the DCM to: (1) Establish an appellate panel

    that is authorized to hear appeals; (2) ensure that the appellate panel

    composition is consistent with Sec. 40.9(c)(iv) of the Commission's

    regulations and does not include any members of the DCM's compliance

    staff, or any person involved in adjudicating any other stage of the

    same proceeding; (3) except for good cause shown, conduct the appeal or

    review solely on the record before the hearing panel, the written

    exceptions filed by the parties, and the oral or written arguments of

    the parties; and (4) issue a written decision of the appellate panel

    and provide a copy to the respondent promptly following the appeal or

    review proceeding.

    Discussion

    Although no specific comments were received on proposed Sec.

    38.712, the Commission is converting the proposed rule to guidance in

    appendix B. Given that proposed Sec. 38.712 allowed, but did not

    require, a DCM to issue rules regarding a respondent's right to appeal,

    the Commission is moving this provision to guidance in appendix B to

    part 38. The Commission believes that adopting the proposed rule as

    guidance rather than a rule, will grant DCMs greater flexibility in

    administering their obligations, consistent with the general comments

    seeking the same.

    The Commission notes that the reference to Sec. 40.9(c)(iv) in the

    proposed rule was a technical error. Instead, proposed Sec. 38.712

    should have referenced the composition requirements of an appellate

    panel outlined in Sec. 40.9(c)(3)(iii). Accordingly, the Commission is

    replacing the reference to Sec. 40.9(c)(iv) with a reference to the

    more general ``part 40'' in the guidance text. Furthermore, the

    Commission is revising the guidance text to reflect the single-panel

    approach now adopted in Sec. 38.702, replacing specific panel names

    with a generic reference to the ``disciplinary panel.''

    xiii. Sec. 38.713--Final Decisions

    Proposed Sec. 38.713 required that each DCM establish rules

    setting forth when a decision rendered under this subpart N will become

    the final decision of the DCM.

    Discussion

    No comments were received in regards to the proposed rule, and the

    Commission is adopting the proposal without modification. However, as a

    result of the renumbering of certain preceding rules discussed above,

    proposed Sec. 38.713 is being adopted as Sec. 38.709.

    xiv. Sec. 38.714--Disciplinary Sanctions

    Proposed Sec. 38.714 required that every disciplinary sanction

    imposed by a DCM must be commensurate with the violations committed and

    must be clearly sufficient to deter recidivism or similar violations by

    other market participants. Additionally, the proposed rule required

    that, in the event of demonstrated customer harm, any disciplinary

    sanction must include full customer restitution. In evaluating

    appropriate sanctions, the proposed rule required the DCM to take into

    account a respondent's disciplinary history.\420\

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

    \420\ Proposed regulation 38.158(c), which was proposed with

    respect to Core Principle 2, required that a copy of a member or

    market participant's disciplinary history be included in the

    compliance staff's investigation report.

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

    Summary of Comments

    CFE supported the goal articulated in proposed Sec. 38.714, but

    argued that in certain situations, the requirement for customer

    restitution should not apply where it may not be possible for a DCM to

    determine the amount of customer harm, which parties may have been

    harmed, and/or how the harm was allocated among potentially aggrieved

    parties.\421\ CFE requested that the Commission clarify that the

    requirement to include customer restitution in a disciplinary sanction

    does not apply to the extent that a DCM is unable to determine with

    reasonable certainty what the restitution should be, to whom to provide

    restitution, and/or how to allocate restitution.\422\

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

    \421\ CFE Comment Letter at 6 (Feb. 22, 2011).

    \422\ Id.

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

    Chris Barnard argued that sanctions should include a public

    reprimand and/or be published.\423\

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

    \423\ Barnard Comment Letter at 2, 4 (May 20, 2011) (Barnard

    stated that under a properly functioning sanctions regime, sanctions

    must be: (1) Significantly greater than potential benefits derived

    from a breach of rules; (2) targeted at those parties who stand to

    gain from a breach of rules, whether natural or legal persons; and

    (3) include a public reprimand and/or be published).

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

    [[Page 36655]]

    Discussion

    The Commission is adopting the proposed rule with certain

    modifications. The Commission has considered CFE's comment, and is

    revising the proposed rule so that it does not require customer

    restitution if the amount of restitution, or the recipient, cannot be

    reasonably determined. Furthermore, the Commission is revising the

    proposed rule to clarify that a respondent's disciplinary history

    should be taken into account in all sanction determinations, including

    sanctions imposed pursuant to an accepted settlement offer. The

    Commission also notes that final disciplinary actions taken against

    registered persons and entities are recorded in the National Futures

    Association's Background Affiliation Status Information Center

    (``BASIC'') database, which is available to the public online. Finally,

    as a result of the renumbering of preceding rules discussed above, the

    Commission is renumbering the proposed rule as Sec. 38.710.

    xv. Sec. 38.715--Summary Fines for Violations of Rules Regarding

    Timely Submission of Records, Decorum, or Other Similar Activities

    Proposed Sec. 38.715 permitted a DCM to adopt a summary fine

    schedule for violations of rules relating to timely submission of

    accurate records required for clearing or verifying each day's

    transactions, decorum, attire, or other similar activities. Under the

    proposed rule, a DCM may authorize its compliance staff to summarily

    impose minor sanctions against persons within the DCM's jurisdiction

    for violating such rules. The proposed rule made clear that a DCM

    should issue no more than one warning letter in a rolling 12-month

    period for the same violation before sanctions are imposed.

    Additionally, the proposed rule specified that a summary fine schedule

    must provide for progressively larger fines for recurring violations.

    Summary of Comments

    CME objected to the restriction of one letter of warning per

    rolling 12-month period.\424\

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

    \424\ CME Comment Letter at 36 (Feb. 22, 2011).

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

    Discussion

    The Commission is partially adopting the proposed rule, and is

    converting the remaining portion of the rule to guidance in appendix B.

    The Commission is maintaining as a rule the provision in the

    proposed rule that prohibits a DCM from issuing more than one warning

    letter per rolling 12-month period for the same violation. Commission

    staff has consistently recommended in RERs that DCMs must engage in

    progressive discipline in order to deter recidivism.

    The Commission is converting the remainder of proposed Sec. 38.715

    to guidance in appendix B because the proposed rule allowed, but did

    not require, a DCM to adopt a summary fine schedule.

    Finally, the proposed rule is being renumbered in its adopted form

    from Sec. 38.715 to Sec. 38.711, and is retitled as ``Warning

    letters.''

    xvi. Sec. 38.716--Emergency Disciplinary Actions

    Proposed Sec. 38.716 provided that a DCM may impose a sanction,

    including a suspension, or take other summary action against a person

    or entity subject to its jurisdiction upon a reasonable belief that

    such immediate action is necessary to protect the best interest of the

    marketplace. The proposed rule also provided that any emergency action

    taken by the DCM must be in accordance with certain procedural

    safeguards that protect the respondent, including the right to be

    served with notice before the action is taken or otherwise at the

    earliest possible opportunity after action has been taken; the right to

    be represented by legal counsel in any proceeding subsequent to the

    emergency disciplinary action; the right to a hearing as soon as

    reasonably practical; and the right to receive a written decision on

    the summary action taken by the DCM.

    Discussion

    No comments were received on proposed Sec. 38.716. Given that

    proposed Sec. 38.716 allowed, but did not require, a DCM to adopt

    rules regarding emergency disciplinary actions, the Commission is

    moving the text of proposed Sec. 38.716 to guidance in appendix B to

    part 38.

    Due to the renumbering described above, the Commission is also

    replacing proposed Sec. 38.712 with new Sec. 38.712 (titled

    ``Additional sources for compliance'') that simply permits DCMs to rely

    upon the guidance in appendix B of this part to demonstrate to the

    Commission compliance with the requirements of Sec. 38.700 of this

    part.

    14. Subpart O--Dispute Resolution

    The Dodd-Frank Act re-designated former Core Principle 13 as Core

    Principle 14. Aside from renumbering the core principle, the language

    of the core principle remained substantively unchanged. The core

    principle governs the obligations of DCMs to implement and enforce a

    dispute resolution program for their market participants and market

    intermediaries.\425\

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

    \425\ 17 CFR part 38, app. B.

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

    In addition to proposing to codify the statutory text of the core

    principle in proposed Sec. 38.750, the Commission proposed to maintain

    the guidance and acceptable practices.

    Discussion

    No comments were received on proposed Sec. 38.750, Sec. 38.751,

    or the proposed guidance under Core Principle 14. The Commission is

    adopting the rules and guidance as proposed.

    15. Subpart P--Governance Fitness Standards

    Other than to re-designate former Core Principle 14 as Core

    Principle 15, the Dodd-Frank Act did not revise the text of this core

    principle. Core Principle 15 requires DCMs to establish and enforce

    appropriate fitness standards for directors, members of any

    disciplinary committee, members of the contract market, and any other

    persons with direct access to the facility (including any parties

    affiliated with any of the persons described in this core principle).

    In the DCM NPRM, the Commission proposed to codify the statutory text

    of the core principle in Sec. 38.800. The Commission did not receive

    comments pertaining to proposed Sec. 38.800, and is adopting the rule

    as proposed.

    As noted in the DCM NPRM, the substantive regulations implementing

    Core Principle 15 were proposed in a separate rulemaking that also

    would implement Core Principles 16 (Conflicts of Interest), 17

    (Composition of Governing Boards of Contract Markets) and 22 (Diversity

    of Boards of Directors).\426\ Until such time as the Commission may

    adopt the substantive rules implementing Core Principle 15, the

    Commission is maintaining the current Guidance under part 38 applicable

    to Governance Fitness Standards (formerly Core Principle 14).

    Accordingly, the existing Guidance from appendix B of Part 38

    applicable to Core Principle 15 is being codified under the revised

    appendix B adopted in this final rulemaking.\427\ At such time as the

    [[Page 36656]]

    Commission may adopt the final rules implementing Core Principle 15,

    appendix B will be amended accordingly.

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

    \426\ See ``Governance Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities; Additional Requirements Regarding the Mitigation of

    Conflicts of Interest,'' Notice of Proposed Rulemaking, 76 FR 722,

    January 6, 2011. CME submitted a comment letter discussing proposed

    regulation 38.801 in connection with 76 FR 722.

    \427\ The Commission is also adding regulation 38.801 to simply

    permit DCMs to continue to rely upon the guidance in appendix B to

    demonstrate to the Commission compliance with regulation 38.800.

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

    CME submitted a comment letter discussing proposed Sec. 38.801 in

    connection with the separate proposed rulemaking implementing Core

    Principle 15. CME's comments will be considered in connection with that

    rulemaking.

    16. Subpart Q--Conflicts of Interest

    The Dodd-Frank Act re-designated current Core Principle 15

    (Conflicts of Interest) as Core Principle 16, and in all other

    respects, did not substantively amend the core principle. The

    Commission proposed to codify the statutory text of the core principle

    in proposed Sec. 38.850, and is codifying the statutory text of Core

    Principle 16 in Sec. 38.850 as proposed.

    As noted in the DCM NPRM, the substantive regulations implementing

    Core Principle 16 were proposed in two separate rulemakings that also

    would implement Core Principles 15 (Governance Fitness Standards), 17

    (Composition of Governing Boards of Contract Markets) and 22 (Diversity

    of Boards of Directors).\428\ Until such time as the Commission may

    adopt the substantive rules implementing Core Principle 16, the

    Commission is maintaining the current guidance and acceptable practices

    under Part 38 applicable to Conflicts of Interest (formerly Core

    Principle 15). Accordingly, the existing Guidance and Acceptable

    Practices from appendix B of part 38 applicable to Core Principle 16

    are being codified in the revised appendix B adopted in this final

    rulemaking.\429\ At such time as the Commission may adopt the final

    rules implementing Core Principle 16, appendix B will be amended

    accordingly.

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

    \428\ See ``Governance Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities; Additional Requirements Regarding the Mitigation of

    Conflicts of Interest,'' Notice of Proposed Rulemaking, 76 FR 722,

    January 6, 2011; and ``Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities Regarding the Mitigation of Conflicts of Interest,'' 75

    FR 63732, Oct. 18, 2010.

    \429\ The Commission is also adding regulation 38.851 to simply

    permit DCMs to continue to rely upon the guidance in appendix B to

    demonstrate to the Commission compliance with section 38.850.

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

    CME submitted a comment letter that referenced comments it

    submitted in connection with the separate rulemakings implementing Core

    Principle 16. CME's comments will be considered in connection with

    those rulemakings.

    17. Subpart R--Composition of Governing Boards of Contract Markets

    The Dodd-Frank Act re-designated former Core Principle 16

    (Composition of Governing Boards of Mutually Owned Contract Markets) as

    Core Principle 17, and revised the title of the core principle to

    ``Composition of Governing Boards of Contract Markets.'' In addition,

    while the core principle formerly applied only to mutually owned DCMs,

    and required such DCMs to ensure that the composition of their

    governing boards included market participants, the amended core

    principle was amended to require the governance arrangements of all DCM

    to be designed to permit the consideration of the views of market

    participants.\430\ The Commission proposed to codify the statutory text

    of the core principle in proposed Sec. 38.900, and is adopting the

    rule as proposed.

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

    \430\ 7 U.S.C. 7(d)(17).

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

    As noted in the DCM NPRM, the substantive regulations implementing

    Core Principle 17 were proposed in a separate rulemaking that also

    would implement Core Principles 15 (Governance Fitness Standards), 16

    (Conflicts of Interest), and 22 (Diversity of Boards of

    Directors).\431\ The rules implementing Core Principle 17 will be

    adopted in that separate rulemaking.

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

    \431\ See ``Governance Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities; Additional Requirements Regarding the Mitigation of

    Conflicts of Interest,'' Notice of Proposed Rulemaking, 76 FR 722,

    January 6, 2011. CME submitted a comment letter discussing proposed

    regulation 38.801 in connection with 76 FR 722.

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

    18. Subpart S--Recordkeeping

    Core Principle 18, as amended by section 735 of the Dodd-Frank Act,

    requires all DCMs to maintain records of all activities related to

    their business as contract markets, in a form and manner acceptable to

    the Commission, for at least five years.\432\

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

    \432\ See section 5(d)(18) of the CEA, 7 U.S.C. 7(d)(18).

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

    The Commission proposed to codify the statutory text of the core

    principle in Sec. 38.950, and is adopting the rule as proposed.

    i. Sec. 38.951--Additional Sources for Compliance

    Proposed Sec. 38.951 required all DCMs to maintain records,

    including trade records and investigatory and disciplinary files, in

    accordance with Commission regulation Sec. 1.31, and in accordance

    with proposed Commission regulation Sec. 45.1 with respect to swap

    transactions.\433\ The proposed rule reiterated DCMs' obligation to

    comply with Sec. 1.31(a), which requires that DCM books and records be

    readily accessible for the first two years of the minimum five-year

    statutory period, and be open to inspection by any representatives of

    the Commission or the United States Department of Justice.\434\ Section

    1.31(a) also requires DCMs to promptly provide either copies or

    original books and records upon request of a Commission

    representative.\435\ As noted in the preamble, the proposed rule also

    incorporated by reference Sec. 1.31(b)'s description of the acceptable

    methods of storing books and records.\436\ Finally, proposed Sec.

    38.951 also incorporated by reference the requirements set forth in

    Sec. 1.31(c) regarding electronic storage systems, and the

    requirements in Sec. 1.31(d) regarding retention of trading cards and

    of other trade, order, and financial reports.\437\ Separately, proposed

    Sec. 38.951 also required DCMs to comply with the recordkeeping

    requirements in Sec. 45.1 with respect to swaps transactions.\438\

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

    \433\ See DCM NPRM at 80622.

    \434\ Id.

    \435\ Id.

    \436\ Id. at 80601.

    \437\ Id. at 80622.

    \438\ See proposed regulation 38.951. At the time of the DCM

    NPRM, the part 45 rules were proposed. See 75 FR 80622, Dec. 22,

    2010. The part 45 rules were recently codified. See 77 FR 2136, Jan.

    13, 2012.

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

    Summary of Comments

    MGEX argued that the proposed rule is too prescriptive in requiring

    that all records and data must be indexed and duplicated.\439\ MGEX

    also commented that the requirement to retain records for ``at least 5

    years'' created uncertainty and requested clarification on how long

    records must be kept.\440\ MGEX questioned the rationale for obligating

    DCMs to keep Commission-required data separate from other data.\441\

    Further, MGEX stated that ``DCMs should not be substitute storage

    facilities for Commission data, nor should they be required to relocate

    and resubmit data that has already been submitted to the Commission.''

    \442\ Chris Barnard recommended that records should be required to be

    kept indefinitely rather than for at least five years.\443\

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

    \439\ MGEX Comment Letters at 9 (Feb. 22, 2011) and at 3 (June

    3, 2011).

    \440\ Id. (requesting a limit on the length of time a DCM should

    be required to hold data).

    \441\ Id.

    \442\ Id.

    \443\ Barnard Comment Letter at 4 (Feb. 22, 2011).

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

    [[Page 36657]]

    Discussion

    The Commission is adopting the proposed rules under Core Principle

    18 with the modification described below.

    The Commission acknowledges MGEX's comment but notes that Sec.

    38.951 incorporates recordkeeping requirements to which DCMs are

    already subject by direct operation of Sec. 1.31. Even if the

    Commission were to amend Sec. 38.951 as requested, many of the

    concerns expressed by MGEX would remain, including the obligation to

    keep certain data separately. In this regard, the Commission notes that

    the Acceptable Practices for former Core Principle 17 stated that Sec.

    1.31 ``governs recordkeeping requirements under the Act.'' \444\ Upon

    adopting Sec. Sec. 38.950 and 38.951, Sec. 1.31 will still govern

    significant elements of recordkeeping under the Act. Accordingly, the

    Commission is largely adopting Sec. 38.951 as proposed. The Commission

    is making one modification to the proposed rule, however, by replacing

    the reference to Sec. 45.1 with a reference to the more general ``part

    45.''

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

    \444\ See 17 CFR part 38, app. B, Application Guidance and

    Acceptable Practices for Core Principle 17.

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

    In response to MGEX's request for clarification regarding the

    requirement to retain records for ``at least 5 years,'' the Commission

    notes that the recordkeeping requirement for swaps is governed by rules

    that were recently codified in part 45, which requires DCMs to maintain

    all requisite records from the date of the creation of the swap through

    the life of the swap and for a period of at least five years from the

    final termination of the swap.\445\ With respect to all other records,

    DCMs can satisfy their recordkeeping requirement pursuant to Sec.

    38.950 by retaining such records for five years, unless the Commission

    determines prior to the expiration of the five-year term that the

    records must be retained for a longer period of time. The Commission

    also notes that the ``at least 5 years'' obligation is required under

    statute. Specifically, as noted in the preamble of the proposed rule,

    one notable difference between the former Core Principle 18, and the

    current amended version, is that while records were previously required

    to be maintained ``for a period of 5 years,'' Core Principle 18 now

    requires that records must be retained for ``at least 5 years.'' \446\

    Accordingly, the proposed rule required a DCM maintain records of all

    activities related to its business as a DCM in a form and manner

    acceptable to the Commission for at least five years.\447\ Similarly,

    in response to Chris Barnard's recommendation that the records be held

    indefinitely, the Commission believes that the current statutory

    requirement to maintain records for at least 5 years is sufficient at

    this time, but notes that it may extend the time period if it

    determines that an extended recordkeeping time is necessary.

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

    \445\ 77 FR 2136, Jan. 13, 2012.

    \446\ See preamble to proposed regulation 38.950. 75 FR 80601,

    Dec. 22, 2010.

    \447\ See proposed regulation 38.950(a). 75 FR 80622, Dec. 22,

    2010.

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

    19. Subpart T--Antitrust Considerations

    The Dodd-Frank Act renumbered former Core Principle 18 as Core

    Principle 19, and in all other respects, maintained the statutory text

    of the core principle. As noted in the DCM NPRM, the Commission

    believed that the existing guidance to this Core Principle remained

    appropriate. Accordingly, other than to codify the statutory text of

    Core Principle 19 into proposed Sec. 38.1000, the Commission did not

    propose any amendments to the pre-existing guidance under part 38.

    Proposed Sec. 38.1001 referred applicants and DCMs to the guidance

    in appendix B to part 38 for purposes of demonstrating to the

    Commission their compliance with the requirements of proposed Sec.

    38.1000.

    Discussion

    No comments were received in regards to the proposed rule and

    guidance, and the Commission is adopting the rule and guidance as

    proposed.

    20. Subpart U--System Safeguards

    Core Principle 20 is a new core principle created by the Dodd-Frank

    Act, and pertains to the establishment of system safeguards by all

    DCMs. Core Principle 20 specifically requires DCMs to: (1) Establish

    and maintain a program of risk oversight to identify and minimize

    sources of operational risk through the development of appropriate

    controls and procedures and the development of automated systems that

    are reliable, secure, and have adequate scalable capacity; (2)

    establish and maintain emergency procedures, backup facilities, and a

    plan for disaster recovery that allow for the timely recovery and

    resumption of operations and the fulfillment of the responsibilities

    and obligations of the DCM; and (3) periodically conduct tests to

    verify that backup resources are sufficient to ensure continued order

    processing and trade matching, price reporting, market surveillance,

    and maintenance of a comprehensive and accurate audit trail. The rules

    proposed under subpart U implement these requirements. The Commission

    proposed to codify the statutory text of the core principle in proposed

    Sec. 38.1050, and adopts the rule as proposed.

    i. Sec. 38.1051--General Requirements

    The rules proposed under Sec. 38.1051 (a) and (b) would require a

    DCM's program of risk analysis and oversight to address six categories

    of risk analysis and oversight, including information security;

    business continuity-disaster recovery (``BC-DR'') planning and

    resources; capacity and performance planning; systems operations;

    systems development and quality assurance; and physical security and

    environmental controls.

    The proposed rule in Sec. 38.1051(c) specifically would require

    each DCM to maintain a BC-DR plan and BC-DR resources sufficient to

    enable resumption of trading and of all of the responsibilities and

    obligations of the DCM during the next business day following any

    disruption of its operations, either through sufficient infrastructure

    and personnel resources of its own or through sufficient contractual

    arrangements with other DCMs or disaster recovery service providers.

    The proposed rule also would require each DCM to notify Commission

    staff of various system security-related events, including prompt

    notice of all electronic trading halts and systems malfunctions in

    Sec. 38.1051(e)(1), timely advance notice of all planned changes to

    automated systems that may impact the reliability, security, or

    adequate scalable capacity of such systems in Sec. 38.1051(f)(1), and

    timely advance notice of all planned changes to programs of risk

    analysis and oversight in Sec. 38.1051(f)(2). The proposed rule also

    required DCMs to provide relevant documents to the Commission in Sec.

    38.1051(g) and to conduct regular, periodic, objective testing and

    review of its automated systems in Sec. 38.1051(h). Moreover, proposed

    Sec. 38.1051(i) would require each DCM, to the extent practicable, to

    coordinate its BC-DR plan with those of the members and market

    participants upon whom it depends to provide liquidity, to initiate

    coordinated testing of such plans, and to take into account in its own

    BC-DR plan, the BC-DR plans of relevant telecommunications, power,

    water, and other essential service providers.

    Summary of Comments

    CME commented that recovery time objectives (``RTOs'') in each

    catastrophic

    [[Page 36658]]

    situation should consider the impact on all market participants and

    independent technology services providers in the context of determining

    a proper RTO.\448\ CME also objected to what it considers to be an

    overly broad requirement in Sec. 38.1051(e)(1) to notify Commission

    staff promptly of all electronic trading halts and systems

    malfunctions.\449\ CME argued that required reporting should be limited

    to any material system failures. Further, CME criticized Sec.

    38.1051(f)(1), arguing that the mandate that DCMs provide the

    Commission with timely advance notice of all planned changes to

    automated systems that may impact the reliability, security, or

    adequate scalable capacity of such systems is overly burdensome, and

    not cost effective.\450\ Additionally, CME argued that the Sec.

    38.1051(f)(2) requirement that DCMs provide timely advance notice of

    all planned changes to their program of risk analysis and oversight is

    too broad and generally unnecessary.\451\ Finally, CME noted that it

    does not control, or generally have access to, the details of the

    disaster recovery plans of its major vendors.\452\

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

    \448\ CME Comment Letter at 36 (Feb. 22, 2011).

    \449\ Id. at 37.

    \450\ Id.

    \451\ Id.

    \452\ Id.

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

    Discussion

    The Commission is adopting the proposed rule, with the

    modifications described below. As noted in the DCM NPRM, automated

    systems play a central and critical role in today's electronic

    financial market environment, and the oversight of core principle

    compliance by DCMs with respect to automated systems is an essential

    part of effective oversight of both futures and swaps markets. Advanced

    computer systems are fundamental to a DCM's ability to meet its

    obligations and responsibilities.\453\

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

    \453\ See 75 CFR 80572, 80601-80602, Dec., 22, 2010.

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

    The Commission has considered CME's comment, and believes that

    timely advance notice of all planned changes to address system

    malfunctions is not necessary and is revising the rule to provide that

    DCMs only need to promptly advise the Commission of all significant

    system malfunctions. With respect to planned changes to automated

    systems or risk analysis and oversight programs, the revised rule will

    require timely advance notification of material changes to automated

    systems or risk analysis and oversight programs. Finally, the rule does

    not require DCMs to control or have access to the details of the

    disaster recovery plans of its major vendors. Rather, the rule suggests

    coordination to the extent possible.

    21. Subpart V--Financial Resources

    New Core Principle 21 requires DCMs to have adequate financial

    resources to discharge their responsibilities, and specifically

    requires that DCMs maintain financial resources sufficient to cover

    operating costs for a period of at least one year, calculated on a

    rolling basis.

    i. Sec. 38.1100--Core Principle 21, and Sec. 38.1101(a) and (c)

    General Rule and Computation of Financial Resources Requirement

    Proposed Sec. 38.1100 codifies the statutory text of the core

    principle and is being adopted as proposed.

    Proposed Sec. 38.1101(a)(1) and (3) required DCMs to maintain

    sufficient financial resources to cover operating costs for at least

    one year, calculated on a rolling basis, at all times. Proposed Sec.

    38.1101(a)(2) would require any entity operating as both a DCM and a

    DCO to comply with both the DCM financial resources requirements, and

    also the DCO financial resources requirements in Sec. 39.11.\454\

    Proposed Sec. 38.1101(c) required a DCM to make a reasonable

    calculation of the financial resources it needs to meet the

    requirements of proposed Sec. 38.1101(a) at the end of each fiscal

    quarter.

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

    \454\ See 76 FR 69334, Nov. 8, 2011. Commission regulation 39.11

    establishes requirements that a DCO will have to meet in order to

    comply with DCO Core Principle B (Financial Resources), as amended

    by the Dodd-Frank Act. Amended Core Principle B requires a DCO to

    possess financial resources that, at a minimum, exceed the total

    amount that would enable the DCO to meet its financial obligations

    to its clearing members notwithstanding a default by the clearing

    member creating the largest financial exposure for the DCO in

    extreme but plausible conditions; and enable the DCO to cover its

    operating costs for a period of 1 year, as calculated on a rolling

    basis.

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

    Summary of Comments

    OCX requested that the Commission define whether ``operating

    costs'' are gross or net.\455\ GreenX recommended that the Commission

    expressly state that ``operating costs'' should be determined from a

    cash flow statement perspective.\456\

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

    \455\ OCX Comment Letter at 5 (Feb. 22, 2011).

    \456\ GreenX Comment Letter at 19 (Feb. 22, 2011).

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

    Chris Barnard recommended that each DCM calculate and regularly

    publish its solvency ratio, defined as the DCM's available financial

    resources divided by the DCM's financial resources requirement.\457\

    Chris Barnard stated that the Commission should be notified when this

    ratio falls below 105 percent.\458\

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

    \457\ Barnard Comment Letter at 5 (May 20, 2011).

    \458\ Id.

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

    KCBT stated that the proposed requirements would result in

    duplication for entities that operate both a DCM and a DCO, because

    proposed Sec. 39.11 imposed similar requirements on DCOs.\459\ KCBT

    stated that its DCO was established as its wholly-owned subsidiary

    corporation for purposes of limiting liability and that as a

    ``privately-owned, for-profit corporation, it should be able to

    determine its own levels of capital resources and deployment.'' \460\

    KCBT referenced this rationale in response to proposed Sec.

    38.1101(a)(3), (b), (e), and (f).\461\

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

    \459\ KCBT Comment Letter at 8 (Feb. 22, 2011).

    \460\ Id.

    \461\ Id.

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

    Discussion

    The Commission is adopting proposed Sec. 38.1101 (a) and (c) with

    the modification described below. The Commission notes that

    specifically defining ``operating costs'' could result in unintended

    restrictions on DCMs. The Commission will maintain the flexibility of

    the proposed rule by not further defining ``operating costs'' and

    instead permitting each DCM to have reasonable discretion in

    determining the methodology it will use to make the calculation. For

    these reasons, the Commission also declines to incorporate a solvency

    ratio requirement to the final rules.

    Finally, the Commission has revised the text of Sec. 38.1101(a)(2)

    (redesignated as paragraph (a)(3)) to clarify that a DCM that is also

    registered with the Commission as a DCO must demonstrate that it has

    sufficient resources to operate the combined entity as both a DCM and

    DCO,\462\ and further, that such combined entity need only file single

    quarterly financial resources reports in accordance with Sec.

    39.11(f). The Commission is not requiring a dually-registered entity to

    file two separate reports because the operating resource requirements

    for a DCM and DCO are the same, and the combined DCM/DCO is required to

    have sufficient financial resources to cover its operating costs as a

    combined entity. The DCO financial resource requirements in Sec. 39.11

    differ from those in Sec. 38.1101 only insofar as they add a

    requirement for default resources, which is applicable only to a

    [[Page 36659]]

    DCM/DCO acting in its capacity as a DCO.

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

    \462\ The Commission anticipates that a corporate entity that

    operates more than one registered entity may share certain costs,

    and may allocate those costs among the registered entities as

    determined by the Commission on a case by case basis.

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

    ii. Sec. 38.1101(b)--Types of Financial Resources

    Under proposed Sec. 38.1101(b), financial resources available to

    DCMs to satisfy the applicable financial requirements would include the

    DCM's own capital (assets in excess of liabilities) and any other

    financial resource deemed acceptable by the Commission. A DCM would be

    able to request an informal interpretation from Commission staff on

    whether a particular financial resource would be acceptable.

    Summary of Comments

    OCX stated that the proposed rule may encourage DCMs to cut

    services in order to reduce their operational need for cash.\463\

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

    \463\ OCX Comment Letter at 5 (Feb. 22, 2011).

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

    Several commenters recommended that the Commission include specific

    examples of financial resources that might satisfy the requirement. OCX

    inquired whether firm commitments from owners to honor capital calls

    would be acceptable under the proposed rule.\464\ CME contended that

    the intent of Congress was to construe the terms ``financial

    resources'' broadly and include anything of value at the DCM's

    disposal, including operating revenues.\465\ CME stated that if

    Congress wanted to exclude operating revenues from what would be

    considered financial resources, Congress could have incorporated an

    ``equity concept.'' \466\

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

    \464\ Id.

    \465\ CME Comment Letter at 37 (Feb. 22, 2011).

    \466\ Id.

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

    GreenX contended that the Commission should continue to permit

    flexibility for DCMs, but also requested that the Commission provide

    specific examples of which assets can be included in the calculation of

    ``financial resources.'' \467\ GreenX requested confirmation that

    accounts receivable and other assets that are reasonably expected to

    result in payments to the DCM, as well as subordinated loans, are

    acceptable financial resources.\468\ GreenX also stated that committed

    lines of credit and similar facilities should be considered ``good''

    financial resources, and that such interpretation is standard in the

    ordinary business world.\469\ GreenX stated that the proposed increase

    in the amount of financial resources needed by DCMs, and the

    restrictions on the use of debt financing, would impede the ability of

    start-ups to become and remain DCMs.\470\

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

    \467\ GreenX Comment Letter at 19 (Feb. 22, 2011).

    \468\ Id.

    \469\ Id. at 18.

    \470\ GreenX Comment Letter at 14 (Feb. 22, 2011).

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

    GreenX proposed language to replace proposed Sec. 38.1101(a)(3),

    (b), and (e) that would provide that a DCM ``be required to maintain

    sufficient financial resources to cover its projected operating costs

    for a period of at least one year, including unencumbered, liquid

    assets equal to at least six months of such projected operating costs,

    and that committed lines of credit or various debt instruments may be

    included in calculating those financial resources, as long as the DCM

    is not incurring indebtedness secured by its assets and counting both

    those assets and the indebtedness as part of its financial resources.''

    \471\ GreenX further contended that if the Commission is unwilling to

    accept this language, the Commission should: (i) clearly specify that

    the ``financial resources'' requirement in proposed Sec. 38.1101(a)(3)

    is a separate requirement from the liquidity requirement in proposed

    Sec. 38.1101(e), and (ii) delete the language in the proposed

    liquidity requirement suggesting that proposed Sec. 38.1101(e) is part

    of the proposed one year's required operating costs coverage.\472\

    Absent revision, GreenX stated that the current proposal could result

    in a requirement of up to 18 months of financial resources if a DCM

    used a line of credit to satisfy the liquidity requirement.\473\

    Moreover, if this provision is not changed, GreenX recommended that the

    Commission undertake a cost-benefit analysis of requiring DCMs to

    maintain financial resources in excess of one year's operating

    costs.\474\ GreenX also stated that the Commission should not adopt a

    ``one-size-fits-all approach'' to the financial resources requirements

    as between DCOs and DCMs, since different circumstances and different

    purposes support differential treatment.\475\

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

    \471\ Id. at 17.

    \472\ Id. GreenX recommended striking the words in proposed

    regulation 38.1101(e) ``to meet the requirements of paragraph (a) of

    this section'' and ``If any portion of such financial resources is

    not sufficiently liquid.''

    \473\ Id. at 14-15.

    \474\ Id. at 17-18.

    \475\ GreenX discussed the significantly different roles played

    by DCMs and DCOs (i.e., DCMs do not guarantee or novate trades and

    their capital is not at risk in the event of a default) and further

    states that the ``Commission should not adopt a one-size-fits-all

    approach and should not treat DCOs and DCMs in the same manner where

    different circumstances and different purposes support differential

    treatment.'' GreenX notes that ``the role of financial resources

    (and letters of credit) in the DCM context is to ensure that DCMs

    can continue to operate in the ordinary course of business and make

    payments as they become due, which does not have the same time

    sensitivity that it does in the DCO context.'' See GreenX Comment

    Letter at 17 (Feb. 22, 2001).

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

    Discussion

    The Commission is adopting the proposed rule with one modification.

    The provision in Sec. 38.1101(b) stating that acceptable financial

    resources include a DCM's own capital and ``any other financial

    resource deemed acceptable by the Commission'' was meant to capture

    other types of resources on a case-by-case basis and provide

    flexibility to both DCMs and the Commission. Accordingly, the

    Commission notes that a DCM's own capital means its assets minus its

    liabilities calculated in accordance with the Generally Accepted

    Accounting Principles (``GAAP''). The Commission believes that if a

    certain financial resource is deemed to be an asset under GAAP, it is

    appropriate for inclusion in the calculation for this rule, and the

    rule has been revised accordingly. To the extent a certain financial

    resource is not considered an asset under GAAP, but based upon the

    facts and circumstances a DCM believes that the particular asset should

    be so considered, Commission staff will work with the DCM to determine

    whether such resource is acceptable. In response to comments pertaining

    to the acceptable forms of financial resources, the Commission may

    consider projected revenues as an acceptable financial resource for

    established DCMs that can demonstrate a historical record of revenue;

    but not for DCM applicants, relatively new DCMs or DCMs with no such

    record.

    The Commission believes that GreenX misinterprets the relationship

    of Sec. 38.1101(a)(3) and Sec. 38.1101(e). The Commission clarifies

    that the one-year financial resources requirements in Sec.

    38.1101(a)(3) and the six month liquidity requirement in Sec.

    38.1101(e) could be met by using the same financial resources. GreenX

    is correct that if a sufficient portion of the financial resources used

    for the one-year financial resources requirement in Sec. 38.1101(a)(3)

    are illiquid, it is possible that an entity could be required to have

    18 months of financial resources to meet the requirements of these two

    sections. However, the Commission is requiring only one-year of

    financial resources, six months of which must be liquid financial

    resources. Each DCM may exercise discretion in determining how to meet

    this requirement (e.g., six months of liquid financial resources

    combined with six months of illiquid ones, 12 months of liquid

    financial resources, or 12 months of illiquid financial resources with

    a line of credit

    [[Page 36660]]

    covering six months of financial resources). Indeed, the Commission

    notes that most, if not all, DCMs have considerably more financial

    resources than the minimum one-year required by this rule. In addition,

    if a DCM does not have this liquidity, it is not achieving the goal of

    the core principle, as it will be unable to pay its creditors. Further,

    the language of the core principle does not limit the resource

    requirement to one year, as it specifically states that a DCM's

    financial resources are adequate if the value of such resources exceeds

    one year of operating costs. Also in response to GreenX, the costs and

    benefits associated with all of the rules being adopted in this

    release, including Sec. 38.1101, are discussed in the cost benefit

    section of the release.

    In response to GreenX's comment regarding the financial resources

    requirements of DCOs and DCMs, the Commission notes that the financial

    resources requirements in Sec. 38.1101, for DCMs, and in Sec. 39.11,

    for DCOs, are different. In addition to the requirement to maintain

    financial resources sufficient to cover operating costs for one year,

    Sec. 39.11 also requires DCOs to possess a certain level of default

    resources.\476\ As GreenX correctly notes, DCMs do not guarantee or

    novate trades and a ``one-size-fits-all'' approach is not being applied

    here.

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

    \476\ See 76 FR 69334, Nov. 8, 2011.

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

    iii. Sec. 38.1101(d)--Valuation of Financial Resources

    Proposed Sec. 38.1101(d) required DCMs to calculate the current

    market value of each financial resource used to meet their obligations

    under these proposed rules, no less frequently than at the end of each

    fiscal quarter. The proposed rule required DCMs to perform the

    valuation at other times as appropriate. As the Commission noted in the

    DCM NPRM, the proposed rule is designed to address the need to update

    valuations in circumstances where there may have been material

    fluctuations in market value that could impact a DCM's ability to meet

    its obligations on a rolling basis as required by proposed Sec.

    38.1101(a). The proposed rule requires that when valuing a financial

    resource, the DCM reduce the value, as appropriate, to reflect any

    market or credit risk specific to that particular resource, i.e., apply

    a haircut.\477\ Under the proposed rule, DCMs would be permitted to

    exercise discretion in determining the applicable haircuts, although

    such haircuts would be subject to Commission review and acceptance.

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

    \477\ A ``haircut'' is a deduction taken from the value of an

    asset to reserve for potential future adverse price movements in

    such asset.

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

    Summary of Comments

    GreenX recommended an explicit statement that the use of GAAP

    principles in calculating the market value of each financial resource

    in meeting obligations under the rules would satisfy the requirements

    of this subsection, without limiting other potential methods of

    complying.\478\

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

    \478\ GreenX Comment Letter at 19 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting the proposed rule without modification.

    In response to GreenX's comment, the Commission notes that GAAP does

    not include haircuts, but valuation under GAAP does take into account

    current market values. The Commission expects each DCM to monitor the

    value of its resources to be certain that the calculation of the value

    of its assets reflects current market conditions in accordance with

    GAAP. A haircut is not intended to be applied in the ordinary course,

    but to be used in those unusual market circumstances that require an

    accounting intervention. As stated in the DCM NPRM, the Commission will

    permit DCMs discretion to, in the first instance, choose an appropriate

    haircut methodology. The Commission will evaluate the appropriateness

    of such methodology on a case-by-case basis.

    iv. Sec. 38.1101(e)--Liquidity of Financial Resources

    Proposed Sec. 38.1101(e) required that DCMs maintain unencumbered

    liquid financial assets, such as cash or highly liquid securities,

    equal to at least six months' operating costs. As noted in the DCM

    NPRM, the Commission believes the requirement to have six months' worth

    of unencumbered liquid financial assets would give a DCM time to

    liquidate the remaining financial assets it needs to continue operating

    for the last six months of the required one-year period. A DCM would be

    permitted to use a committed line of credit or similar facility to

    satisfy the requirement, in the event that the DCM does not have six

    months' worth of unencumbered liquid financial assets.

    The Commission notes that a DCM may only use a committed line of

    credit or similar facility to meet the liquidity requirements set forth

    in proposed Sec. 38.1101(e). Accordingly, a committed line of credit

    or similar facility is not listed in proposed Sec. 38.1101(b) as a

    financial resource available to a DCM to satisfy the requirements of

    proposed Sec. 38.1101(a).

    Summary of Comments

    CME stated that the liquidity measurement is only relevant in the

    context of winding-down, and claims that a three month period, rather

    than six months, is a more accurate assessment of how long it would

    take for a DCM to wind down.\479\

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

    \479\ CME Comment Letter at 37 (Feb. 22, 2011).

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

    GreenX requested clarification of the terms ``unencumbered'' and

    ``committed.'' \480\ GreenX suggested that assets should be considered

    unencumbered even if they are ``subject to security interests or

    adverse claims, as long as the DCM can use and expend those assets in

    the ordinary course without requiring consent of lenders or

    claimants.'' \481\ GreenX also requested that the Commission clarify

    whether ``committed'' is intended to mean anything other than a line of

    credit or similar facility that has been extended pursuant to a legally

    binding agreement.\482\ Finally, GreenX recommended that the Commission

    expressly state that lines of credit and similar facilities incurred

    from banks and other commercial financial institutions on market

    standard terms will presumptively qualify as good ``committed lines of

    credits and similar facilities'' for purposes of proposed Sec.

    38.1101.\483\ GreenX requested that any requirements applicable for

    lines of credit be specified in the final regulations.\484\

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

    \480\ GreenX Comment Letter at 18 (Feb. 22, 2011).

    \481\ Id.

    \482\ Id.

    \483\ Id.

    \484\ Id.

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

    Discussion

    The Commission is adopting the proposed rule without modification.

    The Commission believes that a six month period is appropriate for

    a wind down period and notes that commenters did not provide any

    support for the claim that a wind down would take only three months.

    In response to GreenX's request for clarification, the Commission

    notes that it is using ``unencumbered'' in the ``normal commercial

    sense'' to ``refer to assets that are not subject to a security

    interest or other adverse claims.'' \485\ By ``committed line of credit

    or similar facility,'' the Commission means a committed, irrevocable

    contractual obligation to provide funds on demand with preconditions

    limited to the execution of appropriate agreements. In other words, a

    facility with a material adverse financial condition restriction would

    not be acceptable. The purpose of

    [[Page 36661]]

    this requirement is for a DCM to have no impediments to accessing its

    line of credit at the time it needs liquidity. Further, DCMs are

    encouraged to periodically check their line of credit arrangements to

    confirm that no operational difficulties are present.

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

    \485\ Id.

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

    v. Sec. 38.1101(f)--Reporting Requirements

    Proposed Sec. 38.1101(f) required DCMs, at the end of each fiscal

    quarter, or at any time upon Commission request, to report to the

    Commission: (i) the amount of financial resources necessary to meet the

    requirements set forth in the regulation; and (ii) the value of each

    financial resource available to meet those requirements. The proposed

    rule also required a DCM to provide the Commission with a financial

    statement, including the balance sheet, income statement, and statement

    of cash flows, of the DCM or of its parent company (if the DCM does not

    have an independent financial statement and the parent company's

    financial statement is prepared on a consolidated basis).

    Under the proposed rule, a DCM was required to provide the

    Commission with sufficient documentation explaining the methodology it

    used to calculate its financial requirements, and the basis for its

    valuation and liquidity determinations. The proposed rule also required

    the DCM to provide copies of any agreements establishing or amending a

    credit facility, insurance coverage, or any similar arrangement that

    evidences or otherwise supports its conclusions. The Commission, in its

    sole discretion, would determine the sufficiency of the documentation

    provided. According to the proposed rule, the DCM would have 17

    business days \486\ from the end of the fiscal quarter to file the

    report, unless it requests an extension of time from the Commission.

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

    \486\ This filing deadline is consistent with the deadline

    imposed on FCMs for the filing of monthly financial reports. See 17

    CFR regulation 1.10(b).

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

    Summary of Comments

    Three commenters requested an extended deadline for filing the

    financial reports required as a result of the proposed rule. CFE stated

    that for DCMs that are public, or have financial statements

    consolidated with those of a public company, the filing deadlines

    should be the same as those required by the SEC for Forms 10-Q and 10-

    K.\487\ CME provided a similar comment stating that the proposed 17 day

    filing deadline is not feasible and that instead, the requirement

    should be consistent with the SEC's reporting requirements.\488\

    Similarly, GreenX stated that it has procedures in place to comply with

    the SEC's requirements and that the proposed requirements in this rule

    would require new programming and resources.\489\ GreenX recommended

    extending the reporting deadline to 30 calendar days, noting that this

    is still more burdensome than the requirements imposed by the SEC on

    national securities exchanges.\490\ Rather than recommending an

    extended deadline, KCBT objected to the proposed quarterly filings and

    stated that the annual submissions that it provides to the Commission

    should suffice.\491\

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

    \487\ CFE Comment Letter at 6 (Feb. 22, 2011).

    \488\ CME Comment Letter at 38 (Feb. 22, 2011).

    \489\ GreenX Comment Letter at 20 (Feb. 22, 2011) (GreenX also

    stated that normal year-end adjustments typically require much more

    than 17 business days to complete).

    \490\ Id.

    \491\ KCBT Comment Letter at 8 (Feb. 22. 2011).

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

    In addition to the comments received regarding the reporting

    deadline, two commenters requested clarification as to the

    confidentiality of any filings made pursuant to proposed Sec.

    38.1101(f).\492\ Further, CME requested clarification that consolidated

    financial statements covering multiple DCMs, and DCOs where relevant,

    comply with the proposed rule.\493\

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

    \492\ CFE Comment Letter at 6 (Feb. 22, 2011); CME Comment

    Letter at 37-38 (Feb. 22, 2011).

    \493\ CME Comment Letter at 37-38 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting the proposed rule with certain

    amendments.

    The Commission is persuaded that the proposed 17 business day

    filing deadline may be overly burdensome. The SEC requires its

    quarterly reports on Form 10-Q to be filed with the SEC 40 calendar

    days after the end of the fiscal quarter for accelerated filers and 45

    calendar days after the end of the fiscal quarter for all other SEC-

    registered entities.\494\ The SEC requires annual reports on Form 10-K

    to be filed with the SEC 60 calendar days after the end of the fiscal

    year for large accelerated filers, 75 calendar days for other

    accelerated filers and 90 calendar days for non-accelerated

    filers.\495\ The Commission has extended the 17 business day proposed

    filing deadline to 40 calendar days for the required reports for the

    first three quarters. This revision to the rule will harmonize the

    Commission's financial resource filing requirement with the SEC's

    requirements for its Form 10-Q. Similarly, the Commission has extended

    the filing deadline for the fourth quarter report to 60 days in order

    to harmonize the requirement with the SEC's filing deadline for the

    Form 10-K. However, to the extent that a DCM is also registered as a

    DCO, the DCM must file its quarterly financial reports in accordance

    with the requirement of Sec. 39.11 (which requires that reports be

    filed within 17 business days after the end of each fiscal quarter).

    The shorter time frame for submission of a dual registrant's quarterly

    financial reports is based on the heightened significance of financial

    oversight for the clearinghouse, which serves as the central

    counterparty for all cleared transactions.

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

    \494\ See 17 CFR 249.308a.

    \495\ See 17 CFR 249.310.

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

    The Commission has considered KCBT's comments, but does not believe

    that annual submissions are sufficient. The Commission believes that

    prudent financial management requires DCMs to prepare and review

    financial reports more frequently than annually, and expects that DCMs

    currently are reviewing their finances on at least a quarterly basis.

    In response to the comments requesting clarification on the

    confidentiality of the filings made pursuant to the financial resources

    regulations, the Commission does not plan to make such reports public.

    However, where such information is, in fact, confidential, the

    Commission encourages DCMs to submit a written request for confidential

    treatment of such filings under the Freedom of Information Act

    (``FOIA''),\496\ pursuant to the procedures established in Sec. 145.9

    of the Commission's regulations.\497\ The determination of whether to

    disclose or exempt such information in the context of a FOIA proceeding

    would be governed by the provisions of part 145, and any other relevant

    provision.

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

    \496\ 5 U.S.C. 552 et seq. (2010).

    \497\ 17 CFR 145.9 (2010).

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

    In response to the request for clarification in regard to

    consolidated financial statements, the Commission clarifies that

    consolidated financial statements would comply with the rule.

    Section 38.1101(g) delegates authority to perform certain functions

    that are reserved to the Commission under Sec. 38.1101 to the Director

    of the Division of Market Oversight.

    22. Subpart W--Diversity of Boards of Directors

    Core Principle 22 is a new core principle that was added by the

    Dodd-Frank Act. The core principle requires that publicly traded DCMs

    must endeavor to recruit individuals to serve on their board of

    directors from among

    [[Page 36662]]

    a broad and culturally diverse pool of qualified candidates.

    In the DCM NPRM, the Commission proposed to codify the statutory

    text of the core principle in proposed Sec. 38.1150, and is adopting

    Sec. 38.1150 as proposed.

    As noted in the DCM NPRM, the substantive regulations implementing

    Core Principle 22 were proposed in a separate rulemaking that also

    would implement Core Principles 15 (Governance Fitness Standards), 16

    (Conflicts of Interest), and 17 (Composition of Governing Boards of

    Contract Markets).\498\ The rules implementing Core Principle 22 will

    be adopted in that separate rulemaking.

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

    \498\ See ``Governance Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities; Additional Requirements Regarding the Mitigation of

    Conflicts of Interest,'' Notice of Proposed Rulemaking, 76 FR 722,

    January 6, 2011. CME submitted a comment letter discussing proposed

    regulation 38.801 in connection with 76 FR 722.

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

    CME submitted a comment letter responding to the DCM NPRM that

    referenced comments it submitted in connection with that rulemaking.

    CME's comments will be considered in connection with that rulemaking.

    23. Subpart X--Securities and Exchange Commission

    The Dodd-Frank Act added new Core Principle 23, requiring that DCMs

    keep any records relating to swaps defined in CEA section 1a(47)(A)(v),

    as amended by the Dodd-Frank Act, open to inspection and examination by

    the SEC.\499\ Consistent with the text of this core principle, the

    Commission proposed guidance under part 38 that provided that each DCM

    should have arrangements and resources for collecting and maintaining

    accurate records pertaining to any swap agreements defined in section

    1a(47)(A)(v) of the amended CEA.

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

    \499\ 7 U.S.C. 7; see also section 5(d)(23) of the CEA, as

    amended by the Dodd-Frank Act.

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

    i. Sec. 38.1200--Core Principle 23, Sec. 38.1201 (Additional Sources

    for Compliance), and Guidance in Appendix B

    The Commission proposed a combination of rules and guidance to

    implement the core principle. Proposed Sec. 38.1200 codified the

    statutory text of the core principle. Proposed Sec. 38.1201 referred

    applicants and DCMs to the guidance in appendix B to part 38 for

    purposes of demonstrating to the Commission their compliance with the

    requirements of the core principle. The proposed guidance stated that

    DCMs should have arrangements and resources for collecting and

    maintaining accurate records pertaining to any swaps agreements defined

    in section 1a(47)(A)(v) of the Act.

    Summary of Comments

    CME requested guidance on what records need to be retained and for

    how long they must be retained.\500\

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

    \500\ CME Comment Letter at 38 (Feb. 22, 2011).

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

    Discussion

    The Commission is adopting the proposed rules and guidance, with

    the modifications described below.

    In response to CME's comment, the Commission notes that the

    guidance provides that DCMs should retain ``any'' records relevant to

    swaps defined under CEA section 1a(47)(a)(v), and that the DCM should

    leave such records open to inspection and examination, for a period of

    five years. Commission staff consulted with representatives from the

    SEC, who confirmed that SEC's relevant recordkeeping requirements

    typically extend for a period of five years.\501\ The five year

    requirement is also consistent with the recordkeeping requirement under

    Core Principle 18 and Sec. 1.31 of the Commission's regulations.

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

    \501\ See 76 FR 10982, Feb. 28, 2011, (Proposed regulation

    818(b) requires security-based swap execution facilities to keep

    books and records ``for a period of not less than five years,'' the

    first two years in an easily accessible place). Rule 17a-1(b)

    (240.17a-1(b) requires national securities exchanges, among others,

    to keep books and records for a period of not less than five years,

    the first two years in an easily accessible place, subject to a

    destruction and disposition provisions, which allows exchanges to

    destroy physical documents pursuant to an effective and approved

    plan regarding such destruction and transferring/indexing of such

    documents onto some recording medium.).

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

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \502\ requires federal

    agencies, in promulgating rules, to consider the impact of those rules

    on small entities. The rules adopted herein will affect designated

    contract markets (``DCMs''). The Commission has previously established

    certain definitions of ``small entities'' to be used by the Commission

    in evaluating the impact of its rules on small entities in accordance

    with the RFA.\503\ The Commission previously determined that DCMs are

    not small entities for the purpose of the RFA.\504\ The Commission

    received no comments on the impact of the rules contained herein on

    small entities. Therefore, the Chairman, on behalf of the Commission

    and pursuant to 5 U.S.C. 605(b), certifies that the rules will not have

    a significant economic impact on a substantial number of small

    entities.

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

    \502\ 5 U.S.C. 601 et seq. (2010).

    \503\ 47 FR 18618-21, Apr. 30 1982.

    \504\ Id.

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

    B. Paperwork Reduction Act

    This final rulemaking contains information collection requirements.

    The Paperwork Reduction Act (``PRA'') \505\ imposes certain

    requirements on federal agencies 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 Commission proposed to amend collection 3038-

    0052 to allow for an increase in response hours for the proposed

    rulemaking amending part 38, which included the increase in burden

    hours that will result from the amendments to rules 1.52 and 16.01 that

    are also part of this rulemaking.\506\ Notably, most of the collection

    burdens associated with part 38 are covered by a currently approved

    collection of information for part 38, or by other existing or pending

    collections of information. Thus, only those burdens that are not

    covered elsewhere are included in the Commission's proposed amendment.

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

    \505\ 44 U.S.C. 3501 et seq.

    \506\ See 75 FR 80572, 80603, Dec. 22, 2010 .

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

    The title of the collection will continue to be ``Part 38--

    Designated Contract Markets.'' The Commission submitted the amended

    collection to the Office of Management and Budget (``OMB'') for its

    review and approval in accordance with 44 U.S.C. 3507(d) and 5 CFR

    1320.11. Pursuant to a notice of action from OMB in March 2011,

    approval of the amended collection is pending a resubmission of the

    proposed information collection that includes a description of the

    comments received on the collection and the Commission's responses

    thereto, which will be made available by OMB at www.reginfo.gov.

    Responses to this collection of information will be mandatory. The

    Commission will protect proprietary information gathered according to

    the FOIA and 17 CFR part 145, ``Commission Records and Information.''

    In addition, section 8(a)(1) of the CEA strictly prohibits the

    Commission, unless specifically authorized by the CEA, 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.'' \507\ The Commission is also required

    to protect certain information

    [[Page 36663]]

    contained in a government system of records according to the Privacy

    Act of 1974.\508\

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

    \507\ 7 U.S.C. 12.

    \508\ 5 U.S.C. 552a.

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

    Proposed Collection

    In its existing collection of information for part 38, the

    Commission estimated 300 hours average response time from each

    respondent for the collection of designation and compliance

    information.\509\ Based on its experience with administering registered

    entities' submission requirements since implementation of the Commodity

    Futures Modernization Act of 2000,\510\ the Commission estimated in the

    DCM NPRM that the response time for the designation and compliance

    collections in the proposed rule would generally increase the

    information collection burden by 10 percent. This increase is due to

    the introduction of swaps trading on DCMs permitted under section

    723(a)(3) of the Dodd-Frank Act and the addition of new core principles

    with which DCMs must comply, excepting Core Principle 21 (Financial

    Resources), for which a separate burden estimate is discussed below,

    and the burdens associated with any information collection requirements

    that are being accounted for in other existing or pending collections.

    With respect to all but financial resources compliance, the Commission

    estimated in the DCM NPRM that it would collect information from 17

    respondents.\511\ Accordingly, a 10 percent estimated increase would

    result in 30 additional hours per respondent and 510 additional hours

    annually for all respondents for designation and compliance.

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

    \509\ 66 FR 42256, 42268, Aug. 10, 2001.

    \510\ Public Law 106-554, 114 Stat. 2763 (2000).

    \511\ The number of designated contract markets increased from

    13 to 17 since the last amendment to Collection 3038-0052 and from

    17 to 18 since the DCM NPRM was published in the Federal Register.

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

    With respect to Core Principle 21, the Commission estimated in the

    DCM NPRM that each of the 17 anticipated respondents may expend up to

    10 hours quarterly for filings required under the proposed regulations,

    totaling 40 hours annually for each respondent and 680 hours across all

    respondents with respect to compliance with Core Principle 21.

    Commission staff estimated that respondents could expend up to an

    additional $3,640 annually based on an hourly wage rate of $52 (30

    hours + 40 hours x $52) to comply with the proposed rules. This would

    result in an aggregated additional cost of $61,880 per annum (17

    respondents x $3,640).

    Summary of Comments and Discussion

    Estimated Burden Hours for Compliance for Part 38 Amendments

    The Commission received several comments regarding the estimated

    hours of burden for compliance with the proposal to amend part 38.\512\

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

    \512\ As noted above, the Commission is not finalizing proposed

    regulations 38.501--38.506 at this time, and expects and plans to do

    so when it considers the final SEF rulemaking, The Commission will

    consider all comments related to these provisions at such time.

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

    In particular, the Commission confirms that that the new DCM

    application form, Form DCM, provides a roadmap of required

    documentation, balances the needs of the Commission with the needs of

    the marketplace, and should result in a streamlined and standardized

    review process, as was noted by Eris.\513\

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

    \513\ Eris Comment Letter at 4 (Feb. 22, 2011).

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

    Other commenters suggested that the 60 days proposed in Sec.

    38.3(g) for existing DCMs to certify compliance with the core

    principles and the rules implementing them would be unduly

    burdensome.\514\ As discussed in the preamble, the Commission is

    eliminating this provision from the final rules.

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

    \514\ See, e.g., GreenX Comment Letter at 21 (Feb. 22, 2011);

    KCBT Comment Letter at 2 (Feb. 22, 2011); Nodal Comment Letter at 4

    (Feb. 22, 2011); NYSE Liffe Comment Letter at 14 (Feb. 22, 2011);

    CME Comment Letter at 12 (Feb. 22, 2011); and CFE Comment Letter at

    7 (Feb. 22, 2011).

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

    CME stated that it would be costly to comply with the proposed

    Sec. 38.151(a) requirement that clearing firms obtain every customer's

    consent to the regulatory jurisdiction of each DCM.\515\ The Commission

    believes that Sec. 38.151(a) codifies requirements necessary to

    effectuate Core Principle 2's statutory mandate; a DCM must have an

    agreement in place prior to granting members and market participants

    access to its markets in order to ensure that the DCM has the capacity

    to detect, investigate, and apply appropriate sanctions to persons that

    violate DCM rules. Any incremental costs associated with this rule are

    covered by the 10 percent increase contained in the Commission's

    amended information collection.

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

    \515\ CME Comment Letter at 16 (Feb. 22, 2011).

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

    CME stated that an increased documentation burden associated with

    the submission process would greatly increase the cost and timing for

    DCMs to list products, without providing any corresponding benefit to

    the marketplace.\516\ CME stated that the Commission indicated that the

    proposed rules for Provisions Common to Registered Entities will

    increase the overall collection burden on registered entities by

    approximately 8,300 hours per year.\517\ The referenced burden was

    accounted for in the Commission's information collection for the part

    40 rules that were adopted in July, 2011, however, and therefore the

    burden associated with that collection is not duplicated here.\518\

    Notwithstanding this, the Commission believes that any DCM must have an

    agreement with its customers such that the customer agrees to cooperate

    with the DCM, where necessary, in order for the DCM to perform its

    statutory functions.

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

    \516\ CME Comment Letter at 10 (Feb. 22, 2011).

    \517\ See 75 FR 67282, 67290, Nov. 2, 2010.

    \518\ See Collection 3038-0093.

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

    Similarly, CME commented on the burdens associated with rules

    implementing Core Principles 8 and 18, in particular, the requirement

    to separately identify block trading in daily volume reports.\519\ The

    burden associated with block trading is accounted for in the

    information collection associated with the Commission's Real-Time

    Public Reporting of Swap Transaction Data rulemaking.\520\ To avoid

    double-counting, no adjustment is being made to the amendment to this

    part 38 collection.

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

    \519\ CME Comment Letter at 30-31 (Feb. 22, 2011).

    \520\ See ``Real Time Public Reporting of Swap Transaction

    Data,'' 77 FR 2909, Jan. 20, 2012.

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

    In addition, MGEX commented on the rules implementing the general

    recordkeeping requirements of Core Principle 18.\521\ Core Principle 18

    incorporates by reference Sec. 1.31 of the Commission regulations and

    the recordkeeping requirements in the Commission's Swap Data,

    Recordkeeping, and Reporting Requirements rulemaking.\522\ The Sec.

    1.31 requirements are already covered by the existing information

    collection for part 38, with the incremental costs associated with the

    introduction of swap trading, if a DCM elects to do so, covered by the

    10 percent increase contained in the Commission's amended information

    collection. The recordkeeping requirements in the proposed Swap Data,

    Recordkeeping, and Reporting Requirements rulemaking are accounted for

    in the information collection request that was developed for that

    rulemaking. To avoid double-counting, no adjustment is being made to

    the amendment to the part 38 information collection in response to the

    comment.

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

    \521\ MGEX Comment Letter at 9 (Feb. 22, 2011).

    \522\ See ``Swap Data Recordkeeping and Reporting

    Requirements,'' 77 FR 2136, Jan. 13, 2012.

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

    With respect to the information collection in rules implementing

    Core

    [[Page 36664]]

    Principle 10, CME and MGEX commented that establishing specific audit

    trail requirements would be burdensome, costly, and unnecessary.\523\

    DCM compliance with Core Principle 10 should predate the enactment of

    the Dodd-Frank Act, however, and the information collections associated

    with Core Principle 10 are covered by the Commission's existing part 38

    information collection. Any burden increase associated with the

    maintenance of additional records resulting from the introduction of

    swap trading, if a DCM elects to do so, has been accounted for in the

    10 percent increase in designation and compliance costs discussed

    above.

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

    \523\ CME Comment Letter at 33 (Feb. 22, 2011) and MGEX Comment

    Letter at 7 (Feb. 22, 2011).

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

    CME submitted a comment regarding the information collection

    burdens associated with rules that were proposed to implement new Core

    Principle 20, which requires each DCM to maintain a business

    continuity-disaster recovery plan and to report system security-related

    events and all planned changes to automated systems that may impact the

    reliability, security, or scalability of the systems.\524\ In response

    to CME's concerns that the rule would require reporting of

    insignificant system events, the Commission is adopting final rules

    that require reporting only of significant system malfunctions and

    advance notification only of material system changes. The resulting

    burden reduction eliminates the need to increase the proposed part 38

    information collection amendment.

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

    \524\ CME Comment Letter at 36-37 (Feb. 22, 2011).

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

    Finally, MGEX commented that the hours estimated for designation

    and compliance and the additional new annual cost of compliance with

    the proposed rules were extremely low, and claimed that due to the vast

    number of additional requirements, the total burden is becoming

    ``unwieldy and excessive.'' \525\ MGEX did not provide any estimate of

    what costs would be more accurate for purposes of the part 38

    information collection, and thus the Commission could not evaluate

    alternative estimates to determine whether they would be more

    appropriate than what was proposed, which was based on past Commission

    experience with existing collections of information and which accounts

    only for those collections of information that are not now or will not

    be covered by other collections of information.

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

    \525\ MGEX Comment Letter at 9-10 (Feb. 22, 2011).

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

    Estimated Burden Hours for Core Principle 21

    In addition to the general increase proposed for the existing part

    38 collection discussed above, the Dodd-Frank Act established new Core

    Principle 21 (Financial Resources) that requires respondents to have

    adequate financial, operational and managerial resources.\526\ In order

    to demonstrate compliance with Core Principle 21, each respondent will

    need to file specific reports with the Commission on a quarterly basis,

    which would result in four quarterly responses per respondent per year.

    In the proposed rulemaking, the Commission estimated that each

    respondent would expend 10 hours to prepare each filing required under

    the proposed regulations, and the Commission estimated that it would

    receive filings from 17 respondents.

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

    \526\ See section 735(b) of the Dodd-Frank Act.

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

    The Commission received several comments on the proposed financial

    resources collection. KCBT stated that the financial resources rules,

    as proposed, would result in duplicative reporting for entities that

    operate as both a DCM and DCO.\527\ In response to this comment, the

    Commission is now finalizing the rules with revisions that clarify that

    a DCM that also is registered with the Commission as a DCO is obligated

    only to file its financial resources reports under the DCO rules,

    though it nonetheless must maintain the financial resources necessary

    to satisfy the operating cost requirements of the DCM and the DCO

    separately.

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

    \527\ KCBT Comment Letter at 7-9 (Feb. 22, 2011).

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

    CFE, GreenX, and KCBT requested that the Commission extend the

    proposed deadline for filing of financial resources reports from 17

    days after the end of each quarter, in particular to accommodate DCMs

    that are public companies, or that have financial statements that are

    consolidated with those of a public company, so that the filing

    requirements would be aligned with the requirements for SEC forms 10-Q

    and 10-K, which are longer.\528\ GreenX stated that failing to extend

    the time for filing to align with the SEC filing requirements, for

    which it and other public companies already have procedures and

    controls in place, would result in unnecessary new programming and

    staff resources.\529\ KCBT objected to the quarterly filing requirement

    and suggested that annual reporting would be sufficient.\530\

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

    \528\ CFE Comment Letter (Feb. 22, 2011), GreenX Comment Letter

    (Feb. 22, 2011), KCBT Comment Letter (Feb. 22, 2011).

    \529\ GreenX Comment Letter at 19-20 (Feb. 22, 2011).

    \530\ KCBT Comment Letter at 8-9 (Feb. 22, 2011).

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

    The Commission is not persuaded that an annual reporting

    requirement would be sufficient in terms of financial management on the

    part of the DCM or regulatory oversight on the part of the Commission.

    With respect to regulatory oversight, the adoption of an annual

    reporting requirement alone would result in a need for periodic checks

    by the Commission on financial resources compliance by DCMs between

    annual reports. The multiple unscheduled checks that would be necessary

    each year, in the form of calls for a demonstration of compliance by a

    DCM, as well as more formal rule enforcement reviews, would burden the

    Commission's examination resources. If DCMs are required to report on a

    quarterly basis, DCMs may be able to demonstrate risks toward which the

    Commission's resources should be directed. Moreover, unscheduled checks

    would most likely be more burdensome for DCMs than quarterly reporting.

    Thus, the Commission is adopting both quarterly and annual reporting

    requirements in these final rules.

    However, in response to the comments, the Commission is adopting

    final rules that would mitigate the burden that would result from the

    adoption of filing deadlines that do not align with SEC filing

    requirements. Accordingly, the final rules establish a deadline for the

    filing of financial resources reports of 40 calendar days after the end

    of the quarter for the first three quarters of a DCM's fiscal year, and

    60 calendar days after the end of the DCM's fourth quarter.

    Final Burden Estimate

    The final rules require each respondent to file information with

    the Commission. Information collections are included in several of the

    general provisions being adopted in Subpart A, as well as in certain

    regulations implementing Core Principles 5, 7, 8, 10, 11, 13, 18, 20,

    and 21. The Commission has carefully evaluated the comments discussed

    above and determined that the 10 percent general increase by which the

    Commission seeks to amend its part 38 collection of information is

    appropriate. The 10 percent increase is intended to cover only the

    burdens associated with collections of information that are not already

    covered in the existing part 38 information collection, or in other

    existing collections or collections that are being established with

    other rulemakings.

    [[Page 36665]]

    The 10 percent increase tracks the already approved part 38

    information collection, which accounted for the many one-time or

    infrequent information collections contained in part 38 over the

    assumed life of a DCM. As a general rule, the information collections

    in this rulemaking that are not already covered have the same

    characteristics: The required filing of one-time certifications and

    demonstrations of compliance by existing DCMs; the filing of occasional

    exemptive requests; reporting of material events that are expected to

    occur infrequently; the expansion of a DCM's existing audit trail

    program to cover swap transactions, if the DCM determines to list

    swaps; and the one-time or infrequent system changes needed to report

    transactions, such as EDRPs, that are not covered in the information

    collection requests of other rulemakings.

    The changes sought by the commenters that are being adopted would

    only marginally reduce the overall information collection burden. Thus

    the Commission has determined not to reduce its burden estimates.

    Accordingly, the Commission expects that with respect to all but

    financial resources compliance, a 10 percent estimated increase would

    result in 30 additional hours per respondent and 540 additional hours

    annually for all respondents for designation and compliance.

    With respect to Core Principle 21, the Commission expects that each

    of the 18 anticipated respondents may expend up to 10 hours quarterly

    for filings required under the regulations, totaling 40 hours annually

    for each respondent and 720 hours across all respondents with respect

    to compliance with Core Principle 21.

    Aggregate Information Burden

    In conclusion, amended collection 3038-0052 will result in

    respondents expending up to an additional $3,640 annually based on an

    hourly wage rate of $52 (30 hours + 40 hours x $52) to comply with the

    proposed rules. This would result in an aggregated additional cost of

    $65,520 per annum (18 respondents x $3,640). This final burden estimate

    accounts for the 18 respondents that the Commission believes will be

    affected by the final rule, rather than the 17 initially proposed.\531\

    Otherwise, there is no change from the rule as proposed.

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

    \531\ The DCM NPRM referenced 17 respondents. The number of

    respondents was revised to 18 to include Eris, which was designated

    on October 28, 2011.

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

    C. Cost Benefit Considerations

    Background on Designated Contract Markets

    Designated contract markets (``DCMs'') were established by the

    Commodity Futures Modernization Act of 2000 (``CFMA'') as one of two

    forms of Commission-regulated markets for the trading of futures and

    options contracts based on an underlying commodity, index, or

    instrument. Specifically, the CFMA established, under section 5 of the

    CEA, eight designation criteria and 18 core principles governing the

    designation and operation of DCMs. To implement the CFMA, the

    Commission codified regulations under part 38 consisting largely of

    guidance and acceptable practices which were illustrative of the types

    of matters an applicant or DCM may address and at times provided a safe

    harbor for demonstrating compliance, but did not necessarily mandate

    the principle means of compliance.

    Section 735 of the Dodd-Frank Act amended section 5 of the CEA by:

    (1) Eliminating the eight designation criteria contained in former

    section 5(b) of the CEA; (2) revising the existing core principles,

    including the incorporation of many of the substantive elements of the

    former designation criteria; and (3) adding five new core principles,

    thereby requiring applicants and DCMs to comply with a total of 23 core

    principles as a condition of obtaining and maintaining designation as a

    contract market.

    The Dodd-Frank Act also amended Core Principle 1 to provide that in

    its discretion, the Commission may determine by rule or regulation the

    manner in which DCMs comply with the Core Principles.\532\ Accordingly,

    in proposing this rulemaking, the Commission undertook a comprehensive

    evaluation of its existing DCM rules, guidance, and acceptable

    practices associated with each core principle in order to update those

    provisions and determine which core principles would benefit from new

    or revised regulations. As described in this notice of final

    rulemaking, in addition to codifying new rules for several core

    principles, the Commission also is maintaining the guidance and

    acceptable practices, with necessary modifications, in many instances.

    The Commission believes that the promulgation of bright-line

    requirements in those instances where an industry best practice has

    developed will better serve the goals of the Dodd-Frank Act, and will

    provide the industry and market participants with greater specificity

    and regulatory transparency, and will improve the Commission's ability

    to effectively enforce its regulations.

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

    \532\ The Dodd-Frank Act amended Core Principle 1 to clarify

    that boards of trade have reasonable discretion in establishing the

    manner in which they comply with the core principles, ``[u]nless

    otherwise determined by the Commission by rule or regulation.'' 7

    U.S.C. 7(d)(1).

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

    The Commission's Cost Benefit Consideration

    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.\533\

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

    \533\ 7 U.S.C. 19(a).

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

    To further the Commission's consideration of the costs and benefits

    imposed by its regulations, the Commission requested in the DCM NPRM

    that commenters provide data and any other information or statistics on

    which they relied to reach any conclusions regarding the costs and

    benefits of the proposed rules.\534\ The Commission received one

    comment that provided quantitative information pertaining to the costs

    relevant to the Commission's proposed rules for Core Principle 9.\535\

    A number of commenters did, however, express the general view that

    there would be significant costs associated with implementing and

    complying with the proposed rules, with some commenters generally

    stating their belief that the costs would outweigh any potential

    benefits.\536\ Given the lack of quantitative data provided in the

    comments or publicly available, the Commission has provided a

    qualitative description of the costs that would be incurred by

    DCMs.\537\ In a

    [[Page 36666]]

    number of instances, the Commission is adopting rules that codify

    existing norms and best practices of DCMs (often reflected in existing

    guidance and acceptable practices and recommendations made in recent

    Rule Enforcement Reviews (``RERs''). In those cases, the existing norms

    or best practices serve as the baseline--that is, the point from which

    the Commission considers the incremental costs and benefits of the

    regulations adopted in this release. In other cases, however, there is

    no existing baseline either because the requirements arise under the

    new or revised core principles, or because the Commission determined to

    revise existing requirements or practices.

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

    \534\ 75 FR at 80605, Dec. 22, 2010.

    \535\ CME Comment Letter (Aug. 3, 2011). As discussed above, the

    Commission will consider all comments related to the proposed rules

    implementing Core Principle 9 when it finalizes those rules. The

    Commission expects and plans to finalize the rules implementing Core

    Principle 9 when it finalizes the SEF rulemaking.

    \536\ See, e.g., comment letters from CME (Feb. 22, 2011, Apr.

    18, 2011, Jun. 3, 2011 and Aug. 3, 2011), MGEX (Feb. 22, 2011 and

    Jun. 3, 2011), and GreenX (Feb. 22, 2011).

    \537\ Moreover, for each core principle, the first section of

    the regulation is a codification of the statutory language of the

    core principle as a rule--and accordingly, the Commission did not

    consider the costs and benefits of these rules because they do not

    reflect the exercise of discretion by the Commission. Where the

    Commission includes additional regulations for a core principle, the

    Commission considered the costs and benefits.

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

    To assist the Commission and the public in assessing and

    understanding the economic costs and benefits of the final rule, the

    Commission has analyzed the costs of those regulations adopted in this

    rulemaking that impose additional requirements on DCMs above and beyond

    the baseline described above. In most instances, quantification of

    costs is not reasonably feasible because costs depend on the size and

    structure of DCMs, which vary markedly, or because quantification

    required information or data in the possession of the DCMs to which the

    Commission does not have access, and which was not provided in response

    to the NPRM. The Commission notes that to the extent that the

    regulations adopted in this rulemaking result in additional costs,

    those costs will be realized by DCMs in order to protect market

    participants and the public. In adopting these final regulations, the

    Commission attempted to take the least-prescriptive means necessary to

    promote the interests of the Dodd-Frank Act without impacting

    innovation and flexibility.

    The following costs and benefits are organized, for the most part,

    by core principle. For each DCM core principle,\538\ the Commission

    summarizes the final regulations, describes and responds to comments

    discussing the costs and benefits of the proposed regulations, and

    considers the costs and benefits of the associated regulations,

    followed by a consideration of those costs and benefits in light of the

    five factors set out in Sec. 15(a) of the CEA. In addition, the

    Commission considers the costs and benefits associated with the

    codification of rules in place of guidance and acceptable practices.

    The Commission notes that many of its regulations refer to requirements

    that are contained in other rulemakings, some of which have been

    finalized and others which are still before the Commission. The costs

    and benefits of these regulations are discussed in connection with

    those other rulemakings.

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

    \538\ The costs and benefits of Core Principles 15, 16, 17, and

    22 are discussed in connection with separate rulemakings for

    ``Governance Requirements for Derivatives Clearing Organizations,

    Designated Contract Markets, and Swap Execution Facilities;

    Additional Requirements Regarding the Mitigation of Conflicts of

    Interest,'' 76 FR 722, Jan. 6, 2011, and ``Requirements for

    Derivatives Clearing Organizations, Designated Contract Markets, and

    Swap Execution Facilities Regarding the Mitigation of Conflicts of

    Interest,'' 75 FR 63732, Oct. 18, 2010. The substantive regulations

    implementing Core Principles 15, 16, 17, and 22 were proposed in

    those separate rulemakings. Until such time as the Commission may

    adopt the final substantive rules implementing these core

    principles, the Commission is maintaining the current guidance and

    acceptable practices under part 38 relevant to Core Principles 15

    and 16. Accordingly, the existing guidance and acceptable practices

    from appendix B to part 38 relevant to these core principles is

    being codified in the revised appendix B adopted in this final

    rulemaking. This will not result in additional costs because the

    Commission is simply codifying existing Guidance and Acceptable

    Practices. At such time as the Commission may adopt the final rules

    implementing these core principles, appendix B will be amended

    accordingly.

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

    The Commission further notes that certain final rules, including

    Sec. Sec. 38.3(b), (c), (e), and (f), 38.5(a) and (b) and 38.256,

    38.257, and 38.258 are essentially unchanged from existing rules

    applicable to DCMs and are not discussed further in this section, since

    they do not impose new costs and benefits as a result of the

    Commission's rulemaking.

    Finally, the Commission is obligated to estimate the burden of, and

    provide supporting statements for, any collections of information it

    seeks to establish under considerations contained in the Paperwork

    Reduction Act,\539\ and to seek approval of those requirements from the

    Office of Management and Budget. Therefore, the estimated burden and

    support for the collections of information in this rulemaking, as well

    as the consideration of comments thereto, are discussed in the

    Paperwork Reduction Act section of this rulemaking as required by that

    statute.

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

    \539\ 44 U.S.C. 3501 et seq.

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

    (1) Rules in Lieu of Guidance and Acceptable Practices

    Appendices A and B to part 38 of the Commission's regulations

    provide guidance and acceptable practices for DCMs to comply with the

    CFMA DCM core principles and designation criteria. In this release, the

    Commission is codifying as rules certain of these obligations of DCMs.

    The rules codify certain DCM practices that Commission staff has

    historically recommended in RERs as appropriate under the guidance and

    acceptable practices, which are already followed by DCMs. In certain

    cases, the rules are less prescriptive than the existing guidance and

    acceptable practices they replace, and the rules therefore maintain the

    flexibility for DCMs to determine many aspects of their compliance

    programs.

    Summary of Comments

    As described in this release, the Commission received a number of

    comments opposing the codification of rules in lieu of guidance and

    acceptable practices. In response to commenters' concerns, the

    Commission is converting some of the proposed rules, in whole or in

    part, to guidance or acceptable practices.

    CME, GreenX, MGEX, and KCBT expressed concern with the costs

    imposed by the conversion of guidance and acceptable practices to

    rules, stating that rules are more costly and burdensome to DCMs and

    will increase costs to the Commission \540\ and end-users of

    derivatives.\541\ CME claimed that there is no public policy benefit to

    what it described as ``one-size fits all rules.'' \542\ OCX and CME

    questioned the benefit of what they viewed as the prescriptive tone of

    the proposed rules.\543\ Commenters also asserted that converting

    guidance and acceptable practices to rules may hinder or deter

    innovation for DCMs.\544\

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

    \540\ See CME Comment Letters (Feb. 22, 2011, Apr. 18, 2011,

    Jun. 3, 2011 and Aug. 3, 2011); MGEX Comment Letter (Jun. 3, 2011);

    GreenX Comment Letter (Feb. 22, 2011); KCBT Comment Letter at 9

    (Feb. 22, 2011).

    \541\ CME Comment Letter at 3 (Feb. 22, 2011).

    \542\ CME Comment Letter at 8 (Feb. 22, 2011).

    \543\ OCX Comment Letter at 1-2 (Feb. 22, 2011); CME Comment

    Letter at 2-3 (Feb. 22, 2011).

    \544\ See e.g., ICE Comment Letter at 1-2 (Feb. 22, 2011), Eris

    Comment Letter at 2 (Feb. 22, 2011), CME Comment Letter at 3-4 (Feb.

    22, 2011), GreenX Comment Letter at 1 (Feb. 22, 2011).

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

    Discussion

    As explained throughout this release, in several instances the

    Commission has converted compliance obligations that were previously

    proposed as rules to guidance and acceptable practices (in whole or in

    part) in order to accommodate certain comments raised by market

    participants. In determining whether to codify a compliance practice in

    the form of a rule or guidance and acceptable practices, the Commission

    was guided by: (i) The comment letters that provided a basis for

    greater flexibility or, in some instances, for greater specificity,

    with respect to the stated compliance obligation; (ii) whether the

    practice consisted of a widely-accepted industry practice; and

    [[Page 36667]]

    (iii) whether the proposed rules were of a discretionary nature, and

    thus, were more appropriate as guidance and/or acceptable practices. In

    other circumstances, the Commission believes that maintaining certain

    regulations as rules will better serve market participants and the

    public by providing greater transparency and specificity and by

    improving the ability of the Commission to effectively enforce its

    regulations.

    While CME claimed that the codification of rules is more costly to

    the Commission,\545\ the Commission does not believe that rules are

    necessarily more costly to administer than guidance and acceptable

    practices. To the contrary, guidance and acceptable practices may be

    more costly to the Commission than rules because of the potential need

    to review individual exchange actions that do not meet the provisions

    of guidance and acceptable practices to determine if they comply with

    the underlying core principle. The Commission also notes that many of

    the rules are general in nature, allow for innovation and flexibility,

    and are not intended to be ``one size fits all.'' In response to the

    comment that rules will be more costly for end-users, the Commission

    notes that these regulations apply to DCMs, not to end-users, and are

    intended to protect market participants.

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

    \545\ CME Comment Letter at 2-4 (Feb. 22, 2011).

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

    Commenters have suggested that as markets evolve or DCMs innovate,

    rules may become outdated and may no longer be consistent with evolving

    industry practice.\546\ The Commission notes that in such instances,

    DCMs could petition the Commission for exemptive orders in order to

    implement new methods of compliance or request that the Commission

    propose revisions to its rules. The Commission notes that in accordance

    with Executive Order 13579, it will periodically review its existing

    significant regulations to determine whether any such regulations

    should be modified, streamlined, expanded, or repealed so as to make

    the agency's regulatory program more effective or less burdensome in

    achieving the regulatory objectives.\547\

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

    \546\ See e.g., CME Comment Letter at 3 (Feb. 22, 2011), Eris

    Comment Letter at 3 (Jun. 3, 2011), ICE Comment Letter at 10-11

    (Feb. 22, 2011).

    \547\ 76 FR 41587, July 14, 2011.

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

    Commenters also stated that converting guidance and acceptable

    practices to rules may hinder or deter innovation for DCMs.\548\ The

    Commission notes, in response to comments received, that many of the

    rules that commenters interpret as possibly having an effect on

    innovation, such as those that relate to technology (including certain

    rules under Core Principle 4, Prevention of Market Disruption), have

    been moved to guidance and acceptable practices in the final rule in

    order to provide DCMs with greater flexibility.

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

    \548\ See e.g., ICE Comment Letter at 1-2 (Feb. 22, 2011), Eris

    Comment Letter at 2 (Feb. 22, 2011), CME Comment Letter at 3 (Feb.

    22, 2011), GreenX Comment Letter at 1 (Feb. 22, 2011).

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

    Costs

    Costs to DCMs

    As noted above, the rules finalized in this release generally are

    designed to codify existing industry practice, and implement new or

    revised core principles. However, the Commission is cognizant of the

    possibility that less established DCMs may require more significant

    modifications to their existing programs to comply with these rules if

    they do not currently follow industry practices. Nevertheless, it is

    likely less costly for DCMs to demonstrate compliance with rules than

    to demonstrate compliance with guidance and acceptable practices, which

    may require significantly more communications and exchange of documents

    with Commission staff. Accordingly, the primary cost imposed on DCMs as

    a result of converting guidance and acceptable practices to rules is

    the potential inability of DCMs to choose a different method of

    complying with the core principles as DCMs innovate or industry

    standards evolve. This cost may be present in each instance throughout

    this document where the Commission is replacing guidance or acceptable

    practices with rules. However, the Commission has made every attempt to

    provide sufficient flexibility to allow DCMs to continue to pursue the

    most efficient methods of compliance, within the rules, guidance and

    acceptable practice structure adopted in this release.

    It also is possible that certain DCMs are currently engaged in

    practices that they consider to be in compliance with core principles,

    but which do not precisely follow existing guidance or acceptable

    practices (perhaps because the DCM considers a somewhat different

    method of complying with the core principle to be more efficient given

    the nature of the DCM). In such an instance, a DCM would now need to

    change those practices to be in full compliance with the rule. The

    Commission is not aware of any specific examples of DCMs that consider

    themselves to be in compliance with core principles, while not

    following the Commission's guidance or acceptable practices. Therefore,

    the Commission is unable to quantify the cost associated with this

    potential scenario. However, all DCMs should be in compliance with

    existing guidance and acceptable practices, and the Commission does not

    believe that DCMs employing variant practices can object to the cost of

    complying with existing guidance and acceptable practices.

    As discussed above, the Commission notes that many of the rules

    that could affect innovation, such as those that relate to technology,

    have been moved to guidance and acceptable practices in the final rule

    in order to provide DCMs with added flexibility. However, even with

    guidance and acceptable practices in place of rules, innovation costs

    may still exist to a degree since the Commission may need to modify

    guidance and acceptable practices as industry practices evolve.

    Furthermore, as is the case under current guidance and acceptable

    practices, a DCM that devises a new method of complying with a core

    principle may incur certain costs to demonstrate such compliance to the

    Commission. It is not feasible to quantify these costs since the

    Commission has no way to predict how industry practices will evolve or

    what rule adjustments will be needed.

    Costs to Market Participants and the Public

    If converting guidance and acceptable practices to rules hinders or

    deters innovation for DCMs, commenters have asserted that DCMs may

    decline to innovate to the same extent that they innovate at present,

    potentially depriving market participants and the public of important

    advancements. However, costs to market participants as a result of

    converting some of the guidance and acceptable practices to rules

    should be minimal since existing requirements, including guidance and

    acceptable practices, would also need to be adjusted as important

    advancements occur, and commenters provided no specific examples of how

    converting the guidance and acceptable practices to rules would deter

    innovation. It is not feasible to quantify these costs since the

    Commission has no way to predict how DCMs will innovate or industry

    practices will evolve.

    Benefits

    Benefits to DCMs, Market Participants, and the Public

    The codification of rules in lieu of guidance and acceptable

    practices provides specificity and transparency to DCMs, market

    participants, and the public. It also increases the likelihood of

    prompt compliance with the core

    [[Page 36668]]

    principles because DCMs will have a clear understanding of what is

    required in order to demonstrate compliance with the applicable core

    principle. In turn, a DCM's ability to achieve prompt compliance with

    the rules instills confidence in market participants and the public who

    utilize the markets to offset risk and who utilize prices derived from

    the price discovery process of trading in centralized DCM markets.

    Specific enforceable standards also promote more efficient and

    effective enforcement by the Commission.

    The costs and benefits of each of the rules, including rules that

    replace guidance or acceptable practices, are set out below in the

    cost-benefit discussion for the general compliance regulations under

    part 38 and for each core principle.

    (2) General Compliance Regulations Under Part 38 \549\

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

    \549\ Proposed regulations 38.1 and 38.2 are not discussed

    because they impose no requirements on market participants.

    Regulation 38.1 updates internal references within part 38 and

    regulation 38.2 specifies the regulations from which DCMs will be

    exempt. Proposed regulations 38.3(b), (c), (e), and (f) are

    essentially unchanged from existing rules and impose no new costs or

    benefits. Additionally, regulation 38.6 is not being revised by this

    release.

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

    Sec. 38.3(a) (Application procedures)

    Rule Sec. 38.3 sets forth the application and approval procedures

    for new DCM applicants. Rule Sec. 38.3(a) specifies the application

    process, including the new requirement that the board of trade file the

    DCM Application Form (``Form DCM'') electronically. Rule Sec. 38.3(a)

    also eliminates the 90-day expedited approval procedures for DCM

    applications. Accordingly, all DCM applications will be reviewed within

    the 180-day period governed by procedures specified in CEA section

    6(a).\550\

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

    \550\ 7 U.S.C. 8(a).

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

    Summary of Comments and Discussion

    The Commission did not receive comments on the costs associated

    with filling out Form DCM.

    Eris contended that eliminating the 90-day accelerated review

    process would place new entities at a competitive disadvantage because

    it would delay their time to market, which they believe is critical for

    new entrants.\551\

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

    \551\ Eris Comment Letter at 4 (Feb. 22, 2011). Eris was

    designated as a contract market on October 28, 2011.

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

    The Commission has found that, in the interest of meeting the

    expedited approval timeline, applicants seeking expedited review often

    file incomplete or draft applications without adequate supporting

    materials. This has resulted in the expenditure of significant amounts

    of staff time reviewing incomplete or draft applications, necessitating

    numerous follow-up conversations with applicants, and usually resulting

    in the removal of applications from the expedited review timeline.

    Additionally, some applications raise new or unique issues that require

    additional time for the Commission to review. Notably, since the

    passage of the CFMA, eleven DCM applicants have requested expedited

    treatment, but, for some of the reasons noted above, only three were

    designated within the shortened timeframe.\552\ Moreover, eliminating

    the accelerated 90-day review process will not prevent DCMs from coming

    to market in an expeditious manner because the rule does not prevent

    the Commission from continuing to review applications within a shorter

    timeframe if DCM applicants submit substantially complete applications.

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

    \552\ The three applicants that were designated within the

    shortened timeframe included NYSE Liffe, Chicago Climate Futures

    Exchange (``CCFE''), and GreenX. The remaining applications that

    were not approved during the expedited timeframe included: Inet

    Futures Exchange, OneChicago, CBOE Futures Exchange, U.S. Futures

    Exchange, ELX Futures, The Trend Exchange, NQLX Futures Exchange,

    and Cantor Futures. The Commission notes that while NYSE Liffe,

    CCFE, and GreenX became designated within 90 days, they each

    submitted multiple draft DCM applications that were processed and

    reviewed by Commission staff for significantly longer than 90 days.

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

    Costs

    Form DCM is designed to elicit a demonstration that an applicant

    can satisfy each of the DCM core principles. Toward this end, Form DCM

    requires submission of information about an applicant's intended

    operations. Much of this information has been required of applicants

    under previous regulations. Accordingly, the use of Form DCM does not

    represent a substantive departure from the Commission's practices over

    the past decade. With respect to new core principles, Form DCM captures

    information that tracks statutory requirements and applicable

    Commission implementing regulations. In fact, by providing greater

    specificity and transparency as to what is expected from an applicant

    and by reducing the need for Commission staff to request, and the

    applicant to provide, supplementary information, Form DCM should reduce

    costs for applicants by minimizing the flow of documentation and

    discussions between DCM applicants and Commission staff needed for

    applicants to submit a complete application.

    As noted above, eliminating the 90-day expedited review period is

    unlikely to impose additional costs on DCMs or to result in competitive

    disadvantage because it does not prevent the Commission from continuing

    to review applications within a shorter timeframe if DCM applicants

    submit substantially complete applications.

    Benefits

    The new application form has several benefits for DCM applicants.

    The new form is designed to ensure that applicants are in compliance

    with the DCM Core Principles--as required by the statute. The form

    improves upon existing practice by standardizing the information that a

    DCM must provide. The form includes comprehensive instructions that

    will guide DCM applicants and specify lists of documents and

    information that must be provided as exhibits. The Commission

    anticipates that the new application form will streamline the DCM

    designation process, both for DCM applicants and the Commission. The

    form will provide applicants with greater specificity and transparency

    regarding the type of information that is required. The use of the

    standardized form is expected to reduce the amount of time Commission

    staff will need to review applications, which should enable qualified

    DCMs to begin operating sooner. Other than the specific requirements

    necessitated by the new and revised core principles, and applicable

    regulations, the majority of information required under the new form

    consists of information that the Commission historically has required.

    With respect to the elimination of the expedited review period, the

    Commission determined in the proposal that the 90-day accelerated

    review process was inefficient and impracticable. Applicants seeking

    expedited review often filed incomplete or draft applications, without

    adequate supporting materials, in the interest of meeting the expedited

    approval timeline.\553\ This required Commission staff to expend

    significant amounts of time reviewing incomplete or draft applications

    and usually resulted in removal of the application from the expedited

    review timeline. Eliminating the expedited process is consistent with

    [[Page 36669]]

    the statutory 180-day review period, and should result in a better use

    of Commission resources. During the 180-day review period, applicants

    will have adequate time to respond to Commission staff requests for

    additional information, resulting in a more efficient process for

    applicants and for the Commission.\554\

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

    \553\ For example, while NYSE Liffe, GreenX, and CCFE became

    designated 79, 88, and 60 days, respectively, after they submitted

    their applications, they each submitted several versions of draft

    applications that required numerous follow-up conversations with

    Commission staff. While GreenX technically became designated within

    88 days, the Commission actually processed GreenX's application in

    draft form for nearly a year.

    \554\ This rule is consistent with the Commission's elimination

    of the 90-day expedited review procedures for derivatives clearing

    organization applications under part 39. See ``Derivatives Clearing

    Organization General Provisions and Core Principles,'' 76 FR 69334,

    69337, Nov. 8, 2011.

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

    Section 15(a) Factors

    1. Protection of market participants and the public. Given the

    critical role that DCMs play in the financial markets, a role that now

    includes providing a marketplace for the trading of swaps as well as

    futures and options, it is essential that the Commission conduct a

    comprehensive and thorough review of all DCM applications. Such review

    is essential for the protection of market participants and the public

    insofar as it serves to limit the performance of DCM functions to only

    those entities that have provided adequate demonstration that they are

    capable of satisfying the core principles. The new Form DCM and the

    elimination of the 90-day application review period will enable the

    Commission to more efficiently and accurately determine whether it is

    appropriate to designate a DCM applicant as a contract market.

    2. Efficiency, competitiveness, and financial integrity. The

    Commission expects that the use of Form DCM will promote efficiency,

    competitiveness, and financial integrity by requiring at the outset all

    information the Commission deems necessary to consider an application

    for designation as a contract market. As discussed above, the

    Commission's experience with lengthy reviews of draft applications and

    other materially incomplete submissions highlights the need for a

    streamlined and formalized process. By replacing a series of provisions

    under current Sec. 38.3(a) with a streamlined Form DCM, and by

    eliminating the 90-day expedited application review period, the

    Commission is promoting increased efficiency by providing specific

    guidance to applicants and DCMs before they undertake the application

    process, and by facilitating the submission of a materially complete

    final application. This also will reduce the need for the submission of

    supplemental materials and repeated consultation between applicants and

    Commission staff. The result will be a more cost effective and

    expeditious review and approval of applications. This will benefit

    potential and existing DCMs as well as free Commission staff to handle

    other regulatory matters.

    In addition, the use of Form DCM will make available to the public

    the Commission's informational requirements so that all prospective

    applicants have a heightened understanding of what is involved in the

    preparation and processing of an application. Form DCM will promote

    greater transparency in the process and will enhance competition among

    DCMs by making it easier for qualified applicants to undertake and

    navigate the application process in a timely manner.

    Form DCM is designed to address an applicant or a DCM's ability to

    comply with the core principles, which form the bedrock of the

    Commission's oversight, and which Congress determined are essential to

    ensure the financial integrity of transactions and derivatives markets,

    generally. In particular, the required information in the Form DCM

    (Exhibits I-J--Financial Information and M and T--Compliance) elicit

    important information supporting the applicant or DCM's ability to

    operate a financially sound DCM and appropriately manage the risks

    associated with its role in the financial markets.

    3. Price discovery. The Commission does not anticipate that use of

    Form DCM or the elimination of the 90-day review period will impact the

    price discovery process.

    4. Sound risk management policies. The Commission expects that the

    use of Form DCM will promote sound risk management practices by

    requiring applicants and DCMs to examine their proposed risk management

    program through a series of detailed exhibits and submissions. The

    submission of exhibits relating to risk management, including exhibits

    I-J (Financial Information) and M, O, and T (Compliance) aid Commission

    staff's analysis and evaluation of an applicant's ability to comply

    with the core principles.

    5. Other public interest considerations. The standardization and

    streamlining of the DCM application process benefits the public in

    terms of more efficient use of Commission resources and more cost-

    effective and transparent requirements for applicants and DCMs. DCMs

    play a key role in the financial markets, and this role takes on even

    greater significance now that swaps may be traded on DCMs. A coherent

    and comprehensive approach to DCM designation is needed to ensure that

    only qualified applicants will be approved and that they are capable of

    satisfying the requirements of the core principles and Commission

    regulations.

    Sec. 38.3(d) (Request for transfer of designation) and Sec. 38.5

    (Information relating to contract market compliance)

    Rule Sec. 38.3(d) is a new rule that formalizes the procedures

    under which a DCM may request the transfer of its designation to a new

    legal entity as a result of a corporate event such as a merger or

    corporate reorganization. Rule Sec. 38.5(c) \555\ is a new rule that

    requires that the DCM must submit to the Commission a notification of

    each transaction involving the transfer of ten percent or more of the

    equity interest in the designated contract market, and that such

    notification must be provided at the earliest possible time but in no

    event later than ten business days following the date upon which the

    designated contract market enters into a legally binding obligation to

    transfer the equity interest. As described in the preamble, upon

    receiving a notification of an equity interest transfer, the Commission

    may request, where necessary, additional information and specific

    documentation from the DCM pursuant to its authority under Sec. 38.5,

    although such documentation is no longer required with the initial

    notification. The Commission did not receive any comments discussing

    the costs or benefits of proposed Sec. Sec. 38.3(d) or 38.5(c).

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

    \555\ The provisions in regulation 38.5 regarding requests for

    information and demonstrations of compliance (paragraphs (a) and (b)

    in the final rules) were largely unchanged after Dodd-Frank and will

    not be discussed in this rulemaking because they do not result in

    any incremental costs or benefits.

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

    Costs

    Under Sec. 38.3(d), only DCMs that wish to request the transfer of

    their designation will incur the one-time cost associated with filing

    the request with the Commission and preparing the underlying documents

    and representations that must be included with the request. The

    Commission notes that it has historically requested that DCMs file

    similar information in the event of a transfer of designation. The

    Commission is reducing the burden associated with the proposed

    regulations by clarifying that DCMs have the flexibility to determine

    the appropriate form of the documents they are required to submit. The

    Commission estimates that the submissions and notifications required

    under Sec. 38.3(d) will take around two hours to compile at a cost of

    approximately $104.

    The Commission is also reducing the burden associated with proposed

    [[Page 36670]]

    Sec. 38.5(c) by eliminating the requirement that DCMs must provide a

    series of documents and a representation along with the notification of

    an equity interest transfer. DCMs that enter into agreements that could

    result in equity interest transfers of 10 percent or more will incur

    one-time costs associated with preparing and submitting the required

    notification for each event. The Commission estimates that the initial

    notification required under Sec. 38.5(c) will take around one hour to

    compile at a cost of approximately $52.

    Benefits

    Section 38.3(d) formalizes the procedures that a DCM must follow

    when requesting the transfer of its DCM designation and positions

    comprising open interest in anticipation of a corporate event. The

    provision requiring three months advance notice of an anticipated

    corporate change will provide the Commission with sufficient time to

    evaluate the anticipated change and determine the likely impact of the

    change on the DCM's governance and obligations, as well as the impact

    of the change on the rights and obligations of market participants

    holding open positions. The rule will permit the Commission to evaluate

    the transferee's ability to comply with the applicable laws and

    regulations. The rule also requires DCMs to submit a representation

    that they are in compliance with the applicable laws and regulations.

    This requirement provides regulatory specificity to DCMs regarding

    their obligations.

    Section 38.5 provides Commission staff with an opportunity to

    determine whether a change in ownership at a DCM resulting from an

    equity interest transfer will adversely impact the operations of the

    DCM, or the DCM's ability to comply with the Core Principles and the

    Commission's regulations. Section 38.5 ensures that DCMs remain mindful

    of their self-regulatory responsibilities when negotiating the terms of

    significant equity interest transfers.

    Section 15(a) Factors (Sec. Sec. 38.3(d) and 38.5(c))

    1. Protection of market participants and the public. Given the

    critical role that DCMs play in the financial markets, a role that now

    includes providing a marketplace for the trading of swaps as well as

    futures and options, it is essential that the Commission conduct a

    comprehensive and thorough review of all requests for transfer of

    designation and notifications of equity interest transfers. Such review

    is essential for the protection of market participants and the public

    insofar as it serves to limit the performance of DCM functions to only

    those entities that have provided adequate demonstration that they are

    capable of satisfying the core principles. The new formalized

    procedures for transfers of designation and equity interest transfers

    will provide the Commission with the opportunity to determine the

    impact those transfers are likely to have on a DCM's ability to comply

    with the core principles and on the market.

    2. Efficiency, competitiveness, and financial integrity. The

    Commission expects that the formalized procedures for requesting a

    transfer of designation and for notifying the Commission of an equity

    interest transfer will promote efficiency, competitiveness, and

    financial integrity by providing the Commission with the opportunity to

    obtain the information the Commission deems necessary to consider such

    requests. The result will be more cost effective review and approval of

    requests for transfer of designation and equity interest. This will

    benefit DCMs. Financial integrity is also promoted as the transferee's

    ability to meet core principles will be examined.

    3. Price discovery. The Commission does not anticipate that the

    formalized process for requesting a transfer of designation or

    notifying the Commission of an equity interest transfer will impact the

    price discovery process.

    4. Sound risk management policies. The Commission expects that the

    formalized processes for transfers of designation and equity interests

    will promote sound risk management practices by requiring DCMs to

    examine their proposed risk management program through a series of

    submissions that aid Commission staff's analysis and evaluation of a

    DCM's ability to comply with the core principles.

    5. Other public interest considerations. The standardization and

    streamlining of the transfer of designation and equity interest

    transfer process benefits the public by permitting more efficient use

    of Commission resources and more cost-effective requirements for DCMs.

    A coherent and comprehensive approach to transfers of designations and

    equity interests is needed to ensure that all DCMs continue to satisfy

    the requirements of the core principles and Commission regulations.

    Sec. 38.3(g) (Requirements for existing designated contract markets)

    Proposed rule Sec. 38.3(g) required existing DCMs to certify

    compliance with each of the core principles within 60 days of the

    effective date of the final rules. In response to comments, the

    Commission has eliminated this requirement from the final rules. The

    Commission believes that the removal of this provision will decrease

    costs for DCMs.

    Sec. 38.4 (Procedures for Listing Products)

    Section 38.4 conforms the prior regulation to that of new rules in

    part 40 of the Commission's regulations.\556\ There are no costs

    imposed by the conforming changes beyond those discussed in connection

    with that rulemaking.

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

    \556\ ``Provisions Common to Registered Entities,'' 76 FR 44776,

    Jul. 27, 2011.

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

    Sec. 38.7 (Prohibited use of data collected for regulatory purposes)

    Rule Sec. 38.7 is a new rule that prohibits a DCM from using for

    business or marketing purposes proprietary or personal information that

    it collects from market participants unless the market participant

    clearly consents to the use of its information in such a manner.\557\

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

    \557\ The Commission notes that the requirements of regulation

    38.7 are in line with similar rules intended to provide privacy

    protections to certain consumer information finalized in a separate

    rulemaking implementing regulations under the Fair Credit Reporting

    Act. See 76 FR 43879, Jul. 22, 2011.

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

    Costs

    The Commission notes that in response to general comments that did

    not discuss costs or benefits, it has amended this provision to allow

    DCMs to use this information for business or marketing purposes if the

    market participant clearly consents to the use of its information in

    such a manner. The costs imposed by this provision are limited to the

    cost a DCM might incur in obtaining a market participant's consent to

    use its information for the purposes described above. The Commission

    does not prescribe the method by which a DCM must obtain such consent

    and believes that the burden of doing so would be minimal and would

    likely involve sending an email or a letter.

    Benefits

    This rule protects market participants' information provided to a

    DCM for regulatory purposes from being used to advance the commercial

    interests of the DCM. The rule eliminates incentives on the part of

    DCMs to use market participants' proprietary or personal information

    for their own commercial gain. The rule does, however, afford market

    participants the flexibility to

    [[Page 36671]]

    consent to a DCM's use of their personal information for commercial

    purposes if they so desire.

    Section 15(a) Factors

    1. Protection of market participants and the public. This rule

    protects market participants and the public by ensuring that

    information they provide to DCMs for regulatory purposes it not used

    inappropriately to advance the commercial interests of the DCM without

    their consent.

    2. Efficiency, competitiveness, and financial integrity. This rule

    encourages greater participation in the markets by ensuring market

    participants that their proprietary and personal information will not

    be used by DCMs without their consent. Increased participation by

    market participants will foster greater liquidity, tighter spreads, and

    more competitive markets. The rule also promotes efficient and

    competitive markets by ensuring that DCMs do not use access to their

    market participants' data (without their consent) as a source of

    competitive advantage.

    3. Price discovery. Fostering a competitive environment, as

    mentioned above, aids in the compilation of information traded in

    markets to further price discovery.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    Sec. 38.8 (Listing of Swaps on a Designated Contract Market)

    Section 38.8(a) provides that a DCM that lists a swap contract for

    trading on its contract market for the first time must file with the

    Commission a written demonstration detailing how the DCM is addressing

    its self-regulatory obligations with respect to swap transactions.

    Section 38.8(b) provides that prior to listing swaps for trading on

    or through the DCM, each DCM must request an alphanumeric code from the

    Commission for purposes of identifying the DCM pursuant to part 45.

    Summary of Comments and Discussion

    ELX argued that the DCM NPRM did not make clear what criteria will

    be used to distinguish between a swap contract and a futures contract

    and argued that this ambiguity will cause uncertainty and redundant

    costs for boards of trade that would prefer to follow a DCM model

    without having to adopt a parallel set of rules and procedures.\558\

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

    \558\ ELX Comment Letter at 4 (Feb. 22, 2011).

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

    As noted in the Final Exemptive Order issued July 14, 2011,\559\ a

    DCM may list and trade swaps after July 16, 2011 under the DCM's rules

    related to futures contracts, without further exemptive relief. In the

    Order, the Commission noted that if a DCM intends to trade swaps

    pursuant to the rules, processes, and procedures currently regulating

    trading on its DCM, the DCM may need to amend or otherwise update its

    rules, processes, and procedures in order to address the trading of

    swaps.\560\

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

    \559\ 76 FR 42508, Jul. 14, 2011.

    \560\ Id. at 42518, n. 131.

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

    Costs and Benefits

    In order to comply with new Sec. 38.8(a), DCMs listing swaps for

    the first time will incur costs associated with filing the required

    demonstration detailing how the DCM is addressing its self-regulatory

    obligations and fulfilling its statutory and regulatory obligations

    with respect to swap transactions. The Commission estimates that this

    filing will take two hours to complete at a cost of about $104.

    With respect to Sec. 38.8(b), the comments, costs, and benefits of

    this provision will be discussed in the rulemaking that implement swap

    data recordkeeping and reporting requirements under part 45 of the

    Commission's regulations.\561\

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

    \561\ See 77 FR 2136, Jan. 13, 2012.

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

    Sec. 38.9 (Boards of Trade Operating Both a Designated Contract Market

    and Swap Execution Facility)

    Section 38.9 provides that a board of trade that operates a DCM

    also may operate a SEF, provided that the board of trade separately

    register as a SEF pursuant to the requirements set forth in part 37.

    The rule also requires such boards of trade to comply with the core

    principles under section 5h of the Act and the SEF rules under part 37,

    on an ongoing basis.

    Additionally, the rule codifies the requirement contained in

    section 5h(c) of the CEA, which provides that a board of trade that

    operates both a DCM and a SEF, and that uses the same electronic trade

    execution system for executing and trading swaps that it uses in its

    capacity as a DCM, must clearly identify to market participants for

    each swap whether the execution or trading is taking place on the DCM

    or the SEF. The Commission did not receive any comments on the costs or

    benefits of this provision and is adopting the rule as proposed.

    Costs and Benefits

    The obligations imposed by Sec. 38.9 are codifications of the new

    statutory requirement placed on DCMs. The obligations imposed by the

    CEA are not within the Commission's discretion to change. However, the

    Commission believes there are several benefits to restating the

    statutory requirements in the regulations. Codification of statutory

    requirements in the regulations will improve the Commission's ability

    to enforce the statutory language and will provide market participants

    with a more unified regulatory picture and with greater context and

    specificity regarding the congressional intent underlying the

    regulations.

    Sec. 38.10 (Reporting of Swaps Traded on a Designated Contract Market)

    Section 38.10 provides that each DCM that trades swaps must report

    specified swap data as provided under parts 43 and 45.\562\ This

    provision is consistent with the statute's reporting requirements as

    reflected in sections 2(a)(13)-(14) and 21(b) of the CEA. The costs and

    benefits of these rules are discussed in connection with those

    rulemakings.

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

    \562\ ``Real-Time Public Reporting of Swap Transaction Data,''

    77 FR 1182, Jan. 9, 2012; ``Swap Data Recordkeeping and Reporting

    Requirements,'' 77 FR 2136, Jan. 13, 2012.

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

    (3) Core Principle 2: Compliance With Rules

    For the most part, the regulations adopted under Core Principle 2

    codify: (1) Language found in the guidance and acceptable practices

    issued under former Core Principle 2 and former Designation Criterion

    8; (2) existing DCM compliance practices that the Commission believes

    constitute best practices; and (3) recommendations made over the past

    several years by the Commission in RERs, and which are currently

    largely followed. The Commission also incorporated into the rules for

    Core Principle 2 certain concepts contained in part 8 of its

    regulations--Exchange Procedures for Disciplinary, Summary, and

    Membership Denial Actions. Most DCMs' compliance and enforcement

    practices relating to Core Principle 2 obligations historically have

    been consistent with the rules contained in part 8. The Commission is

    also adopting some requirements that are new for DCMs. The costs and

    benefits of each of these requirements are discussed below.

    [[Page 36672]]

    Sec. 38.151(a) (Jurisdiction), Sec. 38.151(b) (Impartial access by

    members, persons with trading privileges, and independent software

    vendors) and Sec. 38.151(c) (Limitations on access)

    Section 38.151(a) requires that prior to granting a member or

    market participant access to its markets, the DCM must require the

    member or market participant to consent to its jurisdiction. Section

    38.151(b)(1) requires a DCM to provide its members, persons with

    trading privileges, and independent software vendors (``ISVs'') with

    impartial access to its markets and services, including access criteria

    that are impartial, transparent, and applied in a non-discriminatory

    manner. Section 38.151(b)(2) requires that the DCM provide comparable

    fee structures for members, persons with trading privileges, and ISVs

    receiving equal access to, or services from, the DCM.

    Section 38.151(c) (Limitations on Access) requires a DCM to

    establish and impartially enforce rules governing any decision by the

    DCM to deny, suspend, or permanently bar a member's or a person with

    trading privileges access to the contract market. Accordingly, any

    decision by a DCM to deny, suspend, or permanently bar a member's or

    person with trading privileges access to the DCM must be impartial and

    applied in a non-discriminatory manner. Section 38.151(a) derives from

    the statutory language of Core Principle 2. While Sec. Sec. 38.151(b)

    and (c) are new rules, they codify existing industry practice and

    current Commission requirements.

    Summary of Comments

    CME stated that it would be costly to comply with the proposed

    Sec. 38.151(a) requirement that clearing firms obtain every customer's

    consent to the regulatory jurisdiction of each DCM.\563\ KCBT

    questioned the benefit of implementing the proposed rule.\564\

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

    \563\ CME Comment Letter at 16 (Feb. 22, 2011).

    \564\ KCBT Comment Letter at 2 (Feb. 22, 2011).

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

    With respect to 38.151(b)(1), MGEX stated that it is generally in

    the best interest of the DCM to have open and available markets and

    services. Therefore, MGEX argued that the proposed rule was unnecessary

    and infringed on the business judgment of the DCM.\565\

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

    \565\ MGEX Comment Letter at 3 (Feb. 22, 2011).

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

    With respect to 38.151(b)(2), CME argued that the Commission does

    not have the authority to set or limit fees charged by DCMs, likening

    the requirement for comparable fee structures to an industry-wide fee

    cap that has the effect of a tax.\566\

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

    \566\ CME Comment Letter at 8-9 (Feb. 22, 2011).

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

    Discussion

    The Commission believes that Sec. 38.151(a) codifies

    jurisdictional requirements necessary to effectuate Core Principle 2's

    statutory mandate that a board of trade ``shall have the capacity to

    detect, investigate, and apply appropriate sanctions to any person that

    violates any rules of the contract market.'' In the Commission's view,

    a DCM must establish jurisdiction prior to granting members and market

    participants access to its markets in order to effectively investigate

    and sanction persons that violate DCM rules. A DCM should not be in the

    position of asking market participants to voluntarily submit to

    jurisdiction after a potential rule violation has been found. In

    response to CME's comment, the Commission clarifies that each DCM may

    determine for itself how it will secure such agreements. For example, a

    DCM could utilize its clearing firms to secure the agreement. The

    Commission recognizes that DCMs may need additional time to secure

    market participants' agreements to jurisdiction. Accordingly, in order

    to reduce the burden associated with this rule, the Commission is

    granting DCMs up to 180 additional days following the applicable

    effective date for existing members and market participants to comply

    with the requirements of Sec. 38.151(a).

    With respect to Sec. 38.151(b), and as discussed in further detail

    in the preamble, the Commission has considered the arguments asserted

    by commenters and determined that the rule is necessary in order to

    prevent the use of discriminatory access requirements as a competitive

    tool against certain participants. The Commission has, however,

    listened to commenters' concerns about the costs associated with the

    regulation and believes the rules strike an appropriate balance.

    Any comment implying that the Commission is attempting to set or

    limit fees charged by DCMs is misplaced. The requirement in Sec.

    38.151(b)(2) neither sets nor limits fees charged by DCMs. Rather, the

    rule states only that the DCM set non-discriminatory fee classes for

    those receiving access to the DCM as a way to implement the requirement

    of impartial access to DCMs. Accordingly, DCMs may establish different

    categories of market participants, but may not discriminate within a

    particular category. As the Commission noted in the preamble, when a

    DCM determines its fee structure, it may consider other factors in

    addition to the cost of providing access. The fee structure was not

    designed to be a rigid requirement that fails to take account of

    legitimate business justifications for offering different fees to

    different categories of entities seeking access. The Commission

    recognizes that DCMs may also consider services they receive (in

    addition to costs) when determining their fee structure. Accordingly,

    the comment suggesting that the Commission does not have authority to

    set fees is misplaced as the rule neither sets nor limits fees charged

    by DCMs.

    Costs

    The costs associated with Sec. 38.151(a) derive from the statute

    and are likely to be limited to the cost of obtaining customers'

    consent to the DCM's jurisdiction. In response to comments received,

    the Commission is not mandating the method for obtaining consent; this

    may afford cost savings to DCMs. The Commission believes that most DCMs

    are generally already in compliance with the requirements of Sec.

    38.151(b), which require that DCMs provide comparable fee structures

    for members, persons with trading privileges, and ISVs receiving equal

    access to, or services from, the DCM. In addition, the Commission

    believes that most DCMs currently have rules that comply with the

    requirements of Sec. 38.151(c), which states that DCMs must establish

    and enforce rules governing any decisions to deny, suspend, or

    permanently bar a member's or market participant's access to the

    contract market. Accordingly, the Commission believes that the final

    rule is unlikely to impose additional costs on DCMs.

    Benefits

    The requirements of Sec. 38.151(a) ensure that DCMs can

    effectively investigate and sanction persons that violate DCM rules, as

    required by Core Principle 2. A DCM should not be in the position of

    asking market participants to voluntarily submit to jurisdiction after

    a potential rule violation has been found. This requirement also

    ensures that market participants are clear that their trading practices

    are subject to the rules of a DCM.

    As noted above, the impartial access requirements of Sec.

    38.151(b) prevent DCMs from using discriminatory access fee

    requirements as a competitive tool against certain participants. Access

    (and decisions to limit access) to a DCM should be based on the

    financial and operational soundness of a participant, rather than

    discriminatory or other improper motives. Impartial access benefits the

    market by ensuring that all participants that meet the requirements are

    able to trade on the DCM, thus

    [[Page 36673]]

    potentially increasing liquidity in the marketplace. The preamble's

    discussion that any participant should be able to demonstrate financial

    soundness either by showing that it is a clearing member of a DCO that

    clears products traded on that DCM or by showing that it has clearing

    arrangements in place with such a clearing member specifies that access

    will be neutral and non-discriminatory. Granting such impartial access

    to participants will likely improve competition within the market by

    ensuring access criteria do not inappropriately deter market

    participants from participating in the market.

    The benefits described above also apply to the requirement that DCM

    decisions to deny, suspend, or permanently bar a member or person with

    trading privileges' access to the DCM should be impartial and applied

    in a non-discriminatory manner.

    Section 15(a) Factors

    1. Protection of market participants and the public. The final

    rules protect market participants by ensuring that DCMs can effectively

    investigate and sanction persons that violate DCM rules, and by

    ensuring that similarly situated market participants receive similar

    access criteria and comparable fee structures, consistent with the

    statute. Accordingly, the rules protect market participants from the

    potential that DCMs may employ unfair or discriminatory practices in

    rendering access determinations. In addition, the rules will provide

    market participants with greater specificity regarding DCMs procedures

    for denials and suspensions. This will benefit the market by ensuring

    that market participants know what behavior will lead to denials and

    suspensions and that denials and suspensions are being imposed in a

    fair and non-discriminatory manner.

    2. Efficiency, competitiveness, and financial integrity. The rules

    prevent DCMs from employing discriminatory or preferential criteria in

    granting members, persons with trading privileges, and ISVs access to

    their market. Accordingly, the rules will likely promote participation

    and competition within the marketplace by ensuring access criteria do

    not inappropriately deter market participants from participating in the

    market. Efficiency is promoted by defining clear rules governing the

    denial or suspension of a member's or person with trading privileges

    access to the contract market. The final rules may also promote

    financial integrity in the derivatives markets because sound, non-

    discriminatory access criteria and fee structures are less likely to

    deter the financial integrity of members and market participants.

    3. Price discovery. As noted above, the rules are likely to

    increase competition within the market by optimizing market

    participation. Increased participation is likely to enhance the DCM's

    liquidity, leading to enhanced price discovery.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices other than the effects related to the factors

    above, especially with respect to financial integrity.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    Sec. 38.152 (Abusive Trading Practices Prohibited)

    Section 38.152 requires a DCM to prohibit abusive trading

    practices, including front-running, wash trading, fraudulent trading,

    and money passes, as well as any other trading practices that the DCM

    deems to be abusive. The Commission did not receive any comments

    discussing the costs or benefits of this provision.\567\

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

    \567\ CME commented that the rule is overly prescriptive. CME

    Comment Letter at 17-18 (Feb. 22, 2011). The Commission considered

    this comment in preparing this release and discusses the costs and

    benefits of the codification of rules in lieu of guidance and

    acceptable practices in further detail in section C(1) above.

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

    Costs

    DCMs generally already have rules in place that prohibit the

    conduct enumerated in the CEA and the final rule. They also have the

    systems and staff necessary to detect, investigate, and prosecute

    possible rule violations. Accordingly, the Commission believes that the

    final rule is unlikely to impose additional costs on most DCMs.

    Benefits

    The rule ensures that DCMs prohibit the specific trading practices

    identified in the rule, as well as any manipulative or disruptive

    trading practices prohibited by the CEA or by Commission regulation.

    Market participants and the public are likely to have greater

    confidence in markets that are protected from abusive trade practices,

    and therefore will be more willing to participate in the market, which

    may enhance liquidity, competition, and price discovery.

    Section 15(a) Factors

    1. Protection of market participants and the public. Congress

    determined in Core Principle 2 that market participants must be

    protected from abusive trade practices. Market participants rely on

    properly functioning futures markets in order to hedge risk and must

    have confidence in the integrity of the markets in order to actively

    participate. Rule 38.152 requires DCMs to prohibit conduct that could

    result in harm to market participants, as well as members of the public

    who rely on the prices derived from the market. The rule protects

    market participants and the public from possible wrongdoing on the part

    of firms and commodity professionals with whom they deal.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. The rule promotes efficiency, competitiveness, and financial

    integrity in the DCM market because markets that are protected from

    abusive trade practices will likely attract greater market

    participation, and increase public confidence in the market, and

    thereby will likely increase competition and liquidity.

    3. Price discovery. The rule similarly promotes price discovery

    because markets protected from the trading abuses prohibited by the

    rule are likely to operate more efficiently and more accurately and to

    attract greater market participation and competition; such markets

    better reflect the forces of supply and demand, leading to greater

    price discovery.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices, other than the effects related to the factors

    above.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    Sec. 38.153 (Capacity To Detect and Investigate Rule Violations), Sec.

    38.155 (Compliance Staff and Resources), Sec. 38.156 (Automated Trade

    Surveillance System), and Sec. 38.157 (Real Time Market Monitoring)

    Sec. 38.153 (Capacity To Detect and Investigate Rule Violations)

    Section 38.153 requires that a DCM have arrangements and

    appropriate resources for the effective enforcement of all of its

    rules, including the authority to collect information and examine books

    and records of members and persons under investigation, and adequate

    resources for trade and surveillance programs. While the proposed rule

    required DCMs to have the authority to collect information and

    [[Page 36674]]

    examine books and records for ``members'' and ``market participants,''

    the final rule imposes a lesser burden on DCMs by replacing the term

    ``market participants'' with ``persons under investigation.''

    Summary of Comments and Discussion

    CFE requested that the Commission clarify the term ``market

    participant,'' arguing that if the term ``market participant'' were to

    be interpreted to apply to all customers--and not just those customers

    with direct electronic access to the DCM--a DCM's regulatory

    responsibilities would greatly expand over participants with whom it

    has no direct relationship or connection, greatly increasing costs for

    the DCM.\568\

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

    \568\ CFE Comment Letter at 2 (Feb. 22, 2011).

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

    Similarly, CME stated that the proposed rule implied that the

    entire class of non-member, non-registered market participants would be

    subject to the panoply of recordkeeping requirements currently

    applicable only to members, registrants, and direct access clients of

    CME.\569\ CME stated that there has been no showing that such a

    requirement will further the DCM's ability to effectively carry out its

    self-regulatory responsibilities and that it would be imprudent to

    impose these costs and burdens on market participants.\570\

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

    \569\ CME Comment Letter at 18 (Feb. 22, 2011).

    \570\ Id.

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

    The Commission notes that Core Principle 2 requires a DCM to have,

    in addition to appropriate resources for trade practice surveillance

    programs, appropriate resources to enforce all of its rules. Further,

    the Commission is cognizant that a broad interpretation of the term

    ``market participant'' could significantly increase the regulatory

    responsibilities for DCMs. In response to the commenters' concerns, the

    Commission is replacing the term ``market participant'' in the proposed

    rule with ``persons under investigation'' in the final rule, which will

    reduce the costs of compliance.

    Costs

    The requirements of this rule are not new for DCMs. Prior to the

    Dodd-Frank Act, the Commission expected a DCM to have adequate capacity

    and resources for effective rule enforcement.\571\ The existing costs

    associated with Sec. 38.153 include the initial and recurring costs

    associated with a DCM investing in the resources and staff necessary to

    provide effective rule enforcement. A DCM must have sufficient staff

    and resources, including the resources to collect information and

    examine books and records of members and persons under investigation

    and to analyze data to determine whether a rule violation occurred.

    Other costs include automated systems to assist the compliance staff in

    carrying out self-regulatory responsibilities for the DCM. The

    Commission believes that existing DCMs generally already have the

    systems necessary for effective rule enforcement. Further, replacing

    the term ``market participant'' with ``persons under investigation'' in

    the final rule will reduce the costs by narrowing the scope of the

    requirement.

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

    \571\ Commission staff has recommended these practices through

    RERs.

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

    Benefits

    The rule ensures that a DCM has arrangements and resources for

    effective rule enforcement. A DCM can best administer its compliance

    and rule enforcement obligations when it has the ability to access and

    examine the books and records of its members and persons under

    investigation.

    Sec. 38.155 (Compliance staff and resources)

    Section 38.155 requires that a DCM establish and maintain

    sufficient compliance staff and resources to conduct a number of

    enumerated tasks, such as audit trail reviews, trade practice

    surveillance, market surveillance, real-time market monitoring, and the

    ability to address unusual market or trading events and to complete any

    investigations in a timely manner. The Commission did not receive any

    comments discussing the costs or benefits of this provision.

    Costs

    The Commission notes that it currently requires DCMs to have

    sufficient compliance staff and resources to perform the noted

    regulatory functions and that most DCMs have already expended the costs

    necessary to comply with the requirements under Sec. 38.155. Any DCM

    not currently in compliance with the rule will incur the cost of hiring

    and maintaining sufficient staff and resources (e.g. electronic

    systems) to conduct effective audit trail reviews, trade practice

    surveillance, market surveillance, and real-time market monitoring, to

    address unusual market or trading events, and to complete any

    investigations in a timely manner. However, this requirement is

    consistent with existing practice at many DCMs and reflects staff

    recommendations made in RERs from time to time. DCMs will also incur

    the cost of the annual monitoring of the size and workload of

    compliance staff and resources, which will require oversight time for

    compliance staff, management and the regulatory oversight committee.

    Any costs associated with Sec. 38.155 will vary depending upon a DCM's

    trading volumes, the number of products offered for trading, and the

    complexity of conducting surveillance on the particular products

    offered by the DCM. In addition, changes in market characteristics such

    as volatility, the presence or absence of intermediaries, and the

    nature and sophistication of market participants may also impact the

    costs associated with Sec. 38.155.

    Benefits

    This rule ensures that DCMs have adequate compliance staff and

    resources to conduct effective audit trail reviews, trade practice

    surveillance, market surveillance, and real-time market monitoring in

    order to help detect rule violations and abusive trading practices.

    DCMs must also have adequate resources necessary to address unusual

    market or trading events in order to help stabilize market conditions

    if necessary and to complete any investigations in a timely manner. To

    this end, the rule promotes market integrity, customer protection, and

    the effectiveness of DCMs as self-regulatory organizations.

    Sec. 38.156 (Automated trade surveillance system)

    Section 38.156 requires a DCM to maintain an automated trade

    surveillance system capable of detecting and investigating potential

    trade practice violations and able to process this data on a trade date

    plus one (``T+1 basis''). The Commission did not receive any comments

    discussing the costs or benefits of this provision.\572\

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

    \572\ In its comment letter, CME stated this rule is overly

    prescriptive. See CME Comment Letter at 20 (Feb. 22, 2011). The

    Commission considered this comment in preparing this release and

    discusses the costs and benefits of the codification of rules in

    lieu of guidance and acceptable practices in further detail in

    section C(1) above.

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

    Costs

    Costs associated with Sec. 38.156 include the costs of developing

    and maintaining an automated system capable of conducting trade

    practice surveillance, as well as requiring a DCM to have adequate

    compliance staff to administer the trade surveillance system. Adequate

    staff resources are necessary to administer, maintain, and periodically

    upgrade the system. For existing DCMs, the costs associated with Sec.

    38.156 should not be new, as the regulation generally reflects current

    industry practices and Commission

    [[Page 36675]]

    requirements. Further, any costs will vary according to the complexity

    and analytical power of the trade surveillance system it builds, as

    well as the amount of compliance staff necessary to administer,

    maintain, and upgrade the system given the DCM's product and

    participant profiles. Moreover, the Commission has found, through RERs,

    that a DCM's automated surveillance system typically satisfies the

    requirements set forth in the final rule (e.g., the ability to compute,

    retain, and compare trading statistics). Therefore, the Commission

    believes that it will be unnecessary for most DCMs to incur costs to

    significantly upgrade their automated surveillance systems to comply

    with the final rule.

    Benefits

    The rule ensures that a DCM has an adequate automated trade

    practice surveillance system. These systems play a critical role in

    ensuring that a DCM can effectively conduct investigations and detect

    and prosecute possible trading abuses, including the abusive trading

    practices enumerated in Sec. 38.152. Such systems improve DCM

    compliance staff's ability to sort and query voluminous amounts of data

    in order to better detect potential rule violations and abusive trading

    practices that could harm market participants.

    Sec. 38.157 (Real-Time Market Monitoring)

    Section 38.157 requires a DCM to conduct real-time market

    monitoring of all trading activity on its electronic trading

    platform(s) to identify disorderly trading and any market or system

    anomalies and to have the authority to cancel trades and adjust trade

    prices when necessary.\573\

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

    \573\ In its comment letter, CME stated that this rule is overly

    prescriptive. CME Comment Letter at 20-21 (Feb. 22, 2011). The

    Commission considered this comment in preparing this release and

    discusses the costs and benefits of the codification of rules in

    lieu of guidance and acceptable practices in further detail in

    section C(1) above. The Commission did not receive any other

    comments discussing the costs or benefits of this provision.

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

    Costs

    Costs associated with Sec. 38.157 include the costs of developing

    and maintaining electronic systems to facilitate real-time monitoring

    of all trading activity on a DCM's electronic trading platform(s). DCMs

    will also bear the cost of maintaining sufficient staff to conduct

    real-time market monitoring and to administer any interventions in the

    market that may be required, including the cancellation of trades,

    suspension and resumption of trading, and responses to any disorderly

    market conditions requiring human intervention.

    The Commission notes, however, that existing DCMs already have

    market monitoring capabilities, either directly or through a regulatory

    service provider. In addition, existing DCMs also have rules and

    procedures in place regarding items such as the cancellation of trades.

    As such, many of the costs associated with Sec. 38.157 are likely to

    have been previously expended by existing DCMs. The Commission also

    notes that the change in the final rule that replaces the requirement

    to ``ensure orderly trading'' with a requirement to ``identify

    disorderly trading'' will likely reduce the overall burden of the rule.

    Moreover, any costs associated with Sec. 38.157 will vary widely

    according to a DCM's trading volumes, the number of products offered

    for trading, and the complexity of conducting real-time market

    monitoring on the particular products offered by the DCM. In addition,

    changes in market characteristics such as volatility, the presence or

    absence of intermediaries, and the nature and sophistication of market

    participants may also impact the costs associated with Sec. 38.157 due

    to their correlation to system and staff requirements.

    Benefits

    The real-time monitoring requirements imposed by the rule will

    promote orderly trading and will ensure that DCMs have the capability

    to promptly identify and correct market or system anomalies. Prompt

    responses to these anomalies will likely mitigate the effects of these

    anomalies and may help prevent them from generating systemic risk or

    other severe problems. The requirement that any price adjustments or

    trade cancellations be transparent to the market and subject to clear,

    fair, and publicly-available standards ensures that market participants

    are not subject to arbitrary or opaque processes in the event that

    their trades are involuntarily cancelled.

    Section 15(a) Factors (Sec. 38.153 and Sec. Sec. 38.155-38.157)

    1. Protection of market participants and the public. The rules

    protect market participants and the public by requiring that a DCM has

    the capacity to detect and investigate rule violations, including

    adequate compliance staff and resources, automated trade surveillance

    and real time monitoring capability. These rules will help ensure fair

    and equitable markets that are protected from abusive trading practices

    or manipulative market conditions. Under the rules, market users are

    protected from possible wrongdoing on the parts of firms and commodity

    professionals with whom they deal to access the marketplace. In

    addition, the rules are likely to protect the public from the potential

    of price distortion.

    Additionally, the requirement in Sec. 38.157 that any price

    adjustments or trade cancellations are transparent to the market and

    subject to clear, fair and publicly-available standards protects market

    participants from opaque rules related to price adjustments and trade

    cancellations.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. The requirement that DCMs have the capability to monitor and

    detect rule and trade practice violations and market anomalies improves

    market efficiency, promotes financial integrity, and helps to ensure

    fair and equitable markets by ensuring that violations and market

    anomalies are promptly addressed and do not generate systemic risk or

    other severe problems. It also helps to ensure that market prices are

    not distorted by prohibited activities. The rules also enhance the

    competitiveness of the market by increasing participant confidence in

    the integrity of the market and by requiring DCMs to maintain and

    establish resources for effective rule enforcement through the

    collection of relevant information and examination of relevant books

    and records.

    3. Price discovery. Requiring DCMs to conduct effective monitoring

    and surveillance of their markets and to have the capacity to detect

    rule violations will help ensure that legitimate trades with

    fundamental supply and demand information are accurately portrayed in

    market prices. Mitigating rule violations, which deter from the price

    discovery process in DCM markets, helps provide confidence in the

    prices market participants use to hedge risk and to provide confidence

    in the price discovery process.

    4. Sound risk management practices. The rules promote sound risk

    management practices as they would allow DCMs to better evaluate and be

    aware of risks posed by trading practices or member activities.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    Sec. 38.154 (Regulatory Services Provided by a Third Party)

    Section 38.154(a) requires that a DCM that contracts with a

    registered futures association or another registered entity

    (collectively, a ``regulatory service provider'') ensures that its

    regulatory

    [[Page 36676]]

    service provider has sufficient capacity and resources to provide

    timely and effective regulatory services.

    Section 38.154(b) requires that a DCM maintain adequate compliance

    staff to supervise and periodically review any services performed by a

    regulatory service provider.

    Section 38.154(c) requires a DCM that utilizes a regulatory service

    provider to retain exclusive authority over certain decisions. While

    the proposed rule permitted a DCM to retain exclusive authority in

    other areas of its choosing, it required the decision to open an

    investigation into a possible rule violation to reside exclusively with

    the regulatory service provider. As discussed in the preamble, this

    requirement has been removed from the final rule. These regulations

    update and clarify the last general public guidance issued

    approximately 10 years ago by the Commission in this area.\574\

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

    \574\ See 66 FR 42256, 42266, Aug. 10, 2001.

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

    Summary of Comments

    MGEX, KCBT, and CME stated that the proposed rule is either overly

    burdensome or unnecessary.\575\ MGEX expressed its general opposition

    to proposed Sec. 38.154 by stating that if a service has been

    delegated to another registered entity pursuant to a Commission-

    approved agreement, then this ``should be sufficient and no other

    formal agreement is necessary.'' \576\ KCBT contended that proposed

    Sec. 38.154 is overly burdensome and duplicative, particularly when a

    DCM contracts with a regulatory service provider that is also a DCM

    required to comply with the same core principles.\577\ KCBT noted that

    it is currently party to a services agreement with another DCM and

    argued that it will be costly and unnecessary to perform periodic

    reviews and hold regular meetings with this regulatory service

    provider.\578\ CME contended that the proposed rule is overly

    prescriptive and suggested that the rule would be better served as

    guidance and acceptable practices.\579\

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

    \575\ MGEX Comment Letter at 3 (Feb. 22, 2011); KCBT Comment

    Letter at 3 (Feb. 22, 2011); CME Comment Letter at 18-19 (Feb. 22,

    2011).

    \576\ MGEX Comment Letter at 3 (Feb. 22, 2011).

    \577\ KCBT Comment Letter at 3 (Feb. 22, 2011).

    \578\ Id.

    \579\ CME Comment Letter at 18-19 (Feb. 22, 2011).

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

    Discussion

    The Commission has determined that, on the whole, Sec. 38.154

    strikes the appropriate balance between flexibility and ensuring that a

    DCM properly oversees the actions of its regulatory service provider to

    ensure accountability and effective performance. The Commission

    believes that it is necessary to require a DCM to conduct periodic

    reviews and to hold regular meetings with its regulatory service

    provider. A DCM that elects to use a regulatory service provider must

    properly supervise the quality and effectiveness of the services

    provided on its behalf, and can only do so by acquiring detailed

    knowledge during periodic reviews and regular meetings required under

    Sec. 38.154.

    Costs

    The costs associated with Sec. 38.154 will include the cost of

    initially determining whether a regulatory service provider has the

    capacity and resources necessary to provide timely and effective

    regulatory services. An existing DCM replacing a current regulatory

    service provider with a new one will have a similar cost. For existing

    DCMs with a regulatory service provider, this should not be a new cost

    as DCMs are currently required to conduct such due diligence when

    entering into an agreement for regulatory services from a third-party

    provider, in line with existing industry practices.

    The costs associated with Sec. 38.154 will also include the cost

    of hiring and maintaining sufficient compliance staff at the exchange

    to effectively supervise the quality and effectiveness of the services

    provided by a regulatory service provider, including the cost of

    holding regular meetings with their regulatory service provider and the

    cost of periodic reviews of the adequacy and effectiveness of services

    provided. These costs will vary widely depending upon a DCM's trading

    volumes, the number of products offered for trading, and the complexity

    of conducting surveillance on the particular products offered by the

    DCM. Changes in market characteristics such as volatility, the presence

    or absence of intermediaries, and the nature and sophistication of

    market participants may also impact the costs associated with Sec.

    38.154. DCMs will also bear the cost of documenting any instances where

    their actions differed from those recommended by their regulatory

    service provider. Commenters did not, however, provide any specific

    costs to the Commission.

    The Commission notes that prior to the Dodd-Frank Act, many of the

    requirements under Sec. 38.154 (and many of the associated costs

    summarized above), were already required under Commission policy with

    respect to compliance with Core Principle 2. Section 38.154

    communicates the Commission's expectations with respect to supervision

    of third-party regulatory service providers in a more consistent and

    explicit manner.

    Benefits

    The rule ensures that all regulatory service providers have the

    capacity to provide the services they contract to perform, and that

    DCMs are aware of the quality and outputs of the services provided on

    their behalf. Additionally, the rule ensures that all DCMs have the

    staff to adequately supervise their regulatory service providers and

    that these regulatory service providers effectively perform the

    services they are engaged to perform. By requiring that DCMs oversee

    the services provided by the regulatory service provider, and thereby

    ensuring that the service provider is meeting the expected standards

    for compliance, the rule will likely result in cost savings to the DCM,

    as the failure of a service provider to adequately fulfill its duties

    may result in costs to DCMs for not meeting compliance obligations.

    Section 15(a) Factors

    1. Protection of market participants and the public. The final rule

    promotes the protection of market participants and the public because

    it ensures that regulatory service providers that are utilized by DCMs

    are properly supervised and have the capacity to perform the services

    they are engaged to provide, including conducting market surveillance

    for rule violations and performing other market regulatory activities

    that protect market participants and the public.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. Markets that have effective oversight, surveillance, and

    monitoring are likely to function more efficiently as rule violations

    and market abuses would be detected more quickly. Proper supervision of

    a regulatory service provider that provides these functions will ensure

    the provider has the ability to perform these activities and will in

    turn promote confidence in the market and likely increase competition.

    3. Price discovery. The Commission has not identified any effects

    that this rule will have on price discovery.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices, other than those enumerated with regard to the

    factors above.

    5. Other public interest considerations. Section 38.154 is

    particularly important in promoting the public interest as regulatory

    service providers that help DCMs comply with their obligations are

    effectively standing

    [[Page 36677]]

    in place of their DCM clients in providing elements of front-line self-

    regulation.

    Sec. 38.158 (Investigations and Investigation Reports)

    Section 38.158(a) requires that a DCM have procedures in place to

    conduct investigations of possible rule violations, and requires an

    investigation to be commenced upon the request of Commission staff, or

    upon the discovery by a DCM of information indicating a reasonable

    basis for a finding that a violation may have occurred or will occur.

    The final rule reduces the burden imposed by the proposed rule by now

    requiring that an investigation must be commenced upon receipt of a

    request from Commission staff or upon the discovery or receipt of

    information by the DCM that indicates a ``reasonable basis'' for

    finding that a violation ``may have'' occurred or will occur. Section

    38.158(b) requires that an investigation be completed within 12 months

    after an investigation is opened, absent mitigating factors as

    specified in the rule. Sections 38.158(c) and (d) set forth the

    elements and information that must be included in an investigation

    report when there is or is not a reasonable basis for finding a rule

    violation. Section 38.158(e) provides that no more than one warning

    letter for the same violation may be issued to the same person or

    entity during a rolling 12-month period.\580\

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

    \580\ In its comment letter, CME stated that this rule is overly

    prescriptive. CME Comment Letter at 21-22 (Feb. 22, 2011). The

    Commission considered this comment in preparing this release and

    discusses the costs and benefits of the codification of rules in

    lieu of guidance and acceptable practices in further detail in

    section C(1) above. The Commission did not receive any other

    comments discussing the costs or benefits of these provisions.

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

    Costs

    Section 38.158(a) codifies the current practice at DCMs because

    every DCM already has investigation procedures, guidelines, and

    compliance staff. Therefore, the Commission does not believe the final

    rule creates any new resource requirements. Unlike the proposed rule,

    which may have imposed certain costs not currently incurred by DCMs,

    the final rule limits the situations under which a DCM must conduct an

    investigation and keeps the final rule in line with current practices.

    Under section 38.158(b), a DCM may have to periodically adjust its

    compliance staff resources to ensure that investigations are completed

    within the time period specified in the final rule. However, the

    Commission notes that this is not a new cost for DCMs. The Commission,

    through RERs, has already communicated to DCMs that it expects a DCM to

    complete investigations in a timely manner.

    Sections 38.158 (c) and (d) require a DCM to have sufficient

    compliance staff to conduct investigations and to prepare investigation

    reports. The Commission notes that this is not a new cost for DCMs. The

    Commission, through RERs, has already communicated to DCMs that it

    expects a DCM to have adequate staff to perform these responsibilities.

    The Commission has also reduced the cost associated with proposed Sec.

    38.158(c) by eliminating the requirement that an investigation report

    include the member or market participant's disciplinary history at the

    DCM.

    Under Sec. 38.158(e), a DCM will be required to maintain

    sufficient compliance staff to conduct investigations and to determine

    whether a warning letter should be issued for exchange rule violations.

    The Commission notes that this is not a new cost for DCMs. The

    Commission, through RERs, has already communicated to DCMs that it

    expects a DCM to have adequate staff to perform its self-regulatory

    responsibilities and to issue warning letters when appropriate.

    Benefits

    Section 38.158(a) provides that a DCM must establish and maintain

    procedures that require its compliance staff to conduct investigations

    of possible rule violations. Investigations that examine potential rule

    violations help to ensure that rule violations are appropriately

    examined and prosecuted.

    The Commission has determined that the completion of investigations

    in a timely manner, as required by Sec. 38.158(b), increases the

    effectiveness of a DCM's rule enforcement program because prompt

    resolution of investigations is essential to discouraging further

    violations of a DCM's rules and addressing violations before they

    escalate. Timely investigations also assist the Commission in

    appropriately and quickly removing bad actors from markets. By ensuring

    that DCMs are effectively overseeing potential rule violations on a

    regular and timely basis, the rule helps DCMs to determine and address

    violations before they escalate, and serves as a beneficial deterrent

    against misconduct.

    The required elements and information that must be included in an

    investigation report under Sec. Sec. 38.158 (c) and (d) will assist

    disciplinary panels in determining whether there is a reasonable basis

    for finding that a violation of exchange rules warrants the issuance of

    charges. The investigation reports that must be provided to the

    Commission will also assist in reviewing the adequacy of a DCM's trade

    practice and disciplinary programs.

    Section 38.158(e) will ensure that warning letters serve as

    effective deterrents and will protect the public and market

    participants against individuals engaging in recidivist activity. A

    policy of issuing repeated warning letters rather than issuing

    meaningful sanctions to members and market participants who repeatedly

    violate the same or similar rules denigrates the effectiveness of a

    DCM's rule enforcement program.

    Section 15(a) Factors

    1. Protection of market participants and the public. The final rule

    protects market participants and the public by requiring DCMs to flag

    potential rule violations, providing a framework for which an

    investigation is conducted, and protecting against individuals who

    attempt to engage in violative recidivist activity. By ensuring that

    investigations are adequately performed, the rule protects market

    participants and the public by ensuring that remedial action is taken

    as appropriate. Moreover, timely investigation of rule violations will

    help to promote fair and equitable markets free of abusive trading

    practices or manipulative market conditions, and will provide market

    users assurance that the overseers of the markets in which they trade

    have the capacity to effectively investigate wrongdoing.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. For the reasons noted above, the final rule also promotes

    efficiency, competitiveness, and financial integrity in the derivatives

    markets by requiring that a DCM have adequate resources to commence an

    investigation upon the discovery or receipt of information indicating

    that there is a reasonable basis for finding that a violation may have

    occurred or will occur, and to conduct this investigation in a timely

    manner.

    3. Price discovery. The requirement that DCMs conduct

    investigations in a timely manner helps to ensure that the market is

    protected from disruptive and manipulative practices. This rule will

    help protect the price discovery process of markets from these

    violations, and thus help provide confidence in the prices market

    participants use to hedge risk.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices other than

    [[Page 36678]]

    those enumerated with regard to the factors above.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    Sec. 38.159 (Ability To Obtain Information)

    Section 38.159 implements the Core Principle 2 requirement that a

    DCM have the ability and authority to obtain necessary information to

    perform its rule enforcement obligations, including information sharing

    agreements. The Commission did not receive any comments discussing the

    costs or benefits of this provision.

    Costs and Benefits

    This rule codifies and implements the requirements of Core

    Principle 2 that DCM must have the ability and authority to obtain any

    necessary information to perform any required function, including the

    capacity to carry out such international information-sharing

    agreements, as the Commission may require. To the extent that a DCM

    determines it is necessary for it to enter into an information sharing

    agreement with other DCMs or SEFs, the rule makes it clear that this is

    permitted. In so doing, DCMs may face additional costs. However, these

    costs are unlikely to be significant and will only be incurred should a

    DCM determine that it is necessary to enter into an information sharing

    agreement with another DCM or with a SEF. Additionally, some DCMs are

    already parties to such agreements. The Commission is unable to

    quantify the cost of entering into such agreements as the costs will

    vary depending on several factors, including the nature of the

    agreement, the size of the DCM, and whether the DCM is negotiating a

    new agreement or signing-on to an existing agreement.

    Section 15(a) Factors

    1. Protection of market participants and the public. The final rule

    protects market participants and the public by providing a mechanism

    for which DCMs can obtain necessary information to carry out their

    duties. A DCM's ability and authority to obtain information in order to

    perform its rule enforcement obligations is imperative in order to

    identify rule violations and ensure that remedial action is taken as

    appropriate. Moreover, this requirement will help to promote fair and

    equitable markets free of abusive trading practices or manipulative

    market conditions, and will provide market users assurance that the

    overseers of the markets in which they trade have the capacity to

    effectively investigate wrongdoing.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. For the reasons noted above, the final rule also promotes

    efficiency, competitiveness, and financial integrity in the derivatives

    markets by requiring that a DCM have an adequate means to obtain

    information to enforce its rules.

    3. Price discovery. The requirement that DCMs have a mechanism to

    obtain appropriate information about traders in its markets helps to

    ensure that the market is protected from disruptive and manipulative

    practices. This rule will help protect the price discovery process of

    markets from these violations, and thus help provide confidence in the

    prices market participants use to hedge risk.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices other than those enumerated with regard to the

    factors above.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    (4) Core Principle 3: Contracts Not Readily Susceptible to

    Manipulation

    Sec. 38.201 (Additional Sources for Compliance and Appendix C)

    Section 38.201 refers applicants and DCMs to the guidance in

    appendix C to part 38 (Demonstration of Compliance That a Contract is

    Not Readily Susceptible to Manipulation), for purposes of demonstrating

    their compliance with the requirements of Sec. 38.200, which codifies

    Core Principle 3. The guidance under appendix C to part 38 amends and

    replaces Guideline No. 1 under appendix A to part 40.

    Summary of Comments and Discussion

    CME commented that the proposed rulemaking did not identify any

    problems with continuing to use the current methodology to estimate

    deliverable supply, and claimed that if the proposed standard is

    adopted, it will impose additional costs on exchanges and market

    participants with no defined benefit, including requiring exchanges to

    survey market participants annually.\581\ CME also commented on the

    provision that DCMs submit monthly deliverable supply estimates,

    stating that this requirement is onerous for DCMs and suggesting that

    the Commission should only require monthly estimates of deliverable

    supply for the most recent three years.\582\

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

    \581\ CME Comment Letter at 38 (Feb. 22, 2011).

    \582\ CME Comment Letter at 9 (Mar. 28, 2011).

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

    The Commission notes that the proposed guidance regarding

    estimating deliverable supply is not a departure from existing and

    longstanding practice. Estimating deliverable supply has historically

    required that a DCM consult with market participants on a regular, if

    not monthly, basis. In that regard, the burden of maintaining contacts

    with market participants should not be any more or less than it has

    been. In response to CME's second comment, the Commission has made

    amendments to its proposed appendix C by requiring DCMs to submit

    monthly estimates of deliverable supply for the most recent three years

    rather than for five years.

    Costs

    In order to comply with this regulation, DCMs would have to incur

    the cost of supplying supporting information and documentation to

    justify the contract specifications of a new product or substantial

    rule amendment. However, the Commission believes there will likely be

    no additional costs attributed to the rule because under existing

    practices, DCMs conduct market analysis for new products before

    deciding whether or not it makes business sense to list a new product

    for trading, including interviewing market participants. Additionally,

    DCMs also conduct market analysis before adopting amendments to

    existing contract terms and conditions.

    Benefits

    The guidance outlined in appendix C to part 38 provides a reference

    for existing and new regulated markets for information that should be

    provided to the Commission for new products and rule amendments based

    on best practices developed over the past three decades by the

    Commission and other regulators. This guidance will likely reduce the

    time and costs that regulated markets will incur in providing the

    appropriate information. The guidance also reduces the amount of time

    it takes Commission staff to analyze whether a new product or rule

    amendment is in compliance with the CEA. Some DCMs regularly provide

    the information outlined in appendix C, but others do not include

    enough information for Commission staff to determine whether the

    contract is in compliance with the CEA. Having all of the supporting

    information included in a new product submission or rule amendment

    reduces the resources Commission staff must

    [[Page 36679]]

    expend to request such information from the exchange or to find

    independently.

    Section 15(a) Factors

    1. Protection of market participants and the public. The

    information recommended in appendix C for inclusion in the new product

    or rule amendment submission provides insight and evidence of the DCM's

    research into the underlying cash market of the DCM's product. This

    should allow for a timely review by Commission staff of the DCM's

    supporting analysis and data to determine whether the contract is not

    readily susceptible to manipulation.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. By providing guidance based on best practices regarding what a

    DCM should consider when developing a futures contract or amending the

    rules of an existing contract, the contracts listed by DCMs, as a

    whole, should be more reflective of the underlying cash market by

    promoting efficient pricing through convergence.

    3. Price discovery. The guidance provides the information a DCM

    should analyze to determine if its contract is designed in such a way

    to promote convergence at expiration, and thus promote the price

    discovery mechanism of the centralized market.

    4. Sound risk management practices. By following the best practices

    outlined in the guidance in appendix C, a DCM can minimize the

    susceptibility of a contract to manipulation or price distortion while

    it is developing the contract terms and conditions for its futures

    contract. As a result, the risks to the DCM's clearing house and market

    participants would also be minimized.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    (5) Core Principle 4: Prevention of Market Disruption

    Sec. 38.251 (General Requirements)

    Section 38.251 requires that DCMs collect and evaluate data on

    individual traders' market activity on an ongoing basis, monitor and

    evaluate general market data, have the ability to conduct real-time

    monitoring of trading and comprehensive and accurate trade

    reconstructions, and monitor for violations of exchange-set position

    limits. Based upon comments, the Commission removed what were perceived

    as prescriptive elements from the proposed rule (including a

    requirement that DCMs have manual processes or automated alerts

    effective in detecting and preventing trading abuses) and included them

    in the guidance and acceptable practices in appendix B.

    Summary of Comments and Discussion

    Several commenters asserted that their current regulatory systems

    do not allow for effective real-time monitoring of position limits and

    that this regulation would impose additional costs.\583\ Additionally,

    MGEX stated that the automated trading alert requirement of proposed

    Sec. 38.251 did not provide any real value and only imposed more

    burden and cost.\584\

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

    \583\ CME Comment Letter at 24-25 (Feb. 22, 2011), MGEX Comment

    Letter at 4 (Feb. 22, 2011), KCBT Comment Letter at 4 (Feb. 22,

    2011), and ICE Comment Letter at 4 (Feb. 22, 2011).

    \584\ MGEX Comment Letter at 4 (Feb. 22, 2011).

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

    The Commission notes that while Sec. 38.251 requires that DCMs

    monitor for intraday position-limit violations it does not require that

    position limits necessarily be monitored in real-time. Instead, the

    rule requires that DCMs demonstrate the ability to comprehensively and

    accurately reconstruct daily trading activity for the purposes of

    detecting trading abuses and violations of exchange-set position

    limits, including those that may have occurred intraday. The acceptable

    practices under appendix B explains that while real-time monitoring is

    the most effective method, an acceptable program may monitor for

    intraday violations on a T + 1 basis. The flexibility afforded by the

    guidance should limit the cost of compliance given that T+1 monitoring

    is likely less costly than real-time monitoring.

    In order to provide greater specificity to market participants,

    reduce costs, and maximize flexibility, the Commission is also

    converting the requirement that a DCM have an effective automated

    alerts regime to detect trading abuses from a rule to an acceptable

    practice so that a DCM will have added flexibility in meeting this

    requirement, as the Commission believes that automated trading alerts,

    though not necessarily in real time, are the most effective means of

    detecting market anomalies. The Commission is also removing provisions

    from the proposal dealing with the real-time monitoring of impairments

    to market liquidity and clarifying in the guidance and acceptable

    practices what must be included in real-time monitoring as compared to

    what may not need to be monitored in real-time.

    Costs

    While some DCMs already have the ability to monitor for intraday

    trading abuses and market activity, including position-limit violations

    as required in Sec. 38.251, other DCMs may need to hire additional

    staff (even if the monitoring is done on a T+1 basis) and may need to

    install and maintain new or advanced systems with improved

    capabilities. Additional costs will vary based on the number of

    products a DCM offers and its trading volumes. However, the Commission

    notes that a DCM may be able to reduce the costs associated with this

    rule by using a unified monitoring system to jointly satisfy the

    requirements of Sec. 38.251 and Sec. 38.157 (Real-time market

    monitoring). Notwithstanding any related costs, Sec. 38.251 brings

    DCMs into compliance with the statutory language of the Dodd-Frank Act,

    which requires that DCMs conduct real-time monitoring of trading

    activities and be able to reconstruct trading. The regulation does so

    by minimizing costs while abiding by the Dodd-Frank Act.

    Benefits

    The Dodd-Frank Act amended Core Principle 4 to emphasize that DCMs

    must take an active role not only in monitoring trading activities

    within their markets, but in preventing market disruptions. Rule 38.251

    requires that DCMs have the proper tools to prevent manipulation or

    other disruptions. By requiring DCMs to prevent manipulation or other

    disruptions, the Commission is able to help ensure that market

    participants are able to execute trades at prices that are not subject

    to preventable market disruptions. Moreover, to help reduce the cost of

    compliance, the Commission is providing DCMs with flexibility in

    meeting the rule's requirements as set forth in guidance and acceptable

    practices.

    Sec. 38.252 (Additional Requirements for Physical-Delivery Contracts)

    Section 38.252 requires that DCMs monitor physical-delivery

    contracts' terms and conditions as they relate to the underlying

    commodity market and to the convergence between the contract price and

    the price of the underlying commodity, address conditions that

    interfere with convergence, and monitor the supply of the commodity

    used to satisfy the delivery requirements.\585\

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

    \585\ The Commission received comments from CME, MGEX, and KCBT

    stating that this rule is overly prescriptive. CME Comment Letter at

    25 (Feb. 22, 2011), MGEX Comment Letter at 4-5 (Feb. 22, 2011), KCBT

    Comment Letter at 4 (Feb. 22, 2011). The Commission considered these

    comments in preparing this release and discusses the costs and

    benefits of the codification of rules in lieu of guidance and

    acceptable practices in further detail in section C(1) above.

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

    [[Page 36680]]

    Costs and Benefits

    The Commission has a long history of monitoring for convergence and

    addressing issues of non-convergence.\586\ The Commission notes that

    this surveillance requirement is currently in place and that DCMs are

    unlikely to incur any additional costs as a result of this codification

    of an existing practice. The rules adopted in this release ensure that

    market participants are better able to hedge their risk and that price

    discovery is enhanced by helping to detect disconnects between futures

    and underlying physical market prices. Close monitoring of physical-

    delivery contracts helps prevent the manipulation of prices, and the

    public benefits from futures prices that reflect actual market

    conditions because those prices often form the basis for transactions

    taking place in the physical market.

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

    \586\ See, e.g., ``Statement of the Agricultural Advisory

    Committee,'' October 29, 2009, available at: http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/aac102909_bruns.pdf.

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

    Sec. 38.253 (Additional Requirements for Cash-Settled Contracts)

    Section 38.253 requires that for cash-settled contracts, a DCM must

    monitor the pricing of the index to which the contract will be settled

    and also monitor the continued appropriateness of the methodology for

    deriving the index. If a DCM's contract is settled by reference to the

    price of a contract or commodity traded in another venue, the DCM must

    have access to information on the activities of its traders in the

    reference market.

    Summary of Comments and Discussion

    CME commented that the Commission is uniquely situated to add

    regulatory value to the industry by reviewing for potential cross-venue

    rule violations, noting that the Commission is the central repository

    for position information delivered to it on a daily basis in a common

    format across all venues.\587\ CME asserted that the Commission would

    be imposing an onerous burden on DCMs and their customers by requiring

    the reporting of information that the Commission already receives or

    will be receiving.\588\ CME also stated that the alternative proposal,

    that the DCM enter into an information-sharing agreement with the other

    venue, also will result in additional costs to both entities, and that

    it may not be practical or prudent for a DCM to enter into such an

    agreement with the other venue.\589\ CME noted that its rules already

    allow it to request such information from market participants on an as-

    needed basis.\590\ Argus stated that the cost of monitoring the

    ``availability and pricing'' of the commodity making up a third-party

    index to which a contract is settled would be prohibitive.\591\

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

    \587\ CME Comment Letter at 25-26 (Feb. 22, 2011).

    \588\ Id. at 26.

    \589\ Id.

    \590\ Id.

    \591\ Argus Comment Letter at 6-7 (Feb. 22, 2011).

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

    The Commission believes that a DCM must have the ability to

    determine whether a trader in its market is manipulating the instrument

    or index to which the DCM contract cash-settles. A DCM must be able to

    obtain information on its traders' activities in the underlying

    instrument or index. Nonetheless, the Commission believes the rule need

    not prescribe the specific methods to accomplish this, for example, by

    information-sharing agreements or by placing a reporting burden on

    traders who carry a position near contract settlement. Accordingly, the

    description of the methods for obtaining these data on traders'

    activity in an underlying index or instrument are set forth in the

    acceptable practices, rather than included in the rule. Also, the

    specific requirement that DCMs monitor the availability and pricing of

    the commodity making up the index has been removed from the rule.

    Costs

    DCMs have, as a part of the contract market designation process,

    long been required to perform this type of surveillance on cash-settled

    contracts, and thus are unlikely to incur substantial additional costs

    on these contracts. DCMs may, however, incur significant additional

    costs for collecting information on traders' activities in the

    underlying instrument or index. These costs cannot be quantified

    because they will vary according to the particular instrument or index.

    Moreover, no DCM provided the Commission with any quantification of the

    costs of compliance. In consideration of the comment received from CME,

    the Commission has attempted to minimize the costs that will be

    incurred by giving DCMs some flexibility in determining the size of

    positions and the dates for which position data is collected. This will

    sharply reduce the costs for DCMs that routinely have few traders that

    hold substantial positions near contract expirations.

    Benefits

    In certain markets, the settlement price is linked to prices

    established in another market. Linked markets are becoming more and

    more prevalent, and the interconnected nature of these markets may

    create incentives for traders to disrupt or manipulate prices in the

    reference market in order to influence the prices in the linked market.

    Detecting and preventing this sort of manipulation requires information

    on traders' activities in the cash-settled contract and in, or related

    to, the index to which it is settled. This rule ensures that DCMs have

    the information and tools they need to accomplish their statutory duty

    to prevent manipulation and disruptions to the cash-settlement process

    and enhances the confidence of market participants and the public that

    these contracts are free of manipulation.

    Sec. 38.254 (Ability To Obtain Information)

    Section 38.254 requires DCMs to require that traders in their

    markets keep records, including records of their activity in the

    underlying commodity and related derivative markets and contracts. If

    its market has intermediaries, the DCM must either use a comprehensive

    large-trader reporting system or obtain position data from other

    sources in order to conduct an effective surveillance program.

    Summary of Comments and Discussion

    KCBT contended that it is unnecessary and burdensome for a DCM to

    require traders to keep such records.\592\ Similarly, MGEX discussed

    the burden that the proposed rule would place on its traders as a

    result of the proposed record-keeping obligation, and noted that, for

    contracts not traded on the DCM, it is unclear what records a DCM must

    tell its traders to keep.\593\

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

    \592\ KCBT Comment Letter at 5 (Feb. 22, 2011).

    \593\ MGEX Comment Letter at 5 (Feb. 22, 2011).

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

    The Commission notes that a trader's burden to keep such records is

    sound commercial practice, and that a trader of a reportable size is

    already required, under Sec. 18.05 of the Commission's regulations, to

    keep records of such trades and to make them available to the

    Commission upon request. In addition, the Commission has found trader

    records to be an invaluable tool in its market surveillance effort, and

    believes that the DCM, as an SRO, should have direct access to such

    information in order to fulfill its obligations under the DCM core

    principles, and in particular, Core Principle 4. The Commission is,

    however, providing in appendix B an

    [[Page 36681]]

    acceptable practice for meeting the requirements of Sec. 38.254(b)

    that allows the DCM to limit the duration and scope of the trader's

    obligations. For instance, in the acceptable practices, the Commission

    permits a DCM to restrict the record-keeping requirement to traders who

    are reportable to the DCM in its large-trader reporting system or who

    otherwise hold a substantial position. As an acceptable practice, the

    reportable level of a trader is at the discretion of the DCM, as long

    as the reportable level is consistent with an effective oversight

    program.

    Costs

    A trader's cost to keep such records should be minimal if, as

    expected, it is part of their normal business practice. Moreover, the

    Commission already imposes a similar requirement on large traders under

    its rule 18.05 (Maintenance of books and records). As a result, a

    trader's additional cost to provide records to the DCM, and the DCM's

    cost to request and process the records, will be low if, based upon the

    Commission's experience, such requests are infrequent and targeted to

    specific and significant market situations.\594\

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

    \594\ CME opposed the rule as proposed and recommended that the

    types of records the DCM should require traders to keep should be

    covered in acceptable practices. CME Comment Letter at 26 (Feb. 22,

    2011).

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

    Benefits

    This rule ensures that DCMs have sufficient information in order to

    assess the potential for price manipulation, price distortions, and the

    disruption of the delivery or cash-settlement process as required by

    Core Principle 4. Detecting and preventing manipulation requires

    information on large traders' positions in the relevant contracts and

    their activities in the underlying markets. Access to this information

    is vital to an effective surveillance program. Absent this information,

    the DCM may fail in its statutory duty to prevent manipulation and

    disruptions to the cash-settlement process.

    Sec. 38.255 (Risk controls for trading)

    Section 38.255 requires that DCMs establish and maintain risk

    control mechanisms to prevent or reduce the potential risk of price

    distortions and market disruptions, including, but not limited to,

    market restrictions that automatically pause or halt trading in market

    conditions prescribed by the DCM.\595\ While the rule requires pauses

    and halts, the acceptable practices enumerate other additional types of

    risk controls that would also be permitted, giving wide discretion to

    the DCM to select among the listed controls, to create new ones that

    are most appropriate for their markets, and to choose the parameters

    for those selected. If equity products are traded on the DCM, then the

    acceptable practices for this rule include, to the extent practicable,

    coordination of such controls with those placed by national security

    exchanges.\596\

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

    \595\ The Commission received several comments stating that rule

    Sec. 38.255 should not be prescriptive. See, e.g., CME Comment

    Letter at 26-27 (Feb. 22, 2011), KCBT Comment Letter at 5 (Feb. 22,

    2011), ICE Comment Letter at 12 (Feb. 22, 2011), CFE Comment Letter

    at 3-4 (Feb. 22, 2011), NYSE Liffe Comment Letter at 11 (Feb. 22,

    2011), ELX Comment Letter at 4 (Feb. 22, 2011), and MGEX Comment

    Letter at 5-6 (Feb. 22, 2011). The Commission considered these

    comments in preparing this release and discusses the costs and

    benefits of the codification of rules in lieu of guidance and

    acceptable practices in further detail in section C(1) above.

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

    Summary of Comments and Discussion

    ICE stated that a temporary price floor or ceiling can work better

    than a pause or halt since trading can continue uninterrupted, thereby

    offering the earliest opportunity for price reversal should the market

    deem a sudden large move to be an overreaction or error.\597\ ICE also

    stated that pauses and halts are not the only effective way to prevent

    market disruption, and that by being prescriptive, the Commission is

    freezing innovation in preventing market disruptions.\598\

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

    \597\ ICE Comment Letter at 12 (Feb. 22, 2011).

    \598\ Id.

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

    In response to ICE and other commenters that question the necessity

    of pauses and halts over other forms of risk controls, the Commission

    notes that pauses and halts to trading have been effective in the past.

    The ability of DCMs to pause or halt trading in extraordinary

    circumstances and, importantly, to re-start trading through the

    appropriate re-opening procedures, will allow DCMs to mitigate the

    propagation of shocks that are of a systemic nature and to facilitate

    orderly markets. Furthermore, DCMs must ensure that such pauses and

    halts are effective for their specific order-routing and trading

    environment and are adapted to the specific types of products traded.

    With respect to ICE's comment regarding innovation, the Commission

    notes that DCMs are not prohibited from implementing additional risk

    controls, such as temporary price floors or ceilings as ICE suggests,

    or any other appropriate risk control, including those not enumerated

    in the acceptable practices.

    Costs

    Although pauses and halts are not currently required by Commission

    regulation, many DCMs already have the types of risk controls that are

    required by Sec. 38.255, as well as others that have been moved to

    acceptable practices.\599\ There may be certain one-time costs of

    programming such controls where they are not already present as well as

    on-going costs to maintain and adjust such controls across time. Some

    DCMs have pauses and halts only for stock index futures, while

    utilizing other risk controls for other contracts. For those DCMs, the

    costs of adding pause and halt functionality to the other contracts

    should be minimal since much of that technology would already exist.

    DCMs that do not currently utilize pauses and halts should be able to

    implement them with existing software, so that the cost should be

    relatively modest. As noted in the Pre-Trade Functionality Subcommittee

    of the CFTC Technology Advisory Committee report, the costs would

    largely be borne by the exchanges and would center around intellectual

    property, as many exchanges develop, own, and manage their own

    technology.\600\ However, the exact costs associated with implementing

    risk controls were not described in verifiable detail in the Pre-Trade

    Functionality Subcommittee report and can vary greatly from one DCM to

    another. Additionally, the costs will depend on which specific risk

    controls will be implemented and the trading platform being used by the

    DCM. The Commission received no comments indicating that risk controls

    cannot be implemented in a cost-effective manner using commercially

    available technology.

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

    \599\ An FIA working group survey revealed that 66 percent of

    exchanges surveyed currently offer pre-trade risk controls at the

    exchange levels and that an additional 27 percent of respondents are

    planning to add such controls in the future. See http://www.futuresindustry.org/downloads/RC-survey.pdf at 27.

    \600\ See ``Recommendations on Pre-Trade Practices for Trading

    Firms, Clearing Firms and Exchanges involved in Direct Market

    Access,'' Pre-Trade Functionality Subcommittee of the CFTC

    Technology Advisory Committee (``TAC Subcommittee

    Recommendations''), (March 1, 2011) at 4, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf. The Commission notes that the

    subcommittee report was submitted to the Technology Advisory

    Committee and made available for public comment, but no final action

    has been taken by the full committee.

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

    As further noted in the Pre-Trade Functionality Subcommittee of the

    CFTC Technology Advisory Committee report, ``[s]ome measure of

    standardization of pre-trade risk controls at the exchange level is the

    [[Page 36682]]

    cheapest, most effective and most robust path to addressing the

    Commission's concern [for preserving market integrity].'' \601\

    Congress specifically modified DCM Core Principle 4 to substitute the

    title ``prevention of market disruptions'' for the previous title of

    ``monitoring of trading.'' The new rules on risk controls, which are

    designed to prevent market disruptions before they occur, bring the

    rules in line with the amended statute.

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

    \601\ See TAC Recommendations at 4, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pd.

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

    Benefits

    The Commission anticipates that the benefits of this rule will be

    substantial. As noted in the DCM NPRM, risk controls such as automated

    trading pauses and halts can, among other things, allow time for

    participants to analyze the market impact of new information that may

    have caused a sudden market move, allow new orders to come into a

    market that has moved dramatically, and allow traders to assess and

    secure their capital needs in the face of potential margin calls.\602\

    Moreover, the Commission notes that pauses and halts are particularly

    intended to apply in the event of extraordinary price movements that

    may trigger or propagate systemic disruptions. Accordingly, the

    Commission notes that a DCM's ability to pause or halt trading in

    certain circumstances and, importantly, to re-start trading through the

    appropriate re-opening procedures will allow DCMs to mitigate the

    propagation of shocks that are of a systemic nature and to facilitate

    orderly markets. For these reasons, the Commission believes that pauses

    and halts are the most effective risk management tools to carry out

    this purpose and will facilitate orderly markets and prevent systemic

    disruptions. While the Commission is requiring pauses and halts in the

    rule, the Commission is enumerating other types of automated risk

    controls that may be implemented by DCMs in the acceptable practices in

    order to give DCMs greater discretion to select among the enumerated

    risk controls or to create new risk controls. The Commission believes

    that this combination of rules and acceptable practices will facilitate

    orderly markets and mitigate systemic disruptions while maintaining a

    flexible environment that facilitates innovation.

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

    \602\ 75 FR 80572, 80584, Dec. 22, 2010.

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

    Sec. 38.256 (Trade Reconstruction), Sec. 38.257 (Regulatory Service

    Provider), and Sec. 38.258 (Additional Sources for Compliance)

    Section 38.256 requires a DCM to have the ability to

    comprehensively and accurately reconstruct all trading on its trading

    facility. The requirement to have the ability to comprehensively and

    accurately reconstruct trading appears in the statute itself and has

    long been a part of the DCM requirements under former Core Principle

    10.

    Section 38.257 requires a DCM to comply with the regulations in

    this subpart through a dedicated regulatory department, or by

    delegation of that function to a regulatory service provider.

    The Commission eliminated proposed rule 38.258 (which required a

    DCM to adopt and enforce additional rules that are necessary to comply

    with this core principle), and replaced it with new Sec. 38.258, which

    allows a DCM to refer to the guidance and acceptable practices in

    appendix B in order to demonstrate compliance with Core Principle 4.

    The Commission received no comments discussing the costs or

    benefits of Sec. Sec. 38.256, 35.257, and 38.258 and is adopting Sec.

    38.256 with a minor modification, Sec. 35.257 as proposed, and Sec.

    38.258 as noted above. In addition, these rules do not contain any

    significant changes from existing DCM requirements, and thus it is

    unlikely that additional costs will be incurred.

    Section 15(a) Factors (Sec. Sec. 38.251-38.258)

    1. Protection of market participants and the public. These rules

    implementing Core Principle 4 reduce the likelihood that markets will

    be subject to manipulation or other disruptions and ensure that market

    participants are better able to hedge their risk by requiring that:

    DCMs properly monitor their markets; market participants keep adequate

    records; DCMs are able to adequately collect information on market

    activity, including special considerations for physical-delivery

    contracts and cash-settled contracts; and reasonable pre-trade risk

    controls are in place that facilitate orderly markets and prevent

    systemic disruptions that could harm market participants and the

    public. Close monitoring of physical-delivery contracts helps prevent

    the manipulation of prices, and the public benefits from futures prices

    that reflect actual market conditions because those prices often form

    the basis for transactions taking place in the physical market.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. The rules for market monitoring and implementation of risk

    controls, including pauses and halts, help to facilitate orderly,

    efficient markets by requiring DCMs to establish and maintain risk

    control mechanisms that would be able to prevent or reduce the risks

    associated with a variety of market disruptions. By protecting against

    disruptions and market manipulation, the rules enhance competitiveness

    and promote the efficiency and financial integrity of DCM markets.

    Market mispricing that is due to disruptions or manipulation interferes

    with a market's efficiency by limiting its ability to reflect the value

    of the underlying commodity. Markets that are prone to disruption or

    manipulation have a severe competitive disadvantage to those without

    such problems. These rules are designed to address and mitigate such

    problems. Further, the rules are designed to prevent or mitigate

    extreme volatility or other market disruptions that can lead to

    unwarranted margin calls and losses of capital, which could otherwise

    impair the financial integrity of the market and its participants.

    3. Price discovery. Manipulation or other market disruptions

    interfere with the discovery of a commodity's value in normal market

    circumstances. These rules are designed to detect and, where possible,

    prevent such market mispricing and to detect disconnects between

    futures and underlying physical market prices. In physical-delivery

    markets, such disconnects usually relate to market convergence. In

    cash-settled markets, such disconnects usually relate to the integrity

    of the index used to settle the futures contract. Under the new rules,

    DCMs will need to monitor contract terms and resolve conditions that

    are interfering with the price discovery process.

    4. Sound risk management practices. Sound risk management relies

    upon execution of hedge strategies at market prices that are free of

    manipulation or other preventable disruptions. These rules are designed

    to facilitate hedging at prices free of distortions that may be

    preventable by adequate controls.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    (6) Core Principle 5: Position Limitations or Accountability

    Core Principle 5 requires that DCMs, for each contract and as

    necessary and appropriate, adopt position limitation or position

    accountability, and that, for any contract that is subject to a

    position

    [[Page 36683]]

    limitation established by the Commission in part 151 of the

    Commission's regulations,\603\ DCMs must set the position limit at a

    level not higher than the position limitation established by the

    Commission.

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

    \603\ See ``Position Limits for Futures and Swaps,'' 76 FR

    71626, Nov. 18, 2011.

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

    Summary of Comments and Discussion

    The Commission received several comments pertaining to the

    Commission's codification of part 151 of its regulations. These

    comments were appropriately addressed in the relevant rulemaking for

    Position Limits for Futures and Swaps.\604\

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

    \604\ Id.

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

    (7) Core Principle 6: Emergency Authority

    Sec. 38.351 (Additional Sources for Compliance and Appendix B)

    Rule 38.351 refers applicants and DCMs to appendix B to part 38--

    ``Guidance on, and Acceptable Practices in, Compliance With Core

    Principles'' for purposes of demonstrating compliance with the

    requirements of Core Principle 6. The guidance for Core Principle 6

    tracks the former guidance to previous Core Principle 6. As such, the

    costs and benefits of administering emergency procedures pursuant to

    current Core Principle 6 should be no different than the costs and

    benefits of administering emergency procedures prior to the Dodd-Frank

    Act. The Commission did not receive any comments discussing the costs

    or benefits of these provisions.

    (8) Core Principle 7: Availability of General Information

    Sec. 38.401 (General Requirements)

    Section 38.401(a) requires DCMs to have in place procedures for

    disclosing to market authorities, market participants, and the public

    accurate and relevant information pertaining to rules and regulations,

    contract terms and conditions, and operations. Section 38.401(b)

    requires that each DCM have procedures in place to ensure that, to the

    best of its knowledge, any information or communication with the

    Commission is accurate and complete. Section 38.401(c) requires DCMs to

    post such information on their Web sites concurrent with the filing of

    such information with the Commission. Section 38.401(d) requires DCMs

    to update their rulebooks upon the effectiveness of a rule submission

    or certification.

    Costs

    The few requirements in Sec. 38.401 that do not simply replicate

    the statutory language were derived from previous guidance and

    acceptable practices that reflect existing industry practices, and thus

    should impose no new costs on DCMs or market participants. For example,

    the accuracy requirement is unlikely to impose additional costs on

    market participants because the statute already contains an accuracy

    requirement; the rule simply adds additional context to the

    requirement. The requirements for a DCM to place information on its web

    site on the same business day as the filing of such information with

    the Commission and to post new or amended rules on the date of

    implementation are unlikely to result in additional costs to DCMs

    because similar requirements existed in the guidance and acceptable

    practices under the original Core Principle 7. No DCM commented on the

    costs imposed by this rule.

    Benefits

    Market authorities, market participants, and the public all benefit

    from access to accurate, relevant, and timely information pertaining to

    contract terms and conditions, new product listings, new or amended

    governance, trading and product rules, and other changes to information

    previously disclosed by the DCM. The disclosure of accurate information

    to the Commission will assist the Commission's oversight of the markets

    by enabling the Commission to evaluate a DCM's compliance with the core

    principles and to take prompt action to ensure transparent, fair, and

    orderly markets.

    Prompt posting of information pertaining to new product listings,

    new rules, and rule amendments on the DCM's Web site will ensure that

    market participants and the public have sufficient notice and time to

    analyze proposed rule amendments, product listings/de-listings, and

    rule certifications in advance of their taking effect and to be able to

    plan their actions accordingly. Advance notice of rule amendments and

    certifications is consistent with the goal of Core Principle 7 to make

    pertinent information available to market participants and the public.

    Section 15(a) Factors

    1. Protection of market participants and the public. To protect

    market participants and the public, the Commission has comprehensive

    regulatory, surveillance, investigative, and enforcement programs. To

    support these programs, the Commission must have access to accurate,

    relevant, and timely information regarding contract terms and

    conditions, new product listings, new or amended governance, trading

    and product rules, and other changes to information previously

    disclosed by the DCM. Additionally, prompt posting of information

    pertaining to new product listings, new rules, and rule amendments on

    the DCM's Web site will ensure that market participants and the public

    have sufficient notice and time to analyze these changes and report any

    problems to the Commission in advance of the changes taking effect.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. In order to promote efficient, competitive, and financially

    stable markets, the Commission must have access to accurate, relevant,

    and timely information regarding contract terms and conditions, new

    product listings, new or amended governance, trading and product rules,

    and other changes to information previously disclosed by the DCM. The

    Commission must have notice of these changes in order to analyze their

    likely impact on the efficiency, competitiveness, and financial

    integrity of the futures markets and to take action as necessary.

    3. Price discovery. The disclosure of accurate information to the

    Commission will assist the Commission's oversight of the markets and

    protect market participants by enabling the Commission to evaluate a

    DCM's compliance with the core principles.

    4. Sound risk management practices. The disclosure of accurate

    information to the Commission will assist the Commission's oversight of

    the markets and protect market participants by enabling the Commission

    to evaluate a DCM's compliance with the core principles, including Core

    Principle 11 (Financial Integrity of Transactions). A detailed

    discussion of Core Principle 11 in light of the section 15(a) factors

    appears later in this release.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    (9) Core Principle 8: Daily Publication of Trading Information

    Sec. 38.451 (Reporting of Trade Information)

    Core Principle 8 requires that a board of trade make public daily

    information on settlement prices, volume, open interest, and opening

    and closing ranges

    [[Page 36684]]

    for actively traded contracts on the contract market. Section 38.451

    refers a DCM to part 16 of the Commission's regulations in order to

    meet the compliance requirements of Core Principle 8. This rulemaking

    also revises Sec. 16.01 with regards to the information a reporting

    market must record and publish by adding swaps and options on swaps.

    Also, Sec. 16.01 is revised to add the requirement that reporting

    markets also report to the Commission information pertaining to ``the

    total volume of block trades that are included in the total volume of

    trading.''

    Summary of Comments and Discussion

    CME did not object to reporting block trades that are included in

    the daily volume of trading, but noted that this new requirement will

    require it to ascertain what systems changes will be necessary and how

    long such changes will take to implement.\605\ CME did not provide any

    cost or time estimates.

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

    \605\ CME Comment Letter at 29 (Feb. 22, 2011).

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

    The Commission believes that it is necessary for DCMs to report

    trade information; the regulation provides the reporting markets

    flexibility to make the necessary and appropriate changes to their

    systems in a cost-effective manner while providing transparency to the

    markets by means of basic summary trading information of that day's

    trading session.

    Costs

    The cost of reporting volume for swaps should be similar to the

    cost of reporting volume for futures and options. The Commission did

    not receive any comments that provide otherwise. Further, the

    Commission does not anticipate that DCMs that choose to list swaps will

    need to make any changes to systems beyond those needed to report

    prices and volume for any new contract. The requirement to publish the

    total volume of block trading at the end of the day will be an added

    cost for the DCM. This provision may require some changes to DCMs'

    current systems. However, because DCMs already have or will have to

    have systems in place to provide daily trading volumes under Sec.

    16.01, any costs to now include the reporting of blocks should be

    minimal. It is not feasible to quantify the costs of necessary system

    changes, largely because it is unclear what system changes will be

    adopted by DCMs. The Commission did not receive any comments stating

    that the regulation imposes an unnecessary burden.

    Benefits

    The Commission allows DCMs significant flexibility in complying

    with this rule. As such, DCMs are free to design a system that provides

    the transparency required by part 16 in the most cost effective manner.

    This rule complies with the statute and provides transparency to the

    markets by requiring DCMs to publish end of day price and volume

    summary information to the public and to the Commission.

    Section 15(a) Factors

    1. Protection of market participants and the public. The rule

    complies with Core Principle 8 by ensuring that volume and price

    information is publicly available on a daily basis. Market participants

    and the public will be able to make economic decisions based on

    accurate futures and swaps prices that are reported on a timely basis.

    2. Efficiency, competitiveness, and financial integrity of futures

    markets. The rule will promote the efficiency and competitiveness of

    futures markets by ensuring that volume and price data for futures,

    options, and swaps traded at all DCMs are publicly available.

    Competitiveness may be enhanced to the extent that market participants

    are able to compare prices of similar contracts at different DCMs.

    3. Price discovery. The rule promotes price discovery by ensuring

    that end of day trading data, including volume and prices, are

    disseminated to the public. An important benefit of price discovery is

    the availability of prices to market participants and the public who

    may use this information to inform their economic decisions.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices.

    5. Other public interest considerations. The rule provides post-

    trade transparency to the markets by requiring DCMs and SEFs to publish

    end of day trading data including volume and prices to show the

    activity that occurred during that day's trading session.

    (10) Core Principle 9: Execution of Transactions

    Sec. 38.501-38.506

    The Commission received a number of comments pertaining to the

    costs and/or benefits of proposed Sec. Sec. 38.501-38.506. As noted

    above, the Commission is not finalizing these provisions at this time,

    and expects and plans to take up the proposed rules under Core

    Principle 9 when it considers the final SEF rulemaking. Comments

    pertaining to these proposed rules, including those relative to costs

    and/or benefits, will be considered in such future rulemaking.

    (11) Core Principle 10: Trade Information

    Sec. 38.551 (Audit Trail Required), Sec. 38.552 (Elements of an

    Acceptable Audit Trail Program), and Sec. 38.553 (Enforcement of Audit

    Trail Requirements)

    Section 38.551 establishes the requirements of an acceptable audit

    trail program to help ensure that DCMs can monitor and investigate any

    customer or market abuses.

    Section 38.552 sets forth the four program areas that a DCM must

    address as part of an acceptable audit trail program, including

    original source documents, transaction history database, electronic

    analysis capability, and safe storage of all audit trail data.

    Section 38.553(a) establishes the elements of an effective audit

    trail enforcement program. Additionally, Sec. 38.553(b) requires that

    an effective audit trail enforcement program must enable the DCM to

    identify entities that are routinely non-compliant with the regulations

    under Core Principle 10 and to levy meaningful sanctions when such

    deficiencies are identified. The regulation prohibits DCMs from issuing

    more than one warning letter for the same violation within a rolling

    12-month time period.

    Summary of Comments

    CME and MGEX argued that the requirement for enforcement of an

    audit trail program to annually audit all market participants would

    essentially require the exchange to review every participant who enters

    an order into the trading system, which would be onerous, costly, and

    unproductive.\606\ MGEX suggested that DCMs should only be required to

    review a sample of market participants.\607\

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

    \606\ CME Comment Letter at 33-34 (Feb. 22, 2011), MGEX Comment

    Letter at 7 (Feb. 22, 2011).

    \607\ MGEX Comment Letter at 7 (Feb. 22, 2011).

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

    Discussion

    In response to comments that requiring exchanges to conduct annual

    audits of all members and market participants would be onerous and

    costly, the Commission is revising proposed Sec. 38.553 to apply only

    to ``members and persons and firms subject to designated contract

    market recordkeeping rules.'' With this change, the Commission limits

    the universe of entities that a DCM must audit for compliance with Core

    Principle 10. This

    [[Page 36685]]

    revision addresses commenters' concerns by making the annual audit

    requirement less burdensome.

    Additionally, this revision also responds to MGEX's comments that

    the Commission should allow DCMs to test for audit trail compliance by

    auditing only a sample of market participants. While the number of

    persons and entities subject to audit has been reduced in the final

    rule, the remaining population must still be audited annually to ensure

    compliance. As explained above, this revision will decrease the burden

    on DCMs.

    The Commission believes it is essential for DCMs to have complete

    and accurate access to trade information to facilitate trade

    reconstructions and thereby detect customer and market abuses. The

    Commission believes it is essential for DCMs to have complete and

    accurate access to trade information to facilitate trade

    reconstructions and thereby detect customer and market abuses. The

    Commission has determined that the audit trail requirements and the

    annual audits of members and entities subject to Commission or DCM

    recordkeeping rules are the best way to achieve its policy objectives,

    while providing DCMs with flexibility to achieve these objectives. The

    Commission has considered the comments raised related to the cost of

    ensuring that customer and market abuses can be detected, prosecuted,

    and ultimately discouraged, and believes that the benefits of the rule

    as finalized are substantial.

    Costs

    The costs associated with Core Principle 10 include the cost of

    developing and maintaining an electronic history transaction database

    to maintain a history of all orders and transactions entered into the

    trading system and electronic analysis capability to permit the

    exchange to reconstruct orders and trades. DCMs will also bear the cost

    of developing and implementing a program to collect and maintain

    original source documents for trades entered both manually and

    electronically into the trading system. Core Principle 10 compliance

    also imposes costs for developing and maintaining a safe storage system

    for all the trade data collected and ensuring that such data is readily

    accessible to exchange compliance staff. The Commission notes, however,

    that almost all exchanges currently operating are in compliance with

    these regulations. Therefore, existing DCMs should have already

    established these programs and, as such, should have already borne the

    costs necessary to comply with these requirements.

    These requirements were previously explained in the guidance and

    acceptable practices for Core Principle 10--Trade Information. The

    Commission's RERs have frequently highlighted compliance with the

    guidance and acceptable practices in the discussion of an exchange's

    audit trail program. Specifically, past RERs have discussed exchanges'

    practices regarding use of an electronic history transaction database,

    electronic analysis capability, and safe storage systems. As such, the

    Commission is simply codifying these existing practices and regulations

    as rules.

    DCMs will incur costs to ensure they employ appropriate resources

    to enforce Core Principle 10's requirements, including the ability to

    conduct annual compliance audits by hiring sufficient staff to review

    the information and having in place adequate technology to retrieve and

    store the information. It is not feasible to quantify the costs for

    appropriate resources for audit trail and Core Principle 10 enforcement

    because the factors necessary to determine what resources are

    ``appropriate'' vary widely from exchange to exchange, and the costs

    for each variable depend upon the particular circumstances of each

    exchange. For example, the number of participants who trade on a

    particular exchange varies widely and the number of participants who

    are members and persons and firms subject to Commission or DCM

    recordkeeping rules directly corresponds to the number of annual

    compliance audits a particular DCM will conduct to determine compliance

    with all audit trail requirements.

    While the Commission is imposing new requirements that specify

    certain components that must be incorporated in audit trail reviews,

    the Commission notes that most exchanges already have such resources in

    place and conduct audit trail reviews in such a manner to comply with

    these new regulations due to the RER process and recent

    recommendations. What constitutes ``appropriate resources'' to oversee

    and enforce the audit trail requirements is addressed on an

    individualized basis in the specific RERs for each exchange.

    Importantly, no DCM provided the Commission with information related to

    the current cost of compliance and the estimated increase related to

    codification of existing practices.

    Benefits

    Core Principle 10 and the associated regulations promote the

    reliability, completeness, accuracy, and security of exchange order and

    trade data. The ability of DCMs to recover, review, and reconstruct

    trading transactions is imperative to monitor for potential customer

    and market abuses. The requirements of Core Principle 10 ensure the

    ability of DCMs to prosecute rule violations supported by evidence from

    audit trail data and order and trade information. This furthers the

    protection of market participants by requiring exchanges to have the

    ability to adequately conduct market surveillance and prosecute rule

    violations.

    The requirement that exchanges issue no more than one warning

    letter for the same violation within a rolling twelve-month time period

    will ensure that instead of simply sending multiple warning letters,

    exchanges levy meaningful fines and sanctions to deter recidivist

    behavior and prevent future rule violations.

    Section 15(a) Factors (Sec. Sec. 38.551-38.553)

    1. Protection of market participants and the public. Sections

    38.551-38.553 benefit the protection of market participants and the

    public by requiring that DCMs maintain all order and trade information

    so that rule violations that could harm market participants and the

    public may be detected, reconstructed, investigated, and prosecuted. A

    DCM cannot complete its surveillance and enforcement practices without

    such audit trail data collection and requirements. The absence of these

    regulations would result in an increased potential for violations to go

    undetected. Such requirements strengthen DCMs' market oversight

    capabilities and result in stronger protection of market participants

    and the general public from rule violations and market abuses.

    2. Efficiency, competitiveness, and financial integrity of futures

    markets. The regulations under Core Principle 10 implemented in

    Sec. Sec. 38.551-38.553 promote efficiency and competitiveness by

    ensuring that DCMs can adequately monitor their markets for rule

    violations and effectively prosecute and deter such rule violations.

    These regulations strengthen market confidence by deterring such rule

    violations, thereby promoting efficient pricing and a competitive

    trading atmosphere.

    3. Price discovery. Sections 38.551-38.553 benefit the price

    discovery process of markets by allowing DCMs to detect and prosecute

    rule violations that impede market prices from accurately reflecting

    information pertaining to underlying fundamentals. Having a process by

    which to detect, reconstruct, investigate, and prosecute rule

    violations deters market participants

    [[Page 36686]]

    from engaging in activities which harm the market's price discovery

    process.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    (12) Core Principle 11: Financial Integrity of Transactions

    Sec. 38.601-38.606

    Section 38.601 provides that all transactions executed on or

    through a DCM, other than transactions in security futures products,

    must be cleared through a Commission-registered DCO. Section 38.602

    provides that DCMs must adopt rules establishing minimum financial

    standards for both member FCMs and IBs and non-intermediated market

    participants. Section 38.603 provides that DCMs must adopt rules for

    the protection of customer funds.

    Section 38.604 requires that a DCM must routinely receive and

    promptly review financial and related information from its members, and

    conduct ongoing financial surveillance of the risk created by the

    positions taken by an FCM's customers. Section 38.605 requires DCMs, as

    self-regulatory organizations, to comply with the standards of amended

    Sec. 1.52 to ensure the financial integrity of intermediaries by

    establishing and carrying out an SRO program for the examination and

    financial supervision of intermediaries. Section 38.606 provides that

    DCMs may satisfy their financial surveillance responsibilities under

    Sec. Sec. 38.604 and 38.605 by outsourcing such responsibilities to a

    regulatory service provider if certain requirements are met.

    Summary of Comments and Discussion

    KCBT commented that because its rules incorporate by reference the

    requirements of the CEA, the requirement to implement exchange rules

    that mirror Commission regulations is duplicative, unnecessary and

    burdensome.\608\

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

    \608\ KCBT Comment Letter at 7 (Feb. 22, 2011).

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

    The Commission believes the establishment of independent financial

    integrity rules is important because it will provide evidence that: (i)

    Each DCM has focused attention on the specific regulations promulgated

    under the CEA; and (ii) such regulations are appropriately implemented.

    Section 38.603 does not specify the exact rules to be implemented by

    each DCM, but sets forth the substance of what the rules of each DCM

    must address; therefore, a DCM would be unable to meet the requirements

    of the rule by incorporating the CEA requirements by reference.

    Costs

    Section 38.601 imposes no new costs on DCMs, as all transactions on

    a DCM are currently subject to mandatory clearing; this was required by

    the former core principle, before it was amended by the Dodd-Frank Act.

    Section 38.602 imposes no new costs as all DCMs are currently

    required to have rules establishing minimum financial standards for

    member FCMs and IBs pursuant to Core Principle 11. The Commission will

    continue to review the financial standards that each DCM has

    established to be certain that the DCM is in compliance with the rule.

    The requirements of Sec. 38.603 relating to the protection of customer

    funds are all existing requirements pursuant to former Designation

    Criterion 5(b) and have been found to be effective in monitoring and

    mitigating financial risk. By incorporating the substantive standards

    from former designation criteria that have already been implemented by

    registered DCMs, the Commission aims to minimize implementation costs.

    However, the explicit requirement that DCMs adopt rules, as opposed to

    solely incorporating the requirements of the CEA by reference, will

    involve administrative costs on the part of DCMs, such as enacting the

    appropriate rules and building the understanding within its staff of

    those rules.

    The requirements of Sec. 38.604 also reflect requirements pursuant

    to former Designation Criterion 5(a). However, the rule does build on

    the foundation of historical compliance by DCMs by explicitly requiring

    intraday financial surveillance. The Commission believes that intraday

    surveillance is necessary to account for possible intraday risk build-

    up and to meet the requirements of the financial integrity core

    principle. Because DCOs currently conduct intraday monitoring, DCMs

    should already meet this requirement through the DCO(s) that provides

    their clearing services. As the Commission notes in the preamble, an

    arrangement between a DCO and a DCM, whereby the DCO is responsible to

    a DCM for the performance of certain functions, including this

    monitoring, will continue to be permitted by the Commission. Therefore,

    intraday financial surveillance should not impose new costs on DCMs.

    DCMs will not need to expend significant additional resources to

    comply with Sec. 38.605 as all DCMs have existing SRO programs in

    place and currently are in compliance with section 1.52, as well as the

    guidance that has now been incorporated into section 1.52 from Division

    of Trading and Markets Financial and Segregation Interpretations 4-1

    and 4-2. Further, the JAC Agreement, as discussed above, is already in

    place and operating effectively.

    Section 38.606 provides DCMs with the option of outsourcing their

    financial surveillance responsibilities if they would prefer not to do

    such surveillance in house. Although Sec. Sec. 38.604 and 38.605

    impose the actual surveillance requirements, those DCMs electing to

    outsource such surveillance responsibilities will incur costs related

    to conducting due diligence of the regulatory service provider and

    making sure the DCM has adequate staff to monitor the provider. The

    Commission is unable to quantify such costs because the rule does not

    require a certain method of due diligence, and therefore the costs

    would vary based on the practices and choices of each DCM.

    Benefits

    Section 38.601 is a codification of the statutory requirement in

    Core Principle 11. Section 38.602 requires a DCM to establish and

    maintain minimum financial standards for market participants, which is

    essential to mitigating systemic risk. Implementing the requirements of

    the core principle, which requires that each DCM has rules to ensure

    the financial integrity of FCMs and IBs, achieves the Commission's

    regulatory objectives by ensuring the financial integrity of the

    transactions entered into by or through the facilities of the contract

    market, while also providing flexibility as to how to meet the

    requirements of the core principle.

    Rule 38.603 implements the requirement of the core principle that

    DCMs establish and enforce rules to ensure the protection of customer

    funds. DCMs, as SROs, are well-positioned to undertake the

    responsibility of establishing such rules and ensuring the compliance

    of intermediaries with those rules. As a result, the requirements of

    Sec. 38.603 enhance the protection of customers (who are both market

    participants and members of the public) from the losses incurred by

    fellow customers. This directly enhances the protection of market

    participants and the public, and promotes sound risk management.

    Moreover, by mitigating the loss of customer funds, which loss in turn

    would damage all customers' confidence in the safety of the funds they

    post as collateral for cleared

    [[Page 36687]]

    positions, these requirements mitigate systemic risk.

    The intraday surveillance requirement in Sec. 38.604 requires that

    a DCM continually survey each FCM's obligations created by its

    customers. Satisfaction of this requirement is necessary for a DCM to

    meet the requirements of the core principle to have rules ensuring the

    financial integrity of market participants, as well as the protection

    of customer funds. By conducting intraday surveillance and acting on

    the results of the surveillance, DCMs will be able to address intraday

    risks before they grow larger and therefore avoid losses to DCOs

    carrying FCMs or customers.

    For section 38.605, existing benefits include avoiding duplicative

    review of members, as well as ensuring the financial integrity of FCMs

    and IBs, protecting customer funds and contributing to market

    confidence. In addition, because Sec. 38.606 provides a DCM with

    options, it is more efficient and cost-effective as DCMs can choose

    whether to allocate their own resources to this surveillance or to use

    a regulatory service provider.

    Section 15(a) Factors (Sec. Sec. 38.601-38.606)

    1. Protection of market participants and the public. The rules

    protect market participants and the public by ensuring the financial

    integrity of DCM transactions via clearing of all transactions on a

    DCM, financial surveillance of members and minimum standards for

    members. The protection of customer funds rules protect customers from

    the losses incurred by either other market participants or fellow

    customers, thereby strengthening the financial integrity of the markets

    and decreasing potential systemic risks.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. Since most of these rules codify pre-existing requirements,

    DCMs are already in compliance. As a result, the rules do not require

    significant changes (i.e., costs), and therefore have minimal effect on

    the competitiveness of futures markets. The addition of rules requiring

    intraday financial surveillance will benefit the financial integrity of

    the markets by requiring DCMs to have procedures that will foster DCMs

    addressing intraday risks before they grow larger, thereby avoiding

    losses to DCOs carrying FCMs or customers.

    3. Price discovery. The Commission has not identified any effects

    that this rule will have on price discovery.

    4. Sound risk management practices. The rules requiring the

    establishment of minimum financial standards for DCM market

    participants promote sound risk management practices by ensuring that

    market participants have a certain level of sophistication and

    resources, which in turn, mitigates systemic risk.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    Sec. 38.607 (Direct Access)

    Section 38.607 requires a DCM that allows customers direct access

    to its contract market to implement certain direct access controls and

    procedures (such as automated pre-trade controls) in order to provide

    member FCMs with tools to manage their financial risk.

    Costs

    As discussed in the preamble, a recent Futures Industry Association

    (``FIA'') report stated that the majority of exchanges have policies

    and tools in place that comply with the recommendation that mandatory

    pre-trade controls be set at the exchange level.\609\ As a result,

    these requirements will not impose significant costs on a majority of

    DCMs. Those DCMs that do not have controls and procedures in place, but

    do allow customers direct access to the contract market, will incur

    costs in implementing these controls and procedures, and FCMs will

    incur costs in utilizing the controls and procedures. The Commission is

    unable to quantify such costs because the rule does not require a

    certain set of controls and procedures, and therefore the costs would

    vary based on the controls adopted by the individual DCM. In addition,

    such costs would also vary depending on the DCM's existing

    infrastructure, which varies markedly across exchanges. Moreover,

    commenters did not discuss the costs of this provision.

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

    \609\ See FIA report on ``Market Access Risk Management

    Recommendations'' (April 2010), available at: http://www.futuresindustry.org/downloads/Market_Access-6.pdf.

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

    Benefits

    The requirements of this rule will enable an FCM to protect itself

    when a customer has direct access to a DCM and completes a trade before

    an FCM's systems have an opportunity to prevent the execution of such

    trade, thereby avoiding losses that could extend to customers or the

    DCO from trades that would exceed the parameters set by the FCM on the

    DCM. Further, as discussed in the preamble, the benefits of risk

    controls at the FCM, DCO and DCM level, discussed above, have been

    recognized both domestically and internationally.

    Section 15(a) Factors

    1. Protection of market participants and the public. The final rule

    promotes the protection of market participants and the public because

    it enables an FCM to protect itself from its customers with direct

    access to the DCM, thereby preventing customers from undertaking risks

    that could bankrupt an FCM.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. Automated controls will permit an FCM to enforce limitations

    on its customers' trading via direct access, which will serve to

    protect all market participants, which will also promote the efficient,

    competitive, and financial integrity of futures markets.

    3. Price discovery. The Commission has not identified any effects

    that this rule will have on price discovery.

    4. Sound risk management practices. Without the aid of controls at

    the DCM-level, an FCM will be unable to protect itself from its

    customers with direct access to the DCM. Therefore, the final rule

    serves sound risk management practices by enabling FCMs to manage risk.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    (13) Core Principle 12: Protection of Markets and Market Participants

    Section 38.651 provides that a DCM must have and enforce rules that

    are designed to promote fair and equitable trading and to protect the

    market and market participants from abusive practices including

    fraudulent, noncompetitive or unfair actions, committed by any party.

    Costs and Benefits

    Section Sec. 38.651 specifies DCMs' obligations under Core

    Principle 12 relating to their compliance with Core Principles 2, 4 and

    9, and the associated regulations. Accordingly, Sec. 38.651 does not

    impose any additional costs beyond those discussed under each of the

    respective Core Principles 2, 4 and 9.

    (14) Core Principle 13: Disciplinary Procedures

    Core Principle 13 consists of a series of rules that, among other

    things, seek to ensure a fair, prompt, and effective disciplinary

    program.\610\ A more

    [[Page 36688]]

    detailed description of the Core Principle 13 rules themselves is

    contained in the preamble.

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

    \610\ CME and MGEX stated that a number of the rules

    implementing Core Principle 13 are overly prescriptive. See CME

    Comment Letter at 35-36 (Feb. 22, 2011) and MGEX Comment Letter at 9

    (Feb. 22, 2011). The Commission considered these comments in

    preparing this release and discusses the costs and benefits of the

    codification of rules in lieu of guidance and acceptable practices

    in further detail in section C(1) above.

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

    Sec. 38.701 (Enforcement Staff)

    Rule 38.701 requires that a DCM must establish and maintain

    sufficient enforcement staff and resources to effectively and promptly

    prosecute possible rule violations.

    Costs

    The obligations imposed by Sec. 38.701 are not new; rather, the

    requirements for DCMs to ensure adequate staff and resources stem from

    recent RERs, in which Commission staff recommended that DCMs increase

    their compliance staff levels and monitor the size of their staff and

    increase the number of staff as appropriate.\611\ Accordingly, the

    Commission does not anticipate that this provision will impose

    additional costs on DCMs.

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

    \611\ See Rule Enforcement Review of the Minneapolis Grain

    Exchange (Aug. 27, 2009), Rule Enforcement Review of ICE Futures

    U.S. (Feb. 2, 2010), and Rule Enforcement Review of the Chicago

    Board of Trade and the Chicago Mercantile Exchange (Sept. 13, 2010)

    for findings and recommendations pertaining to the adequate staff

    size of DCM compliance departments.

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

    Benefits

    The Commission believes that adequate enforcement staff and

    resources are essential to the effective performance of a DCM's

    disciplinary program. Without an effective disciplinary program, a DCM

    will be unable to effectively and promptly investigate and adjudicate

    potential rule violations and deter future violations. Rule 38.701

    ensures that DCMs monitor the size of their staff and increase the

    number of staff appropriately as trading volume increases, new

    responsibilities are assigned to compliance staff, or internal reviews

    demonstrate that work is not completed in an effective or timely

    manner. Rule 38.701 also ensures the independence of enforcement staff

    and promotes disciplinary procedures that are free of potential

    conflicts of interest by providing that a DCM's enforcement staff may

    not include members of the exchange or persons whose interests conflict

    with their enforcement duties.

    Sec. 38.702 (Disciplinary Panels)

    Rule 38.702 requires DCMs to have one or more ``review panels,

    without imposing a specific requirement for DCMs to maintain a ``review

    panel'' and a ``hearing panel.''

    Costs

    The requirement in the rule to establish disciplinary panels

    reflects industry practices that have already been adopted by most

    DCMs. Accordingly, the Commission anticipates that Sec. 38.702 will

    not impose additional cost burdens on most DCMs. To the extent that the

    rule does impose costs on DCMs, the Commission notes that since

    disciplinary panel members are typically unpaid, any potential costs

    associated with Sec. 38.702 would be limited to administrative costs

    associated with establishing the disciplinary panel, which are likely

    to vary by DCM. Finally, as described above, in response to concerns

    raised by commenters, the Commission has removed the proposed

    requirement to maintain distinct hearing panels and review panels,

    thereby reducing the burden associated with the proposed rule.

    Benefits

    Rule 38.702 requires DCMs to establish one or more disciplinary

    panels authorized to fulfill their obligations under the part 38 rules,

    including, among other things, to issue notices of charges, conduct

    hearings, render written decisions, and impose disciplinary sanctions.

    These functions are critical components of a DCM's disciplinary program

    and will deter violations of DCM rules, prevent recidivist behavior,

    protect respondents by requiring procedural safeguards to ensure

    fairness for all respondents in disciplinary actions, and protect

    customers by requiring full customer restitution in any disciplinary

    matter where customer harm is demonstrated.

    In addition to providing these numerous benefits, Sec. 38.702

    permits flexibility in the structure of DCMs' disciplinary bodies but

    protects against conflicts of interest by ensuring that the same

    individual is not invested with the authority to both issue and

    adjudicate charges in the same manner.

    Sec. 38.703-38.711 and Guidance

    Rules 38.703-38.711, and the accompanying guidance, seek to ensure

    a fair, prompt, and effective disciplinary program by, among other

    things, requiring a notice of charges and providing respondents with a

    right to representation, a reasonable period of time to file an answer

    to charges, and the right to a fair hearing. The rules also outline

    procedures for rendering disciplinary decisions and issuing

    disciplinary sanctions and warning letters. In response to comments

    requesting greater flexibility, the Commission is also converting

    several proposed rules into guidance in order to reduce potential

    incremental costs resulting from the final rules. This guidance will

    cover notices of charges, the admission or failure to deny charges,

    settlement offers, hearings, rights to appeal, summary fines, and

    emergency disciplinary sanctions.

    Summary of Comments and Discussion

    The Commission did not receive any specific comments discussing

    costs or benefits of proposed Sec. Sec. 38.703-38.716. However,

    several commenters made general requests for greater flexibility across

    all core principles. Accordingly, the Commission has modified certain

    aspects of the proposed rules under Core Principle 13 where it believes

    that flexibility can reasonably be afforded. To that end, the

    Commission is converting the following proposed rules, in their

    entirety, to guidance: proposed Sec. 38.707 (Admission or failure to

    deny charges); proposed Sec. 38.709 (Settlement offers); proposed

    Sec. 38.712 (Right to appeal); and proposed Sec. 38.716 (Emergency

    disciplinary actions). In addition, the Commission is moving the

    following specific requirements to guidance: the requirements under

    paragraphs (a) and (b) of proposed Sec. 38.704, which allowed, but did

    not require, a DCM to issue rules regarding failures to request a

    hearing and expressly answer or deny a charge; the provision under

    paragraph (b) of proposed Sec. 38.710, which provided that the DCM's

    rules may provide that a sanction may be summarily imposed upon any

    person whose actions impede the progress of a hearing; and the

    provisions under proposed Sec. 38.715 that permitted, but did not

    require, a DCM to adopt a summary fine schedule.

    The Commission is also removing the following proposed provisions

    from the final rules: paragraphs (a) and (b) under proposed Sec.

    38.703 regarding the review of investigation reports when additional

    evidence is needed or no reasonable basis exists for finding a

    violation; the section of proposed Sec. 38.708 which was optional,

    allowing a DCM's rule to provide that, except for good cause, a hearing

    must be concerned only with those charges denied or sanctions set by

    the panel for which a hearing has been requested; and the optional rule

    under proposed Sec. 38.710(a)(7) which, in certain cases, allowed for

    the cost of transcribing the record of the hearing to be borne by the

    respondent.

    Costs (Sec. 38.703-38.712 and Guidance)

    While Sec. 38.701 and Sec. 38.702 impose specific requirements on

    DCMs to have sufficient enforcement staff and

    [[Page 36689]]

    resources and to establish disciplinary panels, the remainder of the

    Core Principle 13 regulations simply outline the policies and

    procedures that a DCM's disciplinary program must follow. The

    Commission notes that these Core Principle 13 regulations merely

    reflect disciplinary concepts formerly found in Designation Criterion

    6, part 8 of the Commission's regulations,\612\ and the guidance and

    acceptable practices for former Core Principle 2. Accordingly, existing

    exchanges generally have already established disciplinary programs and,

    as such, have already expended the fees and costs necessary to comply

    with the requirements under Sec. Sec. 38.703-38.712.

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

    \612\ Exchange Procedures for Disciplinary, Summary, and

    Membership Denial Actions.

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

    As discussed in the preamble, many of the new requirements

    applicable to DCMs with respect to their disciplinary procedures were

    derived from findings and recommendations made by Commission staff

    through RERs.\613\ These recommendations represent what the Commission

    staff believes are best practices and are typically adopted by DCMs as

    the standard form of compliance. Therefore, while the codification of

    certain disciplinary requirements may be new, Commission staff has

    already expressed these expectations to the industry through RERs.

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

    \613\ For example, the requirements in regulation 38.708

    (Decisions) and regulation 38.710 (Disciplinary Sanctions) are based

    on findings and recommendations in recent RERs.

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

    The exact incremental costs incurred by DCMs to comply with the

    specific requirements of final rules under Core Principle 13 cannot be

    ascertained since they will vary depending on the DCM's current

    disciplinary program. To ensure the effectiveness of their disciplinary

    programs and provide procedural safeguards to potential respondents,

    most DCMs already have disciplinary rules and procedures that are

    similar to those required by the rules, even though they were not

    previously required to do so by Commission regulation. Therefore, as a

    practical matter, the rules may likely require DCMs to amend existing

    disciplinary rules and procedures rather than creating them anew.

    Accordingly, costs would likely be limited to the resources allocated

    to amending existing rules and procedures to ensure compliance with the

    final rules.

    As described above, in response to commenters' request for greater

    flexibility, the Commission has sought to reduce any incremental costs

    imposed by the final rules by modifying certain rules where it believes

    that flexibility can reasonably be afforded and the overall burden on

    DCMs can be reduced. As described above, the Commission is moving

    numerous proposed regulations from rules to guidance, as well as

    removing certain provisions in their entirety. Finally, the Commission

    expects the following additional modifications to the proposed rules to

    also reduce the costs imposed by the rules on market participants: (1)

    The rules regarding a respondent's answer to a notice of charges,

    outlined in paragraphs (a), (b), and (c) of proposed Sec. 38.706, are

    being replaced with a requirement that any rules adopted pursuant to

    this rule be ``fair, equitable, and publically available;'' (2)

    Proposed Sec. 38.714 is being modified so that it does not require

    customer restitution if the amount of restitution, or the recipient,

    cannot be reasonably determined.

    Benefits

    The regulations under Core Principle 13 protect market participants

    and the public by ensuring that exchanges will discipline, suspend or

    terminate the activities of members or market participants found to

    have committed rule violations. To that end, the rules will ensure that

    DCMs maintain fair, prompt, and effective disciplinary programs. The

    rules will deter violations of DCM rules by requiring disciplinary

    sanctions sufficient to deter recidivism underSec. 38.710 and by

    restricting repeat warning letters in Sec. 38.711. The rules protect

    respondents by requiring procedural safeguards to ensure fairness for

    respondents. These include an adequate notice of charges under Sec.

    38.703, the right to representation in Sec. 38.704, a reasonable

    period of time to file an answer to charges under Sec. 38.705, right

    to a hearing under Sec. 38.707, and a prompt written decision under

    Sec. 38.708, among others. Finally, the rules protect customers by

    requiring restitution where customer harm is demonstrated in Sec.

    38.710.

    The guidance provisions regarding settlement offers and Sec.

    38.708 (Decisions) were based on the Commission's recommendation that

    DCM disciplinary committees improve the documentation of their

    disciplinary decisions. As discussed in the DCM NPRM, the Commission

    believes that improved written documentation yields the following

    benefits: (1) Disciplinary panels will be required to focus their

    analysis more carefully in order to articulate the rationale for their

    decisions; (2) DCM enforcement staff will gain a better understanding

    of the evidentiary expectations to which different disciplinary panels

    adhere; (3) DCM enforcement staff and respondents will both have an

    improved record to base any appeals they may wish to file; and (4)

    Improved review of the DCMs' disciplinary program by the Commission.

    Section Sec. 38.710 (Disciplinary Sanctions), which provides that

    all disciplinary penalties imposed by a DCM or its disciplinary panels

    must be commensurate with the violations committed, and be sufficient

    to deter recidivist activity, and Sec. 38.711 (Warning Letters), which

    prohibits a DCM from issuing more than one warning letter in a rolling

    12 month period, are also examples of recommendations made by the

    Commission in RERs. As discussed in the DCM NPRM, these reflected DMO

    staff's concern regarding the adequacy of sanctions.

    Section 15(a) Factors (Sec. 38.701-38.712 and Guidance)

    1. Protection of market participants and the public. The

    regulations and guidance under Core Principle 13 benefit the protection

    of market participants and the public by ensuring that exchanges

    maintain sufficient enforcement staff and resources through Sec.

    38.701 and will discipline, suspend or terminate the activities of

    members or market participants found to have committed rule violations.

    The regulations require that DCMs maintain fair, prompt, and effective

    disciplinary programs to ensure fairness for all respondents in

    disciplinary actions. Additionally, by requiring that DCMs levy

    meaningful sanctions against persons and entities that violate DCM

    rules under Sec. Sec. 38.710 and 38.711, the regulations seek to

    promote the effectiveness of disciplinary sanctions and deter

    recidivist behavior. Finally, to compensate customers who suffer harm,

    the rules require full customer restitution in any disciplinary matter

    where customer harm was demonstrated and where the amount of

    restitution and the recipient can be reasonably determined under Sec.

    38.710.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. The regulations under Core Principle 13 promote the financial

    integrity of the futures markets by ensuring that individuals and

    entities that violate the rules of a DCM are appropriately sanctioned,

    such sanctions are effective and discourage recidivist activity, and

    customers who are harmed received full restitution under Sec. Sec.

    38.710 and 38.711.

    3. Price discovery. The Commission has not identified any effects

    that these rules will have on price discovery other than those

    identified above.

    [[Page 36690]]

    4. Sound risk management practices. The Commission has not

    identified any effects that these rules will have on sound risk

    management practices, other than those identified above.

    5. Other public interest considerations. The regulations under Core

    Principle 13 promote public interest considerations, such as market

    integrity and customer protection, by establishing an enforcement

    program through which DCMs can effectively prosecute members and market

    participants who engage in abusive trading practices or violate other

    DCM rules.

    (15) Core Principle 14: Dispute Resolution

    The new guidance for Core Principle 14 is essentially identical to

    the prior guidance to former Core Principle 13. No comments were

    provided related to the costs of Core Principle 14. Therefore, the

    costs and benefits should be no different than the costs and benefits

    of administering a dispute resolution program under former Core

    Principle 13 prior to enactment of the Dodd-Frank Act.

    (16) Core Principle 18: Recordkeeping

    Sec. 38.951 (Additional Sources for Compliance)

    Section 38.951 requires DCMs to maintain records, including trade

    records and investigatory and disciplinary files, in accordance with

    Commission regulations, Sec. 1.31, and in accordance with part 45 of

    the Commission's regulations with respect to swap transactions.

    Costs

    The Commission did not receive any comments related to the costs of

    this core principle. Although Sec. 38.951 incorporates by reference

    the requirements of existing Sec. 1.31 and part 45, it does not impose

    any additional burden or costs to which DCMs are not already subject

    under current regulations. Regulation 38.951 merely references

    recordkeeping obligations to which DCMs have always been subject under

    Sec. 1.31 and to which DCMs are required to comply with respect to

    swap transactions under part 45. Accordingly, DCMs will not bear any

    new costs solely due to Sec. 38.951.

    Benefits

    Section Sec. 38.951 enables the Commission to obtain the books and

    records of DCMs, which is essential to carrying out the Commission's

    regulatory functions, including trade practice and market surveillance,

    regulatory examinations, and enforcement examinations. Furthermore,

    such books and records assist the Commission in prosecuting violations

    of the CEA and Commission regulations.

    (17) Core Principle 19: Antitrust Considerations

    The guidance for Core Principle 19 is nearly identical to the

    guidance for former Core Principle 18 and therefore the costs and

    benefits of requiring DCMs to operate according to accepted antitrust

    law should be no different than the costs and benefits associated with

    the pre-existing guidance, prior to the enactment of the Dodd-Frank

    Act.

    (18) Core Principle 20: System Safeguards

    Sec. 38.1051 (General Requirements)

    Section 38.1051 establishes system safeguards requirements for all

    DCMs, pursuant to new Core Principle 20 added under the Dodd-Frank Act.

    The rules under Sec. 38.1051(a) and (b) require a DCM's program of

    risk analysis and oversight to address six categories of risk analysis

    and oversight and to follow generally accepted standards and best

    practices with respect to the development, operation, reliability,

    security, and capacity of automated systems. Section 38.1051(c)

    specifically requires each DCM to maintain a business continuity-

    disaster recovery (``BC-DR'') plan and BC-DR resources sufficient to

    enable resumption of trading and of all of the responsibilities and

    obligations of the DCM during the next business day following any

    disruption of its operations. Section 38.1051(d) specifies the

    requirement to be able to resume trading and clearing during the next

    business day following a disruption for DCMs that are not determined to

    be a critical financial market. The rules also require each DCM to

    notify Commission staff of various system security-related events under

    Sec. 38.1051(e) and (f), to provide relevant documents to the

    Commission in Sec. 38.1051(g), and to conduct regular, periodic,

    objective testing and review of automated systems under Sec.

    38.1051(h). Finally, the rules under Sec. 38.1051(i) require each DCM

    to coordinate its BC-DR plan with its members and market participants.

    Summary of Comments

    CME stated that the requirement for notice of all systems

    malfunctions is overly broad and would require onerous reporting of

    mundane and trivial incidents, and that the Commission should limit

    required reporting only to material system failures.\614\ CME also

    stated that the requirement that DCMs provide the Commission with

    timely advance notice of all planned changes to automated systems that

    may impact the reliability, security, or adequate scalable capacity of

    such systems is an ``extremely onerous burden for DCMs'' and that the

    requirement adds ``significant costs that are not at all commensurate

    with any value created.'' \615\ CME claimed that any change to a system

    could conceivably impact the operation of the system, and that it would

    be inefficient and unproductive to report every planned change to their

    automated systems.\616\ Finally, CME stated that the requirement that

    DCMs provide timely advance notice of all planned changes to the DCM's

    program of risk analysis and oversight is overly broad and is neither

    necessary nor productive.\617\

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

    \614\ CME Comment Letter at 36-37 (Feb. 22, 2011).

    \615\ Id.

    \616\ Id.

    \617\ Id.

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

    Discussion

    In response to CME's concerns that the rule would require reporting

    of insignificant system events, the Commission is adopting final rules

    that require reporting only of significant system malfunctions and

    advance notification only of material system changes.

    Costs

    Sec. 38.1051(a) and (b)

    The Commission believes that DCMs generally will not incur

    significant additional costs to achieve compliance with the

    requirements described in Sec. 38.1051(a) and (b) because from the

    time Core Principle 20 went into effect, all DCMs would need to have a

    program addressing all six categories of risk analysis and oversight.

    Former Core Principle 9 and Designation Criteria 4 provided for

    essentially the same requirements which reflect activities that would

    normally be conducted by the DCM in the course of following industry

    standards, guidelines, and best practices for the management and

    operation of automated systems. Additionally, the requirement to

    maintain a program of risk analysis and oversight appears in Core

    Principle 20 itself and was not the product of Commission discretion.

    Sec. 38.1051(c)

    The Commission believes that DCMs generally will not incur

    significant additional costs to achieve compliance with the

    requirements described in

    [[Page 36691]]

    Sec. 38.1051(c). The requirement to maintain a business continuity-

    disaster recovery plan, business continuity disaster recovery

    resources, emergency procedures, and backup facilities appears in the

    core principle itself and was not the product of Commission discretion.

    Additionally, the requirements in Sec. 38.1051(c) reflect industry

    best practices; an exchange without the ability to resume operations

    shortly after a disastrous event, which by definition implies that they

    will not in that timeframe be able to operate out of their production

    environment, cannot expect to retain its customer base. In the event

    that an existing DCM is determined by the Commission to be a ``critical

    financial market,'' substantial additional initial and ongoing costs

    could be incurred due to the more stringent requirements in this

    regard, set forth in Sec. 40.9. The Commission expects to notify a DCM

    of its consideration of the DCM's status as a critical financial market

    sufficiently in advance of any formal designation as such; further, the

    Commission believes that any DCM subject to this designation would be

    generating sufficient volume to reasonably support additional costs

    incurred.

    Sec. 38.1051(d)

    The Commission does not believe that any additional material costs

    will be incurred by DCMs in complying with the requirements listed in

    Sec. 38.1051(d), as DCMs covered by this provision are already in

    compliance with its requirements.

    Sec. 38.1051(e)

    The Commission does not believe that any material costs will be

    incurred by DCMs in complying with the notification requirements listed

    in Sec. 38.1051(e). Given the general operating stability of the

    automated systems at existing DCMs, notification to Commission staff,

    either via email or telephone, would be fairly infrequent and could

    easily be combined with notifications distributed to market

    participants. Several DCMs have automated notification systems; adding

    an email address to these systems would not impose additional costs on

    DCMs. Minimal additional cost due to DCM staff time could be incurred

    in follow-up activities, including completing a systems outage

    notification template developed by Commission staff. However, this

    template closely follows standard technical post-mortem reporting

    procedures, and is not expected to require more than one hour to

    complete, at a cost of about $52. Additionally, the Commission notes

    that it is reducing the burden of this provision by revising the

    proposed rule to provide that DCMs must only promptly advise the

    Commission of all significant system malfunctions, rather than all

    system malfunctions.

    Sec. 39.1051(f)

    The Commission does not believe that any significant material costs

    will be incurred by existing DCMs or applicants in complying with the

    notification requirements listed in Sec. 38.1051(f). Commission staff

    has developed notification templates for the notice requirements

    contained in both (f)(1) and (2); these templates have been designed to

    minimize additional work for DCM staff. As the templates largely follow

    guidelines for best practices in automated systems management and

    capacity planning, Commission staff believes that each notification

    will require no more than two hours of DCM staff time (at a cost of

    about $104). Commission notification of planned changes to a DCM's

    program of risk analysis and oversight should also not impose

    additional costs on DCMs, as copies of documents developed by DCM staff

    for change planning purposes are expected to be sufficient in meeting

    this requirement. Additionally, the Commission notes that it is

    reducing the burden of this provision on DCMs by revising the proposed

    rule to provide that, with respect to planned changes to automated

    systems or risk analysis and oversight programs, a DCM must only

    provide timely advance notification of material changes, rather than of

    all changes.

    Sec. 38.1051(g)

    The Commission does not believe that any significant costs will be

    incurred by existing DCMs or applicants in complying with the

    requirements listed in Sec. 38.1051(g), as these documents and

    procedures can be provided electronically with minimal additional DCM

    staff effort, and would be produced by the DCM in the course of

    following industry standards, guidelines and best practices for the

    management and operation of automated systems. If the documents are

    available electronically, the request can likely be met in under 15

    minutes. Hardcopy responses would likely require no more than 30

    minutes of DCM staff time.

    Sec. 38.1051(h)

    The Commission does not believe that any significant costs will be

    incurred by existing DCMs in complying with the requirements listed in

    Sec. 38.1051(h), as all DCMs should currently be performing this

    testing and review in the course of following industry standards,

    guidelines and best practices for the management and operation of

    automated systems.

    Sec. 38.1051(i)

    The Commission does not believe that any significant costs will be

    incurred by existing DCMs in complying with the requirements listed in

    Sec. 38.1051(i), as all DCMs should meet the requirements of this

    provision in the course of following industry standards (including

    industry-wide tests conducted at least annually and sponsored by the

    Futures Industry Association (``FIA'')), guidelines and best practices

    for the management and operation of automated systems. Further,

    compliance with sections (1) and (3) would generally result from the

    development of contingency and disaster recovery plans following

    generally accepted best practices and standards. Finally, industry-wide

    testing currently conducted on an annual basis would result in

    substantial compliance with part (2) of this section.

    Benefits

    Sophisticated computer systems are crucial to a DCM's ability to

    meet its obligations and responsibilities. Safeguarding the

    reliability, security, and capacity of such systems is essential to

    mitigate systemic risk for the nation's financial sector as a whole.

    The ability of DCMs to recover and resume trading promptly in the event

    of a disruption of their operations is highly important to the U.S.

    economy. Ensuring the resilience of the automated systems of DCMs is a

    vitally important part of the Commission's mission and will be crucial

    to the robust and transparent systemic risk management framework

    established by the Dodd- Frank Act. DCM compliance with generally

    accepted standards and best practices with respect to the development,

    operation, reliability, security, and capacity of automated systems can

    reduce the frequency and severity of automated system security breaches

    or functional failures, thereby augmenting efforts to mitigate systemic

    risk. Notice to the Commission concerning systems malfunctions, systems

    security incidents, or any events leading to the activation of a DCM's

    business continuity-disaster recovery (``BC-DR'') plan will assist the

    Commission's oversight and its ability to assess systemic risk levels.

    It would present unacceptable risks to the U.S. financial system if

    futures and swaps markets that comprise critical components of the

    world financial system were to become unavailable for an extended

    period of time for any reason. Adequate system

    [[Page 36692]]

    safeguards are crucial to mitigate such risks and this regulation will

    ensure such safeguards are in place.

    Section 15(a) Factors

    1. Protection of market participants and the public. Because

    automated systems play a central and critical role in today's

    electronic financial market environment, oversight of core principle

    compliance by DCMs with respect to automated systems is an essential

    part of effective oversight of both futures and swaps markets. Timely

    reporting to the Commission of material system malfunctions, planned

    changes to automated systems, and planned changes to programs of risk

    analysis and oversight will facilitate the Commission's oversight of

    futures and swaps markets, augment the Commission's efforts to monitor

    systemic risk, and will further the protection of market participants

    and the public by helping to ensure that automated systems are

    available, reliable, secure, have adequate scalable capacity, and are

    effectively overseen.

    2. Efficiency, competitiveness, and financial integrity of futures

    markets. Sophisticated computer systems are crucial to a DCM's ability

    to meet its obligations and responsibilities. Safeguarding the

    reliability, security, and capacity of such systems is also essential

    to mitigation of system risk for the nation's financial sector as a

    whole. This is particularly true in light of the fact that the over-

    the-counter swaps market is estimated to have in excess of $600

    trillion in outstanding contracts. The ability of DCMs to recover and

    resume trading promptly in the event of a disruption of their

    operations is highly important to the U.S. economy. Ensuring the

    resilience of the automated systems of DCMs is a critical part of the

    Commission's mission, and will be crucial to the robust and transparent

    systemic risk management framework established by the Dodd-Frank Act.

    Notice to the Commission concerning systems malfunctions, systems

    security incidents, or any events leading to the activation of a DCM's

    business continuity-disaster recovery plan will assist the Commission's

    oversight and its ability to assess systemic risk levels. It would

    present unacceptable risks to the U.S. financial system if futures and

    swaps markets that comprise critical components of the world financial

    system were to become unavailable for an extended period of time for

    any reason, and adequate system safeguards and timely notice to the

    Commission regarding the status of those safeguards are crucial to

    mitigation of such risks.

    3. Price discovery. The reliable function of sophisticated computer

    systems and networks is vital to the fulfillment of a DCM's duties and

    obligations, a crucial ingredient of adequate regulatory oversight, and

    central to the robust, conservative, and transparent risk management

    framework promulgated by the Dodd-Frank Act. Following generally

    accepted standards and best practices with respect to the development,

    operation, reliability, security, and capacity of automated systems

    will reduce the incidence and severity of automated system security

    breaches and functional failures, thereby providing reliable and

    available venues for price discovery.

    4. Sound risk management practices. Reliably functioning computer

    systems and networks are crucial to comprehensive risk management, and

    prompt notice to the Commission concerning systems malfunctions,

    systems security incidents, or any events leading to the activation of

    a DCM's business continuity-disaster recovery plan will assist the

    Commission in its oversight role, and will bolster its ability to

    assess systemic risk levels. Adequate system safeguards and timely

    notice to the Commission regarding the status of those safeguards are

    crucial to mitigation of potential systemic risks.

    5. Other public interest considerations. The American economy and

    the American public depend upon the availability of reliable and secure

    markets for price discovery, hedging, and speculation. Ensuring the

    adequate safeguarding and the reliability, security, and capacity of

    the systems supporting these market functions is a core focus in the

    Commission's role in monitoring and assessing the level of systemic

    risk, and is central to its fulfillment of responsibilities given to it

    by the Dodd-Frank Act.

    (19) Core Principle 21: Financial Resources

    Sec. 38.1101 (Financial Resources)

    Section 38.1101(a) requires DCMs to maintain and calculate

    sufficient financial resources to cover operating costs for at least

    one year, calculated on a rolling basis, at all times, and requires any

    entity operating as both a DCM and a DCO to comply with both the DCM

    and DCO financial resources requirements.

    Under section 38.1101(b), financial resources available to DCMs to

    satisfy the applicable financial resources requirements would include

    the DCM's own capital (assets in excess of liabilities) and any other

    financial resource deemed acceptable by the Commission.

    Sections 38.1101(c), (d), and (f) require each DCM, no less

    frequently than at the end of each fiscal quarter, to calculate the

    financial resources it needs to meet the requirements of Sec.

    38.1101(a) and the current market value of each financial resource and

    report this information to the Commission within a specified timeframe.

    Section 38.1101(e) requires DCMs to maintain unencumbered liquid

    financial assets, such as cash or highly liquid securities, equal to at

    least six months' operating costs, or a committed line of credit or

    similar facility.

    Summary of Comments

    GreenX stated that the proposed rules implementing Core Principle

    21 could effectively require DCMs to maintain financial resources in

    excess of one year's operating costs.\618\ GreenX suggested modifying

    the rule so that the proposed six month liquidity requirement be

    explicitly included in the financial resources required to cover a

    DCM's operating costs for at least one year, or alternatively,

    requested that the Commission perform a cost benefit analysis of the

    proposed rule as written.\619\

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

    \618\ GreenX Comment Letter at 14-15 (Feb. 22, 2011).

    \619\ Id. at 17-18.

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

    GreenX also stated that revising the proposed rule to permit DCMs

    to include committed lines of credit as an acceptable financial

    resource would permit a DCM to reduce its operating costs by avoiding

    the need to incur unnecessary interest charges, while still ensuring

    that it has adequate funds available to pay its operating

    expenses.\620\

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

    \620\ Id. at 16.

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

    Several commenters requested an extended deadline for filing the

    financial reports required as a result of Sec. 38.1101(f). CME stated

    that the proposed 17 day filing deadline is not feasible and that

    instead, the requirement should be consistent with the SEC's reporting

    requirements.\621\ Similarly, GreenX stated that it has procedures in

    place to comply with the SEC's requirements and that the proposed

    requirements in this rule would require new programming and

    resources.\622\ GreenX recommended extending the reporting deadline to

    30 calendar days, noting that this is still more burdensome than the

    requirements imposed by the SEC on national securities exchanges.\623\

    The

    [[Page 36693]]

    Commission received no comments discussing the costs and benefits of

    Sec. Sec. 38.1101(b) and 38.1101(d).

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

    \621\ CME Comment Letter at 38 (Feb. 22, 2011).

    \622\ GreenX Comment Letter at 20 (Feb. 22, 2011).

    \623\ Id.

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

    Discussion

    As discussed in the preamble, the rule does not require each DCM to

    maintain eighteen months of financial resources, but, rather, requires

    each DCM to have at least twelve months of financial resources,

    including six months of liquid financial resources. Each DCM has the

    discretion to determine how to meet this requirement (e.g., six months

    of illiquid financial resources combined with six months of liquid

    ones, twelve months of illiquid financial resources with a line of

    credit covering six months' worth of financial resources, or twelve

    months of illiquid financial resources and six months of liquid ones).

    There are similar proposed financial resources rules in the rulemakings

    for each type of registered entity (i.e., SEFs, SDRs, and DCOs).

    The provision in the rule text stating that acceptable financial

    resources include a DCM's own capital and ``any other financial

    resource deemed acceptable by the Commission'' was meant to capture

    other types of resources on a case-by-case basis and provide

    flexibility to both DCMs and the Commission. Accordingly, the

    Commission has revised the rule text to state that a DCM's own capital

    means its assets minus its liabilities calculated in accordance with

    GAAP. The Commission believes that if a certain financial resource is

    deemed to be an asset under GAAP, it is appropriate for inclusion in

    the calculation for this rule. To the extent a certain financial

    resource is not considered an asset under GAAP, but based upon the

    facts and circumstances a DCM believes that the particular asset should

    be so considered, Commission staff will work with the DCM to determine

    whether such resource is acceptable.

    The Commission is persuaded that the proposed 17 business day

    filing deadline may be overly burdensome. The SEC requires its

    quarterly reports on Form 10-Q to be filed with the SEC 40 calendar

    days after the end of the fiscal quarter for accelerated filers and 45

    calendar days after the end of the fiscal quarter for all other SEC-

    registered entities. The SEC requires annual reports on Form 10-K to be

    filed with the SEC 60 calendar days after the end of the fiscal year

    for large accelerated filers, 75 calendar days for other accelerated

    filers and 90 calendar days for non-accelerated filers. Accordingly,

    the Commission is extending the 17 business day proposed filing

    deadline to 40 calendar days for the required reports for the first

    three quarters. This will harmonize the Commission's regulations with

    the SEC's requirements for its Form 10-Q. Similarly, the Commission has

    extended the filing deadline to 60 days for the fourth quarter report

    to harmonize with the SEC deadlines for the Form 10-K. The Commission

    does not believe that annual submissions are sufficient. The Commission

    believes that prudent financial management requires DCMs to prepare and

    review financial reports more frequently than annually, and expects

    that DCMs currently are reviewing their finances on at least a

    quarterly basis.

    Costs

    This is a new core principle for DCMs, so the requirement to

    maintain and calculate the financial resources necessary to meet the

    requirements of this rule may require an outlay of resources to achieve

    compliance. However, the Commission has required recent DCM registrants

    pursuant to their designation order to calculate and maintain a certain

    level of financial resources and therefore some DCMs are already

    generally in compliance with this requirement.

    The Commission expects that most, if not all, DCMs already

    calculate and prepare financial statements quarterly. Accordingly, the

    Commission does not believe that the calculation of the financial

    resources required to meet the requirements of this core principle

    imposes a significant burden on DCMs. Extrapolation from the prepared

    financial statements should be relatively straightforward, but will

    require some resources on the part of DCMs, potentially including staff

    and technology resources to calculate, monitor, and report financial

    resources. Given the staffing and operational differences among DCMs,

    the Commission is unable to accurately estimate or quantify the

    additional costs DCMs may incur to comply with the new financial

    resource rules, and no information was provided in the comments in

    response to the NPRM. The proposed regulation imposes additional costs

    on the Commission as staff will be required to review the filings

    received from DCMs. However, once the first couple of filings have been

    received and reviewed, Commission staff will be familiarized with the

    financial resources of each DCM and the Commission expects that the

    review will become increasingly more efficient.

    Benefits

    A DCM is obligated to ensure that trading occurs in a liquid, fair,

    and financially secure trading facility. In order to fulfill its

    responsibilities, a DCM must have appropriate minimum financial

    resources on hand and on an ongoing basis to sustain operations for a

    reasonable period of time. This includes a DCM having sufficient

    resources to allow it to close out trading in a manner not disruptive

    to the market, if necessary. The Commission believes that the benefits

    of the rule requiring six months' worth of unencumbered liquid

    financial assets are substantial. Specifically, this provision would

    give a DCM time to liquidate the remaining financial assets it would

    need to continue operating for the last six months of the required one

    year period. If a DCM does not have six months' worth of unencumbered

    liquid financial assets, it would be allowed to use a committed line of

    credit or similar facility to satisfy the requirement. If a DCM does

    not have the liquidity required under Sec. 38.1101(e), it is not

    achieving the goal of the core principle, as it will be unable to pay

    its creditors. Liquidity is implicit in the core principle requirement

    that the financial resources be adequate. Additionally, the rules

    ensure that the Commission can be certain that DCMs are in compliance

    with the core principle as required by the Dodd-Frank Act. In addition,

    the reporting requirements will facilitate the Commission's oversight

    role of ensuring DCMs maintain sufficient financial resources, as

    required by the core principle.

    Section 15(a) Factors

    1. Protection of market participants and the public. As discussed

    herein, these rules implement the requirements of new Core Principle 21

    pursuant to the Dodd-Frank Act. These requirements will enable a DCM to

    fulfill its responsibilities of ensuring that trading occurs in a

    liquid, fair, and financially secure trading facility by maintaining

    appropriate minimum financial resources on hand and on an ongoing basis

    to sustain operations for a reasonable period of time. As discussed, as

    a result of these requirements, DCMs will also have the financial

    resources necessary to close out trading in a manner not disruptive to

    the market. By establishing uniform standards that further the goals of

    avoiding market disruptions, financial losses, and systemic problems

    that could arise from a DCM's failure to maintain adequate financial

    resources, these rules will protect market participants and the public.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. The rules also promote the financial

    [[Page 36694]]

    integrity of the futures markets by requiring DCMs to have adequate

    operating resources (i.e., operating resources sufficient to fund both

    current operations and ensure operations of sufficient length in the

    future), and preventing those DCMs that lack these resources from

    expanding in ways that may ultimately harm the broader financial market

    (i.e., confining the operations of DCMs to levels their financial

    resources can support).

    3. Price discovery. The Commission has not identified any effects

    that this rule will have on price discovery.

    4. Sound risk management practices. By setting specific standards

    with respect to how DCMs should assess and monitor the adequacy of

    their financial resources, the rules promote sound risk management

    practices and further the goal of minimizing systemic risk.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    (20) Core Principle 23: Securities and Exchange Commission

    The Dodd-Frank Act added new Core Principle 23, requiring that DCMs

    keep any records relating to swaps defined in CEA section 1a(47)(A)(v),

    as amended by the Dodd-Frank Act, open to inspection and examination by

    the SEC. Consistent with the text of the core principle, the Commission

    is adopting guidance that provides that each DCM should have

    arrangements and resources for collecting and maintaining accurate

    records pertaining to any swap agreements defined in section

    1a(47)(A)(v) of the amended CEA, and should leave them open to

    inspection and examination for a period of five years. The Commission

    did not receive any comments discussing the costs or benefits of this

    provision.

    Costs

    Core Principle 23 requires DCMs to keep records relating only to

    security-based swaps open to inspection and examination by the SEC. The

    accompanying guidance simply tracks the language of the Core Principle

    and does not impose any additional substantive requirements on DCMs.

    The five-year period is unlikely to impose significant costs on market

    participants because the core principle already requires DCMs to keep

    records relating to certain swaps open to inspection and examination by

    the SEC; the guidance simply provides additional information with

    respect to the duration of the obligation imposed by the core

    principle. The Commission believes the five-year retention period is

    reasonable and reflects industry standards; the recordkeeping

    requirement under Core Principle 18 extends for a period of five years

    and the SEC's relevant recordkeeping requirements typically extend for

    a period of five years as well. Additionally, the requirement only

    applies to security-based swaps.

    Benefits

    The Dodd-Frank Act was intended 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. In order to

    perform effective oversight and ensure the goals of Dodd-Frank are

    realized, the regulatory agencies charged with overseeing the swaps

    market must have access to accurate information regarding swap

    transactions. The SEC shares jurisdiction over the regulation of the

    swaps markets with the Commission and must have access to accurate

    records relating to swaps in order to effectively oversee those

    markets.

    Section 15(a) Factors

    1. Protection of market participants and the public. To protect

    market participants and the public, the SEC has comprehensive

    regulatory, surveillance, investigative, and enforcement programs. To

    support these programs, the SEC must have access to accurate

    information regarding swap agreements. Section 38.1201 and the

    accompanying guidance ensure that DCMs keep accurate records relating

    to certain swaps open to inspection and examination by the SEC for a

    sufficient period of time of five years.

    2. Efficiency, competitiveness and financial integrity of futures

    markets. The SEC has comprehensive regulatory programs designed to

    promote efficient, competitive, and financially stable markets. In

    order to support these programs, the SEC must have access to accurate

    information regarding swap agreements. Section 38.1201 and the

    accompanying guidance ensure that DCMs keep accurate records relating

    to certain swaps open to inspection and examination by the SEC for a

    sufficient period of time of five years.

    3. Price discovery. The Commission has not identified any effects

    that this rule will have on price discovery.

    4. Sound risk management practices. The Commission has not

    identified any effects that this rule will have on sound risk

    management practices.

    5. Other public interest considerations. The Commission has not

    identified any effects that this rule will have on other public

    interest considerations.

    IV. Text of Final Rules

    List of Subjects

    17 CFR Part 1

    Commodity futures, Designated contract markets, Minimum financial

    requirements for intermediaries, Reporting and recordkeeping

    requirements.

    17 CFR Part 16

    Commodity futures, Reporting and recordkeeping requirements

    17 CFR Part 38

    Block transaction, Commodity futures, Designated contract markets,

    Reporting and recordkeeping requirements, Transactions off the

    centralized market.

    For the reasons stated in the preamble, and under the authority of

    7 U.S.C. 1, et seq., the Commodity Futures Trading Commission amends 17

    CFR parts 1, 16, and 38 as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    0

    1. Revise the authority citation for part 1 to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,

    9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as

    amended by Title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    0

    2. Revise Sec. 1.52 to read as follows:

    Sec. 1.52 Self-regulatory organization adoption and surveillance of

    minimum financial requirements.

    (a) Each self-regulatory organization must adopt rules prescribing

    minimum financial and related reporting requirements for members who

    are registered futures commission merchants, registered retail foreign

    exchange dealers, or registered introducing brokers. The self-

    regulatory minimum financial and related reporting requirements must be

    the same as, or more stringent than, the requirements contained in

    Sec. Sec. 1.10 and 1.17 of this chapter, for futures commission

    merchants and introducing brokers, and Sec. Sec. 5.7 and 5.12 of this

    chapter for retail foreign exchange dealers; provided, however, a self-

    regulatory organization may permit its member registrants that are

    registered with the Securities and Exchange Commission as securities

    brokers or

    [[Page 36695]]

    dealers to file (in accordance with Sec. 1.10(h) of this chapter) a

    copy of their Financial and Operational Combined Uniform Single Report

    under the Securities Exchange Act of 1934, Part II, Part IIA, or Part

    II CSE, in lieu of Form 1-FR. The definition of adjusted net capital

    must be the same as that prescribed in Sec. 1.17(c) of this chapter

    for futures commission merchants and introducing brokers, and Sec.

    5.7(b)(2) of this chapter for futures commission merchants offering or

    engaging in retail forex transactions and for retail foreign exchange

    dealers. (b) Each self-regulatory organization must establish and

    operate a supervisory program for the purpose of assessing whether each

    member registrant is in compliance with the applicable self-regulatory

    organization and Commission rules and regulations governing minimum net

    capital and related financial requirements, the obligation to segregate

    customer funds, financial reporting requirements, recordkeeping

    requirements, and sales practice and other compliance requirements. The

    supervisory program also must address the following elements:

    (1) Adequate levels and independence of audit staff. A self-

    regulatory organization must maintain staff of an adequate size,

    training, and experience to effectively implement a supervisory

    program. Staff of the self-regulatory organization, including officers,

    directors and supervising committee members, must maintain independent

    judgment and its actions must not impair its independence nor appear to

    impair its independence in matters related to the supervisory program.

    The self-regulatory organization must provide annual ethics training to

    all staff with responsibilities for the supervisory program.

    (2) Ongoing surveillance. A self-regulatory organization's ongoing

    surveillance of member registrants must include the review and analysis

    of financial reports and regulatory notices filed by member registrants

    with the designated self-regulatory organization.

    (3) High-risk firms. A self-regulatory organization's supervisory

    program must include procedures for identifying member registrants that

    are determined to pose a high degree of potential financial risk,

    including the potential risk of loss of customer funds. High-risk

    member registrants must include firms experiencing financial or

    operational difficulties, failing to meet segregation or net capital

    requirements, failing to maintain current books and records, or

    experiencing material inadequacies in internal controls. Enhanced

    monitoring for high risk firms should include, as appropriate, daily

    review of net capital, segregation, and secured calculations, to assess

    compliance with self-regulatory and Commission requirements.

    (4) On-site examinations. (i) A self-regulatory organization must

    conduct routine periodic on-site examinations of member registrants.

    Member futures commission merchants and retail foreign exchange dealers

    must be subject to on-site examinations no less frequently than once

    every eighteen months. A self-regulatory organization may establish a

    risk-based method of establishing the scope of each on-site

    examination, provided however, that the scope of each on-site

    examination of a futures commission merchant or retail foreign exchange

    dealer must include an assessment of whether the registrant is in

    compliance with applicable Commission and self-regulatory organization

    minimum capital and customer fund protection requirements,

    recordkeeping, and reporting requirements.

    (ii) A self-regulatory organization must establish the frequency of

    on-site examinations of member introducing brokers that do not operate

    pursuant to guarantee agreements with futures commission merchants or

    retail foreign exchange dealers using a risk-based approach, provided

    however, that each introducing broker is subject to an on-site

    examination no less frequently than once every three years.

    (iii) A self-regulatory organization must conduct on-site

    examinations of member registrants in accordance with uniform audit

    programs and procedures that have been submitted to the Commission.

    (5) Adequate documentation. A self-regulatory organization must

    adequately document all aspects of the operation of the supervisory

    program, including the conduct of risk-based scope setting and the

    risk-based surveillance of high-risk member registrants, and the

    imposition of remedial and punitive action(s) for material violations.

    (c) Any two or more self-regulatory organizations may file with the

    Commission a plan for delegating to a designated self-regulatory

    organization, for any registered futures commission merchant, retail

    foreign exchange dealer, or introducing broker that is a member of more

    than one such self-regulatory organization, the responsibility of:

    (1) Monitoring and auditing for compliance with the minimum

    financial and related reporting requirements adopted by such self-

    regulatory organizations and the Commission in accordance with

    paragraphs (a) and (b) of this section; and

    (2) Receiving the financial reports necessitated by such minimum

    financial and related reporting requirements.

    (d) Any plan filed under this section may contain provisions for

    the allocation of expenses reasonably incurred by the designated self-

    regulatory organization among the self-regulatory organizations

    participating in such a plan.

    (e) A plan's designated self-regulatory organization must report

    to:

    (1) That plan's other self-regulatory organizations any violation

    of such other self-regulatory organizations' rules and regulations for

    which the responsibility to monitor, audit or examine has been

    delegated to such designated self-regulatory organization under this

    section; and

    (2) The Commission any violation of a self-regulatory

    organization's rules and regulations or any violation of the

    Commission's regulations for which the responsibility to monitor, audit

    or examine has been delegated to such designated self-regulatory

    organization under this section.

    (f) The self-regulatory organizations may, among themselves,

    establish programs to provide access to any necessary financial or

    related information.

    (g) After appropriate notice and opportunity for comment, the

    Commission may, by written notice, approve such a plan, or any part of

    the plan, if it finds that the plan, or any part of it:

    (1) Is necessary or appropriate to serve the public interest;

    (2) Is for the protection and in the interest of customers;

    (3) Reduces multiple monitoring and multiple auditing for

    compliance with the minimum financial rules of the self-regulatory

    organizations submitting the plan of any futures commission merchant,

    retail foreign exchange dealer, or introducing broker that is a member

    of more than one self-regulatory organization;

    (4) Reduces multiple reporting of the financial information

    necessitated by such minimum financial and related reporting

    requirements by any futures commission merchant, retail foreign

    exchange dealer, or introducing broker that is a member of more than

    one self-regulatory organization;

    (5) Fosters cooperation and coordination among the self-regulatory

    organizations; and

    (6) Does not hinder the development of a registered futures

    association under section 17 of the Act.

    (h) After the Commission has approved a plan, or part thereof,

    under Sec. 1.52(g), a self-regulatory organization

    [[Page 36696]]

    relieved of responsibility must notify each of its members that are

    subject to such a plan:

    (1) Of the limited nature of its responsibility for such a member's

    compliance with its minimum financial and related reporting

    requirements; and

    (2) Of the identity of the designated self-regulatory organization

    that has been delegated responsibility for such a member.

    (i) The Commission may at any time, after appropriate notice and

    opportunity for hearing, withdraw its approval of any plan, or part

    thereof, established under this section, if such plan, or part thereof,

    ceases to adequately effectuate the purposes of section 4f(b) of the

    Act or of this section.

    (j) Whenever a registered futures commission merchant, a registered

    retail foreign exchange dealer, or a registered introducing broker

    holding membership in a self-regulatory organization ceases to be a

    member in good standing of that self-regulatory organization, such

    self-regulatory organization must, on the same day that event takes

    place, give electronic notice of that event to the Commission at its

    Washington, DC, headquarters and send a copy of that notification to

    such futures commission merchant, retail foreign exchange dealer, or

    introducing broker.

    (k) Nothing in this section shall preclude the Commission from

    examining any futures commission merchant, retail foreign exchange

    dealer, or introducing broker for compliance with the minimum financial

    and related reporting requirements to which such futures commission

    merchant, retail foreign exchange dealer, or introducing broker is

    subject.

    (l) In the event a plan is not filed and/or approved for each

    registered futures commission merchant, retail foreign exchange dealer,

    or introducing broker that is a member of more than one self-regulatory

    organization, the Commission may design and, after notice and

    opportunity for comment, approve a plan for those futures commission

    merchants, retail foreign exchange dealers, or introducing brokers that

    are not the subject of an approved plan (under paragraph (g) of this

    section), delegating to a designated self-regulatory organization the

    responsibilities described in paragraph (c) of this section.

    PART 16--REPORTS BY CONTRACT MARKETS AND SWAP EXECUTION FACILITIES

    0

    3. The authority citation for part 16 is revised to read as follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, and 7, and 7b-3, as

    amended by Pub. L. 111-203, 124 Stat. 1376.

    0

    4. The heading for part 16 is revised to read as set forth above.

    0

    5. Revise Sec. 16.01 to read as follows:

    Sec. 16.01 Publication of market data on futures, swaps and options

    thereon: trading volume, open contracts, prices, and critical dates.

    (a) Trading volume and open contracts. (1) Each reporting market,

    as defined in part 15 of this chapter, must separately record for each

    business day the information prescribed in paragraphs (a)(2)(i) through

    (vi) of this section for each of the following contract categories:

    (i) For futures, by commodity and by futures expiration date;

    (ii) For options, by underlying futures contracts for options on

    futures contracts or by underlying physical for options on physicals,

    and by put, by call, by expiration date and by strike price;

    (iii) For swaps or class of swaps, by product type and by term life

    of the swap; and

    (iv) For options on swaps or classes of options on swaps, by

    underlying swap contracts for options on swap contracts or by

    underlying physical for options on swaps on physicals, and by put, by

    call, by expiration date and by strike price.

    (2) Each reporting market must record for each trading session the

    following trading volume and open interest summary data:

    (i) The option delta, where a delta system is used;

    (ii) The total gross open contracts for futures, excluding those

    contracts against which delivery notices have been stopped;

    (iii) For futures products that specify delivery, open contracts

    against which delivery notices have been issued on that business day;

    (iv) The total volume of trading, excluding transfer trades or

    office trades:

    (A) For swaps and options on swaps, trading volume shall be

    reported in terms of the number of contracts traded for standard-sized

    contracts (i.e., contracts with a set contract size for all

    transactions) or in terms of notional value for non-standard-sized

    contracts (i.e., contracts whose contract size is not set and can vary

    for each transaction).

    (v) The total volume of futures/options/swaps/swaptions exchanged

    for commodities or for derivatives positions that are included in the

    total volume of trading; and

    (vi) The total volume of block trades included in the total volume

    of trading.

    (b) Prices. (1) Each reporting market must record the following

    contract types separately

    (i) For futures, by commodity and by futures expiration;

    (ii) For options, by underlying futures contracts for options on

    futures contracts or by underlying physical for options on physicals,

    and by put, by call, by expiration date and by strike price;

    (iii) For swaps, by product type and contract month or term life of

    the swap; and

    (iv) For options on swaps or classes of options on swaps, by

    underlying swap contracts for options on swap contracts or by

    underlying physical for options on swaps on physicals, and by put, by

    call, by expiration date and by strike price.

    (2) Each reporting market must record for the trading session and

    for the opening and closing periods of trading as determined by each

    reporting market:

    (i) The opening and closing prices of each futures, option, swap or

    swaption;

    (ii) The price that is used for settlement purposes, if different

    from the closing price; and

    (iii) The lowest price of a sale or offer, whichever is lower, and

    the highest price of a sale or bid, whichever is higher, that the

    reporting market reasonably determines accurately reflects market

    conditions. Bids and offers vacated or withdrawn shall not be used in

    making this determination. A bid is vacated if followed by a higher bid

    or price and an offer is vacated if followed by a lower offer or price.

    (3) If there are no transactions, bids, or offers during the

    opening or closing periods, the reporting market may record as

    appropriate:

    (i) The first price (in lieu of opening price data) or the last

    price (in lieu of closing price data) occurring during the trading

    session, clearly indicating that such prices are the first and last

    prices; or

    (ii) Nominal opening or nominal closing prices that the reporting

    market reasonably determines to accurately reflect market conditions,

    clearly indicating that such prices are nominal.

    (4) Additional information. Each reporting market must record the

    following information with respect to transactions in commodity

    futures, commodity options, swaps or options on swaps on that reporting

    market:

    (i) The method used by the reporting market in determining nominal

    prices and settlement prices; and

    (ii) If discretion is used by the reporting market in determining

    the opening and/or closing ranges or the settlement prices, an

    explanation that certain discretion may be employed by

    [[Page 36697]]

    the reporting market and a description of the manner in which that

    discretion may be employed. Discretionary authority must be noted

    explicitly in each case in which it is applied (for example, by use of

    an asterisk or footnote).

    (c) Critical dates. Each reporting market must report to the

    Commission, for each futures contract, the first notice date and the

    last trading date, and for each option contract, the expiration date in

    accordance with paragraph (d) of this section.

    (d) Form, manner and time of filing reports. Unless otherwise

    approved by the Commission or its designee, reporting markets must

    submit to the Commission the information specified in paragraphs (a),

    (b), and (c) of this section as follows:

    (1) Using the format, coding structure and electronic data

    transmission procedures approved in writing by the Commission or its

    designee; provided however, that the information must be made available

    to the Commission or its designee in hard copy upon request;

    (2) When each such form of the data is first available, but not

    later than 7:00 a.m. on the business day following the day to which the

    information pertains for the delta factor and settlement price and not

    later than 12:00 p.m. for the remainder of the information. Unless

    otherwise specified by the Commission or its designee, the stated time

    is U.S. eastern standard time for information concerning markets

    located in that time zone, and U.S. central time for information

    concerning all other markets; and

    (3) For information on reports to the Commission for swap or

    options on swap contracts, refer to part 20 of this chapter.

    (e) Publication of recorded information. (1) Reporting markets must

    make the information in paragraph (a) of this section readily available

    to the news media and the general public without charge, in a format

    that readily enables the consideration of such data, no later than the

    business day following the day to which the information pertains. The

    information in paragraphs (a)(2)(iv) through (vi) of this section shall

    be made readily available in a format that presents the information

    together.

    (2) Reporting markets must make the information in paragraphs

    (b)(2) and (3) of this section readily available to the news media and

    the general public, and the information in paragraph (b)(4)(ii) of this

    section readily available to the general public, in a format that

    readily enables the consideration of such data, no later than the

    business day following the day to which the information pertains.

    Information in paragraph (b)(4)(i) of this section must be made

    available in the registered entity's rulebook, which is publicly

    accessible on its Web site.

    PART 38--DESIGNATED CONTRACT MARKETS

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    6. The authority citation for part 38 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,

    6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as

    amended by the Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    0

    7. Designate existing Sec. Sec. 38.1 through 38.6 as subpart A under

    the following subpart heading:

    Subpart A--General Provisions

    * * * * *

    Sec. 38.1 [Amended]

    0

    8. Amend Sec. 38.1 by removing the reference ``Parts 36 or 37 of this

    chapter'' and adding in its place the reference ``parts 37 or 49 of

    this chapter''.

    0

    9. Revise Sec. 38.2 to read as follows:

    Sec. 38.2 Exempt provisions.

    A designated contract market, the designated contract market's

    operator and transactions traded on or through a designated contract

    market under section 5 of the Act shall comply with all applicable

    regulations under Title 17 of the Code of Federal Regulations, except

    for the requirements of Sec. 1.35(e) through (j), Sec. 1.39(b), Sec.

    1.44, Sec. 1.53, Sec. 1.54, Sec. 1.59(b) and (c), Sec. 1.62, Sec.

    1.63(a) and (b) and (d) through (f), Sec. 1.64, Sec. 1.69, part 8,

    Sec. 100.1, Sec. 155.2, and part 156.

    0

    10. Revise Sec. 38.3 to read as follows:

    Sec. 38.3 Procedures for designation.

    (a) Application procedures. (1) A board of trade seeking

    designation as a contract market must file electronically, in a format

    and manner specified by the Secretary of the Commission, the Form DCM

    provided in appendix A of this part, with the Secretary of the

    Commission at its Washington, DC headquarters at submissions@cftc.gov

    and the Division of Market Oversight at DMOSubmissions@cftc.gov. The

    Commission will review the application for designation as a contract

    market pursuant to the 180-day timeframe and procedures specified in

    section 6(a) of the Act. The Commission shall approve or deny the

    application or, if deemed appropriate, designate the applicant as a

    contract market subject to conditions.

    (2) The application must include information sufficient to

    demonstrate compliance with the core principles specified in section

    5(d) of the Act. Form DCM consists of instructions, general questions

    and a list of exhibits (documents, information and evidence) required

    by the Commission in order to determine whether an applicant is able to

    comply with the core principles. An application will not be considered

    to be materially complete unless the applicant has submitted, at a

    minimum, the exhibits required in Form DCM. If the application is not

    materially complete, the Commission shall notify the applicant that the

    application will not be deemed to have been submitted for purposes of

    starting the 180-day review period set forth in paragraph (a)(1) of

    this section.

    (3) The applicant must identify with particularity any information

    in the application that will be subject to a request for confidential

    treatment pursuant to Sec. 145.9 of this chapter.

    (4) Section 40.8 of this chapter sets forth those sections of the

    application that will be made publicly available, notwithstanding a

    request for confidential treatment pursuant to Sec. 145.9 of this

    chapter.

    (5) If any information contained in the application or in any

    exhibit is or becomes inaccurate for any reason, an amendment to the

    application or a submission filed under part 40 of this chapter must be

    filed promptly correcting such information.

    (b) Reinstatement of dormant designation. Before listing or

    relisting products for trading, a dormant designated contract market as

    defined in Sec. 40.1 of this chapter must reinstate its designation

    under the procedures of paragraphs (a)(1) and (2) of this section;

    provided, however, that an application for reinstatement may rely upon

    previously submitted materials that still pertain to, and accurately

    describe, current conditions.

    (c) Delegation of authority. (1) The Commission hereby delegates,

    until it orders otherwise, to the Director of the Division of Market

    Oversight or such other employee or employees as the Director may

    designate from time to time, upon consultation with the General Counsel

    or the General Counsel's designee, authority to notify the applicant

    seeking designation under section 6(a) of the Act that the application

    is materially incomplete and the running of the 180-day period is

    stayed.

    (2) The Director may submit to the Commission for its consideration

    any matter that has been delegated in this paragraph.

    [[Page 36698]]

    (3) Nothing in this paragraph prohibits the Commission, at its

    election, from exercising the authority delegated in paragraph (c)(1)

    of this section.

    (d) Request for transfer of designation. (1) Request for transfer

    of designation, listed contracts and open interest. A designated

    contract market that wants to request the transfer of its designation

    from its current legal entity to a new legal entity, as a result of a

    corporate reorganization or otherwise, must file a request with the

    Commission for approval to transfer the designation, listed contracts

    and positions comprising all associated open interest. Such request

    must be filed electronically, in a format and manner specified by the

    Secretary of the Commission, with the Secretary of the Commission at

    its Washington, DC headquarters at submissions@cftc.gov and the

    Division of Market Oversight at DMOSubmissions@cftc.gov.

    (2) Timing of submission. The request must be filed no later than

    three months prior to the anticipated corporate change; provided that

    the designated contract market may file a request with the Commission

    later than three months prior to the anticipated corporate change if

    the designated contract market does not know and reasonably could not

    have known of the anticipated change three months prior to the

    anticipated corporate change. In such event, the designated contract

    market shall be required to immediately file the request with the

    Commission as soon as it knows of such change, with an explanation as

    to the timing of the request.

    (3) Required information. The request shall include the following:

    (i) The underlying agreement that governs the corporate change;

    (ii) A narrative description of the corporate change, including the

    reason for the change and its impact on the designated contract market,

    including its governance and operations, and its impact on the rights

    and obligations of market participants holding the open interest

    positions;

    (iii) A discussion of the transferee's ability to comply with the

    Act, including the core principles applicable to designated contract

    markets, and the Commission's regulations thereunder;

    (iv) The governing documents of the transferee including, but not

    limited to, articles of incorporation and bylaws;

    (v) The transferee's rules marked to show changes from the current

    rules of the designated contract market;

    (vi) A list of contracts, agreements, transactions or swaps for

    which the designated contract market requests transfer of open

    interest;

    (vii) A representation by the transferee that it:

    (A) Will be the surviving legal entity and successor-in-interest to

    the transferor designated contract market and will retain and assume,

    without limitation, all the assets and liabilities of the transferor;

    (B) Will assume responsibility for complying with all applicable

    provisions of the Act and the Commission's regulations thereunder,

    including part 38 and Appendices thereto;

    (C) Will assume, maintain and enforce all rules implementing and

    complying with these core principles, including the adoption of the

    transferor's rulebook, as amended in the request, and that any such

    amendments will be submitted to the Commission pursuant to section

    5c(c) of the Act and part 40 of the Commission's regulations; and

    (D) Will comply with all self-regulatory responsibilities except if

    otherwise indicated in the request, and will maintain and enforce all

    self-regulatory programs.

    (viii) A representation by the transferee that upon the transfer:

    (A) All open interest in all contracts listed on the transferor

    will be transferred to and represent equivalent open interest in all

    such contracts listed on the transferee;

    (B) It will assume responsibility for and maintain compliance with

    the core principles for all contracts previously listed for trading

    through the transferor, whether by certification or approval; and

    (C) That none of the proposed rule changes will affect the rights

    and obligations of any market participant with open positions

    transferred to it and that the proposed rule changes do not modify the

    manner in which such contracts are settled or cleared.

    (ix) A representation by the transferee that market participants

    will be notified of all changes to the transferor's rulebook prior to

    the transfer and will be further notified of the concurrent transfer of

    the contract market designation, and the related transfer of all listed

    contracts and all associated open interest, to the transferee upon

    Commission approval and issuance of an order permitting this transfer.

    (4) Commission determination. The Commission will review a request

    as soon as practicable and such request will be approved or denied

    pursuant to a Commission order and based on the Commission's

    determination as to the transferee's ability to continue to operate the

    designated contract market in compliance with the Act and the

    Commission's regulations thereunder.

    (e) Request for withdrawal of application for designation. An

    applicant for designation may withdraw its application submitted

    pursuant to paragraphs (a)(1) and (2) of this section by filing such a

    request with the Commission. Such request must be filed electronically,

    in a format and manner specified by the Secretary of the Commission,

    with the Secretary of the Commission at its Washington, DC

    headquarters, at submissions@cftc.gov, and the Division of Market

    Oversight, at DMOSubmissions@cftc.gov. Withdrawal of an application for

    designation shall not affect any action taken or to be taken by the

    Commission based upon actions, activities or events occurring during

    the time that the application for designation was pending with the

    Commission.

    (f) Request for vacation of designation. A designated contract

    market may vacate its designation under section 7 of the Act by filing

    a request electronically, in a format and manner specified by the

    Secretary of the Commission, with the Secretary of the Commission at

    its Washington, DC headquarters at submissions@cftc.gov and the

    Division of Market Oversight at DMOSubmissions@cftc.gov. Vacation of

    designation shall not affect any action taken or to be taken by the

    Commission based upon actions, activities or events occurring during

    the time that the facility was designated by the Commission.

    0

    11. In Sec. 38.4, revise paragraphs (a) and (b) to read as follows:

    Sec. 38.4 Procedures for listing products and implementing designated

    contract market rules.

    (a) Request for Commission approval of rules and products. (1) An

    applicant for designation, or a designated contract market, may request

    that the Commission approve under section 5c(c) of the Act, any or all

    of its rules and contract terms and conditions, and subsequent

    amendments thereto, prior to their implementation or, notwithstanding

    the provisions of section 5c(c)(4) of the Act, at any time thereafter,

    under the procedures of Sec. 40.3 or Sec. 40.5 of this chapter, as

    applicable. A designated contract market may label a future, swap or

    options product in its rules as ``Listed for trading pursuant to

    Commission approval,'' if the future, swap or options product and its

    terms or conditions have been approved by the Commission, and it may

    label as ``Approved by the Commission'' only those rules that have been

    so approved.

    [[Page 36699]]

    (2) Notwithstanding the timeline under Sec. Sec. 40.3(c) and

    40.5(c) of this chapter, the operating rules, and terms and conditions

    of futures, swaps and option products that have been submitted for

    Commission approval at the same time as an application for contract

    market designation or an application under Sec. 38.3(b) of this part

    to reinstate the designation of a dormant designated contract market,

    as defined in Sec. 40.1 of this chapter, or while one of the foregoing

    is pending, will be deemed approved by the Commission no earlier than

    when the facility is deemed to be designated or reinstated.

    (b) Self-certification of rules and products. Rules of a designated

    contract market and subsequent amendments thereto, including both

    operational rules and the terms or conditions of futures, swaps and

    option products listed for trading on the facility, not voluntarily

    submitted for prior Commission approval pursuant to paragraph (a) of

    this section, must be submitted to the Commission with a certification

    that the rule, rule amendment or futures, swap or options product

    complies with the Act or rules thereunder pursuant to the procedures of

    Sec. 40.6 of this chapter, as applicable. Provided, however, any rule

    or rule amendment that would, for a delivery month having open

    interest, materially change a term or condition of a swap or a contract

    for future delivery in an agricultural commodity enumerated in section

    1a(9) of the Act, or of an option on such contract or commodity, must

    be submitted to the Commission prior to its implementation for review

    and approval under Sec. 40.4 of this chapter.

    * * * * *

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    12. Revise Sec. 38.5 to read as follows:

    Sec. 38.5 Information relating to contract market compliance.

    (a) Requests for information. Upon request by the Commission, a

    designated contract market must file with the Commission information

    related to its business as a designated contract market, including

    information relating to data entry and trade details, in the form and

    manner and within the time specified by the Commission in its request.

    (b) Demonstration of compliance. Upon request by the Commission, a

    designated contract market must file with the Commission a written

    demonstration, containing supporting data, information and documents,

    in the form and manner and within the time specified by the Commission,

    that the designated contract market is in compliance with one or more

    core principles as specified in the request, or that is requested by

    the Commission to show that the designated contract market satisfies

    its obligations under the Act.

    (c) Equity interest transfers. (1) Equity interest transfer

    notification. A designated contract market shall file with the

    Commission a notification of each transaction that the designated

    contract market enters into involving the transfer of ten percent or

    more of the equity interest in the designated contract market.

    (2) Timing of Notification. The equity transfer notice described in

    paragraph (1) shall be filed electronically with the Secretary of the

    Commission at its Washington, DC headquarters at submissions@cftc.gov

    and the Division of Market Oversight at DMOSubmissions@cftc.gov, at the

    earliest possible time but in no event later than the open of business

    ten business days following the date upon which the designated contract

    market enters into a firm obligation to transfer the equity interest.

    (3) Rule filing. Notwithstanding the foregoing, any aspect of an

    equity interest transfer described in paragraph (c)(1) of this section

    that necessitates the filing of a rule as defined in part 40 of this

    chapter shall comply with the requirements of 5c(c) of the Act and part

    40 of this chapter, and all other applicable Commission regulations.

    (d) Delegation of authority. The Commission hereby delegates, until

    it orders otherwise, the authority set forth in paragraph (b) of this

    section to the Director of the Division of Market Oversight or such

    other employee or employees as the Director may designate from time to

    time. The Director may submit to the Commission for its consideration

    any matter that has been delegated in this paragraph. Nothing in this

    paragraph prohibits the Commission, at its election, from exercising

    the authority delegated in this paragraph.

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    13. Add Sec. 38.7 to subpart A to read as follows:

    Sec. 38.7 Prohibited use of data collected for regulatory purposes.

    A designated contract market may not use for business or marketing

    purposes any proprietary data or personal information it collects or

    receives, from or on behalf of any person, for the purpose of

    fulfilling its regulatory obligations; provided however, that a

    designated contract market may use such data or information for

    business or marketing purposes if the person from whom it collects or

    receives such data or information clearly consents to the designated

    contract market's use of such data or information in such manner. A

    designated contract market, where necessary, for regulatory purposes,

    may share such data or information with one or more designated contract

    markets or swap execution facilities registered with the Commission. A

    designated contract market may not condition access to its trading

    facility on a market participant's consent to the use of proprietary

    data or personal information for business or marketing purposes.

    0

    14. Add Sec. 38.8 to subpart A to read as follows:

    Sec. 38.8 Listing of swaps on a designated contract market.

    (a) A designated contract market that lists for the first time a

    swap contract for trading on its contract market must, either prior to

    or at the time of such listing, file with the Commission a written

    demonstration detailing how the designated contract market is

    addressing its self-regulatory obligations and is fulfilling its

    statutory and regulatory obligations with respect to swap transactions.

    (b)(1) Prior to listing swaps for trading on or through a

    designated contract market, each designated contract market must obtain

    from the Commission a unique, alphanumeric code assigned to the

    designated contract market by the Commission for the purpose of

    identifying the designated contract market with respect to unique swap

    identifier creation. (2) Each designated contract market must generate

    and assign a unique swap identifier at, or as soon as technologically

    practicable following, the time of execution of the swap, in a manner

    consistent with the requirements of part 45.

    0

    15. Add Sec. 38.9 to subpart A to read as follows:

    Sec. 38.9 Boards of trade operating both a designated contract market

    and a swap execution facility.

    (a) A board of trade that operates a designated contract market and

    that intends to also operate a swap execution facility must separately

    register, pursuant to the swap execution facility registration

    requirements set forth in part 37 of this chapter, and on an ongoing

    basis, comply with the core principles under section 5h of the Act, and

    the swap execution facility rules under part 37 of this chapter.

    (b) A board of trade that operates both a designated contract

    market and a swap execution facility, and that uses the same electronic

    trade execution system for executing and trading swaps that it uses in

    its capacity as a designated contract market, must clearly identify to

    market participants for each swap

    [[Page 36700]]

    whether the execution or trading of such swap is taking place on the

    designated contract market or on the swap execution facility.

    0

    16. Add Sec. 38.10 to subpart A to read as follows:

    Sec. 38.10 Reporting of swaps traded on a designated contract market.

    With respect to swaps traded on and/or pursuant to the rules of a

    designated contract market, each designated contract market must

    maintain and report specified swap data as provided under parts 43 and

    45 of this chapter.

    0

    17. Add subparts B through X to read as follows:

    Subpart B--Designation as Contract Market

    Sec.

    38.100 Core Principle 1.

    Subpart C--Compliance With Rules

    38.150 Core Principle 2.

    38.151 Access requirements.

    38.152 Abusive trading practices prohibited.

    38.153 Capacity to detect and investigate rule violations.

    38.154 Regulatory services provided by a third party.

    38.155 Compliance staff and resources.

    38.156 Automated trade surveillance system.

    38.157 Real-time market monitoring.

    38.158 Investigations and investigation reports.

    38.159 Ability to obtain information.

    38.160 Additional sources for compliance.

    Subpart D--Contracts Not Readily Subject to Manipulation

    38.200 Core Principle 3.

    38.201 Additional sources for compliance.

    Subpart E--Prevention of Market Disruption

    38.250 Core Principle 4.

    38.251 General requirements.

    38.252 Additional requirements for physical-delivery contracts.

    38.253 Additional requirements for cash-settled contracts.

    38.254 Ability to obtain information.

    38.255 Risk controls for trading.

    38.256 Trade reconstruction.

    38.257 Regulatory service provider.

    38.258 Additional sources for compliance.

    Subpart F--Position Limitations or Accountability

    38.300 Core Principle 5.

    38.301 Position limitations and accountability.

    Subpart G--Emergency Authority

    38.350 Core Principle 6.

    38. 351 Additional sources for compliance.

    Subpart H--Availability of General Information

    38.400 Core Principle 7.

    38.401 General requirements.

    Subpart I--Daily Publication of Trading Information

    38.450 Core Principle 8.

    38.451 Reporting of trade information.

    Subpart J--Execution of Transactions

    38.500 Core Principle 9.

    Subpart K--Trade Information

    38.550 Core Principle 10.

    38.551 Audit trail required.

    38.552 Elements of an acceptable audit trail program.

    38.553 Enforcement of audit trail requirements.

    Subpart L--Financial Integrity of Transactions

    38.600 Core Principle 11.

    38.601 Mandatory clearing.

    38.602 General financial integrity.

    38.603 Protection of customer funds.

    38.604 Financial surveillance.

    38.605 Requirements for financial surveillance program.

    38.606 Financial regulatory services provided by a third party.

    38.607 Direct access.

    Subpart M--Protection of Markets and Market Participants

    38.650 Core Principle 12.

    38.651 Protection of Markets and Market Participants.

    Subpart N--Disciplinary Procedures

    38.700 Core Principle 13.

    38.701 Enforcement staff.

    38.702 Disciplinary panels.

    38.703 Notice of charges.

    38.704 Right to representation.

    38.705 Answer to charges.

    38.706 Denial of charges and right to hearing.

    38.707 Hearings.

    38.708 Decisions.

    38.709 Final decisions.

    38.710 Disciplinary sanctions.

    38.711 Warning letters.

    38.712 Additional sources for compliance.

    Subpart O--Dispute Resolution

    38.750 Core Principle 14.

    38.751 Additional sources for compliance.

    Subpart P--Governance Fitness Standards

    38.800 Core Principle 15.

    38.801 Additional sources for compliance.

    Subpart Q--Conflicts of Interest

    38.850 Core Principle 16.

    38.851 Additional sources for compliance.

    Subpart R--Composition of Governing Boards of Contract Markets

    38.900 Core Principle 17.

    Subpart S--Recordkeeping

    38.950 Core Principle 18.

    38.951 Additional sources for compliance.

    Subpart T--Antitrust Considerations

    38.1000 Core Principle 19.

    38.1001 Additional sources for compliance.

    Subpart U--System Safeguards

    38.1050 Core Principle 20.

    38.1051 General requirements.

    Subpart V--Financial Resources

    38.1100 Core Principle 21.

    38.1101 General requirements.

    Subpart W--Diversity of Boards of Directors

    38.1150 Core Principle 22.

    Subpart X--Securities and Exchange Commission

    38.1200 Core Principle 23.

    38.1201 Additional sources for compliance.

    Subpart B--Designation as Contract Market

    Sec. 38.100 Core Principle 1.

    (a) In general. To be designated, and maintain a designation, as a

    contract market, a board of trade shall comply with:

    (1) Any core principle described in section 5(d) of the Act, and

    (2) Any requirement that the Commission may impose by rule or

    regulation pursuant to section 8a(5) of the Act.

    (b) Reasonable discretion of the contract market. Unless otherwise

    determined by the Commission by rule or regulation, a board of trade

    described in paragraph (a) of this section shall have reasonable

    discretion in establishing the manner in which the board of trade

    complies with the core principles described in this subsection.

    Subpart C--Compliance With Rules

    Sec. 38.150 Core Principle 2.

    (a) In general. The board of trade shall establish, monitor, and

    enforce compliance with the rules of the contract market, including:

    (1) Access requirements;

    (2) The terms and conditions of any contracts to be traded on the

    contract market; and

    (3) Rules prohibiting abusive trade practices on the contract

    market.

    (b) Capacity of contract market. The board of trade shall have the

    capacity to detect, investigate, and apply appropriate sanctions to any

    person that violates any rule of the contract market.

    (c) Requirement of rules. The rules of the contract market shall

    provide the board of trade with the ability and authority to obtain any

    necessary information to perform any function described in this

    section, including the capacity to carry out such international

    information-sharing agreements, as the Commission may require.

    Sec. 38.151 Access requirements.

    (a) Jurisdiction. Prior to granting any member or market

    participant access to its markets, a designated contract market must

    require that the member or market participant consent to its

    jurisdiction.

    [[Page 36701]]

    (b) Impartial access by members, persons with trading privileges

    and independent software vendors. A designated contract market must

    provide its members, persons with trading privileges, and independent

    software vendors with impartial access to its markets and services,

    including:

    (1) Access criteria that are impartial, transparent, and applied in

    a non-discriminatory manner; and

    (2) Comparable fee structures for members, persons with trading

    privileges and independent software vendors receiving equal access to,

    or services from, the designated contract market.

    (c) Limitations on access. A designated contract market must

    establish and impartially enforce rules governing denials, suspensions,

    and revocations of a member's and a person with trading privileges'

    access privileges to the designated contract market, including when

    such actions are part of a disciplinary or emergency action by the

    designated contract market.

    Sec. 38.152 Abusive trading practices prohibited.

    A designated contract market must prohibit abusive trading

    practices on its markets by members and market participants. Designated

    contract markets that permit intermediation must prohibit customer-

    related abuses including, but not limited to, trading ahead of customer

    orders, trading against customer orders, accommodation trading, and

    improper cross trading. Specific trading practices that must be

    prohibited by all designated contract markets include front-running,

    wash trading, pre-arranged trading (except for certain transactions

    specifically permitted under part 38 of this chapter), fraudulent

    trading, money passes, and any other trading practices that a

    designated contract market deems to be abusive. In addition, a

    designated contract market also must prohibit any other manipulative or

    disruptive trading practices prohibited by the Act or by the Commission

    pursuant to Commission regulation.

    Sec. 38.153 Capacity to detect and investigate rule violations.

    A designated contract market must have arrangements and resources

    for effective enforcement of its rules. Such arrangements must include

    the authority to collect information and documents on both a routine

    and non-routine basis, including the authority to examine books and

    records kept by the designated contract market's members and by persons

    under investigation. A designated contract market's arrangements and

    resources must also facilitate the direct supervision of the market and

    the analysis of data collected to determine whether a rule violation

    occurred.

    Sec. 38.154 Regulatory services provided by a third party.

    (a) Use of third-party provider permitted. A designated contract

    market may choose to utilize a registered futures association or

    another registered entity, as such terms are defined under the Act,

    (collectively, ``regulatory service provider''), for the provision of

    services to assist in complying with the core principles, as approved

    by the Commission. Any designated contract market that chooses to

    utilize a regulatory service provider must ensure that its regulatory

    service provider has the capacity and resources necessary to provide

    timely and effective regulatory services, including adequate staff and

    automated surveillance systems. A designated contract market will at

    all times remain responsible for the performance of any regulatory

    services received, for compliance with the designated contract market's

    obligations under the Act and Commission regulations, and for the

    regulatory service provider's performance on its behalf.

    (b) Duty to supervise third party. A designated contract market

    that elects to utilize a regulatory service provider must retain

    sufficient compliance staff to supervise the quality and effectiveness

    of the services provided on its behalf. Compliance staff of the

    designated contract market must hold regular meetings with the

    regulatory service provider to discuss ongoing investigations, trading

    patterns, market participants, and any other matters of regulatory

    concern. A designated contract market also must conduct periodic

    reviews of the adequacy and effectiveness of services provided on its

    behalf. Such reviews must be documented carefully and made available to

    the Commission upon request.

    (c) Regulatory decisions required from the designated contract

    market. A designated contract market that elects to utilize a

    regulatory service provider must retain exclusive authority in

    decisions involving the cancellation of trades, the issuance of

    disciplinary charges against members or market participants, and the

    denials of access to the trading platform for disciplinary reasons. A

    designated contract market may also retain exclusive authority in other

    areas of its choosing. A designated contract market must document any

    instances where its actions differ from those recommended by its

    regulatory service provider, including the reasons for the course of

    action recommended by the regulatory service provider and the reasons

    why the designated contract market chose a different course of action.

    Sec. 38.155 Compliance staff and resources.

    (a) Sufficient compliance staff. A designated contract market must

    establish and maintain sufficient compliance department resources and

    staff to ensure that it can conduct effective audit trail reviews,

    trade practice surveillance, market surveillance, and real-time market

    monitoring. The designated contract market's compliance staff also must

    be sufficient to address unusual market or trading events as they

    arise, and to conduct and complete investigations in a timely manner,

    as set forth in Sec. 38.158(b) of this part.

    (b) Ongoing monitoring of compliance staff resources. A designated

    contract market must monitor the size and workload of its compliance

    staff annually, and ensure that its compliance resources and staff are

    at appropriate levels. In determining the appropriate level of

    compliance resources and staff, the designated contract market should

    consider trading volume increases, the number of new products or

    contracts to be listed for trading, any new responsibilities to be

    assigned to compliance staff, the results of any internal review

    demonstrating that work is not completed in an effective or timely

    manner, and any other factors suggesting the need for increased

    resources and staff.

    Sec. 38.156 Automated trade surveillance system.

    A designated contract market must maintain an automated trade

    surveillance system capable of detecting and investigating potential

    trade practice violations. The automated system must load and process

    daily orders and trades no later than 24 hours after the completion of

    the trading day. In addition, the automated trade surveillance system

    must have the capability to detect and flag specific trade execution

    patterns and trade anomalies; compute, retain, and compare trading

    statistics; compute trade gains, losses, and futures-equivalent

    positions; reconstruct the sequence of market activity; perform market

    analyses; and support system users to perform in-depth analyses and ad

    hoc queries of trade-related data.

    [[Page 36702]]

    Sec. 38.157 Real-time market monitoring.

    A designated contract market must conduct real-time market

    monitoring of all trading activity on its electronic trading

    platform(s) to identify disorderly trading and any market or system

    anomalies. A designated contract market must have the authority to

    adjust trade prices or cancel trades when necessary to mitigate market

    disrupting events caused by malfunctions in its electronic trading

    platform(s) or errors in orders submitted by members and market

    participants. Any trade price adjustments or trade cancellations must

    be transparent to the market and subject to standards that are clear,

    fair, and publicly available.

    Sec. 38.158 Investigations and investigation reports.

    (a) Procedures. A designated contract market must establish and

    maintain procedures that require its compliance staff to conduct

    investigations of possible rule violations. An investigation must be

    commenced upon the receipt of a request from Commission staff or upon

    the discovery or receipt of information by the designated contract

    market that indicates a reasonable basis for finding that a violation

    may have occurred or will occur.

    (b) Timeliness. Each compliance staff investigation must be

    completed in a timely manner. Absent mitigating factors, a timely

    manner is no later than 12 months after the date that an investigation

    is opened. Mitigating factors that may reasonably justify an

    investigation taking longer than 12 months to complete include the

    complexity of the investigation, the number of firms or individuals

    involved as potential wrongdoers, the number of potential violations to

    be investigated, and the volume of documents and data to be examined

    and analyzed by compliance staff.

    (c) Investigation reports when a reasonable basis exists for

    finding a violation. Compliance staff must submit a written

    investigation report for disciplinary action in every instance in which

    compliance staff determines from surveillance or from an investigation

    that a reasonable basis exists for finding a rule violation. The

    investigation report must include the reason the investigation was

    initiated; a summary of the complaint, if any; the relevant facts;

    compliance staff's analysis and conclusions; and a recommendation as to

    whether disciplinary action should be pursued.

    (d) Investigation reports when no reasonable basis exists for

    finding a violation. If after conducting an investigation, compliance

    staff determines that no reasonable basis exists for finding a

    violation, it must prepare a written report including the reason(s) the

    investigation was initiated; a summary of the complaint, if any; the

    relevant facts; and compliance staff's analysis and conclusions.

    (e) Warning letters. No more than one warning letter may be issued

    to the same person or entity found to have committed the same rule

    violation within a rolling twelve month period.

    Sec. 38.159 Ability to obtain information.

    A designated contract market must have the ability and authority to

    obtain any necessary information to perform any function required under

    this subpart C of the Commission's regulations, including the capacity

    to carry out international information-sharing agreements as the

    Commission may require. Appropriate information-sharing agreements can

    be established with other designated contract markets and swap

    execution facilities, or the Commission can act in conjunction with the

    designated contract market to carry out such information sharing.

    Sec. 38.160 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance in appendix B of this part to demonstrate to the Commission

    compliance with the requirements of Sec. 38.150 of this part.

    Subpart D--Contracts Not Readily Subject to Manipulation

    Sec. 38.200 Core Principle 3.

    The board of trade shall list on the contract market only contracts

    that are not readily susceptible to manipulation.

    Sec. 38.201 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance in appendix C of this part to demonstrate to the Commission

    compliance with the requirements of Sec. 38.200 of this part.

    Subpart E--Prevention of Market Disruption

    Sec. 38.250 Core Principle 4.

    The board of trade shall have the capacity and responsibility to

    prevent manipulation, price distortion, and disruptions of the delivery

    or cash-settlement process through market surveillance, compliance, and

    enforcement practices and procedures, including:

    (a) Methods for conducting real-time monitoring of trading; and

    (b) Comprehensive and accurate trade reconstructions.

    Sec. 38.251 General requirements.

    A designated contract market must:

    (a) Collect and evaluate data on individual traders' market

    activity on an ongoing basis in order to detect and prevent

    manipulation, price distortions and, where possible, disruptions of the

    physical-delivery or cash-settlement process;

    (b) Monitor and evaluate general market data in order to detect and

    prevent manipulative activity that would result in the failure of the

    market price to reflect the normal forces of supply and demand;

    (c) Demonstrate an effective program for conducting real-time

    monitoring of market conditions, price movements and volumes, in order

    to detect abnormalities and, when necessary, make a good-faith effort

    to resolve conditions that are, or threaten to be, disruptive to the

    market; and

    (d) Demonstrate the ability to comprehensively and accurately

    reconstruct daily trading activity for the purposes of detecting

    trading abuses and violations of exchange-set position limits,

    including those that may have occurred intraday.

    Sec. 38.252 Additional requirements for physical-delivery contracts.

    For physical-delivery contracts, the designated contract market

    must demonstrate that it:

    (a) Monitors a contract's terms and conditions as they relate to

    the underlying commodity market and to the convergence between the

    contract price and the price of the underlying commodity and show a

    good-faith effort to resolve conditions that are interfering with

    convergence; and

    (b) Monitors the supply of the commodity and its adequacy to

    satisfy the delivery requirements and make a good-faith effort to

    resolve conditions that threaten the adequacy of supplies or the

    delivery process.

    Sec. 38.253 Additional requirements for cash-settled contracts.

    (a) For cash-settled contracts, the designated contract market must

    demonstrate that it:

    (1) Monitors the pricing of the index to which the contract will be

    settled; and

    (2) Monitors the continued appropriateness of the methodology for

    deriving the index and makes a good-faith effort to resolve conditions,

    including amending contract terms where necessary, where there is a

    threat of market manipulation, disruptions, or distortions.

    (b) If a contract listed on a designated contract market is settled

    by reference to

    [[Page 36703]]

    the price of a contract or commodity traded in another venue, including

    a price or index derived from prices on another designated contract

    market, the designated contract market must have rules or agreements

    that allow the designated contract market access to information on the

    activities of its traders in the reference market.

    Sec. 38.254 Ability to obtain information.

    (a) The designated contract market must have rules that require

    traders in its contracts to keep records of their trading, including

    records of their activity in the underlying commodity and related

    derivatives markets, and make such records available, upon request, to

    the designated contract market.

    (b) A designated contract market with participants trading through

    intermediaries must either use a comprehensive large-trader reporting

    system (LTRS) or be able to demonstrate that it can obtain position

    data from other sources in order to conduct an effective surveillance

    program.

    Sec. 38.255 Risk controls for trading.

    The designated contract market must establish and maintain risk

    control mechanisms to prevent and reduce the potential risk of price

    distortions and market disruptions, including, but not limited to,

    market restrictions that pause or halt trading in market conditions

    prescribed by the designated contract market.

    Sec. 38.256 Trade reconstruction.

    The designated contract market must have the ability to

    comprehensively and accurately reconstruct all trading on its trading

    facility. All audit-trail data and reconstructions must be made

    available to the Commission in a form, manner, and time that is

    acceptable to the Commission.

    Sec. 38.257 Regulatory service provider.

    A designated contract market must comply with the regulations in

    this subpart through a dedicated regulatory department, or by

    delegation of that function to a registered futures association or a

    registered entity (collectively, ``regulatory service provider''), as

    such terms are defined in the Act and over which the designated

    contract market has supervisory authority.

    Sec. 38.258 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance and acceptable practices in appendix B of this part to

    demonstrate to the Commission compliance with the requirements of Sec.

    38.250 of this part.

    Subpart F--Position Limitations or Accountability

    Sec. 38.300 Core Principle 5.

    To reduce the potential threat of market manipulation or congestion

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

    shall adopt for each contract of the board of trade, as is necessary

    and appropriate, position limitations or position accountability for

    speculators. For any contract that is subject to a position limitation

    established by the Commission, pursuant to section 4a(a), the board of

    trade shall set the position limitation of the board of trade at a

    level not higher than the position limitation established by the

    Commission.

    Sec. 38.301 Position limitations and accountability.

    A designated contract market must meet the requirements of parts

    150 and 151 of this chapter, as applicable.

    Subpart G--Emergency Authority

    Sec. 38.350 Core Principle 6.

    The board of trade, in consultation or cooperation with the

    Commission, shall adopt rules to provide for the exercise of emergency

    authority, as is necessary and appropriate, including the authority:

    (a) To liquidate or transfer open positions in any contract;

    (b) To suspend or curtail trading in any contract; and

    (c) To require market participants in any contract to meet special

    margin requirements.

    Sec. 38.351 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance and/or acceptable practices in appendix B of this part to

    demonstrate to the Commission compliance with the requirements of Sec.

    38.350.

    Subpart H--Availability of General Information

    Sec. 38.400 Core Principle 7.

    The board of trade shall make available to market authorities,

    market participants, and the public accurate information concerning:

    (a) The terms and conditions of the contracts of the contract

    market; and

    (b)(1) The rules, regulations and mechanisms for executing

    transactions on or through the facilities of the contract market, and

    (2) The rules and specifications describing the operation of the

    contract market's:

    (i) Electronic matching platform, or

    (ii) Trade execution facility.

    Sec. 38.401 General requirements.

    (a) General. (1) A designated contract market must have procedures,

    arrangements and resources for disclosing to the Commission, market

    participants and the public accurate information pertaining to:

    (i) Contract terms and conditions;

    (ii) Rules and regulations pertaining to the trading mechanisms;

    and

    (iii) Rules and specifications pertaining to operation of the

    electronic matching platform or trade execution facility.

    (2) Through the procedures, arrangements and resources required in

    paragraph (a) of this section, the designated contract market must

    ensure public dissemination of information pertaining to new product

    listings, new rules, rule amendments or other changes to previously-

    disclosed information, in accordance with the timeline provided in

    paragraph (c) of this section.

    (3) A designated contract market shall meet the requirements of

    this paragraph (a), by placing the information described in this

    paragraph (a) on the designated contract market's Web site within the

    time prescribed in paragraph (c) of this section.

    (b) Accuracy requirement. With respect to any communication with

    the Commission, and any information required to be transmitted or made

    available to market participants and the public, including on its Web

    site or otherwise, a designated contract market must provide

    information that it believes, to the best of its knowledge, is accurate

    and complete, and must not omit material information.

    (c) Notice of regulatory submissions. (1) A designated contract

    market, in making available on its Web site information pertaining to

    new product listings, new rules, rule amendments or other changes to

    previously-disclosed information, must place such information and

    submissions on its Web site concurrent with the filing of such

    information or submissions with the Secretary of the Commission.

    (2) To the extent that a designated contract market requests

    confidential treatment of any information filed with the Secretary of

    the Commission, the designated contract market must post on its Web

    site the public version of such filing or submission.

    (d) Rulebook. A designated contract market must ensure that the

    rulebook posted on its Web site is accurate,

    [[Page 36704]]

    complete, current and readily accessible to the public. A designated

    contract market must publish or post in its rulebook all new or amended

    rules, both substantive and non-substantive, on the date of

    implementation of such new or amended rule, on the date a new product

    is listed, or on the date any changes to previously-disclosed

    information take effect.

    Subpart I--Daily Publication of Trading Information

    Sec. 38.450 Core Principle 8.

    The board of trade shall make public daily information on

    settlement prices, volume, open interest, and opening and closing

    ranges for actively traded contracts on the contract market.

    Sec. 38.451 Reporting of trade information.

    A designated contract market must meet the reporting requirements

    set forth in part 16 of this chapter.

    Subpart J--Execution of Transactions

    Sec. 38.500 Core Principle 9.

    The board of trade shall provide a competitive, open, and efficient

    market and mechanism for executing transactions that protects the price

    discovery process of trading in the centralized market of the board of

    trade. The rules of the board of trade may authorize, for bona fide

    business purposes:

    (a) Transfer trades or office trades;

    (b) An exchange of:

    (1) Futures in connection with a cash commodity transaction;

    (2) Futures for cash commodities; or

    (3) Futures for swaps; or

    (c) A futures commission merchant, acting as principal or agent, to

    enter into or confirm the execution of a contract for the purchase or

    sale of a commodity for future delivery if the contract is reported,

    recorded, or cleared in accordance with the rules of the contract

    market or a derivatives clearing organization.

    Subpart K--Trade Information

    Sec. 38.550 Core Principle 10.

    The board of trade shall maintain rules and procedures to provide

    for the recording and safe storage of all identifying trade information

    in a manner that enables the contract market to use the information:

    (a) To assist in the prevention of customer and market abuses; and

    (b) To provide evidence of any violations of the rules of the

    contract market.

    Sec. 38.551 Audit trail required.

    A designated contract market must capture and retain all audit

    trail data necessary to detect, investigate, and prevent customer and

    market abuses. Such data must be sufficient to reconstruct all

    transactions within a reasonable period of time and to provide evidence

    of any violations of the rules of the designated contract market. An

    acceptable audit trail must also permit the designated contract market

    to track a customer order from the time of receipt through fill,

    allocation, or other disposition, and must include both order and trade

    data.

    Sec. 38.552 Elements of an acceptable audit trail program.

    (a) Original source documents. A designated contract market's audit

    trail must include original source documents. Original source documents

    include unalterable, sequentially identified records on which trade

    execution information is originally recorded, whether recorded manually

    or electronically. Records for customer orders (whether filled,

    unfilled, or cancelled, each of which shall be retained or

    electronically captured) must reflect the terms of the order, an

    account identifier that relates back to the account(s) owner(s), and

    the time of order entry. For open-outcry trades, the time of report of

    execution of the order shall also be captured.

    (b) Transaction history database. A designated contract market's

    audit trail program must include an electronic transaction history

    database. An adequate transaction history database includes a history

    of all trades executed via open outcry or via entry into an electronic

    trading system, and all orders entered into an electronic trading

    system, including all order modifications and cancellations. An

    adequate transaction history database also includes:

    (1) All data that are input into the trade entry or matching system

    for the transaction to match and clear;

    (2) The customer type indicator code;

    (3) Timing and sequencing data adequate to reconstruct trading; and

    (4) Identification of each account to which fills are allocated.

    (c) Electronic analysis capability. A designated contract market's

    audit trail program must include electronic analysis capability with

    respect to all audit trail data in the transaction history database.

    Such electronic analysis capability must ensure that the designated

    contract market has the ability to reconstruct trading and identify

    possible trading violations with respect to both customer and market

    abuse.

    (d) Safe storage capability. A designated contract market's audit

    trail program must include the capability to safely store all audit

    trail data retained in its transaction history database. Such safe

    storage capability must include the capability to store all data in the

    database in a manner that protects it from unauthorized alteration, as

    well as from accidental erasure or other loss. Data must be retained in

    accordance with the recordkeeping requirements of Core Principle 18 and

    the associated regulations in subpart S of this part.

    Sec. 38.553 Enforcement of audit trail requirements.

    (a) Annual audit trail and recordkeeping reviews. A designated

    contract market must enforce its audit trail and recordkeeping

    requirements through at least annual reviews of all members and persons

    and firms subject to designated contract market recordkeeping rules to

    verify their compliance with the contract market's audit trail and

    recordkeeping requirements. Such reviews must include, but are not

    limited to, the following:

    (1) For electronic trading, audit trail and recordkeeping reviews

    must include reviews of randomly selected samples of front-end audit

    trail data for order routing systems; a review of the process by which

    user identifications are assigned and user identification records are

    maintained; a review of usage patterns associated with user

    identifications to monitor for violations of user identification rules;

    and reviews of account numbers and customer type indicator codes in

    trade records to test for accuracy and improper use.

    (2) For open outcry trading, audit trail and recordkeeping reviews

    must include reviews of members' and market participants' compliance

    with the designated contract market's trade timing, order ticket, and

    trading card requirements.

    (b) Enforcement program required. A designated contract market must

    establish a program for effective enforcement of its audit trail and

    recordkeeping requirements for both electronic and open-outcry trading,

    as applicable. An effective program must identify members and persons

    and firms subject to designated contract market recordkeeping rules

    that have failed to maintain high levels of compliance with such

    requirements, and levy meaningful sanctions when deficiencies are

    found. Sanctions must be sufficient to deter recidivist behavior. No

    more than one warning letter may be issued to the

    [[Page 36705]]

    same person or entity found to have committed the same rule violation

    within a rolling twelve month period.

    Subpart L--Financial Integrity of Transactions

    Sec. 38.600 Core Principle 11.

    The board of trade shall establish and enforce:

    (a) Rules and procedures for ensuring the financial integrity of

    transactions entered into on or through the facilities of the contract

    market (including the clearance and settlement of the transactions with

    a derivatives clearing organization); and

    (b) Rules to ensure:

    (1) The financial integrity of any:

    (i) Futures commission merchant, and

    (ii) Introducing broker; and

    (2) The protection of customer funds.

    Sec. 38.601 Mandatory clearing.

    (a) Transactions executed on or through the designated contract

    market must be cleared through a Commission-registered derivatives

    clearing organization, in accordance with the provisions of part 39 of

    this chapter. Notwithstanding the foregoing, transactions in security

    futures products executed on or through the designated contract market

    may alternatively be cleared through a clearing agency, registered

    pursuant to section 17A of the Securities Exchange Act of 1934.

    (b) [Reserved]

    Sec. 38.602 General financial integrity.

    A designated contract market must provide for the financial

    integrity of its transactions by establishing and maintaining

    appropriate minimum financial standards for its members and non-

    intermediated market participants.

    Sec. 38.603 Protection of customer funds.

    A designated contract market must have rules concerning the

    protection of customer funds. These rules shall address appropriate

    minimum financial standards for intermediaries, the segregation of

    customer and proprietary funds, the custody of customer funds, the

    investment standards for customer funds, intermediary default

    procedures and related recordkeeping. A designated contract market must

    review the default rules and procedures of the derivatives clearing

    organization that clears for such designated contract market to wind

    down operations, transfer customers, or otherwise protect customers in

    the event of a default of a clearing member or the derivatives clearing

    organization.

    Sec. 38.604 Financial surveillance.

    A designated contract market must monitor members' compliance with

    the designated contract market's minimum financial standards and,

    therefore, must routinely receive and promptly review financial and

    related information from its members, as well as continuously monitor

    the positions of members and their customers. A designated contract

    market must have rules that prescribe minimum capital requirements for

    member futures commission merchants and introducing brokers. A

    designated contract market must:

    (a) Continually survey the obligations of each futures commission

    merchant created by the positions of its customers;

    (b) As appropriate, compare those obligations to the financial

    resources of the futures commission merchant; and

    (c) Take appropriate steps to use this information to protect

    customer funds.

    Sec. 38.605 Requirements for financial surveillance program.

    A designated contract market's financial surveillance program for

    futures commission merchants, retail foreign exchange dealers, and

    introducing brokers must comply with the requirements of Sec. 1.52 of

    this chapter to assess the compliance of such entities with applicable

    contract market rules and Commission regulations.

    Sec. 38.606 Financial regulatory services provided by a third party.

    A designated contract market may comply with the requirements of

    Sec. 38.604 (Financial Surveillance) and Sec. 38.605 (Requirements

    for Financial Surveillance Program) of this part through the regulatory

    services of a registered futures association or a registered entity

    (collectively, ``regulatory service provider''), as such terms are

    defined under the Act. A designated contract market must ensure that

    its regulatory service provider has the capacity and resources

    necessary to provide timely and effective regulatory services,

    including adequate staff and appropriate surveillance systems. A

    designated contract market will at all times remain responsible for

    compliance with its obligations under the Act and Commission

    regulations, and for the regulatory service provider's performance on

    its behalf. Regulatory services must be provided under a written

    agreement with a regulatory services provider that shall specifically

    document the services to be performed as well as the capacity and

    resources of the regulatory service provider with respect to the

    services to be performed.

    Sec. 38.607 Direct access.

    A designated contract market that permits direct electronic access

    by customers (i.e., allowing customers of futures commission merchants

    to enter orders directly into a designated contract market's trade

    matching system for execution) must have in place effective systems and

    controls reasonably designed to facilitate the FCM's management of

    financial risk, such as automated pre-trade controls that enable member

    futures commission merchants to implement appropriate financial risk

    limits. A designated contract market must implement and enforce rules

    requiring the member futures commission merchants to use the provided

    systems and controls.

    Subpart M--Protection of Markets and Market Participants

    Sec. 38.650 Core Principle 12.

    The board of trade shall establish and enforce rules:

    (a) To protect markets and market participants from abusive

    practices committed by any party, including abusive practices committed

    by a party acting as an agent for a participant; and

    (b) To promote fair and equitable trading on the contract market.

    Sec. 38.651 Protection of markets and market participants.

    A designated contract market must have and enforce rules that are

    designed to promote fair and equitable trading and to protect the

    market and market participants from abusive practices including

    fraudulent, noncompetitive or unfair actions, committed by any party.

    The designated contract market must have methods and resources

    appropriate to the nature of the trading system and the structure of

    the market to detect trade practice and market abuses and to discipline

    such behavior, in accordance with Core Principles 2 and 4, and the

    associated regulations in subparts C and E of this part, respectively.

    The designated contract market also must provide a competitive, open

    and efficient market and mechanism for executing transactions in

    accordance with Core Principle 9 and the associated regulations under

    subpart J of this part.

    Subpart N--Disciplinary Procedures

    Sec. 38.700 Core Principle 13.

    The board of trade shall establish and enforce disciplinary

    procedures that authorize the board of trade to discipline, suspend, or

    expel members or market participants that violate the rules of the

    board of trade, or similar methods for performing the same functions,

    including delegation of the functions to third parties.

    [[Page 36706]]

    Sec. 38.701 Enforcement staff.

    A designated contract market must establish and maintain sufficient

    enforcement staff and resources to effectively and promptly prosecute

    possible rule violations within the disciplinary jurisdiction of the

    contract market. A designated contract market must also monitor the

    size and workload of its enforcement staff annually, and ensure that

    its enforcement resources and staff are at appropriate levels. The

    enforcement staff may not include either members of the designated

    contract market or persons whose interests conflict with their

    enforcement duties. A member of the enforcement staff may not operate

    under the direction or control of any person or persons with trading

    privileges at the contract market. A designated contract market's

    enforcement staff may operate as part of the designated contract

    market's compliance department.

    Sec. 38.702 Disciplinary panels.

    A designated contract market must establish one or more

    disciplinary panels that are authorized to fulfill their obligations

    under the rules of this subpart. Disciplinary panels must meet the

    composition requirements of part 40 of this chapter, and must not

    include any members of the designated contract market's compliance

    staff or any person involved in adjudicating any other stage of the

    same proceeding.

    Sec. 38.703 Notice of charges.

    If compliance staff authorized by a designated contract market or a

    designated contract market disciplinary panel determines that a

    reasonable basis exists for finding a violation and that adjudication

    is warranted, it must direct that the person or entity alleged to have

    committed the violation be served with a notice of charges and must

    proceed in accordance with the rules of this section. A notice of

    charges must adequately state the acts, conduct, or practices in which

    the respondent is alleged to have engaged; state the rule, or rules,

    alleged to have been violated (or about to be violated); and prescribe

    the period within which a hearing on the charges may be requested. The

    notice must also advise that the charged respondent is entitled, upon

    request, to a hearing on the charges.

    Sec. 38.704 Right to representation.

    Upon being served with a notice of charges, a respondent must have

    the right to be represented by legal counsel or any other

    representative of its choosing in all succeeding stages of the

    disciplinary process, except any member of the designated contract

    market's board of directors or disciplinary panel, any employee of the

    designated contract market, or any person substantially related to the

    underlying investigations, such as material witness or respondent.

    Sec. 38.705 Answer to charges.

    A respondent must be given a reasonable period of time to file an

    answer to a notice of charges. The rules of a designated contract

    market governing the requirements and timeliness of a respondent's

    answer to charges must be fair, equitable, and publicly available.

    Sec. 38.706 Denial of charges and right to hearing.

    In every instance where a respondent has requested a hearing on a

    charge that is denied, or on a sanction set by the disciplinary panel,

    the respondent must be given an opportunity for a hearing in accordance

    with the requirements of Sec. 38.707 of this part.

    Sec. 38.707 Hearings.

    (a) A designated contract market must adopt rules that provide for

    the following minimum requirements for any hearing conducted pursuant

    to a notice of charges:

    (1) The hearing must be fair, must be conducted before members of

    the disciplinary panel, and must be promptly convened after reasonable

    notice to the respondent. The formal rules of evidence need not apply;

    nevertheless, the procedures for the hearing may not be so informal as

    to deny a fair hearing. No member of the disciplinary panel for the

    matter may have a financial, personal, or other direct interest in the

    matter under consideration.

    (2) In advance of the hearing, the respondent must be entitled to

    examine all books, documents, or other evidence in the possession or

    under the control of the designated contract market. The designated

    contract market may withhold documents that are privileged or

    constitute attorney work product, documents that were prepared by an

    employee of the designated contract market but will not be offered in

    evidence in the disciplinary proceedings, documents that may disclose a

    technique or guideline used in examinations, investigations, or

    enforcements proceedings, and documents that disclose the identity of a

    confidential source.

    (3) The designated contract market's enforcement and compliance

    staffs must be parties to the hearing, and the enforcement staff must

    present their case on those charges and sanctions that are the subject

    of the hearing.

    (4) The respondent must be entitled to appear personally at the

    hearing, must be entitled to cross-examine any persons appearing as

    witnesses at the hearing, and must be entitled to call witnesses and to

    present such evidence as may be relevant to the charges.

    (5) The designated contract market must require persons within its

    jurisdiction who are called as witnesses to participate in the hearing

    and to produce evidence. It must make reasonable efforts to secure the

    presence of all other persons called as witnesses whose testimony would

    be relevant.

    (6) If the respondent has requested a hearing, a copy of the

    hearing must be made and must become a part of the record of the

    proceeding. The record must be one that is capable of being accurately

    transcribed; however, it need not be transcribed unless the transcript

    is requested by Commission staff or the respondent, the decision is

    appealed pursuant to the rules of the designated contract market, or is

    reviewed by the Commission pursuant to section 8c of the Act or part 9

    of this chapter. In all other instances a summary record of a hearing

    is permitted.

    (b) [Reserved]

    Sec. 38.708 Decisions.

    Promptly following a hearing conducted in accordance with Sec.

    38.707 of this part, the disciplinary panel must render a written

    decision based upon the weight of the evidence contained in the record

    of the proceeding and must provide a copy to the respondent. The

    decision must include:

    (a) The notice of charges or a summary of the charges;

    (b) The answer, if any, or a summary of the answer;

    (c) A summary of the evidence produced at the hearing or, where

    appropriate, incorporation by reference of the investigation report;

    (d) A statement of findings and conclusions with respect to each

    charge, and a complete explanation of the evidentiary and other basis

    for such findings and conclusions with respect to each charge;

    (e) An indication of each specific rule that the respondent was

    found to have violated; and

    (f) A declaration of all sanctions imposed against the respondent,

    including the basis for such sanctions and the effective date of such

    sanctions.

    Sec. 38.709 Final decisions.

    Each designated contract market must establish rules setting forth

    when a decision rendered pursuant to this

    [[Page 36707]]

    section will become the final decision of such designated contract

    market.

    Sec. 38.710 Disciplinary sanctions.

    All disciplinary sanctions imposed by a designated contract market

    or its disciplinary panels must be commensurate with the violations

    committed and must be clearly sufficient to deter recidivism or similar

    violations by other market participants. All disciplinary sanctions,

    including sanctions imposed pursuant to an accepted settlement offer,

    must take into account the respondent's disciplinary history. In the

    event of demonstrated customer harm, any disciplinary sanction must

    also include full customer restitution, except where the amount of

    restitution, or to whom it should be provided, cannot be reasonably

    determined.

    Sec. 38.711 Warning letters.

    Where a rule violation is found to have occurred, no more than one

    warning letter may be issued per rolling 12-month period for the same

    violation.

    Sec. 38.712 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance in appendix B of this part to demonstrate to the Commission

    compliance with the requirements of Sec. 38.700 of this part.

    Subpart O--Dispute Resolution

    Sec. 38.750 Core Principle 14.

    The board of trade shall establish and enforce rules regarding, and

    provide facilities for alternative dispute resolution as appropriate

    for, market participants and any market intermediaries.

    Sec. 38.751 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance and acceptable practices in appendix B of this part to

    demonstrate to the Commission compliance with the requirements of Sec.

    38.750 of this part.

    Subpart P--Governance Fitness Standards

    Sec. 38.800 Core Principle 15.

    The board of trade shall establish and enforce appropriate fitness

    standards for directors, members of any disciplinary committee, members

    of the contract market, and any other person with direct access to the

    facility (including any party affiliated with any person described in

    this paragraph).

    Sec. 38.801 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance in appendix B of this part to demonstrate to the Commission

    compliance with the requirements of Sec. 38.800 of this part.

    Subpart Q--Conflicts of Interest

    Sec. 38.850 Core Principle 16.

    The board of trade shall establish and enforce rules:

    (a) To minimize conflicts of interest in the decision-making

    process of the contract market; and

    (b) To establish a process for resolving conflicts of interest

    described in paragraph (a) of this section.

    Sec. 38.851 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance and/or acceptable practices in appendix B of this part to

    demonstrate to the Commission compliance with the requirements of Sec.

    38.850 of this part.

    Subpart R--Composition of Governing Boards of Contract Markets

    Sec. 38.900 Core Principle 17.

    The governance arrangements of the board of trade shall be designed

    to permit consideration of the views of market participants.

    Subpart S--Recordkeeping

    Sec. 38.950 Core Principle 18.

    The board of trade shall maintain records of all activities

    relating to the business of the contract market:

    (a) In a form and manner that is acceptable to the Commission; and

    (b) For a period of at least 5 years.

    Sec. 38.951 Additional sources for compliance.

    A designated contract market must maintain such records, including

    trade records and investigatory and disciplinary files, in accordance

    with the requirements of Sec. 1.31 of this chapter, and in accordance

    with part 45 of this chapter, if applicable.

    Subpart T--Antitrust Considerations

    Sec. 38.1000 Core Principle 19.

    Unless necessary or appropriate to achieve the purposes of this

    Act, the board of trade shall not:

    (a) Adopt any rule or taking any action that results in any

    unreasonable restraint of trade; or

    (b) Impose any material anticompetitive burden on trading on the

    contract market.

    Sec. 38.1001 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance and acceptable practices in appendix B of this part to

    demonstrate to the Commission compliance with the requirements of Sec.

    38.1000 of this part.

    Subpart U--System Safeguards

    Sec. 38.1050 Core Principle 20.

    Each designated contract market shall:

    (a) Establish and maintain a program of risk analysis and oversight

    to identify and minimize sources of operational risk, through the

    development of appropriate controls and procedures, and the development

    of automated systems, that are reliable, secure, and have adequate

    scalable capacity;

    (b) Establish and maintain emergency procedures, backup facilities,

    and a plan for disaster recovery that allow for the timely recovery and

    resumption of operations and the fulfillment of the responsibilities

    and obligations of the board of trade; and

    (c) Periodically conduct tests to verify that backup resources are

    sufficient to ensure continued order processing and trade matching,

    transmission of matched orders to a designated clearing organization

    for clearing, price reporting, market surveillance, and maintenance of

    a comprehensive and accurate audit trail.

    Sec. 38.1051 General requirements.

    (a) A designated contract market's program of risk analysis and

    oversight with respect to its operations and automated systems must

    address each of the following categories of risk analysis and

    oversight:

    (1) Information security;

    (2) Business continuity-disaster recovery planning and resources;

    (3) Capacity and performance planning;

    (4) Systems operations;

    (5) Systems development and quality assurance; and

    (6) Physical security and environmental controls.

    (b) In addressing the categories of risk analysis and oversight

    required under paragraph (a) of this section, a designated contract

    market should follow generally accepted standards and best practices

    with respect to the development, operation, reliability, security, and

    capacity of automated systems.

    (c) A designated contract market must maintain a business

    continuity-disaster recovery plan and business continuity-disaster

    recovery resources, emergency procedures, and backup facilities

    [[Page 36708]]

    sufficient to enable timely recovery and resumption of its operations

    and resumption of its ongoing fulfillment of its responsibilities and

    obligations as a designated contract market following any disruption of

    its operations. Such responsibilities and obligations include, without

    limitation, order processing and trade matching; transmission of

    matched orders to a designated clearing organization for clearing;

    price reporting; market surveillance; and maintenance of a

    comprehensive audit trail. The designated contract market's business

    continuity-disaster recovery plan and resources generally should enable

    resumption of trading and clearing of the designated contract market's

    products during the next business day following the disruption.

    Designated contract markets determined by the Commission to be critical

    financial markets are subject to more stringent requirements in this

    regard, set forth in Sec. 40.9 of this chapter. Electronic trading is

    an acceptable backup for open outcry trading in the event of a

    disruption.

    (d) A designated contract market that is not determined by the

    Commission to be a critical financial market satisfies the requirement

    to be able to resume trading and clearing during the next business day

    following a disruption by maintaining either:

    (1) Infrastructure and personnel resources of its own that are

    sufficient to ensure timely recovery and resumption of its operations

    and resumption of its ongoing fulfillment of its responsibilities and

    obligations as a designated contract market following any disruption of

    its operations; or

    (2) Contractual arrangements with other designated contract markets

    or disaster recovery service providers, as appropriate, that are

    sufficient to ensure continued trading and clearing of the designated

    contract market's products, and ongoing fulfillment of all of the

    designated contract market's responsibilities and obligations with

    respect to those products, in the event that a disruption renders the

    designated contract market temporarily or permanently unable to satisfy

    this requirement on its own behalf.

    (e) A designated contract market must notify Commission staff

    promptly of all:

    (1) Electronic trading halts and significant systems malfunctions;

    (2) Cyber security incidents or targeted threats that actually or

    potentially jeopardize automated system operation, reliability,

    security, or capacity; and

    (3) Activation of the designated contract market's business

    continuity-disaster recovery plan.

    (f) A designated contract market must give Commission staff timely

    advance notice of all material:

    (1) Planned changes to automated systems that may impact the

    reliability, security, or adequate scalable capacity of such systems;

    and

    (2) Planned changes to the designated contract market's program of

    risk analysis and oversight.

    (g) A designated contract market must provide to the Commission

    upon request current copies of its business continuity-disaster

    recovery plan and other emergency procedures, its assessments of its

    operational risks, and other documents requested by Commission staff

    for the purpose of maintaining a current profile of the designated

    contract market's automated systems.

    (h) A designated contract market must conduct regular, periodic,

    objective testing and review of its automated systems to ensure that

    they are reliable, secure, and have adequate scalable capacity. It must

    also conduct regular, periodic testing and review of its business

    continuity-disaster recovery capabilities. Both types of testing should

    be conducted by qualified, independent professionals. Such qualified

    independent professionals may be independent contractors or employees

    of the designated contract market, but should not be persons

    responsible for development or operation of the systems or capabilities

    being tested. Pursuant to Core Principle 18 (Recordkeeping) and

    Sec. Sec. 38.950 and 38.951 of this part, the designated contract

    market must keep records of all such tests, and make all test results

    available to the Commission upon request.

    (i) To the extent practicable, a designated contract market should:

    (1) Coordinate its business continuity-disaster recovery plan with

    those of the members and other market participants upon whom it depends

    to provide liquidity, in a manner adequate to enable effective

    resumption of activity in its markets following a disruption causing

    activation of the designated contract market's business continuity-

    disaster recovery plan;

    (2) Initiate and coordinate periodic, synchronized testing of its

    business continuity-disaster recovery plan and the business continuity-

    disaster recovery plans of the members and other market participants

    upon whom it depends to provide liquidity; and

    (3) Ensure that its business continuity-disaster recovery plan

    takes into account the business continuity-disaster recovery plans of

    its telecommunications, power, water, and other essential service

    providers.

    (j) Part 46 of this chapter governs the obligations of those

    registered entities that the Commission has determined to be critical

    financial markets, with respect to maintenance and geographic dispersal

    of disaster recovery resources sufficient to meet a same-day recovery

    time objective in the event of a wide-scale disruption. Section 40.9 of

    this chapter establishes the requirements for core principle compliance

    in that respect.

    Subpart V--Financial Resources

    Sec. 38.1100 Core Principle 21.

    (a) In General. The board of trade shall have adequate financial,

    operational, and managerial resources to discharge each responsibility

    of the board of trade.

    (b) Determination of adequacy. The financial resources of the board

    of trade shall be considered to be adequate if the value of the

    financial resources exceeds the total amount that would enable the

    contract market to cover the operating costs of the contract market for

    a 1-year period, as calculated on a rolling basis.

    Sec. 38.1101 General requirements.

    (a) General rule. (1) A designated contract market must maintain

    financial resources sufficient to enable it to perform its functions in

    compliance with the core principles set forth in section 5 of the Act

    and regulations thereunder.

    (2) Financial resources shall be considered sufficient if their

    value is at least equal to a total amount that would enable the

    designated contract market, or applicant for designation as such, to

    cover its operating costs for a period of at least one year, calculated

    on a rolling basis.

    (3) An entity that is registered with the Commission as both a

    designated contract market and a derivatives clearing organization also

    shall comply with the financial resource requirements of Sec. 39.11 of

    this chapter, demonstrating that it has sufficient financial resources

    to operate the single, combined entity as both a designated contract

    market and a derivatives clearing organization. In lieu of filing

    separate quarterly reports under paragraph (a)(2) of this section and

    Sec. 39.11(f) of this chapter, such entity shall file single quarterly

    reports in accordance with Sec. 39.11.

    (b) Types of financial resources. Financial resources available to

    satisfy the requirements of paragraph (a) of this section may include:

    (1) The designated contract market's own capital, calculated in

    accordance with U.S. generally accepted accounting principles; and

    [[Page 36709]]

    (2) Any other financial resource deemed acceptable by the

    Commission.

    (c) Computation of financial resource requirement. A designated

    contract market must, on a quarterly basis, based upon its fiscal year,

    make a reasonable calculation of its projected operating costs over a

    12-month period in order to determine the amount needed to meet the

    requirements of paragraph (a) of this section. The designated contract

    market shall have reasonable discretion in determining the methodology

    used to compute such projected operating costs. The Commission may

    review the methodology and require changes as appropriate.

    (d) Valuation of financial resources. At appropriate intervals, but

    not less than quarterly, a designated contract market must compute the

    current market value of each financial resource used to meet its

    obligations under paragraph (a) of this section. Reductions in value to

    reflect market and credit risk (``haircuts'') must be applied as

    appropriate.

    (e) Liquidity of financial resources. The financial resources

    allocated by the designated contract market to meet the requirements of

    paragraph (a) of this section must include unencumbered, liquid

    financial assets (i.e., cash and/or highly liquid securities) equal to

    at least six months' operating costs. If any portion of such financial

    resources is not sufficiently liquid, the designated contract market

    may take into account a committed line of credit or similar facility

    for the purpose of meeting this requirement.

    (f) Reporting requirements. (1) Each fiscal quarter, or at any time

    upon Commission request, a designated contract market must:

    (i) Report to the Commission:

    (A) The amount of financial resources necessary to meet the

    requirements of paragraph (a) of this section; and

    (B) The value of each financial resource available, computed in

    accordance with the requirements of paragraph (d) of this section; and

    (ii) Provide the Commission with a financial statement, including

    the balance sheet, income statement, and statement of cash flows of the

    designated contract market or of its parent company.

    (2) The calculations required by this paragraph shall be made as of

    the last business day of the designated contract market's fiscal

    quarter.

    (3) The designated contract market must provide the Commission

    with:

    (i) Sufficient documentation explaining the methodology used to

    compute its financial requirements under paragraph (a) of this section;

    (ii) Sufficient documentation explaining the basis for its

    determinations regarding the valuation and liquidity requirements set

    forth in paragraphs (d) and (e) of this section; and

    (iii) Copies of any agreements establishing or amending a credit

    facility, insurance coverage, or other arrangement evidencing or

    otherwise supporting the designated contract market's conclusions.

    (4) The reports shall be filed not later than 40 calendar days

    after the end of the designated contract market's first three fiscal

    quarters, and not later than 60 calendar days after the end of the

    designated contract market's fourth fiscal quarter, or at such later

    time as the Commission may permit, in its discretion, upon request by

    the designated contract market.

    (g) Delegation of authority. (1) The Commission hereby delegates,

    until it orders otherwise, the authority to the Director of the

    Division of Market Oversight or such other employee or employees as the

    Director may designate from time to time, to:

    (i) Determine whether a particular financial resource under

    paragraph (b)(2) may be used to satisfy the requirements of paragraph

    (a)(1) and (2) of this section;

    (ii) Review and make changes to the methodology used to compute the

    requirements of paragraph (c) of this section;

    (iii) Request financial reporting from a designated contract market

    (in addition to quarterly reports) under paragraph (f)(1) of this

    section; and

    (iv) Grant an extension of time for a designated contract market to

    file its quarterly financial report under paragraph (f)(4) of this

    section.

    (2) The Director may submit to the Commission for its consideration

    any matter that has been delegated in this paragraph. Nothing in this

    paragraph prohibits the Commission, at its election, from exercising

    the authority delegated in this paragraph.

    Subpart W--Diversity of Board of Directors

    Sec. 38.1150 Core Principle 22.

    The board of trade, if a publicly traded company, shall endeavor to

    recruit individuals to serve on the board of directors and the other

    decision-making bodies (as determined by the Commission) of the board

    of trade from among, and to have the composition of the bodies reflect,

    a broad and culturally diverse pool of qualified candidates.

    Subpart X--Securities and Exchange Commission

    Sec. 38.1200 Core Principle 23.

    The board of trade shall keep any such records relating to swaps

    defined in section 1a(47)(A)(v) of the Act open to inspection and

    examination by the Securities and Exchange Commission.

    Sec. 38.1201 Additional sources for compliance.

    Applicants and designated contract markets may refer to the

    guidance and/or acceptable practices in appendix B of this part to

    demonstrate to the Commission compliance with the requirements of Sec.

    38.1200 of this part.

    0

    18. Revise appendix A to part 38 to read as follows:

    BILLING CODE 6351-01-P

    [[Page 36710]]

    [GRAPHIC] [TIFF OMITTED] TR19JN12.067

    [[Page 36711]]

    [GRAPHIC] [TIFF OMITTED] TR19JN12.068

    [[Page 36712]]

    [GRAPHIC] [TIFF OMITTED] TR19JN12.069

    [[Page 36713]]

    [GRAPHIC] [TIFF OMITTED] TR19JN12.070

    [[Page 36714]]

    [GRAPHIC] [TIFF OMITTED] TR19JN12.071

    [[Page 36715]]

    [GRAPHIC] [TIFF OMITTED] TR19JN12.072

    [[Page 36716]]

    [GRAPHIC] [TIFF OMITTED] TR19JN12.073

    [[Page 36717]]

    [GRAPHIC] [TIFF OMITTED] TR19JN12.074

    BILLING CODE 6351-01-C

    0

    19. Revise appendix B to part 38 to read as follows:

    Appendix B to Part 38--Guidance on, and Acceptable Practices in,

    Compliance With Core Principles

    1. This appendix provides guidance on complying with core

    principles, both initially and on an ongoing basis, to obtain and

    maintain designation under section 5(d) of the Act and this part 38.

    Where provided, guidance is set forth in paragraph (a) following the

    relevant heading and can be used to demonstrate to the Commission

    compliance with the selected requirements of a core principle, under

    Sec. Sec. 38.3 and 38.5 of this part. The guidance for the core

    principle is illustrative only of the types of matters a designated

    contract market may address, as applicable, and is not intended to

    be used as a mandatory checklist. Addressing the issues set forth in

    this appendix would help the Commission in its consideration of

    whether the designated contract market is in compliance with the

    selected requirements of a core principle; provided however, that

    the guidance is not intended to diminish or replace, in any event,

    the obligations and requirements of applicants and designated

    contract markets to comply with the regulations provided under this

    part.

    2. Where provided, acceptable practices meeting selected

    requirements of core principles are set forth in paragraph (b)

    following guidance. Designated contract markets that follow specific

    practices outlined in the acceptable practices for a core principle

    in this appendix will meet the selected requirements of the

    applicable core principle; provided however, that the acceptable

    practice is not intended to diminish or replace, in any event, the

    obligations and requirements of applicants and designated contract

    markets to comply with the regulations provided under this part 38.

    The acceptable practices are for illustrative purposes only and do

    not state the exclusive means for satisfying a core principle.

    Core Principle 1 of section 5(d) of the Act: DESIGNATION AS

    CONTRACT MARKET.--(A) IN GENERAL.--To be designated, and maintain a

    designation, as a contract market, a board of trade shall comply

    with--

    (i) Any core principle described in this subsection; and

    (ii) Any requirement that the Commission may impose by rule or

    regulation pursuant to section 8a(5).

    (B) REASONABLE DISCRETION OF CONTRACT MARKET.--Unless otherwise

    determined by the Commission by rule or regulation, a board of trade

    described in subparagraph (A) shall have reasonable discretion in

    establishing the manner in which the board of trade complies with

    the core principles described in this subsection.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 2 of section 5(d) of the Act: COMPLIANCE WITH

    RULES--(A) IN GENERAL.--The board of trade shall establish, monitor,

    and enforce compliance with the rules of the contract market,

    including--

    (i) Access requirements;

    (ii) The terms and conditions of any contracts to be traded on

    the contract market; and

    (iii) Rules prohibiting abusive trade practices on the contract

    market.

    (B) CAPACITY OF CONTRACT MARKET.--The board of trade shall have

    the capacity to detect, investigate, and apply appropriate sanctions

    to any person that violates any rule of the contract market.

    (C) REQUIREMENT OF RULES.--The rules of the contract market

    shall provide the board of trade with the ability and authority to

    obtain any necessary information to perform any function described

    in this subsection, including the capacity to carry out such

    international information-sharing agreements as the Commission may

    require.

    (a) Guidance. (1) Investigations and investigation reports--

    Warning letters. The rules of a designated contract market may

    authorize compliance staff to issue a warning letter to a person or

    entity under investigation or to recommend that a disciplinary panel

    take such an action.

    (2) Additional rules required. A designated contract market

    should adopt and enforce any additional rules that it believes are

    necessary to comply with the requirements of subpart C of this

    chapter

    (b) Acceptable Practices. [Reserved.]

    Core Principle 3 of section 5(d) of the Act: CONTRACTS NOT

    READILY SUBJECT TO MANIPULATION.--The board of trade shall list on

    the contract market only contracts that are not readily susceptible

    to manipulation.

    (a) Guidance. (1) Designated contract markets may list new

    products for trading by self-certification under Sec. 40.2 of this

    chapter or may submit products for Commission approval under Sec.

    40.3 of this chapter.

    (2) Guidance in appendix C to this part may be used as guidance

    in meeting this core principle for both new products listings and

    existing listed contracts.

    (b) Acceptable Practices. [Reserved.]

    Core Principle 4 of section 5(d) of the Act: PREVENTION OF

    MARKET DISRUPTION.--The board of trade shall have the capacity and

    responsibility to prevent manipulation, price distortion, and

    disruptions of the delivery or cash-settlement process through

    market surveillance, compliance, and enforcement practices and

    procedures, including--

    (A) Methods for conducting real-time monitoring of trading; and

    (B) Comprehensive and accurate trade reconstructions.

    (a) Guidance. The detection and prevention of market

    manipulation, disruptions, and distortions should be incorporated

    into the design of programs for monitoring trading activity.

    Monitoring of intraday trading should include the capacity to detect

    developing market anomalies, including abnormal price movements and

    unusual trading volumes, and position-limit violations. The

    designated contract market should have rules in place that allow it

    broad powers to intervene to prevent or reduce market disruptions.

    Once a threatened or actual disruption is detected, the designated

    contract market should take steps to prevent the disruption or

    reduce its severity.

    (2) Additional rules required. A designated contract market

    should adopt and enforce any additional rules that it believes are

    necessary to comply with the requirements of subpart E of this part.

    (b) Acceptable Practices. (1) General Requirements. Real-time

    monitoring for market anomalies and position-limit violations are

    the most effective, but the designated contract market may also

    demonstrate that it has an acceptable program if some of the

    monitoring is accomplished on a T+1 basis. An acceptable

    [[Page 36718]]

    program must include automated trading alerts to detect market

    anomalies and position-limit violations as they develop and before

    market disruptions occur or become more serious. In some cases, a

    designated contract market may demonstrate that its manual processes

    are effective.

    (2) Physical-delivery contracts. For physical-delivery

    contracts, the designated contract market must demonstrate that it

    is monitoring the adequacy and availability of the deliverable

    supply, which, if such information is available, includes the size

    and ownership of those supplies and whether such supplies are likely

    to be available to short traders and saleable by long traders at the

    market value of those supplies under normal cash marketing

    conditions. Further, for physical-delivery contracts, the designated

    contract market must continually monitor the appropriateness of a

    contract's terms and conditions, including the delivery instrument,

    the delivery locations and location differentials, and the commodity

    characteristics and related differentials. The designated contract

    market must demonstrate that it is making a good-faith effort to

    resolve conditions that are interfering with convergence of its

    physical-delivery contract to the price of the underlying commodity

    or causing price distortions or market disruptions, including, when

    appropriate, changes to contract terms.

    (3) Cash-settled contracts. At a minimum, an acceptable program

    for monitoring cash-settled contracts must include access, either

    directly or through an information-sharing agreement, to traders'

    positions and transactions in the reference market for traders of a

    significant size in the designated contract market near the

    settlement of the contract.

    (4) Ability to obtain information. With respect to the

    designated contract market's ability to obtain information, a

    designated contract market may limit the application of the

    requirement to keep and provide such records only to those that are

    reportable under its large-trader reporting system or otherwise hold

    substantial positions.

    (5) Risk controls for trading. An acceptable program for

    preventing market disruptions must demonstrate appropriate trade

    risk controls, in addition to pauses and halts. Such controls must

    be adapted to the unique characteristics of the markets to which

    they apply and must be designed to avoid market disruptions without

    unduly interfering with that market's price discovery function. The

    designated contract market may choose from among controls that

    include: pre-trade limits on order size, price collars or bands

    around the current price, message throttles, and daily price limits,

    or design other types of controls. Within the specific array of

    controls that are selected, the designated contract market also must

    set the parameters for those controls, so long as the types of

    controls and their specific parameters are reasonably likely to

    serve the purpose of preventing market disruptions and price

    distortions. If a contract is linked to, or is a substitute for,

    other contracts, either listed on its market or on other trading

    venues, the designated contract market must, to the extent

    practicable, coordinate its risk controls with any similar controls

    placed on those other contracts. If a contract is based on the price

    of an equity security or the level of an equity index, such risk

    controls must, to the extent practicable, be coordinated with any

    similar controls placed on national security exchanges.

    Core Principle 5 of section 5(d) of the Act: POSITION

    LIMITATIONS OR ACCOUNTABILITY--(A) IN GENERAL.--To reduce the

    potential threat of market manipulation or congestion (especially

    during trading in the delivery month), the board of trade shall

    adopt for each contract of the board of trade, as is necessary and

    appropriate, position limitations or position accountability for

    speculators.

    (B) MAXIMUM ALLOWABLE POSITION LIMITATION.--For any contract

    that is subject to a position limitation established by the

    Commission pursuant to section 4a(a), the board of trade shall set

    the position limitation of the board of trade at a level not higher

    than the position limitation established by the Commission.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 6 of section 5(d) of the Act: EMERGENCY

    AUTHORITY--The board of trade, in consultation or cooperation with

    the Commission, shall adopt rules to provide for the exercise of

    emergency authority, as is necessary and appropriate, including the

    authority--

    (A) To liquidate or transfer open positions in any contract;

    (B) To suspend or curtail trading in any contract; and

    (C) To require market participants in any contract to meet

    special margin requirements.

    (a) Guidance. In consultation and cooperation with the

    Commission, a designated contract market should have the authority

    to intervene as necessary to maintain markets with fair and orderly

    trading and to prevent or address manipulation or disruptive trading

    practices, whether the need for intervention arises exclusively from

    the DCM's market or as part of a coordinated, cross-market

    intervention. DCM rules should include procedures and guidelines to

    avoid conflicts of interest in accordance with the provisions of

    Sec. 40.9 of this chapter, and include alternate lines of

    communication and approval procedures to address emergencies

    associated with real-time events. To address perceived market

    threats, the designated contract market should have rules that allow

    it to take certain actions in the event of an emergency, as defined

    in Sec. 40.1(h) of this chapter, including: imposing or modifying

    position limits, price limits, and intraday market restrictions;

    imposing special margin requirements; ordering the liquidation or

    transfer of open positions in any contract; ordering the fixing of a

    settlement price; extending or shortening the expiration date or the

    trading hours; suspending or curtailing trading in any contract;

    transferring customer contracts and the margin or altering any

    contract's settlement terms or conditions; and, where applicable,

    providing for the carrying out of such actions through its

    agreements with its third-party provider of clearing or regulatory

    services. In situations where a contract is fungible with a contract

    on another platform, emergency action to liquidate or transfer open

    interest must be as directed, or agreed to, by the Commission or the

    Commission's staff. The DCM has the authority to independently

    respond to emergencies in an effective and timely manner consistent

    with the nature of the emergency, as long as all such actions taken

    by the DCM are made in good faith to protect the integrity of the

    markets. The Commission should be notified promptly of the DCM's

    exercise of emergency action, explaining how conflicts of interest

    were minimized, including the extent to which the DCM considered the

    effect of its emergency action on the underlying markets and on

    markets that are linked or referenced to the contract market and

    similar markets on other trading venues. Information on all

    regulatory actions carried out pursuant to a DCM's emergency

    authority should be included in a timely submission of a certified

    rule pursuant to part 40 of this chapter.

    (b) Acceptable Practices. A designated contract market must have

    procedures and guidelines for decision-making and implementation of

    emergency intervention in the market. At a minimum, the DCM must

    have the authority to liquidate or transfer open positions in the

    market, suspend or curtail trading in any contract, and require

    market participants in any contract to meet special margin

    requirements. In situations where a contract is fungible with a

    contract on another platform, emergency action to liquidate or

    transfer open interest must be directed, or agreed to, by the

    Commission or the Commission's staff. The DCM must promptly notify

    the Commission of the exercise of its emergency authority,

    documenting its decision-making process, including how conflicts of

    interest were minimized, and the reasons for using its emergency

    authority. The DCM must also have rules that allow it to take such

    market actions as may be directed by the Commission.

    Core Principle 7 of section 5(d) of the Act: AVAILABILITY OF

    GENERAL INFORMATION.--The board of trade shall make available to

    market authorities, market participants, and the public accurate

    information concerning--

    (A) The terms and conditions of the contracts of the contract

    market; and

    (B)(i) The rules, regulations, and mechanisms for executing

    transactions on or through the facilities of the contract market;

    and

    (ii) The rules and specifications describing the operation of

    the contract market's--

    (I) Electronic matching platform; or

    (II) Trade execution facility.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 8 of section 5(d) of the Act: DAILY PUBLICATION

    OF TRADING INFORMATION.--The board of trade shall make public daily

    information on settlement prices, volume, open interest, and opening

    and closing ranges for actively traded contracts on the contract

    market.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 9 of section 5(d) of the Act: EXECUTION OF

    TRANSACTIONS.--``(A) IN

    [[Page 36719]]

    GENERAL.--The board of trade shall provide a competitive, open, and

    efficient market and mechanism for executing transactions that

    protects the price discovery process of trading in the centralized

    market of the board of trade.

    (B) RULES.--The rules of the board of trade may authorize, for

    bona fide business purposes--

    (i) Transfer trades or office trades;

    (ii) An exchange of--

    (I) Futures in connection with a cash commodity transaction;

    (II) Futures for cash commodities; or

    (III) Futures for swaps; or

    (iii) A futures commission merchant, acting as principal or

    agent, to enter into or confirm the execution of a contract for the

    purchase or sale of a commodity for future delivery if the contract

    is reported, recorded, or cleared in accordance with the rules of

    the contract market or a derivatives clearing organization.

    (a) Guidance. [Reserved]

    (b) Acceptable Practices. [Reserved]

    Core Principle 10 of section 5(d) of the Act: TRADE

    INFORMATION.--The board of trade shall maintain rules and procedures

    to provide for the recording and safe storage of all identifying

    trade information in a manner that enables the contract market to

    use the information--

    (A) To assist in the prevention of customer and market abuses;

    and

    (B) To provide evidence of any violations of the rules of the

    contract market.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 11 of section 5(d) of the Act: FINANCIAL

    INTEGRITY OF TRANSACTIONS.--The board of trade shall establish and

    enforce--

    (A) Rules and procedures for ensuring the financial integrity of

    transactions entered into on or through the facilities of the

    contract market (including the clearance and settlement of the

    transactions with a derivatives clearing organization); and

    (B) Rules to ensure--

    (i) The financial integrity of any--

    (I) Futures commission merchant; and

    (II) Introducing broker; and

    (ii) The protection of customer funds.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 12 of section 5(d) of the Act: PROTECTION OF

    MARKETS AND MARKET PARTICIPANTS--The board of trade shall establish

    and enforce rules--

    (A) To protect markets and market participants from abusive

    practices committed by any party, including abusive practices

    committed by a party acting as an agent for a participant; and

    (B) To promote fair and equitable trading on the contract

    market.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 13 of section 5(d) of the Act: DISCIPLINARY

    PROCEDURES.--The board of trade shall establish and enforce

    disciplinary procedures that authorize the board of trade to

    discipline, suspend, or expel members or market participants that

    violate the rules of the board of trade, or similar methods for

    performing the same functions, including delegation of the functions

    to third parties.

    (a) Guidance. (1) Notice of charges. If the rules of the

    designated contract market so provide, a notice may also advise: (i)

    That failure to request a hearing within the period prescribed in

    the notice, except for good cause, may be deemed a waiver of the

    right to a hearing; and (ii) That failure to answer or to deny

    expressly a charge may be deemed to be an admission of such charge.

    (2) Admission or failure to deny charges. The rules of a

    designated contract market may provide that if a respondent admits

    or fails to deny any of the charges, a disciplinary panel may find

    that the violations alleged in the notice of charges for which the

    respondent admitted or failed to deny any of the charges have been

    committed. If the designated contract market's rules so provide,

    then:

    (i) The disciplinary panel should impose a sanction for each

    violation found to have been committed;

    (ii) The disciplinary panel should promptly notify the

    respondent in writing of any sanction to be imposed pursuant to

    paragraph (2)(i) of this section and shall advise the respondent

    that it may request a hearing on such sanction within the period of

    time, which shall be stated in the notice;

    (iii) The rules of a designated contract market may provide that

    if a respondent fails to request a hearing within the period of time

    stated in the notice, the respondent will be deemed to have accepted

    the sanction.

    (3) Settlement offers. (i) The rules of a designated contract

    market may permit a respondent to submit a written offer of

    settlement at any time after an investigation report is completed.

    The disciplinary panel presiding over the matter may accept the

    offer of settlement, but may not alter the terms of a settlement

    offer unless the respondent agrees.

    (ii) The rules of a designated contract market may provide that,

    in its discretion, a disciplinary panel may permit the respondent to

    accept a sanction without either admitting or denying the rule

    violations upon which the sanction is based.

    (iii) If an offer of settlement is accepted, the panel accepting

    the offer should issue a written decision specifying the rule

    violations it has reason to believe were committed, including the

    basis or reasons for the panel's conclusions, and any sanction to be

    imposed, which should include full customer restitution where

    customer harm is demonstrated, except where the amount of

    restitution and to whom it should be provided cannot be reasonably

    determined. If an offer of settlement is accepted without the

    agreement of the enforcement staff, the decision should adequately

    support the disciplinary panel's acceptance of the settlement. Where

    applicable, the decision should also include a statement that the

    respondent has accepted the sanctions imposed without either

    admitting or denying the rule violations.

    (iv) The respondent may withdraw his or her offer of settlement

    at any time before final acceptance by a disciplinary panel. If an

    offer is withdrawn after submission, or is rejected by a

    disciplinary panel, the respondent should not be deemed to have made

    any admissions by reason of the offer of settlement and should not

    be otherwise prejudiced by having submitted the offer of settlement.

    (4) Hearings. The rules of a designated contract market may

    provide that a sanction may be summarily imposed upon any person

    within its jurisdiction whose actions impede the progress of a

    hearing.

    (5) Right to appeal. The rules of a designated contract market

    may permit the parties to a proceeding to appeal promptly an adverse

    decision of a disciplinary panel in all or in certain classes of

    cases. Such rules may require a party's notice of appeal to be in

    writing and to specify the findings, conclusions, or sanctions to

    which objection are taken. If the rules of a designated contract

    market permit appeals, then both the respondent and the enforcement

    staff should have the opportunity to appeal and the designated

    contract market should provide for the following:

    (i) The designated contract market should establish an appellate

    panel that should be authorized to hear appeals of respondents. In

    addition, the rules of a designated contract market may provide that

    the appellate panel may, on its own initiative, order review of a

    decision by a disciplinary panel within a reasonable period of time

    after the decision has been rendered.

    (ii) The composition of the appellate panel should be consistent

    with the requirements set forth in part 40 of this chapter and

    paragraph (4) of the acceptable practices for Core Principle 16, and

    should not include any members of the designated contract market's

    compliance staff, or any person involved in adjudicating any other

    stage of the same proceeding. The rules of a designated contract

    market should provide for the appeal proceeding to be conducted

    before all of the members of the appellate panel or a panel thereof.

    (iii) Except for good cause shown, the appeal or review should

    be conducted solely on the record before the disciplinary panel, the

    written exceptions filed by the parties, and the oral or written

    arguments of the parties.

    (iv) Promptly following the appeal or review proceeding, the

    appellate panel should issue a written decision and should provide a

    copy to the respondent. The decision issued by the appellate panel

    should adhere to all the requirements of Sec. 38.708 of this part,

    to the extent that a different conclusion is reached from that

    issued by the disciplinary panel.

    (6) Summary fines for violations of rules regarding timely

    submission of records, decorum, or other similar activities. A

    designated contract market may adopt a summary fine schedule for

    violations of rules relating to the timely submission of accurate

    records required for clearing or verifying each day's transactions,

    decorum, attire, or other similar activities. A designated contract

    market may permit its compliance staff, or a designated panel of

    contract market officials, to summarily impose minor sanctions

    against persons within the designated contract market's jurisdiction

    for violating such rules. A designated contract market's summary

    fine schedule may allow for warning letters to be issued for first-

    time violations or violators. If

    [[Page 36720]]

    adopted, a summary fine schedule should provide for progressively

    larger fines for recurring violations.

    (7) Emergency disciplinary actions. (i) A designated contract

    market may impose a sanction, including suspension, or take other

    summary action against a person or entity subject to its

    jurisdiction upon a reasonable belief that such immediate action is

    necessary to protect the best interest of the marketplace.

    (ii) Any emergency disciplinary action should be taken in

    accordance with a designated contract market's procedures that

    provide for the following:

    (A) If practicable, a respondent should be served with a notice

    before the action is taken, or otherwise at the earliest possible

    opportunity. The notice should state the action, briefly state the

    reasons for the action, and state the effective time and date, and

    the duration of the action.

    (B) The respondent should have the right to be represented by

    legal counsel or any other representative of its choosing in all

    proceedings subsequent to the emergency action taken. The respondent

    should be given the opportunity for a hearing as soon as reasonably

    practicable and the hearing should be conducted before the

    disciplinary panel pursuant to the requirements of Sec. 38.707 of

    this part.

    (C) Promptly following the hearing provided for in this rule,

    the designated contract market should render a written decision

    based upon the weight of the evidence contained in the record of the

    proceeding and should provide a copy to the respondent. The decision

    should include a description of the summary action taken; the

    reasons for the summary action; a summary of the evidence produced

    at the hearing; a statement of findings and conclusions; a

    determination that the summary action should be affirmed, modified,

    or reversed; and a declaration of any action to be taken pursuant to

    the determination, and the effective date and duration of such

    action.

    (b) Acceptable Practices. [Reserved.]

    Core Principle 14 of section 5(d) of the Act: DISPUTE

    RESOLUTION.--The board of trade shall establish and enforce rules

    regarding, and provide facilities for alternative dispute resolution

    as appropriate for, market participants and any market

    intermediaries.

    (a) Guidance. A designated contract market should provide

    customer dispute resolution procedures that are: appropriate to the

    nature of the market; fair and equitable; and available on a

    voluntary basis, either directly or through another self-regulatory

    organization, to customers that are non-eligible contract

    participants.

    (b) Acceptable Practices.

    (1) Fair and equitable procedure. Every contract market shall

    provide customer dispute resolution procedures that are fair and

    equitable. An acceptable customer dispute resolution mechanism

    would:

    (i) Provide the customer with an opportunity to have his or her

    claim decided by an objective and impartial decisionmaker;

    (ii) Provide each party with the right to be represented by

    counsel at the commencement of the procedure, at the party's own

    expense;

    (iii) Provide each party with adequate notice of the claims

    presented against such party, an opportunity to be heard on all

    claims, defenses and permitted counterclaims, and an opportunity for

    a prompt hearing;

    (iv) Authorize prompt, written, final settlement awards that are

    not subject to appeal within the designated contract market; and

    (v) Notify the parties of the fees and costs that may be

    assessed.

    (2) Voluntary Procedures. The use of dispute settlement

    procedures shall be voluntary for customers other than eligible

    contract participants as defined in section 1a(18) of the Dodd-Frank

    Act, and may permit counterclaims as provided in Sec. 166.5 of this

    chapter.

    (3) Member-to-Member Procedures. If the designated contract

    market also provides procedures for the resolution of disputes that

    do not involve customers (i.e., member-to-member disputes), the

    procedures for resolving such disputes must be independent of and

    shall not interfere with or delay the resolution of customers'

    claims or grievances.

    (4) Delegation. A designated contract market may delegate to

    another self-regulatory organization or to a registered futures

    association its responsibility to provide for customer dispute

    resolution mechanisms, provided, however, that in the event of such

    delegation, the designated contract market shall in all respects

    treat any decision issued by such other organization or association

    with respect to such dispute as if the decision were its own,

    including providing for the appropriate enforcement of any award

    issued against a delinquent member.

    Core Principle 15 of section 5(d) of the Act: GOVERNANCE FITNESS

    STANDARDS.--The board of trade shall establish and enforce

    appropriate fitness standards for directors, members of any

    disciplinary committee, members of the contract market, and any

    other person with direct access to the facility (including any party

    affiliated with any person described in this paragraph).

    (a) Guidance. (1) A designated contract market should have

    appropriate eligibility criteria for the categories of persons set

    forth in the Core Principle that should include standards for

    fitness and for the collection and verification of information

    supporting compliance with such standards. Minimum standards of

    fitness for persons who have member voting privileges, governing

    obligations or responsibilities, or who exercise disciplinary

    authority are those bases for refusal to register a person under

    section 8a(2) of the Act. In addition, persons who have governing

    obligations or responsibilities, or who exercise disciplinary

    authority, should not have a significant history of serious

    disciplinary offenses, such as those that would be disqualifying

    under Sec. 1.63 of this chapter. Members with trading privileges

    but having no, or only nominal, equity, in the facility and non-

    member market participants who are not intermediated and do not have

    these privileges, obligations, responsibilities or disciplinary

    authority could satisfy minimum fitness standards by meeting the

    standards that they must meet to qualify as a ``market

    participant.'' Natural persons who directly or indirectly have

    greater than a ten percent ownership interest in a designated

    contract market should meet the fitness standards applicable to

    members with voting rights.

    (2) The Commission believes that such standards should include

    providing the Commission with fitness information for such persons,

    whether registration information, certification to the fitness of

    such persons, an affidavit of such persons' fitness by the contract

    market's counsel or other information substantiating the fitness of

    such persons. If a contract market provides certification of the

    fitness of such a person, the Commission believes that such

    certification should be based on verified information that the

    person is fit to be in his or her position.

    (b) Applicable Practices. [Reserved.]

    Core Principle 16 of section 5(d) of the Act: CONFLICTS OF

    INTEREST.--The board of trade shall establish and enforce rules--

    (A) to minimize conflicts of interest in the decisionmaking

    process of the contract market; and

    (B) to establish a process for resolving conflicts of interest

    described in subparagraph (A).

    (a) Guidance. The means to address conflicts of interest in

    decisionmaking of a contract market should include methods to

    ascertain the presence of conflicts of interest and to make

    decisions in the event of such a conflict. In addition, the

    Commission believes that the contract market should provide for

    appropriate limitations on the use or disclosure of material non-

    public information gained through the performance of official duties

    by board members, committee members and contract market employees or

    gained through an ownership interest in the contract market.

    (b) Acceptable Practices. All designated contract markets

    (``DCMs'' or ``contract markets'') bear special responsibility to

    regulate effectively, impartially, and with due consideration of the

    public interest, as provided for in section 3 of the Act. Under Core

    Principle 15, they are also required to minimize conflicts of

    interest in their decisionmaking processes. To comply with this Core

    Principle, contract markets should be particularly vigilant for such

    conflicts between and among any of their self-regulatory

    responsibilities, their commercial interests, and the several

    interests of their management, members, owners, customers and market

    participants, other industry participants, and other constituencies.

    Acceptable practices for minimizing conflicts of interest shall

    include the following elements:

    (1) Board composition for contract markets

    (i) At least thirty-five percent of the directors on a contract

    market's board of directors shall be public directors; and

    (ii) The executive committees (or similarly empowered bodies)

    shall be at least thirty-five percent public.

    (2) Public director

    (i) To qualify as a public director of a contract market, an

    individual must first be found, by the board of directors, on the

    record, to have no material relationship with the contract market. A

    ``material relationship'' is one that reasonably could

    [[Page 36721]]

    affect the independent judgment or decisionmaking of the director.

    (ii) In addition, a director shall be considered to have a

    ``material relationship'' with the contract market if any of the

    following circumstances exist:

    (A) The director is an officer or employee of the contract

    market or an officer or employee of its affiliate. In this context,

    ``affiliate'' includes parents or subsidiaries of the contract

    market or entities that share a common parent with the contract

    market;

    (B) The director is a member of the contract market, or an

    officer or director of a member. ``Member'' is defined according to

    section 1a(34) of the Commodity Exchange Act and Commission

    Regulation 1.3(q);

    (C) The director, or a firm with which the director is an

    officer, director, or partner, receives more than $100,000 in

    combined annual payments from the contract market, or any affiliate

    of the contract market (as defined in subsection (2)(ii)(A)), for

    legal, accounting, or consulting services. Compensation for services

    as a director of the contract market or as a director of an

    affiliate of the contract market does not count toward the $100,000

    payment limit, nor does deferred compensation for services prior to

    becoming a director, so long as such compensation is in no way

    contingent, conditioned, or revocable;

    (D) Any of the relationships above apply to a member of the

    director's ``immediate family,'' i.e., spouse, parents, children and

    siblings.

    (iii) All of the disqualifying circumstances described in

    subsection (2)(ii) shall be subject to a one-year look back.

    (iv) A contract market's public directors may also serve as

    directors of the contract market's affiliate (as defined in

    subsection (2)(ii)(A)) if they otherwise meet the definition of

    public director in this section (2).

    (v) A contract market shall disclose to the Commission which

    members of its board are public directors, and the basis for those

    determinations.

    (3) Regulatory oversight committee

    (i) A board of directors of any contract market shall establish

    a Regulatory Oversight Committee (``ROC'') as a standing committee,

    consisting of only public directors as defined in section (2), to

    assist it in minimizing actual and potential conflicts of interest.

    The ROC shall oversee the contract market's regulatory program on

    behalf of the board. The board shall delegate sufficient authority,

    dedicate sufficient resources, and allow sufficient time for the ROC

    to fulfill its mandate.

    (ii) The ROC shall:

    (A) Monitor the contract market's regulatory program for

    sufficiency, effectiveness, and independence;

    (B) Oversee all facets of the program, including trade practice

    and market surveillance; audits, examinations, and other regulatory

    responsibilities with respect to member firms (including ensuring

    compliance with financial integrity, financial reporting, sales

    practice, recordkeeping, and other requirements); and the conduct of

    investigations;

    (C) Review the size and allocation of the regulatory budget and

    resources; and the number, hiring and termination, and compensation

    of regulatory personnel;

    (D) Supervise the contract market's chief regulatory officer,

    who will report directly to the ROC;

    (E) Prepare an annual report assessing the contract market's

    self-regulatory program for the board of directors and the

    Commission, which sets forth the regulatory program's expenses,

    describes its staffing and structure, catalogues disciplinary

    actions taken during the year, and reviews the performance of

    disciplinary committees and panels;

    (F) Recommend changes that would ensure fair, vigorous, and

    effective regulation; and

    (G) Review regulatory proposals and advise the board as to

    whether and how such changes may impact regulation.

    (4) Disciplinary panels

    All contract markets shall minimize conflicts of interest in

    their disciplinary processes through disciplinary panel composition

    rules that preclude any group or class of industry participants from

    dominating or exercising disproportionate influence on such panels.

    Contract markets can further minimize conflicts of interest by

    including in all disciplinary panels at least one person who would

    qualify as a public director, as defined in subsections (2)(ii) and

    (2)(iii) above, except in cases limited to decorum, attire, or the

    timely submission of accurate records required for clearing or

    verifying each day's transactions. If contract market rules provide

    for appeal to the board of directors, or to a committee of the

    board, then that appellate body shall also include at least one

    person who would qualify as a public director as defined in

    subsections (2)(ii) and (2)(iii) above.

    Core Principle 17 of section 5(d) of the Act: COMPOSITION OF

    GOVERNING BOARDS OF CONTRACT MARKETS.--The governance arrangements

    of the board of trade shall be designed to permit consideration of

    the views of market participants.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 18 of section 5(d) of the Act: RECORDKEEPING.--

    The board of trade shall maintain records of all activities relating

    to the business of the contract market--

    (A) In a form and manner that is acceptable to the Commission;

    and

    (B) For a period of at least 5 years.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 19 of section 5(d) of the Act: ANTITRUST

    CONSIDERATIONS.--Unless necessary or appropriate to achieve the

    purposes of this Act, the board of trade shall not--

    (A) Adopt any rule or taking any action that results in any

    unreasonable restraint of trade; or

    (B) Impose any material anticompetitive burden on trading on the

    contract market.

    (a) Guidance. An entity seeking designation as a contract market

    may request that the Commission consider under the provisions of

    section 15(b) of the Act, any of the entity's rules, including

    trading protocols or policies, and including both operational rules

    and the terms or conditions of products listed for trading, at the

    time of designation or thereafter. The Commission intends to apply

    section 15(b) of the Act to its consideration of issues under this

    core principle in a manner consistent with that previously applied

    to contract markets.

    (b) Acceptable Practices. [Reserved.]

    Core Principle 20 of section 5(d) of the Act: SYSTEM

    SAFEGUARDS.--The board of trade shall--

    (A) Establish and maintain a program of risk analysis and

    oversight to identify and minimize sources of operational risk,

    through the development of appropriate controls and procedures, and

    the development of automated systems, that are reliable, secure, and

    have adequate scalable capacity;

    (B) Establish and maintain emergency procedures, backup

    facilities, and a plan for disaster recovery that allow for the

    timely recovery and resumption of operations and the fulfillment of

    the responsibilities and obligations of the board of trade; and

    (C) Periodically conduct tests to verify that backup resources

    are sufficient to ensure continued order processing and trade

    matching, price reporting, market surveillance, and maintenance of a

    comprehensive and accurate audit trail.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 21 of section 5(d) of the Act: FINANCIAL

    RESOURCES.--

    (A) IN GENERAL.--The board of trade shall have adequate

    financial, operational, and managerial resources to discharge each

    responsibility of the board of trade.

    (B) DETERMINATION OF ADEQUACY.--The financial resources of the

    board of trade shall be considered to be adequate if the value of

    the financial resources exceeds the total amount that would enable

    the contract market to cover the operating costs of the contract

    market for a 1-year period, as calculated on a rolling basis.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 22 of section 5(d) of the Act: DIVERSITY OF BOARD

    OF DIRECTORS.--The board of trade, if a publicly traded company,

    shall endeavor to recruit individuals to serve on the board of

    directors and the other decision-making bodies (as determined by the

    Commission) of the board of trade from among, and to have the

    composition of the bodies reflect, a broad and culturally diverse

    pool of qualified candidates.

    (a) Guidance. [Reserved.]

    (b) Acceptable Practices. [Reserved.]

    Core Principle 23 of section 5(d) of the Act: SECURITIES AND

    EXCHANGE COMMISSION.--The board of trade shall keep any such records

    relating to swaps defined in section 1a(47)(A)(v) open to inspection

    and examination by the Securities and Exchange Commission.

    (a) Guidance. A designated contract market should have

    arrangements and resources for collecting and maintaining accurate

    records pertaining to any swaps agreements defined in section

    1a(47)(A)(v) of the Act, and should leave them open to inspection

    and examination for a period of five years.

    (b) Acceptable Practices. [Reserved.]

    [[Page 36722]]

    Appendix C--Demonstration of Compliance That a Contract Is Not Readily

    Susceptible to Manipulation

    (a) Futures Contracts--General Information. When a designated

    contract market certifies or submits for approval contract terms and

    conditions for a new futures contract, that submission should

    include the following information:

    (1) A narrative describing the contract, including data and

    information to support the contract's terms and conditions, as set

    by the designated contract market. When designing a futures

    contract, the designated contract market should conduct market

    research so that the contract design meets the risk management needs

    of prospective users and promotes price discovery of the underlying

    commodity. The designated contract market should consult with market

    users to obtain their views and opinions during the contract design

    process to ensure the contract's term and conditions reflect the

    underlying cash market and that the futures contract will perform

    the intended risk management and/or price discovery functions. A

    designated contract market should provide a statement indicating

    that it took such steps to ensure the usefulness of the submitted

    contract.

    (2) A detailed cash market description for physical and cash-

    settled contracts. Such descriptions should be based on government

    and/or other publicly-available data whenever possible and be

    formulated for both the national and regional/local market relevant

    to the underlying commodity. For tangible commodities, the cash

    market descriptions for the relevant market (i.e., national and

    regional/local) should incorporate at least three full years of data

    that may include, among other factors, production, consumption,

    stocks, imports, exports, and prices. Each of those cash market

    variables should be fully defined and the data sources should be

    fully specified and documented to permit Commission staff to

    replicate the estimates of deliverable supply (defined in paragraph

    (b)(1)(A) of this appendix C). Whenever possible, the Commission

    requests that monthly or daily prices (depending on the contract)

    underlying the cash settlement index be submitted for the most

    recent three full calendar years and for as many of the current

    year's months for which data are available. For contracts that are

    cash settled to an index, the index's methodology should be provided

    along with supporting information showing how the index is

    reflective of the underlying cash market, is not readily subject to

    manipulation or distortion, and is based on a cash price series that

    is reliable, acceptable, publicly available and timely (defined in

    paragraphs (c)(2) and (c)(3) of this appendix C). The Commission

    recognizes that the data necessary for accurate and cogent cash

    market analyses for an underlying commodity vary with the nature of

    the underlying commodity. The Commission may require that the

    designated contract market submit a detailed report on commodity

    definitions and uses.

    (b) Futures Contracts Settled by Physical Delivery. (1) For

    listed contracts that are settled by physical delivery, the terms

    and conditions of the contract should conform to the most common

    commercial practices and conditions in the cash market for the

    commodity underlying the futures contract. The terms and conditions

    should be designed to avoid any impediments to the delivery of the

    commodity so as to promote convergence between the price of the

    futures contract and the cash market value of the commodity at the

    expiration of a futures contract.

    (i) Estimating Deliverable Supplies.

    (A) General definition. The specified terms and conditions,

    considered as a whole, should result in a ``deliverable supply''

    that is sufficient to ensure that the contract is not susceptible to

    price manipulation or distortion. In general, the term ``deliverable

    supply'' means the quantity of the commodity meeting the contract's

    delivery specifications that reasonably can be expected to be

    readily available to short traders and salable by long traders at

    its market value in normal cash marketing channels at the contract's

    delivery points during the specified delivery period, barring

    abnormal movement in interstate commerce. Typically, deliverable

    supply reflects the quantity of the commodity that potentially could

    be made available for sale on a spot basis at current prices at the

    contract's delivery points. For a non-financial physical-delivery

    commodity contract, this estimate might represent product which is

    in storage at the delivery point(s) specified in the futures

    contract or can be moved economically into or through such points

    consistent with the delivery procedures set forth in the contract

    and which is available for sale on a spot basis within the marketing

    channels that normally are tributary to the delivery point(s).

    Furthermore, an estimate of deliverable supply would not include

    supply that is committed for long-term agreements (i.e., the amount

    of deliverable supply that would not be available to fulfill the

    delivery obligations arising from current trading). The size of

    commodity supplies that are committed to long-term agreements may be

    estimated by consulting with market participants. However, if the

    estimated deliverable supply that is committed for long-term

    agreements, or significant portion thereof, can be demonstrated by

    the designated contract market to be consistently and regularly made

    available to the spot market for shorts to acquire at prevailing

    economic values, then those ``available'' supplies committed for

    long-term contracts may be included in the designated contract

    market's estimate of deliverable supply for that commodity. An

    adequate measure of deliverable supply would be an amount of the

    commodity that would meet the normal or expected range of delivery

    demand without causing futures prices to become distorted relative

    to cash market prices. Given the availability of acceptable data,

    deliverable supply should be estimated on a monthly basis for at

    least the most recent three years for which data are available. To

    the extent possible and that data resources permit, deliverable

    supply estimates should be constructed such that the data reflect,

    as close as possible, the market defined by the contract's terms and

    conditions, and should be formulated, whenever possible, with

    government or publicly available data. All deliverable supply

    estimates should be fully defined, have all underlying assumptions

    explicitly stated, and have documentation of all data/information

    sources in order to permit estimate replication by Commission staff.

    (B) Accounting for variations in deliverable supplies. To assure

    the availability of adequate deliverable supplies and acceptable

    levels of commercial risk management utility, contract terms and

    conditions should account for variations in the patterns of

    production, consumption and supply over a period of years of

    sufficient length to assess adequately the potential range of

    deliverable supplies. This assessment also should consider

    seasonality, growth, and market concentration in the production/

    consumption of the underlying cash commodity. Deliverable supply

    implications of seasonal effects are more straightforwardly

    delineated when deliverable supply estimates are calculated on a

    monthly basis and when such monthly estimates are provided for at

    least the most recent three years for which data resources permit.

    In addition, consideration should be given to the relative roles of

    producers, merchants, and consumers in the production, distribution,

    and consumption of the cash commodity and whether the underlying

    commodity exhibits a domestic or international export focus. Careful

    consideration also should be given to the quality of the cash

    commodity and to the movement or flow of the cash commodity in

    normal commercial channels and whether there exist external factors

    or regulatory controls that could affect the price or supply of the

    cash commodity.

    (C) Calculation of deliverable supplies. Designated contract

    markets should derive a quantitative estimate of the deliverable

    supplies for the delivery period specified in the proposed contract.

    For commodities with seasonal supply or demand characteristics, the

    deliverable supply analysis should include that period when

    potential supplies typically are at their lowest levels. The

    estimate should be based on statistical data, when reasonably

    available, covering a period of time that is representative of the

    underlying commodity's actual patterns of production, patterns of

    consumption, and patterns of seasonal effects (if relevant). Often,

    such a relevant time period should include at least three years of

    monthly deliverable supply estimates permitted by available data

    resources. Deliverable supply estimates should also exclude the

    amount of the commodity that would not be otherwise deliverable on

    the futures contract. For example, deliverable supplies should

    exclude quantities that at current price levels are not economically

    obtainable or deliverable or were previously committed for long-term

    agreements.

    (2) Contract terms and conditions requirements for futures

    contracts settled by physical delivery.

    (i) For physical delivery contracts, an acceptable specification

    of terms and conditions would include, but may not be limited to,

    rules that address, as appropriate,

    [[Page 36723]]

    the following criteria and comply with the associated standards:

    (A) Quality Standards. The terms and conditions of a commodity

    contract should describe or define all of the economically

    significant characteristics or attributes of the commodity

    underlying the contract. In particular, the quality standards should

    be described or defined so that such standards reflect those used in

    transactions in the commodity in normal cash marketing channels.

    Documentation establishing that the quality standards of the

    contract's underlying commodity comply with those accepted/

    established by the industry, by government regulations, and/or by

    relevant laws should also be submitted. For any particular commodity

    contract, the specific attributes that should be enumerated depend

    upon the individual characteristics of the underlying commodity.

    These may include, for example, the following items: grade, quality,

    purity, weight, class, origin, growth, issuer, originator, maturity

    window, coupon rate, source, hours of trading, etc. If the terms of

    the contract provide for the delivery of multiple qualities of a

    specific attribute of the commodity having different cash market

    values, then a ``par'' quality should be specified with price

    differentials applicable to the ``non-par'' qualities that reflect

    discounts or premiums commonly observed or expected to occur in the

    cash market for that commodity.

    (B) Delivery Points and Facilities. Delivery point/area

    specifications should provide for futures delivery at a single

    location or at multiple locations where the underlying cash

    commodity is normally transacted or stored and where there exists a

    viable cash market(s). If multiple delivery points are specified and

    the value of the commodity differs between these locations, contract

    terms should include price differentials that reflect usual

    differences in value between the different delivery locations. If

    the price relationships among the delivery points are unstable and a

    designated contract market chooses to adopt fixed locational price

    differentials, such differentials should fall within the range of

    commonly observed or expected commercial price differences. In this

    regard, any price differentials should be supported with cash price

    data for the delivery location(s). The terms and conditions of the

    contracts also should specify, as appropriate, any conditions the

    delivery facilities and/or delivery facility operators should meet

    in order to be eligible for delivery. Specification of any

    requirements for delivery facilities also should consider the extent

    to which ownership of such facilities is concentrated and whether

    the level of concentration would be susceptible to manipulation of

    the futures contract's prices. Commodity contracts also should

    specify appropriately detailed delivery procedures that describe the

    responsibilities of deliverers, receivers and any required third

    parties in carrying out the delivery process. Such responsibilities

    could include allocation between buyer and seller of all associated

    costs such as load-out, document preparation, sampling, grading,

    weighing, storage, taxes, duties, fees, drayage, stevedoring,

    demurrage, dispatch, etc. Required accreditation for third-parties

    also should be detailed. These procedures should seek to minimize or

    eliminate any impediments to making or taking delivery by both

    deliverers and takers of delivery to help ensure convergence of cash

    and futures at the expiration of a futures delivery month.

    (C) Delivery Period and Last Trading Day. An acceptable

    specification of the delivery period would allow for sufficient time

    for deliverers to acquire the deliverable commodity and make it

    available for delivery, considering any restrictions or requirements

    imposed by the designated contract market. Specification of the last

    trading day for expiring contracts should consider whether adequate

    time remains after the last trading day to allow for delivery on the

    contract.

    (D) Contract Size and Trading Unit. An acceptable specification

    of the delivery unit and/or trading unit would be a contract size

    that is consistent with customary transactions, transportation or

    storage amounts in the cash market (e.g., the contract size may be

    reflective of the amount of the commodity that represents a

    pipeline, truckload or railcar shipment). For purposes of increasing

    market liquidity, a designated contract market may elect to specify

    a contract size that is smaller than the typical commercial

    transaction size, storage unit or transportation size. In such

    cases, the commodity contract should include procedures that allow

    futures traders to easily take or make delivery on such a contract

    with a smaller size, or, alternatively, the designated contract

    market may adopt special provisions requiring that delivery be made

    only in multiple contracts to accommodate reselling the commodity in

    the cash market. If the latter provision is adopted, contract terms

    should be adopted to minimize the potential for default in the

    delivery process by ensuring that all contracts remaining open at

    the close of trading in expiring delivery months can be combined to

    meet the required delivery unit size. Generally, contract sizes and

    trading units should be determined after a careful analysis of

    relevant cash market trading practices, conditions and deliverable

    supply estimates, so as to ensure that the underlying market

    commodity market and available supply sources are able to support

    the contract sizes and trading units at all times.

    (E) Delivery Pack. The term ``delivery pack'' refers to the

    packaging standards (e.g., product may be delivered in burlap or

    polyethylene bags stacked on wooden pallets) or non-quality related

    standards regarding the composition of commodity within a delivery

    unit (e.g., product must all be imported from the same country or

    origin). An acceptable specification of the delivery pack or

    composition of a contract's delivery unit should reflect, to the

    extent possible, specifications commonly applied to the commodity

    traded or transacted in the cash market.

    (F) Delivery Instrument. An acceptable specification of the

    delivery instrument (e.g., warehouse receipt, depository certificate

    or receipt, shipping certificate, bill of lading, in-line transfer,

    book transfer of securities, etc.) would provide for its conversion

    into the cash commodity at a commercially-reasonable cost.

    Transportation terms (e.g., FOB, CIF, freight prepaid to

    destination) as well as any limits on storage or certificate daily

    premium fees should be specified. These terms should reflect cash

    market practices and the customary provision for allocating delivery

    costs between buyer and seller.

    (G) Inspection Provisions. Any inspection/certification

    procedures for verifying compliance with quality requirements or any

    other related delivery requirements (e.g., discounts relating to the

    age of the commodity, etc.) should be specified in the contract

    rules. An acceptable specification of inspection procedures would

    include the establishment of formal procedures that are consistent

    with procedures used in the cash market. To the extent that formal

    inspection procedures are not used in the cash market, an acceptable

    specification would contain provisions that assure accuracy in

    assessing the commodity, that are available at a low cost, that do

    not pose an obstacle to delivery on the contract and that are

    performed by a reputable, disinterested third party or by qualified

    designated contract market employees. Inspection terms also should

    detail which party pays for the service, particularly in light of

    the possibility of varying inspection results.

    (H) Delivery (Trading) Months. Delivery months should be

    established based on the risk management needs of commercial

    entities as well as the availability of deliverable supplies in the

    specified months.

    (I) Minimum Price Fluctuation (Minimum Tick). The minimum price

    increment (tick) should be set at a level that is equal to, or less

    than, the minimum price increment commonly observed in cash market

    transactions for the underlying commodity. Specifying a futures'

    minimum tick that is greater than the minimum price increment in the

    cash market can undermine the risk management utility of the futures

    contract by preventing hedgers from efficiently establishing and

    liquidating futures positions that are used to hedge anticipated

    cash market transactions or cash market positions.

    (J) Maximum Price Fluctuation Limits. Designated contract

    markets may adopt price limits to: (1) Reduce or constrain price

    movements in a trading day that may not be reflective of true market

    conditions but might be caused by traders overreacting to news; (2)

    Allow additional time for the collection of margins in times of

    large price movements; and (3) Provide a ``cooling-off'' period for

    futures market participants to respond to bona fide changes in

    market supply and demand fundamentals that would lead to large cash

    and futures price changes. If price limit provisions are adopted,

    the limits should be set at levels that are not overly restrictive

    in relation to price movements in the cash market for the commodity

    underlying the futures contract.

    (K) Speculative Limits. Specific information regarding the

    establishment of speculative position limits are set forth in part

    150, and/or part 151, as applicable, of the Commission's

    regulations.

    (L) Reportable Levels. Refer to Sec. 15.03 of the Commission's

    regulations.

    [[Page 36724]]

    (M) Trading Hours. Should be set by the designated contract

    market to delineate each trading day.

    (c) Futures Contracts Settled by Cash Settlement. (1) Cash

    settlement is a method of settling certain futures or option

    contracts whereby, at contract expiration, the contract is settled

    by cash payment in lieu of physical delivery of the commodity or

    instrument underlying the contract. An acceptable specification of

    the cash settlement price for commodity futures and option contracts

    would include rules that fully describe the essential economic

    characteristics of the underlying commodity (e.g., grade, quality,

    weight, class, growth, issuer, maturity, source, rating, description

    of the underlying index and index's calculation methodology, etc.),

    as well as how the final settlement price is calculated. In

    addition, the rules should clearly specify the trading months and

    hours of trading, the last trading day, contract size, minimum price

    change (tick size) and any limitations on price movements (e.g.,

    price limits or trading halts).

    (2) Cash settled contracts may be susceptible to manipulation or

    price distortion. In evaluating the susceptibility of a cash-settled

    contract to manipulation, a designated contract market should

    consider the size and liquidity of the cash market that underlies

    the listed contract in a manner that follows the determination of

    deliverable supply as noted above in (b)(1). In particular,

    situations susceptible to manipulation include those in which the

    volume of cash market transactions and/or the number of participants

    contacted in determining the cash-settlement price are very low.

    Cash-settled contracts may create an incentive to manipulate or

    artificially influence the data from which the cash-settlement price

    is derived or to exert undue influence on the cash-settlement

    price's computation in order to profit on a futures position in that

    commodity. The utility of a cash-settled contract for risk

    management and price discovery would be significantly impaired if

    the cash settlement price is not a reliable or robust indicator of

    the value of the underlying commodity or instrument. Accordingly,

    careful consideration should be given to the potential for

    manipulation or distortion of the cash settlement price, as well as

    the reliability of that price as an indicator of cash market values.

    Appropriate consideration also should be given to the commercial

    acceptability, public availability, and timeliness of the price

    series that is used to calculate the cash settlement price.

    Documentation demonstrating that the settlement price index is a

    reliable indicator of market values and conditions and is commonly

    used as a reference index by industry/market agents should be

    provided. Such documentation may take on various forms, including

    carefully documented interview results with knowledgeable agents.

    (3) Where an independent, private-sector third party calculates

    the cash settlement price series, a designated contract market

    should consider the need for a licensing agreement that will ensure

    the designated contract market's rights to the use of the price

    series to settle the listed contract.

    (i) Where an independent, private-sector third party calculates

    the cash settlement price series, the designated contract market

    should verify that the third party utilizes business practices that

    minimize the opportunity or incentive to manipulate the cash-

    settlement price series. Such safeguards may include lock-downs,

    prohibitions against derivatives trading by employees, or public

    dissemination of the names of sources and the price quotes they

    provide. Because a cash-settled contract may create an incentive to

    manipulate or artificially influence the underlying market from

    which the cash-settlement price is derived or to exert undue

    influence on the cash-settlement computation in order to profit on a

    futures position in that commodity, a designated contract market

    should, whenever practicable, enter into an information-sharing

    agreement with the third-party provider which would enable the

    designated contract market to better detect and prevent manipulative

    behavior.

    (ii) Where a designated contract market itself generates the

    cash settlement price series, the designated contract market should

    establish calculation procedures that safeguard against potential

    attempts to artificially influence the price. For example, if the

    cash settlement price is derived by the designated contract market

    based on a survey of cash market sources, the designated contract

    market should maintain a list of such entities which all should be

    reputable sources with knowledge of the cash market. In addition,

    the sample of sources polled should be representative of the cash

    market, and the poll should be conducted at a time when trading in

    the cash market is active.

    (iii) The cash-settlement calculation should involve

    computational procedures that eliminate or reduce the impact of

    potentially unrepresentative data.

    (iv) The cash settlement price should be an accurate and

    reliable indicator of prices in the underlying cash market. The cash

    settlement price also should be acceptable to commercial users of

    the commodity contract. The registered entity should fully document

    that the settlement price is accurate, reliable, highly regarded by

    industry/market agents, and fully reflects the economic and

    commercial conditions of the relevant designated contract market.

    (v) To the extent possible, the cash settlement price should be

    based on cash price series that are publicly available and available

    on a timely basis for purposes of calculating the cash settlement

    price at the expiration of a commodity contract. A designated

    contract market should make the final cash settlement price and any

    other supporting information that is appropriate for release to the

    public, available to the public when cash settlement is accomplished

    by the derivatives clearing organization. If the cash settlement

    price is based on cash prices that are obtained from non-public

    sources (e.g., cash market surveys conducted by the designated

    contract market or by third parties on behalf of the designated

    contract market), a designated contract market should make available

    to the public as soon as possible after a contract month's

    expiration the final cash settlement price as well as any other

    supporting information that is appropriate or feasible to make

    available to the public.

    (4) Contract terms and conditions requirements for futures

    contracts settled by cash settlement.

    (i) An acceptable specification of the terms and conditions of a

    cash-settled commodity contract will also set forth the trading

    months, last trading day, contract size, minimum price change (tick

    size) and daily price limits, if any.

    (A) Commodity Characteristics: The terms and conditions of a

    commodity contract should describe the commodity underlying the

    contract.

    (B) Contract Size and Trading Unit: An acceptable specification

    of the trading unit would be a contract size that is consistent with

    customary transactions in the cash market. A designated contract

    market may opt to set the contract size smaller than that of

    standard cash market transactions.

    (C) Cash Settlement Procedure: The cash settlement price should

    be reliable, acceptable, publicly available, and reported in a

    timely manner as described in paragraphs (c)(3)(iv) and (c)(3)(v) of

    this appendix C.

    (D) Pricing Basis and Minimum Price Fluctuation (Minimum Tick):

    The minimum price increment (tick) should be set a level that is

    equal to, or less than, the minimum price increment commonly

    observed in cash market transactions for the underlying commodity.

    Specifying a futures' minimum tick that is greater than the minimum

    price increment in the cash market can undermine the risk management

    utility of the futures contract by preventing hedgers from

    efficiently establishing and liquidating futures positions that are

    used to hedge anticipated cash market transactions or cash market

    positions.

    (E) Maximum Price Fluctuation Limits: Designated contract

    markets may adopt price limits to: (1) Reduce or constrain price

    movements in a trading day that may not be reflective of true market

    conditions but might be caused by traders overreacting to news; (2)

    Allow additional time for the collection of margins in times of

    large price movements; and (3) Provide a ``cooling-off'' period for

    futures market participants to respond to bona fide changes in

    market supply and demand fundamentals that would lead to large cash

    and futures price changes. If price-limit provisions are adopted,

    the limits should be set at levels that are not overly restrictive

    in relation to price movements in the cash market for the commodity

    underlying the futures contract. For broad-based stock index futures

    contracts, rules should be adopted that coordinate with New York

    Stock Exchange (``NYSE'') declared Circuit Breaker Trading Halts (or

    other market coordinated Circuit Breaker mechanism) and would

    recommence trading in the futures contract only after trading in the

    majority of the stocks underlying the index has recommenced.

    (F) Last Trading Day: Specification of the last trading day for

    expiring contracts should be established such that it occurs before

    publication of the underlying third-party price index or

    determination of the final settlement price. If the designated

    contract market chooses to allow trading to occur through the

    determination of the final

    [[Page 36725]]

    settlement price, then the designated contract market should show

    that futures trading would not distort the final settlement price

    calculation.

    (G) Trading Months: Trading months should be established based

    on the risk management needs of commercial entities as well as the

    availability of price and other data needed to calculate the cash

    settlement price in the specified months. Specification of the last

    trading day should take into consideration whether the volume of

    transactions underlying the cash settlement price would be unduly

    limited by occurrence of holidays or traditional holiday periods in

    the cash market. Moreover, a contract should not be listed past the

    date for which the designated contract market has access to use a

    proprietary price index for cash settlement.

    (H) Speculative Limits: Specific rules and policies for

    speculative position limits are set forth in part 150 and/or part

    151, as applicable, of the Commission's regulations.

    (I) Reportable Levels: Refer to Sec. 15.03 of the Commission's

    regulations.

    (J) Trading Hours: Should be set by the designated contract

    market to delineate each trading day.

    (d) Options on a Futures Contract. (1) The Commission's

    experience with the oversight of trading in futures option contracts

    indicates that most of the terms and conditions associated with such

    trading do not raise any regulatory concerns or issues. The

    Commission has found that the following terms do not affect an

    option contract's susceptible to manipulation or its utility for

    risk management. Thus, the Commission believes that, in most cases,

    any specification of the following terms would be acceptable; the

    only requirement is that such terms be specified in an automatic and

    objective manner in the option contract's rules:

    [cir] Exercise method;

    [cir] Exercise procedure (if positions in the underlying futures

    contract are established via book entry);

    [cir] Strike price listing provisions, including provisions for

    listing strike prices on a discretionary basis;

    [cir] Strike price intervals;

    [cir] Automatic exercise provisions;

    [cir] Contract size (unless not set equal to the size of the

    underlying futures contract); and

    [cir] Option minimum tick should be equal to or smaller than

    that of the underlying futures contract.

    (2) Option Expiration & Last Trading Day. For options on futures

    contracts, specification of expiration dates should consider the

    relationship of the option expiration date to the delivery period

    for the underlying futures contract. In particular, an assessment

    should be made of liquidity in the underlying futures market to

    assure that any futures contracts acquired through exercise can be

    liquidated without adversely affecting the orderly liquidation of

    futures positions or increasing the underlying futures contract's

    susceptibility to manipulation. When the underlying futures contract

    exhibits a very low trading activity during an expiring delivery

    month's final trading days or has a greater risk of price

    manipulation than other contracts, the last trading day and

    expiration day of the option should occur prior to the delivery

    period or the settlement date of the underlying future. For example,

    the last trading day and option expiration day might appropriately

    be established prior to first delivery notice day for option

    contracts with underlying futures contracts that have very limited

    deliverable supplies. Similarly, if the futures contract underlying

    an option contract is cash settled using cash prices from a very

    limited number of underlying cash market transactions, the last

    trading and option expiration days for the option contract might

    appropriately be established prior to the last trading day for the

    futures contract.

    (3) Speculative Limits. In cases where the terms of an

    underlying futures contract specify a spot-month speculative

    position limit and the option contract expires during, or at the

    close of, the futures contract's delivery period, the option

    contract should include a spot-month speculative position limit

    provision that requires traders to combine their futures and option

    position and be subject to the limit established for the futures

    contract. Specific rules and policies for speculative position

    limits are set forth in part 150 and/or part 151, as applicable, of

    the Commission's regulations.

    (4) Options on Physicals Contracts.

    (i) Under the Commission's regulations, the term ``option on

    physicals'' refers to option contracts that do not provide for

    exercise into an underlying futures contract. Upon exercise, options

    on physicals can be settled via physical delivery of the underlying

    commodity or by a cash payment. Thus, options on physicals raise

    many of the same issues associated with trading in futures contracts

    regarding adequacy of deliverable supplies or acceptability of the

    cash settlement price series. In this regard, an option that is cash

    settled based on the settlement price of a futures contract would be

    considered an ``option on physicals'' and the futures settlement

    price would be considered the cash price series.

    (ii) In view of the above, acceptable practices for the terms

    and conditions of options on physicals contracts include, as

    appropriate, those practices set forth above for physical-delivery

    or cash-settled futures contracts plus the practices set forth for

    options on futures contracts.

    (e) Security Futures Products. The listing of security futures

    products are governed by the special requirements of part 41 of the

    Commission's regulations.

    (f) Non-Price Based Futures Contracts. (1) Non-price based

    contracts are typically construed as binary options, but also may be

    designed to function similar to traditional futures or option

    contracts.

    (2) Where the contract is settled to a third party cash-

    settlement series, the designated contract market should consider

    the nature and sources of the data comprising the cash-settlement

    calculation, the computational procedures, and the mechanisms in

    place to ensure the accuracy and reliability of the index value. The

    evaluation also considers the extent to which the third party has,

    or will adopt, safeguards against unauthorized or premature release

    of the index value itself or any key data used in deriving the index

    value.

    (3) The designated contract market should follow the guidance in

    paragraph (c)(4) (Contract Terms and Conditions Requirements for

    Futures Contracts Settled by Cash Settlement) of this appendix C to

    meet compliance.

    (g) Swap Contracts. (1) In general, swap contracts are an

    agreement to exchange a series of cash flows over a period of time

    based on reference price indices. When listing a swap for trading, a

    swap execution facility or designated contract market should

    determine that the reference price indices used for its contracts

    are not readily susceptible to manipulation. Accordingly, careful

    consideration should be given to the potential for manipulation or

    distortion of the cash settlement price, as well as the reliability

    of that price as an indicator of cash market values. Appropriate

    consideration also should be given to the commercial acceptability,

    public availability, and timeliness of the price series that is used

    to calculate the cash settlement price. Documentation demonstrating

    that the settlement price index is a reliable indicator of market

    values and conditions and is highly regarded by industry/market

    agents should be provided. Such documentation may take on various

    forms, including carefully documented interviews with principal

    market trading agents, pricing experts, marketing agents, etc.

    Appropriate consideration also should be given to the commercial

    acceptability, public availability, and timeliness of the price

    series that is used to calculate the cash flows of the swap.

    (i) Where an independent, private-sector third party calculates

    the referenced price index, the designated contract market should

    verify that the third party utilizes business practices that

    minimize the opportunity or incentive to manipulate the cash-

    settlement price series. Such safeguards may include lock-downs,

    prohibitions against derivatives trading by employees, or public

    dissemination of the names of sources and the price quotes they

    provide. Because a cash-settled contract may create an incentive to

    manipulate or artificially influence the underlying market from

    which the cash-settlement price is derived or to exert undue

    influence on the cash-settlement computation in order to profit on a

    futures position in that commodity, a designated contract market

    should, whenever practicable, enter into an information-sharing

    agreement with the third-party provider which would enable the

    designated contract market to better detect and prevent manipulative

    behavior.

    (ii) Where a designated contract market itself generates the

    cash settlement price series, the designated contract market should

    establish calculation procedures that safeguard against potential

    attempts to artificially influence the price. For example, if the

    cash settlement price is derived by the designated contract market

    based on a survey of cash market sources, the designated contract

    market should maintain a list of such entities which all should be

    reputable sources with knowledge of the cash market. In addition,

    the sample of sources polled should be representative of the cash

    market, and the poll should be conducted at a time when trading in

    the cash market is active.

    [[Page 36726]]

    (iii) The cash-settlement calculation should involve appropriate

    computational procedures that eliminate or reduce the impact of

    potentially unrepresentative data.

    (2) Speculative Limits: Specific rules and policies for

    speculative position limits are set forth in part 151 and/or part

    151, as applicable, of the Commission's regulations.

    (3) Intraday Market Restrictions: Designated contract markets or

    swap execution facilities should have in place intraday market

    restrictions that pause or halt trading in the event of

    extraordinary price moves that may result in distorted prices. Such

    restrictions need to be coordinated with other markets that may be a

    proxy or a substitute for the contracts traded on their facility.

    For example, coordination with NYSE rule 80.B Circuit Breaker

    Trading Halts. The designated contract market or swap execution

    facility should adopt rules to specifically address who is

    authorized to declare an emergency; how the designated contract

    market or swap execution facility will notify the Commission of its

    decision that an emergency exists; how it will address conflicts of

    interest in the exercise of emergency authority; and how it will

    coordinate trading halts with markets that trade the underlying

    price reference index or product.

    (4) Settlement Method. The designated contract market or swap

    execution facility should follow the guidanc