Federal Register, Volume 76 Issue 144 (Wednesday, July 27, 2011)[Federal Register Volume 76, Number 144 (Wednesday, July 27, 2011)]
[Rules and Regulations]
[Pages 44776-44800]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18661]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 40
RIN 3038-AD07
Provisions Common to Registered Entities
AGENCY: Commodity Futures Trading Commission.
ACTION: Final Rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
adopting regulations to implement certain statutory provisions of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act''). The Commission also is amending its existing regulations
governing the submission of new products, rules, and rule amendments.
The final regulations establish the Commission's procedural framework
for the submission of new products, rules, and rule amendments by
designated contract markets (``DCMs''), derivatives clearing
organizations (``DCOs''), swap execution facilities (``SEFs''), and
swap data repositories (``SDRs''). In addition, the final regulations
prohibit event contracts involving certain excluded commodities,
establish special submission procedures for certain rules proposed by
systemically important derivatives clearing organizations (``SIDCOs''),
and stay the certifications and the approval review periods of novel
derivative products pending jurisdictional determinations.
DATES: Effective date: September 26, 2011.
FOR FURTHER INFORMATION CONTACT: Bella Rozenberg, Assistant Deputy
Director, Division of Market Oversight (``DMO''), at 202-418-5119 or
cftc.gov">[email protected], Riva Spear Adriance, Associate Director, DMO at
202-418-5494 or cftc.gov">[email protected], Phyllis Dietz, Associate Director,
Division of Clearing and Intermediary Oversight at 202-418-5449 or
cftc.gov">[email protected], and Joseph R. Cisewski, Attorney Advisor, DMO at 202-
418-5718 or cftc.gov">[email protected], in each case, at the Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Amendments to Part 40 of the Commission's Regulations
a. Definitions (Sec. 40.1)
b. Listing Products for Trading by Certification (Sec. 40.2)
c. Voluntary Submission of New Products for Commission Review
and Approval (Sec. 40.3)
d. Amendments to Terms or Conditions of Enumerated Agricultural
Contracts (Sec. 40.4)
e. Voluntary Submission of Rules for Commission Review and
Approval (Sec. 40.5)
f. Self-Certification of Rules (Sec. 40.6)
g. Delegations (Sec. 40.7)
h. Availability of Public Information (Sec. 40.8)
i. Special Certification Procedures for Submission of Rules by
Systemically Important Derivatives Clearing Organizations (Sec.
40.10)
j. Review of Event Contracts Based Upon Certain Excluded
Commodities (Sec. 40.11)
k. Staying of Certification and Tolling of Review Period Pending
Jurisdictional Determination (Sec. 40.12)
III. Cost Benefit Considerations
IV. Related Matters
a. Regulatory Flexibility Act
b. Paperwork Reduction Act
I. Background
On November 2, 2010, the Commission published proposed regulations
to implement certain statutory provisions of the Dodd-Frank Act and to
amend existing regulations governing the submission of new products,
rules, and rule amendments.\1\ The Commission is hereby adopting final
regulations 40.1 through 40.8, as amended below, and new regulations
40.10 through 40.12 to implement certain provisions of the Dodd-Frank
Act, to clarify submission-related regulatory obligations of registered
entities, and to enhance the Commission's administration of the
Commodity Exchange Act (``Act'').
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\1\ 17 CFR part 40 Provisions Common to Registered Entities, 75
FR 67282 (Nov. 2, 2010).
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The Commission's final regulations implement, among other
provisions, Section 745 of the Dodd-Frank Act, which, effective July
16, 2011, amended Section 5c of the Act to provide new procedures for
the submission of rules and rule amendments by DCMs, SEFs, DCOs, and
SDRs.\2\ The final regulations also amend existing requirements for the
submission of new products and prohibit the listing and clearing of
products based upon certain excluded commodities, if such products
involve statutorily-specified activities or similar activities
determined, by rule or regulation, to be contrary to the public
interest. In addition, the Commission is adopting special submission
procedures for certain risk-related rules proposed
[[Page 44777]]
by SIDCOs.\3\ The SIDCO regulations implement Section 806(e)(1) of the
Dodd-Frank Act by requiring, among other things, 60-days advance notice
of proposed rules that may materially affect the nature or level of
risk presented by the SIDCO. Finally, the Commission is adopting
previously proposed regulations to stay certifications and toll
approval review periods for novel derivative products subject to
jurisdictional determinations by the Commission or the Securities and
Exchange Commission (``SEC'').
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\2\ Sections 728 and 733 of the Dodd-Frank Act created two new
categories of registered entities, SEFs and SDRs. Provisions related
to the regulation of these entities will be promulgated in other
Commission rulemakings.
\3\ A SIDCO is a DCO that has been designated as a
systematically important financial market utility by the Financial
Stability Oversight Council pursuant to Section 804 of the Dodd-
Frank Act and for which the Commission is the Supervisory Agency.
See below section II.i. (discussing Sec. 40.10).
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Part 40 of the Commission's regulations, as amended herein, will
become effective sixty days after publication in the Federal Register.
II. Amendments to Part 40 of the Commission's Regulations
The Commission received nine comment letters during the 60-day
public comment period following the publication of its notice of
proposed rulemaking. Seven of these comment letters were submitted by
registered entities subject to the proposed regulations. Five comments
were submitted on behalf of DCMs--the CME Group, Inc. (``CME''), ICE
Futures U.S., Inc. (``ICE''), the Kansas City Board of Trade
(``KCBOT''), the Minneapolis Grain Exchange, Inc. (``MGEX''), and
OneChicago LLC Futures Exchange (``OCX'')--and two comments were
submitted on behalf of registered DCOs--the Options Clearing
Corporation (``OCC'') and LCH.Clearnet Ltd (``LCH'').\4\ The Commission
also received comments from the Futures Industry Association (``FIA''),
an organization representing futures commission merchants, and the
American Benefits Council (``ABC''), an organization representing
pension funds and other buy-side swaps users.
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\4\ CME also submitted a comment on the Commission's cost-
benefit analysis subsequent to the close of the public comment
public for the proposed rulemaking. The Commission has addressed
CME's comments in its cost-benefit analysis, below. CME, KCBOT, and
MGEX are also registered DCOs and they commented on clearing-related
issues.
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Many of the comments received by the Commission offered specific
recommendations for clarification or modification of proposed
regulations; other comments generally objected to certain aspects of
the proposal. The Commission, in consideration of these comments and as
detailed below, is modifying its proposed rules to clarify regulatory
obligations under certain provisions of part 40. The Commission has
otherwise determined to implement its regulations as originally
published on November 2, 2010.
a. Definitions (Sec. 40.1)
Three registered entities submitted comments concerning the
proposed definitions of ``rule'' and ``terms and conditions'' in Sec.
40.1 of the Commission's regulations. The Commission has determined to
revise both definitions to address these comments. In addition, the
Commission is adopting revised language in the definition of ``terms
and conditions'' to provide specific examples of terms and conditions
frequently included in swaps.
The FIA asked the Commission to consider whether an amendment to
the Sec. 40.1 definition of ``rule'' might be appropriate to ensure
that the Commission's regulations captured advisories, interpretations,
and less formal means of communicating policies to market participants.
The FIA noted that registered entities, including DCMs, may be able to
circumvent regulatory obligations by issuing communications under a
category not enumerated in the proposed definition of ``rule.'' The
Commission notes that ``interpretations'' and ``stated policies'' are
explicitly included in the present definition of ``rule'' and that the
non-exclusive categories enumerated in that definition are merely
examples of the types of actions that are subject to Commission review.
The Commission's position has always been that the definition of
``rule'' turns more on substance than form; that is, a registered
entity cannot avoid regulatory obligations by adopting what is in
substance a policy or interpretation by formally issuing the
communication under a category that is not enumerated in the definition
of ``rule.''
The Commission nevertheless has determined to add the term
``advisory'' to the list of categories constituting ``rules'' under
Sec. 40.1, which should ensure that registered entities issue
advisories in compliance with all regulations applicable to ``rules.''
In consideration of the FIA's comments, the Commission also has
determined to move the phrase ``in whatever form adopted'' to ensure
that an addition or deletion to a communication constitutes a ``rule''
under Sec. 40.1, without regard to the particular form in which a
registered entity adopts such an amendment. In this regard, the
Commission is clarifying that the language ``in whatever form adopted''
applies to all non-exclusive categories of ``rules'' enumerated in
Sec. 40.1 and that the enumeration of particular examples of ``rules''
does not imply the exclusion of others.
MGEX commented on the proposed definition of ``rule'' as well. In
its comments, MGEX suggested that the Commission may be exceeding its
authority by requiring DCMs to submit market maker and trading
incentive programs as ``rules'' subject to the provisions of part 40.
MGEX also commented that the terms and conditions of such programs
should not be submitted to the Commission for approval, because, as a
policy matter, the Commission should not substitute its judgment for
``the business judgment of the registered entities.'' Moreover, in
MGEX's view, the publication of program terms and conditions could
inhibit negotiations with market participants. The Commission disagrees
with MGEX and, for the reasons discussed below, has determined to
continue requiring registered entities to submit the complete terms and
conditions of market maker and trading incentive programs to the
Commission, with an appropriate request for confidential treatment.\5\
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\5\ Pursuant to Sec. 145.9 of the Commission's regulation,
registered entities requesting confidential treatment for program
terms and conditions must, among other things, file a written
justification for the confidential treatment request.
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A DCM's rules implementing market maker and trading incentive
programs fall within the Commission's oversight authority. Indeed, a
number of core principles touch upon trading issues that may be
implicated by the design of such programs. Core Principle 9, for
example, establishes the Commission's framework for regulating the
execution of transactions, requiring DCMs, like MGEX, to provide a
competitive, open, and efficient market and mechanism for execution.
The newly-amended Core Principle 12 also requires DCMs to establish and
enforce rules to protect markets and market participants from abusive
practices and to promote fair and equitable trading on designated
contract markets. In addition, market maker and trading incentive
programs frequently touch upon Core Principle 19, which requires that
DCMs avoid adopting any rules or taking any actions that result in
unreasonable restraints of trade.
It is not always clear in the first instance whether the rules
implementing market maker and trading incentive programs have
implications for a DCM's compliance with these core principles.
Consequently, for many years, the Commission has required registered
entities to submit the terms and conditions of all market maker and
[[Page 44778]]
trading incentive programs to ensure that, among other things, they do
not incentivize manipulative activities, unreasonably restrain
competition on or between exchanges, or otherwise interfere with the
fair and efficient functioning of the marketplace. Reviewing program
rules for compliance with applicable law is not tantamount to
substituting the Commission's judgment for the business judgment of the
registered entity.
The Commission continues to view such programs as ``agreements * *
* corresponding'' to a ``trading protocol'' within the Sec. 40.1
definition of ``rule'' and, as such, all market maker and trading
incentive programs must be submitted to the Commission in accordance
with procedures established in part 40. In addition, to further clarify
submission obligations, the Commission intends to continue reminding
each newly-designated contract market, in its designation letter, that
such programs are considered ``rules'' under Sec. 40.1. The Commission
would like to emphasize, however, that such programs need not be
submitted to the Commission for approval, as suggested in MGEX's
comment. Market maker and trading incentive programs may be submitted
for approval under Sec. 40.5, but they also may be certified and
submitted in accordance with the provisions of Sec. 40.6, which has
been the favored process for submission of market maker and trading
incentive programs to date.
In a similar comment concerning the Commission's authority to amend
rules relating to margin, MGEX stated that ``DCMs and DCOs are best
qualified to set margins'' in light of their ``extensive historical
record for doing this well.'' MGEX recommended that the Commission
provide DCOs ``the broadest latitude possible'' to establish
appropriate margin rules. The Commission believes that the final
definition of ``rule,'' as adopted herein--and which does not restrict
the Commission's review of rules relating to margin levels--is not
inconsistent with the comment submitted by MGEX. As discussed in the
proposed rulemaking, Section 736 of the Dodd-Frank Act amends Section
8a(7) of the Act to permit the Commission to alter or supplement the
rules of a registered DCO by issuing rules, regulations or orders
regarding margin requirements. To ascertain whether or not and under
what conditions to issue such rules, regulations, or orders, the
Commission must be able to review rules ``relating to the setting of
levels of margin'' in the first instance, although the Commission is
not authorized to ``set specific margin amounts'' under Section
8a(7)(D)(iii) of the Act. The Commission's review of such rules is an
appropriate exercise of its DCO oversight responsibilities and may not
result in the Commission taking action under Section 8(a)(7).
Finally, OCC recommended that the Commission reconsider certain
language within the proposed definition of ``terms and conditions'' in
Sec. 40.1(j). Specifically, OCC suggested that the Commission delete
language that would have required ``proposed swap or contract terms and
conditions * * * [to] conform to industry standards or those terms and
conditions adopted by comparable contracts.'' In OCC's view, novel
products, by their nature, contain provisions that deviate somewhat
from those in comparable contracts. The Commission, as suggested by
OCC, intended to prevent registered entities from designing products
that are economically identical to existing products but that have
``one or more unique features that serve no apparent purpose but to
prevent fungibility.'' Given the potential adverse effect on innovation
and other proposed regulatory provisions, the Commission has determined
to revise the definition of ``terms and conditions'' to delete the
above-cited language.
To further clarify the definition of ``terms and conditions,'' the
Commission is revising Sec. 40.1(j) to differentiate between the
``terms and conditions'' generally applicable to a contract for the
purchase or sale of a commodity for future delivery, or an option on
such a contract or an option on a commodity--not including an option on
a commodity that falls within the definition of a swap--(``commodity
futures and options contracts'') in paragraph (j)(1) and the ``terms
and conditions'' generally applicable to a swap in paragraph (j)(2).
Some of the ``terms and conditions'' associated with commodity futures
and options contracts are different from those associated with swaps
and, accordingly, the revised format for identifying particular
examples of ``terms and conditions'' applicable to each product type
may clarify certain submission requirements that are dependent on this
definition. For example, the Commission has determined to revise the
introductory paragraph to the definition of ``terms and conditions'' to
include language that describes a swap's underlying ``trading unit'' or
``commodity'' as a ``description of the payments to be exchanged under
a swap.''
The examples of ``terms and conditions'' generally applicable to
commodity futures and options contracts and contained in paragraph
(j)(1) are being adopted as proposed, except that the Commission has
determined to amend the definition to include ``no cancellation
ranges'' within subparagraph (vi). However, as discussed above, the
Commission also has determined to amend and clarify the definition of
``terms and conditions'' by separating those terms and conditions
generally applicable to commodity futures and options contracts from
those generally applicable to swaps.\6\ Accordingly, the new and final
Sec. 40.1(j)(2) provides examples of ``terms and conditions''
frequently associated with swaps,\7\ which the Commission has
determined to clarify and/or renumber as follows:
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\6\ The examples of terms and conditions proposed as paragraphs
(j)(1)-(14) are being renumbered as paragraphs (j)(1)(i) through
(xiv) to reflect the inclusion of paragraph (j)(2) for swaps.
\7\ The Commission notes that the definition of ``swap'' in
Section 1a(47)(A)(i) of the Act includes an option (``any agreement,
contract or transaction (i) that is a put, call, cap, floor, collar,
or similar option of any kind that is for the purchase or sale, or
based on the value of 1, or more interest or other rates,
currencies. * * *''
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Paragraph (j)(2)(i) defines as a ``term'' or ``condition''
the ``identification of the major group, category, type or class in
which the swap falls'' and ``any further sub-group, category, type or
class that further describes the swap.'' \8\ To clarify the meaning of
this phrase, a parenthetical lists ``interest rate, commodity, credit,
or equity'' swaps as non-exclusive examples of major swap groups. This
is equivalent to a description of the ``quality and other standards
that define the commodity or instrument underlying the contract''
applied to commodity futures and options contracts in Sec.
40.1(j)(1)(i);
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\8\ The terminolory used in this provision, i.e., ``group,
category, type, or class,'' is used to describe swaps in section 723
of the Dodd-Frank Act, codified in section 2(h)(2) of the Act,
regarding the review of swaps for a mandatory clearing
determination. See also proposed Sec. 39.5 (process for review of
swaps for mandatory clearing; 75 FR 67277 (Nov. 2, 2010)).
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Paragraph (j)(2)(ii) refers to ``[n]otional amounts,
quantity standards, or other unit size characteristics.'' This
provision, as proposed in paragraph (j)(15)(i), previously referred
only to ``notional values.'' The revision clarifies that there may be
more than one way to state the size of a swap;
Paragraphs (j)(2)(iii) (any applicable premiums or
discounts for delivery of nonpar products) and (iv) (trading hours and
the listing of swaps) are parallel to paragraphs (j)(1)(iii) and (iv),
which are applicable to commodity futures and options contracts;
Paragraph (j)(2)(v) for swaps, like paragraph (j)(1)(v)
for commodity
[[Page 44779]]
futures and options contracts, addresses the pricing basis of the
instrument. It refers to ``pricing basis for establishing the payment
obligations under, and mark-to-market value of, the swap including, as
applicable, the accrual start dates, termination or maturity dates,
and, for each leg of the swap, the initial cash flow components,
spreads, and points, and the relevant indexes, prices, rates, coupons,
or other price reference measures.'' This incorporates the provisions
of proposed paragraphs (j)(15)(iii) (indexes), (iv) (relevant prices,
rates or coupons), (vi) (initial cash flow components), and (x)
(spreads and points). The Commission notes that other ``price reference
measures'' could include any factor that might have a bearing on the
price of a swap, including pricing curves, reference prices, reference
entities or obligations, reference currencies, disruption fallbacks,
or, given the variety of existing and potential swap products, any
other term or condition that affects the pricing basis of the swap;
Paragraphs (j)(2)(vi) (any price limits, trading halts, or
circuit breaker provisions, and procedures for the establishment of
daily settlement prices) and (vii) (position limits, position
accountability standards, and position reporting requirements) for
swaps are the same as paragraphs (j)(1)(vi) and (vii), respectively, as
applied to commodity futures and options contracts;
Paragraph (j)(2)(viii) refers to ``payment and reset
frequency, day count conventions, business calendars, and accrual
features.'' It incorporates proposed paragraphs (j)(15)(ii) (relevant
dates, tenor and day count conventions), (vii) (payment and reset
frequency), (viii) (business calendars), and (ix) (accrual type).
Included within this category are such specifications as payment,
delivery, pricing and reset dates, day count fractions, holiday
calendars, and accrual features such as compounding;
Paragraph (j)(2)(ix) addresses specifications related to
physical delivery, if physical delivery applies. The enumerated
features are the same as those listed for commodity futures and options
contracts in paragraph (j)(1)(ix);
Paragraph (j)(2)(x) relates to cash settlement and
provides ``[i]f cash settled, the definition, composition, calculation
and revision of the cash settlement price, and the settlement
currency.'' This is the same as paragraph (j)(1)(x) for commodity
futures and options contracts, except that the new paragraph contains
an additional reference to settlement currency that incorporates
proposed paragraph (j)(15)(v) (currency);
Paragraphs (j)(2)(xi), (xii), (xiii) and (xiv), relating
to swaps that are options, parallel paragraphs (j)(1)(xi), (xii),
(xiii) and (xiv) relating to commodity options contracts;
Paragraph (j)(2)(xv) lists ``[l]ife cycle events'' as a
term or condition. Originally included in proposed paragraph
(j)(15)(vi), this encompasses provisions relating to such attributes as
special assignment, novation, exchange or other transfer rights or
limitations, special termination events, amendment provisions, rights
to extinguish obligations under the swap, and special notice
requirements.
The Commission would like to clarify that these ``terms and
conditions'' apply to the submission of products for listing or trading
by DCMs and SEFs. The Commission's proposed swap-related examples
referenced ``swaps cleared by a derivatives clearing organization,''
which may have suggested that the examples were relevant only in
connection with rules submitted by DCOs. The ``terms and conditions''
of a swap are relevant to rules that may be submitted by DCMs and SEFs,
as well as DCOs, and the reference to swaps cleared by DCOs therefore
has been removed.
b. Listing Products for Trading by Certification (Sec. 40.2)
The Commission previously proposed to amend Sec. 40.2(a) to
require registered entities to accompany their submissions with the
documentation relied upon to establish the basis for compliance with
the Act and the Commission's regulations. The Commission received a
number of comments regarding the proposed documentation requirement in
Sec. 40.2(a)(3)(v). Two registered entities, ICE Futures and CME,
commented that the Commission may not have the authority to require the
submission of documentation with newly-certified products. A number of
registered entities also found the proposed provision unclear or overly
prescriptive. The Commission, in consideration of these comments, has
determined to amend its regulations to clarify the filing obligations
of registered entities and to ameliorate the perceived burdens
associated with the proposal.
ICE Futures and CME suggested that the Commission may not have the
authority to amend the product submission requirements, because the
Dodd-Frank Act, while substantially amending statutory provisions
relevant to the submission of rules and rule amendments, did not amend
the Act's provisions governing the certification and approval of
products. The Commission would like to clarify that its proposed
rulemaking concerned not only Dodd-Frank related amendments but also
certain amendments that facilitate the Commission's administration of
the Act. Thus, although the Dodd-Frank Act did not substantively change
the product certification provisions in Section 5c(c) of the Act, the
Commission proposed the documentation requirement in Sec. 40.2, as
well as other provisions,\9\ to expedite the submission review process
and to ensure adequate consideration is given to legal and financial
issues arising from new product and rule submissions.
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\9\ See proposed Sec. Sec. 40.3, 40.5, 40.6, and 40.10, 17 CFR
part 40 Provisions Common to Registered Entities, 75 FR 57282 (Nov.
2, 2010).
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In this regard, the Commission continues to view its product
submission requirements as a logical adjunct to the certification
provisions of Section 5c(c)(1) of the Act. To argue that the
Commission's proposal exceeds statutory authority, the product
submission provisions of the Act would need to be read strictly to
require that registered entities merely make--and not support--
certifications of compliance with the Act and regulations thereunder.
This interpretation ignores the Commission's product oversight function
and its duty to examine support for certifications of compliance with
core principles, including certifications that new products are not
susceptible to manipulation. The Commission has long recognized ``the
need to balance the flexibility'' that the Act, as amended by the
Commodity Futures Modernization Act (``CFMA''), gives ``a DCM in being
able to [quickly] self-certify new products * * * against the
obligations of both the DCM and the Commission to assure themselves
that the certification is accurate--i.e., that the product or rule does
indeed comply with applicable * * * core principles.'' \10\
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\10\ See Technical Clarifying Amendmens to Rules for Exempt
Markets, Derivatives Transaction Executiion Facilities and
Designated Contract Markets, and Procedural Changes for Derivatives
Clearing Organization Registration Applications, 71 FR 1953, 1956
(Jan. 12, 2006).
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The Commission nevertheless agrees with ICE Futures that it might
be ``more useful'' for staff to have ``a written explanation'' of the
newly-certified product than to receive ``pages of reports, data and
other records.'' The Commission therefore has determined to
substantially revise Sec. 40.2(a)(3)(v) to require product
certifications be supported by a ``concise explanation and analysis''
of the certified product
[[Page 44780]]
and its compliance with applicable law. This ``explanation and
analysis'' must either (1) be accompanied by supporting documentation,
or (2) incorporate the information contained in such documentation,
with appropriate citations to data sources.\11\ Thus, under final Sec.
40.2(a)(3)(v), registered entities certifying new products with an
appropriately detailed and cited ``explanation and analysis'' do not
have to submit supporting documentation.
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\11\ For example, registered entities could incorporate a
summarized record in the product explanation and analysis with
reference to a Web site link containing the information relied upon
to establish compliance with applicable law.
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The submission of an explanation and analysis is necessary for the
Commission's review of a new product certification. The Commission has
encountered numerous instances in which registered entities provided
only cursory supporting analyses for their product submissions or, in
certain cases, failed to document the evidentiary basis for their
certifications altogether. The Commission also has experienced undue
delays in receiving certain requested information, suggesting that
supporting analyses had not been prepared by the registered entities as
of the time of request.\12\ Without prompt receipt of supporting
information, the staff must expend significant resources and time to
replicate existing analyses or to otherwise independently establish a
product's compliance with applicable law. In addition, the staff
frequently has found it necessary to contact registered entities for
additional guidance on product submissions. To address these problems,
final Sec. 40.2(a)(3)(v) facilitates the staff's review of new
products subsequent to certification while discouraging unsupported
certification of products in the first instance.\13\ The more flexible
and substantially revised provision permits registered entities to
support product certifications in a manner that may be most effective
and least costly under the circumstances.
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\12\ Staff recently received a number of self-certified
submissions containing insufficient information for several
products, implicating a number of core principles. Each submission's
deficiencies were corrected only after numerous discussions with the
Commission's staff, a process that exhausted significant resources
and time.
\13\ Moreover, the Dodd-Frank Act's elimination of certain
exemptions and exclusions relied upon by currently operating exempt
entities may encourage these entities to register with the
Commission, thereby increasing the number of product certifications
subject to staff review.
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The Commission notes that the explanation and analysis supporting a
product certification requires the incorporation of information that,
in many cases, is already collected or reviewed by registered entities.
For example, registered entities complying with the guidance and
acceptable practices in the Guideline No. 1 Appendix to part 40
presently must review and, if necessary, develop the evidentiary basis
for certain certifications prior to submitting new products for
Commission review. Moreover, under existing Sec. 40.2(b), registered
entities must, upon receipt of a staff request, submit this or other
supporting information to substantiate product submissions. The routine
provision of a concise explanation and analysis should be no more
burdensome than compliance with existing regulations requiring
registered entities to collect supporting information and to further
explain and submit such information upon request.
To further address comments concerning the perceived burdens of the
product submission requirements, the Commission also has determined to
streamline the product certification process for a significant
percentage of swap contracts \14\ by permitting DCMs and SEFs to
certify, within a single submission, one or more swaps without
submitting each swap and its supporting information to the Commission.
To list a particular swap or a particular number of swaps through the
class certification provisions of new Sec. 40.2(d), the DCM or SEF
must certify that each of the individual contracts within the certified
class complies with certain conditions.
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\14\ According to a recently published report by the
International Organization of Securities Commissions (``IOSCO''),
interest rate swaps comprised approximately 77.5% of the total
outstanding notional value of over-the-counter swaps. Foreign
exchange swaps accounted for another 9.1%. See Technical Committee
of IOSCO, Report on Trading of OTC Derivatives, 1, 6 (Feb. 3, 2011).
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A DCM or SEF may submit a class certification only if each swap
within the certified class of swaps complies with the conditions
specified in Sec. 40.2(d)(1)(i)-(iv). First, each swap within the
certified class of swaps must be based upon an ``excluded commodity,''
as defined in Sec. 40.2(d)(1); these swaps include, for example,
interest rate swaps, swaps on widely-held and liquid currencies, and
swaps based upon the occurrence or non-occurrence of certain events or
contingencies. Second, if more than one swap is included in a single
filing under Sec. 40.2(d), each particular swap within the certified
class of swaps must be based upon an excluded commodity with an
identical pricing source and methodology for calculating reference
prices and payment obligations. This ensures that DCMs and SEFs
simultaneously certify, for example, only those interest rate swaps
with a common pricing source--such as Thomson Reuters on behalf of the
British Bankers' Association (``BBA'')--and a common methodology for
calculating the reference rates for swaps with varying maturities--such
as the contributor averaging methodology used to calculate each of the
BBA's fifteen London Interbank Offer Rates (``LIBOR'') for a particular
currency. Thus, a DCM or SEF may class certify (i.e., include in a
single submission under Sec. 40.2) a number of LIBOR-based interest
rate swaps for a particular currency notwithstanding the varying
underlying maturities or varying tenors of swaps within the certified
class.
Third, the regulation limits class certifications to swaps based
upon sources and methodologies that the Commission previously reviewed
in connection with a certified or approved futures or swap contract.
This ensures that the Commission had an opportunity to review the
particular pricing source and methodology used in each of the swaps
within the certified class of swaps.\15\ Fourth and finally, each
particular swap within the certified class of swaps must be based upon
an excluded commodity involving an identical currency or identical
currencies. For example, a swap based upon 3-month LIBOR for U.S.
Dollars may not be submitted in the same submission as a swap based
upon the 3-month LIBOR rate for any of the other 9 currencies presently
included in the BBA survey.
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\15\ Based upon its experience with Sec. 40.2(d), the
Commission may consider expanding the classes of commodities
eligible for class certification in a future rulemaking.
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To further streamline the new product submission process, the
Commission also has determined to permit DCOs to submit products
accepted for clearing under the forthcoming provisions of Sec. 39.5.
As proposed, the second provision of Sec. 40.2(a) would have retained
the existing requirement that, prior to accepting any over-the-counter
product for clearing, a DCO must submit the new product pursuant to the
provisions of part 40. Comments submitted in connection with the
proposed process for review of swaps for mandatory clearing indicated
some confusion about the interplay between the Sec. 40.2 product
submission process and the Sec. 39.5 submission process for a
mandatory clearing determination. In light of the introduction of
procedures for a DCO to submit swap products for a mandatory clearing
determination under Sec. 39.5 and the potential for confusion as to
the interaction between
[[Page 44781]]
the two regulatory provisions, the Commission has reconsidered what
would have been a dual submission requirement. The Commission therefore
is deleting from Sec. 40.2 the provision requiring submission of new
products by a DCO.\16\ A DCO may submit a single filing in accordance
with Sec. 39.5 instead of submitting two filings--one under Sec. 40.2
and one under Sec. 39.5--and the information required for the Sec.
39.5 submission encompasses the information that would otherwise be
required under Sec. 40.2. The Commission believes that this revision
will facilitate the product submission process without adversely
affecting the supervisory purpose of regulations requiring the
submission of products for Commission review.
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\16\ DCOs voluntarily seeking prior approval to clear a new
product under Sec. 40.3 may still submit two filings--one under
Sec. 40.3 and one under Sec. 39.5.
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In other comments related to product certification requirements,
registered entities stated that the price certification provision in
proposed Sec. 40.2(a)(3)(vi) required unclear or vague certifications
concerning matters unrelated to the Commission's core regulatory
functions. CME commented that registered entities already have
sufficient incentives--for example, avoiding possible litigation--to
ensure that products meet applicable legal standards. In addition, ICE
Futures commented that the Commission's proposal ``exceed[ed] the
requirements contained in [the] Dodd-Frank [Act]'' and
``inappropriately inject[ed] the Commission into the commercial and
business practices of registered entities.'' In its view, the
Commission should not be the ``business and legal sounding board for
each registered entity in the area of intellectual property and other
legal conditions.'' Moreover, ICE Futures questioned ``whether the
Commission would be properly positioned to make * * * complex
[intellectual property] determinations'' as part of the product review
process. The OCC did not object to the price certification requirement
but questioned whether it served a ``useful purpose.'' The OCC
correctly stated that registered entities are required to abide by the
Act and the Commission's regulations, which contemplate appropriate due
diligence concerning intellectual property and pricing issues,
``whether or not [they] give[] * * * a [special] certification'' to
that effect.
The Commission, in consideration of these comments, has determined
not to adopt proposed Sec. 40.2(a)(3)(vi). The Commission recognizes
that registered entities should, and generally are, sensitive to
intellectual property issues that might arise in the course of
developing a new product and that the general certification provision
in Sec. 40.2(a)(3)(iv) captures the more specific settlement price
certification proposed in Sec. 40.2(a)(3)(vi).\17\ However, in light
of recent experience, the Commission disagrees with the assertion that
registered entities, without exception, sufficiently account for
intellectual property issues when listing new products for trading. In
fact, a DCM was recently involved in a legal dispute concerning the use
of certain published third-party prices. Although the DCM had been
facilitating trading in contracts referencing these prices, another
entity obtained an exclusive license to use the third party's prices
and, accordingly, threatened to seek legal action to enjoin the DCM
from further referencing those prices to cash settle its products. The
DCM ultimately found an alternative means for settlement of its
existing contracts but not without some disruption to the market. The
episode highlights the relevance and necessity of appropriate due
diligence in referencing third-party prices for purposes of cash
settlement. Market participants should be able to enter into positions
in a newly-certified contract without concerns that the registered
entity's use of a particular price may be subject to legal challenge.
Legal challenges or disputes can be not only disruptive to the
marketplace but also may undermine confidence in the futures and
derivatives markets. Moreover, such challenges or disputes can affect
the value of positions taken in contracts subject to the controversy.
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\17\ Accordingly, implicit in any certification that a product
complies with the Act and the Commission's regulations is an
assertion that the submitting entity has the rights to use or
reference a particular price. Filing a false certification could
result in a Commission action under Sec. 40.2(c).
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Thus, although the Commission has determined not to adopt the
proposed pricing certification provisions, it notes that the staff, in
its discretion and as part of its due diligence reviews of new product
submissions, may request information under Sec. 40.2(b) concerning
whether a registered entity has obtained the legal rights to use or
reference proprietary prices, including third-party index prices, in
connection with the listing or trading of a product. Registered
entities submitting a product that uses prices published by another
market or that references third-party prices should include all
information relevant to the cash settlement of the product with its
accompanying explanation and analysis. In this regard, a simple
statement that the registered entity has the legal rights to use or
reference a particular price could expedite Commission staff review
without imposing a material burden on either the Commission or
registered entities.
Finally, the Commission notes that registered entities frequently
submit product ``terms and conditions'' with accompanying rules--for
example, rules establishing block trade thresholds--that, upon the
effective date of these regulations, will be subject to a new rule
certification review process. Such ``rules'' or ``rule amendments''
submitted in connection with the listing or trading of a product, if
not included in the definition of ``terms and conditions,'' will not be
effective and cannot be implemented until properly submitted for
Commission review under Sec. Sec. 40.5 or 40.6. The Commission also
notes that the ``terms and conditions'' of a product, as defined in
Sec. 40.1(j), must be submitted in connection with the listing or
trading of a product and therefore would become effective one full
business day after the business day of submission. However, if ``terms
and conditions'' submitted in connection with the listing or trading of
a particular contract would amend the existing terms or conditions of a
previously certified or approved product, such ``terms and conditions''
must be certified under Sec. 40.6 or submitted for approval under
Sec. 40.5 as well.
c. Voluntary Submission of New Products for Commission Review and
Approval (Sec. 40.3)
For the reasons noted in its explanation of amendments to Sec.
40.2, the Commission has determined to revise its documentation
provisions in proposed Sec. 40.3(a)(4) and to eliminate the price
certification provisions in proposed Sec. 40.3(a)(9). The amendments
parallel those adopted with respect to product certifications under
Sec. 40.2. Final Sec. 40.3(a)(4) requires that products submitted for
Commission approval be accompanied by an explanation and analysis of
the product and its compliance with applicable law and either (1) the
documentation relied upon to establish the basis for compliance with
applicable law, or (2) the information contained within such
documentation, with appropriate citations to data sources.
The Commission received a comment concerning its existing
regulation governing staff requests for additional information under
final Sec. 40.3(a)(10). The OCC commented that the two-day deadline
for responses to requests for additional information may be
insufficient and impractical in certain circumstances. It reasoned that
[[Page 44782]]
registered entities generally seek to provide ``additional materials as
soon as possible in order to expedite the staff's review of the new
product'' and that the regulation's inflexible deadline therefore was
unnecessary. The OCC also suggested that the Commission adopt
alternative language to permit registered entities to ``notify the
Commission'' that additional time is ``reasonably required to provide
the requested evidence'' and, in such cases, to require the submission
of this information no later than ten business days subsequent to the
request, or at the completion of a longer period specified by staff.
The Commission has determined that a longer response period is not
appropriate for the submission of additional information. The
Commission has a limited timeframe for making final determinations
under the product approval provisions of Sec. 40.3 and the prompt
receipt of requested information frequently is requisite to its
determination regarding the submission. In light of the OCC's comment,
however, the Commission has determined to amend the final Sec.
40.3(a)(10) to permit, at the discretion of its staff and upon receipt
of a written request from the registered entity, an extension of time
for the submission of additional information.
d. Amendments to Terms or Conditions of Enumerated Agricultural
Contracts (Sec. 40.4)
The Commission has determined to adopt technical amendments to
Sec. 40.4(b)(3) to permit registered entities to implement ``[c]hanges
in no cancellation ranges'' for enumerated agricultural contracts
without prior approval, provided these rules are properly submitted to
the Commission pursuant to Sec. 40.6. Newly-certified products
frequently include terms and conditions related to ``no cancellation
ranges'' and the Commission does not believe it appropriate to delay
implementation of a no cancellation range for products involving
enumerated agricultural commodities, especially when those products may
be actively trading through a registered entity.
e. Voluntary Submission of Rules for Commission Review and Approval
(Sec. 40.5)
For the reasons noted below, the Commission has determined to
eliminate the documentation provision previously proposed in Sec.
40.5(a)(7), to revise existing Sec. 40.5(a)(5) to be similar to final
Sec. 40.6(a)(7)(v), and to eliminate proposed Sec. 40.5(a)(10). The
Commission notes that the ``explanation and analysis'' requirement in
final Sec. 40.5(a)(5) does not include the qualifier that the
submission be ``concise.'' The Commission requires registered entities
to provide a more detailed explanation and analysis of rules
voluntarily submitted for Commission approval under the provisions of
Sec. 40.5.
f. Self-Certification of Rules (Sec. 40.6)
The Commission received a number of comments concerning the
proposed documentation requirement in Sec. 40.6(a)(7)(v) and its
application to routine rules and rule amendments. The OCC, for example,
commented that it is frequently ``obvious'' that a routine rule
submission complies with applicable statutory and regulatory provisions
and that the documentation requirement failed to account for the fact
that many rules warrant the submission of minimal, if any, supporting
documentation. Similarly, KCBOT commented that many rule submissions
need be supported only by a ``cursory review of the rule or rule change
in relation to Commission regulations,'' with little or no
``significant benefit'' to be gained from the collection or provision
of supporting documentation. Like comments concerning the submission of
documentation in Sec. Sec. 40.2 and 40.3, a number of comments also
stated that the submission of documentation in connection with all new
rules and rule amendments would be burdensome and unlikely to yield
benefits that outweighed costs.
The Commission has determined, in consideration of these comments,
to eliminate its proposed documentation requirement in Sec.
40.6(a)(7)(v) and to insert in its place a requirement that registered
entities provide a ``concise explanation and analysis'' of the
``operation, purpose, and effect'' of certified rules, consistent with
the existing requirement in Sec. 40.5(a)(5). Unlike the certification
provisions applicable to new products, the rule certification
provisions of the Act provide the staff ten-business days to review new
rules and rule amendments and, if necessary, to prevent them from
becoming effective until staff receives adequate information from the
submitting entity.\18\ Registered entities therefore should have
sufficient incentives to provide adequate explanations of new
submissions under Sec. 40.6 without the provision of actual
documentation.\19\
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\18\ Pursuant to Section 745 of the Dodd-Frank Act, the
Commission has ten-business days to review rule certifications and
to determine whether to stay certain submissions--including those
submitted with inadequate information--for as many as 90 additional
days. Moreover, the Commission's staff may request additional
information at any time during the applicable rule review period
pursuant to existing Sec. 40.6(a)(8).
\19\ CME commented that the extended review period should not be
``mandatorily invoked in the event a rule submission [is] stayed due
to the provision of inadequate information.'' In its view, the
public comment period associated with stayed rules is designed to
solicit external perspectives regarding only ``controversial''
submissions. The Commission does not, however, have the authority to
prevent a stayed submission from being subject to the extended
review and public comment requirements. Section 745 of the Dodd-
Frank Act provides that the Commission's issuance of a notification
``shall stay the certification of the new rule or rule amendment''
and that ``[t]he Commission shall provide a not less than 30-day
public comment period.'' However, the Commission acknowledges that
its authority to issue a notification of stay in the first instance
is discretionary rather than mandatory. Under Sec. 40.6(c), the
Commission ``may stay the certification of a new rule or rule
amendment'' for the enumerated reasons, but it may also request a
revised submission that would render a notice of stay unnecessary.
Accordingly, the Commission's regulations permit--but do not
require--a stay of any submission that omits information that could
``reasonably be deemed important by the Commission,'' as noted by
FIA.
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The ``concise explanation and analysis'' will facilitate the
Commission's review of newly-certified rules and rule amendments.
Registered entities recently have submitted rule submissions with only
a cursory explanation of the rule change and a conclusory statement
concerning the submission's compliance with core principles. As a
consequence, the staff frequently has found it necessary to contact
registered entities for additional guidance on submissions and the
potential implications for compliance with core principles. The
Commission's review of the explanation and analysis will be less
burdensome--both for the Commission and registered entities--than the
current practice of contacting registered entities to request
explanations and analyses subsequent to each rule submission.\20\ Like
the explanation and analysis required for new product submissions, the
explanation and analysis of certified rules or rule amendments should
be a
[[Page 44783]]
clear and informative--but not necessarily lengthy--discussion of the
submission, the factors leading to the adoption of the rule or rule
amendment, and the expected impact of the rule or rule amendment on the
public and market participants.
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\20\ The Commission believes that its final regulations will
conserve both Commission and registered entity resources. Subsequent
to the effective date of the Dodd-Frank, the Commission anticipates
an increase in the number of new and amendatory rule submissions
implementing the Dodd-Frank Act and forthcoming regulations, as well
as an increase in the number of registered entities submitting such
rules. Concise explanations and analyses will assist the
Commission's staff in conducting its due diligence within the
initial 10-business-day review period, thereby minimizing potential
delays for registered entities. Moreover, registered entities
presently submit a large number of rules and rule amendments
throughout the year; CME, for example, noted that it submitted more
than 342 rules in the last calendar year alone.
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In another comment concerning proposed Sec. 40.6, the FIA
encouraged the Commission to adopt regulations that would maximize the
transparency of the rule submission process, as well as account for the
expertise of market participants. The Commission, in consideration of
the FIA's comment, intends to continue its practice of publishing all
incoming submissions on its Web site and will continue developing a Web
portal at cftc.gov that, once completed, should expedite both
Commission and public review of submissions.\21\ The Commission also
intends to facilitate public comment by enabling interested parties to
submit comments directly from the submissions page on the Commission's
Web site. As noted in the notice of proposed rulemaking, the Commission
presently is working on enhancements to its Web site and information
technology systems that will, among other things, enable the Commission
to promptly inform the public of rule submissions and stays of rule
submissions. The Commission also intends to continue using its current
ability to provide notice through e-mail notifications and RSS feeds to
those who choose to sign-up for them.
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\21\ Given the short time period for the Commission's review,
the Commission agrees with FIA that immediate Web site notice is ``a
far superior alternative to waiting several days for Federal
Register publication of the rule or product filing.''
---------------------------------------------------------------------------
The Commission would like to note that the ``industry filings'' tab
on the Commission's Web site currently consolidates all filings onto a
single Web page and posts them for public review with a brief
explanation of the rule or rule amendment. Market participants and the
public can click on a link within this Web page and access all rule
filings by registered entities. Thus, although the Commission does not
intend to publish a ``daily rule digest,'' as suggested by the FIA, all
market participants currently have and will continue to have access to
submissions in an organized format, which will be complemented by the
``concise explanation and analysis'' accompanying each submission.
The FIA also commented that, with respect to rules submitted in
response to an emergency pursuant to Sec. 40.6(a)(6), the Commission
should not limit the ability of registered entities ``to respond as may
be necessary to the unforeseen circumstances of an emergency
situation.'' The FIA expressed concerns, however, that a registered
entity could potentially ``cite an emergency event as the grounds for a
fundamental recasting'' of regulatory responsibilities. The Commission
agrees that registered entities must be able to respond flexibly and
decisively to emergencies. In addition, the Commission acknowledges the
possibility that a registered entity could attempt to immediately
implement a rule and bypass the rule certification process by asserting
that the rule is in response to an emergency. The final regulations
accordingly clarify that registered entities are required to certify
any rule implemented in response to an emergency under the procedures
set forth in Sec. 40.6. The staff will review such certifications for
compliance with applicable law in situations where the rule, by
necessity, has been implemented and in situations where the rule is
intended for implementation prior to the completion of the 10-business-
day review period. In either situation, the staff may permit the
registered entity's rule to remain effective or it may determine that
the implemented rule should be stayed for an extended review.\22\
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\22\ The Commission's staff may stay a rule or rule amendment
implemented in response to an emergency for the same reasons that it
may stay other rules or rule amendments submitted pursuant to the
procedures in part 40. Specifically, the staff may stay the rule for
an extended review if the submission insufficiently explains the
emergency or the registered entity's response, presents novel or
complex issues warranting further consideration, or is potentially
inconsistent with the Act or regulations thereunder.
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The Commission is adopting three revisions to its proposed
regulations in Sec. 40.6. First, the price certification in proposed
Sec. 40.6(a)(7)(viii) has been eliminated for the reasons discussed in
connection with revisions to proposed Sec. Sec. 40.2(a)(3)(vi),
40.3(a)(9), and 40.5(a)(10). Second, the Commission, in consideration
of comments from both CME and OCX, has determined to amend Sec.
40.6(a) to make rules delisting or withdrawing the certification of
products effective upon submission to the Commission. The Commission
agrees that such submissions should be exempt from the 10-business-day
review period in order to avoid complicating the delisting of the
product by providing market participants an opportunity to enter into
contracts between the time period of submission and the effective date
of the rule.\23\ Finally, the Commission, in response to a comment from
the OCC, is retaining the existing language in Sec. 40.6(d) that
permits certain non-substantive rules to take effect without
certification to the Commission.
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\23\ The Commission has the discretion to permit certain rules
to become effective prior to the expiration of the 10-business-day
rule review period, provided it establishes the effective date of
such rules by rule or regulation. See Section 5c(c)(2) of the Act,
as amended by Section 745(b) of the Dodd-Frank Act.
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g. Delegations (Sec. 40.7)
The Commission is correcting a typographical error that appeared in
proposed Sec. 40.7(a)(1) by replacing the reference to ``Sec.
40.5(c)(1)(B)'' with a reference to ``Sec. 40.5(c)(1)(ii).''
h. Availability of Public Information (Sec. 40.8)
The Commission has determined to adopt technical amendments to
Sec. 40.8 to reflect possible changes in the designation or
registration application procedures for DCMs, SEFs, DCOs and SDRs.\24\
Specifically, Sec. 40.8(a) will make public the following: (1) The
transmittal letter and first page of the ``cover sheet'' of
applications; (2) the applicant's regulatory ``compliance chart;'' and
(3) the ``narrative summary'' of the applicant's proposed activities.''
\25\
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\24\ See, e.g., 76 FR 3698 (Jan. 20, 2011) (proposing revisions
to DCO application procedures).
\25\ See id. at 3718 (proposing a parallel public information
provision in Sec. 39.3(a)(5)).
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i. Special Certification Procedures for Submission of Rules by
Systemically Important Derivatives Clearing Organizations (Sec. 40.10)
CME, FIA, LCH, and OCC submitted comments regarding the
Commission's proposed regulations to implement Section 806 of the Dodd-
Frank Act. Section 806 requires a financial market utility that has
been designated by the Financial Stability Oversight Council (``FSOC'')
to be systemically important to provide its Supervisory Agency with 60
days advance notice of any proposed changes to rules, procedures, or
operations that could materially affect the nature or level of risks
presented by the financial market utility. Section 40.10 sets forth
implementing requirements for SIDCOs.
Proposed Sec. 40.10(a) required that all SIDCOs provide 60 days
advance notice to the Commission in accordance with Section 806 of the
Dodd-Frank Act. In a separate proposed rulemaking, the Commission
proposed to define a ``systemically important derivatives clearing
organization'' to mean a ``financial market utility that is a
derivatives clearing organization registered under section 5b of the
Act (7 U.S.C. 7a-1), which has been designated by the FSOC to be
systemically
[[Page 44784]]
important.'' \26\ Under this definition, a DCO could be a SIDCO even if
the Commission was not its Supervisory Agency and, as an unintended
result, proposed Sec. 40.10 would require such a DCO to provide
advance notice to the Commission.
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\26\ See 75 FR 77576, 77586 (Dec. 13, 2010).
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OCC pointed out this issue, noting that the authority for Sec.
40.10(a) is Section 806(e)(1)(A) of the Dodd-Frank Act, which requires
a systemically important financial market utility to provide 60 days
advance notice to ``its Supervisory Agency.'' Under Section 803(8)(B)
of the Dodd-Frank Act, there can be only one Supervisory Agency for a
financial market utility designated as systemically important.\27\
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\27\ Section 803(8)(B) provides as follows: ``Multiple Agency
Jurisdiction: If a designated financial market is subject to the
jurisdictional supervision of more than 1 agency listed in
subparagraph (A), then such agencies should agree on 1 agency to act
as the Supervisory Agency, and if such agencies cannot agree on
which agency has primary jurisdiction, the Council shall decide
which agency is the Supervisory Agency for purposes of this title.''
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The Commission recognizes that some DCOs, like OCC, may be
regulated by more than one Federal agency. In the case of OCC, if it
were designated as a systemically important financial market utility,
it is possible that it would be so designated because of its activities
as a securities clearing agency, not because of its activities as a
DCO. Accordingly, the SEC, not the Commission, would likely be its
Supervisory Agency.
OCC recommended revising the language in Sec. 40.10(a) to clarify
that advance notice to the Commission would be required only for DCOs
for which the Commission is the Supervisory Agency.\28\ Although the
Commission is adopting Sec. 40.10(a) as proposed, it intends to act on
OCC's suggestion by revising the definition of ``systemically important
derivatives clearing organization'' in a future final rulemaking to
clarify that a SIDCO is a financial market utility that has been
designated by the FSOC to be systemically important and for which the
Commission acts as its Supervisory Agency pursuant to section 803(8) of
the Dodd-Frank Act. This clarification will address the issue raised by
OCC in connection with Sec. 40.10 and will serve to clarify the scope
of any other regulations relating to SIDCOs.
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\28\ OCC suggested revising Sec. 40.10(a) to read, in relevant
part: ``A registered derivatives clearing organization that has been
designated by the Financial Stability Oversight Council as a
systemically important derivatives clearing organization and for
which the Commission acts as the Supervisory Agency pursuant to
Section 803(8) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act shall provide notice to the Commission * * *'' See
OCC letter at 7.
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Proposed Sec. 40.10(a) required a SIDCO to notify the Commission
of a change in rules, procedures, or operations that could materially
affect the nature or level of risks presented by the SIDCO. OCC and CME
commented that a SIDCO would be required to notify the Commission of
proposed changes that could decrease the nature or level of risk in
addition to changes that could increase the nature or level of risk.
OCC does not believe that a SIDCO should be required to report a change
that could materially reduce risk under Sec. 40.10 because the
proposed change would be subject to a 60-day ``waiting period,'' and
the goal of reducing risk is not served by requiring that such a change
be subject to delay.
Similarly, CME expressed the view that the Dodd-Frank Act does not
provide the Commission with authority to impose a 60-day advance notice
requirement for changes in rules, procedures, or operations that could
improve the operations of a SIDCO, and it believes the Commission
should exercise its authority over risk-reducing changes under the
certification procedures of Sec. 40.6.
OCC and CME proposed that the Commission change Sec. 40.10(a) to
cover only a proposed change in rules, procedures, or operations that
could have a materially adverse impact on risk. The Commission has
determined not to adopt this suggested revision for the reasons
discussed below.
As a preliminary matter, the Dodd-Frank Act does not distinguish
between a change that could materially increase or decrease the nature
or level of risks presented by a SIDCO. Although Congress could
reasonably have expected that risk-related changes are almost always
intended to reduce risk, it required advance notice of ``any'' change
that could ``affect'' risk and did not limit Section 806 to only those
instances where a change could increase risk. Moreover, the purpose of
advance notice is to assist the Commission in monitoring systemic risk
and in seeing that SIDCOs effectively manage risk in furtherance of
compliance with the core principles. The Commission acknowledges that
requiring a SIDCO to notify the Commission under Sec. 40.10 of a
change that could materially reduce risk could delay the time when that
change becomes effective. However, a proposed change that could
materially reduce risk in certain respects also could materially
increase risk in other respects, and a SIDCO and the Commission might
come to different conclusions when evaluating whether a particular
change could increase or decrease risk, overall. For example, a SIDCO
could reduce risk by requiring heightened membership requirements, but
this might also reduce the number of clearing members and therefore
increase concentration of risk. As a practical matter, even for
ostensibly risk-reducing changes, there may be adverse consequences
that the Commission should have the opportunity to consider in the time
frame set forth in Section 806 of the Dodd-Frank Act.
The Commission notes that, as proposed, Sec. 40.10(g) provides
that a SIDCO may implement a change in less than 60 days from the date
the Commission receives the notice of proposed change or the date the
Commission receives any further information it has requested, if the
Commission notifies the SIDCO in writing that it does not object to the
proposed change and authorizes implementation of the change on an
earlier date, subject to any conditions imposed by the Commission. To
further address the concerns expressed by the commenters, the
Commission is adding a new paragraph (a)(3) that provides that a SIDCO
may request that the Commission expedite the review on the grounds that
the change would materially decrease risk. The Commission, in its
discretion, may expedite the review and, pursuant to paragraph (g) of
this section, notify the SIDCO in less than 60 days.
The concern that Sec. 40.10 prevents a SIDCO from instituting a
risk-reducing change in less than 60 days may be overstated. Section
40.10(g) allows a SIDCO to implement a change in less than 60 days if
the Commission notifies the SIDCO in writing that it does not object to
the change. Moreover, unless an emergency exists, it is unlikely the
market would be significantly harmed if implementation of the change
were delayed for more than 10 days, which is the basic time period for
the Commission's review of certified rules under Sec. 40.6.
Proposed Sec. 40.10(h) required a SIDCO to provide notice to the
Commission of an emergency change no later than 24 hours after
implementation of the change.\29\ Among other things, the proposed rule
required the notification to include the information set forth in
proposed Sec. 40.10(a). OCC commented that it is not practical to
require a SIDCO's emergency filing to conform to the requirements of
Sec. 40.10(a) within 24
[[Page 44785]]
hours of implementing the change. OCC proposed a two-stage approach
whereby the SIDCO would file an initial notice within 24 hours of the
change and would submit a more extensive filing conforming to Sec.
40.10(a) as soon as reasonably practicable thereafter, but in any event
not more than 30 days after implementation of the change.
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\29\ This standard is consistent with the 24-hour requirement
for emergency rule certifications under Sec. 40.6(a)(6).
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The Commission notes that Sec. 40.10(h)(1) codifies Section
806(e)(2)(B) of the Dodd-Frank Act, which requires that the emergency
notice be provided as soon as practicable and no later than 24 hours
after implementation of the change. Section 40.10(h)(2) codifies
Section 806(e)(2)(C), which requires that the notice contain the
information that must be submitted for changes subject to advance
notice, plus a description of the nature of the emergency and the
reason the change was necessary for the SIDCO to continue to provide
its services in a safe and sound manner. These provisions do not
provide for partial or late submissions, as suggested by OCC. However,
the Commission believes that it can adequately address the concern
expressed by OCC.
As proposed, Sec. 40.10(a) required a SIDCO to provide the
information required by proposed Sec. 40.6(a)(7) within 24 hours. OCC
singled out the documentation requirement in proposed Sec.
40.6(a)(7)(v) as one that would be difficult to satisfy within 24
hours. As discussed above, that provision, as adopted herein, has been
revised to significantly reduce the perceived burden of the proposed
rule, and the Commission believes that a SIDCO should be able to
provide the required ``concise explanation and analysis,'' as well as
other required information within 24 hours.
LCH observed that the Commission may require modification or
rescission of an emergency change if it finds that the change is not
consistent with the Act or the Commission's regulations. According to
LCH, this could lead to legal uncertainty regarding activities
undertaken while the emergency change is in effect. As a result, LCH
proposed that the Commission revise Sec. 40.10(h)(3) by adding a
provision to immunize from legal challenge any action taken by a SIDCO
pursuant to an emergency change that is later modified or rescinded by
the Commission.\30\ The Commission is not taking further action on
LCH's suggestion because it believes that the existing enforceability
provisions in Sec. 39.6 of the Commission's regulations adequately
address the concern expressed by LCH.\31\
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\30\ LCH proposed that the Commission add the following language
adapted from Section 739 of the Dodd-Frank Act (regarding swaps):
``* * * However, no modification or rescission shall retroactively
affect the enforceability of any power exercised by the SIDCO, nor
shall any agreement, contract or transaction entered into by the
SIDCO or its counterparty pursuant to the exercise by such SIDCO of
any emergency change, be void, voidable, or unenforceable, and no
party to such agreement, contract, or transaction shall be entitled
to rescind, or recover, any payment made with respect to, the
agreement, contract, or transaction under this section or any other
provision of Federal or State law.''
\31\ Section 39.6 provides as follows:
An agreement, contract or transaction submitted to a derivatives
clearing organization for clearance shall not be void, voidable,
subject to rescission, or otherwise invalidated or rendered
unenforceable as a result of:
(a) A violation by the derivatives clearing organization of the
provisions of the Act or of Commission regulations; or
(b) Any Commission proceeding to alter or supplement a rule
under section 8a(7) of the Act, to declare an emergency under
section 8a(9) of the Act, or any other proceeding the effect of
which is to alter, supplement, or require a derivatives clearing
organization to adopt a specific rule or procedure, or to take or
refrain from taking a specific action. See also Sec. 38.6
(comparable enforceability provisions for DCMs); and proposed Sec.
37.6, 76 FR 1214, 1240 (Jan. 7, 2011) (comparable enforceability
provisions for SEFs).
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In the notice of proposed rulemaking, the Commission solicited
comment as to whether there are any changes a SIDCO should be
prohibited from adopting on an emergency basis. FIA and CME did not
favor imposing any restrictions on a SIDCO's response to an emergency.
CME also noted that a DCO does not have unfettered discretion to act in
an emergency situation. Rather, a DCO's ability to act is limited by
the emergency rules and procedures that have been vetted previously by
the Commission.\32\ The Commission agrees that there should not be any
express limitation on the type of actions that a SIDCO can take in
responding to an emergency, primarily because it is difficult to pre-
judge the permissibility of an emergency action taken in the context of
particular circumstances.
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\32\ Under proposed Sec. 40.6(a)(6), new rules or rule
amendments that establish standards for responding to an emergency
must be submitted pursuant to Sec. 40.6.
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Finally, the Commission is making a technical revision to the
proposed Sec. 40.10(a)(2) requirement that concurrent with providing
the Commission with the advance notice or any request or other
information related to the advance notice, the SIDCO provide the Board
of Governors of the Federal Reserve System (``Board'') with a copy of
the submission. The Commission is adding the instruction that such
notice, request or other information must be filed in the same format
and manner as the Board requires for those designated financial market
utilities for which it is the Supervisory Agency pursuant to section
803(8) of the Dodd-Frank Act.
j. Review of Event Contracts Based Upon Certain Excluded Commodities
(Sec. 40.11)
Pursuant to Section 745(b) of the Dodd-Frank Act, the Commission
proposed Sec. 40.11(a)(1) to prohibit the listing of certain contracts
involving terrorism, assassination, war, gaming, or activities that are
unlawful under any State or Federal law. The CME commented that the
term ``gaming'' should be further defined to ensure that registered
entities do not confront difficult legal questions with respect to the
applicability of the ``gaming'' prohibition in Sec. 40.11(a)(1). In
this regard, the CME noted that the courts have struggled to arrive at
an appropriate legal definition for ``gaming'' for many years and that
the Commission's prohibition on contracts involving ``gaming'' could
introduce uncertainty into the markets.
The Commission agrees that the term ``gaming'' requires further
clarification and that the term is not susceptible to easy definition.
Indeed, in its ``Concept Release on the Appropriate Regulatory
Treatment of Event Contracts,'' the Commission solicited public
comments on the best approach for addressing the ``the potential gaming
aspects of some event contracts and the potential pre-emption of state
laws.'' \33\ The Commission received a number of responses to its
concept release, including several comments articulating bases for
distinguishing trading in contracts linked to the occurrence (or non-
occurrence) of events and participation in traditional ``gaming''
activities. The Commission continues to consider these comments and may
issue a future rulemaking concerning the appropriate regulatory
treatment of ``event contracts,'' including those involving ``gaming.''
In the meantime, the Commission has determined to prohibit contracts
based upon the activities enumerated in Section 745 of the Dodd-Frank
Act and to consider individual product submissions on a case-by-case
basis under Sec. 40.2 or Sec. 40.3.
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\33\ Concept Release on the Appropriate Regulatory Treatment of
Event Contracts, 73 FR 25669, 25670 (May 7, 2008).
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The Commission would like to note that registered entities may
receive a definitive resolution of any questions concerning the
applicability of Sec. 40.11(a)(1) by submitting a particular product
for Commission approval under to Sec. 40.3. If the submitted product
is approved, the registered entity may list it for trading or clearing
with an
[[Page 44786]]
assurance that the Commission reviewed and did not object to the
submission based on the prohibitions in Sec. 40.11(a). In addition,
registered entities may always certify products pursuant to the
procedures in Sec. 40.2. If the Commission determines during its
review of a product that the submission may violate the prohibitions in
Sec. 40.11(a)(1)-(2), the Commission may request that the registered
entity suspend the trading or clearing of the contract pending the
completion of a 90-day extended review. Upon the completion of that
review, the Commission must issue an order, pursuant to Section 745(b)
of the Dodd-Frank Act, finding either that the product violates or does
not violate the prohibitions in Sec. 40.11(a)(1)-(2).
The Commission's staff also may, at its discretion and upon a
request from a registered entity, review a draft product submission or
proposal and provide guidance concerning the product's compliance with
core principles and Sec. 40.11(a). The Commission would like to note,
however, that the staff's guidance concerning drafts and proposals is
preliminary and non-binding. The staff formally reviews products only
at such time as a compliant submission is provided to the Commission
pursuant to Sec. 40.2 or Sec. 40.3.
Finally, the Commission would like to note that its prohibition of
certain ``gaming'' contracts is consistent with Congress's intent to
``prevent gambling through the futures markets'' \34\ and to ``protect
the public interest from gaming and other events contracts.'' \35\ The
Commission may, at some future time, adopt regulations that prohibit
products that are based upon activities ``similar to'' those enumerated
in Section 745 of the Dodd-Frank Act. It has determined not to propose
such regulations at this time.
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\34\ Congressional Record--Senate, S5906 (July 15, 2010).
\35\ Id. Senator Lincoln, in a colloquy with Senator Feinstein,
emphasized that the Commission ``needs the power to, and should,
prevent derivatives contracts that are contrary to the public
interest because they exist predominantly to enable gambling through
supposed event contracts.''
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k. Staying of Certification and Tolling of Review Period Pending
Jurisdictional Determination (Sec. 40.12)
The OCC objected to the Commission's use of the term ``derivative''
in proposed Sec. 40.12(a)(1), which, the Commission agrees, is an
undefined term encompassing products within the jurisdiction of both
the SEC and the Commission. The Commission therefore has determined to
delete the word ``a derivative'' from Sec. 40.12(a)(1) and to insert
in its place ``a contract for the sale of a commodity for future
delivery (or an option on such contract or an option on a commodity).''
The final regulation thereby codifies the Dodd-Frank Act's provisions
concerning ``novel derivative products having elements of both
securities and contracts for the sale of a commodity for future
delivery (or options on such contracts or options on commodities).'' In
addition, the Commission has determined to limit the application of
Sec. 40.12 to only those novel agreements, transactions, or contracts
that are not subject to a separate process for requesting
interpretations of the characterization of swaps, security-based swaps,
and mixed swaps pursuant to Sec. 1.8 of this chapter.\36\
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\36\ See Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement;'' Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 76 FR 29818 (May 23,
2011).
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The Commission also is amending proposed Sec. 40.12(b) to clarify
that the receipt of a request for a jurisdictional determination
``tolls'' both the applicable product certification and the applicable
approval review period until the issuance of a final determination. In
this regard, the Commission has determined to insert ``shall be
stayed'' after ``the product certification,'' which more appropriately
characterizes the Commission's action with respect to certified
products and distinguishes that action from the suspension of the
approval review period under Sec. 40.3.\37\ Similarly, in Sec.
40.12(b)(2), the Commission has determined to clarify that the stay
shall be withdrawn and that the submission review period shall resume
upon the issuance of a final determination order finding that the
Commission has jurisdiction over the submission.
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\37\ Section 717(d) of the Dodd-Frank Act amended Section
5c(c)(1) of the Act to ``stay the certification of a product pending
a determination by the Commission upon a request of the Securities
and Exchange Commission * * * that the Commission issue a
determination as to whether'' a novel derivative product is within
the jurisdiction of the Commission. However, Section 745 of the
Dodd-Frank Act amended the Act by striking Section 5c in its
entirety and inserting language that did not include the stay
provision in Section 717(d) of the Dodd-Frank Act. The Commission
would like to clarify that the stay provisions adopted in final
Sec. 40.12 of its regulations do not give effect to the stay
provisions in Section 717(d) of the Dodd-Frank Act, given
inconsistent amendments to Section 5c(c). The Commission is adopting
its stay provisions pursuant to its Section 8a(5) authority to
``make and promulgate such rules and regulations as, in the judgment
of the Commission, are reasonably necessary to effectuate any of the
provisions or to accomplish any purposes of the Act.''
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The Commission would like to note that the suspension of a
product's certification would permit continued trading for liquidation
purposes. That is, the stay of certification under Sec. 40.12 would
not prevent market participants from entering into positions that
offset others taken while the product certification remained in effect.
The Commission will provide to the registered entity a written notice
of stay pending issuance of a final determination order by the
Commission.\38\
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\38\ A final determination, for purposes of Sec. 40.12(b) of
this part, shall be a determination order issued pursuant to Section
718(a)(3) of the Dodd-Frank Act.
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Finally, the Commission notes that Section 718(a)(2) of the Dodd-
Frank Act provides the Commission explicit authority to request a
jurisdictional determination concerning a novel derivative product
having elements of both a security and a contract for the sale of a
commodity for future delivery (or an option on such contract or an
option on a commodity) at any time subsequent to the effective date of
a product containing such elements, provided no notice of a novel
derivative product filing has been received from the SEC pursuant to
Section 718(a)(1) of the Dodd-Frank Act.
III. Cost-Benefit Considerations
Section 15(a) of the Act requires the Commission to ``consider the
costs and benefits'' of its actions before promulgating a
regulation.\39\ In particular, these costs and benefits must 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. In conducting its analysis, the Commission
may, in its discretion, give greater weight to any one of the five
enumerated areas and it may determine that, notwithstanding costs, a
particular rule is necessary to protect the public interest or to
effectuate any of the provisions or to accomplish any of the purposes
of the Act.\40\
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\39\ 7 U.S.C. 19(a).
\40\ See, e.g., Fisherman's Doc Co-op., Inc v. Brown, 75 F.3d
164 (4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336
(DC Cir. 1985) (noting that an agency has discretion to weigh
factors in undertaking cost-benefit analysis).
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Certain of the regulations promulgated in this final rule are
mandated by the Act, as amended by the Dodd-Frank Act, and, for those
[[Page 44787]]
provisions, the Commission does not have the authority to consider
alternatives to the statute's prescribed procedures. For example, the
final regulations implement, among other provisions, Section 745 of the
Dodd-Frank Act, which specifies new procedures for the submission of
certain rules and rule amendments and new default timelines for the
Commission's review of rule submissions. Many of these new procedures--
for example, the 30-day public comment period following the stay of a
submitted rule--are statutorily mandated and the Commission's final
regulations have been drafted to remain within the confines of the
enabling language. Similarly, the Commission's SIDCO provisions, in
large part, codify the procedures established by Section 806 of the
Dodd-Frank Act. For those final regulations not mandated by the Dodd-
Frank Act, the Commission has adopted the least-cost alternative
consistent with achieving the purposes of the Act.
The Commission invited but did not receive public comments specific
to its cost-benefit discussion within the initial comment period
following the Commission's proposal. The Commission also invited the
public ``to submit any data or other information that [it] may have
quantifying or qualifying the costs and benefits of the proposal with
their comment letters.'' The Commission received no such data or other
information. The Commission did, however, receive general comments on
the ``burden'' associated with the documentation and pricing source
certification requirements proposed in Sec. Sec. 40.2, 40.3, 40.5, and
40.6. Those comments suggested that the new provisions could
substantially increase the time and resources required to prepare
submissions and could potentially delay the introduction of new
products and implementation of rules. However, none of these comments
suggested feasible alternatives to the statutory mandate. Nor did such
comments show how and to what extent those burdens would be increased
by the implementing proposal.
In a comment concerning the Commission's cost-benefit analysis, the
CME stated that the CFMA streamlined the product and rule submission
process to eliminate the ``substantial unnecessary paperwork''
previously required to be submitted to the Commission. In the CME's
view, the documentation and pricing source certification requirements
effectively reinstated the pre-CFMA submission process by mandating
that registered entities submit ``massive amounts of documentation''
for Commission review. In addition, CME stated that the part 40
proposal's cost-benefit discussion did not ``acknowledge that a fully-
functional and less costly system of self-certification is already in
place'' and that the Commission failed to justify what CME
characterized as ``onerous requirements'' with few public benefits. CME
also stated that the Commission's proposal did not ``address any actual
costs'' to industry, including ``the cost of compiling all
documentation relied upon to determine whether a new product, new rule
or rule amendment complies with the Core Principles'' and the costs of
``enabl[ing] foreign competitors'' to introduce products that compete
with domestic DCM product innovations.
The Commission, after consideration of the public interest factors
specified in section 15(a) of the Act, has determined, as set forth
below, that the costs associated with its final regulations will not
have a material effect on the efficiency, competitiveness, and
financial integrity of the futures and swaps markets and should
substantially benefit registered entities by facilitating and
expediting the Commission's review of product and rule submissions. The
Commission has considered the costs and benefits of its regulations
throughout the preamble and generally views the related matters section
of this final rulemaking to be an extension of that discussion.
Estimates pursuant to the Paperwork Reduction Act are a subset of and
incorporated into the overall compliance costs associated with final
part 40.
The Commission's final regulations address the relevant areas of
market and public concern specified in section 15(a) of the Act.
Specifically, the Commission's certification and approval procedures
ensure that registered entities do not enact rules that, among other
things, harm market participants or the public, result in unreasonable
restraints of trade or material anticompetitive burdens on trading, or
have other effects that are detrimental to the public interest. In
addition, the special certification procedures for SIDCOs and certain
event contracts implement Sections 806 and 745 of the Dodd-Frank Act,
respectively, and ensure that the Commission has adequate time and
information to analyze certain risk-related rules and novel products
based upon certain excluded commodities. The SIDCO notice requirement
is important to the Commission's oversight of sound risk management
practices and to its efforts to monitor and mitigate systemic risks.
The proposed event contract provisions, consistent with the intent of
Congress, prevent individuals from speculating on activities that are
potentially harmful to national security or detrimental to the
stability of the futures markets. Finally, the ``concise explanation
and analysis'' required for the submission of new products is a less-
costly alternative to the Commission's proposed documentation
requirement and will assist the Commission in protecting the price
discovery function of the markets.
The final certification and approval procedures are necessary to
fulfill the requirements of the Dodd-Frank Act, to protect market
participants, to enhance the Commission's administration of the Act,
and to ensure the continued competitiveness and financial integrity of
the futures and swaps markets. Moreover, in response to public comments
and after consultations with market participants and prudential
regulators, the proposed rules have been amended to implement, where
possible, a less costly alternative that achieves the statutory
objectives of the Act, as amended by the Dodd-Frank Act.
With respect to costs, the Commission recognizes that its final
regulations may increase compliance costs by requiring the submission
of a ``concise explanation and analysis'' and by requiring registered
entities to certify that they posted the complete submission on the
registered entity's Web site at the time of filing. The Commission
believes that these costs will be de minimis. A ``concise explanation
and analysis'' should be a clear and informative--but not necessarily
lengthy--description of the product or rule and its implications for
compliance with applicable law. Moreover, the explanation and analysis
incorporates information that is, in many cases, already required to be
reviewed or collected by registered entities. A concise description and
examination of the submission should impose minimal costs on registered
entities, because it requires the registered entity merely to
memorialize its due diligence in certifying compliance with applicable
law. Posting this information on the registered entity's Web site
should be as simple as providing an electronic copy of the submission
to appropriate personnel. All current registered entities maintain a
Web site and therefore this new requirement may increase the overall
cost, if at all, by only a negligible margin.
In addition, the proposed price certification provisions are not
being adopted and the proposed documentation provisions have been
revised--and, in some cases, removed from the final regulations--to
permit
[[Page 44788]]
registered entities more flexibility in complying with the Act and
Commission's regulations, to reduce potential administrative and
compliance costs, and to adopt, where possible, less burdensome
alternatives to the Commission's proposal. For example, under the
Commission's final product submission regulations, registered entities,
including CME, are not required to submit ``massive amounts of
documentation'' with their new product submissions. Instead, as
suggested by ICE Futures, the Commission will allow registered entities
to submit an explanation and analysis of the product with the
information contained in such documentation and citations to relevant
data sources. Moreover, the Commission finds that the submission of an
explanation and analysis is necessary for its review of product and
rule certifications. Although CME correctly notes that self-
certification regime has been retained under the Act, as amended by the
Dodd-Frank Act, the Commission has encountered numerous instances in
which registered entities provided only cursory supporting analyses for
their product submissions or, in certain cases, failed to document the
evidentiary basis for their certifications altogether. As discussed in
the preamble, the staff must expend significant resources and time to
replicate existing analyses or to otherwise independently establish a
product's compliance with applicable law when submissions are not
adequately explained or supported by registered entities.
With respect to the new SIDCO provisions in Sec. 40.10, the cost
of creating the advance notice will not be substantial. A SIDCO should
have this information prior to determining whether to implement a
change and, consequently, the marginal cost of drafting and submitting
the notice will be small. On the other hand, the Commission believes
that the benefit of this information is significant because it is
necessary to assess the effect that the proposed change would have on
the nature or level of risks. The final provisions of Sec. 40.10
parallel the requirements of the Dodd-Frank Act. The Commission's
proposal effectively mirrors the enabling provisions of the statute
and, accordingly, the Commission's ability to revise the proposed
requirements is limited.
As discussed above, advance notice of all changes that materially
impact risk--increasing or decreasing risk--is necessary for the
Commission to monitor systemic risk and to see that SIDCOs effectively
manage risk in furtherance of compliance with the core principles. The
Commission acknowledges that requiring a SIDCO to notify the Commission
under Sec. 40.10 of a change that could materially reduce risk could
delay the time when that change becomes effective. However, even for
ostensibly risk-reducing changes, there may be adverse consequences
that the Commission should have the opportunity to consider in the time
frame set forth in Section 806 of the Dodd-Frank Act.
Moreover, the Commission and the Board have statutory obligations
to review proposed changes to SIDCO rules, procedures and operations
that materially impact risks and Section 806 of the Dodd-Frank Act
mandates the time period for review. The Commission also notes that, in
appropriate cases, the staff may permit a risk-related rule to become
effective prior to the expiration of the 60-day notice period.
The costs associated with the emergency notice required in Sec.
40.10(h) are similarly minimal and include the cost of drafting and
submitting the notice and any cost associated with the possibility that
the Commission could rescind or modify the emergency change. There also
may be a cost of requiring notice within 24 hours; however, section
806(e)(2)(B) of the Dodd-Frank Act mandates notices be provided within
this timeframe. The substantive requirements of the notice provisions
also are outlined by section 806(e)(2)(C) of the Dodd-Frank Act and, as
explained above, the Commission believes that the cost of providing the
information required for an advance notice will be small. The marginal
cost of providing additional information concerning an emergency notice
should be similarly small because a SIDCO will already know the nature
of the emergency and will have determined that the change was necessary
for the SIDCO to continue to provide its services in a safe and sound
manner prior to implementing the emergency change. The Commission
believes that the information is necessary for it to review an
emergency change.
Having considered the costs of its proposal, the Commission is
adopting these final regulations, including changes to the proposed
regulations as summarized below, to further reduce the information
collection burdens on and associated costs for registered entities as
follows:
The Commission is revising the proposed documentation
requirements in Sec. 40.2 and Sec. 40.3 to permit the submission of
an appropriately detailed and cited explanation and analysis in lieu of
documentation;
The Commission is amending Sec. 40.2 to apply only to
DCMs and SEFs and intends to implement new product clearing submission
requirements in a new Sec. 39.5 (in a separate rulemaking);
The Commission is eliminating the documentation
requirements in Sec. 40.5 and Sec. 40.6;
The Commission is providing new provisions for class
certifications of certain swaps;
The Commission is amending Sec. 40.6(a) to make effective
upon submission rules delisting or withdrawing the certification of
products;
The Commission is eliminating the proposed certification
requirement concerning the use of third-party prices;
The Commission is eliminating a previously proposed
provision requiring ``[w]henever possible, all proposed swap or
contract terms and conditions [to] conform to industry standards or
those terms and conditions adopted by comparable contracts;''
The Commission is limiting the application of Sec. 40.12
to novel derivative products that are not subject to the forthcoming
provisions of Sec. 1.8.
The resulting final rules should impose significantly lower costs
on registered entities than the proposed rules. The average annual
burden for the 70 anticipated registered entities may be reduced by
more than one-third in comparison to the initial proposed
requirements--from an estimated 324 hours per year per registered
entity to approximately 202 hours per year per registered entity. To
the extent that the Commission's final regulations impose any
additional costs or burdens on registered entities, these costs or
burdens would require a single part-time staff person to handle new
requirements related to product and rule submissions to the Commission;
the total time cost may be as little as four hours per week per
registered entity. Thus, the Commission has determined that these final
regulations are necessary to enable the Commission to perform its
oversight functions and to carry out its statutory responsibilities
under the Act.
IV. Related Matters
a. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \41\ requires agencies to
consider whether final regulations have a significant economic impact
on a substantial number of small entities and, where the regulations do
so, to provide a regulatory flexibility analysis concerning the impact
of such
[[Page 44789]]
regulations.\42\ The final rules require DCOs, DCMs, SEFs, and SDRs to
submit to the Commission new products, rules, and rule amendments,
before they become effective, with either a request for Commission
approval or a certification that the products or rules comply with the
Act and Commission regulations. In addition, the Commission's new
regulations require product submissions be accompanied by a concise
explanation and analysis that incorporates information contained in
supporting documents, whereas the new requirements for rule
certifications simply require the submission of a concise explanation
and analysis of the purpose, operation, and effect of the filing.
Accordingly, these product and rule approval and self-certification
regulations are not complex and do not impose a significant economic
impact on any registered entity.
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\41\ 5 U.S.C. 601 et seq.
\42\ 5 U.S.C. 601 et seq.
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Moreover, the Commission previously determined that DCMs, DCOs,
SEFs, and SDRs are not ``small entities'' for purposes of the RFA.\43\
In determining that these registered entities are not ``small
entities,'' the Commission reasoned that it designates a contract
market or registers a DCO, SEF, or SDR only if the entity meets a
number of specific criteria, including the expenditure of sufficient
resources to establish and maintain an adequate self-regulatory
program.\44\ Because DCMs, DCOs, SEFs and SDRs are required to
demonstrate compliance with Core Principles, including principles
concerning the maintenance or expenditure of financial resources, the
Commission previously determined that SEFs and SDRs, like DCMs and
DCOs, are not ``small entities'' for the purposes of the RFA.
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\43\ See 17 CFR part 40 Provisions Common to Registered
Entities, 75 FR 67282 (November 2, 2010); see also 47 FR 18618,
18619 (April 30, 1982) and 66 FR 45604, 45609 (August 29, 2001).
\44\ See, e.g., Core Principle 2 applicable to SEFs under
Section 733 of the Dodd-Frank Act and Core Principles 1-3 applicable
to SDRs under Section 728 of the Dodd-Frank Act.
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The Chairman, on behalf of the Commission, hereby certifies
pursuant to 5 U.S.C. 605(b) that these regulations do not have a
significant impact on a substantial number of small entities.
b. Paperwork Reduction Act
The Commission may not conduct or sponsor, and a registered entity
is not required to respond to, a collection of information unless it
displays a currently valid Office of Management and Budget (``OMB'')
control number. Amendments to Sec. Sec. 40.2, 40.3, 40.5, 40.6, and
40.10 impose new information collection requirements on registered
entities within the meaning of the Paperwork Reduction Act.\45\
Accordingly, the Commission requested and OMB assigned a control number
for the required collections of information. The Commission has
submitted this notice of final rulemaking along with supporting
documentation for OMB's review in accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11. The title for this collection of information is ``Part
40, Provisions Common to Registered Entities, OMB control number 3038-
D07.'' Many of the responses to this new collection of information are
mandatory.
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\45\ 44 U.S.C. 3501 et seq.
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The Commission protects proprietary information according to the
Freedom of Information Act and 17 CFR part 145, ``Commission Records
and Information.'' In addition, section 8(a)(1) of the Act strictly
prohibits the Commission, unless specifically authorized by the Act,
from making public ``data and information that would separately
disclose the business transactions or market positions of any person
and trade secrets or names of customers.'' The Commission also is
required to protect certain information contained in a government
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
1. Information Provided by Reporting Entities/Persons
These rules require DCMs, DCOs, and new registered entities, SEFs
and SDRs, to collect and submit to the Commission information
concerning new products, rules, and rule amendments pursuant to the
procedures outlined in Sec. Sec. 40.2, 40.3, 40.5, 40.6, and 40.10.
The Commission is adopting these information collection requirements in
order to give effect to various notice, rule certification, and rule
approval provisions of the Dodd-Frank Act, to expedite the staff's
review of newly-certified and submitted products, and to improve the
Commission's administration of the Act.
The Commission estimated the final information collection burdens
on registered entities below. These estimates account for the
following: (1) The number of respondents; (2) the number of responses
required of each respondent; (3) the average hours required to produce
each response; and (4) the aggregate annual reporting burden. The
Commission estimates that the effect of final Sec. Sec. 40.2, 40.3,
40.5, 40.6, 40.10, and 40.12 will be to increase the information
collection burden by approximately 202 hours per year per registered
entity, resulting mostly from the preparation of the concise
explanation and analysis to be filed with the Commission in connection
with the listing of products or the certification or approval of rules.
The Commission estimates that 70 registered entities will be required
to file their new product and rule submissions.
The Commission previously estimated the aggregate number of hours
that it expected registered entities to spend complying with part 40.
Upon further consideration, the Commission has determined to revise the
hours attributable to the new provisions of part 40. The newly-revised
and final regulations require each registered entity to spend an
estimated and additional 202 hours per year complying with part 40. Due
to a calculation error in the proposed rulemaking, the estimated
information collection burden in the proposed part 40 rulemaking was
quoted as 8,300 hours; the estimated information collection burden
should have been 22,664. Based on the 22,664 estimate, the estimated
average hours per registered entity would have been 323.771 hours.
Thus, under the Commission's current analysis and in light of the
regulatory changes below, each registered entity may expect to spend
approximately 121 fewer hours per year complying with part 40 than
would have been required under the Commission's proposal. The
substantial reduction in the estimated annual time that each registered
entity may spend complying with part 40 results from revisions to the
documentation requirements in Sec. Sec. 40.2 and 40.3, the elimination
of the documentation requirements in Sec. Sec. 40.5 and 40.6, the
elimination of the price certification requirements in Sec. Sec. 40.2,
40.3, 40.5, and 40.6, and the addition of the class certification
provisions for certain swaps in Sec. 40.2(d).
Final Sec. Sec. 40.2, 40.3, 40.5 and 40.6 require each registered
entity to comply with new certification and approval requirements when
seeking to implement new products, rules, and rule amendments,
including changes to product terms or conditions. However, in
consideration of comments concerning proposed Sec. Sec. 40.2, 40.3,
40.5 and 40.6, the Commission has determined to amend its proposal to
reduce the information collection burden on the registered entities.
Specifically, the Commission's final Sec. 40.2(d) streamlines the
product certification process for a significant percentage of swap
contracts by permitting a DCM or SEF to class certify, within a single
submission, one
[[Page 44790]]
or more swaps with similar, specified characteristics.
In addition, the Commission has determined to amend its proposal to
do the following: (1) Substantially revise Sec. 40.2 and Sec. 40.3 to
reduce the document collection burden for newly-submitted products, and
(2) eliminate the previously proposed documentation provisions in Sec.
40.5 and Sec. 40.6. The Commission has determined to maintain
Sec. Sec. 40.2(a)(3)(vii), 40.3(a)(10), 40.5(a)(6), and 40.6(a)(2)
requiring registered entities to state that they posted a copy of the
certification or request for approval on the registered entity's Web
site at the time of the filing with the Commission.
In light of the amendments to the Commission's final regulations,
noted above, the Commission revises its previous estimates as follows:
Estimated number of respondents: 70.
Annual responses by each respondent: 100.
Estimated average hours per response: 2.00.
Aggregate annual reporting burden hours (for all respondents):
14,000.
The Commission originally estimated that 45 registered entities
would be subject to the information collection requirements in
Sec. Sec. 40.2, 40.3, 40.5 and 40.6. The Commission based this
estimate upon the number of registered and exempt entities at the time
of proposal. The Commission has determined to increase its previous
estimate to account for an increased number of anticipated registered
entities, a few of which do not currently operate a registered or
exempt entity. The 70 registered entity figure, above, only minimally
alters the per registered entity estimate of time that will be required
to comply with part 40.
In addition, the Commission initially estimated 120 responses per
year from registered entities. In light of the revisions to the
documentation requirements and the ability of registered entities to
certify certain swap contracts as a class under Sec. 40.2(d), the
number of estimated submissions has been reduced. The Commission also
reduced the estimated hourly burden in light of revisions to the
documentation requirements in Sec. Sec. 40.2 and 40.3 and the
elimination of the documentation requirements in Sec. Sec. 40.5 and
40.6.
Sec. 40.10 requires SIDCOs to provide to the Commission 60 days
advance notice of proposed changes to rules, procedures or operations
that could materially affect the nature or level of risks presented by
the SIDCO.
Estimated number of respondents: 4.
Annual responses by each respondent: 2.
Estimated average hours per response: 5.
Aggregate annual reporting burden hours (for all respondents): 40.
Finally, Sec. 40.12 permits registered entities to provide notice
to the Commission and the Securities and Exchange Commission when
certifying, submitting for approval, or otherwise filing a proposal to
list a product (other than a product subject to the forthcoming
provisions of Sec. 1.8 of this chapter) having elements of both a
security and a contract for the sale of a commodity for future delivery
(or an option on such contract or an option on a commodity). The
Commission has determined to promulgate rules governing jurisdictional
disputes over novel swap products in a separate and forthcoming
rulemaking. Accordingly, it is adjusting its estimates to reflect that
fact that jurisdictional determinations concerning certain novel
product submissions will not be subject to the provisions of Sec.
40.12.
Estimated number of respondents: 8.
Annual responses by each respondent: 4.
Estimated average hours per response: 2.52.
Aggregate annual reporting burden hours (for all respondents):
80.64.
List of Subjects in 17 CFR Part 40
Commodity futures, Contract markets, Designation application,
Reporting and recordkeeping requirements, Swap execution facility, Swap
data repository, Systemically important derivatives clearing
organization, Rule approval, Rule certification, Review of certain
event contracts.
In light of the foregoing, and pursuant to authority in the Act,
and, in particular, Sections 3, 5, 5c(c) and 8a(5) of the Act, the
Commission hereby revises part 40 of Title 17 of the Code of Federal
Regulations to read as follows:
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
Sec.
40.1 Definitions.
40.2 Listing products for trading by certification.
40.3 Voluntary submission of new products for Commission review and
approval.
40.4 Amendments to terms or conditions of enumerated agricultural
products.
40.5 Voluntary submission of rules for Commission review and
approval.
40.6 Self-certification of rules.
40.7 Delegations.
40.8 Availability of public information.
40.9 [Reserved]
40.10 Special certification procedures for submission of rules by
systemically important derivatives clearing organizations.
40.11 Review of event contracts based upon certain excluded
commodities.
40.12 Staying of certification and tolling of review period pending
jurisdictional determination.
Appendix A to Part 40--Schedule of Fees
Appendix B to Part 40--[Reserved]
Appendix C to Part 40--[Reserved]
Appendix D to Part 40--Submission Cover Sheet and Instructions
Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 7a, 8 and 12, as amended by
Titles VII and VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Pub. L. 111-203, 124 Stat. 1376
(2010).
Sec. 40.1 Definitions.
As used in this part:
(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.
Business day and business hour are 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, instrument, swap or any
such commodity futures or option contract with respect to all future or
option expiries, listed on a designated contract market, a swap
execution facility or cleared by a registered derivatives clearing
organization, that has no open interest and in which no trading has
occurred for a period of twelve complete calendar months following a
certification to, or approval by, the Commission; provided, however,
that no contract or instrument under this paragraph (b)(1) initially
and originally certified to, 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, swap or other
agreement, contract, transaction or instrument of a dormant designated
contract market, dormant swap execution facility or a dormant
derivatives clearing organization; or
(3) Any commodity futures or option contract or other agreement,
contract, swap, transaction or instrument not otherwise dormant that a
designated contract market, a swap execution facility or a derivatives
clearing
[[Page 44791]]
organization self-declares through certification to be dormant.
(c) Dormant designated contract market means any designated
contract market on which no trading has occurred during the period of
twelve consecutive calendar months, preceding the first day of the most
recent calendar month; 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
consecutive 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 swap data repository means any registered swap data
repository on which no data has resided for a period of twelve
consecutive calendar months, preceding the most recent calendar month.
(f) Dormant swap execution facility means any swap execution
facility on which no trading has occurred for a period of twelve
consecutive calendar months, preceding the first day of the most recent
calendar month; provided, however, no swap execution facility shall be
considered to be dormant if its initial and original Commission order
of registration was issued within the preceding 36 consecutive calendar
months.
(g) Dormant rule means:
(1) Any registered entity rule which remains unimplemented for
twelve consecutive calendar months following a certification with, or
an approval by, the Commission; or
(2) Any rule or rule amendment of a dormant designated contract
market, dormant swap execution facility, dormant swap data repository
or dormant derivatives clearing organization.
(h) 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, swaps or transactions or the timely collection and payment
of funds in connection with clearing and settlement by a derivatives
clearing organization, 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, swaps 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 or clearing and settlement; and
(5) Any other circumstance which may have a severe, adverse effect
upon the functioning of a registered entity.
(i) Rule means any constitutional provision, article of
incorporation, bylaw, rule, regulation, resolution, interpretation,
stated policy, advisory, terms and conditions, trading protocol,
agreement or instrument corresponding thereto, including those that
authorize a response or establish standards for responding to a
specific emergency, and any amendment or addition thereto or repeal
thereof, made or issued by a registered entity or by the governing
board thereof or any committee thereof, in whatever form adopted.
(j) Terms and conditions means any definition of the trading unit
or the specific commodity underlying a contract for the future delivery
of a commodity or commodity option contract, description of the
payments to be exchanged under a swap, specification of cash settlement
or delivery standards and procedures, and establishment of buyers' and
sellers' rights and obligations under the swap or contract. Terms and
conditions include provisions relating to the following:
(1) For a contract for the purchase or sale of a commodity for
future delivery or an option on such a contract or an option on a
commodity (other than a swap):
(i) Quality and other standards that define the commodity or
instrument underlying the contract;
(ii) Quantity standards or other provisions related to contract
size;
(iii) Any applicable premiums or discounts for delivery of nonpar
products;
(iv) Trading hours, trading months and the listing of contracts;
(v) The pricing basis, minimum price fluctuations, and maximum
price fluctuations;
(vi) Any price limits, no cancellation ranges, trading halts, or
circuit breaker provisions, and procedures for the establishment of
daily settlement prices;
(vii) Position limits, position accountability standards, and
position reporting requirements;
(viii) Delivery points and locational price differentials;
(ix) Delivery standards and procedures, including fees related to
delivery or the delivery process; alternatives to delivery and
applicable penalties or sanctions for failure to perform;
(x) If cash settled; the definition, composition, calculation and
revision of the cash settlement price or index;
(xi) Payment or collection of commodity option premiums or margins;
(xii) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(xiii) Threshold prices for an option contract, the existence of
which is contingent upon those prices; and
(xiv) Any restrictions or requirements for exercising an option;
and
(2) For a swap:
(i) Identification of the major group, category, type or class in
which the swap falls (such as an interest rate, commodity, credit or
equity swap) and of any further sub-group, category, type or class that
further describes the swap;
(ii) Notional amounts, quantity standards, or other unit size
characteristics;
(iii) Any applicable premiums or discounts for delivery of nonpar
products;
(iv) Trading hours and the listing of swaps;
(v) Pricing basis for establishing the payment obligations under,
and mark-to-market value of, the swap including, as applicable, the
accrual start dates, termination or maturity dates, and, for each leg
of the swap, the initial cash flow components, spreads, and points, and
the relevant indexes, prices, rates, coupons, or other price reference
measures;
(vi) Any price limits, trading halts, or circuit breaker
provisions, and procedures for the establishment of daily settlement
prices;
(vii) Position limits, position accountability standards, and
position reporting requirements;
[[Page 44792]]
(viii) Payment and reset frequency, day count conventions, business
calendars, and accrual features;
(ix) If physical delivery applies, delivery standards and
procedures, including fees related to delivery or the delivery process,
alternatives to delivery and applicable penalties or sanctions for
failure to perform;
(x) If cash settled, the definition, composition, calculation and
revision of the cash settlement price, and the settlement currency;
(xi) Payment or collection of option premiums or margins;
(xii) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(xiii) Threshold prices for an option, the existence of which is
contingent upon those prices;
(xiv) Any restrictions or requirements for exercising an option;
and
(xv) Life cycle events.
Sec. 40.2 Listing products for trading by certification.
(a) A designated contract market or a swap 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 part or that remains dormant subsequent to being submitted
under this section or approved under Sec. 40.3 of this part. A
submission shall comply with the following conditions:
(1) The designated contract market or the swap execution facility
has filed its submission electronically in a format and manner
specified by the Secretary of the Commission with the Secretary of the
Commission;
(2) The Commission has received the submission by the open of
business on the business day preceding the product's listing; and
(3) The submission includes:
(i) A copy of the submission cover sheet in accordance with the
instructions in Appendix D to this part;
(ii) A copy of the product's rules, including all rules related to
its terms and conditions;
(iii) The intended listing date;
(iv) A certification by the designated contract market or the swap
execution facility that the product to be listed complies with the Act
and Commission regulations thereunder;
(v) A concise explanation and analysis of the product and its
compliance with applicable provisions of the Act, including core
principles, and the Commission's regulations thereunder. This
explanation and analysis shall either be accompanied by the
documentation relied upon to establish the basis for compliance with
applicable law, or incorporate information contained in such
documentation, with appropriate citations to data sources;
(vi) A certification that the registered entity posted a notice of
pending product certification with the Commission and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the registered entity's Web site. Information that the
registered entity seeks to keep confidential may be redacted from the
documents published on the registered entity's Web site but must be
republished consistent with any determination made pursuant to Sec.
40.8(c)(4);
(vii) A request for confidential treatment, if appropriate, as
permitted under Sec. 40.8.
(b) Additional information. If requested by Commission staff, a
registered entity shall provide any additional evidence, information or
data that demonstrates that the contract meets, initially or on a
continuing basis, the requirements of the Act or the Commission's
regulations or policies thereunder.
(c) Stay. The Commission may stay the listing of a contract
pursuant to paragraph (a) of this section during the pendency of
Commission proceedings for filing a false certification or during the
pendency of a petition to alter or amend the contract terms and
conditions pursuant to Section 8a(7) of the Act. The decision to stay
the listing of a contract in such circumstances shall not be delegable
to any employee of the Commission.
(d) Class certification of swaps. (1) A designated contract market
or swap execution facility may list or facilitate trading in any swap
or number of swaps based upon an ``excluded commodity,'' as defined in
Section 1a(19)(i) of the Act, not including any security, security
index, and currency other than the United States Dollar and a ``major
foreign currency,'' as defined in Sec. 15.03(a), or an ``excluded
commodity,'' as defined in Section 1a(19)(ii)-(iv) of the Act, provided
the designated contract market or swap execution facility certifies,
under Sec. 40.2(a)(1)-(2), Sec. 40.2(a)(3)(i), Sec. 40.2(a)(3)(iv),
and Sec. 40.2(a)(3)(vi), each of the following:
(i) That each particular swap within the certified class of swaps
is based upon an excluded commodity specified in Sec. 40.2(d)(1); and
(ii) That each particular swap within the certified class of swaps
is based upon an excluded commodity with an identical pricing source,
formula, procedure, and methodology for calculating reference prices
and payment obligations; and
(iii) That the pricing source, formula, procedure, and methodology
for calculating reference prices and payment obligations in each
particular swap within the certified class of swaps is identical to a
pricing source, formula, procedure, and methodology for calculating
reference prices and payment obligations in a product previously
submitted to the Commission and certified or approved pursuant to Sec.
40.2 or Sec. 40.3;
(iv) That each particular swap within the certified class of swaps
is based upon an excluded commodity involving an identical currency or
identical currencies.
(2) The Commission may in its discretion require a registered
entity to withdraw its certification under Sec. 40.2(d)(1) and to
submit each individual swap or certain individual swaps within the
submission for Commission review pursuant to Sec. 40.2 or Sec. 40.3
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, a
designated contract market, a swap execution facility, or a derivatives
clearing organization may request that the Commission approve a new or
dormant product prior to listing the product for trading or accepting
the product for clearing, or if a product was initially submitted under
Sec. 40.2 of this part or Sec. 39.5 of this chapter, subsequent to
listing the product for trading or accepting the product for clearing.
A submission requesting approval shall:
(1) Be filed electronically in a format and manner specified by the
Secretary of the Commission with the Secretary of the Commission;
(2) Include a copy of the submission cover sheet in accordance with
the instructions in Appendix D to this part;
(3) Include a copy of the rules that set forth the contract's terms
and conditions;
(4) Include an explanation and analysis of the product and its
compliance with applicable provisions of the Act, including core
principles, and the Commission's regulations thereunder. This
explanation and analysis shall either be accompanied by the
documentation relied upon to establish the basis for compliance with
the applicable law, or incorporate information contained in such
documentation, with appropriate citations to data sources;
[[Page 44793]]
(5) Describe any agreements or contracts entered into with other
parties that enable the registered entity to carry out its
responsibilities;
(6) Include the certifications required in Sec. 41.22 for product
approval of a commodity that is a security future or a security futures
product as defined in Sections 1a(44) or 1a(45) of the Act,
respectively;
(7) Include, if appropriate, a request for confidential treatment
as permitted under Sec. 40.8;
(8) Include the filing fee required under Appendix A to this part;
(9) Certify that the registered entity posted a notice of its
request for Commission approval of the new product and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the registered entity's Web site. Information that the
registered entity seeks to keep confidential may be redacted from the
documents published on the registered entity's Web site but must be
republished consistent with any determination made pursuant to Sec.
40.8(c)(4);
(10) Include, if requested by Commission staff, additional
evidence, information or data demonstrating that the contract meets,
initially or on a continuing basis, the requirements of the Act, or
other requirement for designation or registration under the Act, or the
Commission's regulations or policies thereunder. The registered entity
shall submit the requested information by the open of business on the
date that is two business days from the date of request by Commission
staff, or at the conclusion of such extended period agreed to by
Commission staff after timely receipt of a written request from the
registered entity.
(b) Standard for review and approval. The Commission shall approve
a new product unless the terms and conditions of the product violate
the Act or the Commission's regulations.
(c) Forty-five day review. All products submitted for Commission
approval under this paragraph shall be deemed approved by the
Commission 45 days after receipt by the Commission, or at the
conclusion of an extended period as provided under paragraph (d) of
this section, unless notified otherwise within the applicable period,
if:
(1) The submission complies with the requirements of paragraph (a)
of this section; and
(2) The submitting entity does not amend the terms or conditions of
the product or supplement the request for approval, except as requested
by the Commission or for correction of typographical errors,
renumbering or other non-substantive revisions, during that period. Any
voluntary, substantive amendment by the submitting entity will be
treated as a new submission under this section.
(d) Extension of time. The Commission may extend the 45 day review
period in paragraph (c) of this section for:
(1) An additional 45 days, if the product raises novel or complex
issues that require additional time to analyze, in which case the
Commission shall notify the registered entity within the initial 45 day
review period and shall briefly describe the nature of the specific
issues for which additional time for review is required; or
(2) Any extended review period to which the registered entity
agrees in writing.
(e) Notice of non-approval. The Commission at any time during its
review under this section may notify the registered entity that it will
not, or is unable to, approve the product. This notification will
briefly specify the nature of the issues raised and the specific
provision of the Act or the Commission's regulations, including the
form or content requirements of paragraph (a) of this section, that the
product violates, appears to violate or potentially violates but which
cannot be ascertained from the submission.
(f) Effect of non-approval. (1) Notification to a registered entity
under paragraph (e) of this section of the Commission's determination
not to approve a product does not prejudice the entity from
subsequently submitting a revised version of the product for Commission
approval or from submitting the product as initially proposed pursuant
to a supplemented submission.
(2) Notification to a registered entity under paragraph (e) of this
section of the Commission's refusal to approve a product shall be
presumptive evidence that the entity may not truthfully certify under
Sec. 40.2 that the same, or substantially the same, product does not
violate the Act or the Commission's regulations thereunder.
Sec. 40.4 Amendments to terms or conditions of enumerated
agricultural products.
(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(j), of
a contract for future delivery in an agricultural commodity enumerated
in Section 1a(9) of the Act, or of an option on such a contract or
commodity.
(b) The following rules or rule amendments are not material and
should not be submitted under this section:
(1) Changes that are enumerated in Sec. 40.6(d)(2) may be
implemented without prior approval or certification if implemented
pursuant to the notification procedures of Sec. 40.6(d);
(2) Changes that are enumerated in Sec. 40.6(d)(3)(ii) may be
implemented without prior approval or certification or notification as
permitted pursuant to Sec. 40.6(d)(3);
(3) Changes in no cancellation ranges and trading hours may be
implemented without prior approval if implemented pursuant to the
procedures of Sec. 40.6(a);
(4) Changes required to comply with a binding order of a court of
competent jurisdiction, or a rule, regulation or order of the
Commission or of another Federal regulatory authority, may be
implemented without prior approval if implemented pursuant to the
procedures of Sec. 40.6(a);or
(5) Any other rule:
(i) The text of which has been submitted for review at least ten
business days prior to its implementation and that has been labeled
``Non-Material Agricultural Rule Change;''
(ii) For which the designated contract market has provided an
explanation as to why it considers the rule ``non-material,'' and any
other information that may be beneficial to the Commission in analyzing
the merits of the entity's claim of non-materiality; and
(iii) With respect to which the Commission has not notified the
contract market during the review period that the rule appears to
require or does require prior approval under this section, may be
implemented without prior approval if implemented under the procedures
of Sec. 40.6(a).
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, a registered entity may request that the Commission approve a new
rule, rule amendment or dormant rule prior to implementation of the
rule, or if the request was initially submitted under Sec. Sec. 40.2
or 40.6 of this part, subsequent to implementation of the rule. A
request for approval shall:
(1) Be filed electronically in a format and manner specified by the
Secretary of the Commission with the Secretary of the Commission;
[[Page 44794]]
(2) Include a copy of the submission cover sheet in accordance with
the instructions in Appendix D to this part;
(3) Set forth the text of the rule or rule amendment (in the case
of a rule amendment, deletions and additions must be indicated);
(4) Describe the proposed effective date of the rule or rule
amendment and any action taken or anticipated to be taken to adopt the
proposed rule by the registered entity or by its governing board or by
any committee thereof, and cite the rules of the entity that authorize
the adoption of the proposed rule;
(5) Provide an explanation and analysis of the operation, purpose,
and effect of the proposed rule or rule amendment and its compliance
with applicable provisions of the Act, including core principles, and
the Commission's regulations thereunder, including, as applicable, a
description of the anticipated benefits to market participants or
others, any potential anticompetitive effects on market participants or
others, and how the rule fits into the registered entity's framework of
self-regulation;
(6) Certify that the registered entity posted a notice of pending
rule with the Commission and a copy of the submission, concurrent with
the filing of a submission with the Commission, on the registered
entity's Web site. Information which the registered entity seeks to
keep confidential may be redacted from the documents published on the
registered entity's Web site but must be republished consistent with
any determination made pursuant to Sec. 40.8(c)(4);
(7) Provide additional information which may be beneficial to the
Commission in analyzing the new rule or rule amendment. If a proposed
rule affects, directly or indirectly, the application of any other rule
of the registered entity, the pertinent text of any such rule must be
set forth and the anticipated effect described;
(8) Provide a brief explanation of any substantive opposing views
expressed to the registered entity by governing board or committee
members, members of the entity or market participants that were not
incorporated into the rule, or a statement that no such opposing views
were expressed;
(9) Identify any Commission regulation that the Commission may need
to amend, or sections of the Act or the Commission's regulations that
the Commission may need to interpret, in order to approve the new rule
or rule amendment. To the extent that such an amendment or
interpretation is necessary to accommodate a new rule or rule
amendment, the submission should include a reasoned analysis supporting
the amendment to the Commission's regulation or the interpretation;
(10) As appropriate, include a request for confidential treatment
as permitted under the procedures of Sec. 40.8.
(b) Standard for review and approval. The Commission shall approve
a new rule or rule amendment unless the rule or rule amendment is
inconsistent with the Act or the Commission's regulations.
(c) Forty-five day review. (1) All rules submitted for Commission
approval under paragraph (a) of this section shall be deemed approved
by the Commission under section 5c(c) of the Act 45 days after receipt
by the Commission, or at the conclusion of such extended period as
provided under paragraph (d) of this section, unless the registered
entity is notified otherwise within the applicable period, if:
(i) The submission complies with the requirements of paragraph (a)
of this section;
(ii) The registered entity does not amend the proposed rule or
supplement the submission, except as requested by the Commission,
during the pendency of the review period other than for correction of
typographical errors, renumbering or other non-substantive revisions.
Any amendment or supplementation not requested by the Commission will
be treated as the submission of a new filing under this section.
(2) The Commission shall commence the review period in paragraph
(c) of this section for a compliant submission under Sec. 40.4(b)(5)
ten business days after its receipt.
(d) Commencement and extension of time for review. The Commission
may further extend the review period in paragraph (c) of this section
for any approval request for:
(1) An additional 45 days, if the proposed rule raises novel or
complex issues that require additional time for review or is of major
economic significance, the submission is incomplete or the requestor
does not respond completely to Commission questions in a timely manner,
in which case the Commission shall notify the submitting registered
entity within the initial forty-five day review period and shall
briefly describe the nature of the specific issues for which additional
time for review shall be required; or
(2) Any period, beyond the additional 45 days provided in Sec.
40.5(d)(1), to which the registered entity agrees in writing.
(e) Notice of non-approval. Any time during its review under this
section, the Commission may notify the registered entity that it will
not, or is unable to, approve the new rule or rule amendment. This
notification will briefly specify the nature of the issues raised and
the specific provision of the Act or the Commission's regulations,
including the form or content requirements of this section, with which
the new rule or rule amendment is inconsistent or appears to be
inconsistent with the Act or the Commission's regulations.
(f) Effect of non-approval. (1) Notification to a registered entity
under paragraph (e) of this section does not prevent the registered
entity from subsequently submitting a revised version of the proposed
rule or rule amendment for Commission review and approval or from
submitting the new rule or rule amendment as initially proposed in a
supplemented submission; the revised submission will be reviewed
without prejudice.
(2) Notification to a registered entity under paragraph (e) of this
section of the Commission's determination not to approve a proposed
rule or rule amendment of a registered entity shall be presumptive
evidence that the entity may not truthfully certify that the same, or
substantially the same, proposed rule or rule amendment under Sec.
40.6(a) of this section.
(g) Expedited approval. Notwithstanding the provisions of paragraph
(c) of this section, changes to a proposed rule or a rule amendment,
including changes to terms and conditions of a product that are
consistent with the Act and Commission regulations and with standards
approved or established by the Commission may be approved by the
Commission at such time and under such conditions as the Commission
shall specify in the written notification, provided, however, that the
Commission may, at any time, alter or revoke the applicability of such
a notice to any particular product or rule amendment.
Sec. 40.6 Self-certification of rules.
(a) Required certification. A registered entity shall comply with
the following conditions prior to implementing any rule, other than a
rule delisting or withdrawing the certification of a product, that has
not obtained Commission approval under Sec. 40.5 of this part, that
remains dormant subsequent to being submitted under this section or
approved under Sec. 40.5 of this part, or that is submitted under
Sec. 40.10 of this part, except as otherwise provided by Sec.
40.10(a):
(1) The registered entity has filed its submission electronically
in a format and manner specified by the Secretary
[[Page 44795]]
of the Commission with the Secretary of the Commission.
(2) The registered entity has provided a certification that the
registered entity posted a notice of pending certification with the
Commission and a copy of the submission, concurrent with the filing of
a submission with the Commission, on the registered entity's Web site.
Information that the registered entity seeks to keep confidential may
be redacted from the documents published on the registered entity's Web
site but it must be republished consistent with any determination made
pursuant to Sec. 40.8(c)(4).
(3) The Commission has received the submission not later than the
open of business on the business day that is 10 business days prior to
the registered entity's implementation of the rule or rule amendment.
(4) The Commission has not stayed the submission pursuant to Sec.
40.6(c).
(5) The rule or rule amendment is not a rule or rule amendment of a
designated contract market that materially changes a term or condition
of a contract for future delivery of an agricultural commodity
enumerated in section 1a(4) of the Act or an option on such a contract
or commodity in a delivery month having open interest.
(6) Emergency rule certifications. (i) New rules or rule amendments
that establish standards for responding to an emergency must be
submitted pursuant to Sec. 40.6(a);
(ii) 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. Such rules shall be
subject to the certification and stay provisions of paragraphs (b) and
(c) of this section.
(7). The rule submission shall include:
(i) A copy of the submission cover sheet in accordance with the
instructions in Appendix D to this part (in the case of a rule or rule
amendment that responds to an emergency, ``Emergency Rule
Certification'' should be noted in the Description section of the
submission coversheet);
(ii) The text of the rule (in the case of a rule amendment,
deletions and additions must be indicated);
(iii) The date of intended implementation;
(iv) A certification by the registered entity that the rule
complies with the Act and the Commission's regulations thereunder;
(v) A concise explanation and analysis of the operation, purpose,
and effect of the proposed rule or rule amendment and its compliance
with applicable provisions of the Act, including core principles, and
the Commission's regulations thereunder;
(vi) A brief explanation of any substantive opposing views
expressed to the registered entity by governing board or committee
members, members of the entity or market participants, that were not
incorporated into the rule, or a statement that no such opposing views
were expressed;
(vii) As appropriate, a request for confidential treatment pursuant
to the procedures provided in Sec. 40.8; and
(8) The registered entity shall provide, if requested by Commission
staff, additional evidence, information or data that may be beneficial
to the Commission in conducting a due diligence assessment of the
filing and the registered entity's compliance with any of the
requirements of the Act or the Commission's regulations or policies
thereunder.
(b) Review by the Commission. The Commission shall have 10 business
days to review the new rule or rule amendment before the new rule or
rule amendment is deemed certified and can be made effective, unless
the Commission notifies the registered entity during the 10-business
day review period that it intends to issue a stay of the certification
under paragraph (c) of this section.
(c) Stay (1) Stay of certification of new rule or rule amendment.
The Commission may stay the certification of a new rule or rule
amendment submitted pursuant to paragraph (a) of this section by
issuing a notification informing the registered entity that the
Commission is staying the certification of the rule or rule amendment
on the grounds that the rule or rule amendment presents novel or
complex issues that require additional time to analyze, the rule or
rule amendment is accompanied by an inadequate explanation or the rule
or rule amendment is potentially inconsistent with the Act or the
Commission's regulations thereunder. The Commission will have an
additional 90 days from the date of the notification to conduct the
review. The decision to stay the certification of a rule in such
circumstances shall be delegable pursuant to Sec. 40.7 of this part.
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission Web
site. Comments from the public shall be submitted as specified in that
notice.
(3) Expiration of a stay of certification of new rule or rule
amendment. A new rule or rule amendment subject to a stay pursuant to
this paragraph shall become effective, pursuant to the certification,
at the expiration of the 90-day review period described in paragraph
(c)(1) of this section unless the Commission withdraws the stay prior
to that time, or the Commission notifies the registered entity during
the 90-day time period that it objects to the proposed certification on
the grounds that the proposed rule or rule amendment is inconsistent
with the Act or the Commission's regulations.
(4) Stay of effectiveness of rules or rule amendments already
implemented. The Commission may stay the effectiveness of an
implemented rule during the pendency of Commission proceedings for
filing a false certification or during the pendency of a petition to
alter or amend the rule pursuant to section 8a(7) of the Act. The
decision to stay the effectiveness of a rule in such circumstances
shall not be delegable to any employee of the Commission.
(d) Notification of rule amendments. Notwithstanding the rule
certification requirement of Section 5c(c)(1) of the Act and paragraph
(a) of this section, a registered entity may place the following rules
or rule amendments into effect without certification to the Commission
if the following conditions are met:
(1) The registered entity provides to the Commission at least
weekly a summary notice of all rule amendments made effective pursuant
to this paragraph during the preceding week. Such notice must be
labeled ``Weekly Notification of Rule Amendments'' and need not be
filed for weeks during which no such actions have been taken. One copy
of each such submission shall be furnished electronically in a format
and manner specified by the Secretary of the Commission; and
(2) The rule governs:
(i) Non-substantive revisions. Corrections of typographical errors,
renumbering, periodic routine updates to identifying information about
registered entities and other such non-substantive revisions of a
product's terms and conditions that have no effect on the economic
characteristics of the product;
(ii) Delivery standards set by third parties. Changes to grades or
standards of commodities deliverable on a product
[[Page 44796]]
that are established by an independent third party and that are
incorporated by reference as product terms, provided that the grade or
standard is not established, selected or calculated solely for use in
connection with futures or option trading and such changes do not
affect deliverable supplies or the pricing basis for the product;
(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 (d)(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
(d)(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;
(v) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(A) Total $1.00 or more per contract, and
(B) Are established by an independent third party or are unrelated
to delivery, trading, clearing or dispute resolution.
(vi) Survey lists. Changes to lists of banks, brokers, dealers, or
other entities that provide price or cash market information to an
independent third party and that are incorporated by reference as
product terms;
(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 weigh masters, assayers, and inspectors) at a delivery
location, pursuant to previously certified or Commission approved
standards or criteria;
(ix) Trading months. The initial listing of trading months, which
may qualify for implementation without notice pursuant to (d)(3)(ii)(H)
of this section, within the currently established cycle of trading
months; or
(x) Minimum tick. Reductions in the minimum price fluctuation (or
``tick'').
(3) Notification of rule amendments not required. Notwithstanding
the rule certification requirements of section 5c(c)(1) of the Act and
paragraph (a) of this section, a registered entity may place the
following rules or rule amendments into effect without certification or
notice to the Commission if the following conditions are met:
(i) The registered entity maintains documentation regarding all
changes to rules; and
(ii) The rule governs:
(A) Transfer of membership or ownership. Procedures and forms for
the purchase, sale or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership or dues or assessments;
(B) Administrative procedures. The organization and administrative
procedures of a registered entity governing bodies such as a Board of
Directors, Officers and Committees, but not voting requirements, Board
of Directors or Committee composition requirements or procedures,
decision making procedures, use or disclosure of material non-public
information gained through the performance of official duties, or
requirements relating to conflicts of interest;
(C) Administration. The routine, daily administration, direction
and control of employees, requirements relating to gratuity and similar
funds, but not guaranty, reserves, or similar funds; declaration of
holidays, and changes to facilities housing the market, trading floor
or trading area;
(D) Standards of decorum. Standards of decorum or attire or similar
provisions relating to admission to the floor, badges, or visitors, but
not the establishment of penalties for violations of such rules; and
(E) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(1) Are less than $1.00; or
(2) Relate to matters such as dues, badges, telecommunication
services, booth space, real time quotations, historical information,
publications, software licenses or other matters that are
administrative in nature.
(F) Securities indexes. Routine changes to the composition,
computation or method of security selection of an index that is
referenced and defined in the product's rules, and which is made by an
independent third party.
(G) Option contract terms. For registered entities that are in
compliance with the daily reporting requirements of Sec. 16.01 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 of this chapter,
the initial listing of trading months which are within the currently
established cycle of trading months.
Sec. 40.7 Delegations.
(a) Procedural matters. (1) The Commission hereby delegates, until
it orders otherwise, to the Director of the Division of Clearing and
Intermediary Oversight and, separately, to the Director of the Division
of Market Oversight, to be exercised by either Director, as
appropriate, or by such employees of the Commission that either
Director may designate from time to time, the following authorities,
with the concurrence of the General Counsel or the General Counsel's
delegate:
(i) To request, pursuant to Sec. 40.3(c)(2) or Sec.
40.5(c)(1)(ii) of this part, that the registered entity requesting
approval amend the proposed product, rule or rule amendment, or
supplement the submission to the Commission;
(ii) To notify the registered entity, pursuant to Sec. 40.3(e) or
Sec. 40.5(e) of this part, that the Commission is not approving, or is
unable to approve, the proposed product, rule or rule amendment;
(iii) To make all determinations reserved to the Commission in
Sec. 40.10.
(2) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Clearing and Intermediary Oversight
and, separately, to the Director of the Division of Market Oversight,
to be exercised by either Director, as appropriate, or by such
employees of the Commission that either Director may designate from
time to time, the following authorities, after consultation with the
Office of General Counsel or the General Counsel's delegate to notify a
registered entity:
(i) Pursuant to Sec. 40.3(d) of this part, that the time for
review of the submission has been extended because the product raises
novel or complex issues that require additional time for review;
(ii) Pursuant to Sec. 40.5(d) of this part, that the time for
review of the submission has been extended because the proposed rule or
rule amendment raises novel or complex issues that
[[Page 44797]]
require additional time for review or is of major economic
significance;
(iii) Pursuant to Sec. 40.6(c) of this part, that the proposed
rule or rule amendment has been stayed because there exist novel or
complex issues that require additional time to analyze, or there is
potential inconsistency with the Act or the Commission's regulations.
(3) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Clearing and Intermediary Oversight
and, separately, to the Director of the Division of Market Oversight,
to be exercised by either Director, as appropriate, or by such
employees of the Commission that either Director may designate from
time to time, the authority to notify a registered entity, pursuant to
Sec. 40.3(d) or Sec. 40.5(d) of this part, that the time for review
of the submission has been extended, or that a rule certified pursuant
to Sec. 40.6(c) has been stayed, because the submission is incomplete
or provides an inadequate explanation.
(4) Emergency rules. The Commission hereby delegates to the
Director of the Division of Market Oversight and, separately, to the
Director of the Division of Clearing and Intermediary Oversight, to be
exercised by either Director, as appropriate, or by such other employee
or employees of the Commission that either Director may designate from
time to time, authority to receive notification of emergency rules
under Sec. 40.6(a)(6)(ii) of this part.
(5) The Commission hereby delegates to the Director of the Division
of Market Oversight, to be exercised by the Director or by such
employees of the Commission that the Director may designate from time
to time, with the concurrence of the General Counsel or the General
Counsel's delegate, the authority to determine whether a rule change
submitted by a designated contract market for a materiality
determination under Sec. 40.4(b)(5) of this part is not material (in
which case it may be reported pursuant to the provisions of Sec.
40.6(d) of this part), or is material, in which case he or she shall
notify the registered entity that the rule change must be submitted for
the Commission's prior approval.
(b) Approval authority. The Commission hereby delegates, until it
orders otherwise, to the Director of the Division of Clearing and
Intermediary Oversight and, separately, to the Director of the Division
of Market Oversight, to be exercised by either Director, as
appropriate, or by such employees of the Commission that either
Director may designate from time to time, with the concurrence of the
General Counsel or the General Counsel's delegate, the authority to
approve, pursuant to section 5c(c)(3) of the Act and Sec. 40.5 of this
part, rules or rule amendments of a registered entity that:
(1) Relate to, but do not substantially change, the quantity,
quality, or other delivery specifications, procedures, or obligations
for delivery, cash settlement, or exercise under an agreement, contract
or transaction approved for trading by the Commission; daily settlement
prices; clearing position limits; requirements or procedures for
governance of a registered entity; procedures for transfer trades;
trading hours; minimum price fluctuations; and maximum price limit and
trading suspension provisions;
(2) Reflect routine modifications that are required or anticipated
by the terms of the rule of a registered entity;
(3) Establish or amend speculative limits or position
accountability provisions that are in compliance with the requirements
of the Act and the Commission's regulations;
(4) Are in substance the same as a rule of the same or another
registered entity which has been approved previously by the Commission
pursuant to section 5c(c)(3) of the Act;
(5) Are consistent with a specific, stated policy or interpretation
of the Commission; or
(6) Relate to the listing of additional trading months of approved
contracts.
(c) Notwithstanding the provisions of this section, the Director of
the Division of Clearing and Intermediary Oversight and, separately,
the Director of the Division of Market Oversight may submit to the
Commission for its consideration any matter that has been delegated
pursuant to this section.
(d) Nothing in this section shall be deemed to prohibit the
Commission, at its election, from exercising any of the authority
delegated pursuant to this section.
Sec. 40.8 Availability of public information.
(a) The following sections of all applications to become a
designated contract market, swap execution facility, derivatives
clearing organization, or swap data repository shall be made publicly
available: Transmittal letter and first page of the application cover
sheet, proposed rules, narrative summary of the applicant's proposed
activities and regulatory compliance chart, documents establishing the
applicant's legal status, documents setting forth the applicant's
corporate and governance structure and any other part of the
application not covered by a request for confidential treatment.
(b) The following submissions provided by an electronic trading
facility on which significant price discovery contracts are traded or
executed will be public: rulebook, the facility's regulatory compliance
chart, documents establishing the facility's legal status, documents
setting forth the facility's governance structure, and any other parts
of the submissions not covered by a request for confidential treatment
(Sec. 40.8(b) will be removed on July 20, 2012).
(c) A registered entity's filing of new products pursuant to the
self-certification procedures of Sec. 40.2 of this part, new products
for Commission review and approval pursuant to Sec. 40.3 of this part,
new rules and rule amendments for Commission review and approval
pursuant to Sec. 40.4 or Sec. 40.5 of this part, and new rules and
rule amendments pursuant to the self-certification procedures of Sec.
40.6 and Sec. 40.10 of this part shall be treated as public
information unless accompanied by a request for confidential treatment.
If a registered entity files a request for confidential treatment, the
following procedures shall apply:
(1) A detailed written justification of the confidential treatment
request must be filed simultaneously with the request for confidential
treatment. The form and content of the detailed written justification
shall be governed by Sec. 145.9 of this chapter;
(2) All material for which confidential treatment is requested must
be segregated in an Appendix to the submission;
(3) The submission itself must indicate that material has been
segregated and, as appropriate, an additional redacted version
provided;
(4) Commission staff may make an initial determination with respect
to the request for confidential treatment without regard to whether a
request for the information has been sought under the Freedom of
Information Act;
(5) All requests for confidential treatment shall be subject to the
process provided by Sec. 145.9 of this chapter.
(6) A submitter of information under this part may appeal an
adverse decision by staff to the Commission's Office of General
Counsel. The form and content of such appeal shall be governed by Sec.
145.9(g) of this chapter.
(7) The grant of any part of a request for confidential treatment
under this section may be reconsidered if a subsequent request under
the Freedom of Information Act is made for the information.
(d) Commission staff will not consider confidential treatment
requests for information that is required to be made
[[Page 44798]]
public under the Act. The terms and conditions of a product submitted
to the Commission pursuant to Sec. 40.2, Sec. 40.3, Sec. 40.5 and
Sec. 40.6 of this part shall be made publicly available at the time of
submission.
Sec. 40.9 [Reserved]
Sec. 40.10 Special certification procedures for submission of rules
by systemically important derivatives clearing organizations.
(a) Advance notice. A registered derivatives clearing organization
that has been designated by the Financial Stability Oversight Council
as a systemically important derivatives clearing organization shall
provide notice to the Commission not less than 60 days in advance of
any proposed change to its rules, procedures, or operations that could
materially affect the nature or level of risks presented by the
systemically important derivatives clearing organization. A notice
submitted under this section shall be subject to the filing
requirements of Sec. 40.6(a)(1) and the Web site publication
requirements of Sec. 40.6(a)(2).
(1) The notice of a proposed change shall provide the information
required to be submitted under Sec. 40.6(a)(7) and shall specifically
describe:
(i) The nature of the change and expected effects on risks to the
systemically important derivatives clearing organization, its clearing
members, or the market; and
(ii) How the systemically important derivatives clearing
organization plans to manage any identified risks.
(2) Concurrent with providing the Commission with the advance
notice or any request or other information related to the advance
notice, the systemically important derivatives clearing organization
shall provide the Board of Governors of the Federal Reserve System with
a copy of such notice, request or other information in the same format
and manner as required by the Board of Governors for those designated
financial market utilities for which it is the Supervisory Agency
pursuant to section 803(8) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
(3) The systemically important derivatives clearing organization
may request that the Commission expedite the review on the grounds that
the change would materially decrease risk. The Commission, in its
discretion, may expedite the review and, pursuant to paragraph (g) of
this section, notify the systemically important derivatives clearing
organization in less than 60 days from the date the Commission receives
the notice of proposed change in writing that it does not object to the
proposed change and authorizes implementation of the change on an
earlier date.
(b) Materiality. The term ``materially affect the nature or level
of risks presented,'' when used to qualify determinations on a change
to rules, procedures, or operations of a systemically important
derivatives clearing organization, means matters as to which there is a
reasonable possibility that the change could affect the performance of
essential clearing and settlement functions or the overall nature or
level of risk presented by the systemically important derivatives
clearing organization. Such changes may include, but are not limited
to, changes that materially affect financial resources, participant and
product eligibility, risk management (including matters relating to
margin and stress testing), daily or intraday settlement procedures,
default procedures, system safeguards (business continuity and disaster
recovery), and governance. If a systemically important derivatives
clearing organization determines that a proposed change is not material
and therefore does not file an advance notice under this Sec. 40.10,
but the Commission determines that the change is material, the
Commission may require the systemically important derivatives clearing
organization to withdraw the proposed change and provide notice
pursuant to this section.
(c) Further information. The Commission may require the
systemically important derivatives clearing organization to provide any
further information necessary to assess the effect the proposed change
would have on the nature or level of risks associated with the
systemically important derivatives clearing organization's payment,
clearing, or settlement activities and the sufficiency of any proposed
risk management techniques.
(d) Notice of objection. A systemically important derivatives
clearing organization shall not implement a change to which the
Commission has an objection on the grounds that the proposed change is
not consistent with the Act or the Commission's regulations, or the
purposes of the Dodd-Frank Act or any applicable rules, orders, or
standards prescribed under Section 805(a) of the Dodd-Frank Act. The
Commission will notify the systemically important derivatives clearing
organization in writing of any objection regarding the proposed change
within 60 days from the later of:
(1) The date that the notice of the proposed change was received;
or
(2) The date the Commission received any further information it had
requested for consideration of the notice.
(e) Implementation of change absent Commission objection. A
systemically important derivatives clearing organization may implement
a change if it has not received an objection to the proposed change
within 60 days from the later of:
(1) The date that the Commission received the notice of proposed
change; or
(2) The date the Commission received any further information it had
requested for consideration of the notice.
(f) Extended review. The Commission may, during the 60-day review
period, extend the review period if the proposed change raises novel or
complex issues. A notification by the Commission pursuant to this
paragraph will extend the review for an additional 60 days. Any
extension under this paragraph will extend the time periods under
paragraphs (d) and (e) of this section for an additional 60 days.
(g) Change allowed earlier if notified of no objection. A
systemically important derivatives clearing organization may implement
a change in less than 60 days from the date the Commission receives the
notice of proposed change or the date the Commission receives any
further information it has requested, if the Commission notifies the
systemically important derivatives clearing organization in writing
that it does not object to the proposed change and authorizes
implementation of the change on an earlier date, subject to any
conditions imposed by the Commission.
(h) Emergency changes. A systemically important derivatives
clearing organization may implement a change that would otherwise
require advance notice under this section if it determines that an
emergency exists and immediate implementation of the change is
necessary for the systemically important derivatives clearing
organization to continue to provide its services in a safe and sound
manner.
(1) The systemically important derivatives clearing organization
shall provide notice of any such emergency change to the Commission as
soon as practicable, which shall be no later than 24 hours after
implementation of the change.
(2) The notice of an emergency change shall:
(i) Provide the information required for advance notice as set
forth in paragraph (a) of this section;
(ii) Describe the nature of the emergency; and
[[Page 44799]]
(iii) Describe the reason the change was necessary for the
systemically important derivatives clearing organization to continue to
provide its services in a safe and sound manner.
(3) The Commission may require modification or rescission of the
emergency change if it finds that the change is not consistent with the
Act or the Commission's regulations, or the purposes of the Dodd-Frank
Act or any applicable rules, orders, or standards prescribed under
Section 805(a) of the Dodd-Frank Act.
Sec. 40.11 Review of event contracts based upon certain excluded
commodities.
(a) Prohibition. A registered entity shall not list for trading or
accept for clearing on or through the registered entity any of the
following:
(1) An agreement, contract, transaction, or swap based upon an
excluded commodity, as defined in Section 1a(19)(iv) of the Act, that
involves, relates to, or references terrorism, assassination, war,
gaming, or an activity that is unlawful under any State or Federal law;
or
(2) An agreement, contract, transaction, or swap based upon an
excluded commodity, as defined in Section 1a(19)(iv) of the Act, which
involves, relates to, or references an activity that is similar to an
activity enumerated in Sec. 40.11(a)(1) of this part, and that the
Commission determines, by rule or regulation, to be contrary to the
public interest.
(b) [Reserved.]
(c) 90-day review and approval of certain event contracts. The
Commission may determine, based upon a review of the terms or
conditions of a submission under Sec. 40.2 or Sec. 40.3, that an
agreement, contract, transaction, or swap based on an excluded
commodity, as defined in Section 1a(19)(iv) of the Act, which may
involve, relate to, or reference an activity enumerated in Sec.
40.11(a)(1) or Sec. 40.11(a)(2), be subject to a 90-day review. The
90-day review shall commence from the date the Commission notifies the
registered entity of a potential violation of Sec. 40.11(a).
(1) The Commission shall request that a registered entity suspend
the listing or trading of any agreement, contract, transaction, or swap
based on an excluded commodity, as defined in Section 1a(19)(iv) of the
Act, which may involve, relate to, or reference an activity enumerated
in Sec. 40.11(a)(1) or Sec. 40.11(a)(2), during the Commission's 90-
day review period. The Commission shall post on the Web site a
notification of the intent to carry out a 90-day review.
(2) Final determination. The Commission shall issue an order
approving or disapproving an agreement, contract, transaction, or swap
that is subject to a 90-day review under Sec. 40.11(c) not later than
90 days subsequent to the date that the Commission commences review, or
if applicable, at the conclusion of such extended period agreed to or
requested by the registered entity.
Sec. 40.12 Staying of certification and tolling of review period
pending jurisdictional determination.
(a) Notice of novel derivative products. (1) A registered entity
certifying, submitting for approval, or otherwise filing a proposal to
list, trade, or clear a novel derivative product (other than a product
subject to the provisions of Sec. 1.8 of this chapter) having elements
of both a security and a contract for the sale of a commodity for
future delivery (or an option on such contract or an option on a
commodity) may provide notice of its proposal to the Commission and the
Securities and Exchange Commission with a statement that written notice
has been provided to both agencies through an appropriate means
provided in each Commission's regulations.
(2) If concurrent notice is not provided pursuant to Sec.
40.12(a)(1), the Commission shall notify the Securities and Exchange
Commission of the registered entity's submission of a novel derivative
product described in Sec. 40.12(a)(1) and accompany such notice with a
copy of the submission. The Commission shall determine whether a
particular submission is a novel derivative product requiring notice to
the Securities and Exchange Commission not later than five business
days subsequent to the date that the registered entity submits the
product for Commission review.
(b) Tolling of review period. Upon receipt of a request for a
jurisdictional determination, pursuant to Section 718(a)(2) of the
Dodd-Frank Act, by the Commission or the Securities and Exchange
Commission, the product certification shall be stayed or the approval
review period shall be tolled until a final determination order is
issued.
(1) The Commission will provide the registered entity with a
written notice of stay pending issuance of a final determination order
by the Commission or the Securities and Exchange Commission.
(2) The stay shall be withdrawn or the approval review period shall
resume upon the Commission's or the Securities and Exchange
Commission's issuance of a final determination order finding that the
Commission has jurisdiction over the submission.
(3) Determination order. A final determination, for purposes of
Sec. 40.12(b) of this part, shall be a determination order issued by
the Commission or the Securities and Exchange Commission pursuant to
Section 718(a)(3) of the Dodd-Frank Act.
(c) Judicial review of determination order. The filing of a
petition by a complaining Commission, pursuant to Section 718(b) of the
Dodd-Frank Act, shall operate as a stay of the agency order.
(1) The stay shall remain in effect until the date on which the
United States Court of Appeals for the District of Columbia Circuit
issues a final determination pursuant to Section 718(b)(4) of the Dodd-
Frank Act, or until such date that there is a final disposition of an
appeal of that determination.
(2) The submission review period shall resume upon issuance of a
final determination, as described in Sec. 40.12(c)(1), that the
Commission has jurisdiction over the submission.
Appendix A to Part 40--Schedule of Fees
(a) Applications for product approval. Each application for
product approval under Sec. 40.3 must be accompanied by a check or
money order made payable to the Commodity Futures Trading Commission
in an amount to be determined annually by the Commission and
published in the Federal Register.
(b) Checks and applications should be sent to the attention of
the Office of the Secretariat, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC
20581. No checks or money orders may be accepted by personnel other
than those in the Office of the Secretariat.
(c) Failure to submit the fee with an application for product
approval will result in return of the application. Fees will not be
returned after receipt.
Appendix B to Part 40--[Reserved]
Appendix C to Part 40--[Reserved]
Appendix D to Part 40--Submission Cover Sheet and Instructions
(a) A properly completed submission cover sheet shall accompany
all rule and product submissions submitted electronically by a
registered entity in a format and manner specified by the Secretary
of the Commission to the Secretary of the Commission. A properly
completed submission cover sheet shall include all of the following:
1. Identifier Code (optional)--A registered entity Identifier
Code at the top of the cover sheet, if applicable. Such codes are
commonly generated by registered entities to
[[Page 44800]]
provide an identifier that is unique to each filing (e.g., NYMEX
Submission 03-116).
2. Date--The date of the filing.
3. Organization--The name of the organization filing the
submission (e.g., CBOT).
4. Filing as a--Check in the appropriate box indicating that the
rule or product is being submitted by a designated contract market
(DCM), derivatives clearing organization (DCO), swap execution
facility (SEF), or swap data repository (SDR), electronic trading
facility with a significant price discovery contract (the term will
be removed on July 20, 2012).\1\
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\1\ Even though ECM-SPDC was eliminated by the Dodd-Frank Act,
the Commission will retain references to this entity in the cover
sheet since ECMs may be allowed to operate until July 20, 2012,
pursuant to grandfather relief issued by the Commission. See 75 FR
56513 (Sept. 16, 2010).
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5. Type of Filing--An indication as to whether the filing is a
new rule, rule amendment or new product. The registered entity
should check the appropriate box to indicate the applicable category
under that heading.
6. Rule Numbers--For rule filings, the rule number(s) being
adopted or modified in the case of rule amendment filings.
7. Description--For rule or rule amendment filings, a
description of the new rule or rule amendment, including a
discussion of its expected impact on the registered entity, market
participants, and the overall market. The narrative should describe
the substance of the submission with enough specificity to
characterize all material aspects of the filing.
(b) Other Requirements--A submission shall comply with all
applicable filing requirements for proposed rules, rule amendments,
or products. The filing of the submission cover sheet does not
obviate the registered entity's responsibility to comply with
applicable filing requirements (e.g., rules submitted for Commission
approval under Sec. 40.5 must be accompanied by an explanation of
the purpose and effect of the proposed rule along with a description
of any substantive opposing views).
(c) Checking the box marked ``confidential treatment requested''
on the Submission Cover Sheet does not obviate the submitter's
responsibility to comply with all applicable requirements for
requesting confidential treatment in Sec. 40.8 and, where
appropriate, Sec. 145.9 of this chapter, and will not substitute
for notice or full compliance with such requirements.
Issued in Washington, DC, on July 19, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Provisions Common to Registered Entities--Commission
Voting Summary and Statements of Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Dunn,
Sommers, Chilton and O'Malia voted in the affirmative; no
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rulemaking to establish a process for the
certification and approval of new rules and rule amendments for
designated contract markets, derivatives clearing organizations, as
well as new registrants, swap execution facilities and swap data
repositories. The Dodd-Frank Wall Street Reform and Consumer
Protection Act establishes enhanced CFTC review and certification of
new rules and amendments. Today's final regulations provide
important procedural guidance to registered entities on how to
comply with Congress's mandate for the Commission's review of new
rules and rule amendments.
[FR Doc. 2011-18661 Filed 7-26-11; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: July 27, 2011