e7-11984

[Federal Register: June 22, 2007 (Volume 72, Number 120)]

[Proposed Rules]

[Page 34417-34419]

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

[DOCID:fr22jn07-19]

[[Page 34417]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 21

Special Calls

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

proposing to amend Part 21 of its regulations relating to special calls

for information. The proposed amendments would: add to the types of

information specified in Sec. 21.02, which must be furnished upon

special call, information regarding exchanges of futures for physical

commodities or for derivatives positions, and information regarding

delivery notices issued and stopped; and delegate to the Director of

the Division of Market Oversight and the Director's delegatees, the

ability to issue special calls pursuant to sections 21.01 and 21.02.

DATES: Comments must be received by July 23, 2007.

ADDRESSES: Comments should be sent to the Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,

DC 20581, attention: Office of the Secretariat. Comments may be sent by

facsimile transmission to 202-418-5521, or by e-mail to [email protected] Reference should be made to ``Proposed Rules for

Special Calls.''

FOR FURTHER INFORMATION CONTACT: Don Heitman, Senior Special Counsel

(telephone 202-418-5041, e-mail [email protected]), Division of Market

Oversight, Commodity Futures Trading Commission, Three Lafayette

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

SUPPLEMENTARY INFORMATION:

I. Background

The Commodity Exchange Act (``Act''), as amended by the Commodity

Futures Modernization Act of 2000 (``CFMA''), Pub. L. No. 106-554, is

intended, among other things, to ``deter and prevent price manipulation

or any other disruptions to market integrity.'' \1\ To that end, the

Commission, through its Division of Market Oversight (``Division''),

conducts a comprehensive program of market surveillance. A centerpiece

of this program is its large-trader reporting system, under which all

large futures and option positions are reported to the Commission. Each

day, for every active futures or option market, Division surveillance

staff monitors the activities of large traders, key price

relationships, and all relevant supply and demand factors in a

continuous review for potential market problems. An essential element

of the Commission's market surveillance program is the ability to make

special calls for information from Commission registrants and other

market participants.

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\1\ Commodity Exchange Act Sec. 3(b), 7 U.S.C. Sec. 5(b).

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II. Information To Be Furnished Upon Special Call

Part 17 of the Commission's regulations sets forth the routine

reports that futures commission merchants, members of contract markets

and foreign brokers (collectively, ``reporting firms'') are required to

submit to the Commission.\2\ These reports provide the information for

the Commission's large trader reporting system that it uses in its

market surveillance program to detect and prevent market manipulation

or other disruptions to market integrity in markets subject to

Commission oversight.

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\2\ The Commission has recently proposed amendments to its

definition of the term, ``foreign broker.'' The amended definition

would also be relocated, from its current location at Sec. 15.00(g)

to Sec. 1.3(xx). See 72 FR 15637 (April 2, 2007). If such

amendments were to be adopted, there would be no change in a foreign

broker's obligations to comply with the Commission's large trader or

special call regulations set forth in 17 CFR parts 15-21.

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By contrast, the purpose of the Commission's special call authority

in Part 21 of the Commission's regulations is to provide the Commission

with relevant information that is not routinely supplied to the

Commission, pursuant to other parts of the Commission's regulations

such as Part 17. For example, the Commission may need to know about

futures positions that are below the routine reporting levels specified

in Part 15 of the Commission's regulations. Among possible reasons for

such special needs for information may be a particular market situation

that warrants unusually close Commission market surveillance, or when

Commission staff is conducting an audit of reporting firms to ensure

complete and accurate reporting.

The proposed amendments to Part 21 would require reporting firms to

retain and make available to the Commission, upon a special call,

information similar to that which they are required to report to the

Commission pursuant to Part 17 of the Commission's regulations.

Specifically, the proposed amendments would add two additional

categories of information to the types of information specified in

Sec. 21.02, which must be furnished upon special call. The first

additional category of information that would be subject to special

call under this proposal includes information regarding futures

contracts exchanged for physical commodities (``EFPs''), as well as

futures contracts exchanged for other derivatives contracts, including

exchanges of futures for options (``EFOs'') and exchanges of futures

for swaps (``EFSs''). The second additional category of information

includes the amount of futures contracts where actual delivery of the

underlying commodity has been initiated (i.e., delivery notices have

been issued or received).

Section 21.02 applies to futures commission merchants (``FCMs''),

introducing brokers (``IBs''), members of contract markets and foreign

brokers. However, the first three of the foregoing categories are

already subject to substantial reporting and recordkeeping requirements

under Sec. 1.35 of the Commission's regulations, which, among other

things, requires FCMs, IBs and contract market members to maintain, and

produce on request, the records that are also the subject of these

proposed rules. Therefore, as a practical matter, the proposed rules

will impose new requirements only on foreign brokers (who are not

subject to Sec. 1.35).

Foreign brokers and other persons receiving a special call pursuant

to Sec. 21.02 are required by that regulation to furnish the

information requested. Since such persons cannot comply with the legal

requirement to furnish information pursuant to a special call without

maintaining records from which to generate the information requested,

it follows that persons subject to special calls under Sec. 21.02 are

required, by the Commission's regulations, to maintain such records.

Therefore, such records--including both those already listed in Sec.

21.02, and those that would be added by this proposed rule amendment--

are subject to the five-year record retention requirements of Sec.

1.31(a)(1) of the regulations, which provides in relevant part that:

All books and records required to be kept by the Act or by these

regulations shall be kept for a period of five years from the date

thereof and shall be readily accessible during the first two years

of the five-year period.

III. Delegation of Authority

For reasons of administrative efficiency, the Commission is also

proposing to delegate to the Director of the Division of Market

Oversight, and the Director's delegatees, the power to issue special

calls pursuant to sections 21.01 and 21.02. Consistent with other

delegations of authority to Commission

[[Page 34418]]

senior staff, the proposed delegation of the Part 21 special call

authority allows the Director to submit to the Commission for its

consideration any matter that has been delegated pursuant to the new

section. The proposed amendment also preserves the Commission's

ultimate authority over the special calls by providing that, ``nothing

in this section shall be deemed to prohibit the Commission, at its

election, from exercising the authority delegated * * * to the

Director.''

Ordinarily, the delegation of authority to make special calls would

not be published for comment because the Administrative Procedure Act

provides that ``a matter relating to agency management'' \3\ is not

required to be published for comment. However, because the proposed

delegation is being published as part of a larger notice that includes

other proposed amendments on which the Commission is seeking comment,

the Commission will also accept public comments regarding the proposed

delegation of authority to issue special calls from the Commission to

the Director of the Division of Market Oversight.

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\3\ 5 U.S.C. 553(a)(2).

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IV. Cost Benefit Analysis

Section 15 of the Act, as amended by section 119 of the CFMA,

requires the Commission to consider the costs and benefits of its

action before issuing a new regulation or order under the Act. By its

terms, Sec. 15(a) does not require the Commission to quantify the

costs and benefits of its action or to determine whether the benefits

of the action outweigh its costs. Rather, Sec. 15(a) simply requires

the Commission to ``consider the costs and benefits'' of the subject

rule or order.

Section 15(a) further specifies that the costs and benefits of the

proposed rule or order shall be evaluated in light of five broad areas

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

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

futures markets; (3) price discovery; (4) sound risk management

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

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

enumerated areas of concern and may, in its discretion, determine that,

notwithstanding its costs, a particular rule or order 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 amendments are intended to supplement the Commission's

rules regarding its market surveillance program. That program supports

one of the Commission's most critical statutory responsibilities,

deterring and preventing price manipulation or any other disruptions to

market integrity. Effective surveillance activities are crucial not

only to protecting market participants and the public from price

manipulation, but also to: promoting market efficiency, competitiveness

and financial integrity; protecting the futures markets' price

discovery function; and promoting sound risk management practices.

In addition, the records that would be subject to special call

under these proposed amendments are the type of basic transaction

records that any foreign broker would create as a matter of sound

business practices. Because these records would be created in any

event, independently of any regulatory requirements, the proposed rules

would impose no additional costs on foreign brokers in that area. There

would be minimal costs associated with providing the records in answer

to a special call, but such costs would be far outweighed by the

benefits of protecting the markets and the public. Finally, with

respect to the five-year record retention requirement that would apply

to these records, the cost of retaining the records would be minimal

because Commission rules allow such records to be maintained

electronically. Those minimal costs would, again, be far outweighed by

the benefits of protecting the marketplace and the public.

The Commission has considered the costs and benefits of the

proposed amendments to Part 21 regarding special calls in light of the

above-noted specific areas of concern identified in section 15. The

Commission believes that the amended rules would impose the minimum

requirements necessary to enable it to perform its oversight functions

and to carry out its mandate to protect the public interest in markets

that are free of fraud, abuse and manipulation.

After considering these factors, the Commission has determined to

propose the rule amendments set forth below.

The Commission specifically invites public comment on its

application of the criteria contained in the Act for consideration.

Commenters are also invited to submit any quantifiable data that they

may have concerning the costs and benefits of the proposed rules with

their comment letter.

V. Related Matters

A. Regulatory Flexibility Act

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

requires federal agencies, in promulgating rules, to consider the

impact of those rules on small entities. The proposed amendment to

Sec. 21.02 would apply to FCMs, IBs, members of contract markets and

foreign brokers. However, as noted above, the first three of these

categories are already subject to substantial reporting and

recordkeeping requirements under Sec. 1.35 of the Commission's

regulations. Among other things, that section requires FCMs, IBs and

contract market members to maintain, and produce on request, the

records that are also the subject of these proposed rules. Therefore,

as a practical matter, the proposed rules will impose new requirements

only on foreign brokers (who are not subject to Sec. 1.35).

With respect to such foreign brokers, the Commission recently

published proposed rules to exempt from registration certain foreign

persons (including foreign brokers).\4\ In reviewing the applicability

of the RFA to such foreign persons, the Commission noted that it has

previously established certain definitions of ``small entities'' to be

used in evaluating the impact of its regulations on such entities in

accordance with the RFA.\5\ The Commission has previously determined

that FCMs are not small entities for purposes of the RFA because each

FCM has an underlying fiduciary relationship with its customers,

regardless of the size of the FCM.\6\ The Commission notes that the

foreign brokers affected by these proposed changes to the Commission's

regulations would be required to be registered as FCMs if not for

certain exemptions provided in Commission regulations. As such, they

would maintain a fiduciary relationship with customers similar to the

relationship maintained by each registered FCM. Therefore, in this

context foreign brokers, like FCMs, are not appropriately categorized

as small entities. Accordingly, the Chairman, on behalf of the

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

proposed rules will not have a significant economic impact on a

substantial number of small entities.

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\4\ 72 FR 15673 (April 2, 2007).

\5\ 47 FR 18618 at 18621 (April 30, 1982).

\6\ Id. at 18619.

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B. Paperwork Reduction Act

When publishing proposed rules, the Paperwork Reduction Act (PRA)

\7\

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imposes certain requirements on federal agencies, including the

Commission, in connection with conducting or sponsoring any collection

of information as defined by the PRA. In compliance with the PRA, the

Commission through these proposed rules solicits comments to: (1)

Evaluate whether the proposed collection of information is necessary

for the proper performance of the functions of the agency, including

the validity of the methodology and assumptions used; (2) evaluate the

accuracy of the agency's estimate of the burden of the proposed

collection of information, including the validity of the methodology

and assumptions used; (3) enhance the quality, utility, and clarity of

the information to be collected; and (4) minimize the burden of the

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

appropriate automated, electronic, mechanical, or other technological

collection techniques or other forms of information technology. The

Commission has submitted the proposed rules and their associated

information collection requirements to the Office of Management and

Budget (OMB). The proposed rules are part of an approved collection of

information (OMB Control No. 3038-0009). The estimated burden

associated with information to be provided pursuant to special calls is

as follows:

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\7\ Pub. L. 104-13 (May 13, 1995).

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Average burden of response: One hour.

Number of respondents: 10 per year.

Frequency of response: One response per respondent per year.

Annual reporting burden: 10 hours.

Persons wishing to comment on the information that would be

required by these proposed rules should contact the Desk Officer, CFTC,

Office of Management and Budget, Room 10202, NEOB, Washington, DC

20503, (202) 395-7340. Copies of the information collection submission

to OMB are available from the CFTC Clearance Officer, 1155 21st Street,

NW., Washington, DC 20581, (202) 418-5160. Copies of the OMB-approved

information collection package associated with the rulemaking may be

obtained from the Desk Officer, Commodity Futures Trading Commission,

Office of Management and Budget, Room 10202, NEOB, Washington, DC

20503, (202) 395-7340.

List of Subjects in 17 CFR Part 21

Commodity futures, Commodity Futures Trading Commission.

In consideration of the foregoing, and pursuant to the authority in

the Commodity Exchange Act, the Commission hereby proposes to amend

Part 21 of Title 17 of the Code of Federal Regulations as follows:

PART 21--SPECIAL CALLS

1. 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; 5 U.S.C. 552 and 552(b).

2. Section 21.02 is proposed to be amended by:

a. Removing the word ``and'' at the end of paragraph (f);

b. Redesignating paragraph (g) as paragraph (i); and

c. Adding new paragraphs (g) and (h).

The additions read as follows:

Sec. 21.02 Special calls for information on open contracts in

accounts carried or introduced by futures commission merchants, members

of contract markets, introducing brokers, and foreign brokers.

* * * * *

(g) The total number of futures contracts exchanged for commodities

or for derivatives positions;

(h) The total number of futures contracts against which delivery

notices have been issued or received; and

* * * * *

3. Section 21.04 is added 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, to the Director of the Division of Market Oversight, or to

the Director's delegates, the authority set forth in section 21.01 of

this Part to make special calls for information on controlled accounts

from futures commission merchants and from introducing brokers and the

authority set forth in section 21.02 of this Part to make special calls

for information on open contracts in accounts carried or introduced by

futures commission merchants, members of contract markets, introducing

brokers, and foreign brokers. The Director may submit to the Commission

for its consideration any matter that has been delegated pursuant to

this section. 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.

Issued in Washington, DC, on June 15, 2007 by the Commission.

Eileen Donovan,

Acting Secretary of the Commission.

[FR Doc. E7-11984 Filed 6-21-07; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: June 27, 2007