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[Federal Register: December 12, 2008 (Volume 73, Number 240)]

[Proposed Rules]

[Page 75887-75921]

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

[DOCID:fr12de08-29]

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Part III

Commodity Futures Trading Commission

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17 CFR Parts 15, 16, 17, et al.

Significant Price Discovery Contracts on Exempt Commercial Markets;

Proposed Rule

[[Page 75888]]

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COMMODITY FUTURES TRADING COMMISSION

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

Significant Price Discovery Contracts on Exempt Commercial

Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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

``CFTC'') is proposing rules to implement the CFTC Reauthorization Act

of 2008 (``Reauthorization Act'').\1\ In pertinent part, the

Reauthorization Act amends the Commodity Exchange Act to significantly

expand the CFTC's regulatory authority over exempt commercial markets

(``ECMs''), which had heretofore operated largely outside the

Commission's regulatory reach, by creating a new regulatory category--

ECMs with significant price discovery contracts (``SPDCs'')--and

directing the Commission to adopt rules to implement this expanded

authority. In addition to proposing regulations mandated by the

Reauthorization Act, the Commission is also proposing to amend 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, Pub. L. No. 110-246, 122 Stat. 1624 (June 18,

2008).

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DATES: Comments must be received by February 10, 2009.

ADDRESSES: You may submit comments by any of the following methods:

Federal eRulemaking Portal: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov http://www.regulations.gov.

Mail/Hand Deliver: David Stawick, Secretary of the

Commission, Commodity Futures Trading Commission, Three Lafayette

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

E-mail: [email protected].

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:

Table of Contents

I. Background

A. The Commodity Futures Modernization Act of 2000 Established a

New Regulatory Framework

1. Multi-Tiered Regulation

2. Exempt Commercial Markets

3. Differences Between ECMs and DCMs

B. The Changing ECM Landscape

C. The CFTC's Response to the Changing Energy Markets

1. Empirical Study of Trades on ICE and NYMEX

2. Commission Surveillance of Energy Markets

3. The Commission's ECM Hearing

4. The Commission's Findings and Legislative Recommendations

D. The Reauthorization Legislation and the Statutory Scheme

II. The Proposed Rules

A. Part 36--Exempt Markets

1. Required Information

2. Identifying Significant Price Discovery Contracts

(i) Criteria for SPDC Determination

(ii) Notification Requirement for ECMs With a SPDC

3. Procedures

4. Substantive Compliance With the Core Principles

5. Annual Commission Review

B. Market, Transaction and Large Trader Reporting Rules

C. Other Regulatory Provisions

1. Part 40--Provisions Common to Registered Entities

III. Related Matters

A. Cost Benefit Analysis

B. Regulatory Flexibility Act

C. Paperwork Reduction Act

List of Subjects: Proposed Rules

I. Background

A. The Commodity Futures Modernization Act of 2000 Established a New

Regulatory Framework

1. Multi-Tiered Regulation

On December 21, 2000, Congress enacted the Commodity Futures

Modernization Act (``CFMA''), which amended the Commodity Exchange Act

(``Act'' or ``CEA'') \2\ to replace the Act's ``one-size-fits-all''

supervisory framework for futures trading with a multi-tiered approach

to regulatory oversight of derivatives markets. The CFMA applies

different levels of regulatory oversight to markets based primarily on

the nature of the underlying commodity being traded and the

participants who are trading. 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.

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

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Accordingly, designated contract markets (``DCMs''), are subject to

the highest level of regulatory oversight because they are open to all

participants and may offer all types of commodities.\3\ Derivatives

Transaction Execution Facilities (``DTEFs'') \4\ are subject to less

regulatory oversight than DCMs because participants must be

sophisticated investors or must be hedging risk associated with their

commercial activities. Additionally, the CFMA imposes limitations on

the types of commodities that may be traded, and the manner in which

they may be traded.\5\ Exempt Boards of Trade (``EBOTs'') are subject

to virtually no regulatory oversight and are not registered with or

designated by the Commission. EBOTs are exempt from most provisions of

the CEA other than its antifraud and anti-manipulation prohibitions,

but are subject to significant commodity and participant

restrictions.\6\ In addition to creating these three new categories of

trading facility, the CFMA created a broad array of exclusions and

exemptions from regulation for certain swaps and other derivatives

products traded either bilaterally or on electronic trading

facilities.\7\ These exclusions and exemptions reflected a view,

consistent with Congressional and Commission actions relating to the

passage of the CFMA, that transactions between sophisticated

counterparties do not necessarily require the protections that the CEA

provides for transactions on DCMs and DTEFs.

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\3\ 7 U.S.C. 7.

\4\ To qualify as a DTEF, an exchange must implement certain

restrictions on retail market participation and can only trade

certain commodities (including excluded commodities and other

commodities with very high levels of deliverable supply) and

generally must exclude retail participants. CFTC Glossary

(Glossary).

\5\ 7 U.S.C. 7a.

\6\ EBOTs may trade only ``excluded commodities'' (7 U.S.C.

1a(13); 17 CFR Sec. 36.2(a)(2)(i)), and are open only to ``eligible

contract participants'' (``ECPs'') (7 U.S.C. 1a(12)).

\7\ For example, section 2(g) created an exclusion from the CEA

for individually negotiated swaps, based on non-agricultural

commodities entered into between eligible contract participants, 7

U.S.C. 2(g). Similarly excluded are transactions between ECPs

involving excluded commodities that are not executed on a trading

facility. 7 U.S.C. 2(d)(1).

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2. Exempt Commercial Markets

The CFMA established an exemption for transactions in exempt

commodities traded on electronic trading facilities, also known as

exempt commercial markets (``ECMs'').\8\ To qualify as an ECM, a

facility must limit its transactions to principal-to-principal

transactions executed between ``eligible commercial entities''

(``ECEs'') \9\ on an ``electronic trading facility.'' \10\ Contracts

[[Page 75889]]

for all commodities except agricultural and excluded commodities

(primarily financial commodities but also commodities such as weather)

potentially are eligible to trade on an ECM. Examples of commodities

traded on ECMs are energy products, metals, chemicals, air emission

allowances, paper pulp, and barge freight rates.\11\ ECMs fall

somewhere between DTEFs and EBOTs on the regulatory oversight spectrum.

Like EBOTs, they are neither licensed nor registered with the CFTC and

are subject to the Act's antifraud and anti-manipulation

provisions.\12\ In addition, and different from EBOTs, ECMs are subject

to certain recordkeeping and reporting requirements under the CEA.\13\

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\8\ 7 U.S.C. 2(h)(3)-(5).

\9\ 7 U.S.C. 1a(11) (a subset of ECPs).

\10\ 7 U.S.C. 1a(10). For purposes of this proposed rulemaking,

the terms electronic trading facility and ECM are used

interchangeably. The term ``trading facility'' means a person or

group of persons that constitutes, maintains, or provides a physical

or electronic facility or system in which multiple participants have

the ability to execute or trade agreements, contracts or

transactions--(i) by accepting bids or offers made by other

participants that are open to multiple participants in the facility

or system; or (ii) through the interaction of multiple bids or

multiple offers within a system with a pre-determined non-

discretionary automated trade matching and execution algorithm. 7

U.S.C. 1a(34).

\11\ 7 U.S.C. 1a(14).

\12\ Sections 2(h)(4)(B) and (C) of the Act, 7 U.S.C. 2(h)(4)(B)

and (C).

\13\ For example, an ECM must maintain for five years and make

available for inspection records of its activities relating to its

business as a trading facility. 7 U.S.C. 2(h)(5)(B)(ii). More

specifically, Commission rule 36.3, 17 CFR 36.3, requires that an

ECM identify to the Commission those transactions for which it

intends to rely on the exemption in section 2(h)(3) of the CEA and

which averaged five trades per day or more over the most recent

calendar quarter. For all such transactions, the ECM must provide to

the Commission weekly reports showing certain basic trading

information, or provide the Commission with electronic access that

would allow it to compile the same information. 17 CFR

36.3(b)(1)(ii). An ECM also must provide to the Commission, upon

special call, any information relating to its business that the

Commission determines is appropriate to enforce the antifraud and

anti-manipulation provisions of the CEA, to evaluate a systemic

market event, or to obtain information on behalf of another federal

financial regulator. 7 U.S.C. 2(h)(5)(B)(iii); 17 CFR 36.3(b)(3). An

ECM must maintain a record of any allegations or complaints it

receives concerning suspected fraud or manipulation and must provide

the Commission with a copy of the record of each such complaint. 17

CFR 36.3(b)(1)(iii). Finally, an ECM is required to file an annual

certification that it continues to operate in reliance on the

exemption in section 2(h)(3) of the Act and that the information it

previously provided to the Commission remains correct. 17 CFR

36.3(c)(4).

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3. Differences Between ECMs and DCMs

ECMs are not subject to the level of transparency and Commission

oversight associated with DCMs. DCMs must satisfy specified criteria to

become designated, and then must demonstrate continuing compliance with

18 core principles set out in the Act.\14\ The Act provides flexibility

with respect to how DCMs may choose to meet the core principles'

mandate that DCMs undertake significant supervisory responsibility with

respect to trading on their markets. DCMs must, for example, establish

rules and procedures for preventing market manipulation and must adopt

necessary and appropriate position limit or accountability rules to

address the potential for manipulation or congestion. DCMs also must

establish compliance and surveillance programs, which the Commission

evaluates through rule enforcement reviews,\15\ must monitor trading on

their markets and must undertake other self-regulatory responsibilities

mandated by the CEA.

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\14\ See sections 5(d)(1)-(18) of the Act, 7 U.S.C. 7(d)(1)-

(18).

\15\ The Commission conducts regular rule enforcement reviews of

the self regulatory programs operated by DCMs for enforcing exchange

rules, preventing market manipulations and customer and market

abuses, and ensuring that trade related information is recorded and

stored in a manner consistent with the Act.

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The CFMA did not impose these obligations on ECMs. While the

Commission was given the authority to determine whether an ECM performs

a significant price discovery function for transactions in an

underlying cash market,\16\ such a determination did not trigger any

self-regulatory responsibilities for the ECM or confer any additional

oversight authority on the Commission. Rather, the presence of a

contract performing a significant price discovery function required the

ECM to publicly disseminate certain basic information, such as contract

terms and conditions and daily trading volume, open interest, and

opening and closing prices or price ranges.\17\

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\16\ In 2004, the Commission amended its part 36 rules to

include the requirement that an ECM notify the Commission when it

has reason to believe that one or more of the markets on which it is

conducting agreements, contracts or transactions in reliance on

section 2(h)(3) of the CEA has been met or if the market holds

itself out to the public as performing a price discovery function

for the cash market of a commodity. 17 CFR 36.3(c)(2)(i) and (ii).

69 FR 43285 (July 20, 2004).

\17\ Id.

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B. The Changing ECM Landscape

Following enactment of the CFMA in December 2000, the first ECMs

that notified the Commission of their intent to operate generally were

simple trading platforms, resembling in many ways business-to-business

facilities for large commercial firms. ECMs facilitate the execution of

trades between commercial counterparties by offering an anonymous and

efficient electronic matching system which many believed to be superior

to the existing voice broker system, and to provide a competitive

advantage over the bilateral OTC market, especially for energy

products. Initially, most ECMs were small operations with low trading

volumes that were small relative to DCMs. The first ECMs did not offer

centralized clearing, but sought to address counterparty risk through

the use of credit filters whereby traders could limit their potential

counterparties to a list of traders whose credit they found

satisfactory. Significantly, early ECM contracts were not linked to

contracts listed on DCMs. Over time, however, ECMs began to offer

``look-alike'' contracts that were linked to the settlement prices of

their exchange-traded counterparts, and these look-alike contracts in

one case began to garner significant volumes. In recent years, 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, and 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. Of special

concern to CFTC staff was the existence of the ECM cash-settled ``look-

alike'' contracts that could provide an incentive to manipulate the

settlement price of an underlying DCM futures contract to benefit

positions in the look-alike ECM contract. As discussed more fully

below, the Commission subsequently considered and studied these

concerns in a variety of ways, culminating, in September 2007, in a

public hearing examining trading on regulated exchanges and ECMs.\18\

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\18\ See Commodity Futures Trading Commission, Report on the

Oversight of Trading on Regulated Futures Exchanges and Exempt

Commercial Markets (October 2007), http://www.cftc.gov/stellent/

groups/public/@newsroom/documents/file/pr5403-07_ecmreport.pdf for

a comprehensive report of the Commission's findings following its

September 2007 hearing (``ECM Report'').

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C. The CFTC's Response to the Changing Energy Markets

1. Empirical Study of Trades on ICE \19\ and NYMEX

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\19\ Intercontinental Exchange, or ICE, consists of four

separate entities: ICE OTC, to which this document refers, is an ECM

trading energy products. ICE Future Europe trades energy futures and

is regulated by the Financial Services Authority of Great Britain;

ICE Futures US focuses primarily on futures based on soft

commodities (e.g., coffee, sugar, cocoa, cotton) and financial

futures and is regulated by the CFTC; ICE Futures Canada trades

futures and options and is regulated by the Manitoba Securities

Commission.

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During the last several years, one ECM in particular--the

Intercontinental

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Exchange (``ICE'')--has become a major trading venue for natural gas

contracts in direct competition with the New York Mercantile Exchange

(``NYMEX'') natural gas benchmark futures contract, in addition,

Commission staff has found that the traders on ICE are virtually the

same as the traders on NYMEX. All of the top 25 natural gas traders on

NYMEX are also significant traders on ICE. For the Henry Hub natural

gas market,\20\ market participants generally view ICE and NYMEX as

essentially a single market, looking to both ICE and NYMEX when

determining where to execute a trade at the best price.

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\20\ Henry Hub is a natural gas pipeline hub in Louisiana that

serves as the delivery point for NYMEX natural gas futures contracts

and often serves as a benchmark for wholesale natural gas prices

across the U.S. Glossary.

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To assess these changes in the marketplace, the Commission's Office

of the Chief Economist (``OCE'') conducted an empirical study of the

relationship between the natural gas contracts that trade on ICE and

NYMEX. OCE collected transaction prices for ICE and NYMEX natural gas

contracts from January 3, 2006 through December 31, 2006 and evaluated

trading for 12 contract months when trading on each market was

appropriately active. OCE examined the timing of price changes on ICE

and NYMEX to draw inferences about where information arrives first. If

price changes on one venue consistently ``led'' those on the other

venue, then OCE concluded that informed traders preferred trading at

that ``leading'' venue and inferred that market to be ``discovering''

prices.\21\ OCE found that ICE exhibited price leadership with respect

to NYMEX on 20 percent of the contract-days, while NYMEX exhibited

price leadership on 63 percent of the contract-days. OCE concluded that

these results suggested that both ICE and NYMEX are significant price

discovery venues for natural gas futures contracts.

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\21\ See ECM Report at 11-12. Price discovery is the process of

determining the price level for a commodity based on supply and

demand conditions. Price discovery may occur in a futures market or

cash market. Glossary.

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2. Commission Surveillance of the Energy Markets

The Commission's surveillance of natural gas energy markets

traditionally has focused on the regulated futures markets traded on

NYMEX. Prior to the Reauthorization Act, ECMs were not subject to the

requirements of the Commission's large trader reporting system

(``LTRS'').\22\ In order to obtain analogous large trader information

from ECMs, the Commission had to issue special calls.\23\ Based on the

prominent role played by the ICE natural gas contract in the price

discovery process and the possible impact on the NYMEX natural gas

contract, the Commission determined to issue a series of special calls

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.\24\

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\22\ The LTRS is the centerpiece of the Commission's market

surveillance system. Under the LTRS, clearing members, futures

commission merchants and foreign brokers file daily reports with the

CFTC showing futures and option positions in accounts they carry

that are above reporting levels set by the Commission. The reporting

level for the NYMEX natural gas futures market is 200 contracts.

\23\ Section 2(h)(5)(B)(iii) of the Act, 7 U.S.C.

2(h)(5)(B)(iii), requires that an electronic trading facility

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 an electronic trading facility as the Commission may

determine appropriate to enforce the antifraud provisions of the

CEA, 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.

\24\ The special calls were issued primarily to assist the

Commission in its surveillance of the NYMEX natural gas contract.

They were not issued as part of an investigation of any particular

market participant or trading activity on either ICE or NYMEX, nor

were they issued to conduct regular market surveillance of ICE. The

first special call, issued on September 28, 2006, requested daily

clearing member position data for ICE's natural gas swap contracts,

broken out between house and aggregate customer positions, which is

similar to information that the Commission receives from NYMEX

pursuant to Commission rule 16.00. This information permits CFTC

market surveillance staff to see all cleared positions at the

clearing member level, but it is not possible to determine

individual customer positions. To obtain daily individual trader

positions, the Commission issued a second special call on December

1, 2006. While the data received is similar to large trader

reporting for DCMs, the methodology for reporting is very different.

Because ICE is a principal-to-principal market and therefore does

not receive position reporting from firms, it was necessary for ICE

to develop an algorithm to infer open positions from the sum of all

trading by each individual trader. While this approach has provided

valuable information, it is less accurate than traditional large

trader reporting. The third special call, issued on September 5,

2007, required ICE to provide all cleared transaction data for its

Henry Hub swap contracts and identify counterparties for the final

two trading sessions prior to the expiration of prompt month Henry

Hub natural gas products. This data is similar to transaction data

that the Commission receives from NYMEX for all trading days and

enables CFTC staff to monitor trading activity on ICE and obtain

more complete coverage to counter possible manipulative schemes that

could affect trading on ICE.

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3. The Commission's ECM Hearing

Following the OCE study and the special calls issued to ICE, the

Commission held a public hearing on September 18, 2007, to examine the

oversight of DCMs and ECMs. Witnesses at the hearing included

Commission staff, representatives of DCMs and ECMs, and representatives

of a broad spectrum of market users and consumer groups. The hearing

focused on a number of issues, including the tiered regulatory approach

of the CFMA and whether it was adequate; the similarities and

differences between ECMs and DCMs; the associated regulatory risks of

each market category; the types of regulatory or legislative changes

that may 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.

In announcing the hearing, CFTC Acting Chairman Lukken observed that:

The evolution of these energy markets [ECMs] in recent years

requires our agency to address whether the level of regulatory

oversight is proper given the importance of energy prices to all

Americans.* * * This oversight hearing will provide a better

understanding of the inter-relationship of these trading venues so

policymakers can make informed decisions to protect these vital

markets.\25\

\25\ CFTC Release 5368-07, August 2, 2007 (CFTC Announces

September Hearing to Examine Trading on Regulated Exchanges and

Exempt Commercial Markets).

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4. The Commission's Findings and Legislative Recommendations

Based on information developed through various studies,

surveillance, special calls and its public hearing, the Commission

published in October 2007 a ``Report on the Oversight of Trading on

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

Report'').\26\ The report was provided to the Commission's

Congressional oversight committees, which were then in the process of

considering legislation to amend the CEA and reauthorize the

Commission.

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\26\ supra n. 20.

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The ECM Report noted that while some participants disagreed, most

witnesses at the September 18 hearing generally supported the tiered

regulatory structure of the CFMA, but expressed concern regarding the

regulatory provisions governing ECMs and the regulatory disparity

between DCMs and ECMs.\27\ Witnesses suggested that this disparity made

markets more susceptible to manipulation and put regulated exchanges at

a competitive disadvantage vis-[agrave]-vis ECMs offering virtually

identical products. Generally, most witnesses felt that some changes to

the ECM provisions might be appropriate, provided those changes

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were prudently targeted and did not adversely affect the ability of

ECMs to innovate and grow.\28\

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\27\ Id. at 15.

\28\ Id.

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Based on the hearing testimony and its own experience in

administering the Act, the Commission at that time concluded that the

tiered approach of the CFMA generally had operated effectively. ECMs

had proven popular for new start-up markets and had provided

competition for DCMs, spurring them toward innovations of their own.

The Commission further found that, to the extent that trading volume on

an ECM contract remained low and its prices were not significantly

relied upon by other markets, the current level of regulation remained

appropriate. However, when a futures contract traded on an ECM matured

and began to serve a significant price discovery function for

transactions in commodities in interstate commerce, the contract

warranted increased oversight to deter and prevent price manipulation

or other disruptions to market integrity, both on the ECM itself and in

any related futures contracts trading on DCMs. Such increased oversight

would also help to ensure fair competition among ECMs and DCMs trading

similar products and competing for the same business.

In light of these conclusions, the Commission's ECM Report

recommended that the CEA be amended to grant the Commission additional

authority over ECM contracts serving a significant price discovery

function, and that certain self-regulatory responsibilities be assigned

to ECMs offering such contracts. Specifically, the Commission advocated

that (1) An ECM contract that is determined to perform a significant

price discovery function be subject to large trader reporting

requirements comparable to those applicable to all DCM contracts; (2)

an ECM should be required to adopt position limits or accountability

levels, as appropriate, for a listed contract that serves a significant

price discovery function similar to the limits on DCMs; (3) an ECM

should be required to monitor trading of a listed contract that serves

a significant price discovery function to detect and prevent

manipulation, price distortion, and disruptions of the delivery or

cash-settlement process; and (4) the Commission and the ECM should be

provided with emergency authority to alter or supplement contract

rules, liquidate open positions, and suspend or curtail trading in any

listed contract that serves a significant price discovery function.

These authorities would be essential tools for the Commission and the

ECM to prevent manipulation and disruptions of the delivery or cash-

settlement process.

The Commission further recommended that the determination whether

an ECM contract serves a significant price discovery function should

focus on the following factors: (1) Material Liquidity--trading volume

in the ECM contract must be significant enough to affect regulated

markets or to become a pricing benchmark; and (2) Linkage/Material

Price Reference--the relevant ECM contract must either influence other

markets and transactions through this linkage or be materially

referenced by others in interstate commerce on a frequent and recurring

basis.

D. The Reauthorization Legislation and the Statutory Scheme

The CFTC Reauthorization Act of 2008 \29\ adds a new section

2(h)(7) to the CEA to govern the treatment of ``significant price

discovery contracts'' (``SPDCs'') on ECMs.\30\ The legislation, based

largely on the Commission's recommendations for improving oversight of

ECMs, provides for greater regulation of contracts traded on ECMs that

fulfill a significant price discovery function and establishes criteria

for the Commission to consider in determining whether an ECM contract

qualifies as a SPDC. The Reauthorization Act directs the CFTC to extend

its regulatory oversight to the trading of SPDCs; requires ECMs to

adopt position and accountability limits for SPDCs; authorizes the

Commission to require large traders to report their positions in SPDCs;

and establishes core principles for ECMs with contracts that are

determined to perform a significant price discovery function. Finally,

the legislation directs the Commission to issue rules implementing the

provisions of new section 2(h)(7) of the CEA 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 the exemption provided in section 2(h)(3) of

the CEA may perform a price discovery function.\31\

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\29\ Public Law No. 110-246, supra. n. 1 (``Pub. L. 110-246'').

The Reauthorization Act was incorporated into the Food, Conservation

and Energy Act of 2008 as Title XIII of that legislation. Title XIII

was not the subject of Congressional hearings and the legislative

history is limited to The Joint Explanatory Statement of the

Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d Sess.

at 978-86 (2008) (Conference Committee Report).

\30\ 7 U.S.C. 2(h)(7).

\31\ Pub. L. 110-246 at sec. 12304. See also Conference

Committee Report, at 985-86; 2008 Farm Bill Commodity Futures Title:

Strengthening Oversight of Futures Markets, House Committee on

Agriculture (May 9, 2008) http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://agriculture.house.gov/inside/Legislation/110/FB/Conf/Title_XIII_fs.pdf http://agriculture.house.gov/inside/

Legislation/110/FB/Conf/Title_XIII_fs.pdf.

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The Reauthorization Act significantly broadens the CFTC's

regulatory authority over ECMs by creating, in section 2(h)(7) of the

CEA, a new regulatory category--ECMs on which SPDCs are traded--and

treating electronic trading facilities in that category as registered

entities subject to all provisions of the CEA that are applicable to

registered entities.\32\ The legislation confers on the CFTC the

authority to designate an agreement, contract or transaction as a SPDC

if the Commission determines, in its discretion, that the agreement,

contract or transaction performs a significant price discovery function

under criteria established by section 2(h)(7). When the Commission

makes such a determination, the ECM on which the SPDC is traded must

assume, with respect to that contract or contracts, all the

responsibilities and obligations of a registered entity under the Act

and Commission regulations, and must comply with nine core principles

established by new section 2(h)(7)(C)--including the obligation to

establish position limits and/or accountability standards for

SPDCs.\33\ The Reauthorization Act separately amends section 4i of the

CEA to authorize the Commission to require large trader reports for

SPDCs listed on ECMs.\34\

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\32\ Conference Committee Report, at 985-86.

\33\ Congress has made clear that an ECM with a SPDC shall be

considered as a registered entity for purposes of the CEA. Id. at

985.

\34\ Public Law 110-246 at sec. 13202.

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Consistent with Congress' directive, the Commission is issuing this

proposed notice of rulemaking as an initial step to implementing the

amended statutory scheme for ECMs with SPDCs.\35\ These regulations are

applicable to exempt markets, but also implicate parts 16 through 21

(market, transaction and large trader reporting rules), and 40

(provisions common to contract markets, derivatives transaction

execution facilities and derivatives clearing organizations).

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\35\ Id. at sec. 13204. 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 and that the Commission issue a final rule no

later than 270 days after the date of enactment. The Reauthorization

Act initially was enacted as H.R. 2419 on May 22, 2008 but was

repealed due to clerical error--and concurrently enacted--by H.R.

2164, Public Law 110-264 on June 18, 2008.

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[[Page 75892]]

II. The Proposed Rules

A. Part 36--Exempt Markets

Part 36 of the Commission's regulations contains the provisions

that apply to exempt boards of trade and to exempt commercial markets,

regardless of whether the markets are a significant source for price

discovery. Rule 36.3 imposes a number of requirements and restrictions

on ECMs--electronic trading facilities relying on the exemption in

section 2(h)(3) of the CEA--including notification of intent to rely on

the exemption; initial and ongoing information submission requirements;

prohibited representations; price discovery notification; and price

dissemination requirements. The Commission proposes to amend rule 36.3

to implement its broadened regulatory authority over ECMs with SPDCs

under section 2(h)(7) of the CEA.

1. Required Information

The notification provision in rule 36.3(a) is unchanged. The

Commission proposes to amend rule 36.3(b) to separately specify the

information submission requirements, both initially and on an ongoing

basis, for: (1) All ECMs; (2) for ECMs with respect to agreements,

contracts or transactions that have not been determined to perform a

significant price discovery function; and (3) for ECMs with SPDCs.\36\

The proposed amendment to rule 36.3(b) additionally includes provisions

related to subpoenas, special calls and the delegation of authority and

provides that an electronic trading facility relying on the exemption

in section 2(h)(3) of the Act shall not, with respect to agreements,

contracts or transactions that are not SPDCs, represent to any person

that it is registered with, designated, recognized, licensed or

approved by the Commission. This prohibition has its origin in section

2(h)(5) of the CEA, which sets forth the requirements and obligations

for ECMs. Although the Reauthorization Act did not amend the

prohibition on representation in section 2(h)(5)(7) of the Act, the

legislation did amend the statutory definition of ``registered entity''

to include, ``with respect to a contract that the Commission determines

is a significant price discovery contract, any electronic trading

facility on which the contract is executed or traded.'' \37\

Accordingly, the Commission believes that when it has determined that a

contract, agreement or transaction executed or traded on the trading

facility is a SPDC, the trading facility may represent that it is a

registered entity, provided that the representation clearly and

prominently states that the ECM is a registered entity only with

respect to its SPDCs.

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\36\ Enhanced obligations for ECMs with SPDCs apply only to the

SPDCs and need not be applied to ECM contracts, agreements or

transactions that are not SPDCs.

\37\ Public Law 110-246 at sec. 13203(b)(3).

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In general, the proposed information submission requirements for

ECMs without SPDCs are drafted to be substantively similar to the

information that all ECMs currently are required to provide.\38\ A

significant change to the submission requirements for ECMs is the

proposed requirement to file, initially and on a quarterly basis,

information about the terms and conditions as well as related

information for all contracts traded on the facility. Although the

proposed rules set forth the terms, standards and conditions under

which an ECM will be responsible to notify the Commission that it may

have a SPDC, the Commission is mindful that it must independently be

aware of ECM contracts that may develop into SPDCs. The Commission

believes that requiring ECMs to identify all agreements, contracts and

transactions and to provide basic trading information will enable it to

fulfill that obligation. To that end, the Commission proposes to retain

for non-SPDCs the requirement that ECMs submit to the Commission weekly

reports (or alternatively provide electronic access that would allow

the Commission to capture the same information) for contracts that

average five trades per day or more.\39\ In addition, the Commission is

proposing to add a quarterly reporting requirement for all non-SPDCs,

to include their terms and conditions, average daily trading volume,

and open interest. This quarterly reporting requirement also is being

proposed to provide the Commission with information that will assist it

in making prompt assessments whether ECM contracts may be SPDCs. ECMs

should note that this provision will require them to fulfill the

quarterly reporting requirement beginning with the end of the calendar

quarter following the adoption of these final rules. Under proposed

rule 36.3(b)(3), ECMs with SPDCs will be required to comply with the

daily reporting and publication requirements of regulation 16.01.\40\

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\38\ ECMs that have already filed a Notification of Operation

under section 2(h)(3) of the Act should note that proposed rule

36.3(b) will not require them to provide any additional information

to the Commission explaining how the facility meets the definition

of trading facility or with information demonstrating that the

facility requires all participants to be ECEs as long as the

operations of the facility and the participants trading on the

facility have not materially changed since the filing of the

notification or the most recent ECM Annual Certification form.

\39\ See 17 CFR 36.3(b).

\40\ Once in compliance with the core principles and daily

reporting and publication requirements applicable to ECMs with

SPDCs, ECMs will not be required to comply with proposed rule

36.3(b)(2) except in regard to non-SPDC contracts that are traded or

executed on the facility.

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2. Identifying Significant Price Discovery Contracts

The Reauthorization Act directs the Commission to consider, as

appropriate, four specific criteria when identifying whether an

agreement, contract or transaction is a SPDC: Price linkage, arbitrage,

material price reference, and material liquidity.\41\ The legislation

further directs that in its rulemaking to implement the provisions of

section 2(h)(7) of the CEA, the Commission shall include the standards,

as well as conditions under which an ECM will have the responsibility

to notify the Commission that a contract traded on the facility may

perform a significant price discovery function. Accordingly, proposed

rule 36.3(c) addresses: (i) The criteria on which the Commission will

rely in making a determination that an agreement, contract or

transaction is a SPDC; (ii) the factors that will trigger the ECM's

obligation to notify the Commission that it may have a SPDC; (iii) the

procedures the Commission will follow in reaching its determination

whether a contract is a SPDC (and in determining that a contract is no

longer a SPDC); and (iv) the procedures and standards by which an ECM

with a SPDC must demonstrate compliance with the core principles.

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\41\ Section 2(h)(7)(B)(v) also authorizes the Commission to

specify by rule other material factors relevant to a determination

whether a contract is a SPDC.

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(i) Criteria for SPDC Determination. In enacting new section

2(h)(7) of the CEA, Congress specified four criteria that the

Commission must consider in making a determination that an agreement,

contract or transaction performs a significant price discovery

function. Proposed rule 36.3(c)(1) enumerates the factors--price

linkage, arbitrage, material price reference, and material liquidity.

Because the legislation does not assign priority to any of the factors,

and neither the statutory language nor the Conference Committee Report

specifies the degree to which any of the factors must be present,

section 2(h)(7)(B) gives the Commission flexibility in applying the

criteria to a particular contract and market. The Commission is also

mindful that:

[n]ot all the listed factors must be present to make a

determination that a contract

[[Page 75893]]

performs a significant price discovery function. However, the

Managers intend 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 has sufficient volume

to impact other regulated contracts or to become an independent

price reference or benchmark that is regularly utilized by the

public.\42\

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\42\ Conference Committee Report at 984-85. In addition to the

four criteria established by Congress, section 2(h)(7) permits the

Commission to consider such other material factors as it may specify

by rule as relevant to a determination whether an agreement,

contract or transaction serves a significant price discovery

function. 7 U.S.C. 2(h)(7)(B)(v).

Because the criteria mandated by Congress do not lend themselves to

bright-line rules, the Commission proposes to explain, in Appendix A to

the part 36 rules, how it expects to apply the criteria in making its

determinations. This proposed guidance explains that the Commission

will make SPDC determinations on a case-by-case basis, applying and

weighing each factor as appropriate to the specific contract and

circumstances under consideration; offers examples to illustrate which

factor or combinations of factors the Commission would look to when

evaluating whether a contract is performing a significant price

discovery function; and describes the circumstances under which the

presence of a factor or factors would be sufficient to warrant such a

determination.

By way of example, for contracts that are linked to other contracts

or that may be arbitraged with other contracts, the Commission would

determine that the contract is a SPDC if the price of the contract

moves in such harmony with the other contract that the two markets

essentially become interchangeable. This co-movement of prices would be

an indication that liquidity in the contract has reached a level

sufficient for the contract to perform a significant price discovery

function. Accordingly, the proposed guidance establishes threshold

liquidity and price relationship standards that will inform the

Commission's determination. A different approach is required when

considering the price discovery potential of a contract that is serving

as a material price reference. In these circumstances, the Commission

would rely on either of two sources of evidence in making its

determination. The Commission believes that a direct indicator that a

contract is serving as a material price reference is observation that

cash market participants are actively referencing the contract price

when they enter into cash market transactions. Routine publication of

an ECM's contract price in widely distributed industry publications and

newsletters also would indicate that industry participants attach some

value to this information.

(ii) Notification requirement for ECMs with a SPDC. The

Reauthorization Act requires that as part of its rulemaking to

implement new section 2(h)(7) of the CEA, the Commission include the

standards, terms and conditions under which an ECM will have the

responsibility to notify the Commission that an agreement, contract or

transaction conducted in reliance on the exemption provided in section

2(h)(3) of the CEA may perform a significant price discovery

function.\43\ Accordingly, in proposed rule 36.3(c)(2) the Commission

has specified conditions, derived from the statutory criteria, which

signal the ECM's obligation to notify the Commission of a possible

SPDC. An ECM will be obligated to notify the Commission of a potential

SPDC when an agreement, contract or transaction is traded an average of

5 trades per day or more over the most recent calendar quarter and also

meets one of the other two reporting factors. The Commission is aware

that this requirement may result in over-reporting by ECMs, and wishes

to emphasize that the presence of one factor alone will not necessarily

result in a determination that a contract is a SPDC. This notice

requirement, however, will serve to alert the Commission to the

contracts that are most likely to be SPDCs. The Commission believes

that the benefit of having the maximum available information with which

to make its determinations outweighs the costs associated with possible

over-reporting by ECMs.

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\43\ Public Law 110-246 at sec. 13204.

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3. Procedures

When the Commission learns of a potential SPDC--whether through its

own information collection and surveillance activities,\44\

notification by an ECM pursuant to proposed rule 36.3(c)(2), or

unsolicited information from participants in the cash market underlying

a contract--the Reauthorization Act directs the Commission to implement

a process for determining whether ECM contracts are SPDCs. In proposed

rule 36.3(c)(3) the Commission establishes procedures under which the

Commission will make and announce its determination whether a

particular contract performs a significant price discovery function and

also sets forth the actions that must be taken by an ECM following such

a determination. With respect to the former, proposed rule 36.3(c)(3)

provides that when the Commission intends to undertake such a

determination in response to notice by an ECM pursuant to rule

36.3(c)(2), or upon its own initiative, it will notice its intention in

the Federal Register. The proposed rule also specifies that the

Commission, as part of its consideration, will solicit written data,

views and arguments from the ECM that lists the potential SPDC and from

any other interested parties. Generally, such written submissions must

be received within 30 calendar days of the date of publication in the

Federal Register. After consideration of all relevant matters the

Commission will issue an order explaining its determination. The

issuance of an affirmative Commission order signals the effectiveness

of the Commission's authorities with respect to ECMs with SPDCs \45\

and triggers the obligations, requirements--both procedural and

substantive--and timetables prescribed in proposed rule 36.3(c)(4) for

the ECM.\46\

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\44\ The Reauthorization Act amended the CEA to require that the

Commission review all ECM contracts at least once a year to

determine whether any contract is a SPDC. In addition to these

formal reviews, it is expected that Commission staff might also

become aware of the price discovery attributes of ECM contracts in

the ordinary course of discussion or interaction with ECM personnel

and various cash and futures market participants.

\45\ Those authorities include the emergency powers conferred by

section 8a(9) of the Act, 7 U.S.C. 12a(9), which permits the

Commission to intervene when it has reason to believe an emergency

exists and to take action necessary to maintain or restore orderly

trading or liquidation of any futures contract.

\46\ Should the Commission conclude, either formally or

informally, that a contract which demonstrates some characteristics

consistent with a SPDC nonetheless does not serve a significant

price discovery function, the Commission may continue to monitor the

contract pursuant to its special call authority under proposed rule

36.3(b)(1)(iv), and will advise the ECM as to what further reporting

it may require with respect to the contract.

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Under proposed rule 36.3(c)(4), an ECM with a SPDC must submit to

the Commission a written demonstration that it complies with the nine

core principles established in section 2(h)(7) of the CEA with respect

to the SPDC. Although status as a registered entity attaches to an ECM

as soon as the Commission issues its order determining that a

particular ECM contract performs a significant price discovery

function, the Commission has included in proposed rule 36.3(c)(4) a

grace period for achieving compliance with the core principles. As

proposed, the rule provides 90 calendar days for ECMs with a first-time

determination of a SPDC to demonstrate compliance with

[[Page 75894]]

the core principles.\47\ For each subsequent SPDC, the ECM is given 15

calendar days from the date of the Commission's order to achieve

compliance. The grace period is designed to ensure that the ECM has

sufficient time to implement its new regulatory requirements and

operations, while avoiding the market disruption that might occur by

the sudden imposition of position limits and other trading rules. The

Commission is aware that position limits that become effective at the

end of the applicable grace period may negatively impact traders who in

good faith acquired positions that are above that limit. Requiring

immediate compliance would force such traders to liquidate positions in

order to be at or below the limit. Accordingly, for the purpose of

applying limits on speculative positions in newly-determined SPDCs, the

Commission proposes to permit a grace period following the ECM's

implementation of position limits applicable to SPDCs 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 SPDC must be at or below the

specified position limit no later than 90 calendar days from the date

on which the electronic trading facility implements a position limit,

unless a hedge exemption is granted by the electronic trading facility.

This grace period applies to both initial and subsequent SPDCs on an

ECM, and the ECM should promptly notify traders when it has set

position limits. This provision is outlined in the proposed Guidance to

Core Principle IV.

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\47\ Conference Committee Report at 986.

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Rule 36.3(c)(4) requires that the ECM's submission include specific

information designed to permit the Commission to evaluate whether the

ECM is indeed in compliance with the core principles. Although there

are obvious differences between them, this procedure was modeled on the

procedure required of applicants to become designated contract

markets.\48\ As with other aspects of this rulemaking, the Commission

is striving to make the procedures and requirements for ECMs with SPDCs

as close as possible to those for DCMs, and in this regard will review

the adequacy of submitted materials with the same rigor it applies to

DCM applications. Submissions that are incomplete or do not adequately

demonstrate compliance with each of the core principles may trigger

Commission proceedings under section 5c(d) of the Act and may, pursuant

to section 5e or 6 of the Act, result in the revocation of the ECM's

right to operate in reliance on the exemption set forth in section

2(h)(3) of the Act with respect to a SPDC.

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\48\ DCM applicants make submissions prior to designation as a

registered entity and prior to the listing of any contract, whereas

the Commission must review the same information for ECMs after they

are deemed registered entities and after the subject contract has

established trading volume and open interest.

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The Commission also proposes to establish a process for vacating a

SPDC determination when the contract no longer meets the criteria

specified in section 2(h)(7)(B). Under proposed regulation 36.3(c)(6),

the Commission may, on its own initiative or at the request of an ECM

with a SPDC, determine that a contract no longer performs a significant

price discovery function and vacate its previous determination. Any

subsequent determination that the contract once again is a SPDC will be

subject to the procedures proposed in regulation 36.3(c)(2). Proposed

rule 36.3(c)(6) further provides for the automatic vacation of a

significant price discovery contract determination when the SPDC has no

open interest and no trading on the contract has occurred for a period

of 12 complete calendar months. The Commission is proposing this

provision in order to reduce the administrative burden on staff and the

compliance burden on an ECM where lack of activity eliminates any

possibility that a contract performs a significant price discovery

function for the underlying cash market.

4. Substantive Compliance With the Core Principles: Guidance and

Acceptable Practices

Section 2(h)(7) of the CEA, as amended, requires that an electronic

trading facility on which significant price discovery contracts are

traded comply with nine core regulatory principles. Consistent with

Congress's intent that status as a registered entity attach to an ECM

following the Commission's determination that a particular ECM contract

serves a significant price discovery function,\49\ these core

principles have their origins in their DCM counterparts in section 5 of

the CEA and have been construed similarly.\50\ The Commission proposes

to adopt Appendix B to the part 36 rules to provide general guidance

and acceptable practices with respect to compliance with the ECM core

principles; the acceptable practices for compliance with the ECM core

principles will, where appropriate, mirror those for DCMs. The

Commission intends in the acceptable practices to provide non-exclusive

safe harbors for compliance with the core principles by ECMs with

SPDCs. As is the case with the core principles established for other

registered entities, the guidance offered for ECMs is neither mandatory

nor the only means of compliance with the core principles. Consistent

with its practice of evaluating a DCM's compliance with the core

principles during rule enforcement reviews, the Commission will conduct

regular rule enforcement reviews of ECMs with SPDCs to evaluate

compliance with the nine core regulatory principles.

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\49\ Conference Committee Report at 986.

\50\ 7 U.S.C. 7(d); Conference Committee Report at 985.

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The Guidance to Core Principle I of section 2(h)(7)(C) of the Act

requires the ECM to certify the terms and conditions of the SPDC within

90 calendar days of an ECM's initial SPDC, or 15 calendar days if the

ECM has previously traded a SPDC. The acceptable practice for this core

principle provides that Guideline No. 1 in Appendix A to the

Commission's part 40 rules may be used as guidance to satisfy this

provision. To ensure continued compliance with all elements of the

Commission's statutory and regulatory regimes for ECMs with SPDCs, the

ECM is expected to monitor the SPDC and its trading activity on a

continuous basis.

Core Principle II requires ECMs to monitor trading in SPDCs to

prevent market manipulation and participation abuses. Its guidance and

acceptable practices were derived from DCM Core Principle 4 (Monitoring

of Trading) and DCM Designation Criterion 2 (Prevention of Market

Manipulation).\51\ The proposed guidance and acceptable practices in

Appendix B to part 36 make clear that ECMs with SPDCs must demonstrate

the capacity to prevent market manipulation and have rules deterring

trading and participation abuses. Under the proposed guidance, ECMs

with SPDCs can demonstrate this capacity through either a dedicated

regulatory department or by delegation of that function to an

appropriate third party.\52\ In either case, the regulatory

[[Page 75895]]

department or third party should have an acceptable trade monitoring

program, the authority to collect information and documents, and the

ability to assess participants' market activity and power.

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\51\ 17 CFR 38, Appendices A and B to Part 38.

\52\ As is the case for DCMs and DTEFs, ECMs with SPDCs may

comply with any core principle through delegation of any relevant

function to any registered futures association or another registered

entity, but the ECM remains responsible for carrying out the

function. Section 5c(b) of the CEA, 7 U.S.C. 7a-2(b). A detailed

discussion of registered entities' responsibilities and obligations

with respect to delegated functions, as well as a discussion of the

distinctions between delegation of functions and outsourcing, or

contracting out specified core principle duties is found in the

Commission's final rulemaking implementing provisions of the CFMA

relating to trading facilities (``A New Regulatory Framework''), 66

FR 42256, 42266 (August 10, 2001).

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Core Principle III addresses the ability of an ECM with a SPDC to

obtain information necessary to perform any of the functions enumerated

in section 2(h)(7)(C) of the CEA (the core principles), to provide that

information to the Commission, and to have the capacity to carry out

any required information sharing agreements. Core Principle III's

guidance and acceptable practices have as their source the guidance and

acceptable practices of DCM Designation Criterion 8--Ability to Obtain

Information.\53\ Proposed Appendix B to part 36 makes clear that ECMs

with SPDCs must have the authority to collect information and documents

on both a routine and non-routine basis; maintain and properly store

audit trail data; maintain records in a form and manner acceptable to

the Commission; and have the capacity to carry out appropriate

information-sharing agreements. In providing guidance on compliance

with this requirement, the Commission also proposes to incorporate the

guidance and acceptable practices provided for DCM Core Principles 10

(Trade Information) and 17 (Recordkeeping).\54\ The Commission believes

that the acceptable practices outlined in Core Principle 10 should be

made applicable to ECMs with SPDCs because the ability to record full

data entry and trade details, as well as the safe storage of audit

trail data, is a necessary component in assessing potential

manipulation and conducting effective market surveillance. DCM Core

Principle 17 requires that DCMs maintain required records in a form and

manner acceptable to the Commission and establishes as guidance for

acceptable recordkeeping the standards prescribed in Commission

regulation 1.31.\55\ To ensure that all information required by the

Commission is maintained in a uniform manner, the Commission proposes

in the acceptable practices for Core Principle III to adopt the

acceptable practices for recordkeeping found in DCM Core Principle 17.

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\53\ 17 CFR 38, Appendix B to Part 38.

\54\ 17 CFR 38, Appendix B to Part 38.

\55\ 17 CFR 1.31.

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Core Principle IV requires electronic trading facilities with

significant price discovery contracts to establish position limit or

accountability rules for traders in such significant price discovery

contracts. Speculative position limits are necessary to reduce the

potential for market manipulation. The acceptable practices for Core

Principle IV were derived largely from Core Principle 5 for designated

contract markets.\56\

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\56\ 17 CFR 38, Appendix B to Part 38.

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DCMs can list for trading futures contracts on a wide range of

commodities, including enumerated agricultural products, excluded

commodities (e.g., financial products such as currencies), and exempt

commodities (e.g., metals, crude oil, natural gas and electricity).

Some of these commodities have limited deliverable supplies while

others have deep and liquid cash markets. Depending on the variety of

possible contracts listed for trading, a DCM may have a mix of position

limit and accountability rules. Specifically, futures contracts based

on commodities with limited deliverable supplies should have spot-month

speculative position limits. In contrast, financial products having

deep and liquid cash markets may be eligible for position

accountability levels in lieu of position limits since the potential

for market manipulation is minimal.

Unlike DCMs, ECMs relying on the exemption in section 2(h)(3) of

the CEA are permitted to offer for trading only contracts on exempt

commodities. Because the deliverable supplies of exempt commodities

typically are limited, the Commission believes that it will be

necessary for SPDCs to have spot-month position limits.

The acceptable practices for Core Principle IV make recommendations

with respect to how ECMs should establish spot-month speculative

position limits. For a unique SPDC,\57\ the spot-month speculative

position limit should be set in the same manner outlined for contracts

listed for trading on DCMs. In this regard, for a physically-delivered

SPDC, the level of the spot-month limit should be based upon an

analysis of the deliverable supply 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.\58\ Where a SPDC has a cash settlement provision,

the spot-month speculative position limit should be set at a level that

minimizes the potential for price manipulation or distortion in the

SPDC itself; in related futures and option contracts traded on a DCM or

DTEF; in other SPDCs; in other fungible agreements, contracts and

transactions; and in the underlying commodity.

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\57\ A unique SPDC is one that is not economically equivalent to

another SPDC or to a contract traded on a DCM or DTEF.

\58\ The Commission notes that deliverable supply typically is

less than total supply. In this regard, it is common for some

portion of the supply to be unavailable for delivery for a variety

of reasons. Deliverable supply is the amount of the underlying

commodity that reasonably can be expected to be available to short

traders and salable by long traders at its market value in normal

cash market channels.

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The Commission notes that some SPDCs may not be unique. In other

words, a SPDC may be economically equivalent to another SPDC or to a

contract traded on a DCM or DTEF. Economic equivalence can arise due to

substantial similarity among contracts' terms and conditions (e.g., two

physically-delivered contracts or two cash-settled contracts having the

same specifications). A SPDC also can be economically equivalent to

another SPDC or to a contract listed for trading on a DCM or DTEF if it

is cash settled based on a daily settlement price or the final

settlement price of the referenced contract. For economically-

equivalent SPDCs, the electronic trading facility should establish the

same spot-month speculative position limits as specified for the

equivalent contract.\59\

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\59\ Many DCMs have non-spot individual month and all-months-

combined position accountability rules for their futures contracts.

Moreover, some DCMs establish non-spot individual month and all-

months-combined position limits in lieu of the position

accountability levels. The Commission believes that the

implementation of such accountability provisions or position limits

is a good practice. Accordingly, the Commission proposes to adopt it

as an acceptable practice for ECMs.

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ECMs should establish non-spot individual month position

accountability levels and all-months-combined position accountability

levels for its SPDCs. Once a trader exceeds an established position

accountability level, the ECM should initiate an investigation to

determine whether the individual's trading activity is justified and is

not intended to manipulate the market. As part of its investigation,

the ECM should inquire about the trader's rationale for holding a net

position in excess of the accountability levels. The ECM also can

request that the trader not further increase contract positions. If a

trader fails to comply with a request for information, 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 ECM, then the accountability provisions should enable

the ECM to order the trader to reduce the positions.

If a SPDC is economically equivalent to another SPDC or to a

contract traded

[[Page 75896]]

on a DCM or DTEF, then the ECM should set the non-spot individual month

position accountability level and all-months-combined position

accountability level at the same level as those specified for the

economically-equivalent contract. For a unique SPDC, the ECM should

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.

Position accountability levels are not necessary for SPDCs that

specify non-spot individual month position limits and all-months-

combined position limits. If a SPDC is economically equivalent to

another contract, then the non-spot individual month position limit and

all-months-combined position limit should be set at the same levels

specified for the equivalent or referenced contract. For unique SPDCs,

the non-spot individual month and all-months-combined position limits

should be set in the same manner as for position accountability levels,

i.e., levels that capture a material amount of large positions that

could threaten the market.

An ECM with a SPDC may require that all transactions in that

contract be cleared only through a DCO. Alternatively, an ECM's SPDC

may not be subject to any clearing requirement, in which case the

contract would trade on an uncleared basis. Lastly, an ECM may permit a

given SPDC to trade on either a cleared or uncleared basis depending on

the status of the counterparties involved. The amendments to the CEA

give electronic trading facilities reasonable discretion to take into

account the differences between cleared and uncleared transactions when

complying with Core Principle IV.\60\ For the purpose of applying

speculative limits to positions in SPDCs, the ECM should apply

speculative position limits to cleared positions only.

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\60\ Public Law 110-246 at sec. 13201.

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Uncleared transactions in SPDCs potentially play an important role

in risk management strategies and price formation. As a result, the

Commission believes that an ECM should monitor not only trading in

cleared transactions but also trading with respect to uncleared

transactions. However, the Commission is cognizant of the fact that

uncleared trades conducted on the ECM may be offset by trades done off

the facility. Such offsetting transactions consummated outside of an

ECM typically are not reported to the facility. Thus, the ECM likely

would find it difficult to net uncleared transactions and maintain

records of traders' uncleared positions in a given SPDC. In order to

account for this situation, the Commission proposes for ECMs with SPDCs

a new measure of trading activity called the volume accountability

level. For this measure, the ECM should keep track of each trader's

uncleared transactions in a SPDC on a net basis that are conducted on

the facility. (For the purpose of netting uncleared transactions, long

and short uncleared transactions are only offset if they are conducted

with the same counterparty.) A volume accountability level is similar

to a position accountability level in that a trader may exceed the

volume accountability level. However, if a trader's net volume of

uncleared trades exceeds the volume accountability level, the ECM

should initiate an investigation to determine whether the trading

activity is justified and is not intended to manipulate the market. As

part of its investigation, the ECM should inquire about the trader's

rationale for holding a net volume of uncleared trades in excess of the

volume accountability level. The ECM also can request that the trader

not further increase the volume of uncleared trades. If a trader fails

to comply with a request for information about the portfolio of

uncleared trades, provides information that does not sufficiently

justify the uncleared transactions conducted, or continues to increase

the volume of uncleared trades after a request not to do so is issued

by the ECM, then the volume accountability provisions should enable the

ECM to require the trader to reduce the volume of uncleared trades.

Consistent with the specific directive of Core Principle IV, the

Commission expects ECMs to impose position limit and position

accountability requirements on SPDCs as well as positions in

agreements, contracts and transactions that are fungible and cleared

together with any SPDC. This circumstance typically occurs where an ECM

lists a particular contract on its multilateral trading platform and

the resultant positions are cleared by a DCO. Separately, the ECM also

provides a non-multilateral trading platform capability for the trading

of the same contract and the resultant positions are cleared at the

same clearing organization together with positions established on the

multilateral platform. Given the fact that such arrangements allow

market participants to put on positions on the multilateral platform

and take them off away from the platform--as well as vice versa--the

Commission believes that it is appropriate for position limit

requirements to be applied to overall positions regardless of where

they originated.

With regard to compliance with a particular position limit or

position accountability rule, ECMs should aggregate on a net basis

cleared transactions, including those that are treated by a DCO

(registered or unregistered) as fungible with the SPDC. Aggregate

positions then will be compared with the applicable position limit and

position accountability rules to determine compliance. Uncleared

transactions also should be aggregated by trader on a net basis in

order to determine whether such trader's volume of uncleared trades

exceeds the spot-month volume accountability level.

An ECM with SPDCs should use an automated means of detecting

traders' violations of speculative limit rules and exemptions. An

automated system also should be used to determine whether a trader has

exceeded applicable non-spot individual month accountability levels,

all-months-combined accountability levels, and spot-month volume

accountability levels. An electronic trading facility should establish

a program for effective enforcement of position limits for SPDCs.

Lastly, ECMs should use a large trader reporting system to monitor and

enforce daily compliance with position limit rules.

The Commission recognizes that some traders with relatively large

positions may be adversely affected by newly imposed position limits

when a SPDC initially comes into compliance with the core principles.

To address this issue, the Commission proposes, for the purpose of

applying limits on speculative positions in newly-determined SPDCs, to

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 ECMs SPDC must be at or below the specified position limit level

no later than 90 calendar days from the date of the ECM's

implementation of position limit rules, unless a hedge exemption is

granted by the ECM.

Core Principle V requires the ECM to adopt rules to provide for the

exercise of emergency authority. The proposed guidance contained in

Appendix B to part 36 is substantially similar to the guidance for DCM

Core Principle 6.\61\ However, the Commission added a

[[Page 75897]]

reference in the proposed guidance for Core Principle V to acknowledge

that calls for additional margin apply only to contracts that are

cleared through a clearinghouse, since not all contracts traded on

electronic trading facilities are cleared.

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\61\ 17 CFR 38, Appendix B to Part 38.

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Core Principle VI requires that an ECM with a SPDC make public

daily information on price, trading volume, and other trading data. The

Commission believes this information should include settlement prices,

price range, volume, open interest, and other related market

information, and has proposed in the acceptable practices that

compliance with Commission regulation 16.01,\62\ which the Commission

proposes to make mandatory for ECMs with SPDCs, would constitute an

acceptable practice under Core Principle VI.

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\62\ 17 CFR 16.01.

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Core Principle VII requires the ECM to monitor and enforce

compliance with the rules of its market. The proposed guidance and

acceptable practices provided in Appendix B to part 36 are roughly

parallel to the guidance and acceptable practices prescribed for DCM

Core Principle 2.\63\ The Commission notes that ECMs on which SPDCs are

traded are non-intermediated markets, and for this reason guidance

relating to a DCM's authority to examine the books and records of

intermediaries has not been included in the proposed guidance for Core

Principle VII.

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\63\ 17 CFR 38, Appendix B to part 38.

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Core Principle VIII requires the electronic trading facility to

establish and enforce rules to minimize conflicts of interest in its

decision-making processes. The Commission notes that an ECM may face

conflicts between its self-regulatory responsibilities and its

commercial interests similar to those encountered by a DCM. For this

reason the Commission proposes to insert certain general elements of

the acceptable practices for DCM Core Principle 15 \64\--specifically,

those descriptive elements that provide greater clarity and context to

particular conflicts--into paragraph (a)(2) of the guidance section for

ECM Core Principle VIII.

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\64\ Id.

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The acceptable practices for DCM Core Principle 15 include four

specific provisions that must be met to receive the benefit of the safe

harbor. These provisions address: (1) Board Composition; (2) Definition

of Public Director; (3) Regulatory Oversight Committee; and (4)

Disciplinary Panels. Although the Commission did not propose any

acceptable practices for Core Principle VIII, the Commission emphasizes

that the four provisions in the acceptable practices for DCM Core

Principle 15 are a clear articulation of acceptable methods for

managing conflicts of interest in decision-making. Accordingly, the

Commission encourages ECMs with SPDCs to consult the DCM Core Principle

15 acceptable practices for additional guidance as to the spirit of

Core Principle VIII.

The Commission recognizes that an electronic trading facility may

become subject to compliance with Core Principle VIII by virtue of a

single contract representing a small portion of the facility's

operations. Thus, the ECM's conflicts may be contract-specific and not

require the all-encompassing safe harbor offered for the benefit of

DCMs in Core Principle 15.\65\ The Commission also recognizes that it

may not be practicable for an ECM to implement the full panoply of the

Core Principle 15 acceptable practices. The ECM must nonetheless ensure

that appropriate measures are in place to guard against conflicts of

interest in decision-making. An electronic trading facility should

carefully consider its method of compliance, including whether

additional measures may be required as the number or importance of its

SPDCs increases. The Commission reserves the right to issue additional

guidance or specific acceptable practices for Core Principle VIII as

circumstances warrant.

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\65\ The Commission recognizes that, pursuant to the

Reauthorization Act, compliance with the core regulatory principles

is limited to ECMs with SPDCs. However, the Commission also

recognizes that all ECMs, not just ECMs with SPDCs, may face

potential conflicts of interest in their decision-making processes.

Therefore, all ECMs may want to consider implementing appropriate

measures to minimize conflicts of interests.

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Core Principle IX requires ECMs with SPDCs to avoid adopting rules

or taking actions that result in unreasonable restraints of trade or

impose a material anticompetitive burden on trading. The Commission is

required by section 15(b) of its statute to take into consideration the

public interest to be protected by the antitrust laws and to take the

least anticompetitive means of achieving the objectives, policies and

purposes of the CEA.\66\ Consistent with the Commission's approach to

antitrust considerations with respect to DCMs,\67\ it is the

Commission's intent to be guided by section 15(b) of the Act in its

consideration of any issues arising under this core principle.

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\66\ 7 U.S.C. 19.

\67\ 17 CFR 38, Appendix B to part 38, Guidance for Core

Principle 18.

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5. Annual Commission Review

In accordance with section 2(h)(7) of the CEA, proposed regulation

36.3(d) provides that the Commission will review at least annually

agreements, contracts and transactions traded on ECMs to determine

whether they serve a significant price discovery function. The

Commission proposes to limit these annual reviews to those contracts

that have an average daily volume of five or more trades or that have

been brought to the attention of the Commission, through the

notification procedures of proposed regulation 36.3(c)(2) or otherwise,

as possible SPDCs. The Commission believes this approach is consistent

with Congress' intent as reflected in the Conference Committee Report:

The Managers do not intend that the Commission conduct an

exhaustive annual examination of every contract traded on an

electronic trading facility pursuant to the section 2(h)(3)

exemption, but instead to concentrate on those contracts that are

most likely to meet the criteria for performing a significant price

discovery function.\68\

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\68\ Conference Committee Report at 985.

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B. Market, Transaction and Large Trader Reporting Rules

The Commission's market and large trader reporting rules

(``reporting rules'') are contained in parts 15 through 21 of the

Commission's regulations.\69\ Collectively, the reporting rules

effectuate the Commission's market and financial surveillance

programs.\70\ The market surveillance programs analyze market data to

detect and prevent market manipulation and disruptions and to enforce

speculative position limits. The financial surveillance programs use

market data to measure the financial risks that large contract

positions may pose to Commission registrants and clearing

organizations.

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\69\ 17 CFR parts 15 to 21.

\70\ See 69 FR 76392 (Dec. 21, 2004).

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The Commission's reporting rules can be applied to SPDCs traded on

ECMs pursuant to the authority of sections 4a, 4c(b), 4g and 4i of the

CEA.\71\ The amendments introduced to the CEA by the Reauthorization

Act, both by defining ECMs with SPDCs as registered entities with

respect to those contracts and by making certain provisions of the

[[Page 75898]]

Act directly applicable to SPDCs, give the Commission the authority to

establish a comprehensive transaction and position reporting system for

SPDCs. Specifically, section 4a of the CEA permits the Commission to

set, approve exchange-set, and enforce speculative position limits.\72\

Section 4c(b) of the Act,\73\ which gives the Commission plenary

authority to establish the rules pursuant to which the terms and

conditions on which commodity options transactions may be conducted,

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, as amended, imposes reporting and

recordkeeping obligations on registered persons and requires them to

file such reports as the Commission may require on proprietary and

customer positions executed on any board of trade and in any SPDC

traded or executed on an electronic trading facility.\74\ 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.\75\

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\71\ The Reauthorization Act amended section 2(h)(4)(B) of the

Act to subject SPDCs requiring large trader reporting to the

provisions of section 4c(b) of the Act. In addition, section

2(h)(4)(D) of the Act provides that transactions executed on ECMs

shall be subject to ``such rules, regulations, and orders as the

Commission may issue to ensure timely compliance with any of the

provisions of this Act applicable to a significant price discovery

contract traded on or executed on any electronic trading facility *

* *.'' 7 U.S.C. 2(h)(4)(D).

\72\ 7 U.S.C. 6a.

\73\ 7 U.S.C. 6c(b).

\74\ 7 U.S.C. 6g.

\75\ 7 U.S.C. 6i.

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In addition to proposing technical and conforming amendments to

parts 15 through 21 of its regulations, the Commission seeks, through

the proposed regulations, 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 regulation 15.00 to apply to positions in, and the

trading and clearing of, SPDCs executed on ECMs. Under the proposed

rules, ECMs would provide clearing member reports for SPDCs to the

Commission pursuant to Commission regulation 16.00. As with DCMs,

proposed rule 16.01 would require ECMs to submit to the Commission and

publicly disseminate option deltas and aggregated trading data on a

daily basis.\76\ ECM clearing members that clear SPDCs, regardless of

their registration status with the Commission or their status as

domestic or foreign persons, would be required to file position reports

with the Commission for large SPDC positions held in accounts carried

by such brokers when customer positions exceed the contract reporting

levels of Commission regulation 15.03(b). In addition, the proposed

regulations would require clearing members to identify the owners of

reportable SPDC positions on Form 102 (Identification of Special

Accounts).\77\

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\76\ Currently, the public dissemination requirement of

Commission regulation 16.01(e) applies only to DCMs. The proposed

rules would uniformly apply the public dissemination requirement of

Commission regulation 16.01(e) to actively traded DCM contracts and

SPDCs executed on DTEFs and ECMs. 17 CFR 16.01(e).

\77\ The Commission's Division of Market Oversight increasingly

has been charged with administering the procedural requirements of

the reporting rules. Accordingly, the Commission is proposing to

shift any delegation of the Commission's authority to determine the

format of reports and the manner of reporting under parts 15 through

21 of the Commission's regulations from the Executive Director to

the Director of the Division of Market Oversight.

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Under the proposed regulations, SPDC traders likewise would be

subject to the special call provisions of part 18 of the Commission's

regulations for reportable positions. Moreover, clearing members for

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

the special call provisions of part 21 of the Commission's regulations,

which establish 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 regulation

15.03(b).\78\

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\78\ 17 CFR 15.03(b). The proposed rules also seek to amend

paragraphs (i)(1) and (i)(2) of Commission regulation 21.01 to

ensure that any special call to an intermediary for information that

classifies a trader as a commercial or noncommercial trader, 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 effectively communicate 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 regulations,

the Commission is also proposing to amend the designation of agent

provisions of Commission regulation 15.05. This rule relates to the

appointment of an agent for service of process for foreign persons; it

is self-effectuating and is designed to permit the Commission to

communicate expeditiously with foreign individuals and entities that

trade on domestic commodity exchanges.\79\ Similar to requirements that

currently apply to DCMs and DTEFs, the proposed amendments to

regulation 15.05 would 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 foreign

trader.\80\

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\79\ For background on the adoption of the rule, see 45 FR 30426

(May 8, 1980).

\80\ In order to ensure that the Commission can expeditiously

communicate with all foreign individuals and entities that may

effect transactions in ECM SPDCs, the Commission is proposing to

define the term foreign clearing member in proposed regulation

15.00(g), and to use that term along with the term foreign trader as

defined in regulation 15.00(h), in proposed regulation 15.05(i).

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The Commission is also proposing new regulation 16.02 to require

all reporting markets--a definition that currently includes DCMs and

DTEFs (unless the Commission determines otherwise) and, as proposed,

will include ECMs listing SPDCs with respect to such contracts--to

report on a daily basis trade data and related order information for

each transaction that is executed on the market. Such reports would

include time and sales data, reference files and such other information

as the Commission or its designee may require and, upon request, would

be accompanied by data that identifies or facilitates the

identification of each trader for each transaction or order included in

a submitted report. For some time, DCMs have consistently provided

transaction level data to the Commission pursuant to rule 38.5(a),

under which they must file trade data upon request by the

Commission.\81\ Recent acquisitions of technology have enabled the

Commission more effectively to integrate trade data and related order

information into its trade practice, market and financial surveillance

programs. Accordingly, the Commission proposes in new regulation 16.02

to make the submission of trade data and related order information

mandatory.

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\81\ 17 CFR 38.5(a).

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In this regard, and specifically with respect to SPDCs, the

Commission notes that the proposed amendments to part 17 of the

Commission's regulations do not apply 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 would use

proposed regulation 16.02 to access transaction information and trader

identifications to enforce position limits and monitor large positions

for market and financial surveillance purposes.

[[Page 75899]]

C. Other Regulatory Provisions

1. Part 40--Provisions Common to Registered Entities

ECMs with SPDCs are integrated into the definition of ``registered

entity'' in section 1a(29) of the CEA, as amended. Part 40 of the

Commission's regulations applies to registered entities, and therefore,

ECMs with SPDCs. Proposed part 40 is being amended to specify which

provisions would be, or would not be, applicable to all registered

entities. In particular, rules 40.1, 40.2 and 40.5-40.8 and Appendix D

apply to ECMs with SPDCs. Although not all provisions of part 40 will

be applicable to ECMs with SPDCs,\82\ interested parties are strongly

encouraged to review all of part 40 because even those 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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\82\ Regulation 40.3 will not apply to ECMs with SPDCs because

it addresses Commission approval of products. Regulation 40.4

applies solely to agricultural products, which cannot be traded on

ECMs.

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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 regulations outweigh their costs. Rather, section

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

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

benefits of the regulations shall be evaluated in light of five broad

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

participants and the public; (2) efficiency, competitiveness, and

financial integrity of 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 regulation is necessary or appropriate to protect the public

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

the purposes of the Act.

The proposed regulations implement the Reauthorization Act by

establishing an enhanced level of oversight of ECMs--including ECMs

with SPDCs and ECM market participants--as mandated by Reauthorization

Act. As a result, in certain cases, it may be more appropriate to

attribute the compliance costs imposed by the proposed regulations to

requirements that directly arise from the provisions of the

Reauthorization Act.

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

determines otherwise) and ECMs with SPDCs would be required to provide

daily transaction and related data reports to the Commission under

proposed rule 16.02. The costs associated with the daily transaction

and related data reporting requirements of proposed regulation 16.02,

however, may be ameliorated by the fact that DCMs have been voluntarily

providing 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 would likely be required to

file such reports pursuant to proposed rule 16.02.

The proposed regulations would extend the market and position

reporting requirements of parts 15 to 21 of the Commission's

regulations to ECMs with SPDCs with respect to such contracts. The

requirements of the proposed regulations are substantial, would involve

the submission of daily reports, and would impose burdens on market

participants that clear and trade SPDCs. More specifically, the

proposed rules would require ECMs with SPDCs with respect to such

contracts to provide clearing member reports for SPDCs to the

Commission pursuant to Commission regulation 16.00. Proposed rule 16.01

would require ECMs to submit to the Commission and publicly disseminate

option deltas and aggregated trading data on a daily basis. Pursuant to

proposed rule 17.00 ECM clearing members that clear SPDCs would be

required to file position reports with the Commission for large SPDC

positions held in accounts carried by such brokers when customer

positions exceed contract reporting levels and would be required to

identify the owners of reportable SPDC positions on Form 102 under

proposed rule 17.01. SPDC traders likewise would be subject to the

special call provisions of part 18 of the Commission's regulations for

reportable positions, and clearing members for SPDCs, SPDC traders, and

ECMs listing SPDCs each would be subject to the special call provisions

of part 21 of the Commission's regulations.

The costs associated with the requirements of the market and

position reporting rules, should, however, be reduced in part by the

substantial overlap between the persons that are currently subject to

the reporting rules, and the persons that would be subject to the

reporting rules pursuant to the Commission's proposed regulations. For

example, there is substantial overlap between traders of the natural

gas contract on ICE OTC and traders of the same contract on NYMEX. With

respect to clearing members of ICE OTC, for example, such persons are

often clearing members or affiliates of clearing members of NYMEX.

The benefits of extending the market and reporting rules to SPDCs

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 Commission the authority to

extend the market and position 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 market and position

reporting rules to such contracts, is elevated. The Commission analyzes

the information funneled to it by the requirements of the market and

position reporting rules to conduct market and financial surveillance.

Without such information, the ability of the Commission to discharge

its regulatory responsibilities, including the responsibilities of

preventing market manipulations and contract price distortions and

ensuring the financial integrity of the listed derivatives marketplace,

would be compromised.

The bulk of the costs that would be imposed by the requirements of

proposed regulation 36.3 relate to significant and increased submission

of information requirements. For example, under proposed regulation

36.3(b)(1), all ECMs would be required to file certain basic

information including contract terms and conditions with, and make

certain demonstrations related to compliance with the terms of the

section 2(h)(3) exemption to, the Commission. Proposed regulation

36.3(b)(2) would require 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 proposed rule 16.02.

Proposed regulation 36.3(c)(4) would impose a substantial cost on ECMs

with SPDCs in terms of providing information to the Commission.

In enacting the Reauthorization Act, Congress directed the

Commission to take an active role in determining

[[Page 75900]]

whether contracts listed by ECMs could qualify as SPDCs. Accordingly,

the enhanced informational requirements that would be imposed on ECMs

with respect to contracts that have not been identified as SPDCs have

been proposed by the Commission in order to acquire the information

that it requires to discharge this newly mandated responsibility. In

addition, the substantial information submission and demonstration

requirements that would be imposed on ECMs with SPDCs have been

proposed because ECMs with SPDCs, by statute, acquire certain of the

self-regulatory responsibilities of DCMs. The submission requirements

associated with proposed regulation 36.3(c)(4) are 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 market and position reporting rules, the

primary benefit to the public of proposed regulation 36.3 is that its

requirements give the Commission the ability to discharge its

statutorily mandated responsibility for monitoring for the presence of

SPDCs and extending its oversight to the trading of SPDCs.

B. The Regulatory Flexibility Act

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

requires that agencies consider the impact of their regulations on

small businesses. The requirements related to the proposed amendments

fall mainly on registered entities, exchanges, futures commission

merchants, clearing members, foreign brokers, and large traders. The

Commission has previously determined that exchanges, futures commission

merchants and large traders are not ``small entities'' for the purposes

of the RFA.\83\ Similarly, clearing members, foreign brokers and

traders would be subject to the proposed regulations only if carrying

or holding large positions. Accordingly, the Acting Chairman, on behalf

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

the actions proposed to be taken herein will not have a significant

economic impact on a substantial number of small entities.

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\83\ 47 FR 18618 (April 30, 1982).

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C. Paperwork Reduction Act

Certain provisions of proposed Commission regulation 36.3 would

result in new collection of information requirements within the meaning

of the Paperwork Reduction Act of 1995 (PRA).\84\ The Commission

therefore is submitting this proposal 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 title for this collection of information is ``Regulation

36.3--Exempt Commercial Market Submission Requirements'' (OMB control

number 3038-NEW). If adopted, responses to this collection of

information would be mandatory. The Commission will protect proprietary

information according to the Freedom of Information Act and 17 CFR part

145, ``Commission Records and Information.'' In addition, section

8(a)(1) of the Act strictly prohibits the Commission, unless

specifically authorized by the Act, from making public ``data and

information that would separately disclose the business transactions or

market positions of any person and trade secrets or names of

customers.'' \85\

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\84\ 44 U.S.C. 3501-3520.

\85\ 7 U.S.C. 12(a)(1).

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The requirements of Commission regulation 36.3 are currently

covered by OMB control number 3038-0054 which applies to both EBOTs and

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

comply with additional divergent regulatory requirements. Accordingly,

the Commission is seeking a new and separate control number for ECMs

operating in compliance with the requirements of regulation 36.3. Upon

OMB's approval and assignment of a separate control number specifically

for the collection of information requirements of proposed regulation

36.3, the Commission intends to submit the necessary documentation to

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

EBOTs.

In addition, the Commission is proposing amendments to parts 15 to

21 of the Commission's regulations, which amend 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).

Responses to this collections of information would be mandatory. Where

appropriate, the Commission will protect proprietary information

pursuant to the Freedom of Information Act \86\ and 17 CFR part 145,

``Commission Records and Information.'' In addition, section 8(a)(1) of

the Act prohibits the Commission, unless specifically authorized by the

Act, from making public ``data and information that would separately

disclose the business transactions or market positions of any person

and trade secrets or names of customers.'' \87\

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\86\ 5 U.S.C. 552 et seq.

\87\ Id.

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Finally, proposed regulation 16.02 would result in a new collection

of information requirement within the meaning of the PRA. The

Commission is therefore submitting the proposal for regulation 16.02 to

OMB for review. The title for the collection of information requirement

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

control number 3038-NEW). If adopted, this collection would be

mandatory. The Commission will protect proprietary information

according to the Freedom of Information Act and 17 CFR part 145,

``Commission Records and Information.'' In addition, section 8(a)(1) of

the Act strictly prohibits the Commission, unless specifically

authorized by the Act, from making public ``data and information that

would separately disclose the business transactions or market positions

of any person and trade secrets or names of customers.'' \88\

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\88\ Id.

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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. OMB has not yet assigned control

numbers to the new collections for proposed regulations 36.3 and 16.02.

The approved collection of information requirements associated with

parts 15 to 21, which would be revised by the proposed rules and rule

amendments, display control numbers 3038-0009 and 3038-0012.

1. Proposed Regulation 36.3

A. Regulation 36.3(a)

Regulation 36.3(a) requires that ECMs notify the Commission of the

intent to operate as an ECM in reliance of section 2(h)(3) of the Act

and further provide the information and certifications required by

section 2(h)(5)(A) of the Act. Section 2(h)(5)(A) of the Act requires

an ECM to provide the name and address of the person who is authorized

on behalf of the ECM to receive communications from the Commission, the

commodity categories that the ECM intends to offer, and certifications

that certain owners and principals of the ECM are not bad actors, that

the facility will comply with the requirements of the ECM exemption,

and that the facility will update its filings under section 2(h)(5)(A)

to account for material changes in the information submitted to the

Commission.

[[Page 75901]]

The substantive requirements of regulation 36.3(a) repeat the

requirements that are imposed by the Act as a condition of operating

pursuant to the ECM exemption. The reporting or recordkeeping burden

associated with Commission regulation 36.3(a) involves the compilation

and submission of the required information to the Commission.

Commission staff estimates that each ECM would expend approximately 4

hours of professional time annually to maintain, verify, and update the

notification and required certifications. Commission staff estimates

that 20 ECMs will be subject to the requirement resulting in an

aggregate burden of 80 hours annually.

B. Regulation 36.3(b)(1)

Under proposed regulation 36.3(b)(1), each ECM would be required to

provide contract descriptions and terms and conditions, the market's

trading conventions, and the market's trading protocols to the

Commission. Each ECM would be required to describe how it meets the

statutory definition of a trading facility and demonstrate that it

requires each participant to comply with all applicable laws; complies

with the initial statutory requirements for the ECM exemption under

section 2(h)(3) of the Act; and directs a program to monitor market

participants for compliance with the transactional requirements of the

ECM exemption. Proposed regulation 36.3(b)(1) would further require

that each ECM provide, upon the Commission's request, information that

the Commission would deem helpful to its determination as to whether a

particular contract is a SPDC. Lastly, each ECM would be required to

annually indicate on Form 205 whether it continues to operate under the

ECM exemption and certify the accuracy of the information contained in

its Notification of Operation submitted pursuant to section 2(h)(5)(A)

of the Act and regulation 36.3(a).

Based on the number of contract submissions made by DCMs, the

Commission estimates that ECMs collectively would list for trading 250

commodity futures and options contracts annually. Commission staff

estimates that compliance with the above requirements and the

transmission of descriptions and terms and conditions for such products

would take approximately 2 hours of professional time to prepare per

contract resulting in a collective burden of 500 hours annually for all

ECMs.

C. Regulation 36.3(b)(2)

Proposed regulation 36.3(b)(2) would require that ECMs, with

respect to contracts that are not SPDCs, identify contracts which

average 5 or more trades per day over a calendar quarter, and for such

contracts, compile daily transaction-based reports that include the

date of execution, the time of execution, the price of execution, the

quantity executed, the total daily trading volume, the total open

interest, option type, option strike prices for each qualifying

contract, and such other information as may be requested by the

Commission. Proposed regulation 36.3(b)(2) would require the submission

of the reports on a weekly basis. Such data is generated by ECMs in the

normal course of operation. The Commission staff estimates that ECMs

would submit weekly reports for a total of 40 contracts annually (2,080

reports). Commission staff estimates that ECMs would expend

approximately 20 minutes of professional time to compile and transmit

each weekly report to the Commission resulting in an annual burden of

approximately 693 hours.

Proposed regulation 36.3(b)(2) would give an ECM the flexibility to

choose to submit weekly transaction-based reports or, in the

alternative, give the Commission electronic access to its trading

facility to enable the Commission to create the weekly reports. Should

an ECM select this option, Commission staff believes that such access

would not result in any estimable burden on an ECM.

Proposed regulation 36.3(b)(2) also would require that ECMs, with

respect to contracts that are not SPDCs, to identify contracts which

average 1 or more trades per day over a calendar quarter, and for such

contracts, to provide to the Commission on a quarterly basis, the terms

and conditions of such contracts, the average daily trading volume, and

the most recent level of open interest. As with weekly reports, such

data is generated by ECMs in the normal course of operation. The

Commission staff estimates that ECMs would submit quarterly reports for

a total of 90 contracts annually (360 total reports). Commission staff

estimates that ECMs would expend approximately 20 minutes of

professional time to compile and transmit each quarterly report

resulting in an annual burden of 120 hours.

Furthermore, proposed regulation 36.3(b)(2) would require ECMs to

maintain an inventory of all fraud or manipulation based complaints and

submit a copy of such complaints to the Commission within 3 or 30 days,

depending on the specific facts of the complaints. ECMs should record

and retain an inventory of complaints in the normal course of

operation. Commission staff is unable to estimate the hourly burden

associated with the routine transmittal of such reports to the

Commission. However, Commission staff would presume that such

transmittal requirements should not result in any materially measurable

burden on ECMs.

Lastly, proposed regulation 36.3(b)(2) addresses the Commission's

authority to require the submission of data upon special call under

section 2(h)(5)(B)(iii) of the Act. Pursuant to that section of the

Act, the Commission has the authority to issue special calls in order

to enforce certain provisions of the Act including the anti-fraud and

anti-manipulation provisions. In addition, the Commission is authorized

to issue special calls to ECMs to facilitate its determination as to

whether certain contracts are SPDCs, to evaluate a systemic market

event, or to obtain information requested by another Federal financial

regulator. Commission staff estimates that a total of 15 special calls

would be issued to ECMs annually under section 2(h)(5)(B)(iii) of the

Act. Each ECM that has been issued a special call would expend

approximately 5 hours of professional time to respond to the call

resulting in a burden of 75 hours annually.

D. Proposed Regulation 36.3(c)(2)

Proposed regulation 36.3(c)(2) establishes for ECMs certain

requirements for notifying the Commission of possible SPDCs that may be

listed by the ECM. Specifically, an ECM's obligation to notify the

Commission would apply to contracts that average 5 trades or more per

day over the most recent calendar quarter, and may be triggered by

either the ECM's sale of contract price data or by a contract's daily

settlement price being within 2.5 percent of the contemporaneously

determined closing, settlement or daily price of another contract 95

percent or more of the days in the most recent quarter. Such

notifications would be accompanied by supporting details. Commission

staff estimates that cost of monitoring for the triggering conditions

is nominal. Commission staff estimates that collectively 10 contracts

would be the subject of the notification requirement annually. Each ECM

with a qualifying contract would expend approximately 1 hour of

professional time to compile and transmit such data to the Commission

at an aggregate annual burden of 10 hours.

[[Page 75902]]

E. Proposed Regulation 36.6(c)(4)

An ECM with a SPDC, with respect to such a contract, has

substantial regulatory responsibilities including the obligation to

comply with the core principles of section 2(h)(7)(C) of the Act and to

certify the compliance of SPDC contract terms and conditions and

exchange rules with the core principles, other applicable provisions of

the Act, and Commission regulations thereunder. To enable the

Commission to evaluate an ECM's compliance with the statutory and

regulatory provisions applicable to SPDCs and ECMs listing SPDCs,

Commission regulation 36.3(c)(4) would require ECMs with SPDCs to

submit a substantial amount of information and documentation to the

Commission including the market's rules, a description of financial

standards for members or participants, a description of the market's

trading algorithm, legal status documents, and a description of the

governance structure of the market. As proposed, such information

collectively would be filed only once upon the market's listing of a

SPDC. However, subsequent exchange rule changes, as with initial SPDC

contract terms and conditions and amendments thereto, would be required

to be certified on an ongoing basis.

Commission staff estimates that up to three new ECMs could list at

least one SPDC during the next five years. Commission staff estimates

that each new ECM listing its initial SPDC would expend approximately

200 hours of professional time providing the information and

documentation required under regulation 36.3(c)(4) for an aggregate

burden of 600 hours. Assuming that such trading facilities will operate

for ten years, the aggregated annualized cost, in terms of burden

hours, would be 60 hours. Additionally, Commission staff estimates that

the Commission would receive approximately 50 certified filings per

SPDC. For each SPDC related certified filing, an ECM would expend, in

accordance with the procedural and submission requirements of

Commission regulation 40.6, approximately 30 minutes resulting in an

aggregate annual burden of 75 hours.

F. Proposed Regulation 36.3(c)(6)

Proposed regulation 36.3(c)(6) requires an ECM listing a SPDC, upon

the Commission's request, to file a written demonstration that the ECM

is in compliance with the core principles of section 2(h)(7)(C) of the

Act. Commission staff estimates that such demonstrations of compliance

could require up to 20 hours of response time. Commission staff

anticipates issuing 2 requests annually resulting in an aggregate

burden of 40 hours.

2. Proposed Regulation 16.02

Under proposed regulation 16.02, reporting markets, a term which as

proposed would include ECMs with SPDCs with respect to SPDCs, in

addition to DCMs and DTEFs (unless determined otherwise by the

Commission), would be required to provide trade and supporting data

reports to the Commission on a daily basis. Such reports would include

transaction-level trade data and related order information for each

transaction executed on the reporting market and would be accompanied

by data that identifies traders for each transaction when reporting

markets maintain such data.

Since the mid-1980s, all DCMs have voluntarily provided the

Commission with transaction level data on a daily basis. Proposed

regulation 16.02 seeks to formalize and codify the submission process.

Commission staff estimates that each reporting market would expend 18

hours for onsite visits to the Commission, discussions with staff to

introduce the order flow process, and meetings with staff for follow-up

discussions. The proposed rules would require that reporting markets

expend approximately 2325 hours in additional start-up costs to

establish the required information technology infrastructure.

Commission staff estimates that it would receive daily trade and

supporting data reports from up to15 reporting markets annually.

Accordingly the start-up burden in terms of hours would in the

aggregate be 35,145 hours. Annualized over a useful life of ten years,

the aggregated annual burden hours would be 3,514.

It is also estimated that start-up and continuing costs may involve

product and service purchases. Commission staff estimates that

reporting markets could expend up to $5,000 annually per market on

product and service purchases to comply with proposed regulation 16.02.

This would result in an aggregated cost of $75,000 per annum (15

reporting markets x $5,000). This estimate, however, is speculative

because reporting markets must possess the ability to audit and track

transactions in the ordinary course of operations independently of

proposed regulation 16.02.

In addition to the start-up burden, proposed regulation 16.02, if

adopted, would impose certain ongoing costs. Commission staff estimates

that each reporting market would expend 30 minutes for each daily trade

and supporting data report transmitted to the Commission resulting in

an aggregate burden of 1,875 hours annually (assuming that such reports

are provided for each of 250 trading days).

3. Market and Large Trader Reporting Rules

In order to implement the CEA as amended by the Reauthorization

Act, the Commission through this rulemaking proposes to extend the

market and large trader reporting requirements that currently apply to

DCMs and DTEFs to ECMs with SPDCs with respect to such contracts.

A. Futures Volume, Open Interest, Price, Deliveries, and Exchanges of

Futures (OMB control number 3038-0012)

Twelve exchanges currently submit aggregated market data to the

Commission and are required to publicly disseminate for each of

approximately 250 trading days per year under Commission regulation

16.01. The information includes aggregate figures on a per contract

basis on total gross open contracts, open futures contracts against

which delivery notices have been stopped, volume generated from the

exchange of futures, delta factors as well as certain pricing data.

Should the proposed amendments be adopted, it is estimated that up to

15 reporting markets, including ECMs with SPDCs with respect to such

contracts, could be required to submit this data to the Commission on a

continuing basis. Commission staff estimates that such markets would

expend approximately 30 minutes per day to generate the required data

files, transmit that file to Commission offices, and publish the

required information. This would results in an annual burden of

approximately 1,875 hours.

B. Large Trader Reports (OMB Control Number 3038-0009)

1. Clearing Member Reports

Twelve designated contract markets provide clearing member reports

pursuant to Commission regulation 16.00 once on each of an estimated

250 trading days per year. Should the proposed rules be adopted, it is

estimated that up to 15 reporting markets, including ECMs with SPDCs

with respect to such contracts, would be providing this data to the

Commission on a continuing basis. The exchanges and ECMs would be

required to submit confidential information to the Commission on the

aggregate positions and trading activity of each clearing member.

Reporting markets, on a daily basis, are required under regulation

16.00 to

[[Page 75903]]

report each clearing member's open long and short positions, purchases

and sales, exchanges of futures, and futures delivery notices. The data

is reported separately by proprietary and customer accounts by futures

month and, for options, by puts and calls by expiration date and strike

price. The Commission obtains clearing member reports from the

reporting markets or the clearing organizations of each reporting

market. Reporting markets and the clearing organizations routinely

compile, analyze and provide such data to each clearing member. Since

the data is routinely provided to clearing members, the reporting

burden for this set of data is estimated at 20 minutes for each

reporting market per day. Assuming that a total of 15 entities would

provide this data on a daily basis to the Commission, the total

aggregate burden hours for reporting would be 1,250 hours (assuming

that there are 250 trading days annually).

2. Reporting Firms

Under Commission regulation 17.00, routine reports are filed only

for accounts with commodity futures and option positions that exceed

levels set by the Commission in regulation 15.03(b). As proposed,

regulation 17.00 would extend the routine reporting requirements of

regulation 17.00 to clearing members on ECMs with SPDCs with respect to

SPDCs. Should proposed regulation 17.00 be adopted, it is estimated

that up to an additional 30 respondents would be required to file

reports at any one time under regulation 17.00 increasing the total

number of respondents to 250. The reporting burden consists of staff of

reporting firms initializing their information technology systems for

new contracts and new accounts. On average it is expected that about 15

minutes per day is expended by these reporting firm staff. Over 250

trading days annually, the aggregate burden would be 15,625 hours.

3. Forms 102

Each account reported to the Commission by an FCM, clearing member,

or foreign broker must also be identified on a Form 102 pursuant to

regulation 17.01. By amending the definition of reporting market,

clearing member, and clearing organization, the notice of proposed

rulemaking would extend the requirements of regulation 17.01 to

clearing members of ECMs with SPDCs with respect to such contracts.

Forms 102 provide information that allows the Commission to combine

different accounts held or controlled by the same trader and to

identify commercial firms using the markets for hedging. Should the

notice of proposed rulemaking be adopted, the total number of Forms 102

filed with the Commission is estimated to increase by 500 to 4,500 per

year. Respondents would expend 12 minutes completing each form for a

total aggregate burden of 900 hours annually.

4. Reports From Traders

Traders provide identifying information using Forms 40 under

Commission regulation 18.04 and position data upon special call under

Commission regulations 18.00 and 18.05. The notice of proposed

rulemaking would extend the requirements of those regulations to

traders of SPDCs. Should the proposed amendments be adopted, the total

estimated number of traders filing the Form 40 under regulation 18.04

would increase by 100 to 2,500 per year with each response requiring

approximately 20 minutes, resulting in an aggregate annual burden of

833 hours.

The Commission has maintained the authority to make special calls

on traders under part 18 of the Commission's regulations when the

information obtained routinely under part 17 of the Commission's

regulations is incomplete for its market and financial surveillance

purposes. Information obtained on call under Commission regulations

18.00 and 18.05 is provided in the manner stipulated per instruction

contained in the special call. Should the proposed regulations be

adopted, the Commission estimates that 12 special calls would be issued

to each of 45 traders under Commission regulations 18.00 and 18.05 and

that each response to a call would require approximately 5 hours, for

an estimated aggregate annual burden of 2,700 hours.

5. Part 21 of the Commission Regulations

Under part 21 of the Commission's regulations, the Commission may

issue special calls for additional cash and futures data concerning

traders from FCMs, introducing broker, clearing members, foreign

brokers, and traders. In addition, under part 21 of the Commission's

regulations (17 CFR part 21), the Commission may request identifying

information regarding persons who exercise trading control over

accounts. Position information collected pursuant to special call under

part 21 of the Commission's regulations may be used to audit large

trader reports and is used to investigate potential market abuses.

Although similar to the standardized information routinely collected

under part 17 of the Commission's regulations for reportable accounts,

such data is submitted in response to customized requests for

information and may regard accounts and positions that are not

reportable. In contrast to special calls for identifying data made

under Commission regulation 18.04, special calls made under any

provision of part 21 of the Commission's regulations generally occur

only when a particular market shows a potential for disruption or when

there is an investigation of possible violations of the Act or the

regulations thereunder. The notice of proposed rulemaking would apply

the terms of part 21 to ECMs with SPDCs with respect to such contracts,

clearing members clearing SPDCs, and SPDC traders. Should the proposed

regulations be adopted, the Commission estimates that the Commission

will continue to make less than 10 special calls under all of the

provisions of part 21 of the Commission's regulations and that each

response to a call will require approximately 1 hour, resulting in an

aggregate reporting burden of 10 hours annually.

4. Information Collection Comments

The Commission invites the public and other Federal agencies to

comment on any aspect of the reporting and recordkeeping burdens

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

solicits comments in order to: (i) Evaluate whether the proposed

collections of information are 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

estimate of the burden of 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.

You may submit your comments directly to the Office of Information

and Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at OIRA-

[email protected]. Please provide the Commission with a copy of

your comments so that we can summarize all written comments and address

them in the final rule preamble. Refer to the Addresses section of this

notice of proposed rulemaking for comment submission instructions to

the Commission. You may obtain a copy of the supporting statements for

the

[[Page 75904]]

collections of information discussed above by visiting RegInfo.gov. OMB

is required to make a decision concerning the collections of

information between 30 and 60 days after publication of this Release.

Consequently, a comment to OMB is most assured of being fully effective

if received by OMB (and the Commission) within 30 days after

publication of this notice of proposed rulemaking.

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.

For the reasons stated in the preamble, the Commodity Futures

Trading Commission proposes to amend 17 CFR parts 15, 16, 17, 18, 19,

21, 36 and 40 as follows:

PART 15--REPORTS--GENERAL PROVISIONS

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

follows:

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

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

Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat.

1624 (June 18, 2008).

2. Revise Sec. 15.00 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 option 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 ``option 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 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 (o) of

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

its territories or possessions.

(k) 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.

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

includes two or more discretionary accounts traded pursuant to a common

plan, advice or recommendations.

(m) 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.

(n) 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 future of any commodity on any one reporting market,

excluding future 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.

[[Page 75905]]

(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.

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

entity under section 1a(29)(E) 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.

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

in which there is a reportable position.

(q) 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.

3. In Sec. 15.01, revise 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.

* * * * *

4. In Sec. 15.05, revise the heading and paragraph (a); and add

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 Sec. 36.3(b)(i) of this

chapter 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; 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; 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) introductory text 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 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) introductory text and

(i)(1) of this section.

5. Add Sec. 15.06 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

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,

[[Page 75906]]

Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008), unless

otherwise noted.

7. In Sec. 16.01, revise paragraphs (e)(1) and (e)(2) 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.

* * * * *

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

transaction that is executed on the reporting market. 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.

9. In Sec. 16.07, revise the heading and introductory text; and

add 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 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

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, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008), unless

otherwise noted.

11. Revise the heading of part 17 as set forth above.

12. In Sec. 17.00, revise paragraph (a) introductory text and

paragraphs (a)(1), (b)(1), and (f); and add and reserve 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 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 traded in reliance on the

exemption in section 2(h)(3) of the Act, separately for each reporting

market and for each future position traded in reliance on the exemption

in section 2(h)(3) of the Act, and each put and call options position

separately for each reporting market, expiration and strike price in

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.

* * * * *

13. In Sec. 17.03, revise 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.

[[Page 75907]]

(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.

* * * * *

14. In Sec. 17.04, revise 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

15. The authority citation for part 18 continues 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, Pub. L. No. 110-246, 122 Stat. 1624 (June 18,

2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.

16. Revise Sec. 18.01 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.

17. In Sec. 18.04, revise 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).

* * * * *

18. In Sec. 18.05, revise 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

19. The authority citation for part 19 continues 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, Pub. L. No.

110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.

20. In Sec. 19.00, revise 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(n)(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(n)(1)(i) of this chapter, or

(3) All persons holding or controlling positions for future

delivery that are reportable pursuant to Sec. 15.00(n)(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.

* * * * *

21. In Sec. 19.01, revise 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

[[Page 75908]]

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

22. The authority citation for part 21 continues 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, Pub. L. No. 110-246, 122 Stat.

1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise

noted.

23. Revise Sec. 21.01 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.

24. In Sec. 21.02, revise 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.

* * * * *

25. Amend Sec. 21.03 as follows:

A. Revise the heading and paragraphs (a), (b), (c) and (d);

B. Revise paragraph (e) introductory text and paragraphs (e)(1)

introductory text , (e)(1)(iv) and (e)(1)(v); and

C. Revise 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 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)(E) 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:

* * * * *

[[Page 75909]]

(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 section shall constitute an estoppel against

the Commission in any other action.

26. Revise Sec. 21.04 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 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 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

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, Pub. L.

No. 110-246, 122 Stat. 1624 (June 18, 2008).

28-30. Section 36.3 is amended by revising paragraphs (b) and (c),

and adding paragraph (d), 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 part 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

[[Page 75910]]

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, showing 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.

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; or

(B) (1) 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;

(2) 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;

(3) 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 regulations, such copy shall

be provided to the Commission within three business days after the

complaint is received; and

(4) 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 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 Division 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.

(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 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

[[Page 75911]]

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 consideration of all relevant

information, the Commission shall 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 paragraphs

(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

the electronic trading facility's agreement, contract or transaction

performs a significant price discovery function, the facility must

submit a written demonstration of compliance with the Core Principles

within 90 calendar days of the date of the Commission's order. For

subsequent determinations 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 15 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.

[[Page 75912]]

(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) of this section, 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.

(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

15 calendar days of the date of the Commission's order.

(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.

(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 paragraph (c)(1)

of this section 31. Part 36 is amended by adding a new Appendix A 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,

[[Page 75913]]

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 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 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. 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.

(4) If, in the example above, the Commission determines that

material volume existed, it will examine the relationship between

the prices of the linked contracts and the referenced contracts. If

it finds that the transaction prices of the linked contract were

consistently within a small percentage of the referenced contract or

index of contracts that was being referenced, the Commission will be

likely to find the linked contract to be a significant price

discovery contract. As a threshold, the Commission will consider a

2.5 percent price range for 95 per cent of closing or settlement

prices over the most recent quarter to be sufficiently close for a

linked contract to potentially be deemed a significant price

discovery contract. For example, if, over the most recent quarter,

it was found that on 95 percent or more of the days the closing or

settlement price of the contract, which has been calculated using

transaction prices, was within 2.5 percent of the closing or

settlement price of a contract to which it was linked, the

Commission potentially will 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 5

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

[[Page 75914]]

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.

32. Part 36 is amended by adding a new Appendix B to read as

follows:

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 15 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 of this chapter.

(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

[[Page 75915]]

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 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 regulation 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 regulation 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.

(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 and uncleared 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

[[Page 75916]]

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 may be

traded on either a cleared or an uncleared basis, the electronic

trading facility should apply position limits to cleared

transactions in the contract. For those transactions in the contract

that are not cleared, the electronic trading facility should

establish accountability procedures for monitoring traders' overall

positions and take that information into account when ascertaining

whether an individual trader's overall position poses a threat to

the market.

(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 investigation 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 should 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 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) Provisions for uncleared contracts. If an electronic trading

facility offers a significant price discovery contract that is

exclusively uncleared, or one that may be either cleared by a

derivatives clearing organization or uncleared at the discretion of

the trader, the trading facility should establish for the uncleared

trades a spot-month volume accountability level equal to the spot-

month speculative position limit. In this regard, the electronic

trading facility should keep track of each trader's uncleared

transactions in a significant price discovery contract on a net

basis. (For the purpose of netting uncleared transactions, long and

short uncleared transactions are only offset if they are conducted

with the same counterparty.) If a particular trader's net volume of

uncleared transactions exceeds the specified spot-month volume

accountability level, the electronic trading facility should conduct

an investigation to determine whether the trader's trading activity

is warranted and is not intended to manipulate the market.

(6) 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,

as well as to uncleared transactions with respect to applicable

spot-month volume accountability levels. 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.

(7) 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 15 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

[[Page 75917]]

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.

(8) 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, all-months-combined

position accountability levels, and spot-month volume 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.

(9) Violation of Commission rules. A violation of position

limits for significant price discovery contracts that have been

self-certified by an electronic trading facility 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 and satisfies

the requirements of under 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.

(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;

[[Page 75918]]

(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

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, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008).

34. Revise the heading of part 40 as set forth above.

35. Amend Sec. 40.1 as follows:

A. Remove the term ``registered entity'' and add in its place the

term ``contract market, derivatives transaction execution facility or

derivatives clearing organization'' in paragraphs (b)(2), (b)(3), and

(f)(2); and

B. Remove the term ``contract market, derivatives transaction

execution facility or derivatives clearing organization'' and add in

its place the term ``registered entity'' in paragraph (h).

36. Amend Sec. 40.2 as follows:

A. Remove the term ``registered entity'' and add in its place

``contract market, derivatives transaction execution facility on which

significant price discovery contracts are traded or executed'' in

paragraph (a);

B. Remove the term ``registered entity'' and add in its place

``contract market, derivatives transaction execution facility or

derivatives clearing organization'' in paragraphs (a)(1) and

(a)(3)(iv); and

C. Revise paragraph (b) 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 regulations 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.

* * * * *

37. In Sec. 40.3, remove the term ``registered entity'' and add 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).

38. In Sec. 40.4, remove the term ``registered entity'' and add in

its place the term ``designated contract market'' in paragraph

(b)(9)(ii).

39. In Sec. 40.6, revise paragraphs (a)(2), (c)(3)(ii)(G), and

(c)(3)(ii)(H) to read as follows:

Sec. 40.6 Self-certification of rules.

(a) * * *

(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].gov, 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.

40. In Sec. 40.7, remove the term ``designated contract market,

registered derivatives transaction execution

[[Page 75919]]

facility or registered derivatives clearing organization'' and add in

its place the term ``registered entity'' in paragraph (b) introductory

text.

41. In Sec. 40.8, revise paragraph (a), redesignate paragraph (b)

as paragraph (c), and add 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) 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.

* * * * *

42. Revise Appendix D to part 40 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).

A sample of the required submission cover sheet follows.

BILLING CODE 6351-01-P

[[Page 75920]]

[GRAPHIC] [TIFF OMITTED] TP12DE08.001

[[Page 75921]]

Issued in Washington, DC, on December 2, 2008, by the

Commission.

David Stawick,

Secretary of the Commission.

[FR Doc. E8-28867 Filed 12-11-08; 8:45 am]

BILLING CODE 6351-01-C

Last Updated: May 9, 2012