[Federal Register: June 11, 2003 (Volume 68, Number 112)]
[Rules and Regulations]
[Page 34790-34795]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jn03-6]

=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AB93


Account Identification for Eligible Bunched Orders

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is amending Commission Rule 1.35(a-1)(5) (``Rule 1.35(a-
1)''), which allows certain account managers to bunch customer orders
for execution and to allocate them to individual accounts at the end of
the day. The amended rule will expand the availability of bunching to
all customers, simplify the process and clarify the respective
responsibilities of account managers and futures commission merchants
(``FCMs'').

EFFECTIVE DATE: July 11, 2003.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Deputy Director,
or R. Trabue Bland, Attorney-Advisor, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581.
Telephone: (202) 418-5430. Email: lpatent@cftc.gov or tbland@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Background

    Commission Rule 1.35(a-1), in effect since August 27, 1998 has
allowed bunched orders for eligible customers to be placed on a
contract market without specific customer account identification either
at the time of order placement or at the time of report of execution.
Rule 1.35(a-1) has limited post-execution allocation of bunched orders
to sophisticated customers and required eligible account managers \1\
to make certain disclosures regarding the allocation methodology, the
standard of fairness of allocations, composite or summary data of the
trades, and whether the account manager has any interest in the bunched
order.
---------------------------------------------------------------------------

    \1\ The term account manager as used herein includes commodity
trading advisors, investment advisers and other persons identified
in the revised regulation, who would place orders and direct the
allocation in accordance with the procedures set forth in the
revised rule.
---------------------------------------------------------------------------

    In December 2000, the Commodity Futures Modernization Act
(``CFMA'') was enacted. One of the mandates of the CFMA was for the
Commission to review its rules relating to intermediaries with an eye
to identifying areas where greater flexibility might be warranted.
Since the enactment of the CFMA, numerous industry participants have
stated to Commission staff that the regulations related to bunched
orders needed to be revisited for a number of reasons and the
Commission so reported to Congress in its Intermediaries Study in June
2002.
    For example, enhancements in technology have made it easier for
account managers to enter orders directly, thereby making certain
aspects of the current requirements less workable. In addition, many
account managers use ``give-up'' agreements and multiple FCMs for
clearing and execution. Thus, while the current rule requires that an
account manager identify eligible customer accounts to which fills will
be allocated before placing an order eligible for post-execution
allocation, FCMs may not know that an order has been executed for a
particular client until that order has been executed and cleared.\2\
Account managers and FCMs have also commented that their
responsibilities under the current rule are unclear, especially their
respective recordkeeping responsibilities. Therefore, as markets become
more global in scope, account managers, both domestic and foreign, and
FCMs have claimed that the current bunched order requirements serve as
a disincentive to using U.S. futures markets.
---------------------------------------------------------------------------

    \2\ 17 CFR Part 1, Appendix C (2002), 62 FR 25470 (May 8, 1997).
---------------------------------------------------------------------------

    On February 2, 2001, the National Futures Association (``NFA'') and
the Futures Industry Institute issued an industry-wide study of issues
associated with order transmission and order entry process by commodity
professionals (``Best Practices Study'').\3\ The study reported that,
although the current rule increased flexibility over previously
applicable requirements, many commenters in the study felt that the
current rule caused ``unnecessary processing delays without adding
customer protections that otherwise could be realized through equally
effective, less costly procedures.''\4\
---------------------------------------------------------------------------

    \3\ National Futures Association & Futures Industry Institute,
Recommendations for Best Practices in Order Entry and Transmission
of Exchange Traded Futures and Options Transactions (2001).
    \4\ Id. at 25.
---------------------------------------------------------------------------

    Based upon the foregoing, on March 14, 2003, the Commission
published the proposed amendments to Rule 1.35(a-1).\5\ The Commission
received twenty-five comments on the proposed rule. The commenters
included ten FCMs \6\, four exchanges \7\, two industry associations
\8\, one commodity trading advisor (``CTA'') \9\, seven individuals
\10\ and NFA. The FCMs, exchanges, industry associations, NFA and the
CTA supported the amendments to the rule, generally stating that the
essential customer protections would be retained while clarifying the
responsibilities of FCMs and account managers. Six individuals
submitted comments expressing concern over the possible unfair
allocation by account managers. One commenter submitted comments
expressing concern over the Commission's ability to monitor for unfair
allocation under the amended rule. These comments are discussed fully
below.
---------------------------------------------------------------------------

    \5\ 68 FR 12319 (March 14, 2003).
    \6\ ABN AMRO, Inc., Bear Stearns & Co., Carr Futures, Inc.,
Credit Suisse First Boston, Fimat USA, Inc., Goldman Sachs & Co.,
J.P. Morgan Futures Inc., Lehman Brothers, Morgan Stanley & Co., and
Prudential Securities Inc.
    \7\ The New York Board of Trade, Chicago Board of Trade, Chicago
Mercantile Exchange, and the New York Mercantile Exchange.
    \8\ Futures Industry Association (``FIA'') and the Managed Funds
Association (``MFA'').
    \9\ John Henry & Company, Inc.
    \10\ One commenter, Paul H. Bjarnason, Jr., is a former
Commission employee. Six other individual commenters submitted
identical letters.
---------------------------------------------------------------------------

II. Final Rules

A. Eligible Customers

    The current rule limits the post-execution allocation of bunched
orders to ``eligible customers,'' who, in essence, are sophisticated
customers. In its comment, NFA noted that ``[a]ll customers deserve to
have their orders filled efficiently and at the most favorable terms
under the circumstances.'' The NFA and other commenters expressed the
view that bunched orders can meet these objectives because bunched
orders can provide better pricing and execution of orders. The
Commission agrees; accordingly, as proposed, the amendments to Rule
1.35(a-1)(5) will expand eligibility to all customers who

[[Page 34791]]

provide written investment discretion to account managers.\11\
---------------------------------------------------------------------------

    \11\ Rule 1.35(a-1)(5) and NFA Compliance Rule 2-8(a), require
that grants of discretionary authority to account controllers be in
writing.
---------------------------------------------------------------------------

    In the proposal, the Commission requested comment on whether it
should retain an interpretive notice currently found at Appendix C to
Part 1.\12\ Appendix C allows CTAs to bunch orders if they prefile
their allocation procedures with a clearing member, NFA, or an
exchange. As the Commission noted in the proposal, Appendix C may prove
unnecessary given the amended rule. One commenter, FIA, stated that the
Commission should make clear that the amended rule supercedes any NFA
interpretive notices or Commission rules to the extent they are
inconsistent. The Commission notes that Appendix C governs the
allocation of bunched orders pursuant to a pre-filed or
contemporaneously-filed allocation scheme as opposed to the amended
Rule, which governs the post-execution allocation of bunched orders.
However, if any conflict between the two rules arises, the standards
set forth in this rule supercede any interpretive guidance on bunched
orders issued by the Commission. The Commission will retain Appendix C
as guidance to account managers who may wish to allocate orders under
the circumstances described therein and as an example of permissible
allocation methods, but may reconsider this issue in the future.
---------------------------------------------------------------------------

    \12\ 17 CFR Part 1, Appendix C (2002), 62 FR 25470 (May 8,
1997).
---------------------------------------------------------------------------

B. Eligible Account Managers

    Current rule 1.35(a-1) includes as eligible account managers
registered CTAs and Investment Advisers (``IAs''), banks, insurance
companies, trust companies, and savings and loan associations. Rule
1.35(a-1), as amended, expands the class of account managers permitted
to bunch orders.\13\ Generally, the Commission and the Securities and
Exchange Commission exempt certain CTAs and IAs from registration or
other regulatory requirements if they exclusively service certain
sophisticated customers.\14\ The Commission believes that post-
execution allocation should be expanded to these entities. The amended
rule expands the list of eligible account managers to include CTAs and
IAs who are exempt from registration, or are excluded from the
definition of CTA or IA by operation of law or rule. In addition, the
amended rule allows foreign advisors, who exercise discretionary
trading authority over the accounts of non-United States persons, to be
eligible account managers regardless of whether the foreign advisor has
been granted an exemption pursuant to Rule 30.10.\15\
---------------------------------------------------------------------------

    \13\ In the proposal, the Commission requested comment on
whether it was appropriate to expand the list of eligible account
managers. All comments received on this issue supported the
expansion of eligible account managers.
    \14\ Another Commission rule proposal would expand the number of
entities that are exempt from CTA registration. See, 68 FR 12622
(March 17, 2003).
    \15\ 17 CFR 30.10 (2002). Rule 30.10 permits any person to
petition for an exemption from certain of the Commission's Part 30
rules, which govern foreign futures and option trading by persons
located in the United States. Commission orders issued pursuant to
Rule 30.10 permit firms, among other things, to solicit and accept
orders for foreign futures and option contracts from United States
customers without registering under the Commodity Exchange Act,
based upon substituted compliance with the rules and regulations of
the jurisdiction in which the firm is located.
---------------------------------------------------------------------------

    As noted in the proposal, the amended rule does not apply to
associated persons or introducing brokers exempt from Commission
registration as CTAs pursuant to Rule 4.14(a)(3) and (6).\16\ As also
noted in the proposed rule, the Commission will retain antifraud and
antimanipulation authority over account managers who are exempt from
registration. The Commission notes that foreign advisers would be
foreign brokers or foreign traders subject to Commission Rule 15.05,
which makes the FCMs through which foreign advisers make or cause to be
made trades the agents of the foreign advisers for purposes of
communications from the Commission.\17\
---------------------------------------------------------------------------

    \16\ 17 CFR 4.14(a)(3) (2002), 17 CFR 4.14(a)(6) (2002).
    \17\ See 17 CFR 15.00(e) and 17 CFR 15.05 (2002).
---------------------------------------------------------------------------

C. Information

    The Commission has converted the disclosure requirement of Rule
1.35(a-1) to an information availability requirement. Under the amended
rule, account managers are required to make the following information
available to customers upon request: (1) The general nature of the
allocation methodology the account manager uses; and (2) summary or
composite data sufficient for that customer to compare its results with
those of other relevant customers and, if applicable, any account in
which the account manager has an interest. In addition, the Commission
has added a requirement that account managers make available
information on 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.\18\
---------------------------------------------------------------------------

    \18\ In the proposal, the Commission requested comment on
whether the information availability requirement was sufficient to
inform customers. All comments received on this issue supported the
information availability requirement.
---------------------------------------------------------------------------

    One commenter, John Henry & Company, suggested that the amended
rule clarify the definition of ``results'' to include only the result
of executions and allocations as opposed to a broader measure such as
account performance results. The Commission agrees. Therefore, under
the amended Rule 1.35(a-1), account managers must only make available
the results of executions and allocations to comply with Rule 1.35(a-
1)(5)(ii)(C).

D. Allocation

    The amended rule clarifies the allocation procedures for post-
execution allocation of bunched orders. In particular, the rule makes
clear that the Commission will examine allocation fairness over time,
rather than trade-by-trade.
    The amended rule requires that account managers observe three
requirements when allocating post-execution. First, pursuant to Rule
1.35(a-1)(5)(iii)(A), allocations must be fair and equitable. No
account or group of accounts may receive consistently favorable or
unfavorable treatment. Second, to determine whether the account manager
is allocating fills fairly, the amended rule mandates that account
managers use an allocation methodology sufficiently objective and
specific to permit independent verification of the fairness of the
allocation.\19\ The final rule permits the account manager to exercise
discretion over the allocation methodology, recognizing that allocation
strategies may need to vary in order to treat all customers fairly.
However, the Commission must be able to reconstruct the allocation
methodology sufficiently to verify that the account manager is acting
without bias.
---------------------------------------------------------------------------

    \19\ Appendix C of Part 1 contains examples of allocation
methods. See, 17 CFR Part 1, Appendix C (2002), 62 FR 25470 (May 8,
1997). As noted in Appendix C, ``the appropriateness of any
particular method for allocating split and partial fills depends on
the CTA's overall trading approach. For example, a daily rotation of
accounts may satisfy the general standards for CTAs who trade on a
daily basis but inappropriate for CTAs who trade less frequently.''
---------------------------------------------------------------------------

    One commenter, Paul H. Bjarnason, Jr., expressed concern that the
amended rule may allow biased allocations by unscrupulous account
managers. To combat biased allocations, Mr. Bjarnason recommended that
the amended rule define allocation bias and require measurement of it
with an

[[Page 34792]]

appropriate accounting system. In addition, Mr. Bjarnason suggested
that the amended rule require account managers to track for bias in
their trade allocations.
    As noted above, the Commission mandates that allocations be fair
and equitable. The Commission agrees that account managers should
diligently monitor for bias in their trade allocations and notes that
NFA, in its interpretive notices, provides guidance on the type of
allocation methodologies designed to provide non-preferential
treatment.\20\ In its comment letter, NFA notes that it will amend its
interpretive notices regarding bunched orders, but will retain the
requirement that CTAs use an allocation methodology designed to provide
non-preferential treatment for all accounts.\21\ Thus, given that NFA
will be retaining this requirement, the Commission believes that it is
unnecessary to modify the rule to define allocation bias further.
---------------------------------------------------------------------------

    \20\ Interpretive Notice, NFA Compliance Rule 2-10: The
Allocation of Block Orders for Multiple Accounts (June 9, 1998). Not
all eligible account managers, e.g., foreign account managers, will
be subject to NFA requirements or inspections. However, FCMs will
remain subject to the duty to supervise accounts, whether or not
managed by third party account managers. See, 17 CFR 166.3 (2002).
In addition, FCMs are subject to NFA's requirements.
    \21\ In addition, NFA anticipates it will continue to (1)
provide guidance on the type of allocation methodologies designed to
provide non-preferential treatment; (2) require CTAs to regularly
analyze each trading program to ensure that the allocation method
has been fair and equitable and to document this analysis and (3)
remind FCMs that they have certain basic duties to their customers
in connection with bunched orders.
---------------------------------------------------------------------------

    The third requirement that account managers must observe under the
amended rule is to provide information to FCMs 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.
FIA, in its comment, noted a discrepancy in the proposing release. FIA
noted that the preamble to the proposed rule stated that account
managers must provide allocation information to FCMs in a time
sufficiently before the end of the ``trading session,'' although the
proposed rule text stated that account managers must provide allocation
information sufficiently before the end of the ``trading day.'' In
response, the Commission wishes to make clear that account managers
must provide allocation information to FCMs before the end of the
trading day during which the order is executed.
    As noted above, the amended rule clarifies the respective
responsibilities of account managers and FCMs.\22\ Account managers are
responsible for the allocation of bunched orders, not FCMs. Comments
submitted by FCMs stated that the proposed amendments accurately
reflect today's increasing use of electronic order entry systems. As
Goldman Sachs noted in its comment, ``[t]he wide use of give-up
arrangements means that an account manager's transactions on behalf of
its clients frequently are executed through one FCM and later cleared
through several different FCMs * * *. An FCM, therefore may have no
reason to know that an order has been executed for a client's account
until the transaction has been executed and cleared.''
---------------------------------------------------------------------------

    \22\ In the proposal, the Commission requested comment on
whether the proposed rule struck the appropriate balance with regard
to judging allocation and assigning responsibilities to account
managers and FCMs. All comments received on this issue supported the
changes.
---------------------------------------------------------------------------

    All FCMs will continue to have responsibility to monitor for
unusual account activity. As noted in the proposed release, an
interpretive notice accompanying NFA Compliance Rule 2-10, states that
``[t]he FCM has certain basic duties to its customers, including the
duty to supervise its own activities in a way designed to ensure that
it treats its customers fairly. Specifically, an FCM would violate this
duty if it has actual or constructive notice that allocations for its
customers may be fraudulent and fails to take appropriate action. An
FCM with such notice must make a reasonable inquiry into the matter
and, if appropriate, refer the matter to the proper regulatory
authorities.'' \23\
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    Under the amended rule, account managers have a responsibility to
allocate trades fairly and equitably and FCMs must monitor account
managers for unusual account activity. Paul H. Bjarnason, Jr., in his
comment, expressed concern that, although account managers and FCMs
have a duty to ensure that customers receive fair treatment, the
amended rule may not prescribe sufficient oversight of allocations. Mr.
Bjarnason suggests that account managers submit allocation reports to
NFA and that NFA provide adequate audits of trade allocations. In
response, as explained below, the Commission will require that account
managers keep records sufficient to demonstrate that all allocations
are fair and equitable and that the allocation methodology used by the
account manager is objective. These records will be available to the
Commission and other appropriate regulatory agencies. Customers will
also have access to this information as well. In addition, the
Commission notes that NFA schedules CTA audits using a risk-based
auditing system that incorporates a regular auditing cycle. In its
comment, NFA stated that any complaint involving fraudulent allocations
would result in an immediate examination of any account manager
registered with the Commission as a CTA. Therefore, given the
recordkeeping requirements of the amended rule and NFA oversight, the
Commission has determined to adopt the provision as proposed.

E. Records

    Amended Rule 1.35(a-1)(5)(vi) requires that account managers keep
two types of records. First, account managers must keep records of
information maintained pursuant to amended Rule 1.35(a-1)(5)(ii).
Second, account managers must make records available that allow
independent verification of the fairness of the account manager's
allocation methodology as required in Rule 1.35(a-1)(5)(iii). The
records kept pursuant to amended Rule 1.35(a-1)(5)(iv) must be made
available to any representative of the Commission, the United States
Department of Justice, or other appropriate regulatory body.
    The amended rule contains a provision to address cases in which
account managers fail to provide the Commission with the information
requested pursuant to amended Rule 1.35(a-1)(5)(iv)(A) or (B).
Specifically, the Commission may prohibit the account manager from
submitting orders for execution on designated contract markets and
prohibit FCMs from accepting orders from such account managers.
Commission action under this provision would not require prior notice
and hearing. The failure of an account manager to respond to a request
for information under this rule would be sufficient to trigger the
prohibition. Any account manager that believes he or she is adversely
affected by this process may use the procedures outlined in Rule
21.03(g).\24\ Any prohibitions imposed pursuant to this Rule 1.35(a-
1)(5)(iv)(D) would be without prejudice to any other remedies the
Commission or any other regulatory body may have against the account
manager in question for violation of the rule or any other legal
requirements.\25\
---------------------------------------------------------------------------

    \24\ 17 CFR 21.03(g) (2002).
    \25\ Cf. 17 CFR 21.03(h) (2002) (providing for other Commission
remedies).
---------------------------------------------------------------------------

    Two commenters, MFA and John Henry & Company, expressed concern
that the proposed information request provision would be too severe.
MFA

[[Page 34793]]

suggested that the standard of failure to provide requested information
should be revised to ``willful failure to provide'' requested
information. In the alternative, MFA suggested that the prohibition
should be limited to the prohibition of the use of bunched orders,
rather than a blanket prohibition of trading on all contract markets.
John Henry & Company echoed MFA's concern, suggesting that the standard
of failure to provide requested information should be revised to
``willful failure to provide.''
    The Commission recognizes that prohibiting account managers from
trading on contract markets would have a serious impact on the account
manager and possibly the account manager's customers. The Commission
notes that this approach is the same as that in similar provisions in
the Act and rules and that the prohibition can only be invoked by the
Commission, itself, when it has reason to believe that an account
manager has failed to provide information requested pursuant to
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B).\26\ In addition, account
managers will have the opportunity to have a hearing to contest the
prohibition.\27\ Thus, weighing the impact of this provision on account
managers with the interest of protecting customers, the Commission has
determined to adopt the provision as proposed, that a failure to answer
a Commission request for information will result in a prohibition of
trading on all contract markets.
---------------------------------------------------------------------------

    \26\ See, 17 CFR part 21 (2002).
    \27\ Similar statutory provisions and Commission rules have the
same standard for failure to provide information. See, e.g., 7
U.S.C. Sec.  2(h)(5)(C)(ii) (2001), 17 CFR 21.03 (2002).
---------------------------------------------------------------------------

    The amended rule also provides that FCMs must retain certain
records. Pursuant to amended Rule 1.35(a-1)(5)(iv)(C), FCMs that
execute trades for orders eligible for bunching, or that carry accounts
to which contracts executed for such orders are allocated, must
maintain records that identify each order subject to post-execution
allocation and the accounts to which contracts executed for such order
are allocated.\28\
---------------------------------------------------------------------------

    \28\ The recordkeeping provisions of Rule 1.31 would still
apply. 17 CFR 1.31 (2002). It is important to note that at the time
of order placement with the FCM, current rules require that a
customer identification code must be placed on an order ticket,
unless the order is bunched. See, 17 CFR 1.35(a-1) (2002).
---------------------------------------------------------------------------

    In order for FCMs to keep records required pursuant to the rule,
account managers employing post-execution allocation procedures
generally would be expected to forward written allocation instructions
to the clearing firm by facsimile, e-mail, or other electronic means.
In those instances in which allocation instructions are furnished
orally, the FCM must create a written record of the account manager's
instructions. In each case, these records will be available to the
Commission and other regulatory agencies or self-regulatory
organizations.

F. Account Certification and Self Regulatory Organization Rule
Enforcement and Audit Procedures

    As noted above, the Commission is clarifying the relative
responsibilities of FCMs and account managers. Therefore, the amended
rule, as proposed, deletes the requirement that account managers send
certifications of their compliance with Rule 1.35(a-1) to FCMs. In
addition, as the Commission is converting the recordkeeping requirement
into an information availability requirement; the amended rule, as
proposed, deletes the requirement that self regulatory organizations
must adopt procedures to determine compliance with the previous rule's
recordkeeping requirements.

III. Other Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies, in promulgating rules, consider the impact of
those rules on small businesses. The Commission has previously
determined that contract markets \29\, futures commission merchants
\30\, registered commodity pool operators \31\ and large traders \32\
are not ``small entities'' for purposes of the Regulatory Flexibility
Act. Although the Commission did not receive any comments on the impact
of the amended rule on ``small entities,'' some account managers may be
considered ``small entities'' for the purposes of the Regulatory
Flexibility Act. In such cases, the amendments to the rule will have
the net effect of decreasing the regulatory burden for such small
entities. In addition, the Commission has previously determined to
evaluate within the context of a particular rule proposal whether all
or some commodity trading advisors should be considered ``small
entities'' for purposes of the Regulatory Flexibility Act and, if so,
to analyze the economic impact on commodity trading advisors of any
such rule at that time.\33\ Commodity trading advisors who would place
eligible orders pursuant to these procedures would likely do so for
multiple clients and would likely be participating as investment
managers in more than one financial market. Accordingly, the Commission
does not believe that commodity trading advisors should be considered
``small entities'' for purposes of this rule.
---------------------------------------------------------------------------

    \29\ 47 FR 18618, 18619 (April 30, 1982).
    \30\ Id.
    \31\ Id. at 18620.
    \32\ Id.
    \33\ Id.
---------------------------------------------------------------------------

B. Paperwork Reduction Act of 1995

    This rulemaking contains information collection requirements. As
required by the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et
seq., the Commission has submitted a copy of the rule amendments to the
Office of Management and Budget (OMB) for its review. No comments were
received in response to the Commission's invitation in the proposed
rules to comment on any potential paperwork burden associated with this
regulation.

C. Cost-Benefit Analysis

    Section 15(a) of the Act 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(a) 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(a) simply requires the Commission to ``consider the
costs and benefits'' of its action.
    Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
Protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular rule 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.
    The amended rule is intended to facilitate increased flexibility
and consistency, and to rationalize application of Commission
regulations to entities subject to other regulatory frameworks. The
Commission is considering the costs and benefits of these rules in
light of the specific provisions of section 15(a) of the Act:
    1. Protection of market participants and the public.
    While amended Rule 1.35(a-1)(5) is expected to lessen the burden
imposed

[[Page 34794]]

upon FCMs and account managers, market participants and the public will
be protected by requirements in the allocation procedure. Accordingly,
the amended rule should have no effect on the Commission's ability to
protect market participants and the public.
    2. Efficiency and competition.
    The amended rule is expected to benefit efficiency in the commodity
futures and options markets, resulting in greater liquidity and market
efficiency.
    3. Financial integrity of futures markets and price discovery.
    The amended rule should have no effect, from the standpoint of
imposing costs or creating benefits, on the financial integrity or
price discovery function of the commodity futures and options markets.
    4. Sound risk management practices.
    The amended rule should have no effect on sound risk management
practices.
    5. Other public interest considerations.
    The amended rule will also take into account certain effects of
legislative changes and the passage of time.
    After considering these factors, the Commission has determined to
issue the amended rule.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Commodity options, Consumer protection,
Contract markets, Customers, Members of contract markets,
Noncompetitive trading, Reporting and recordkeeping requirements, Rule
enforcement programs.


0
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections 5,
5a, 5b, 6(a), 6b, 8a(7), and 8c, 7 U.S.C. 7, 7a, 7b, 8(a), 8b, 12a(7),
12a(9), and 12c, the Commission hereby amends Part 1 of Chapter I of
Title 17 of the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.


0
2. Section 1.35 is amended by revising paragraph (a-1)(5) to read as
follows:


Sec.  1.35  Records of cash commodity, futures and option transactions.

* * * * *
    (a-1) * * *
    (5) Post-execution allocation of bunched orders. Specific customer
account identifiers for accounts included in bunched orders need not be
recorded at time of order placement or upon report of execution if the
requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.
    (i) Eligible account managers. 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:
    (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) or Sec.  4.14(a)(6) 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; or
    (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.
    (ii) 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, any account in which the account manager has an interest.
    (iii) 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 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.
    (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.
    (iv) 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 (a-1)(5)(ii) 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 (a-1)(5)(iii) 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 that execute orders or that carry
accounts eligible for post-execution allocation, and members of
contract markets 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 (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the
Commission may inform in writing any designated contract market or
derivatives transaction execution facility and that designated contract
market or derivatives transaction execution facility shall prohibit the
account manager from submitting orders for execution except for
liquidation of open positions and no futures commission merchants shall
accept orders for execution on any designated contract market or
derivatives transaction execution facility from the account manager
except for liquidation of open positions.

[[Page 34795]]

    (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 (a-1)(5)(iv)(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.
* * * * *

    Issued in Washington, DC, on June 5, 2003 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-14776 Filed 6-10-03; 8:45 am]
BILLING CODE 6351-01-P