[Federal Register: November 26, 1999 (Volume 64, Number 227)]
[Proposed Rules]
[Page 66428-66432]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



17 CFR Part 1

RIN 3038-ZA01

Proposed Revision of the Commission's Procedure for the Review of
Contract Market Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comment.


[[Page 66429]]

SUMMARY: As part of an ongoing program of regulatory reform, the
Commodity Futures Trading Commission (``CFTC'' or ``Commission'') is
proposing to revise its procedures for the review of contract market
rules and rule amendments. Subject to stated conditions, the proposed
rulemaking would permit contract markets to place new rules and rule
amendments into effect on the business day following their submission
to and receipt by the Commission.

DATES: Comments must be received on or before Janaury 25, 2000.

ADDRESSES: Comments should be mailed to Jean A. Webb, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW, Washington, DC 20581; transmitted by facsimile to (202)
418-5521; or transmitted electronically to [[email protected]].

Director, Division of Trading and Markets, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington,
DC 20581. Telephone: (202) 418-5490.


I. Statutory and Regulatory Background

    Section 5a(a)(12)(A) of the Commodity Exchange Act (``Act'')
provides, among other things, that all rules \1\ of a contract market
that relate to terms and conditions \2\ in futures or option contracts
traded on or subject to the rules of a contract market must be
submitted to the Commission for its prior approval. Section
5a(a)(12)(A) further requires that contract markets submit all other
rules to the Commission for prior review. Other sections of the Act
require rules addressing specified matters to be explicitly approved by
the Commission.\3\

    \1\ Commission Regulation 1.41(a)(1) defines ``rule'' of a
contract market to mean ``any constitutional provision, article of
incorporation, bylaw, rule, regulation, resolution, interpretation,
stated policy, or instrument corresponding thereto, in whatever form
adopted, and any amendment or addition thereto or repeal thereof,
made or issued by a contract market, or by the governing board
thereof or any committee thereof.''
    \2\ Commission Regulation 1.41(a)(2) defines ``terms and
conditions'' to mean ``any definition of the trading unit or the
specific commodity underlying a contract for the future delivery of
a commodity or commodity option contract, specification of
settlement or delivery standards and procedures, and establishment
of buyers' and sellers' rights and obligations under the contract.''
    \3\ For example, Section 4f(b) of the Act requires that contract
markets must receive Commission approval for any minimum financial
standards that they establish for futures commission merchants and
introducing brokers.

    Pursuant to Section 5a(a)(12)(A), the Commission adopted Regulation
1.41 which sets forth procedures for the submission and review of
proposed contract market rules. These procedures vary depending on the
type of rule that the contract market seeks to implement. Paragraph (b)
of Regulation 1.41 establishes review procedures for rules that relate
to terms and conditions of a contract. Paragraph (c) of the regulation
establishes review procedures for most rules that do not relate to
terms and conditions.\4\ Commission Regulation 1.41 also contains
procedures for the filing of other types of exchange rules that may be
implemented before or simultaneous to filing with the Commission. These
include, among others, rules that are exempt from the requirements of
Section 5a(a)(12)(A) of the Act (Regulation 1.41(d)), temporary
emergency rules (Regulation 1.41(f)), and physical emergency rules
(Regulation 1.41(g)).

    \4\ In Federal Register releases published on March 7, 1997, (62
FR 10434 and 62 FR 10427), the Commission adopted amendments to
streamline and to expedite the procedures contained in Regulations
1.41 (b) and (c). Those amendments established alternative
procedures that shortened the Commission's timeframe for reviewing
contract market rules. Under these ``fast track'' review procedures,
rule changes generally can be deemed approved, or permitted to be
put into effect without Commission approval, ten days after
Commission receipt, unless the Commission takes action to commence
review of the rule for a 45-day period (or 75-day period in the case
of rules published for comment in the Federal Register). The rules
of certain non-cash settled contracts may be deemed approved forty-
five days after receipt by the Commission.

    Section 4(c) of the Act provides that ``[i]n order to promote
responsible economic or financial innovation and fair competition,''
the Commission may exempt any agreement, contract, or transaction (or
class thereof) that is otherwise subject to Section 4(a) of the Act \5\
from any of the requirements of that provision or from any other
provision of the Act except Section 2(a)(1)(B). The Commission may not
grant such an exemption unless it determines that the agreement,
contract, or transaction would be consistent with the public interest.

    \5\ Among other things, Section 4(a) of the Act prohibits any
person from executing, confirming the execution of, or otherwise
dealing in any transaction in, or in connection with, a contract for
the purchase or sale of a commodity for future delivery, unless such
transaction is conducted subject to the rules of a board of trade
which has been designed by the Commission as a contract market for
such commodity.

    Pursuant to this authority, the Commission is proposing to exempt
contract markets from the rule review requirements of Section
5a(a)(12)(A) of the Act and from the regulations adopted thereunder.
The Commission would continue to pursue vigorously its surveillance and
enforcement activities. The Commission intends that this proposed
rulemaking, and the manner in which the Commission would conduct
oversight of contract market rules adopted pursuant to such a
provision, should ``promote responsible economic or financial
innovation and fair competition.''

II. The Proposed Amendments

A. Description of the Procedure

    Proposed Commission Regulation 1.41(z) would permit contract
markets \6\ to place a new rule into effect the business day after the
Commission has received submission of the rule. There would be no
requirement, as under current regulations, to allow for prior
Commission review of the rule. The submission would have to include a
brief explanation of the rule and a description of any substantive
opposing views expressed by members of the contract market or others
with respect to the rule. In addition, the contract market would be
required to certify that the rule submitted neither violates nor is
inconsistent with any provision of the Act or the Commission's
regulations. Although the form and content requirements for Regulation
1.41(z) rule filings would be more abbreviated than those for rule
filings pursuant to Regulations 1.41(b) or 1.41(c), the Commission
would retain its authority under Section 4(d) of the Act and other
relevant provisions to conduct investigations, to gather information,
and generally to oversee the contract market's adherence with the
requirements and conditions of the Act.

    \6\ For the purposes of Regulation 1.41, the term ``contract
market'' includes a clearing organization that clears futures
contract transactions. Regulation 1.41(a)(3).

B. Eligibility for the Procedure

1. Previous Designation as a Contract Market
    In a companion Federal Register release (the ``Companion
Release''), the Commission is adopting today a new Regulation 5.3 that
establishes a similar streamlined procedure for the listing of
contracts, and their subsequent amendment, without Commission prior
review and approval.\7\ That procedure will be available solely to
boards of trade that are designated as contract markets in at least one
contract that is not dormant.\8\ In its comment letter on that
proposal, the Chicago Mercantile Exchange supported this provision,

[[Page 66430]]

noting that start-up exchanges are not appropriate for this procedure,
as ``the initial designation of a board of trade as a contract market
entails a more lengthy review and analysis of its trading and clearing
systems and its self-regulatory programs.'' The Commission believes
that this rationale is equally applicable to the review of rules from
inactive contract markets. Accordingly, the Commission is proposing to
make the Regulation 1.41(z) process available solely to contract
markets which are designated in at least one non-dormant contract.

    \7\ The new designation procedure was proposed on July 20, 1999.
64 FR 40528 (July 27, 1999).
    \8\ See Commission Regulation 5.2.

2. Consistency with the Act and the Commission Regulations
    A contract market would be required to submit a certification that
the rule being implemented neither violated nor was inconsistent with
any provision of the Act or the Commission regulations. This is the
standard used by the Commission in determining whether to disapprove a
rule.\9\ Thus, the Regulation 1.41(z) procedure would not be available
for contract market rules that, in the absence of some type of
Commission exemption, would violate, or be inconsistent with the Act or
the Commission regulations. For example, under Regulation 1.38(a),
transactions are required to be executed in an open and competitive
manner. Regulation 1.38(a), however, also permits exchanges to adopt
rules for the execution of non-competitive transactions so long as such
rules are submitted to and approved by the Commission. Thus, Regulation
1.38(a) reserves to the Commission the authority to determine what
types of trading procedures need not meet the open and competitive
requirement. Accordingly, non-competitive trading rules, such as
certain block trading procedures, would not qualify for the Regulation
1.41(z) process because, absent affirmative Commission approval under
Regulation 1.38, they would violate a provision of the regulations.

    \9\ See Standard to be Applied by the Commission in Disapproving
Contract Market Rules. 45 FR 34873 (May 23, 1980).

C. Legal Certainty

    In the Companion Release, the Commission is adopting a provision
that makes clear that, among other things, contracts listed pursuant to
Rule 5.3 are not void or voidable in the event the Commission initiates
a proceeding to disapprove, to alter, to amend, or to require a
contract market to adopt a specific trading rule or procedure or to
refrain from taking a specific action. The Commission is including a
similar provision in proposed Regulation 1.41(z)(2) to ensure legal
certainty for transactions effected subject to rules implemented
pursuant to Regulation 1.41(z). Although the Commission would not
approve, affirmatively allow into effect, or deem approved any contract
market rules that were implemented pursuant to this proposed
rulemaking, Regulation 1.41(z)(3) would expressly state that the
submitting contract market would not be exempt from any provision of
the Act or the Commission's regulations other than the rule review
requirements of Section 5a(a)(12) of the Act and related Commission
regulations. Therefore, for example, contract markets implementing
rules pursuant to Regulation 1.41(z) would continue to be subject to
the rule enforcement obligations of Section 5a(a)(8) of the Act.

III. Request for Comments

    The Commission is requesting comment on any aspect of the proposed
procedure, including, but not limited to, the following.

A. Exclusivity of Regulation 14.1(z) Process

    Under the current rule review process of Regulation 1.41(b), rules
relating to terms and conditions must be submitted for Commission
approval. Rules that do not relate to terms and conditions must be
submitted for Commission review pursuant to other provisions of
Regulation 1.41. Unless the Commission determines otherwise, such rules
may be deemed approved or placed into effect, as appropriate.
    Contract markets on occasion specifically request that the
Commission approve a rule that otherwise did not require Commission
approval under any provision of the Act or the Commission Regulations.
Contract markets rules processed under Regulation 1.41(z) would simply
be placed into effect and would not be considered to have been
``approved'' by the Commission. The Commission is proposing the
Regulation 1.41(z) procedure as an alternative to the existing
Regulation 1.41 process. Under this proposal, contract markets could
still submit a rule pursuant to Regulation 1.41(b) or 1.41(c), even if
that rule qualified for the Regulation 1.41(z) process. However, the
existence of these various rule review procedures may create confusion
for market participants with respect to the regulatory history of rules
and may lead to the inaccurate impression that rules adopted pursuant
to Regulation 1.41(z) or 5.3 have been reviewed by the Commission.\10\

    \10\ So, for example, rules that were adopted pursuant to
Regulation 1.41(z) or 5.3 would not have been reviewed by the
Commission for possible antitrust implications.

    As a means of avoiding this possible confusion, the Commission
requests comment on whether it should preserve the current approval
process for rules that would qualify for the Regulation 1.41(z) process
or whether the proposed Regulation 1.41(z) process should be the only
process available. Similarly, should the Commission make the Regulation
5.3 procedure adopted today the sole means of listing new contracts and
of amending their terms and conditions?

B. Suspension of Effectiveness of a Rule

    The Act requires notice and opportunity for hearing before a rule
may be disapproved or altered. This process can be lengthy. Market
participants and others adversely affected by a rule change could incur
harm during this period. The Commission requests comment on whether it
should reserve the authority, under Regulation 1.41(z), to stay or to
suspend the operation of an exchange rule once it has initiated a
proceeding under Section 5a(a)(10), 5a(a)(12), 8a(7) or 8a(9) of the

C. Contracts with Open Interest

    The Commission is requesting comment on whether the Regulation
1.41(z) process should be available for rule amendments relating to
contracts that have open interest at the time the rule is implemented.
Could the rights of such position holders be impacted by a rule change
affecting their contracts? How could the Commission and/or a contract
market ensure that traders are not harmed by the adoption of a rule
amendment for a contract with open positions?

D. Emergency Rules

    In Section 5a(a)(12)(B) of the Act, Congress mandated that the
Commission create a special process for the implementation of contract
market rules on an emergency basis without Commission approval. Section
5a(a)(12)(B) was adopted in the Futures Trading Practices Act of 1992.
The legislative history for this provision indicates that ``the
Committee [on Agriculture] was concerned that the Commission might not
be actively engaged in decisions by exchanges to invoke their emergency
powers.'' \11\ The Commission notes that proposed

[[Page 66431]]

Regulation 1.41(z) may obviate the need for a contract market to follow
Section 5a(a)(12)(B), and its implementing regulatory provision,
Regulation 1.41(f), when adopting emergency rules. The Commission
requests comment on how to differentiate an emergency rule provision
from any other rule that could be adopted pursuant to proposed
Regulation 1.41(z).

    \11\ See Reported No. 101-236 to accompany H.R. 2869, 101st
Cong., 1st Sess. at 20.

E. New Electronic Trading Systems

    As noted, the Regulation 1.41(z) process would not be available to
a board of trade that is not designated as a contract market in at
least one non-dormant contract. The implementation of a new electronic
trading system and adoption of related rules could be viewed as being
analogous to the organization of a new exchange in many respects. The
Commission requests comment on whether proposed rules implementing a
new electronic trading system at an existing contract market should be
processed under for Regulation 1.41(z).

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies, in promulgating rules, consider the impact of
these rules on small entities. The Commission has previously determined
that contract markets are not ``small entities'' for purposes of the
RFA, 5 U.S.C. 601 et seq. 47 FR 18618 (April 30, 1982). This rulemaking
establishes streamlined procedures for the review of contract market
rules and rule amendments. Accordingly, the Chairman, on behalf of the
Commission, hereby certifies, pursuant to section 3(a) of the RFA, 5
U.S.C. 605(b), that the action taken herein will not have a significant
economic impact on a substantial number of small entities.

B. Agency Information Activites: Proposed Collection; Comment Request

    Proposed Regulation 1.41(z) contains information collection
requirements. As required by the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), the Commission has submitted a copy of this section to
the Office of Management and Budget (``OMB'') for its review.
    Collection of Information: Rules Pertaining to Contract Markets and
Their Members, OMB Control Number 3038-0022.
    The effect of the proposed Regulation 1.41(z) will be to reduce the
burden previously approved by OMB for Regulations 1.41(b) and (c) by
4290 hours because the predominant number of rule submissions will be
made pursuant to new proposed Regulation 1.41(z) instead of either
Regulation 1.41(b) or (c). The burden associated with the proposed new
Regulation 141(z) is estimated to be 858 hours which will result from
compliance with the requirements for information required for
Regulation 1.41(z) submissions.
    The estimated burden of new Regulation 1.41(z) was calculated as
    Number of respondents: 11.
    Annual responses by each respondent: 26.
    Total annual responses: 286.
    Estimated average hours per response: 3.
    Annual Reporting Burden: 858 hours.
    The revised estimated burden of Regulations 1.41(b) and (c) (which
was 4,125 hours and 825 hours, respectively) is:
    Regulation 1.41(b).
    Number of respondents: 11.
    Annual responses by each respondent: 2.
    Total annual responses: 22.
    Estimated average hours per response: 25.
    Annual Reporting burden: 550 hours.
    Regulation 1.41(c).
    Number of respondents: 11.
    Annual responses by each respondent: 2.
    Total annual responses: 22.
    Estimated average hours per response: 5.
    Annual Reporting burden: 110.
    The burden associated with the entire collection (3038-0022)
including this proposed rule is as follows:
    Number of respondents: 15,893.
    Number of responses per year: 434,052.
    Estimated average hours per response: 1.8095.
    Annual Reporting Burden: 785,443 hours.
    This annual reporting burden of 785,443 hours represents a
reduction of 3,432 hours as a result of proposed new Regulation
    Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed
collection of information in--
    <bullet> Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
    <bullet> Evaluating the accuracy of the Commission's estimate of
the burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
    <bullet> Enhancing the quality, usefulness, and clarity of the
information to be collected; and
    <bullet> Minimizing the burden of collection of information 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; e.g., permitting
electronic submission of responses.
    OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Commission on the
proposed regulations.
    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.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity exchanges, Commodity futures, Contract markets,
Reporting and recordkeeping requirements, Rule review procedures.
    In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections 4,
4c, 5, 5a, 6 and 8a thereof, 7 U.S.C. 6, 6c, 7, 7a, 8, and 12a, the
Commission proposes to amend Chapter I of Title 17 of the Code of
Federal Regulations as follows:


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

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6I, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 8, 9, 12, 12a, 12c,
13a, 13a-1, 16, 16a, 19, 21, 23, and 24, unless stated otherwise.

    2. Section 1.41 is amended by adding a paragraph (z) to read as

Sec. 1.41  Contract market rules; submission of rules to the
Commission; exemption of certain rules.

* * * * *

[[Page 66432]]

    (z) Exemption from the rule review procedure requirements of
Section 5a(a)(12) of the Act and related regulations. (1)
Notwithstanding the rule filing requirements of Section 5a(a)(12) of
the Act and related Commission regulations, a contract market may place
a rule into effect without prior Commission review or approval provided
    (i) The contract market has filed a submission for the rule, and
the Commission has received the submission at its Washington, D.C.
headquarters and at the regional office having jurisdiction over the
contract market by close of business on the business day preceding
implementation of the rule;
    (ii) The contract market is designated in, or clears, at least one
commodity contract, under Sections 4c, 5, 5a(a) and 6 of the Act, which
is not dormant within the meaning of Sec. 5.2 of part 5 of the
Commission's regulations; and
    (iii) The rule submission includes:
    (A) The text of the rule (in the case of a rule amendment, brackets
must indicate words deleted and underscoring must indicate words
    (B) A brief explanation of the rule;
    (C) A description of any substantive opposing views expressed by
members of the contract market or others with respect to the rule; and
    (D) A certification by the contract market that the rule neither
violates nor is inconsistent with any provision of the Act or of the
regulations thereunder.
    (2) A transaction effected subject to a rule implemented under this
paragraph shall not be void or voidable as a result of:
    (i) A violation by the contract market of the provisions of this
section; or
    (ii) The initiation, conduct or disposition of any Commission
proceeding to disapprove the rule or require the contract market to
revise the rule.
    (3) This paragraph does not exempt contract markets from any
provision of the Act or the Commission's regulations, except for the
rule review requirements of Section 5a(a)(12) of the Act and related
Commission regulations.

    Issued in Washington, DC on November 17, 1999, by the
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-30512 Filed 11-24-99; 8:45 am]

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