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2011-12270

  • Federal Register, Volume 76 Issue 109 (Tuesday, June 7, 2011)[Federal Register Volume 76, Number 109 (Tuesday, June 7, 2011)]

    [Proposed Rules]

    [Pages 33066-33113]

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

    [FR Doc No: 2011-12270]

    [[Page 33065]]

    Vol. 76

    Tuesday,

    No. 109

    June 7, 2011

    Part III

    Commodity Futures Trading Commission

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    17 CFR Parts 1, 5, 7 et al.

    Adaptation of Regulations to Incorporate Swaps; Proposed Rule

    Federal Register / Vol. 76 , No. 109 / Tuesday, June 7, 2011 /

    Proposed Rules

    [[Page 33066]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1, 5, 7, 8, 15, 18, 21, 36, 41, 140, 145, 155, and 166

    RIN Number 3038-AD53

    Adaptation of Regulations to Incorporate Swaps

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act

    (``Dodd-Frank Act'' or ``DFA'') established a comprehensive new

    statutory framework for swaps and security-based swaps. The Dodd-Frank

    Act repeals some sections of the Commodity Exchange Act (``CEA'' or

    ``Act''), amends others, and adds a number of new provisions. The DFA

    also requires the Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') to promulgate a number of rules to implement the new

    framework. The Commission has proposed numerous rules to satisfy its

    obligations under the DFA. Because the Dodd-Frank Act makes so many

    changes to the existing statutory and regulatory frameworks, the

    proposed rules would make a number of conforming changes to the CFTC's

    regulations to integrate them more fully with the new statutory and

    regulatory framework (``Proposal'').

    DATES: Comments must be received on or before August 8, 2011.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD53,

    by any of the following methods:

    The agency's Web site, at: http://comments.cftc.gov.

    Follow the instructions for submitting comments through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the Commission's regulations.\1\

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    \1\ 17 CFR 145.9. Commission regulations referred to herein are

    found on the Commission's website.

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    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Peter A. Kals, Attorney-Advisor, 202-

    418-5466, pkals@cftc.gov, or Elizabeth Miller, Attorney-Advisor, 202-

    418-5450, emiller@cftc.gov, Division of Clearing and Intermediary

    Oversight; David E. Aron, Counsel, at 202-418-6621, daron@cftc.gov,

    Office of General Counsel; Nadia Zakir, Attorney-Advisor, 202-418-5720,

    nzakir@cftc.gov, Division of Market Oversight, Commodity Futures

    Trading Commission, Three Lafayette Centre, 1151 21st Street, NW.,

    Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    II. Proposed Regulations

    A. Part 1

    1. Regulation 1.3: Definitions

    a. General Changes

    b. Amended and New Definitions

    c. Regulation 1.3(ll): Physical

    d. Regulation 1.3(yy): Commodity Interest

    2. Regulation 1.4: Use of Electronic Signatures

    3. Regulation 1.31: Books and Records; Keeping and Inspection

    4. Regulation 1.33: Monthly and Confirmation Statements

    5. Regulation 1.35: Records of Cash Commodity, Futures and

    Option Transactions

    6. Regulation 1.37: Customer's or Option Customer's Name,

    Address, and Occupation Recorded; Record of Guarantor or Controller

    of Account

    7. Regulation 1.39: Simultaneous Buying and Selling Orders of

    Different Principals; Execution of, for and Between Principals

    8. Regulation 1.40: Crop, Market Information Letters, Reports;

    Copies Required

    9. Regulation 1.59: Activities of Self-Regulatory Employees,

    Governing Board Members, Committee Members and Consultants

    10. Regulation 1.63: Service on Self-Regulatory Organization

    Governing Boards or Committees by Persons With Disciplinary

    Histories

    11. Regulation 1.67: Notification of Final Disciplinary Action

    Involving Financial Harm to a Customer

    12. Regulation 1.68: Customer Election Not To Have Funds,

    Carried by a Futures Commission Merchant for Trading on a Registered

    Derivatives Trading Execution Facility, Separately Accounted for and

    Segregated

    13. Regulations 1.44, 1.53, and 1.62--Deletion of Regulations

    Inapplicable to Designated Contract Markets

    14. Appendix C to Part 1: Bunched Orders and Account

    Identification

    B. Part 7

    C. Part 8

    D. Parts 15, 18, 21, and 36

    E. Parts 41, 140 and 145

    F. Part 155

    G. Other General Changes to CFTC Regulations

    1. Removal of References to DTEFs

    2. Other Conforming Changes

    III. Request for Comment

    IV. Administrative Compliance

    A. Paperwork Reduction Act

    B. Regulatory Flexibility Act

    C. Cost-Benefit Analysis

    I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act into

    law.\2\ Title VII of the Dodd-Frank Act \3\ (``Title VII'') amended the

    CEA \4\ to establish a comprehensive new regulatory framework for swaps

    and security-based swaps. The legislation was enacted, among other

    reasons, to reduce risk, increase transparency, and promote market

    integrity within the financial system, including by: (1) Providing for

    the registration and comprehensive regulation of swap dealers

    (``SDs''), security-based swap dealers, major swap participants

    (``MSPs''), and major security-based swap participants; (2) imposing

    clearing and trade execution requirements on swaps and security-based

    swaps, subject to certain exceptions; (3) creating rigorous

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    rulemaking and enforcement authorities of the Commissions with respect

    to, among others, all registered entities and intermediaries subject to

    the Commission's oversight.

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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection

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

    Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

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

    2010.''

    \4\ 7 U.S.C. 1 et seq. (2006).

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    [[Page 33067]]

    Title VII added to the CEA two new categories of Commission

    registrant (i.e., SDs \5\ and MSPs \6\) and provided a definition for

    associated persons of the foregoing.\7\ Title VII also added to the CEA

    compliance obligations for SDs and MSPs and revised the definitional

    scope of each existing intermediary registrant category,\8\ with the

    exception of retail foreign exchange dealers (``RFEDs''), to include

    intermediation activity involving swaps.

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    \5\ DFA section 721(a)(21), adding CEA section 1a(49), codified

    at 7 U.S.C. 1a(49).

    \6\ DFA section 721(a)(16), adding CEA section 1a(33), codified

    at 7 U.S.C. 1a(33).

    \7\ DFA section 721(a)(15), adding CEA section 1a(4), codified

    at 7 U.S.C. 1a(4).

    \8\ Existing intermediary registrant categories include futures

    commission merchants (``FCMs''), commodity pool operators

    (``CPOs''), commodity trading advisors (``CTAs''), introducing

    brokers (``IBs''), floor brokers (``FBs'') and floor traders

    (``FTs'').

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    To apply its regulatory regime to the swap activity of

    intermediaries, the Commission must make a number of changes to its

    regulations to conform them to the Dodd-Frank Act. These changes

    primarily affect part 1 of the Commission's rules, but also affect

    parts 5, 7, 8, 15, 18, 21, 36, 41, 140, 145, 155, and 166. To the

    extent the DFA required the Commission to promulgate rules to address

    certain specific DFA sections, the Commission has proposed or is in the

    process of proposing such rules separately.

    Today's Proposal contains amendments of three different types:

    ministerial, accommodating, and substantive. Many of the proposed

    amendments are purely ministerial--for instance, several proposed

    changes would update definitions to conform them to the CEA as amended

    by the Dodd-Frank Act; add to the Commission's regulations new terms

    created by the Dodd-Frank Act; remove all regulations and references

    pertaining to derivatives transaction execution facilities (``DTEFs''),

    a category of exchange which was eliminated by the DFA; correct various

    statutory cross-references to the CEA in the regulations; and remove

    regulations in whole or in part that were rendered moot by the

    Commodity Futures Modernization Act of 2000 (``CFMA'').

    The proposed accommodating amendments are essential to the

    implementation of the DFA in that they propose to add swaps, swap

    markets, and swap entities to numerous definitions and regulations, but

    are more than ministerial because they require some judgment in

    drafting. Accommodating amendments would include, among other things,

    amending numerous definitions in regulation 1.3 to reference or include

    swaps; creating new definitions as necessary in regulation 1.3;

    amending recordkeeping requirements to include information on swap

    transactions; adding references to swaps, swap execution facilities

    (``SEFs'') and derivatives clearing organizations (``DCOs'') to various

    part 1 regulations; and amending parts 15, 18, 21, and 36 to implement

    the DFA's grandfathering and phase-out of exempt boards of trade and

    exempt commercial markets.

    The remaining proposed substantive amendments are changes that

    would align requirements or procedures across futures and swap markets.

    They consist of proposed amendments to regulations 1.31 and 1.35 that

    would harmonize current part 1 recordkeeping requirements with those

    applicable to SDs and MSPs under proposed part 23 regulations and

    harmonize certain procedures applicable to swaps with those applicable

    to futures.

    To aid the public in understanding the numerous changes to

    different parts of the CFTC's regulations explained in the Proposal,

    the Commission will also publish on its Web site a ``redline'' of the

    affected regulations which will clearly reflect the proposed amendments

    and deletions.\9\

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    \9\ Furthermore, while there are many outstanding Notices of

    Proposed Rulemaking (``NPRMs'') published by the CFTC, today's

    Proposal does not reflect those separately proposed amendments, most

    of which are not yet final. For example, the Proposal amends

    regulation 1.3(z) (definition of ``bona fide hedging transactions

    and positions'') to remove certain cross-references, but the

    Proposal does not also show other amendments to that definition

    proposed earlier this year in a separate release. See Position

    Limits for Derivatives, 76 FR 4752, Jan. 26, 2011. All NPRMs are

    available on the Commission's Web site for the public to review and

    provide comment. For a list of all rulemaking proposals related to

    the Dodd-Frank Act, please visit http://www.cftc.gov/LawRegulation/DoddFrankAct/Dodd-FrankProposedRules/index.htm.

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    II. Proposed Regulations

    A. Part 1

    1. Regulation 1.3: Definitions

    a. General Changes

    The Commission proposes to revise regulation 1.3 so that its

    definitions, which are used throughout the regulations, incorporate

    relevant provisions of the DFA. For instance, proposed regulation 1.3

    updates current definitions to conform them to the Dodd-Frank Act's

    amendments of the same terms in the CEA's definitions section,\10\ and

    also includes definitions specifically added by the Dodd-Frank Act to

    the CEA. This is the case for many of the definitions in proposed

    regulation 1.3, including ``associated person of a swap dealer or major

    swap participant,'' ``commodity pool operator,'' ``commodity trading

    advisor,'' ``futures commission merchant,'' ``floor broker,'' ``floor

    trader,'' ``swap data repository,'' and ``swap execution facility.''

    \11\ Additionally, the Commission is proposing to revise the definition

    of ``self-regulatory organization'' (``SRO'') to include SEFs, a new

    category of regulated markets under the DFA, and to make clear that

    DCOs are SROs.\12\

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    \10\ CEA section 1a, 7 U.S.C. 1a.

    \11\ The DFA amended the definition of ``commodity pool

    operator'' in CEA section 1a to add swaps to those contracts for

    which a CPO solicits investment. DFA section 721(a)(5). In addition

    to amending the definition of ``commodity pool operator'' in

    proposed regulation 1.3 to accommodate that revision, the Commission

    proposes to add equivalent language to the definition of ``commodity

    trading advisor'' in regulation 1.3.

    \12\ Currently, some individual rules specifically include DCO

    in the definition of SRO, but they are not included in the general

    definition of SRO in regulation 1.3.

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    b. Amended and New Definitions

    The Commission also proposes (1) to simplify or clarify certain

    existing regulation 1.3 definitions, and (2) to add several new

    definitions to regulation 1.3, pursuant to amendments to the CEA by the

    Dodd-Frank Act, existing regulations, and other amendments in the

    Proposal.\13\

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    \13\ The Commission realizes that several earlier published

    releases have also proposed to add definitions to regulation 1.3,

    and that these amendments may overlap, e.g., more than one

    definition was proposed for regulation 1.3(zz). See Agricultural

    Commodity Definition, 75 FR 65586, Oct. 26, 2010; Requirements for

    Derivatives Clearing Organizations, Designated Contract Markets, and

    Swap Execution Facilities Regarding the Mitigation of Conflicts of

    Interest, 75 FR 63732, Oct. 18, 2010. However, as each rule proposal

    is published as a final rulemaking, the Commission will ensure that

    the lettering of paragraphs within regulation 1.3 for newly added

    definitions is correct. Therefore, the Commission requests that the

    public review the new definitions proposed today for their content

    only and ignore any inconsistencies in lettering between the

    Proposal and prior NPRMs.

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    The term ``contract market,'' for instance, is not defined under

    the CEA, and is currently defined under regulation 1.3(h) as ``a board

    of trade designated by the Commission as a contract market under the

    Commodity Exchange Act or in accordance with the provisions of part 33

    of this chapter.'' In certain provisions throughout the Commission's

    regulations, contract markets are also referred to as ``designated

    contract markets.'' Because both terms are used interchangeably within

    the regulations, the Commission is proposing to revise the definition

    to mean contract market and designated contract market (``DCM'').

    Proposed

    [[Page 33068]]

    regulation 1.3(h) will contain one definition identified by the title

    ``Contract market; designated contract market.'' The current definition

    also erroneously cross-references part 33 as the DCM provisions of the

    Commission's regulations. The proposed definition would change that

    cross-reference to part 38 of the Commission's regulations.

    The Commission proposes a similar clarification regarding the

    definition of ``customer.'' The Proposal simplifies the definition of

    ``customer'' by combining two existing definitions, ``Customer;

    commodity customer'' in regulation 1.3(k) and ``Option customer'' in

    regulation 1.3(jj), and adding swaps.\14\ Therefore, the ``customer''

    definition proposed herein would include swap customers, commodity

    customers, and option customers, and refer to them all with the single

    term, ``customer.'' Furthermore, the Commission proposes to revise all

    references to ``commodity customer'' and ``option customer'' throughout

    the Commission's regulations, but particularly in part 1, to simply

    refer to ``customer.'' \15\ These revisions have retained references to

    requirements specific to certain contracts.\16\

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    \14\ The ``General Regulations and Derivatives Clearing

    Organizations'' Federal Register release proposed to amend

    regulation 1.3(k) by adding ``swap customer,'' but there is nothing

    unique about that term requiring it to be separately defined.

    General Regulations and Derivatives Clearing Organizations, 75 FR

    77576, Dec. 13, 2010.

    \15\ The Commission proposes to remove references to commodity

    customers and option customers, replacing them with references to

    simply ``customer,'' in the following regulations: 17 CFR 1.3, 1.20-

    1.24, 1.26, 1.27, 1.30, 1.32-1.34, 1.35-1.37, 1.46, 1.57, 1.59,

    155.3, 155.4, and 166.5.

    \16\ For example, proposed regulation 1.33 (Monthly and

    confirmation statements) requires an FCM to document a customer's

    positions in futures contracts differently from its option or swap

    positions. Proposed regulation 1.33 preserves these distinctions,

    even though it refers only to ``customers'' as opposed to

    ``commodity customers,'' ``option customers,'' and ``swap

    customers.''

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    The Commission proposes to define the term ``confirmation'' to

    reflect its differing use in various regulations depending on whether a

    transaction is executed by an FCM, IB or CTA on the one hand, or by a

    SD or MSP on the other hand. In the first case, the registrant is

    acting as an agent. In the second it is acting as a principal.\17\

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    \17\ A single entity could be registered in more than one

    capacity, for example, as both a SD and a CTA. Which rules were

    applicable would depend on the capacity in which it was performing a

    particular function.

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    The Commission also proposes to revise the ``Member of a contract

    market'' definition currently found at regulation 1.3(q) and to add to

    regulation 1.3 a definition of the term ``Registered entity,''

    currently provided in CEA section 1a(40), as revised by the Dodd-Frank

    Act. The definition of ``registered entity'' proposed in regulation 1.3

    is identical to its CEA counterpart and would include DCOs, DCMs, SEFs,

    swap data repositories (``SDRs'') and certain electronic trading

    facilities. To correspond with this new definition, the Commission also

    proposes to replace the current ``Member of a contract market''

    definition with a new definition of ``Member,'' which would be nearly

    identical to the ``Member of a registered entity'' definition provided

    in CEA section 1a(34), also as revised by the Dodd-Frank Act.\18\

    Therefore, the proposed ``Member'' definition would be broadened to

    accommodate newly established SEFs, and it would include those ``owning

    or holding membership in, or admitted to membership representation on,

    the registered entity; or having trading privileges on the registered

    entity.''

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    \18\ In accordance with the removal of DTEF references from many

    other Commission regulations, the proposed ``Member'' definition

    would not include DTEF references currently in the definition of

    ``Member of a registered entity'' found in CEA section 1a(34). See 7

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

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    The Commission proposes to add a definition of the term ``order.''

    This term has not previously been defined, although it is used in

    several of the regulations, e.g., 1.35, 155.3, and 155.4. In light of

    this and with the addition of new categories of registrants (SDs and

    MSPs) who act as principals rather than agents, clarification of this

    term is appropriate. The definition would provide that an order is ``an

    instruction or authorization provided by a customer to a futures

    commission merchant, introducing broker, or commodity trading advisor

    regarding trading in a commodity interest on behalf of the customer.''

    Because amendments to regulation 1.31 also proposed herein

    incorporate the term ``prudential regulator,'' as added to the CEA by

    the Dodd-Frank Act, the Commission proposes to add it to regulation

    1.3.\19\ Pursuant to proposed regulation 1.31, records of swap

    transactions must be presented, upon request, to ``any applicable

    prudential regulator as that term is defined in section 1a(39) of the

    Act.'' The proposed definition of ``prudential regulator'' in

    regulation 1.3 is coextensive with the definition in section 1a(39) of

    the Act and lists the various prudential regulators. Pursuant to the

    definition in section 1a(39) of the Act, determining the ``applicable''

    prudential regulator depends upon what type of entity the SD or MSP is

    and which regulator oversees that SD or MSP.\20\ For example, if a SD

    is a national bank, it is overseen by the Office of the Comptroller of

    the Currency, and that agency would be the ``applicable prudential

    regulator'' for the purposes of proposed regulation 1.31.

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    \19\ See infra Part II.A.3.

    \20\ 7 U.S.C. 1a(39), as amended by DFA section 721(a)(17).

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    The Commission proposes to add the term ``registrant'' to

    regulation 1.3 so that certain regulations in part 1 can refer to

    various intermediaries (e.g., FCMs, IBs, CPOs), their employees

    (associated persons), and other registrants (MSPs). As discussed above,

    the Commission also has proposed to add the definition of ``registered

    entity'' from CEA section 1a, which refers to DCOs, DCMs, SEFs, SDRs,

    and other entities, to regulation 1.3. Because the DFA created a

    definition of and several proposed part 1 regulations refer to

    ``associated persons of swap dealers or major swap participants,'' the

    Commission proposes to add that term to regulation 1.3 as well.

    The Commission also proposes adding the term ``retail forex

    customer'' to regulation 1.3 because it appears in several regulations

    in part 1 and currently is only defined in part 5. The proposed

    definition is identical in all material respects to the definition of

    this term as it currently appears in regulation 5.1(k).\21\

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    \21\ 17 CFR 5.1(k) currently defines ``retail forex customer''

    as ``a person, other than an eligible contract participant as

    defined in section 1a(12) of the Act, acting on its own behalf and

    trading in any account, agreement, contract or transaction described

    in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.'' The Proposal would

    amend this definition in part 5 only to reflect the renumbering of

    section 1a of the Act by the DFA, and add an identically amended

    definition to regulation 1.3. See infra Part II.G.2.

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    Proposed regulation 1.3 also changes certain definitions so that

    the Commission's regulations properly refer to both futures and swaps.

    Additionally, for ease of reference, proposed regulation 1.3 would

    simply adopt several terms defined under the CEA, including

    ``electronic trading facility,'' ``organized exchange,'' and ``trading

    facility.''

    c. Regulation 1.3(ll): Physical

    Regulation 1.3(ll) defines the term ``physical'' as ``any good,

    article, service, right or interest upon which a commodity option may

    be traded in accordance with the Act and these regulations,'' \22\

    which is similar to the ``commodity'' definition in regulation

    1.3(e).\23\ Regulation 1.3(e) defines the

    [[Page 33069]]

    term ``commodity,'' in relevant part, as ``all * * * goods and articles

    * * * and all services, rights and interests in which contracts for

    future delivery are presently or in the future dealt in.'' \24\ The

    word ``physical'' is used in 45 Commission regulations other than

    regulation 1.3(ll).\25\ The introductory text of regulation 1.3 states

    that ``[t]he following terms, as used in the Commodity Exchange Act, or

    in the rules and regulations in this chapter, shall have the meanings

    hereby assigned to them, unless the context otherwise requires.'' \26\

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    \22\ 17 CFR 1.3(ll).

    \23\ 17 CFR 1.3(e).

    \24\ Regulation 1.3(e) tracks 7 U.S.C. 1a(9), as renumbered and

    amended by Dodd-Frank Sections 721(a)(1) and (4), respectively.

    \25\ See 17 CFR 1.3(z)(1), 1.3(kk), 1.17(c)(iii),

    1.17(c)(5)(ii)(A), 1.17(c)(5)(xi), 1.17(j)(1), 1.31(b)(3)(iii)(B),

    1.33(a)(2)(i), 1.33(a)(2)(ii), 1.33(b)(2)(iv), 1.33(b)(3), 1.34(b),

    1.35(b)(2)(iii), 1.35(b)(3)(iii), 1.35(d)(1), 1.35(e), 1.39(a),

    1.39(a)(3), 1.44, 1.44(b), 1.46(a)(iii), 1.46(a)(iv), 4.23(a)(1),

    4.23(b)(1), 4.33(b)(1), 5.13(b)(3), 10.68(b)(1)(i), 15.00(p)(1)(ii),

    16.00(a), 16.01(a), 16.01(b), 18.04(b)(3), 18.04(b)(3)(ii),

    18.04(b)(6), 18.04(b)(6)(ii), 31.8(a)(1), 31.8(a)(2)(iii),

    31.8(a)(2)(iv), 31.9(a), 31.9(a)(1), 32.12(a), 32.13(a),

    32.13(e)(2), 33.4, 33.4(a)(4), 33.4(a)(5)(iv), 33.4(a)(5)(iv)(A),

    33.4(a)(5)(iv)(B), 33.4(a)(5)(iv)(C), 33.4(a)(5)(iv),

    33.4(b)(1)(iii), 33.4(d)(3), 33.7(b), 33.7(b)(1), 33.7(b)(2)(i),

    33.7(b)(5), 33.7(b)(6), 33.7(b)(7)(ii), 33.7(b)(7)(iii),

    33.7(b)(7)(iv), 33.7(b)(7)(v), and 33.7(b)(7)(x); 17 CFR pt. 36 app.

    A (paragraph 3 under PRICE LINKAGE, (c)(3)(ii) under CORE PRINCIPLE

    IV OF SECTION 2(h)(7)(C)--POSITION LIMITATIONS OR ACCOUNTABILITY,

    (c) under TRADING PROCEDURES, (c) under FAIR AND EQUITABLE TRADING,

    (b)(4) under POSITION LIMITATIONS OR ACCOUNTABILITY); 17 CFR

    40.3(a)(4)(ii); 17 CFR pt. 40 app. A Guideline No. 1(a),(c)(2)(ii),

    and (c)(2)(ii)(B); 17 CFR 41.25(c), 41.25(g)(6), 145.7(j),

    147.3(b)(7)(vi), 149.103, 149.150(b)(2), 149.150(d)(1),

    150.3(a)(4)(i)(A), 150.5(b)(1), 150.5(c)(1), and 160.30; 17 CFR pt.

    160 app. B Sample Clause A-7; 17 CFR 190.01(x)(1), 190.01(x)(2),

    190.01(kk)(3), 190.01(kk)(4), 190.01(kk)(5), 190.01(ll),

    190.02(f)(1), 190.05(a)(1), 190.05(b)(1), 190.05(b)(1)(iii),

    190.05(c)(3), 190.07(e)(2)(i), 190.07(e)(2)(ii),

    190.07(e)(2)(ii)(A), and 190.07(e)(2)(ii)(B); 17 CFR pt. 190 app. A,

    Form 1, paragraph 4 and Form 4 (Proof of Claim), paragraphs (c), (d)

    and (e).

    \26\ 17 CFR 1.3 (emphasis added).

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    The ``physical'' definition was first added to regulation 1.3 in

    1983 to enable trading, on DCMs, in options to buy or sell an

    underlying commodity and has not been substantively amended.\27\ In the

    Federal Register release proposing the addition of regulation 1.3(ll),

    the Commission stated that ``[t]he proposed definition is intended to

    be coextensive with the Commission's jurisdiction with respect to

    commodity options.'' \28\ At the time of that proposal in 1982, cash-

    settled futures on non-physical commodities had just been introduced in

    the form of the Chicago Mercantile Exchange's Eurodollar futures. In

    that context, in proposing rules to permit exchange-traded options on

    underlying commodities, it made sense to name such options based on

    physical commodities, which constituted the vast majority of

    commodities covered by then-existing futures contracts.

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

    \27\ See Domestic Exchange-Traded Commodity Options; Expansion

    of Pilot Program To Include Options on Physicals, 47 FR 56996, Dec.

    22, 1982 and 48 FR 12519, Mar. 25, 1983.

    \28\ Domestic Exchange-Traded Commodity Options; Expansion of

    Pilot Program Provisions, 47 FR 28401, June 30, 1982.

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

    At present, however, options may be traded on both physically

    deliverable and non-physically deliverable commodities, such as

    interest rates and temperatures. Using the term ``physical'' to refer

    to an option on both physically deliverable commodities and non-

    physically deliverable commodities may be confusing on its face.\29\

    Also, the requirement in the forward exclusion from the ``swap''

    definition contained in CEA section 1a(47)(B)(ii), as amended by Dodd-

    Frank section 721(a)(21), that a sale of a non-financial commodity or

    security for deferred shipment or delivery ``is intended to be

    physically settled'' would be meaningless if ``physical'' included non-

    physical. As noted above, the introductory text of regulation 1.3

    states that its defined terms have the meanings assigned to them in

    regulation 1.3, unless the context otherwise requires.

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

    \29\ Moreover, the Commission has recently proposed a rewrite of

    its options regulations in parts 32 and 33. References to options on

    a physical would be removed from part 33, which will apply only to

    DCM-traded options on futures. Options on physicals would be

    permitted to transact under revised part 32, which permits all

    options that are swaps under the Dodd-Frank swap definition to

    transact subject to the same rules applicable to any other swap. See

    Commodity Options and Agricultural Swaps, 76 FR 6095, Feb. 3, 2011.

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

    The Commission requests comment on whether any changes to the

    ``physical'' definition are necessary or warranted. Should the

    Commission revise the definition of ``physical'' to limit it to its

    common sense meaning? Should the Commission remove it on the theory

    that the meaning of ``physical'' is self-evident? Should the Commission

    address such issues, if at all, in other rulemakings where they arise

    more directly, such as with respect to emission-related commodities as

    they relate to the forward exclusion from the swap definition? \30\ If

    so, should the Commission replace the term ``physical'' with some other

    more suitable term in the relevant regulations referencing current

    regulation 1.3(ll)? If so, what should the new term be? Should the

    Commission take no action, in reliance on the ability of interested

    parties to interpret the ``unless the context otherwise requires''

    language of regulation 1.3, or on some other basis? \31\

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

    \30\ The Commission received several comment letters regarding

    environmental commodity issues in response to the advance notice of

    proposed rulemaking regarding Definitions Contained in Title VII of

    Dodd-Frank Wall Street Reform and Consumer Protection Act, 75 FR

    51429, Aug. 20, 2010. See Letter from Kyle Danish, Van Ness Feldman,

    P.C., Counsel to the Coalition for Emission Reduction Projects

    (available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26164& SearchText=emission%20reduction); Letter

    from Thomas Huetteman, Chairman, Jeffery C. Fort, Chair, Market

    Oversight Committee, and Jeremy D. Weinstein, Member, Environmental

    Markets Association (available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26166&SearchText=ema); Letter

    from R. Michael Sweeney, Jr., Mark W. Menezes, and David T. McIndoe,

    Hunton & Williams, LLP, on behalf of the Working Group of Commercial

    Energy Firms (available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26219&SearchText=working%20group).

    \31\ In a number of cases (e.g., the reference to ``physical

    safeguards'' in Regulation 160.30 (Procedures to safeguard customer

    records and information); and the reference to ``provide physical

    access to handicapped persons'' in Regulation 149.150 (Program

    accessibility: Existing facilities)), the context will make it

    obvious that the term ``physical'' is meant to have its plain

    meaning.

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

    d. Regulation 1.3(yy): Commodity Interest

    The Commission proposes to add swaps on all commodities within the

    CFTC's jurisdiction to the definition of ``commodity interest'' in

    regulation 1.3(yy).\32\ Commodity interest currently is defined as:

    ``(1) Any contract for the purchase or sale of a commodity for future

    delivery; (2) Any contract, agreement or transaction subject to

    Commission regulation under section 4c or 19 of the Act; and (3) Any

    contract, agreement or transaction subject to Commission jurisdiction

    under section 2(c)(2) of the Act.'' The term ``commodity interest'' is

    cross-referenced by 33 other Commission regulations and appendices to

    parts of Commission regulations.\33\ Generally, the term is meant to

    encompass all agreements, contracts and transactions within the

    Commission's jurisdiction, though not all such agreements, contracts

    and transactions are expressly set forth therein.\34\

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

    \32\ 17 CFR 1.3(yy).

    \33\ See 17 CFR 1.12, 1.56, 1.59, 3.10, 3.12, 3.21, 4.6, 4.7,

    4.10, 4.12- 4.14, 4.22-4.25, 4.30-4.34, 4.36, 4.41, 30.3, 160.3-

    160.5, and 166.1-166.3; 17 CFR pt. 3 app. B, 17 CFR pt. 4 app. A,

    and 17 CFR pt. 190 app. B.

    \34\ For example, the term ``contract for the purchase or sale

    of a commodity for future delivery'' in current regulation

    1.3(yy)(1) encompasses options on futures and security futures

    products. Similarly, the term ``swaps'' if added to proposed

    regulation 1.3(yy) would include mixed swaps. Of course, the impact

    of the scope of proposed regulation 1.3(yy) is only as extensive as

    the other regulations referencing it.

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

    [[Page 33070]]

    The Dodd-Frank Act adds a definition of ``swap'' to the CEA.\35\

    DFA section 712(d) requires the Commission to further define the term

    ``swap'' jointly with the Securities and Exchange Commission.\36\ The

    Commission is proposing to add ``swap'' to the ``commodity interest''

    definition so that the regulations cross-referencing it will apply to

    swaps.

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

    \35\ DFA section 721(a)(47); codified at 7 U.S.C. 1a(47).

    \36\ The Commissions have not yet proposed a further definition

    of the term ``swap.''

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

    2. Regulation 1.4: Use of Electronic Signatures

    The Commission proposes to revise regulation 1.4 \37\ to extend the

    benefit of electronic signatures and other electronic actions to SDs

    and MSPs. Section 731 of the Dodd-Frank Act amends the CEA by adding

    new sections 4s(i)(1), requiring SDs and MSPs to ``conform with such

    standards as may be prescribed by the Commission by rule or regulation

    that relate to timely and accurate confirmation, processing, netting,

    documentation, and valuation of all swaps,'' \38\ and 4s(i)(2),

    requiring the Commission to adopt rules ``governing documentation

    standards for swap dealers and major swap participants.'' \39\

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

    \37\ 17 CFR 1.4.

    \38\ 7 U.S.C. 6s(i)(1).

    \39\ 7 U.S.C. 6s(i)(2).

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

    Pursuant to the foregoing authority, the Commission previously

    proposed new regulation 23.501(a)(1), which would require ``[e]ach swap

    dealer and major swap participant entering into a swap transaction with

    a counterparty that is a swap dealer or major swap participant [to]

    execute a confirmation for the swap transaction,'' according to a

    specified schedule.\40\ Also pursuant to the foregoing authority, the

    Commission has proposed new regulation 23.501(a)(2), which would

    require ``[e]ach swap dealer and major swap participant entering into a

    swap transaction with a counterparty that is not a swap dealer or a

    major swap participant [to] send an acknowledgment of such swap

    transaction,'' according to a specified schedule.\41\ Proposed

    regulation 23.500(a) would define such an ``acknowledgment'' as ``a

    written or electronic record of all of the terms of a swap signed and

    sent by one counterparty to the other.'' \42\ In issuing the proposed

    confirmation and acknowledgment rules cited above, the Commission

    explained that ``[w]hen one party acknowledges the terms of a swap and

    its counterparty verifies it, the result is the issuance of a

    confirmation.'' \43\

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

    \40\ Confirmation, Portfolio Reconciliation, and Portfolio

    Compression Requirements for Swap Dealers and Major Swap

    Participants, 75 FR 81519, Dec. 28, 2010.

    \41\ Id.

    \42\ Id.

    \43\ 75 FR at 81522.

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

    Regulation 1.4 currently provides that an FCM, IB, CPO and CTA

    receiving an electronically signed document is in compliance with

    Commission regulations requiring signed documents, provided that such

    entity generally accepts electronic signatures.\44\ The rationale for

    allowing the existing entities listed in regulation 1.4 to use

    electronic signatures (i.e., ``[a]s part of [the Commission's] ongoing

    efforts to facilitate the use of electronic technology and media'')

    \45\ applies equally to SDs and MSPs. Therefore, the Commission

    proposes to add SDs and MSPs to the list of entities covered by

    regulation 1.4 and to amend its structure to account for the provisions

    of the Commission's proposed confirmation and acknowledgement

    obligations discussed above.\46\

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

    \44\ 17 CFR 1.4. The regulation also requires that the

    signatures in question comply with applicable Federal laws and

    Commission regulations, and requires the relevant entity to employ

    reasonable safeguards regarding the use of electronic signatures,

    including safeguards against alteration of the record of the

    electronic signature. Id.

    \45\ Use of Electronic Signatures by Customers, Participants and

    Clients of Registrants, 64 FR 47151, Aug. 30, 1999.

    \46\ This includes proposing a change to the title of regulation

    1.4 to reflect these changes. Proposed regulation 1.4 is entitled

    ``Use of electronic signatures, acknowledgments and verifications.''

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

    3. Regulation 1.31: Books and Records; Keeping and Inspection

    In recent years, the phrase ``books and records'' has evolved with

    respect to the varying formats used to communicate and store

    information.\47\ The Federal Rules of Civil Procedure have been revised

    to reflect this evolution by requiring producing parties to produce

    electronically stored information as specified in the request, but if

    not so specified, then as they are kept in the normal course of

    business or in a reasonably usable form.\48\ Similarly, the

    Commission's own data delivery standards, which accompany the

    Commission's requests for production, indicate a preference for

    requested electronic information to be produced in native file format.

    The Commission's delivery standards provide technical instructions to

    producers designed to enable the Commission to receive such information

    in a machine-readable format that is compatible with the technology

    used by the Commission.

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

    \47\ U.S. Commodity Futures Trading Commission, Division of

    Market Oversight, Advisory for Futures Commission Merchants,

    Introducing Brokers, and Members of a Contract Market over

    Compliance with Recordkeeping Requirements, Feb. 5, 2009 (http://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/recordkeepingdmoadvisory0209.pdf) [hereinafter Recordkeeping

    Advisory].

    \48\ Fed. R. Civ. P. 34(b)(2)(E); Fed. R. Civ. P. 34, advisory

    committee note, 2006 amendment (``Rule 34(b) provides that a party

    must produce documents as they are kept in the usual course of

    business or must organize and label them to correspond with the

    categories in the discovery request. The production of

    electronically stored information should be subject to comparable

    requirements to protect against deliberate or inadvertent production

    in ways that raise unnecessary obstacles for the requesting

    party'').

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

    Recognizing that storage formats vary across different types of

    electronically stored information and to be consistent with current

    Commission practice and the Federal Rules of Civil Procedure, the

    proposed changes to regulations 1.31(a)(1), (a)(2), and (b) would

    require that: (1) All books and records required to be kept by the Act

    or by the Commission's regulations be kept in their original (for paper

    records) or native file format (for electronic records); and (2)

    production of such records be made in a form specified by the

    Commission. In addition, as provided in the existing regulation, books

    and records may continue to be stored on electronic storage media,

    provided, however, that for electronic records, the storage media must

    preserve the native file format of the electronic records.

    Keeping electronic records in their native file format and

    producing them in a format designated by the Commission should not

    create any unreasonable burdens on persons required to maintain records

    under the Act and Commission regulations in light of Federal Rule of

    Civil Procedure 34(b), which would apply to such persons--and all other

    persons in possession of investigatory information--upon the filing of

    an enforcement action in Federal district court. Rule 34(b) permits the

    requesting party to designate the form or forms in which it wants

    electronically stored information produced in order to facilitate its

    usability. This is recognition that ``the form of production is more

    important to the exchange of electronically stored information than of

    hard-copy materials.''\49\

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

    \49\ Fed. R. Civ. P. 34, advisory committee note, 2006

    amendment.

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

    The Commission also proposes amendments to regulation 1.31 to

    incorporate two books and records obligations that proposed regulation

    23.203(b) applies to SDs and MSPs. Proposed regulation 23.203(b) would

    require SDs and MSPs to (1) keep

    [[Page 33071]]

    records of swap or related cash or forward transactions until the

    termination, maturity, expiration, transfer, assignment, or novation

    date of the transaction and for a period of five years after such date;

    and (2) make such records available for inspection not only by the

    Commission and the United States Department of Justice, but also to any

    applicable prudential regulator, as that term is defined in section

    1a(39) of the Act, or, in connection with security-based swap

    agreements described in section 1a(47)(A)(v) of the Act, the United

    States Securities and Exchange Commission. By contrast, existing

    regulation 1.31, which pertains to ``all books and records required to

    be kept by the Act,'' requires that records be kept for five years and

    that they be made available only to the Commission and the Department

    of Justice.\50\ The Proposal would add to regulation 1.31 the special

    requirements for swaps and cash related transactions in proposed

    regulation 23.203(b).

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

    \50\ 17 CFR 1.31(a) (emphasis added).

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

    The Commission solicits comments on the potential costs and effects

    of the proposed new requirement that all books and records be

    maintained in their original form (for paper) and their native file

    format (for electronic records) as provided in the proposed rule.

    Comment also is requested regarding whether the retention period for

    any communication medium (e.g., oral communications) should be shorter

    than the retention period applicable to other required records. In this

    regard, the Commission requests that commenters specify what the

    proposed retention period should be and why.

    4. Regulation 1.33: Monthly and Confirmation Statements

    Regulation 1.33 requires FCMs to maintain certain records and to

    regularly furnish monthly and confirmation statements to customers

    regarding commodity futures and option transactions they have entered

    into on behalf of customers. The DFA amended the definition of FCM in

    section 1a of the CEA to authorize an FCM to solicit or accept orders

    for swaps in addition to commodity futures and option transactions.\51\

    Therefore, the Commission proposes adding requirements for monthly and

    confirmation statements applicable to swaps.

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

    \51\ DFA section 721(a)(13).

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

    Proposed regulation 1.33(a)(3) describes what information on swap

    positions an FCM must provide in monthly statements to its customers.

    Proposed regulation 1.33(b)(2) would extend the requirement that an FCM

    furnish confirmation statements to customers to swaps executed on a

    customer's behalf and describes what information such a confirmation

    statement must contain. In addition, the Commission proposes to amend

    regulation 1.33 to reflect proposed changes to the definitions of the

    terms ``commodity interest,'' ``customer,'' and ``open contract'' in

    regulation 1.3.

    5. Regulation 1.35: Records of Cash Commodity, Futures and Option

    Transactions

    The Commission proposes to amend regulation 1.35 in several

    respects. First, the Commission proposes to revise paragraph (a) such

    that this regulation's recordkeeping obligations would extend to trades

    executed by FCMs and IBs on SEFs. Those obligations currently apply

    only to trades executed on DCMs. Similarly, the proposed amendments

    would extend all of the regulation 1.35 recordkeeping obligations

    currently applicable to members of DCMs to include ``members,'' as that

    term is proposed to be defined in proposed regulation 1.3, of SEFs.

    Second, the proposed revisions replace the terms ``commodity

    futures transactions,'' ``retail forex exchange transactions,'' and

    ``commodity option transactions'' with the term ``commodity

    interests.'' According to the Commission's proposed definition of

    ``commodity interest'' in regulation 1.3, ``commodity interest''

    includes all of the aforementioned transactions as well as swaps. Thus,

    the Commission proposes that regulation 1.35's recordkeeping

    obligations for transactions in futures, commodity options, and retail

    forex exchange transactions also apply to swaps.\52\ Pursuant to the

    Dodd-Frank Act, DCMs are permitted to list swaps, and FCMs and IBs are

    permitted to execute swaps on behalf of customers.\53\

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

    \52\ Accordingly, the Commission also proposes to amend the

    title of regulation 1.35 to reflect such a change. Therefore,

    proposed regulation 1.35 is entitled ``Records of commodity interest

    and cash commodity transactions.''

    \53\ See 7 U.S.C. 1a(28) and 1a(31), as amended by DFA sections

    721(a)(13) and (a)(15), respectively.

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

    In relevant part, existing regulation 1.35 requires FCMs, IBs, and

    DCM members to ``keep full, complete, and systematic records, together

    with all pertinent data and memoranda, of all transactions relating to

    [their] business of dealing in commodity futures, commodity options and

    cash commodities,'' subject to the requirements of regulation 1.31.

    Specifically included among the records to be retained under regulation

    1.35 are ``all orders (filled, unfilled, or canceled), trading cards,

    signature cards, street books, journals, ledgers, canceled checks,

    copies of confirmations, copies of statements of purchase and sale, and

    all other records, data and memoranda'' that have been prepared in the

    course of an FCM's, an IB's, or a DCM member's business of dealing in

    commodity futures, commodity options, and cash commodities.

    On February 5, 2009, the Commission's Division of Market Oversight

    (``DMO'') issued an advisory stating that ``[t]he Commission's

    recordkeeping regulations, by their terms, do not distinguish between

    whatever medium is used to record the information covered by the

    regulations, including emails, instant messages, and any other form of

    communication created or transmitted electronically.'' \54\ Thus, the

    advisory made clear that the existing language of regulation 1.35

    ``appl[ies] to records that are created or retained in an electronic

    format, including email, instant messages, and other forms of

    communication created or transmitted electronically for all trading.''

    \55\ Accordingly, under the Commission's existing regulations, FCMs,

    IBs, and DCM members are required to retain and produce for inspection

    any such electronic records, subject to the retention and accessibility

    requirements set forth in regulation 1.31.

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

    \54\ See Recordkeeping Advisory, supra note 47, at 3.

    \55\ Id. at 4.

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

    Notwithstanding the DMO advisory relating to certain electronic

    records, the Commission's existing recordkeeping requirements, as they

    relate to FCMs, IBs and DCM members, remain limited by a 1996

    Commission decision, Gilbert v. Lind-Waldock & Co., wherein audio tapes

    of telephone conversations with customers were found to be beyond the

    definition of ``records'' covered by regulation 1.35.\56\

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

    \56\ [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ]

    26,720 at 43,992 n.23 (CFTC June 17, 1996).

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

    Consequently, where Commission-regulated persons use oral

    communications, the Commission has encountered greater difficulties in

    effectively exercising its enforcement responsibilities, thereby

    increasing the potential for market abuses. Such difficulties have been

    particularly acute in cases where the Commission is required to

    establish a threshold level of knowledge and/or intent on the part of

    the actor, such as cases involving market manipulation and false

    reporting. The Commission's enforcement success in such cases often has

    correlated directly with the

    [[Page 33072]]

    existence of high-quality recordings of voice communications between

    the persons involved. Conversely, the Commission's enforcement

    capabilities have been limited in cases where such voice recordings

    were not available.

    Significant technological advancements in recent years,

    particularly with respect to the cost of capturing and retaining copies

    of electronic material, including telephone communications, have made

    the prospect of enhancing the Commission's recordkeeping requirements

    for oral communications more economically feasible and systemically

    prudent. Evidence of these trends was examined in March 2008 by the

    United Kingdom's Financial Services Authority (``FSA''), which studied

    the issue of mandating the recording and retention of voice

    conversations and electronic communications. The FSA issued a Policy

    Statement detailing its findings and ultimately implemented rules

    relating to the recording and retention of such communications,

    including a rule requiring all financial service firms to record any

    relevant communication by employees on their firm-issued or firm-

    sanctioned cell phones that will take effect on November 14, 2011.\57\

    Similar rules that mandate recording of certain voice and/or telephone

    conversations have been promulgated by the Hong Kong Securities and

    Futures Commission \58\ and by the Autorit[eacute] des March[eacute]s

    Financiers in France,\59\ and have been recommended by the

    International Organization of Securities Commissions (``IOSCO'').\60\

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

    \57\ Financial Services Authority, ``Policy Statement: Telephone

    Recording: recording of voice conversations and electronic

    communications'' (Mar. 2008); Financial Services Authority,

    ``Taping: Removing the mobile phone exemption,'' (Mar. 2010);

    Financial Services Authority, ``Policy Statement: Taping of Mobile

    Phones: Feedback on CP 10/7 and Final Rules,'' (Nov. 2010).

    \58\ Code of Conduct for Persons Licensed by or Registered with

    the Securities and Futures Commission para. 3.9 (2010) (H.K.).

    \59\ General Regulation of the Autorit[eacute] des

    March[eacute]s Financiers art. 313-51 (2010) (Fr.).

    \60\ Press Release, International Organization of Securities

    Commissions, ``IOSCO Publishes Recommendations to Enhance Commodity

    Futures Markets Oversight,'' (Mar. 5, 2009), http://www.iosco.org/news/pdf/IOSCONEWS137.pdf. The IOSCO members on the committee

    formulating the recommendations included Brazil, Canada (Ontario and

    Quebec), Dubai, France, Germany, Hong Kong, Italy, Japan, Norway,

    Switzerland, the United Kingdom, and the United States.

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

    Under the FSA rules, firms (identified generally as those entities

    conducting any of the following activities: receiving, executing,

    arranging for execution of customer orders or transactions carried out

    on behalf of the firm) must take reasonable steps to record relevant

    (relevant means conversations or communications between the firm and

    the client or when the firm is acting on behalf of a client with

    another person) telephone conversations (including mobile telephones)

    and keep a copy of relevant electronic communications that enable the

    referenced activities to be carried out. Firms are required to keep

    recordings of certain telephone lines for a period of at least six

    months in a medium that is readily accessible.

    In promulgating this rule, the FSA issued guidance stating the

    following benefits: ``i) recorded communication may increase the

    probability of successful enforcement; ii) this reduces the expected

    value to be gained from committing market abuse; and iii) this, in

    principle, leads to increased market confidence and greater price

    efficiency.'' In determining its policy, the FSA conducted a cost-

    benefit analysis, including eight meetings with several trade

    associations including the Securities Industry and Financial Markets

    Association (``SIFMA''), the International Swaps and Derivatives

    Association (``ISDA''), and the Futures and Options Association

    (``FOA''). The FSA report estimated that 80% of telephone lines of its

    firms that would need to be recorded were already being recorded at the

    time of its study.\61\

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

    \61\ See Financial Services Authority, ``Policy Statement:

    Telephone Recording: recording of voice conversations and electronic

    communications'' (Mar. 2008); Financial Services Authority,

    ``Taping: Removing the mobile phone exemption'' (Mar. 2010);

    Financial Services Authority, ``Policy Statement: Taping of Mobile

    Phones: Feedback on CP 10/7 and Final Rules'' (Nov. 2010).

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

    Indeed, the futures industry has imposed a requirement on certain

    of its member firms to tape telephone conversations with customers

    since 1997. Since then, the National Futures Association (``NFA'') has

    required member firms with more than a certain percentage of APs who

    have been disciplined to record all telephone conversations between the

    member's APs and both existing and potential customers for a period of

    two years. Those recordings must be retained for a period of five years

    from the date each tape is created, and the tapes shall be readily

    accessible during the first two years of the five year period.\62\ A

    similar rule exists in the securities industry.\63\

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

    \62\ See Interpretative Notice to NFA Compliance Rule 2-9,

    Supervision of Telemarketing Activity, 9021 (Feb. 18, 1997).

    \63\ See NASD Rule 3010, Supervision (the procedures required by

    this rule include tape-recording all telephone conversations between

    the member's registered persons and both existing and potential

    customers. All tape recordings made pursuant to the requirements of

    this paragraph shall be retained for a period of not less than three

    years from the date the tape was created, the first two years in an

    easily accessible place).

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

    Consistent with these developments, the proposed change to

    regulation 1.35(a) would explicitly require FCMs, RFEDs, IBs and

    members of DCMs and SEFs to record all oral communications that lead to

    the execution of transactions in a commodity interest or cash

    commodity. In addition to increasing consistency across regulatory

    regimes, this proposal would harmonize regulation 1.35 with the

    recordkeeping requirements proposed for SDs and MSPs under the Dodd-

    Frank Act.\64\ The proposed amendments to regulation 1.35 would require

    that the recorded communications be identifiable by counterparty and

    transaction. As noted above, one of the proposed revisions to

    regulation 1.31 would require that each recorded communication be

    maintained in its native file format and produced in a form specified

    by any Commission representative. Records of these communications may

    continue to be stored on electronic storage media, provided, however,

    that for electronic records, the storage media must preserve the native

    file format of the electronic records. Records must be maintained for a

    period of five years and shall be readily accessible for the first two

    years of that five-year period.

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

    \64\ See Reporting, Recordkeeping, and Daily Trading Records

    Requirements for Swap Dealers and Major Swap Participants, 75 FR

    7666, Dec. 9, 2010 (Proposed regulation 23.202(a)(1) would require

    ``[e]ach swap dealer and major swap participant [to] make and keep

    pre-execution trade information, including, at a minimum, records of

    all oral and written communications provided or received concerning

    quotes, solicitations, bids, offers, instructions, trading, and

    prices, that lead to the execution of a swap, whether communicated

    by telephone, voicemail, facsimile, instant messaging, chat rooms,

    electronic mail, mobile device or other digital or electronic

    media'').

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

    The Commission solicits comments on the potential costs and

    benefits of requiring registrants to record and maintain oral

    communications as provided in the proposed rule.\65\

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

    \65\ The Commission has received several comments on the costs

    and benefits associated with its proposed regulation 23.202 Daily

    Trading Records (Reporting, Recordkeeping, and Daily Trading Records

    Requirements for Swap Dealers and Major Swap Participants, 75 FR

    76666, Dec. 9, 2010) and will consider those comments in connection

    with these proposed rules. The comments are available on the

    Commission's Web site at http://www.cftc.gov.

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

    As part of the ministerial amendments proposed in this release, the

    Commission is proposing to renumber portions of regulation 1.35 so that

    paragraphs currently numbered 1.35(a-1) and 1.35(a-2) will be

    renumbered 1.35(b) and 1.35(c), respectively. As a result, paragraphs

    currently numbered 1.35(b), (c), (d) and (e) will be

    [[Page 33073]]

    renumbered 1.35(d), (e) (f) and (g), respectively.

    Because proposed regulation 1.35 extends recordkeeping obligations

    to swaps, the Commission has proposed special language for swaps, where

    appropriate. In paragraph (b)(2) (proposed (d)(2)) (records of futures,

    commodity options, and retail forex exchange transactions for each

    account), the Commission has proposed adding provision (iv). Proposed

    regulation 1.35(d)(2)(iv) would require FCMs, IBs, and any clearing

    members clearing swaps executed on a DCM or SEF to maintain records

    describing the date, price, quantity, market, commodity, and, if

    cleared, DCO of each swap.

    The Commission recognizes that money managers currently execute

    bunched swap orders on behalf of clients and allocate the trades to

    individual clients post-execution. The Commission believes that the

    bunched order procedures currently applicable to futures can be adapted

    for use in swap trading. Therefore, the Commission proposes to amend

    subsection (a-1)(5) (proposed (b)(5)), which addresses post-execution

    allocation of bunched orders. As discussed below, the Commission also

    is proposing to delete appendix C to part 1, which predated regulation

    1.35(a-1)(5) (proposed (b)(5)) and also addresses bunched orders.

    In order to have a single standard for all intermediaries that

    might have discretion over customer accounts, the Commission is

    proposing to include FCMs and IBs as eligible account managers in

    regulation 1.35(a-1)(5) (proposed (b)(5)). Unlike other account

    managers, however, FCMs and IBs are prohibited from including

    proprietary trades in a bunched order with customer trades.

    Accordingly, the Commission is proposing to add a cross-reference in

    regulation 1.35(a-1)(5) (proposed (b)(5)) to regulations 155.3 and

    155.4, which impose that restriction on FCMs and IBs, respectively. The

    Commission requests comment on whether the proposal to add FCMs and IBs

    to the list of eligible account managers is appropriate.

    The Commission further proposes to amend regulation 1.35(a-1)

    (proposed (b)) to provide that specific customer account identifiers

    need not be included in confirmations or acknowledgments provided

    pursuant to proposed regulation 23.501(a), if the requirements of

    regulation 1.35(a-1)(5) (proposed (b)(5)) are met. This would enable

    account managers to bunch orders for trades executed bilaterally with

    SDs or MSPs. The proposal would require that, similar to the current

    procedure for futures, the allocation be completed by the end of the

    day of execution and provided to the counterparty. The Commission

    requests comment on whether the proposed procedures for handling

    bunched swap orders would be effective. In particular, the Commission

    requests comment on whether allocation can be conducted by the end of

    the day of execution.

    The Commission proposes deleting paragraphs (f)-(l) of regulation

    1.35. Pursuant to the CFMA, regulation 38.2 required DCMs to comply

    with an enumerated list of Commission regulations, and exempted them

    from all remaining Commission regulations that were no longer

    applicable post-CFMA.\66\ Paragraphs (f)-(l) of regulation 1.35 are not

    among those enumerated regulations still applicable to DCMs and,

    therefore, have been moot since regulation 38.2 took effect.

    Regulations 1.35(f)-(l) required contract markets: To identify floor

    brokers, floor traders, and clearing members in a certain manner; to

    keep records indicating the time of trade executions in a certain

    manner; to maintain records of changes in the price of transactions; to

    demonstrate their effectiveness in complying with recordkeeping

    obligations; and to create rules imposing certain recordkeeping

    requirements on contract market members. The DCM Core Principles

    proposal in December 2010 substantially revised part 38, but did not

    revoke regulation 38.2.\67\

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

    \66\ See 71 FR 1964, Jan. 12, 2006.

    \67\ Core Principles and Other Requirements for Designated

    Contract Markets, 75 FR 80572, Dec. 22, 2010.

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

    As part of the ministerial amendments proposed in this release, the

    Commission is proposing to eliminate from the Commission's regulations

    any provisions that have been inapplicable to DCMs since the passage of

    the CFMA, and that remain inapplicable after the passage of the DFA.

    Paragraphs (f)-(l) of regulation 1.35 are among those provisions.

    Pursuant to the proposed removal of paragraph (j) of regulation 1.35,

    the Commission also proposes copying most of that provision into

    proposed subsection (d)(7)(i) (currently (b)(7)(i)).

    Finally, the Commission proposes the following technical correction

    to regulation 1.35(b)(3)(v) (proposed (d)(3)(v)): that the final

    sentence reference ``commodity futures, retail forex, commodity option,

    or swap books and records'' instead of ``commodity retail forex or

    commodity option books and records.''

    6. Regulation 1.37: Customer's or Option Customer's Name, Address, and

    Occupation Recorded; Record of Guarantor or Controller of Account

    Dodd-Frank Act section 723(a)(3) added a new section 2(h)(8) to the

    CEA to require, among other things, that swaps subject to the clearing

    requirement of CEA section 2(h)(1) be executed either on a DCM or on a

    SEF. The DFA established SEFs as a new category of regulated markets

    for the purpose of trading and executing swaps.\68\ Because SEFs are

    now regulated markets under the CEA, many of the Commission's existing

    regulatory provisions that currently are applicable to DCMs also will

    become applicable to SEFs.

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

    \68\ Section 723(a)(3) of the Dodd-Frank Act amends section 2(h)

    of the CEA, providing that with respect to transactions involving a

    swap subject to the clearing requirement of section 2(h)(1) of the

    CEA, counterparties must execute the transaction on a DCM or a SEF.

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

    Accordingly, the Commission proposes to amend paragraphs (c) and

    (d) of regulation 1.37, pertaining to recording foreign traders' and

    guarantors' names, addresses, and business information. Currently,

    these provisions apply to DCMs and futures and options contracts

    executed on those facilities. The proposed revision would amend the

    provisions to also include SEFs and swap transactions. Additionally,

    the Commission proposes to amend the title and remaining text of

    regulation 1.37 to reflect the proposed removal of the term ``option

    customer.'' \69\

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    \69\ See supra note 15 and accompanying text.

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

    7. Regulation 1.39: Simultaneous Buying and Selling Orders of Different

    Principals; Execution of, for and Between Principals

    Like regulation 1.37, the Commission is proposing to amend

    regulation 1.39 to apply it to SEFs and swaps. Regulation 1.39, which

    currently applies to members of contract markets, governs the

    simultaneous execution of buy and sell orders of different principals

    for the same commodity for future delivery by a member and permits the

    execution of such orders between such principals on a contract market.

    The Commission proposes to amend this provision to include eligible

    contract participants (``ECPs'') on SEFs and registrants, and to

    include swap transactions. The Commission is also amending paragraph

    (c) to eliminate the reference to ``cross trades'' as they are no

    longer defined under section 4c(a) of the Act, as amended by the DFA.

    [[Page 33074]]

    8. Regulation 1.40: Crop, Market Information Letters, Reports; Copies

    Required

    Regulation 1.40 requires FCMs, RFEDs, IBs and members of contract

    markets to furnish to the Commission certain information they publish

    or circulate concerning crop or market information affecting prices of

    commodities. The Commission is proposing to apply regulation 1.40 to

    ECPs trading on SEFs to the extent that such ECPs have trading

    privileges on the SEF. ECPs that do not have trading privileges on a

    SEF would not be subject to regulation 1.40. The amendments also update

    the forms of communication covered by the regulation by replacing the

    word ``telegram'' with ``telecommunication.''

    9. Regulation 1.59: Activities of Self-Regulatory Employees, Governing

    Board Members, Committee Members and Consultants

    The Commission proposes to amend regulation 1.59 to include SEFs

    and swaps. The Commission is also proposing to amend regulation 1.59(b)

    to correct certain cross-references to the Act and its regulations.

    Paragraph (c) of proposed regulation 1.59 has been revised to apply

    only to registered futures associations, as the prohibitions contained

    therein applicable to the other SROs already are addressed in proposed

    regulation 40.9.

    10. Regulation 1.63: Service on Self-Regulatory Organization Governing

    Boards or Committees by Persons With Disciplinary Histories

    The Commission is proposing to amend regulation 1.63 to correct

    certain cross-references to the Act and its regulations. The Commission

    also is proposing to amend paragraph (d) to incorporate the posting of

    notices required under that paragraph on each SRO's Web site.

    11. Regulation 1.67: Notification of Final Disciplinary Action

    Involving Financial Harm to a Customer

    Regulation 1.67 requires contract markets, upon taking any final

    disciplinary action involving a member causing financial harm to a non-

    member, to provide notice to the FCM that cleared the transaction. FCMs

    and other registrants on SEFs should also be notified of any

    disciplinary action involving transactions on a SEF they executed for

    ECPs. Accordingly, the Commission is proposing to amend regulation 1.67

    to include SEFs, registrants and ECPs on such facilities.

    12. Regulation 1.68: Customer Election Not To Have Funds, Carried by a

    Futures Commission Merchant for Trading on a Registered Derivatives

    Transaction Execution Facility, Separately Accounted for and Segregated

    The Commission proposes to remove regulation 1.68. Regulation 1.68

    permits a customer of an FCM to allow the FCM to not separately account

    for and segregate such customer's funds if, among other things, such

    funds are being carried by the FCM to trade on or through the

    facilities of a DTEF, a category of trading organization added to the

    CEA by section 111 of the CFMA.\70\ No DTEF has ever registered with

    the Commission. Furthermore, section 734 of the Dodd-Frank Act repeals

    the DTEF provisions in the CEA, effective July 15, 2011. Therefore,

    because the statutory provisions underpinning regulation 1.68 will be

    repealed, the Commission proposes to remove it from the Commission's

    regulations.\71\

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

    \70\ Public Law 106-554, 114 Stat. 2763, app. E (2000) (codified

    at CEA section 5a, 7 U.S.C. 7a).

    \71\ The Commission is also proposing to delete all other

    references to DTEFs, except those already removed by other

    proposals, throughout its regulations. See infra Part II.G.

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

    13. Regulations 1.44, 1.53, and 1.62--Deletion of Regulations

    Inapplicable to Designated Contract Markets

    The CFMA adopted core principles for DCMs.\72\ On August 10, 2001,

    the Commission published final rules implementing provisions of the

    CFMA, in which it concluded that the CFMA's framework effectively

    constituted a broad exemption from many of the existing regulations

    applicable to DCMs.\73\ In implementing the provisions of the CFMA, the

    final rule exempted DCMs from such regulations. Specifically, the final

    rule codified regulation 38.2, which required DCMs to comply with an

    enumerated list of Commission regulations, and exempted them from all

    remaining Commission regulations no longer applicable post-CFMA. As

    part of the ministerial amendments proposed in this release, the

    Commission is proposing to eliminate from the Commission's regulations

    any provisions that have been inapplicable to DCMs since the CFMA was

    enacted and that remain inapplicable after enactment of the DFA.

    Accordingly, the Commission proposes to eliminate the following

    regulations: Regulation 1.44 (Records and reports of warehouses,

    depositories, and other similar entities; visitation of premises),

    regulation 1.53 (Enforcement of contract market bylaws, rules,

    regulations, and resolutions), and regulation 1.62 (Contract market

    requirement for floor broker and floor trader registration).

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

    \72\ Public Law 106-554, 114 Stat. 2763 (2000).

    \73\ A New Regulatory Framework for Trading Facilities,

    Intermediaries and Clearing Organizations, 66 FR 42256, Aug. 10,

    2001.

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

    14. Appendix C to Part 1: Bunched Orders and Account Identification

    The Commission proposes to eliminate appendix C to part 1. Appendix

    C consists of a Commission Interpretation regarding certain account

    identification requirements pertaining to the practice of combining

    orders for different accounts into a single order book, referred to as

    bunched orders. The procedures for bunched orders are set forth in

    regulation 1.35(a-1)(5). Accordingly, the procedures under appendix C

    to part 1 are duplicative and no longer necessary.

    B. Part 7

    The Commission is proposing to rename part 7 of the Commission's

    regulations ``Registered Entity Rules Altered or Supplemented by the

    Commission,'' thus reflecting the language in section 8a(7) of the Act,

    as amended by the Dodd-Frank Act, which provides the basis for Part 7.

    The Commission is also proposing to make a similar change in regulation

    7.1, replacing contract market rules with registered entity rules.

    Finally, the Commission is proposing to remove and reserve subparts B

    (Chicago Mercantile Exchange Rules) and C (Board of Trade of the City

    of Chicago Rules) and their associated sections.

    C. Part 8

    The Commission proposes to remove part 8 of its regulations.\74\ As

    part of its implementation of the Dodd-Frank Act, on December 1, 2010,

    the Commission issued a comprehensive NPRM for DCMs.\75\ In the NPRM,

    the Commission proposed regulations in ``Subpart N--Disciplinary

    Procedures'' of part 38 to amend the disciplinary procedure

    requirements applicable to DCMs.\76\ Several of the proposed

    regulations in

    [[Page 33075]]

    subpart N of part 38 are similar to the text of the disciplinary

    procedures found in part 8 of the Commission's regulations.\77\

    Although the Commission noted in the DCM NPRM that the proposed

    disciplinary procedures propose new disciplinary procedures for

    inclusion in part 38, the Commission proposes to remove part 8 from its

    regulations to avoid any confusion that could result from those

    regulations containing two sets of exchange disciplinary

    procedures.\78\ The effective date of any deletion of these part 8

    regulations would be contemporaneous with the effective date of any

    changes to the part 38 regulations.

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

    \74\ Regulation 38.2 exempts designated contract markets from

    all Commission rules not specifically reserved. 17 CFR 38.2. The

    Part 8 rules were not reserved.

    \75\ Core Principles and Other Requirements for Designated

    Contract Markets, 75 FR 80572, Dec. 22, 2010.

    \76\ 75 FR at 80597. Section 735(a) of the Dodd-Frank Act

    eliminates all DCM designation criteria, including Designation

    Criterion 6 (Disciplinary Procedures). Section 735(b) of the Dodd-

    Frank Act creates a new Core Principle 13 (Disciplinary Procedures)

    that is devoted exclusively to exchange disciplinary proceedings,

    and captures disciplinary concepts inherent in both Designation

    Criterion 6 and in current DCM Core Principle 2.

    \77\ Paragraph (b)(4) of the acceptable practices for former

    Core Principle 2 referenced part 8 of the Commission's regulations

    as an example that DCMs could follow to comply with Core Principle

    2. 17 CFR pt. 38, app. B, Acceptable Practices for Core Principle 2

    at (b)(4). In its experience, the Commission has found that many

    DCMs' disciplinary programs do in fact model their disciplinary

    structures and processes on part 8.

    \78\ 75 FR at 80597.

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

    D. Parts 15, 18, 21, and 36

    The Commission also proposes to incorporate changes into parts 15,

    18, 21, and 36 of its regulations to account for (1) the DFA's

    elimination of two categories of exempt markets, exempt commercial

    markets (``ECMs'') and electronic boards of trade (``EBOTs''); and (2)

    the DFA's grandfather relief provisions for such entities.

    Section 723 of the DFA strikes CEA section 2(h), thus eliminating

    the ECM category. Section 734 of the DFA strikes CEA section 5d, thus

    eliminating the EBOT category. Section 734 also strikes CEA section 5a,

    thus eliminating the DTEF category of regulated markets effective July

    15, 2011, as discussed above.

    Both sections 723 and 734 of the Dodd-Frank Act contain grandfather

    provisions whereby ECMs and EBOTs may petition the Commission to

    continue to operate as ECMs and EBOTs. Pursuant to the grandfather

    provisions, in September 2010, the Commission issued orders regarding

    the treatment of such grandfather petitions (the ``Grandfather Relief

    Orders'').\79\ Under the Grandfather Relief Orders, the Commission may,

    subject to certain conditions, provide relief to ECMs and EBOTs for up

    to one year.

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

    \79\ 75 FR 56513, Sept. 16, 2010.

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

    Pursuant to the DFA and the Grandfather Relief Orders, the

    Commission proposes to remove from parts 15, 18, 21 and 36 \80\

    references to CEA sections 2(h) and 5d and to replace those references,

    where appropriate, with references to the Grandfather Relief Orders as

    the authority under which ECMs and EBOTs can continue to operate. The

    Commission also proposes to remove from parts 15, 18, 21, and 36 of its

    regulations references to CEA sections 2(d), 2(g), and 5a, as well as

    references to DTEFs.

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

    \80\ Part 36 provisions apply to ECMs and EBOTs. The Commission

    is not proposing to delete part 36 in its entirety because part 36

    provisions will continue to apply to ECMs and EBOTs that continue to

    operate under the Grandfather Relief Orders.

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

    E. Parts 41, 140, and 145

    The Commission also proposes to incorporate changes into its

    regulations to account for other new categories of registered entities

    and to include new products now subject to Commission jurisdiction.

    Section 733 of the Dodd-Frank Act added new section 5h to the CEA and

    created SEFs. Section 728 of the Dodd-Frank Act added new section 21 to

    the CEA and created SDRs. SEFs will allow for the trading and clearing

    of swap transactions between ECPs, as that term is defined in CEA

    section 1a(18).\81\ In addition to the amendments contained in proposed

    part 37, the Commission is proposing additional amendments throughout

    the regulations to include SEFs and SDRs where necessary. The

    Commission also proposes to delete from part 41 references to DTEFs as

    that term was deleted from CEA section 5b by the Dodd-Frank Act,

    effective July 15, 2011.\82\

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

    \81\ For a detailed discussion of the proposed rules as they

    directly relate to SEFs, see 76 FR 1214, Jan. 7, 2011.

    \82\ Section 5b of the CEA provided for the registration of

    DTEFs. Although secondary references to DTEFs remain in the act,

    none of those would enable an entity to commence operations as a

    DTEF. The proposed deletions are in regulations 41.2, 41.12, 41.13,

    41.21-41.25, 41.27, 41.43 and 41.49.

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

    The proposed changes throughout parts 140 (Organization, Functions

    and Procedures of the Commission) and 145 (Commission Records and

    Information) reflect the need to incorporate SEFs and SDRs into the

    Commission's regulations dealing with the rights and obligations of

    other registered entities. Proposed regulation 140.72 provides the

    Commission with the authority to disclose confidential information to

    SEFs and SDRs. This provision allows the Commission, or specifically

    identified Commission personnel, to disclose information necessary to

    effectuate the purposes of the CEA, including such matters as

    transactions or market operations. Proposed regulation 140.96

    authorizes the Commission to publish in the Federal Register

    information pertaining to the applications for registration of DCMs,

    SEFs and SDRs, as well as new rules and rule amendments which present

    novel or complex issues that require additional time to analyze, an

    inadequate explanation by the submitting registered entity, or a

    potential inconsistency with the Act, or regulations under the Act.

    Proposed regulation 140.99 also includes SEFs and SDRs in the category

    of registered entities that may petition the Commission for exemptive

    relief and no-action and interpretative letters.

    Proposed regulation 140.735-3 adds SEFs and SDRs to the list of

    entities from which Commission members and employees may not accept

    employment or compensation. The Commission proposes adding swaps to

    those agreements, contracts or transactions Commission staff may not

    trade. The Commission would like to take this opportunity to also add

    retail forex transactions, as that term is defined in regulation

    5.1(m), to this list.

    Finally, proposed regulation 145.9 expands the definition of

    ``submitter'' by adding SEFs and SDRs to the list of registered

    entities to which a person's confidential information has been

    submitted, and which, in turn, submit that information to the

    Commission. This amendment allows individuals who have submitted

    information to a SEF or SDR to request confidential treatment under

    regulation 145.9.

    F. Part 155

    1. Regulation 155.2: Trading Standards for Floor Brokers

    The Commission proposes removing the references to regulation 1.41

    within regulation 155.2 because the Commission removed and reserved

    regulation 1.41 in 2001 (66 FR 42256) pursuant to the CFMA. The

    Commission also proposes removing the related reference to former

    section 5a(a)(12)(A) of the Act.

    G. Other General Changes to CFTC Regulations

    1. Removal of References to DTEFs

    The Commission proposes the removal of references to DTEFs and

    regulations pertaining to DTEFs in parts 1, 5, 15, 36, 41, 140, and 155

    because section 734 of the DFA abolished DTEFs, effective July 15,

    2011.\83\

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

    \83\ This proposed rulemaking is not deleting those DTEF

    references that other NPRMs have already proposed deleting from the

    Commission's regulations (e.g., some references in part 3 and all

    references in part 40).

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

    2. Other Conforming Changes

    The Commission also proposes in various parts of its regulations to

    update

    [[Page 33076]]

    cross-references to CEA provisions, now renumbered after the passage of

    the DFA. An example of one such change is proposed regulation 166.5, in

    which the Commission proposes to update the statutory reference to

    ``eligible contract participant,'' to reflect the Dodd-Frank Act's

    renumbering of CEA section 1a. Additionally, where typographical errors

    or other minor inconsistencies were discovered while reviewing CFTC

    regulations, the Proposal includes instructions and proposed

    regulations to correct them.

    III. Request for Comment

    The Commission requests comment generally on all aspects of the

    proposed rules. As discussed in more detail above, the Commission also

    requests comment on: whether any changes to the ``physical'' definition

    in regulation 1.3 are necessary or warranted; the potential costs and

    effects of the proposed new requirements that all books and records be

    maintained in their original form (for paper) and their native file

    format (for electronic records); whether the retention period for any

    communication medium (e.g., oral communications) should be shorter than

    the retention period applicable to other required records; the

    potential costs and effects of requiring registrants to record and

    maintain oral communications; whether the proposal to add FCMs and IBs

    to the list of eligible account managers is appropriate; and whether

    the proposed procedures for handling bunched swap orders are feasible.

    IV. Administrative Compliance

    A. Paperwork Reduction Act

    The Paperwork Reduction Act provides that an agency may not conduct

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

    information unless it has been approved by the Office of Management and

    Budget (``OMB'') and displays a currently valid control number.\84\

    This proposed rulemaking contains new collections of information for

    which the Commission must seek a valid control number. The Commission

    therefore is submitting this proposal to OMB for its review in

    accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for

    these new collections of information is ``Books and Records

    Requirements for Certain Registrants and Other Market Participants.''

    Responses to these information collections would be mandatory.

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

    \84\ 44 U.S.C. 3501 et seq.

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

    With respect to all of the Commission's collections, 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 Commodity Exchange

    Act strictly prohibits the Commission, unless specifically authorized

    by the Act, from making public ``data and information that would

    separately disclose the business transactions or market positions of

    any person and trade secrets or names of customers.'' The Commission

    also is required to protect certain information contained in a

    government system of records according to the Privacy Act of 1974, 5

    U.S.C. 552a.

    1. Information To Be Provided by Reporting Entities/Persons

    a. Proposed Amendments to Regulation 1.31 (Books and Records; Keeping

    and Inspection)

    Regulation 1.31 describes the manner in which ``all books and

    records required to be kept by the Act'' must be maintained. Most of

    the requirements of regulation 1.31 are applicable to FCMs, IBs, RFEDs,

    CTAs, CPOs, and members of DCMs and SEFs in conjunction with other part

    1 regulations, and the PRA burdens either have been or will be covered

    by the OMB control numbers associated with the other part 1

    regulations. Examples of these other part 1 regulations are regulation

    1.33, which requires certain registrants to produce monthly and

    confirmation statements, and regulation 1.35, which requires the

    maintenance of records of cash commodity, futures, and option

    transactions. Regulation 1.31 would also be applicable to SDs and MSPs

    in conjunction with proposed part 23 regulations.\85\

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

    \85\ Reporting, Recordkeeping, and Daily Trading Records

    Requirements for Swap Dealers and Major Swap Participants, 75 FR

    76666, Dec. 9, 2010.

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

    i. Obligation To Develop and Maintain Recordkeeping Policies and

    Controls

    Regulation 1.31 additionally contains discrete stand-alone

    collections for which a control number must be sought. Subsection

    (b)(3)(ii) requires persons keeping records using electronic storage

    media to ``develop and maintain written operational procedures and

    controls (an `audit system') designed to provide accountability over

    [the entry of records into the electronic storage media].'' This

    provision is already applicable to FCMs, RFEDs, IBs, CTAs, CPOs, and

    members of DCMs, and would be applicable to SDs and MSPs pursuant to

    the proposed part 23 regulations. As members of SEFs will be newly

    subject to the part 1 regulations, the Commission must estimate the

    burden of subsection (b)(3)(ii) on these entities and seek OMB approval

    for this new application of the subsection.

    The Commission anticipates that members of SEFs may incur certain

    one-time start-up costs in connection with establishing the audit

    system. This will include drafting and adopting procedures and controls

    and may include updates to existing recordkeeping systems. The

    Commission estimates the burden hours associated with these one-time

    start-up costs to be 100 hours.

    As there will not be any SEFs operating until after the Dodd-Frank

    Act becomes effective in July 2011, it is not possible for the

    Commission to estimate with precision how many SEF members there will

    be or how many of those SEF members will be FCMs, SDs, or MSPs that are

    being covered by already pending existing information collections.

    Nonetheless, the Commission has estimated that 35 SEFs will register

    with it after the Dodd-Frank Act becomes effective, and now is

    estimating that there may be on average 100 members of a SEF that will

    not fall under one of the other collections. Accordingly, the aggregate

    new burden of subsection (b)(3)(ii) is estimated to be 100 one-time

    burden hours to approximately 3,500 SEF members.

    The Commission expects that compliance and operations managers will

    be employed in the establishment of the written procedures and controls

    under subsection (b)(3)(ii). According to recent Bureau of Labor

    Statistics, the mean hourly wage of an employee under occupation code

    11-3031, ``Financial Managers,'' that is employed by the ``Securities

    and Commodity Contracts Intermediation and Brokerage'' industry is

    $74.41.\86\ Because members of SEFs may be large entities that may

    engage employees with wages above the mean, the Commission has

    conservatively chosen to use a mean hourly wage of $100 per hour.

    Accordingly, the burden associated with developing written procedures

    and controls will total approximately $10,000 for each applicable

    member of a SEF on a one-time basis.

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

    \86\ Occupational Employment Statistics, Occupation Employment

    and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2009).

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

    ii. Representation to the Commission

    Members of SEFs will also have to comply with regulation 1.31(c),

    which

    [[Page 33077]]

    requires persons employing an electronic storage system to provide a

    representation to the Commission prior to the initial use of the

    system.\87\ The Commission estimates the burden of drafting this

    representation in accordance with regulation 1.31(c) and submitting it

    to the Commission to be 1 hour.

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

    \87\ As with subsection (b)(3)(ii), regulation 1.31(c) is

    already applicable or will be made applicable by other actions to

    FCMs, IBs, DCM members, as well as SDs or MSPs pursuant to proposed

    part 23 regulations.

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

    According to recent Bureau of Labor Statistics, the mean hourly

    wage of an employee under occupation code 11-3031, ``Financial

    Managers,'' (which includes operations managers) that is employed by

    the ``Securities and Commodity Contracts Intermediation and Brokerage''

    industry is $74.41.\88\ Because members of SEFs may be large entities

    that may engage employees with wages above the mean, the Commission has

    conservatively chosen to use a mean hourly wage of $100 per hour.

    Accordingly, the burden associated with drafting and submitting the

    representation prior to using an electronic storage system would be

    $100 per affected member of a SEF.

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

    \88\ Occupational Employment Statistics, Occupation Employment

    and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2009).

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

    b. Proposed Amendments to Regulation 1.33 (Monthly and Confirmation

    Statements)

    The Commission proposes amending regulation 1.33 by requiring FCMs

    to include in their monthly and confirmation statements sent to

    customers certain specified information related to a customer's swap

    positions. The information required to be summarized in respect of swap

    transactions would be analogous to information currently required to be

    kept in respect of futures and commodity option transactions. The

    Commission estimates the burden of complying with regulation 1.33 in

    respect of swap transactions to be 1 hour for each swap confirmation

    and 1 hour for each monthly statement.

    According to recent Bureau of Labor Statistics, the mean hourly

    wage of an employee under occupation code 11-3031, ``Financial

    Managers,'' (which includes operations managers) that is employed by

    the ``Securities and Commodity Contracts Intermediation and Brokerage''

    industry is $74.41.\89\ Accordingly the burden associated with

    complying with 1.33 in respect of a swap confirmation and each monthly

    statement to be $74.41 ($74.41 x 1 hour) for each swap transaction

    entered into.

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

    \89\ Occupational Employment Statistics, Occupation Employment

    and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2009).

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

    c. Proposed Amendments to Regulation 1.35 (Records of Commodity

    Interest and Cash Commodity Transactions)

    The proposed amendments would require members of SEFs to comply

    with the regulation 1.35 recordkeeping requirements that are currently

    followed by FCMs, IBs, RFEDs, and members of DCMs. The Commission

    anticipates that members of SEFs will spend approximately eight hours

    per trading day (or 2,016 hours per year based on 252 trading days)

    compiling and maintaining transaction records.

    According to recent Bureau of Labor Statistics, the mean hourly

    wage of an employee under occupation code 11-3031, ``Financial

    Managers,'' (which includes operations managers) that is employed by

    the ``Securities and Commodity Contracts Intermediation and Brokerage''

    industry is $74.41.\90\ Because members of SEFs may be large entities

    that may engage employees with wages above the mean, the Commission has

    conservatively chosen to use a mean hourly wage of $100 per hour. Thus,

    each SEF member will have a burden of $201,600 per year (2,016 hours x

    $100/hour).

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

    \90\ Occupational Employment Statistics, Occupation Employment

    and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2009).

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

    The proposed amendments to regulation 1.35 would also require FCMs,

    RFEDs, IBs, and members of DCMs to comply with the regulation 1.35

    recordkeeping requirements for any swap transactions into which they

    enter. Because the proposed recordkeeping requirements for swaps would

    be equivalent to the recordkeeping requirements they must currently

    follow in respect of futures and commodity option transactions, the

    additional burden for any swap transaction would be the same for any

    additional futures and commodity option transaction for which they keep

    records pursuant to regulation 1.35 in its current form. The Commission

    estimates that the recordkeeping burden associated with each swap

    transaction would be 0.5 hours, for a total burden of $50 per

    transaction.

    The proposed amendments to regulation 1.35 would also require that

    each FCM, IB, RFED and member of a DCM or SEF retain all oral and

    written communications provided or received concerning quotes,

    solicitations, bids, offers, instructions, trading, and prices, that

    lead to the execution of transactions in a commodity interest or cash

    commodity, whether communicated by telephone, voicemail, facsimile,

    instant messaging, chat rooms, electronic mail, mobile device or other

    digital or electronic media, with a further requirement that each

    transaction record be maintained as a separate electronic file

    identifiable by transaction and counterparty.

    The Commission anticipates that the aforementioned registrants and

    members of DCMs and SEFs may incur certain one-time start-up costs in

    connection with establishing a system to retain oral communications.

    The Commission estimates that the cost of procuring systems to record

    these oral communications will be $55,000 for an average large entity

    that does not already have such systems in place, and estimates

    procurement costs of $10,000 for each small entity that does not

    already have such systems in place.

    The Commission estimates the burden hours associated with these

    start-up costs to be 135 hours for any entity that does not already

    have a system in place. According to the recent Bureau of Labor

    Statistics, the mean hourly wage of computer programmers under

    occupation code 15-1021 and computer software engineers under program

    codes 15-1031 and 1032 are between $34.10 and $44.94.\91\ Because

    members of SEFs may be large entities that may engage employees with

    wages above the mean, the Commission has conservatively chosen to use a

    mean hourly programming wage of $50 per hour for each of the categories

    of persons who will have to establish the system for maintaining oral

    records. Accordingly, the start-up burden associated with establishing

    an audit system would be $6,750 ($50 x 135 hours) per affected FCM, IB,

    RFED, member of a DCM, and member of a SEF.

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

    \91\ Occupational Employment Statistics, Occupational Employment

    and Wages: 15-1021, Computer Programmers, http://www.bls.gov/oes/current/oes151021.htm (May 2009); Occupational Employment

    Statistics, Occupational Employment and Wages: 15-1031, Computer

    Software Engineers, Applications, http://www.bls.gov/oes/current/oes151031.htm (May 2009); Occupational Employment Statistics,

    Occupational Employment and Wages: 15-1032, Computer Software

    Engineers, Systems Software, http://www.bls.gov/oes/current/oes151032.htm (May 2009).

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

    The Commission also estimates that each of these persons will have

    to devote one hour per trading day to ensure the operation of the

    system to retain oral records. This would lead to $12,600 per year (1

    hour per trading day x 252 trading days per year x $50/hour) per

    affected FCM, IB, RFED, member of a DCM, and member of a SEF.

    [[Page 33078]]

    d. Amendments to Regulation 1.37 (Customer's Name, Address, and

    Occupation Recorded; Record of Guarantor or Controller of Account)

    The Commission proposes amending regulation 1.37(a) by requiring

    each FCM, IB, and member of a DCM to keep the same kind of record

    (showing the customer's name, address, occupation or business, and name

    of any other person guaranteeing the account or exercising any trading

    control over it) for any swap transactions it ``carries or introduces''

    for another person. The Commission estimates that it will take each of

    these entities an average of 0.4 hours to gather the information and

    file it or key it into the entity's customer recordkeeping programs.

    The Commission also proposes amending regulation 1.37(b) by

    requiring each FCM carrying an omnibus account for another FCM, a

    foreign broker, a member of a DCM or any other person to maintain a

    daily record for such account of the total open long contracts and the

    total open short contracts in each swap. FCMs presently have an

    equivalent obligation with respect to futures and commodity option

    transactions. These daily records typically are maintained in

    electronic form. Therefore, once a position is entered into the

    entity's systems, the daily record will be automatically available. The

    Commission estimates that entering the position into the system,

    commencing with the placement of an order and ending with execution

    will take each of these entities an average of 0.4 hours.

    The Commission additionally proposes amending regulation 1.37(c) by

    requiring SEFs to comply with a provision that DCMs must currently

    follow: Keep a record showing the true name, address, and principal

    occupation or business of any foreign trader executing transactions on

    the facility or exchange. According to regulation 1.37(d), this

    provision does not apply in respect of futures/options/swaps that

    foreign traders execute through FCMs or IBs.

    The Commission estimates that it would take a SEF a total of 0.4

    hours to prepare each record in accordance with regulation 1.37(c).

    According to the Bureau of Labor Statistics, the mean hourly wage of an

    employee under occupation code 43-9021, ``Data Entry Keyer,'' that is

    employed in ``Office and Administrative Support'' is $14.03.\92\

    Because SEFs may be large entities employing persons at wages higher

    than the average, the Commission conservatively estimates the mean

    hourly wage to be $19.03 per hour. Thus, the burden associated with

    preparing a record with regulation 1.37(c) would be $7.61 ($19.03/hour

    x 0.4 hours).

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

    \92\ Occupational Employment Statistics, National Industry-

    Specific Occupational Employment and Wage Estimates, NAICS 523100--

    Securities and Commodity Contracts Intermediation and Brokerage,

    http://www.bls.gov/oes/current/naics4_523100.htm#43-0000 (May

    2009).

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

    e. Amendments to Regulation 1.39 (Simultaneous Buying and Selling

    Orders of Different Principals; Execution of, for and Between

    Principals)

    The Commission proposes amending regulation 1.39, which currently

    applies to DCMs, by enabling members of SEFs to execute simultaneous

    buying and selling orders of different principals pursuant to rules of

    the SEF if certain conditions are met. Among those conditions, a SEF

    would have to record these transactions in a manner that ``shows all

    transaction details required to be captured by the Act, Commission

    rule, or regulation.'' The Commission anticipates that the data to be

    captured would already exist in the SEF's trading system. The

    Commission estimates that it will take the SEF an average of 0.1 hours

    to capture this data, and storage costs of less than $1 per record.

    According to the recent Bureau of Labor Statistics, the mean hourly

    wage of computer programmers under occupation code 15-1021 and computer

    software engineers under program codes 15-1031 and 1032 are between

    $34.10 and $44.94.\93\ Because SEFs may be large entities that may

    engage employees with wages above the mean, the Commission has

    conservatively chosen to use a mean hourly programming wage of $50 per

    hour for each of the categories of persons who will have to establish

    the system for maintaining oral records. Accordingly, the start-up

    burden associated with the data capture requirements would be an

    average of $5.

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

    \93\ Occupational Employment Statistics, Occupational Employment

    and Wages: 15-1021, Computer Programmers, http://www.bls.gov/oes/current/oes151021.htm (May 2009); Occupational Employment

    Statistics, Occupational Employment and Wages: 15-1031, Computer

    Software Engineers, Applications, http://www.bls.gov/oes/current/oes151031.htm (May 2009); Occupational Employment Statistics,

    Occupational Employment and Wages: 15-1032, Computer Software

    Engineers, Systems Software, http://www.bls.gov/oes/current/oes151032.htm (May 2009).

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

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \94\ requires that

    agencies consider whether the rules they propose will have a

    significant economic impact on a substantial number of small entities

    and, if so, provide a regulatory flexibility analysis respecting the

    impact. The rules proposed by the Commission are for the most part

    technical amendments to conform the affected parts to provisions of the

    Dodd-Frank Act and, as such, non-substantive. The Commission is also

    amending its books and records regulations to require FCMs, IBs, RFEDs,

    and members of DCMs to observe recordkeeping requirements for swaps

    that they currently observe in respect of futures and commodity option

    transactions. Additionally, the Commission is proposing to apply

    certain of those books and records regulations to members of SEFs,

    mirroring obligations that currently are met by members of DCMs. The

    Commission is also proposing to add a substantive rule change to

    regulation 1.35. The substantive rules would affect FCMs, IBs, RFEDs,

    and members of DCMs and SEFs.

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

    \94\ 5 U.S.C. 601 et seq.

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

    Except for the new regulations requiring FCMs, IBs, RFEDs, and

    members of DCMs and SEFs to record all oral communications leading to

    the execution of transactions in a commodity interest or cash

    commodity, the Commission has determined that none of the proposed

    rules will have a significant economic impact on any substantial number

    of entities. Additionally, as presented below, the Commission

    previously has determined or is now determining that all entities

    except for certain IBs are not small entities for the purposes of the

    RFA.

    Therefore, according to 5 U.S.C. 605(b), the Chairman, on behalf of

    the Commission, is hereby certifying that all rules except for the oral

    communications recordkeeping rules will not have a significant economic

    effect on a significant number of small entities. A regulatory

    flexibility analysis addressing the impact of the oral communications

    recordkeeping rules on certain IBs is provided herein.

    1. FCMs, RFEDs, DCMs, ECPs, and Large Traders

    The Commission has previously determined that registered FCMs,

    RFEDs, DCMs, ECPs, and large traders are not small entities for

    purposes of the RFA.\95\ Accordingly, the Chairman, on behalf of the

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

    proposed rules will not have a

    [[Page 33079]]

    significant economic impact on a substantial number of small entities

    with respect to these entities.

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

    \95\ See respectively and as indicated: 47 FR 18618, 18619, Apr.

    30, 1982 (DCMs, FCMs, and large traders); 66 FR 20740, 20743, Apr.

    25, 2001 (ECPs); and 75 FR 55410, 55416, Sept. 19, 2010 (RFEDs).

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

    2. SEFs

    SEFs are new categories of registrant under the Dodd-Frank Act.

    Therefore, the Commission has not previously addressed the question of

    whether SEFs are, in fact, ``small entities'' for purposes of the RFA.

    For the reasons that follow, the Commission is hereby determining that

    none of these entities would be small entities. Accordingly, the

    Chairman, on behalf of the Commission, hereby certifies pursuant to 5

    U.S.C. 605(b) that the proposed rules, with respect to SEFs, will not

    have a significant impact on a substantial number of small entities.

    The Dodd-Frank Act defines a SEF as a trading system or platform in

    which multiple participants have the ability to accept bids and offers

    made by multiple participants in the facility or system, through any

    means of interstate commerce, including any trading facility that

    facilitates the execution of swaps between persons and is not a DCM.

    The Commission previously determined that a DCM is not a small entity

    because, among other things, it may only be designated when it meets

    specific criteria, including expenditure of sufficient resources to

    establish and maintain adequate self-regulatory programs. Likewise, the

    Commission will register an entity as a SEF only after it has met

    specific criteria, including the expenditure of sufficient resources to

    establish and maintain an adequate self-regulatory program. Moreover,

    members of SEFs, to whom many of the proposed regulations would apply,

    additionally are not small entities for the purposes of the RFA. As

    noted above, the Commission previously determined that ECPs are not

    small entities, and the Dodd-Frank Act provides that only ECPs can

    enter into swaps on a SEF. Accordingly, as with DCMs, the Commission is

    hereby determining that SEFs and members of SEFs are not ``small

    entities'' for purposes of the RFA.

    3. Regulatory Flexibility Analysis for Oral Communication Rules

    Applicable to IBs

    The Commission has not previously determined that IBs are not

    ``small entities'' for the purposes of the RFA. Historically, the

    Commission has evaluated within the context of a particular regulatory

    proposal whether all or some affected IBs would be considered to be

    small entities and, if so, the economic impact on them of the

    particular regulation.

    Accordingly, the Commission offers, pursuant to 5 U.S.C. 603, the

    following initial regulatory flexibility analysis, which it shall

    transmit to the Chief Counsel for Advocacy of the Small Business

    Administration as 5 U.S.C. 603 requires:

    a. A Description of the Reasons Why Action by the Agency Is Being

    Considered

    The Commission is considering the adoption of the proposed

    amendments to regulation 1.35 requiring FCMs, RFEDs, IBs and DCM and

    SEF members to keep records of all oral communications leading to the

    execution of transactions in a commodity interest or cash commodity for

    several reasons. To begin, such an amendment to regulation 1.35 would

    protect customers from abusive sales practices, would protect

    registrants from the risks associated with transactional disputes, and

    would allow registrants to follow-up more effectively on customer

    complaints of abuses by their associated persons. Additionally, the

    amendment would make enforcement investigations more efficient by

    preserving critical evidence that otherwise may be lost to lapsed and

    inconsistent memories. This, in turn, is expected to increase the

    success of enforcement actions, which benefits customers, regulated

    entities, and the markets as a whole.\96\ Finally, it is being proposed

    for regulatory parity, as it has been proposed recently for SDs and

    MSPs as part of their recordkeeping and reporting obligations.\97\

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

    \96\ In promulgating its own taping rule, the Financial Services

    Authority issued guidance stating the following benefits: ``(i)

    Recorded communication may increase the probability of successful

    enforcement; (ii) this reduces the expected value to be gained from

    committing market abuse; and (iii) this, in principle, leads to

    increased market confidence and greater price efficiency.'' See

    Financial Services Authority, ``Policy Statement: Telephone

    Recording: recording of voice conversations and electronic

    communications'' (Mar. 2008).

    \97\ See Reporting, Recordkeeping, and Daily Trading Records

    Requirements for Swap Dealers and Major Swap Participants, 75 FR

    76666, Dec. 9, 2010.

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

    b. A Succinct Statement of the Objectives of, and Legal Basis for, the

    Proposed Rule

    As stated above, the objective of the proposed amendment to

    regulation 1.35 is to protect the market participants and the public,

    as well as to increase market integrity. In terms of the legal basis

    for this proposed rule, the Commission has been authorized by sections

    4g and 8a(5) of the CEA to adopt regulations requiring registrants to

    keep books and records pertaining to such transactions and positions in

    a form and manner and for such period as may be required by the

    Commission.\98\

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

    \98\ 7 U.S.C. 6g and 12a(5).

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

    c. A Description of and, Where Feasible, an Estimate of the Number of

    Small Entities To Which the Proposed Rule Will Apply

    There are an estimated 1,500 IBs registered with the Commission at

    any given time. Between 80 and 90% of these IBs are ``guaranteed

    introducing brokers,'' many of which may be small entities. There are

    an estimated 11,500 members of DCMs, some of which may be small

    entities. The Commission believes, however, that it is likely that less

    than 10% of the members of DCMs would be small entities given the

    capital and other resources they would need to comply with DCM rules.

    d. A Description of the Projected Reporting, Recordkeeping, and Other

    Compliance Requirements of the Proposed Rule, Including an Estimate of

    the Classes of Small Entities Which Will Be Subject to the Requirement

    and the Type of Professional Skills Necessary for Preparation of the

    Report or Record

    Proposed regulation 1.35 would require all FCMs, RFEDs, IBs and

    members of DCMs or SEFs to keep records of all oral communications that

    lead to the execution of a commodity interest or cash commodity

    transaction. All small IBs and small DCM or SEF members will be subject

    to this requirement. The proposed regulation is primarily a

    recordkeeping requirement, which will obligate those firms that do not

    already do so to tape the telephone lines of their traders and sales

    forces. Maintenance of these oral communications for five years will

    require investments in hardware, software, and information technology

    personnel, all of which will be scalable to the size of the enterprise.

    There may be periodic reporting requirements, most frequently in

    response to a subpoena from the Commission, any other federal agency

    that has regulatory or civil enforcement authority over the firm, and

    the markets in which it conducts business, as well as law enforcement.

    e. Identification, to the Extent Practicable, of All Relevant Federal

    Rules Which May Duplicate, Overlap or Conflict With the Proposed Rule

    The Commission has not identified any Federal rules which may

    duplicate, overlap, or conflict with the proposed rule. Certain firms

    may be obligated to

    [[Page 33080]]

    retain oral communications by rule of a private SRO.

    f. Description of Any Significant Alternatives to the Proposed Rule

    Which Accomplish the Stated Objectives of Applicable Statutes and Which

    Minimize Any Significant Economic Impact of the Proposed Rule on Small

    Entities

    The Commission has identified no significant alternatives that may

    minimize any significant economic impact of the proposed rule amendment

    on small entities. Clarification, consolidation, or simplification of

    compliance and reporting requirements would leave a large portion of

    the sales operations in the futures industry uncovered, and in

    consequence, the customers that transact business with them. Moreover,

    the benefits from the enforcement of the CEA by the Commission and by

    the Department of Justice at the criminal level would be lost. Finally,

    leaving a large portion of the sales operations uncovered by this rule

    could create regulatory arbitrage, causing large entities subject to

    this rule to move their sales operations into a series of small firms.

    The same would apply for exemptions.

    Given the foregoing, the Commission has determined to treat equally

    all entities that engage in oral communications that lead to the

    execution of commodity interest and cash commodity transactions.

    To the extent that certain IBs and members of DCMs and SEFs are

    impacted by the proposed amendments, the RFA analysis focuses on

    whether the proposed amendments will have a significant economic impact

    on a substantial number of small entities. At present, such entities

    are subject to certain recordkeeping retention and reporting

    requirements, based on the nature of their respective businesses; the

    proposed amendments would augment the existing recordkeeping retention

    and reporting requirements of these firms. The Commission understands

    that recent advancements in technology, particularly with respect to

    capturing records and storing such records, will enable all affected

    entities, including small entities, to incorporate into their existing

    recordkeeping programs the enhanced requirements set forth in the

    proposed amendments, without encountering a significant economic

    impact. The United Kingdom's FSA, which recently adopted similar

    recordkeeping requirements, discussed the declining costs of such

    recordkeeping programs in a Policy Statement addressing these and other

    issues.\99\

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

    \99\ Financial Services Authority, ``Policy Statement: Telephone

    Recording: recording of voice conversations and electronic

    communications'' (Mar. 2008). In addition to the rules promulgated

    by the Financial Services Authority, similar rules which mandate

    recording of certain voice and/or telephone conversations have been

    promulgated by the Comiss[atilde]o de Valores Mobili[aacute]rios in

    Brazil and by the Autorit[eacute] des March[eacute]s Financiers in

    France.

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

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA \100\ requires the Commission to consider

    the costs and benefits of its actions before promulgating a regulation

    under the CEA. Section 15(a) specifies that the costs and benefits

    shall be considered against five broad areas of market and public

    concern: (1) Protection of market participants and the public; (2)

    efficiency, competitiveness and financial integrity of futures markets;

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

    public interest considerations. The Commission may give greater weight

    to one or more of the five enumerated considerations to determine, in

    its discretion, that a particular rule is necessary or appropriate to

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

    accomplish any of the purposes of the CEA.

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

    \100\ 7 U.S.C. 19(a).

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

    1. Costs

    a. Amendments to Regulation 1.31

    With respect to costs, the Commission has determined that for FCMs,

    IBs, CPOs, CTAs and members of DCMs, costs to institute recordkeeping

    systems to retain swap records for the life of the swap (i.e., until

    the termination, maturity, expiration, transfer, assignment, or

    novation date of the transaction) and for five years after that date

    would be far outweighed by the benefits to the financial system as a

    whole. The Commission is not imposing any cost that a prudent FCM, IB,

    CPO, CTA, and DCM member would not already incur in maintaining records

    for swap transactions. A prudent registrant would retain a swap record

    for the life of the swap to ensure that its rights under the contract

    are protected and its obligations are fulfilled.

    As to the proposed requirements that records be kept in their

    original form (for paper records) and native file format (for

    electronic records), that the method of storage maintains electronic

    records in their native file format, and that the records be produced

    to the Commission in a form specified by the Commission, the Commission

    is not imposing significant new burdens on registrants and regulated

    entities. The Commission understands that registrants and regulated

    entities already retain electronic records in these forms. Moreover, to

    the extent that a registrant's transactional activity is retained on a

    platform operated by or additionally is captured by a regulated entity,

    trading mechanism, clearinghouse or another regulated entity (for

    example, where an IB transacts through an FCM) that is required to

    maintain these records in the same form, the registrant may rely on the

    retention requirements of the other registrant in order to comply with

    the proposed requirements of regulation 1.31.

    b. Amendments to Regulation 1.33, 1.35, 1.37, and 1.39

    The proposed regulations would require FCMs, IBs, RFEDs, DCMs and

    members of DCMs to comply with the same recordkeeping functions for

    swaps that they currently adhere to with respect to futures and

    commodity option transactions. The Commission anticipates that in

    complying with amended regulations 1.33, 1.35, 1.37 and 1.39, the

    aforementioned persons will already have the framework for producing

    and storing records and would only make adjustments as necessary to

    provide the additional information regarding swaps. Because the

    recordkeeping requirements in respect of swaps would be equivalent to

    the existing recordkeeping requirements for futures and commodity

    option transactions, the cost of complying with the proposed amendments

    should not differ materially from the cost of recording additional

    futures or commodity option transactions.

    The Commission has also amended the aforementioned recordkeeping

    regulations by applying them to SEFs and their members. These persons

    will therefore need to factor in the costs in complying with these

    regulations before commencing their operations.

    c. Amendments to Regulation 1.35 (Records of Oral Communications).

    To the extent FCMs, RFEDs, IBs, members of DCMs, and members of

    SEFs enter into transactions in a commodity interest or cash commodity,

    the newly proposed requirements under regulation 1.35 would require

    them to record all oral communications that lead to the execution of

    transactions in a commodity interest or cash commodity. As described

    above, it is expected that any additional cost imposed by the

    recordkeeping requirements of proposed amendments to regulation 1.35

    would be minimal for the average large FCM,

    [[Page 33081]]

    RFED, IB, or DCM or SEF member because the information and data

    required to be recorded is information and data a prudent FCM, RFED,

    IB, or DCM or SEF member would already maintain during the ordinary

    course of its business.\101\ Moreover, most FCMs, RFEDs, IBs, or

    members of DCMs or SEFs have adequate existing resources, technology

    systems, and recordkeeping structures that are capable of adjusting to

    the new regulatory framework without material diversion of resources

    away from commercial operations.

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

    \101\ The Commission preliminarily has determined that any

    additional cost imposed by the recordkeeping requirements of

    proposed regulation 23.202(a)(1) (which has an analogous requirement

    for SDs and MSPs relating to retention of oral and written

    communications that lead to the execution of swaps) ``would be

    minimal because the information and data required to be recorded is

    information and data a prudent swap dealer or major swap participant

    would already maintain during the ordinary course of its business,''

    and ``[m]oreover, most swap dealers and major swap participants have

    adequate, existing resources and recordkeeping structures that are

    capable of adjusting to the new regulatory framework without

    material diversion of resources away from commercial operations.''

    See Reporting, Recordkeeping, and Daily Trading Records Requirements

    for Swap Dealers and Major Swap Participants, 75 FR 76666, 76673,

    Dec. 9, 2010.

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

    The Commission also believes that such costs would be minimal for

    the average small IB or member of a SEF who does not have digital

    telephone systems in place and may not have robust or up-to-date

    electronic data saving and storage capacity.

    2. Benefits

    a. Amendments to Regulation 1.31.

    The Commission believes that the benefit of requiring FCMs, IBs,

    CPOs, CTAs, and DCM and SEF members to maintain swap records for the

    life of the swap (i.e., until the termination, maturity, expiration,

    transfer, assignment, or novation date of the transaction) and for five

    years after that date is significant, as is the requirement to maintain

    records in their native format. Proposed regulation 23.203(b)(2) has

    already proposed requiring SDs and MSPs to maintain swap records for

    the life of the swap and for five years after termination, maturity,

    expiration, transfer, assignment, or novation date of the

    transaction.\102\ It would therefore be inconsistent not to require

    other registrants, as well as DCM and SEF members to have the same

    obligation for swap records that they keep. The five-year retention

    period, which already applies to records for futures and commodity

    option transactions, is meant to protect market participants, the

    integrity of the market, and the public at large by ensuring that an

    audit trail is maintained for routine compliance examinations, in the

    event of counterparty complaints, or in case of other events that may

    trigger an investigation by the Commission and other government

    agencies.

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    \102\ 75 FR 76666, Dec. 9, 2010.

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    b. Amendments to Regulations 1.33, 1.35, 1.37, and 1.39

    The Commission believes that there are significant benefits in

    requiring FCMs, IBs, RFEDs, DCMs and members of DCMs to comply with the

    same recordkeeping functions for swaps that they currently adhere to

    with respect to futures and commodity option transactions. The

    Commission also believes that there are significant benefits in

    requiring SEFs and members of SEFs to comply with certain of the

    recordkeeping functions contained in regulations 1.33, 1.35, 1.37 and

    1.39. First is the issue of regulatory parity: Because many swaps will

    be executed on trading platforms, they should be subject to the same

    recordkeeping requirements as futures and commodity options. Moreover,

    these recordkeeping rules are fundamental to the Commission's efforts

    to maintain an orderly marketplace and to remain informed about market

    positions.

    c. Amendments to Regulation 1.35 (Records of Oral Communications)

    The proposed amendments to regulation 1.35 would newly require

    FCMs, RFEDs, IBs, and DCM and SEF members to comply with regulation

    1.35 for any swap transactions into which they enter. The benefit of

    this amendment is significant because it requires these registrants to

    perform the same recordkeeping functions for swaps that they already

    perform for futures transactions, which protect the integrity and

    efficiency of the markets, market participants, and the public at large

    by ensuring that these records are available in the event of customer

    disputes, routine compliance examinations, and regulatory

    investigations.

    Notwithstanding the potential costs described above that could be

    incurred by FCMs, RFEDs, IBs, and DCM and SEF members in complying with

    the proposed amendments that would newly require them to record all

    oral communications that lead to the execution of a transaction in a

    commodity interest or cash commodity, the Commission believes the

    benefits of the proposed amendments are significant and important.

    First, the Commission believes that the proposed amendments will

    enhance the protection of market participants and the public by

    increasing the probability of timely successful enforcement of the CEA

    and Commission regulations, particularly in cases involving suspected

    fraud, market manipulation and/or false reporting, by deterring market

    abuses, and additionally by reducing the expected value to be gained

    from committing market abuse. The Commission believes that increasing

    the quantity and quality of contemporaneous records that affected

    persons must retain, as provided under the proposed amendments, will

    protect market participants and the public from harm by wrongdoers.

    Such increases in the quantity and quality of contemporaneous records

    will enable the Commission to more fully and accurately establish the

    knowledge and intent of wrongdoers at the time of their wrongful acts.

    The Commission believes that the enhanced protection of market

    participants and the public outweighs the costs that may be borne by

    persons under the proposed amendments who do not already maintain oral

    communications.

    Second, the Commission anticipates that the proposed amendments

    will lead to increased market confidence and greater price efficiency

    by reducing the expected value to be gained from committing market

    abuse, thereby deterring such inefficient acts. By requiring the

    recording of oral communications, which could be evidence of anti-

    competitive behavior, the proposed amendments will discourage anti-

    competitive behavior, thereby enhancing competition.

    Third, the Commission believes that the proposed amendments, by

    increasing the probability of timely successful enforcement of the CEA

    and Commission regulations, and by deterring market abuses, will

    benefit the financial integrity of futures markets and lead to more

    effective price discovery. The Commission anticipates that such

    benefits will be achieved through the resultant enhanced investigative

    capabilities in cases involving suspected fraud, market manipulation,

    and/or false reporting.

    Fourth, the Commission believes that the enhanced investigative and

    enforcement capabilities made possible under the proposed amendments

    ultimately will decrease the likelihood that incidents of wrongdoing,

    particularly with respect to cases of fraud, market manipulation and/or

    false reporting, will go undetected or unproven. The Commission

    believes that the cumulative impact of the proposed amendments will

    result in more successful prosecutions of wrongdoing under the CEA as

    well as

    [[Page 33082]]

    fewer market abuses being committed, which will benefit both market

    participants and the general public.

    After considering these factors, the Commission has determined to

    propose the amendments described above. The Commission invites public

    comment on its application of the cost-benefit provision. Commenters

    also are invited to submit, with their comment letters, any data that

    quantifies the costs and benefits of the proposed amendments.

    Other than the foregoing, these proposed rules do not impose any

    substantive regulatory obligations on any person. Rather, the

    Commission is adopting technical amendments to conform to the Dodd-

    Frank Act. Accordingly, there are no quantifiable costs associated with

    this rulemaking other than those discussed above. The sole qualitative

    benefit associated with this rulemaking, other than as discussed above,

    is accuracy.

    List of Subjects

    17 CFR Part 1

    Agricultural commodity, Agriculture, Brokers, Committees, Commodity

    futures, Conflicts of interest, Consumer protection, Definitions,

    Designated contract markets, Directors, Major swap participants,

    Minimum financial requirements for intermediaries, Reporting and

    recordkeeping requirements, Swap dealers.

    17 CFR Part 5

    Bulk transfers, Commodity pool operators, Commodity trading

    advisors, Consumer protection, Customer's money, Securities and

    property, Definitions, Foreign exchange, Minimum financial and

    reporting requirements, Prohibited transactions in retail foreign

    exchange, Recordkeeping requirements, Retail foreign exchange dealers,

    Risk assessment, Special calls, Trading practices.

    17 CFR Part 7

    Commodity futures, Consumer protection, Registered entity.

    17 CFR Part 8

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 15

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements, Electronic trading facility.

    17 CFR Part 18

    Commodity futures, Reporting and recordkeeping requirements,

    Grandfather relief order.

    17 CFR Part 21

    Brokers, Commodity futures, Reporting and recordkeeping

    requirements, Grandfather relief order.

    17 CFR Part 36

    Commodity futures, Commodity Futures Trading Commission, Electronic

    trading facility, Eligible commercial entities, Eligible contract

    participants, Federal financial regulatory authority, Principal-to-

    principal, Special calls, Systemic market event.

    17 CFR Part 41

    Brokers, Reporting and recordkeeping requirements, Security futures

    products.

    17 CFR Part 140

    Authority delegations (Government agencies), Conflict of interests,

    Organizations and functions (Government agencies).

    17 CFR Part 145

    Confidential business information, Freedom of information.

    17 CFR Part 155

    Brokers, Commodity futures, Consumer protection, Reporting and

    recordkeeping requirements, Swaps.

    17 CFR Part 166

    Brokers, Commodity futures, Consumer protection, Reporting and

    recordkeeping requirements, Swaps.

    For the reasons stated in the preamble, under the authority of 7

    U.S.C. 1 et seq., the Commodity Futures Trading Commission proposes to

    amend Chapter I of Title 17 of the Code of Federal Regulations as set

    forth below:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

    Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f,

    6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3,

    8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as

    amended by Title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    2. Amend Sec. 1.3 by:

    a. Revising paragraphs (a), (b), (c), (d), (e), (g), (h), (k), (n),

    (p), (q), (r), (s), (t), (x), (y) introductory text, (y)(1), (y)(2)

    introductory text, (y)(2)(iii)(B), (y)(2)(iii)(C), (y)(2)(v)(B),

    (y)(2)(v)(C), (y)(2)(vii), (y)(2)(viii), (z)(1), (aa)(1)(i),

    (aa)(2)(i), (aa)(5), (bb), (cc), (ee), (ff), (gg), (ii), (kk), (mm)(1),

    (mm)(2) introductory text, (mm)(2)(i), (nn), (oo), (pp), (rr)(2), (ss),

    (tt), (vv), (xx), and (yy);

    b. Removing and reserving paragraphs (jj) and (uu); and

    c. Adding paragraphs (zz), (aaa), (bbb), (ccc), (ddd), (eee),

    (fff), (ggg), (hhh), (iii), (jjj), (kkk), and (lll), to read as

    follows:

    Sec. 1.3 Definitions.

    (a) Board of Trade. This term means an organized exchange or other

    trading facility.

    (b) Business day. This term means any day other than a Sunday or

    holiday. In all notices required by the Act or by the rules and

    regulations in this chapter to be given in terms of business days the

    rule for computing time shall be to exclude the day on which notice is

    given and include the day on which shall take place the act of which

    notice is given.

    (c) Clearing member. This term 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.

    (d) Clearing organization. This term 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.

    (e) Commodity. This term means and includes wheat, cotton, rice,

    corn, oats, barley, rye, flaxseed, grain sorghums, millfeeds, butter,

    eggs, Irish potatoes, wool, wool tops, fats and oils (including lard,

    tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and

    oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal,

    livestock, livestock products, and frozen concentrated orange juice,

    and all other goods and articles, except onions (as provided by the

    first section of Pub. L. 85-839) and motion picture box office receipts

    (or any index, measure, value or data related to such receipts), and

    all services, rights and interests (except motion picture box office

    receipts, or any index, measure, value or data related to such

    receipts) in which contracts for future delivery are presently or in

    the future dealt in.

    * * * * *

    (g) Institutional customer. This term has the same meaning as

    ``eligible contract participant'' as defined in section 1a(18) of the

    Act.

    (h) Contract market; designated contract market. These terms mean a

    board of trade designated by the Commission as a contract market under

    [[Page 33083]]

    the Act or in accordance with the provisions of part 38 of this

    chapter.

    * * * * *

    (k) Customer. This term means any person who uses a futures

    commission merchant, introducing broker, commodity trading advisor, or

    commodity pool operator as an agent in connection with trading in any

    commodity interest; Provided, however, an owner or holder of a

    proprietary account as defined in paragraph (y) of this section shall

    not be deemed to be a customer within the meaning of section 4d of the

    Act, the regulations that implement sections 4d and 4f of the Act and

    Sec. 1.35, and such an owner or holder of such a proprietary account

    shall otherwise be deemed to be a customer within the meaning of the

    Act and Sec. Sec. 1.37 and 1.46 and all other sections of these rules,

    regulations, and orders which do not implement sections 4d and 4f of

    the Act.

    * * * * *

    (n) Floor broker. This term means any person:

    (1) Who, in or surrounding any pit, ring, post or other place

    provided by a contract market for the meeting of persons similarly

    engaged, shall purchase or sell for any other person--

    (i) Any commodity for future delivery, security futures product, or

    swap; or

    (ii) Any commodity option authorized under section 4c of the Act;

    or

    (2) Who is registered with the Commission as a floor broker.

    * * * * *

    (p) Futures commission merchant. This term means:

    (1) Any individual, association, partnership, corporation, or

    trust--

    (i) Who is engaged in soliciting or in accepting orders for the

    purchase or sale of any commodity for future delivery; a security

    futures product; a swap; any agreement, contract, or transaction

    described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act;

    a commodity option authorized under section 4c of the Act; a leverage

    transaction authorized under section 19 of the Act; or acting as a

    counterparty in any agreement, contract or transaction described in

    section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act and

    (ii) Who, in connection with any of these activities accepts any

    money, securities, or property (or extends credit in lieu thereof) to

    margin, guarantee, or secure any trades or contracts that result or may

    result therefrom; and

    (2) Any person that is registered as a futures Commission merchant.

    (q) Member. This term means:

    (1) An individual, association, partnership, corporation, or

    trust--

    (i) Owning or holding membership in, or admitted to membership

    representation on, a registered entity; or

    (ii) Having trading privileges on a registered entity.

    (2) A participant in an alternative trading system that is

    designated as a contract market pursuant to section 5f of the Act is

    deemed a member of the contract market for purposes of transactions in

    security futures products through the contract market.

    (r) Net equity. (1) For futures and commodity option positions,

    this term means the credit balance which would be obtained by combining

    the margin balance of any person with the net profit or loss, if any,

    accruing on the open futures or commodity option positions of such

    person.

    (2) For swap positions other than commodity option positions, this

    term means the credit balance which would be obtained by combining the

    margin balance of any person with the net profit or loss, if any,

    accruing on the open swap positions of such person.

    (s) Net deficit. (1) For futures and commodity option positions,

    this term means the debit balance which would be obtained by combining

    the margin balance of any person with the net profit or loss, if any,

    accruing on the open futures or commodity option positions of such

    person.

    (2) For swap positions other than commodity option positions, this

    term means the debit balance which would be obtained by combining the

    margin balance of any person with the net profit or loss, if any,

    accruing on the open swap positions of such person.

    (t) Open positions. This term means:

    (1) Contracts of purchase or sale of any commodity made by or for

    any person on or subject to the rules of a board of trade for future

    delivery during a specified month or delivery period that have neither

    been fulfilled by delivery nor been offset by other contracts of

    purchase or sale in the same commodity and delivery month;

    (2) Commodity option transactions that have not expired, been

    exercised, or offset; and

    (3) Swaps that have neither expired nor been terminated.

    * * * * *

    (x) Floor trader. This term means any person:

    (1) Who, in or surrounding any pit, ring, post or other place

    provided by a contract market for the meeting of persons similarly

    engaged, purchases, or sells solely for such person's own account -

    (i) Any commodity for future delivery, security futures product, or

    swap; or

    (ii) Any commodity option authorized under section 4c of the Act;

    or

    (2) Who is registered with the Commission as a floor trader.

    (y) Proprietary account. This term means a commodity futures,

    commodity option, or swap trading account carried on the books and

    records of an individual, a partnership, corporation or other type of

    association:

    (1) For one of the following persons, or

    (2) Of which ten percent or more is owned by one of the following

    persons, or an aggregate of ten percent or more of which is owned by

    more than one of the following persons:

    * * * * *

    (iii) * * *

    (B) The handling of the trades of customers or customer funds of

    such partnership,

    (C) The keeping of records pertaining to the trades of customers or

    customer funds of such partnership, or

    * * * * *

    (v) * * *

    (B) The handling of the trades of customers or customer funds of

    such individual, partnership, corporation or association,

    (C) The keeping of records pertaining to the trades of customers or

    customer funds of such individual, partnership, corporation or

    association, or

    * * * * *

    (vii) A business affiliate that directly or indirectly controls

    such individual, partnership, corporation or association; or

    (viii) A business affiliate that, directly or indirectly is

    controlled by or is under common control with, such individual,

    partnership, corporation or association. Provided, however, That an

    account owned by any shareholder or member of a cooperative association

    of producers, within the meaning of section 6a of the Act, which

    association is registered as a futures commission merchant and carries

    such account on its records, shall be deemed to be an account of a

    customer and not a proprietary account of such association, unless the

    shareholder or member is an officer, director or manager of the

    association.

    (z) Bona fide hedging transactions and positions--(1) General

    definition. (i) Bona fide hedging transactions and positions shall mean

    transactions or positions in a contract for future delivery on any

    contract market, or in a commodity option, where such transactions or

    positions normally represent a substitute for transactions to be made

    or positions to be taken at a later time in a physical marketing

    channel, and where they are

    [[Page 33084]]

    economically appropriate to the reduction of risks in the conduct and

    management of a commercial enterprise, and where they arise from:

    (A) The potential change in the value of assets which a person

    owns, produces, manufactures, processes, or merchandises or anticipates

    owning, producing, manufacturing, processing, or merchandising, or

    (B) The potential change in the value of liabilities which a person

    owns or anticipates incurring, or

    (C) The potential change in the value of services which a person

    provides, purchases, or anticipates providing or purchasing.

    (ii) Notwithstanding the foregoing, no transactions or positions

    shall be classified as bona fide hedging unless their purpose is to

    offset price risks incidental to commercial cash or spot operations and

    such positions are established and liquidated in an orderly manner in

    accordance with sound commercial practices and, for transactions or

    positions on contract markets subject to trading and position limits in

    effect pursuant to section 4a of the Act, unless the provisions of

    paragraph (z)(2) and (3) of this section have been satisfied.

    * * * * *

    (aa) * * *

    (1) * * *

    (i) The solicitation or acceptance of customers' orders (other than

    in a clerical capacity) or

    * * * * *

    (2) * * *

    (i) The solicitation or acceptance of customers' orders (other than

    in a clerical capacity) or

    * * * * *

    (5) A leverage transaction merchant as a partner, officer,

    employee, consultant, or agent (or any natural person occupying a

    similar status or performing similar functions), in any capacity which

    involves:

    (i) The solicitation or acceptance of leverage customers' orders

    (other than in a clerical capacity) for leverage transactions as

    defined in Sec. 31.4(x) of this chapter, or

    (ii) The supervision of any person or persons so engaged.

    (bb)(1) Commodity trading advisor. This term means any person who,

    for compensation or profit, engages in the business of advising others,

    either directly or through publications, writings or electronic media,

    as to the value of or the advisability of trading in any contract of

    sale of a commodity for future delivery, security futures product, or

    swap; any agreement, contract or transaction described in section

    2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option

    authorized under section 4c of the Act; any leverage transaction

    authorized under section 19 of the Act; any person registered with the

    Commission as a commodity trading advisor; or any person, who, for

    compensation or profit, and as part of a regular business, issues or

    promulgates analyses or reports concerning any of the foregoing. The

    term does not include any bank or trust company or any person acting as

    an employee thereof, any news reporter, news columnist, or news editor

    of the print or electronic media or any lawyer, accountant, or teacher,

    any floor broker or futures commission merchant, the publisher or

    producer of any print or electronic data of general and regular

    dissemination, including its employees, the named fiduciary, or

    trustee, of any defined benefit plan which is subject to the provisions

    of the Employee Retirement Income Security Act of 1974, or any

    fiduciary whose sole business is to advise that plan, any contract

    market, and such other persons not within the intent of this definition

    as the Commission may specify by rule, regulation or order: Provided,

    That the furnishing of such services by the foregoing persons is solely

    incidental to the conduct of their business or profession: Provided

    further, That the Commission, by rule or regulation, may include within

    this definition, any person advising as to the value of commodities or

    issuing reports or analyses concerning commodities, if the Commission

    determines that such rule or regulation will effectuate the purposes of

    this provision.

    (2) Client. This term, as it relates to a commodity trading

    advisor, means any person:

    (i) To whom a commodity trading advisor provides advice, for

    compensation or profit, either directly or through publications,

    writings, or electronic media, as to the value of, or the advisability

    of trading in, any contract of sale of a commodity for future delivery,

    security futures product or swap; any agreement, contract or

    transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i)

    of the Act; any commodity option authorized under section 4c of the

    Act; any leverage transaction authorized under section 19 of the Act;

    or

    (ii) To whom, for compensation or profit, and as part of a regular

    business, the commodity trading advisor issues or promulgates analyses

    or reports concerning any of the activities referred to in paragraph

    (bb)(2)(i) of this section. The term ``client'' includes, without

    limitation, any subscriber of a commodity trading advisor.

    (cc) Commodity pool operator. This term means any person engaged in

    a business which is of the nature of a commodity pool, investment

    trust, syndicate, or similar form of enterprise, and who, in connection

    therewith, solicits, accepts, or receives from others, funds,

    securities, or property, either directly or through capital

    contributions, the sale of stock or other forms of securities, or

    otherwise, for the purpose of trading in commodity interests, including

    any commodity for future delivery, security futures product, or swap;

    any agreement, contract or transaction described in section

    2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option

    authorized under section 4c of the Act; any leverage transaction

    authorized under section 19 of the Act; or any person who is registered

    with the Commission as a commodity pool operator, but does not include

    such persons not within the intent of this definition as the Commission

    may specify by rule or regulation or by order.

    * * * * *

    (ee) Self-regulatory organization. This term means a contract

    market (as defined in Sec. 1.3(h)), a swap execution facility (as

    defined in Sec. 1.3(kkk)), a derivatives clearing organization (as

    defined in section 1a(15) of the Act), or a registered futures

    association under section 17 of the Act.

    (ff) Designated self-regulatory organization. This term means:

    (1) Self-regulatory organization of which a futures commission

    merchant, an introducing broker, a leverage transaction merchant, a

    retail foreign exchange dealer, a swap dealer, or a major swap

    participant is a member; or

    (2) If a Commission registrant other than a leverage transaction

    merchant is a member of more than one self-regulatory organization and

    such registrant is the subject of an approved plan under Sec. 1.52 of

    this part, then a self-regulatory organization delegated the

    responsibility by such a plan for monitoring and auditing such

    registrant for compliance with the minimum financial and related

    reporting requirements of the self-regulatory organizations of which

    the registrant is a member, and for receiving the financial reports

    necessitated by such minimum financial and related reporting

    requirements from such registrant; or

    (3) If a leverage transaction merchant is a member of more than one

    self-regulatory organization and such leverage transaction merchant is

    the

    [[Page 33085]]

    subject of an approved plan under Sec. 31.28 of this chapter, then a

    self-regulatory organization delegated the responsibility by such a

    plan for monitoring and auditing such leverage transaction merchant for

    compliance with the minimum financial, cover, segregation and sales

    practice, and related reporting requirements of the self-regulatory

    organizations of which the leverage transaction merchant is a member,

    and for receiving the reports necessitated by such minimum financial,

    cover, segregation and sales practice, and related reporting

    requirements from such leverage transaction merchant.

    (gg) Customer funds. This term means all money, securities, and

    property received by a futures commission merchant or by a clearing

    organization from, for, or on behalf of, customers:

    (1) To margin, guarantee, or secure contracts for future delivery

    or swaps (other than commodity options) on or subject to the rules of a

    contract market, swap execution facility, or derivatives clearing

    organization, as the case may be, and all money accruing to such

    customers as the result of such contracts; and

    (2) In connection with a commodity option transaction on or subject

    to the rules of a contract market, swap execution facility, or

    derivatives clearing organization, as the case may be:

    (i) To be used as a premium for the purchase of a commodity option

    transaction for a customer;

    (ii) As a premium payable to a customer;

    (iii) To guarantee or secure performance of a commodity option by a

    customer; or

    (iv) Representing accruals (including, for purchasers of a

    commodity option for which the full premium has been paid, the market

    value of such commodity option) to a customer.

    (3) Notwithstanding paragraphs (gg)(1) and (2) of this section, the

    term customer funds shall exclude money, securities or property held to

    margin, guarantee or secure security futures products held in a

    securities account, and all money accruing as the result of such

    security futures products.

    * * * * *

    (ii) Premium. This term means the amount agreed upon between the

    purchaser and seller, or their agents, for the purchase or sale of a

    commodity option.

    (jj) [Reserved]

    (kk) Strike price. This term means the price, per unit, at which a

    person may purchase or sell the commodity, swap or contract of sale of

    a commodity for future delivery that is the subject of a commodity

    option: Provided, That for purposes of Sec. 1.17, the term strike

    price means the total price at which a person may purchase or sell the

    commodity, swap, or contract of sale of a commodity for future delivery

    that is the subject of a commodity option (i.e., price per unit times

    the number of units).

    * * * * *

    (mm) * * *

    (1) Any person who, for compensation or profit, whether direct or

    indirect,

    (i) Is engaged in soliciting or in accepting orders (other than in

    a clerical capacity) for the purchase or sale of any commodity for

    future delivery, security futures product, or swap; any agreement,

    contract or transaction described in section 2(c)(2)(C)(i) or section

    2(c)(2)(D)(i) of the Act; any commodity option transaction authorized

    under section 4c; or any leverage transaction authorized under section

    19; or who is registered with the Commission as an introducing broker;

    and

    (ii) Does not accept any money, securities, or property (or extend

    credit in lieu thereof) to margin, guarantee, or secure any trades or

    contracts that result or may result therefrom.

    (2) The term introducing broker shall not include:

    (i) Any futures commission merchant, floor broker, associated

    person, or associated person of a swap dealer or major swap participant

    acting in its capacity as such, regardless of whether that futures

    commission merchant, floor broker, or associated person is registered

    or exempt from registration in such capacity;

    * * * * *

    (nn) Guarantee agreement. This term means an agreement of guarantee

    in the form set forth in part B or C of Form 1-FR, executed by a

    registered futures commission merchant or retail foreign exchange

    dealer, as appropriate, and by an introducing broker or applicant for

    registration as an introducing broker on behalf of an introducing

    broker or applicant for registration as an introducing broker in

    satisfaction of the alternative adjusted net capital requirement set

    forth in Sec. 1.17(a)(1)(iii).

    (oo) Leverage transaction merchant. This term means and includes

    any individual, association, partnership, corporation, trust or other

    person that is engaged in the business of offering to enter into,

    entering into or confirming the execution of leverage contracts, or

    soliciting or accepting orders for leverage contracts, and who accepts

    leverage customer funds (or extends credit in lieu thereof) in

    connection therewith.

    (pp) Leverage customer funds. This term means all money, securities

    and property received, directly or indirectly by a leverage transaction

    merchant from, for, or on behalf of leverage customers to margin,

    guarantee or secure leverage contracts and all money, securities and

    property accruing to such customers as the result of such contracts, or

    the customers' leverage equity. In the case of a long leverage

    transaction, profit or loss accruing to a leverage customer is the

    difference between the leverage transaction merchant's current bid

    price for the leverage contract and the ask price of the leverage

    contract when entered into. In the case of a short leverage

    transaction, profit or loss accruing to a leverage customer is the

    difference between the bid price of the leverage contract when entered

    into and the leverage transaction merchant's current ask price for the

    leverage contract.

    * * * * *

    (rr) * * *

    (2) In the case of foreign options customers in connection with

    open foreign options transactions, money, securities and property

    representing premiums paid or received, plus any other funds required

    to guarantee or secure open transactions plus or minus any unrealized

    gain or loss on such transactions.

    (ss) Foreign board of trade. This term means any board of trade,

    exchange or market located outside the United States, its territories

    or possessions, whether incorporated or unincorporated, where foreign

    futures, foreign options, or foreign swaps are entered into.

    (tt) Electronic signature. This term means an electronic sound,

    symbol, or process attached to or logically associated with a record

    and executed or adopted by a person with the intent to sign the record.

    (uu) [Reserved]

    (vv) Futures account. This term means an account that is maintained

    in accordance with the segregation requirements of section 4d(a) of the

    Act and the rules thereunder.

    * * * * *

    (xx) Foreign broker. This term means any person located outside the

    United States, its territories or possessions who is engaged in

    soliciting or in accepting orders only from persons located outside the

    United States, its territories or possessions for the purchase or sale

    of any commodity interest transaction on or subject to the rules of any

    designated contract market or swap

    [[Page 33086]]

    execution facility and that, in or in connection with such solicitation

    or acceptance of orders, accepts any money, securities or property (or

    extends credit in lieu thereof) to margin, guarantee, or secure any

    trades or contracts that result or may result therefrom.

    (yy) Commodity interest. This term means:

    (1) Any contract for the purchase or sale of a commodity for future

    delivery;

    (2) Any contract, agreement or transaction subject to a Commission

    regulation under section 4c or 19 of the Act;

    (3) Any contract, agreement or transaction subject to Commission

    jurisdiction under section 2(c)(2) of the Act; and

    (4) Any swap as defined in the Act, the Commission's regulations, a

    Commission order or interpretation, or a joint interpretation or order

    issued by the Commission and the Securities and Exchange Commission.

    (zz) Associated person of a swap dealer or major swap participant.

    This term means any person who is associated with a swap dealer or

    major swap participant as a partner, officer, employee, or agent (or

    any person occupying a similar status or performing similar functions),

    in any capacity that involves the solicitation or acceptance of swaps,

    or the supervision of any person or persons so engaged. Provided,

    however, That the term does not include any person associated with a

    swap dealer or major swap participant the functions of which are solely

    clerical or ministerial.

    (aaa) Confirmation. When used in reference to a futures commission

    merchant, introducing broker, or commodity trading advisor, this term

    means documentation (electronic or otherwise) that memorializes

    specified terms of a transaction executed on behalf of a customer. When

    used in reference to a swap dealer or major swap participant, this term

    means documentation (electronic or otherwise) that memorializes

    specified terms of a transaction executed opposite a counterparty.

    (bbb) Electronic trading facility. This term means a trading

    facility that--

    (1) Operates by means of an electronic or telecommunications

    network; and

    (2) Maintains an automated audit trail of bids, offers, and the

    matching of orders or the execution of transactions on the facility.

    (ccc) Order. This term means an instruction or authorization

    provided by a customer to a futures commission merchant, introducing

    broker or commodity trading advisor regarding trading in a commodity

    interest on behalf of the customer.

    (ddd) Organized exchange. This term means a trading facility that--

    (1) Permits trading--

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

    participant; or

    (ii) By persons other than on a principal-to-principal basis; or

    (2) Has adopted (directly or through another nongovernmental

    entity) rules that--

    (i) Govern the conduct of participants, other than rules that

    govern the submission of orders or execution of transactions on the

    trading facility; and

    (ii) Include disciplinary sanctions other than the exclusion of

    participants from trading.

    (eee) Prudential regulator. This term has the meaning given to the

    term in section 1a(39) of the Commodity Exchange Act and includes the

    Board of Governors of the Federal Reserve System, the Office of the

    Comptroller of the Currency, the Federal Deposit Insurance Corporation,

    the Farm Credit Administration, and the Federal Housing Finance Agency,

    as applicable to the swap dealer or major swap participant. The term

    also includes the Federal Deposit Insurance Corporation, with respect

    to any financial company as defined in section 201 of the Dodd-Frank

    Wall Street Reform and Consumer Protection Act or any insured

    depository institution under the Federal Deposit Insurance Act, and

    with respect to each affiliate of any such company or institution.

    (fff) Registered entity. This term means:

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

    5 of the Act;

    (2) A derivatives clearing organization registered under section 5b

    of the Act;

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

    5f of the Act;

    (4) A swap execution facility registered under section 5h of the

    Act;

    (5) A swap data repository registered under section 21 of the Act;

    and

    (6) 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.

    (ggg) Registrant. This term means a commodity pool operator;

    commodity trading advisor; futures commission merchant; introducing

    broker; leverage transaction merchant; floor broker; floor trader;

    major swap participant; retail foreign exchange dealer; or swap dealer

    that is subject to these regulations; or an associated person of any of

    the foregoing other than an associated person of a swap dealer or major

    swap participant.

    (hhh) Retail forex customer. This term means a person, other than

    an eligible contract participant as defined in section 1a(18) of the

    Act, acting on its own behalf and trading in any account, agreement,

    contract or transaction described in section 2(c)(2)(B) or 2(c)(2)(C)

    of the Act.

    (iii) Swap account. This term means an account that is maintained

    in accordance with the segregation requirements of section 4d(f) of the

    Act and the rules thereunder.

    (jjj) Swap data repository. This term means any person that

    collects and maintains information or records with respect to

    transactions or positions in, or the terms and conditions of, swaps

    entered into by third parties for the purpose of providing a

    centralized recordkeeping facility for swaps.

    (kkk) Swap execution facility. This term means a trading system or

    platform in which multiple participants have the ability to execute or

    trade swaps by accepting bids and offers made by multiple participants

    in the facility or system, through any means of interstate commerce,

    including any trading facility, that--

    (1) Facilitates the execution of swaps between persons; and

    (2) Is not a designated contract market.

    (lll) Trading facility. This term has the meaning set forth in

    section 1a(51) of the Act.

    3. Revise Sec. 1.4 to read as follows:

    Sec. 1.4 Use of electronic signatures, acknowledgments and

    verifications.

    For purposes of complying with any provision in the Commodity

    Exchange Act or the rules or regulations in this Chapter I that

    requires a swap transaction to be acknowledged by a swap dealer or

    major swap participant or a document to be signed or verified by a

    customer of a futures commission merchant or introducing broker, a

    retail forex customer of a retail foreign exchange dealer or futures

    commission merchant, a pool participant or a client of a commodity

    trading advisor, or a counterparty of a swap dealer or major swap

    participant, an electronic signature executed by the customer, retail

    forex customer, participant, client, counterparty, swap dealer or major

    swap participant will be sufficient, if the futures commission

    merchant, retail foreign exchange dealer, introducing broker, commodity

    pool operator, commodity trading advisor, swap dealer or major swap

    participant elects generally to accept electronic signatures,

    acknowledgments or verifications or another Commission rule permits the

    use of electronic signatures for the

    [[Page 33087]]

    purposes listed above; Provided, however, That the electronic signature

    must comply with applicable Federal laws and other Commission rules;

    And, Provided further, That the futures commission merchant, retail

    foreign exchange dealer, introducing broker, commodity pool operator,

    commodity trading advisor, swap dealer or major swap participant must

    adopt and use reasonable safeguards regarding the use of electronic

    signatures, including at a minimum safeguards employed to prevent

    alteration of the electronic record with which the electronic signature

    is associated, after such record has been electronically signed.

    4. Remove and reserve paragraph (a)(1)(ii) of Sec. 1.17 to read as

    follows:

    Sec. 1.17 Minimum financial requirements for futures commission

    merchants and introducing brokers.

    (a)(1)(i) * * *

    (ii) [Reserved]

    * * * * *

    5. Revise Sec. 1.20 to read as follows:

    Sec. 1.20 Customer funds to be segregated and separately accounted

    for.

    (a) All customer funds shall be separately accounted for and

    segregated as belonging to customers. Such customer funds when

    deposited with any bank, trust company, clearing organization or

    another futures commission merchant shall be deposited under an account

    name which clearly identifies them as such and shows that they are

    segregated as required by the Act and this part. Each registrant shall

    obtain and retain in its files for the period provided in Sec. 1.31 a

    written acknowledgment from such bank, trust company, clearing

    organization, or futures commission merchant, that it was informed that

    the customer funds deposited therein are those of customers and are

    being held in accordance with the provisions of the Act and this part:

    Provided however, that an acknowledgment need not be obtained from a

    clearing organization that has adopted and submitted to the Commission

    rules that provide for the segregation as customer funds, in accordance

    with all relevant provisions of the Act and the rules and orders

    promulgated thereunder, of all funds held on behalf of customers. Under

    no circumstances shall any portion of customer funds be obligated to a

    clearing organization, any member of a contract market, a futures

    commission merchant, or any depository except to purchase, margin,

    guarantee, secure, transfer, adjust or settle trades, contracts or

    commodity option transactions of customers. No person, including any

    clearing organization or any depository, that has received customer

    funds for deposit in a segregated account, as provided in this section,

    may hold, dispose of, or use any such funds as belonging to any person

    other than the customers of the futures commission merchant which

    deposited such funds.

    (b) All customer funds received by a clearing organization from a

    member of the clearing organization to purchase, margin, guarantee,

    secure or settle the trades, contracts or commodity options of the

    clearing member's customers and all money accruing to such customers as

    the result of trades, contracts or commodity options so carried shall

    be separately accounted for and segregated as belonging to such

    customers, and a clearing organization shall not hold, use or dispose

    of such customer funds except as belonging to such customers. Such

    customer funds when deposited in a bank or trust company shall be

    deposited under an account name which clearly shows that they are the

    customer funds of the customers of clearing members, segregated as

    required by the Act and these regulations. The clearing organization

    shall obtain and retain in its files for the period provided by Sec.

    1.31 an acknowledgment from such bank or trust company that it was

    informed that the customer funds deposited therein are those of

    customers of its clearing members and are being held in accordance with

    the provisions of the Act and these regulations.

    (c) Each futures commission merchant shall treat and deal with the

    customer funds of a customer as belonging to such customer. All

    customer funds shall be separately accounted for, and shall not be

    commingled with the money, securities or property of a futures

    commission merchant or of any other person, or be used to secure or

    guarantee the trades, contracts or commodity options, or to secure or

    extend the credit, of any person other than the one for whom the same

    are held: Provided, however, That customer funds treated as belonging

    to the customers of a futures commission merchant may for convenience

    be commingled and deposited in the same account or accounts with any

    bank or trust company, with another person registered as a futures

    commission merchant, or with a clearing organization, and that such

    share thereof as in the normal course of business is necessary to

    purchase, margin, guarantee, secure, transfer, adjust, or settle the

    trades, contracts or commodity options of such customers or resulting

    market positions, with the clearing organization or with any other

    person registered as a futures commission merchant, may be withdrawn

    and applied to such purposes, including the payment of premiums to

    option grantors, commissions, brokerage, interest, taxes, storage and

    other fees and charges, lawfully accruing in connection with such

    trades, contracts or commodity options: Provided further, That customer

    funds may be invested in instruments described in Sec. 1.25.

    6. Revise Sec. 1.21 to read as follows:

    Sec. 1.21 Care of money and equities accruing to customers.

    All money received directly or indirectly by, and all money and

    equities accruing to, a futures commission merchant from any clearing

    organization or from any clearing member or from any member of a

    contract market incident to or resulting from any trade, contract or

    commodity option made by or through such futures commission merchant on

    behalf of any customer shall be considered as accruing to such customer

    within the meaning of the Act and these regulations. Such money and

    equities shall be treated and dealt with as belonging to such customer

    in accordance with the provisions of the Act and these regulations.

    Money and equities accruing in connection with customers' open trades,

    contracts, or commodity options need not be separately credited to

    individual accounts but may be treated and dealt with as belonging

    undivided to all customers having open trades, contracts, or commodity

    option positions which if closed would result in a credit to such

    customers.

    7. Revise Sec. 1.22 to read as follows:

    Sec. 1.22 Use of customer funds restricted.

    No futures commission merchant shall use, or permit the use of, the

    customer funds of one customer to purchase, margin, or settle the

    trades, contracts, or commodity options of, or to secure or extend the

    credit of, any person other than such customer. Customer funds shall

    not be used to carry trades or positions of the same customer other

    than in commodities or commodity options traded through the facilities

    of a contract market.

    8. Revise Sec. 1.23 to read as follows:

    Sec. 1.23 Interest of futures commission merchant in segregated

    funds; additions and withdrawals.

    The provision in section 4d(a)(2) of the Act and the provision in

    Sec. 1.20(c), which prohibit the commingling of customer funds with

    the funds of a futures commission merchant, shall not be construed to

    prevent a futures

    [[Page 33088]]

    commission merchant from having a residual financial interest in the

    customer funds, segregated as required by the Act and the rules in this

    part and set apart for the benefit of customers; nor shall such

    provisions be construed to prevent a futures commission merchant from

    adding to such segregated customer funds such amount or amounts of

    money, from its own funds or unencumbered securities from its own

    inventory, of the type set forth in Sec. 1.25, as it may deem

    necessary to ensure any and all customers' accounts from becoming

    undersegregated at any time. The books and records of a futures

    commission merchant shall at all times accurately reflect its interest

    in the segregated funds. A futures commission merchant may draw upon

    such segregated funds to its own order, to the extent of its actual

    interest therein, including the withdrawal of securities held in

    segregated safekeeping accounts held by a bank, trust company, contract

    market, clearing organization or other futures commission merchant.

    Such withdrawal shall not result in the funds of one customer being

    used to purchase, margin or carry the trades, contracts or commodity

    options, or extend the credit of any other customer or other person.

    9. Revise Sec. 1.24 to read as follows:

    Sec. 1.24 Segregated funds; exclusions therefrom.

    Money held in a segregated account by a futures commission merchant

    shall not include: (a) Money invested in obligations or stocks of any

    clearing organization or in memberships in or obligations of any

    contract market; or

    (b) Money held by any clearing organization which it may use for

    any purpose other than to purchase, margin, guarantee, secure,

    transfer, adjust, or settle the contracts, trades, or commodity options

    of the customers of such futures commission merchant.

    10. Revise Sec. 1.26 to read as follows:

    Sec. 1.26 Deposit of instruments purchased with customer funds.

    (a) Each futures commission merchant who invests customer funds in

    instruments described in Sec. 1.25 shall separately account for such

    instruments and segregate such instruments as belonging to such

    customers. Such instruments, when deposited with a bank, trust company,

    clearing organization or another futures commission merchant, shall be

    deposited under an account name which clearly shows that they belong to

    customers and are segregated as required by the Act and this part. Each

    futures commission merchant upon opening such an account shall obtain

    and retain in its files an acknowledgment from such bank, trust

    company, clearing organization or other futures commission merchant

    that it was informed that the instruments belong to customers and are

    being held in accordance with the provisions of the Act and this part.

    Provided, however, that an acknowledgment need not be obtained from a

    clearing organization that has adopted and submitted to the Commission

    rules that provide for the segregation as customer funds, in accordance

    with all relevant provisions of the Act and the rules and orders

    promulgated thereunder, of all funds held on behalf of customers and

    all instruments purchased with customer funds. Such acknowledgment

    shall be retained in accordance with Sec. 1.31. Such bank, trust

    company, clearing organization or other futures commission merchant

    shall allow inspection of such obligations at any reasonable time by

    representatives of the Commission.

    (b) Each clearing organization which invests money belonging or

    accruing to customers of its clearing members in instruments described

    in Sec. 1.25 shall separately account for such instruments and

    segregate such instruments as belonging to such customers. Such

    instruments, when deposited with a bank or trust company, shall be

    deposited under an account name which will clearly show that they

    belong to customers and are segregated as required by the Act and this

    part. Each clearing organization upon opening such an account shall

    obtain and retain in its files a written acknowledgment from such bank

    or trust company that it was informed that the instruments belong to

    customers of clearing members and are being held in accordance with the

    provisions of the Act and this part. Such acknowledgment shall be

    retained in accordance with Sec. 1.31. Such bank or trust company

    shall allow inspection of such instruments at any reasonable time by

    representatives of the Commission.

    11. Revise the introductory text of paragraph (a) in Sec. 1.27 to

    read as follows:

    Sec. 1.27 Record of investments.

    (a) Each futures commission merchant which invests customer funds,

    and each derivatives clearing organization which invests customer funds

    of its clearing members' customers, shall keep a record showing the

    following:

    * * * * *

    12. Revise Sec. 1.30 to read as follows:

    Sec. 1.30 Loans by futures commission merchants; treatment of

    proceeds.

    Nothing in the regulations in this part shall prevent a futures

    commission merchant from lending its own funds to customers on

    securities and property pledged by such customers, or from repledging

    or selling such securities and property pursuant to specific written

    agreement with such customers. The proceeds of such loans used to

    purchase, margin, guarantee, or secure the trades, contracts, or

    commodity options of customers shall be treated and dealt with by a

    futures commission merchant as belonging to such customers, in

    accordance with and subject to the provisions of section 4d(a)(2) of

    the Act and these regulations.

    13. Amend Sec. 1.31 by revising paragraphs (a)(1), (a)(2), (b)

    introductory text, (b)(1)(ii)(D), (b)(2)(i), (b)(2)(ii), (b)(2)(iii),

    (b)(2)(v)(B), (b)(3)(i), (b)(3)(ii)(A), (b)(3)(ii)(C), (b)(3)(iii)(A),

    and (b)(4)(i), to read as follows:

    Sec. 1.31 Books and records; keeping and inspection.

    (a)(1) All books and records required to be kept by the Act or by

    these regulations shall be kept in their original form (for paper

    records) or native file format (for electronic records) for a period of

    five years from the date thereof and shall be readily accessible during

    the first 2 years of the 5-year period; Provided, however, That records

    of any swap or related cash or forward transaction shall be kept until

    the termination, maturity, expiration, transfer, assignment, or

    novation date of the transaction and for a period of five years after

    such date. All such books and records shall be open to inspection by

    any representative of the Commission, the United States Department of

    Justice, any applicable prudential regulator as that term is defined in

    section 1a(39) of the Act, or, in connection with those security-based

    swap agreements described in section 1a(47)(A)(v) of the Act, the

    United States Securities and Exchange Commission. For purposes of this

    section, native file format means an electronic file that exists in the

    format it was originally created.

    (2) Persons required to keep books and records by the Act or by

    these regulations shall produce such records in a form specified by any

    representative of the Commission. Such production shall be made, at the

    expense of the person required to keep the book or record, to a

    Commission representative upon the representative's request. Instead of

    furnishing a copy, such person may provide the original book or record

    for reproduction, which

    [[Page 33089]]

    the representative may temporarily remove from such person's premises

    for this purpose. All copies or originals shall be provided promptly.

    Upon request, the Commission representative shall issue a receipt

    provided by such person for any copy or original book or record

    received. At the request of the Commission representative, such person

    shall, upon the return thereof, issue a receipt for any copy or

    original book or record returned by the representative.

    (b) Except as provided in paragraph (d) of this section, books and

    records required to be kept by the Act or by these regulations may be

    stored on either ``micrographic media'' (as defined in paragraph

    (b)(1)(i) of this section) or ``electronic storage media'' (as defined

    in paragraph (b)(1)(ii) of this section) for the required time period

    under the conditions set forth in this paragraph (b); Provided,

    however, For electronic records, such storage media must preserve the

    native file format of the electronic records as required by paragraph

    (a)(1) of this section.

    (1) * * *

    (ii) * * *

    (D) Permits the immediate downloading of indexes and records

    preserved on the electronic storage media onto paper, microfilm,

    microfiche or other medium acceptable under this paragraph (b) upon the

    request of representatives of the Commission, the Department of

    Justice, any applicable prudential regulator as that term is defined in

    section 1a(39) of the Act, or the Securities and Exchange Commission

    with respect to those security-based swap agreements described in

    section 1a(47)(A)(5) of the Act.

    (2) * * *

    (i) Have available at all times, for examination by representatives

    of the Commission, the Department of Justice, any applicable prudential

    regulator as that term is defined in section 1a(39) of the Act, or the

    Securities and Exchange Commission with respect to those security-based

    swap agreements described in section 1a(47)(A)(5) of the Act,

    facilities for immediate, easily readable projection or production of

    micrographic media or electronic storage media images;

    (ii) Be ready at all times to provide, and immediately provide at

    the expense of the person required to keep such records, any easily

    readable hard-copy image that representatives of the Commission, the

    Department of Justice, any applicable prudential regulator as that term

    is defined in section 1a(39) of the Act, or the Securities and Exchange

    Commission with respect to those security-based swap agreements

    described in section 1a(47)(A)(5) of the Act, may request;

    (iii) Keep only Commission-required records on the individual

    medium employed (e.g., a disk or sheets of microfiche);

    * * * * *

    (v) * * *

    (B) The index is available at all times for immediate examination

    by representatives of the Commission, the Department of Justice, any

    applicable prudential regulator as that term is defined in section

    1a(39) of the Act, or the Securities and Exchange Commission with

    respect to those security-based swap agreements described in section

    1a(47)(A)(5) of the Act;

    * * * * *

    (3) * * *

    (i) Be ready at all times to provide, and immediately provide at

    the expense of the person required to keep such records, copies of such

    records on such approved compatible data processing media as defined in

    Sec. 15.00(d) of this chapter which any representative of the

    Commission, the Department of Justice, any applicable prudential

    regulator as that term is defined in section 1a(39) of the Act, or the

    Securities and Exchange Commission with respect to those security-based

    swap agreements described in section 1a(47)(A)(5) of the Act, may

    request. Records must use a format and coding structure specified in

    the request.

    (ii) * * *

    (A) The results of such audit system are available at all times for

    immediate examination by representatives of the Commission, the

    Department of Justice, any applicable prudential regulator as that term

    is defined in section 1a(39) of the Act, or the Securities and Exchange

    Commission with respect to those security-based swap agreements

    described in section 1a(47)(A)(5) of the Act;

    * * * * *

    (C) The written operational procedures and controls are available

    at all times for immediate examination by representatives of the

    Commission, the Department of Justice, any applicable prudential

    regulator as that term is defined in section 1a(39) of the Act, or the

    Securities and Exchange Commission with respect to those security-based

    swap agreements described in section 1a(47)(A)(5) of the Act.

    (iii) * * *

    (A) Maintain, keep current, and make available at all times for

    immediate examination by representatives of the Commission, the

    Department of Justice, any applicable prudential regulator as that term

    is defined in section 1a(39) of the Act, or the Securities and Exchange

    Commission with respect to those security-based swap agreements

    described in section 1a(47)(A)(5) of the Act, all information necessary

    to access records and indexes maintained on the electronic storage

    media; or

    * * * * *

    (4) * * *

    (i) The Technical Consultant must file with the Commission an

    undertaking in a form acceptable to the Commission, signed by the

    Technical Consultant or a person duly authorized by the Technical

    Consultant. An acceptable undertaking must include the following

    provision with respect to the Electronic Recordkeeper:* * *

    With respect to any books and records maintained or preserved on

    behalf of the Electronic Recordkeeper, the undersigned hereby

    undertakes to furnish promptly to any representative of the United

    States Commodity Futures Trading Commission, the United States

    Department of Justice, any applicable prudential regulator as that

    term is defined in section 1a(39) of the Act, or the United States

    Securities and Exchange Commission with respect to those security-

    based swap agreements described in section 1a(47)(A)(5) of the Act

    (the ``Representative''), upon reasonable request, such information

    as is deemed necessary by the Representative to download information

    kept on the Electronic Recordkeeper's electronic storage media to

    any medium acceptable under 17 CFR 1.31. The undersigned also

    undertakes to take reasonable steps to provide access to information

    contained on the Electronic Recordkeeper's electronic storage media,

    including, as appropriate, arrangements for the downloading of any

    record required to be maintained under the Commodity Exchange Act or

    the rules, regulations, or orders of the United States Commodity

    Futures Trading Commission, in a format acceptable to the

    Representative. In the event the Electronic Recordkeeper fails to

    download a record into a readable format and after reasonable notice

    to the Electronic Recordkeeper, upon being provided with the

    appropriate electronic storage medium, the undersigned will

    undertake to do so, at no charge to the United States, as the

    Representative may request.

    * * * * *

    14. Revise paragraphs (a)(1) and (a)(2) of Sec. 1.32 to read as

    follows:

    Sec. 1.32 Segregated account; daily computation and record.

    (a) * * *

    (1) The total amount of customer funds on deposit in segregated

    accounts on behalf of customers;

    (2) The amount of such customer funds required by the Act and these

    regulations to be on deposit in segregated accounts on behalf of such

    customers; and

    * * * * *

    [[Page 33090]]

    15. Amend Sec. 1.33 by:

    a. Revising paragraph (a) introductory text, (a)(1) introductory

    text, (a)(1)(i), (a)(1)(ii), (a)(2) introductory text, and (a)(2)(v);

    b. Adding paragraph (a)(3);

    c. Revising paragraph (b) introductory text and paragraph (b)(1),

    redesignating paragraphs (b)(2) through (b)(4) as paragraphs (b)(3)

    through (b)(5), respectively, and adding paragraph (b)(2);

    d. Revising redesignated paragraph (b)(3) introductory text, and

    redesignated paragraphs (b)(3)(i), (b)(4), and (b)(5); and

    e. Revising paragraph (d) introductory text to read as follows:

    Sec. 1.33 Monthly and confirmation statements.

    (a) Monthly statements. Each futures commission merchant must

    promptly furnish in writing to each customer, and to each foreign

    futures and foreign options customer, as of the close of the last

    business day of each month or as of any regular monthly date selected,

    except for accounts in which there are neither open positions at the

    end of the statement period nor any changes to the account balance

    since the prior statement period, but in any event not less frequently

    than once every three months, a statement which clearly shows:

    (1) For each commodity futures and foreign futures position--

    (i) The open position with prices at which acquired;

    (ii) The net unrealized profits or losses in all open positions

    marked to the market;

    * * * * *

    (2) For each commodity option position and foreign option

    position--

    * * * * *

    (v) A detailed accounting of all financial charges and credits to

    such customer's account(s) during the monthly reporting period,

    including all customer funds and funds on deposit with respect to

    foreign option transactions in accordance with Sec. 30.7 of this

    chapter received from or disbursed to such customer, premiums charged

    and received, and realized profits and losses.

    (3) For each swap position--

    (i) All swaps caused to be executed by the futures commission

    merchant for the customer;

    (ii) The net unrealized profits or losses in all swaps marked to

    the market;

    (iii) Any customer funds carried with the futures commission

    merchant; and

    (iv) A detailed accounting of all financial charges and credits to

    such customer accounts during the monthly reporting period, including

    all customer funds received from or disbursed to such customer and

    realized profits and losses.

    (b) Confirmation statement. Each futures commission merchant must,

    not later than the next business day after any commodity interest or

    commodity option transaction, including any foreign futures or foreign

    options transactions, furnish to each customer:

    (1) A written confirmation of each commodity futures transaction

    caused to be executed by it for the customer.

    (2) A written confirmation of each swap caused to be executed by it

    for the customer, containing at least the following information:

    (i) The unique swap identifier, as required by Sec. 45.4(a) of

    this chapter, for each swap and date each swap was executed;

    (ii) The product name of each swap;

    (iii) The price at which the swap was executed;

    (iv) The date of maturity for each swap; and

    (v) If cleared, the derivatives clearing organization through which

    it is cleared.

    (3) A written confirmation of each commodity option transaction,

    containing at least the following information:

    (i) The customer's account identification number;

    * * * * *

    (4) Upon the expiration or exercise of any commodity option, a

    written confirmation statement thereof, which statement shall include

    the date of such occurrence, a description of the option involved, and,

    in the case of exercise, the details of the futures or physical

    position which resulted therefrom including, if applicable, the final

    trading date of the contract for future delivery underlying the option.

    (5) Notwithstanding the provisions of paragraphs (b)(1) through

    (b)(4) of this section, a commodity interest transaction that is caused

    to be executed for a commodity pool need be confirmed only to the

    operator of the commodity pool.

    * * * * *

    (d) Controlled accounts. With respect to any account controlled by

    any person other than the customer for whom such account is carried,

    each futures commission merchant shall:

    * * * * *

    16. Revise Sec. 1.34 to read as follows:

    Sec. 1.34 Monthly record, ``point balance''.

    (a) With respect to commodity futures transactions, each futures

    commission merchant shall prepare, and retain in accordance with the

    requirements of Sec. 1.31, a statement commonly known as a ``point

    balance,'' which accrues or brings to the official closing price, or

    settlement price fixed by the clearing organization, all open positions

    of customers as of the last business day of each month or of any

    regular monthly date selected: Provided, however, That a futures

    commission merchant who carries part or all of customers' open

    positions with other futures commission merchants on an ``instruct

    basis'' will be deemed to have met the requirements of this section as

    to open positions so carried if a monthly statement is prepared which

    shows that the prices and amounts of such positions long and short in

    the customers' accounts are in balance with those in the carrying

    futures commission merchants' accounts, and such statements are

    retained in accordance with the requirements of Sec. 1.31.

    (b) With respect to commodity option transactions, each futures

    commission merchant shall prepare, and retain in accordance with the

    requirements of Sec. 1.31, a listing in which all open commodity

    option positions carried for customers are marked to the market. Such

    listing shall be prepared as of the last business day of each month, or

    as of any regular monthly date selected, and shall be by put or by

    call, by underlying contract for future delivery (by delivery month) or

    underlying physical (by option expiration date), and by strike price.

    17. Section 1.35 is revised to read as follows:

    Sec. 1.35 Records of commodity interest and cash commodity

    transactions.

    (a) Futures commission merchants, retail foreign exchange dealers,

    introducing brokers, and members of designated contract markets or swap

    execution facilities. Each futures commission merchant, retail foreign

    exchange dealer, introducing broker, and member of a designated

    contract market or swap execution facility shall keep full, complete,

    and systematic records, which include all pertinent data and memoranda,

    of all transactions relating to its business of dealing in commodity

    interests and cash commodities. Each futures commission merchant,

    retail foreign exchange dealer, introducing broker, and member of a

    designated contract market or swap execution facility shall retain the

    required records in accordance with the requirements of Sec. 1.31, and

    produce them for inspection and furnish true and correct information

    and reports as to the contents or the meaning thereof, when and as

    requested by an authorized

    [[Page 33091]]

    representative of the Commission or the United States Department of

    Justice. Included among such records shall be all orders (filled,

    unfilled, or canceled), trading cards, signature cards, street books,

    journals, ledgers, canceled checks, copies of confirmations, copies of

    statements of purchase and sale, and all other records, which have been

    prepared in the course of its business of dealing in commodity

    interests and cash commodities, and all oral and written communications

    provided or received concerning quotes, solicitations, bids, offers,

    instructions, trading, and prices, that lead to the execution of

    transactions in a commodity interest or cash commodity, whether

    communicated by telephone, voicemail, facsimile, instant messaging,

    chat rooms, electronic mail, mobile device or other digital or

    electronic media. Each transaction record shall be maintained as a

    separate electronic file identifiable by transaction and counterparty.

    Among such records each member of a designated contract market or swap

    execution facility must retain and produce for inspection are all

    documents on which trade information is originally recorded, whether or

    not such documents must be prepared pursuant to the rules or

    regulations of either the Commission, the designated contract market or

    the swap execution facility. For purposes of this section, such

    documents are referred to as ``original source documents.''

    (b) Futures commission merchants, retail foreign exchange dealers,

    introducing brokers, and members of designated contract markets and

    swap execution facilities: Recording of customers' orders. (1) Each

    futures commission merchant, each retail foreign exchange dealer, each

    introducing broker, and each member of a designated contract market or

    swap execution facility receiving a customer's order that cannot

    immediately be entered into a trade matching engine shall immediately

    upon receipt thereof prepare a written record of the order including

    the account identification, except as provided in paragraph (b)(5) of

    this section, and order number, and shall record thereon, by time stamp

    or other timing device, the date and time, to the nearest minute, the

    order is received, and in addition, for commodity option orders, the

    time, to the nearest minute, the order is transmitted for execution.

    (2)(i) Each member of a designated contract market who on the floor

    of such designated contract market receives a customer's order which is

    not in the form of a written record including the account

    identification, order number, and the date and time, to the nearest

    minute, the order was transmitted or received on the floor of such

    designated contract market, shall immediately upon receipt thereof

    prepare a written record of the order in nonerasable ink, including the

    account identification, except as provided in paragraph (b)(5) of this

    section, and order number and shall record thereon, by time stamp or

    other timing device, the date and time, to the nearest minute, the

    order is received.

    (ii) Except as provided in paragraph (b)(3) of this section:

    (A) Each member of a designated contract market who on the floor of

    such designated contract market receives an order from another member

    present on the floor which is not in the form of a written record

    shall, immediately upon receipt of such order, prepare a written record

    of the order or obtain from the member who placed the order a written

    record of the order, in non-erasable ink, including the account

    identification and order number and shall record thereon, by time stamp

    or other timing device, the date and time, to the nearest minute, the

    order is received; or

    (B) When a member of a designated contract market present on the

    floor places an order, which is not in the form of a written record,

    for his own account or an account over which he has control, with

    another member of such designated contract market for execution:

    (1) The member placing such order immediately upon placement of the

    order shall record the order and time of placement to the nearest

    minute on a sequentially numbered trading card maintained in accordance

    with the requirements of paragraph (f) of this section;

    (2) The member receiving and executing such order immediately upon

    execution of the order shall record the time of execution to the

    nearest minute on a trading card or other record maintained pursuant to

    the requirements of paragraph (f) of this section; and

    (3) The member receiving and executing the order shall return such

    trading card or other record to the member placing the order. The

    member placing the order then must submit together both of the trading

    cards or other records documenting such trade to designated contract

    market personnel or the clearing member.

    (3)(i) The requirements of paragraph (b)(2)(ii) of this section

    will not apply if a designated contract market maintains in effect

    rules which provide for an exemption where:

    (A) A member of a designated contract market places with another

    member of such designated contract market an order that is part of a

    spread transaction;

    (B) The member placing the order personally executes one or more

    legs of the spread; and

    (C) The member receiving and executing such order immediately upon

    execution of the order records the time of execution to the nearest

    minute on his trading card or other record maintained in accordance

    with the requirements of paragraph (f) of this section.

    (4) Each member of a designated contract market reporting the

    execution from the floor of the designated contract market of a

    customer's order or the order of another member of the designated

    contract market received in accordance with paragraphs (b)(2)(i) or

    (b)(2)(ii)(A) of this section, shall record on a written record of the

    order, including the account identification, except as provided in

    paragraph (b)(5) of this section, and order number, by time stamp or

    other timing device, the date and time to the nearest minute such

    report of execution is made. Each member of a designated contract

    market shall submit the written records of customer orders or orders

    from other designated contract market members to designated contract

    market personnel or to the clearing member responsible for the

    collection of orders prepared pursuant to this paragraph. The execution

    price and other information reported on the order tickets must be

    written in nonerasable ink.

    (5) Post-execution allocation of bunched orders. Specific customer

    account identifiers for accounts included in bunched orders executed on

    designated contract markets or swap execution facilities need not be

    recorded at time of order placement or upon report of execution if the

    requirements of paragraphs (b)(5)(i) through (v) of this section are

    met. Specific customer account identifiers for accounts included in

    bunched orders involving swaps need not be included in confirmations or

    acknowledgments provided by swap dealers or major swap participants

    pursuant to Sec. 23.501(a) of this chapter if the requirements of

    paragraphs (b)(5)(i) through (v) of this section are met.

    (i) Eligible account managers for orders executed on designated

    contract markets or swap execution facilities. The person placing and

    directing the allocation of an order eligible for post-execution

    allocation must have been granted written investment discretion with

    regard to participating customer accounts. The following persons shall

    qualify as eligible account managers for

    [[Page 33092]]

    trades executed on designated contract markets or swap execution

    facilities:

    (A) A commodity trading advisor registered with the Commission

    pursuant to the Act or excluded or exempt from registration under the

    Act or the Commission's rules, except for entities exempt under Sec.

    4.14(a)(3) of this chapter;

    (B) An investment adviser registered with the Securities and

    Exchange Commission pursuant to the Investment Advisers Act of 1940 or

    with a state pursuant to applicable state law or excluded or exempt

    from registration under such Act or applicable state law or rule;

    (C) A bank, insurance company, trust company, or savings and loan

    association subject to federal or state regulation;

    (D) A foreign adviser that exercises discretionary trading

    authority solely over the accounts of non-U.S. persons, as defined in

    Sec. 4.7(a)(1)(iv) of this chapter;

    (E) A futures commission merchant registered with the Commission

    pursuant to the Act; or

    (F) An introducing broker registered with the Commission pursuant

    to the Act.

    (ii) Eligible account managers for orders executed bilaterally. The

    person placing and directing the allocation of an order eligible for

    post-execution allocation must have been granted written investment

    discretion with regard to participating customer accounts. The

    following persons shall qualify as eligible account managers for trades

    executed bilaterally:

    (A) A commodity trading advisor registered with the Commission

    pursuant to the Act or excluded or exempt from registration under the

    Act or the Commission's rules, except for entities exempt under Sec.

    4.14(a)(3) of this chapter;

    (B) A futures commission merchant registered with the Commission

    pursuant to the Act; or

    (C) An introducing broker registered with the Commission pursuant

    to the Act.

    (iii) Information. Eligible account managers shall make the

    following information available to customers upon request:

    (A) The general nature of the allocation methodology the account

    manager will use;

    (B) Whether accounts in which the account manager may have any

    interest may be included with customer accounts in bunched orders

    eligible for post-execution allocation; and

    (C) Summary or composite data sufficient for that customer to

    compare its results with those of other comparable customers and, if

    applicable and consistent with Sec. 155.3(a)(1) and Sec. 155.4(a)(1)

    of this chapter, any account in which the account manager has an

    interest.

    (iv) Allocation. Orders eligible for post-execution allocation must

    be allocated by an eligible account manager in accordance with the

    following:

    (A) Allocations must be made as soon as practicable after the

    entire transaction is executed, but in any event no later than the

    following times: For cleared trades, account managers must provide

    allocation information to futures commission merchants no later than a

    time sufficiently before the end of the day the order is executed to

    ensure that clearing records identify the ultimate customer for each

    trade. For uncleared trades, account managers must provide allocation

    information to the counterparty no later than the end of the calendar

    day that the swap was executed.

    (B) Allocations must be fair and equitable. No account or group of

    accounts may receive consistently favorable or unfavorable treatment.

    (C) The allocation methodology must be sufficiently objective and

    specific to permit independent verification of the fairness of the

    allocations using that methodology by appropriate regulatory and self-

    regulatory authorities and by outside auditors.

    (v) Records. (A) Eligible account managers shall keep and must make

    available upon request of any representative of the Commission, the

    United States Department of Justice, or other appropriate regulatory

    agency, the information specified in paragraph (b)(5)(iii) of this

    section.

    (B) Eligible account managers shall keep and must make available

    upon request of any representative of the Commission, the United States

    Department of Justice, or other appropriate regulatory agency, records

    sufficient to demonstrate that all allocations meet the standards of

    paragraph (b)(5)(iv) of this section and to permit the reconstruction

    of the handling of the order from the time of placement by the account

    manager to the allocation to individual accounts.

    (C) Futures commission merchants, introducing brokers, or commodity

    trading advisors that execute orders or that carry accounts eligible

    for post-execution allocation, and members of designated contract

    markets or swap execution facilities that execute such orders, must

    maintain records that, as applicable, identify each order subject to

    post-execution allocation and the accounts to which contracts executed

    for such order are allocated.

    (D) In addition to any other remedies that may be available under

    the Act or otherwise, if the Commission has reason to believe that an

    account manager has failed to provide information requested pursuant to

    paragraph (b)(5)(v)(A) or (b)(5)(v)(B) of this section, the Commission

    may inform in writing any designated contract market, swap execution

    facility, swap dealer, or major swap participant, and that designated

    contract market, swap execution facility, swap dealer, or major swap

    participant shall prohibit the account manager from submitting orders

    for execution except for liquidation of open positions and no futures

    commission merchant shall accept orders for execution on any designated

    contract market, swap execution facility, or bilaterally from the

    account manager except for liquidation of open positions.

    (E) Any account manager that believes he or she is or may be

    adversely affected or aggrieved by action taken by the Commission under

    paragraph (b)(5)(v)(D) of this section shall have the opportunity for a

    prompt hearing in accordance with the provisions of Sec. 21.03(g) of

    this chapter.

    (c)(1) Futures commission merchants, introducing brokers, and

    members of designated contract markets and swap execution facilities.

    Upon request of the designated contract market or swap execution

    facility, the Commission, or the United States Department of Justice,

    each futures commission merchant, introducing broker, and member of a

    designated contract market or swap execution facility shall request

    from its customers and, upon receipt thereof, provide to the requesting

    body documentation of cash transactions underlying exchanges of futures

    or swaps for cash commodities or exchanges of futures or swaps in

    connection with cash commodity transactions.

    (2) Customers. Each customer of a futures commission merchant,

    introducing broker, or member of a designated contract market or swap

    execution facility shall create, retain, and produce upon request of

    the designated contract market or swap execution facility, the

    Commission, or the United States Department of Justice documentation of

    cash transactions underlying exchanges of futures or swaps for cash

    commodities or exchanges of futures or swaps in connection with cash

    commodity transactions.

    (3) Documentation. For the purposes of this paragraph,

    documentation means those documents customarily generated

    [[Page 33093]]

    in accordance with cash market practices which demonstrate the

    existence and nature of the underlying cash transactions, including,

    but not limited to, contracts, confirmation statements, telex

    printouts, invoices, and warehouse receipts or other documents of

    title.

    (d) Futures commission merchants, retail foreign exchange dealers,

    introducing brokers, and members of derivatives clearing organizations

    clearing trades executed on designated contract markets and swap

    execution facilities. Each futures commission merchant, each retail

    foreign exchange dealer, and each member of a derivatives clearing

    organization clearing trades executed on a designated contract market

    or swap execution facility and, for purposes of paragraph (d)(3) of

    this section, each introducing broker, shall, as a minimum requirement,

    prepare regularly and promptly, and keep systematically and in

    permanent form, the following:

    (1) A financial ledger record which will show separately for each

    customer all charges against and credits to such customer's account,

    including but not limited to customer funds deposited, withdrawn, or

    transferred, and charges or credits resulting from losses or gains on

    closed transactions;

    (2) A record of transactions which will show separately for each

    account (including proprietary accounts):

    (i) All commodity futures transactions executed for such account,

    including the date, price, quantity, market, commodity and future;

    (ii) All retail forex transactions executed for such account,

    including the date, price, quantity, and currency;

    (iii) All commodity option transactions executed for such account,

    including the date, whether the transaction involved a put or call,

    expiration date, quantity, underlying contract for future delivery or

    underlying physical, strike price, and details of the purchase price of

    the option, including premium, mark-up, commission and fees; and

    (iv) All swap transactions executed for such account, including the

    date, price, quantity, market, commodity, swap, and, if cleared, the

    derivatives clearing organization; and

    (3) A record or journal which will separately show for each

    business day complete details of:

    (i) All commodity futures transactions executed on that day,

    including the date, price, quantity, market, commodity, future and the

    person for whom such transaction was made;

    (ii) All retail forex transactions executed on that day for such

    account, including the date, price, quantity, currency and the person

    who whom such transaction was made;

    (iii) All commodity option transactions executed on that day,

    including the date, whether the transaction involved a put or call, the

    expiration date, quantity, underlying contract for future delivery or

    underlying physical, strike price, details of the purchase price of the

    option, including premium, mark-up, commission and fees, and the person

    for whom the transaction was made;

    (iv) All swap transactions executed on that day, including the

    date, price, quantity, market, commodity, swap, the person for whom

    such transaction was made, and, if cleared, the derivatives clearing

    organization; and

    (v) In the case of an introducing broker, the record or journal

    required by this paragraph (d)(3) shall also include the futures

    commission merchant or retail foreign exchange dealer carrying the

    account for which each commodity futures, retail forex, commodity

    option, and swap transaction was executed on that day. Provided,

    however, that where reproductions on microfilm, microfiche or optical

    disk are substituted for hard copy in accordance with the provisions of

    Sec. 1.31(b) of this part, the requirements of paragraphs (d)(1) and

    (d)(2) of this section will be considered met if the person required to

    keep such records is ready at all times to provide, and immediately

    provides in the same city as that in which such person's commodity

    futures, retail forex, commodity option, or swap books and records are

    maintained, at the expense of such person, reproduced copies which show

    the records as specified in paragraphs (b)(1) and (b)(2) of this

    section, on request of any representatives of the Commission or the

    U.S. Department of Justice.

    (e) Members of derivatives clearing organizations clearing trades

    executed on designated contract markets and swap execution facilities.

    In the daily record or journal required to be kept under paragraph

    (d)(3) of this section, each member of a derivatives clearing

    organization clearing trades executed on a designated contract market

    or swap execution facility shall also show the floor broker or floor

    trader executing each transaction, the opposite floor broker or floor

    trader, and the opposite clearing member with whom it was made.

    (f) Members of designated contract markets. (1) Each member of a

    designated contract market who, in the place provided by the designated

    contract market for the meeting of persons similarly engaged, executes

    purchases or sales of any commodity for future delivery, commodity

    option, or swap on or subject to the rules of such designated contract

    market, shall prepare regularly and promptly a trading card or other

    record showing such purchases and sales. Such trading card or record

    shall show the member's name, the name of the clearing member,

    transaction date, time, quantity, and, as applicable, underlying

    commodity, contract for future delivery, swap or physical, price or

    premium, delivery month or expiration date, whether the transaction

    involved a put or a call, and strike price. Such trading card or other

    record shall also clearly identify the opposite floor broker or floor

    trader with whom the transaction was executed, and the opposite

    clearing member (if such opposite clearing member is made known to the

    member).

    (2) Each member of a designated contract market recording purchases

    and sales on trading cards must record such purchases and sales in

    exact chronological order of execution on sequential lines of the

    trading card without skipping lines between trades; Provided, however,

    That if lines remain after the last execution recorded on a trading

    card, the remaining lines must be marked through.

    (3) Each member of a designated contract market must identify on

    his or her trading cards the purchases and sales executed during the

    opening and closing periods designated by the designated contract

    market.

    (4) Trading cards prepared by a member of a designated contract

    market must contain:

    (i) Pre-printed member identification or other unique identifying

    information which would permit the trading cards of one member to be

    distinguished from those of all other members;

    (ii) Pre-printed sequence numbers to permit the intra-day

    sequencing of the cards; and

    (iii) Unique and pre-printed identifying information which would

    distinguish each of the trading cards prepared by the member from other

    such trading cards for no less than a one-week period.

    (5) Trading cards prepared by a member of a designated contract

    market and submitted pursuant to paragraph (f)(7)(i) of this section

    must be time-stamped promptly to the nearest minute upon collection by

    either the designated contract market or the relevant clearing member.

    (6) Each member of a designated contract market shall be

    accountable for all trading cards prepared in exact numerical sequence,

    whether or not

    [[Page 33094]]

    such trading cards are relied on as original source documents.

    (7) Trading records prepared by a member of a designated contract

    market must:

    (i) Be submitted to designated contract market personnel or the

    clearing member within 15 minutes of designated intervals not to exceed

    30 minutes, commencing with the beginning of each trading session. The

    time period for submission of trading records after the close of

    trading in each market shall not exceed 15 minutes from the close. Such

    documents should nevertheless be submitted as often as is practicable

    to the designated contract market or relevant clearing member; and

    (ii) Be completed in non-erasable ink. A member may correct any

    errors by crossing out erroneous information without obliterating or

    otherwise making illegible any of the originally recorded information.

    With regard to trading cards only, a member may correct erroneous

    information by rewriting the trading card; Provided, however, that the

    member must submit a ply of the trading card, or in the absence of

    plies the original trading card, that is subsequently rewritten in

    accordance with the collection schedule for trading cards and provided

    further, that the member is accountable for any trading card that

    subsequently is rewritten pursuant to paragraph (f)(6) of this section.

    (8) Each member of a designated contract market must use a new

    trading card at the beginning of each designated 30-minute interval (or

    such lesser interval as may be determined appropriate) or as may be

    required pursuant hereto.

    (g) Members of derivatives clearing organizations clearing trades

    executed on designated contract markets and swap execution facilities.

    (1) Each member of a derivatives clearing organization clearing trades

    executed on a designated contract market or swap execution facility

    shall maintain a single record which shall show for each futures,

    option or swap trade: the transaction date, time, quantity, and, as

    applicable, underlying commodity, contract for future delivery, swap or

    physical, price or premium, delivery month or expiration date, whether

    the transaction involved a put or a call, strike price, floor broker or

    floor trader buying, clearing member buying, floor broker or floor

    trader selling, clearing member selling, and symbols indicating the

    buying and selling customer types. The customer type indicator shall

    show, with respect to each person executing the trade, whether such

    person:

    (i) Was trading for his or her own account, or an account for which

    he or she has discretion;

    (ii) Was trading for his or her clearing member's house account;

    (iii) Was trading for another member present on the exchange floor,

    or an account controlled by such other member; or

    (iv) Was trading for any other type of customer.

    (2) The record required by this paragraph (g) shall also show, by

    appropriate and uniform symbols, any transaction which is made non-

    competitively in accordance with the provisions of subpart J of part 38

    of this chapter, and trades cleared on dates other than the date of

    execution. Except as otherwise approved by the Commission for good

    cause shown, the record required by this paragraph (g) shall be

    maintained in a format and coding structure approved by the

    Commission--

    (i) In hard copy or on microfilm as specified in Sec. 1.31, and

    (ii) For 60 days in computer-readable form on compatible magnetic

    tapes or discs.

    18. Revise Sec. 1.36 to read as follows:

    Sec. 1.36 Record of securities and property received from customers.

    (a) Each futures commission merchant and each retail foreign

    exchange dealer shall maintain, as provided in Sec. 1.31, a record of

    all securities and property received from customers or retail forex

    customers in lieu of money to margin, purchase, guarantee, or secure

    the commodity interests of such customers or retail forex customers.

    Such record shall show separately for each customer or retail forex

    customer: A description of the securities or property received; the

    name and address of such customer or retail forex customer; the dates

    when the securities or property were received; the identity of the

    depositories or other places where such securities or property are

    segregated or held; the dates of deposits and withdrawals from such

    depositories; and the dates of return of such securities or property to

    such customer or retail forex customer, or other disposition thereof,

    together with the facts and circumstances of such other disposition. In

    the event any futures commission merchant deposits with a clearing

    organization, directly or with a bank or trust company acting as

    custodian for such clearing organization, securities and/or property

    which belong to a particular customer, such futures commission merchant

    shall obtain written acknowledgment from such clearing organization

    that it was informed that such securities or property belong to

    customers of the futures commission merchant making the deposit. Such

    acknowledgment shall be retained as provided in Sec. 1.31.

    (b) Each clearing organization which receives from members

    securities or property belonging to particular customers of such

    members in lieu of money to margin, purchase, guarantee, or secure the

    commodity interests of such customers, or receives notice that any such

    securities or property have been received by a bank or trust company

    acting as custodian for such clearing organization, shall maintain, as

    provided in Sec. 1.31, a record which will show separately for each

    member, the dates when such securities or property were received, the

    identity of the depositories or other places where such securities or

    property are segregated, the dates such securities or property were

    returned to the member, or otherwise disposed of, together with the

    facts and circumstances of such other disposition including the

    authorization therefor.

    19. Revise Sec. 1.37 to read as follows:

    Sec. 1.37 Customer's name, address, and occupation recorded; record

    of guarantor or controller of account.

    (a) Each futures commission merchant, retail foreign exchange

    dealer, introducing broker, and member of a contract market shall keep

    a record in permanent form which shall show for each commodity interest

    account carried or introduced by it the true name and address of the

    person for whom such account is carried or introduced and the principal

    occupation or business of such person as well as the name of any other

    person guaranteeing such account or exercising any trading control with

    respect to such account. For each such commodity option account, the

    records kept by such futures commission merchant, introducing broker,

    and member of a contract market must also show the name of the person

    who has solicited and is responsible for each customer's account or

    assign account numbers in such a manner to identify that person.

    (b) As of the close of the market each day, each futures commission

    merchant which carries an account for another futures commission

    merchant, foreign broker (as defined in Sec. 15.00 of this chapter),

    member of a contract market, or other person, on an omnibus basis shall

    maintain a daily record for each such omnibus account of the total open

    long contracts and the total open short contracts in each future and in

    each swap and, for commodity option transactions, the total open put

    options purchased, the total open put options granted, the total open

    call options

    [[Page 33095]]

    purchased, and the total open call options granted for each commodity

    option expiration date.

    (c) Each designated contract market and swap execution facility

    shall keep a record in permanent form, which shall show the true name,

    address, and principal occupation or business of any foreign trader

    executing transactions on the facility or exchange. In addition, upon

    request, a designated contract market or swap execution facility shall

    provide to the Commission information regarding the name of any person

    guaranteeing such transactions or exercising any control over the

    trading of such foreign trader.

    (d) Paragraph (c) of this section shall not apply to a designated

    contract market or swap execution facility on which transactions in

    futures, swaps or options (other than swaps) contracts of foreign

    traders are executed through, or the resulting transactions are

    maintained in, accounts carried by a registered futures commission

    merchant or introduced by a registered introducing broker subject to

    the provisions of paragraph (a) of this section.

    20. Amend Sec. 1.39 by revising paragraph (a) introductory text,

    (a)(1)(ii), (a)(2), (a)(3), (a)(4), (b) introductory text, (b)(2), and

    (c), to read as follows:

    Sec. 1.39 Simultaneous buying and selling orders of different

    principals; execution of, for and between principals.

    (a) Conditions and requirements. A member of a contract market or a

    swap execution facility who shall have at the same time both buying and

    selling orders of different principals for the same swap, commodity for

    future delivery in the same delivery month or the same option (both

    puts or both calls, with the same underlying contract for future

    delivery or the same underlying physical, expiration date and strike

    price) may execute such orders for and directly between such principals

    at the market price, if in conformity with written rules of such

    contract market or swap execution facility which have been approved by

    or self-certified to the Commission, and:

    (1) * * *

    (ii) When in non-pit trading in swaps or contracts of sale for

    future delivery, bids and offers are posted on a board, such member:

    (A) Pursuant to such buying order posts a bid on the board and,

    incident to the execution of such selling order, accepts such bid and

    all other bids posted at prices equal to or higher than the bid posted

    by him, or

    (B) Pursuant to such selling order posts an offer on the board and,

    incident to the execution of such buying order, accepts such offer and

    all other offers posted at prices equal to or lower than the offer

    posted by him;

    (2) Such member executes such orders in the presence of an official

    representative of such contract market designated to observe such

    transactions or on a system or platform accessible by an official

    representative of such swap execution facility and, by appropriate

    descriptive words or symbol, clearly identifies all such transactions

    on his trading card or other record, made at the time of execution, and

    notes thereon the exact time of execution and promptly presents or

    makes available said record to such official representative for

    verification and initialing, as appropriate;

    (3) Such swap execution facility or contract market keeps a record

    in permanent form of each such transaction showing all transaction

    details required to be captured by the Act, Commission rule or

    regulation; and

    (4) Neither the futures commission merchant, other registrant

    receiving nor the member executing such orders has any interest

    therein, directly or indirectly, except as a fiduciary.

    (b) Large order execution procedures. A member of a contract market

    or a swap execution facility may execute simultaneous buying and

    selling orders of different principals directly between the principals

    in compliance with Commission regulations and large order execution

    procedures established by written rules of the contract market or swap

    execution facility that have been approved by or self-certified to the

    Commission: Provided, That, to the extent such large order execution

    procedures do not meet the conditions and requirements of paragraph (a)

    of this section, the contract market or swap execution facility has

    petitioned the Commission for, and the Commission has granted, an

    exemption from the conditions and requirements of paragraph (a) of this

    section. Any such petition must be accompanied by proposed contract

    market or swap execution facility rules to implement the large order

    execution procedures. The petition shall include:

    * * * * *

    (2) A description of a special surveillance program that would be

    followed by the contract market or swap execution facility in

    monitoring the large order execution procedures.

    * * * * *

    (c) Not deemed filling orders by offset. The execution of orders in

    compliance with the conditions herein set forth will not be deemed to

    constitute the filling of orders by offset within the meaning of

    section 4b(a) of the Act.

    21. Revise Sec. 1.40 to read as follows:

    Sec. 1.40 Crop, market information letters, reports; copies required.

    Each futures commission merchant, each retail foreign exchange

    dealer, each introducing broker, each member of a contract market and

    each eligible contract participant with trading privileges on a swap

    execution facility shall, upon request, furnish or cause to be

    furnished to the Commission a true copy of any letter, circular,

    telecommunication, or report published or given general circulation by

    such futures commission merchant, retail foreign exchange dealer,

    introducing broker, member or eligible contract participant which

    concerns crop or market information or conditions that affect or tend

    to affect the price of any commodity, including any exchange rate, and

    the true source of or authority for the information contained therein.

    Sec. 1.44 [Removed and Reserved]

    22. Remove and reserve Sec. 1.44.

    23. Amend Sec. 1.46 by revising paragraph (a)(1) introductory text

    and paragraphs (a)(1)(iii), (a)(1)(iv), (a)(2)(iii), (a)(2)(iv), and

    (b), to read as follows:

    Sec. 1.46 Application and closing out of offsetting long and short

    positions.

    (a) Application of purchases and sales. (1) Except with respect to

    purchases or sales which are for omnibus accounts, or where the

    customer or account controller has instructed otherwise, any futures

    commission merchant who, on or subject to the rules of a designated

    contract market:

    * * * * *

    (iii) Purchases a put or call option for the account of any

    customer when the account of such customer at the time of such purchase

    has a short put or call option position with the same underlying

    futures contract or same underlying physical, strike price, expiration

    date and contract market as that purchased; or

    (iv) Sells a put or call option for the account of any customer

    when the account of such customer at the time of such sale has a long

    put or call option position with the same underlying futures contract

    or same underlying physical, strike price, expiration date and contract

    market as that sold--shall on the same day apply such purchase or sale

    against such previously held short or long futures or option position,

    as the case may be, and shall, for futures transactions, promptly

    furnish such

    [[Page 33096]]

    customer a statement showing the financial result of the transactions

    involved and, if applicable, that the account was introduced to the

    futures commission merchant by an introducing broker and the names of

    the futures commission merchant and introducing broker.

    (2) * * *

    (iii) Purchases a put or call option involving foreign currency for

    the account of any customer when the account of such customer at the

    time of such purchase has a short put or call option position with the

    same underlying currency, strike price, and expiration date as that

    purchased; or

    (iv) Sells a put or call option involving foreign currency for the

    account of any customer when the account of such customer at the time

    of such sale has a long put or call option position with the same

    underlying currency, strike price, and expiration date as that sold--

    shall immediately apply such purchase or sale against such previously

    held opposite transaction, and shall promptly furnish such retail forex

    customer a statement showing the financial result of the transactions

    involved and, if applicable, that the account was introduced to the

    futures commission merchant or retail foreign exchange dealer by an

    introducing broker and the names of the futures commission merchant or

    retail foreign exchange dealer, and the introducing broker.

    (b) Close-out against oldest open position. In all instances

    wherein the short or long futures, retail forex transaction or option

    position in such customer's or retail forex customer's account

    immediately prior to such offsetting purchase or sale is greater than

    the quantity purchased or sold, the futures commission merchant or

    retail foreign exchange dealer shall apply such offsetting purchase or

    sale to the oldest portion of the previously held short or long

    position: Provided, That upon specific instructions from the customer

    the offsetting transaction shall be applied as specified by the

    customer without regard to the date of acquisition of the previously

    held position; and Provided, further, That a futures commission

    merchant or retail foreign exchange dealer, if permitted by the rules

    of a registered futures association, may offset, at the customer's

    request, retail forex transactions of the same size, even if the

    customer holds other transactions of a different size, but in each case

    must offset the transaction against the oldest transaction of the same

    size. Such instructions may also be accepted from any person who, by

    power of attorney or otherwise, actually directs trading in the

    customer's or retail forex customer's account unless the person

    directing the trading is the futures commission merchant or retail

    foreign exchange dealer (including any partner thereof), or is an

    officer, employee, or agent of the futures commission merchant or

    retail foreign exchange dealer. With respect to every such offsetting

    transaction that, in accordance with such specific instructions, is not

    applied to the oldest portion of the previously held position, the

    futures commission merchant or retail foreign exchange dealer shall

    clearly show on the statement issued to the customer or retail forex

    customer in connection with the transaction, that because of the

    specific instructions given by or on behalf of the customer or retail

    forex customer the transaction was not applied in the usual manner,

    i.e., against the oldest portion of the previously held position.

    However, no such showing need be made if the futures commission

    merchant or retail foreign exchange dealer has received such specific

    instructions in writing from the customer or retail forex customer for

    whom such account is carried.

    * * * * *

    24. Revise paragraph (b)(1)(iii) of Sec. 1.49 to read as follows:

    Sec. 1.49 Denomination of customer funds and location of

    depositories.

    * * * * *

    (b) * * * (1) * * *

    (iii) In a currency in which funds have accrued to the customer as

    a result of trading conducted on a designated contract market, to the

    extent of such accruals.

    * * * * *

    Sec. 1.53 [Removed and Reserved]

    25. Remove and reserve Sec. 1.53.

    26. Amend Sec. 1.57 by revising paragraph (a)(1), (a)(2)

    introductory text, (a)(2)(ii), (c) introductory text, (c)(2),

    (c)(4)(i), and (c)(4)(iv), to read as follows:

    Sec. 1.57 Operations and activities of introducing brokers.

    (a) * * *

    (1) Open and carry each customer's account with a carrying futures

    commission merchant on a fully-disclosed basis: Provided, however, That

    an introducing broker which has entered into a guarantee agreement with

    a futures commission merchant in accordance with the provisions of

    Sec. 1.10(j) of this part must open and carry such customer's account

    with such guarantor futures commission merchant on a fully-disclosed

    basis; and

    (2) Transmit promptly for execution all customer orders to:

    * * * * *

    (ii) A floor broker, if the introducing broker identifies its

    carrying futures commission merchant and that carrying futures

    commission merchant is also the clearing member with respect to the

    customer's order.

    * * * * *

    (c) An introducing broker may not accept any money, securities or

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

    secure any trades or contracts of customers, or any money, securities

    or property accruing as a result of such trades or contracts:

    Provided, however, That an introducing broker may deposit a check

    in a qualifying account or forward a check drawn by a customer if:

    * * * * *

    (2) The check is payable to the futures commission merchant

    carrying the customer's account;

    * * * * *

    (4) * * *

    (i) Which is maintained in an account name which clearly identifies

    the funds therein as belonging to customers of the futures commission

    merchant carrying the customer's account;

    * * * * *

    (iv) For which the bank or trust company provides the futures

    commission merchant carrying the customer's account with a written

    acknowledgment, which the futures commission merchant must retain in

    its files in accordance with Sec. 1.31, that it was informed that the

    funds deposited therein are those of customers and are being held in

    accordance with the provisions of the Act and these regulations.

    27. Amend Sec. 1.59 by revising paragraphs (a)(4)(i), (a)(5),

    (a)(7), (a)(8), (a)(9) introductory text, (a)(10), (b)(1) introductory

    text, (b)(1)(i)(A), (b)(1)(i)(C), and (c), to read as follows:

    Sec. 1.59 Activities of self-regulatory organization employees,

    governing board members, committee members and consultants.

    (a) * * *

    (4) * * *

    (i) Any governing board member compensated by a self-regulatory

    organization solely for governing board activities; or

    * * * * *

    (5) Material information means information which, if such

    information were publicly known, would be considered important by a

    reasonable person in deciding whether to trade a particular commodity

    interest on a

    [[Page 33097]]

    contract market or a swap execution facility, or to clear a swap

    contract through a derivatives clearing organization. As used in this

    section, ``material information'' includes, but is not limited to,

    information relating to present or anticipated cash positions,

    commodity interests, trading strategies, the financial condition of

    members of self-regulatory organizations or members of linked exchanges

    or their customers, or the regulatory actions or proposed regulatory

    actions of a self-regulatory organization or a linked exchange.

    * * * * *

    (7) Linked exchange means:

    (i) Any board of trade, exchange or market outside the United

    States, its territories or possessions, which has an agreement with a

    contract market or swap execution facility in the United States that

    permits positions in a commodity interest which have been established

    on one of the two markets to be liquidated on the other market;

    (ii) Any board of trade, exchange or market outside the United

    States, its territories or possessions, the products of which are

    listed on a United States contract market, swap execution facility, or

    a trading facility thereof;

    (iii) Any securities exchange, the products of which are held as

    margin in a commodity account or cleared by a securities clearing

    organization pursuant to a cross-margining arrangement with a futures

    clearing organization; or

    (iv) Any clearing organization which clears the products of any of

    the foregoing markets.

    (8) Commodity interest means any commodity futures, commodity

    option or swap contract traded on or subject to the rules of a contract

    market, a swap execution facility or linked exchange, or cleared by a

    derivatives clearing organization, or cash commodities traded on or

    subject to the rules of a board of trade which has been designated as a

    contract market.

    (9) Related commodity interest means any commodity interest which

    is traded on or subject to the rules of a contract market, swap

    execution facility, linked exchange, or other board of trade, exchange,

    or market, or cleared by a derivatives clearing organization, other

    than the self-regulatory organization by which a person is employed,

    and with respect to which:

    * * * * *

    (10) Pooled investment vehicle means a trading vehicle organized

    and operated as a commodity pool within the meaning of Sec. 4.10(d) of

    this chapter, and whose units of participation have been registered

    under the Securities Act of 1933, or a trading vehicle for which Sec.

    4.5 of this chapter makes available relief from regulation as a

    commodity pool operator, i.e., registered investment companies,

    insurance company separate accounts, bank trust funds, and certain

    pension plans.

    (b) Employees of self-regulatory organizations; Self-regulatory

    organization rules. (1) Each self-regulatory organization must maintain

    in effect rules which have been submitted to the Commission pursuant to

    section 5c(c) of the Act and part 40 of this chapter (or, pursuant to

    section 17(j) of the Act in the case of a registered futures

    association) that, at a minimum, prohibit:

    (i) * * *

    (A) Trading, directly or indirectly, in any commodity interest

    traded on or cleared by the employing contract market, swap execution

    facility, or clearing organization;

    * * * * *

    (C) Trading, directly or indirectly, in a commodity interest traded

    on contract markets or swap execution facilities or cleared by

    derivatives clearing organizations other than the employing self-

    regulatory organization if the employee has access to material, non-

    public information concerning such commodity interest;

    * * * * *

    (c) Governing board members, committee members, and consultants;

    Registered futures association rules. Each registered futures

    association must maintain in effect rules which have been submitted to

    the Commission pursuant to section 17(j) of the Act which provide that

    no governing board member, committee member, or consultant shall use or

    disclose --for any purpose other than the performance of official

    duties as a governing board member, committee member, or consultant--

    material, non-public information obtained as a result of the

    performance of such person's official duties.

    * * * * *

    Sec. 1.62 [Removed and Reserved]

    28. Remove and reserve Sec. 1.62.

    29. Amend Sec. 1.63 by revising paragraph (a)(1), (b) introductory

    text and (d) to read as follows:

    Sec. 1.63 Service on self-regulatory organization governing boards or

    committees by persons with disciplinary histories.

    (a) * * *

    (1) Self-regulatory organization means a ``self-regulatory

    organization'' as defined in Sec. 1.3(ee) of this chapter, and

    includes a ``clearing organization'' as defined in Sec. 1.3(d) of this

    chapter, except as defined in paragraph (b)(6) of this section.

    * * * * *

    (b) Each self-regulatory organization must maintain in effect rules

    which have been submitted to the Commission pursuant to section 5c(c)

    of the Act and part 40 of this chapter or, in the case of a registered

    futures association, pursuant to section 17(j) of the Act, that render

    a person ineligible to serve on its disciplinary committees,

    arbitration panels, oversight panels or governing board who:

    * * * * *

    (d) Each self-regulatory organization shall submit to the

    Commission a schedule listing all those rule violations which

    constitute disciplinary offenses as defined in paragraph (a)(6)(i) of

    this section and to the extent necessary to reflect revisions shall

    submit an amended schedule within thirty days of the end of each

    calendar year. Each self-regulatory organization must maintain and keep

    current the schedule required by this section, and post the schedule on

    the self-regulatory organization's website so that it is in a public

    place designed to provide notice to members and otherwise ensure its

    availability to the general public.

    * * * * *

    30. Revise paragraph (a)(1) and paragraph (b) of Sec. 1.67 to read

    as follows:

    Sec. 1.67 Notification of final disciplinary action involving

    financial harm to a customer.

    (a) * * *

    (1) Final disciplinary action means any decision by or settlement

    with a contract market or swap execution facility in a disciplinary

    matter which cannot be further appealed at the contract market or swap

    execution facility, is not subject to the stay of the Commission or a

    court of competent jurisdiction, and has not been reversed by the

    Commission or any court of competent jurisdiction.

    * * * * *

    (b) Upon any final disciplinary action in which a contract market

    or swap execution facility finds that a member has committed a rule

    violation that involved a transaction for a customer, whether executed

    or not, and that resulted in financial harm to the customer:

    (1)(i) The contract market or swap execution facility shall

    promptly provide written notice of the disciplinary action to the

    futures commission merchant or other registrant; and

    [[Page 33098]]

    (ii) A futures commission merchant or other registrant that

    receives a notice, under paragraph (b)(1)(i) of this section shall

    promptly provide written notice of the disciplinary action to the

    customer as disclosed on its books and records. If the customer is

    another futures commission merchant or other registrant, such futures

    commission merchant or other registrant shall promptly provide notice

    to the customer.

    (2) A written notice required by paragraph (b)(1) of this section

    must include the principal facts of the disciplinary action and a

    statement that the contract market or swap execution facility has found

    that the member has committed a rule violation that involved a

    transaction for the customer, whether executed or not, and that

    resulted in financial harm to the customer. For the purposes of this

    paragraph, a notice which includes the information listed in Sec.

    9.11(b) of this chapter shall be deemed to include the principal facts

    of the disciplinary action thereof.

    Sec. 1.68 [Removed and Reserved]

    31. Remove and reserve Sec. 1.68.

    32. Amend Appendix B to part 1 by revising paragraph (b) to read as

    follows:

    Appendix B to Part 1--Fees for Contract Market Rule Enforcement Reviews

    and Financial Reviews

    * * * * *

    (b) The Commission determines fees charged to exchanges based

    upon a formula that considers both actual costs and trading volume.

    * * * * *

    Appendix C to Part 1--[Removed and Reserved]

    33. Remove and reserve Appendix C to part 1.

    PART 5--OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

    34a. The authority citation for part 5 continues to read as

    follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

    6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19,

    21, 23.

    34b. Revise paragraphs (k) and (m) of Sec. 5.1 to read as follows:

    Sec. 5.1 Definitions.

    * * * * *

    (k) Retail forex customer means a person, other than an eligible

    contract participant as defined in section 1a(18) of the Act, acting on

    its own behalf and trading in any account, agreement, contract or

    transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.

    * * * * *

    (m) Retail forex transaction means any account, agreement, contract

    or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the

    Act. A retail forex transaction does not include an account, agreement,

    contract or transaction in foreign currency that is a contract of sale

    of a commodity for future delivery (or an option thereon) that is

    executed, traded on or otherwise subject to the rules of a contract

    market designated pursuant to section 5(a) of the Act.

    PART 7--CONTRACT MARKET RULES ALTERED OR SUPPLEMENTED BY THE

    COMMISSION

    35. Revise part 7 to read as follows:

    PART 7--REGISTERED ENTITY RULES ALTERED OR SUPPLEMENTED BY THE

    COMMISSION

    Authority: 7 U.S.C. 7a-2(c) and 12a(7), as amended by Title VII

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

    Pub. L. 111-203, 124 Stat. 1376 (2010).

    Subpart A--General Provisions

    Sec. 7.1. Scope of rules.

    This part sets forth registered entity rules altered or

    supplemented by the Commission pursuant to section 8a(7) of the Act.

    Subpart B--[Reserved]

    Subpart C--[Reserved]

    PART 8--[REMOVED AND RESERVED]

    36. Remove and reserve part 8.

    PART 15--REPORTS--GENERAL PROVISIONS

    37a. 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, 9,

    12a, 19, and 21, as amended by Title VII of the Dodd-Frank Wall

    Street Reform and Consumer Protection Act, Pub. L. 111-203, 124

    Stat. 1376 (2010).

    37b. Revise paragraphs (a), (e), (f), (g) and (h) of Sec. 15.05 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(c)(1)(i) traded on

    an electronic trading facility operating in reliance on the exemption

    set forth in Sec. 36.3 of this chapter, traded or executed on or

    subject to the rules of any designated contract market, or for the

    purposes of paragraph (i) of this section, a reporting market

    (including all agreements, contracts and transactions that are treated

    by a clearing organization as fungible with such contracts); the term

    ``option contract'' means any contract for the purchase or sale of a

    commodity option, or as applicable, any other instrument subject to the

    Act, traded or executed on or subject to the rules of any designated

    contract market, or for the purposes of paragraph (i) of this section,

    a reporting market (including all agreements, contracts and

    transactions that are treated by a clearing organization as fungible

    with such contracts); the term ``customer'' means any person for whose

    benefit a foreign broker makes or causes to be made any futures

    contract or option contract; and the term ``communication'' means any

    summons, complaint, order, subpoena, special call, request for

    information, or notice, as well as any other written document or

    correspondence.

    * * * * *

    (e) Any designated contract market that permits a foreign broker to

    intermediate contracts, agreements or transactions, or permits a

    foreign trader to effect contracts, agreements or transactions on the

    facility or exchange, shall be deemed to be the agent of the foreign

    broker and any of its customers for whom the transactions were

    executed, or the foreign trader, for purposes of accepting delivery and

    service of any communication issued by or on behalf of the Commission

    to the foreign broker, any of its customers or the foreign trader with

    respect to any contracts, agreements or transactions executed by the

    foreign broker or the foreign trader on the designated contract market.

    Service or delivery of any communication issued by or on behalf of the

    Commission to a designated contract market shall constitute valid and

    effective service upon the foreign broker, any of its customers or the

    foreign trader. A designated contract 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 broker, any of its

    customers or a 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

    broker, any of its customers or the foreign trader.

    (f) It shall be unlawful for any designated contract market to

    permit a foreign broker, any of its customers or a foreign trader to

    effect contracts, agreements or transactions on the facility unless the

    designated contract

    [[Page 33099]]

    market prior thereto informs the foreign broker, any of its customers

    or the foreign trader, in any reasonable manner the facility deems to

    be appropriate, of the requirements of this section.

    (g) The requirements of paragraphs (e) and (f) of this section

    shall not apply to any contracts, transactions or agreements traded on

    any designated contract market if the foreign broker, any of its

    customers or the 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 designated contract market prior to effecting any

    contract, agreement or transaction on the facility. This agreement must

    authorize the person domiciled in the United States to serve as the

    agent of the foreign broker, any of its customers or the foreign trader

    for purposes of accepting delivery and service of all communications

    issued by or on behalf of the Commission to the foreign broker, any of

    its customers 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 designated contract market prior to permitting

    the foreign broker, any of its customers or the foreign trader to

    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. A foreign broker, any of its customers 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 designated contract market knows or should know that the

    agreement has expired, been terminated, or is no longer in effect, the

    designated contract market shall notify the Secretary of the Commission

    immediately. If the written agency agreement expires, terminates, or is

    not in effect, the designated contract market and the foreign broker,

    any of its customers or the foreign trader are subject to the

    provisions of paragraphs (e) and (f) of this section.

    (h) The provisions of paragraphs (e), (f) and (g) of this section

    shall not apply to a designated contract market on which all

    transactions of foreign brokers, their customers or foreign traders in

    futures or option contracts are executed through, or the resulting

    transactions are maintained in, accounts carried by a registered

    futures commission merchant or introduced by a registered introducing

    broker subject to the provisions of paragraphs (a), (b), (c) and (d) of

    this section.

    * * * * *

    PART 18--REPORTS BY TRADERS

    38a. The authority citation for part 18 is revised to read as

    follows:

    Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a

    and 19, as amended by Title VII of the Dodd-Frank Wall Street Reform

    and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376

    (2010); 5 U.S.C. 552 and 552(b), unless otherwise noted.

    38b. Revise paragraphs (a)(2), (a)(3), and (a)(4) of Sec. 18.05 to

    read as follows:

    Sec. 18.05 Maintenance of books and records.

    (a) * * *

    (2) Executed over the counter or pursuant to part 35 of this

    chapter;

    (3) On exempt commercial markets operating under a Commission

    grandfather relief order issued pursuant to Section 723(c)(2)(B) of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-

    203, 124 Stat. 1376 (2010));

    (4) On exempt boards of trade operating under a Commission

    grandfather relief order issued pursuant to Section 734(c)(2) of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-

    203, 124 Stat. 1376 (2010)); and

    * * * * *

    PART 21--SPECIAL CALLS

    39a. The authority citation for part 21 is revised to read as

    follows:

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

    12a, 19 and 21, as amended by Title VII of the Dodd-Frank Wall

    Street Reform and Consumer Protection Act, Pub. L. 111-203, 124

    Stat. 1376 (2010); 5 U.S.C. 552 and 552(b), unless otherwise noted.

    39b. Revise paragraph (b) of Sec. 21.03 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.

    * * * * *

    (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(40)(F) of

    the Act, to cause to open an account, or to cause transactions to be

    effected, in a contract traded in reliance on a Commission grandfather

    relief order issued pursuant to Section 723(c)(2)(B) of the Dodd-Frank

    Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124

    Stat. 1376 (2010)), 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 person deems

    appropriate, the provisions of this section.

    * * * * *

    PART 36--EXEMPT MARKETS

    40a. The authority citation for part 36 is revised to read as

    follows:

    Authority: 7 U.S.C. 2, 6, 6c and 12a, as amended by Title VII

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

    Pub. L. 111-203, 124 Stat. 1376 (2010); Sections 723(c)(2)(B) and

    734(c)(2), Pub. L. 111-203, 124 Stat. 1376 (2010).

    40b. Section 36.1 is revised to read as follows:

    Sec. 36.1 Scope.

    The provisions of this part apply to any board of trade or

    electronic trading facility that operates as:

    (a) An exempt commercial market operating under a grandfather

    relief order issued by the Commission pursuant to Section 723(c)(2)(B)

    of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.

    L. 111-203, 124 Stat. 1376 (2010)), or

    (b) An exempt board of trade operating under a grandfather relief

    order issued by the Commission pursuant to Section 734(c)(2) of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-

    203, 124 Stat. 1376 (2010)).

    41. Amend Sec. 36.2 by:

    a. Revising paragraph (a) introductory text and (a)(2)(i);

    b. Adding paragraph (a)(3); and

    c. Revising paragraph (b) introductory text, (c)(1), (c)(2)(i)

    introductory text, (c)(2)(ii) introductory text, (c)(2)(iii),

    (c)(2)(iv)(A) introductory text, and (c)(3), to read as follows:

    Sec. 36.2 Exempt boards of trade.

    (a) Eligible commodities. Commodities eligible to be traded by an

    exempt board of trade are:

    * * * * *

    (2) * * *

    (i) The commodities defined in section 1a(19) of the Act as

    ``excluded commodities'' (other than a security,

    [[Page 33100]]

    including any group or index thereof or any interest in, or based on

    the value of, any security or group or index of securities); and

    * * * * *

    (3) Such contracts must be entered into only between persons that

    are eligible contract participants, as defined in section 1a(18) of the

    Act and as further defined by the Commission, at the time at which the

    persons entered into the contract.

    (b) Notification. Boards of trade operating as exempt boards of

    trade shall maintain on file with the Secretary of the Commission at

    the Commission's Washington, DC headquarters, in electronic form, a

    ``Notification of Operation as an Exempt Board of Trade,'' and it shall

    include:

    * * * * *

    (c) Additional requirements--(1) Prohibited representation. A board

    of trade that meets the criteria set forth in this section and operates

    as an exempt board of trade shall not represent to any person that it

    is registered with, designated, recognized, licensed or approved by the

    Commission.

    (2) Market data dissemination--(i) Criteria for price discovery

    determination. An exempt board of trade 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 when:

    * * * * *

    (ii) Notification. An exempt board of trade operating a market in

    reliance on the criteria set forth in this section shall notify the

    Commission when:

    * * * * *

    (iii) Price discovery determination. Following receipt of notice

    under paragraph (c)(2)(ii) of this section, or on its own initiative,

    the Commission may notify an exempt board of trade that the facility

    appears to meet the criteria for performing a significant price

    discovery function under paragraph (c)(2)(i)(A) or (B) of this section.

    Before making a final price discovery determination under this

    paragraph, the Commission shall provide the exempt board of trade with

    an opportunity for a hearing through the submission of written data,

    views and arguments. Any such written data, views and arguments shall

    be filed with the Secretary of the Commission in the form and manner

    and within the time specified by the Commission. After consideration of

    all relevant matters, the Commission shall issue an order containing

    its determination whether the facility performs a significant price

    discovery function under the criteria of paragraph (c)(2)(i)(A) or (B)

    of this section.

    (iv) Price dissemination. (A) An exempt board of trade that the

    Commission has determined performs a significant price discovery

    function under paragraph (c)(2)(iii) of this section shall disseminate

    publicly, and on a daily basis, all of the following information with

    respect to transactions executed in reliance on the criteria set forth

    in this section:

    * * * * *

    (3) Annual certification. A board of trade operating as an exempt

    board of trade shall file with the Commission annually, no later than

    the end of each calendar year, a notice that includes:

    (i) A statement that it continues to operate under the exemption;

    and

    (ii) A certification that the information contained in the previous

    Notification of Operation as an Exempt Board of Trade is still correct.

    42. Section 36.3 is revised to read as follows:

    Sec. 36.3 Exempt commercial markets.

    (a) Eligible transactions. Agreements, contracts or transactions in

    an exempt commodity eligible to be entered into on an exempt commercial

    market must be:

    (1) Entered into on a principal-to-principal basis solely between

    persons that are eligible commercial entities, as that term is defined

    in section 1a(17) of the Act, at the time the persons enter into the

    agreement, contract or transaction; and

    (2) Executed or traded on an electronic trading facility.

    (b) Notification. An electronic trading facility relying upon the

    exemption set forth in this section shall maintain on file with the

    Secretary of the Commission at the Commission's Washington, DC

    headquarters, in electronic form, a ``Notification of Operation as an

    Exempt Commercial Market,'' and it shall include the information and

    certifications specified in this section.

    (c) Required information--(1) All electronic trading facilities. A

    facility operating in reliance on the exemption set forth in this

    section on an on-going basis, must:

    (i) Provide the Commission with the terms and conditions, as

    defined in Sec. 40.1(i) of this chapter and product descriptions for

    each agreement, contract or transaction listed by the facility in

    reliance on the exemption set forth in this section, 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(51) 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(17) 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 (c)(1) of this

    section, a facility operating in reliance on the exemption set forth in

    this section, with respect to agreements, contracts or transactions

    that have not been determined to perform significant price discovery

    function, 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 set forth

    in this section, and which averaged five trades per day or more over

    the most recent calendar quarter; and, with respect to such agreements,

    contracts and transactions, either:

    (A) Submit to the Commission, in a form and manner acceptable to

    the Commission, a report for each business day. Each such report shall

    be electronically transmitted weekly,

    [[Page 33101]]

    within such time period as is acceptable to the Commission after the

    end of the week to which the data applies, and shall show for each

    agreement, contract or transaction executed the following information:

    (1) The underlying commodity, the delivery or price-basing location

    specified in the agreement, contract or transaction maturity date,

    whether it is a financially settled or physically delivered instrument,

    and the date of execution, time of execution, price, and quantity;

    (2) Total daily volume and, if cleared, open interest;

    (3) For an option instrument, in addition to the foregoing

    information, the type of option (i.e., call or put) and strike prices;

    and

    (4) Such other information as the Commission may determine; or

    (B) Provide to the Commission, in a form and manner acceptable to

    the Commission, electronic access to those transactions conducted on

    the electronic trading facility in reliance on the exemption set forth

    in this section, and meeting the average five trades per day or more

    threshold test of this section, which would allow the Commission to

    compile the information set forth in paragraph (c)(2)(i)(A) of this

    section and create a permanent record thereof.

    (ii) Maintain a record of allegations or complaints received by the

    electronic trading facility concerning instances of suspected fraud or

    manipulation in trading activity conducted in reliance on the exemption

    set forth in this section. The record shall contain the name of the

    complainant, if provided, date of the complaint, market instrument,

    substance of the allegations, and name of the person at the electronic

    trading facility who received the complaint;

    (iii) Provide to the Commission, in the form and manner prescribed

    by the Commission, a copy of the record of each complaint received

    pursuant to paragraph (c)(2)(ii) of this section that alleges, or

    relates to, facts that would constitute a violation of the Act or

    Commission regulations. Such copy shall be provided to the Commission

    no later than 30 calendar days after the complaint is received;

    Provided, however, that in the case of a complaint alleging, or

    relating to, facts that would constitute an ongoing fraud or market

    manipulation under the Act or Commission rules, such copy shall be

    provided to the Commission within three business days after the

    complaint is received; and

    (iv) Provide to the Commission on a quarterly basis, within 15

    calendar days of the close of each quarter, a list of each agreement,

    contract or transaction executed on the electronic trading facility in

    reliance on the exemption set forth in this section 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

    (c)(1) of this section, if the Commission determines that a facility

    operating in reliance on the exemption set forth in this section 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

    (c)(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 (c)(4).

    (5) Special calls. (i) All information required upon special call

    of the Commission shall be transmitted at the same time and to the

    office of the Commission as may be specified in the call.

    (ii) Such information shall include information related to the

    facility's business as an exempt electronic trading facility in

    reliance on the exemption set forth in this section, including

    information relating to data entry and transaction details in respect

    of transactions entered into in reliance on the exemption, as the

    Commission may determine appropriate--

    (A) To enforce the antifraud and anti-manipulation provisions of

    the Act and Commission regulations, and

    (B) To evaluate a systemic market event; or

    (C) To obtain information requested by a Federal financial

    regulatory authority in order to enable the regulator to fulfill its

    regulatory or supervisory responsibilities.

    (iii) The Commission hereby delegates, until the Commission orders

    otherwise, the authority to make special calls 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

    (c)(5). 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 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 set forth in this section, 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.

    (d) 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 set forth in this

    section 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 significant price discovery contract traded on an

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

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

    position;

    (ii) Arbitrage. The extent to which the price for the agreement,

    contract or transaction is sufficiently related to the price of a

    contract or contracts listed for trading on or subject to the rules of

    a

    [[Page 33102]]

    designated contract market, 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 or an electronic

    trading facility operating in reliance on the exemption set forth in

    this section;

    (v) Other material factors. [Reserved]

    (2) Notification of possible significant price discovery contract

    conditions. An electronic trading facility operating in reliance on the

    exemption set forth in this section shall promptly notify the

    Commission, and such notification shall be accompanied by supporting

    information or data concerning any contract that:

    (i) Averaged five trades per day or more over the most recent

    calendar quarter; and

    (ii)(A) For which the exchange sells its price information

    regarding the contract to market participants or industry publications;

    or

    (B) Whose daily closing or settlement prices on 95 percent or more

    of the days in the most recent quarter were within 2.5 percent of the

    contemporaneously determined closing, settlement or other daily price

    of another agreement, contract or transaction.

    (3) Procedure for significant price discovery determination. Before

    making a final price discovery determination under this paragraph, the

    Commission shall publish notice in the Federal Register that it intends

    to undertake a determination with respect to whether a particular

    agreement, contract or transaction performs a significant price

    discovery function and to receive written data, views and arguments

    relevant to its determination from the electronic trading facility and

    other interested persons. Any such written data, views and arguments

    shall be filed with the Secretary of the Commission, in the form and

    manner specified by the Commission, within 30 calendar days of

    publication of notice in the Federal Register or within such other time

    specified by the Commission. After prompt consideration of all relevant

    information, the Commission shall, within a reasonable period of time

    after the close of the comment period, issue an order explaining its

    determination whether the agreement, contract or transaction executed

    or traded by the electronic trading facility performs a significant

    price discovery function under the criteria specified in paragraph

    (d)(1)(i) through (v) of this section.

    (4) Compliance with core principles. (i) 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 set forth in this

    section and the applicable provisions of this part. If the Commission's

    order represents the first time it has determined that one of the

    electronic trading facility's agreements, contracts or transactions

    performs a significant price discovery function, the facility must

    submit a written demonstration of compliance with the Core Principles

    within 90 calendar days of the date of the Commission's order. For each

    subsequent determination by the Commission that the electronic trading

    facility has an additional agreement, contract or transaction that

    performs a significant price discovery function, the facility must

    submit a written demonstration of compliance with the Core Principles

    within 30 calendar days of the date of the Commission's order.

    Attention is directed to Appendix B of this part for guidance on and

    acceptable practices for complying with the Core Principles.

    Submissions demonstrating how the electronic trading facility complies

    with the Core Principles with respect to its significant price

    discovery contract must be filed with the Secretary of the Commission

    at its Washington, DC headquarters. Submissions must include the

    following:

    (A) A written certification that the significant price discovery

    contract(s) complies with the Act and regulations thereunder;

    (B) 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;

    (C) 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;

    (D) A copy of any documents pertaining to or describing the

    electronic trading system's legal status and governance structure,

    including governance fitness information;

    (E) 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;

    (F) 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;

    (G) To the extent that any of the items in paragraphs (d)(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.

    (ii) 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 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 33103]]

    (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 set forth in this section; 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 (d)(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 (d)(1), and has not done so for at

    least the prior 12 months. An electronic trading facility shall not

    petition for a vacation of a significant price discovery determination

    more frequently than once every 12 months for any individual contract.

    (ii) By the Commission. The Commission may, on its own initiative,

    begin vacation proceedings if it believes that an agreement, contract

    or transaction has not performed a significant price discovery function

    for at least the prior 12 months.

    (iii) Procedure. Before making a final determination whether an

    agreement, contract or transaction has ceased to perform a significant

    price discovery function, the Commission shall publish notice in the

    Federal Register that it intends to undertake such a determination and

    to receive written data, views and arguments relevant to its

    determination from the electronic trading facility and other interested

    persons. Written submissions shall be filed with the Secretary of the

    Commission in the form and manner specified by the Commission, within

    30 calendar days of publication of notice in the Federal Register, or

    within such other time specified by the Commission. After consideration

    of all relevant information, the Commission shall issue an order

    explaining its determination whether the agreement, contract or

    transaction has ceased to perform a significant price discovery

    function and, if so, vacating its prior order. If such an order issues,

    and the Commission subsequently determines, on its own initiative or

    after notification by the electronic trading facility, that the

    agreement, contract or transaction that was subject to the vacation

    order again performs a significant price discovery function, the

    electronic trading facility must comply with the Core Principles within

    30 calendar days of the date of the Commission's order.

    (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.

    (e) 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 set

    forth in this section to determine whether they serve a significant

    price discovery function as set forth in paragraph (d)(1) above.

    43. Amend Appendix A to part 36 by revising introductory paragraph

    1, the headings to paragraphs (A), (B), and (C), and paragraphs (D)2.

    and (D)4., to read as follows:

    Appendix A to Part 36--Guidance on Specific Price Discovery Contracts

    1. There are 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.

    * * * * *

    (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,

    or an electronic trading facility operating in reliance on the

    exemption set forth in this section.

    * * * * *

    (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 significant price discovery

    contract traded on an electronic trading facility, to value a

    position, transfer or convert a position, cash or financially settle

    a position, or close out a position.

    * * * * *

    (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 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.

    * * * * *

    (D) * * *

    * * * * *

    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 contract being traded on the electronic trading

    facility 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 contract being traded on

    the electronic trading facility when, for instance, they are arrived

    at after adding to, or subtracting from the contract being traded on

    the electronic trading facility, 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 contract being traded on

    the electronic trading facility on a frequent and recurring basis.

    * * * * *

    4. In applying this criterion, consideration will be given to

    whether prices established by a contract being traded on the

    electronic trading facility are reported in a widely distributed

    industry publication. In making

    [[Page 33104]]

    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.

    * * * * *

    44. Revise Appendix B to Part 36 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 set forth in 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(d)(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(d)(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--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(d)(4) within

    90 calendar days of the date of the Commission's order if the

    contract is the electronic trading facility's first significant

    price discovery contract; or 30 days from the date of the

    Commission's order if the contract is not the electronic trading

    facility's first significant price discovery contract. Once the

    Commission determines that a contract performs a significant price

    discovery function, subsequent rule changes must be self-certified

    to the Commission by the electronic trading facility pursuant to

    Sec. 40.6 or submitted to the Commission for review and approval

    pursuant to Sec. 40.5.

    (b) Acceptable practices. Guideline No.1, 17 CFR part 40,

    Appendix A may be used as guidance in meeting this core principle

    for significant price discovery contracts.

    CORE PRINCIPLE II--MONITORING OF TRADING. The electronic trading

    facility shall monitor trading in significant price discovery

    contracts to prevent market manipulation, price distortion, and

    disruptions of the delivery of cash-settlement process through

    market surveillance, compliance and disciplinary practices and

    procedures, including methods for conducting real-time monitoring of

    trading and comprehensive and accurate trade reconstructions.

    (a) Guidance. An electronic trading facility on which

    significant price discovery contracts are traded or executed should,

    with respect to those contracts, demonstrate a capacity to prevent

    market manipulation and have trading and participation rules to

    detect and deter abuses. The facility should seek to prevent market

    manipulation and other trading abuses through a dedicated regulatory

    department or by delegation of that function to an appropriate third

    party. An electronic trading facility also should have the authority

    to intervene as necessary to maintain an orderly market.

    (b) Acceptable practices--(1) An acceptable trade monitoring

    program. An acceptable trade monitoring program should facilitate,

    on both a routine and non-routine basis, arrangements and resources

    to detect and deter abuses through direct surveillance of each

    significant price discovery contract. Direct surveillance of each

    significant price discovery contract will generally involve the

    collection of various market data, including information on

    participants' market activity. Those data should be evaluated on an

    ongoing basis in order to make an appropriate regulatory response to

    potential market disruptions or abusive practices. For contracts

    with a substantial number of participants, an effective surveillance

    program should employ a much more comprehensive large trader

    reporting system.

    (2) Authority to collect information and documents. The

    electronic trading facility should have the authority to collect

    information and documents in order to reconstruct trading for

    appropriate market analysis. Appropriate market analysis should

    enable the electronic trading facility to assess whether each

    significant price discovery contract is responding to the forces of

    supply and demand. Appropriate data usually include various

    fundamental data about the underlying commodity, its supply, its

    demand, and its movement through market channels. Especially

    important are data related to the size and ownership of deliverable

    supplies--the existing supply and the future or potential supply--

    and to the pricing of the deliverable commodity relative to the

    futures price and relative to the 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--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 set forth 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.

    [[Page 33105]]

    (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 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 rule 1.31 (17 CFR

    1.31).

    (3) Arrangements and resources for the disclosure of the

    obtained information and documents to the Commission upon request.

    The electronic trading facility should maintain records of all

    information and documents related to each significant price

    discovery contract in a form and manner acceptable to the

    Commission. Where no acceptable manner of maintenance is specified,

    records should be maintained in accordance with the recordkeeping

    standards of Commission rule 1.31 (17 CFR 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--POSITION LIMITATIONS OR ACCOUNTABILITY. The

    electronic trading facility shall adopt, where necessary and

    appropriate, position limitations or position accountability for

    speculators in significant price discovery contracts, taking into

    account positions in other agreements, contracts and transactions

    that are treated by a derivatives clearing organization, whether

    registered or not registered, as fungible with such significant

    price discovery contracts to reduce the potential threat of market

    manipulation or congestion, especially during trading in the

    delivery month.

    (a) Guidance. [Reserved]

    (b) Acceptable practices for uncleared trades. [Reserved]

    (c) Acceptable practices for cleared trades--(1) Introduction.

    In order to diminish potential problems arising from excessively

    large speculative positions, and to facilitate orderly liquidation

    of expiring contracts, an electronic trading facility relying on the

    exemption set forth in this section should adopt rules that set

    position limits or accountability levels on traders' cleared

    positions in significant price discovery contracts. These position

    limit rules specifically may exempt bona fide hedging; permit other

    exemptions; or set limits differently by market, delivery month or

    time period. For the purpose of evaluating a significant price

    discovery contract's speculative-limit program for cleared

    positions, the Commission will consider the specified position

    limits or accountability levels, aggregation policies, types of

    exemptions allowed, methods for monitoring compliance with the

    specified limits or levels, and procedures for dealing with

    violations.

    (2) Accounting for cleared trades--(i) Speculative-limit levels

    typically should be set in terms of a trader's combined position

    involving cleared trades in a significant price discovery contract,

    plus positions in agreements, contracts and transactions that are

    treated by a derivatives clearing organization, whether registered

    or not registered, as fungible with such significant price discovery

    contract. (This circumstance typically exists where an exempt

    commercial market lists a particular contract for trading but also

    allows for positions in that contract to be cleared together with

    positions established through bilateral or off-exchange

    transactions, such as block trades, in the same contract.

    Essentially, both the on-facility and off-facility transactions are

    considered fungible with each other.) In this connection, the

    electronic trading facility should make arrangements to ensure that

    it is able to ascertain accurate position data for the market.

    (ii) For significant price discovery contracts that are traded

    on a cleared basis, the electronic trading facility should apply

    position limits to cleared transactions in the contract.

    (3) Limitations on spot-month positions. Spot-month limits

    should be adopted for significant price discovery contracts to

    minimize the susceptibility of the market to manipulation or price

    distortions, including squeezes and corners or other abusive trading

    practices.

    (i) Contracts economically equivalent to an existing contract.

    An electronic trading facility that lists a significant price

    discovery contract that is economically-equivalent to another

    significant price discovery contract or to a contract traded on a

    designated contract market 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. 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; in other

    significant price discovery contracts; in other fungible agreements,

    contracts and transactions; and in the underlying commodity.

    (4) Position accountability for non-spot-month positions. The

    electronic trading facility should establish for its significant

    price discovery contracts non-spot individual month position

    accountability levels and all-months-combined position

    accountability levels. An electronic trading facility may establish

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

    position limits for its significant price discovery contracts in

    lieu of position accountability levels.

    (i) Definition. Position accountability provisions provide a

    means for an exchange to monitor traders' positions that may

    threaten orderly trading. An acceptable accountability provision

    sets target accountability threshold levels that may be exceeded,

    but once a trader breaches such accountability levels, the

    electronic trading facility should initiate an inquiry to determine

    whether the individual's trading activity is justified and is not

    intended to manipulate the market. As part of its investigation, the

    electronic trading facility may inquire about the trader's rationale

    for holding a position in excess of the accountability levels. An

    acceptable accountability provision should provide the electronic

    trading facility with the authority to order the trader not to

    further increase positions. If a trader fails to comply with a

    request for information about positions held, provides information

    that does not sufficiently justify the position, or continues to

    increase contract positions after a request not to do so is issued

    by the facility, then the accountability provision should enable the

    electronic trading facility to require the trader to reduce

    positions.

    (ii) Contracts economically equivalent to an existing contract.

    When an electronic trading facility lists a significant price

    discovery contract that is economically equivalent to another

    significant price discovery contract or to a contract traded on a

    designated contract market, 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

    [[Page 33106]]

    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

    that has adopted non-spot or all-months-combined position limits,

    the electronic trading facility should set non-spot month position

    limits and all-months-combined position limits for its significant

    price discovery contract at the same (or lower) levels as those

    specified for the economically-equivalent contract.

    (5) Account aggregation. An electronic trading facility should

    have aggregation rules for significant price discovery contracts

    that apply to accounts under common control, those with common

    ownership, i.e., where there is a ten percent or greater financial

    interest, and those traded according to an express or implied

    agreement. Such aggregation rules should apply to cleared

    transactions with respect to applicable speculative position limits.

    An electronic trading facility will be permitted to set more

    stringent aggregation policies. An electronic trading facility may

    grant exemptions to its price discovery contracts' position limits

    for bona fide hedging (as defined in Sec. 1.3(z) of this chapter)

    and may grant exemptions for reduced risk positions, such as

    spreads, straddles and arbitrage positions.

    (6) Implementation deadlines. An electronic trading facility

    with a significant price discovery contract is required to comply

    with Core Principle IV within 90 calendar days of the date of the

    Commission's order determining that the contract performs a

    significant price discovery function if such contract is the

    electronic trading facility's first significant price discovery

    contract, or within 30 days of the date of the Commission's order if

    such contract is not the electronic trading facility's first

    significant price discovery contract. For the purpose of applying

    limits on speculative positions in newly-determined significant

    price discovery contracts, the Commission will permit a grace period

    following issuance of its order for traders with cleared positions

    in such contracts to become compliant with applicable position limit

    rules. Traders who hold cleared positions on a net basis in the

    electronic trading facility's significant price discovery contract

    must be at or below the specified position limit level no later than

    90 calendar days from the date of the electronic trading facility's

    implementation of position limit rules, unless a hedge exemption is

    granted by the electronic trading facility. This grace period

    applies to both initial and subsequent price discovery contracts.

    Electronic trading facilities should notify traders of this

    requirement promptly upon implementation of such rules.

    (7) Enforcement provisions. The electronic trading facility

    should have appropriate procedures in place to monitor its position

    limit and accountability provisions and to address violations.

    (i) An electronic trading facility with significant price

    discovery contracts should use an automated means of detecting

    traders' violations of speculative limits or exemptions,

    particularly if the significant price discovery contracts have large

    numbers of traders. An electronic trading facility should monitor

    the continuing appropriateness of approved exemptions by

    periodically reviewing each trader's basis for exemption or

    requiring a reapplication. An automated system also should be used

    to determine whether a trader has exceeded applicable non-spot

    individual month position accountability levels and all-months-

    combined position accountability levels.

    (ii) An electronic trading facility should establish a program

    for effective enforcement of position limits for significant price

    discovery contracts. Electronic trading facilities should use a

    large trader reporting system to monitor and enforce daily

    compliance with position limit rules. The Commission notes that an

    electronic trading facility may allow traders to periodically apply

    to the electronic trading facility for an exemption and, if

    appropriate, be granted a position level higher than the applicable

    speculative limit. The electronic trading facility should establish

    a program to monitor approved exemptions from the limits. The

    position levels granted under such hedge exemptions generally should

    be based upon the trader's commercial activity in related markets

    including, but not limited to, positions held in related futures and

    options contracts listed for trading on designated contract markets,

    fungible agreements, contracts and transactions, as determined by a

    derivatives clearing organization. Electronic trading facilities may

    allow a brief grace period where a qualifying trader may exceed

    speculative limits or an existing exemption level pending the

    submission and approval of appropriate justification. An electronic

    trading facility should consider whether it wants to restrict

    exemptions during the last several days of trading in a delivery

    month. Acceptable procedures for obtaining and granting exemptions

    include a requirement that the electronic trading facility approve a

    specific maximum higher level.

    (iii) An acceptable speculative limit program should have

    specific policies for taking regulatory action once a violation of a

    position limit or exemption is detected. The electronic trading

    facility policies should consider appropriate actions.

    (8) Violation of Commission rules. A violation of position

    limits for significant price discovery contracts that have been

    self-certified by an electronic trading facility is also a violation

    of section 4a(e) of the Act.

    CORE PRINCIPLE V--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--DAILY PUBLICATION OF TRADING INFORMATION. The

    electronic trading facility shall make public daily information on

    price, trading volume, and other trading data to the extent

    appropriate for significant price discovery contracts.

    (a) Guidance. An electronic trading facility, with respect to

    significant price discovery contracts, should provide to the public

    information regarding settlement prices, price range, volume, open

    interest, and other related market information for all applicable

    contracts as determined by the Commission on a fair, equitable and

    timely basis. Provision of information for any applicable contract

    can be through such means as provision of the information to a

    financial information service or by timely placement of the

    information on the electronic trading facility's public Web site.

    (b) Acceptable practices. Compliance with Sec. 16.01 of this

    chapter, which is mandatory, is an acceptable practice that

    satisfies the requirements of Core Principle VI.

    CORE PRINCIPLE VII--COMPLIANCE WITH RULES. The electronic

    trading facility shall monitor and enforce compliance with

    [[Page 33107]]

    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;

    (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.

    CORE PRINCIPLE VIII--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--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 41--SECURITY FUTURES PRODUCTS

    45a. The authority citation for part 41 continues to read as

    follows:

    Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114

    Stat. 2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).

    45b. Revise Sec. 41.2 to read as follows:

    Sec. 41.2 Required records.

    A designated contract market that trades a security index or

    security futures product shall maintain in accordance with the

    requirements of Sec. 1.31 of this chapter books and records of all

    activities related to the trading of such products, including: Records

    related to any determination under subpart B of this part whether or

    not a futures contract on a security index is a narrow-based security

    index or a broad-based security index.

    46. Revise paragraph (a) introductory text of Sec. 41.12 to read

    as follows:

    Sec. 41.12 Indexes underlying futures contracts trading for fewer

    than 30 days.

    (a) An index on which a contract of sale for future delivery is

    trading on a designated contract market or foreign board of trade is

    not a narrow-based security index under section 1a(25) of the Act (7

    U.S.C. 1a(25)) for the first 30 days of trading, if:

    * * * * *

    47. Revise Sec. 41.13 to read as follows:

    Sec. 41.13 Futures contracts on security indexes trading on or

    subject to the rules of a foreign board of trade.

    When a contract of sale for future delivery on a security index is

    traded on or subject to the rules of a foreign board of trade, such

    index shall not be a narrow-based security index if it would not be a

    narrow-based security index if a futures contract on such index were

    traded on a designated contract market.

    48. Revise paragraphs (a)(1), (a)(3) and (b)(4) of Sec. 41.21 to

    read as follows:

    Sec. 41.21 Requirements for underlying securities.

    (a) * * *

    (1) The underlying security is registered pursuant to section 12 of

    the Securities Exchange Act of 1934;

    * * * * *

    (3) The underlying security conforms with the listing standards for

    the security futures product that the designated contract market has

    filed with the SEC under section 19(b) of the Securities Exchange Act

    of 1934.

    (b) * * *

    (4) The index conforms with the listing standards for the security

    futures product that the designated contract market has filed with the

    SEC under section 19(b) of the Securities Exchange Act of 1934.

    49. Revise the introductory text and paragraph (e) of Sec. 41.22

    to read as follows:

    Sec. 41.22 Required certifications.

    It shall be unlawful for a designated contract market to list for

    trading or

    [[Page 33108]]

    execution a security futures product unless the designated contract

    market has provided the Commission with a certification that the

    specific security futures product or products and the designated

    contract market meet, as applicable, the following criteria:

    * * * * *

    (e) If the board of trade is a designated contract market pursuant

    to section 5 of the Act, dual trading in these security futures

    products is restricted in accordance with Sec. 41.27;

    * * * * *

    50. Revise paragraph (a) introductory text, paragraph (a)(5), and

    paragraph (b) of Sec. 41.23 to read as follows:

    Sec. 41.23 Listing of security futures products for trading.

    (a) Initial listing of products for trading. To list new security

    futures products for trading, a designated contract market shall submit

    to the Commission at its Washington, DC headquarters, either in

    electronic or hard-copy form, to be received by the Commission no later

    than the day prior to the initiation of trading, a filing that:

    * * * * *

    (5) If the board of trade is a designated contract market pursuant

    to section 5 of the Act, it includes a certification that the security

    futures product complies with the Act and rules thereunder; and

    * * * * *

    (b) Voluntary submission of security futures products for

    Commission approval. A designated contract market may request that the

    Commission approve any security futures product under the procedures of

    Sec. 40.5 of this chapter, provided however, that the registered

    entity shall include the certification required by Sec. 41.22 with its

    submission under Sec. 40.5 of this chapter. Notice designated contract

    markets may not request Commission approval of security futures

    products.

    51. Amend Sec. 41.24 by removing paragraph (b), redesignating

    paragraph (c) as paragraph (b), and revising redesignated paragraph

    (b), to read as follows:

    Sec. 41.24 Rule amendments to security futures products.

    * * * * *

    (b) Voluntary submission of rules for Commission review and

    approval. A designated contract market or a registered derivatives

    clearing organization clearing security futures products may request

    that the Commission approve any rule or proposed rule or rule amendment

    relating to a security futures product under the procedures of Sec.

    40.5 of this chapter, provided however, that the registered entity

    shall include the certifications required by Sec. 41.22 with its

    submission under Sec. 40.5 of this chapter. Notice designated contract

    markets may not request Commission approval of rules.

    52. Revise paragraphs (a)(1), (a)(2) introductory text, (a)(3)

    introductory text, (a)(3)(i)(A), (a)(3)(i)(B), (a)(3)(iv), and (d) of

    Sec. 41.25 to read as follows:

    Sec. 41.25 Additional conditions for trading for security futures

    products.

    (a) Common provisions--(1) Reporting of data. The designated

    contract market shall comply with chapter 16 of this title requiring

    the daily reporting of market data.

    (2) Regulatory trading halts. The rules of a designated contract

    market that lists or trades one or more security futures products must

    include the following provisions:

    * * * * *

    (3) Speculative position limits. The designated contract market

    shall have rules in place establishing position limits or position

    accountability procedures for the expiring futures contract month. The

    designated contract market shall:

    (i) * * *

    (A) For security futures products where the average daily trading

    volume in the underlying security exceeds 20 million shares, or exceeds

    15 million shares and there are more than 40 million shares of the

    underlying security outstanding, the designated contract market may

    adopt a net position limit no greater than 22,500 (100-share) contracts

    applicable to positions held during the last five trading days of an

    expiring contract month; or

    (B) For security futures products where the average daily trading

    volume in the underlying security exceeds 20 million shares and there

    are more than 40 million shares of the underlying security outstanding,

    the designated contract market may adopt a position accountability

    rule. Upon request by the designated contract market, traders who hold

    net positions greater than 22,500 (100-share) contracts, or such lower

    level specified by exchange rules, must provide information to the

    exchange and consent to halt increasing their positions when so ordered

    by the exchange.

    * * * * *

    (iv) For purposes of this section, average daily trading volume

    shall be calculated monthly, using data for the most recent six-month

    period. If the data justify a higher or lower speculative limit for a

    security future, the designated contract market may raise or lower the

    position limit for that security future effective no earlier than the

    day after it has provided notification to the Commission and to the

    public under the submission requirements of Sec. 41.24. If the data

    require imposition of a reduced position limit for a security future,

    the designated contract market may permit any trader holding a position

    in compliance with the previous position limit, but in excess of the

    reduced limit, to maintain such position through the expiration of the

    security futures contract; provided, that the designated contract

    market does not find that the position poses a threat to the orderly

    expiration of such contract.

    * * * * *

    (d) The Commission may exempt a designated contract market from the

    provisions of paragraphs (a)(2) and (b) of this section, either

    unconditionally or on specified terms and conditions, if the Commission

    determines that such exemption is consistent with the public interest

    and the protection of customers. An exemption granted pursuant to this

    paragraph shall not operate as an exemption from any Securities and

    Exchange Commission rules. Any exemption that may be required from such

    rules must be obtained separately from the Securities and Exchange

    Commission.

    53. Amend Sec. 41.27 by:

    a. Revising paragraphs (a)(1), (a)(3) introductory text, (a)(4)(v),

    (a)(5), (b), (d) introductory text, (d)(1), (d)(4), and (f); and

    b. Removing and reserving paragraphs (c)(2) and (e)(2), to read as

    follows:

    Sec. 41.27 Prohibition of dual trading in security futures products

    by floor brokers.

    (a) * * *

    (1) Trading session means hours during which a designated contract

    market is scheduled to trade continuously during a trading day, as set

    forth in its rules, including any related post settlement trading

    session. A designated contract market may have more than one trading

    session during a trading day.

    * * * * *

    (3) Broker association includes two or more designated contract

    market members with floor trading privileges of whom at least one is

    acting as a floor broker who:

    * * * * *

    (4) * * *

    (v) An account for another member present on the floor of a

    designated contract market or an account controlled by such other

    member.

    (5) Dual trading means the execution of customer orders by a floor

    broker

    [[Page 33109]]

    through open outcry during the same trading session in which the floor

    broker executes directly or by initiating and passing to another

    member, either through open outcry or through a trading system that

    electronically matches bids and offers pursuant to a predetermined

    algorithm, a transaction for the same security futures product on the

    same designated contract market for an account described in paragraphs

    (a)(4)(i) through (v) of this section.

    (b) Dual trading prohibition. (1) No floor broker shall engage in

    dual trading in a security futures product on a designated contract

    market, except as otherwise provided under paragraphs (d), (e), and (f)

    of this section.

    (2) A designated contract market operating an electronic market or

    electronic trading system that provides market participants with a time

    or place advantage or the ability to override a predetermined algorithm

    must submit an appropriate rule proposal to the Commission consistent

    with the procedures set forth in Sec. 40.5. The proposed rule must

    prohibit electronic market participants with a time or place advantage

    or the ability to override a predetermined algorithm from trading a

    security futures product for accounts in which these same participants

    have any interest during the same trading session that they also trade

    the same security futures product for other accounts. This paragraph,

    however, is not applicable with respect to execution priorities or

    quantity guarantees granted to market makers who perform that function,

    or to market participants who receive execution priorities based on

    price improvement activity, in accordance with the rules governing the

    designated contract market.

    (c) * * *

    (2) [Reserved]

    (d) Specific permitted exceptions. Notwithstanding the

    applicability of a dual trading prohibition under paragraph (b) of this

    section, dual trading may be permitted on a designated contract market

    pursuant to one or more of the following specific exceptions:

    (1) Correction of errors. To offset trading errors resulting from

    the execution of customer orders, provided, that the floor broker must

    liquidate the position in his or her personal error account resulting

    from that error through open outcry or through a trading system that

    electronically matches bids and offers as soon as practicable, but,

    except as provided herein, not later than the close of business on the

    business day following the discovery of error. In the event that a

    floor broker is unable to offset the error trade because the daily

    price fluctuation limit is reached, a trading halt is imposed by the

    designated contract market, or an emergency is declared pursuant to the

    rules of the designated contract market, the floor broker must

    liquidate the position in his or her personal error account resulting

    from that error as soon as practicable thereafter.

    * * * * *

    (4) Market emergencies. To address emergency market conditions

    resulting in a temporary emergency action as determined by a designated

    contract market.

    (e) * * *

    (2) [Reserved]

    (f) Unique or special characteristics of agreements, contracts or

    transactions, or of designated contract markets. Notwithstanding the

    applicability of a dual trading prohibition under paragraph (b) of this

    section, dual trading may be permitted on a designated contract market

    to address unique or special characteristics of agreements, contracts,

    or transactions, or of the designated contract market as provided

    herein. Any rule of a designated contract market that would permit dual

    trading when it would otherwise be prohibited, based on a unique or

    special characteristic of agreements, contracts, or transactions, or of

    the designated contract market must be submitted to the Commission for

    prior approval under the procedures set forth in Sec. 40.5 of this

    chapter. The rule submission must include a detailed demonstration of

    why an exception is warranted.

    54. Revise paragraph (a)(30) of Sec. 41.43 to read as follows:

    Sec. 41.43 Definitions.

    (a) * * *

    (30) Self-regulatory authority means a national securities exchange

    registered under section 6 of the Exchange Act, a national securities

    association registered under section 15A of the Exchange Act, or a

    contract market registered under section 5 of the Act or section 5f of

    the Act.

    * * * * *

    55. Revise paragraph (b) introductory text of Sec. 41.49 to read

    as follows:

    Sec. 41.49 Filing proposed margin rule changes with the Commission.

    * * * * *

    (b) Filing requirements under the Act. Any self-regulatory

    authority that is registered with the Commission as a designated

    contract market under section 5 of the Act shall, when filing a

    proposed rule change regarding customer margin for security futures

    with the SEC for approval in accordance with section 19(b)(2) of the

    Securities Exchange Act, submit such proposed rule change to the

    Commission as follows:

    * * * * *

    PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    56a. The authority citation for part 140 continues to read as

    follows:

    Authority: 7 U.S.C. 2 and 12a.

    56b. Amend Sec. 140.72 by

    a. Revising the heading; and

    b. Revising paragraphs (a), (b), (d) and (f), to read as follows:

    Sec. 140.72 Delegation of authority to disclose confidential

    information to a contract market, swap execution facility, swap data

    repository, registered futures association or self-regulatory

    organization.

    (a) Pursuant to the authority granted under sections 2(a)(11),

    8a(5) and 8a(6) of the Act, the Commission hereby delegates, until such

    time as the Commission orders otherwise, to the Executive Director, the

    Deputy Executive Director, the Special Assistant to the Executive

    Director, the Director of the Division of Clearing and Intermediary

    Oversight, each Deputy Director of the Division of Clearing and

    Intermediary Oversight, the Chief Accountant, the General Counsel, each

    Deputy General Counsel, the Director of the Division of Market

    Oversight, each Deputy Director of the Division of Market Oversight,

    the Director of the Market Surveillance Section, the Director of the

    Division of Enforcement, each Deputy Director of the Division of

    Enforcement, each Associate Director of the Division of Enforcement,

    the Chief Counsel of the Division of Enforcement, each Regional Counsel

    of the Division of Enforcement, each of the Regional Administrators,

    each of the Directors of the Market Surveillance Branches, the Chief

    Economist of the Office of the Chief Economist, the Deputy Chief

    Economist of the Office of the Chief Economist, the Director of the

    Office of International Affairs, and the Deputy Director of the Office

    of International Affairs, the authority to disclose to an official of

    any contract market, swap execution facility, swap data repository,

    registered futures association, or self-regulatory organization as

    defined in section 3(a)(26) of the Securities Exchange Act of 1934, any

    information necessary or appropriate to effectuate the purposes of the

    Act, including, but not limited to, the full facts concerning any

    transaction or market operation, including the names of the parties

    [[Page 33110]]

    thereto. This authority to disclose shall be based on a determination

    that the transaction or market operation disrupts or tends to disrupt

    any market or is otherwise harmful or against the best interests of

    producers, consumers, or investors or that disclosure is necessary or

    appropriate to effectuate the purposes of the Act. The authority to

    make such a determination is also delegated by the Commission to the

    Commission employees identified in this section. A Commission employee

    delegated authority under this section may exercise that authority on

    his or her own initiative or in response to a request by an official of

    a contract market, swap execution facility, swap data repository,

    registered futures association or self-regulatory organization.

    (b) Disclosure under this section shall only be made to a contract

    market, swap execution facility, swap data repository, registered

    futures association or self-regulatory organization official who is

    named in a list filed with the Commission by the chief executive

    officer of the contract market, swap execution facility, swap data

    repository, registered futures association or self-regulatory

    organization, which sets forth the official's name, business address

    and telephone number. The chief executive officer shall thereafter

    notify the Commission of any deletions or additions to the list of

    officials authorized to receive disclosures under this section. The

    original list and any supplemental list required by this paragraph

    shall be filed with the Secretary of the Commission, and a copy thereof

    shall also be filed with the Regional Coordinator for the region in

    which the contract market, swap execution facility, or swap data

    repository is located or in which the registered futures association or

    self-regulatory organization has its principal office.

    * * * * *

    (d) For purposes of this section, the term ``official'' shall mean

    any officer or member of a committee of a contract market, swap

    execution facility, swap data repository, registered futures

    association or self-regulatory organization who is specifically charged

    with market surveillance or audit or investigative responsibilities, or

    their duly authorized representative or agent, who is named on the list

    filed pursuant to paragraph (b) of this section or any supplement

    thereto.

    * * * * *

    (f) Any contract market, swap execution facility, swap data

    repository, registered futures association or self-regulatory

    organization receiving information from the Commission under these

    provisions shall not disclose such information except that disclosure

    may be made in any self-regulatory action or proceeding.

    57. Amend Sec. 140.77 by:

    a. Revising the heading; and

    b. Revising paragraph (a) to read as follows:

    Sec. 140.77 Delegation of authority to determine that applications

    for contract market designation, swap execution facility registration,

    or swap data repository registration are materially incomplete.

    (a) The Commodity Futures Trading Commission hereby delegates,

    until such time as the Commission orders otherwise, to the Director of

    the Division of Market Oversight or the Director's designees, the

    authority to determine that an application for contract market

    designation, swap execution facility registration, or swap data

    repository registration is materially incomplete under section 6 of the

    Commodity Exchange Act and to so notify the applicant.

    * * * * *

    58. Revise paragraphs (a) and (b) of Sec. 140.96 to read as

    follows:

    Sec. 140.96 Delegation of authority to publish in the Federal

    Register.

    (a) The Commodity Futures Trading Commission hereby delegates,

    until such time as the Commission orders otherwise, to the Director of

    the Division of Market Oversight or the Director's designee, with the

    concurrence of the General Counsel or the General Counsel's designee,

    the authority to publish in the Federal Register notice of the

    availability for comment of the proposed terms and conditions of

    applications for contract market designation, swap execution facility

    and swap data repository registration, and to determine to publish, and

    to publish, requests for public comment on proposed exchange, swap

    execution facility, or swap data repository rules, and rule amendments,

    when there exists novel or complex issues that require additional time

    to analyze, an inadequate explanation by the submitting registered

    entity, or a potential inconsistency with the Act, including

    regulations under the Act.

    (b) The Commodity Futures Trading Commission hereby delegates,

    until such time as the Commission orders otherwise, to the Director of

    the Division of Market Oversight or the Director's designee, and to the

    Director of the Division of Clearing and Intermediary Oversight or the

    Director's designee, with the concurrence of the General Counsel or the

    General Counsel's designee, the authority to determine to publish, and

    to publish, in the Federal Register, requests for public comment on

    proposed exchange and self-regulatory organization rule amendments when

    publication of the proposed rule amendment is in the public interest

    and will assist the Commission in considering the views of interested

    persons.

    * * * * *

    59. Revise paragraph (d)(2) of Sec. 140.99 to read as follows:

    Sec. 140.99 Requests for exemptive, no-action and interpretative

    letters.

    * * * * *

    (d) * * *

    (2) A request for a Letter relating to the provisions of the Act or

    the Commission's rules, regulations or orders governing designated

    contract markets, registered swap execution facilities, registered swap

    data repositories, exempt commercial markets, exempt boards of trade,

    the nature of particular transactions and whether they are exempt or

    excluded from being required to be traded on one of the foregoing

    entities, foreign trading terminals, hedging exemptions, and the

    reporting of market positions shall be filed with the Director,

    Division of Market Oversight, Commodity Futures Trading Commission,

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

    request for a Letter relating to all other provisions of the Act or

    Commission rules shall be filed with the Director, Division of Clearing

    and Intermediary Oversight, Commodity Futures Trading Commission, Three

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

    request must be submitted electronically using the e-mail address

    dmoletters@cftc.gov (for requests filed with the Division of Market

    Oversight), or dcioletters@cftc.gov (for requests filed with the

    Division of Clearing and Intermediary Oversight), as appropriate, and a

    properly signed paper copy of the request must be provided to the

    Division of Market Oversight or the Division of Clearing and

    Intermediary Oversight, as appropriate, within ten days for purposes of

    verification of the electronic submission.

    * * * * *

    60. Amend Sec. 140.735-2 by:

    a. Redesignating paragraphs (b)(1)(i), (b)(1)(ii), and (b)(1)(iii)

    as (b)(1)(ii), (b)(1)(iv), and (b)(1)(v), respectively;

    b. Adding paragraphs (b)(1)(i) and (b)(1)(iii); and

    c. Revising paragraphs (b)(2) and (c), to read as follows:

    [[Page 33111]]

    Sec. 140.735-2 Prohibited transactions.

    * * * * *

    (b) * * *

    (1) * * *

    (i) In swaps;

    * * * * *

    (iii) In retail forex transactions, as that term is defined in

    Sec. 5.1(m);

    * * * * *

    (2) Effect any purchase or sale of a commodity option, futures

    contract, or swap involving a security or group of securities;

    * * * * *

    (c) Exception for farming, ranching, and natural resource

    operations. The prohibitions in paragraphs (b)(1)(i) and (ii) of this

    section shall not apply to a transaction in connection with any

    farming, ranching, oil and gas, mineral rights, or other natural

    resource operation in which the member or employee has a financial

    interest, if he or she is not involved in the decision to engage in,

    and does not have prior knowledge of, the actual futures, commodity

    option, or swap transaction and has previously notified the General

    Counsel \2\ in writing of the nature of the operation, the extent of

    the member's or employee's interest, the types of transactions in which

    the operation may engage, and the identity of the person or persons who

    will make trading decisions for the operation; \3\

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

    \2\ As used in this subpart, ``General Counsel'' refers to the

    General Counsel in his or her capacity as counselor for the

    Commission and designated agency ethics official for the Commission,

    and includes his or her designee and the alternate designated agency

    ethics official appointed by the agency head pursuant to 5 CFR

    2638.202.

    \3\ Although not required, if they choose to do so, members or

    employees may use powers of attorney or other arrangements in order

    to meet the notice requirements of, and to assure that they have no

    control or knowledge of, futures or options transactions permitted

    under paragraph (c) of this section. A member or employee

    considering such arrangements should consult with the Office of

    General Counsel in advance for approval. Should a member or employee

    gain knowledge of an actual futures, commodity option, or swap

    transaction entered into by an operation described in paragraph (c)

    of this section that has already taken place and the market position

    represented by that transaction remains open, he or she should

    promptly report that fact and all other details to the General

    Counsel and seek advice as to what action, including recusal from

    any particular matter that will have a direct and predictable effect

    on the financial interest in question, may be appropriate.

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

    * * * * *

    61. Revise paragraph (b)(1) of Sec. 140.735-2a to read as follows:

    Sec. 140.735-2a Prohibited Interests.

    * * * * *

    (b) * * *

    (1) Have a financial interest, through ownership of securities or

    otherwise, in any person \5\ registered with the Commission (including

    futures commission merchants, associated persons and agents of futures

    commission merchants, floor brokers, commodity trading advisors and

    commodity pool operators, and any other persons required to be

    registered in a fashion similar to any of the above under the Commodity

    Exchange Act or pursuant to any rule or regulation promulgated by the

    Commission), or any contract market, swap execution facility, swap data

    repository, board of trade, or other trading facility, or any clearing

    organization subject to regulation or oversight by the Commission; \6\

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

    \5\ As defined in section 1a(38) of the Commodity Exchange Act

    and 17 CFR 1.3(u) thereunder, a ``person'' includes an individual,

    association, partnership, corporation and a trust.

    \6\ Attention is directed to 18 U.S.C. 208.

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

    * * * * *

    62. Revise Sec. 140.735-3 to read as follows:

    Sec. 140.735-3 Non-governmental employment and other outside

    activity.

    A Commission member or employee shall not accept employment or

    compensation from any person, exchange, swap execution facility, swap

    data repository or clearinghouse subject to regulation by the

    Commission. For purposes of this section, a person subject to

    regulation by the Commission includes but is not limited to a contract

    market, swap execution facility, swap data repository or clearinghouse

    or member thereof, a registered futures commission merchant, any person

    associated with a futures commission merchant or with any agent of a

    futures commission merchant, floor broker, commodity trading advisor,

    commodity pool operator or any person required to be registered in a

    fashion similar to any of the above or file reports under the Act or

    pursuant to any rule or regulation promulgated by the Commission.\11\

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

    \11\ Attention is directed to section 2(a)(8) of the Commodity

    Exchange Act, which provides, among other things, that no Commission

    member or employee shall accept employment or compensation from any

    person, exchange or clearinghouse subject to regulation by the

    Commission, or participate, directly or indirectly, in any contract

    market operations or transactions of a character subject to

    regulation by the Commission.

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

    PART 145--COMMISSION RECORDS AND INFORMATION

    63a. The authority citation for part 145 continues to read as

    follows:

    Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80

    Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.

    1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389

    (5 U.S.C. 4a(j)); unless otherwise noted.

    63b. Revise paragraph (c)(1), (d)(1) introductory text, and

    (d)(1)(vi) of Sec. 145.9 to read as follows:

    Sec. 145.9 Petition for confidential treatment of information

    submitted to the Commission.

    * * * * *

    (c) * * *

    (1) Submitter. A ``submitter'' is any person who submits any

    information or material to the Commission or who permits any

    information or material to be submitted to the Commission. For purposes

    of paragraph (d)(1)(ii) of this section only, ``submitter'' includes

    any person whose information has been submitted to a designated

    contract market, derivatives clearing organization, swap execution

    facility, swap data repository or registered futures association that

    in turn has submitted the information to the Commission.

    * * * * *

    (d) Written request for confidential treatment. (1) Any submitter

    may request in writing that the Commission afford confidential

    treatment under the Freedom of Information Act to any information that

    he or she submits to the Commission. Except as provided in paragraph

    (d)(4) of this section, no oral requests for confidential treatment

    will be accepted by the Commission. The submitter shall specify the

    grounds on which confidential treatment is being requested but need not

    provide a detailed written justification of the request unless required

    to do so under paragraph (e) of this section. Confidential treatment

    may be requested only on the grounds that disclosure:

    * * * * *

    (vi) Would reveal investigatory records compiled for law

    enforcement purposes when disclosure would interfere with enforcement

    proceedings or disclose investigative techniques and procedures,

    provided, that the claim may be made only by a designated contract

    market, derivatives clearing organization, swap execution facility,

    swap data repository or registered futures association with regard to

    its own investigatory records.

    * * * * *

    64. Revise paragraphs (a)(6), (a)(8), and (b)(13) of Appendix A to

    part 145 to read as follows:

    Appendix A To Part 145--Compilation of Commission Records Available to

    the Public

    * * * * *

    (a) * * *

    [[Page 33112]]

    (6) Rule enforcement and financial reviews (public version).

    * * * * *

    (8) Commission rules and regulations, Federal Register notices,

    interpretative letters.

    * * * * *

    (b) * * *

    (13) Publicly available portions of applications to become a

    registered entity including the transmittal letter, application

    form, proposed rules, proposed bylaws, corporate documents, any

    overview or similar summary provided by the applicant, any documents

    pertaining to the applicant's legal status and governance structure,

    including governance fitness information, and any other part of the

    application not covered by a request for confidential treatment.

    * * * * *

    PART 155--TRADING STANDARDS

    65a. The authority citation for part 155 continues to read as

    follows:

    Authority: 7 U.S.C. 6b, 6c, 6g, 6j and 12a, unless otherwise

    noted.

    65b. Revise the introductory text of Sec. 155.2 to read as

    follows:

    Sec. 155.2 Trading standards for floor brokers.

    Each contract market shall adopt rules which shall, at a minimum,

    with respect to each member of the contract market acting as a floor

    broker:

    * * * * *

    66. Revise paragraphs (a)(1), (b)(2)(ii), and (c)(1) of Sec. 155.3

    to read as follows:

    Sec. 155.3 Trading standards for futures commission merchants.

    (a) * * *

    (1) Insure, to the extent possible, that each order received from a

    customer which is executable at or near the market price is transmitted

    to the floor of the appropriate contract market before any order in any

    future or in any commodity option in the same commodity for any

    proprietary account, any other account in which an affiliated person

    has an interest, or any account for which an affiliated person may

    originate orders without the prior specific consent of the account

    owner, if the affiliated person has gained knowledge of the customer's

    order prior to the transmission to the floor of the appropriate

    contract market of the order for a proprietary account, an account in

    which the affiliated person has an interest, or an account in which the

    affiliated person may originate orders without the prior specific

    consent of the account owner; and

    * * * * *

    (b) * * *

    (2) * * *

    (ii) In the case of a customer who does not qualify as an

    ``institutional customer'' as defined in Sec. 1.3(g) of this chapter,

    a futures commission merchant must obtain the customer's prior consent

    through a signed acknowledgment, which may be accomplished in

    accordance with Sec. 1.55(d) of this chapter.

    (c) * * *

    (1) Receives written authorization from a person designated by such

    other futures commission merchant or introducing broker with

    responsibility for the surveillance over such account pursuant to

    paragraph (a)(2) of this section or Sec. 155.4(a)(2), respectively;

    * * * * *

    67. Revise paragraphs (a)(1), (b)(2)(ii), and (c)(2) of Sec. 155.4

    to read as follows:

    Sec. 155.4 Trading standards for introducing brokers.

    (a) * * *

    (1) Insure, to the extent possible, that each order received from a

    customer which is executable at or near the market price is transmitted

    to the futures commission merchant carrying the account of the customer

    before any order in any future or in any commodity option in the same

    commodity for any proprietary account, any other account in which an

    affiliated person has an interest, or any account for which an

    affiliated person may originate orders without the prior specific

    consent of the account owner, if the affiliated person has gained

    knowledge of the customer's order prior to the transmission to the

    floor of the appropriate contract market of the order for a proprietary

    account, an account in which the affiliated person has an interest, or

    an account in which the affiliated person may originate orders without

    the prior specific consent of the account owner; and

    * * * * *

    (b) * * *

    (2) * * *

    (ii) In the case of a customer who does not qualify as an

    ``institutional customer'' as defined in Sec. 1.3(g) of this chapter,

    an introducing broker must obtain the customer's prior consent through

    a signed acknowledgment, which may be accomplished in accordance with

    Sec. 1.55(d) of this chapter.

    * * * * *

    (c) * * *

    (2) Copies of all statements for such account and of all written

    records prepared by such futures commission merchant upon receipt of

    orders for such account pursuant to Sec. 155.3(c)(2) are transmitted

    on a regular basis to the introducing broker with which such person is

    affiliated.

    Sec. 155.6 [Removed and Reserved]

    68. Remove and reserve Sec. 155.6.

    PART 166--CUSTOMER PROTECTION RULES

    69a. The authority citation for part 155 is revised to read as

    follows:

    Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,

    12a, 21, and 23, as amended by Title VII of the Dodd-Frank Wall

    Street Reform and Consumer Protection Act, Pub. L. 111-203, 124

    Stat. 1376 (2010).

    69b. Revise paragraph (a) introductory text and paragraph (b) of

    Sec. 166.2 to read as follows:

    Sec. 166.2 Authorization to trade.

    * * * * *

    (a) With respect to a commodity interest as defined in any

    paragraph of the commodity interest definition in Sec. 1.3(yy) of this

    chapter, specifically authorized the futures commission merchant,

    retail foreign exchange dealer, introducing broker or any of their

    associated persons to effect the transaction (a transaction is

    ``specifically authorized'' if the customer or person designated by the

    customer to control the account specifies--

    * * * * *

    (b) With respect to a commodity interest as defined in paragraph

    (1) or (2) of the commodity interest definition in Sec. 1.3(yy) of

    this chapter, authorized in writing the futures commission merchant,

    introducing broker or any of their associated persons to effect

    transactions in commodity interests for the account without the

    customer's specific authorization; Provided, however, That if any such

    futures commission merchant, introducing broker or any of their

    associated persons is also authorized to effect transactions in foreign

    futures or foreign options without the customer's specific

    authorization, such authorization must be expressly documented.

    70. Revise paragraph (a)(2) of Sec. 166.5 to read as follows:

    Sec. 166.5 Dispute settlement procedures.

    (a) * * *

    (2) The term customer as used in this section includes any person

    for or on behalf of whom a member of a designated contract market, or a

    participant transacting on or through such designated contract market,

    effects a transaction on such contract market, except another member of

    or participant in such designated contract market. Provided, however, a

    person who is an ``eligible contract participant'' as defined in

    section 1a(18) of the Act shall not be

    [[Page 33113]]

    deemed to be a customer within the meaning of this section.

    * * * * *

    Issued in Washington, DC on April 27, 2011, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Adaptation of Regulations To Incorporate Swaps--

    Commission Voting Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Chilton

    and O'Malia voted in the affirmative; Commissioner Sommers voted in

    the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking to adapt existing CFTC

    regulations to the new requirements of the Dodd-Frank Act. The Act

    expanded the scope of the Commodity Exchange Act to include swaps.

    In addition to rulemakings implementing specific provisions of the

    Act, conforming changes across the Commission's existing regulations

    are needed to incorporate that expanded scope. Specifically, this

    proposed rulemaking would update the definitions of futures

    commission merchant (FCM) and introducing broker (IB) to fulfill the

    Dodd-Frank Act's requirement to permit those entities to trade swaps

    on behalf of their customers. The proposal also would add swap

    execution facilities (SEFs) to the list of CFTC-regulated trading

    venues. The proposal includes recordkeeping requirements for FCMs,

    IBs and SEFs to ensure that similar records are kept for swaps as

    are currently kept for futures, among other protections that already

    exist in the futures markets. The rules for FCMs with regard to

    allocations of bunched orders for swaps will be consistent with

    those rules for futures.

    [FR Doc. 2011-12270 Filed 6-6-11; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: June 7, 2011



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