Font Size: AAA // Print // Bookmark

e8-28867

  • [Federal Register: December 12, 2008 (Volume 73, Number 240)]

    [Proposed Rules]

    [Page 75887-75921]

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

    [DOCID:fr12de08-29]

    [[Page 75887]]

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

    Part III

    Commodity Futures Trading Commission

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

    17 CFR Parts 15, 16, 17, et al.

    Significant Price Discovery Contracts on Exempt Commercial Markets;

    Proposed Rule

    [[Page 75888]]

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

    COMMODITY FUTURES TRADING COMMISSION

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

    Significant Price Discovery Contracts on Exempt Commercial

    Markets

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rules.

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

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

    ``CFTC'') is proposing rules to implement the CFTC Reauthorization Act

    of 2008 (``Reauthorization Act'').\1\ In pertinent part, the

    Reauthorization Act amends the Commodity Exchange Act to significantly

    expand the CFTC's regulatory authority over exempt commercial markets

    (``ECMs''), which had heretofore operated largely outside the

    Commission's regulatory reach, by creating a new regulatory category--

    ECMs with significant price discovery contracts (``SPDCs'')--and

    directing the Commission to adopt rules to implement this expanded

    authority. In addition to proposing regulations mandated by the

    Reauthorization Act, the Commission is also proposing to amend existing

    regulations applicable to registered entities in order to clarify that

    such regulations are now applicable to ECMs with SPDCs.

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

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

    Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18,

    2008).

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

    DATES: Comments must be received by February 10, 2009.

    ADDRESSES: You may submit comments by any of the following methods:

    Federal eRulemaking Portal: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov http://www.regulations.gov.

    Mail/Hand Deliver: David Stawick, Secretary of the

    Commission, Commodity Futures Trading Commission, Three Lafayette

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

    E-mail: secretary@cftc.gov.

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

    Division of Market Oversight, Commodity Futures Trading Commission,

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

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

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. The Commodity Futures Modernization Act of 2000 Established a

    New Regulatory Framework

    1. Multi-Tiered Regulation

    2. Exempt Commercial Markets

    3. Differences Between ECMs and DCMs

    B. The Changing ECM Landscape

    C. The CFTC's Response to the Changing Energy Markets

    1. Empirical Study of Trades on ICE and NYMEX

    2. Commission Surveillance of Energy Markets

    3. The Commission's ECM Hearing

    4. The Commission's Findings and Legislative Recommendations

    D. The Reauthorization Legislation and the Statutory Scheme

    II. The Proposed Rules

    A. Part 36--Exempt Markets

    1. Required Information

    2. Identifying Significant Price Discovery Contracts

    (i) Criteria for SPDC Determination

    (ii) Notification Requirement for ECMs With a SPDC

    3. Procedures

    4. Substantive Compliance With the Core Principles

    5. Annual Commission Review

    B. Market, Transaction and Large Trader Reporting Rules

    C. Other Regulatory Provisions

    1. Part 40--Provisions Common to Registered Entities

    III. Related Matters

    A. Cost Benefit Analysis

    B. Regulatory Flexibility Act

    C. Paperwork Reduction Act

    List of Subjects: Proposed Rules

    I. Background

    A. The Commodity Futures Modernization Act of 2000 Established a New

    Regulatory Framework

    1. Multi-Tiered Regulation

    On December 21, 2000, Congress enacted the Commodity Futures

    Modernization Act (``CFMA''), which amended the Commodity Exchange Act

    (``Act'' or ``CEA'') \2\ to replace the Act's ``one-size-fits-all''

    supervisory framework for futures trading with a multi-tiered approach

    to regulatory oversight of derivatives markets. The CFMA applies

    different levels of regulatory oversight to markets based primarily on

    the nature of the underlying commodity being traded and the

    participants who are trading. In general, the more sophisticated the

    traders or commercial participants, or the less susceptible a commodity

    is to manipulation or other market or trading abuses, the less

    regulatory oversight is required under the CFMA.

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

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

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

    Accordingly, designated contract markets (``DCMs''), are subject to

    the highest level of regulatory oversight because they are open to all

    participants and may offer all types of commodities.\3\ Derivatives

    Transaction Execution Facilities (``DTEFs'') \4\ are subject to less

    regulatory oversight than DCMs because participants must be

    sophisticated investors or must be hedging risk associated with their

    commercial activities. Additionally, the CFMA imposes limitations on

    the types of commodities that may be traded, and the manner in which

    they may be traded.\5\ Exempt Boards of Trade (``EBOTs'') are subject

    to virtually no regulatory oversight and are not registered with or

    designated by the Commission. EBOTs are exempt from most provisions of

    the CEA other than its antifraud and anti-manipulation prohibitions,

    but are subject to significant commodity and participant

    restrictions.\6\ In addition to creating these three new categories of

    trading facility, the CFMA created a broad array of exclusions and

    exemptions from regulation for certain swaps and other derivatives

    products traded either bilaterally or on electronic trading

    facilities.\7\ These exclusions and exemptions reflected a view,

    consistent with Congressional and Commission actions relating to the

    passage of the CFMA, that transactions between sophisticated

    counterparties do not necessarily require the protections that the CEA

    provides for transactions on DCMs and DTEFs.

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

    \3\ 7 U.S.C. 7.

    \4\ To qualify as a DTEF, an exchange must implement certain

    restrictions on retail market participation and can only trade

    certain commodities (including excluded commodities and other

    commodities with very high levels of deliverable supply) and

    generally must exclude retail participants. CFTC Glossary

    (Glossary).

    \5\ 7 U.S.C. 7a.

    \6\ EBOTs may trade only ``excluded commodities'' (7 U.S.C.

    1a(13); 17 CFR Sec. 36.2(a)(2)(i)), and are open only to ``eligible

    contract participants'' (``ECPs'') (7 U.S.C. 1a(12)).

    \7\ For example, section 2(g) created an exclusion from the CEA

    for individually negotiated swaps, based on non-agricultural

    commodities entered into between eligible contract participants, 7

    U.S.C. 2(g). Similarly excluded are transactions between ECPs

    involving excluded commodities that are not executed on a trading

    facility. 7 U.S.C. 2(d)(1).

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

    2. Exempt Commercial Markets

    The CFMA established an exemption for transactions in exempt

    commodities traded on electronic trading facilities, also known as

    exempt commercial markets (``ECMs'').\8\ To qualify as an ECM, a

    facility must limit its transactions to principal-to-principal

    transactions executed between ``eligible commercial entities''

    (``ECEs'') \9\ on an ``electronic trading facility.'' \10\ Contracts

    [[Page 75889]]

    for all commodities except agricultural and excluded commodities

    (primarily financial commodities but also commodities such as weather)

    potentially are eligible to trade on an ECM. Examples of commodities

    traded on ECMs are energy products, metals, chemicals, air emission

    allowances, paper pulp, and barge freight rates.\11\ ECMs fall

    somewhere between DTEFs and EBOTs on the regulatory oversight spectrum.

    Like EBOTs, they are neither licensed nor registered with the CFTC and

    are subject to the Act's antifraud and anti-manipulation

    provisions.\12\ In addition, and different from EBOTs, ECMs are subject

    to certain recordkeeping and reporting requirements under the CEA.\13\

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

    \8\ 7 U.S.C. 2(h)(3)-(5).

    \9\ 7 U.S.C. 1a(11) (a subset of ECPs).

    \10\ 7 U.S.C. 1a(10). For purposes of this proposed rulemaking,

    the terms electronic trading facility and ECM are used

    interchangeably. 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 non-

    discretionary automated trade matching and execution algorithm. 7

    U.S.C. 1a(34).

    \11\ 7 U.S.C. 1a(14).

    \12\ Sections 2(h)(4)(B) and (C) of the Act, 7 U.S.C. 2(h)(4)(B)

    and (C).

    \13\ For example, an ECM must maintain for five years and make

    available for inspection records of its activities relating to its

    business as a trading facility. 7 U.S.C. 2(h)(5)(B)(ii). More

    specifically, Commission rule 36.3, 17 CFR 36.3, requires that an

    ECM identify to the Commission those transactions for which it

    intends to rely on the exemption in section 2(h)(3) of the CEA and

    which averaged five trades per day or more over the most recent

    calendar quarter. For all such transactions, the ECM must provide to

    the Commission weekly reports showing certain basic trading

    information, or provide the Commission with electronic access that

    would allow it to compile the same information. 17 CFR

    36.3(b)(1)(ii). An ECM also must provide to the Commission, upon

    special call, any information relating to its business that the

    Commission determines is appropriate to enforce the antifraud and

    anti-manipulation provisions of the CEA, to evaluate a systemic

    market event, or to obtain information on behalf of another federal

    financial regulator. 7 U.S.C. 2(h)(5)(B)(iii); 17 CFR 36.3(b)(3). An

    ECM must maintain a record of any allegations or complaints it

    receives concerning suspected fraud or manipulation and must provide

    the Commission with a copy of the record of each such complaint. 17

    CFR 36.3(b)(1)(iii). Finally, an ECM is required to file an annual

    certification that it continues to operate in reliance on the

    exemption in section 2(h)(3) of the Act and that the information it

    previously provided to the Commission remains correct. 17 CFR

    36.3(c)(4).

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

    3. Differences Between ECMs and DCMs

    ECMs are not subject to the level of transparency and Commission

    oversight associated with DCMs. DCMs must satisfy specified criteria to

    become designated, and then must demonstrate continuing compliance with

    18 core principles set out in the Act.\14\ The Act provides flexibility

    with respect to how DCMs may choose to meet the core principles'

    mandate that DCMs undertake significant supervisory responsibility with

    respect to trading on their markets. DCMs must, for example, establish

    rules and procedures for preventing market manipulation and must adopt

    necessary and appropriate position limit or accountability rules to

    address the potential for manipulation or congestion. DCMs also must

    establish compliance and surveillance programs, which the Commission

    evaluates through rule enforcement reviews,\15\ must monitor trading on

    their markets and must undertake other self-regulatory responsibilities

    mandated by the CEA.

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

    \14\ See sections 5(d)(1)-(18) of the Act, 7 U.S.C. 7(d)(1)-

    (18).

    \15\ The Commission conducts regular rule enforcement reviews of

    the self regulatory programs operated by DCMs for enforcing exchange

    rules, preventing market manipulations and customer and market

    abuses, and ensuring that trade related information is recorded and

    stored in a manner consistent with the Act.

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

    The CFMA did not impose these obligations on ECMs. While the

    Commission was given the authority to determine whether an ECM performs

    a significant price discovery function for transactions in an

    underlying cash market,\16\ such a determination did not trigger any

    self-regulatory responsibilities for the ECM or confer any additional

    oversight authority on the Commission. Rather, the presence of a

    contract performing a significant price discovery function required the

    ECM to publicly disseminate certain basic information, such as contract

    terms and conditions and daily trading volume, open interest, and

    opening and closing prices or price ranges.\17\

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

    \16\ In 2004, the Commission amended its part 36 rules to

    include the requirement that an ECM notify the Commission when it

    has reason to believe that one or more of the markets on which it is

    conducting agreements, contracts or transactions in reliance on

    section 2(h)(3) of the CEA has been met or if the market holds

    itself out to the public as performing a price discovery function

    for the cash market of a commodity. 17 CFR 36.3(c)(2)(i) and (ii).

    69 FR 43285 (July 20, 2004).

    \17\ Id.

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

    B. The Changing ECM Landscape

    Following enactment of the CFMA in December 2000, the first ECMs

    that notified the Commission of their intent to operate generally were

    simple trading platforms, resembling in many ways business-to-business

    facilities for large commercial firms. ECMs facilitate the execution of

    trades between commercial counterparties by offering an anonymous and

    efficient electronic matching system which many believed to be superior

    to the existing voice broker system, and to provide a competitive

    advantage over the bilateral OTC market, especially for energy

    products. Initially, most ECMs were small operations with low trading

    volumes that were small relative to DCMs. The first ECMs did not offer

    centralized clearing, but sought to address counterparty risk through

    the use of credit filters whereby traders could limit their potential

    counterparties to a list of traders whose credit they found

    satisfactory. Significantly, early ECM contracts were not linked to

    contracts listed on DCMs. Over time, however, ECMs began to offer

    ``look-alike'' contracts that were linked to the settlement prices of

    their exchange-traded counterparts, and these look-alike contracts in

    one case began to garner significant volumes. In recent years, several

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

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

    manage counterparty risk.

    This evolution, and particularly the linkage of ECM contract

    settlement prices to DCM futures contract settlement prices, began to

    raise questions about whether ECM trading activity could impact trading

    on DCMs and whether the CFTC had adequate authority to address that

    impact and protect markets from manipulation and abuse. Of special

    concern to CFTC staff was the existence of the ECM cash-settled ``look-

    alike'' contracts that could provide an incentive to manipulate the

    settlement price of an underlying DCM futures contract to benefit

    positions in the look-alike ECM contract. As discussed more fully

    below, the Commission subsequently considered and studied these

    concerns in a variety of ways, culminating, in September 2007, in a

    public hearing examining trading on regulated exchanges and ECMs.\18\

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

    \18\ See Commodity Futures Trading Commission, Report on the

    Oversight of Trading on Regulated Futures Exchanges and Exempt

    Commercial Markets (October 2007), http://www.cftc.gov/stellent/

    groups/public/@newsroom/documents/file/pr5403-07_ecmreport.pdf for

    a comprehensive report of the Commission's findings following its

    September 2007 hearing (``ECM Report'').

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

    C. The CFTC's Response to the Changing Energy Markets

    1. Empirical Study of Trades on ICE \19\ and NYMEX

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

    \19\ Intercontinental Exchange, or ICE, consists of four

    separate entities: ICE OTC, to which this document refers, is an ECM

    trading energy products. ICE Future Europe trades energy futures and

    is regulated by the Financial Services Authority of Great Britain;

    ICE Futures US focuses primarily on futures based on soft

    commodities (e.g., coffee, sugar, cocoa, cotton) and financial

    futures and is regulated by the CFTC; ICE Futures Canada trades

    futures and options and is regulated by the Manitoba Securities

    Commission.

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

    During the last several years, one ECM in particular--the

    Intercontinental

    [[Page 75890]]

    Exchange (``ICE'')--has become a major trading venue for natural gas

    contracts in direct competition with the New York Mercantile Exchange

    (``NYMEX'') natural gas benchmark futures contract, in addition,

    Commission staff has found that the traders on ICE are virtually the

    same as the traders on NYMEX. All of the top 25 natural gas traders on

    NYMEX are also significant traders on ICE. For the Henry Hub natural

    gas market,\20\ market participants generally view ICE and NYMEX as

    essentially a single market, looking to both ICE and NYMEX when

    determining where to execute a trade at the best price.

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

    \20\ Henry Hub is a natural gas pipeline hub in Louisiana that

    serves as the delivery point for NYMEX natural gas futures contracts

    and often serves as a benchmark for wholesale natural gas prices

    across the U.S. Glossary.

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

    To assess these changes in the marketplace, the Commission's Office

    of the Chief Economist (``OCE'') conducted an empirical study of the

    relationship between the natural gas contracts that trade on ICE and

    NYMEX. OCE collected transaction prices for ICE and NYMEX natural gas

    contracts from January 3, 2006 through December 31, 2006 and evaluated

    trading for 12 contract months when trading on each market was

    appropriately active. OCE examined the timing of price changes on ICE

    and NYMEX to draw inferences about where information arrives first. If

    price changes on one venue consistently ``led'' those on the other

    venue, then OCE concluded that informed traders preferred trading at

    that ``leading'' venue and inferred that market to be ``discovering''

    prices.\21\ OCE found that ICE exhibited price leadership with respect

    to NYMEX on 20 percent of the contract-days, while NYMEX exhibited

    price leadership on 63 percent of the contract-days. OCE concluded that

    these results suggested that both ICE and NYMEX are significant price

    discovery venues for natural gas futures contracts.

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

    \21\ See ECM Report at 11-12. Price discovery is the process of

    determining the price level for a commodity based on supply and

    demand conditions. Price discovery may occur in a futures market or

    cash market. Glossary.

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

    2. Commission Surveillance of the Energy Markets

    The Commission's surveillance of natural gas energy markets

    traditionally has focused on the regulated futures markets traded on

    NYMEX. Prior to the Reauthorization Act, ECMs were not subject to the

    requirements of the Commission's large trader reporting system

    (``LTRS'').\22\ In order to obtain analogous large trader information

    from ECMs, the Commission had to issue special calls.\23\ Based on the

    prominent role played by the ICE natural gas contract in the price

    discovery process and the possible impact on the NYMEX natural gas

    contract, the Commission determined to issue a series of special calls

    for information related to ICE's cleared natural gas swap contracts

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

    physical delivery natural gas contract.\24\

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

    \22\ The LTRS is the centerpiece of the Commission's market

    surveillance system. Under the LTRS, clearing members, futures

    commission merchants and foreign brokers file daily reports with the

    CFTC showing futures and option positions in accounts they carry

    that are above reporting levels set by the Commission. The reporting

    level for the NYMEX natural gas futures market is 200 contracts.

    \23\ Section 2(h)(5)(B)(iii) of the Act, 7 U.S.C.

    2(h)(5)(B)(iii), requires that an electronic trading facility

    relying on the exemption provided in section 2(h)(3) must, upon a

    special call by the Commission, provide such information related to

    its business as an electronic trading facility as the Commission may

    determine appropriate to enforce the antifraud provisions of the

    CEA, to evaluate a systemic market event, or to obtain information

    requested by a Federal financial regulatory authority in connection

    with its regulatory or supervisory responsibilities.

    \24\ The special calls were issued primarily to assist the

    Commission in its surveillance of the NYMEX natural gas contract.

    They were not issued as part of an investigation of any particular

    market participant or trading activity on either ICE or NYMEX, nor

    were they issued to conduct regular market surveillance of ICE. The

    first special call, issued on September 28, 2006, requested daily

    clearing member position data for ICE's natural gas swap contracts,

    broken out between house and aggregate customer positions, which is

    similar to information that the Commission receives from NYMEX

    pursuant to Commission rule 16.00. This information permits CFTC

    market surveillance staff to see all cleared positions at the

    clearing member level, but it is not possible to determine

    individual customer positions. To obtain daily individual trader

    positions, the Commission issued a second special call on December

    1, 2006. While the data received is similar to large trader

    reporting for DCMs, the methodology for reporting is very different.

    Because ICE is a principal-to-principal market and therefore does

    not receive position reporting from firms, it was necessary for ICE

    to develop an algorithm to infer open positions from the sum of all

    trading by each individual trader. While this approach has provided

    valuable information, it is less accurate than traditional large

    trader reporting. The third special call, issued on September 5,

    2007, required ICE to provide all cleared transaction data for its

    Henry Hub swap contracts and identify counterparties for the final

    two trading sessions prior to the expiration of prompt month Henry

    Hub natural gas products. This data is similar to transaction data

    that the Commission receives from NYMEX for all trading days and

    enables CFTC staff to monitor trading activity on ICE and obtain

    more complete coverage to counter possible manipulative schemes that

    could affect trading on ICE.

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

    3. The Commission's ECM Hearing

    Following the OCE study and the special calls issued to ICE, the

    Commission held a public hearing on September 18, 2007, to examine the

    oversight of DCMs and ECMs. Witnesses at the hearing included

    Commission staff, representatives of DCMs and ECMs, and representatives

    of a broad spectrum of market users and consumer groups. The hearing

    focused on a number of issues, including the tiered regulatory approach

    of the CFMA and whether it was adequate; the similarities and

    differences between ECMs and DCMs; the associated regulatory risks of

    each market category; the types of regulatory or legislative changes

    that may be appropriate to address identified risks; and the impact

    that regulatory or legislative changes might have on the U.S. futures

    industry and the global competitiveness of the U.S. financial industry.

    In announcing the hearing, CFTC Acting Chairman Lukken observed that:

    The evolution of these energy markets [ECMs] in recent years

    requires our agency to address whether the level of regulatory

    oversight is proper given the importance of energy prices to all

    Americans.* * * This oversight hearing will provide a better

    understanding of the inter-relationship of these trading venues so

    policymakers can make informed decisions to protect these vital

    markets.\25\

    \25\ CFTC Release 5368-07, August 2, 2007 (CFTC Announces

    September Hearing to Examine Trading on Regulated Exchanges and

    Exempt Commercial Markets).

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

    4. The Commission's Findings and Legislative Recommendations

    Based on information developed through various studies,

    surveillance, special calls and its public hearing, the Commission

    published in October 2007 a ``Report on the Oversight of Trading on

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

    Report'').\26\ The report was provided to the Commission's

    Congressional oversight committees, which were then in the process of

    considering legislation to amend the CEA and reauthorize the

    Commission.

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

    \26\ supra n. 20.

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

    The ECM Report noted that while some participants disagreed, most

    witnesses at the September 18 hearing generally supported the tiered

    regulatory structure of the CFMA, but expressed concern regarding the

    regulatory provisions governing ECMs and the regulatory disparity

    between DCMs and ECMs.\27\ Witnesses suggested that this disparity made

    markets more susceptible to manipulation and put regulated exchanges at

    a competitive disadvantage vis-[agrave]-vis ECMs offering virtually

    identical products. Generally, most witnesses felt that some changes to

    the ECM provisions might be appropriate, provided those changes

    [[Page 75891]]

    were prudently targeted and did not adversely affect the ability of

    ECMs to innovate and grow.\28\

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

    \27\ Id. at 15.

    \28\ Id.

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

    Based on the hearing testimony and its own experience in

    administering the Act, the Commission at that time concluded that the

    tiered approach of the CFMA generally had operated effectively. ECMs

    had proven popular for new start-up markets and had provided

    competition for DCMs, spurring them toward innovations of their own.

    The Commission further found that, to the extent that trading volume on

    an ECM contract remained low and its prices were not significantly

    relied upon by other markets, the current level of regulation remained

    appropriate. However, when a futures contract traded on an ECM matured

    and began to serve a significant price discovery function for

    transactions in commodities in interstate commerce, the contract

    warranted increased oversight to deter and prevent price manipulation

    or other disruptions to market integrity, both on the ECM itself and in

    any related futures contracts trading on DCMs. Such increased oversight

    would also help to ensure fair competition among ECMs and DCMs trading

    similar products and competing for the same business.

    In light of these conclusions, the Commission's ECM Report

    recommended that the CEA be amended to grant the Commission additional

    authority over ECM contracts serving a significant price discovery

    function, and that certain self-regulatory responsibilities be assigned

    to ECMs offering such contracts. Specifically, the Commission advocated

    that (1) An ECM contract that is determined to perform a significant

    price discovery function be subject to large trader reporting

    requirements comparable to those applicable to all DCM contracts; (2)

    an ECM should be required to adopt position limits or accountability

    levels, as appropriate, for a listed contract that serves a significant

    price discovery function similar to the limits on DCMs; (3) an ECM

    should be required to monitor trading of a listed contract that serves

    a significant price discovery function to detect and prevent

    manipulation, price distortion, and disruptions of the delivery or

    cash-settlement process; and (4) the Commission and the ECM should be

    provided with emergency authority to alter or supplement contract

    rules, liquidate open positions, and suspend or curtail trading in any

    listed contract that serves a significant price discovery function.

    These authorities would be essential tools for the Commission and the

    ECM to prevent manipulation and disruptions of the delivery or cash-

    settlement process.

    The Commission further recommended that the determination whether

    an ECM contract serves a significant price discovery function should

    focus on the following factors: (1) Material Liquidity--trading volume

    in the ECM contract must be significant enough to affect regulated

    markets or to become a pricing benchmark; and (2) Linkage/Material

    Price Reference--the relevant ECM contract must either influence other

    markets and transactions through this linkage or be materially

    referenced by others in interstate commerce on a frequent and recurring

    basis.

    D. The Reauthorization Legislation and the Statutory Scheme

    The CFTC Reauthorization Act of 2008 \29\ adds a new section

    2(h)(7) to the CEA to govern the treatment of ``significant price

    discovery contracts'' (``SPDCs'') on ECMs.\30\ The legislation, based

    largely on the Commission's recommendations for improving oversight of

    ECMs, provides for greater regulation of contracts traded on ECMs that

    fulfill a significant price discovery function and establishes criteria

    for the Commission to consider in determining whether an ECM contract

    qualifies as a SPDC. The Reauthorization Act directs the CFTC to extend

    its regulatory oversight to the trading of SPDCs; requires ECMs to

    adopt position and accountability limits for SPDCs; authorizes the

    Commission to require large traders to report their positions in SPDCs;

    and establishes core principles for ECMs with contracts that are

    determined to perform a significant price discovery function. Finally,

    the legislation directs the Commission to issue rules implementing the

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

    rules the conditions under which an ECM will have the responsibility to

    notify the Commission that an agreement, contract or transaction

    conducted in reliance on the exemption provided in section 2(h)(3) of

    the CEA may perform a price discovery function.\31\

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

    \29\ Public Law No. 110-246, supra. n. 1 (``Pub. L. 110-246'').

    The Reauthorization Act was incorporated into the Food, Conservation

    and Energy Act of 2008 as Title XIII of that legislation. Title XIII

    was not the subject of Congressional hearings and the legislative

    history is limited to The Joint Explanatory Statement of the

    Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d Sess.

    at 978-86 (2008) (Conference Committee Report).

    \30\ 7 U.S.C. 2(h)(7).

    \31\ Pub. L. 110-246 at sec. 12304. See also Conference

    Committee Report, at 985-86; 2008 Farm Bill Commodity Futures Title:

    Strengthening Oversight of Futures Markets, House Committee on

    Agriculture (May 9, 2008) http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://agriculture.house.gov/inside/Legislation/110/FB/Conf/Title_XIII_fs.pdf http://agriculture.house.gov/inside/

    Legislation/110/FB/Conf/Title_XIII_fs.pdf.

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

    The Reauthorization Act significantly broadens the CFTC's

    regulatory authority over ECMs by creating, in section 2(h)(7) of the

    CEA, a new regulatory category--ECMs on which SPDCs are traded--and

    treating electronic trading facilities in that category as registered

    entities subject to all provisions of the CEA that are applicable to

    registered entities.\32\ The legislation confers on the CFTC the

    authority to designate an agreement, contract or transaction as a SPDC

    if the Commission determines, in its discretion, that the agreement,

    contract or transaction performs a significant price discovery function

    under criteria established by section 2(h)(7). When the Commission

    makes such a determination, the ECM on which the SPDC is traded must

    assume, with respect to that contract or contracts, all the

    responsibilities and obligations of a registered entity under the Act

    and Commission regulations, and must comply with nine core principles

    established by new section 2(h)(7)(C)--including the obligation to

    establish position limits and/or accountability standards for

    SPDCs.\33\ The Reauthorization Act separately amends section 4i of the

    CEA to authorize the Commission to require large trader reports for

    SPDCs listed on ECMs.\34\

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

    \32\ Conference Committee Report, at 985-86.

    \33\ Congress has made clear that an ECM with a SPDC shall be

    considered as a registered entity for purposes of the CEA. Id. at

    985.

    \34\ Public Law 110-246 at sec. 13202.

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

    Consistent with Congress' directive, the Commission is issuing this

    proposed notice of rulemaking as an initial step to implementing the

    amended statutory scheme for ECMs with SPDCs.\35\ These regulations are

    applicable to exempt markets, but also implicate parts 16 through 21

    (market, transaction and large trader reporting rules), and 40

    (provisions common to contract markets, derivatives transaction

    execution facilities and derivatives clearing organizations).

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

    \35\ Id. at sec. 13204. Congress has directed that the

    Commission issue proposed rules implementing section 2(h)(7) of the

    CEA not later than 180 days after the date of enactment of the

    Reauthorization Act and that the Commission issue a final rule no

    later than 270 days after the date of enactment. The Reauthorization

    Act initially was enacted as H.R. 2419 on May 22, 2008 but was

    repealed due to clerical error--and concurrently enacted--by H.R.

    2164, Public Law 110-264 on June 18, 2008.

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

    [[Page 75892]]

    II. The Proposed Rules

    A. Part 36--Exempt Markets

    Part 36 of the Commission's regulations contains the provisions

    that apply to exempt boards of trade and to exempt commercial markets,

    regardless of whether the markets are a significant source for price

    discovery. Rule 36.3 imposes a number of requirements and restrictions

    on ECMs--electronic trading facilities relying on the exemption in

    section 2(h)(3) of the CEA--including notification of intent to rely on

    the exemption; initial and ongoing information submission requirements;

    prohibited representations; price discovery notification; and price

    dissemination requirements. The Commission proposes to amend rule 36.3

    to implement its broadened regulatory authority over ECMs with SPDCs

    under section 2(h)(7) of the CEA.

    1. Required Information

    The notification provision in rule 36.3(a) is unchanged. The

    Commission proposes to amend rule 36.3(b) to separately specify the

    information submission requirements, both initially and on an ongoing

    basis, for: (1) All ECMs; (2) for ECMs with respect to agreements,

    contracts or transactions that have not been determined to perform a

    significant price discovery function; and (3) for ECMs with SPDCs.\36\

    The proposed amendment to rule 36.3(b) additionally includes provisions

    related to subpoenas, special calls and the delegation of authority and

    provides that an electronic trading facility relying on the exemption

    in section 2(h)(3) of the Act shall not, with respect to agreements,

    contracts or transactions that are not SPDCs, represent to any person

    that it is registered with, designated, recognized, licensed or

    approved by the Commission. This prohibition has its origin in section

    2(h)(5) of the CEA, which sets forth the requirements and obligations

    for ECMs. Although the Reauthorization Act did not amend the

    prohibition on representation in section 2(h)(5)(7) of the Act, the

    legislation did amend the statutory definition of ``registered entity''

    to include, ``with respect to a contract that the Commission determines

    is a significant price discovery contract, any electronic trading

    facility on which the contract is executed or traded.'' \37\

    Accordingly, the Commission believes that when it has determined that a

    contract, agreement or transaction executed or traded on the trading

    facility is a SPDC, the trading facility may represent that it is a

    registered entity, provided that the representation clearly and

    prominently states that the ECM is a registered entity only with

    respect to its SPDCs.

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

    \36\ Enhanced obligations for ECMs with SPDCs apply only to the

    SPDCs and need not be applied to ECM contracts, agreements or

    transactions that are not SPDCs.

    \37\ Public Law 110-246 at sec. 13203(b)(3).

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

    In general, the proposed information submission requirements for

    ECMs without SPDCs are drafted to be substantively similar to the

    information that all ECMs currently are required to provide.\38\ A

    significant change to the submission requirements for ECMs is the

    proposed requirement to file, initially and on a quarterly basis,

    information about the terms and conditions as well as related

    information for all contracts traded on the facility. Although the

    proposed rules set forth the terms, standards and conditions under

    which an ECM will be responsible to notify the Commission that it may

    have a SPDC, the Commission is mindful that it must independently be

    aware of ECM contracts that may develop into SPDCs. The Commission

    believes that requiring ECMs to identify all agreements, contracts and

    transactions and to provide basic trading information will enable it to

    fulfill that obligation. To that end, the Commission proposes to retain

    for non-SPDCs the requirement that ECMs submit to the Commission weekly

    reports (or alternatively provide electronic access that would allow

    the Commission to capture the same information) for contracts that

    average five trades per day or more.\39\ In addition, the Commission is

    proposing to add a quarterly reporting requirement for all non-SPDCs,

    to include their terms and conditions, average daily trading volume,

    and open interest. This quarterly reporting requirement also is being

    proposed to provide the Commission with information that will assist it

    in making prompt assessments whether ECM contracts may be SPDCs. ECMs

    should note that this provision will require them to fulfill the

    quarterly reporting requirement beginning with the end of the calendar

    quarter following the adoption of these final rules. Under proposed

    rule 36.3(b)(3), ECMs with SPDCs will be required to comply with the

    daily reporting and publication requirements of regulation 16.01.\40\

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

    \38\ ECMs that have already filed a Notification of Operation

    under section 2(h)(3) of the Act should note that proposed rule

    36.3(b) will not require them to provide any additional information

    to the Commission explaining how the facility meets the definition

    of trading facility or with information demonstrating that the

    facility requires all participants to be ECEs as long as the

    operations of the facility and the participants trading on the

    facility have not materially changed since the filing of the

    notification or the most recent ECM Annual Certification form.

    \39\ See 17 CFR 36.3(b).

    \40\ Once in compliance with the core principles and daily

    reporting and publication requirements applicable to ECMs with

    SPDCs, ECMs will not be required to comply with proposed rule

    36.3(b)(2) except in regard to non-SPDC contracts that are traded or

    executed on the facility.

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

    2. Identifying Significant Price Discovery Contracts

    The Reauthorization Act directs the Commission to consider, as

    appropriate, four specific criteria when identifying whether an

    agreement, contract or transaction is a SPDC: Price linkage, arbitrage,

    material price reference, and material liquidity.\41\ The legislation

    further directs that in its rulemaking to implement the provisions of

    section 2(h)(7) of the CEA, the Commission shall include the standards,

    as well as conditions under which an ECM will have the responsibility

    to notify the Commission that a contract traded on the facility may

    perform a significant price discovery function. Accordingly, proposed

    rule 36.3(c) addresses: (i) The criteria on which the Commission will

    rely in making a determination that an agreement, contract or

    transaction is a SPDC; (ii) the factors that will trigger the ECM's

    obligation to notify the Commission that it may have a SPDC; (iii) the

    procedures the Commission will follow in reaching its determination

    whether a contract is a SPDC (and in determining that a contract is no

    longer a SPDC); and (iv) the procedures and standards by which an ECM

    with a SPDC must demonstrate compliance with the core principles.

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

    \41\ Section 2(h)(7)(B)(v) also authorizes the Commission to

    specify by rule other material factors relevant to a determination

    whether a contract is a SPDC.

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

    (i) Criteria for SPDC Determination. In enacting new section

    2(h)(7) of the CEA, Congress specified four criteria that the

    Commission must consider in making a determination that an agreement,

    contract or transaction performs a significant price discovery

    function. Proposed rule 36.3(c)(1) enumerates the factors--price

    linkage, arbitrage, material price reference, and material liquidity.

    Because the legislation does not assign priority to any of the factors,

    and neither the statutory language nor the Conference Committee Report

    specifies the degree to which any of the factors must be present,

    section 2(h)(7)(B) gives the Commission flexibility in applying the

    criteria to a particular contract and market. The Commission is also

    mindful that:

    [n]ot all the listed factors must be present to make a

    determination that a contract

    [[Page 75893]]

    performs a significant price discovery function. However, the

    Managers intend that the Commission should not make a determination

    that an agreement, contract or transaction performs a significant

    price discovery function on the basis of the price linkage factor

    unless the agreement, contract or transaction has sufficient volume

    to impact other regulated contracts or to become an independent

    price reference or benchmark that is regularly utilized by the

    public.\42\

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

    \42\ Conference Committee Report at 984-85. In addition to the

    four criteria established by Congress, section 2(h)(7) permits the

    Commission to consider such other material factors as it may specify

    by rule as relevant to a determination whether an agreement,

    contract or transaction serves a significant price discovery

    function. 7 U.S.C. 2(h)(7)(B)(v).

    Because the criteria mandated by Congress do not lend themselves to

    bright-line rules, the Commission proposes to explain, in Appendix A to

    the part 36 rules, how it expects to apply the criteria in making its

    determinations. This proposed guidance explains that the Commission

    will make SPDC determinations on a case-by-case basis, applying and

    weighing each factor as appropriate to the specific contract and

    circumstances under consideration; offers examples to illustrate which

    factor or combinations of factors the Commission would look to when

    evaluating whether a contract is performing a significant price

    discovery function; and describes the circumstances under which the

    presence of a factor or factors would be sufficient to warrant such a

    determination.

    By way of example, for contracts that are linked to other contracts

    or that may be arbitraged with other contracts, the Commission would

    determine that the contract is a SPDC if the price of the contract

    moves in such harmony with the other contract that the two markets

    essentially become interchangeable. This co-movement of prices would be

    an indication that liquidity in the contract has reached a level

    sufficient for the contract to perform a significant price discovery

    function. Accordingly, the proposed guidance establishes threshold

    liquidity and price relationship standards that will inform the

    Commission's determination. A different approach is required when

    considering the price discovery potential of a contract that is serving

    as a material price reference. In these circumstances, the Commission

    would rely on either of two sources of evidence in making its

    determination. The Commission believes that a direct indicator that a

    contract is serving as a material price reference is observation that

    cash market participants are actively referencing the contract price

    when they enter into cash market transactions. Routine publication of

    an ECM's contract price in widely distributed industry publications and

    newsletters also would indicate that industry participants attach some

    value to this information.

    (ii) Notification requirement for ECMs with a SPDC. The

    Reauthorization Act requires that as part of its rulemaking to

    implement new section 2(h)(7) of the CEA, the Commission include the

    standards, terms and conditions under which an ECM will have the

    responsibility to notify the Commission that an agreement, contract or

    transaction conducted in reliance on the exemption provided in section

    2(h)(3) of the CEA may perform a significant price discovery

    function.\43\ Accordingly, in proposed rule 36.3(c)(2) the Commission

    has specified conditions, derived from the statutory criteria, which

    signal the ECM's obligation to notify the Commission of a possible

    SPDC. An ECM will be obligated to notify the Commission of a potential

    SPDC when an agreement, contract or transaction is traded an average of

    5 trades per day or more over the most recent calendar quarter and also

    meets one of the other two reporting factors. The Commission is aware

    that this requirement may result in over-reporting by ECMs, and wishes

    to emphasize that the presence of one factor alone will not necessarily

    result in a determination that a contract is a SPDC. This notice

    requirement, however, will serve to alert the Commission to the

    contracts that are most likely to be SPDCs. The Commission believes

    that the benefit of having the maximum available information with which

    to make its determinations outweighs the costs associated with possible

    over-reporting by ECMs.

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

    \43\ Public Law 110-246 at sec. 13204.

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

    3. Procedures

    When the Commission learns of a potential SPDC--whether through its

    own information collection and surveillance activities,\44\

    notification by an ECM pursuant to proposed rule 36.3(c)(2), or

    unsolicited information from participants in the cash market underlying

    a contract--the Reauthorization Act directs the Commission to implement

    a process for determining whether ECM contracts are SPDCs. In proposed

    rule 36.3(c)(3) the Commission establishes procedures under which the

    Commission will make and announce its determination whether a

    particular contract performs a significant price discovery function and

    also sets forth the actions that must be taken by an ECM following such

    a determination. With respect to the former, proposed rule 36.3(c)(3)

    provides that when the Commission intends to undertake such a

    determination in response to notice by an ECM pursuant to rule

    36.3(c)(2), or upon its own initiative, it will notice its intention in

    the Federal Register. The proposed rule also specifies that the

    Commission, as part of its consideration, will solicit written data,

    views and arguments from the ECM that lists the potential SPDC and from

    any other interested parties. Generally, such written submissions must

    be received within 30 calendar days of the date of publication in the

    Federal Register. After consideration of all relevant matters the

    Commission will issue an order explaining its determination. The

    issuance of an affirmative Commission order signals the effectiveness

    of the Commission's authorities with respect to ECMs with SPDCs \45\

    and triggers the obligations, requirements--both procedural and

    substantive--and timetables prescribed in proposed rule 36.3(c)(4) for

    the ECM.\46\

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

    \44\ The Reauthorization Act amended the CEA to require that the

    Commission review all ECM contracts at least once a year to

    determine whether any contract is a SPDC. In addition to these

    formal reviews, it is expected that Commission staff might also

    become aware of the price discovery attributes of ECM contracts in

    the ordinary course of discussion or interaction with ECM personnel

    and various cash and futures market participants.

    \45\ Those authorities include the emergency powers conferred by

    section 8a(9) of the Act, 7 U.S.C. 12a(9), which permits the

    Commission to intervene when it has reason to believe an emergency

    exists and to take action necessary to maintain or restore orderly

    trading or liquidation of any futures contract.

    \46\ Should the Commission conclude, either formally or

    informally, that a contract which demonstrates some characteristics

    consistent with a SPDC nonetheless does not serve a significant

    price discovery function, the Commission may continue to monitor the

    contract pursuant to its special call authority under proposed rule

    36.3(b)(1)(iv), and will advise the ECM as to what further reporting

    it may require with respect to the contract.

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

    Under proposed rule 36.3(c)(4), an ECM with a SPDC must submit to

    the Commission a written demonstration that it complies with the nine

    core principles established in section 2(h)(7) of the CEA with respect

    to the SPDC. Although status as a registered entity attaches to an ECM

    as soon as the Commission issues its order determining that a

    particular ECM contract performs a significant price discovery

    function, the Commission has included in proposed rule 36.3(c)(4) a

    grace period for achieving compliance with the core principles. As

    proposed, the rule provides 90 calendar days for ECMs with a first-time

    determination of a SPDC to demonstrate compliance with

    [[Page 75894]]

    the core principles.\47\ For each subsequent SPDC, the ECM is given 15

    calendar days from the date of the Commission's order to achieve

    compliance. The grace period is designed to ensure that the ECM has

    sufficient time to implement its new regulatory requirements and

    operations, while avoiding the market disruption that might occur by

    the sudden imposition of position limits and other trading rules. The

    Commission is aware that position limits that become effective at the

    end of the applicable grace period may negatively impact traders who in

    good faith acquired positions that are above that limit. Requiring

    immediate compliance would force such traders to liquidate positions in

    order to be at or below the limit. Accordingly, for the purpose of

    applying limits on speculative positions in newly-determined SPDCs, the

    Commission proposes to permit a grace period following the ECM's

    implementation of position limits applicable to SPDCs for traders with

    cleared positions in such contracts to become compliant with applicable

    position limit rules. Traders who hold cleared positions on a net basis

    in the electronic trading facility's SPDC must be at or below the

    specified position limit no later than 90 calendar days from the date

    on which the electronic trading facility implements a position limit,

    unless a hedge exemption is granted by the electronic trading facility.

    This grace period applies to both initial and subsequent SPDCs on an

    ECM, and the ECM should promptly notify traders when it has set

    position limits. This provision is outlined in the proposed Guidance to

    Core Principle IV.

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

    \47\ Conference Committee Report at 986.

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

    Rule 36.3(c)(4) requires that the ECM's submission include specific

    information designed to permit the Commission to evaluate whether the

    ECM is indeed in compliance with the core principles. Although there

    are obvious differences between them, this procedure was modeled on the

    procedure required of applicants to become designated contract

    markets.\48\ As with other aspects of this rulemaking, the Commission

    is striving to make the procedures and requirements for ECMs with SPDCs

    as close as possible to those for DCMs, and in this regard will review

    the adequacy of submitted materials with the same rigor it applies to

    DCM applications. Submissions that are incomplete or do not adequately

    demonstrate compliance with each of the core principles may trigger

    Commission proceedings under section 5c(d) of the Act and may, pursuant

    to section 5e or 6 of the Act, result in the revocation of the ECM's

    right to operate in reliance on the exemption set forth in section

    2(h)(3) of the Act with respect to a SPDC.

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

    \48\ DCM applicants make submissions prior to designation as a

    registered entity and prior to the listing of any contract, whereas

    the Commission must review the same information for ECMs after they

    are deemed registered entities and after the subject contract has

    established trading volume and open interest.

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

    The Commission also proposes to establish a process for vacating a

    SPDC determination when the contract no longer meets the criteria

    specified in section 2(h)(7)(B). Under proposed regulation 36.3(c)(6),

    the Commission may, on its own initiative or at the request of an ECM

    with a SPDC, determine that a contract no longer performs a significant

    price discovery function and vacate its previous determination. Any

    subsequent determination that the contract once again is a SPDC will be

    subject to the procedures proposed in regulation 36.3(c)(2). Proposed

    rule 36.3(c)(6) further provides for the automatic vacation of a

    significant price discovery contract determination when the SPDC has no

    open interest and no trading on the contract has occurred for a period

    of 12 complete calendar months. The Commission is proposing this

    provision in order to reduce the administrative burden on staff and the

    compliance burden on an ECM where lack of activity eliminates any

    possibility that a contract performs a significant price discovery

    function for the underlying cash market.

    4. Substantive Compliance With the Core Principles: Guidance and

    Acceptable Practices

    Section 2(h)(7) of the CEA, as amended, requires that an electronic

    trading facility on which significant price discovery contracts are

    traded comply with nine core regulatory principles. Consistent with

    Congress's intent that status as a registered entity attach to an ECM

    following the Commission's determination that a particular ECM contract

    serves a significant price discovery function,\49\ these core

    principles have their origins in their DCM counterparts in section 5 of

    the CEA and have been construed similarly.\50\ The Commission proposes

    to adopt Appendix B to the part 36 rules to provide general guidance

    and acceptable practices with respect to compliance with the ECM core

    principles; the acceptable practices for compliance with the ECM core

    principles will, where appropriate, mirror those for DCMs. The

    Commission intends in the acceptable practices to provide non-exclusive

    safe harbors for compliance with the core principles by ECMs with

    SPDCs. As is the case with the core principles established for other

    registered entities, the guidance offered for ECMs is neither mandatory

    nor the only means of compliance with the core principles. Consistent

    with its practice of evaluating a DCM's compliance with the core

    principles during rule enforcement reviews, the Commission will conduct

    regular rule enforcement reviews of ECMs with SPDCs to evaluate

    compliance with the nine core regulatory principles.

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

    \49\ Conference Committee Report at 986.

    \50\ 7 U.S.C. 7(d); Conference Committee Report at 985.

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

    The Guidance to Core Principle I of section 2(h)(7)(C) of the Act

    requires the ECM to certify the terms and conditions of the SPDC within

    90 calendar days of an ECM's initial SPDC, or 15 calendar days if the

    ECM has previously traded a SPDC. The acceptable practice for this core

    principle provides that Guideline No. 1 in Appendix A to the

    Commission's part 40 rules may be used as guidance to satisfy this

    provision. To ensure continued compliance with all elements of the

    Commission's statutory and regulatory regimes for ECMs with SPDCs, the

    ECM is expected to monitor the SPDC and its trading activity on a

    continuous basis.

    Core Principle II requires ECMs to monitor trading in SPDCs to

    prevent market manipulation and participation abuses. Its guidance and

    acceptable practices were derived from DCM Core Principle 4 (Monitoring

    of Trading) and DCM Designation Criterion 2 (Prevention of Market

    Manipulation).\51\ The proposed guidance and acceptable practices in

    Appendix B to part 36 make clear that ECMs with SPDCs must demonstrate

    the capacity to prevent market manipulation and have rules deterring

    trading and participation abuses. Under the proposed guidance, ECMs

    with SPDCs can demonstrate this capacity through either a dedicated

    regulatory department or by delegation of that function to an

    appropriate third party.\52\ In either case, the regulatory

    [[Page 75895]]

    department or third party should have an acceptable trade monitoring

    program, the authority to collect information and documents, and the

    ability to assess participants' market activity and power.

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

    \51\ 17 CFR 38, Appendices A and B to Part 38.

    \52\ As is the case for DCMs and DTEFs, ECMs with SPDCs may

    comply with any core principle through delegation of any relevant

    function to any registered futures association or another registered

    entity, but the ECM remains responsible for carrying out the

    function. Section 5c(b) of the CEA, 7 U.S.C. 7a-2(b). A detailed

    discussion of registered entities' responsibilities and obligations

    with respect to delegated functions, as well as a discussion of the

    distinctions between delegation of functions and outsourcing, or

    contracting out specified core principle duties is found in the

    Commission's final rulemaking implementing provisions of the CFMA

    relating to trading facilities (``A New Regulatory Framework''), 66

    FR 42256, 42266 (August 10, 2001).

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

    Core Principle III addresses the ability of an ECM with a SPDC to

    obtain information necessary to perform any of the functions enumerated

    in section 2(h)(7)(C) of the CEA (the core principles), to provide that

    information to the Commission, and to have the capacity to carry out

    any required information sharing agreements. Core Principle III's

    guidance and acceptable practices have as their source the guidance and

    acceptable practices of DCM Designation Criterion 8--Ability to Obtain

    Information.\53\ Proposed Appendix B to part 36 makes clear that ECMs

    with SPDCs must have the authority to collect information and documents

    on both a routine and non-routine basis; maintain and properly store

    audit trail data; maintain records in a form and manner acceptable to

    the Commission; and have the capacity to carry out appropriate

    information-sharing agreements. In providing guidance on compliance

    with this requirement, the Commission also proposes to incorporate the

    guidance and acceptable practices provided for DCM Core Principles 10

    (Trade Information) and 17 (Recordkeeping).\54\ The Commission believes

    that the acceptable practices outlined in Core Principle 10 should be

    made applicable to ECMs with SPDCs because the ability to record full

    data entry and trade details, as well as the safe storage of audit

    trail data, is a necessary component in assessing potential

    manipulation and conducting effective market surveillance. DCM Core

    Principle 17 requires that DCMs maintain required records in a form and

    manner acceptable to the Commission and establishes as guidance for

    acceptable recordkeeping the standards prescribed in Commission

    regulation 1.31.\55\ To ensure that all information required by the

    Commission is maintained in a uniform manner, the Commission proposes

    in the acceptable practices for Core Principle III to adopt the

    acceptable practices for recordkeeping found in DCM Core Principle 17.

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

    \53\ 17 CFR 38, Appendix B to Part 38.

    \54\ 17 CFR 38, Appendix B to Part 38.

    \55\ 17 CFR 1.31.

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

    Core Principle IV requires electronic trading facilities with

    significant price discovery contracts to establish position limit or

    accountability rules for traders in such significant price discovery

    contracts. Speculative position limits are necessary to reduce the

    potential for market manipulation. The acceptable practices for Core

    Principle IV were derived largely from Core Principle 5 for designated

    contract markets.\56\

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

    \56\ 17 CFR 38, Appendix B to Part 38.

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

    DCMs can list for trading futures contracts on a wide range of

    commodities, including enumerated agricultural products, excluded

    commodities (e.g., financial products such as currencies), and exempt

    commodities (e.g., metals, crude oil, natural gas and electricity).

    Some of these commodities have limited deliverable supplies while

    others have deep and liquid cash markets. Depending on the variety of

    possible contracts listed for trading, a DCM may have a mix of position

    limit and accountability rules. Specifically, futures contracts based

    on commodities with limited deliverable supplies should have spot-month

    speculative position limits. In contrast, financial products having

    deep and liquid cash markets may be eligible for position

    accountability levels in lieu of position limits since the potential

    for market manipulation is minimal.

    Unlike DCMs, ECMs relying on the exemption in section 2(h)(3) of

    the CEA are permitted to offer for trading only contracts on exempt

    commodities. Because the deliverable supplies of exempt commodities

    typically are limited, the Commission believes that it will be

    necessary for SPDCs to have spot-month position limits.

    The acceptable practices for Core Principle IV make recommendations

    with respect to how ECMs should establish spot-month speculative

    position limits. For a unique SPDC,\57\ the spot-month speculative

    position limit should be set in the same manner outlined for contracts

    listed for trading on DCMs. In this regard, for a physically-delivered

    SPDC, the level of the spot-month limit should be based upon an

    analysis of the deliverable supply and the history of spot-month

    liquidations. The spot-month limit for a physical-delivery market is

    appropriately set at no more than 25 percent of the estimated

    deliverable supply.\58\ Where a SPDC has a cash settlement provision,

    the spot-month speculative position limit should be set at a level that

    minimizes the potential for price manipulation or distortion in the

    SPDC itself; in related futures and option contracts traded on a DCM or

    DTEF; in other SPDCs; in other fungible agreements, contracts and

    transactions; and in the underlying commodity.

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

    \57\ A unique SPDC is one that is not economically equivalent to

    another SPDC or to a contract traded on a DCM or DTEF.

    \58\ The Commission notes that deliverable supply typically is

    less than total supply. In this regard, it is common for some

    portion of the supply to be unavailable for delivery for a variety

    of reasons. Deliverable supply is the amount of the underlying

    commodity that reasonably can be expected to be available to short

    traders and salable by long traders at its market value in normal

    cash market channels.

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

    The Commission notes that some SPDCs may not be unique. In other

    words, a SPDC may be economically equivalent to another SPDC or to a

    contract traded on a DCM or DTEF. Economic equivalence can arise due to

    substantial similarity among contracts' terms and conditions (e.g., two

    physically-delivered contracts or two cash-settled contracts having the

    same specifications). A SPDC also can be economically equivalent to

    another SPDC or to a contract listed for trading on a DCM or DTEF if it

    is cash settled based on a daily settlement price or the final

    settlement price of the referenced contract. For economically-

    equivalent SPDCs, the electronic trading facility should establish the

    same spot-month speculative position limits as specified for the

    equivalent contract.\59\

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

    \59\ Many DCMs have non-spot individual month and all-months-

    combined position accountability rules for their futures contracts.

    Moreover, some DCMs establish non-spot individual month and all-

    months-combined position limits in lieu of the position

    accountability levels. The Commission believes that the

    implementation of such accountability provisions or position limits

    is a good practice. Accordingly, the Commission proposes to adopt it

    as an acceptable practice for ECMs.

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

    ECMs should establish non-spot individual month position

    accountability levels and all-months-combined position accountability

    levels for its SPDCs. Once a trader exceeds an established position

    accountability level, the ECM should initiate an investigation to

    determine whether the individual's trading activity is justified and is

    not intended to manipulate the market. As part of its investigation,

    the ECM should inquire about the trader's rationale for holding a net

    position in excess of the accountability levels. The ECM also can

    request that the trader not further increase contract positions. If a

    trader fails to comply with a request for information, provides

    information that does not sufficiently justify the position, or

    continues to increase contract positions after a request not to do so

    is issued by the ECM, then the accountability provisions should enable

    the ECM to order the trader to reduce the positions.

    If a SPDC is economically equivalent to another SPDC or to a

    contract traded

    [[Page 75896]]

    on a DCM or DTEF, then the ECM should set the non-spot individual month

    position accountability level and all-months-combined position

    accountability level at the same level as those specified for the

    economically-equivalent contract. For a unique SPDC, the ECM should

    adopt non-spot individual month and all-months-combined position

    accountability levels that are no greater than 10 percent of the

    average combined futures and delta-adjusted option month-end open

    interest for the most recent calendar year.

    Position accountability levels are not necessary for SPDCs that

    specify non-spot individual month position limits and all-months-

    combined position limits. If a SPDC is economically equivalent to

    another contract, then the non-spot individual month position limit and

    all-months-combined position limit should be set at the same levels

    specified for the equivalent or referenced contract. For unique SPDCs,

    the non-spot individual month and all-months-combined position limits

    should be set in the same manner as for position accountability levels,

    i.e., levels that capture a material amount of large positions that

    could threaten the market.

    An ECM with a SPDC may require that all transactions in that

    contract be cleared only through a DCO. Alternatively, an ECM's SPDC

    may not be subject to any clearing requirement, in which case the

    contract would trade on an uncleared basis. Lastly, an ECM may permit a

    given SPDC to trade on either a cleared or uncleared basis depending on

    the status of the counterparties involved. The amendments to the CEA

    give electronic trading facilities reasonable discretion to take into

    account the differences between cleared and uncleared transactions when

    complying with Core Principle IV.\60\ For the purpose of applying

    speculative limits to positions in SPDCs, the ECM should apply

    speculative position limits to cleared positions only.

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

    \60\ Public Law 110-246 at sec. 13201.

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

    Uncleared transactions in SPDCs potentially play an important role

    in risk management strategies and price formation. As a result, the

    Commission believes that an ECM should monitor not only trading in

    cleared transactions but also trading with respect to uncleared

    transactions. However, the Commission is cognizant of the fact that

    uncleared trades conducted on the ECM may be offset by trades done off

    the facility. Such offsetting transactions consummated outside of an

    ECM typically are not reported to the facility. Thus, the ECM likely

    would find it difficult to net uncleared transactions and maintain

    records of traders' uncleared positions in a given SPDC. In order to

    account for this situation, the Commission proposes for ECMs with SPDCs

    a new measure of trading activity called the volume accountability

    level. For this measure, the ECM should keep track of each trader's

    uncleared transactions in a SPDC on a net basis that are conducted on

    the facility. (For the purpose of netting uncleared transactions, long

    and short uncleared transactions are only offset if they are conducted

    with the same counterparty.) A volume accountability level is similar

    to a position accountability level in that a trader may exceed the

    volume accountability level. However, if a trader's net volume of

    uncleared trades exceeds the volume accountability level, the ECM

    should initiate an investigation to determine whether the trading

    activity is justified and is not intended to manipulate the market. As

    part of its investigation, the ECM should inquire about the trader's

    rationale for holding a net volume of uncleared trades in excess of the

    volume accountability level. The ECM also can request that the trader

    not further increase the volume of uncleared trades. If a trader fails

    to comply with a request for information about the portfolio of

    uncleared trades, provides information that does not sufficiently

    justify the uncleared transactions conducted, or continues to increase

    the volume of uncleared trades after a request not to do so is issued

    by the ECM, then the volume accountability provisions should enable the

    ECM to require the trader to reduce the volume of uncleared trades.

    Consistent with the specific directive of Core Principle IV, the

    Commission expects ECMs to impose position limit and position

    accountability requirements on SPDCs as well as positions in

    agreements, contracts and transactions that are fungible and cleared

    together with any SPDC. This circumstance typically occurs where an ECM

    lists a particular contract on its multilateral trading platform and

    the resultant positions are cleared by a DCO. Separately, the ECM also

    provides a non-multilateral trading platform capability for the trading

    of the same contract and the resultant positions are cleared at the

    same clearing organization together with positions established on the

    multilateral platform. Given the fact that such arrangements allow

    market participants to put on positions on the multilateral platform

    and take them off away from the platform--as well as vice versa--the

    Commission believes that it is appropriate for position limit

    requirements to be applied to overall positions regardless of where

    they originated.

    With regard to compliance with a particular position limit or

    position accountability rule, ECMs should aggregate on a net basis

    cleared transactions, including those that are treated by a DCO

    (registered or unregistered) as fungible with the SPDC. Aggregate

    positions then will be compared with the applicable position limit and

    position accountability rules to determine compliance. Uncleared

    transactions also should be aggregated by trader on a net basis in

    order to determine whether such trader's volume of uncleared trades

    exceeds the spot-month volume accountability level.

    An ECM with SPDCs should use an automated means of detecting

    traders' violations of speculative limit rules and exemptions. An

    automated system also should be used to determine whether a trader has

    exceeded applicable non-spot individual month accountability levels,

    all-months-combined accountability levels, and spot-month volume

    accountability levels. An electronic trading facility should establish

    a program for effective enforcement of position limits for SPDCs.

    Lastly, ECMs should use a large trader reporting system to monitor and

    enforce daily compliance with position limit rules.

    The Commission recognizes that some traders with relatively large

    positions may be adversely affected by newly imposed position limits

    when a SPDC initially comes into compliance with the core principles.

    To address this issue, the Commission proposes, for the purpose of

    applying limits on speculative positions in newly-determined SPDCs, to

    permit a grace period following issuance of its order for traders with

    cleared positions in such contracts to become compliant with applicable

    position limit rules. Traders who hold cleared positions on a net basis

    in the ECMs SPDC must be at or below the specified position limit level

    no later than 90 calendar days from the date of the ECM's

    implementation of position limit rules, unless a hedge exemption is

    granted by the ECM.

    Core Principle V requires the ECM to adopt rules to provide for the

    exercise of emergency authority. The proposed guidance contained in

    Appendix B to part 36 is substantially similar to the guidance for DCM

    Core Principle 6.\61\ However, the Commission added a

    [[Page 75897]]

    reference in the proposed guidance for Core Principle V to acknowledge

    that calls for additional margin apply only to contracts that are

    cleared through a clearinghouse, since not all contracts traded on

    electronic trading facilities are cleared.

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

    \61\ 17 CFR 38, Appendix B to Part 38.

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

    Core Principle VI requires that an ECM with a SPDC make public

    daily information on price, trading volume, and other trading data. The

    Commission believes this information should include settlement prices,

    price range, volume, open interest, and other related market

    information, and has proposed in the acceptable practices that

    compliance with Commission regulation 16.01,\62\ which the Commission

    proposes to make mandatory for ECMs with SPDCs, would constitute an

    acceptable practice under Core Principle VI.

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

    \62\ 17 CFR 16.01.

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

    Core Principle VII requires the ECM to monitor and enforce

    compliance with the rules of its market. The proposed guidance and

    acceptable practices provided in Appendix B to part 36 are roughly

    parallel to the guidance and acceptable practices prescribed for DCM

    Core Principle 2.\63\ The Commission notes that ECMs on which SPDCs are

    traded are non-intermediated markets, and for this reason guidance

    relating to a DCM's authority to examine the books and records of

    intermediaries has not been included in the proposed guidance for Core

    Principle VII.

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

    \63\ 17 CFR 38, Appendix B to part 38.

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

    Core Principle VIII requires the electronic trading facility to

    establish and enforce rules to minimize conflicts of interest in its

    decision-making processes. The Commission notes that an ECM may face

    conflicts between its self-regulatory responsibilities and its

    commercial interests similar to those encountered by a DCM. For this

    reason the Commission proposes to insert certain general elements of

    the acceptable practices for DCM Core Principle 15 \64\--specifically,

    those descriptive elements that provide greater clarity and context to

    particular conflicts--into paragraph (a)(2) of the guidance section for

    ECM Core Principle VIII.

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

    \64\ Id.

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

    The acceptable practices for DCM Core Principle 15 include four

    specific provisions that must be met to receive the benefit of the safe

    harbor. These provisions address: (1) Board Composition; (2) Definition

    of Public Director; (3) Regulatory Oversight Committee; and (4)

    Disciplinary Panels. Although the Commission did not propose any

    acceptable practices for Core Principle VIII, the Commission emphasizes

    that the four provisions in the acceptable practices for DCM Core

    Principle 15 are a clear articulation of acceptable methods for

    managing conflicts of interest in decision-making. Accordingly, the

    Commission encourages ECMs with SPDCs to consult the DCM Core Principle

    15 acceptable practices for additional guidance as to the spirit of

    Core Principle VIII.

    The Commission recognizes that an electronic trading facility may

    become subject to compliance with Core Principle VIII by virtue of a

    single contract representing a small portion of the facility's

    operations. Thus, the ECM's conflicts may be contract-specific and not

    require the all-encompassing safe harbor offered for the benefit of

    DCMs in Core Principle 15.\65\ The Commission also recognizes that it

    may not be practicable for an ECM to implement the full panoply of the

    Core Principle 15 acceptable practices. The ECM must nonetheless ensure

    that appropriate measures are in place to guard against conflicts of

    interest in decision-making. An electronic trading facility should

    carefully consider its method of compliance, including whether

    additional measures may be required as the number or importance of its

    SPDCs increases. The Commission reserves the right to issue additional

    guidance or specific acceptable practices for Core Principle VIII as

    circumstances warrant.

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

    \65\ The Commission recognizes that, pursuant to the

    Reauthorization Act, compliance with the core regulatory principles

    is limited to ECMs with SPDCs. However, the Commission also

    recognizes that all ECMs, not just ECMs with SPDCs, may face

    potential conflicts of interest in their decision-making processes.

    Therefore, all ECMs may want to consider implementing appropriate

    measures to minimize conflicts of interests.

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

    Core Principle IX requires ECMs with SPDCs to avoid adopting rules

    or taking actions that result in unreasonable restraints of trade or

    impose a material anticompetitive burden on trading. The Commission is

    required by section 15(b) of its statute to take into consideration the

    public interest to be protected by the antitrust laws and to take the

    least anticompetitive means of achieving the objectives, policies and

    purposes of the CEA.\66\ Consistent with the Commission's approach to

    antitrust considerations with respect to DCMs,\67\ it is the

    Commission's intent to be guided by section 15(b) of the Act in its

    consideration of any issues arising under this core principle.

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

    \66\ 7 U.S.C. 19.

    \67\ 17 CFR 38, Appendix B to part 38, Guidance for Core

    Principle 18.

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

    5. Annual Commission Review

    In accordance with section 2(h)(7) of the CEA, proposed regulation

    36.3(d) provides that the Commission will review at least annually

    agreements, contracts and transactions traded on ECMs to determine

    whether they serve a significant price discovery function. The

    Commission proposes to limit these annual reviews to those contracts

    that have an average daily volume of five or more trades or that have

    been brought to the attention of the Commission, through the

    notification procedures of proposed regulation 36.3(c)(2) or otherwise,

    as possible SPDCs. The Commission believes this approach is consistent

    with Congress' intent as reflected in the Conference Committee Report:

    The Managers do not intend that the Commission conduct an

    exhaustive annual examination of every contract traded on an

    electronic trading facility pursuant to the section 2(h)(3)

    exemption, but instead to concentrate on those contracts that are

    most likely to meet the criteria for performing a significant price

    discovery function.\68\

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

    \68\ Conference Committee Report at 985.

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

    B. Market, Transaction and Large Trader Reporting Rules

    The Commission's market and large trader reporting rules

    (``reporting rules'') are contained in parts 15 through 21 of the

    Commission's regulations.\69\ Collectively, the reporting rules

    effectuate the Commission's market and financial surveillance

    programs.\70\ The market surveillance programs analyze market data to

    detect and prevent market manipulation and disruptions and to enforce

    speculative position limits. The financial surveillance programs use

    market data to measure the financial risks that large contract

    positions may pose to Commission registrants and clearing

    organizations.

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

    \69\ 17 CFR parts 15 to 21.

    \70\ See 69 FR 76392 (Dec. 21, 2004).

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

    The Commission's reporting rules can be applied to SPDCs traded on

    ECMs pursuant to the authority of sections 4a, 4c(b), 4g and 4i of the

    CEA.\71\ The amendments introduced to the CEA by the Reauthorization

    Act, both by defining ECMs with SPDCs as registered entities with

    respect to those contracts and by making certain provisions of the

    [[Page 75898]]

    Act directly applicable to SPDCs, give the Commission the authority to

    establish a comprehensive transaction and position reporting system for

    SPDCs. Specifically, section 4a of the CEA permits the Commission to

    set, approve exchange-set, and enforce speculative position limits.\72\

    Section 4c(b) of the Act,\73\ which gives the Commission plenary

    authority to establish the rules pursuant to which the terms and

    conditions on which commodity options transactions may be conducted,

    provides the basis for the Commission's authority to establish a large

    trader reporting system for transactions on ECMs that involve commodity

    options. Section 4g of the Act, as amended, imposes reporting and

    recordkeeping obligations on registered persons and requires them to

    file such reports as the Commission may require on proprietary and

    customer positions executed on any board of trade and in any SPDC

    traded or executed on an electronic trading facility.\74\ Finally,

    section 4i of the Act requires the filing of such reports as the

    Commission may require when positions made or obtained on DCMs, DTEFs

    or ECMs with respect to SPDCs equal or exceed Commission-set

    levels.\75\

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

    \71\ The Reauthorization Act amended section 2(h)(4)(B) of the

    Act to subject SPDCs requiring large trader reporting to the

    provisions of section 4c(b) of the Act. In addition, section

    2(h)(4)(D) of the Act provides that transactions executed on ECMs

    shall be subject to ``such rules, regulations, and orders as the

    Commission may issue to ensure timely compliance with any of the

    provisions of this Act applicable to a significant price discovery

    contract traded on or executed on any electronic trading facility *

    * *.'' 7 U.S.C. 2(h)(4)(D).

    \72\ 7 U.S.C. 6a.

    \73\ 7 U.S.C. 6c(b).

    \74\ 7 U.S.C. 6g.

    \75\ 7 U.S.C. 6i.

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

    In addition to proposing technical and conforming amendments to

    parts 15 through 21 of its regulations, the Commission seeks, through

    the proposed regulations, to extend to SPDCs the reporting rules that

    currently apply to DCMs and DTEFs by defining clearing member and

    clearing organization and amending the definition of reporting market

    in Commission regulation 15.00 to apply to positions in, and the

    trading and clearing of, SPDCs executed on ECMs. Under the proposed

    rules, ECMs would provide clearing member reports for SPDCs to the

    Commission pursuant to Commission regulation 16.00. As with DCMs,

    proposed rule 16.01 would require ECMs to submit to the Commission and

    publicly disseminate option deltas and aggregated trading data on a

    daily basis.\76\ ECM clearing members that clear SPDCs, regardless of

    their registration status with the Commission or their status as

    domestic or foreign persons, would be required to file position reports

    with the Commission for large SPDC positions held in accounts carried

    by such brokers when customer positions exceed the contract reporting

    levels of Commission regulation 15.03(b). In addition, the proposed

    regulations would require clearing members to identify the owners of

    reportable SPDC positions on Form 102 (Identification of Special

    Accounts).\77\

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

    \76\ Currently, the public dissemination requirement of

    Commission regulation 16.01(e) applies only to DCMs. The proposed

    rules would uniformly apply the public dissemination requirement of

    Commission regulation 16.01(e) to actively traded DCM contracts and

    SPDCs executed on DTEFs and ECMs. 17 CFR 16.01(e).

    \77\ The Commission's Division of Market Oversight increasingly

    has been charged with administering the procedural requirements of

    the reporting rules. Accordingly, the Commission is proposing to

    shift any delegation of the Commission's authority to determine the

    format of reports and the manner of reporting under parts 15 through

    21 of the Commission's regulations from the Executive Director to

    the Director of the Division of Market Oversight.

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

    Under the proposed regulations, SPDC traders likewise would be

    subject to the special call provisions of part 18 of the Commission's

    regulations for reportable positions. Moreover, clearing members for

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

    the special call provisions of part 21 of the Commission's regulations,

    which establish the Commission's ability to request information on

    persons that exercise trading control over commodity futures and

    options accounts along with additional account-related information for

    positions that may or may not be reportable under Commission regulation

    15.03(b).\78\

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

    \78\ 17 CFR 15.03(b). The proposed rules also seek to amend

    paragraphs (i)(1) and (i)(2) of Commission regulation 21.01 to

    ensure that any special call to an intermediary for information that

    classifies a trader as a commercial or noncommercial trader, and the

    positions of the trader as speculative, spread positions, or

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

    to both commodity futures and commodity options contracts. 17 CFR

    21.02(i).

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

    In order to effectively communicate with foreign clearing members

    and foreign traders and to properly administer the proposed special

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

    the Commission is also proposing to amend the designation of agent

    provisions of Commission regulation 15.05. This rule relates to the

    appointment of an agent for service of process for foreign persons; it

    is self-effectuating and is designed to permit the Commission to

    communicate expeditiously with foreign individuals and entities that

    trade on domestic commodity exchanges.\79\ Similar to requirements that

    currently apply to DCMs and DTEFs, the proposed amendments to

    regulation 15.05 would require ECMs that list SPDCs to act as the agent

    of foreign clearing members and foreign traders for the purpose of

    accepting service or delivery of any communication, including special

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

    trader.\80\

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

    \79\ For background on the adoption of the rule, see 45 FR 30426

    (May 8, 1980).

    \80\ In order to ensure that the Commission can expeditiously

    communicate with all foreign individuals and entities that may

    effect transactions in ECM SPDCs, the Commission is proposing to

    define the term foreign clearing member in proposed regulation

    15.00(g), and to use that term along with the term foreign trader as

    defined in regulation 15.00(h), in proposed regulation 15.05(i).

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

    The Commission is also proposing new regulation 16.02 to require

    all reporting markets--a definition that currently includes DCMs and

    DTEFs (unless the Commission determines otherwise) and, as proposed,

    will include ECMs listing SPDCs with respect to such contracts--to

    report on a daily basis trade data and related order information for

    each transaction that is executed on the market. Such reports would

    include time and sales data, reference files and such other information

    as the Commission or its designee may require and, upon request, would

    be accompanied by data that identifies or facilitates the

    identification of each trader for each transaction or order included in

    a submitted report. For some time, DCMs have consistently provided

    transaction level data to the Commission pursuant to rule 38.5(a),

    under which they must file trade data upon request by the

    Commission.\81\ Recent acquisitions of technology have enabled the

    Commission more effectively to integrate trade data and related order

    information into its trade practice, market and financial surveillance

    programs. Accordingly, the Commission proposes in new regulation 16.02

    to make the submission of trade data and related order information

    mandatory.

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

    \81\ 17 CFR 38.5(a).

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

    In this regard, and specifically with respect to SPDCs, the

    Commission notes that the proposed amendments to part 17 of the

    Commission's regulations do not apply to SPDC transactions that are not

    cleared for the simple reason that no clearing members are involved in

    clearing such transactions. For purposes of enforcing SPDC position

    limits and monitoring large SPDC positions, the Commission would use

    proposed regulation 16.02 to access transaction information and trader

    identifications to enforce position limits and monitor large positions

    for market and financial surveillance purposes.

    [[Page 75899]]

    C. Other Regulatory Provisions

    1. Part 40--Provisions Common to Registered Entities

    ECMs with SPDCs are integrated into the definition of ``registered

    entity'' in section 1a(29) of the CEA, as amended. Part 40 of the

    Commission's regulations applies to registered entities, and therefore,

    ECMs with SPDCs. Proposed part 40 is being amended to specify which

    provisions would be, or would not be, applicable to all registered

    entities. In particular, rules 40.1, 40.2 and 40.5-40.8 and Appendix D

    apply to ECMs with SPDCs. Although not all provisions of part 40 will

    be applicable to ECMs with SPDCs,\82\ interested parties are strongly

    encouraged to review all of part 40 because even those sections that

    are not being amended in this rulemaking may be de facto amended by

    virtue of the fact that the term ``registered entity'' now includes

    ECMs with SPDCs.

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

    \82\ Regulation 40.3 will not apply to ECMs with SPDCs because

    it addresses Commission approval of products. Regulation 40.4

    applies solely to agricultural products, which cannot be traded on

    ECMs.

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

    III. Related Matters

    A. Cost Benefit Analysis

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

    costs and benefits of its actions before issuing new regulations under

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

    costs and benefits of new regulations or to determine whether the

    benefits of adopted regulations outweigh their costs. Rather, section

    15(a) requires the Commission to consider the cost and benefits of the

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

    benefits of the regulations shall be evaluated in light of five broad

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

    participants and the public; (2) efficiency, competitiveness, and

    financial integrity of the market for listed derivatives; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may, in its discretion, give

    greater weight to any one of the five enumerated areas of concern and

    may, in its discretion, determine that, notwithstanding its costs, a

    particular regulation is necessary or appropriate to protect the public

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

    the purposes of the Act.

    The proposed regulations implement the Reauthorization Act by

    establishing an enhanced level of oversight of ECMs--including ECMs

    with SPDCs and ECM market participants--as mandated by Reauthorization

    Act. As a result, in certain cases, it may be more appropriate to

    attribute the compliance costs imposed by the proposed regulations to

    requirements that directly arise from the provisions of the

    Reauthorization Act.

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

    determines otherwise) and ECMs with SPDCs would be required to provide

    daily transaction and related data reports to the Commission under

    proposed rule 16.02. The costs associated with the daily transaction

    and related data reporting requirements of proposed regulation 16.02,

    however, may be ameliorated by the fact that DCMs have been voluntarily

    providing transactional data to the Commission on a daily basis since

    the mid-1980s. The Commission estimates that DCMs would account for the

    substantial majority of the markets that would likely be required to

    file such reports pursuant to proposed rule 16.02.

    The proposed regulations would extend the market and position

    reporting requirements of parts 15 to 21 of the Commission's

    regulations to ECMs with SPDCs with respect to such contracts. The

    requirements of the proposed regulations are substantial, would involve

    the submission of daily reports, and would impose burdens on market

    participants that clear and trade SPDCs. More specifically, the

    proposed rules would require ECMs with SPDCs with respect to such

    contracts to provide clearing member reports for SPDCs to the

    Commission pursuant to Commission regulation 16.00. Proposed rule 16.01

    would require ECMs to submit to the Commission and publicly disseminate

    option deltas and aggregated trading data on a daily basis. Pursuant to

    proposed rule 17.00 ECM clearing members that clear SPDCs would be

    required to file position reports with the Commission for large SPDC

    positions held in accounts carried by such brokers when customer

    positions exceed contract reporting levels and would be required to

    identify the owners of reportable SPDC positions on Form 102 under

    proposed rule 17.01. SPDC traders likewise would be subject to the

    special call provisions of part 18 of the Commission's regulations for

    reportable positions, and clearing members for SPDCs, SPDC traders, and

    ECMs listing SPDCs each would be subject to the special call provisions

    of part 21 of the Commission's regulations.

    The costs associated with the requirements of the market and

    position reporting rules, should, however, be reduced in part by the

    substantial overlap between the persons that are currently subject to

    the reporting rules, and the persons that would be subject to the

    reporting rules pursuant to the Commission's proposed regulations. For

    example, there is substantial overlap between traders of the natural

    gas contract on ICE OTC and traders of the same contract on NYMEX. With

    respect to clearing members of ICE OTC, for example, such persons are

    often clearing members or affiliates of clearing members of NYMEX.

    The benefits of extending the market and reporting rules to SPDCs

    are substantial. As an initial matter, it is important to note that a

    significant focus of the Reauthorization Act concerned amending the CEA

    with the specific intent of giving the Commission the authority to

    extend the market and position reporting rules to SPDC markets and

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

    a significant price discovery function, the regulatory value of

    enhanced oversight, through the application of the market and position

    reporting rules to such contracts, is elevated. The Commission analyzes

    the information funneled to it by the requirements of the market and

    position reporting rules to conduct market and financial surveillance.

    Without such information, the ability of the Commission to discharge

    its regulatory responsibilities, including the responsibilities of

    preventing market manipulations and contract price distortions and

    ensuring the financial integrity of the listed derivatives marketplace,

    would be compromised.

    The bulk of the costs that would be imposed by the requirements of

    proposed regulation 36.3 relate to significant and increased submission

    of information requirements. For example, under proposed regulation

    36.3(b)(1), all ECMs would be required to file certain basic

    information including contract terms and conditions with, and make

    certain demonstrations related to compliance with the terms of the

    section 2(h)(3) exemption to, the Commission. Proposed regulation

    36.3(b)(2) would require ECMs to submit transactional information on a

    weekly basis to the Commission for certain traded contracts that are

    not SPDCs and would not be subject to the terms of proposed rule 16.02.

    Proposed regulation 36.3(c)(4) would impose a substantial cost on ECMs

    with SPDCs in terms of providing information to the Commission.

    In enacting the Reauthorization Act, Congress directed the

    Commission to take an active role in determining

    [[Page 75900]]

    whether contracts listed by ECMs could qualify as SPDCs. Accordingly,

    the enhanced informational requirements that would be imposed on ECMs

    with respect to contracts that have not been identified as SPDCs have

    been proposed by the Commission in order to acquire the information

    that it requires to discharge this newly mandated responsibility. In

    addition, the substantial information submission and demonstration

    requirements that would be imposed on ECMs with SPDCs have been

    proposed because ECMs with SPDCs, by statute, acquire certain of the

    self-regulatory responsibilities of DCMs. The submission requirements

    associated with proposed regulation 36.3(c)(4) are tailored to enable

    the Commission to ensure that ECMs with SPDCs, as entities with the

    elevated status of a registered entity under the Act, are in compliance

    with the statutory terms of the core principles of section 2(h)(7)(C)

    of the Act. As with the market and position reporting rules, the

    primary benefit to the public of proposed regulation 36.3 is that its

    requirements give the Commission the ability to discharge its

    statutorily mandated responsibility for monitoring for the presence of

    SPDCs and extending its oversight to the trading of SPDCs.

    B. The Regulatory Flexibility Act

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

    requires that agencies consider the impact of their regulations on

    small businesses. The requirements related to the proposed amendments

    fall mainly on registered entities, exchanges, futures commission

    merchants, clearing members, foreign brokers, and large traders. The

    Commission has previously determined that exchanges, futures commission

    merchants and large traders are not ``small entities'' for the purposes

    of the RFA.\83\ Similarly, clearing members, foreign brokers and

    traders would be subject to the proposed regulations only if carrying

    or holding large positions. Accordingly, the Acting Chairman, on behalf

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

    the actions proposed to be taken herein will not have a significant

    economic impact on a substantial number of small entities.

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

    \83\ 47 FR 18618 (April 30, 1982).

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

    C. Paperwork Reduction Act

    Certain provisions of proposed Commission regulation 36.3 would

    result in new collection of information requirements within the meaning

    of the Paperwork Reduction Act of 1995 (PRA).\84\ The Commission

    therefore is submitting this proposal to the Office of Management and

    Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR

    1320.11. The title for this collection of information is ``Regulation

    36.3--Exempt Commercial Market Submission Requirements'' (OMB control

    number 3038-NEW). If adopted, responses to this collection of

    information would be mandatory. The Commission will protect proprietary

    information according to the Freedom of Information Act and 17 CFR part

    145, ``Commission Records and Information.'' In addition, section

    8(a)(1) of the Act strictly prohibits the Commission, unless

    specifically authorized by the Act, from making public ``data and

    information that would separately disclose the business transactions or

    market positions of any person and trade secrets or names of

    customers.'' \85\

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

    \84\ 44 U.S.C. 3501-3520.

    \85\ 7 U.S.C. 12(a)(1).

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

    The requirements of Commission regulation 36.3 are currently

    covered by OMB control number 3038-0054 which applies to both EBOTs and

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

    comply with additional divergent regulatory requirements. Accordingly,

    the Commission is seeking a new and separate control number for ECMs

    operating in compliance with the requirements of regulation 36.3. Upon

    OMB's approval and assignment of a separate control number specifically

    for the collection of information requirements of proposed regulation

    36.3, the Commission intends to submit the necessary documentation to

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

    EBOTs.

    In addition, the Commission is proposing amendments to parts 15 to

    21 of the Commission's regulations, which amend two existing

    collections of information titled ``Large Trader Reports'' (OMB control

    number 3038-0009) and ``Futures Volume, Open Interest, Price,

    Deliveries, and Exchanges of Futures'' (OMB control number 3038-0012).

    Responses to this collections of information would be mandatory. Where

    appropriate, the Commission will protect proprietary information

    pursuant to the Freedom of Information Act \86\ and 17 CFR part 145,

    ``Commission Records and Information.'' In addition, section 8(a)(1) of

    the Act prohibits the Commission, unless specifically authorized by the

    Act, from making public ``data and information that would separately

    disclose the business transactions or market positions of any person

    and trade secrets or names of customers.'' \87\

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

    \86\ 5 U.S.C. 552 et seq.

    \87\ Id.

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

    Finally, proposed regulation 16.02 would result in a new collection

    of information requirement within the meaning of the PRA. The

    Commission is therefore submitting the proposal for regulation 16.02 to

    OMB for review. The title for the collection of information requirement

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

    control number 3038-NEW). If adopted, this collection would be

    mandatory. The Commission will protect proprietary information

    according to the Freedom of Information Act and 17 CFR part 145,

    ``Commission Records and Information.'' In addition, section 8(a)(1) of

    the Act strictly prohibits the Commission, unless specifically

    authorized by the Act, from making public ``data and information that

    would separately disclose the business transactions or market positions

    of any person and trade secrets or names of customers.'' \88\

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

    \88\ Id.

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

    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. OMB has not yet assigned control

    numbers to the new collections for proposed regulations 36.3 and 16.02.

    The approved collection of information requirements associated with

    parts 15 to 21, which would be revised by the proposed rules and rule

    amendments, display control numbers 3038-0009 and 3038-0012.

    1. Proposed Regulation 36.3

    A. Regulation 36.3(a)

    Regulation 36.3(a) requires that ECMs notify the Commission of the

    intent to operate as an ECM in reliance of section 2(h)(3) of the Act

    and further provide the information and certifications required by

    section 2(h)(5)(A) of the Act. Section 2(h)(5)(A) of the Act requires

    an ECM to provide the name and address of the person who is authorized

    on behalf of the ECM to receive communications from the Commission, the

    commodity categories that the ECM intends to offer, and certifications

    that certain owners and principals of the ECM are not bad actors, that

    the facility will comply with the requirements of the ECM exemption,

    and that the facility will update its filings under section 2(h)(5)(A)

    to account for material changes in the information submitted to the

    Commission.

    [[Page 75901]]

    The substantive requirements of regulation 36.3(a) repeat the

    requirements that are imposed by the Act as a condition of operating

    pursuant to the ECM exemption. The reporting or recordkeeping burden

    associated with Commission regulation 36.3(a) involves the compilation

    and submission of the required information to the Commission.

    Commission staff estimates that each ECM would expend approximately 4

    hours of professional time annually to maintain, verify, and update the

    notification and required certifications. Commission staff estimates

    that 20 ECMs will be subject to the requirement resulting in an

    aggregate burden of 80 hours annually.

    B. Regulation 36.3(b)(1)

    Under proposed regulation 36.3(b)(1), each ECM would be required to

    provide contract descriptions and terms and conditions, the market's

    trading conventions, and the market's trading protocols to the

    Commission. Each ECM would be required to describe how it meets the

    statutory definition of a trading facility and demonstrate that it

    requires each participant to comply with all applicable laws; complies

    with the initial statutory requirements for the ECM exemption under

    section 2(h)(3) of the Act; and directs a program to monitor market

    participants for compliance with the transactional requirements of the

    ECM exemption. Proposed regulation 36.3(b)(1) would further require

    that each ECM provide, upon the Commission's request, information that

    the Commission would deem helpful to its determination as to whether a

    particular contract is a SPDC. Lastly, each ECM would be required to

    annually indicate on Form 205 whether it continues to operate under the

    ECM exemption and certify the accuracy of the information contained in

    its Notification of Operation submitted pursuant to section 2(h)(5)(A)

    of the Act and regulation 36.3(a).

    Based on the number of contract submissions made by DCMs, the

    Commission estimates that ECMs collectively would list for trading 250

    commodity futures and options contracts annually. Commission staff

    estimates that compliance with the above requirements and the

    transmission of descriptions and terms and conditions for such products

    would take approximately 2 hours of professional time to prepare per

    contract resulting in a collective burden of 500 hours annually for all

    ECMs.

    C. Regulation 36.3(b)(2)

    Proposed regulation 36.3(b)(2) would require that ECMs, with

    respect to contracts that are not SPDCs, identify contracts which

    average 5 or more trades per day over a calendar quarter, and for such

    contracts, compile daily transaction-based reports that include the

    date of execution, the time of execution, the price of execution, the

    quantity executed, the total daily trading volume, the total open

    interest, option type, option strike prices for each qualifying

    contract, and such other information as may be requested by the

    Commission. Proposed regulation 36.3(b)(2) would require the submission

    of the reports on a weekly basis. Such data is generated by ECMs in the

    normal course of operation. The Commission staff estimates that ECMs

    would submit weekly reports for a total of 40 contracts annually (2,080

    reports). Commission staff estimates that ECMs would expend

    approximately 20 minutes of professional time to compile and transmit

    each weekly report to the Commission resulting in an annual burden of

    approximately 693 hours.

    Proposed regulation 36.3(b)(2) would give an ECM the flexibility to

    choose to submit weekly transaction-based reports or, in the

    alternative, give the Commission electronic access to its trading

    facility to enable the Commission to create the weekly reports. Should

    an ECM select this option, Commission staff believes that such access

    would not result in any estimable burden on an ECM.

    Proposed regulation 36.3(b)(2) also would require that ECMs, with

    respect to contracts that are not SPDCs, to identify contracts which

    average 1 or more trades per day over a calendar quarter, and for such

    contracts, to provide to the Commission on a quarterly basis, the terms

    and conditions of such contracts, the average daily trading volume, and

    the most recent level of open interest. As with weekly reports, such

    data is generated by ECMs in the normal course of operation. The

    Commission staff estimates that ECMs would submit quarterly reports for

    a total of 90 contracts annually (360 total reports). Commission staff

    estimates that ECMs would expend approximately 20 minutes of

    professional time to compile and transmit each quarterly report

    resulting in an annual burden of 120 hours.

    Furthermore, proposed regulation 36.3(b)(2) would require ECMs to

    maintain an inventory of all fraud or manipulation based complaints and

    submit a copy of such complaints to the Commission within 3 or 30 days,

    depending on the specific facts of the complaints. ECMs should record

    and retain an inventory of complaints in the normal course of

    operation. Commission staff is unable to estimate the hourly burden

    associated with the routine transmittal of such reports to the

    Commission. However, Commission staff would presume that such

    transmittal requirements should not result in any materially measurable

    burden on ECMs.

    Lastly, proposed regulation 36.3(b)(2) addresses the Commission's

    authority to require the submission of data upon special call under

    section 2(h)(5)(B)(iii) of the Act. Pursuant to that section of the

    Act, the Commission has the authority to issue special calls in order

    to enforce certain provisions of the Act including the anti-fraud and

    anti-manipulation provisions. In addition, the Commission is authorized

    to issue special calls to ECMs to facilitate its determination as to

    whether certain contracts are SPDCs, to evaluate a systemic market

    event, or to obtain information requested by another Federal financial

    regulator. Commission staff estimates that a total of 15 special calls

    would be issued to ECMs annually under section 2(h)(5)(B)(iii) of the

    Act. Each ECM that has been issued a special call would expend

    approximately 5 hours of professional time to respond to the call

    resulting in a burden of 75 hours annually.

    D. Proposed Regulation 36.3(c)(2)

    Proposed regulation 36.3(c)(2) establishes for ECMs certain

    requirements for notifying the Commission of possible SPDCs that may be

    listed by the ECM. Specifically, an ECM's obligation to notify the

    Commission would apply to contracts that average 5 trades or more per

    day over the most recent calendar quarter, and may be triggered by

    either the ECM's sale of contract price data or by a contract's daily

    settlement price being within 2.5 percent of the contemporaneously

    determined closing, settlement or daily price of another contract 95

    percent or more of the days in the most recent quarter. Such

    notifications would be accompanied by supporting details. Commission

    staff estimates that cost of monitoring for the triggering conditions

    is nominal. Commission staff estimates that collectively 10 contracts

    would be the subject of the notification requirement annually. Each ECM

    with a qualifying contract would expend approximately 1 hour of

    professional time to compile and transmit such data to the Commission

    at an aggregate annual burden of 10 hours.

    [[Page 75902]]

    E. Proposed Regulation 36.6(c)(4)

    An ECM with a SPDC, with respect to such a contract, has

    substantial regulatory responsibilities including the obligation to

    comply with the core principles of section 2(h)(7)(C) of the Act and to

    certify the compliance of SPDC contract terms and conditions and

    exchange rules with the core principles, other applicable provisions of

    the Act, and Commission regulations thereunder. To enable the

    Commission to evaluate an ECM's compliance with the statutory and

    regulatory provisions applicable to SPDCs and ECMs listing SPDCs,

    Commission regulation 36.3(c)(4) would require ECMs with SPDCs to

    submit a substantial amount of information and documentation to the

    Commission including the market's rules, a description of financial

    standards for members or participants, a description of the market's

    trading algorithm, legal status documents, and a description of the

    governance structure of the market. As proposed, such information

    collectively would be filed only once upon the market's listing of a

    SPDC. However, subsequent exchange rule changes, as with initial SPDC

    contract terms and conditions and amendments thereto, would be required

    to be certified on an ongoing basis.

    Commission staff estimates that up to three new ECMs could list at

    least one SPDC during the next five years. Commission staff estimates

    that each new ECM listing its initial SPDC would expend approximately

    200 hours of professional time providing the information and

    documentation required under regulation 36.3(c)(4) for an aggregate

    burden of 600 hours. Assuming that such trading facilities will operate

    for ten years, the aggregated annualized cost, in terms of burden

    hours, would be 60 hours. Additionally, Commission staff estimates that

    the Commission would receive approximately 50 certified filings per

    SPDC. For each SPDC related certified filing, an ECM would expend, in

    accordance with the procedural and submission requirements of

    Commission regulation 40.6, approximately 30 minutes resulting in an

    aggregate annual burden of 75 hours.

    F. Proposed Regulation 36.3(c)(6)

    Proposed regulation 36.3(c)(6) requires an ECM listing a SPDC, upon

    the Commission's request, to file a written demonstration that the ECM

    is in compliance with the core principles of section 2(h)(7)(C) of the

    Act. Commission staff estimates that such demonstrations of compliance

    could require up to 20 hours of response time. Commission staff

    anticipates issuing 2 requests annually resulting in an aggregate

    burden of 40 hours.

    2. Proposed Regulation 16.02

    Under proposed regulation 16.02, reporting markets, a term which as

    proposed would include ECMs with SPDCs with respect to SPDCs, in

    addition to DCMs and DTEFs (unless determined otherwise by the

    Commission), would be required to provide trade and supporting data

    reports to the Commission on a daily basis. Such reports would include

    transaction-level trade data and related order information for each

    transaction executed on the reporting market and would be accompanied

    by data that identifies traders for each transaction when reporting

    markets maintain such data.

    Since the mid-1980s, all DCMs have voluntarily provided the

    Commission with transaction level data on a daily basis. Proposed

    regulation 16.02 seeks to formalize and codify the submission process.

    Commission staff estimates that each reporting market would expend 18

    hours for onsite visits to the Commission, discussions with staff to

    introduce the order flow process, and meetings with staff for follow-up

    discussions. The proposed rules would require that reporting markets

    expend approximately 2325 hours in additional start-up costs to

    establish the required information technology infrastructure.

    Commission staff estimates that it would receive daily trade and

    supporting data reports from up to15 reporting markets annually.

    Accordingly the start-up burden in terms of hours would in the

    aggregate be 35,145 hours. Annualized over a useful life of ten years,

    the aggregated annual burden hours would be 3,514.

    It is also estimated that start-up and continuing costs may involve

    product and service purchases. Commission staff estimates that

    reporting markets could expend up to $5,000 annually per market on

    product and service purchases to comply with proposed regulation 16.02.

    This would result in an aggregated cost of $75,000 per annum (15

    reporting markets x $5,000). This estimate, however, is speculative

    because reporting markets must possess the ability to audit and track

    transactions in the ordinary course of operations independently of

    proposed regulation 16.02.

    In addition to the start-up burden, proposed regulation 16.02, if

    adopted, would impose certain ongoing costs. Commission staff estimates

    that each reporting market would expend 30 minutes for each daily trade

    and supporting data report transmitted to the Commission resulting in

    an aggregate burden of 1,875 hours annually (assuming that such reports

    are provided for each of 250 trading days).

    3. Market and Large Trader Reporting Rules

    In order to implement the CEA as amended by the Reauthorization

    Act, the Commission through this rulemaking proposes to extend the

    market and large trader reporting requirements that currently apply to

    DCMs and DTEFs to ECMs with SPDCs with respect to such contracts.

    A. Futures Volume, Open Interest, Price, Deliveries, and Exchanges of

    Futures (OMB control number 3038-0012)

    Twelve exchanges currently submit aggregated market data to the

    Commission and are required to publicly disseminate for each of

    approximately 250 trading days per year under Commission regulation

    16.01. The information includes aggregate figures on a per contract

    basis on total gross open contracts, open futures contracts against

    which delivery notices have been stopped, volume generated from the

    exchange of futures, delta factors as well as certain pricing data.

    Should the proposed amendments be adopted, it is estimated that up to

    15 reporting markets, including ECMs with SPDCs with respect to such

    contracts, could be required to submit this data to the Commission on a

    continuing basis. Commission staff estimates that such markets would

    expend approximately 30 minutes per day to generate the required data

    files, transmit that file to Commission offices, and publish the

    required information. This would results in an annual burden of

    approximately 1,875 hours.

    B. Large Trader Reports (OMB Control Number 3038-0009)

    1. Clearing Member Reports

    Twelve designated contract markets provide clearing member reports

    pursuant to Commission regulation 16.00 once on each of an estimated

    250 trading days per year. Should the proposed rules be adopted, it is

    estimated that up to 15 reporting markets, including ECMs with SPDCs

    with respect to such contracts, would be providing this data to the

    Commission on a continuing basis. The exchanges and ECMs would be

    required to submit confidential information to the Commission on the

    aggregate positions and trading activity of each clearing member.

    Reporting markets, on a daily basis, are required under regulation

    16.00 to

    [[Page 75903]]

    report each clearing member's open long and short positions, purchases

    and sales, exchanges of futures, and futures delivery notices. The data

    is reported separately by proprietary and customer accounts by futures

    month and, for options, by puts and calls by expiration date and strike

    price. The Commission obtains clearing member reports from the

    reporting markets or the clearing organizations of each reporting

    market. Reporting markets and the clearing organizations routinely

    compile, analyze and provide such data to each clearing member. Since

    the data is routinely provided to clearing members, the reporting

    burden for this set of data is estimated at 20 minutes for each

    reporting market per day. Assuming that a total of 15 entities would

    provide this data on a daily basis to the Commission, the total

    aggregate burden hours for reporting would be 1,250 hours (assuming

    that there are 250 trading days annually).

    2. Reporting Firms

    Under Commission regulation 17.00, routine reports are filed only

    for accounts with commodity futures and option positions that exceed

    levels set by the Commission in regulation 15.03(b). As proposed,

    regulation 17.00 would extend the routine reporting requirements of

    regulation 17.00 to clearing members on ECMs with SPDCs with respect to

    SPDCs. Should proposed regulation 17.00 be adopted, it is estimated

    that up to an additional 30 respondents would be required to file

    reports at any one time under regulation 17.00 increasing the total

    number of respondents to 250. The reporting burden consists of staff of

    reporting firms initializing their information technology systems for

    new contracts and new accounts. On average it is expected that about 15

    minutes per day is expended by these reporting firm staff. Over 250

    trading days annually, the aggregate burden would be 15,625 hours.

    3. Forms 102

    Each account reported to the Commission by an FCM, clearing member,

    or foreign broker must also be identified on a Form 102 pursuant to

    regulation 17.01. By amending the definition of reporting market,

    clearing member, and clearing organization, the notice of proposed

    rulemaking would extend the requirements of regulation 17.01 to

    clearing members of ECMs with SPDCs with respect to such contracts.

    Forms 102 provide information that allows the Commission to combine

    different accounts held or controlled by the same trader and to

    identify commercial firms using the markets for hedging. Should the

    notice of proposed rulemaking be adopted, the total number of Forms 102

    filed with the Commission is estimated to increase by 500 to 4,500 per

    year. Respondents would expend 12 minutes completing each form for a

    total aggregate burden of 900 hours annually.

    4. Reports From Traders

    Traders provide identifying information using Forms 40 under

    Commission regulation 18.04 and position data upon special call under

    Commission regulations 18.00 and 18.05. The notice of proposed

    rulemaking would extend the requirements of those regulations to

    traders of SPDCs. Should the proposed amendments be adopted, the total

    estimated number of traders filing the Form 40 under regulation 18.04

    would increase by 100 to 2,500 per year with each response requiring

    approximately 20 minutes, resulting in an aggregate annual burden of

    833 hours.

    The Commission has maintained the authority to make special calls

    on traders under part 18 of the Commission's regulations when the

    information obtained routinely under part 17 of the Commission's

    regulations is incomplete for its market and financial surveillance

    purposes. Information obtained on call under Commission regulations

    18.00 and 18.05 is provided in the manner stipulated per instruction

    contained in the special call. Should the proposed regulations be

    adopted, the Commission estimates that 12 special calls would be issued

    to each of 45 traders under Commission regulations 18.00 and 18.05 and

    that each response to a call would require approximately 5 hours, for

    an estimated aggregate annual burden of 2,700 hours.

    5. Part 21 of the Commission Regulations

    Under part 21 of the Commission's regulations, the Commission may

    issue special calls for additional cash and futures data concerning

    traders from FCMs, introducing broker, clearing members, foreign

    brokers, and traders. In addition, under part 21 of the Commission's

    regulations (17 CFR part 21), the Commission may request identifying

    information regarding persons who exercise trading control over

    accounts. Position information collected pursuant to special call under

    part 21 of the Commission's regulations may be used to audit large

    trader reports and is used to investigate potential market abuses.

    Although similar to the standardized information routinely collected

    under part 17 of the Commission's regulations for reportable accounts,

    such data is submitted in response to customized requests for

    information and may regard accounts and positions that are not

    reportable. In contrast to special calls for identifying data made

    under Commission regulation 18.04, special calls made under any

    provision of part 21 of the Commission's regulations generally occur

    only when a particular market shows a potential for disruption or when

    there is an investigation of possible violations of the Act or the

    regulations thereunder. The notice of proposed rulemaking would apply

    the terms of part 21 to ECMs with SPDCs with respect to such contracts,

    clearing members clearing SPDCs, and SPDC traders. Should the proposed

    regulations be adopted, the Commission estimates that the Commission

    will continue to make less than 10 special calls under all of the

    provisions of part 21 of the Commission's regulations and that each

    response to a call will require approximately 1 hour, resulting in an

    aggregate reporting burden of 10 hours annually.

    4. Information Collection Comments

    The Commission invites the public and other Federal agencies to

    comment on any aspect of the reporting and recordkeeping burdens

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

    solicits comments in order to: (i) Evaluate whether the proposed

    collections of information are necessary for the proper performance of

    the functions of the Commission, including whether the information will

    have practical utility; (ii) evaluate the accuracy of the Commission's

    estimate of the burden of the proposed collections of information;

    (iii) determine whether there are ways to enhance the quality, utility,

    and clarity of the information to be collected; and (iv) minimize the

    burden of the collections of information on those who are to respond,

    including through the use of automated collection techniques or other

    forms of information technology.

    You may submit your comments directly to the Office of Information

    and Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at OIRA-

    submissions@omb.eop.gov. Please provide the Commission with a copy of

    your comments so that we can summarize all written comments and address

    them in the final rule preamble. Refer to the Addresses section of this

    notice of proposed rulemaking for comment submission instructions to

    the Commission. You may obtain a copy of the supporting statements for

    the

    [[Page 75904]]

    collections of information discussed above by visiting RegInfo.gov. OMB

    is required to make a decision concerning the collections of

    information between 30 and 60 days after publication of this Release.

    Consequently, a comment to OMB is most assured of being fully effective

    if received by OMB (and the Commission) within 30 days after

    publication of this notice of proposed rulemaking.

    List of Subjects

    17 CFR Part 15

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements.

    17 CFR Part 16

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 17

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements.

    17 CFR Part 18

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 19

    Commodity futures, Cottons, Grains, Reporting and recordkeeping

    requirements.

    17 CFR Part 21

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements.

    17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission.

    17 CFR Part 40

    Commodity futures, Contract markets, Designation application,

    Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures

    Trading Commission proposes to amend 17 CFR parts 15, 16, 17, 18, 19,

    21, 36 and 40 as follows:

    PART 15--REPORTS--GENERAL PROVISIONS

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

    follows:

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

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

    Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat.

    1624 (June 18, 2008).

    2. Revise Sec. 15.00 to read as follows:

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

    chapter.

    As used in parts 15 to 21 of this chapter:

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

    the actual commodity as distinguished from a futures or option contract

    in such commodity.

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

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

    organization of a designated contract market, registered derivatives

    transaction execution facility, or registered entity under section

    1a(29) of the Act.

    (c) Clearing organization means the person or organization which

    acts as a medium for clearing transactions in commodities for future

    delivery or commodity option transactions, or for effecting settlements

    of contracts for future delivery or commodity option transactions, for

    and between members of any designated contract market, registered

    derivatives transaction execution facility or registered entity under

    section 1a(29) of the Act.

    (d) Compatible data processing media means data processing media

    approved by the Commission or its designee.

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

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

    chapter).

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

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

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

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

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

    agreement, recommendations, advice or otherwise, directly or indirectly

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

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

    participant enters into an expressed or implied agreement not obtained

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

    required of other customers for the purpose of receiving specific

    advice or recommendations which are not made available to other

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

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

    account, discretionary account, commodity pool or partnership account.

    (g) Discretionary account means a commodity futures or commodity

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

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

    general authorization and without the specific consent of the customer,

    whether the general authorization for such orders or transactions is

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

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

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

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

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

    secure any trade.

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

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

    of the United States, its territories or possessions.

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

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

    its territories or possessions.

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

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

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

    advised or recommended to the participant in the program.

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

    includes two or more discretionary accounts traded pursuant to a common

    plan, advice or recommendations.

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

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

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

    expired, been exercised, or offset.

    (n) Reportable position means:

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

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

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

    in Sec. 15.03 of this part in either:

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

    excluding future contracts against which notices of delivery have been

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

    reporting market; or

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

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

    options on physicals that have identical expirations and exercise into

    the same physical, on any one reporting market.

    [[Page 75905]]

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

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

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

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

    commodity on any one reporting market, excluding futures positions

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

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

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

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

    150.2 of this chapter for the particular commodity and reporting

    market.

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

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

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

    contract listed by the facility, a registered derivatives transaction

    execution facility.

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

    in which there is a reportable position.

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

    account which he controls, makes transactions in commodity futures or

    options, or has such transactions made.

    3. In Sec. 15.01, revise paragraph (a) to read as follows:

    Sec. 15.01 Persons required to report.

    * * * * *

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

    chapter.

    * * * * *

    4. In Sec. 15.05, revise the heading and paragraph (a); and add

    paragraph (i) to read as follows:

    Sec. 15.05 Designation of agent for foreign persons.

    (a) For purposes of this section, the term ``futures contract''

    means any contract for the purchase or sale of any commodity for future

    delivery, or a contract identified under Sec. 36.3(b)(i) of this

    chapter as traded in reliance on the exemption in section 2(h)(3) of

    the Act, traded or executed on or subject to the rules of any

    designated contract market or registered derivatives transaction

    execution facility, or for the purposes of paragraph (i) of this

    section, a reporting market; the term ``option contract'' means any

    contract for the purchase or sale of a commodity option, or as

    applicable, any other instrument subject to the Act pursuant to section

    5a(g) of the Act, traded or executed on or subject to the rules of any

    designated contract market or registered derivatives transaction

    execution facility, or for the purposes of paragraph (i) of this

    section, a reporting market; the term ``customer'' means any person for

    whose benefit a foreign broker makes or causes to be made any futures

    contract or option contract; and the term ``communication'' means any

    summons, complaint, order, subpoena, special call, request for

    information, or notice, as well as any other written document or

    correspondence.

    * * * * *

    (i) Any reporting market that is a registered entity under section

    1a(29)(E) of the Act that permits a foreign clearing member or foreign

    trader to clear or effect contracts, agreements or transactions on the

    trading facility or its clearing organization, shall be deemed to be

    the agent of the foreign clearing member or foreign trader with respect

    to any such contracts, agreements or transactions cleared or executed

    by the foreign clearing member or the foreign trader. Service or

    delivery of any communication issued by or on behalf of the Commission

    to the reporting market shall constitute valid and effective service

    upon the foreign clearing member or foreign trader. The reporting

    market which has been served with, or to which there has been

    delivered, a communication issued by or on behalf of the Commission to

    a foreign clearing member or foreign trader shall transmit the

    communication promptly and in a manner which is reasonable under the

    circumstances, or in a manner specified by the Commission in the

    communication, to the foreign clearing member or foreign trader.

    (1) It shall be unlawful for any such reporting market to permit a

    foreign clearing member or a foreign trader to clear or effect

    contracts, agreements or transactions on the facility or its clearing

    organization unless the reporting market prior thereto informs the

    foreign clearing member or foreign trader of the requirements of this

    section.

    (2) The requirements of paragraphs (i) introductory text and (i)(1)

    of this section shall not apply to any contracts, transactions or

    agreements if the foreign clearing member or foreign trader has duly

    executed and maintains in effect a written agency agreement in

    compliance with this paragraph with a person domiciled in the United

    States and has provided a copy of the agreement to the reporting market

    prior to effecting or clearing any contract, agreement or transaction

    on the trading facility or its clearing organization. This agreement

    must authorize the person domiciled in the United States to serve as

    the agent of the foreign clearing member or foreign trader for the

    purposes of accepting delivery and service of all communications issued

    by or on behalf of the Commission to the foreign clearing member or the

    foreign trader and must provide an address in the United States where

    the agent will accept delivery and service of communications from the

    Commission. This agreement must be filed with the Commission by the

    reporting market prior to permitting the foreign clearing member or the

    foreign trader to clear or effect any transactions in futures or option

    contracts. Unless otherwise specified by the Commission, the agreements

    required to be filed with the Commission shall be filed with the

    Secretary of the Commission at Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    (3) A foreign clearing member or a foreign trader shall notify the

    Commission immediately if the written agency agreement is terminated,

    revoked, or is otherwise no longer in effect. If the reporting market

    knows or should know that the agreement has expired, been terminated,

    or is no longer in effect, the reporting market shall notify the

    Secretary of the Commission immediately. If the written agency

    agreement expires, terminates, or is not in effect, the reporting

    market, the foreign clearing member and the foreign trader shall be

    subject to the provisions of paragraphs (i) introductory text and

    (i)(1) of this section.

    5. Add Sec. 15.06 to read as follows:

    Sec. 15.06 Delegations.

    (a) The Commission hereby delegates, until the Commission orders

    otherwise, the authority to approve data processing media, as

    referenced in Sec. 15.00(d), for data submissions to the Director of

    the Division of Market Oversight, to be exercised by such Director or

    by such other employee or employees of such Director as designated from

    time to time by the Director. The Director may submit to the Commission

    for its consideration any matter which has been delegated in this

    paragraph. Nothing in this paragraph prohibits the Commission, at its

    election, from exercising the authority delegated in this paragraph.

    (b) [Reserved]

    PART 16--REPORTS BY REPORTING MARKETS

    6. The authority citation for part 16 is revised to read as

    follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as amended

    by Title XIII of the Food, Conservation and Energy Act of 2008,

    [[Page 75906]]

    Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008), unless

    otherwise noted.

    7. In Sec. 16.01, revise paragraphs (e)(1) and (e)(2) to read as

    follows:

    Sec. 16.01 Trading volume, open contracts, prices, and critical

    dates.

    * * * * *

    (e) Publication of recorded information. (1) Reporting markets

    shall make the information in paragraph (a) of this section readily

    available to the news media and the general public without charge, in a

    format that readily enables the consideration of such data, no later

    than the business day following the day to which the information

    pertains. The information in paragraphs (a)(4) through (a)(6) of this

    section shall be made readily available in a format that presents the

    information together.

    (2) Reporting markets shall make the information in paragraphs

    (b)(1) and (b)(2) of this section readily available to the news media

    and the general public, and the information in paragraph (b)(3) of this

    section readily available to the general public, in a format that

    readily enables the consideration of such data, no later than the

    business day following the day to which the information pertains.

    * * * * *

    8. Section 16.02 is added to read as follows:

    Sec. 16.02 Daily trade and supporting data reports.

    Reporting markets shall provide trade and supporting data reports

    to the Commission on a daily basis. Such reports shall include

    transaction-level trade data and related order information for each

    transaction that is executed on the reporting market. Reports shall

    also include time and sales data, reference files and other information

    as the Commission or its designee may require. All reports must be

    submitted at the time, and in the manner and format, and with the

    specific content specified by the Commission or its designee. Upon

    request, such information shall be accompanied by data that identifies

    or facilitates the identification of each trader for each transaction

    or order included in a submitted trade and supporting data report if

    the reporting market maintains such data.

    9. In Sec. 16.07, revise the heading and introductory text; and

    add paragraph (c) to read as follows:

    Sec. 16.07 Delegation of authority to the Director of the Division of

    Market Oversight.

    The Commission hereby delegates, until the Commission orders

    otherwise, the authority set forth in paragraphs (a), (b) and (c) of

    this section to the Director of the Division of Market Oversight, to be

    exercised by such Director or by such other employee or employees of

    such Director as may be designated from time to time by the Director.

    The Director of the Division of Market Oversight may submit to the

    Commission for its consideration any matter which has been delegated in

    this paragraph. Nothing in this paragraph prohibits the Commission, at

    its election, from exercising the authority delegated in this

    paragraph.

    * * * * *

    (c) Pursuant to Sec. 16.02, the authority to determine the

    specific content of any daily trade and supporting data report, request

    that such reports be accompanied by data that identifies or facilitates

    the identification of each trader for each transaction or order

    included in a submitted trade and supporting data report, and the time

    for the submission of and the manner and format of such reports.

    PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION

    MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS

    10. The authority citation for part 17 is revised to read as

    follows:

    Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 7, 7a and 12a, as

    amended by Title XIII of the Food, Conservation and Energy Act of

    2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008), unless

    otherwise noted.

    11. Revise the heading of part 17 as set forth above.

    12. In Sec. 17.00, revise paragraph (a) introductory text and

    paragraphs (a)(1), (b)(1), and (f); and add and reserve paragraph (c)

    to read as follows:

    Sec. 17.00 Information to be furnished by futures commission

    merchants, clearing members and foreign brokers.

    (a) Special accounts--reportable futures and options positions,

    delivery notices, and exchanges of futures. (1) Each futures commission

    merchant, clearing member and foreign broker shall submit a report to

    the Commission for each business day with respect to all special

    accounts carried by the futures commission merchant, clearing member or

    foreign broker, except for accounts carried on the books of another

    futures commission merchant or clearing member on a fully-disclosed

    basis. Except as otherwise authorized by the Commission or its

    designee, such report shall be made in accordance with the format and

    coding provisions set forth in paragraph (g) of this section. The

    report shall show each futures position traded in reliance on the

    exemption in section 2(h)(3) of the Act, separately for each reporting

    market and for each future position traded in reliance on the exemption

    in section 2(h)(3) of the Act, and each put and call options position

    separately for each reporting market, expiration and strike price in

    each special account as of the close of market on the day covered by

    the report and, in addition, the quantity of exchanges of futures for

    commodities or for derivatives positions and the number of delivery

    notices issued for each such account by the clearing organization of a

    reporting market and the number stopped by the account. The report

    shall also show all positions in all contract months and option

    expirations of that same commodity on the same reporting market for

    which the special account is reportable.

    * * * * *

    (b) * * *

    (1) Accounts of eligible entities--Accounts of eligible entities as

    defined in Sec. 150.1 of this chapter that are traded by an

    independent account controller shall, together with other accounts

    traded by the independent account controller or in which the

    independent controller has a financial interest, be considered a single

    account.

    * * * * *

    (c) [Reserved]

    * * * * *

    (f) Omnibus accounts. If the total open long positions or the total

    open short positions for any future of a commodity carried in an

    omnibus account is a reportable position, the omnibus account is in

    Special Account status and shall be reported by the futures commission

    merchant or foreign broker carrying the account in accordance with

    paragraph (a) of this section.

    * * * * *

    13. In Sec. 17.03, revise the heading, the introductory text, and

    paragraphs (a) and (b) to read as follows:

    Sec. 17.03 Delegation of authority to the Director of the Division of

    Market Oversight.

    The Commission hereby delegates, until the Commission orders

    otherwise, the authority set forth in the paragraphs below to the

    Director of the Division of Market Oversight to be exercised by such

    Director or by such other employee or employees of such Director as

    designated from time to time by the Director. The Director of the

    Division of Market Oversight may submit to the Commission for its

    consideration any matter which has been delegated in this paragraph.

    Nothing in this paragraph prohibits the Commission, at its election,

    from exercising the authority delegated in this paragraph.

    [[Page 75907]]

    (a) Pursuant to Sec. 17.00(a) and (h), the authority to determine

    whether futures commission merchants, clearing members and foreign

    brokers can report the information required under paragraphs (a) and

    (h) of Sec. 17.00 on series '01 forms or using some other format upon

    a determination that such person is unable to report the information

    using the format, coding structure or electronic data transmission

    procedures otherwise required.

    (b) Pursuant to Sec. 17.02, the authority to instruct or approve

    the time at which the information required under Sec. Sec. 17.00 and

    17.01 must be submitted by futures commission merchants, clearing

    members and foreign brokers provided that such persons are unable to

    meet the requirements set forth in Sec. Sec. 17.01(g) and 17.02.

    * * * * *

    14. In Sec. 17.04, revise the heading, paragraph (a), and

    paragraph (b)(1)(ii) to read as follows:

    Sec. 17.04 Reporting omnibus accounts to reporting firms.

    (a) Any futures commission merchant, clearing member or foreign

    broker who establishes an omnibus account with another futures

    commission merchant, clearing member or foreign broker shall report to

    that futures commission merchant, clearing member or foreign broker the

    total open long positions and the total open short positions in each

    future of a commodity and, for commodity options transactions, the

    total open long put options, the total open short put options, the

    total open long call options, and the total open short call options for

    each commodity options expiration date and each strike price in such

    account at the close of trading each day. The information required by

    this section shall be reported in sufficient time to enable the futures

    commission merchant, clearing member or foreign broker with whom the

    omnibus account is established to comply with the regulations of this

    part and the reporting requirements established by the reporting

    markets.

    (b) * * *

    (1) * * *

    (ii) The account is an omnibus account of another futures

    commission merchant, clearing member or foreign broker; or

    * * * * *

    PART 18--REPORTS BY TRADERS

    15. The authority citation for part 18 continues to read as

    follows:

    Authority: 7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a

    and 19, as amended by Title XIII of the Food, Conservation and

    Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18,

    2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.

    16. Revise Sec. 18.01 to read as follows:

    Sec. 18.01 Interest in or control of several accounts.

    If any trader holds, has a financial interest in or controls

    positions in more than one account, whether carried with the same or

    with different futures commission merchants or foreign brokers, all

    such positions and accounts shall be considered as a single account for

    the purpose of determining whether such trader has a reportable

    position and, unless instructed otherwise in the special call to report

    under Sec. 18.00 for the purpose of reporting.

    17. In Sec. 18.04, revise paragraphs (a)(7) and (b)(3)(i) to read

    as follows:

    Sec. 18.04 Statement of reporting trader.

    * * * * *

    (a) * * *

    (7) The names and locations of all futures commission merchants,

    clearing members, introducing brokers, and foreign brokers through whom

    accounts owned or controlled by the reporting trader are carried or

    introduced at the time of filing a Form 40, if such accounts are

    carried through more than one futures commission merchant, clearing

    member or foreign broker or carried through more than one office of the

    same futures commission merchant, clearing member or foreign broker, or

    introduced by more than one introducing broker clearing accounts

    through the same futures commission merchant, and the name of the

    reporting trader's account executive at each firm or office of the

    firm.

    (b) * * *

    (3) * * *

    (i) Commercial activity associated with use of the option or

    futures market (such as and including production, merchandising or

    processing of a cash commodity, asset or liability risk management by

    depository institutions, or security portfolio risk management).

    * * * * *

    18. In Sec. 18.05, revise paragraphs (a)(2), (a)(3), and (a)(4) to

    read as follows:

    Sec. 18.05 Maintenance of books and records.

    (a) * * *

    (2) Over the counter or pursuant to sections 2(d), 2(g) or 2(h)(1)-

    (2) of the Act or part 35 of this chapter;

    (3) On exempt commercial markets operating pursuant to sections

    2(h)(3)-(5) of the Act;

    (4) On exempt boards of trade operating pursuant to section 5d of

    the Act; and

    * * * * *

    PART 19--REPORTS BY PERSONS HOLDING BONA FIDE HEDGE POSITIONS

    PURSUANT TO Sec. 1.3(z) OF THIS CHAPTER AND BY MERCHANTS AND

    DEALERS IN COTTON

    19. The authority citation for part 19 continues to read as

    follows:

    Authority: 7 U.S.C. 6g(a), 6i, and 12a(5), as amended by Title

    XIII of the Food, Conservation and Energy Act of 2008, Pub. L. No.

    110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.

    20. In Sec. 19.00, revise paragraph (a) to read as follows:

    Sec. 19.00 General provisions.

    (a) Who must file series '04 reports. The following persons are

    required to file series '04 reports:

    (1) All persons holding or controlling futures and option positions

    that are reportable pursuant to Sec. 15.00(n)(2) of this chapter and

    any part of which constitute bona fide hedging positions as defined in

    Sec. 1.3(z) of this chapter;

    (2) Merchants and dealers of cotton holding or controlling

    positions for futures delivery in cotton that are reportable pursuant

    to Sec. 15.00(n)(1)(i) of this chapter, or

    (3) All persons holding or controlling positions for future

    delivery that are reportable pursuant to Sec. 15.00(n)(1) of this

    chapter who have received a special call for series '04 reports from

    the Commission or its designee. Filings in response to a special call

    shall be made within one business day of receipt of the special call

    unless otherwise specified in the call. For the purposes of this

    paragraph, the Commission hereby delegates to the Director of the

    Division of Market Oversight, or to such other person designated by the

    Director, authority to issue calls for series '04 reports.

    * * * * *

    21. In Sec. 19.01, revise paragraph (b) introductory text and

    paragraph (b)(1) to read as follows:

    Sec. 19.01 Reports on stocks and fixed price purchases and sales

    pertaining to futures positions in wheat, corn, oats, soybeans, soybean

    oil, soybean meal or cotton.

    * * * * *

    (b) Time and place of filing reports--Except for reports filed in

    response to special calls made under Sec. 19.00(a)(3), each report

    shall be made monthly, as of the close of business on the last Friday

    of the month, and filed at the appropriate Commission office specified

    in paragraph (b)(1) or (2) of this section not later than the second

    business day following the date of the report in the case of the 304

    report and not later than the third business day following the

    [[Page 75908]]

    date of the report in the case of the 204 report. Reports may be

    transmitted by facsimile or, alternatively, information on the form may

    be reported to the appropriate Commission office by telephone and the

    report mailed to the same office, not later than midnight of its due

    date.

    (1) CFTC Form 204 reports with respect to transactions in wheat,

    corn, oats, soybeans, soybean meal and soybean oil should be sent to

    the Commission's office in Chicago, IL, unless otherwise specifically

    authorized by the Commission or its designee.

    * * * * *

    PART 21--SPECIAL CALLS

    22. The authority citation for part 21 continues to read as

    follows:

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

    6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food,

    Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat.

    1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise

    noted.

    23. Revise Sec. 21.01 to read as follows:

    Sec. 21.01 Special calls for information on controlled accounts from

    futures commission merchants, clearing members and introducing brokers.

    Upon call by the Commission, each futures commission merchant,

    clearing member and introducing broker shall file with the Commission

    the names and addresses of all persons who, by power of attorney or

    otherwise, exercise trading control over any customer's account in

    commodity futures or commodity options on any reporting market.

    24. In Sec. 21.02, revise the heading, introductory text, and

    paragraphs (f) and (i) to read as follows:

    Sec. 21.02 Special calls for information on open contracts in

    accounts carried or introduced by futures commission merchants,

    clearing members, members of reporting markets, introducing brokers,

    and foreign brokers.

    Upon special call by the Commission for information relating to

    futures or option positions held or introduced on the dates specified

    in the call, each futures commission merchant, clearing member, member

    of a reporting market, introducing broker, or foreign broker, and, in

    addition, for option information, each reporting market, shall furnish

    to the Commission the following information concerning accounts of

    traders owning or controlling such futures or option positions, except

    for accounts carried on a fully disclosed basis by another futures

    commission merchant or clearing member, as may be specified in the

    call:

    * * * * *

    (f) The number of open futures or option positions introduced or

    carried in each account, as specified in the call;

    * * * * *

    (i) As applicable, the following identifying information:

    (1) Whether a trader who holds commodity futures or option

    positions is classified as a commercial or as a noncommercial trader

    for each commodity futures or option contract;

    (2) Whether the open commodity futures or option contracts are

    classified as speculative, spreading (straddling), or hedging; and

    (3) Whether any of the accounts in question are omnibus accounts

    and, if so, whether the originator of the omnibus account is another

    futures commission merchant, clearing member or foreign broker.

    * * * * *

    25. Amend Sec. 21.03 as follows:

    A. Revise the heading and paragraphs (a), (b), (c) and (d);

    B. Revise paragraph (e) introductory text and paragraphs (e)(1)

    introductory text , (e)(1)(iv) and (e)(1)(v); and

    C. Revise paragraphs (f), (g) and (h) to read as follows:

    Sec. 21.03 Selected special calls-duties of foreign brokers, domestic

    and foreign traders, futures commission merchants, clearing members,

    introducing brokers, and reporting markets.

    (a) For purposes of this section, the term ``accounts of a futures

    commission merchant, clearing member or foreign broker'' means all open

    contracts and transactions in futures and options on the records of the

    futures commission merchant, clearing member or foreign broker; the

    term ``beneficial interest'' means having or sharing in any rights,

    obligations or financial interest in any futures or options account;

    the term ``customer'' means any futures commission merchant, clearing

    member, introducing broker, foreign broker, or trader for whom a

    futures commission merchant, clearing member or reporting market that

    is a registered entity under section 1a(29)(E) of the Act makes or

    causes to be made a futures or options contract. Paragraphs (e), (g)

    and (h) of this section shall not apply to any futures commission

    merchant, clearing member or customer whose books and records are open

    at all times to inspection in the United States by any representative

    of the Commission.

    (b) It shall be unlawful for a futures commission merchant to open

    a futures or options account or to effect transactions in futures or

    options contracts for an existing account, or for an introducing broker

    to introduce such an account, for any customer for whom the futures

    commission merchant or introducing broker is required to provide the

    explanation provided for in Sec. 15.05(c) of this chapter, or for a

    reporting market that is a registered entity under section 1a(29)(E) of

    the Act, to cause to open an account in a contract traded in reliance

    on the exemption in section 2(h)(3) of the Act or to cause to be

    effected transactions in a contract traded in reliance on the exemption

    in section 2(h)(3) of the Act for an existing account for any person

    that is a foreign clearing member or foreign trader, until the futures

    commission merchant, introducing broker, clearing member, or reporting

    market has explained fully to the customer, in any manner that such

    persons deem appropriate, the provisions of this section.

    (c) Upon a determination by the Commission that information

    concerning accounts may be relevant information in enabling the

    Commission to determine whether the threat of a market manipulation,

    corner, squeeze, or other market disorder exists on any reporting

    market, the Commission may issue a call for information from a futures

    commission merchant, clearing member, introducing broker or customer

    pursuant to the provisions of this section.

    (d) In the event the call is issued to a foreign broker, foreign

    clearing member or foreign trader, its agent, designated pursuant to

    Sec. 15.05 of this chapter, shall, if directed, promptly transmit

    calls made by the Commission pursuant to this section by electronic

    mail or a similarly expeditious means of communication.

    (e) The futures commission merchant, clearing member, introducing

    broker, or customer to whom the special call is issued must provide to

    the Commission the information specified below for the commodity,

    reporting market and delivery months or option expiration dates named

    in the call. Such information shall be filed at the place and within

    the time specified by the Commission.

    (1) For each account of a futures commission merchant, clearing

    member, introducing broker, or foreign broker, including those accounts

    in the name of the futures commission merchant, clearing member or

    foreign broker, on the dates specified in the call issued pursuant to

    this section, such persons shall provide the Commission with the

    following information:

    * * * * *

    [[Page 75909]]

    (iv) Whether the account is carried for and in the name of another

    futures commission merchant, clearing member, introducing broker, or

    foreign broker; and

    (v) For the accounts which are not carried for and in the name of

    another futures commission merchant, clearing member, introducing

    broker, or foreign broker, the name and address of any other person who

    controls the trading of the account, and the name and address of any

    person who has a ten percent or more beneficial interest in the

    account.

    * * * * *

    (f) If the Commission has reason to believe that any person has not

    responded as required to a call made pursuant to this section, the

    Commission in writing may inform the reporting market specified in the

    call and that reporting market shall prohibit the execution of, and no

    futures commission merchant, clearing member, introducing broker, or

    foreign broker shall effect a transaction in connection with trades on

    the reporting market and in the months or expiration dates specified in

    the call for or on behalf of the futures commission merchant or

    customer named in the call, unless such trades offset existing open

    contracts of such futures commission merchant or customer.

    (g) Any person named in a special call that believes he or she is

    or may be adversely affected or aggrieved by action taken by the

    Commission under paragraph (f) of this section shall have the

    opportunity for a prompt hearing after the Commission acts. That person

    may immediately present in writing to the Commission for its

    consideration any comments or arguments concerning the Commission's

    action and may present for Commission consideration any documentary or

    other evidence that person deems appropriate. Upon request, the

    Commission may, in its discretion, determine that an oral hearing be

    conducted to permit the further presentation of information and views

    concerning any matters by any or all such persons. The oral hearing may

    be held before the Commission or any person designated by the

    Commission, which person shall cause all evidence to be reduced to

    writing and forthwith transmit the same and a recommended decision to

    the Commission. The Commission's directive under paragraph (f) of this

    section shall remain in effect unless and until modified or withdrawn

    by the Commission.

    (h) If, during the course of or after the Commission acts pursuant

    to paragraph (f) of this section, the Commission determines that it is

    appropriate to undertake a proceeding pursuant to section 6(c) of the

    Act, the Commission shall issue a complaint in accordance with the

    requirements of section 6(c), and, upon further determination by the

    Commission that the conditions described in paragraph (c) of this

    section still exist, a hearing pursuant to section 6(c) of the Act

    shall commence no later than five business days after service of the

    complaint. In the event the person served with the complaint under

    section 6(c) of the Act has, prior to the commencement of the hearing

    under section 6(c) of the Act, sought a hearing pursuant to paragraph

    (g) of this section and the Commission has determined to accord him

    such a hearing, the two hearings shall be conducted simultaneously.

    Nothing in this section shall preclude the Commission from taking other

    appropriate action under the Act or the Commission's regulations

    thereunder, including action under section 6(c) of the Act, regardless

    of whether the conditions described in paragraph (c) of this section

    still exist, and no ruling issued in the course of a hearing pursuant

    to paragraph (g) or this section shall constitute an estoppel against

    the Commission in any other action.

    26. Revise Sec. 21.04 to read as follows:

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

    Market Oversight.

    The Commission hereby delegates, until the Commission orders

    otherwise, the special call authority set forth in Sec. Sec. 21.01 and

    21.02 the Director of the Division of Market Oversight to be exercised

    by such Director or by such other employee or employees of such

    Director as designated from time to time by the Director. The Director

    of the Division of Market Oversight may submit to the Commission for

    its consideration any matter which has been delegated in this

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

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

    this section to the Director.

    PART 36--EXEMPT MARKETS

    27. The authority citation for part 36 is revised to read as

    follows:

    Authority: 7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by

    Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L.

    No. 110-246, 122 Stat. 1624 (June 18, 2008).

    28-30. Section 36.3 is amended by revising paragraphs (b) and (c),

    and adding paragraph (d), to read as follows:

    Sec. 36.3 Exempt commercial markets.

    * * * * *

    (b) Required information.

    (1) All electronic trading facilities. A facility operating in

    reliance on the exemption in section 2(h)(3) of the Act, initially and

    on an on-going basis, must:

    (i) Provide the Commission with the terms and conditions, as

    defined in part 40.1(i) of this chapter and product descriptions for

    each agreement, contract or transaction listed by the facility in

    reliance on the exemption set forth in section 2(h)(3) of the Act, as

    well as trading conventions, mechanisms and practices;

    (ii) Provide the Commission with information explaining how the

    facility meets the definition of ``trading facility'' contained in

    section 1a(33) of the Act and provide the Commission with access to the

    electronic trading facility's trading protocols, in a format specified

    by the Commission;

    (iii) Demonstrate to the Commission that the facility requires, and

    will require, with respect to all current and future agreements,

    contracts and transactions, that each participant agrees to comply with

    all applicable laws; that the authorized participants are ``eligible

    commercial entities'' as defined in section 1a(11) of the Act; that all

    agreements, contracts and transactions are and will be entered into

    solely on a principal-to-principal basis; and that the facility has in

    place a program to routinely monitor participants' compliance with

    these requirements;

    (iv) At the request of the Commission, provide any other

    information that the Commission, in its discretion, deems relevant to

    its determination whether an agreement, contract, or transaction

    performs a significant price discovery function; and

    (v) File with the Commission annually, no later than the end of

    each calendar year, a completed copy of CFTC Form 205--Exempt

    Commercial Market Annual Certification. The information submitted in

    Form 205 shall include:

    (A) A statement indicating whether the electronic trading facility

    continues to operate under the exemption; and

    (B) A certification that affirms the accuracy of and/or updates the

    information contained in the previous Notification of Operation as an

    Exempt Commercial Market.

    (2) Electronic trading facilities trading or executing agreements,

    contracts or transactions other than significant price discovery

    contracts. In addition to the requirements of paragraph (b)(1) of this

    section, a facility operating in reliance on the exemption in section

    2(h)(3) of the Act, with respect to agreements, contracts or

    transactions that have not been determined to perform significant

    [[Page 75910]]

    price discovery function, initially and on an on-going basis, must:

    (i) Identify to the Commission those agreements, contracts and

    transactions conducted on the electronic trading facility with respect

    to which it intends, in good faith, to rely on the exemption in section

    2(h)(3) of the Act, and which averaged five trades per day or more over

    the most recent calendar quarter; and, with respect to such agreements,

    contracts and transactions, either:

    (A) Submit to the Commission, in a form and manner acceptable to

    the Commission, a report for each business day, showing for each such

    agreement, contract or transaction executed the following information:

    (1) The underlying commodity, the delivery or price-basing location

    specified in the agreement, contract or transaction maturity date,

    whether it is a financially settled or physically delivered instrument,

    and the date of execution, time of execution, price, and quantity;

    (2) Total daily volume and, if cleared, open interest;

    (3) For an option instrument, in addition to the foregoing

    information, the type of option (i.e., call or put) and strike prices;

    and

    (4) Such other information as the Commission may determine.

    Each such report shall be electronically transmitted weekly, within

    such time period as is acceptable to the Commission after the end of

    the week to which the data applies; or

    (B) (1) Provide to the Commission, in a form and manner acceptable

    to the Commission, electronic access to those transactions conducted on

    the electronic trading facility in reliance on the exemption in section

    2(h)(3) of the Act, and meeting the average five trades per day or more

    threshold test of this section, which would allow the Commission to

    compile the information described in paragraph (b)(2)(i)(A) of this

    section and create a permanent record thereof;

    (2) Maintain a record of allegations or complaints received by the

    electronic trading facility concerning instances of suspected fraud or

    manipulation in trading activity conducted in reliance on the exemption

    set forth in section 2(h)(3) of the Act. The record shall contain the

    name of the complainant, if provided, date of the complaint, market

    instrument, substance of the allegations, and name of the person at the

    electronic trading facility who received the complaint;

    (3) Provide to the Commission, in the form and manner prescribed by

    the Commission, a copy of the record of each complaint received

    pursuant to paragraph (b)(2)(ii) of this section that alleges, or

    relates to, facts that would constitute a violation of the Act or

    Commission regulations. Such copy shall be provided to the Commission

    no later than 30 calendar days after the complaint is received.

    Provided, however, that in the case of a complaint alleging, or

    relating to, facts that would constitute an ongoing fraud or market

    manipulation under the Act or Commission regulations, such copy shall

    be provided to the Commission within three business days after the

    complaint is received; and

    (4) Provide to the Commission on a quarterly basis, within 15

    calendar days of the close of each quarter, a list of each agreement,

    contract or transaction executed on the electronic trading facility in

    reliance on the exemption set forth in section 2(h)(3) of the Act and

    indicate for each such agreement, contract or transaction the contract

    terms and conditions, the contract's average daily trading volume, and

    the most recent open interest figures.

    (3) Electronic trading facilities trading or executing significant

    price discovery contracts. In addition to the requirements of paragraph

    (b)(1) of this section, if the Commission determines that a facility

    operating in reliance on the exemption in section 2(h)(3) of the Act

    trades or executes an agreement, contract or transaction that performs

    a significant price discovery function, the facility must, with respect

    to any significant price discovery contract, publish and provide to the

    Commission the information required by Sec. 16.01 of this chapter.

    (4) Delegation of authority. The Commission hereby delegates, until

    the Commission orders otherwise, the authority to determine the form

    and manner of submitting the required information under paragraphs

    (b)(1) through (3) of this section, to the Director of the Division of

    Market Oversight and such members of the Commission's staff as the

    Director may designate. The Director may submit to the Commission for

    its consideration any matter that has been delegated by this paragraph.

    Nothing in this paragraph prohibits the Commission, at its election,

    from exercising the authority delegated in this paragraph.

    (5) Special calls.

    (i) All information required upon special call of the Commission

    under section 2(h)(5)(B)(iii) of the Act shall be transmitted at the

    time and to the office of the Commission as may be specified in the

    call.

    (ii) The Commission hereby delegates, until the Commission orders

    otherwise, the authority to make special calls as set forth in section

    2(h)(5)(B)(iii) of the Act to the Directors of the Division of Market

    Oversight, the Division of Clearing and Intermediary Oversight, and the

    Division of Enforcement to be exercised by each such Director or by

    such other employee or employees as the Director may designate. The

    Directors may submit to the Commission for its consideration any matter

    that has been delegated in this paragraph. Nothing in this paragraph

    prohibits the Commission, at its election, from exercising the

    authority delegated in this paragraph.

    (6) Subpoenas to foreign persons. A foreign person whose access to

    an electronic trading facility is limited or denied at the direction of

    the Commission based on the Commission's belief that the foreign person

    has failed timely to comply with a subpoena as provided under section

    2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt

    hearing under the procedures provided in Sec. 21.03(b) and (h) of this

    chapter.

    (7) Prohibited representation. An electronic trading facility

    relying upon the exemption in section 2(h)(3) of the Act, with respect

    to agreements, contracts or transactions that are not significant price

    discovery contracts, shall not represent to any person that it is

    registered with, designated, recognized, licensed or approved by the

    Commission.

    (c) Significant price discovery contracts.

    (1) Criteria for significant price discovery determination. The

    Commission may determine, in its discretion, that an electronic trading

    facility operating a market in reliance on the exemption in section

    2(h)(3) of the Act performs a significant price discovery function for

    transactions in the cash market for a commodity underlying any

    agreement, contract or transaction executed or traded on the facility.

    In making such a determination, the Commission shall consider, as

    appropriate:

    (i) Price linkage. The extent to which the agreement, contract or

    transaction uses or otherwise relies on a daily or final settlement

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

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

    market or a derivatives transaction execution facility to value a

    position, transfer or convert a position, cash or financially settle a

    position, or close out a position;

    (ii) Arbitrage. The extent to which the price for the agreement,

    contract or transaction is sufficiently related to the price of a

    contract or contracts listed for

    [[Page 75911]]

    trading on or subject to the rules of a designated contract market or

    derivatives transaction execution facility, or a significant price

    discovery contract or contracts trading on or subject to the rules of

    an electronic trading facility, so as to permit market participants to

    effectively arbitrage between the markets by simultaneously maintaining

    positions or executing trades in the contracts on a frequent and

    recurring basis;

    (iii) Material price reference. The extent to which, on a frequent

    and recurring basis, bids, offers, or transactions in a commodity are

    directly based on, or are determined by referencing, the prices

    generated by agreements, contracts or transactions being traded or

    executed on the electronic trading facility;

    (iv) Material liquidity. The extent to which the volume of

    agreements, contracts or transactions in the commodity being traded on

    the electronic trading facility is sufficient to have a material effect

    on other agreements, contracts or transactions listed for trading on or

    subject to the rules of a designated contract market, a derivatives

    transaction execution facility, or an electronic trading facility

    operating in reliance on the exemption in section 2(h)(3) of the Act;

    (v) Other material factors [Reserved].

    (2) Notification of possible significant price discovery contract

    conditions. An electronic trading facility operating in reliance on

    section 2(h)(3) of the Act shall promptly notify the Commission, and

    such notification shall be accompanied by supporting information or

    data concerning any contract that:

    (i) Averaged five trades per day or more over the most recent

    calendar quarter; and

    (ii) (A) For which the exchange sells its price information

    regarding the contract to market participants or industry publications;

    or

    (B) Whose daily closing or settlement prices on 95 percent or more

    of the days in the most recent quarter were within 2.5 percent of the

    contemporaneously determined closing, settlement or other daily price

    of another agreement, contract or transaction.

    (3) Procedure for significant price discovery determination. Before

    making a final price discovery determination under this paragraph, the

    Commission shall publish notice in the Federal Register that it intends

    to undertake a determination with respect to whether a particular

    agreement, contract or transaction performs a significant price

    discovery function and to receive written data, views and arguments

    relevant to its determination from the electronic trading facility and

    other interested persons. Any such written data, views and arguments

    shall be filed with the Secretary of the Commission, in the form and

    manner specified by the Commission, within 30 calendar days of

    publication of notice in the Federal Register or within such other time

    specified by the Commission. After consideration of all relevant

    information, the Commission shall issue an order explaining its

    determination whether the agreement, contract or transaction executed

    or traded by the electronic trading facility performs a significant

    price discovery function under the criteria specified in paragraphs

    (c)(1)(i) through (v) of this section.

    (4) Compliance with Core Principles. Following the issuance of an

    order by the Commission that the electronic trading facility executes

    or trades an agreement, contract or transaction that performs a

    significant price discovery function, the electronic trading facility

    must demonstrate, with respect to that agreement, contract or

    transaction, compliance with the Core Principles under section

    2(h)(7)(C) of the Act and the applicable provisions of this part. If

    the Commission's order represents the first time it has determined that

    the electronic trading facility's agreement, contract or transaction

    performs a significant price discovery function, the facility must

    submit a written demonstration of compliance with the Core Principles

    within 90 calendar days of the date of the Commission's order. For

    subsequent determinations by the Commission that the electronic trading

    facility has an additional agreement, contract or transaction that

    performs a significant price discovery function, the facility must

    submit a written demonstration of compliance with the Core Principles

    within 15 calendar days of the date of the Commission's order.

    Attention is directed to Appendix B of this part for guidance on and

    acceptable practices for complying with the Core Principles.

    Submissions demonstrating how the electronic trading facility complies

    with the Core Principles with respect to its significant price

    discovery contract must be filed with the Secretary of the Commission

    at its Washington, DC headquarters. Submissions must include the

    following:

    (i) A written certification that the significant price discovery

    contract(s) complies with the Act and regulations thereunder;

    (ii) A copy of the electronic trading facility's rules (as defined

    in Sec. 40.1 of this chapter) and any technical manuals, other guides

    or instructions for users of, or participants in, the market, including

    minimum financial standards for members or market participants.

    Subsequent rule changes must be certified by the electronic trading

    facility pursuant to section 5c(c) of the Act and Sec. 40.6 of this

    chapter. The electronic trading facility also may request Commission

    approval of any rule changes pursuant to section 5c(c) of the Act and

    Sec. 40.5 of this chapter;

    (iii) A description of the trading system, algorithm, security and

    access limitation procedures with a timeline for an order from input

    through settlement, and a copy of any system test procedures, tests

    conducted, test results and contingency or disaster recovery plans;

    (iv) A copy of any documents pertaining to or describing the

    electronic trading system's legal status and governance structure,

    including governance fitness information;

    (v) An executed or executable copy of any agreements or contracts

    entered into or to be entered into by the electronic trading facility,

    including partnership or limited liability company, third-party

    regulatory service, or member or user agreements, that enable or

    empower the electronic trading facility to comply with a Core

    Principle;

    (vi) A copy of any manual or other document describing, with

    specificity, the manner in which the trading facility will conduct

    trade practice, market and financial surveillance;

    (vii) To the extent that any of the items in paragraphs (c)(4)(ii)

    through (vi) of this section raise issues that are novel, or for which

    compliance with a core principle is not self-evident, an explanation of

    how that item satisfies the applicable core principle or principles.

    The electronic trading facility must identify with particularity

    information in the submission that will be subject to a request for

    confidential treatment pursuant to Sec. 145.09 of this chapter. The

    electronic trading facility must follow the procedures specified in

    Sec. 40.8 of this chapter with respect to any information in its

    submission for which confidential treatment is requested.

    (5) Determination of compliance with core principles. The

    Commission shall take into consideration differences between cleared

    and uncleared significant price discovery contracts when reviewing the

    implementation of the Core Principles by an electronic trading

    facility. The electronic facility also has reasonable discretion in

    accounting for differences between cleared and uncleared significant

    price discovery contracts when establishing the manner in which it

    complies with the Core Principles.

    [[Page 75912]]

    (6) Information relating to compliance with core principles. Upon

    request by the Commission, an electronic trading facility trading a

    significant price discovery contract shall file with the Commission a

    written demonstration, containing such supporting data, information and

    documents, in the form and manner and within such time as the

    Commission may specify, that the electronic trading facility is in

    compliance with one or more core principles as specified in the

    request, or that is otherwise requested by the Commission to enable the

    Commission to satisfy its obligations under the Act.

    (7) Enforceability. An agreement, contract or transaction entered

    into on or pursuant to the rules of an electronic trading facility

    trading or executing a significant price discovery contract shall not

    be void, voidable, subject to rescission or otherwise invalidated or

    rendered unenforceable as a result of:

    (i) A violation by the electronic trading facility of the

    provisions of section 2(h) of the Act or this part; or

    (ii) Any Commission proceeding to alter or supplement a rule, term

    or condition under section 8a(7) of the Act, to declare an emergency

    under section 8a(9) of the Act, or any other proceeding the effect of

    which is to alter, supplement or require an electronic trading facility

    to adopt a specific term or condition, trading rule or procedure, or to

    take or refrain from taking a specific action.

    (8) Procedures for vacating a determination of a significant price

    discovery function.

    (i) By the electronic trading facility. An electronic trading

    facility that executes or trades an agreement, contract or transaction

    that the Commission has determined performs a significant price

    discovery function under paragraph (c)(3) of this section may petition

    the Commission to vacate that determination. The petition shall

    demonstrate that the agreement, contract or transaction no longer

    performs a significant price discovery function under the criteria

    specified in paragraph (c)(1) of this section, and has not done so for

    at least the prior 12 months. An electronic trading facility shall not

    petition for a vacation of a significant price discovery determination

    more frequently than once every 12 months.

    (ii) By the Commission. The Commission may, on its own initiative,

    begin vacation proceedings if it believes that an agreement, contract

    or transaction has not performed a significant price discovery function

    for at least the prior 12 months.

    (iii) Procedure. Before making a final determination whether an

    agreement, contract or transaction has ceased to perform a significant

    price discovery function, the Commission shall publish notice in the

    Federal Register that it intends to undertake such a determination and

    to receive written data, views and arguments relevant to its

    determination from the electronic trading facility and other interested

    persons. Written submissions shall be filed with the Secretary of the

    Commission in the form and manner specified by the Commission, within

    30 calendar days of publication of notice in the Federal Register or

    within such other time specified by the Commission. After consideration

    of all relevant information, the Commission shall issue an order

    explaining its determination whether the agreement, contract or

    transaction has ceased to perform a significant price discovery

    function and, if so, vacating its prior order. If such an order issues,

    and the Commission subsequently determines, on its own initiative or

    after notification by the electronic trading facility, that the

    agreement, contract or transaction that was subject to the vacation

    order again performs a significant price discovery function, the

    electronic trading facility must comply with the Core Principles within

    15 calendar days of the date of the Commission's order.

    (iv) Automatic vacation of significant price discovery

    determination. Regardless of whether a proceeding to vacate has been

    initiated, any significant price discovery contract that has no open

    interest and in which no trading has occurred for a period of 12

    complete and consecutive calendar months shall, without further

    proceedings, no longer be considered to be a significant price

    discovery contract.

    (d) Commission review. The Commission shall, at least annually,

    evaluate as appropriate agreements, contracts or transactions conducted

    on an electronic trading facility in reliance on the exemption provided

    in section 2(h)(3) of the Act to determine whether they serve a

    significant price discovery function as described in paragraph (c)(1)

    of this section 31. Part 36 is amended by adding a new Appendix A to

    read as follows:

    Appendix A to Part 36--Guidance on Significant Price Discovery

    Contracts

    1. Section 2(h)(7) of the CEA specifies four factors that the

    Commission must consider, as appropriate, in making a determination

    that a contract is performing a significant price discovery

    function. The four factors prescribed by the statute are: Price

    Linkage; Arbitrage; Material Price Reference; and Material

    Liquidity.

    2. Not all listed factors must be present to support a

    determination that a contract performs a significant price discovery

    function. Moreover, the statutory language neither prioritizes the

    factors nor specifies the degree to which a significant price

    discovery contract must conform to the various factors. Congress has

    indicated that it intends that the Commission should not make a

    determination that an agreement, contract or transaction performs a

    significant price discovery function on the basis of the Price

    Linkage factor unless the agreement, contract or transaction also

    has sufficient volume to impact other regulated contracts or to

    become an independent price reference or benchmark that is regularly

    utilized by the public. The Commission believes that the Arbitrage

    and Material Price Reference factors can be considered separately

    from each other. That is, the Commission could make a determination

    that a contract serves a significant price discovery function based

    on the presence of one of these factors and the absence of the

    other. The presence of any of these factors, however, would not

    necessarily be sufficient to establish the contract as a significant

    price discovery contract. The fourth factor, Liquidity, would be

    considered in conjunction with the arbitrage and linkage factors as

    a significant amount of liquidity presumably would be necessary for

    a contract to perform a significant price discovery function in

    conjunction with these factors.

    3. These factors do not lend themselves to a mechanical

    checklist or formulaic analysis. Accordingly, this guidance is

    intended to illustrate which factors, or combinations of factors,

    the Commission will look to when determining that a contract is

    performing a significant price discovery function, and under what

    circumstances the presence of a particular factor or factors would

    be sufficient to support such a determination.

    (A) MATERIAL LIQUIDITY--The extent to which the volume of

    agreements, contracts or transactions in the commodity being traded

    on the electronic trading facility is sufficient to have a material

    effect on other agreements, contracts or transactions listed for

    trading on or subject to the rules of a designated contract market,

    a derivatives transaction execution facility, or an electronic

    trading facility operating in reliance on the exemption in section

    2(h)(3) of the Act.

    (1) Liquidity is a broad concept that captures the ability to

    transact immediately with little or no price concession.

    Traditionally, objective measures of trading such as volume or open

    interest have been used as measures of liquidity. So, for example, a

    market in which trades occur multiple times per minute at prices

    that differ by only fractions of a cent normally would be considered

    highly liquid, since presumably a trader could quickly execute a

    trade at a price that was approximately the same as the price for

    other recently executed trades. Other factors also will affect the

    characterization of liquidity, such as whether a large trade--e.g.,

    100 contracts versus 1 contract--could be executed without a

    significant price concession. For example,

    [[Page 75913]]

    having to wait a day to sell 1000 bushels of corn may be considered

    an illiquid market while waiting a day to sell a home may be

    considered quite liquid. Thus, quantifying the levels of immediacy

    and price concession that would define material liquidity may differ

    from one market or commodity to another.

    (2) The Commission believes that material liquidity

    alternatively can be identified by the impact liquidity exhibits

    through observed prices. In markets where material liquidity exists,

    a more or less continuous stream of prices can be observed and the

    prices should be similar. For example, if the trading of a contract

    occurs on average five times a day, there will be on average five

    observed prices for the contract per day. If the market is liquid in

    terms of traders having to make little in the way of price

    concessions to execute these trades, the prices of this contract

    should be similar to those observed for similar or related contracts

    traded in liquid markets elsewhere. Thus, in making determinations

    that contracts have material liquidity, the Commission will look to

    transaction prices, both in terms of how often prices are observed

    and the extent to which observed prices tend to correlate with other

    contemporaneous prices.

    (3) The Commission anticipates that material liquidity will

    frequently be a consideration in evaluating whether a contract is a

    significant price discovery contract; however, there may be

    circumstances in which other factors so dominate the conclusion that

    a contract is serving a significant price discovery function that a

    finding of material liquidity in the contract would not be

    necessary. Circumstances in which this might arise are discussed

    with respect to the assessment of other factors below.

    (4) Finally, material liquidity itself would not be sufficient

    to make a determination that a contract is a significant price

    discovery contract, but combined with other factors it can serve as

    a guidepost indicating which contracts are functioning as

    significant price discovery contracts. As further discussed below,

    material liquidity, as reflected through the prices of linked or

    arbitraged contracts, will be a primary consideration in determining

    whether such contracts are significant price discovery contracts.

    (B) PRICE LINKAGE--The extent to which the agreement, contract

    or transaction uses or otherwise relies on a daily or final

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

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

    designated contract market or a derivatives transaction execution

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

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

    (1) A price-linked contract is a contract that relies on a

    contract traded on another trading facility to settle, value or

    otherwise offset the price-linked contract. The link may involve a

    one-to-one linkage, in that the value of the linked contract is

    based on a single contract's price, or it may involve multiple

    contracts. An example of a multiple contract linkage might be where

    the settlement price is calculated as an index of prices obtained

    from a basket of contracts traded on other exchanges.

    (2) For a linked contract, the mere fact that a contract is

    linked to another contract will not be sufficient to support a

    determination that a contract performs a significant price discovery

    function. To assess whether such a determination is warranted, the

    Commission will examine the relationship between transaction prices

    of the linked contract and the prices of the referenced contract(s).

    The Commission believes that where material liquidity exists, prices

    for the linked contract would be observed to be substantially the

    same as or move substantially in conjunction with the prices of the

    referenced contract(s). Where such price characteristics are

    observed on an ongoing basis, the Commission would expect to

    determine that the linked contract is a significant price discovery

    contract.

    (3) As an example, where the Commission has observed price

    linkage, it will next consider whether transactions were occurring

    on a daily basis for the linked contract in material volumes.

    (Conversely, where volume has increased noticeably in a particular

    contract, the Commission would look for linkage) The ultimate level

    of volume that would be considered material for purposes of deeming

    a contract a significant price discovery contract will likely differ

    from one contract to another depending on the characteristics of the

    underlying commodity and the overall size of the physical market in

    which it is traded. At a minimum, however, the Commission will

    consider a linked contract which has volume equal to 5% of the

    volume of trading in the contract to which it is linked to have

    sufficient volume potentially to be deemed a significant price

    discovery contract. In combination with this volume level, the

    Commission will also examine the relationship between prices of the

    linked contract and the contract to which it is linked to determine

    whether a contract is serving a significant price discovery

    function. As a threshold, the Commission will consider a 2.5 percent

    price range for 95 percent of contemporaneously determined closing,

    settlement, or other daily prices over the most recent quarter to be

    sufficiently close for a linked contract potentially to be deemed a

    significant price discovery contract. For example, if, over the most

    recent quarter, it was found that 95 percent of the closing,

    settlement, or other daily prices of the contract, which have been

    calculated using transaction prices, were within 2.5 percent of the

    contemporaneously determined closing, settlement, or other daily

    prices of a contract to which it was linked, the Commission

    potentially would consider the contract to perform a significant

    price discovery function.

    (4) If, in the example above, the Commission determines that

    material volume existed, it will examine the relationship between

    the prices of the linked contracts and the referenced contracts. If

    it finds that the transaction prices of the linked contract were

    consistently within a small percentage of the referenced contract or

    index of contracts that was being referenced, the Commission will be

    likely to find the linked contract to be a significant price

    discovery contract. As a threshold, the Commission will consider a

    2.5 percent price range for 95 per cent of closing or settlement

    prices over the most recent quarter to be sufficiently close for a

    linked contract to potentially be deemed a significant price

    discovery contract. For example, if, over the most recent quarter,

    it was found that on 95 percent or more of the days the closing or

    settlement price of the contract, which has been calculated using

    transaction prices, was within 2.5 percent of the closing or

    settlement price of a contract to which it was linked, the

    Commission potentially will consider the contract to perform a

    significant price discovery function.

    (C) ARBITRAGE CONTRACTS--The extent to which the price for the

    agreement, contract or transaction is sufficiently related to the

    price of a contract or contracts listed for trading on or subject to

    the rules of a designated contract market or derivatives transaction

    execution facility, or a significant price discovery contract or

    contracts trading on or subject to the rules of an electronic

    trading facility, so as to permit market participants to effectively

    arbitrage between the markets by simultaneously maintaining

    positions or executing trades in the contracts on a frequent and

    recurring basis.

    (1) Arbitrage contracts are those contracts that can be combined

    with other contracts to exploit expected economic relationships in

    anticipation of a profit. In assessing whether a contract can be

    incorporated into an arbitrage strategy, the Commission will weigh

    the terms and conditions of a contract in comparison to contracts

    that potentially could be used in an arbitrage strategy; will

    consult with industry or other sources regarding a contract's

    viability in an arbitrage strategy; and will rely on direct

    observation confirming the use of a contract in arbitrage

    strategies.

    (2) As with linked contracts, the mere fact that a contract

    could be employed in an arbitrage strategy will not be sufficient to

    make a determination that a contract is a significant price

    discovery contract. In addition, the level of liquidity will be

    considered. To assess whether designation as a significant price

    discovery contract is warranted, the Commission will examine the

    relationship between transaction prices of an arbitrage contract and

    the prices of the contract(s) to which it is related. The Commission

    believes that where material liquidity exists, prices for the

    arbitrage contract would be observed to move substantially in

    conjunction with the prices of the related contract(s) to which it

    is economically linked. Where such price characteristics are

    observed on an ongoing basis, it is likely that the linked contract

    performs a significant price discovery function.

    (3) The Commission will apply the same threshold liquidity and

    price relationship standards for arbitrage contracts as it does for

    linked contracts. That is, the Commission will view the average of 5

    trades per day or more threshold as the level of activity that would

    potentially meet the material volume criterion. With respect to

    prices, the Commission will consider an arbitrage

    [[Page 75914]]

    contract potentially to be a significant price discovery contract

    if, over the most recent quarter, greater than 95 percent of the

    closing or settlement prices of the contract, which have been

    calculated using transaction prices, fall within 2.5 percent of the

    closing or settlement price of the contract or contracts to which it

    could be arbitraged.

    (D) MATERIAL PRICE REFERENCE--The extent to which, on a frequent

    and recurring basis, bids, offers or transactions in a commodity are

    directly based on, or are determined by referencing, the prices

    generated by agreements, contracts or transactions being traded or

    executed on the electronic trading facility.

    (1) The Commission will rely on one of two sources of evidence--

    direct or indirect--to determine that the price of a contract was

    being used as a material price reference and, therefore, serving a

    significant price discovery function. The primary source of direct

    evidence is that cash market bids, offers or transactions are

    directly based on, or quoted at a differential to, the prices

    generated on the market on a frequent and recurring basis. The

    Commission expects that normally only contracts with material

    liquidity will be referenced by the cash market; however, the

    Commission notes that it may be possible for a contract to have very

    low liquidity and yet still be used as a price reference. In such

    cases, the simple fact that participants in the underlying cash

    market broadly have elected to use the contract price as a price

    reference would be a strong indicator that the contract is a

    significant price discovery contract.

    (2) In evaluating a contract's price discovery role as a

    directly referenced price source, the Commission will perform an

    analysis to determine whether cash market participants are quoting

    bid or offer prices or entering into transactions at prices that are

    set either explicitly or implicitly at a differential to prices

    established for the contract. Cash market prices are set explicitly

    at a differential to the section 2(h)(3) contract when, for

    instance, they are quoted in dollars and cents above or below the

    reference contract's price. Cash market prices are set implicitly at

    a differential to a section 2(h)(3) contract when, for instance,

    they are arrived at after adding to, or subtracting from the section

    2(h)(3) contract, but then quoted or reported at a flat price. The

    Commission will also consider whether cash market entities are

    quoting cash prices based on a section 2(h)(3) contract on a

    frequent and recurring basis.

    (3) The second source of evidence is that the price of the

    contract is being routinely disseminated in widely distributed

    industry publications--or offered by the ECM itself for some form of

    remuneration--and consulted on a frequent and recurring basis by

    industry participants in pricing cash market transactions. As with

    contract prices that are directly incorporated into cash market

    prices, the Commission assumes that industry publications choose to

    publish prices because of the value they transfer to industry

    participants for the purpose of formulating prices in the cash

    market.

    (4) In applying this criterion, consideration will be given to

    whether prices established by a section 2(h)(3) contract are

    reported in a widely distributed industry publication. In making

    this determination, the Commission will consider the reputation of

    the publication within the industry, how frequently it is published,

    and whether the information contained in the publication is

    routinely consulted by industry participants in pricing cash market

    transactions.

    (5) Under a Material Price Reference analysis, the Commission

    expects that material liquidity in the contract likely will be the

    primary motivation for a publisher to publish particular prices. In

    other words, the fact that the price of a contract is being used as

    a reference by industry participants suggests, prima facie, that the

    contract performs a significant price discovery function. But the

    Commission recognizes that trading levels could nonetheless be low

    for the contract while still serving a significant price discovery

    function and that evidence of routine publication and consultation

    by industry participants may be sufficient to establish the contract

    as a significant price discovery contract. On the other hand, while

    cash market participants may regularly refer to published prices of

    a particular contract when establishing cash market prices, it may

    be the case that the contract itself is a niche market for a

    specialized grade of the commodity or for delivery at a minor

    geographic location. In such cases, the Commission will look to such

    measures as trading volume, open interest, and the significance of

    the underlying cash market to make a determination that a contract

    is functioning as a significant price discovery contract. If an

    examination of trading in the contract were to reveal that true

    price discovery was occurring in other more broadly defined

    contracts and that this contract was itself simply reflective of

    those broader contracts, it is less likely the Commission will deem

    the contract a significant price discovery contract.

    (6) Because price referencing normally occurs out of the view of

    the electronic trading facility, the Commission may have difficulty

    ascertaining the extent to which cash market participants actually

    reference or consult a contract's price when transacting. The

    Commission expects, however, that as a contract begins to be relied

    upon to set a reference price, market participants will be

    increasingly willing to purchase price information. To the extent,

    then, that an electronic trading facility begins to sell its price

    information regarding a contract to market participants or industry

    publications, the contract will meet a threshold standard to

    indicate that the contract potentially is a significant price

    discovery contract.

    32. Part 36 is amended by adding a new Appendix B to read as

    follows:

    Appendix B to Part 36--Guidance On, and Acceptable Practices in,

    Compliance With Core Principles

    1. This Appendix provides guidance on complying with the core

    principles under section 2(h)(7)(C) of the Act and this part, both

    initially and on an ongoing basis. The guidance is provided in

    paragraph (a) following each core principle and can be used to

    demonstrate to the Commission core principle compliance under Sec.

    36.3(c)(4). The guidance for each core principle is illustrative

    only of the types of matters an electronic trading facility may

    address, as applicable, and is not intended to be used as a

    mandatory checklist. Addressing the issues and questions set forth

    in this guidance will help the Commission in its consideration of

    whether the electronic trading facility is in compliance with the

    core principles. A submission pursuant to Sec. 36.3(c)(4) should

    include an explanation or other form of documentation demonstrating

    that the electronic trading facility complies with the core

    principles.

    2. Acceptable practices meeting selected requirements of the

    core principles are set forth in paragraph (b) following each core

    principle. Electronic trading facilities on which significant price

    discovery contracts are traded or executed that follow the specific

    practices outlined under paragraph (b) for any core principle in

    this appendix will meet the selected requirements of the applicable

    core principle. Paragraph (b) is for illustrative purposes only, and

    does not state the exclusive means for satisfying a core principle.

    CORE PRINCIPLE I OF SECTION 2(h)(7)(C)--CONTRACTS NOT READILY

    SUSCEPTIBLE TO MANIPULATION. The electronic trading facility shall

    list only significant price discovery contracts that are not readily

    susceptible to manipulation.

    (a) Guidance. Upon determination by the Commission that a

    contract listed for trading on an electronic trading facility is a

    significant price discovery contract, the electronic trading

    facility must self-certify the terms and conditions of the

    significant price discovery contract under Sec. 36.3(c)(4) within

    90 calendar days of the date of the Commission's order, if the

    contract is the electronic trading facility's first significant

    price discovery contract; or 15 days from the date of the

    Commission's order if the contract is not the electronic trading

    facility's first significant price discovery contract. Once the

    Commission determines that a contract performs a significant price

    discovery function, subsequent rule changes must be self-certified

    to the Commission by the electronic trading facility pursuant to

    Sec. 40.6 of this chapter.

    (b) Acceptable practices. Guideline No. 1, 17 CFR part 40,

    Appendix A may be used as guidance in meeting this core principle

    for significant price discovery contracts.

    CORE PRINCIPLE II OF SECTION 2(h)(7)(C)--MONITORING OF TRADING.

    The electronic trading facility shall monitor trading in significant

    price discovery contracts to prevent market manipulation, price

    distortion, and disruptions of the delivery of cash-settlement

    process through market surveillance, compliance and disciplinary

    practices and procedures, including methods for conducting real-time

    monitoring of trading and comprehensive and accurate trade

    reconstructions.

    (a) Guidance. An electronic trading facility on which

    significant price discovery contracts are traded or executed should,

    with respect to those contracts, demonstrate a capacity to prevent

    market manipulation and

    [[Page 75915]]

    have trading and participation rules to detect and deter abuses. The

    facility should seek to prevent market manipulation and other

    trading abuses through a dedicated regulatory department or by

    delegation of that function to an appropriate third party. An

    electronic trading facility also should have the authority to

    intervene as necessary to maintain an orderly market.

    (b) Acceptable practices.

    (1) An acceptable trade monitoring program. An acceptable trade

    monitoring program should facilitate, on both a routine and non-

    routine basis, arrangements and resources to detect and deter abuses

    through direct surveillance of each significant price discovery

    contract. Direct surveillance of each significant price discovery

    contract will generally involve the collection of various market

    data, including information on participants' market activity. Those

    data should be evaluated on an ongoing basis in order to make an

    appropriate regulatory response to potential market disruptions or

    abusive practices. For contracts with a substantial number of

    participants, an effective surveillance program should employ a much

    more comprehensive large trader reporting system.

    (2) Authority to collect information and documents. The

    electronic trading facility should have the authority to collect

    information and documents in order to reconstruct trading for

    appropriate market analysis. Appropriate market analysis should

    enable the electronic trading facility to assess whether each

    significant price discovery contract is responding to the forces of

    supply and demand. Appropriate data usually include various

    fundamental data about the underlying commodity, its supply, its

    demand, and its movement through market channels. Especially

    important are data related to the size and ownership of deliverable

    supplies--the existing supply and the future or potential supply--

    and to the pricing of the deliverable commodity relative to the

    futures price and relative to similar, but non-deliverable, kinds of

    the commodity. For cash-settled contracts, it is more appropriate to

    pay attention to the availability and pricing of the commodity

    making up the index to which the contract will be settled, as well

    as monitoring the continued suitability of the methodology for

    deriving the index.

    (3) Ability to assess participants' market activity and power.

    To assess participants' activity and potential power in a market,

    electronic trading facilities, with respect to significant price

    discovery contracts, at a minimum should have routine access to the

    positions and trading of its participants and, if applicable, should

    provide for such access through its agreements with its third-party

    provider of clearing services.

    CORE PRINCIPLE III OF SECTION 2(h)(7)(C)--ABILITY TO OBTAIN

    INFORMATION. The electronic trading facility shall establish and

    enforce rules that allow the electronic trading facility to obtain

    any necessary information to perform any of the functions described

    in this subparagraph, provide the information to the Commission upon

    request, and have the capacity to carry out such international

    information-sharing agreements as the Commission may require.

    (a) Guidance. An electronic trading facility on which

    significant price discovery contracts are traded or executed should,

    with respect to those contracts, have the ability and authority to

    collect information and documents on both a routine and non-routine

    basis, including the examination of books and records kept by

    participants. This includes having arrangements and resources for

    recording full data entry and trade details and safely storing audit

    trail data. An electronic trading facility should have systems

    sufficient to enable it to use the information for purposes of

    assisting in the prevention of participant and market abuses through

    reconstruction of trading and providing evidence of any violations

    of the electronic trading facility's rules.

    (b) Acceptable practices.

    (1) The goal of an audit trail is to detect and deter market

    abuse. An effective contract audit trail should capture and retain

    sufficient trade-related information to permit electronic trading

    facility staff to detect trading abuses and to reconstruct all

    transactions within a reasonable period of time. An audit trail

    should include specialized electronic surveillance programs that

    identify potentially abusive trades and trade patterns. An

    acceptable audit trail must be able to track an order from time of

    entry into the trading system through its fill. The electronic

    trading facility must create and maintain an electronic transaction

    history database that contains information with respect to

    transactions executed on each significant price discovery contract.

    (2) An acceptable audit trail should include the following:

    original source documents, transaction history, electronic analysis

    capability, and safe storage capability. An acceptable audit trail

    system would satisfy the following practices.

    (i) Original source documents. Original source documents include

    unalterable, sequentially identified records on which trade

    execution information is originally recorded. For each order

    (whether filled, unfilled or cancelled, each of which should be

    retained or electronically captured), such records reflect the terms

    of the order, an account identifier that relates back to the

    account(s) owner(s), and the time of order entry.

    (ii) Transaction history. A transaction history consists of an

    electronic history of each transaction, including:

    (A) All the data that are input into the trade entry or matching

    system for the transaction to match and clear;

    (B) Timing and sequencing data adequate to reconstruct trading;

    and

    (C) The identification of each account to which fills are

    allocated.

    (iii) Electronic analysis capability. An electronic analysis

    capability that permits sorting and presenting data included in the

    transaction history so as to reconstruct trading and to identify

    possible trading violations with respect to market abuse.

    (iv) Safe storage capability. Safe storage capability provides

    for a method of storing the data included in the transaction history

    in a manner that protects the data from unauthorized alteration, as

    well as from accidental erasure or other loss. Data should be

    retained in the form and manner specified by the Commission or,

    where no acceptable manner of retention is specified, in accordance

    with the recordkeeping standards of Commission regulation 1.31.

    (3) Arrangements and resources for the disclosure of the

    obtained information and documents to the Commission upon request.

    To satisfy section 2(h)(7)(C)(III)(bb), the electronic trading

    facility should maintain records of all information and documents

    related to each significant price discovery contract in a form and

    manner acceptable to the Commission. Where no acceptable manner of

    maintenance is specified, records should be maintained in accordance

    with the recordkeeping standards of Commission regulation 1.31.

    (4) The capacity to carry out appropriate information-sharing

    agreements as the Commission may require. Appropriate information-

    sharing agreements could be established with other markets or the

    Commission can act in conjunction with the electronic trading

    facility to carry out such information sharing.

    CORE PRINCIPLE IV OF SECTION 2(h)(7)(C)--POSITION LIMITATIONS OR

    ACCOUNTABILITY. The electronic trading facility shall adopt, where

    necessary and appropriate, position limitations or position

    accountability for speculators in significant price discovery

    contracts, taking into account positions in other agreements,

    contracts and transactions that are treated by a derivatives

    clearing organization, whether registered or not registered, as

    fungible with such significant price discovery contracts to reduce

    the potential threat of market manipulation or congestion,

    especially during trading in the delivery month.

    (a) Guidance. [Reserved]

    (b) Acceptable practices.

    (1) Introduction. In order to diminish potential problems

    arising from excessively large speculative positions, and to

    facilitate orderly liquidation of expiring contracts, an electronic

    trading facility relying on the exemption in section 2(h)(3) should

    adopt rules that set position limits or accountability levels on

    traders' cleared positions in significant price discovery contracts.

    These position limit rules specifically may exempt bona fide

    hedging; permit other exemptions; or set limits differently by

    market, delivery month or time period. For the purpose of evaluating

    a significant price discovery contract's speculative-limit program

    for cleared positions, the Commission will consider the specified

    position limits or accountability levels, aggregation policies,

    types of exemptions allowed, methods for monitoring compliance with

    the specified limits or levels, and procedures for dealing with

    violations.

    (2) Accounting for cleared and uncleared trades.

    (i) Speculative-limit levels typically should be set in terms of

    a trader's combined position involving cleared trades in a

    significant price discovery contract, plus positions in agreements,

    contracts and transactions that are treated by a derivatives

    clearing organization, whether registered or not registered, as

    fungible with such significant price discovery contract. (This

    [[Page 75916]]

    circumstance typically exists where an exempt commercial market

    lists a particular contract for trading but also allows for

    positions in that contract to be cleared together with positions

    established through bilateral or off-exchange transactions, such as

    block trades, in the same contract. Essentially, both the on-

    facility and off-facility transactions are considered fungible with

    each other.) In this connection, the electronic trading facility

    should make arrangements to ensure that it is able to ascertain

    accurate position data for the market.

    (ii) For significant price discovery contracts that may be

    traded on either a cleared or an uncleared basis, the electronic

    trading facility should apply position limits to cleared

    transactions in the contract. For those transactions in the contract

    that are not cleared, the electronic trading facility should

    establish accountability procedures for monitoring traders' overall

    positions and take that information into account when ascertaining

    whether an individual trader's overall position poses a threat to

    the market.

    (3) Limitations on spot-month positions. Spot-month limits

    should be adopted for significant price discovery contracts to

    minimize the susceptibility of the market to manipulation or price

    distortions, including squeezes and corners or other abusive trading

    practices.

    (i) Contracts economically equivalent to an existing contract.

    An electronic trading facility that lists a significant price

    discovery contract that is economically-equivalent to another

    significant price discovery contract or to a contract traded on a

    designated contract market or derivatives transaction execution

    facility should set the spot-month limit for its significant price

    discovery contract at the same level as that specified for the

    economically-equivalent contract.

    (ii) Contracts that are not economically equivalent to an

    existing contract. There may not be an economically-equivalent

    significant price discovery contract or economically equivalent

    contract traded on a designated contract market or derivatives

    transaction execution facility. In this case, the spot-month

    speculative position limit should be established in the following

    manner. The spot-month limit for a physical delivery market should

    be based upon an analysis of deliverable supplies and the history of

    spot-month liquidations. The spot-month limit for a physical-

    delivery market is appropriately set at no more than 25 percent of

    the estimated deliverable supply. In the case where a significant

    price discovery contract has a cash settlement provision, the spot-

    month limit should be set at a level that minimizes the potential

    for price manipulation or distortion in the significant price

    discovery contract itself; in related futures and options contracts

    traded on a designated contract market or derivatives transaction

    execution facility; in other significant price discovery contracts;

    in other fungible agreements, contracts and transactions; and in the

    underlying commodity.

    (4) Position accountability for non-spot-month positions. The

    electronic trading facility should establish for its significant

    price discovery contracts non-spot individual month position

    accountability levels and all-months-combined position

    accountability levels. An electronic trading facility may establish

    non-spot individual month position limits and all-months-combined

    position limits for its significant price discovery contracts in

    lieu of position accountability levels.

    (i) Definition. Position accountability provisions provide a

    means for an exchange to monitor traders' positions that may

    threaten orderly trading. An acceptable accountability provision

    sets target accountability threshold levels that may be exceeded,

    but once a trader breaches such accountability levels, the

    electronic trading facility should initiate an investigation to

    determine whether the individual's trading activity is justified and

    is not intended to manipulate the market. As part of its

    investigation, the electronic trading facility should inquire about

    the trader's rationale for holding a position in excess of the

    accountability levels. An acceptable accountability provision should

    provide the electronic trading facility with the authority to order

    the trader not to further increase positions. If a trader fails to

    comply with a request for information about positions held, provides

    information that does not sufficiently justify the position, or

    continues to increase contract positions after a request not to do

    so is issued by the facility, then the accountability provision

    should enable the electronic trading facility to require the trader

    to reduce positions.

    (ii) Contracts economically equivalent to an existing contract.

    When an electronic trading facility lists a significant price

    discovery contract that is economically equivalent to another

    significant price discovery contract or to a contract traded on a

    designated contract market or derivatives transaction execution

    facility, the electronic trading facility should set the non-spot

    individual month position accountability level and all-months-

    combined position accountability level for its significant price

    discovery contract at the same levels, or lower, as those specified

    for the economically-equivalent contract.

    (iii) Contracts that are not economically equivalent to an

    existing contract. For significant price discovery contracts that

    are not economically equivalent to an existing contract, the trading

    facility shall adopt non-spot individual month and all-months-

    combined position accountability levels that are no greater than 10

    percent of the average combined futures and delta-adjusted option

    month-end open interest for the most recent calendar year. For

    electronic trading facilities that choose to adopt non-spot

    individual month and all-months-combined position limits in lieu of

    position accountability levels for their significant price discovery

    contracts, the limits should be set in the same manner as the

    accountability levels.

    (iv) Contracts economically equivalent to an existing contract

    with position limits. If a significant price discovery contract is

    economically equivalent to another significant price discovery

    contract or to a contract traded on a designated contract market or

    derivatives transaction execution facility that has adopted non-spot

    or all-months-combined position limits, the electronic trading

    facility should set non-spot month position limits and all-months-

    combined position limits for its significant price discovery

    contract at the same (or lower) levels as those specified for the

    economically-equivalent contract.

    (5) Provisions for uncleared contracts. If an electronic trading

    facility offers a significant price discovery contract that is

    exclusively uncleared, or one that may be either cleared by a

    derivatives clearing organization or uncleared at the discretion of

    the trader, the trading facility should establish for the uncleared

    trades a spot-month volume accountability level equal to the spot-

    month speculative position limit. In this regard, the electronic

    trading facility should keep track of each trader's uncleared

    transactions in a significant price discovery contract on a net

    basis. (For the purpose of netting uncleared transactions, long and

    short uncleared transactions are only offset if they are conducted

    with the same counterparty.) If a particular trader's net volume of

    uncleared transactions exceeds the specified spot-month volume

    accountability level, the electronic trading facility should conduct

    an investigation to determine whether the trader's trading activity

    is warranted and is not intended to manipulate the market.

    (6) Account aggregation. An electronic trading facility should

    have aggregation rules for significant price discovery contracts

    that apply to accounts under common control, those with common

    ownership, i.e., where there is a ten percent or greater financial

    interest, and those traded according to an express or implied

    agreement. Such aggregation rules should apply to cleared

    transactions with respect to applicable speculative position limits,

    as well as to uncleared transactions with respect to applicable

    spot-month volume accountability levels. An electronic trading

    facility will be permitted to set more stringent aggregation

    policies. An electronic trading facility may grant exemptions to its

    price discovery contracts' position limits for bona fide hedging (as

    defined in Sec. 1.3(z) of this chapter) and may grant exemptions

    for reduced risk positions, such as spreads, straddles and arbitrage

    positions.

    (7) Implementation deadlines. An electronic trading facility

    with a significant price discovery contract is required to comply

    with Core Principle IV as set forth in section 2(h)(7)C) of the Act

    within 90 calendar days of the date of the Commission's order

    determining that the contract performs a significant price discovery

    function if such contract is the electronic trading facility's first

    significant price discovery contract, or within 15 days of the date

    of the Commission's order if such contract is not the electronic

    trading facility's first significant price discovery contract. For

    the purpose of applying limits on speculative positions in newly-

    determined significant price discovery contracts, the Commission

    will permit a grace period following issuance of its order for

    traders with cleared positions in such contracts to become compliant

    with applicable position limit rules. Traders who hold cleared

    positions on a net basis in the

    [[Page 75917]]

    electronic trading facility's significant price discovery contract

    must be at or below the specified position limit level no later than

    90 calendar days from the date of the electronic trading facility's

    implementation of position limit rules, unless a hedge exemption is

    granted by the electronic trading facility. This grace period

    applies to both initial and subsequent price discovery contracts.

    Electronic trading facilities should notify traders of this

    requirement promptly upon implementation of such rules.

    (8) Enforcement provisions. The electronic trading facility

    should have appropriate procedures in place to monitor its position

    limit and accountability provisions and to address violations.

    (i) An electronic trading facility with significant price

    discovery contracts should use an automated means of detecting

    traders' violations of speculative limits or exemptions,

    particularly if the significant price discovery contracts have large

    numbers of traders. An electronic trading facility should monitor

    the continuing appropriateness of approved exemptions by

    periodically reviewing each trader's basis for exemption or

    requiring a reapplication. An automated system also should be used

    to determine whether a trader has exceeded applicable non-spot

    individual month position accountability levels, all-months-combined

    position accountability levels, and spot-month volume accountability

    levels.

    (ii) An electronic trading facility should establish a program

    for effective enforcement of position limits for significant price

    discovery contracts. Electronic trading facilities should use a

    large trader reporting system to monitor and enforce daily

    compliance with position limit rules. The Commission notes that an

    electronic trading facility may allow traders to periodically apply

    to the electronic trading facility for an exemption and, if

    appropriate, be granted a position level higher than the applicable

    speculative limit. The electronic trading facility should establish

    a program to monitor approved exemptions from the limits. The

    position levels granted under such hedge exemptions generally should

    be based upon the trader's commercial activity in related markets

    including, but not limited to, positions held in related futures and

    options contracts listed for trading on designated contract markets,

    fungible agreements, contracts and transactions, as determined by

    either a registered or unregistered derivatives clearing

    organization. Electronic trading facilities may allow a brief grace

    period where a qualifying trader may exceed speculative limits or an

    existing exemption level pending the submission and approval of

    appropriate justification. An electronic trading facility should

    consider whether it wants to restrict exemptions during the last

    several days of trading in a delivery month. Acceptable procedures

    for obtaining and granting exemptions include a requirement that the

    electronic trading facility approve a specific maximum higher level.

    (iii) An acceptable speculative limit program should have

    specific policies for taking regulatory action once a violation of a

    position limit or exemption is detected. The electronic trading

    facility policies should consider appropriate actions.

    (9) Violation of Commission rules. A violation of position

    limits for significant price discovery contracts that have been

    self-certified by an electronic trading facility also a violation of

    section 4a(e) of the Act.

    CORE PRINCIPLE V OF SECTION 2(h)(7)(C)--EMERGENCY AUTHORITY--The

    electronic trading facility shall adopt rules to provide for the

    exercise of emergency authority, in consultation or cooperation with

    the Commission, where necessary and appropriate, including the

    authority to liquidate open positions in significant price discovery

    contracts and to suspend or curtail trading in a significant price

    discovery contract.

    (a) Guidance. An electronic trading facility on which

    significant price discovery contracts are traded should have clear

    procedures and guidelines for decision-making regarding emergency

    intervention in the market, including procedures and guidelines to

    avoid conflicts of interest while carrying out such decision-making.

    An electronic trading facility on which significant price discovery

    contracts are executed or traded should also have the authority to

    intervene as necessary to maintain markets with fair and orderly

    trading as well as procedures for carrying out the intervention.

    Procedures and guidelines should include notifying the Commission of

    the exercise of the electronic trading facility's regulatory

    emergency authority, explaining how conflicts of interest are

    minimized, and documenting the electronic trading facility's

    decision-making process and the reasons for using its emergency

    action authority. Information on steps taken under such procedures

    should be included in a submission of a certified rule and any

    related submissions for rule approval pursuant to part 40 of this

    chapter, when carried out pursuant to an electronic trading

    facility's emergency authority. To address perceived market threats,

    the electronic trading facility on which significant price discovery

    contracts are executed or traded should, among other things, be able

    to impose position limits in the delivery month, impose or modify

    price limits, modify circuit breakers, call for additional margin

    either from market participants or clearing members (for contracts

    that are cleared through a clearinghouse), order the liquidation or

    transfer of open positions, order the fixing of a settlement price,

    order a reduction in positions, extend or shorten the expiration

    date or the trading hours, suspend or curtail trading on the

    electronic trading facility, order the transfer of contracts and the

    margin for such contracts from one market participant to another, or

    alter the delivery terms or conditions or, if applicable, should

    provide for such actions through its agreements with its third-party

    provider of clearing services.

    (b) Acceptable practices. [Reserved]

    CORE PRINCIPLE VI OF SECTION 2(h)(7)(C)--DAILY PUBLICATION OF

    TRADING INFORMATION. The electronic trading facility shall make

    public daily information on price, trading volume, and other trading

    data to the extent appropriate for significant price discovery

    contracts.

    (a) Guidance. An electronic trading facility, with respect to

    significant price discovery contracts, should provide to the public

    information regarding settlement prices, price range, volume, open

    interest, and other related market information for all applicable

    contracts as determined by the Commission on a fair, equitable and

    timely basis. Provision of information for any applicable contract

    can be through such means as provision of the information to a

    financial information service or by timely placement of the

    information on the electronic trading facility's public Web site.

    (b) Acceptable practices. Compliance with Sec. 16.01 of this

    chapter, which is mandatory, is an acceptable practice and satisfies

    the requirements of under Core Principle VI.

    CORE PRINCIPLE VII OF SECTION 2(h)(7)(C)--COMPLIANCE WITH RULES.

    The electronic trading facility shall monitor and enforce compliance

    with the rules of the electronic trading facility, including the

    terms and conditions of any contracts to be traded and any

    limitations on access to the electronic trading facility.

    (a) Guidance.

    (1) An electronic trading facility on which significant price

    discovery contracts are executed or traded should have appropriate

    arrangements and resources for effective trade practice surveillance

    programs, with the authority to collect information and documents on

    both a routine and non-routine basis, including the examination of

    books and records kept by its market participants. The arrangements

    and resources should facilitate the direct supervision of the market

    and the analysis of data collected. Trade practice surveillance

    programs may be carried out by the electronic trading facility

    itself or through delegation or contracting-out to a third party. If

    the electronic trading facility on which significant price discovery

    contracts are executed or traded delegates or contracts-out the

    trade practice surveillance responsibility to a third party, such

    third party should have the capacity and authority to carry out such

    programs, and the electronic trading facility should retain

    appropriate supervisory authority over the third party.

    (2) An electronic trading facility on which significant price

    discovery contracts are executed or traded should have arrangements,

    resources and authority for effective rule enforcement. The

    Commission believes that this should include the authority and

    ability to discipline and limit or suspend the activities of a

    market participant as well as the authority and ability to terminate

    the activities of a market participant pursuant to clear and fair

    standards. The electronic trading facility can satisfy this

    criterion for market participants by expelling or denying such

    person's future access upon a determination that such a person has

    violated the electronic trading facility's rules.

    (b) Acceptable practices. An acceptable trade practice

    surveillance program generally would include:

    (1) Maintenance of data reflecting the details of each

    transaction executed on the electronic trading facility;

    (2) Electronic analysis of this data routinely to detect

    potential trading violations;

    [[Page 75918]]

    (3) Appropriate and thorough investigative analysis of these and

    other potential trading violations brought to the electronic trading

    facility's attention; and

    (4) Prompt and effective disciplinary action for any violation

    that is found to have been committed. The Commission believes that

    the latter element should include the authority and ability to

    discipline and limit or suspend the activities of a market

    participant pursuant to clear and fair standards that are available

    to market participants. See, e.g., 17 CFR part 8.

    CORE PRINCIPLE VIII OF SECTION 2(h)(7)(C)--CONFLICTS OF

    INTEREST. The electronic trading facility on which significant price

    discovery contracts are executed or traded shall establish and

    enforce rules to minimize conflicts of interest in the decision-

    making process of the electronic trading facility and establish a

    process for resolving such conflicts of interest.

    (a) Guidance.

    (1) The means to address conflicts of interest in the decision-

    making of an electronic trading facility on which significant price

    discovery contracts are executed or traded should include methods to

    ascertain the presence of conflicts of interest and to make

    decisions in the event of such a conflict. In addition, the

    Commission believes that the electronic trading facility on which

    significant price discovery contracts are executed or traded should

    provide for appropriate limitations on the use or disclosure of

    material non-public information gained through the performance of

    official duties by board members, committee members and electronic

    trading facility employees or gained through an ownership interest

    in the electronic trading facility or its parent organization(s).

    (2) All electronic trading facilities on which significant price

    discovery contracts are traded bear special responsibility to

    regulate effectively, impartially, and with due consideration of the

    public interest, as provided in section 3 of the Act. Under Core

    Principle VIII, they are also required to minimize conflicts of

    interest in their decision-making processes. To comply with this

    core principle, electronic trading facilities on which significant

    price discovery contracts are traded should be particularly vigilant

    for such conflicts between and among any of their self-regulatory

    responsibilities, their commercial interests, and the several

    interests of their management, members, owners, market participants,

    other industry participants and other constituencies.

    (b) Acceptable practices. [Reserved]

    CORE PRINCIPLE IX OF SECTION 2(h)(7)(C)--ANTITRUST

    CONSIDERATIONS. Unless necessary or appropriate to achieve the

    purposes of this Act, the electronic trading facility, with respect

    to any significant price discovery contracts, shall endeavor to

    avoid adopting any rules or taking any actions that result in any

    unreasonable restraints of trade or imposing any material

    anticompetitive burden on trading on the electronic trading

    facility.

    (a) Guidance. An electronic trading facility, with respect to a

    significant price discovery contract, may at any time request that

    the Commission consider under the provisions of section 15(b) of the

    Act any of the electronic trading facility's rules, which may be

    trading protocols or policies, operational rules, or terms or

    conditions of any significant price discovery contract. The

    Commission intends to apply section 15(b) of the Act to its

    consideration of issues under this core principle in a manner

    consistent with that previously applied to contract markets.

    (b) Acceptable practices. [Reserved]

    PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

    33. The authority citation for part 40 is revised to read as

    follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as

    amended by Title XIII of the Food, Conservation and Energy Act of

    2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008).

    34. Revise the heading of part 40 as set forth above.

    35. Amend Sec. 40.1 as follows:

    A. Remove the term ``registered entity'' and add in its place the

    term ``contract market, derivatives transaction execution facility or

    derivatives clearing organization'' in paragraphs (b)(2), (b)(3), and

    (f)(2); and

    B. Remove the term ``contract market, derivatives transaction

    execution facility or derivatives clearing organization'' and add in

    its place the term ``registered entity'' in paragraph (h).

    36. Amend Sec. 40.2 as follows:

    A. Remove the term ``registered entity'' and add in its place

    ``contract market, derivatives transaction execution facility on which

    significant price discovery contracts are traded or executed'' in

    paragraph (a);

    B. Remove the term ``registered entity'' and add in its place

    ``contract market, derivatives transaction execution facility or

    derivatives clearing organization'' in paragraphs (a)(1) and

    (a)(3)(iv); and

    C. Revise paragraph (b) to read as follows:

    Sec. 40.2 Listing and accepting products for trading or clearing by

    certification.

    * * * * *

    (b) A registered entity shall provide, if requested by Commission

    staff, additional evidence, information or data relating to whether any

    contract meets, initially or on a continuing basis, any of the

    requirements of the Act or Commission regulations or policies

    thereunder which may be beneficial to the Commission in conducting a

    due diligence assessment of the product and the entity's compliance

    with these requirements.

    * * * * *

    37. In Sec. 40.3, remove the term ``registered entity'' and add in

    its place the term ``designated contract market or registered

    derivatives transaction execution facility'' in paragraphs (a)(1),

    (c)(1), (c)(2), and (e)(2).

    38. In Sec. 40.4, remove the term ``registered entity'' and add in

    its place the term ``designated contract market'' in paragraph

    (b)(9)(ii).

    39. In Sec. 40.6, revise paragraphs (a)(2), (c)(3)(ii)(G), and

    (c)(3)(ii)(H) to read as follows:

    Sec. 40.6 Self-certification of rules.

    (a) * * *

    (2) The registered entity has filed its submission electronically

    in a format specified by the Secretary of the Commission with the

    Secretary of the Commission at submissions@cftc.gov, the relevant

    branch chief at the regional office having local jurisdiction over the

    registered entity, and, for filings submitted by a designated contract

    market, registered derivatives transaction execution facility, or

    electronic trading facility on which significant price discovery

    contracts are traded or executed, the Division of Market Oversight at

    DMOSubmissions@cftc.gov, and the Commission has received the submission

    at its headquarters by the open of business on the business day

    preceding implementation of the rule; provided, however, rules or rule

    amendments implemented under procedures of the governing board to

    respond to an emergency as defined in Sec. 40.1, shall, if

    practicable, be filed with the Commission prior to the implementation

    or, if not practicable, be filed with the Commission at the earliest

    possible time after implementation, but in no event more than twenty-

    four hours after implementation; and

    * * * * *

    (c) * * *

    (3) * * *

    (ii) * * *

    (G) Option contract terms. For registered entities that are in

    compliance with the daily reporting requirements of Sec. 16.01 of this

    chapter, changes to option contract rules relating to the strike price

    listing procedures, strike price intervals, and the listing of strike

    prices on a discretionary basis.

    (H) Trading months. For registered entities that are in compliance

    with the daily reporting requirements of Sec. 16.01 of this chapter,

    the initial listing of trading months which are within the currently

    established cycle of trading months.

    40. In Sec. 40.7, remove the term ``designated contract market,

    registered derivatives transaction execution

    [[Page 75919]]

    facility or registered derivatives clearing organization'' and add in

    its place the term ``registered entity'' in paragraph (b) introductory

    text.

    41. In Sec. 40.8, revise paragraph (a), redesignate paragraph (b)

    as paragraph (c), and add new paragraph (b) to read as follows:

    Sec. 40.8 Availability of public information.

    (a) The following sections of all applications to become a

    designated contract market, derivatives execution transaction facility

    or designated clearing organization will be public: transmittal letter,

    proposed rules, the applicant's regulatory compliance chart, documents

    establishing the applicant's legal status, documents setting forth the

    applicant's governance structure, and any other part of the application

    not covered by a request for confidential treatment.

    (b) The following submissions required by Sec. 36.3(c)(4) by an

    electronic trading facility on which significant price discovery

    contracts are traded or executed will be public: rulebook, the

    facility's regulatory compliance chart, documents establishing the

    facility's legal status, documents setting forth the facility's

    governance structure, and any other parts of the submissions not

    covered by a request for confidential treatment.

    * * * * *

    42. Revise Appendix D to part 40 to read as follows:

    Appendix D to Part 40--Submission Cover Sheet and Instructions

    A properly completed submission cover sheet must accompany all

    rule submissions submitted electronically by a registered entity to

    the Secretary of the Commodity Futures Trading Commission, at

    submissions@cftc.gov in a format specified by the Secretary of the

    Commission. Each submission should include the following:

    1. Identifier Code (optional)--If applicable, the exchange or

    clearing organization Identifier Code at the top of the cover sheet.

    Such codes are commonly generated by the exchanges or clearing

    organizations to provide an identifier that is unique to each filing

    (e.g., NYMEX Submission 03-116).

    2. Date--The date of the filing.

    3. Organization--The name of the organization filing the

    submission (e.g., CBOT).

    4. Filing as a--Check the appropriate box for a designated

    contract market (DCM), derivatives clearing organization (DCO),

    derivatives transaction execution facility (DTEF), or electronic

    trading facility with a significant price discovery contract (ECM-

    SPDC).

    5. Type of Filing--Indicate whether the filing is a rule

    amendment or new product and the applicable category under that

    heading.

    6. Rule Numbers--For rule filings only, identify rule number(s)

    being adopted or modified in the case of rule amendment filings.

    7. Description--For rule or rule amendment filings only, enter a

    brief description of the new rule or rule amendment. This narrative

    should describe the substance of the submission with enough

    specificity to characterize all essential aspects of the filing.

    8. Other Requirements--Comply with all filing requirements for

    the underlying proposed rule or rule amendment. The filing of the

    submission cover sheet does not obviate the responsibility to comply

    with any applicable filing requirement (e.g., rules submitted for

    Commission approval under Sec. 40.5 must be accompanied by an

    explanation of the purpose and effect of the proposed rule along

    with a description of any substantive opposing views).

    A sample of the required submission cover sheet follows.

    BILLING CODE 6351-01-P

    [[Page 75920]]

    [GRAPHIC] [TIFF OMITTED] TP12DE08.001

    [[Page 75921]]

    Issued in Washington, DC, on December 2, 2008, by the

    Commission.

    David Stawick,

    Secretary of the Commission.

    [FR Doc. E8-28867 Filed 12-11-08; 8:45 am]

    BILLING CODE 6351-01-C

    Last Updated: May 9, 2012



See Also:

OpenGov Logo

CFTC's Commitment to Open Government

Gavel and Book

Follow the Status of Enforcement Actions