e9-6044

FR Doc E9-6044[Federal Register: March 23, 2009 (Volume 74, Number 54)]

[Rules and Regulations]

[Page 12177-12203]

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

[DOCID:fr23mr09-12]

[[Page 12177]]

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Part II

Commodity Futures Trading Commission

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17 CFR Parts 15, 16, 17 et al.

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Significant Price Discovery Contracts on Exempt Commercial Markets;

Final Rule

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 15, 16, 17, 18, 19, 21, 36, 40

RIN 3038-AC76

Significant Price Discovery Contracts on Exempt Commercial

Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Final Rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

``Commission'') is promulgating final rules to implement those

provisions of the CFTC Reauthorization Act of 2008 (``Reauthorization

Act'') \1\ relating to exempt commercial markets (``ECMs'') on which

significant price discovery contracts (``SPDCs'') are traded or

executed. In addition to promulgating regulations mandated by the

Reauthorization Act, the Commission also is amending existing

regulations applicable to registered entities in order to clarify that

such regulations are now applicable to ECMs with SPDCs.

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\1\ Incorporated as Title XIII of the Food, Conservation and

Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

2008).

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DATES: Effective Date: April 22, 2009.

FOR FURTHER INFORMATION CONTACT: Susan Nathan, Senior Special Counsel,

Division of Market Oversight, Commodity Futures Trading Commission,

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

Telephone: (202) 418-5133. E-mail: [email protected]

SUPPLEMENTARY INFORMATION:

I. Background

A. Overview

The Commodity Futures Modernization Act of 2000 (``CFMA'') amended

the Commodity Exchange Act (``CEA'' or the ``Act'') \2\ to replace the

Act's ``one-size-fits-all'' supervisory framework for futures trading

with a multi-tiered approach to oversight of derivatives markets. The

CFMA applies different levels of oversight to markets based primarily

on the nature of the underlying commodity being traded, the

participants who are trading, and the manner in which trading is

conducted. In general, the more sophisticated the traders or commercial

participants, or the less susceptible a commodity is to manipulation or

other market or trading abuses, the less regulatory oversight is

required under the CFMA. In addition to creating three new categories

of trading facility,\3\ the CFMA created a number of exemptions and

exclusions from regulation for certain swaps and other derivative

products traded either bilaterally or on electronic trading facilities-

including an exemption for transactions in exempt commodities traded on

electronic trading facilities, also known as exempt commercial markets

(``ECMs'').\4\

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\2\ 7 U.S.C. 1 et seq.

\3\ Designated Contract Markets (``DCMs'') are open to all

participants and may offer all types of commodities; Derivatives

Transaction Execution Facilities (``DTEFs'') generally are open only

to sophisticated participants and are limited as to the types of

commodities that may be traded; and Exempt Boards of Trade

(``EBOTs'') may trade only excluded commodities and are open only to

eligible contract participants and are subject to no regulatory

oversight, exempt from most provisions of the CEA and not registered

with or designated by the CFTC.

\4\ The CFMA established the ECM exemption in section 2(h)(3) of

the CEA, 7 U.S.C. 2(h)(3).

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Since the adoption of the CFMA, ECMs have evolved such that some no

longer are simple trading platforms with low trading volumes relative

to DCMs. Also over time, these facilities began to offer ``look-alike''

contracts that are linked to the settlement prices of their exchange-

traded counterparts, and in at least one case these look-alike

contracts began to garner significant volumes. More recently, several

active ECMs began to offer the option of centralized clearing for their

contracts--an option which became widely utilized by their customers to

manage counterparty risk. This evolution, particularly the linkage of

ECM contract settlement prices to DCM futures contract settlement

prices, began to raise questions about whether ECM trading activity

could impact trading on DCMs and whether the CFTC had adequate

authority to address that impact and protect markets from manipulation

and abuse.

The Commission responded to these changing markets in a variety of

ways. Its Office of the Chief Economist (``OCE'') conducted a study of

the relationship between the natural gas contracts that trade on the

New York Mercantile Exchange (``NYMEX''), a DCM, and the

InterContinental Exchange (``ICE''), an ECM. Concurrently, the

Commission's Division of Market Oversight issued a series of special

calls \5\ for information related to ICE's cleared natural gas swap

contracts that are cash-settled based on the settlement price of the

NYMEX physical delivery natural gas contract. Following the OCE study

and the special calls, the Commission held a public hearing in

September 2007 to further explore a number of issues, including the

adequacy of the CFMA's regulatory approach; the similarities and

differences between ECMs and DCMs; the associated regulatory risks of

each market category; the types of regulatory changes that might be

appropriate to address identified risks; and the impact that regulatory

or legislative changes might have on the U.S. futures industry and the

global competitiveness of the U.S. financial industry. Based on

information developed as a result of these efforts, the Commission

published its October 2007 ``Report on the Oversight of Trading on

Regulated Futures Exchanges and Exempt Commercial Markets'' (``ECM

Report''). The ECM Report, which was provided to the Commission's

Congressional oversight committees, recommended, among other things,

that the CEA be amended to grant the CFTC additional authority over ECM

contracts serving a significant price discovery function and that

certain self-regulatory responsibilities be assigned to ECMs offering

such contracts.

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\5\ Section 2(h)(5)(B)(iii) of the Act, 7 U.S.C.

2(h)(5)(B)(iii), requires that an ECM relying on the exemption

provided in section 2(h)(3) must, upon a special call by the

Commission, provide such information related to its business as the

Commission may determine appropriate to enforce the antifraud

provisions of the Act, to evaluate a systemic market event, or to

obtain information requested by a Federal financial regulatory

authority in connection with its regulatory or supervisory

responsibilities.

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The Reauthorization Act's provisions regarding ECMs were based

largely on the Commission's recommendations for improving oversight of

ECMs whose contracts perform a significant price discovery function.

The legislation significantly expanded the CFTC's regulatory authority

over ECMs by adding a new section 2(h)(7) to the CEA establishing

criteria for the Commission to consider in determining whether a

particular ECM contract performs a significant price discovery function

and providing for greater regulation of SPDCs traded on ECMs. In

addition to extending the CFTC's regulatory oversight to the trading of

SPDCs, the Reauthorization Act requires ECMs to adopt position limit

and accountability level provisions for SPDCs; authorizes the

Commission to require the reporting of large trader positions in SPDCs;

and establishes core principles governing ECMs with SPDCs. The core

principles applicable to ECMs with SPDCs are derived from selected DCM

core principles and designation criteria set forth in the CEA, and

Congress intended that they be construed in a like manner.\6\

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\6\ Joint Explanatory Statement of the Committee of Conference,

H.R. Rep. No. 110-627, 110 Cong., 2d Sess. at 985 (2008)

(``Conference Committee Report''). The core principles and

designation criteria for DCMs are contained in section 5 of the CEA,

7 U.S.C. 7.

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The legislation directed the Commission to issue rules implementing

the provisions of new section 2(h)(7) and to include in such rules the

conditions under which an ECM will have the responsibility to notify

the Commission that an agreement, contract or transaction conducted in

reliance on section 2(h)(3) of the Act may perform a significant price

discovery function. The Reauthorization Act mandated that the

``significant price discovery standards'' rules be proposed not later

than 180 days after the date of enactment of the Reauthorization Act,

and that the Commission issue final rules not later than 270 days after

the date of implementation of that Act.\7\

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\7\ Public Law 110-246, sec. 13204(b)(1).

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Consistent with Congress' directive, the Commission on December 12,

2008 issued a notice of proposed rulemaking (``NPRM'' or ``proposing

release'') to substantially amend rule 36.3 \8\ of the Commission's

rules applicable to ECMs to implement the broadened regulatory

authority conferred by section 2(h)(7) of the CEA over ECMs with SPDCs.

In addition, the proposed rules implicated parts 16 through 21 (market,

transaction and large trader reporting rules) and part 40 (provisions

common to contract markets, derivatives transaction execution

facilities and derivatives clearing organizations). In promulgating

these final rules, the Commission recognizes that these are rapidly

evolving markets. We are mindful that, as we carry out Congressional

directives in the present context, we continue to maintain careful

scrutiny of the marketplace with regard to new products and trading

platforms in the future. As markets evolve, we acknowledge our

obligation to continue to adapt our regulatory oversight to protect

consumers and ensure the integrity of the core risk management and

price discovery functions of our markets.

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\8\ Part 36 of the Commission's rules contains the provisions

that apply to exempt markets regardless of whether the markets are a

significant source for price discovery. Rule 36.3 imposes a number

of requirements on ECMs, including required notification of intent

to rely on the exemption in section 2(h)(3) of the Act; initial and

ongoing information submission requirements; prohibited

representations; required price discovery notification; and price

dissemination requirements.

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B. The Proposed Rules

1. Part 36: Exempt Markets--Rules Applicable to ECMs

The Commission proposed to amend rule 36.3(b) to: (1) Specify the

information submission requirements, both initially and on an ongoing

basis, for all ECMs and also for ECMs with respect to agreements,

contracts or transactions that have not been determined to perform a

significant price discovery function; and (2) to enumerate separately

the enhanced information submission obligations for ECMs with SPDCs.

Consistent with the Reauthorization Act's directive that the

Commission's rulemaking address specific statutory criteria for

identifying a SPDC and the conditions under which an ECM will be

responsible for notifying the Commission of a possible SPDC, proposed

rule 36.3(c) addressed (1) The criteria on which the Commission will

rely in making a determination that an agreement, contract or

transaction performs a significant price discovery function; (2) the

factors that will trigger an ECM's obligation to notify the Commission

of a possible SPDC; (3) the procedures the Commission will follow in

reaching its determination whether a contract is a SPDC; and (4) the

procedures, standards and timetables by which an ECM with a SPDC must

demonstrate compliance with the core principles. Because the criteria

mandated by Congress for determining the existence of a SPDC do not

lend themselves to bright-line rules or formulas, proposed Appendix A

to Part 36 explains how the Commission anticipates applying the

criteria, on a case-by-case basis, to the facts and circumstances under

consideration.

Consistent with the Reauthorization Act, the CFTC's proposed rules

required ECMs with SPDCs to establish a self-regulatory regime with

respect to those contracts. Those responsibilities generally are set

forth in nine core principles, largely derived from counterpart

provisions for DCMs, including core principles that require the ECM to

implement an acceptable trade monitoring program; to develop an audit

trail in order to detect and deter market abuses; to adopt position

limitations or position accountability levels for speculators in SPDCs;

to develop and implement procedures for the exercise of emergency

authority; to make public daily trading information; to develop a

program to monitor compliance with the ECM's rules; to establish rules

to minimize conflicts of interest in the decision-making process of the

ECM; and to avoid taking any actions or adopting any rules that result

in any unreasonable restraints of trade or impose any material

anticompetitive burden on trading on the ECM. Proposed Appendix B to

Part 36 offers guidance and non-exclusive safe harbors for compliance

with the core principles. In proposing this guidance, the Commission

made every effort to construe the ECM core principles in a like manner

as it construes the DCM core principles.

Parts 15-21: Market, Transaction and Large Trader Reporting Rules

Collectively, the Commission's market, transaction, and large

trader reporting rules (``reporting rules'') effectuate the

Commission's market and financial surveillance programs. The market

surveillance program analyzes market data to detect and prevent market

manipulation and disruptions and to enforce speculative position

limits. The financial surveillance program uses market data to measure

the financial and systemic risks that large contract positions may pose

to Commission registrants and clearing organizations. The

Reauthorization Act authorized the Commission to establish a

comprehensive transaction and position reporting system for SPDCs when

it defined ECMs with SPDCs as registered entities and made certain

provisions of the Act directly applicable to SPDCs.\9\ In addition to

proposing technical and conforming amendments to parts 15 through 21 of

its rules, the Commission sought in the proposed rules to extend to

SPDCs the reporting rules that currently apply to DCMs and DTEFs by

defining clearing member and clearing organization and amending the

definition of reporting market in Commission rule 15.00 to apply to

positions in, and the trading and clearing of, SPDCs.\10\

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\9\ Specifically, section 4a of the CEA permits the Commission

to set, approve exchange-set, and enforce speculative position

limits. 7 U.S.C. 6a. Section 4c(b) of the Act, 7 U.S.C. 6c(b), gives

the Commission plenary authority to establish rules pursuant to

which the terms and conditions on which commodity options

transactions may be conducted and provides the basis for the

Commission's authority to establish a large trader reporting system

for transactions on ECMs that involve commodity options. Section 4g

of the Act imposes reporting and recordkeeping obligations on

registered persons and requires them to file reports on positions

executed on any board of trade and in any SPDC traded or executed on

an ECM. 7 U.S.C. 6g. Finally, section 4i of the Act requires the

filing of such reports as the Commission may require when positions

made or obtained on DCMs, DTEFs or ECMs with respect to SPDCs equal

or exceed Commission-set levels. 7 U.S.C. 6i.

\10\ Consistent with ECM Core Principle IV's directive that ECMs

take into account contracts that are treated by DCOs as fungible

with a SPDC when establishing position limits or accountability

levels for SPDCs, in this section the term SPDC will include any

contracts that are fungible and cleared by DCOs together with SPDCs.

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Specifically, the NPRM proposed that ECMs be required to provide

clearing member reports for SPDCs pursuant to rule16.00. Under proposed

rule 16.01, ECMs, like DCMs, would be required to

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submit to the Commission and publicly disseminate option deltas and

aggregated trading data on a daily basis.\11\ ECM clearing members that

clear SPDCs would, regardless of their registration status with the

Commission or their status as domestic or foreign persons, be required

to file reports for large SPDC positions when the positions meet or

exceed the contract reporting levels of Commission rule 15.03(b). In

addition, the NPRM proposed to require clearing members to identify the

owners of reportable SPDC positions on Form 102.\12\ Under the proposed

rules, SPDC traders likewise would be subject to the special call

provisions of the Commission's part 18 rules for reportable positions.

Furthermore, the Commission proposed that clearing members clearing

SPDCs, SPDC traders, and ECMs listing SPDCs would each be subject to

the special call provisions of the part 21 rules.\13\

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\11\ The NPRM also proposed to uniformly apply the public

dissemination requirement of Commission rule 16.01(e) to DCMs,

DTEFs, and ECMs with SPDCs.

\12\ The Commission's Division of Market Oversight (``DMO'')

increasingly has been charged with administering the procedural

requirements of the reporting rules. Accordingly, the Commission

proposed to shift the delegation of the Commission's authority to

determine the format of reports and the manner of reporting under

parts 15 to 21 of the Commission's rules from the Executive Director

to the Director of DMO.

\13\ Part 21 of the Commission's rules establishes the

Commission's ability to request information on persons that exercise

trading control over commodity futures and options accounts along

with additional account-related information for positions that may

or may not be reportable under Commission rule 15.03(b). The final

rules amend paragraphs (i)(1) and (i)(2) of rule 21.02 to ensure

that any special call to an intermediary for information that

classifies a trader as commercial or noncommercial, and the

positions of the trader as speculative, spread positions, or

positions held to hedge commercial risks, can be made with respect

to both commodity futures and commodity options contracts. 17 CFR

21.02)(i).

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In order to communicate effectively with foreign clearing members

and foreign traders and to properly administer the proposed special

call provisions of parts 17, 18 and 21 of the Commission's rules, the

Commission also proposed to amend the designation of agent provisions

of rule 15.05 to require ECMs that list SPDCs to act as the agent of

foreign clearing members and foreign traders for the purpose of

accepting service or delivery of any communication, including special

calls, issued by the Commission to a foreign clearing member or trader.

The Commission also proposed new rule 16.02 to require all reporting

markets, including ECMs listing SPDCs, to report on a daily basis trade

data and related order information for each transaction that is

executed on the market,\14\ and to specify the information to be

included in such reports.\15\ In this regard, while the Commission

proposed amendments to its part 17 rules dealing with reportable

positions, it did not extend those proposals to SPDC transactions that

are not cleared for the simple reason that no clearing members are

involved in clearing such transactions. For purposes of enforcing SPDC

position limits and monitoring large SPDC positions, the Commission

anticipated using proposed rule 16.02 to access transaction information

and trader identification to enforce position limits and monitor large

positions for market and financial surveillance purposes.

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\14\ For some time, DCMs consistently have provided transaction

level data on request by the Commission pursuant to rule 38.5(a).

Proposed rule 16.02 would make such submissions mandatory.

\15\ Such reports would include time and sales data, reference

files and other information as the Commission or its designee may

request; upon request, this information could be accompanied by data

that identifies or facilitates the identification of each trader for

each transaction or order included in a submitted report. The

Commission noted in the NPRM that recent acquisitions of technology

have enabled the agency to more effectively integrate trade data and

related orders into its trade practice, market, and financial

surveillance programs. Accordingly, new rule 16.02 would make the

submission of such information mandatory.

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Part 40: Provisions Common to Registered Entities

The Reauthorization Act amended the definition of ``registered

entity'' in section 1a(29) of the CEA to include ECMs with SPDCs.

Because certain provisions in part 40 of the Commission's rules apply

to registered entities--and, accordingly, to ECMs with SPDCs--the

Commission proposed to amend part 40 to specify the provisions which

would be applicable to all registered entities.\16\ The Commission

emphasized in its NPRM that although not all provisions of part 40 will

be applicable to ECMs with SPDCs, even sections that are not being

amended in this rulemaking may be de facto amended by virtue of the

fact that the term ``registered entity'' now includes ECMs with SPDCs.

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\16\ In particular, the proposed amendments to part 40 made

rules 40.1, 40.2 and 40.5-40.8 and Appendix D specifically

applicable to ECMs with SPDCs.

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C. Overview of Comments Received \17\

General. The Commission received a total of eleven comments from a

range of commenters, including a government agency,\18\ several trade

associations,\19\ two ECMs,\20\ an interdealer broker in over-the-

counter (``OTC'') energy markets,\21\ and a DCM.\22\ Most commenters

expressed support for the proposed rules and several particularly

commended the Commission's adherence to the letter and spirit of the

Reauthorization Act. Several commenters offered specific

recommendations for clarification or modification of certain

provisions. These comments will be addressed more fully below. The

Commission notes that some commenters requested that particular rules

and core principle guidance proposed for ECMs be modified to mirror

analogous provisions for DCMs. In this regard, the Commission reminds

interested parties that the Reauthorization Act did not mandate

identical rules for ECMs and DCMs, and the Commission has attempted to

craft rules tailored to the special concerns raised by SPDCs. In that

same vein, interested parties should bear in mind that Commission

acceptable practices for all core principles do not denote requirements

under the Act; rather, they offer safe harbors. Registered entities

always have the option of crafting alternate means of complying with

core principles than those set forth in the Commission's acceptable

practices.

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\17\ In this NPRM, comment letters (``CL'') are referenced by

the letter's author and/or file number and page. These letters are

available through the Commission's Internet Web site: http://

www.cftc.gov/lawandregulation/federalregister/

federalregistercomments/2008/08-012.html.

\18\ The Federal Energy Regulatory Commission (``FERC'') (CL 05)

responded to the CFTC's request for comments but did not comment on

the particulars of the proposed rules.

\19\ American Feed Industry Association (``AFIA'') (CL 04)

(representing animal feed interests); International Swaps and

Derivatives Association, Inc. (``ISDA'') (CL 06) (representing

participants in the privately negotiated derivatives industry);

American Public Gas Association (``APGA'') (CL 07) (the national

association for publicly-owned natural gas distribution systems);

Society of Independent Gasoline Marketers of America (``SIGMA'') (CL

08) (a national trade association representing independent chain

retailers and marketers of motor fuel); Air Transport Association of

America, Inc. (``ATA'') (CL 09) (airline trade association); Managed

Funds Association (``MFA'') (CL 10) (representing the global

alternative investment community).

\20\ HoustonStreet Exchange (CL 01); InterContinental Exchange,

Inc. (``ICE'') (CL 03).

\21\ OTC Global Holdings, Inc. (CL 11) OTC Global Holdings has

submitted notification to the Commission of its intent to operate a

market pursuant to the exemption found in section 2(h)(3) of the

Act.

\22\ CME Group (CL 02).

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Core Principle IV. Several commenters expressed substantive

concerns with respect to the Commission's proposed guidance and

acceptable practices for compliance with Core Principle IV (Position

Limitations or Accountability). Specifically, these commenters objected

to the Commission's proposal that ECM market surveillance programs

account

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for uncleared transactions through volume accountability levels (based

on a measure of net uncleared trading calculated by netting each

trader's long and short uncleared transactions against the same

counterparty). As more fully discussed below, the Commission believes

the issues and recommendations raised by these commenters merit further

attention and study. The Commission is mindful, however, that the time

constraints imposed by the Reauthorization Act for issuing final rules

implementing section 2(h)(7) do not permit the level of study necessary

to properly address and resolve these issues.\23\ Moreover, even if the

Commission was prepared immediately to adopt some or all of the

suggested changes, they reflect a substantial departure from the

proposed guidance that might warrant re-proposal under the

Administrative Procedure Act.\24\

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\23\ Congress has directed that the Commission issue proposed

rules implementing section 2(h)(7) of the CEA not later than 180

days after the date of enactment of the Reauthorization Act (June

18, 2008), and that the Commission issue final rules no later than

270 days after the date of enactment. Public Law 110-246 at section

13204.

\24\ 5 U.S.C. 553.

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For these reasons, the Commission, in an abundance of caution, has

determined not to make final its Core Principle IV proposed guidance

and acceptable practices relating to uncleared trades pending a full

and complete evaluation of the issues raised in these comments.

Accordingly, upon publication of this notice of final rulemaking, the

Commission intends to immediately examine these issues and to issue a

notice of proposed rulemaking that specifically addresses appropriate

guidance and acceptable practices for uncleared trades on ECMs.

Like all core principles, Core Principle IV is statutory, and the

Commission's decision not to provide particular guidance or safe

harbors with respect to ECM uncleared trades at this time does not

diminish an ECM's obligation to comply with the core principle itself.

In that regard, the Commission reminds interested parties that section

2(h)(7)(C)(ii) of the CEA gives an electronic trading facility explicit

discretion to take into account differences between cleared and

uncleared SPDCs in applying the position limits and accountability core

principle.\25\ Likewise, the Commission will take these differences

into account when reviewing an ECM's implementation of a core

principle, as directed by section 2(h)(7)(D)(i).

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\25\ See also Conference Committee Report at 985-86.

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II. The Final Rules

A. Part 36--Exempt Markets

Part 36 of the Commission's rules governs both exempt boards of

trade and ECMs, regardless of whether any individual contract traded

thereon is a significant source for price discovery. As described

infra, Rule 36.3 more particularly imposes a number of requirements and

restrictions on ECMs, including notification of the ECM's intent to

rely on the section 2(h)(3) exemption; initial and ongoing information

submission requirements; prohibited representations; price discovery

notification; and price dissemination requirements. The Commission is

adopting as proposed the provisions of Rule 36.3(b) that separately

specify the information submission requirements, both initially and on

an ongoing basis, for all ECMs and for ECMs with respect to agreements,

contracts or transactions that have not been determined to perform a

significant price discovery function.

The Commission is adopting as proposed the substance of that

provision's enhanced reporting requirements for ECMs with SPDCs.

However, the final rules will correct an error in numbering in rule

36.3(b)(2). As proposed, rule 36.3(b)(2)(i) provided that ECMs, with

respect to contracts that have not been determined to be SPDCs, must

identify to the CFTC those contracts that averaged five trades per day

or more over the most recent calendar quarter, and for each such

contract, either: pursuant to subparagraph (A), submit a weekly report

to the CFTC showing specific information; or, pursuant to subparagraph

(B)(1), provide the Commission with electronic access sufficient to

allow it to compile the same information. The rule then also required

in subparagraph (B)(2) through (B)(4) that the ECM maintain and provide

the CFTC with other records.\26\ These last three requirements were

incorrectly numbered. Because they apply regardless of whether the ECM

has elected the weekly reporting path of rule 36.3(b)(2)(i)(A) or to

provide access to the CFTC pursuant to rule 36.3(b)(2)(i)(B), these

requirements properly are numbered as 36.3(b)(2)(ii)-(iv) rather than

as 36.3(b)(2)(i)(B)(2)-(4).\27\

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\26\ Subparagraph (B)(2) required that the ECM maintain a record

of allegations and complaints; subparagraph (B)(3) direct the ECM to

provide the CFTC with a copy of the record of each complaint

relating to violations of the CEA; pursuant to subparagraph (B)(4)

the ECM must provide the Commission with a quarterly list of

transactions executed in reliance on the section 2(h)(3) exemption

and indicate the terms and conditions, average daily trading volume,

and most recent open interest figures for each such transaction.

\27\ To complete this technical correction, proposed rule

36.3(b)(2)(i)(B)(1) is properly numbered as 36.3(b)(2)(i)(B) in the

final rules.

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Proposed rule 36.3(c) and Appendix A to Part 36 set forth the

procedures and guidance, respectively, which the Commission will use in

determining whether an ECM agreement, contract or transaction is a

SPDC. The Commission is adopting, substantially as proposed, Appendix A

and its general guidance as to how the Commission expects flexibly to

apply the four criteria specified in section 2(h)(7) of the CEA for

determining a SPDC--price linkage, arbitrage, material price reference

and material liquidity. Although much of rule 36.3(c) and its SPDC-

determination procedures are being adopted as proposed, some provisions

have been modified in response to comments and some have been modified

to reflect technical and clarifying changes.

The Commission has made a technical correction to proposed new rule

36.3(c)(1)(i). This rule is intended to track the statutory language

added to the CEA by the Reauthorization Act as section 2(h)(7)(B)(i),

which provides that in determining a SPDC, the Commission shall

consider, as appropriate,

PRICE LINKAGE--The extent to which the agreement, contract, or

transaction uses or otherwise relies on a daily or final settlement

price, or other major price parameter, of a contract or contracts

listed for trading on or subject to the rules of a designated

contract market or a derivatives transaction execution facility, or

a significant price discovery contract traded on an electronic

trading facility, to value a position, transfer or convert a

position, cash or financially settle a position, or close out a

position.

As proposed, section 36.3(c)(1)(i) inadvertently dropped a portion

of the statutory language. The final rules have been corrected to

reflect the complete statutory provision.

As proposed, rule 36.3(c)(3) provides that the Commission will

issue an order determining whether a contract is a SPDC after

consideration of all relevant information, including any ``data, views

and arguments'' submitted to the Commission in response to Federal

Register notification of the Commission's intent to so evaluate the

contract. The proposed rule did not include a timeframe for issuance of

such an order. CME Group suggests that the public interests underlying

the regulatory oversight requirements for

[[Page 12182]]

SPDCs dictate that such determinations be issued within a reasonable

timeframe following the close of the comment period for the Federal

Register notification.\28\ The Commission is committed to the prompt

and thorough processing of SPDC determinations and agrees, as CME Group

suggests, that absent special circumstances, its order generally should

issue within 60 days of the closing of the comment period. We are

aware, however, that the term ``special circumstances'' may take its

meaning from the particular context, including but not limited to the

volume of work before the agency and the complexity of the submission

under review, and we are reluctant to define those circumstances by

rule. The Commission instead has modified rule 36.3(c)(3) to specify

that the Commission shall promptly consider relevant information and

shall issue an order explaining its determination within a reasonable

period of time after the close of the comment period.\29\

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\28\ CME Group CL 02 at 7-8.

\29\ The ATA urged the Commission to revise proposed rule

36.3(c)(3) ``to provide 14 calendar days notice, not 30, of its

intention to designate a contract as an SPDC.'' CL 09 at 5. The

Commission wishes to clarify that rule 36.3(c)(3) establishes a 30-

day notice and comment period following the Commission's notice of

its intention to undertake a determination whether a particular

contract is a SPDC. ATA further urges the Commission to specify that

it will issue a final determination no later than 14 days from the

end of the comment period. As discussed supra, while the Commission

is committed to reviewing potential SPDCs as expeditiously as

possible, in our view 14 days is inadequate to review and issue a

determination on any SPDC and in most cases would preclude an

adequate evaluation of complex matters.

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Proposed rule 36.3(c)(4) established the timetables for compliance

with the core principles by ECMs that have been determined to have a

SPDC, providing a 90-day grace period for an ECM's initial SPDC and a

15-day grace period for subsequently-identified SPDCs traded on the

same ECM. CME Group suggests that the passage of the Reauthorization

Act put ECMs on notice that one or more of their contracts may become a

SPDC at some future date; in its view, a 45-day grace period should be

sufficient for all ECMs. ATA also views a 90-day grace period as

excessive in light of ECMs' sophistication and suggests that ECMs can

demonstrate compliance with the core principles in 60 days. With due

regard for the market integrity interests associated with the core

principles, we disagree that all ECMs will be able, in every

circumstance, to demonstrate compliance with all the core principles

within 45 or 60 days. While larger, established ECMs may be prepared to

develop core principle compliance strategies in anticipation of a SPDC

determination, the grace period must also permit ECMs that are less

well-established sufficient time to develop and implement programs

responsive to the core principles. Accordingly, the Commission has

adopted as final the 90-day grace period for initial compliance with

the core principles.

Although ISDA found the 90-day time frame reasonable, noting that

it allows market participants to make necessary changes to their

trading system to ensure compliance with the core principles,\30\ it

objected to the 15-day grace period for subsequently-identified SPDCs

and urged the Commission to extend the timeframe in recognition of the

additional obligations compliance imposes and the likely system changes

required of ECMs.\31\ ICE noted that both the 90-day and 15-day grace

periods generally allow sufficient time for an ECM to comply with the

core principles, but warned that 15 calendar days may not be sufficient

time for clearing firms that outsource large trader reporting to meet

the reporting requirements. The Commission has considered these

suggestions and believes that 30 calendar days should be sufficient to

ensure that clearing firms can meet the reporting requirements and

avoid market disruptions. Rule 36.3(c)(4) has been modified accordingly

to grant a 30-day period for ECMs to come into core principle

compliance for their subsequent SPDCs. In addition to this change, the

Commission has determined to clarify rule 36.3(c)(4) by changing the

second sentence of this provision \32\ to read ``* * * one of the

electronic trading facility's agreements, contracts or transactions

performs a significant price discovery function* * *''

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\30\ ISDA CL 06 at 3.

\31\ Id. ISDA's comment did not recommend a specific time

period.

\32\ As proposed, the relevant phrase reads as follows: ``* * *

the electronic trading facility's agreement, contract or transaction

performs a significant price discovery function* * *'' See 73 FR

75888 at 75911.

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In order to clarify its intent and eliminate a redundancy in

paragraph (B)(4) of Appendix A, the Commission is amending Appendix A

to part 36 as follows: Paragraph (B)(4) is deleted in its entirety as

repetitive of paragraph (B)(3). In paragraph (B)(3), the language

beginning with ``In combination with this volume level'' will become

new paragraph (B)(4).

B. Substantive Compliance With Core Principle IV: Guidance and

Acceptable Practices

Although comments addressing the nine ECM SPDC core principles

generally expressed satisfaction with the Commission's proposed

guidance and acceptable practices, the Commission's guidance for

substantive compliance with Core Principle IV--particularly with

respect to speculative position limits and the treatment of uncleared

contracts--was a cause for concern among several commenters. Their

comments are summarized below.

1. The Commission's authority with respect to uncleared trades. In

its comment letter, ISDA questioned the Commission's authority under

the Reauthorization Act to address limits for uncleared SPDC

transactions in its Core Principle IV acceptable practices.\33\ In

support, ISDA cites Core Principle IV's direction that ECMs take into

account positions in other ``agreements, contracts, and transactions

that are treated by a derivatives clearing organization, whether

registered or not registered, as fungible'' with a SPDC when

determining appropriate position limitations or accountability for the

SPDC.\34\ The Commission believes that Congress did not so limit the

Commission's authority with respect to uncleared SPDC transactions; on

the contrary, both the statutory language and the legislative history

make plain that Congress intended for new CEA section 2(h)(7) to apply

to all SPDCs, whether cleared or uncleared. The Conference Committee

report emphasizes that the legislation gives electronic trading

facilities ``the explicit discretion to take into account differences

between cleared and uncleared SPDCs in applying the position limits or

accountability core principle.'' \35\ And CEA section 2(h)(7)(D)

directs the Commission to ``take into consideration the differences''

between cleared and uncleared trades in reviewing an ECM's

implementation of the core principles. Under principles of statutory

construction, Congress must be presumed to have said what it meant.\36\

The Commission believes that the ECM SPDC Core Principle IV clause

cited by ISDA in support of its argument stands for a different

proposition altogether. Specifically, the clause pertains to

[[Page 12183]]

transactions in ``other agreements, contracts and transactions.''

Accordingly, Congress directed ECMs to include certain non-SPDC

transactions when applying position limitations and/or accountability

levels to a SPDC. So, for example, if another non-SPDC ECM contract or

even a contract executed off of a trading facility pursuant to CEA

Section 2(h)(1) is fungible and cleared together with a SPDC, the

subject ECM should take those non-SPDC positions ``into account'' when

administering the SPDC's position limit or accountability regime.

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\33\ ISDA CL 06 at 2.

\34\ Id.

\35\ Conference Committee Report at 985-86; Public Law 110-246

at 13201.

\36\ Where the plain language of a statute is clear, courts

generally will presume that Congress meant precisely what it said

absent a showing that ``as a matter of historical fact, Congress did

not mean what it appears to have said, or that, as a matter of logic

and statutory structure, it almost surely could not have meant it.''

Engine Mfrs. Ass'n v. EPA, 88 F.3d 1075, 1089 (D.C. Cir. 1996),

quoted in National Public Radio, Inc. et al. v. FCC, 254 F.3d 226,

230 (D.C. Cir. 2001).

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2. Grace period for open positions. As proposed, the acceptable

practices for Core Principle IV permitted a grace period of 90 calendar

days from the ECM's implementation of speculative position limit rules

for traders to comply with those rules unless a hedge exemption is

granted by the ECM. MFA has recommended that the Commission, rather

than creating a new grace period applicable only to SPDCs, should rely

on the existing standards of section 4a(b)(2) of the CEA\37\ and the

standards applied to exchange-set speculative position limits under

rule 150.5(f).\38\ The Commission believes that this recommendation is

premised on a misunderstanding of the statutory and regulatory

structures governing exchange-set speculative position limits. As MFA

notes, section 4a(b)(2) applies to Commission-set speculation limits,

not exchange-set limits.\39\

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\37\ 7 U.S.C. 6a(b)(2).

\38\ MFA CL 10 at 6.

\39\ Id.

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Furthermore, Rule 150.5(f) no longer has direct application to DCM-

set position limits. The statutory authority governing DCM-set limits

is found in CEA section 5(d)(5)-- DCM Core Principle 5.\40\ That core

principle does not contain any aspect of the exemptive language found

in either CEA section 4a or Rule 150.5(f). Moreover, it should be noted

that the part 38 rules explicitly exempt agreements, contracts or

transactions traded on a DCM from all Commission rules other than those

specifically referenced in Rule 38.2. That provision did not retain

Rule 150.5(f).\41\ Further, although the acceptable practices for Core

Principle 5 (which are found in Appendix B to part 38) contain many of

rule 150.5's provisions, they do not specify the rule 150.5(f) good

faith exemption. Accordingly, the part 150 rules essentially constitute

guidance for DCMs administering position limit regimes, Commission

staff in overseeing such regimes has not required that position limits

include an exemption for positions acquired in good faith.

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\40\ ``(5) Position Limitations or Accountability.--To reduce

the potential threat of market manipulation or congestion,

especially during trading in the delivery month, the board of trade

shall adopt position limitations or position accountability for

speculators, where necessary and appropriate.'' 7 U.S.C. 7(d)(5).

\41\ 17 CFR 38.2.

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The Reauthorization Act established Core Principle IV as part of

new CEA section 2(h)(7) to require the establishment of position

limitations or accountability levels for SPDCs listed on ECMs. As with

DCM Core Principle 5, ECM Core Principle IV does not contain the

exemptive provision for positions established in good faith--nor do its

acceptable practices rely for authority on section 4a of the CEA. For

this reason, the Commission was not obliged to adopt such a good faith

exemption.\42\ In the Commission's view, the primary goal for an ECM

with a SPDC should be to ensure that large positions not be disruptive

to the market. Indeed, a sudden decrease in a position to meet an ECM's

newly-adopted position limit could itself be disruptive. The

Commission's proposed acceptable practice was crafted to permit market

participants to make any necessary adjustments to their positions in an

orderly fashion, thus reducing market disruptions and avoiding, as much

as possible, an unfair impact on position holders. For the reasons

discussed in these sections, the Commission has determined to adopt the

acceptable practice as proposed (except with respect to uncleared

trades, as discussed infra), and reminds interested parties that

acceptable practices serve as a safe harbor and do not represent the

only means of compliance with the core principles.

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\42\ In part for the reasons discussed in this section, the

Commission expects in the near future to revisit and clarify Core

Principle 5 for DCMs.

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3. Position Accountability

MFA also encourages the Commission to bring its Core Principle IV

acceptable practices with respect to position accountability into

closer alignment with its acceptable practices for DCMs. Although

perfect symmetry between the DCM and ECM core principles and acceptable

practices was not mandated by the Reauthorization Act and is not a

primary goal of this rulemaking, it is the Commission's view that its

expectations for DCMs and ECMs in this regard are not significantly

different. MFA argues that ``DCMs are not mandated to conduct an

inquiry in response to every breach of a position accountability level.

Rather, DCMs have the discretion to determine whether to open an

inquiry in particular cases.'' \43\ So, too, do ECMs under the Core

Principle IV acceptable practices.\44\ Unlike position limits,

accountability levels are not limitations on position sizes, as traders

are permitted to take positions in excess of the established

accountability levels. ECMs are obliged to monitor trading in their

markets and to discourage manipulative activity in the spot month as

well as in back months; the purpose of accountability levels is to

provide the ECM with additional information and authority to address

positions that threaten to create disorderly trading or market abuses.

For positions that exceed a position accountability level, appropriate

action by the ECM may be dictated by a number of factors, including

characteristics of the market and the size of the position relative to

the market. For smaller positions that exceed the accountability level,

the ECM may find that placing such positions on a ``close watch'' is

appropriate. For larger positions, depending on the potential threat to

the market, it may be appropriate for the ECM to request that the

trader not further increase (or even reduce) a position. Market

liquidity also should be considered when monitoring traders with

positions above the accountability level; an ECM may find it

appropriate to more aggressively limit positions in markets that are

relatively illiquid. In any event, ECMs are reminded that the

acceptable practices serve as safe harbors; alternative methods to

monitor trading may be sufficient.

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\43\ MFA CL 10 at 4.

\44\ MFA points to the directive in the Core Principle IV

acceptable practices that an ECM ``should initiate'' an inquiry once

a trader exceeds a position accountability level as an indication

that action is mandated in every case. The Commission does not view

this language as a mandate; as noted above, acceptable practices

serve as safe harbors and do not represent the only means of

compliance with the core principles.

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Also in connection with the ECM's monitoring of positions, the

Commission has considered MFA's concern that the term ``investigation''

may connote a level of wrongdoing which, in turn, might inadvertently

render a commodity pool ineligible to receive investor funds\45\ or

otherwise have an adverse effect on a trader's business. Although the

Commission believes such a misimpression is unlikely, we have modified

the acceptable practice to replace the word ``investigation'' with

``inquiry.''

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\45\ MFA CL 10 at 4.

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With regard to establishing position accountability levels in non-

spot months and all months combined, MFA questioned why ECMs are given

specific guidance--that is, the ``10% of open

[[Page 12184]]

interest'' standard--while DCMs are free to determine their own

methodology.\46\ Again, the Commission wishes to emphasize that its

guidance for ECMs need not follow precisely the guidance it has

offered--or not offered--for DCMs. The Commission believes it is sound

practice for DCMs and ECMs to adopt non-spot month and all-months-

combined position accountability levels or position limits and believes

the specific guidance offered in this acceptable practice will be

beneficial to ECMs wishing to take advantage of the safe harbor.

Moreover, the Commission intends shortly to revisit DCM Core Principle

5 with a view to providing more specific guidance with respect to non-

spot month and all-months-combined position accountability levels.

Finally, the Commission wishes to remind interested parties that the

``10% of open interest'' standard for determining position

accountability levels applies to unique SPDCs (i.e., cleared ECM

contracts that are determined to be SPDCs based on material price

reference grounds, rather than on the basis of economic equivalence

\47\ with another contract through a price linkage or arbitrage

relationship). The acceptable practices for non-unique, economically-

equivalent SPDCs provide that the ECM may adopt the accountability

levels adopted by the DCM for the underlying contract.\48\ As noted,

the Commission expects to further consider the treatment of uncleared

trades and anticipates proposing rule amendments as well as guidance

and acceptable practices in the near future.

Speculative Position Limits: Accountability Levels for Uncleared

Trades.

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

\46\ Id. at 4-5.

\47\ With regard to ICE and ISDA's concern that economic

equivalence is subjective (ICE CL 03 at 5; ISDA CL 06 at 2-3); the

Commission believes the concept of economic equivalence is

relatively straightforward. Essentially, the concept is designed to

capture SPDCs that replicate or serve as a close substitute for a

corresponding DCM, DTEF or second ECM SPDC contract. In this regard,

any SPDC that is cash settled based on another contract's settlement

price will be considered economically equivalent, assuming

sufficient volume. In addition, SPDCs that can be used to arbitrage

price discrepancies may be considered economically equivalent to DCM

contracts. For arbitragable contracts to be considered economically

equivalent, both the prices and the contract terms would have to be

highly correlated. As part of its determination whether a particular

contract is an SPDC, the Commission will indicate whether it

considers the SPDC economically equivalent to another contract.

\48\ ICE and ISDA warned that requiring an ECM to adopt a DCM's

position limits for its economically-equivalent SPDCs may have

anticompetitive implications for trading on an ECM (ICE CL 03 at 6;

ISDA CL 06 at 3): a DCM could set an artificially low position limit

for its own contract in order to squeeze out an ECM. The Commission

does not believe this is a likely consequence of its acceptable

practice. First, assuming that the DCM contract is the dominant

market, setting the spot-month limit at an extraordinarily low level

would limit trading in its own contract, which would be self-

defeating. Secondly, the instant procedures are acceptable practices

that provide a safe harbor; they are not rules or requirements, and

they do not comprise all possible means of satisfying Core Principle

IV. If an ECM believes that a DCM is engaging in anticompetitive

behavior (which is itself the subject of a core principle for both

ECMs and DCMs), it should notify the Commission and should propose

alternative position limits and/or accountability levels that are

reasonable and based on economic analysis.

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

Both ISDA\49\ and ICE \50\ opined that requiring ECMs to adopt the

same speculative position limits as an ``unaffiliated'' DCM would be

anticompetitive since the DCM would have the authority to dictate the

ECM's position limits even where an ECM is the dominant, more liquid

market. CME Group and APGA suggest that the Commission should propose

comprehensive, industry-wide speculative position limits that would

apply to both cleared and uncleared transactions.\51\ Similarly, MFA

suggested that SPDCs should be incorporated into the existing

regulatory framework because a separate category for uncleared trades

could impede a trader's ability to reflect the true net economic

exposure of a position and could chill legitimate economic

activity.\52\

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\49\ ISDA CL 06 at 3.

\50\ ICE CL 03 at 5-6.

\51\ CME Group CL 02 at 6; APGA CL 07 at 3-4.

\52\ MFA CL 10 at 6. AFIA requests that as part of the final

rule the Commission exercise its authority to remove the exemption

for position limits that has been given to Index Speculator Funds.

CL 04 at 2-3. The Commission appreciates AFIA's concern but notes

that such an action is beyond the scope of the instant rulemaking.

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

APGA supports the use of spot month speculative position limits as

an effective tool for addressing contracts on commodities--such as

natural gas--with constrained deliverable supplies.\53\ It urges,

however, that the Commission modify its proposed guidance such that an

ECM must account for positions that may be held on another registered

entity in economically-related SPDCs in setting such limits. Without

such a revision, APGA believes that traders will be able to amass a far

larger speculative position in the spot month by dividing its position

among several markets or market segments for SPDCs.\54\ Accordingly

APGA urges that the volume accountability level for uncleared contracts

should be included in calculating the size of a trader's position for

speculative position limits purposes. APGA expresses similar concerns

with respect to the Commission's proposal in the Core Principle IV

guidance, and similarly suggests the establishment of separate

accountability levels for cleared and uncleared trades and a separate

volume accountability level in the spot month.\55\ CME Group agrees

that the proposed guidance should be reconsidered, and pointed out that

the disparate standards provided by the acceptable practices make it

possible for a trader to maintain double the position permitted for an

economically equivalent contract on a DCM. CME Group believes that

there should be one position limit and one associated set of

accountability levels for non-spot contracts that apply across all

activities for a SPDC, including cleared and uncleared trades.\56\

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

\53\ APGA CL 07 at 2-3. APGA also suggested that the Commission

set federal speculative limits for exempt commodities and that such

limits should be applied to a given trader's aggregate position in

economically-equivalent contracts across all registered entities.

While innovative and worthy of further consideration in the future,

the Commission believes these recommendations are beyond the scope

of the instant rulemaking.

\54\ APGA CL 07 at 2-3.

\55\ Id. at 5-6. APGA argues that the separate volume

accountability category potentially would enable speculative traders

to amass a larger position before prompting an inquiry by the ECM.

More critically, where there is a separate volume accountability

level in the spot-month, APGA stated that a trader can readily avoid

a spot month speculative position limit by holding a combination of

cleared and uncleared positions, even on the same market.

\56\ CME Group CL 02 at 6.

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As noted above, these and other recommendations related to the

proposed guidance and acceptable practices for Core Principle IV with

respect to uncleared trades raise complex issues which, in the

Commission's view, warrant further serious consideration before a

decision can be made whether, and to what extent, they should be

implemented. For this reason, the Commission has determined not to make

final those aspects of the Core Principle IV guidance and acceptable

practices relating to uncleared trades pending additional study of

these comments and consultation with the commenters and others,

culminating in a subsequent rulemaking proposing guidance and

acceptable practices applicable to uncleared trades. As part of this

process, and in the course of formulating that proposed guidance, the

Commission will consider the issues raised in the comments received in

connection with the instant rulemaking.

C. Market, Transaction and Large Trader Reporting Rules

Reporting Rules. With the three substantive exceptions noted below,

the

[[Page 12185]]

Commission is promulgating the reporting rules as proposed.\57\ Five

commenters addressed the proposed reporting rules. ATA expresses

support for the extension of the reporting rules to SPDCs--

specifically, ATA endorses the application of the reporting

requirements to ECM clearing members that clear SPDCs, regardless of

their registration status with the Commission or their status as

foreign or domestic persons.\58\ ATA additionally expressed support for

the use of transaction and trader identification data that would be

collected under new rule 16.02 to monitor large SPDC positions. Four

commenters expressed general concerns or recommended the adoption of

additional or alternative amendments to the reporting rules.

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\57\ 17 CFR parts 15 through 21.

\58\ ATA CL 09 at 8.

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

CME Group, for example, observes that while the acceptable

practices for Core Principle IV advise ECMs to establish an effective

program for enforcement of SPDC position limits that should include a

large trader reporting system to monitor and enforce daily compliance

with position limit rules, Appendix B to Part 36 does not establish

similar acceptable practices that tie large trader reporting

requirements to the daily monitoring of volume accountability levels

for uncleared SPDCs.\59\ As noted above, the Commission intends

expeditiously to propose rules and acceptable practices that will focus

on position limit and accountability rules for uncleared SPDCs. The

Commission intends to address CME Group's concern at that time.

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

\59\ CME Group CL 02 at 5.

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

HoustonStreet, an ECM, opined that voice brokers must be subject to

the same reporting requirements as ECMs to ensure a level playing field

in the OTC energy markets and to prevent market participants from

avoiding transparency and disclosure obligations.\60\ The Commission

does not have authority under the CEA to directly extend the reporting

rules to voice-brokered transactions which are not entered into in

reliance on a section 2(h)(3) exemption and are not otherwise fungible

with SPDCs for clearing purposes. Although the Commission does have the

authority to require the reporting of all OTC and cash market positions

(including voice-brokered transactions) under section 4i of the Act

when traders' positions in contracts executed on or subject to the

rules of a registered entity exceeds fixed thresholds, such an

extension of the reporting rules is beyond the scope of this

rulemaking.\61\

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\60\ HoustonStreet, CL 01 at 1.

\61\ A routine trader reporting requirement, including the

routine reporting of OTC positions, is not a current requirement for

any contract traded on or subject to the rules of a DCM.

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

ISDA comments that the reporting rules' references to clearing

members ``carrying'' large positions may be inappropriate in the

context of transactions that are executed on ECMs, which by definition

are principal-to-principal markets that do not permit some forms of

intermediation.\62\ With respect to ECMs, the Commission reiterates

that the large trader reporting requirements of part 17 place the

burden of routine position reporting on clearing members that clear

positions for market participants or clear proprietary transactions.

The term ``carry'' is used in the reporting rules to refer to and

encompass both positions that are cleared for market positions and

those that are cleared for the benefit of proprietary accounts. In

either instance, the reporting rules view the clearing member to be

carrying positions that, when in excess of the levels delineated in

rule 15.03, would be reportable as part of a special account under part

17 of the Commission's rules. The continued use of the term ``carry''

in the reporting rules is consistent with the nature of ECM

transactions. In coming to this determination, the Commission

understands that clearing members that clear transactions for ECM

market participants, although not executing SPDC or SPDC-fungible

transactions on behalf of market participants, are in part providing

clearing intermediation and taking on certain responsibilities that may

be associated with executing brokers. In addition, the reporting rules

generally need a working vocabulary that is flexible enough to cover

transactions that are executed on disparate market structures and

subject to different clearing methods. Because the reporting rules

heretofore have not been applied to ECM transactions, the Commission

will be mindful of the potential for ambiguities in the application of

the rules to SPDCs and SPDC-fungible transactions, will monitor for the

specific concerns raised by ISDA, and will implement appropriate

amendments should they be required.

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

\62\ ISDA CL 06 at 3-4.

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

APGA raises a number of concerns and offered several

recommendations. APGA noted that as proposed, the reporting rules would

not routinely provide information on a SPDC trader's large uncleared

positions and thus would leave a gap in the Commission's ability to

collect necessary trader and market data. APGA initially notes that the

transaction reporting requirements of new rule 16.02, which the

Commission intends to use in part for market surveillance purposes, may

not significantly improve the Commission's surveillance capability

because of the possible inability to link the transaction-based

information collected under the rule with a particular trader.\63\ The

language of new rule 16.02 requires all reporting markets, including

ECMs with SPDCs, to report trade data and related order information for

each transaction executed on the market, and upon request to accompany

such data with information that identifies or facilitates the

identification of each trader for each reported transaction. Since rule

16.02 only extends the identification requirement to markets that

independently maintain such data, APGA is concerned that unless ECMs

are explicitly required to maintain identifying information, the

Commission will be unable to obtain the data it needs to construct an

accurate picture of a trader's large positions in SPDCs.

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

\63\ APGA CL 07 at 7-8.

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

Section 2(h)(5)(B)(ii)(I) of the Act requires all ECMs to maintain

current records that include the name and address of each participant

that is authorized to enter into transactions on the facility in

reliance on section 2(h)(3) of the Act. In addition, final rule

36.3(b)(1) mandates that ECMs demonstrate that they require each

authorized market participant to be an eligible commercial entity and

that all contracts will be entered into solely on a principal-to-

principal basis. The rule also requires that ECMs have in place a

program to routinely monitor participants' compliance with these

requirements. The Commission believes that the nature of the section

2(h)(3) qualified exemption itself, along with the above-mentioned

statutory and regulatory requirements, mandates that ECMs know the

identity of each trader for each transaction effected by such trader on

or subject to the rules of the electronic trading facility regardless

of whether such transactions are subject to centralized clearing or

settled bilaterally by the executing traders. New rule 16.02 applies to

all reporting markets, including DCMs. DCMs do not, as a matter of

routine practice, collect detailed trader identifying data.\64\

[[Page 12186]]

Accordingly, rule 16.02 has been drafted to take into consideration

current DCM practice while permitting the Commission to collect

detailed trader identification data--which ECMs are required to

maintain--from ECMs that are reporting markets.

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

\64\ Unlike SPDCs traded on ECMs, however, all contracts on DCMs

are funneled through clearing members that are subject to the large

trader reporting rules. Therefore, the Commission need not rely on

new rule 16.02 to conduct DCM market surveillance.

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

APGA also argues that even if the Commission did collect

identifying data under rule 16.02 from ECMs that are reporting markets,

it still would be unable to determine a particular trader's ability to

impact market prices without routinely obtaining information with

respect to uncleared contracts that are economically related to SPDCs

but effectuated off of a registered entity. Accordingly, APGA urges the

Commission to use its authority under section 4i of the Act to require

that large traders routinely report such transactions.\65\

Alternatively, APGA recommends that the Commission at a minimum adopt a

formal policy of aggressively using its special call authority under

rule 18.05 to request information with respect to such uncleared

transactions. APGA describes this policy as one that could require

staff to issue special calls for information regarding uncleared

positions for all traders that hold positions that are below

speculative position limits but which are large enough to be

significant.\66\

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

\65\ APGA CL 07 at 10.

\66\ Id. at 9-10.

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

As discussed above in connection with HoustonStreet's comment

letter, the Commission does have the authority, under section 4i of the

CEA and the special call provisions of part 18 of its rules, to require

traders that hold reportable SPDC positions to report their OTC

(cleared and uncleared) and cash market positions. An extension of

routine reporting requirements to such positions is, however, beyond

the scope of this rulemaking and at odds with a long-established large

trader reporting system that places the initial burden of reporting on

intermediaries that are typically regulated and well-versed in

complying with routine reporting requirements. Any routine reporting

requirement imposed on traders as a class would represent a substantial

departure from the Commission's current reporting system and would

necessitate careful study and consideration prior to a final

determination.

Lastly, APGA recommends that for the purpose of regulatory clarity

the Commission's special call authority under rule 18.05 be amended to

refer directly to traders that hold or control reportable futures or

option SPDC positions on ECMs operating under sections 2(h)(3) through

2(h)(5) of the Act.\67\ The language of rule 18.05 applies directly to

traders with reportable positions. A reportable position, in turn, is

defined in rule 15.00 to include commodity futures and options

positions on reporting markets--including, with respect to a contract

that the Commission determines to be a SPDC--that exceeds the reporting

levels established by Commission rule 15.03. Accordingly, the

Commission believes that the plain language of rule 18.05, as proposed,

is directly applicable to traders that hold or control reportable

futures or options SPDC positions on ECMs operating pursuant to

sections 2(h)(3) through 2(h)(5) of the Act.

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

\67\ Id.

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Changes to the Final Rules. For the purpose of regulatory clarity

and to address generally the concerns raised by the commenters with

respect to the scope of the reporting rules, the Commission is defining

the terms futures and options contract solely for the purpose of the

reporting rules as contracts executed on or subject to the rules of a

reporting market, and all agreements, contracts and transactions that

are treated by DCOs as fungible with such contracts.\68\ The new

definition impacts all of the operative provisions of parts 15 through

21 and reinforces and clarifies the applicability of the reporting

rules, as proposed and adopted, to ECMs that list SPDCs, to SPDCs and

to transactions that are treated as fungible with SPDCs by DCOs.

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\68\ As noted in text, the Commission is utilizing these

definitions solely to clarify the scope of its reporting rules. It

does not intend these definitions to have any bearing on determining

the boundaries of futures and options transactions over which it has

jurisdiction under the CEA.

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Rule 16.02 as adopted substitutes for the phrase ``for each

transaction executed on the reporting market,'' the phrase ``for each

futures or options contract.'' The Commission recognizes that certain

transactions that are treated as fungible with SPDCs by DCOs may not

clearly be executed on a reporting market, and this change is intended

to address that point. In addition, final rule 15.05, which

independently defines futures and options transactions, differs from

the proposed rule in that it includes a conforming amendment to account

for defining the terms futures and options contract in final rule

15.00. Lastly, the final definition of reportable position in rule

15.00 and final rule 19.00 differ from the proposed definitions in that

they include nonsubstantive editorial amendments.

III. Related Matters

A. Cost Benefit Analysis

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

costs and benefits of its actions before issuing new regulations under

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

costs and benefits of new regulations or to determine whether the

benefits of adopted rules outweigh their costs. Rather, section 15(a)

requires the Commission to consider the costs and benefits of the

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

benefits of the rules shall be evaluated in light of five broad areas

of market and public concern: (1) Protection of market participants and

the public; (2) efficiency, competitiveness and financial integrity of

the market for listed derivatives; (3) price discovery; (4) sound risk

management practices; and (5) other public interest considerations. The

Commission may, in its discretion, give greater weight to any one of

the five enumerated areas of concern and may, in its discretion,

determine that, notwithstanding its costs, a particular rule is

necessary and appropriate to protect the public interest or to

effectuate any of the provisions or to accomplish any of the purposes

of the Act.

The final rules implement the Reauthorization Act by establishing

an enhanced level of oversight of ECMs and ECM market participants. As

a result, in certain cases, it is more appropriate to attribute the

compliance costs imposed by the proposed rules to requirements that

directly arise from the provisions of the Reauthorization Act.

Under the final rules, all DCMs, DTEFs (unless the Commission

determines otherwise) and ECMs with SPDCs are required to provide daily

transaction and related data reports to the Commission under rule

16.02. The costs associated with the daily transaction and related data

reporting requirements of final rule 16.02, however, are ameliorated by

the fact that DCMs have voluntarily provided transactional data to the

Commission on a daily basis since the mid-1980s. The Commission

estimates that DCMs would account for the substantial majority of the

markets that likely would be required to file such reports under final

rule 16.02.

The final rules extend the reporting requirements of parts 15 to 21

of the Commission's rules to ECMs with SPDCs and to transactions in

SPDCs and SPDC-fungible contracts. The

[[Page 12187]]

requirements of the adopted rules are substantial, involve the

submission of daily reports, and impose burdens on market participants

that clear and trade SPDCs and SPDC-fungible contracts. More

specifically, the adopted rules require ECMs with SPDCs to provide

clearing member reports for SPDCs and SPDC-fungible contracts to the

Commission pursuant to CFTC rule 16.00. Final rule 16.01 requires ECMs

to submit to the Commission and publicly disseminate option deltas and

aggregated trading data on a daily basis for such transactions.

Pursuant to rule 17.00, ECM clearing members that clear SPDCs and SPDC-

fungible contracts are required to file reports with the Commission for

large positions when such positions meet or exceed the contract

reporting levels of rule 15.03. Under rule 17.01, clearing members also

must identify the owners of reportable positions on Form 102. SPDC

traders likewise are subject to the special call provisions of final

part 18 of the Commission's rules for reportable positions, and

clearing members, SPDC traders, and ECMs listing SPDCs are each subject

to the special call provisions of final part 21 of the Commission's

rules.

The costs associated with the requirements of the reporting rules

should be reduced in part by the substantial overlap between the

persons that already are subject to the reporting rules and the persons

that are subject to the reporting rules pursuant to the Commission's

final rules. For example, there is substantial overlap between traders

of the natural gas contract on ICE and traders of the same contract on

NYMEX. With respect to clearing members of ICE, for example, such

persons often are clearing members or affiliates of clearing members of

NYMEX.

The benefits of extending the reporting rules to SPDCs and SPDC-

fungible contracts are substantial. As an initial matter, it is

important to note that a significant focus of the Reauthorization Act

concerned amending the CEA with the specific intent of giving the CFTC

authority to extend its reporting rules to SPDC markets and market

participants. To the extent that contracts listed on ECMs serve a

significant price discovery function, the regulatory value of enhanced

oversight, through the application of the reporting rules to such

contracts, is elevated. The Commission analyzes the information

funneled to it by the requirements of the reporting rules to conduct

financial, market and trade practice surveillance. Without such

information, the ability of the Commission to discharge its regulatory

responsibilities--including the responsibilities to prevent market

manipulations and commodity price distortions and ensure the financial

integrity of the listed derivatives marketplace--would be compromised.

The bulk of the costs that are imposed by the requirements of final

rule 36.3 relate to significant and increased submission of information

requirements. For example, under final rule 36.3(b)(1), all ECMs are

required to file certain basic information (including contract terms

and conditions) with, and to make certain demonstrations related to

compliance with the terms of the CEA section 2(h)(3) exemption to, the

Commission. Final rule 36.3(b)(2) requires ECMs to submit transactional

information on a weekly basis to the Commission for certain traded

contracts that are not SPDCs and would not be subject to the terms of

final rule 16.02. Likewise, final rule 36.3(c)(4) imposes a substantial

cost on ECMs with SPDCs as a result of the information that such

markets are required to submit to the Commission.

In enacting the Reauthorization Act, Congress directed the

Commission to take an active role in determining whether contracts

listed by ECMs qualify as SPDCs. Accordingly, the Commission has

adopted enhanced informational requirements for ECMs with respect to

contracts that have not been identified as SPDCs specifically for the

purpose of acquiring the information that it needs to discharge this

newly-mandated responsibility. In addition, the substantial information

submission and demonstration requirements that are imposed on ECMs with

SPDCs have been adopted because ECMs with SPDCs, by statute, acquire

certain of the self-regulatory responsibilities of fully regulated

DCMs. The submission requirements associated with final rule 36.3(c)(4)

are therefore tailored to enable the Commission to ensure that ECMs

with SPDCs, as entities with the elevated status of a registered entity

under the Act, are in compliance with the statutory terms of the core

principles of section 2(h)(7)(C) of the Act. As with the final

reporting rules, the primary benefit to the public of final rule 36.3

is that its requirements enable the Commission to discharge its

statutory responsibility for monitoring for the presence of SPDCs and

extending its oversight to the trading of SPDCs.

B. Regulatory Flexibility Act

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

requires that agencies consider the impact of their rules on small

businesses. As noted in the proposing release, the requirements related

to the proposed amendments fall mainly on registered entities,

exchanges, futures commission merchants, clearing members, foreign

brokers and large traders. The Commission previously has determined

that exchanges, futures commission merchants and large traders are not

``small entities'' for purposes of the RFA.\69\ Similarly, clearing

members, foreign brokers and traders would be subject to the final

rules only if clearing, carrying or holding large positions.

Accordingly, the Acting Chairman, on behalf of the Commission,

certified in the NPRM pursuant to 5 U.S.C. 605(b) that the actions to

be taken herein will not have a significant economic impact on a

substantial number of small entities.\70\

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\69\ 47 FR 18618 (April 30, 1982).

\70\ 73 FR 75888 at 75900.

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

C. Paperwork Reduction Act

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a

currently valid control number. Final rule 16.02, the Commission's

reporting rules, and certain provisions of final rule 36.3 result in

information collection requirements within the meaning of the Paperwork

Reduction Act of 1995 (``PRA'').\71\ The Commission submitted the

proposing release along with supporting documentation to the Office of

Management and Budget (``OMB'') for review in accordance with 44 U.S.C.

3507(d) and 5 CFR 1320.11. The Commission requested that OMB approve,

and with respect to rules 36.3 and 16.02 assign a new control number

for, the collections of information covered by the proposing release.

The information collection burdens created by the Commission's proposed

rules, which were discussed in detail in the proposing release, are

identical to the collective information collection burdens of the final

rules.

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

\71\ 44 U.S.C. 3501-3520.

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

The Commission invited the public and other Federal agencies to

comment on any aspect of the information collection requirements

discussed above.\72\ Pursuant to 44 U.S.C. 3506(c)(2)(B), the

Commission solicited comments in order to: (i) Evaluate whether the

proposed collections of information were necessary for the proper

performance of the functions of the Commission, including whether the

information will have practical utility; (ii) evaluate the accuracy of

the Commission's estimates of the burden of

[[Page 12188]]

the proposed collections of information; (iii) determine whether there

are ways to enhance the quality, utility and clarity of the information

to be collected; and (iv) minimize the burden of the collections of

information on those who are to respond, including through the use of

automated collection techniques or other forms of information

technology. The Commission received no comment on its burden estimates

or on any other aspect of the information collection requirements

contained in its proposing release.

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

\72\ 73 FR 75888 at 75903.

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

The title for the collection of information under rule 36.3 is

``Regulation 36.3--Exempt Commercial Market Submission Requirements.''

OMB has approved and assigned OMB control number 3038-0060 to this

collection of information. The requirements of Commission rule 36.3

were covered previously by OMB control number 3038-0054 which applied

to both EBOTs and ECMs. As a result of the Reauthorization Act, EBOTs

and ECMs must comply with additional, divergent regulatory

requirements. Accordingly, the Commission sought a new and separate

control number for ECMs operating in compliance with the requirements

of rule 36.3. As a result of OMB's approval of a control number

specifically for ECMs, the Commission intends to submit the necessary

documentation to OMB to enable it to apply OMB control number 3038-0054

exclusively to EBOTs.

The final amendments to parts 15 to 21 of the Commission's rules

affect two existing collections of information titled ``Large Trader

Reports'' (OMB control number 3038-0009) and ``Futures Volume, Open

Interest, Price, Deliveries, and Exchanges of Futures'' (OMB control

number 3038-0012). OMB has approved the amendments made to these two

collections of information.

Finally, the title for the collection of information of new rule

16.02 is ``Regulation 16.02--Daily Trade and Supporting Data Reports.''

OMB has approved assigned OMB control number 3038-0061 to this

collection of information.

List of Subjects

17 CFR Part 15

Brokers, Commodity futures, Reporting and recordkeeping

requirements

17 CFR Part 16

Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 17

Brokers, Commodity futures, Reporting and recordkeeping

requirements

17 CFR Part 18

Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 19

Commodity futures, Cottons, Grains, Reporting and recordkeeping

requirements.

17 CFR Part 21

Brokers, Commodity futures, Reporting and recordkeeping

requirements.

17 CFR Part 36

Commodity futures, Commodity Futures Trading Commission

17 CFR Part 40

Commodity futures, Contract markets, Designation application,

Reporting and recordkeeping requirements.

In consideration of the foregoing, and pursuant to the authority

contained in the Act, as amended by the Reauthorization Act of 2008,

Title XIII of Public Law 110-246, 122 Stat. 1624 (2008), and in

particular sections 2, 5, 6, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 9,

12a, 19, and 21, the Commodity Futures Trading Commission hereby amends

17 CFR parts 15, 16, 17, 18, 19, 21, 36 and 40 as follows:

PART 15--REPORTS--GENERAL PROVISIONS

0

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

Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a,

9, 12a, 19, and 21, as amended by Title XIII of the Food,

Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.

1624 (June 18, 2008).

0

2. Section 15.00 is revised to read as follows:

Sec. 15.00 Definitions of terms used in parts 15 to 21 of this

chapter.

As used in parts 15 to 21 of this chapter:

(a) Cash or Spot, when used in connection with any commodity, means

the actual commodity as distinguished from a futures or options

contract in such commodity.

(b) Clearing member means any person who is a member of, or enjoys

the privilege of clearing trades in his own name through, the clearing

organization of a designated contract market, registered derivatives

transaction execution facility, or registered entity under section

1a(29) of the Act.

(c) Clearing organization means the person or organization which

acts as a medium for clearing transactions in commodities for future

delivery or commodity option transactions, or for effecting settlements

of contracts for future delivery or commodity option transactions, for

and between members of any designated contract market, registered

derivatives transaction execution facility or registered entity under

section 1a(29) of the Act.

(d) Compatible data processing media means data processing media

approved by the Commission or its designee.

(e) Customer means ``customer'' (as defined in Sec. 1.3(k) of this

chapter) and ``options customer'' (as defined in Sec. 1.3(jj) of this

chapter).

(f) Customer trading program means any system of trading offered,

sponsored, promoted, managed or in any other way supported by, or

affiliated with, a futures commission merchant, an introducing broker,

a commodity trading advisor, a commodity pool operator, or other

trader, or any of its officers, partners or employees, and which by

agreement, recommendations, advice or otherwise, directly or indirectly

controls trading done and positions held by any other person. The term

includes, but is not limited to, arrangements where a program

participant enters into an expressed or implied agreement not obtained

from other customers and makes a minimum deposit in excess of that

required of other customers for the purpose of receiving specific

advice or recommendations which are not made available to other

customers. The term includes any program which is of the character of,

or is commonly known to the trade as, a managed account, guided

account, discretionary account, commodity pool or partnership account.

(g) Discretionary account means a commodity futures or commodity

option trading account for which buying or selling orders can be placed

or originated, or for which transactions can be effected, under a

general authorization and without the specific consent of the customer,

whether the general authorization for such orders or transactions is

pursuant to a written agreement, power of attorney, or otherwise.

(h) Exclusively self-cleared contract means a cleared contract for

which no persons, other than a reporting market and its clearing

organization, are permitted to accept any money, securities, or

property (or extend credit in lieu thereof) to margin, guarantee, or

secure any trade.

(i) Foreign clearing member means a ``clearing member'' (as defined

by

[[Page 12189]]

paragraph (b) of this section) who resides or is domiciled outside of

the United States, its territories or possessions.

(j) Foreign trader means any trader (as defined in paragraph (s) of

this section) who resides or is domiciled outside of the United States,

its territories or possessions.

(k) Futures, futures contract, future delivery or contract for

future delivery, means any contract for the purchase or sale of any

commodity for future delivery that is executed on or subject to the

rules of a reporting market, including all agreements, contracts and

transactions that are treated by a clearing organization as fungible

with such contracts.

(l) Guided account program means any customer trading program which

limits trading to the purchase or sale of a particular contract for

future delivery of a commodity or a particular commodity option that is

advised or recommended to the participant in the program.

(m) Managed account program means a customer trading program which

includes two or more discretionary accounts traded pursuant to a common

plan, advice or recommendations.

(n) Open contracts means ``open contracts'' (as defined in Sec.

1.3(t) of this chapter) and commodity option positions held by any

person on or subject to the rules of a board of trade which have not

expired, been exercised, or offset.

(o) Option, options, option contract, or options contract, unless

specifically provided otherwise, means any contract for the purchase or

sale of a commodity option that is executed on or subject to the rules

of a reporting market, including all agreements, contracts and

transactions that are treated by a clearing organization as fungible

with such contracts.

(p) Reportable position means:

(1) For reports specified in parts 17, 18 and Sec. 19.00(a)(2) and

(a)(3) of this chapter any open contract position that at the close of

the market on any business day equals or exceeds the quantity specified

in Sec. 15.03 of this part in either:

(i) Any one futures of any commodity on any one reporting market,

excluding futures contracts against which notices of delivery have been

stopped by a trader or issued by the clearing organization of a

reporting market; or

(ii) Long or short put or call options that exercise into the same

future of any commodity, or long or short put or call options for

options on physicals that have identical expirations and exercise into

the same physical, on any one reporting market.

(2) For the purposes of reports specified in Sec. 19.00(a)(1) of

this chapter, any combined futures and futures-equivalent option open

contract position as defined in part 150 of this chapter in any one

month or in all months combined, either net long or net short in any

commodity on any one reporting market, excluding futures positions

against which notices of delivery have been stopped by a trader or

issued by the clearing organization of a reporting market, which at the

close of the market on the last business day of the week exceeds the

net quantity limit in spot, single or in all-months fixed in Sec.

150.2 of this chapter for the particular commodity and reporting

market.

(q) Reporting market means a designated contract market, registered

entity under section 1a(29) of the Act, and unless determined otherwise

by the Commission with respect to the facility or a specific contract

listed by the facility, a registered derivatives transaction execution

facility.

(r) Special account means any commodity futures or option account

in which there is a reportable position.

(s) Trader means a person who, for his own account or for an

account which he controls, makes transactions in commodity futures or

options, or has such transactions made.

0

3. Section 15.01 is amended by revising paragraph (a) to read as

follows:

Sec. 15.01 Persons required to report.

* * * * *

(a) Reporting markets--as specified in parts 16, 17, and 21 of this

chapter.

* * * * *

0

4. Section 15.05 is amended by revising the heading and paragraph (a);

and by adding paragraph (i) to read as follows:

Sec. 15.05 Designation of agent for foreign persons.

(a) For purposes of this section, the term ``futures contract''

means any contract for the purchase or sale of any commodity for future

delivery, or a contract identified under section 36.3(b)(1)(i) as

traded in reliance on the exemption in section 2(h)(3) of the Act,

traded or executed on or subject to the rules of any designated

contract market or registered derivatives transaction execution

facility, or for the purposes of paragraph (i) of this section, a

reporting market (including all agreements, contracts and transactions

that are treated by a clearing organization as fungible with such

contracts); the term ``option contract'' means any contract for the

purchase or sale of a commodity option, or as applicable, any other

instrument subject to the Act pursuant to section 5a(g) of the Act,

traded or executed on or subject to the rules of any designated

contract market or registered derivatives transaction execution

facility, or for the purposes of paragraph (i) of this section, a

reporting market (including all agreements, contracts and transactions

that are treated by a clearing organization as fungible with such

contracts); the term ``customer'' means any person for whose benefit a

foreign broker makes or causes to be made any futures contract or

option contract; and the term ``communication'' means any summons,

complaint, order, subpoena, special call, request for information, or

notice, as well as any other written document or correspondence.

* * * * *

(i) Any reporting market that is a registered entity under section

1a(29)(E) of the Act that permits a foreign clearing member or foreign

trader to clear or effect contracts, agreements or transactions on the

trading facility or its clearing organization, shall be deemed to be

the agent of the foreign clearing member or foreign trader with respect

to any such contracts, agreements or transactions cleared or executed

by the foreign clearing member or the foreign trader. Service or

delivery of any communication issued by or on behalf of the Commission

to the reporting market shall constitute valid and effective service

upon the foreign clearing member or foreign trader. The reporting

market which has been served with, or to which there has been

delivered, a communication issued by or on behalf of the Commission to

a foreign clearing member or foreign trader shall transmit the

communication promptly and in a manner which is reasonable under the

circumstances, or in a manner specified by the Commission in the

communication, to the foreign clearing member or foreign trader.

(1) It shall be unlawful for any such reporting market to permit a

foreign clearing member or a foreign trader to clear or effect

contracts, agreements or transactions on the facility or its clearing

organization unless the reporting market prior thereto informs the

foreign clearing member or foreign trader of the requirements of this

section.

(2) The requirements of paragraphs (i) and (i)(1) of this section

shall not apply to any contracts, transactions or agreements if the

foreign clearing member or foreign trader has duly executed and

maintains in effect a

[[Page 12190]]

written agency agreement in compliance with this paragraph with a

person domiciled in the United States and has provided a copy of the

agreement to the reporting market prior to effecting or clearing any

contract, agreement or transaction on the trading facility or its

clearing organization. This agreement must authorize the person

domiciled in the United States to serve as the agent of the foreign

clearing member or foreign trader for the purposes of accepting

delivery and service of all communications issued by or on behalf of

the Commission to the foreign clearing member or the foreign trader and

must provide an address in the United States where the agent will

accept delivery and service of communications from the Commission. This

agreement must be filed with the Commission by the reporting market

prior to permitting the foreign clearing member or the foreign trader

to clear or effect any transactions in futures or option contracts.

Unless otherwise specified by the Commission, the agreements required

to be filed with the Commission shall be filed with the Secretary of

the Commission at Three Lafayette Centre, 1155 21st Street, NW.,

Washington, DC 20581.

(3) A foreign clearing member or a foreign trader shall notify the

Commission immediately if the written agency agreement is terminated,

revoked, or is otherwise no longer in effect. If the reporting market

knows or should know that the agreement has expired, been terminated,

or is no longer in effect, the reporting market shall notify the

Secretary of the Commission immediately. If the written agency

agreement expires, terminates, or is not in effect, the reporting

market, the foreign clearing member and the foreign trader shall be

subject to the provisions of paragraphs (i) and (i)(1) of this section.

* * * * *

0

5. Section 15.06 is added to read as follows:

Sec. 15.06 Delegations.

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

otherwise, the authority to approve data processing media, as

referenced in Sec. 15.00(d), for data submissions to the Director of

the Division of Market Oversight, to be exercised by such Director or

by such other employee or employees of such Director as designated from

time to time by the Director. The Director may submit to the Commission

for its consideration any matter which has been delegated in this

paragraph. Nothing in this paragraph prohibits the Commission, at its

election, from exercising the authority delegated in this paragraph.

(b) [Reserved]

PART 16--REPORTS BY REPORTING MARKETS

0

6. The authority citation for part 16 is revised to read as follows:

Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as amended

by Title XIII of the Food, Conservation and Energy Act of 2008,

Public Law 110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise

noted.

0

7. Section 16.01 is amended by revising paragraph (e) to read as

follows:

Sec. 16.01 Trading volume, open contracts, prices, and critical

dates.

* * * * *

(e) Publication of recorded information. (1) Reporting markets

shall make the information in paragraph (a) of this section readily

available to the news media and the general public without charge, in a

format that readily enables the consideration of such data, no later

than the business day following the day to which the information

pertains. The information in paragraphs (a)(4) through (a)(6) of this

section shall be made readily available in a format that presents the

information together.

(2) Reporting markets shall make the information in paragraphs

(b)(1) and (b)(2) of this section readily available to the news media

and the general public, and the information in paragraph (b)(3) of this

section readily available to the general public, in a format that

readily enables the consideration of such data, no later than the

business day following the day to which the information pertains.

* * * * *

0

8. Section 16.02 is added to read as follows:

Sec. 16.02 Daily trade and supporting data reports.

Reporting markets shall provide trade and supporting data reports

to the Commission on a daily basis. Such reports shall include

transaction-level trade data and related order information for each

futures or options contract. Reports shall also include time and sales

data, reference files and other information as the Commission or its

designee may require. All reports must be submitted at the time, and in

the manner and format, and with the specific content specified by the

Commission or its designee. Upon request, such information shall be

accompanied by data that identifies or facilitates the identification

of each trader for each transaction or order included in a submitted

trade and supporting data report if the reporting market maintains such

data.

0

9. Section 16.07 is amended by revising the heading and introductory

text; and by adding paragraph (c) to read as follows:

Sec. 16.07 Delegation of authority to the Director of the Division of

Market Oversight.

The Commission hereby delegates, until the Commission orders

otherwise, the authority set forth in paragraphs (a), (b) and (c) of

this section to the Director of the Division of Market Oversight, to be

exercised by such Director or by such other employee or employees of

such Director as may be designated from time to time by the Director.

The Director of the Division of Market Oversight may submit to the

Commission for its consideration any matter which has been delegated in

this paragraph. Nothing in this paragraph prohibits the Commission, at

its election, from exercising the authority delegated in this

paragraph.

* * * * *

(c) Pursuant to Sec. 16.02, the authority to determine the

specific content of any daily trade and supporting data report, request

that such reports be accompanied by data that identifies or facilitates

the identification of each trader for each transaction or order

included in a submitted trade and supporting data report, and establish

the time for the submission of and the manner and format of such

reports.

PART 17--REPORTS BY REPORTING MARKETS, FUTURES COMMISSION

MERCHANTS, CLEARING MEMBERS, AND FOREIGN BROKERS

0

10. The authority citation for part 17 is revised to read as follows:

Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 7, 7a and 12a, as

amended by Title XIII of the Food, Conservation and Energy Act of

2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008), unless

otherwise noted.

0

11. Revise the heading of part 17 as set forth above.

0

12. Section 17.00 is amended by the heading of paragraph (a) and

paragraphs (a)(1), (b)(1), and (f); and by adding and reserving

paragraph (c) to read as follows:

Sec. 17.00 Information to be furnished by futures commission

merchants, clearing members and foreign brokers.

(a) Special accounts--reportable futures and options positions,

delivery notices, and exchanges of futures. (1) Each futures commission

merchant, clearing member and foreign broker shall submit a report to

the Commission

[[Page 12191]]

for each business day with respect to all special accounts carried by

the futures commission merchant, clearing member or foreign broker,

except for accounts carried on the books of another futures commission

merchant or clearing member on a fully-disclosed basis. Except as

otherwise authorized by the Commission or its designee, such report

shall be made in accordance with the format and coding provisions set

forth in paragraph (g) of this section. The report shall show each

futures position, separately for each reporting market and for each

future, and each put and call options position separately for each

reporting market, expiration and strike price en each special account

as of the close of market on the day covered by the report and, in

addition, the quantity of exchanges of futures for commodities or for

derivatives positions and the number of delivery notices issued for

each such account by the clearing organization of a reporting market

and the number stopped by the account. The report shall also show all

positions in all contract months and option expirations of that same

commodity on the same reporting market for which the special account is

reportable.

* * * * *

(b) * * *

(1) Accounts of eligible entities--Accounts of eligible entities as

defined in Sec. 150.1 of this chapter that are traded by an

independent account controller shall, together with other accounts

traded by the independent account controller or in which the

independent controller has a financial interest, be considered a single

account.

* * * * *

(c) [Reserved]

* * * * *

(f) Omnibus accounts. If the total open long positions or the total

open short positions for any future of a commodity carried in an

omnibus account is a reportable position, the omnibus account is in

Special Account status and shall be reported by the futures commission

merchant or foreign broker carrying the account in accordance with

paragraph (a) of this section.

* * * * *

0

13. Section 17.03 is amended by revising the heading, the introductory

text, and paragraphs (a) and (b) to read as follows:

Sec. 17.03 Delegation of authority to the Director of the Division of

Market Oversight.

The Commission hereby delegates, until the Commission orders

otherwise, the authority set forth in the paragraphs below to the

Director of the Division of Market Oversight to be exercised by such

Director or by such other employee or employees of such Director as

designated from time to time by the Director. The Director of the

Division of Market Oversight may submit to the Commission for its

consideration any matter which has been delegated in this paragraph.

Nothing in this paragraph prohibits the Commission, at its election,

from exercising the authority delegated in this paragraph.

(a) Pursuant to Sec. 17.00(a) and (h), the authority to determine

whether futures commission merchants, clearing members and foreign

brokers can report the information required under paragraphs (a) and

(h) of Sec. 17.00 on series '01 forms or using some other format upon

a determination that such person is unable to report the information

using the format, coding structure or electronic data transmission

procedures otherwise required.

(b) Pursuant to Sec. 17.02, the authority to instruct or approve

the time at which the information required under Sec. Sec. 17.00 and

17.01 must be submitted by futures commission merchants, clearing

members and foreign brokers provided that such persons are unable to

meet the requirements set forth in Sec. Sec. 17.01(g) and 17.02.

* * * * *

0

14. Section 17.04 is amended by revising the heading, paragraph (a),

and paragraph (b)(1)(ii) to read as follows:

Sec. 17.04 Reporting omnibus accounts to reporting firms.

(a) Any futures commission merchant, clearing member or foreign

broker who establishes an omnibus account with another futures

commission merchant, clearing member or foreign broker shall report to

that futures commission merchant, clearing member or foreign broker the

total open long positions and the total open short positions in each

future of a commodity and, for commodity options transactions, the

total open long put options, the total open short put options, the

total open long call options, and the total open short call options for

each commodity options expiration date and each strike price in such

account at the close of trading each day. The information required by

this section shall be reported in sufficient time to enable the futures

commission merchant, clearing member or foreign broker with whom the

omnibus account is established to comply with the regulations of this

part and the reporting requirements established by the reporting

markets.

(b) * * *

(1) * * *

(ii) The account is an omnibus account of another futures

commission merchant, clearing member or foreign broker; or

* * * * *

PART 18--REPORTS BY TRADERS

0

15. The authority citation for part 18 is revised to read as follows:

Authority: 7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a

and 19, as amended by Title XIII of the Food, Conservation and

Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.

0

16. Section 18.01 is revised to read as follows:

Sec. 18.01 Interest in or control of several accounts.

If any trader holds, has a financial interest in or controls

positions in more than one account, whether carried with the same or

with different futures commission merchants or foreign brokers, all

such positions and accounts shall be considered as a single account for

the purpose of determining whether such trader has a reportable

position and, unless instructed otherwise in the special call to report

under Sec. 18.00 for the purpose of reporting.

0

17. Section 18.04 is amended by revising paragraphs (a)(7) and

(b)(3)(i) to read as follows:

Sec. 18.04 Statement of reporting trader.

* * * * *

(a) * * *

(7) The names and locations of all futures commission merchants,

clearing members, introducing brokers, and foreign brokers through whom

accounts owned or controlled by the reporting trader are carried or

introduced at the time of filing a Form 40, if such accounts are

carried through more than one futures commission merchant, clearing

member or foreign broker or carried through more than one office of the

same futures commission merchant, clearing member or foreign broker, or

introduced by more than one introducing broker clearing accounts

through the same futures commission merchant, and the name of the

reporting trader's account executive at each firm or office of the

firm.

* * * * *

(b) * * *

(3) * * *

(i) Commercial activity associated with use of the option or

futures market (such as and including production, merchandising or

processing of a cash commodity, asset or liability risk management by

depository institutions, or security portfolio risk management).

* * * * *

[[Page 12192]]

0

18. Section 18.05 is amended by revising paragraphs (a)(2), (a)(3), and

(a)(4) to read as follows:

Sec. 18.05 Maintenance of books and records.

(a) * * *

(2) Over the counter or pursuant to sections 2(d), 2(g) or 2(h)(1)-

(2) of the Act or part 35 of this chapter;

(3) On exempt commercial markets operating pursuant to sections

2(h)(3)-(5) of the Act;

(4) On exempt boards of trade operating pursuant to section 5d of

the Act; and

* * * * *

PART 19--REPORTS BY PERSONS HOLDING BONA FIDE HEDGE POSITIONS

PURSUANT TO Sec. 1.3(z) OF THIS CHAPTER AND BY MERCHANTS AND

DEALERS IN COTTON

0

19. The authority citation for part 19 is revised to read as follows:

Authority: 7 U.S.C. 6g(a), 6i, and 12a(5), as amended by Title

XIII of the Food, Conservation and Energy Act of 2008, Public Law

110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.

0

20. Section 19.00 is amended by revising paragraph (a) to read as

follows:

Sec. 19.00 General provisions.

(a) Who must file series '04 reports. The following persons are

required to file series '04 reports:

(1) All persons holding or controlling futures and option positions

that are reportable pursuant to Sec. 15.00(p)(2) of this chapter and

any part of which constitute bona fide hedging positions as defined in

Sec. 1.3(z) of this chapter;

(2) Merchants and dealers of cotton holding or controlling

positions for futures delivery in cotton that are reportable pursuant

to Sec. 15.00(p)(1)(i) of this chapter, or

(3) All persons holding or controlling positions for future

delivery that are reportable pursuant to Sec. 15.00(p)(1) of this

chapter who have received a special call for series '04 reports from

the Commission or its designee. Filings in response to a special call

shall be made within one business day of receipt of the special call

unless otherwise specified in the call. For the purposes of this

paragraph, the Commission hereby delegates to the Director of the

Division of Market Oversight, or to such other person designated by the

Director, authority to issue calls for series '04 reports.

* * * * *

0

21. Section 19.01 is amended by revising paragraph (b) introductory

text and paragraph (b)(1) to read as follows:

Sec. 19.01 Reports on stocks and fixed price purchases and sales

pertaining to futures positions in wheat, corn, oats, soybeans, soybean

oil, soybean meal or cotton.

* * * * *

(b) Time and place of filing reports--Except for reports filed in

response to special calls made under Sec. 19.00(a)(3), each report

shall be made monthly, as of the close of business on the last Friday

of the month, and filed at the appropriate Commission office specified

in paragraph (b)(1) or (2) of this section not later than the second

business day following the date of the report in the case of the 304

report and not later than the third business day following the date of

the report in the case of the 204 report. Reports may be transmitted by

facsimile or, alternatively, information on the form may be reported to

the appropriate Commission office by telephone and the report mailed to

the same office, not later than midnight of its due date.

(1) CFTC Form 204 reports with respect to transactions in wheat,

corn, oats, soybeans, soybean meal and soybean oil should be sent to

the Commission's office in Chicago, IL, unless otherwise specifically

authorized by the Commission or its designee.

* * * * *

PART 21--SPECIAL CALLS

0

22. The authority citation for part 21 is revised to read as follows:

Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m,

6n, 7, 7a, 12a, 19 and 21, as amended by Title XIII of the Food,

Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat.

1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise

noted.

0

23. Section 21.01 is revised to read as follows:

Sec. 21.01 Special calls for information on controlled accounts from

futures commission merchants, clearing members and introducing brokers.

Upon call by the Commission, each futures commission merchant,

clearing member and introducing broker shall file with the Commission

the names and addresses of all persons who, by power of attorney or

otherwise, exercise trading control over any customer's account in

commodity futures or commodity options on any reporting market.

0

24. Section 21.02 is amended by revising the heading, introductory

text, and paragraphs (f) and (i) to read as follows:

Sec. 21.02 Special calls for information on open contracts in

accounts carried or introduced by futures commission merchants,

clearing members, members of reporting markets, introducing brokers,

and foreign brokers.

Upon special call by the Commission for information relating to

futures or option positions held or introduced on the dates specified

in the call, each futures commission merchant, clearing member, member

of a reporting market, introducing broker, or foreign broker, and, in

addition, for option information, each reporting market, shall furnish

to the Commission the following information concerning accounts of

traders owning or controlling such futures or option positions, except

for accounts carried on a fully disclosed basis by another futures

commission merchant or clearing member, as may be specified in the

call:

* * * * *

(f) The number of open futures or option positions introduced or

carried in each account, as specified in the call;

* * * * *

(i) As applicable, the following identifying information:

(1) Whether a trader who holds commodity futures or option

positions is classified as a commercial or as a noncommercial trader

for each commodity futures or option contract;

(2) Whether the open commodity futures or option contracts are

classified as speculative, spreading (straddling), or hedging; and

(3) Whether any of the accounts in question are omnibus accounts

and, if so, whether the originator of the omnibus account is another

futures commission merchant, clearing member or foreign broker.

* * * * *

0

25. Section 21.03 is amended as follows:

0

A. By revising the heading and paragraphs (a), (b), (c) and (d);

0

B. By revising paragraph (e) introductory text and paragraphs (e)(1)

introductory text, (e)(1)(iv) and (e)(1)(v); and

0

C. By revising paragraphs (f), (g) and (h) to read as follows:

Sec. 21.03 Selected special calls-duties of foreign brokers, domestic

and foreign traders, futures commission merchants, clearing members,

introducing brokers, and reporting markets.

(a) For purposes of this section, the term ``accounts of a futures

commission merchant, clearing member or foreign broker'' means all open

contracts and transactions in futures and options on the records of the

futures commission merchant, clearing member or foreign

[[Page 12193]]

broker; the term ``beneficial interest'' means having or sharing in any

rights, obligations or financial interest in any futures or options

account; the term ``customer'' means any futures commission merchant,

clearing member, introducing broker, foreign broker, or trader for whom

a futures commission merchant, clearing member or reporting market that

is a registered entity under section 1a(29) of the Act makes or causes

to be made a futures or options contract. Paragraphs (e), (g) and (h)

of this section shall not apply to any futures commission merchant,

clearing member or customer whose books and records are open at all

times to inspection in the United States by any representative of the

Commission.

(b) It shall be unlawful for a futures commission merchant to open

a futures or options account or to effect transactions in futures or

options contracts for an existing account, or for an introducing broker

to introduce such an account, for any customer for whom the futures

commission merchant or introducing broker is required to provide the

explanation provided for in Sec. 15.05(c) of this chapter, or for a

reporting market that is a registered entity under section 1a(29)(E) of

the Act, to cause to open an account in a contract traded in reliance

on the exemption in section 2(h)(3) of the Act or to cause to be

effected transactions in a contract traded in reliance on the exemption

in section 2(h)(3) of the Act for an existing account for any person

that is a foreign clearing member or foreign trader, until the futures

commission merchant, introducing broker, clearing member, or reporting

market has explained fully to the customer, in any manner that such

persons deem appropriate, the provisions of this section.

(c) Upon a determination by the Commission that information

concerning accounts may be relevant information in enabling the

Commission to determine whether the threat of a market manipulation,

corner, squeeze, or other market disorder exists on any reporting

market, the Commission may issue a call for information from a futures

commission merchant, clearing member, introducing broker or customer

pursuant to the provisions of this section.

(d) In the event the call is issued to a foreign broker, foreign

clearing member or foreign trader, its agent, designated pursuant to

Sec. 15.05 of this chapter, shall, if directed, promptly transmit

calls made by the Commission pursuant to this section by electronic

mail or a similarly expeditious means of communication.

(e) The futures commission merchant, clearing member, introducing

broker, or customer to whom the special call is issued must provide to

the Commission the information specified below for the commodity,

reporting market and delivery months or option expiration dates named

in the call. Such information shall be filed at the place and within

the time specified by the Commission.

(1) For each account of a futures commission merchant, clearing

member, introducing broker, or foreign broker, including those accounts

in the name of the futures commission merchant, clearing member or

foreign broker, on the dates specified in the call issued pursuant to

this section, such persons shall provide the Commission with the

following information:

* * * * *

(iv) Whether the account is carried for and in the name of another

futures commission merchant, clearing member, introducing broker, or

foreign broker; and

(v) For the accounts which are not carried for and in the name of

another futures commission merchant, clearing member, introducing

broker, or foreign broker, the name and address of any other person who

controls the trading of the account, and the name and address of any

person who has a ten percent or more beneficial interest in the

account.

* * * * *

(f) If the Commission has reason to believe that any person has not

responded as required to a call made pursuant to this section, the

Commission in writing may inform the reporting market specified in the

call and that reporting market shall prohibit the execution of, and no

futures commission merchant, clearing member, introducing broker, or

foreign broker shall effect a transaction in connection with trades on

the reporting market and in the months or expiration dates specified in

the call for or on behalf of the futures commission merchant or

customer named in the call, unless such trades offset existing open

contracts of such futures commission merchant or customer.

(g) Any person named in a special call that believes he or she is

or may be adversely affected or aggrieved by action taken by the

Commission under paragraph (f) of this section shall have the

opportunity for a prompt hearing after the Commission acts. That person

may immediately present in writing to the Commission for its

consideration any comments or arguments concerning the Commission's

action and may present for Commission consideration any documentary or

other evidence that person deems appropriate. Upon request, the

Commission may, in its discretion, determine that an oral hearing be

conducted to permit the further presentation of information and views

concerning any matters by any or all such persons. The oral hearing may

be held before the Commission or any person designated by the

Commission, which person shall cause all evidence to be reduced to

writing and forthwith transmit the same and a recommended decision to

the Commission. The Commission's directive under paragraph (f) of this

section shall remain in effect unless and until modified or withdrawn

by the Commission.

(h) If, during the course of or after the Commission acts pursuant

to paragraph (f) of this section, the Commission determines that it is

appropriate to undertake a proceeding pursuant to section 6(c) of the

Act, the Commission shall issue a complaint in accordance with the

requirements of section 6(c), and, upon further determination by the

Commission that the conditions described in paragraph (c) of this

section still exist, a hearing pursuant to section 6(c) of the Act

shall commence no later than five business days after service of the

complaint. In the event the person served with the complaint under

section 6(c) of the Act has, prior to the commencement of the hearing

under section 6(c) of the Act, sought a hearing pursuant to paragraph

(g) of this section and the Commission has determined to accord him

such a hearing, the two hearings shall be conducted simultaneously.

Nothing in this section shall preclude the Commission from taking other

appropriate action under the Act or the Commission's regulations

thereunder, including action under section 6(c) of the Act, regardless

of whether the conditions described in paragraph (c) of this section

still exist, and no ruling issued in the course of a hearing pursuant

to paragraph (g) or this paragraph shall constitute an estoppel against

the Commission in any other action.

* * * * *

0

26. Section 21.04 is revised to read as follows:

Sec. 21.04 Delegation of authority to the Director of the Division of

Market Oversight.

The Commission hereby delegates, until the Commission orders

otherwise, the special call authority set forth in Sec. Sec. 21.01 and

21.02 to the Director of the Division of Market Oversight to be

exercised by such Director or by such other employee or employees of

such Director as designated from time to time

[[Page 12194]]

by the Director. The Director of the Division of Market Oversight may

submit to the Commission for its consideration any matter which has

been delegated in this paragraph. Nothing in this section shall be

deemed to prohibit the Commission, at its election, from exercising the

authority delegated in this section to the Director.

PART 36--EXEMPT MARKETS

0

27. The authority citation for part 36 is revised to read as follows:

Authority: 7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by

Title XIII of the Food, Conservation and Energy Act of 2008, Public

Law 110-246, 122 Stat. 1624 (June 18, 2008).

0

28. Section 36.3 is amended by revising paragraph (b) to read as

follows:

Sec. 36.3 Exempt commercial markets.

* * * * *

(b) Required information.

(1) All electronic trading facilities. A facility operating in

reliance on the exemption in section 2(h)(3) of the Act, initially and

on an on-going basis, must:

(i) Provide the Commission with the terms and conditions, as

defined in Sec. 40.1(i) of this chapter and product descriptions for

each agreement, contract or transaction listed by the facility in

reliance on the exemption set forth in section 2(h)(3) of the Act, as

well as trading conventions, mechanisms and practices;

(ii) Provide the Commission with information explaining how the

facility meets the definition of ``trading facility'' contained in

section 1a(33) of the Act and provide the Commission with access to the

electronic trading facility's trading protocols, in a format specified

by the Commission;

(iii) Demonstrate to the Commission that the facility requires, and

will require, with respect to all current and future agreements,

contracts and transactions, that each participant agrees to comply with

all applicable laws; that the authorized participants are ``eligible

commercial entities'' as defined in section 1a(11) of the Act; that all

agreements, contracts and transactions are and will be entered into

solely on a principal-to-principal basis; and that the facility has in

place a program to routinely monitor participants' compliance with

these requirements;

(iv) At the request of the Commission, provide any other

information that the Commission, in its discretion, deems relevant to

its determination whether an agreement, contract, or transaction

performs a significant price discovery function; and

(v) File with the Commission annually, no later than the end of

each calendar year, a completed copy of CFTC Form 205--Exempt

Commercial Market Annual Certification. The information submitted in

Form 205 shall include:

(A) A statement indicating whether the electronic trading facility

continues to operate under the exemption; and

(B) A certification that affirms the accuracy of and/or updates the

information contained in the previous Notification of Operation as an

Exempt Commercial Market.

(2) Electronic trading facilities trading or executing agreements,

contracts or transactions other than significant price discovery

contracts. In addition to the requirements of paragraph (b)(1) of this

section, a facility operating in reliance on the exemption in section

2(h)(3) of the Act, with respect to agreements, contracts or

transactions that have not been determined to perform significant price

discovery function, initially and on an on-going basis, must:

(i) Identify to the Commission those agreements, contracts and

transactions conducted on the electronic trading facility with respect

to which it intends, in good faith, to rely on the exemption in section

2(h)(3) of the Act, and which averaged five trades per day or more over

the most recent calendar quarter; and, with respect to such agreements,

contracts and transactions, either:

(A) Submit to the Commission, in a form and manner acceptable to

the Commission, a report for each business day. Each such report shall

be electronically transmitted weekly, within such time period as is

acceptable to the Commission after the end of the week to which the

data applies, and shall show for each such agreement, contract or

transaction executed the following information:

(1) The underlying commodity, the delivery or price-basing location

specified in the agreement, contract or transaction maturity date,

whether it is a financially settled or physically delivered instrument,

and the date of execution, time of execution, price, and quantity;

(2) Total daily volume and, if cleared, open interest;

(3) For an option instrument, in addition to the foregoing

information, the type of option (i.e., call or put) and strike prices;

and

(4) Such other information as the Commission may determine; or

(B) Provide to the Commission, in a form and manner acceptable to

the Commission, electronic access to those transactions conducted on

the electronic trading facility in reliance on the exemption in section

2(h)(3) of the Act, and meeting the average five trades per day or more

threshold test of this section, which would allow the Commission to

compile the information described in paragraph (b)(2)(i)(A) of this

section and create a permanent record thereof.

(ii) Maintain a record of allegations or complaints received by the

electronic trading facility concerning instances of suspected fraud or

manipulation in trading activity conducted in reliance on the exemption

set forth in section 2(h)(3) of the Act. The record shall contain the

name of the complainant, if provided, date of the complaint, market

instrument, substance of the allegations, and name of the person at the

electronic trading facility who received the complaint;

(iii) Provide to the Commission, in the form and manner prescribed

by the Commission, a copy of the record of each complaint received

pursuant to paragraph (b)(2)(ii) of this section that alleges, or

relates to, facts that would constitute a violation of the Act or

Commission regulations. Such copy shall be provided to the Commission

no later than 30 calendar days after the complaint is received.

Provided, however, that in the case of a complaint alleging, or

relating to, facts that would constitute an ongoing fraud or market

manipulation under the Act or Commission rules, such copy shall be

provided to the Commission within three business days after the

complaint is received; and

(iv) Provide to the Commission on a quarterly basis, within 15

calendar days of the close of each quarter, a list of each agreement,

contract or transaction executed on the electronic trading facility in

reliance on the exemption set forth in section 2(h)(3) of the Act and

indicate for each such agreement, contract or transaction the contract

terms and conditions, the contract's average daily trading volume, and

the most recent open interest figures.

(3) Electronic trading facilities trading or executing significant

price discovery contracts. In addition to the requirements of paragraph

(b)(1) of this section, if the Commission determines that a facility

operating in reliance on the exemption in section 2(h)(3) of the Act

trades or executes an agreement, contract or transaction that performs

a significant price discovery function, the facility must, with respect

to any significant price discovery contract, publish and provide to the

Commission the information required by Sec. 16.01 of this chapter.

(4) Delegation of authority. The Commission hereby delegates, until

the

[[Page 12195]]

Commission orders otherwise, the authority to determine the form and

manner of submitting the required information under paragraphs (b)(1)

through (3) of this section, to the Director of the Division of Market

Oversight and such members of the Commission's staff as the Director

may designate. The Director may submit to the Commission for its

consideration any matter that has been delegated by this paragraph.

Nothing in this paragraph prohibits the Commission, at its election,

from exercising the authority delegated in this paragraph.

(5) Special calls. (i) All information required upon special call

of the Commission under section 2(h)(5)(B)(iii) of the Act shall be

transmitted at the time and to the office of the Commission as may be

specified in the call.

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

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

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

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

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

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

Directors may submit to the Commission for its consideration any matter

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

prohibits the Commission, at its election, from exercising the

authority delegated in this paragraph.

(6) Subpoenas to foreign persons. A foreign person whose access to

an electronic trading facility is limited or denied at the direction of

the Commission based on the Commission's belief that the foreign person

has failed timely to comply with a subpoena as provided under section

2(h)(5)(C)(ii) of the Act shall have an opportunity for a prompt

hearing under the procedures provided in Sec. 21.03(b) and (h) of this

chapter.

(7) Prohibited representation. An electronic trading facility

relying upon the exemption in section 2(h)(3) of the Act, with respect

to agreements, contracts or transactions that are not significant price

discovery contracts, shall not represent to any person that it is

registered with, designated, recognized, licensed or approved by the

Commission.

* * * * *

0

29. Section 36.3 is amended by revising paragraph (c) to read as

follows:

Sec. 36.3 Exempt commercial markets.

* * * * *

(c) Significant price discovery contracts--(1) Criteria for

significant price discovery determination. The Commission may

determine, in its discretion, that an electronic trading facility

operating a market in reliance on the exemption in section 2(h)(3) of

the Act performs a significant price discovery function for

transactions in the cash market for a commodity underlying any

agreement, contract or transaction executed or traded on the facility.

In making such a determination, the Commission shall consider, as

appropriate:

(i) Price linkage. The extent to which the agreement, contract or

transaction uses or otherwise relies on a daily or final settlement

price, or other major price parameter, of a contract or contracts

listed for trading on or subject to the rules of a designated contract

market or a derivatives transaction execution facility, or a

significant price discovery contract traded on an electronic trading

facility, to value a position, transfer or convert a position, cash or

financially settle a position, or close out a position;

(ii) Arbitrage. The extent to which the price for the agreement,

contract or transaction is sufficiently related to the price of a

contract or contracts listed for trading on or subject to the rules of

a designated contract market or derivatives transaction execution

facility, or a significant price discovery contract or contracts

trading on or subject to the rules of an electronic trading facility,

so as to permit market participants to effectively arbitrage between

the markets by simultaneously maintaining positions or executing trades

in the contracts on a frequent and recurring basis;

(iii) Material price reference. The extent to which, on a frequent

and recurring basis, bids, offers, or transactions in a commodity are

directly based on, or are determined by referencing, the prices

generated by agreements, contracts or transactions being traded or

executed on the electronic trading facility;

(iv) Material liquidity. The extent to which the volume of

agreements, contracts or transactions in the commodity being traded on

the electronic trading facility is sufficient to have a material effect

on other agreements, contracts or transactions listed for trading on or

subject to the rules of a designated contract market, a derivatives

transaction execution facility, or an electronic trading facility

operating in reliance on the exemption in section 2(h)(3) of the Act;

(v) Other material factors [Reserved].

(2) Notification of possible significant price discovery contract

conditions. An electronic trading facility operating in reliance on

section 2(h)(3) of the Act shall promptly notify the Commission, and

such notification shall be accompanied by supporting information or

data concerning any contract that:

(i) Averaged five trades per day or more over the most recent

calendar quarter; and

(ii) (A) For which the exchange sells its price information

regarding the contract to market participants or industry publications;

or

(B) Whose daily closing or settlement prices on 95 percent or more

of the days in the most recent quarter were within 2.5 percent of the

contemporaneously determined closing, settlement or other daily price

of another agreement, contract or transaction.

(3) Procedure for significant price discovery determination. Before

making a final price discovery determination under this paragraph, the

Commission shall publish notice in the Federal Register that it intends

to undertake a determination with respect to whether a particular

agreement, contract or transaction performs a significant price

discovery function and to receive written data, views and arguments

relevant to its determination from the electronic trading facility and

other interested persons. Any such written data, views and arguments

shall be filed with the Secretary of the Commission, in the form and

manner specified by the Commission, within 30 calendar days of

publication of notice in the Federal Register or within such other time

specified by the Commission. After prompt consideration of all relevant

information, the Commission shall, within a reasonable period of time

after the close of the comment period, issue an order explaining its

determination whether the agreement, contract or transaction executed

or traded by the electronic trading facility performs a significant

price discovery function under the criteria specified in paragraph

(c)(1)(i) through (v) of this section.

(4) Compliance with core principles. Following the issuance of an

order by the Commission that the electronic trading facility executes

or trades an agreement, contract or transaction that performs a

significant price discovery function, the electronic trading facility

must demonstrate, with respect to that agreement, contract or

transaction, compliance with the Core Principles under section

2(h)(7)(C) of the Act and the applicable provisions of this part. If

the Commission's order represents the first time it has determined that

one of the electronic trading facility's agreements, contracts or

transactions performs a significant price discovery function, the

facility must submit a

[[Page 12196]]

written demonstration of compliance with the Core Principles within 90

calendar days of the date of the Commission's order. For each

subsequent determination by the Commission that the electronic trading

facility has an additional agreement, contract or transaction that

performs a significant price discovery function, the facility must

submit a written demonstration of compliance with the Core Principles

within 30 calendar days of the date of the Commission's order.

Attention is directed to Appendix B of this part for guidance on and

acceptable practices for complying with the Core Principles.

Submissions demonstrating how the electronic trading facility complies

with the Core Principles with respect to its significant price

discovery contract must be filed with the Secretary of the Commission

at its Washington, DC headquarters. Submissions must include the

following:

(i) A written certification that the significant price discovery

contract(s) complies with the Act and regulations thereunder;

(ii) A copy of the electronic trading facility's rules (as defined

in Sec. 40.1 of this chapter) and any technical manuals, other guides

or instructions for users of, or participants in, the market, including

minimum financial standards for members or market participants.

Subsequent rule changes must be certified by the electronic trading

facility pursuant to section 5c(c) of the Act and Sec. 40.6 of this

chapter. The electronic trading facility also may request Commission

approval of any rule changes pursuant to section 5c(c) of the Act and

Sec. 40.5 of this chapter;

(iii) A description of the trading system, algorithm, security and

access limitation procedures with a timeline for an order from input

through settlement, and a copy of any system test procedures, tests

conducted, test results and contingency or disaster recovery plans;

(iv) A copy of any documents pertaining to or describing the

electronic trading system's legal status and governance structure,

including governance fitness information;

(v) An executed or executable copy of any agreements or contracts

entered into or to be entered into by the electronic trading facility,

including partnership or limited liability company, third-party

regulatory service, or member or user agreements, that enable or

empower the electronic trading facility to comply with a Core

Principle;

(vi) A copy of any manual or other document describing, with

specificity, the manner in which the trading facility will conduct

trade practice, market and financial surveillance;

(vii) To the extent that any of the items in paragraphs (c)(4)(ii)

through (vi) of this section raise issues that are novel, or for which

compliance with a Core Principle is not self-evident, an explanation of

how that item satisfies the applicable Core Principle or Principles.

The electronic trading facility must identify with particularity

information in the submission that will be subject to a request for

confidential treatment pursuant to Sec. 145.09 of this chapter. The

electronic trading facility must follow the procedures specified in

Sec. 40.8 of this chapter with respect to any information in its

submission for which confidential treatment is requested.

(5) Determination of compliance with core principles. The

Commission shall take into consideration differences between cleared

and uncleared significant price discovery contracts when reviewing the

implementation of the Core Principles by an electronic trading

facility. The electronic facility also has reasonable discretion in

accounting for differences between cleared and uncleared significant

price discovery contracts when establishing the manner in which it

complies with the Core Principles.

(6) Information relating to compliance with core principles. Upon

request by the Commission, an electronic trading facility trading a

significant price discovery contract shall file with the Commission a

written demonstration, containing such supporting data, information and

documents, in the form and manner and within such time as the

Commission may specify, that the electronic trading facility is in

compliance with one or more Core Principles as specified in the

request, or that is otherwise requested by the Commission to enable the

Commission to satisfy its obligations under the Act.

(7) Enforceability. An agreement, contract or transaction entered

into on or pursuant to the rules of an electronic trading facility

trading or executing a significant price discovery contract shall not

be void, voidable, subject to rescission or otherwise invalidated or

rendered unenforceable as a result of:

(i) A violation by the electronic trading facility of the

provisions of section 2(h) of the Act or this part; or

(ii) Any Commission proceeding to alter or supplement a rule, term

or condition 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 an electronic trading facility

to adopt a specific term or condition, trading rule or procedure, or to

take or refrain from taking a specific action.

(8) Procedures for vacating a determination of a significant price

discovery function--(i) By the electronic trading facility. An

electronic trading facility that executes or trades an agreement,

contract or transaction that the Commission has determined performs a

significant price discovery function under paragraph (c)(3) of this

section may petition the Commission to vacate that determination. The

petition shall demonstrate that the agreement, contract or transaction

no longer performs a significant price discovery function under the

criteria specified in paragraph (c)(1), and has not done so for at

least the prior 12 months. An electronic trading facility shall not

petition for a vacation of a significant price discovery determination

more frequently than once every 12 months for any individual contract.

(ii) By the Commission. The Commission may, on its own initiative,

begin vacation proceedings if it believes that an agreement, contract

or transaction has not performed a significant price discovery function

for at least the prior 12 months.

(iii) Procedure. Before making a final determination whether an

agreement, contract or transaction has ceased to perform a significant

price discovery function, the Commission shall publish notice in the

Federal Register that it intends to undertake such a determination and

to receive written data, views and arguments relevant to its

determination from the electronic trading facility and other interested

persons. Written submissions shall be filed with the Secretary of the

Commission in the form and manner specified by the Commission, within

30 calendar days of publication of notice in the Federal Register or

within such other time specified by the Commission. After consideration

of all relevant information, the Commission shall issue an order

explaining its determination whether the agreement, contract or

transaction has ceased to perform a significant price discovery

function and, if so, vacating its prior order. If such an order issues,

and the Commission subsequently determines, on its own initiative or

after notification by the electronic trading facility, that the

agreement, contract or transaction that was subject to the vacation

order again performs a significant price discovery function, the

electronic trading facility must comply with the Core Principles within

30 calendar days of the date of the Commission's order.

[[Page 12197]]

(iv) Automatic vacation of significant price discovery

determination. Regardless of whether a proceeding to vacate has been

initiated, any significant price discovery contract that has no open

interest and in which no trading has occurred for a period of 12

complete and consecutive calendar months shall, without further

proceedings, no longer be considered to be a significant price

discovery contract.

0

30. Section 36.3 is amended by adding new paragraph (d) to read as

follows:

(d) Commission Review. The Commission shall, at least annually,

evaluate as appropriate agreements, contracts or transactions conducted

on an electronic trading facility in reliance on the exemption provided

in section 2(h)(3) of the Act to determine whether they serve a

significant price discovery function as described in Sec. (d)(1)

above.

0

31. Add a new Appendix A to Part 36 to read as follows:

Appendix A to Part 36--Guidance on Significant Price Discovery

Contracts

1. Section 2(h)(7) of the CEA specifies four factors that the

Commission must consider, as appropriate, in making a determination

that a contract is performing a significant price discovery

function. The four factors prescribed by the statute are: Price

Linkage; Arbitrage; Material Price Reference; and Material

Liquidity.

2. Not all listed factors must be present to support a

determination that a contract performs a significant price discovery

function. Moreover, the statutory language neither prioritizes the

factors nor specifies the degree to which a significant price

discovery contract must conform to the various factors. Congress has

indicated that it intends that the Commission should not make a

determination that an agreement, contract or transaction performs a

significant price discovery function on the basis of the Price

Linkage factor unless the agreement, contract or transaction also

has sufficient volume to impact other regulated contracts or to

become an independent price reference or benchmark that is regularly

utilized by the public. The Commission believes that the Arbitrage

and Material Price Reference factors can be considered separately

from each other. That is, the Commission could make a determination

that a contract serves a significant price discovery function based

on the presence of one of these factors and the absence of the

other. The presence of any of these factors, however, would not

necessarily be sufficient to establish the contract as a significant

price discovery contract. The fourth factor, Liquidity, would be

considered in conjunction with the arbitrage and linkage factors as

a significant amount of liquidity presumably would be necessary for

a contract to perform a significant price discovery function in

conjunction with these factors.

3. These factors do not lend themselves to a mechanical

checklist or formulaic analysis. Accordingly, this guidance is

intended to illustrate which factors, or combinations of factors,

the Commission will look to when determining that a contract is

performing a significant price discovery function, and under what

circumstances the presence of a particular factor or factors would

be sufficient to support such a determination.

(A) MATERIAL LIQUIDITY--The extent to which the volume of

agreements, contracts or transactions in the commodity being traded

on the electronic trading facility is sufficient to have a material

effect on other agreements, contracts or transactions listed for

trading on or subject to the rules of a designated contract market,

a derivatives transaction execution facility, or an electronic

trading facility operating in reliance on the exemption in section

2(h)(3) of the Act.

1. Liquidity is a broad concept that captures the ability to

transact immediately with little or no price concession.

Traditionally, objective measures of trading such as volume or open

interest have been used as measures of liquidity. So, for example, a

market in which trades occur multiple times per minute at prices

that differ by only fractions of a cent normally would be considered

highly liquid, since presumably a trader could quickly execute a

trade at a price that was approximately the same as the price for

other recently executed trades. Other factors also will affect the

characterization of liquidity, such as whether a large trade--e.g.,

100 contracts versus 1 contract--could be executed without a

significant price concession. For example, having to wait a day to

sell 1000 bushels of corn may be considered an illiquid market while

waiting a day to sell a home may be considered quite liquid. Thus,

quantifying the levels of immediacy and price concession that would

define material liquidity may differ from one market or commodity to

another.

2. The Commission believes that material liquidity alternatively

can be identified by the impact liquidity exhibits through observed

prices. In markets where material liquidity exists, a more or less

continuous stream of prices can be observed and the prices should be

similar. For example, if the trading of a contract occurs on average

five times a day, there will be on average five observed prices for

the contract per day. If the market is liquid in terms of traders

having to make little in the way of price concessions to execute

these trades, the prices of this contract should be similar to those

observed for similar or related contracts traded in liquid markets

elsewhere. Thus, in making determinations that contracts have

material liquidity, the Commission will look to transaction prices,

both in terms of how often prices are observed and the extent to

which observed prices tend to correlate with other contemporaneous

prices.

3. The Commission anticipates that material liquidity will

frequently be a consideration in evaluating whether a contract is a

significant price discovery contract; however, there may be

circumstances in which other factors so dominate the conclusion that

a contract is serving a significant price discovery function that a

finding of material liquidity in the contract would not be

necessary. Circumstances in which this might arise are discussed

with respect to the assessment of other factors below.

4. Finally, material liquidity itself would not be sufficient to

make a determination that a contract is a significant price

discovery contract, but combined with other factors it can serve as

a guidepost indicating which contracts are functioning as

significant price discovery contracts. As further discussed below,

material liquidity, as reflected through the prices of linked or

arbitraged contracts, will be a primary consideration in determining

whether such contracts are significant price discovery contracts.

(B) PRICE LINKAGE--The extent to which the agreement, contract

or transaction uses or otherwise relies on a daily or final

settlement price, or other major price parameter, of a contract or

contracts listed for trading on or subject to the rules of a

designated contract market or a derivatives transaction execution

facility, or a significant price discovery contract traded on an

electronic trading facility, to value a position, transfer or

convert a position, cash or financially settle a position, or close

out a position.

1. A price-linked contract is a contract that relies on a

contract traded on another trading facility to settle, value or

otherwise offset the price-linked contract. The link may involve a

one-to-one linkage, in that the value of the linked contract is

based on a single contract's price, or it may involve multiple

contracts. An example of a multiple contract linkage might be where

the settlement price is calculated as an index of prices obtained

from a basket of contracts traded on other exchanges.

2. For a linked contract, the mere fact that a contract is

linked to another contract will not be sufficient to support a

determination that a contract performs a significant price discovery

function. To assess whether such a determination is warranted, the

Commission will examine the relationship between transaction prices

of the linked contract and the prices of the referenced contract(s).

The Commission believes that where material liquidity exists, prices

for the linked contract would be observed to be substantially the

same as or move substantially in conjunction with the prices of the

referenced contract(s). Where such price characteristics are

observed on an ongoing basis, the Commission would expect to

determine that the linked contract is a significant price discovery

contract.

3. As an example, where the Commission has observed price

linkage, it will next consider whether transactions were occurring

on a daily basis for the linked contract in material volumes.

(Conversely, where volume has increased noticeably in a particular

contract, the Commission would look for linkage) The ultimate level

of volume that would be considered material for purposes of deeming

a contract a significant price discovery contract will likely differ

from one contract to another depending on the characteristics of the

underlying commodity and the overall size of the physical market in

which it is traded. At a minimum, however, the Commission will

consider a linked contract which has volume

[[Page 12198]]

equal to 5% of the volume of trading in the contract to which it is

linked to have sufficient volume potentially to be deemed a

significant price discovery contract.

4. In combination with this volume level, the Commission will

also examine the relationship between prices of the linked contract

and the contract to which it is linked to determine whether a

contract is serving a significant price discovery function. As a

threshold, the Commission will consider a 2.5 percent price range

for 95 percent of contemporaneously determined closing, settlement,

or other daily prices over the most recent quarter to be

sufficiently close for a linked contract potentially to be deemed a

significant price discovery contract. For example, if, over the most

recent quarter, it was found that 95 percent of the closing,

settlement, or other daily prices of the contract, which have been

calculated using transaction prices, were within 2.5 percent of the

contemporaneously determined closing, settlement, or other daily

prices of a contract to which it was linked, the Commission

potentially would consider the contract to perform a significant

price discovery function.

(C) ARBITRAGE CONTRACTS--The extent to which the price for the

agreement, contract or transaction is sufficiently related to the

price of a contract or contracts listed for trading on or subject to

the rules of a designated contract market or derivatives transaction

execution facility, or a significant price discovery contract or

contracts trading on or subject to the rules of an electronic

trading facility, so as to permit market participants to effectively

arbitrage between the markets by simultaneously maintaining

positions or executing trades in the contracts on a frequent and

recurring basis.

1. Arbitrage contracts are those contracts that can be combined

with other contracts to exploit expected economic relationships in

anticipation of a profit. In assessing whether a contract can be

incorporated into an arbitrage strategy, the Commission will weigh

the terms and conditions of a contract in comparison to contracts

that potentially could be used in an arbitrage strategy; will

consult with industry or other sources regarding a contract's

viability in an arbitrage strategy; and will rely on direct

observation confirming the use of a contract in arbitrage

strategies.

2. As with linked contracts, the mere fact that a contract could

be employed in an arbitrage strategy will not be sufficient to make

a determination that a contract is a significant price discovery

contract. In addition, the level of liquidity will be considered. To

assess whether designation as a significant price discovery contract

is warranted, the Commission will examine the relationship between

transaction prices of an arbitrage contract and the prices of the

contract(s) to which it is related. The Commission believes that

where material liquidity exists, prices for the arbitrage contract

would be observed to move substantially in conjunction with the

prices of the related contract(s) to which it is economically

linked. Where such price characteristics are observed on an ongoing

basis, it is likely that the linked contract performs a significant

price discovery function.

3. The Commission will apply the same threshold liquidity and

price relationship standards for arbitrage contracts as it does for

linked contracts. That is, the Commission will view the average of

five trades per day or more threshold as the level of activity that

would potentially meet the material volume criterion. With respect

to prices, the Commission will consider an arbitrage contract

potentially to be a significant price discovery contract if, over

the most recent quarter, greater than 95 percent of the closing or

settlement prices of the contract, which have been calculated using

transaction prices, fall within 2.5 percent of the closing or

settlement price of the contract or contracts to which it could be

arbitraged.

(D) MATERIAL PRICE REFERENCE--The extent to which, on a frequent

and recurring basis, bids, offers or transactions in a commodity are

directly based on, or are determined by referencing, the prices

generated by agreements, contracts or transactions being traded or

executed on the electronic trading facility.

1. The Commission will rely on one of two sources of evidence--

direct or indirect--to determine that the price of a contract was

being used as a material price reference and, therefore, serving a

significant price discovery function. The primary source of direct

evidence is that cash market bids, offers or transactions are

directly based on, or quoted at a differential to, the prices

generated on the market on a frequent and recurring basis. The

Commission expects that normally only contracts with material

liquidity will be referenced by the cash market; however, the

Commission notes that it may be possible for a contract to have very

low liquidity and yet still be used as a price reference. In such

cases, the simple fact that participants in the underlying cash

market broadly have elected to use the contract price as a price

reference would be a strong indicator that the contract is a

significant price discovery contract.

2. In evaluating a contract's price discovery role as a directly

referenced price source, the Commission will perform an analysis to

determine whether cash market participants are quoting bid or offer

prices or entering into transactions at prices that are set either

explicitly or implicitly at a differential to prices established for

the contract. Cash market prices are set explicitly at a

differential to the section 2(h)(3) contract when, for instance,

they are quoted in dollars and cents above or below the reference

contract's price. Cash market prices are set implicitly at a

differential to a section 2(h)(3) contract when, for instance, they

are arrived at after adding to, or subtracting from the section

2(h)(3) contract, but then quoted or reported at a flat price. The

Commission will also consider whether cash market entities are

quoting cash prices based on a section 2(h)(3) contract on a

frequent and recurring basis.

3. The second source of evidence is that the price of the

contract is being routinely disseminated in widely distributed

industry publications--or offered by the ECM itself for some form of

remuneration--and consulted on a frequent and recurring basis by

industry participants in pricing cash market transactions. As with

contract prices that are directly incorporated into cash market

prices, the Commission assumes that industry publications choose to

publish prices because of the value they transfer to industry

participants for the purpose of formulating prices in the cash

market.

4. In applying this criterion, consideration will be given to

whether prices established by a section 2(h)(3) contract are

reported in a widely distributed industry publication. In making

this determination, the Commission will consider the reputation of

the publication within the industry, how frequently it is published,

and whether the information contained in the publication is

routinely consulted by industry participants in pricing cash market

transactions.

5. Under a Material Price Reference analysis, the Commission

expects that material liquidity in the contract likely will be the

primary motivation for a publisher to publish particular prices. In

other words, the fact that the price of a contract is being used as

a reference by industry participants suggests, prima facie, that the

contract performs a significant price discovery function. But the

Commission recognizes that trading levels could nonetheless be low

for the contract while still serving a significant price discovery

function and that evidence of routine publication and consultation

by industry participants may be sufficient to establish the contract

as a significant price discovery contract. On the other hand, while

cash market participants may regularly refer to published prices of

a particular contract when establishing cash market prices, it may

be the case that the contract itself is a niche market for a

specialized grade of the commodity or for delivery at a minor

geographic location. In such cases, the Commission will look to such

measures as trading volume, open interest, and the significance of

the underlying cash market to make a determination that a contract

is functioning as a significant price discovery contract. If an

examination of trading in the contract were to reveal that true

price discovery was occurring in other more broadly defined

contracts and that this contract was itself simply reflective of

those broader contracts, it is less likely the Commission will deem

the contract a significant price discovery contract.

6. Because price referencing normally occurs out of the view of

the electronic trading facility, the Commission may have difficulty

ascertaining the extent to which cash market participants actually

reference or consult a contract's price when transacting. The

Commission expects, however, that as a contract begins to be relied

upon to set a reference price, market participants will be

increasingly willing to purchase price information. To the extent,

then, that an electronic trading facility begins to sell its price

information regarding a contract to market participants or industry

publications, the contract will meet a threshold standard to

indicate that the contract potentially is a significant price

discovery contract.

0

32. Add a new Appendix B to Part 36 to read as follows:

[[Page 12199]]

Appendix B to Part 36--Guidance on, and Acceptable Practices in,

Compliance With Core Principles

1. This Appendix provides guidance on complying with the core

principles under section 2(h)(7)(C) of the Act and this part, both

initially and on an ongoing basis. The guidance is provided in

paragraph (a) following each core principle and can be used to

demonstrate to the Commission core principle compliance under Sec.

36.3(c)(4). The guidance for each core principle is illustrative

only of the types of matters an electronic trading facility may

address, as applicable, and is not intended to be used as a

mandatory checklist. Addressing the issues and questions set forth

in this guidance will help the Commission in its consideration of

whether the electronic trading facility is in compliance with the

core principles. A submission pursuant to Sec. 36.3(c)(4) should

include an explanation or other form of documentation demonstrating

that the electronic trading facility complies with the core

principles.

2. Acceptable practices meeting selected requirements of the

core principles are set forth in paragraph (b) following each core

principle. Electronic trading facilities on which significant price

discovery contracts are traded or executed that follow the specific

practices outlined under paragraph (b) for any core principle in

this appendix will meet the selected requirements of the applicable

core principle. Paragraph (b) is for illustrative purposes only, and

does not state the exclusive means for satisfying a core principle.

CORE PRINCIPLE I OF SECTION 2(h)(7)(C)--CONTRACTS NOT READILY

SUSCEPTIBLE TO MANIPULATION. The electronic trading facility shall

list only significant price discovery contracts that are not readily

susceptible to manipulation.

(a) Guidance. Upon determination by the Commission that a

contract listed for trading on an electronic trading facility is a

significant price discovery contract, the electronic trading

facility must self-certify the terms and conditions of the

significant price discovery contract under Sec. 36.3(c)(4) within

90 calendar days of the date of the Commission's order, if the

contract is the electronic trading facility's first significant

price discovery contract; or 30 days from the date of the

Commission's order if the contract is not the electronic trading

facility's first significant price discovery contract. Once the

Commission determines that a contract performs a significant price

discovery function, subsequent rule changes must be self-certified

to the Commission by the electronic trading facility pursuant to

Sec. 40.6 or submitted to the Commission for review and approval

pursuant to Sec. 40.5.

(b) Acceptable practices. Guideline No. 1, 17 CFR part 40,

Appendix A may be used as guidance in meeting this core principle

for significant price discovery contracts.

CORE PRINCIPLE II OF SECTION 2(h)(7)(C)--MONITORING OF TRADING.

The electronic trading facility shall monitor trading in significant

price discovery contracts to prevent market manipulation, price

distortion, and disruptions of the delivery of cash-settlement

process through market surveillance, compliance and disciplinary

practices and procedures, including methods for conducting real-time

monitoring of trading and comprehensive and accurate trade

reconstructions.

(a) Guidance. An electronic trading facility on which

significant price discovery contracts are traded or executed should,

with respect to those contracts, demonstrate a capacity to prevent

market manipulation and have trading and participation rules to

detect and deter abuses. The facility should seek to prevent market

manipulation and other trading abuses through a dedicated regulatory

department or by delegation of that function to an appropriate third

party. An electronic trading facility also should have the authority

to intervene as necessary to maintain an orderly market.

(b) Acceptable practices--(1) An acceptable trade monitoring

program. An acceptable trade monitoring program should facilitate,

on both a routine and non-routine basis, arrangements and resources

to detect and deter abuses through direct surveillance of each

significant price discovery contract. Direct surveillance of each

significant price discovery contract will generally involve the

collection of various market data, including information on

participants' market activity. Those data should be evaluated on an

ongoing basis in order to make an appropriate regulatory response to

potential market disruptions or abusive practices. For contracts

with a substantial number of participants, an effective surveillance

program should employ a much more comprehensive large trader

reporting system.

(2) Authority to collect information and documents. The

electronic trading facility should have the authority to collect

information and documents in order to reconstruct trading for

appropriate market analysis. Appropriate market analysis should

enable the electronic trading facility to assess whether each

significant price discovery contract is responding to the forces of

supply and demand. Appropriate data usually include various

fundamental data about the underlying commodity, its supply, its

demand, and its movement through market channels. Especially

important are data related to the size and ownership of deliverable

supplies--the existing supply and the future or potential supply--

and to the pricing of the deliverable commodity relative to the

futures price and relative to similar, but non-deliverable, kinds of

the commodity. For cash-settled contracts, it is more appropriate to

pay attention to the availability and pricing of the commodity

making up the index to which the contract will be settled, as well

as monitoring the continued suitability of the methodology for

deriving the index.

(3) Ability to assess participants' market activity and power.

To assess participants' activity and potential power in a market,

electronic trading facilities, with respect to significant price

discovery contracts, at a minimum should have routine access to the

positions and trading of its participants and, if applicable, should

provide for such access through its agreements with its third-party

provider of clearing services.

CORE PRINCIPLE III OF SECTION 2(h)(7)(C)--ABILITY TO OBTAIN

INFORMATION. The electronic trading facility shall establish and

enforce rules that allow the electronic trading facility to obtain

any necessary information to perform any of the functions described

in this subparagraph, provide the information to the Commission upon

request, and have the capacity to carry out such international

information-sharing agreements as the Commission may require.

(a) Guidance. An electronic trading facility on which

significant price discovery contracts are traded or executed should,

with respect to those contracts, have the ability and authority to

collect information and documents on both a routine and non-routine

basis, including the examination of books and records kept by

participants. This includes having arrangements and resources for

recording full data entry and trade details and safely storing audit

trail data. An electronic trading facility should have systems

sufficient to enable it to use the information for purposes of

assisting in the prevention of participant and market abuses through

reconstruction of trading and providing evidence of any violations

of the electronic trading facility's rules.

(b) Acceptable practices--(1) The goal of an audit trail is to

detect and deter market abuse. An effective contract audit trail

should capture and retain sufficient trade-related information to

permit electronic trading facility staff to detect trading abuses

and to reconstruct all transactions within a reasonable period of

time. An audit trail should include specialized electronic

surveillance programs that identify potentially abusive trades and

trade patterns. An acceptable audit trail must be able to track an

order from time of entry into the trading system through its fill.

The electronic trading facility must create and maintain an

electronic transaction history database that contains information

with respect to transactions executed on each significant price

discovery contract.

(2) An acceptable audit trail should include the following:

original source documents, transaction history, electronic analysis

capability, and safe storage capability. An acceptable audit trail

system would satisfy the following practices.

(i) Original source documents. Original source documents include

unalterable, sequentially identified records on which trade

execution information is originally recorded. For each order

(whether filled, unfilled or cancelled, each of which should be

retained or electronically captured), such records reflect the terms

of the order, an account identifier that relates back to the

account(s) owner(s), and the time of order entry.

(ii) Transaction history. A transaction history consists of an

electronic history of each transaction, including (a) all the data

that are input into the trade entry or matching system for the

transaction to match and clear; (b) timing and sequencing data

adequate to reconstruct trading; and (c) the identification of each

account to which fills are allocated.

(iii) Electronic analysis capability. An electronic analysis

capability that permits

[[Page 12200]]

sorting and presenting data included in the transaction history so

as to reconstruct trading and to identify possible trading

violations with respect to market abuse.

(iv) Safe storage capability. Safe storage capability provides

for a method of storing the data included in the transaction history

in a manner that protects the data from unauthorized alteration, as

well as from accidental erasure or other loss. Data should be

retained in the form and manner specified by the Commission or,

where no acceptable manner of retention is specified, in accordance

with the recordkeeping standards of Commission rule 1.31.

(3) Arrangements and resources for the disclosure of the

obtained information and documents to the Commission upon request.

To satisfy section 2(h)(7)(C)(III)(bb), the electronic trading

facility should maintain records of all information and documents

related to each significant price discovery contract in a form and

manner acceptable to the Commission. Where no acceptable manner of

maintenance is specified, records should be maintained in accordance

with the recordkeeping standards of Commission rule 1.31.

(4) The capacity to carry out appropriate information-sharing

agreements as the Commission may require. Appropriate information-

sharing agreements could be established with other markets or the

Commission can act in conjunction with the electronic trading

facility to carry out such information sharing.

CORE PRINCIPLE IV OF SECTION 2(h)(7)(C)--POSITION LIMITATIONS OR

ACCOUNTABILITY. The electronic trading facility shall adopt, where

necessary and appropriate, position limitations or position

accountability for speculators in significant price discovery

contracts, taking into account positions in other agreements,

contracts and transactions that are treated by a derivatives

clearing organization, whether registered or not registered, as

fungible with such significant price discovery contracts to reduce

the potential threat of market manipulation or congestion,

especially during trading in the delivery month.

(a) Guidance. [Reserved]

(b) Acceptable practices for uncleared trades [Reserved]

(c) Acceptable practices for cleared trades--(1) Introduction.

In order to diminish potential problems arising from excessively

large speculative positions, and to facilitate orderly liquidation

of expiring contracts, an electronic trading facility relying on the

exemption in section 2(h)(3) should adopt rules that set position

limits or accountability levels on traders' cleared positions in

significant price discovery contracts. These position limit rules

specifically may exempt bona fide hedging; permit other exemptions;

or set limits differently by market, delivery month or time period.

For the purpose of evaluating a significant price discovery

contract's speculative-limit program for cleared positions, the

Commission will consider the specified position limits or

accountability levels, aggregation policies, types of exemptions

allowed, methods for monitoring compliance with the specified limits

or levels, and procedures for dealing with violations.

(2) Accounting for cleared trades--(i) Speculative-limit levels

typically should be set in terms of a trader's combined position

involving cleared trades in a significant price discovery contract,

plus positions in agreements, contracts and transactions that are

treated by a derivatives clearing organization, whether registered

or not registered, as fungible with such significant price discovery

contract. (This circumstance typically exists where an exempt

commercial market lists a particular contract for trading but also

allows for positions in that contract to be cleared together with

positions established through bilateral or off-exchange

transactions, such as block trades, in the same contract.

Essentially, both the on-facility and off-facility transactions are

considered fungible with each other.) In this connection, the

electronic trading facility should make arrangements to ensure that

it is able to ascertain accurate position data for the market. (ii)

For significant price discovery contracts that are traded on a

cleared basis, the electronic trading facility should apply position

limits to cleared transactions in the contract.

(3) Limitations on spot-month positions. Spot-month limits

should be adopted for significant price discovery contracts to

minimize the susceptibility of the market to manipulation or price

distortions, including squeezes and corners or other abusive trading

practices.

(i) Contracts economically equivalent to an existing contract.

An electronic trading facility that lists a significant price

discovery contract that is economically-equivalent to another

significant price discovery contract or to a contract traded on a

designated contract market or derivatives transaction execution

facility should set the spot-month limit for its significant price

discovery contract at the same level as that specified for the

economically-equivalent contract.

(ii) Contracts that are not economically equivalent to an

existing contract. There may not be an economically-equivalent

significant price discovery contract or economically-equivalent

contract traded on a designated contract market or derivatives

transaction execution facility. In this case, the spot-month

speculative position limit should be established in the following

manner. The spot-month limit for a physical delivery market should

be based upon an analysis of deliverable supplies and the history of

spot-month liquidations. The spot-month limit for a physical-

delivery market is appropriately set at no more than 25 percent of

the estimated deliverable supply. In the case where a significant

price discovery contract has a cash settlement provision, the spot-

month limit should be set at a level that minimizes the potential

for price manipulation or distortion in the significant price

discovery contract itself; in related futures and options contracts

traded on a designated contract market or derivatives transaction

execution facility; in other significant price discovery contracts;

in other fungible agreements, contracts and transactions; and in the

underlying commodity.

(4) Position accountability for non-spot-month positions. The

electronic trading facility should establish for its significant

price discovery contracts non-spot individual month position

accountability levels and all-months-combined position

accountability levels. An electronic trading facility may establish

non-spot individual month position limits and all-months-combined

position limits for its significant price discovery contracts in

lieu of position accountability levels.

(i) Definition. Position accountability provisions provide a

means for an exchange to monitor traders' positions that may

threaten orderly trading. An acceptable accountability provision

sets target accountability threshold levels that may be exceeded,

but once a trader breaches such accountability levels, the

electronic trading facility should initiate an inquiry to determine

whether the individual's trading activity is justified and is not

intended to manipulate the market. As part of its investigation, the

electronic trading facility may inquire about the trader's rationale

for holding a position in excess of the accountability levels. An

acceptable accountability provision should provide the electronic

trading facility with the authority to order the trader not to

further increase positions. If a trader fails to comply with a

request for information about positions held, provides information

that does not sufficiently justify the position, or continues to

increase contract positions after a request not to do so is issued

by the facility, then the accountability provision should enable the

electronic trading facility to require the trader to reduce

positions.

(ii) Contracts economically equivalent to an existing contract.

When an electronic trading facility lists a significant price

discovery contract that is economically equivalent to another

significant price discovery contract or to a contract traded on a

designated contract market or derivatives transaction execution

facility, the electronic trading facility should set the non-spot

individual month position accountability level and all-months-

combined position accountability level for its significant price

discovery contract at the same levels, or lower, as those specified

for the economically-equivalent contract.

(iii) Contracts that are not economically equivalent to an

existing contract. For significant price discovery contracts that

are not economically equivalent to an existing contract, the trading

facility shall adopt non-spot individual month and all-months-

combined position accountability levels that are no greater than 10

percent of the average combined futures and delta-adjusted option

month-end open interest for the most recent calendar year. For

electronic trading facilities that choose to adopt non-spot

individual month and all-months-combined position limits in lieu of

position accountability levels for their significant price discovery

contracts, the limits should be set in the same manner as the

accountability levels.

(iv) Contracts economically equivalent to an existing contract

with position limits. If a significant price discovery contract is

economically equivalent to another significant price discovery

contract or to a contract traded on a designated contract

[[Page 12201]]

market or derivatives transaction execution facility that has

adopted non-spot or all-months-combined position limits, the

electronic trading facility should set non-spot month position

limits and all-months-combined position limits for its significant

price discovery contract at the same (or lower) levels as those

specified for the economically-equivalent contract.

(5) Account aggregation. An electronic trading facility should

have aggregation rules for significant price discovery contracts

that apply to accounts under common control, those with common

ownership, i.e., where there is a ten percent or greater financial

interest, and those traded according to an express or implied

agreement. Such aggregation rules should apply to cleared

transactions with respect to applicable speculative position limits.

An electronic trading facility will be permitted to set more

stringent aggregation policies. An electronic trading facility may

grant exemptions to its price discovery contracts' position limits

for bona fide hedging (as defined in Sec. 1.3(z) of this chapter)

and may grant exemptions for reduced risk positions, such as

spreads, straddles and arbitrage positions.

(6) Implementation deadlines. An electronic trading facility

with a significant price discovery contract is required to comply

with Core Principle IV as set forth in section 2(h)(7)C) of the Act

within 90 calendar days of the date of the Commission's order

determining that the contract performs a significant price discovery

function if such contract is the electronic trading facility's first

significant price discovery contract, or within 30 days of the date

of the Commission's order if such contract is not the electronic

trading facility's first significant price discovery contract. For

the purpose of applying limits on speculative positions in newly-

determined significant price discovery contracts, the Commission

will permit a grace period following issuance of its order for

traders with cleared positions in such contracts to become compliant

with applicable position limit rules. Traders who hold cleared

positions on a net basis in the electronic trading facility's

significant price discovery contract must be at or below the

specified position limit level no later than 90 calendar days from

the date of the electronic trading facility's implementation of

position limit rules, unless a hedge exemption is granted by the

electronic trading facility. This grace period applies to both

initial and subsequent price discovery contracts. Electronic trading

facilities should notify traders of this requirement promptly upon

implementation of such rules.

(7) Enforcement provisions. The electronic trading facility

should have appropriate procedures in place to monitor its position

limit and accountability provisions and to address violations.

(i) An electronic trading facility with significant price

discovery contracts should use an automated means of detecting

traders' violations of speculative limits or exemptions,

particularly if the significant price discovery contracts have large

numbers of traders. An electronic trading facility should monitor

the continuing appropriateness of approved exemptions by

periodically reviewing each trader's basis for exemption or

requiring a reapplication. An automated system also should be used

to determine whether a trader has exceeded applicable non-spot

individual month position accountability levels and all-months-

combined position accountability levels.

(ii) An electronic trading facility should establish a program

for effective enforcement of position limits for significant price

discovery contracts. Electronic trading facilities should use a

large trader reporting system to monitor and enforce daily

compliance with position limit rules. The Commission notes that an

electronic trading facility may allow traders to periodically apply

to the electronic trading facility for an exemption and, if

appropriate, be granted a position level higher than the applicable

speculative limit. The electronic trading facility should establish

a program to monitor approved exemptions from the limits. The

position levels granted under such hedge exemptions generally should

be based upon the trader's commercial activity in related markets

including, but not limited to, positions held in related futures and

options contracts listed for trading on designated contract markets,

fungible agreements, contracts and transactions, as determined by

either a registered or unregistered derivatives clearing

organization. Electronic trading facilities may allow a brief grace

period where a qualifying trader may exceed speculative limits or an

existing exemption level pending the submission and approval of

appropriate justification. An electronic trading facility should

consider whether it wants to restrict exemptions during the last

several days of trading in a delivery month. Acceptable procedures

for obtaining and granting exemptions include a requirement that the

electronic trading facility approve a specific maximum higher level.

(iii) An acceptable speculative limit program should have

specific policies for taking regulatory action once a violation of a

position limit or exemption is detected. The electronic trading

facility policies should consider appropriate actions.

(8) Violation of Commission rules. A violation of position

limits for significant price discovery contracts that have been

self-certified by an electronic trading facility is also a violation

of section 4a(e) of the Act.

CORE PRINCIPLE V OF SECTION 2(h)(7)(C)--EMERGENCY AUTHORITY--The

electronic trading facility shall adopt rules to provide for the

exercise of emergency authority, in consultation or cooperation with

the Commission, where necessary and appropriate, including the

authority to liquidate open positions in significant price discovery

contracts and to suspend or curtail trading in a significant price

discovery contract.

(a) Guidance. An electronic trading facility on which

significant price discovery contracts are traded should have clear

procedures and guidelines for decision-making regarding emergency

intervention in the market, including procedures and guidelines to

avoid conflicts of interest while carrying out such decision-making.

An electronic trading facility on which significant price discovery

contracts are executed or traded should also have the authority to

intervene as necessary to maintain markets with fair and orderly

trading as well as procedures for carrying out the intervention.

Procedures and guidelines should include notifying the Commission of

the exercise of the electronic trading facility's regulatory

emergency authority, explaining how conflicts of interest are

minimized, and documenting the electronic trading facility's

decision-making process and the reasons for using its emergency

action authority. Information on steps taken under such procedures

should be included in a submission of a certified rule and any

related submissions for rule approval pursuant to part 40 of this

chapter, when carried out pursuant to an electronic trading

facility's emergency authority. To address perceived market threats,

the electronic trading facility on which significant price discovery

contracts are executed or traded should, among other things, be able

to impose position limits in the delivery month, impose or modify

price limits, modify circuit breakers, call for additional margin

either from market participants or clearing members (for contracts

that are cleared through a clearinghouse), order the liquidation or

transfer of open positions, order the fixing of a settlement price,

order a reduction in positions, extend or shorten the expiration

date or the trading hours, suspend or curtail trading on the

electronic trading facility, order the transfer of contracts and the

margin for such contracts from one market participant to another, or

alter the delivery terms or conditions or, if applicable, should

provide for such actions through its agreements with its third-party

provider of clearing services.

(b) Acceptable practices. [Reserved]

CORE PRINCIPLE VI OF SECTION 2(h)(7)(C)--DAILY PUBLICATION OF

TRADING INFORMATION. The electronic trading facility shall make

public daily information on price, trading volume, and other trading

data to the extent appropriate for significant price discovery

contracts.

(a) Guidance. An electronic trading facility, with respect to

significant price discovery contracts, should provide to the public

information regarding settlement prices, price range, volume, open

interest, and other related market information for all applicable

contracts as determined by the Commission on a fair, equitable and

timely basis. Provision of information for any applicable contract

can be through such means as provision of the information to a

financial information service or by timely placement of the

information on the electronic trading facility's public Web site.

(b) Acceptable practices. Compliance with Sec. 16.01 of this

chapter, which is mandatory, is an acceptable practice that

satisfies the requirements of Core Principle VI.

CORE PRINCIPLE VII OF SECTION 2(h)(7)(C)--COMPLIANCE WITH RULES.

The electronic trading facility shall monitor and enforce compliance

with the rules of the electronic trading facility, including the

terms and conditions of any contracts to be traded and any

limitations on access to the electronic trading facility.

[[Page 12202]]

(a) Guidance--(1) An electronic trading facility on which

significant price discovery contracts are executed or traded should

have appropriate arrangements and resources for effective trade

practice surveillance programs, with the authority to collect

information and documents on both a routine and non-routine basis,

including the examination of books and records kept by its market

participants. The arrangements and resources should facilitate the

direct supervision of the market and the analysis of data collected.

Trade practice surveillance programs may be carried out by the

electronic trading facility itself or through delegation or

contracting-out to a third party. If the electronic trading facility

on which significant price discovery contracts are executed or

traded delegates or contracts-out the trade practice surveillance

responsibility to a third party, such third party should have the

capacity and authority to carry out such programs, and the

electronic trading facility should retain appropriate supervisory

authority over the third party.

(2) An electronic trading facility on which significant price

discovery contracts are executed or traded should have arrangements,

resources and authority for effective rule enforcement. The

Commission believes that this should include the authority and

ability to discipline and limit or suspend the activities of a

market participant as well as the authority and ability to terminate

the activities of a market participant pursuant to clear and fair

standards. The electronic trading facility can satisfy this

criterion for market participants by expelling or denying such

person's future access upon a determination that such a person has

violated the electronic trading facility's rules.

(b) Acceptable practices. An acceptable trade practice

surveillance program generally would include:

(1) Maintenance of data reflecting the details of each

transaction executed on the electronic trading facility;

(2) Electronic analysis of this data routinely to detect

potential trading violations;

(3) Appropriate and thorough investigative analysis of these and

other potential trading violations brought to the electronic trading

facility's attention; and

(4) Prompt and effective disciplinary action for any violation

that is found to have been committed. The Commission believes that

the latter element should include the authority and ability to

discipline and limit or suspend the activities of a market

participant pursuant to clear and fair standards that are available

to market participants. See, e.g., 17 CFR part 8.

CORE PRINCIPLE VIII OF SECTION 2(h)(7)(C)--CONFLICTS OF

INTEREST. The electronic trading facility on which significant price

discovery contracts are executed or traded shall establish and

enforce rules to minimize conflicts of interest in the decision-

making process of the electronic trading facility and establish a

process for resolving such conflicts of interest.

(a) Guidance.

(1) The means to address conflicts of interest in the decision-

making of an electronic trading facility on which significant price

discovery contracts are executed or traded should include methods to

ascertain the presence of conflicts of interest and to make

decisions in the event of such a conflict. In addition, the

Commission believes that the electronic trading facility on which

significant price discovery contracts are executed or traded should

provide for appropriate limitations on the use or disclosure of

material non-public information gained through the performance of

official duties by board members, committee members and electronic

trading facility employees or gained through an ownership interest

in the electronic trading facility or its parent organization(s).

(2) All electronic trading facilities on which significant price

discovery contracts are traded bear special responsibility to

regulate effectively, impartially, and with due consideration of the

public interest, as provided in section 3 of the Act. Under Core

Principle VIII, they are also required to minimize conflicts of

interest in their decision-making processes. To comply with this

core principle, electronic trading facilities on which significant

price discovery contracts are traded should be particularly vigilant

for such conflicts between and among any of their self-regulatory

responsibilities, their commercial interests, and the several

interests of their management, members, owners, market participants,

other industry participants and other constituencies.

(b) Acceptable practices. [Reserved]

CORE PRINCIPLE IX OF SECTION 2(h)(7)(C)--ANTITRUST

CONSIDERATIONS. Unless necessary or appropriate to achieve the

purposes of this Act, the electronic trading facility, with respect

to any significant price discovery contracts, shall endeavor to

avoid adopting any rules or taking any actions that result in any

unreasonable restraints of trade or imposing any material

anticompetitive burden on trading on the electronic trading

facility.

(a) Guidance. An electronic trading facility, with respect to a

significant price discovery contract, may at any time request that

the Commission consider under the provisions of section 15(b) of the

Act any of the electronic trading facility's rules, which may be

trading protocols or policies, operational rules, or terms or

conditions of any significant price discovery contract. The

Commission intends to apply section 15(b) of the Act to its

consideration of issues under this core principle in a manner

consistent with that previously applied to contract markets.

(b) Acceptable practices. [Reserved]

PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES

0

33. The authority citation for part 40 is revised to read as follows:

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

amended by Title XIII of the Food, Conservation and Energy Act of

2008, Public Law No. 110-246, 122 Stat. 1624 (June 18, 2008).

0

34. Revise the heading of part 40 as set forth above.

Sec. 40.1 [Amended]

0

35. Section 40.1 is amended as follows:

0

A. The term ``registered entity'' is removed and the term ``designated

contract market, derivatives transaction execution facility or

derivatives clearing organization'' is added in its place in paragraphs

(b)(2), (b)(3), and (f)(2); and

0

B. The term ``contract market, derivatives transaction execution

facility or derivatives clearing organization'' is removed and the term

``registered entity'' is added in its place in paragraph (h).

0

36. Section 40.2 is amended as follows:

0

A. The term ``registered entity'' is removed and ``designated contract

market, derivatives transaction execution facility or derivatives

clearing organization'' is added in its place in paragraph (a)

introductory text;

0

B. The term ``registered entity'' is removed and ``designated contract

market or derivatives transaction execution facility'' is added in its

place in paragraphs (a)(1) and (a)(3)(iv); and

0

C. Paragraph (b) is revised to read as follows:

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

certification.

* * * * *

(b) A registered entity shall provide, if requested by Commission

staff, additional evidence, information or data relating to whether any

contract meets, initially or on a continuing basis, any of the

requirements of the Act or Commission rules or policies thereunder

which may be beneficial to the Commission in conducting a due diligence

assessment of the product and the entity's compliance with these

requirements.

* * * * *

Sec. 40.3 [Amended]

0

37. Section 40.3 is amended by removing the term ``registered entity''

and adding in its place the term ``designated contract market or

registered derivatives transaction execution facility'' in paragraphs

(a)(1), (c)(1), (c)(2), and (e)(2).

Sec. 40.6 [Amended]

0

38. Section 40.4 is amended by removing the term ``registered entity''

and adding in its place the term ``designated contract market'' in

paragraph (b)(9)(ii).

0

39. Section 40.6 is amended by revising paragraphs (a)(2),

(c)(3)(ii)(G), and (c)(3)(ii)(H) to read as follows:

Sec. 40.6 Self-certification of rules.

(a) * * *

[[Page 12203]]

(2) The registered entity has filed its submission electronically

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

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

branch chief at the regional office having local jurisdiction over the

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

market, registered derivatives transaction execution facility, or

electronic trading facility on which significant price discovery

contracts are traded or executed, the Division of Market Oversight at

[email protected], and the Commission has received the submission

at its headquarters by the open of business on the business day

preceding implementation of the rule; provided, however, rules or rule

amendments implemented under procedures of the governing board to

respond to an emergency as defined in Sec. 40.1, shall, if

practicable, be filed with the Commission prior to the implementation

or, if not practicable, be filed with the Commission at the earliest

possible time after implementation, but in no event more than twenty-

four hours after implementation; and

* * * * *

(c) * * *

(3) * * *

(ii) * * *

(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 [Amended]

0

40. Section 40.7 is amended by removing the term ``designated contract

market, registered derivatives transaction execution facility or

registered derivatives clearing organization'' and adding in its place

the term ``registered entity'' in paragraph (b).

0

41. Section 40.8 is amended by revising paragraph (a), redesignating

paragraph (b) as paragraph (c), and adding new paragraph (b) to read as

follows:

Sec. 40.8 Availability of public information.

(a) The following sections of all applications to become a

designated contract market, derivatives execution transaction facility

or designated clearing organization will be public: transmittal letter,

proposed rules, the applicant's regulatory compliance chart, documents

establishing the applicant's legal status, documents setting forth the

applicant's governance structure, and any other part of the application

not covered by a request for confidential treatment.

(b) The following submissions required by Sec. 36.3(c)(4) of this

chapter 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.

* * * * *

0

42. Appendix D to part 40 is revised to read as follows:

Appendix D to Part 40--Submission Cover Sheet and Instructions

A properly completed submission cover sheet must accompany all

rule submissions submitted electronically by a registered entity to

the Secretary of the Commodity Futures Trading Commission, at

[email protected] in a format specified by the Secretary of the

Commission.

Each submission should include the following:

1. Identifier Code (optional)--If applicable, the exchange or

clearing organization Identifier Code at the top of the cover sheet.

Such codes are commonly generated by the exchanges or clearing

organizations to 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 the appropriate box for a designated

contract market (DCM), derivatives clearing organization (DCO),

derivatives transaction execution facility (DTEF), or electronic

trading facility with a significant price discovery contract (ECM-

SPDC).

5. Type of Filing--Indicate whether the filing is a rule

amendment or new product and the applicable category under that

heading.

6. Rule Numbers--For rule filings only, identify rule number(s)

being adopted or modified in the case of rule amendment filings.

7. Description--For rule or rule amendment filings only, enter a

brief description of the new rule or rule amendment. This narrative

should describe the substance of the submission with enough

specificity to characterize all essential aspects of the filing.

8. Other Requirements--Comply with all filing requirements for

the underlying proposed rule or rule amendment. The filing of the

submission cover sheet does not obviate the responsibility to comply

with any applicable filing requirement (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). 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).

Issued in Washington, DC, this 16th day of March, 2009, by the

Commission.

David Stawick,

Secretary of the Commission.

[FR Doc. E9-6044 Filed 3-20-09; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: November 23, 2009