[Federal Register: March 15, 2002 (Volume 67, Number 51)]
[Rules and Regulations]
[Page 11569-11571]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15mr02-6]

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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: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is amending its rules to establish reporting levels for security
features products (SFPs) traded on designated contract markets and
notice-designated contract markets. The reporting levels are 1000
contracts for an SFP involving an individual security and 200 contracts
for an SFP involving a narrow-based index of equity securities.

EFFECTIVE DATE: April 15, 2002.

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. 106-554, which extensively revised 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 made 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

[[Page 11570]]

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 proposed establishing 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\ 66 FR 64383 (December 13, 2001). In its proposal, the
Commission stated its intent to review these levels an appropriate
amount of time after trading in SFPs commences to determine if they
provide adequate coverage for effective market surveillance. At that
time, the Commission will also consider actual trading experience--
including trading volume, open interest and the number and position
sizes of individual traders--to determine whether these levels are 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 noted in its proposal that the 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 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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    The Commission received two comment letters on its proposal--one
from a contract market, the Chicago Mercantile Exchange (CME), and one
from a national securities exchange that, in connection with listing
and trading SFPs, is required to become a notice-designated contract
market, the American Stock Exchange (AMEX). Both the CME and the AMEX
generally supported the reporting levels. The CME specifically noted
that the levels appropriately balance the protection of market
integrity with administrative burdens. AMEX commented that, based on
actual trading experience, the Commission may in the future need to
establish higher reporting levels. AMEX also suggested that it may be
appropriate for the Commission to tier reporting levels to take into
account capitalization, trading volume and/or public float of the
underlying security.\9\
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    \9\ AMEX also noted its intent to use its current reporting
level of 200 (which applies to options positions on stocks, shares
of exchange-traded funds and stock indexes) for SFPs.
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    The Commission is adopting the reporting levels as proposed. As
stated in the proposal, and consistent with the comments, the
Commission will review these levels an appropriate amount of time after
trading in SFPs commences to determine if they provide adequate
coverage for effective market surveillance. At that time, the
Commission will also consider actual trading experience--including
trading volume, open interest and the number and position sizes of
individual traders--to determine whether the levels are too high or too
low for effective market surveillance. While the Commission does not
anticipate tiered reporting levels, due to the administrative
difficulties inherent in such a system, the Commission has not ruled
out such an approach and will consider it, as appropriate.\10\
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    \10\ AMEX noted that some firms are considering submitting their
reports through the Security Industry Automation Corporation (SIAC).
The Commission and the exchanges are working with SIAC to facilitate
this. Whether or not the reports are filed through SIAC, the
reporting firm remains responsible for the filing of the report.
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IV. 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 Commission's proposal contained an analysis of its
consideration of these costs and benefits and solicited public comment
thereon. 66 FR at 64384. The Commission specifically invited commenters
to submit any data that they had quantifying the costs and benefits of
the proposed rules with their comment letters. The Commission has
considered the two comment letters received, neither of which
specifically addressed the Commission's analysis of the costs and
benefits of the proposed rules.
    The Commission has considered the costs and benefits of the
proposed rules and has decided to adopt the rules as discussed above.

V. 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

[[Page 11571]]

entities. The Commission has previously determined that large traders
and FCMs are not ``small entities'' for purposes of the RFA.\11\ The
amendment to reporting requirements primarily impacts FCMs. Similarly,
foreign brokers and foreign traders report only if carrying or holding
reportable, i.e., large positions. The Commission invited comments from
any firm believing that these rules would have a significant economic
impact on its operations. No comments were received in response to that
invitation,
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    \11\ 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 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 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. 106-554, 114 Stat.
2763; 5 U.S.C. 552 and 552(b).


    2. Section 15.03 is 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:

------------------------------------------------------------------------
                                                              Number of
                         Commodity                            contracts
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Agricultural:
  Wheat....................................................          100
  Corn.....................................................          150
  Oats.....................................................           60
  Soybeans.................................................          100
  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............          100
All Other Commodities......................................           25
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    Issued in Washington, DC, this 11th day of March, 2002 by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-6288 Filed 3-14-02; 8:45 am]
BILLING CODE 6351-01-M