[Federal Register: December 13, 2001 (Volume 66, Number 240)]
[Proposed Rules]
[Page 64383-64385]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13de01-11]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 15

RIN 3038-AB88


Reporting Levels for Large Trader Reports; Security Futures
Products

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing to amend part 15 of its rules, 17 CFR part 15, to
establish reporting levels for security futures products (SFPs) traded
on designated contract markets and notice-designated contract markets.
The reporting levels being proposed are 1000 contracts for an SFP
involving an individual security and 200 contracts for an SFP involving
a narrow-based index of equity securities.

DATES: Comments must be received by January 14, 2002.

ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521 or, by e-mail to
secretary@cftc.gov. Reference should be made to ``Reporting Levels for
Security Futures Products.''

FOR FURTHER INFORMATION CONTACT: Gary J. Martinaitis, Deputy Associate
Director, Market Surveillance Section, or Nancy E. Yanofsky, Assistant
Chief Counsel, Division of Economic Analysis, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. Telephone: (202) 418-5260. E-mail: GMartinaitis@cftc.gov or
NYanofsky@cftc.gov.

SUPPLEMENTARY INFORMATION: On December 21, 2000, the President signed
into law the Commodity Futures Modernization Act of 2000 (CFMA), Pub.
L. No. 106-554, which extensively revises the Commodity Exchange Act
(Act). Among other things, the CFMA removed the restriction in the Act
on the trading of futures contracts on individual equity securities and
narrow-based indices of equity securities.\1\ Under the revised law,
these products are now referred to as ``security futures products''
(SFPs) \2\ and may be traded on designated contract markets, notice-
designated contract markets and registered derivatives transaction
execution facilities.
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    \1\ See section 251(a) of the CFMA. This trading previously had
been prohibited by section 2(a)(1)(B)(v) of the Act.
    \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; it
generally means a contract of sale for future delivery of a single
security or of a narrow-based security index, including any interest
therein or based on the value thereof, except exempted securities
(with the exclusion of municipal securities) and certain agreements,
contracts, or transactions excluded from the Act. Because the CFMA
provides that options on security futures cannot be traded until at
least December 21, 2003, security futures are the only security
futures product that may be available for trading during the next
two years.
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    SFPs, like all other commodities traded on Commission-designated
markets, will be subject to the Commission's large trader reporting
rules. Those rules require futures commission merchants, clearing
members and foreign brokers to report to the Commission position
information of the largest futures and options traders and require the
traders themselves to provide certain identifying information.
Reporting levels are set for individual futures and option markets
under the authority of sections 4i and 4c of the Act to ensure that the
Commission receives adequate information to carry out its market
surveillance programs. These market surveillance programs are designed
to detect and to prevent market congestion and price manipulation and
to enforce speculative position limits. They also provide information
regarding the overall hedging and speculative use of, and foreign
participation in, the futures markets and other matters of public
interest. Generally, large trader reports are filed by the firm
carrying the reportable trader's position.\3\
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    \3\ Generally, parts 17 and 18 of the regulations, 17 CFR parts
17 and 18, require reports from firms and traders, respectively,
when a trader holds a ``reportable position.'' A reportable position
is any open contract position that at the close of the market on any
business day equals or exceeds the quantity specified in Commission
rule 15.03 in either: (1) Any one future of any commodity on any one
contract market, excluding futures contracts against which notices
of delivery have been stopped by a trader or issued by the clearing
organization of a contract market; or (2) long or short put or call
options that exercise into the same future of any commodity on any
one contract market. 17 CFR 15.00 and part 150.
    The firms which carry accounts for traders holding ``reportable
positions'' are required to identify those accounts by filing a CFTC
Form 102 and to report all reportable positions in the accounts to
the Commission. The individual trader who holds or controls the
reportable position, however, is required to report to the
Commission only in response to a special call.
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    Based upon its experience in administering the large trader
reporting system, the Commission is proposing to establish a reporting
level of 1000 contracts for SFPs involving an individual security \4\
and 200 contracts for SFPs involving a narrow-based index of
securities.\5\ The Commission intends to review these levels an
appropriate amount of time after trading in SFPs commences to determine
if it provides adequate coverage for effective market surveillance. At
that time, the Commission will consider actual trading experience--
including trading volume, open interest and the number and position
sizes of individual traders--to determine whether the level is too high
or too low for effective market surveillance.
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    \4\ Based on staff discussions with industry participants, the
Commission understands that futures contracts on individual
securities will specify 100 shares of the underlying security.
    \5\ This number corresponds to the current reporting level for
security options.
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    The Commission notes that the proposed rules require the reporting
of positions in SFPs on notice-designated contract markets. Notice-
designated contract markets are entities that are otherwise regulated
by the Securities and Exchange Commission (such as registered national
securities exchanges and registered national securities associations)
that apply for and, pursuant to a notice-filing procedure, become
designated as contract markets by the Commission for the limited

[[Page 64384]]

purpose of trading SFPs.\6\ The Act and the Commission's regulations
exempt notice-designated contract markets from certain provisions of
the Act and the Commission's regulations; these trading facilities,
however, are subject to the Commission's large trader reporting
system.\7\ Thus, futures commission merchants (whether registered under
a full or a notice filing-procedure under rule 3.10 \8\), clearing
members, foreign brokers and others who have reporting and other
obligations under parts 15 through 21 of the Commission's rules will
have concomitant obligations with respect to SFPs traded on notice-
designated contract markets.
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    \6\ See section 5f of the Act, 7 U.S.C. 7f.
    \7\ See section 4f(a)(4) of the Act, 7 U.S.C. 6f(a)(4); 17 CFR
41.34. The Commission discussed the application of its large trader
reporting system to notice-designated contract markets when it
adopted its rules governing these markets. See 66 FR 44960 (Aug. 27,
2001).
    \8\ See 66 FR 43080 (Aug. 17, 2001)
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I. Cost Benefit Analysis

    Section 15 of the Act, as amended by section 119 of the CFMA,
requires the Commission to consider the costs and benefits of its
action before issuing a new regulation under the Act. By its terms,
section 15 does not require the Commission to quantify the costs and
benefits of a new regulation or to determine whether the benefits of
the proposed regulation outweigh its costs. Rather, section 15 simply
requires the Commission to ``consider the costs and benefits'' of the
subject rule.
    Section 15(a) further specifies that the costs and benefits of the
proposed rule 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; (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 rule is necessary or
appropriate to protect the public interest or to effectuate any of the
provisions or to accomplish any of the purposes of the Act.
    The proposed rule imposes limited costs in terms of reporting
requirements, particularly since most entities that trade on U.S.
futures markets already file larger trader reports with the Commission.
Moreover, to reduce the cost of reporting, the Commission will
periodically review the reporting level for SFPs, as it generally does
for reporting levels for all commodities.\9\ The Commission also notes
that it will be collecting these reports for itself as well as sharing
them with the Securities and Exchange Commission, thereby diminishing
the potential for duplication of this reporting burden. The
countervailing benefits of these costs are that the Commission will
have the necessary information to perform its market surveillance
function and thus carry out its mandate of assuring the continued
existence of competitive and efficient markets, protecting their price
discovery function and protecting market participants and the public
interest therein.
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    \9\ See, e.g., 65 FR 14452 (Mar. 17, 2000).
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    After considering these factors, the Commission has determined to
propose the revision to part 15 set forth below.
    The Commission specifically invites public comment on its
application of the criteria contained in the Act for consideration.
Commenters are also invited to submit any quantifiable data that they
may have concerning the costs and benefits of the proposed rules with
their comment letters.

II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that federal agencies, in proposing rules, consider the impact
of those rules on small entities. The Commission has previously
determined that large traders and FCMs are not ``small entities'' for
purposes of the RFA.\10\ The proposed amendment to reporting
requirements primarily impacts FCMs. Similarly, foreign brokers and
foreign traders report only if carrying or holding reportable, i.e.,
large positions. Therefore, the Acting Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
action taken herein will not have a significant economic impact on a
substantial number of small entities. The Commission invites comments
from any firm believing that these rules would have a significant
economic impact on its operations.
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    \10\ 47 FR 18618-20 (Apr. 30, 1982).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (PRA),
which imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the PRA, does not apply to this
rule. The Commission believes that the proposed rule amendment does not
contain information requirements which require the approval of the
Office of Management and Budget. The purpose of this rule is to
establish a specific reporting level for security futures products.

List of Subjects in 17 CFR Part 15

    Brokers, Reporting and recordkeeping requirements.
    In consideration of the foregoing, and pursuant to the authority
contained in the Act, and in particular sections 4g, 4i, 5, 5a and 8a
of the Act, 7 U.S.C. 6g, 6i, 7, 7a and 12a, as amended, the Commission
hereby proposes to amend Part 15 of Chapter I of Title 17 of the Code
of Federal Regulations as follows:

PART 15--REPORTS--GENERAL PROVISIONS

    1. The authority citation for part 15 is proposed to be revised to
read as follows:

    Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a,
9, 12a, 19, and 21, as amended by the Commodity Futures
Modernization Act of 2000, Appendix E of Pub. L. No. 106-554, 114
Stat. 2763 (2000); 5 U.S.C. 552 and 552(b).
    2. Section 15.03 is proposed to be amended by revising paragraph
(b) to read as follows:


Sec. 15.03  Reporting levels.

* * * * *
    (b) The quantities for the purpose of reports filed under Parts 17
and 18 of this chapter are as follows:

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                                                              Number of
                         Commodity                            contracts
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Agricultural:
    Wheat..................................................          100
    Corn...................................................          150
    Oats...................................................           60
    Soybeans...............................................          100

[[Page 64385]]


    Soybean Oil............................................          200
    Soybean Meal...........................................          200
    Cotton.................................................           50
    Frozen Concentrated Orange Juice.......................           50
    Rough Rice.............................................           50
    Live Cattle............................................          100
    Feeder Cattle..........................................           50
    Lean Hogs..............................................          100
    Sugar No. 11...........................................          400
    Sugar No. 14...........................................          100
    Cocoa..................................................          100
    Coffee.................................................           50
Natural Resources:
    Copper.................................................          100
    Gold...................................................          200
    Silver Bullion.........................................          150
    Platinum...............................................           50
    No. 2 Heating Oil......................................          250
    Crude Oil, Sweet.......................................          350
    Unleaded Gasoline......................................          150
    Natural Gas............................................          175
Financial:
    Municipal Bond Index...................................          300
    3-month (13-Week) U.S. Treasury Bills..................          150
    30-Year U.S. Treasury Bonds............................        1,000
    10-Year U.S. Treasury Notes............................        1,000
    5-Year U.S. Treasury Notes.............................          800
    2-Year U.S. Treasury Notes.............................          500
    3-Month Eurodollar Time Deposit Rates..................        1,000
    30-Day Fed Funds.......................................          300
    1-month LIBOR Rates....................................          300
    3-month Euroyen........................................          100
    Major-Foreign Currencies...............................          400
    Other Foreign Currencies...............................          100
    U.S. Dollar Index......................................           50
    S&P 500 Stock Price Index..............................        1,000
    E-Mini S&P Stock Price Index...........................          300
    S&P 400 Midcap Stock Index.............................          100
    Dow Jones Industrial Average Index.....................          100
    New York Stock Exchange Composite Index................           50
    Amex Major Market Index, Maxi..........................          100
    NASDAQ 100 Stock Index.................................          100
    Russell 2000 Stock Index...............................          100
    Value Line Average Index...............................           50
    NIKKEI Stock Index.....................................          100
    Goldman Sachs Commodity Index..........................          100
    Security Futures Products:
        Individual Equity Security.........................        1,000
        Narrow-Based Index of Equity Securities............          200
All Other Commodities......................................           25
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    Issued in Washington, D.C., this 7th day of December, 2001, by
the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-30812 Filed 12-12-01; 8:45 am]
BILLING CODE 6351-01-M