[Federal Register: August 27, 2001 (Volume 66, Number 166)]
[Rules and Regulations]
[Page 44960-44967]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27au01-7]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 41 and 140

RIN 3038-AB82


Designated Contract Markets in Security Futures Products: Notice-
Designation Requirements, Continuing Obligations, Applications for
Exemptive Orders, and Exempt Provisions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: The Commodity Futures Trading Commission hereby adopts new
regulations providing notice procedures for a national securities
exchange, a national securities association, or an alternative trading
system to become a designated contract market in security futures
products, in accordance with the Commodity Futures Modernization Act of
2000. Such notice-designated contract markets would be subject to
certain limited filing requirements, based on various provisions of the
Commodity Exchange Act. Notice-designated contract markets may apply
for exemptive relief from any section of the Commodity Exchange Act or
regulations thereunder, to the extent such an exemption is necessary or
appropriate in the public interest and is consistent with the
protection of investors.

EFFECTIVE DATE: August 21, 2001.

FOR FURTHER INFORMATION CONTACT: Joshua R. Marlow, Attorney-Advisor, or
David P. Van Wagner, Associate Director, Division of Trading and
Markets, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC 20581, (202) 418-5490, electronic
mail: jmarlow@cftc.gov or dvanwagner@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Background

    The Commodity Futures Modernization Act of 2000 (``CFMA'')\1\
amended the Commodity Exchange Act (``Act'') to permit the trading of
security futures products,\2\ subject to the joint jurisdiction of the
Commodity Futures Trading Commission (``Commission'' or ``CFTC'') and
the Securities and Exchange Commission (``SEC'').\3\ Security futures
products may be traded on any board of trade either designated as a
contract market (``DCM'') by the Commission pursuant to section 5 of
the Act or registered with the Commission as a derivatives transaction
execution facility (``DTF'') pursuant to section 5a of the Act.\4\
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    \1\Pub. L. 106-554, 114 Stat. 2763 (December 21, 2000).
    \2\The term ``security futures product'' is defined in section
1a(32) of the Act to mean ``a security future or any put, call,
straddle, option, or privilege on any security future.'' The term
``security future'' is defined in section 1a(31) of the Act and
specifically excludes, among other things, ``excluded swap
transactions'' (as defined in section 2(g) of the Act). Because the
CFMA also provides that options on security futures cannot be traded
until at least December 21, 2003, security futures are the only
security futures products that may be available for trading before
such date. See section 2(a)(1)(D)(iii)(II) of the Act.
    \3\See section 251(a)(2) of the CFMA. Prior to passage of the
CFMA, section 2(a)(1)(B)(v) of the Act prohibited the trading of
security futures products.
    \4\The CFMA prescribes certain dates before which trading in
security futures products shall not commence. Specifically, trading
on a principal-to-principal basis between eligible contract
participants (``ECPs'') was not permissible prior to August 21,
2001, and retail trading may not begin until December 21, 2001.
However, both of these dates are conditioned upon the registration
of a futures association as a national securities association under
the Securities Exchange Act of 1934 (``'34 Act''). See section
202(a)(5) of the CFMA and section 6(g)(5) of the '34 Act.
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    Alternatively, section 5f of the Act permits certain entities that
are otherwise regulated by the SEC to become designated contract
markets for the limited purpose of trading security futures
products.\5\ Specifically, any board of trade registered with the SEC
as a national securities exchange pursuant to section 6(a) of the '34
Act or as a national securities association

[[Page 44961]]

pursuant to section 15A(a) of the '34 Act, or that operates as an
alternative trading system (``ATS'') as defined by section 1a(1) of the
Act, shall be a designated contract market in security futures products
(``SFPCM'') if:
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    \5\See section 252(a)(2) of the CFMA.

    (1) Such national securities exchange, national securities
association, or alternative trading system lists or trades no other
contracts of sale for future delivery, except for security futures
products;
    (2) such national securities exchange, national securities
association, or alternative trading system files written notice with
the Commission in such form as the Commission, by rule, may
prescribe containing such information as the Commission, by rule,
may prescribe as necessary or appropriate in the public interest or
for the protection of customers; and
    (3) the registration of such national securities exchange,
national securities association, or alternative trading system is
not suspended pursuant to an order by the Securities and Exchange
Commission.\6\
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    \6\Section 5f(a) of the Act.

    The designation ``shall be effective contemporaneously with the
submission of notice * * * to the Commission.''\7\ Moreover, section
5f(b)(4) of the Act permits the Commission to exempt SFPCMs from any
provision of the Act or regulations thereunder, and requires that the
Commission determine procedures which would allow SFPCMs to apply to
the Commission for such an exemption, ``to the extent [any] such
exemption is necessary or appropriate in the public interest and is
consistent with the protection of investors.''
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    \7\Id.
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    Accordingly, on May 31, 2001, the Commission proposed new
regulations 41.31, 41.32, 41.33, and 41.34, which would apply to boards
of trade seeking notice-designation as an SFPCM.\8\ In addition to
these rule proposals, the Commission sought comment on a variety of
related issues, including a potential disparity between the
Commission's proposed notice-designation procedures and related notice-
registration procedures proposed by the SEC. The Commission received
two comment letters.\9\
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    \8\See 66 FR 29517 (May 31, 2001). The comment period expired on
July 2, 2001.
    \9\Comments were provided by the Chicago Board of Trade
(``CBT'') on July 2, 2001, and by the American Stock Exchange
(``AMEX'') on July 12, 2001.
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II. Final Rules

A. Regulation 41.1--Definitions

    To implement the procedures identified in regulations 41.31 through
41.34, the Commission proposed to establish regulation 41.1, which
would contain six definitions: ``alternative trading system''; board of
trade''; ``national securities association''; ``national securities
exchange''; ``rule''; and ``security futures product.'' The definitions
of ``alternative trading system,'' ``board of trade,'' and ``security
futures product'' would be taken verbatim from section 1a of the Act.
The terms ``national securities exchange'' and ``national securities
association'' would have the same meanings as in the ``34 Act, and the
definition of ``rule'' would be identical to the definition found in
Commission regulation 40.1.\10\ No comments were received regarding
this rule, and the Commission has determined to adopt it as proposed.
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    \10\See 66 FR 42256 (Aug. 10, 2001). Commission regulations
referred to herein are found at 17 CFR Ch. I (2000).
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B. Regulation 41.31--Notice--Designation

    Section 5f(a)(2) of the Act states that a board of trade may obtain
designation as a contract market in security futures products by filing
``written notice with the Commission in such form as the Commission, by
rule, may prescribe containing such information as the Commission, by
rule, may prescribe as necessary or appropriate in the public interest
or for the protection of customers.'' The Commission therefore proposed
new regulation 41.31, which would establish notice-designation
procedures for any board of trade which operates as a national
securities exchange, national securities association, or alternative
trading system and which seeks designation as an SFPCM.
    The proposed content requirements of the notice include contact
information, a description of the security futures products that would
be traded, a copy of the rules of the board of trade, and five
certifications derived from various requirements found in sections 5f
and 2(a)(1)(D)(vii) of the Act.\11\ The Commission believes that this
information is necessary in order to maintain communication with a
board of trade and to receive information about its operations, two
functions that are ``necessary or appropriate in the public interest or
for the protection of customers.'' CBT is supportive of this proposed
rule, stating that the Commission's approach is ``reasonable and
consistent with the intent of the CFMA.''\12\ The Commission has
determined to adopt regulation 41.31 as proposed.\13\
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    \11\Section 2(a)(1)(D)(vii) of the Act states: ``It shall be
unlawful for a board of trade to trade or execute a security futures
product unless the board of trade has provided the Commission with a
certification that the specific security futures product and the
board of trade, as applicable, meet the criteria specified in
subclauses (I) through (XI) of [section 2(a)(1)(D)(i)], except as
otherwise provided in [section 2(a;)(1)(D)(vi)].''
    \12\CBT's comment in this regard was a response to both the
Commission's proposed regulation 41.31 and the request for comment
regarding the potential disparity between the proposed notice-
designation procedures and the related SEC notice-registration
procedures.
    \13\If a board of trade previously filed documents with the SEC
containing information that satisfies any of these requirements, the
Commission would accept copies of such documents in lieu of the
required information.
    The Commission intends to amend regulation 41.31(a)(5)(iii) so
that it cross-references regulations 41.22 and 41.23, rather than
the Act, should regulations 41.22 and 41.23 become final. Proposed
regulations 41.22 and 41.23 would establish listing standards for
the trading of security futures products, pursuant to section
2(a)(1)(D)(i) and (vii) of the Act. See 66 FR 37932 (July 20, 2001).
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C. Regulation 41.32--Continuing Obligations

    Proposed regulation 41.32 would establish a mechanism for the
Commission to receive the following from an SFPCM:
    (1) Notification of any change in its regulatory status with the
SEC or with a futures association registered under section 17 of the
Act;\14\
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    \14\A change in regulatory status includes, among other things,
suspension of registration pursuant to an order by the SEC, a switch
in SEC registration from ``alternative trading system'' to
``national securities exchange,'' or suspension or revocation of
membership by a registered futures association.
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    (2) a certification consistent with the requirements of section
2(a)(1)(D)(vii) of the Act each time the board of trade lists a new
security futures product for trading;\15\
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    \15\See supra note 11.
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    (3) a copy of any new rules or rule amendments that relate to the
trading of security futures products, including any operational rules
and the terms and conditions of any security futures products;\16\
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    \16\A change in the clearing facilities by an SFPCM would be
included in this category.
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    (4) upon request, information related to its business as a
designated contract market in security futures products; and
    (5) upon request, a written demonstration, including supporting
data, that the board of trade is in compliance with a specified
provision of the Act or regulations thereunder.
    This information would facilitate the Commission's efforts in
carrying out its market oversight responsibilities under the Act and
would help ensure that SFPCMs continue to comply with the conditions of
designation under section 5f(a) of the Act and regulation 41.31.\17\
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    \17\As is the case under regulation 41.31, if a board of trade
previously filed documents with the SEC which contain information
satisfying any of these proposed informational requirements, the
Commission would accept copies of such documents in lieu of the
required information.

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[[Page 44962]]

    As stated in the proposing release,\18\ these requirements are
authorized by various recordkeeping and reporting provisions of the Act
that are applicable to all designated contract markets. In particular,
section 4g(b) of the Act requires that ``[e]very registered entity * *
* maintain daily trading records * * * includ[ing] such information as
the Commission shall prescribe by rule,''\19\ and section 4g(d) of the
Act continues, ``[d]aily trading records shall be maintained in a form
suitable to the Commission * * * . Reports shall be made from the
records maintained * * * in such form as the Commission may
prescribe.'' Moreover, sections 8(a)(1) and 2(a)(1)(D)(iv)(I) of the
Act, respectively, permit the Commission to ``make such investigations
as it deems necessary to ascertain the facts regarding the operations
of boards of trade * * * subject to the provisions of this Act'' and to
make ``such reasonable periodic or special examinations * * * as the
Commission deems necessary or appropriate in the public interest, for
the protection of investors, or otherwise in furtherance of the
purposes of this Act.''\20\ Under section 3 of the Act, the Commission
also has general responsibilities to prevent manipulation and other
disruptions to market integrity, to ensure the financial integrity of
all transactions subject to the Act, and to protect all market
participants from fraud.
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    \18\See 66 FR 29517 at 29519.
    \19\The term ``registered entity'' is defined by Section 1a(29)
of the Act to include DCMs, DTFs, derivatives clearing
organizations, and SFPCMs.
    \20\The Commission's authority under section 2(a)(1)(D)(iv)(I)
of the Act is subject to certain limitations appearing later in that
provision.
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    The Commission stated in the proposing release, and reiterates now,
that regulation 41.32 is not an exhaustive list of SFPCM regulatory
requirements meant to supplant SFPCMs' statutory and other regulatory
obligations.\21\ AMEX commented that SFPCMs would face regulatory
uncertainties because the Commission ``did not identify the particular*
* * regulations with which SFPCMs were expected to comply.''\22\
Because AMEX's concern in this instance is bound up with its concerns
over proposed regulation 41.34, the Commission will address the AMEX
comment below in section II.D. AMEX did not, however, take issue with
any of the particular requirements of regulation 41.32, and the
Commission has decided to adopt regulation 41.32 in substantially the
same form as proposed.\23\
    Additionally, the proposing release noted the Commission's
authority under Section 4i of the Act to collect information on the
positions of large traders.\24\ This information ordinarily is provided
to the Commission by futures commission merchants (``FCMs''), clearing
members, and foreign brokers, pursuant to Part 17 of the Commission's
regulations. Because Part 17 will apply to the trading of security
futures products, but might fail to capture large trader information
under certain circumstances, the Commission requested comment on
amending Part 17.\25\ No comments were received on this issue. The
Commission plans to address this issue separately in the near
future.\26\
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    \21\For example, the Commission emphasized in the proposing
release that an SFPCM would be subject to the requirements of Part
16 of the Commission's regulations, but that the Commission would
endeavor to limit its requests to information deemed necessary for
routine market surveillance. The Commission also noted that SFPCM
would be required to grant the Commission access to any books and
records relating to transactions conducted in reliance on its
designation as an SFPCM, pursuant to sections 4(a)(3), 4(b), 4g(b),
and 4g(d) of the Act and Commission regulation 1.31. (Regulation
1.31 has been reserved by the Commission's recent regulatory reform
rulemaking. See 66 FR 42256 at 42277).
    \22\CBT was generally supportive of regulation 41.32.
    \23\Proposed regulation 41.32 has been modified in two respects.
The Commission has determined to delete the first eight words from
proposed regulation 41.32(a)(3). This deletion is made in order to
eliminate any potential confusion regarding the inapplicability of
Part 40 to SFPCMs, discussed infra section II.D. The Commission also
added a clause to the end of paragraph (a) to notice that all
filings made pursuant to regulation 41.32(a) shall be addressed to
the Commission's Secretary at its Washington, D.C. headquarters.
    The Commission intends to amend regulation 41.32(a)(2) so that
it cross-references regulation 41.22 and 41.23, rather than the Act,
should requlations 41.22 and 41.23 become final. Proposed
regulations 41.22 and 41.23 would establish listing standards for
the trading of security futures products, pursuant to section
2(a)(1)(D)(i) and (vii) of the Act. See 66 FR 37932 (July 20, 2001).
    \24\Section 4i of the Act prohibits any person to ``have or
obtain a long or short position in any commodity or any future of
such commodity equal to or in excess of such amount as shall be
fixed from time to time by the Commission, unless such person files
or causes to be filed with the properly designated officer of the
Commission such reports regarding any [such] transactions or
positions * * * * as the Commission may by rule or regulation
require''.
    \25\For example, if an ATS operates a non-intermediated
marketplace and notice-designates as an SFPCM, it is not clear who
would be responsible for providing to the Commission any large
trader information arising out of security futures product
transactions conducted on that marketplace. The Commission therefore
requested comment on amending Part 17 so that, in such
circumstances, the ATS itself would be required to provide large
trader position information that otherwise would be provided by an
FCM.
    \26\The Commission also requested comment on whether there are
other potential circumstances under which large trader position
information might not be captured by Part 17, in its current form,
particularly in light of this rulemaking. No comments were received.
The Commission will address this issue when a need arises.
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D. Regulations 41.33(a)-(f), 41.34, and 140.99--Exemptions

    Section 5f(b)(4)(A) of the Act provides that the Commission ``by
rule, regulation or order, may conditionally or unconditionally
exempt'' any board of trade designated as an SFPCM from any provisions
of the Act or regulations thereunder, to the extent that the exemption
is necessary or appropriate in the public interest and is consistent
with the protection of investors. Section 5f(b)(4)(B) directs the
Commission to determine the procedures by which an exemptive order
under section 5f(b)(4)(A) shall be granted, and vests the Commission
with sole discretion to decline to entertain any application for such
an order.
    Accordingly, the Commission proposed regulation 41.33, which would
require an SFPCM seeking an exemption to file an application with the
Commission containing various information, including: the name and
address of the SFPCM requesting relief, and a contact person at the
SFPCM; a certification that the SEC registration of the SFPCM is not
suspended pursuant to an order of the SEC; an identification of the
provision(s) from which the SFPCM is requesting relief and, if
applicable, whether the SFPCM is subject to similar SEC provisions; the
type of relief sought; and an explanation of the need for relief,
including the extent to which such relief is necessary or appropriate
in the public interest and consistent with the protection of investors.
    The Commission proposed that it would have 90 days to review the
application, but could stay the review period at any time if it
determined that the application was materially incomplete. Moreover,
the Commission could, in its sole discretion, decline to entertain an
application for any reason, without explanation, at any time during the
review period. These exemptive order procedures would become an
enumerated exception to the applicability of Commission Regulation
140.99, which governs generally the form and manner of requests for
exemptive letters.
    AMEX objected to the discretion that would be afforded Commission
staff under this exemption process.\27\ It asserted that the Commission
should modify proposed regulation 41.33:
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    \27\CBT did not comment on this proposed rule.

    (1) To require Commission review of SFPCM requests for exemptive
orders using

[[Page 44963]]

the CFMA standard, that is, the ``necessary or appropriate in the
public interest and is consistent with the protection of investors''
standard; and
    (2) To require the preparation of a written explanation upon
request of the reasons for a denial of a request for an exemptive
order.\28\

    \28\This argument was made in the alternative. AMEX's primary
objection, addressed below, is that the Commission should publish
``a comprehensive list of rules that SFPCMs should comply with.''
AMEX believes that if the Commission does not publish such a list,
it should seek to minimize the discretion afforded Commission staff
in the exemptive order application process.
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(emphasis in original)
    The Commission notes that proposed regulation 41.33(a) already
requires that requests for exemptive orders be reviewed using the CFMA
standard. Moreover, paragraphs (b) and (e) of proposed regulation 41.33
would require that the Commission notify the board of trade of any
decision in writing. The Commission believes that this is appropriate
in light of section 5f(b)(4)(B) of the Act, which states that ``the
Commission shall, by rule or regulation, determine the procedures under
which an exemptive order under this section is granted and may, in its
sole discretion, decline to entertain any application for an order of
exemption under this section.'' This grant of exemptive authority by
Congress gives the Commission ``sole discretion'' whether to decline to
entertain exemptive order applications. If the Commission were to bind
itself to a requirement that a written explanation be provided, it
would effectively undermine its authority to decline to entertain an
application; a formal, written explanation under such circumstances
would be indistinguishable from a denial of the application. In order
to maintain conformity between the statutory and regulatory provisions,
the Commission has determined that it will adopt regulation 41.33 as
proposed.\29\ Nonetheless, as discussed below, the Commission welcomes
any suggestions concerning potential exemptions, and is committed to
providing a thorough, expeditious review to any petitions filed
pursuant to these provisions.
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    \29\Adoption of regulation 41.33 includes an associated
amendment to Commission regulation 140.99, which makes applications
for exemptive orders submitted pursuant to regulation 41.33 an
exception to the procedures identified in regulation 140.99.
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    The Commission also proposed regulation 41.34, which would list the
provisions of the Act from which SFPCMs would be exempted. Paragraph
(a) lists each of the statutory provisions enumerated in section
5f(b)(1) of the Act.\30\ Paragraph (b), which originally contained only
section 6(a) of the Act,\31\ has been expanded to include Parts 38 and
40 of the regulations.\32\ Because SFPCMs are exempted from sections 5
and 5c of the Act,\33\ which are the source for much of the authority
for Parts 38 and 40, the Commission has modified regulation 41.34 to
reflect that SFPCMs also are exempt from the provisions of Parts 38 and
40.\34\
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    \30\Section 5f(b)(1) of the Act states--
    A national securities exchange, national securities association,
or alternative trading system that is designated as a contract
market pursuant to section 5f shall be exempt from the following
provisions of this Act and the rules thereunder.
    (A) Subsections (c), (e), and (g) of section 4c.
    (B) Section 4j.
    (C) Section 5.
    (D) Section 5c.
    (E) Section 6a.
    (F) Section 8(d).
    (G) Section 9(f).
    (H) Section 16.
    \31\Section 6(a) of the Act addresses the application process
applicable to DCMs and DTFs.
    \32\See 66 FR 42256 (Aug. 10, 2001) (promulgating, among other
things, Parts 38 and 40 of the Commission's regulations). Although
proposed regulation 41.34(b) only included section 6(a) of the Act,
the proposing release discussed the inapplicability of parts 38 and
40 to SFPCMs. See 66 FR 29517 at 29520. No comments were received
regarding the Commission's proposal to exempt SFPCMs from section
6(a) of the Act or the Commission's discussion of Parts 38 and 40
generally.
    \33\See supra note 30.
    \34\Moreover, regulation 38.1, addressing the ``scope'' of Part
38 generally, states that ``(t)he provisions of this part 38 shall
apply to every board of trade or trading facility that has been
designated as a contract market in a commodity under section 6 of
the Act.'' Because other paragraphs under section 6 remain
applicable to SFPCMs, the Commission believes that specifically
exempting SFPCMs from section 6(a) of the Act further clarifies that
Part 38 is inapplicable to SFPCMs.
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    Regarding paragraph (a) of proposed regulation 41.34, AMEX
commented that the Commission did not identify the particular
regulations with which SFPCMs were expected to comply.\35\ AMEX also
noted that it may be difficult to ascertain which Commission
requirements were promulgated pursuant to provisions of Act from which
SFPCMs are exempt. The Commission understands this predicament, and
requested comment on precisely these two issues.\36\ However, no
commenters, including AMEX, offered any specific examples of which
Commission requirements were duplicative of SEC obligations.
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    \35\CBT did not comment on this proposed rule.
    \36\``In addition to the proposals above, the Commission seeks
comment from boards of trade and other interested persons regarding
whether there are any other provisions of the Act or regulations
thereunder from which SFPCMs should be exempt by regulation. The
Commission is particularly interested in commenters' views
regarding, among other things, the interplay between the enumerated
exemptions in sections 5f(b)(1) and (2) of the Act and the
Commission's regulations generally.'' 66FR 29517 at 29520.
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    As discussed above, the Commission has identified section 6(a) of
the Act and Parts 38 and 40 of the regulations as additional provisions
from which SFPCMs are exempted. Moreover, in the spirit of the general
intent of the CFMA to reduce the burdens of shared jurisdiction, the
Commission remains open to suggestions regarding any provisions from
which SFPCMs should be exempted.\37\ The Commission believes that
SFPCMs are in the best position to determine which Commission
requirements are duplicative of their other regulatory obligations.
Accordingly, regulation 41.34(a) will be adopted as proposed.
Commission staff is always available to consult with any board of trade
that seeks or accomplishes notice-designation and is unsure of its
regulatory and compliance responsibilities.
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    \37\The Commission notes that no comments were received
regarding which provisions a notice-designated ATS might be
appropriately exempted from pursuant to section 5f(b)(2) of the Act.
See 66 FR 29517 at note 27. The Commission also remains open to
suggestions on this matter.
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E. Regulation 41.33(g)--Delegation of Authority

    Finally, the Commission proposed to delegate to the Director of the
Division of Trading and Markets and the Director of the Division of
Economic Analysis, jointly, with the concurrence of the Commission's
General Counsel, the authority to grant or deny applications for
exemptive orders under regulation 41.33. This delegation of authority
is intended to expedite the procedures described in proposed regulation
41.33 and to place responsibility for them with those Commission staff
members most directly involved in the relevant matters. No comments
were received on this issue, and the Commission will adopt the
delegation of authority as proposed. The Commission believes that this
delegation will maximize regulatory efficiency with respect to the
processing of regulation 41.33 exemption applications.

III. Administrative Procedure Act

    Section 553(d) of the Administrative Procedure Act generally
provides that a substantive rule may not be made effective less than 30
days after notice is published in the Federal Register.\38\ One
exception to the 30-day requirement, among others, is an agency's
finding of good cause for providing a shorter effective date.
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    \38\See 5 U.S.C. 553(d).

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[[Page 44964]]

    The CFMA provides that principal-to-principal transactions in
security futures products between ECPs may commence on August 21,
2001.\39\ Prior to passage of the CFMA, there was no need for the
Commission to have rules providing for the expedited designation of
certain boards of trade as contract markets in security futures
products. Since passage of the CFMA, the Commission has moved quickly
to adopt rules that would facilitate notice-designation. The
Commission, after reviewing and considering the comments received, is
now adopting these rules in substantially the same form as proposed. By
allowing certain principal-to-principal transactions to commence on
August 21, 2001, Congress, in essence, established a statutory deadline
for the promulgation of these rules. If the effective date is delayed
for 30 days, then those boards of trade that wish to notice-designate
as contract markets in security futures products would not be able to
begin listing products for trading, assuming the various other
conditions\40\ for the commencement of trading would have been met
before the 30 days expired.
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    \39\See supra note 4.
    \40\Id.
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    The primary purpose of delaying effectiveness of new rules for 30
days is to give affected parties a reasonable period of time to adjust.
In this instance, parties that might be affected would not be harmed by
immediate effectiveness of the rules because they would only be subject
to the rules voluntarily. Moreover, to the extent that these rules have
been promulgated in substantially the same form as the proposed rules
and were published for comment, any affected boards of trade are
already familiar with the rules. Finally, the 30-day delay in
effectiveness could interfere with the goals and mandates of the CFMA.
Therefore, the Commission concludes that there is good cause for making
these rules effective immediately upon publication.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'')\41\ requires that
agencies, in proposing regulations, consider the impact of those
regulations on small businesses. The regulations discussed herein
affect boards of trade seeking to be designated as contract markets in
security futures products under notice procedures promulgated pursuant
to section 5f(a) of the Act. The Commission has previously established
certain definitions of ``small entities'' to be used by the Commission
in evaluating the impact of its regulations on such entities in
accordance with the RFA.\42\ The Commission determined that contract
markets are not small entities for the purpose of the RFA.\43\
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    \41\See 5 U.S.C. 601 et seq. (1994) and Supp. II 1996).
    \42\See 47 18618 (April 30, 1982).
    \43\See 47 FR 18618 at 18619-20.
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    The Commission further notes that section 252 of the CFMA requires
the Commission to promulgate these regulations. Moreover, the
regulations promulgated herein would not impose any new burdens upon
entities seeking to be designated as an SFPCM pursuant section 5f(a) of
the Act. Rather, these regulations would facilitate exemptive relief
from the more burdensome requirements in sections 5 and 5a of the Act,
and regulations thereunder, that otherwise would be applicable to
entities seeking to list security futures products for trading.
Therefore, the Commission believes that the adoption of these
regulations reduces the burden of compliance by such entities.
    Accordingly, the Acting Chairman, on behalf of the Commission,
hereby certifies, pursuant to 5 U.S.C. 605(b), that the regulations
herein will not have a significant economic impact on a substantial
number of small entities.

B. Paperwork Reduction Act

    This rulemaking contains information collection requirements within
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\44\ As
required by the PRA, the Commission has submitted a copy of this part
to the Office of Management and Budget (``OMB'') for its review. In
response to the Commission's invitation in the notice of proposed
rulemaking to comment on any potential paperwork burdens associated
therewith, no comments were received.
---------------------------------------------------------------------------

    \44\See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The final rules do not contain any disclosure requirements or any
consumer reporting requirements. It does, however, require the
collection of certain information from boards of trade seeking to be
notice-designated as contract markets in security futures products, and
from notice-designated contract markets in security futures products
which seek an exemption from the Act or regulations thereunder. The
Commission may not conduct or sponsor, and a person is not required to
respond to, an information collection unless it displays a currently
valid OMB control number. The Commission has received a control number
for this information collection from OMB.

C. Cost-Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA,
requires the Commission, before promulgating a new regulation under the
Act, to consider the costs and benefits of the Commission's action. The
Commission recently applied the cost-benefit provisions of section 15
for the first time with respect to a final rulemaking,\45\ and
understands that although section 15, as amended, requires the
Commission to consider the costs and benefits of a new regulation, it
does not require the Commission to quantify those costs and benefits or
determine whether the benefits of the regulation outweigh its costs.
---------------------------------------------------------------------------

    \45\See 66 FR 20740 (Apr. 25, 2001).
---------------------------------------------------------------------------

    The amended Section 15 further specifies that costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: (1) Protection of market participants and the public; (2)
efficiency, competitiveness, and financial integrity of futures
markets; (3) price discovery;\46\ (4) sound risk management practices;
and (5) other public interest considerations. The Commission may, in
its discretion, give greater weight to any one of the five enumerated
areas of concern and may, in its discretion, determine that,
notwithstanding its costs, a particular regulation was necessary or
appropriate to protect the public interest or to effectuate any of the
provisions or to accomplish any of the purposes of the Act.
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    \46\Price discovery is not a concern relevant to this
rulemaking.
---------------------------------------------------------------------------

    The main areas of concern relevant to this rulemaking are the first
two set forth in the Act, ``protection of market participants and the
public'' and ``efficiency, competitiveness and financial integrity of
the futures markets.'' The Commission notes that the CFMA specifically
mandates that certain boards of trade be notice-designated by the
Commission as a contract market if they seek to list or trade security
futures products only, and that procedures be established by the
Commission for such entities to apply for exemptions from the Act or
regulations thereunder. Further, the Commission believes that these
additional registrants may promote the efficiency and competitiveness
of those futures markets on which security future products may be
traded and, in turn, may serve to promote the financial integrity of
those markets. The Commission has endeavored to impose minimal costs--
i.e., only necessary disclosure and recordkeeping--on any of the
entities involved, so that the benefits of the notice-designation and

[[Page 44965]]

exemptive processes intended by Congress can be fully realized.
Furthermore, submission of an application for exemptive relief is not
required of SFPCMs, but elected on a voluntary basis.
    AMEX commented that the costs and benefits of applying the
Commission's regulations to SFPCMs should have been assessed in the
proposed rulemaking. The Commission notes that SFPCMs' exposure to CFTC
regulatory requirements has been imposed by Congress, by virtue of its
passage of CFMA, rather than as a result of this rulemaking. The
applicability of Commission regulations to SFPCMs is implicit in
section 5f(b) of the Act, which exempts SFPCMs from only a limited
number of provisions of the Act and regulations thereunder. If Congress
intended that SFPCMs be exempt from additional provisions of the Act
and regulations thereunder, the list of enumerated exemptions in
section 5f(b)(1) would have been longer. Moreover, the fact that
Congress contemplated procedures to exempt SFPCMs ``from any provision
of this Act or of any rule or regulation thereunder''\47\ further
demonstrates that it intended for any requirements not enumerated under
section 5f(b)(1) to apply initially. Therefore, the Commission
disagrees that SFPCMs are subjected to new regulatory requirements as a
result of this rulemaking; the imposition of any new regulatory
requirements result directly from passage of the CFMA.
---------------------------------------------------------------------------

    \47\See section 5f(b)(4) of the Act.
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List of Subjects

17 CFR Part 41

    Contract markets, reporting and recordkeeping requirements,
security futures products.

17 CFR Part 140

    Authority delegations.


    For the reasons discussed in the preamble, the Commission hereby
amends Chapter I of Title 17 of the Code of Federal Regulations as
follows:
    1. The heading for Part 41 is revised to read as follows:\1\
---------------------------------------------------------------------------

    \1\Note: This revision supersedes the part heading added on
August 10, 2001 (66 FR 42287) which was to become effective October
9, 2001.
---------------------------------------------------------------------------

PART 41--SECURITY FUTURES PRODUCTS

    2. The authority citation for Part 41 is revised to read as
follows:

    Authority:  Sections 251 and 252, Pub. L. 106-554, 114 Stat.
2763; 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a.

    3. Section 41.1 is amended by adding paragraphs (a) and (b) and (f)
through (i) as follows:


Sec. 41.1  Definitions.

    For purposes of this part:
    (a) Alternative trading system shall have the meaning set forth in
section 1a(1) of the Act.
    (b) Board of trade shall have the meaning set forth in section
1a(2) of the Act.
* * * * *
    (f) National securities association means a board of trade
registered with the Securities and Exchange Commission pursuant to
section 15A(a) of the Securities Exchange Act of 1934.
    (g) National securities exchange means a board of trade registered
with the Securities and Exchange Commission pursuant to section 6(a) of
the Securities Exchange Act of 1934.
    (h) Rule shall have the meaning set forth in Commission regulation
40.1.
    (i) Security futures product shall have the meaning set forth in
section 1a(32) of the Act.

    4. Subpart D (Secs. 41.31 through 41.34) is added as follows:
Subpart D--Designated Contract Markets in Security Futures Products
Sec.
41.31   Notice-designation requirements.
41.32   Continuing obligations.
41.33   Applications for exemptive orders.
41.34   Exempt provisions.

Subpart D--Notice-Designated Contract Markets in Security Futures
Products


Sec. 41.31  Notice-designation requirements.

    (a) Any board of trade that is a national securities exchange, a
national securities association, or an alternative trading system, and
that seeks to operate as a designated contract market in security
futures products under section 5f of the Act, shall so notify the
Commission. Such notification shall be filed with the Secretary of the
Commission at its Washington, D.C. headquarters, in either electronic
or hard copy form, shall be labeled as ``Notice of Designation as a
Contract Market in Security Futures Products,'' and shall include:
    (1) The name and address of the board of trade;
    (2) The name and telephone number of a contact person designated to
receive communications from the Commission on behalf of the board of
trade;
    (3) A description of the security futures products that the board
of trade intends to make available for trading, including an
identification of all facilities that would clear transactions in
security futures products on behalf of the board of trade;
    (4) A copy of the current rules of the board of trade; and
    (5) A certification that the board of trade--
    (i) Will not list or trade any contracts of sale for future
delivery, except for security futures products;
    (ii) Is registered with the Securities and Exchange Commission as a
national securities exchange, national securities association, or
alternative trading system, and such registration is not suspended
pursuant to an order by the Securities and Exchange Commission;
    (iii) Will meet the criteria specified in subclauses (I) through
(XI) of section 2(a)(1)(D)(i) of the Act, except as otherwise provided
in section 2(a)(1)(D)(vi) of the Act, for each specific security
futures product that the board of trade intends to make available for
trading;
    (iv) Will comply with the conditions for designation under this
section and section 5f of the Act, including a specific representation
by any alternative trading system that it is a member of a futures
association registered under section 17 of the Act; and
    (v) Will comply with the continuing obligations of regulation
41.32.
    (b) A board of trade which files notice with the Commission under
this section shall be deemed a designated contract market in security
futures products upon the Commission's receipt of such notice.
Accordingly, the Commission shall send prompt acknowledgment of receipt
to the filer.
    (c) Designation as a contract market in security futures products
pursuant to this section shall be deemed suspended if the board of
trade:
    (1) Lists or trades any contracts of sale for future delivery,
except for security futures products; or
    (2) Has its registration as a national securities exchange,
national securities association, or alternative trading system
suspended pursuant to an order by the Securities and Exchange
Commission.


Sec. 41.32  Continuing obligations.

    (a)(1) A board of trade designated as a contract market in security
futures products pursuant to Sec. 41.31 of this chapter shall:
    (i) Notify the Commission of any change in its regulatory status
with the Securities and Exchange Commission or with a futures
association registered under section 17 of the Act;
    (ii) Comply with the filing requirements of section 2(a)(1)(D)(vii)
of the Act each time the board of trade lists a security futures
product for trading;

[[Page 44966]]

    (iii) Provide the Commission with any new rules or rule amendments
that relate to the trading of security futures products, including both
operational rules and the terms and conditions of products listed for
trading on the facility, promptly after final implementation of such
rules or rule amendments; and
    (iv) Upon request, file promptly with the Commission--
    (A) Such information related to its business as a designated
contract market in security futures products as the Commission may
request; and
    (B) A written demonstration, containing such supporting data and
other information and documents as the Commission may specify, that the
board of trade is in compliance with one or more applicable provisions
of the Act or regulations thereunder as specified in the request.
    (2) Any information filed pursuant to paragraph (a) of this section
shall be addressed to the Secretary of the Commission at its
Washington, D.C. headquarters, shall be labeled ``SFPCM Continuing
Obligations,'' and may be transmitted in either electronic or hard copy
form.
    (b) Except as exempted under section 5f(b) of the Act or under
Secs. 41.33 and 41.34 of this chapter, any board of trade designated as
a contract market in security futures products pursuant to Sec. 41.31
of this chapter shall be subject to all applicable requirements of the
Act and regulations thereunder. Failure to comply shall subject the
board of trade to Commission action under, among other provisions,
sections 5e and 6(b) of the Act.


Sec. 41.33  Applications for exemptive orders.

    (a) Any board of trade designated as a contract market in security
futures products pursuant to Sec. 41.31 of this chapter may apply to
the Commission for an exemption from any provision of the Act or
regulations thereunder. Except as provided in sections 5f(b)(1) and
5f(b)(2) of the Act, the Commission shall have sole discretion to
exempt a board of trade, conditionally or unconditionally, from any
provision of the Act or regulations thereunder pursuant to this
section. The Commission may issue such an exemptive order in response
to an application only to the extent it finds, after review, that the
issuance of an exemptive order is necessary or appropriate in the
public interest and is consistent with the protection of investors.
    (b) Each application for exemptive relief must comply with the
requirements of this section. The Commission may, in its sole
discretion, decline to entertain any application for an exemptive order
under this section without explanation; provided, however, that the
Commission shall notify the board of trade of such a decision in
writing.
    (c) Application requirements. (1) Each application for an exemptive
order made pursuant to this section must include:
    (i) The name and address of the board of trade requesting relief,
and the name and telephone number of a person whom Commission staff may
contact to obtain additional information regarding the request;
    (ii) A certification that the registration of the board of trade is
not suspended pursuant to an order of the Securities and Exchange
Commission;
    (iii) The provision(s) of the Act or regulations thereunder from
which the board of trade seeks relief and, if applicable, whether the
board of trade is otherwise subject to similar provisions as a result
of Securities and Exchange Commission jurisdiction; and
    (iv) The type of relief requested and the order sought; an
explanation of the need for relief, including all material facts and
circumstances giving rise to the request; and the extent to which such
relief is necessary or appropriate in the public interest and
consistent with the protection of investors.
    (2) Each application must be filed with the Secretary of the
Commission at its Washington, D.C. headquarters, in either electronic
or hard copy form, signed by an authorized representative of the board
of trade, and labeled ``Application for an Exemptive Order pursuant to
Commission regulation 41.33.''
    (d) Review Period. (1) The Commission shall have 90 days upon
receipt of an application for an exemptive order in which to make a
determination as to whether such relief should be granted or denied.
    (2) The Commission may request additional information from the
applicant at any time prior to the end of the review period.
    (3) The Commission may stay the review period if it determines that
an application is materially incomplete; provided, however, that this
paragraph (d) does not limit the Commission's authority, under
paragraph (b) of this section, to decline to entertain an application.
    (e) Upon conclusion of the review period, the Commission shall
issue an order granting or denying relief, or granting relief subject
to conditions; provided, however, that the Commission's obligations
under this paragraph shall not limit its authority, under paragraph (b)
of this section, to decline to entertain an application. The Commission
shall notify the board of trade in writing of its decision to grant or
deny relief under this paragraph.
    (f) An application for an exemptive order may be withdrawn by the
applicant at any time, without explanation, by filing with the
Secretary of the Commission a written request for withdrawal, signed by
an authorized representative of the board of trade.
    (g) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Trading and Markets and the Director of
the Division of Economic Analysis, jointly, with the concurrence of the
General Counsel, authority to make determinations on applications for
exemptive orders pursuant to this section; provided, however, that:
    (1) The Director of the Division of Trading and Markets or the
Director of the Division of Economic Analysis may submit to the
Commission for its consideration any matter which has been delegated
pursuant to paragraph (g) of this section; and
    (2) Nothing in this section shall be deemed to prohibit the
Commission, at its election, from exercising the authority delegated to
the Director of the Division of Trading and Markets and the Director of
the Division of Economic Analysis under paragraph (g) of this section.


Sec. 41.34  Exempt provisions.

    Any board of trade notice-designated as a contract market in
security futures products pursuant to Sec. 41.31 of this chapter also
shall be exempt from:
    (a) The following provisions of the Act, pursuant to section
5f(b)(1) of the Act:
    (1) Section 4c(c);
    (2) Section 4c(e);
    (3) Section 4c(g);
    (4) Section 4j;
    (5) Section 5;
    (6) Section 5c;
    (7) Section 6a;
    (8) Section 8(d);
    (9) Section 9(f);
    (10) Section 16; and
    (b) The following provisions, pursuant to section 5f(b)(4) of the
Act:
    (1) Section 6(a) of the Act;
    (2) Part 38 of this chapter; and
    (3) Part 40 of this chapter.

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    5. The authority citation for Part 140 continues to read as
follows:


[[Page 44967]]


    Authority: 7 U.S.C. 4a and 12a.

    6. Section 140.99(i) is amended by revising paragraphs (i)(1) and
(2) and adding new paragraph (i)(3) as follows:


Sec. 140.99  Requests for exemptive, no-action and interpretive
letters.

* * * * *
    (i) * * *
    (1) Notice filings required to be made to claim relief from the Act
or from a Commission rule, regulation, or order including, without
limitations, Secs. 4.5, 4.7(a), 4.7(b), 4.12(b), 4.13(b) and 4.14(a)(8)
of this chapter;
    (2) Requests for exemption pursuant to section 4(c) of the Act; or
    (3) Requests for exemption pursuant to Sec. 41.33 of this chapter.

    Issued in Washington, DC on August 20, 2001 by the Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 01-21452 Filed 8-24-01; 8:45 am]
BILLING CODE 6351-01-U