e8-2580

[Federal Register: February 14, 2008 (Volume 73, Number 31)]

[Rules and Regulations]

[Page 8599-8606]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr14fe08-12]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 36 and 40

RIN 3038-AC39

Amendments Pertinent to Registered Entities and Exempt Commercial

Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commission is adopting final regulations that effectuate

the following amendments to the Commission's regulations. The

amendments delegate the Commission's authority to issue special calls

to exempt commercial markets to the Director of the Division of

Enforcement and that Director's designees. The amendments clarify the

process for listing, clearing, or implementing products or rules,

including dormant products and rules, and amend the definition of

emergency to clarify that persons other than persons comprising a

registered entity's full governing board may declare an emergency on

behalf of the governing board. The amendments also amend the approval

period for designated contract market rules that may change a material

term or condition of an enumerated agricultural futures or options

contract. Lastly, the amendments clarify how far in advance of

implementation registered entities must submit self-certified contracts

and rules to the Commission, and identify three additional categories

of rules that may be implemented without certification or Commission

approval.

EFFECTIVE DATE: February 14, 2008.

FOR FURTHER INFORMATION CONTACT: Bruce Fekrat, Special Counsel, Office

of the Director (telephone 202.418.5578, e-mail [email protected]),

Division of Market Oversight, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

The Commission published initial comprehensive final regulations

for trading facilities on August 10, 2001 \1\ to implement amendments

introduced to the Commodity Exchange Act (CEA or Act) by the Commodity

Futures Modernization Act of 2000 (CFMA).\2\ The final regulations

codified the procedural provisions common to exempt boards of trade and

exempt commercial markets (ECM) operating pursuant to sections 5d and

2(h)(3) through (5) of the Act, respectively, in part 36 of the

Commission's regulations. The final regulations also codified the

procedural provisions common to designated contract markets (DCM),

derivatives transaction execution facilities (DTEF), and derivatives

clearing organizations (DCO) in part 40 of the Commission's

regulations, and further established the regulatory framework necessary

to implement and interpret the provisions of the CEA, as amended by the

CFMA, pertinent to trading facilities.

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\1\ 66 FR 42256 (August 10, 2001).

\2\ Pub. L. 106-554, 114 Stat. 2763 (December 21, 2000).

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The Commission recently proposed additional amendments to parts 36

and 40 of the Commission's regulations that, based upon its experience

in administering the Act, will better implement certain provisions of

the Act and provide clearer direction as to the Commission's regulatory

requirements thereunder (August 2007 notice of proposed rulemaking).\3\

The Commission received two comment letters in response to the Federal

Register publication of the August 2007 notice of proposed rulemaking.

The material issues raised in each comment letter are addressed in the

following discussion of the final amendments.

II. Exempt Commercial Markets

ECMs are electronic trading facilities that offer a platform for

executing or trading principal-to-principal transactions involving

exempt commodities solely between persons that are eligible commercial

entities (ECM transactions).\4\ ECM transactions, pursuant to section

2(h)(3) of the Act, as amended by the CFMA, are subject to a qualified

exemption from the Act that reserves the applicability of the Act's

fraud and manipulation provisions as well as the Commission's

regulations thereunder to such contracts.\5\ In accord with this

reservation of applicability, the CEA specifically authorizes the

Commission's issuance of special calls for information to ECMs in order

to, among other things, enforce the Act's antifraud and

antimanipulation provisions.\6\

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\3\ 17 CFR parts 36 and 40, Amendments Pertinent to Registered

Entities and Exempt Commercial Markets, 72 FR 45185 (August 13,

2007).

\4\ 7 U.S.C. 2(h)(3).

\5\ 7 U.S.C. 2(h)(4).

\6\ 7 U.S.C. 2(h)(5)(B)(iii).

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In July 2004, the Commission amended regulation 36.3(b), which

governs the Commission's access to ECM transaction data, to improve the

quality of accessible information relevant to its antifraud and

antimanipulation authority.\7\ In that rulemaking, the Commission

stated that aberrant price behavior on ECMs may require further

Commission investigation and the eventual use of special calls to

identify wrongful conduct.\8\ The authority to issue special calls to

ECMs currently is delegated only to the Directors of the Division of

Market Oversight (DMO) and the Division of Clearing and Intermediary

Oversight (DCIO) or their designees.\9\ Given that the Division of

Enforcement is directly charged with the responsibility to enforce the

provisions of the Act that apply to ECMs, and the importance of the

authority to issue special calls to the Commission's ability to enforce

its reserved antifraud and antimanipulation authority, the Commission

is amending, as proposed, regulation 36.3 to expand the set of persons

with delegated authority to issue ECM special calls to include the

Director of the Division of Enforcement or that Director's designees.

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\7\ 69 FR 43285 (July 20, 2004).

\8\ Id. at 43289.

\9\ The persons to whom the authority to issue special calls may

be designated is not restricted by regulation. Nonetheless, pursuant

to Commission practice, the persons who have been so designated by

the Division Directors of DMO and DCIO have been limited to Deputy

Directors, Associate Directors, Branch Chiefs and Chief Counsels of

those Divisions.

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In its comment letter submitted in response to the Commission's

publication of the August 2007 notice of proposed rulemaking, the

IntercontinentalExchange, Inc. (ICE), a Delaware corporation that,

among other things, operates an ECM that predominantly lists energy

commodities derivative contracts, emphasized that information subject

to special calls may include confidential details of transactions that

often reflect the proprietary trading activities of market

participants.\10\ Citing its prior experience providing information to

the Division of Enforcement and the potential sensitive nature of the

information that may be submitted, ICE requested that the exercise of

ECM special call authority, by regulation, be restricted to certain

senior Enforcement staff, or in the alternative, be subject to

consideration and review by a restricted group of senior Enforcement

staff. ICE argued that such restrictions would develop channels of

communication between ECMs and staff from the Division of Enforcement

that would be

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particularly familiar with the type and working value of callable

information. According to ICE, these procedural restrictions would

facilitate the timely and efficient production of information by, for

example, reducing the time spent on specifying the scope of particular

productions.

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\10\ Letter from Johnathan H. Short, Senior Vice President and

General Counsel, ICE, to the Commission's Office of the Secretariat

(September 12, 2007) (on file with the Commission), available at

http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/frcomment/07-010c001.pdf.

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The CEA specifically recognizes the value and sensitive nature of

transaction data and expressly prohibits, with limited exceptions, the

Commission's public disclosure of ``information that would separately

disclose the business transactions or market positions of any person *

* *'' \11\ The Commission appreciates and will remain aware of the

concerns raised by ICE. The Commission, however, will not adopt ICE's

recommendation that special call authority be restricted by regulation

because adequate controls are in place to ensure the effective and

proper use of delegated authority.

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\11\ 7 U.S.C. 12(a)(1).

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The issuance of an ECM special call by Enforcement staff will be an

agency action undertaken pursuant to delegated authority to act on

behalf of the Commission. The exercise of the authority to issue or

assign the authority to issue special calls under Commission regulation

36.3 will be the product of deliberation and substantial internal

process and will involve the participation of the Division Director

prior to the issuance of a special call. Pursuant to Commission

practice with respect to the other divisions, Division of Enforcement

staff that would be designated by the Director to exercise special

calls should be limited to the Division's Deputy Directors, Associate

Directors and Chief Counsel. Restricting, by regulation, the Division

of Enforcement's authority to issue ECM special calls to certain senior

Enforcement staff, or in the alternative, requiring that issuances be

subject to consideration and review by a restricted group of senior

Enforcement staff, in the judgment of the Commission, will not

substantially facilitate the efficiencies referenced by ICE.

Accordingly, the Commission is amending Commission regulation 36.3, as

proposed, to expand the set of persons with delegated authority to

issue ECM special calls to include the Director of the Division of

Enforcement or that Director's designees.

III. Amendments to Part 40 of the Commission's Regulations

A. Self-Certification, Approval, and Dormancy

The Commission applies the procedural requirements for listing,

clearing or implementing initial submissions of contracts and rules

(including rule amendments) to dormant contracts and rules, and with

certain exceptions, requires DCMs and DCOs to certify or submit for

Commission approval all products and rules prior to listing or

implementation.\12\ Part 40 of the Commission's regulations, however,

currently does not clearly indicate that the procedural requirements

for listing, clearing or implementing dormant contracts and rules are

identical to the requirements established for initial submissions of

contracts and rules that have never been certified with, or approved

by, the Commission.\13\ Furthermore, the current product and rule

filing provisions of part 40 do not clearly indicate that DCMs and

DCOs, in general, must choose either to comply with the approval

process established in part 40, or in the alternative, the

certification process established in part 40, prior to listing,

clearing, or implementing any product or rule, including any product or

rule that has become dormant.\14\

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\12\ The Commission defines a dormant contract as a contract or

product without open interest that, after the expiration of a

thirty-six month development period following initial certification

or approval, has not traded in the preceding twelve consecutive

calendar months. 17 CFR 40.1(b). The Commission defines a dormant

rule as a rule that has remained unimplemented for twelve

consecutive calendar months following the rule's initial

certification with, or approval by, the Commission. 17 CFR 40.1(f).

\13\ This alignment of procedural requirements is based, in

part, on the premise that certain contracts and rules, which have

remained inactive or unimplemented for a significant period of time,

may contain terms that are no longer consistent with the

Commission's regulations or prevailing market conditions. 67 FR

62783, 62784 (October 9, 2002).

\14\ The Commission's regulations do not require a DTEF to

either certify or submit for Commission approval a product or rule

prior to listing or implementation. However, a DTEF, which is

generally subject to notice filing requirements, may choose to self-

certify products or rules or submit them for Commission approval

pursuant to the procedures established in part 40 of the

Commission's regulations. See 17 CFR 37.7.

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The Commission is herein adopting several amendments to address

these matters. The Commission is amending regulations 40.2(a), 40.3(a),

40.4(a), 40.5(a) and 40.6(a) to clarify that the procedural

requirements for listing, clearing or implementing dormant contracts

and rules are identical to the requirements established for submissions

of contracts and rules (including rule amendments) that have never been

certified with, or approved by, the Commission. The Commission is also

amending the above referenced regulations to clarify that a DCM or DCO

in general must choose either to list, clear, or implement a product or

rule, including any dormant product or rule, pursuant to the self-

certification provisions of part 40 or, in the alternative, pursuant to

the process established in part 40 for receiving the Commission's prior

approval.\15\

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\15\ Registered entities may voluntarily seek the Commission's

approval for products, rules, and rule amendments. DCM rules that

will materially change a term or condition of a contract with open

interest that is based on an agricultural commodity enumerated in

section 1a(4) of the Act, however, must be approved by the

Commission prior to implementation. 7 U.S.C. 7a-2(c)(2)(B).

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B. Dormant Registered Entities, Contracts, and Rules

The Commission has applied the concept of dormancy to registered

entities by defining a dormant market or clearing organization as a

registered entity that has been designated by, or registered with, the

Commission for a period of thirty-six months or more but has not served

as a facility for the trading or clearing of transactions for a period

of twelve consecutive calendar months.\16\ The Commission recognizes

that a significant period of inactivity can potentially have a negative

impact on a registered entity's ability to implement rules and list and

clear contracts in a manner that remains consistent with current market

conditions, the Commission's regulations, and self-regulatory best

practices.\17\ Accordingly, the Commission has deemed that upon a

registered entity becoming dormant, its rules and contracts also become

dormant.\18\

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\16\ See 17 CFR 40.1.

\17\ See 47 FR 29515 (July 7, 1982).

\18\ See 71 FR 1953, 1960 (January 12, 2006).

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In contrast to this view, the current language of the Commission's

regulations implies that the earliest possible time that a rule can

become dormant, regardless of whether a registered entity has entered

into dormancy, is at the end of a twelve month rule implementation

period.\19\ Similarly, the current language of the Commission's

regulations implies that the earliest possible time that a contract can

become dormant, regardless of whether a registered entity has entered

into dormancy and absent affirmative

[[Page 8601]]

action on the part of the registered entity, is at the end of a thirty-

six month contract development period. The Commission therefore is

revising the definition of a dormant product or contract, dormant rule,

and dormant DCM, DTEF, and DCO in Commission regulation 40.1 to clearly

establish that the dormancy of a registered entity will automatically

and separately trigger the dormancy of that entity's contracts and

rules.\20\

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\19\ The term ``rule'' is defined to include any registered

entity (DCM, DTEF, or DCO) ``* * * rule, regulation, resolution,

interpretation, stated policy, term and condition * * * in whatever

form adopted, and any amendment or addition thereto or repeal

thereof * * *'' 17 CFR 40.1(h).

\20\ The final amendments also clarify that only registered DCOs

can be dormant.

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C. Definition of Emergency

The Commission's regulations give registered entities the ability

to implement emergency rules in response to market disruptions without

certifying or receiving the Commission's approval prior to

implementation.\21\ The current definition of emergency implies that

the full governing board of a registered entity must determine whether

particular developments constitute an emergency before the registered

entity may operate under emergency procedures.\22\ The Commission, in

its August 2007 notice of proposed rulemaking, proposed to amend the

definition of emergency in regulation 40.1(g) to clarify that certain

persons other than persons that comprise a registered entity's full

governing board may properly issue an emergency determination on behalf

of the governing board. The proposed revision was precipitated by a New

York Mercantile Exchange (NYMEX) comment letter (submitted in response

to the publication of a procedurally unrelated notice of proposed

rulemaking) that suggested that the full governing board of an

exchange, under emergency conditions, may not be able to issue a

determination in a timely manner to address emergency conditions.\23\

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\21\ See 17 CFR 40.6(a)(2).

\22\ See 17 CFR 40.1(g).

\23\ See letter from James A. Newsome, President, NYMEX, to Jean

A. Webb, Secretary of the Commission (September 26, 2005) (on file

with the Commission), available at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/foia/comment05/foi05-004_1page2.htm.

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The Commission received one comment in response to its proposal to

amend the definition of emergency. In its comment letter, the CME Group

Inc., a DCM formed by the 2007 merger of the Chicago Mercantile

Exchange Inc. and the Board of Trade of the City of Chicago, expressed

its support for the proposed clarification.\24\ CME Group based its

support on the premise that an authorized committee or an exchange

official may be better able to respond in the first instance to market

disruptions that may quickly evolve into emergencies.

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\24\ See letter from Craig S. Donohue, Chief Executive Officer,

CME Group, to David A. Stawick, Secretary of the Commission

(September 12, 2007) (on file with the Commission), available at

http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/frcomment/07-010c002.pdf.

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The Commission agrees with CME Group and NYMEX, and pursuant to a

broader interpretation of the definition of emergency, has previously

approved registered entity rules that delegate the authority to make an

emergency determination to persons other than persons that comprise the

full governing board. Accordingly, the Commission herein revises the

definition of emergency in regulation 40.1(g) to clarify that duly

authorized persons may determine whether a particular occurrence or

circumstance is an emergency that ``requires immediate action and

threatens or may threaten such things as the fair and orderly trading

in, or the liquidation of or delivery pursuant to, any agreements,

contracts or transactions * * *'' \25\ The final amendments to the

definition of emergency require, as proposed, that the authorization to

act on behalf of the governing board be derived from registered entity

rules that specify in detail: (1) The persons authorized to issue an

emergency opinion on behalf of the governing board; and (2) the

procedures for the exercise of such authority.\26\

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\25\ 17 CFR 40.1(g).

\26\ The Commission is further adopting, as proposed, amendments

to the definition of emergency in Commission regulation 40.1(g) to

clarify the definition's applicability to all registered entities,

including DCOs.

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D. Commission Review and Approval of Registered Entity Rules

In contrast to other registered entity rules that may be

implemented pursuant to the self-certification process established in

part 40, DCM rules that, as determined by the Commission, materially

change a term or condition of a contract with open interest that is

based on an agricultural commodity enumerated in section 1a(4) of the

Act must be approved by the Commission prior to implementation.\27\

Since a finding of materiality is by statute at the reasonable

discretion of the Commission, part 40 currently affords DCMs the

opportunity to request a materiality opinion from the Commission for

rules that a submitting DCM characterizes as non-material. Upon

request, the Commission will determine whether a DCM rule submitted

under regulation 40.4(b)(9) at least ten business days prior to

implementation is material within the meaning of section 5c(c) of the

Act.\28\

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\27\ 7 U.S.C. 7a-2(c).

\28\ Id.

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DCMs often simultaneously request that agricultural rule changes be

reviewed for materiality, and if found to be material, approved by the

Commission. Commission regulation 40.5 does not specify when the

approval period commences with respect to rules submitted for

materiality review under the process framed by Commission regulation

40.4(b)(9).\29\ To establish certainty, the Commission is amending

regulation 40.5 to commence the rule approval period at the conclusion

of the 10-day materiality review period under regulation 40.4(b)(9). As

stated in the August 2007 notice of proposed rulemaking, the

commencement of the approval period at this point is appropriate

because determining a rule's consistency with the Act and the

Commission's regulations thereunder requires an analysis that is

qualitatively different from the analysis required to determine the

materiality of the same rule within the meaning of section 5c(c) of the

Act.\30\

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\29\ See 17 CFR 40.4(b) and 40.5(b).

\30\ August 2007 notice of proposed rulemaking, at 45187.

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E. Listing of Products and the Implementation of Registered Entity

Rules

1. The Timing of Submissions

The Commission understands that there may be some confusion as to

how far in advance of implementation registered entities must submit

self-certified products and rules to the Commission. Commission

regulations 40.2(a) and 40.6(a) provide that such submissions must be

filed electronically with the Commission at or before the close of

business on the business day preceding implementation. Questions have

arisen as to whether these provisions refer to the Commission's

business day or the business day of the submitting registered entity.

The Commission is adopting regulations to clarify that the

specified date is the Commission's business day. For clarity and in

order to ensure proper notice of certified products and rules, the

Commission is defining business day in part 40 and adding language to

Commission regulations 40.2(a) and 40.6(a) to expressly require the

filing of certified submissions with the Commission at least one full

Commission business day prior to

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implementation.\31\ In addition, to ensure that the appropriate

operating divisions of the Commission have the ability to access

electronic copies of submissions at the time of filing, the Commission

is amending the mandatory recipients of electronic submissions filed

under regulations 40.2(a)(1) and 40.6(a)(2) to include the Secretary of

the Commission at [email protected], the relevant branch chief at

the regional office having local jurisdiction over the registered

entity, and, for filings submitted by a designated contract market or

registered derivatives transaction execution facility, DMO at

[email protected]

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\31\ These amendments are consistent with other Commission

regulations that exclude the day on which a notice is given or an

event occurs in computing time periods that begin upon the

occurrence of that notice or event. See 17 CFR 1.3(b) and 10.5.

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2. Implementing Registered Entity Rules Without Certification

a. Additional Rule Categories

The Commission's regulations generally permit a registered entity

to implement a new or dormant rule without seeking prior Commission

approval by certifying to the Commission that the rule complies with

the Act and the Commission's regulations thereunder on the business day

preceding implementation.\32\ Registered entities, however, are not

required to file certified submissions prior to implementing several

categories of registered entity rules that are enumerated in Commission

regulation 40.6(c)(2).\33\ Registered entity rules that come within

these categories typically are limited in scope and are implemented

under enabling rules that have already been approved by, or certified

with, the Commission. In order to lessen the burden placed on

registered entities as well as better utilize Commission resources, the

Commission is codifying several additional categories of registered

entity rules that may be implemented without prior certification or

Commission approval if subsequently included in a weekly notification

of rule changes under regulation 40.6(c)(2). The categories of rules

enumerated in Commission regulation 40.6(c)(2) are amended to include:

(1) The initial listing of trading months that are consistent with

previously approved or certified standards; (2) changes in lists of

producers' brands or markings that are made pursuant to previously

approved or certified standards or criteria relating to quality

specifications; and (3) for existing delivery locations, changes in

lists of approved delivery facilities and delivery service providers

that are made pursuant to previously approved or certified standards or

criteria.\34\

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\32\ See 17 CFR 40.6(a).

\33\ 17 CFR 40.6(c)(2).

\34\ Commission regulation 40.4(b)(2) identifies rules that are

changes in lists of approved delivery facilities as immaterial. In

conformance with the amendments to Commission regulation 40.6(c)(2),

the Commission is amending regulation 40.4(b)(2) to identify rules

that are changes to lists of approved delivery service providers as

immaterial.

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A registered entity's ability to notice file changes that relate to

trading months under amended regulation 40.6(c)(2) only extends to

trading months within currently established cycles of trading months

and does not extend to the delisting or relisting of trading months. By

way of example, assume that the currently established cycle of trading

months for a particular contract is December, March, May, July and

September. Under the final amendments, the listing of a new trading

month, such as November, would not qualify for notice filing under

regulation 40.6(c) while an earlier than anticipated (or delayed)

listing of a July contract could properly be notice filed.\35\ With

respect to producer's brands or markings and delivery facilities and

service providers, the Commission reviews the relevant enabling

standards and criteria to ensure their consistency with cash market

practices and to ensure that their terms do not unreasonably restrain

trade by inappropriately prohibiting the open participation of certain

producers, facilities or service providers.\36\ The identification of

producers' brands and enumerated delivery facilities and service

providers at an existing delivery location does not alter certified or

Commission approved qualifying standards or criteria, nor does it

change exchange procedures that verify compliance with those standards

or criteria. The final regulations will therefore require that the

Commission be kept apprised of changes in lists of approved producers'

brands or markings, changes in lists of delivery location delivery

facilities and service providers, and the initial listing of trading

months that are consistent with previously certified or approved

standards through weekly notices of rule changes filed under regulation

40.6(c)(2) as opposed to requiring that such changes be certified with

or approved by the Commission prior to implementation.\37\

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\35\ The language of the final regulations for delivery months

is different from the language that was proposed by the Commission

in its August 2007 notice of proposed rulemaking. The final

regulations discard redundant references to open interest and the

delisting and relisting of trading months. The substantive effect of

the final regulations, that is, allowing the initial listing of

trading months (trading months that cannot have open interest or be

delisted or relisted trading months) within the currently

established cycle of trading months without prior certification or

Commission approval, is equivalent to the substantive effect of the

regulations and amendments proposed in the August 2007 notice of

proposed rulemaking. See August 2007 notice of proposed rulemaking,

at 45187 to 45188.

\36\ See 17 CFR part 40, Appendix A (Application for Designation

of Physical Delivery Futures Contracts).

\37\ Registered entities must be able to cite clearly

identifiable registered entity rules that establish the applicable

enabling standards and criteria in any such submission made under

Commission regulation 40.6(c)(2).

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b. Implementing Rules Without Notification

Rule changes that may appear in a weekly notification pursuant to

Commission regulation 40.6(c)(2)(iv) also include ``[c]hanges to option

contract rules relating to the strike price listing procedures, strike

price intervals, and the listing of strike prices on a discretionary

basis.'' \38\ The Commission currently receives substantially the same

information under part 16 of the Commission's regulations, which

specifies the daily reporting requirements that apply to DCMs.\39\ In

particular, regulation 16.01(b) stipulates that each reporting market

must submit to the Commission on a daily basis various trade data,

including trade volume, open interest and price information for all

listed option strike prices, including discretionary prices.\40\

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\38\ 17 CFR 40.6(c)(iv).

\39\ See 17 CFR part 16.

\40\ 17 CFR 16.01(b).

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In January 2006, DMO staff granted no-action relief to permit DCMs

to satisfy the regulation 40.6(c)(2)(iv) notification requirement by

complying with the daily reporting requirements of regulation 16.01 of

the Commission's regulations.\41\ In order to codify the no-action

relief granted by DMO and avoid duplicative regulatory requirements,

the Commission is amending regulation 40.6(c)(2)(iv) and adding

paragraph (G) to regulation 40.6(c)(3)(ii) to allow registered entities

that are in compliance with regulation 16.01(b) to implement the

specified changes relating to option contract strike prices without

either prior approval, certification or inclusion in a weekly

notification to the Commission.\42\

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\41\ See CFTC Staff Letter 06-01 (January 9, 2006).

\42\ In July of 2006, the Commission adopted final rules to

permit the trading of futures contracts based on corporate debt

securities. 71 FR 39541 (July 13, 2006) (Debt Futures Release). The

Commission herein adopts, as proposed, a technical amendment that

conforms regulation 40.6(c)(2)(iii) to the adoption of the Debt

Futures Release by replacing that regulation's reference to stock

indexes with a reference to securities indexes, a general term that

includes both equity and debt securities. Final Commission

regulation 40.6(c)(2)(iii) also includes a reference to regulation

40.6(c)(3)(ii)(F) to alert registered entities that certain rule

changes relating to securities indexes may be implemented pursuant

to notification or without such notice if implemented under

regulation 40.6(c)(3).

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[[Page 8603]]

The Commission is making a similar amendment for registered entity

rules denoting changes to contract trading months within currently

established cycles of trading months that may be implemented pursuant

to a regulation 40.6(c)(2) notification filing.\43\ As with rules that

are changes to option contract strike prices, the Commission currently

receives adequate notification of the same information under regulation

16.01(a). In order to avoid duplicative regulatory requirements, the

Commission is adding paragraph (H) to regulation 40.6(c)(3)(ii) to

provide that registered entities that are in compliance with regulation

16.01(a) may effect the initial listing of contract trading months

within the currently established cycle of trading months without prior

approval, certification or inclusion in a weekly notification to the

Commission.\44\

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\43\ The Commission is amending the heading of regulation 40.6,

and that provision's references to DCMs and DCOs, to clarify its

potential applicability to all registered entities, including DTEFs.

\44\ In its comment letter, CME Group stated that permitting

DCMs that comply with the reporting requirements of Commission

regulations 16.01(a) and (b) to implement changes in the listing of

trading months within currently established cycles of trading months

and changes to certain option contract rules relating to strike

prices, without certification or prior Commission approval, will

avoid duplicative requirements and will facilitate the efficient use

of Commission resources.

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V. Related Matters

A. Cost Benefit Analysis

Section 15(a) of the Act requires the Commission to consider the

costs and benefits of its actions before issuing new regulations under

the Act. Section 15(a) does not require the Commission to quantify the

costs and benefits of new regulations or to determine whether the

benefits of adopted regulations outweigh their costs. Rather, section

15(a) requires the Commission to consider the cost and benefits of the

subject regulations. Section 15(a) further specifies that the costs and

benefits of the regulations 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

regulation 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 final regulations expand the set of persons delegated by the

Commission with the authority to issue ECM special calls to include the

Director of the Division of Enforcement and that Director's designees.

The final regulations do not expand the basis for issuing ECM special

calls; rather, they simply expand the set of persons authorized to

issue such special calls. There are no regulatory costs imposed by this

extension of delegated special call authority.

The final regulations clarify that a DCM or DCO must generally

choose either to comply with the rule approval process established in

part 40 of the Commission's regulations or, in the alternative, the

certification process established in part 40, prior to listing or

clearing any product, or implementing any rule, including any product

or rule that has become dormant. The final regulations also clearly

establish that the dormancy of a registered entity will automatically

and separately trigger the dormancy of that entity's contracts and

rules. These clarifications are consistent with current Commission

practice, do not impose any regulatory cost, and serve the public

interest by facilitating regulatory certainty for persons subject to

the Act and the Commission's regulations thereunder.

The final regulations clarify that the definition of emergency

allows persons other than persons comprising the full governing board

of a registered entity to declare an emergency on behalf of the

governing board. The final regulations expressly recognize that the

full governing board of an exchange under emergency conditions may not

be able to issue an opinion in a timely manner to address an emergency.

Accordingly, the Commission's final definition of emergency in part 40

clearly permits duly authorized persons to determine whether a

particular occurrence or circumstance is an emergency. The final

regulations facilitate the ability of registered entities to undertake

timely action in response to emergency events and thereby better

protect market participants and the financial integrity of transactions

executed and cleared on registered entities. The final regulations also

limit the potential costs that may arise from any misuse of authority

by requiring registered entities to adopt detailed procedural rules to

effectuate the exercise of this delegated authority.

The final regulations clearly set forth the duration of the rule

approval period for DCM rules that may change a material term or

condition of a contract based on the agricultural commodities

enumerated in section 1a(4) of the Act by commencing the rule approval

period at the conclusion of the 10-day materiality review period under

Commission regulation 40.4(b)(9). Commencing the approval period at

this point gives the Commission time to effectively discharge its

separate regulatory responsibilities to review registered entity rule

changes for their impact on contracts with open interest and to

determine whether such changes are consistent with the Act and the

Commission's regulations thereunder. The amended review period is

consistent with current Commission regulatory practice and should not

place any additional cost or burden on submitting DCMs.

The final regulations address how far in advance of implementation

registered entities must submit self-certified contracts and rules to

the Commission pursuant to regulations 40.2(a) and 40.6(a) by

clarifying that the date specified in those regulations refers to the

Commission's business day. The final regulations ensure that there is

at least one full Commission business day between the submission of a

certified product or rule and such product or rule's listing or

implementation. The final regulations provide regulatory clarity and

impose no additional cost or burden.

The final regulations lessen the burden placed on registered

entities as well as better utilize Commission resources by codifying

several additional rule categories that may be implemented without

prior certification or Commission approval if noticed to the Commission

through other required filings or disclosure requirements or

subsequently included in a weekly notification of rule changes to the

Commission under regulation 40.6(c)(2). The final regulations add lists

of approved producers' brands or markings, changes in lists of approved

delivery facilities and delivery service providers, certain changes in

contract trading months, and certain specified changes to option

contract strike prices to the categories of rules may be implemented

without prior certification or Commission approval, or as applicable,

notification. Registered entity rules that come within these categories

typically are limited in scope

[[Page 8604]]

and are implemented under enabling rules that have already been

certified with, or approved by, the Commission. Permitting their

implementation without certification or approval, or as applicable,

notification, avoids unnecessary or duplicative regulatory requirements

and better utilizes the Commission's resources.

The Commission's August 2007 notice of proposed rulemaking analyzed

the aforementioned costs and benefits. No relevant comments were

received with respect to the Commission's analysis. After considering

these factors, the Commission has determined to amend parts 36 and 40

of the Commission's regulations as set forth below.

B. The Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,

requires that agencies consider the impact of their regulations on

small businesses. The requirements related to the final amendments fall

mainly on registered entities. The Commission has previously determined

that registered entities are not ``small entities'' for the purposes of

the RFA.\45\ In addition, these final regulations, collectively, tend

to relieve regulatory burdens. Accordingly, the Chairman, on behalf of

the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the

actions to be taken herein will not have a significant economic impact

on a substantial number of small entities.

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

\45\ See 47 FR 18618 (April 30, 1982).

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

C. Paperwork Reduction Act

When publicizing final regulations, the Paperwork Reduction Act

(PRA) of 1995 (44 U.S.C. 3501 et seq.) 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. The information collection requirements associated with the

final regulations are administered under Office of Management and

Budget control numbers 3038-0022 and 3038-0054. These final amendments

to parts 36 and 40 of the Commission's regulations would not impose any

new or additional recordkeeping or information collection requirement

that would require the approval of the Office of Management and Budget

under 44 U.S.C. 3501, et seq.

List of Subjects

17 CFR Part 36

Commodity futures.

17 CFR Part 40

Commodity futures, Reporting and recordkeeping requirements.

0

In consideration of the foregoing, and pursuant to the authority

contained in the Act, and, in particular, sections 2, 4, 5, 5a, 5b, 5c,

5d and 8a of the Act, the Commission hereby amends Chapter I of Title

17 of the Code of Federal Regulations as follows:

PART 36--EXEMPT MARKETS

0

1. The authority citation for part 36 continues to read as follows:

Authority: 7 U.S.C. 2, 5, 6, 6c, and 12a, as amended by the

Commodity Futures Modernization Act of 2000, Appendix E of Public

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

0

2. In Sec. 36.3, revise paragraphs (b)(3)(ii) to read as follows:

Sec. 36.3 Exempt commercial markets.

* * * * *

(b) * * *

(3) * * *

(ii) The Commission hereby delegates, until the Commission orders

otherwise, the authority to make special calls as set forth in Section

2(h)(5)(B)(iii) of the Act to the Directors of the Divisions of Market

Oversight, the Division of Clearing and Intermediary Oversight, and the

Division of Enforcement to be exercised by each such Director or by

such other employee or employees as the Director may designate. The

Directors may submit to the Commission for its consideration any matter

that has been delegated in this paragraph. Nothing in this paragraph

prohibits the Commission, at its election, from exercising the

authority delegated in this paragraph.

* * * * *

PART 40--PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES

TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING

ORGANIZATIONS

0

3. The authority citation for part 40 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as

amended by appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

0

4. In Sec. 40.1, revise paragraph (a) through (g) to read as follows:

Sec. 40.1 Definitions.

* * * * *

(a) Business day means the intraday period of time starting at the

business hour of 8:15 a.m. and ending at the business hour of 4:45

p.m.; business hour means any hour between 8:15 a.m. and 4:45 p.m.,

Eastern Standard Time or Eastern Daylight Savings Time, whichever is

currently in effect in Washington, DC, on all days except Saturdays,

Sundays and federal holidays in Washington, DC.

(b) Dormant contract or dormant product means:

(1) Any agreement, contract, transaction, or instrument, or any

commodity futures or option contract with respect to all future or

option expiries that has no open interest and in which no trading has

occurred for a period of twelve complete calendar months following a

certification with, or approval by, the Commission; provided, however,

that no contract or instrument under this paragraph (b)(1) initially

and originally certified with, or approved by, the Commission within

the preceding 36 complete calendar months shall be considered to be

dormant; or

(2) Any commodity futures or option contract or other agreement,

contract, transaction or instrument of a dormant registered entity; or

(3) Any commodity futures or option contract or other agreement,

contract, transaction or instrument not otherwise dormant that a

registered entity self-declares through certification to be dormant.

(c) Dormant designated contract market means any designated

contract market on which no trading has occurred for a period of twelve

complete calendar months; provided, however, no designated contract

market shall be considered to be dormant if its initial and original

Commission order of designation was issued within the preceding 36

complete calendar months.

(d) Dormant derivatives clearing organization means any derivatives

clearing organization registered pursuant to Section 5b of the Act that

has not accepted for clearing any agreement, contract or transaction

that is required or permitted to be cleared by a derivatives clearing

organization under Sections 5b(a) and 5b(b) of the Act, respectively,

for a period of twelve complete calendar months; provided, however, no

derivatives clearing organization shall be considered to be dormant if

its initial and original Commission order of registration was issued

within the preceding 36 complete calendar months.

(e) Dormant derivatives transaction execution facility means any

derivatives transaction execution facility on which no trading has

occurred for a period of twelve complete calendar months; provided,

however, no derivatives transaction execution facility shall be

considered to be dormant if its initial and original Commission order

of

[[Page 8605]]

designation was issued within the preceding 36 complete calendar

months.

(f) Dormant rule means:

(1) Any registered entity rule which remains unimplemented for

twelve complete calendar months following a certification with, or an

approval by, the Commission; or

(2) Any rule or rule amendment of a dormant registered entity.

(g) Emergency means any occurrence or circumstance that, in the

opinion of the governing board of a registered entity, or a person or

persons duly authorized to issue such an opinion on behalf of the

governing board of a registered entity under circumstances and pursuant

to procedures that are specified by rule, requires immediate action and

threatens or may threaten such things as the fair and orderly trading

in, or the liquidation of or delivery pursuant to, any agreements,

contracts or transactions, including:

(1) Any manipulative or attempted manipulative activity;

(2) Any actual, attempted, or threatened corner, squeeze,

congestion, or undue concentration of positions;

(3) Any circumstances which may materially affect the performance

of agreements, contracts or transactions, including failure of the

payment system or the bankruptcy or insolvency of any participant;

(4) Any action taken by any governmental body, or any other

registered entity, board of trade, market or facility which may have a

direct impact on trading; and

(5) Any other circumstance which may have a severe, adverse effect

upon the functioning of a registered entity.

* * * * *

0

5. In Sec. 40.2, revise the heading and paragraphs (a) introductory

text, (a)(1) and (a)(2) to read as follows:

Sec. 40.2 Listing and accepting products for trading or clearing by

certification.

(a) Unless permitted otherwise by Sec. 37.7 of this chapter, a

designated contract market or a registered derivatives transaction

execution facility must comply with the submission requirements of this

section prior to listing a product for trading that has not been

approved under Sec. 40.3 of this chapter or that remains dormant

subsequent to being submitted under this section or approved under

Sec. 40.3 of this chapter. A registered derivatives clearing

organization must comply with the submission requirements of this

section prior to accepting for clearing a product that is not traded on

a registered entity and has not been approved for clearing under Sec.

40.5 of this chapter or that remains dormant subsequent to being

submitted under this section or approved under Sec. 40.5 of this

chapter. A submission shall comply with the following conditions:

(1) The registered entity has filed its submission electronically

in a format specified by the Secretary of the Commission with the

Secretary of the Commission at [email protected], the relevant

branch chief at the regional office having local jurisdiction over the

registered entity, and, for filings submitted by a designated contract

market or registered derivatives transaction execution facility, the

Division of Market Oversight at [email protected];

(2) The Commission has received the submission at its headquarters

by the open of business on the business day preceding the product's

listing or acceptance for clearing; and

* * * * *

0

6. In Sec. 40.3, revise paragraph (a) introductory text to read as

follows:

Sec. 40.3 Voluntary submission of new products for Commission review

and approval.

(a) Request for approval. Pursuant to Section 5c(c) of the Act and

Sec. Sec. 37.7 and 38.4 of this chapter, a designated contract market

or registered derivatives transaction execution facility may request

that the Commission approve a new or dormant product prior to listing

the product for trading, or if initially submitted under Sec. 40.2 of

this chapter, subsequent to listing the product for trading. A

submission requesting approval shall:

* * * * *

0

7. In Sec. 40.4, revise paragraph (a) and (b)(2) to read as follows:

Sec. 40.4 Amendments to terms or conditions of enumerated

agricultural contracts.

(a) Notwithstanding the provisions of this part, a designated

contract market must submit for Commission approval under the

procedures of Sec. 40.5, prior to its implementation, any rule or

dormant rule that, for a delivery month having open interest, would

materially change a term or condition, as defined in Sec. 40.1(i), of

a contract for future delivery in an agricultural commodity enumerated

in Section 1a(4) of the Act, or of an option on such a contract or

commodity.

* * * * *

(b) * * *

(2) For each delivery location, changes in lists of approved

delivery facilities and delivery service providers, including

weighmasters and inspectors, pursuant to previously set standards or

criteria;

* * * * *

0

8. In Sec. 40.5, revise paragraphs (a) introductory text and (c)

introductory text to read as follows:

Sec. 40.5 Voluntary submission of rules for Commission review and

approval.

(a) Request for approval of rules. Pursuant to Section 5c(c) of the

Act and Sec. Sec. 37.7, 38.4 and 39.4 of this chapter, a registered

entity may request that the Commission approve a new or dormant rule

prior to implementation, or if initially submitted under Sec. Sec.

40.2 or 40.6 of this chapter, subsequent to implementation. A

submission requesting approval shall:

* * * * *

(c) Commencement and extension of time for review. The Commission

shall commence the review period in paragraph (b) of this section for a

compliant submission under Sec. 40.4(b)(9) ten business days after its

receipt and further may extend the review period in paragraph (b) of

this section for any approval request for:

* * * * *

0

9. Amend Sec. 40.6 as follows:

A. Remove the term ``designated contract market or registered

derivatives clearing organization'' and add in its place the term

``registered entity'' in paragraphs (a)(2), (c)(1), and (c)(3)(i);

B. Remove the term ``designated contract market or a registered

derivatives clearing organization'' and add in its place the term

``registered entity'' in paragraph (c) introductory text;

C. Remove the term ``designated contract markets and registered

derivatives clearing organizations'' and add in its place the term

``registered entities'' in paragraph (c)(3) introductory text;

D. Remove the term ``contract market or a derivatives clearing

organization's'' and add in its place the term ``registered entity'' in

paragraph (c)(3)(ii)(B); and

E. In addition, revise the heading and paragraphs (a) introductory

text, (a)(2), (c)(2)(iii), and (c)(2)(iv), and add paragraphs

(c)(2)(vii) through (c)(2)(ix), (c)(3)(ii)(G) and (c)(3)(ii)(H) to read

as follows:

Sec. 40.6 Self-certification of rules.

(a) Required certification. Unless permitted otherwise by Sec.

37.7 of this chapter, a registered entity must comply with the

following conditions prior to the implementation of any rule that has

not obtained Commission approval under Sec. 40.5 of this chapter or

that remains dormant subsequent to being

[[Page 8606]]

submitted under this section or approved under Sec. 40.5 of this

chapter:

(1) * * *

(2) The registered entity has filed its submission electronically

in a format specified by the Secretary of the Commission with the

Secretary of the Commission at [email protected], the relevant

branch chief at the regional office having local jurisdiction over the

registered entity, and, for filings submitted by a designated contract

market or registered derivatives transaction execution facility, the

Division of Market Oversight at [email protected], and the

Commission has received the submission at its headquarters by the open

of business on the business day preceding implementation of the rule;

provided, however, rules or rule amendments implemented under

procedures of the governing board to respond to an emergency as defined

in Sec. 40.1, shall, if practicable, be filed with the Commission

prior to the implementation or, if not practicable, be filed with the

Commission at the earliest possible time after implementation, but in

no event more than twenty-four hours after implementation; and

* * * * *

(c) * * *

(2) * * *

(iii) Index products. Routine changes in the composition,

computation, or method of selection of component entities of an index

(other than routine changes to securities indexes to the extent that

such changes are not described in paragraph (c)(3)(ii)(F) of this

section) referenced and defined in the product's terms, that do not

affect the pricing basis of the index, which are made by an independent

third party whose business relates to the collection or dissemination

of price information and which was not formed solely for the purpose of

compiling an index for use in connection with a futures or option

product;

(iv) Option contract terms. Changes to option contract rules, which

may qualify for implementation without notice pursuant to paragraph

(c)(3)(ii)(G) of this section, relating to the strike price listing

procedures, strike price intervals, and the listing of strike prices on

a discretionary basis;

* * * * *

(vii) Approved brands. Changes in lists of approved brands or

markings pursuant to previously certified or Commission approved

standards or criteria;

(viii) Delivery facilities and delivery service providers. Changes

in lists of approved delivery facilities and delivery service providers

(including weighmasters, assayers, and inspectors) at a delivery

location, pursuant to previously certified or Commission approved

standards or criteria; or

(ix) Trading Months. The initial listing of trading months, which

may qualify for implementation without notice pursuant to (c)(3)(ii)(H)

of this section, within the currently established cycle of trading

months.

(3) * * *

(ii) * * *

(G) Option contract terms. For registered entities that are in

compliance with the daily reporting requirements of Sec. 16.01(b) of

this chapter, changes to option contract rules relating to the strike

price listing procedures, strike price intervals, and the listing of

strike prices on a discretionary basis.

(H) Trading Months. For registered entities that are in compliance

with the daily reporting requirements of Sec. 16.01(a) of this

chapter, the initial listing of trading months which are within the

currently established cycle of trading months.

Issued in Washington, DC, on February 6, 2008, by the

Commission.

David A. Stawik,

Secretary of the Commission.

[FR Doc. E8-2580 Filed 2-13-08; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: February 14, 2008