Wednesday,

December 22, 2010

Part II

Commodity Futures
Trading Commission
17 CFR Parts 1, 16, and 38
Core Principles and Other Requirements
for Designated Contract Markets;
Proposed Rule
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 80572 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

COMMODITY FUTURES TRADING that you believe is exempt from 2. Subpart C—Compliance With Rules
COMMISSION disclosure under the Freedom of i. Proposed § 38.151—Access Requirements
Information Act, a petition for ii. Proposed § 38.152—Abusive Trading
17 CFR Parts 1, 16, and 38 Practices Prohibited
confidential treatment of the exempt
iii. Proposed § 38.153—Capacity To Detect
information may be submitted according and Investigate Rule Violations
RIN 3038–AD09
to the procedures established in § 145.9 iv. Proposed § 38.154—Regulatory Services
Core Principles and Other of the Commission’s regulations, 17 CFR Provided by a Third Party
Requirements for Designated Contract 145.9. v. Proposed § 38.155—Compliance Staff
Markets The Commission reserves the right, and Resources
but shall have no obligation, to review, vi. Proposed § 38.156—Automated Trade
AGENCY: Commodity Futures Trading pre-screen, filter, redact, refuse or Surveillance System
Commission. remove any or all of your submission vii. Proposed § 38.157—Real-Time Market
Monitoring
ACTION: Notice of proposed rulemaking. from [Link] that it may deem to
viii. Proposed § 38.158—Investigations and
be inappropriate for publication, such as Investigation Reports
SUMMARY: The Commodity Futures obscene language. All submissions that ix. Proposed § 38.159—Ability To Obtain
Trading Commission (‘‘Commission’’ or have been redacted or removed that Information
‘‘CFTC’’) is proposing new rules and contain comments on the merits of the x. Proposed § 38.160—Additional Rules
amended guidance and acceptable rulemaking will be retained in the Required
practices to implement the new public comment file and will be 3. Subpart D–Contracts Not Readily
statutory provisions enacted by Title VII considered as required under the Susceptible to Manipulation
of the Dodd-Frank Wall Street Reform 4. Subpart E–Prevention of Market
Administrative Procedure Act and other
Disruption
and Consumer Protection Act (‘‘Dodd- applicable laws, and may be accessible i. Proposed § 38.251—General
Frank Act’’). The proposed rules, under the Freedom of Information Act. Requirements
guidance and acceptable practices, FOR FURTHER INFORMATION CONTACT: ii. Proposed § 38.252—Additional
which apply to the designation and Nancy Markowitz, Assistant Deputy Requirements for Physical Delivery
operation of contract markets, Director, 202–418–5453, Contracts
implement the Dodd-Frank Act’s new nmarkowitz@[Link], or Nadia Zakir, iii. Proposed § 38.253—Additional
statutory framework that, among other Attorney-Advisor, 202–418–5720, Requirements for Cash-Settled Contracts
things, amends Section 5 of the iv. Proposed § 38.254—Ability to Obtain
nzakir@[Link], Division of Market
Commodity Exchange Act (‘‘CEA’’) Information
Oversight, Commodity Futures Trading v. Proposed § 38.255—Risk Controls for
concerning designation and operation of Commission, Three Lafayette Centre, Trading
contract markets, and adds a new CEA 1155 21st Street, NW., Washington, DC vi. Proposed § 38.256—Trade
Section 2(h)(8) to include the listing, 20581. Reconstruction
trading and execution of swaps on SUPPLEMENTARY INFORMATION: vii. Proposed § 38.257—Regulatory Service
designated contract markets. The Provider
Commission requests comment on all Table of Contents viii. Proposed § 38.258—Additonal Rules
aspects of the proposed rules, guidance Required
and acceptable practices. I. Background 5. Subpart F—Position Limitations or
A. Overview Accountability
DATES: Comments must be received on B. The Current Statutory Framework 6. Subpart G—Emergency Authority
or before February 22, 2011. C. The Dodd-Frank Act Amendments 7. Subpart H—Availability of General
ADDRESSES: You may submit comments, II. The Proposed Rules Information
identified by RIN number 3038–AD09, A. Proposed Repeal of Appendix A to Part i. Proposed § 38.401(a)—General
38 ii. Proposed § 38.401(b)—Accuracy
by any of the following methods: B. Adoption of New Regulations and
• Agency Web site, via its Comments Requirement
Revised Guidance and Acceptable iii. Proposed § 38.401(c)—Notice of
Online process: http:// Practices Regulatory Submissions
[Link]. Follow the C. Proposed Amendments to General iv. Proposed § 38.401(d)—Rulebook
instructions for submitting comments Regulations Under Part 38 (New Subpart
8. Subpart I—Daily Publication of Trading
through the Web site. A)
Information
• Mail: David A. Stawick, Secretary of 1. Proposed § 38.1—Scope
9. Subpart J—Execution of Transactions
2. Proposed § 38.2—Applicable Provisions
the Commission, Commodity Futures 3. Proposed § 38.3—Procedures for
i. Proposed § 38.501—General
Trading Commission, Three Lafayette Designation Requirements
Centre, 1155 21st Street, NW., 4. Proposed § 38.4—Procedures for Listing ii. Proposed § 38.502—Minimum
Washington, DC 20581. Products and Implementing Designated Centralized Market Trading Requirement
a. Minimum Centralized Market Trading
• Hand Delivery/Courier: Same as Contract Market Rules
5. Proposed § 38.5—Information Relating to Percentage Requirement
mail above. b. Centralized Market Trading Percentage
• Federal eRulemaking Portal: http:// Contract Market Compliance
6. Proposed § 38.7—Prohibited Use of Data Calculation
[Link]. Follow the Collected for Regulatory Purposes c. Mandatory Delisting
instructions for submitting comments. 7. Proposed § 38.8—Listing of Swaps on a d. Treatment of Contracts Listed as of the
Please submit your comments using Designated Contract Market Effective Date of this Section
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only one method. 8. Proposed § 38.9—Designated Contract e. Exemptions

All comments must be submitted in Markets Operating as Swap Execution iii. Proposed § 38.501—Block Trades on
English, or if not, accompanied by an Facilities Futures Contracts
9. Proposed § 38.10—Reporting of Swaps iv. Proposed § 38.504—Block Trades on
English translation. Comments will be
Traded on a Designated Contract Market Swap Contracts
posted as received to http:// v. Proposed § 38.505—Exchange of
D. Proposed New Regulations and Revised
[Link]. You should submit only Guidance and Acceptable Practices for Derivatives For Related Positions
information that you wish to make Compliance With Core Principles vi. Proposed § 38.506—Office Trades and
available publicly. If you wish the 1. Subpart B—Designation as Contract Transfer Trades
Commission to consider information Market 10. Subpart K—Trade Information

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80573

i. Proposed § 38.551—Audit Trail Required Reform and Consumer Protection Act 1 a SEF or as a DCM. Accordingly, the
ii. Proposed § 38.552—Elements of an Title VII of the Dodd-Frank Act 2 rules proposed in this release also
Acceptable Audit Trail Program amended the CEA 3 to establish a implement provisions related to the
iii. Proposed § 38.553—Enforcement of comprehensive, new regulatory processing, trading and execution of
Audit Trail Requirements
11. Subpart L—Financial Integrity of
framework for swaps and security-based swaps on DCMs.
Transactions swaps. The legislation was enacted to In enacting the Dodd-Frank Act,
12. Subpart M—Protection of Market reduce risk, increase transparency, and Congress directed that rules and
Participants promote market integrity within the regulations required by the provisions of
13. Subpart N—Disciplinary Procedures financial system by, among other things: Title VII take effect the later of 360 days
i. Proposed § 38.701—Enforcement Staff (1) Providing for the registration and after enactment of the bill or to the
ii. Proposed § 38.702—Disciplinary Panels comprehensive regulation of swap extent that a rulemaking is required by
iii. Proposed § 38.703—Review of dealers and major swap participants; (2) the Dodd-Frank Act, not less than 60
Investigation Report imposing clearing and trade execution days after the publication of that final
iv. Proposed § 38.704—Notice of Charges requirements on standardized derivative rule.5 Consistent with Congress’
v. Proposed § 38.705—Right to directive, this release proposes
Representation
products; (3) creating robust
vi. Proposed § 38.706—Answer to Charges recordkeeping and real-time reporting amendments to parts 38, 16 and 1 of the
vii. Proposed § 38.707—Admission or regimes; and (4) enhancing the Commission’s regulations to implement
Failure to Deny Charges Commission’s rulemaking and Section 5 of the CEA, as well as the
viii. Proposed § 38.708—Denial of Charges enforcement authorities with respect to, requirements of Sections 2(h)(8) and
and Right to Hearing among others, all registered entities and 5h(a)(1) of the CEA, as amended by the
ix. Proposed § 38.709—Settlement Offers intermediaries subject to the Dodd-Frank Act, as applicable to DCMs.
x. Proposed § 38.710—Hearings Commission’s oversight.
xi. Proposed § 38.711—Decisions B. The Current Statutory Framework
Section 735 of the Dodd-Frank Act
xii. Proposed § 38.712—Right to Appeal amended Section 5 of the CEA Section 5 of the CEA governs the
xiii. Proposed § 38.13—Final Decisions pertaining to the designation and designation and operation of DCMs.6
xiv. Proposed § 38.714—Disciplinary DCMs were first established under the
Sanctions
operation of contract markets, by: (i)
Eliminating the stand-alone designation Commodity Futures Modernization Act
xv. Proposed § 38.715—Summary of Fines
for Violations of Rules Regarding Timely criteria contained in former Section 5(b) of 2000 (‘‘CFMA’’) 7 as one of two forms
Submission of Records, Decorum or of the CEA; (ii) revising the existing core of Commission-regulated markets for the
Other Similar Activities principles, including incorporating trading of contracts for sale of a
xvi. Proposed § 38.716—Emergency therein most of the substantive elements commodity for future delivery or
Disciplinary Actions of the former designation criteria; and commodity options.8
14. Subpart O—Dispute Resolution (iii) adding five new core principles, The CEA, as amended by the CFMA,
15. Subpart P—Governance Fitness thereby requiring applicants and requires a DCM applicant to
Standards demonstrate that it satisfies each of
designated contract markets (‘‘DCMs’’) to
16. Subpart Q—Conflicts of Interest
17. Subpart R—Composition of Governing comply with a total of 23 core principles
5 See Section 754 of the Dodd-Frank Act.
Boards of Contract Markets as a condition of obtaining and 67 U.S.C. 7; see also, Section 5 of the CEA, as
18. Subpart S—Recordkeeping maintaining designation as a contract amended by the Dodd-Frank Act.
19. Subpart T—Antitrust Considerations market. 7 Commodity Futures Modernization Act of 2000,

20. Subpart U—System Safeguards In addition, Section 723(a)(3) of the Public Law 106–554, 114 Stat. 2763 (2000)
21. Subpart V—Financial Resources Dodd-Frank Act added Section 2(h)(8) (‘‘CFMA’’).
i. Proposed § 38.1101(a)—General of the CEA to require, among other 8 The CFMA established two tiers of regulated

Requirements markets—designated contract markets and

things, that execution of swaps subject registered derivatives transaction execution
ii. Proposed § 38.1101(b)—Types of to the clearing requirement of Section facilities (‘‘DTEFs’’). In addition, the CFMA
Financial Resources
2(h)(1) of the CEA must occur either on provided for two markets exempt from regulation,
iii. Proposed § 38.1101(c)—Computation of exempt boards of trade (‘‘EBOTs’’) and exempt
Financial Resource Requirement a DCM or on a new type of regulated
commercial markets (‘‘ECMs’’). A description of the
iv. Proposed § 38.1101(d)—Valuation of facility called a Swap Execution Facility categories, requirements and functions of each of
Financial Resources (‘‘SEF’’).4 Also, Section 733 of the Dodd- these markets as first established under the CFMA
v. Proposed § 38.1101(e)—Liquidity of Frank Act added Section 5h(a)(1), is provided in the Commission’s notice of proposed
Financial Resources requiring that no person may operate a rulemaking and final rulemaking implementing the
CFMA. See A New Regulatory Framework for
vi. Proposed § 38.1101(f)—Reporting facility for the trading or processing of Trading Facilities, Intermediaries and Clearing
Requirements swaps unless the facility is registered as Organizations, Notice of Proposed Rulemaking, 66
22. Subpart W—Diversity of Boards of FR 14,262, March 9, 2001; Final Rulemaking, 66 FR
Directors 1 See Dodd-Frank Wall Street Reform and 42,256, Aug. 10, 2001. In addition, a new type of
23. Subpart X—Securities and Exchange Consumer Protection Act, Public Law 111–203, 124 regulated market was created under the CFTC
Commission Stat. 1376 (2010) (‘‘Dodd-Frank Act’’). The text of Reauthorization Act of 2008 (‘‘Farm Bill’’),
III. Related Matters the Dodd-Frank Act may be accessed at http:// Incorporated as Title XIII of the Food, Conservation
and Energy Act of 2008, Public Law 110–246, 122
A. Regulatory Flexibility Act [Link]/ucm/groups/public/@swaps/
Stat. 1651 (June 18, 2008). Under the Farm Bill, the
B. Paperwork Reduction Act documents/file/hr4173_enrolledbill.pdf.
2 Pursuant to Section 701 of the Dodd-Frank Act,
Commission was required to determine and make
1. Additional Information Provided by public its determination whether a particular
Designated Contract Markets Title VII may be cited as the ‘‘Wall Street agreement, contract or transaction executed or
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2. Information Collection Comments Transparency and Accountability Act of 2010.’’ traded on an ECM serves a significant price
3 7 U.S.C. 1 et seq. (amended 2010).
C. Cost Benefit Analysis discovery function (‘‘SPDC’’). Once a contract was
4 The Commission will be proposing rules
IV. Text of Proposed Rules identified as a SPDC, the ECM on which the
governing the registration and operation of SEFs in contract was traded was required to demonstrate to
a separate, forthcoming rulemaking. See CFTC Web the Commission that the ECM had a regulatory
I. Background site for additional information on the ‘‘SEF system in place that satisfied the requirements of
Registration Requirements and Core Principle the core principles under current Section 2(h)(7) of
A. Overview Rulemaking, Interpretation & Guidance’’ the current CEA and the applicable provisions of
rulemaking, at [Link] § 36.3 of the Commission’s regulations. Section 723
On July 21, 2010, President Obama DoddFrankAct/Rulemakings/DF_13_SEFRules/ of the Dodd-Frank Act repealed the ECM SPDC
signed the Dodd-Frank Wall Street [Link] (last visited Dec. 14, 2010). provisions.

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 80574 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

eight designation criteria as a condition that each DCM must meet in order to Commission undertook a
of obtaining designation as a contract comply with Section 5 of the CEA, as comprehensive evaluation of its existing
market.9 In addition, each applicant is amended by the Dodd-Frank Act, regulations, guidance and acceptable
required to demonstrate its ability to initially upon designation and thereafter practices associated with each of the
comply with 18 core principles at the on an ongoing basis. The Commission core principles in order to update those
time of application, and on an ongoing requests comments on all aspects of the provisions and to determine which core
basis after designation.10 proposed rules, guidance and acceptable principles would benefit from new or
practices. revised regulations and new or revised
C. The Dodd-Frank Act Amendments
guidance or acceptable practices. Based
Applicable to Designated Contract II. The Proposed Rules
on that review, the Commission is
Markets
A. Proposed Repeal of Appendix A to proposing both new and revised
Section 735 of the Dodd-Frank Act Part 38 regulations and revised guidance and
amends Section 5 of the CEA by: (i) acceptable practices for some core
Section 735 of the Dodd-Frank Act
Eliminating the eight criteria for principles, as set forth in this release.
eliminates the criteria for designation as
designation as a contract market; (ii) The proposed new regulations codify
a contract market in current CEA
amending many of the core principles, certain requirements and practices that
Section 5(b), creates a new core
including incorporating most of the are commonly accepted in the industry
principle from one of the criterion, and
substantive requirements of the current and have been found, based on the
incorporates most of the substance of
designation criteria, and requiring that Commission’s administrative experience
the remaining designation criteria into
all DCMs demonstrate compliance with in overseeing the futures markets since
the core principles. Because the
each of the core principles as a passage of the CFMA, to represent the
designation criteria are eliminated
condition of obtaining and maintaining best practice means of complying with
under the Dodd-Frank Act, the
designation as a contract market; and the core principles.16 Indeed, some of
Commission proposes to eliminate the
(iii) adding five new core principles, these requirements are the off-shoot of
guidance on compliance with the
specifically Core Principle 13 the Rule Enforcement Reviews (‘‘RERs’’)
designation criteria for DCMs contained
(Disciplinary Procedures), Core periodically carried out by Commission
in Appendix A to part 38. As noted
Principle 20 (System Safeguards), Core staff.
below, this release further proposes to
Principle 21 (Financial Resources), Core The RERs are the cornerstone of the
redesignate Appendix A as the
Principle 22 (Diversity of Boards of Commission’s oversight program,
application form for contract market
Directors), and Core Principle 23 serving as a key tool for monitoring a
designation.
(Securities and Exchange DCM’s compliance with the core
Commission).11 B. Adoption of New Regulations and principles, and also as a primary means
As noted above, the Dodd-Frank Act Revised Guidance and Acceptable for identifying industry trends and DCM
also specifically requires under Section Practices best practices for self-regulation.
2(h)(8) of the CEA, as amended,12 that In implementing the provisions of the Essentially, RER findings and
execution of swaps that are required to CFMA, the Commission adopted a recommendations communicate to the
be cleared must occur on either a DCM regulatory framework for part 38 of its industry what Commission staff believes
or a SEF, except where no DCM or SEF regulations that consisted largely of are best practices for compliance and
makes the swap available for trading.13 general application guidance and such recommendations typically are
Accordingly, unless otherwise specified acceptable practices consistent with the then adopted industry-wide as the
in this release, each of the 23 core CFMA’s principles-based regime.14 The standard form of compliance.
principles and the proposed regulations, Dodd-Frank Act amends Section The RERs, which are conducted
guidance and acceptable practices, periodically at all DCMs, typically
5(d)(1)(B) of the CEA generally to
apply to all ‘‘contracts’’ listed on a DCM, examine DCMs’ compliance with
provide that the Commission, in its
which will include swaps, futures and specific core principles relating to audit
discretion, may determine by rule or
options contracts. trail, trade practice surveillance, market
In sum, the new and revised regulation the manner in which boards
of trade comply with the core surveillance, disciplinary programs, and
regulations, guidance and acceptable dispute resolution.17 Commission staff’s
practices proposed in this release will principles.15 Accordingly, the
implement the regulatory obligations 14 Guidance provides DCMs and DCM applicants amends this provision to include the proviso that
with contextual information regarding the core ‘‘[u]nless otherwise determined by the Commission
9 The eight designation criteria under current principles, including important concerns which the by rule or regulation * * *,’’ boards of trade shall
Section 5(b) of the CEA are titled the following: (1) Commission believes must be taken into account in have reasonable discretion in establishing the
In General; (2) Prevention of Market Manipulation; complying with specific core principles. In contrast, manner in which they comply with the core
(3) Fair and Equitable Trading; (4) Trade Execution the acceptable practices are more specific than principles. See Section 735(b) of the Dodd-Frank
Facility; (5) Financial Integrity of Transactions; (6) guidance and provide examples of how DCMs may Act, amending Section 5(d)(1)(B) of the CEA.
Disciplinary Procedures; (7) Public Access; and (8) satisfy particular requirements of the core 16 The Commission’s oversight of DCMs’
Ability to Obtain Information. principles; they do not, however, establish compliance with the core principles includes the
10 7 U.S.C. 7(d). The Commission also undertakes
mandatory means of compliance. Acceptable evaluation of applications for contract market
due diligence reviews of each contract market’s practices are intended to assist DCMs by designation, periodic RERs of DCMs’ compliance
compliance with the core principles during rule establishing non-exclusive safe harbors. The safe with various statutory requirements, and the review
and product certification reviews and periodic harbors apply only to compliance with specific of rule and product certifications implicating all
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examinations of DCMs’ compliance with the core aspects of the core principle, and do not protect the aspects of the core principles.
principles under Rule Enforcement Reviews contract market with respect to charges of violations 17 Staff typically review a one-year target period
(‘‘RERs’’). of other sections of the CEA or other aspects of the and, depending on the core principles covered,
11 New Core Principle 13 is verbatim of current
core principle. thoroughly examine a DCM’s audit trail reviews,
Designation Criterion 6. 15 Current Core Principle 1 states, among other trade practice and market surveillance
12 See Section 723 of the Dodd-Frank Act.
things, that boards of trade ‘‘shall have reasonable investigations, investigation logs, hedge
13 Section 5h(a)(1) of the CEA, as amended by discretion in establishing the manner in which they exemptions, surveillance systems, compliance
Dodd-Frank Act, also prohibits any person from comply with the core principles.’’ This ‘‘reasonable manuals, summary fine schedules, disciplinary
operating a facility for the trading and processing discretion’’ provision underpins the Commission’s files, settlement agreements, and arbitration files.
of swaps unless the facility is registered as a SEF use of core principle guidance and acceptable Staff also conducts on-the-record interviews with
or DCM. practices. Section 735 of the Dodd-Frank Act DCM compliance officials.

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80575

findings and any recommendations for 1. Proposed § 38.1—Scope that the timing of such reviews will be
improvement are included in a report The proposed revisions to § 38.1 are governed only by the 180-day statutory
that is presented to the Commission, non-substantive as they simply review period and procedures specified
and the Commission votes on whether eliminate cross-references to other in Section 6(a) of the CEA.23 Based upon
to accept the report. The RER report is sections of the Commission’s its experience since 2001, the
publicly released and published on the regulations that are no longer Commission has determined that the
Commission’s Web site and also sent to applicable, and add references to 90-day accelerated review process is
the DCM. Although a DCM may not sections, most of them new, that are inefficient and impracticable.
fully agree with the Commission staff’s now applicable. Specifically, the Commission has found
findings, responses from DCMs, which that applicants seeking expedited
are required within 30 days, almost 2. Proposed § 38.2—Applicable review often file incomplete or draft
always explain how the DCM intends to Provisions applications, without adequate
implement staff’s recommendations, if Section 38.2 sets forth the supporting materials, in the interest of
any. Because RER reports are public, Commission regulations that DCMs meeting the expedited approval
recommendations for one DCM must comply with in addition to those timeline. This, in turn, has required
invariably lead to all DCMs that suffer in part 38. The proposed revisions to Commission staff to expend significant
from the same identified shortfall taking § 38.2 include a change to the title of the amounts of time reviewing incomplete
timely corrective action. Such corrective section to more accurately describe the or draft applications, necessitating
action usually includes modifying regulation, and further updates the list numerous follow-up conversations with
compliance procedures and/or adopting of Commission regulations that are applicants, usually resulting in removal
or modifying existing rules. applicable to DCMs based on the new of applications from the expedited
The Commission believes that the provisions under the Dodd-Frank Act, review timeline. The Commission
promulgation of clear-cut and definite including the proposed provisions believes that by requiring all
requirements or practices in those relating to real time reporting of swaps applications to be reviewed within the
instances where a standard industry and the determination of appropriate 180-day review period, applicants will
practice has developed would provide block size for swaps which will be have sufficient time to submit complete
greater legal certainty to the industry in proposed under part 43, requirements applications for review, and to respond
demonstrating compliance with the for data element, recordkeeping and to Commission staff requests for
CEA. Accordingly, in certain reporting of swap information to swap additional information, resulting in a
circumstances, the Commission is data repositories which will be more efficient review process.24
proposing to replace the general proposed under part 45, business
To provide an applicant with more
application guidance and acceptable continuity and disaster recovery which
certainty of the types of information that
practices in part 38 with regulations that will be proposed under part 46,
are required to support its DCM
codify the relevant practices and designation requirements for swap data
application, the Commission proposes
requirements for those core principles. repositories which will be proposed
to redesignate Appendix A to part 38 25
For some of the new core principles, the under part 49, and position limits which
to include a new application form with
Commission also is proposing will be proposed under part 151.20
comprehensive instructions to guide
regulations that represent the best 3. Proposed § 38.3—Procedures for DCM applicants and a specified lists of
practice for complying with the core Designation documents and information that must
principle. For several core principles, Current § 38.3 sets forth the be provided as exhibits.26 Other than
the Commission is proposing to application and approval procedures for the specific requirements necessitated
maintain the guidance and acceptable new DCM applications.21 The by the revised and newly added core
practices, albeit with proposed revisions Commission is proposing in § 38.3 that principles, the majority of information
that reflect developments in the all DCM applications, reinstatements, required under the form application
industry since the passage of the CFMA, requests for transfer of designations, consists of information that historically
and the Commission’s considerable requests for withdrawal of application has been required by the Commission
experience since the passage of the for designation, and vacation of staff in its reviews of DCM applications
CFMA with matters involving designations be filed with the Secretary under the Commission’s regulations.
compliance with the core principles by of the Commission in an electronic Accordingly, proposed § 38.3(a)(1)
a broad range of DCMs. format, via the Internet, e-mail, or other requires that, at a minimum, all
means of direct electronic submission as applicants must complete the
C. Proposed Amendments to General
approved by the Commission.22 application form and provide the
Regulations Under Part 38 (New
The Commission also is proposing to necessary information and
Subpart A)
eliminate the expedited approval documentation, in accordance with the
The Commission is proposing to procedures for DCM applications, such associated instructions, in order to
reorganize part 38 to include new
subparts A through X. Proposed subpart 20 The Commission notes that because some of the 23 7 U.S.C. 8(a); see also, Section 6(a) of the CEA,

A would include the general regulation proposed rulemakings are either ongoing or as amended by the Dodd-Frank Act.
forthcoming, this proposed list of reserved sections 24 This proposal also is consistent with the
§§ 38.1 through 38.10,18 applicable both
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under § 38.2 may be subject to further revisions Commission’s proposal to eliminate the 90-day
to DCM applicants and to existing pending the final rules for each respective expedited review procedures for derivatives
DCMs. Subparts B through X would rulemaking. clearing organization applications under part 39 in
each include relevant regulations 21 In addition to these substantive revisions, many a separate rulemaking.
applicable to each core principle.19 of the proposed revisions to § 38.3 are non- 25 Appendix A currently contains the stand alone

substantive and are intended to clarify the rule. designation criteria now eliminated under the
22 This amendment also would ensure Dodd-Frank Act.
18 This release does not propose any revisions to
consistency with the electronic process used for 26 The Commission also is requiring tailored
§ 38.6 of the Commission’s regulations. filing rule and product submissions under parts 39 application forms for the registration of Designated
19 Each of these subparts begins with a regulation and 40 of the Commission’s regulations. See 17 CFR Clearing Organizations, Swap Execution Facilities
containing the language of the core principle. parts 39 and 40. and Swap Data Repositories.

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 80576 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

initiate the 180-day designation review listed on the transferor will be to the proposed changes to existing
process. transferred to and represent equivalent §§ 40.3 (Voluntary submission of new
The Commission is proposing new open interest in all such contracts listed products for Commission review and
§ 38.3(d) to formalize the procedures on the transferee, (4) that none of the approval) and 40.5(b) (Voluntary
that a DCM must follow when proposed rule changes will affect the submission of rules for Commission
requesting the transfer of its DCM rights and obligations of any participant review and approval).30 The proposed
designation and positions comprising with open positions transferred to it; amendments to those rules are made in
open interest, in anticipation of a and (5) it will notify market participants the separate release pertaining to
corporate event (e.g., a merger, corporate of any changes to the rulebook and of ‘‘Provisions Common to Registered
reorganization, or change in corporate the transfer. Entities.’’ 31
domicile) which results in the transfer Proposed § 38.3(d) also provides that
of all or substantially all of the DCM’s the Commission will review any 5. Proposed § 38.5—Information
assets to another legal entity. Under requests for transfer of designation and Relating to Contract Market Compliance
proposed § 38.3(d)(2), the DCM would open interest as soon as practicable, and On occasion, DCMs enter into equity
submit to the Commission a request for such request will be approved or denied interest transfers that result in a change
transfer no later than three months prior pursuant to a Commission order. in ownership. In those situations,
to the anticipated corporate change, Proposed § 38.3(g) 28 is a new rule that Commission staff must determine
with a limited exception.27 The request is intended to ensure that all DCMs whether the change in ownership will
shall include: (1) The underlying designated before the effective date of impact adversely the operations of the
agreement that governs the corporate the rules proposed in this part 38 are in DCM or the DCM’s ability to comply
change; (2) a narrative description of the compliance with both the five new core with the core principles and the
corporate change, including the reason principles and the revised core Commission’s regulations. The
for the change and its impact on the principles. As noted above, the Dodd- Commission is proposing to amend
DCM, including its governance and Frank Act significantly changes some of § 38.5 to ensure that DCMs remain
operations, and its impact on the rights the compliance obligations of DCMs mindful of their self-regulatory
and obligations of market participants under current Section 5 of the CEA by responsibilities when negotiating the
holding the open positions; (3) a amending the majority of the existing terms of significant equity interest
discussion of the transferee’s ability to core principles and adding five new transfers, and to improve the
comply with the CEA, including the core principles.29 All DCMs, including Commission staff’s ability to undertake
core principles applicable to DCMs, and existing DCMs, must comply with the a timely and effective due diligence
the Commission’s regulations requirements of Section 5 of the CEA, as review of the impact, if any, of such
thereunder; (4) the governing amended, as well as the applicable transfers.
documents of the transferee, including requirements under the Commission’s In this regard, proposed § 38.5(c)
but not limited to, articles of regulations, including this release, upon would require DCMs to file with the
incorporation, bylaws, operating their effective date. Accordingly, in Commission a notice of the equity
agreements and/or partnership proposed § 38.3(g), the Commission interest transfer of ten percent or more,
agreements, as applicable; (5) the would require that each existing DCM no later than the business day, as
transferee’s rules marked to show provide the Commission with a signed defined in § 40.1, following the date on
changes from the current rules of the certification of its compliance with each which the DCM enters into a firm
DCM; and (6) a list of contracts, of the 23 core principles and the obligation to transfer the equity
agreements, transactions or swaps for Commission’s regulations under part 38 interest.32 The notification must include
which the DCM requests transfer of as amended in this release, within 60 and be accompanied by: (i) Any relevant
open interest. days of the effective date of the
agreement(s), including preliminary
Proposed § 38.3(d) also would require, publication of the final rules proposed
agreements; (ii) any associated changes
as a condition of approval, that the DCM in this release. The failure of any
to relevant corporate documents; (iii) a
submit a representation that it is in existing DCM to provide such
chart outlining any new ownership or
compliance with the CEA, including the certification shall be grounds for
corporate or organizational structure;
DCM core principles, and the revocation of the DCM’s designation
Commission’s regulations. In addition, status. While the Commission believes 30 Proposed § 40.3 is amended to require
the DCM would have to submit various that 60 days is a sufficient period of additional information to be provided by registered
representations by the transferee, time for DCMs to have rules and entities submitting new products for the
including but not limited to: (1) That the procedures in place to ensure Commission’s review and approval. Proposed
transferee will assume responsibility for compliance with the core principles and § 40.5(b) codifies a new standard for the review of
new rules or rule amendments as established under
complying with all applicable the rules proposed in this release, the the Dodd-Frank Act.
provisions of the CEA and the Commission requests comments on 31 75 FR 67482, Nov. 2, 2010.

Commission’s regulations promulgated whether the 60 day period is sufficient, 32 The Commission is proposing a 10 percent

thereunder, including part 38 and and if not, what period of time may be threshold because it believes that a change in
Appendices thereto; (2) that the more appropriate and why. ownership of such magnitude may have an impact
on the operations of the DCM. The Commission
transferee will assume, maintain and believes that such impact may be present even if the
4. Proposed § 38.4—Procedures for
enforce all rules implementing and change in ownership does not constitute a change
Listing Products and Implementing
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complying with these core principles, in control. For example, if one entity holds a
Designated Contract Market Rules minority 10 percent equity share in the DCM, it may
including the adoption of the
The proposed amendments to § 38.4 have a more significant voice in the operation of the
transferor’s rulebook; (3) upon the DCM than five entities each with a minority 2
transfer, all open interest in all contracts are largely intended to conform this rule percent equity share. Given the potential impact
that a change in ownership might have on the
27 The proposed rule would require that where a 28 In addition, proposed §§ 38.3(e) and 38.3(f) operations of a DCM, the Commission believes that
DCM does not know or could not have reasonably restate existing requirements with certain non- it is appropriate to require such DCM to certify after
known three months prior to the anticipated substantive, clarifying changes. such change that it continues to comply with all
change, it shall be required to file the request as 29 Compare 7 U.S.C. 7(d) with section 5(d) of the obligations under the CEA and Commission
soon as it knows of the change. CEA, as amended by the Dodd-Frank Act. regulations.

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80577

(iv) a brief description of the purpose on, and be supported by, prior materials swaps.38 In particular, the Commission
and any impact of the equity interest and information submitted as part of an is required to adopt consistent data
transfer; and (v) a representation from application for designation or a required element standards for ‘‘registered
the DCM that it meets all of the product or rule filing or new filings if entities,’’ which includes DCMs. part 45,
requirements of Section 5(d) of the Act necessary to update its previous filings. which is being proposed in the separate
and Commission regulations adopted Commission release ‘‘Data
thereunder. The proposed rule requires 6. Proposed § 38.7 36—Prohibited Use of Recordkeeping and Reporting
that the DCM keep the Commission Data Collected for Regulatory Purposes Requirements,’’ will set forth the
apprised of the projected date that the To fulfill their regulatory and recordkeeping and reporting
transaction resulting in the equity compliance obligations, DCMs often requirements for DCMs with respect to
interest transfer will be consummated, require market participants to provide swaps.39 Proposed § 38.8(b) codifies the
and must provide to the Commission proprietary data or personal obligations of DCMs to comply with the
any new agreements or modifications to information. Proposed § 38.7 would provisions of proposed part 45.
the original agreement(s) filed pursuant prohibit DCMs from using such 8. Proposed § 38.9—Boards of Trade
to § 38.5(c). The DCM must notify the information for business or marketing Operating Both a Designated Contract
Commission of the consummation of the purposes.37 The Commission notes that Market and a Swap Execution Facility
transaction on the day in which it nothing in this provision should be
occurs. The proposed rule will enable As noted above, the Dodd-Frank Act
viewed as prohibiting a DCM from
staff to consider whether any conditions created a new regulated entity, the SEF,
sharing such information with another
contained in an equity transfer for the listing, trading and processing of
DCM or SEF for regulatory purposes,
agreement(s) are inconsistent with the swaps. The registration and compliance
where necessary.
self-regulatory responsibilities of a DCM requirements for SEFs will be proposed
or with any of the core principles.33 7. Proposed § 38.8—Listing of Swaps on in redesignated part 37, in a
Section 38.5(d) currently requires that a Designated Contract Market forthcoming release.40 Under the Dodd-
upon a change in ownership, an Frank Act, a DCM may list and trade
acquirer of an existing DCM must certify The Dodd-Frank Act permits existing swaps pursuant to its designation as a
that the exchange meets all of the DCMs to list, trade and execute swaps, contract market. In addition, a board of
requirements of the current Sections provided that the DCMs do so in a trade that operates a DCM also may
5(b) and 5(d) of the Act, and the manner that complies with the operate a SEF, provided that the board
provisions of part 38 of the provisions of the CEA, as amended by of trade separately registers as a SEF and
Commission’s regulations. The the Dodd-Frank Act, and part 38, as complies with the applicable SEF core
Commission believes when there is a amended. Proposed § 38.8(a) requires a principles and any Commission
10% or greater change in ownership, the DCM to notify the Commission, prior to regulations thereunder. Proposed § 38.9
DCM itself is the more appropriate or upon listing its first swap contract, of codifies the requirement that a board of
entity to provide a certification of its the manner in which it will fulfill each trade that operates a DCM and that
continued compliance with all of the requirements under amended intends to operate a SEF must separately
regulatory obligations. Accordingly, CEA and part 38 with respect to the register pursuant to the SEF registration
proposed § 38.5(c)(3) 34 would require listing, trading, execution and reporting requirements and, on an ongoing basis,
that if there is a change in ownership 35 of swap transactions. must separately comply with the SEF
the DCM must certify, no later than two Proposed § 38.8(b) requires a DCM to rules and core principles under Section
business days following the date on request and obtain from the Commission 5h of the CEA, as amended by the Dodd-
which the change in ownership occurs, a unique, extensible, alphanumeric code Frank Act, and part 37 of the
that the DCM meets all of the for the purpose of identifying the DCM Commission’s regulations.
requirements of Section 5(d) of the CEA, before it lists swaps. A DCM will do so Moreover, section 5h(c) of the CEA, as
as amended by the Dodd-Frank Act, and pursuant to the swap recordkeeping and amended by the Dodd-Frank Act,
the provisions of part 38 of the reporting requirements under proposed provides that any board of trade that is
Commission’s regulations. The part 45 of the Commission’s regulations. a DCM and intends to operate as an
proposed rule also requires that the This requirement stems from the independent SEF may use the same
DCM include as part of its certification Commission’s authority, under Section electronic trade execution system for
whether any aspects of the DCM’s 728 of the Dodd-Frank Act, to establish listing and executing swaps, provided
operations will change as a result of the standards and requirements related to that the board of trade makes it clear to
change in ownership, and if so, the reporting and recordkeeping for market participants whether the
DCM must provide a description of the electronic trading of such swaps is
changes. Finally, proposed § 38.5(c) 36 Current § 38.6 (Enforceability) remains taking place on or through the DCM or
provides that the certification may rely unchanged. the SEF.41 Proposed § 38.9(b) codifies
37 The Commission notes that in the recent notice
this statutory requirement.
33 The Commission also maintains the existing of proposed rulemaking for Business Affiliate
provisions of § 38.5 that allow the Commission at Marketing and Disposal of Consumer Information 38 See Section 21 of the CEA, as amended by the
any time to request a DCM to file a written Rules, 75 FR 66018–01, Oct. 27, 2010 (to be codified
demonstration with the Commission that it is in at 17 CFR part 163) rules are proposed prohibiting Dodd-Frank Act.
39 See ‘‘Swap Data Recordkeeping and Reporting
compliance with one or more of the core principles. FCMs (and other intermediaries) from using certain
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34 The Commission is proposing to redesignate consumer information received from an affiliate to Requirements,’’ Proposed Rule, 75 FR 76574 (Dec.
§ 38.5(d) as § 38.5(c). make a solicitation for marketing purposes. In 8, 2010).
40 See CFTC Web site for additional information
35 The Commission’s regulations consistently addition, rules were proposed requiring FCMs to
identify a financial or ownership interest of ten develop a written disposal program to the extent on the ‘‘SEF Registration Requirements and Core
percent or more as material and indicative of the that such FCMs possess consumer information. The Principle Rulemaking, Interpretation & Guidance,’’
ability to influence the activities of an entity or underlying policy for these rules is to protect the at [Link]
trading in an account. See, e.g., Core Principle 5, privacy of customer information. Similarly, this DoddFrankAct/Rulemakings/DF_13_SEFRules/
Acceptable Practices, and Core Principle 14, proposed rule is intended to protect market [Link] (last visited Dec. 14, 2010).
Application Guidance, in appendix B to part 38 of participant’s information provided to a DCM for 41 Section 5h(c) of the CEA, as amended by the

the Commission’s regulations. 17 CFR part 38, regulatory purposes from its use to advance the Dodd-Frank Act, provides:
appendix B. commercial interests of the DCM. Continued

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 80578 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

9. Proposed § 38.10—Reporting of 1. Subpart B—Designation as Contract Commission is proposing some

Swaps Traded on a Designated Contract Market practices and requirements that are new
Market The Dodd-Frank Act amends Core for DCMs. The Commission also looked
Section 727 of the Dodd-Frank Act Principle 1 to make clear that to and incorporated into the proposed
directs the Commission to adopt rules compliance with the core principles, rules for Core Principle 2 certain
providing for the public availability of and any other rule or regulation that the concepts that are currently contained in
swap transaction and pricing data in Commission may impose under Section part 8 of its regulations— Exchange
real-time.42 To the extent that they make 8a(5) of the CEA, is a necessary Procedures for Disciplinary, Summary,
swaps available for trading and condition to obtain and maintain and Membership Denial Actions. In this
execution either on a SEF or a DCM, designation as a contract market.45 regard, the Commission notes that most
DCMs will have real-time public Amended Core Principle 1 provides that DCMs’ compliance and enforcement
reporting obligations pursuant to the unless otherwise determined by the practices relating to Core Principle 2
Dodd-Frank Act and, therefore, must Commission by rule or regulation, obligations historically have been
comply with the applicable provisions DCMs will continue to have reasonable consistent with the rules contained in
governing real time reporting. The discretion in establishing the manner in part 8.48 Each of the proposed rules
Commission is proposing regulations which they comply with the core under subpart C is discussed below.
applicable to the real time swap principles. The Commission proposes to i. Proposed § 38.151—Access
reporting obligations of certain entities codify the statutory text of Core Requirements
under a separate release.43 The real time Principle 1 in proposed § 38.100.
Proposed § 38.151 is an example of a
reporting regulations are proposed to be
2. Subpart C—Compliance With Rules rule in which the Commission proposes
codified under part 43 of the
Core Principle 2, as amended by the a new requirement for DCMs.49
Commission’s regulations. In addition to
Dodd-Frank Act, requires that a DCM Proposed § 38.151(a) requires that prior
the real time reporting obligations, the
establish, monitor, and enforce its rules, to granting a member or market
proposed rule also requires DCMs to
including rules relating to access participant access to its markets, the
comply with the swap reporting and
requirements, rules regarding the terms DCM must require the member or
recordkeeping requirements that are
and conditions of any contract to be market participant to consent to its
being proposed by the Commission in a
traded on the contract market, and rules jurisdiction. The growth of electronic
separate release, and are proposed to be
prohibiting abusive trading practices. A trading in the futures industry and the
codified under part 45 of the
DCM also must have the capacity to transformation of futures exchanges
Commission’s regulations. Accordingly,
detect and investigate potential rule from traditional membership
proposed § 38.10 would codify the
violations, and to sanction any person organizations to demutualized for-profit
compliance obligations of DCMs with
that violates its rules.46 In addition, a entities has changed how individuals
respect to real time reporting of swap
DCM’s rules must provide it with the and firms access the markets and
transactions and swap data
ability and authority to perform the execute trades. When open outcry
recordkeeping and reporting obligations,
obligations and responsibilities required dominated trading, orders were
as may be required under proposed
under Core Principle 2, including the typically called in to a desk on the
parts 43 and 45 of the Commission’s
capacity to carry-out such international trading floor and members on the floor
regulations, respectively.
information sharing agreements that the executed trades. Today, on most DCMs,
D. Proposed New Regulations and Commission may require. Proposed one does not need to be a ‘‘member’’ to
Revised Guidance and Acceptable § 38.150 implements these enter an order on an electronic trading
Practices For Compliance With the Core requirements. system. Rather, clearing members can
Principles For the most part, the Commission is provide their customers with access to
As noted above, this release proposes codifying: (1) Language found in the a DCM’s electronic trading system and
to reorganize part 38 to include subparts guidance and acceptable practices for customers can enter their own orders.
A through X. As proposed, each of Core Principle 2 and former designation Depending on the type of access granted
subparts B through X will include criterion 8; (2) existing DCM compliance by the clearing member, the customer’s
relevant regulations applicable to the 23 practices that the Commission believes order either will go through the clearing
core principles. In addition to the constitute best practices; and (3) member’s system for risk management
proposed new regulations, the recommendations made over the past before hitting the DCM’s electronic
Commission proposes to codify within several years by the Commission in rule trading system or directly go into the
each subpart the statutory language of enforcement reviews.47 In addition, the DCM’s trading system.
the respective core principle.44 DCMs generally require through rule
references to the CEA where the statutory language and/or clearing firm connection
IDENTIFICATION OF FACILITY USED TO simply cited to the CEA section without citing to
TRADE SWAPS BY CONTRACT MARKETS.—A the statute. These non-substantive edits were made and recommendations regarding any identified
board of trade that operates a contract market shall, to §§ 38.100 and 38.1200. deficiencies are included in a publicly available
45 7 U.S.C. 7; see also Section 5(d)(1) of the CEA, written report.
to the extent that the board of trade also operates
a swap execution facility and uses the same as amended by the Dodd-Frank Act. 48 Section 38.2 of the Commission’s regulations

electronic trade execution system for listing and 46 As noted above, Section 735 of the Dodd-Frank exempts DCMs from all Commission rules not
executing trades of swaps on or through the Act amends Section 5 of the CEA to eliminate DCM specifically reserved. The part 8 rules were not
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contract market and the swap execution facility, designation criteria and amends several core reserved.
identify whether the electronic trading of such principles, including Core Principle 2. Core 49 Generally, § 38.151 is being proposed pursuant
swaps is taking place on or through the contract Principle 2 was amended to include language to the Commission’s general rulemaking authority
market or the swap execution facility. formerly found in Designation Criterion 8—Ability under Section 8a(5) of the CEA (providing the
42 See Sections 2(a)(13)–(14) of the CEA, as to Obtain Information, and to specifically require authority to ‘‘promulgate such rules * * *
amended by the Dodd-Frank Act. that a DCM have the ability to detect, investigate, reasonably necessary * * * to accomplish any of
43 See ‘‘Real Time Public Reporting of Swap and sanction rule violations. the purposes of’’ the CEA), and Section 3 of the CEA
Transaction Data,’’ Proposed Rule, 75 FR 76140 47 Commission staff conducts periodic RERs of all (providing that the purposes of the Act include the
(Dec. 7, 2010). DCMs. RERs examine DCM compliance with promotion of ‘‘fair competition among boards of
44 In two instances, the language of the core specific core principles over a one-year target trade, other markets and market participants’’). 7
principle, as codified, was slightly revised to add period. Commission staff’s analyses, conclusions U.S.C. 5, 12a(5).

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80579

agreements that prior to a clearing equal access to, or services from the situation where a DCM wishes to deny
member granting a customer access to DCM. The purpose of the proposed access, or to revoke the access of
the DCM’s electronic trading system, the impartial access requirements is to members or market participants who
clearing member secure its customer’s prevent DCMs from using already possess it. Proposed § 38.151(c)
agreement to abide by, and be subject to, discriminatory access requirements as a gives specific examples of when such
the DCM’s rules. Nevertheless, DCMs do competitive tool against certain situations might arise, including DCM
not view themselves as having the participants. Access to a DCM should be disciplinary proceedings or emergency
jurisdiction needed to compel these based on the financial and operational actions. As with decisions to grant
market participants to participate in the soundness of a participant, rather than access, any decision by a DCM to deny,
investigation and disciplinary process. discriminatory or other improper suspend, or permanently bar a member’s
Although DCMs have the option of motives.51 Any participant should be or market participant’s access to the
requiring a clearing firm to bar a able to demonstrate financial soundness DCM must be impartial and applied in
customer from accessing the DCM if the either by showing that it is a clearing a non-discriminatory manner.
DCM believes that the customer member of a DCO that clears products ii. Proposed § 38.152—Abusive Trading
committed a rule violation, most DCMs traded on that DCM or by showing that Practices Prohibited
will first request that the customer it has clearing arrangements in place
submit to its jurisdiction and participate with such a clearing member. Proposed § 38.152 requires that a
in the investigation and disciplinary Furthermore, granting impartial access DCM prohibit enumerated abusive
process before exercising this option. to participants that satisfy a DCM’s trading practices. The listed practices
Trading on a DCM is a privilege that access requirements may enhance the are a compilation of abusive trading
is subject to conditions and entails DCM’s liquidity and the overall practices that DCMs already prohibit. A
certain responsibilities. The transparency of the swaps and futures DCM permitting intermediation must
Commission believes that if a markets. prohibit specific trading practices,
participant is granted the privilege of A DCM can satisfy the requirement including trading ahead of customer
trading on a DCM, the participant that membership and participation orders, trading against customer orders,
should not only be required to abide by criteria are impartial, transparent, and accommodation trading, and improper
the DCM’s rules, but the participant also non-discriminatory by establishing clear cross-trading. Specific trading practices
must consent to the DCM’s jurisdiction and impartial guidelines and procedures that must be prohibited by all DCMs
and participate in both the investigatory for granting access to its facilities and include front-running, wash trading,
and disciplinary process. The publishing such guidelines and pre-arranged trading, fraudulent trading,
Commission recognizes that this procedures on its Web site. Such money passes and any other trading
requirement will require clearing firms requirements may establish different practices that the DCM deems to be
to amend their existing customer categories of market participants, but abusive. In addition, a DCM also must
agreements to secure customers’ may not discriminate within a particular prohibit any other manipulative or
agreements to submit to a DCM’s category. Fee structures may differ disruptive trading practices prohibited
jurisdiction. Accordingly, although among categories if such fee structures by the CEA or by the Commission
DCMs would be required to implement are reasonably related to the cost of pursuant to Commission regulation.52
proposed § 38.151(a) either by rule and/ providing access or services to a iii. Proposed § 38.153—Capacity To
or modification of connection particular category. For example, if a Detect and Investigate Rule Violations
agreements by the effective date of the certain category requires greater
final rule, the proposed rule permits Proposed § 38.153 is based on the
information technology or
DCMs to allow their clearing firms up to current application guidance for Core
administrative expenses on the part of
180 days to secure the necessary Principle 2.53 The proposed rule
the DCM, then a DCM may recoup those
modifications to existing customer requires that a DCM have arrangements
costs in establishing fees for that
agreements. and resources for effective rule
category of member or market
Proposed § 38.151(b) requires that a enforcement. This includes the
participant.
DCM provide its members, market Proposed § 38.151(c) (Limitations on authority to collect information and
participants and ISVs with impartial Access) requires a DCM to establish and examine books and records of members
access to its markets and services. This impartially enforce rules governing any and market participants.54 By its terms,
includes: 1) access criteria that are decision by the DCM to deny, suspend, Core Principle 2 requires a DCM to
impartial, transparent, and applied in a or permanently bar a member’s or have, in addition to appropriate
non-discriminatory manner, and 2) market participant’s access to the resources for trade practice surveillance
comparable fee structures for members, contract market. While paragraph (b) of
market participants and independent proposed § 38.151 requires impartiality
52 Section 747 of the Dodd-Frank Act amends

software vendors (‘‘ISV’’),50 receiving Section 4c(a) of the CEA by adding three disruptive
in a DCM’s decision to grant access, practices which make it: unlawful for any person
50 The Commission notes that examples of
paragraph (c) addresses the converse to engage in any trading, practice, or conduct on or
subject to the rules of a registered entity that–
independent software vendors include: smart order (A) Violates bids or offers;
routers, trading software companies that develop market services. For instance, certain providers of
front-end trading applications, and aggregators of market services with access to multiple trading (B) Demonstrates intentional or reckless disregard
transaction data. Smart order routing generally systems or platforms could provide consolidated for the orderly execution of transactions during the
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involves scanning of the market for the best- transaction data from such trading systems or closing period; or
displayed price and then routing orders to that platforms to market participants. (C) Is, is of the character of, or is commonly
market for execution. Software that serves as a 51 The Commission believes that the requirement known to the trade as, ‘spoofing’ (bidding or
front-end trading application is typically used by to provide impartial access requires DCMs to avoid offering with the intent to cancel the bid or offer
traders to input orders, monitor quotations and the creation of exclusive membership standards that before execution).
53 17 CFR part 38, App. B, Core Principle 2,
view a record of the transactions completed during focus on high net worth. Therefore, any participant
a trading session. Aggregators of transaction data should be able to demonstrate financial soundness Application Guidance at ¶ 1.
provide access to news, analytics and execution either by showing that it is a clearing member of 54 The language in the current application

services. The Commission believes that a DCO that clears products traded on that DCM or guidance requires that a DCM ‘‘have arrangements
transparency and trading efficiency would be by showing that it has clearing arrangements in and resources for effective trade practice
enhanced as a result of innovations in this field for place with such a clearing member. surveillance programs[.]’’ Id.

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 80580 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

programs, appropriate resources to registered futures associations or other completed in an effective or timely
enforce all of its rules. registered entities. For purposes of manner.58
The proposed rule also requires a proposed § 38.154, the applicable self- Those recommendations have formed
DCM to have the authority to examine regulatory functions include: trade the basis for proposed § 38.155. The
books and records for all market practice surveillance; market proposed rule requires that a DCM
participants rather than limiting that surveillance; real-time market maintain sufficient compliance
authority to ‘‘non-intermediated market monitoring; investigations of possible resources to conduct effective audit trail
participants’’ as such authority was rule violations; and disciplinary actions. reviews, trade practice surveillance,
limited in the former application market surveillance, and real-time
guidance. A DCM can best administer The proposed rule requires that DCMs monitoring. It also requires that a DCM
its compliance and rule enforcement utilizing third-party regulatory service monitor its staff size annually to ensure
obligations if it has the ability to reach providers must ensure that their that it is appropriate to effectively
the books and records of all market providers have sufficient capacity and perform those functions. Staff size also
participants, rather than a subset of resources to render timely and effective must be sufficient to address market or
market participants. regulatory services. The DCM also must trading events and to complete
oversee the quality of the contracted investigations in a timely manner.
iv. Proposed § 38.154—Regulatory regulatory services and must retain The Commission is not proposing that
Services Provided by a Third Party exclusive authority with respect to staff size be determined based on a
The CEA provides that a DCM may certain regulatory decisions. These specific formula. Rather, the
comply with applicable core principles regulatory decisions include Commission proposes to leave to the
by delegating relevant functions to a cancellation of trades, the issuance of discretion of each individual DCM to
registered futures association or another disciplinary charges against members or determine the size of the staff it needs
registered entity.55 The Commission market participants, and denials of to effectively perform its self-regulatory
also has described acceptable access to the trading platform for responsibilities. In making this
‘‘contracting’’ arrangements for the disciplinary reasons. Conversely, the determination, the proposed rule
performance of core principle functions proposed rule also specifies that a requires that a DCM take into account
by third-parties.56 In this context, the decision to open an investigation of a specific facts and circumstances (e.g.,
term ‘‘contracting’’ implies a lesser possible rule violation must be made volume, the number of new contracts,
transference of authority to the third- solely by a regulatory service provider, etc.), as well as any other factors
party than does ‘‘delegating.’’ In all and all instances where a DCM’s actions suggesting the need for increased
cases, however, the Commission has differ from those recommended by its resources. Factors that may suggest the
specified, as required under the CEA,57 regulatory provider must be need for increased compliance resources
that DCMs remain responsible for are a prolonged surge in trading volume
documented and explained in writing.
carrying out any function delegated or or a prolonged period of price volatility.
contracted to a third party and that v. Proposed § 38.155—Compliance Staff A DCM must have sufficient staff to
DCMs must ensure that the services and Resources address unusual or unanticipated events
received will enable them to remain in while continuing to effectively conduct
compliance with the CEA’s As noted above, Core Principle 2 its routine self-regulatory duties.
requirements. requires that a DCM enforce compliance
In recent years, the Commission has with its rules and have the capacity to vi. Proposed § 38.156—Automated
gained much experience in detect, investigate, and sanction Trade Surveillance System
administering the delegation and violations. Having adequate staff to All currently active DCMs, or their
contracting regime for regulatory perform a DCM’s compliance and third-party service providers, maintain
services. Many DCMs, especially those enforcement responsibilities is essential automated surveillance systems to
that were designated after passage of the to the effectiveness of its self-regulatory conduct trade practice surveillance.
CFMA, employ third-party regulatory programs, including market These systems vary in degree of
service providers to meet one or more surveillance, audit trail, trade practice sophistication, but typically generate
core principle obligations. In surveillance, and disciplinary programs. alerts on a trade date plus one day (T+1)
administering this regime, the basis to help staff focus on potential
A DCM’s ability to enforce speculative
Commission has found that DCM violations and anomalies found in trade
applicants have questions as to the limits, monitor for manipulation, data.59 They also provide a DCM’s
manner and degree to which their staffs complete timely investigations, conduct compliance staff the ability to sort and
must remain involved in regulatory annual open outcry and electronic audit query voluminous amounts of data. In
decisions when they utilize third-party trail reviews, as well as perform other performing their surveillance
providers. Accordingly, the Commission regulatory duties, is compromised if a responsibilities, DCMs engage in various
is proposing new § 38.154 to DCM does not have sufficient staff. analyses to profile trading activity and
supplement its previous guidance on Thus, examining the size and conduct investigations to detect and
delegation and contracting arrangements experience of a DCM’s compliance staff prosecute possible trading abuses. These
to clarify its expectations in this regard. is a critical component of RERs carried functions all require the collection of
The proposed rule is equally applicable out by Commission staff. In several order and trade data and the ability to
RERs, staff has recommended, and the
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to delegations and contracting, and to

arrangements DCMs have with Commission has accepted, findings that 58 See Rule Enforcement Review of the

regulatory service providers that are DCMs: (1) increase their compliance Minneapolis Grain Exchange (Aug. 27, 2009); Rule
staff levels, and (2) monitor the size of Enforcement Review of ICE Futures U.S. (Feb. 2,
2010); and Rule Enforcement Review of the Chicago
55 7 U.S.C. 7a–2(b); see also, section 5c(b)(1) of their staffs and increase the number of Board of Trade and the Chicago Mercantile
the CEA, as amended by the Dodd-Frank Act. staff appropriately as trading volume Exchange (Sep. 13, 2010).
56 See 66 FR 42256, 42266, Aug. 10, 2001.
57 See 7 U.S.C. 7a–2(b)(2); see also, Section
increases, new responsibilities are 59 These systems typically differ from those

systems used for real-time market monitoring. The

5c(b)(2) of the CEA, as amended by the Dodd-Frank
assigned to compliance staff, or internal requirements for real-time market monitoring can
Act. reviews demonstrate that work is not be found in proposed § 38.157.

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80581

process that data in various ways for clear, fair and publicly-available Second, proposed § 38.158(d) requires
analysis. standards. that if a DCM’s compliance staff
Proposed § 38.156 reflects the recommends that a warning letter be
viii. Proposed § 38.158—Investigations
substantial growth in U.S. futures issued, the investigation report must
and Investigation Reports
trading volume since the CFMA was also include the potential wrongdoer’s
adopted in 2000. The approximate Proposed § 38.158 is largely a disciplinary history.62 Requiring
trading volume for U.S. futures compilation of requirements found in disclosure of a member’s or market
exchanges (including futures and §§ 8.06 and 8.07 of the Commission’s participant’s prior disciplinary history
options on futures) was 596 million regulations, with some modifications. in the above-described circumstances is
contracts in 2000, 2 billion contracts in Paragraph (a) of the proposed rule consistent with recommendations made
2005, and 3.2 billion contracts in 2010. requires that a DCM have procedures to
in RERs.63 The Commission believes
In view of this growth in volume, conduct investigations of possible rule
that prior disciplinary history is critical
combined with new participants in the violations. Paragraph (b) requires that an
information that a disciplinary
markets, such as high frequency traders, investigation be completed within a
timely manner. A timely manner is committee should consider when either
it is critical that DCMs have automated issuing a warning letter or assessing an
tools that, at a minimum, have the defined to be 12 months after an
investigation is opened, absent appropriate penalty as part of any
capability to generate alerts, profile settlement decision or hearing.64 In
trading activity, and sort and query data mitigating circumstances. This differs
from § 8.06(b) of the Commission’s practice, when a DCM’s compliance
to conduct trade practice surveillance. department believes there is a
The Commission has found, in regulations, which provides that an
investigation be ‘‘completed within four reasonable basis to find a violation, the
performing its oversight responsibility investigation report is forwarded to a
of monitoring the markets to ensure months, unless significant reasons exist
to extend it beyond such period.’’ In its disciplinary committee for action.
market integrity and customer Therefore, the Commission believes that
protection, that effectively monitoring experience in conducting RERs, the
Commission has found that while the investigation report is the most
this large amount of volume requires
simple, straight-forward investigations logical place to include disciplinary
automated tools.60 A DCM’s automated
typically are completed in less than four history.
surveillance system must have specific
characteristics for it to be able to detect months, many DCM investigations Proposed § 38.158(e) provides that a
involve fact patterns requiring more in- DCM may authorize its compliance staff
and prosecute the abusive trading
depth and sophisticated analysis. to issue a warning letter or to
practices enumerated in proposed
Depending on the complexity of a recommend that a disciplinary
§ 38.152. A DCM’s automated
matter, an investigation frequently may committee issue a warning letter. The
surveillance system must maintain all
take between four and 12 months to proposed rule is substantively identical
trade and order data, including order
complete. to Commission § 8.07(c), except that it
modifications and cancellations. The While it is not typical for an
system must process this data on a T+1 prohibits a DCM from issuing more than
investigation to take longer than one
basis. In addition, a DCM’s automated year to complete, certain circumstances one warning letter for the same violation
trade surveillance system must provide may justify an investigation taking during a rolling 12-month period.
users with the ability to compute, retain longer than one year. These include the Currently, many DCMs use summary
and compare trading statistics; compute complexity of the investigation, the fine programs to enforce their audit trail
profit and loss; and reconstruct the number of firms or individuals rules. Typically, such programs allow
sequence of trading activity. involved, the number of potential compliance staff to issue summary fines
vii. Proposed § 38.157—Real-time violations, the amount of trade data for trade timing, order ticket and trading
Market Monitoring requiring analysis and, in some card violations. Such summary fine
instances, the amount of video schemes generally start with a warning
Proposed § 38.157 codifies existing letter for the first offense. While a
recordings to be reviewed and
practices at DCMs for real-time warning letter may be appropriate for a
analyzed.61
monitoring of electronic trading. The Paragraphs (c) and (d) of proposed first-time violation, the Commission
practices codified in proposed § 38.157 § 38.158 set forth the elements and does not believe that more than one
reflect the growth of electronic trading information that must be included in an warning letter in a rolling 12-month
in the U.S. futures markets, as well as investigation report when there is or period for the same or similar violation
the Commission’s experience in there is not a reasonable basis for is ever appropriate. A policy of issuing
designating new contract markets since finding a rule violation. While the repeated warning letters, rather than
passage of the CFMA. All DCMs that proposed language is similar to issuing meaningful sanctions, to
were designated post-CFMA trade §§ 8.07(a) and (b) of the Commission’s members and market participants who
exclusively on electronic trading regulations, there are two notable repeatedly violate the same or similar
platforms. differences. rules denigrates the effectiveness of a
The purpose of real-time monitoring First, proposed § 38.158(c) requires
of electronic trading is to ensure orderly that when DCM compliance staff 62 In some instances, even though there is not
trading and to identify and correct any believes there is a reasonable basis for sufficient evidence to recommend disciplinary
market or system anomalies promptly.
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finding a violation, the investigation action, a DCM’s compliance staff may believe that
The proposed rule requires that any report must include the potential
a rule violation occurred.
63 See 2000 Rule Enforcement Review of the New
DCM price adjustment or trade wrongdoer’s disciplinary history. York Mercantile Exchange.
cancellation process be clear and 64 As noted below in the discussion of proposed
transparent to the market and subject to 61 See Rule Enforcement Review of ICE Futures § 38.158(c), a DCM’s disciplinary committee should
U.S. (Feb. 2, 2010), and Rule Enforcement Review review a member’s complete disciplinary history
60 In this regard, the Commission is in the midst of the Chicago Board of Trade and the Chicago when determining appropriate sanctions and
of modifying its own automated surveillance Mercantile Exchange (Sep. 13, 2010). Some impose meaningful sanctions on members who
systems for both trade practice surveillance and exchanges, such as CBOT and CME, have video repeatedly violate the same or similar rules to
market surveillance. cameras on their open outcry trading floors. discourage recidivist activity.

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 80582 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

DCM’s rule enforcement program.65 The The amended guidance provides time to time. Furthermore, the
proposed rule is consistent with what greater detail to DCMs regarding the Commission’s Guideline served as the
Commission staff has advised DCM relevant considerations in basis for ‘‘Guidance on Standards of Best
applicants and recommendations made demonstrating compliance with Core Practice for the Design and/or Review of
in RERs.66 Principle 3 when designing a contract Commodity Contracts,’’ endorsed by the
and submitting supporting International Organization of Securities
ix. Proposed § 38.159—Ability To
documentation and data to the Commissioners (‘‘IOSCO’’) in its Tokyo
Obtain Information
Commission at the time the DCM Communiqué (October 1997).69 The
Proposed § 38.159 expands on the submits: (1) The terms and conditions of Guidance recognizes that the proper
Core Principle 2 requirement that a a new contract under §§ 40.2 or 40.3, or design of the terms and conditions of
DCM have the ability and authority to (2) amendments to terms and conditions contracts reduces the susceptibility of
obtain necessary information to perform under §§ 40.5 or 40.6. such contracts to market abuses,
its rule enforcement obligations, In general, the guidance provides that including manipulation, and enhances
including the capacity to carry out any the settlement or delivery procedures the economic utility of such contracts to
international information sharing adopted by a DCM for a futures contract commercial users. Accordingly, the
agreements required by the should reflect the underlying cash Guidance for designing futures contracts
Commission. The proposed rule market. The objective is to ensure that focuses on such issues as a contract’s
provides that information sharing a given futures contract is not readily economic utility (i.e., a contract should
agreements can be established with susceptible to manipulation and that it meet risk management needs of
other DCMs or SEFs, or that the will provide a reliable pricing basis and potential users and/or promote price
Commission can act in conjunction with promote cash/futures price convergence. discovery of the underlying
a DCM to carry out such information Accordingly, the terms and conditions commodity), the contract’s correlation
sharing. This language is virtually should conform to prevailing with the cash market (i.e., the contract
identical to the language found in the commercial practices and provide for terms and conditions generally should
guidance for former Designation adequate deliverable supply. reflect the operation of the underlying
Criterion 8.67 For cash-settled contracts, the cash- cash market and avoid impediments to
settlement procedure should be based delivery), a contract’s settlement and
x. Proposed § 38.160—Additional Rules
on a reliable price reference series that delivery reliability (i.e., the settlement
Required
accurately reflects the underlying and delivery procedures should reflect
Proposed § 38.160 requires a DCM to market value, is not readily susceptible
adopt and enforce any additional rules the underlying cash market and promote
to manipulation, and is commonly used price convergence), the contract’s
that it believes are necessary to comply by industry/market participants as a
with the requirements of this subpart C. responsiveness to the views of potential
price reference. Therefore, the
market users, and the contract’s
3. Subpart D—Contracts Not Readily calculation methodology of the price
transparency (i.e., the contract’s terms
Subject to Manipulation reference series, if applicable, must be
and conditions, as well as relevant
submitted as supporting documentation.
The Dodd-Frank Act did not make information concerning delivery and
In that regard, for a price reference
any amendments to current Core pricing, should be readily available to
series that is based on an index or
Principle 3—Contracts Not Readily market authorities and to market users).
survey of prices or rates, this would
Subject to Manipulation. Historically, Appendix C to part 38 is intended to
include the index or survey
DCMs complied with the requirements act as a source for new and existing
methodology used to determine the
of Core Principle 3 by using as guidance DCMs to reference for best practices
level of the index used as the price
the provisions of Guideline No. 1, reference. Furthermore, the views and when developing new products to list
contained in Appendix A to part 40. opinions of prospective market users of for trading. Specifically, Appendix C to
The Commission proposes certain the contracts should be given part 38 provides guidance regarding:
revisions to the former Guideline No. 1, considerable weight in the contract (1) The forms of supporting information
including: (1) Amending the provision design process. The more accurately a a new contract submission should
to include swap transactions, (2) re- listed contract’s terms and conditions include; (2) how to estimate deliverable
titling the guidance as ‘‘Demonstration reflect the underlying cash market in supplies; (3) the contract terms and
of compliance that a contract is not that commodity, the more likely the conditions that should be specified for
readily susceptible to manipulation,’’ contract will perform the intended risk physically delivered contracts; (4) how
and (3) redesignating the provision as management and/or price discovery to demonstrate that a cash-settled
Appendix C of part 38. Proposed functions. Finally, a DCM should ensure contract is reflective of the underlying
§ 38.201 refers applicants and DCMs to that the terms and conditions of listed cash market, is not readily subject to
the guidance in Appendix C to part 38 contracts remain consistent with the manipulation or distortion, and is based
for purposes of demonstrating to the guidance set forth herein. These on a cash price series that is reliable,
Commission their compliance with the concepts are set forth in the guidance in acceptable, publicly available and
requirements of § 38.200. Proposed Appendix C to part 38. timely; (5) the contract terms and
guidance under Appendix C to part 38 The guidance in Appendix C to part conditions that should be specified for
would replace Guideline No. 1 under 38 is comprised of best practices that cash-settled contracts; (6) the
Appendix A to part 40. requirements for options on futures
srobinson on DSKHWCL6B1PROD with PROPOSALS2

were developed over the past three

decades by the Commission and other contracts; (7) the terms and conditions
65 For purposes of this rule, the Commission does
market regulators in their review of for non-price based futures contracts;
not consider a ‘‘reminder letter’’ or such other
similar letter to be any different than a warning product submissions. The Commission and (8) the terms and conditions for
letter. first adopted a Guideline for product
66 See 1998 Rule Enforcement Review of Kansas 69 See Tokyo Commodity Futures Markets
submissions on November 3, 1982 68
City Board of Trade; and, Rule Enforcement Review Regulators’ Conference (October, 1997), http://
of the Minneapolis Grain Exchange (Aug. 27, 2009). and since then has modified it from [Link]/ucm/groups/public/
67 17 CFR Part 38, App. A, Designation Criterion @internationalaffairs/documents/file/
8, Guidance. 68 See 47 FR 49832, 49838, Nov. 3, 1982. oia_tokyorpt.pdf (last visited Oct. 25, 2010).

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80583

swap contracts. Currently, DCMs automated trading alerts to detect physical commodity into normal
generally conduct market research in a potential problems. marketing channels, may weaken the
manner discussed in Appendix C. We invite comment on whether in any crucial link between cash markets and
rule the Commission may adopt in this the futures market, resulting in a lack of
4. Subpart E—Prevention of Market matter DCMs should be required to reliable price convergence.72
Disruption monitor the extent of high frequency Therefore, for physical delivery
The Dodd-Frank Act amended current trading, and whether automated trading contracts, proposed § 38.252 specifically
Core Principle 4 by: (i) Changing the systems should include the ability to requires that, among other things, DCMs
title of the core principle from detect and flag high frequency trading must monitor each contract’s terms and
‘‘Monitoring of Trading’’ to ‘‘Prevention anomalies. conditions as to whether there is
of Market Disruptions;’’ and (ii) convergence of the futures price to the
specifying the methods and procedures ii. Proposed § 38.252—Additional
Requirements for Physical Delivery cash price of the underlying commodity
DCMs must employ in discharging their and take meaningful corrective action,
obligations under Core Principle 4. The Contracts
including to address conditions that
amendments to Core Principle 4 The Commission has observed a interfere with convergence, or if
emphasize that DCMs must take an number of physically-delivered futures appropriate, change contract terms and
active role, not only in monitoring contracts where the convergence of the conditions, when lack of convergence
trading activities within their markets, futures price and the cash market price impacts the ability to use the markets
but in preventing market disruptions. of the underlying commodity have been for making hedging decisions and for
Accordingly, the proposed rules under problematic.71 Price convergence refers price discovery.
subpart E of part 38 codify the relevant to the process whereby the price of a The Commission requests comments
provisions of the current Application physically-delivered futures contract on what other factors, in addition to the
Guidance and Acceptable Practices for converges to the spot price of the delivery mechanism, a DCM should be
Core Principle 4 in current Appendix B underlying commodity, as the futures required to consider in determining
to part 38, and include new contract nears expiration (a cash-settled whether convergence is occurring.
requirements that clarify and strengthen contract, by definition, converges to the
a DCM’s responsibilities under the underlying price series at expiration). iii. Proposed § 38.253—Additional
amended core principle. The hedging effectiveness of a Requirements for Cash-Settled Contracts
i. Proposed § 38.251—General physically-delivered futures contract Over the past several years, there has
Requirements depends in part upon the extent to been a growth in markets that are
which the futures price reliably linked, for example, where the
As noted above, the Dodd-Frank Act converges to the comparable cash settlement price of one market is linked
amended Section 5(d)(4) of the CEA by market price, or to a predictable to the prices established in another
adding new language to Core Principle differential to the comparable cash market. As a result, traders may have
4 to require DCMs to conduct real-time market price. The delivery mechanism incentives to disrupt or manipulate
monitoring of trading and to have the for physically-delivered futures prices in the reference market in order
ability to comprehensively and contracts is the critical link that drives to influence the prices in the linked
accurately reconstruct trading.70 price convergence. To the extent that market. Accordingly, proposed § 38.253
Accordingly, proposed § 38.251 delivery of a commodity at futures would require that, where a DCM
(General Requirements) would require expiration occurs and the delivered contract is settled by reference to the
that the DCM have the ability to conduct commodity is merchandised in the price of a contract or instrument traded
real-time monitoring of trading and physical marketing channel, arbitrage in another venue, including a price or
comprehensive and accurate trade should ensure that the price of the index derived from prices on another
reconstructions. Intra-day trade futures contract converges to the price exchange, the DCM must have rules that
monitoring must include the capacity to of the commodity in the physical require the traders on the DCM’s market
detect abnormal price movements, marketing channel. Impediments to to provide the DCM with their positions
unusual trading volumes, impairments futures delivery, or the delivery of an in the reference market as the traders’
to market liquidity, and position-limit instrument that permits a long futures contracts approach settlement. In the
violations. position holder to defer moving the alternative, § 38.253 provides that the
As noted above in its discussion of
DCM may have an information sharing
the need for automated tools in 71 The Commission notes that the lack of
agreement with the other venue or
connection with Core Principle 2 convergence and its adverse impact on the ability
designated contract market.
requirements, the Commission believes to effectively hedge in some agricultural futures
that it would be difficult, if not markets has been the subject of several meetings of iv. Proposed § 38.254—Ability To
the Commission’s Agricultural Advisory
impossible, to monitor for market Committee. Where there is a lack of convergence, Obtain Information
disruptions in contract markets with this has resulted in extremely weak bases, i.e., cash The current acceptable practice for
high transaction volume and a large prices well below equivalent futures prices,
Core Principle 4 provides that DCMs, at
number of trades unless the DCM has disadvantaging short hedgers and resulting in
abnormally large quantities of futures deliveries a minimum, should have routine access
installed automated trading alerts to that diverted grain from normal commercial to the positions and trading of their
detect many types of potential channels and tied up warehouse space. The lack of market participants. To ensure that the
srobinson on DSKHWCL6B1PROD with PROPOSALS2

violations of exchange or Commission convergence likely sends the wrong price discovery
DCM has the ability to properly assess
rules. Accordingly, the Commission signals to the market. See, Materials from Meeting
of the CFTC’s Agricultural Advisory Committee
proposes in § 38.251 to require that, (AAC) (October 29, 2009), [Link] 72 For example, specifying a shipping certificate
where the DCM cannot reasonably About/CFTCCommittees/AgriculturalAdvisory/ with an indefinite life as the futures delivery
demonstrate that its manual processes aac_102909agenda.html; see also, the AAC instrument that permits a long futures position
are effective in detecting and preventing Subcommittee on Convergence in Agricultural holder to avoid taking delivery in the physical
Commodity Markets Report and Recommendations marketing channel, which, in certain
abuses, the DCM must implement (October 29, 2009), [Link] circumstances, may result in weak or erratic
groups/public/@aboutcftc/documents/file/ convergence between the futures price and the cash
70 See Section 735 of the Dodd-Frank Act. [Link]. price.

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 80584 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

the potential for price manipulation, Trading pauses are used,75 most These basic risk controls also have
price distortions, and the disruption of commonly, for trading in equity index proven to be effective and necessary in
the delivery or cash-settlement process, products. preventing market disruptions. The
proposed § 38.254 provides that each The CME’s GLOBEX system also has Commission requests comments on
DCM require that traders in their market a risk control, commonly referred to as what types of pauses and halts are
keep records, including records of their ‘‘stop logic functionality,’’ that necessary and appropriate for particular
activity in the underlying commodity implements a pause of a few seconds in market conditions. The Commission
and related derivative markets and the order matching system to protect recognizes that pauses and halts are
contracts, and make such records against cascading stop orders—the only one category of risk controls and
available, upon request, to the domino effect of one stop order that additional controls may be
designated contract market. The triggering others. The stop logic necessary to further reduce the potential
Commission’s own market surveillance functionality pauses trading when the for market disruptions. Such controls
staff, which has similar authority to last transaction price would have may include price collars or bands,77
obtain information from large traders triggered a series of stop loss orders that, maximum order size limits,78 stop loss
(under § 18.05 for futures and options if executed, would cause the market to order protections,79 kill button,80 and
and proposed § 20.6 for swaps), has trade outside of predefined values, others. The Commission is considering
found that access to such information is which typically consist of values that mandating in this rulemaking risk
vital to an effective surveillance are the same as the ‘‘no bust’’ range 76 controls that are appropriate and/or
program. established for a market. necessary. Accordingly, the Commission
In order to prevent market disruptions invites comments on the
v. Proposed § 38.255—Risk Controls for due to sudden volatile price appropriateness of these and other
Trading movements, proposed § 38.255 requires controls that could supplement trading
DCMs to have in place effective risk halts or pauses. The Commission also
Proposed § 38.255 requires that a controls, including but not limited to
DCM have effective risk controls to invites comments on the following
pauses and/or halts to trading in the additional questions:
reduce the potential risk of market event of extraordinary price movements • What other DCM risk controls are
disruptions and ensure orderly market that may result in distorted prices or appropriate or necessary to reduce the
conditions. In the current futures trigger market disruptions. Risk controls risk of market disruptions?
markets, DCMs have implemented a such as trading pauses and halts can, • Which risk controls should be
variety of risk controls to avoid market among other things, allow time for mandated and how?
disruptions through restrictions on participants to analyze the market
order entry, including daily price limits, vi. Proposed § 38.256—Trade
impact of new information that may Reconstruction
price/quantity bands, and trading have caused a sudden market move,
pauses. Most commonly used by DCMs allow new orders to come into a market The Dodd-Frank Act added language
for futures contracts in physical that has moved dramatically, and allow to Core Principle 4 that designated
commodities (outside of the spot month) traders to assess and secure their capital contract markets must have the ability
and futures contracts in broad-based needs in the face of potential margin to comprehensively and accurately
equity indexes (in coordination with calls. Moreover, where a contract market reconstruct all trading on its trading
circuit breakers on national security can be a proxy or substitute for similar facility. These audit-trail data and
exchanges) are daily price limits, which markets on the DCM or on other trading reconstructions must also be made
restrict the total price movement venues, including where a contract is available to the Commission in a form,
allowed on any given trading day, based on the price of an equity security manner, and time as determined by the
calculated as a limit above and below or the level of an equity index, risk Commission. Proposed § 38.256 codifies
the prior day’s futures settlement controls should be coordinated with these requirements.
price.73 Under daily price limits, futures those on the similar markets or trading
can continue to trade within the limit vii. Proposed § 38.257—Regulatory
venues, to the extent possible. The Service Provider
up/down prices, but no trading can take desirability of coordination of various
place above or below the daily price Proposed § 38.257 provides that a
risk controls, for example, ‘‘circuit
limit. Some DCMs also have rules for designated contract market must comply
breakers’’ in equities and their various
the automatic expansion of the daily with the regulations in this section
derivatives including futures and
price limit after consecutive days of options, recently has been the subject of
limit bid/offer prices. Some electronic discussions by regulators and the
77 Price bands would prevent clearly erroneous

trading platforms also have orders from entering the trading system, including
industry. ‘‘fat finger’’ errors, by automatically rejecting orders
‘‘reasonability tests’’ and/or ‘‘price The Commission believes that pauses priced outside of a range of reasonability.
bands’’ for order entry, which do not and halts are effective risk management 78 Maximum order size limitations prevent entry

allow an order to enter the trade tools and must be implemented by into the trading system of an order that exceeds a
matching system if it is outside a maximum quantity established by the DCM.
DCMs to facilitate orderly markets. 79 Stop loss orders would be triggered if the
predetermined price range or is of a
market declines to a level pre-selected by the
particularly large size.74 Finally, some 75 The NYMEX Henry Hub Natural Gas (NG) person entering the order. This mechanism would
trading platforms use trading pauses to futures has a 5 minute pause in trading when a provide that when the market declines to the
srobinson on DSKHWCL6B1PROD with PROPOSALS2

halt trading for a short period of time daily price limit—up or down—is hit, then trading trader’s pre-selected stop level for such an order,
during certain market conditions. resumes at a higher limit. However, this provision the order would become a limit order executable
does not apply during the last 60 minutes of regular only down to a price within the range of
trading hours. See NYMEX rule 220.08. reasonability permitted by the system, instead of
73 Option contracts on futures may have different 76 Under most exchanges’ trade cancellation becoming a market order.
daily price limits than the underlying futures. rules, trades considered to have been executed in 80 The kill button gives clearinghouses associated
74 For example, the GLOBEX electronic trading error may be cancelled. Where the trade is within with the DCM the ability to delete open orders and
system for the NYMEX crude oil futures contract the ‘‘no bust range’’ for the specified futures quotes and reject entry of new orders or quotes in
generally will not accept an order 75 points above contract, which range is determined by the instances where a trader breaches its obligations
or below the last traded price nor will it accept an exchange under its rules, the exchange will allow with the clearinghouse. FIA Market Access Risk
order for a quantity larger than 999 contracts. the trade to stand. Management Recommendations, p. 10 (April 2010).

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80585

through a dedicated regulatory version of the existing guidance and add transfer open positions in the market,82
department, or by delegation of that an acceptable practice under its suspend or curtail trading in any
function to a regulatory service regulations for purposes of complying contract, require market participants in
provider, over which the designated with this core principle. As a result, the any contract to meet special margin
market has supervisory authority. Commission proposes to retain most of requirements and allow it to take such
the former Application Guidance found market actions as the Commission may
viii. Proposed § 38.258—Additional
in Appendix B to part 38 of the direct.
Rules Required
Commission’s regulations, with some 7. Subpart H—Availability of General
Proposed § 38.258 requires a DCM to
revisions and additions. Proposed Information
adopt and enforce any additional rules
§ 38.351 refers applicants and DCMs to
that it believes are necessary to comply Core Principle 7 requires that DCMs
with the requirements of subpart E. the guidance and acceptable practices in make available to the public accurate
Appendix B to part 38 for purposes of information concerning the contract
5. Subpart F—Position Limitations or demonstrating to the Commission their market’s rules and regulations, contracts
Accountability compliance with the requirements of and operations. The Dodd-Frank Act
Core Principle 5 under Section 5(d)(5) subpart G. Specifically, a DCM is amended Core Principle 7 by adding a
requires that DCMs adopt for each required to have rules providing it with provision requiring the board of trade to
contract, as is necessary and the authority to intervene as necessary make public the rules and specifications
appropriate, position limitations or to maintain fair and orderly trading and describing the operation of the DCM’s
position accountability. The Dodd- to prevent or address manipulation or electronic matching platform or trade
Frank Act amended Core Principle 5 by disruptive trading practices, whether execution facility.83 Since passage of the
adding that for any contract that is the need for intervention arises CFMA, the types of information and the
subject to a position limitation exclusively from the DCM’s own market various practices for providing
established by the Commission pursuant or as part of a coordinated, cross-market information have become standardized
to Section 4a(a) of the CEA, the DCM intervention. The increased tendency across the industry as DCMs have
shall set the position limitation of the for similar, if not identical, contracts to adopted practices that comply with the
board of trade at a level not higher than be traded on more than one venue, that current guidance and acceptable
the position limitation established by in the future may include a SEF, practices for Core Principle 7.
the Commission. The Federal position demonstrates the importance of Accordingly, proposed § 38.401 in
limits established by the Commission subpart H codifies these practices. In
coordinated interventions. Accordingly,
currently are codified in part 150. In a addition, the Commission proposes
the Commission believes that there
separate release, as required by the several additional provisions to ensure
should be an increased emphasis on
Dodd-Frank Act, the Commission will that pertinent information is available to
consider replacing part 150 (Limits on cross-market coordination of emergency
actions. The guidance also provides that the Commission, market participants
Positions) with new part 151 (Limits on and the public, as described below.
Positions) to establish Federal position the DCM rules should include
limits for certain exempt and procedures and guidelines to avoid i. Proposed § 38.401(a)—General
agricultural commodities that currently conflicts of interest in accordance with Proposed § 38.401(a) requires DCMs
are not subject to Federal position new provisions proposed in § 40.9 and to have in place procedures,
limits.81 In that release, the Commission to include alternate lines of arrangements and resources for
will propose to require that exchanges communication and approval disclosing to market authorities, market
adopt their own position limits for all procedures in order to be able to participants and the public accurate and
commodities (whether such address, in real time, emergencies that relevant information pertaining to: (i)
commodities are subject to Federal may arise. This latter provision is a Contract terms and conditions, (ii) rules
limits or not), with an alternative of result of the expansion of electronic and regulations applicable to the trading
adopting position accountability rules markets and the speed of order mechanism, and (iii) rules and
in lieu of position limits for contracts in execution. As a result of fast-paced specifications pertaining to the
major currencies and certain excluded trading systems, there is a need for operation of the electronic matching
commodities. Proposed § 38.301 DCMs to be able to react quickly to platform or trade execution facility.
requires that each DCM must comply market events and intervene without Among other types of information,
with the requirements of part 151 that delay. Thus, the proposed guidance DCMs must ensure that market
the Commission adopts in order to be in acknowledges this trend with this authorities, market participants and the
compliance with Core Principle 5. provision. The proposed guidance also public have available all material
6. Subpart G—Emergency Authority clarifies that the DCM must also have information pertaining to new product
rules that allow it to take such market listings, new or amended governance,
The Dodd-Frank Act made minor, actions as may be directed by the trading and product rules, or other
non-substantive changes to Core Commission. changes to information previously
Principle 6 under Section 5(d)(6) of the disclosed by the DCM, within the time
CEA. Based upon its experience, and in The Commission’s experience and
period prescribed in proposed § 38.401.
recognition of the fact that DCMs may industry practice have demonstrated
As described in § 38.401(a) of the
that there are some specific best
srobinson on DSKHWCL6B1PROD with PROPOSALS2

have different procedures and regulation, DCMs must provide the

guidelines for taking emergency action, practices that should be followed, and
required information to market
the Commission believes that it is these best practices are incorporated in
appropriate to maintain an expanded an acceptable practice. Specifically, the 82 In situations where a swap is traded on more
DCM should have procedures and than one platform, emergency action to liquidate or
81 See CFTC Web site for additional information guidelines for decision-making and transfer open interest must be directed, or agreed
on the Position Limits rulemaking, at http:// implementation of emergency to, by the Commission or Commission staff.
[Link]/LawRegulation/DoddFrankAct/ 83 This requirement, while new to the text of Core

Rulemakings/DF_26_PosLimits/[Link] (last
intervention in the market. The DCM Principle 7, was previously required as part of
visited Dec. 14, 2010). should have the authority to liquidate or former Designation Criteria 4.

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 80586 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

participants and the public by posting obligation of DCMs to update their against which delivery notices have
such information on their Web site, as Rulebooks upon the effectiveness of a been stopped on that business day; the
set forth in proposed § 38.401(c). rule submission or certification. total volume of trading, excluding
To the extent that a DCM requests transfer trades or office trades; and the
ii. Proposed § 38.401(b)—Accuracy confidential treatment of certain total volume of futures exchanged for
Requirement information filed or submitted to the commodities or for derivatives positions
Proposed § 38.401(b) requires that Commission, the proposed rule requires that are included in the total volume of
each DCM have procedures in place to the DCM to post the public portions of trading.
ensure that any information or the filing or submission. The Commission proposes to require
communication with the Commission is reporting markets to also report to the
accurate and complete, and further that iv. Proposed § 38.401(d)—Rulebook
Commission the information found in
no false or misleading information is As noted above, consistent with the paragraph (a)(6) that is ‘‘the total volume
submitted and that no material current acceptable practices for Core of block trades that are included in the
information is omitted. Similarly, each Principle 7, all DCMs must post and total volume of trading.’’ Previously
DCM must have procedures in place to routinely update their rulebooks, which such information was only required to
ensure the accuracy and completeness appear on their Web sites. Currently, be reported to the public but not
of any information made available to each DCM updates its rulebook the day separately to the Commission. The
market participants and the public, that a new product is listed or a new or Commission believes that having block
including information that is made amended rule takes effect. The vast trade volumes reported separately to it
available on its Web site. majority of DCM Web sites also are would be useful, particularly in
readily accessible to the public and the analyzing whether a contract market is
iii. Proposed § 38.401(c)—Notice of information is available by visitors to
Regulatory Submissions in compliance with Core Principle 9
the Web site without requiring (Execution of Transactions). Because
The Commission historically has registration, log-in, or user name or reporting markets currently are required
required DCMs to update their password. Proposed § 38.401(d) merely to make block trade volumes available
rulebooks upon the effectiveness of a codifies these existing practices.85 to the public, it should not be an
rule amendment, product listing or rule unreasonable burden for the reporting
certification that has been filed with the 8. Subpart I—Daily Publication of
Trading Information market to submit that information
Commission. While proposed separately to the Commission.
§ 38.401(c) maintains the general Core Principle 8 requires that DCMs Under the Dodd-Frank Act, DCMs are
requirement for posting rules in the make available to the public accurate able to list and trade swaps.
DCM rulebook upon their effectiveness, information on settlement prices, Accordingly, amendments to part 16
the Commission believes that market volume, open interest, and opening and specify the type of information that
participants and the public would closing ranges for actively traded DCMs or SEFs must publish daily
benefit from notifications of proposed contracts on the contract market. The regarding the swaps contracts traded.
rule amendments, product listing (or de- Dodd-Frank Act did not amend Core Specifically, DCMs and SEFs would be
listings) and rule certifications in Principle 8. Accordingly, in proposed required to publish for their swaps
advance of their taking effect.84 § 38.451, the Commission reiterates the contracts all the information included in
Accordingly, proposed § 38.401(c) current acceptable practice that requires proposed § 16.01 (a) (1) through (6) for
requires each DCM to post on its Web mandatory compliance with § 16.01, each trading day for each swap, class of
site all rule filings and submissions that ‘‘Trading volume, open contracts, prices swaps, swaption or class of swaptions as
it makes to the Secretary of the and critical dates.’’ appropriate. For swap contracts that are
Commission. This information should However, in order to conform to the standard-sized contracts (i.e., contracts
be posted on the DCM’s Web site on the Dodd-Frank Act, certain changes were that have a set contract size for all
same day that such information is made to § 16.01 regarding the contracts), volume and open interest for
transmitted to the Commission. Where information a reporting market will swaps and swaptions shall be reported
applicable, the DCM Web site should record and publish on futures and in terms of number of contracts traded,
make clear that the posted submissions options contracts, and on swap and just as futures contracts currently are
are pending before the Commission. For swaption contracts. reported. For swap contracts that are
example, a DCM’s Web site may contain Specifically, the Commission non-standard-sized contracts (i.e.,
a separate Web page for ‘‘regulatory proposes to amend § 16.01(d) to require contracts whose contract size can vary
filings’’ or ‘‘rule certifications’’ for reporting markets to report information for each transaction) the volume and
posting submissions or certifications in paragraphs (a)(1) through (6) of open interest should be reported in
pertaining to new product listings, new § 16.01. Prior to the enactment of the terms of total notional value traded for
rules, rule amendments or changes to Dodd-Frank Act, reporting markets were that trading day. In addition, § 16.01(b)
previously-disclosed information. This required only to report separately the is amended to require each DCM or SEF
requirement will provide market following information enumerated in to publish for each trading day, by
participants with advance notice of rule paragraphs (a)(1) through (5) of current commodity and contract month or by
amendments and certifications, § 16.01 for futures and options: The tenor of the swap, the opening price,
consistent with the goal of Core option delta, where delta system is high price, low price and settlement
srobinson on DSKHWCL6B1PROD with PROPOSALS2

Principle 7 to make pertinent used, total gross open contracts, price of the swap or swaption contract.
information available to market excluding from futures those contracts The Commission is seeking comments
participants and the public. This against which notices have been on end-of-day price reporting for swaps.
posting requirement is in addition to the stopped; for futures, open contracts Specifically, the Commission seeks
comments on the following issues:
84 This is especially relevant when the 85 As noted above, the requirement to maintain an
• For interest rate swaps, because the
Commission determines to stay the certification of accurate and updated rulebook does not relieve
a DCM submission, as provided by the Dodd-Frank DCMs of their obligations under paragraph (c) to
tenor on an interest rate swap can be
Act, for a 90-day review period, thereby triggering post on their Web sites all rule filings and one of thousands of possible periods,
a public comment period. submissions submitted to the Commission. what would be an appropriate manner

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80587

to display end-of-day prices for each Principle 9 provides that a competitive, In short, the Commission proposes to
interest rate swap? open and efficient market and adopt the following regulations,
• Would certain end-of-day swap mechanism for execution of transactions guidance and acceptable practices for
price reporting be more meaningful than includes: (1) The DCM’s methodology Core Principle 9, as amended by the
others? If so, which methods of price for entering orders and executing Dodd-Frank Act:
reporting would be more meaningful transactions; (2) that appropriate • New § 38.501 proposes to codify in
and why? objective testing and review of part 38 the requirements that are
• Would certain end-of-day swap automated systems should occur currently contained in § 1.38 of the
price reporting be misleading? If so, initially and periodically to ensure Commission’s regulations, with
which methods of price reporting would proper system functioning, adequate amendments that were initially
be misleading and why? capacity and security; and (3) that a proposed in the 2008 Core Principle 9
9. Subpart J—Execution of Transactions DCM that determines to allow block Proposed Rulemaking along with
trades should ensure that such trades do relevant updates. Section 1.38 of the
The Dodd-Frank Act amended Core Commission’s regulations would be
Principle 9 to require, among other not operate in a manner that
compromises the integrity of prices or eliminated.
things, that a board of trade must
price discovery in the relevant market.89 • New § 38.502 addresses the specific
provide a competitive, open and requirements associated with protecting
efficient market and mechanism for In light of the Dodd-Frank Act the price discovery function of trading
executing transactions ‘‘that protects the amendments to Core Principle 9 and the on a DCM’s centralized market as now
price discovery process of trading in the Commission’s experience in specifically imposed by the Dodd-Frank
centralized market of the board of implementing Core Principle 9 since Act. The proposed rule imposes: (i)
trade.86 The amended core principle enactment of the CFMA, the Minimum requirements for trading on
also provides that off exchange Commission proposes to adopt certain the centralized market for contracts
transactions are permitted for bona fide regulations in subpart J of the listed on DCMs, (ii) mandatory delisting
business purposes if authorized by the Commission’s regulations to establish of contracts if the requirements of
board of trade’s rules.87 requirements that a DCM must meet in trading are not met, (iii) specified
In assessing a DCM’s initial and order to comply with amended Core procedures for treatment of contracts
ongoing compliance with Core Principle Principle 9. Specifically, new existing prior to the effective date of this
9, the Commission currently considers regulations are proposed to clarify the section, and (iv) limited exemptions for
several criteria, including, among amended core principle’s mandate certain contracts that the Commission,
others, the methodology and requiring the protection of the price upon a petition of the DCM, permits to
mechanisms of the DCM’s trading discovery function of trading on a remain listed under specified
system to ensure fair and orderly trading DCM’s centralized market. Other circumstances.
and the rules the DCM may have for regulations codify practices that have • New §§ 38.503 and 38.504 propose
permissible transactions executed off become standard and adopted over the to codify certain requirements for block
the centralized market. In so doing, the years by the industry. In addition, the trades for futures and swaps and
Commission has looked at § 1.38 of the Commission re-proposes certain § 38.505 addresses other off-exchange
Commission’s regulations, which sets guidance and acceptable practices that transactions. These provisions codify
forth a requirement that all purchases were published by the Commission in practices that Commission staff has
and sales of a commodity for future the September 2008 Notice of Proposed previously required and that have
delivery or a commodity option on or Rulemaking pertaining to ‘‘Execution of become industry practices. In particular,
subject to the rules of a DCM should be Transactions: Regulation 1.38 and these proposed rules set forth block
executed by open and competitive Guidance on Core Principle 9’’ 90 trade requirements for futures contracts
methods. There is an exception to this (hereafter ‘‘2008 Core Principle 9 and options, including who may enter
‘‘open and competitive’’ requirement if Proposed Rulemaking’’) for purposes of into block trade transactions, conditions
the transaction is in compliance with informing DCMs of how they may for block trades between affiliated
the rules of the DCM that specifically comply with certain other aspects of parties, aggregation, recordkeeping and
provide for the non-competitive amended Core Principle 9.91 reporting procedures. In addition, in
execution of such transactions.88 In proposed § 38.505, the Commission
addition, the current guidance for Core 89 The current acceptable practice for Core proposes to adopt rules for off-exchange
Principle 9 identifies an example of the type of transactions that involve exchange of
86 7 U.S.C. 7; see also Section 5(d)(9) of the CEA, party that would be an acceptable party to carry out derivatives for related position,
as amended by the Dodd-Frank Act. the testing and review of an electronic trading specifically describing what constitutes
87 This language was taken from former system. The Commission notes that under its
Designation Criterion 3. proposed rulemaking, all rules relating to the type a bona fide trade and reporting
88 The Commission notes that the CFMA, which of testing and review required for trading systems requirements for such trades. Proposed
was enacted after promulgation of § 1.38, modified would be set forth under new Core Principle 20, § 38.504 addresses certain block trading
Section 3 of the current CEA to require that System Safeguards, discussed infra at Section requirements specifically for swaps
transactions subject to the CEA provide ‘‘a means II.D.20.
90 73 FR 54097, Sep. 18, 2008. That proposed
traded on the DCM, and proposed
for managing and assuming price risks, discovering
prices, or disseminating pricing information rulemaking was a re-proposal of some rules, § 38.506 addresses transfer and office
through trading in liquid, fair and financially secure guidance and acceptable practices pertaining to trades.
srobinson on DSKHWCL6B1PROD with PROPOSALS2

trading facilities.’’ The CFMA also specifically listed Regulation 1.38 and Core Principle 9, initially • A new acceptable practice would
some of the types of transactions that could be proposed on July 1, 2004. See 69 FR 39880, July 1, provide a safe harbor methodology for
executed off the centralized market, including 2004. There were no final rulemakings to either of
exchange of futures for swaps, and allowing a these proposals. DCMs to follow in determining the
futures commission merchant, acting as principal or 91 In 2009, before those proposed rules were minimum size of block transactions for
agent, to enter into or confirm the execution of a finalized, Congress initiated the legislative process individual contracts. The acceptable
contract for the purchase or sale of a commodity for that culminated in the Dodd-Frank Act. practice also would provide a safe
future delivery if the contract is reported, recorded, Accordingly, a number of the proposed rules
or cleared in accordance with the rules of a contract contained in this release consist of regulations that
harbor relating to the manner of pricing
market or derivatives clearing organization. 7 U.S.C. were initially proposed in the 2008 Core Principle block trades. By proposing this
7(b)(3). 9 Proposed Rulemaking, with relevant updates. acceptable practice the Commission

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 80588 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

recognizes the need for flexibility as the for futures. This term also will contracts still manage to achieve open
appropriate minimum size and pricing encompass other types of off-exchange interest over sustained periods of time.
of block trades vary among contracts transactions, not limited to futures. A DCM that trades contracts that have
and across DCMs. Finally, because swaps may now be a disproportionate percentage of their
i. Proposed § 38.501—General traded on DCMs, the proposed rule will trading volume attributable to off-
Requirements reference swaps. exchange activity and little or no open
ii. Proposed § 38.502—Minimum and competitive, centralized market
Current § 1.38 of the Commission’s
Centralized Market Trading trading would not appear to be in
regulations requires, subject to certain
Requirement compliance with amended Core
exceptions, ‘‘that all purchases and sales
Principle 9. Specifically, where all or
of a commodity for future delivery, and
of any commodity option, on or subject As noted, the Dodd-Frank Act most transactions in a DCM contract are
to the rules of a DCM shall be executed amended Core Principle 9 to specifically executed off the centralized market,
openly and competitively by open require that in the execution of there is no price discovery taking place
outcry or posting of bids and offers or transactions, ‘‘the price discovery on the DCM such that the protection of
by other equally open and competitive function of trading in the centralized the price discovery process of trading in
methods * * * provided, however, that market’’ must be protected.94 The the centralized market is not satisfied.
this requirement shall not apply to amended core principle recognizes that The Commission notes that, while
transactions that are executed trading in the centralized market amended Core Principle 9 recognizes
noncompetitively in accordance with provides a price discovery function, and the primacy of trading on the
written rules of the contract market specifically requires that the execution centralized market for price discovery, it
* * *’’ 92 The 2008 Core Principle 9 of transactions be in a manner that does not bar off exchange transactions.
Proposed Rulemaking proposed certain protects that price discovery process. Congress reaffirmed that the rules of the
revisions to § 1.38. Specifically, in The Commission notes that, under the DCM may authorize bona fide off-
addition to simplifying the language, the current regulatory landscape, some exchange transactions. Thus, in
2008 Core Principle 9 Proposed DCMs have listed contracts for the implementing the provisions of the
Rulemaking proposed to update the purpose of providing a clearing solution Dodd-Frank Act, the Commission seeks
language of § 1.38 to more accurately for privately negotiated bi-lateral swap to protect the price discovery process of
identify the types of transactions that trades or trades made on exempt trading on the DCM’s centralized market
may be executed off a contract market’s commercial markets. The DCMs accept while permitting DCMs to authorize off-
centralized market under the rules of a these trades as futures contracts by exchange transactions where necessary
DCM.93 The 2008 Core Principle 9 converting them, through their block and appropriate for bona fide business
Proposed Rulemaking also would make trade or exchange-for-swaps (or other purposes. Accordingly, the
it clear that under § 1.38, DCMs may exchange of derivatives for a related Commission’s proposal provides for
self-certify (not just seek approval for) position) rules, to economically permissible off-exchange transactions,
rules or rule amendments related to equivalent futures contracts in order for but only to the extent that such
transactions off the centralized them to be cleared by their derivatives transactions do not compromise the
marketplace. Both of these changes were clearing organization. The vast majority price discovery process of trading in the
proposed to the language of regulation of those contracts are not executed centralized market. If off-exchange
§ 1.38 to incorporate updates made to openly or competitively on the transactions become the exclusive or
the CEA in 2000 by the CFMA. centralized market, but rather are predominant method of establishing or
As noted above, the existing effected away from the DCM’s offsetting positions in a particular
provisions of current § 1.38 will be centralized market.95 Despite the lack of market, the price discovery process in
incorporated in proposed § 38.501, trading on the centralized market these the centralized market will be
including previously proposed jeopardized.
amendments, with some updates. These 94 7 U.S.C. 7; see also section 5(d)(9) of the CEA,
updates include language that adds to as amended by the Dodd-Frank Act.
a. Minimum Centralized Market Trading
the types of transactions that may be 95 Under current CEA section 4d(a)(2), funds Percentage Requirement
executed off of a DCM’s centralized supporting customer trades executed on a
The Commission believes that a
market. In addition, the proposed rule designated contract market must be segregated from
other funds, including proprietary funds, of a future significant amount of trading in any
replaces the term ‘‘exchange of futures commission merchant (‘‘FCM’’) or clearinghouse. contract listed on a DCM must occur on
for commodities or for derivatives Customers often desire to comingle funds in this the centralized market in order to meet
positions’’ with the term ‘‘exchange of segregated account primarily to take advantage of
lower margins due to off-setting positions. Current the requirements of Core Principle 9.
derivatives for a related position.’’ This
CEA section 4d(a)(2) provides a venue for achieving The Commission believes that setting a
term is more descriptive of the panoply this by allowing the Commission to issue orders minimum percentage of trading that
of off-exchange transactions currently exempting an FCM or clearinghouse from the must take place on the centralized
offered by DCMs, including exchange segregation requirement in appropriate situations.
The DCM must go through the process of market is an appropriate method of
for physicals, exchange for swaps,
petitioning the Commission for an exemption, and implementing this provision in order to
exchange for risk or exchange of futures providing the necessary information and data for provide clarity and legal certainty to
the Commission to make a decision. The DCMs. Accordingly, the Commission is
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92 17 CFR 1.38 (2009). Commission’s process for issuing Section 4d orders

93 The proposed language for § 1.38(b)(1) necessarily entails careful and measured review, proposing to establish a minimum on-
identified ‘‘transfer trades, office trades, block and accordingly, can be time-intensive. The exchange trading threshold of 85
trades, inter-exchange spread transactions, or trades Commission believes that rather than seeking 4d percent.
involving the exchange of futures for commodities orders for off-exchange products, certain DCMs
or for derivatives positions, if transacted in have resorted to listing those products as futures In considering the minimum
accordance with written rules of a contract market despite their unlikely prospects for central threshold of trading on the centralized
that provide for execution away from the marketplace trading, to achieve the same results as market, the Commission reviewed data
centralized market and that have been certified to the Section 4d process to the possible detriment of
or approved by the Commission.’’ This release the centralized market. See also, section 4d(a)(2) of
regarding the amount of off-exchange
proposes updates to this list. the CEA, as amended by the Dodd-Frank Act. transactions in 570 listed DCM

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contracts.96 Those contracts represented of total trading volume of a contract must initially calculate the centralized
actively traded futures products on eight would be an allowable amount of off- market trading percentage in each of its
DCMs and included a wide cross- exchange trading in order to protect the contracts within thirty days of the
section of products with open interest. price discovery process of trading on the effective date of this minimum
The data illustrated that the trading centralized market. centralized market trading rule. The
volume in the 570 contracts could be The Commission believes that initial calculation for each existing
grouped into two main categories.97 In requiring at least 85% of a contract’s contract must be based on the trading
one category, involving 410 of the volume to be traded on the centralized volume in the contract during the 12
contracts, mostly involving energy, market will balance the goal of month period immediately preceding
forex and weather contracts, almost all protecting the price discovery process of the effective date of this rule.98
or all of the trading over a three month trading in the centralized market, with Thereafter, the DCM must calculate the
period occurred off-exchange. As noted the goal of allowing off-exchange centralized market trading percentage in
above, the Commission believes that the transactions for bona fide business each such contract within thirty days of
price discovery process in the purposes. The Commission invites the 12 month anniversary of the initial
centralized market is jeopardized where comments on the minimum centralized calculation.
off-exchange transactions become the market trading percentage requirement
proposed herein. In particular, the c. Mandatory Delisting
exclusive or predominant method of
establishing or offsetting positions in a Commission requests that commenters As noted above, the minimum
particular market. Since there was no providing alternative percentage centralized market trading requirement
centralized market trading in those requirements or alternative approaches would permit DCMs to list only those
contracts, the Commission did not also provide data that supports any contracts that have a minimum average
consider these 410 contracts in its alternative percentage or other over a 12 month period of 85% trading
analysis of the appropriate minimum approach. on the centralized market. Accordingly,
centralized market trading requirement. subject to the relief provided for existing
b. Centralized Market Trading contracts and the other limited
In the second largest category, involving Percentage Calculation
128 contracts from all asset classes exemptions noted in paragraphs (d) and
which included contracts with large and In order to determine the percentage (e) of proposed § 38.502 below,
small open interest, the average amount of on and off exchange trading in a proposed § 38.502(c) requires that for
of off-exchange trading over the three- contract, DCMs must measure the those contracts that do not meet the
month period ranged from 0% to 15%. average percentage of trading in each minimum centralized market trading
The Commission believes that this contract over a sufficient period of time. percentage requirement, the DCM has
second category of contracts, where Indeed, the data collected by the the following options, which it must
there was actual centralized market Commission indicates that for those effectuate within ninety days of the
trading to observe, provides a contracts that have significant trading centralized market trading percentage
reasonable basis for establishing a on the centralized market, the amount of calculation: (i) If the DCM operates a
minimum centralized market trading off-exchange trading varies from day to SEF, it can delist the swap contract from
requirement. Accordingly, from this day. The Commission proposes that a the DCM and transfer open swap
second category the Commission took reasonable time period over which to positions to the SEF; (ii) the DCM can
the upper range of the maximum measure and determine a contract’s on- transfer the swap contract(s) to another
average amount of off-exchange trading, exchange trading volume is 12 months. SEF that accepts the contract; or (iii) the
and proposes that a maximum of 15% Thus, for new contracts listed after DCM can trade the contract on the DCM
the effective date of the minimum for liquidation purposes only.
96 Commission staff collected data on the amount centralized market trading percentage The Commission notes that contracts
of off-exchange trading that took place over the requirement in 38.502(a), the that may be required to be delisted have
three month period from May 2010 through July Commission proposes that DCMs a potential alternative venue as
2010, for 570 contracts listed on eight designated determine the amount of on-exchange
contract markets (CME, CBOT, NYMEX, COMEX, Congress created, in the Dodd-Frank
ICEUS, One Chicago, Kansas City Board of Trade trading in each contract at the Act, the SEF,99 a new trading facility for
and the Minneapolis Grain Exchange) and covering conclusion of the 12 month period the trading, processing and execution of
10 asset classes (agricultural, alternative markets following the contract’s initial listing on swaps.100 Among other requirements,
(i.e., environmental products), currency, energy, the exchange, and again on every 12
financial, index, interest rates, metal, real estate and
weather). In collecting data, Commission staff month anniversary going forward. The 98 As noted in the discussion under subpart J of

attempted to sample a cross-section of trading data designated contract market must this release, if a contract has been listed for less
from the eight DCMs. The data collected represents calculate the centralized market trading than a 12 month period, the Commission proposes
samples of: (i) Active contracts in the main asset that a DCM may seek an exemption as to that
percentage for each listed contract contract(s) and obtain a maximum of 12 additional
classes (financials, energy, agricultural, index,
currency, weather, real estate, and metals); (ii) within thirty days following the months to calculate its centralized market trading
particular contracts that historically have not traded conclusion of the 12 month anniversary for that contract(s).
on the centralized market (i.e., certain energy of each contract’s listing. The 99 The SEF Core Principles, under Section 5h of

contracts, currency); (iii) commodities that as a Commission notes that in order to be in the CEA, as amended by the Dodd-Frank Act, do
group trade differently from other commodities (i.e., not include a counterpart to the DCM Core
cocoa, coffee); (iv) commodities that are prominent compliance with Core Principle 9, the Principle 9 requirement to protect the ‘‘price
on certain exchanges (i.e., wheat on the Kansas City DCM has the burden of reviewing the on discovery process of trading in the centralized
srobinson on DSKHWCL6B1PROD with PROPOSALS2

Board of Trade and the Minneapolis Grain and off-exchange trading for each of its market of the board of trade.’’
Exchange), (v) ‘‘softs’’ and (vi) other products on ICE contracts over the relevant period to 100 The Commission notes that based upon a letter
Futures U.S. Commission staff began collecting data sent to Chairman Gensler from the Wholesale
in early August 2010 for the period May 2010 determine whether it is subject to Markets Brokers’ Association (‘‘WMBA’’), the
through July 2010. This time period was chosen delisting. The Commission notes that as Commission understands that many of the
because it represented the most current and part of its oversight, it also will be participants that currently facilitate the privately
straightforward data available at the time reviewing trading data of contracts. For negotiated contracts that are listed, but not traded,
Commission staff began collecting data. on a designated contract market intend to establish
97 A third category, consisting of a small number contracts and contract months listed SEFs, confirming that this is an appropriate
of contracts with trading volume between 15–60%, prior to the effective date of § 38.502(a), alternative forum for such contracts. The
is discussed further below. the Commission proposes that the DCM Continued

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 80590 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

the Dodd-Frank Act requires SEFs to centralized market trading requirement e. Exemption Upon Petition
facilitate the clearing and settlement of may continue to be listed on the DCM As noted above, the data collected by
swaps.101 Accordingly, parties seeking until all open positions in such the Commission illustrates a category of
clearing and segregated account status contracts and contract months are contracts that experienced an average
for swaps may achieve these objectives closed or liquidated. Trading in such off-exchange trading volume greater
on a SEF.102 The Commission invites contracts will be allowed but only to than 15% but less than 100% over the
comments as to these proposals. close or liquidate a position.103 three month period. The Commission
d. Treatment of Contracts Listed as of In essence then, after the effective recognizes that there are contracts that
the Effective Date of This Section date of the proposed rules in this may experience off-exchange trading
section, affected contracts that are listed averages that are above the proposed
Proposed § 38.502(d) provides relief
before the effective date of this rule and 15% maximum off-exchange trading
from the provisions of § 38.502(c) for
contracts listed on a DCM as of the that do not meet the minimum and that circumstances surrounding
effective date of this section. The centralized market trading requirement those contracts may warrant an
Commission understands that many will not be required to delist or exemption from the minimum
contracts and contract months listed on liquidate within 90 days as required by centralized market trading percentage
a DCM before the effective date of the the proposed rule. Instead, all affected requirement. For example, there may be
proposed rule may not meet the contracts will be allowed to continue to situations where a newly-listed contract
proposed minimum centralized market be listed, and either traded on the DCM initially may have little on-exchange
trading percentage requirement and, for liquidation purposes only, through trading, and may fail to meet the
therefore, would be subject to offsetting trades, or held until minimum centralized market trading
mandatory delisting upon the effective settlement at contract expiration. These requirement for the initial 12 month
date of the rules in this section affected contracts would, therefore, period despite experiencing a steady
(‘‘affected contracts’’). The Commission either close out at contract expiration or increase in trading volume over time. In
also notes that delisting a large number when open interest in the contract those situations, it may be appropriate
of these affected contracts within a short reaches zero. For any affected contracts to provide the DCM with an opportunity
period of time may be difficult and that may not have been listed and to petition for an exemption to this
result in potential financial traded for a full 12 month period on the requirement for a maximum of a 12
consequences. Accordingly, the effective date of the proposed rule, month period. Proposed § 38.502(e)(1)
Commission proposes a transition proposed § 38.502(e) proposes reflects such an exemption.
process for the affected contracts to be additional relief, as described below. In order to promote legitimate
liquidated in a fair and orderly manner. The Commission points out that with petitions, the proposed rule specifically
Specifically, the Commission proposes respect to this transition period, trades provides that the DCM must
in § 38.502(d) that affected contracts in the affected contracts must comply demonstrate in its petition that such
that do not meet the minimum with the provisions of Section 2(h)(8) of contract has achieved an average of at
the CEA, as amended by the Dodd-Frank least 50% trading volume on the
Commission, however, takes notice of the fact that Act, once effective. Thus, while a DCM centralized market over the preceding
the WMBA also proposes a much broader reading will be allowed to continue to list and 12 month period, and also must make
of Core Principle 9 contending, among other things, an adequate showing that the contract,
that the requirements of Core Principle 9 apply only trade in its existing contracts for
to transactions that are traded on a DCM and not purposes of liquidating respective if granted the exception, is likely to
to transactions, such as exchanges of futures for futures positions, upon the effective attain the minimum trading requirement
swaps, that are submitted in compliance with DCM
date of amended CEA Section 2(h)(8), within the following 12 month period.
rules; that the Commission should consider other The Commission also recognizes that
execution models that are competitive open and the closing out of that position with an
efficient; that compliance with Core Principle 9 associated swaps position must be some affected contracts that are listed as
does not require that all trades submitted to a DCM accomplished in compliance with the of the effective date of the proposed rule
be executed on the DCM’s proprietary electronic
requirements of amended CEA Section may not have been listed and traded for
trading network; and that Core Principle 9 should a full 12 month period at such time,
not be applied in the same way to futures, which 2(h)(8). To that end, such swaps
may be traded by retail investors, as it may be positions can only be executed on a SEF potentially requiring the DCM to
applied to OTC products that are only eligible to be or DCM, or with a bilateral off-exchange calculate the contract’s on-exchange
traded by Eligible Contract Participants. Letter to trading based on some shorter period of
Chairman Gary Gensler from WMBA dated trade either as a block trade, or where
September 10, 2010. the trade is exempt from the provisions time. In those situations, the
101 CEA Section 5h(f)(7), as amended by the of amended CEA Section 2(h)(8) because Commission believes it is only fair to
Dodd-Frank Act. In addition, this requirement one party to the trade includes an end allow such contracts additional time, if
accommodates the creation of Cleared Swaps
user.104 desired, to determine whether the
Customer Collateral account with bankruptcy minimum centralized market trading
protection. Additionally, the Commission may The Commission invites comments on percentage requirement is met. As such,
permit the netting of futures and swaps within such its proposal and also invites alternative
account. See CEA Section 4d(f)(3)(B), as amended the Commission proposes in
by the Dodd-Frank Act. proposals on how to address those DCM § 38.502(e)(2) to allow a DCM in this
102 The Commission notes that swaps cleared contracts listed prior to the effective situation to petition the Commission to
through an FCM and associated collateral are date of these rules. exempt a contract from the requirements
protected in bankruptcy as commodity contracts.
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See section 724(b) of the Dodd Frank Act (to be of proposed § 38.502(d) for a maximum
103 It is possible that a trader may not desire to
codified at 11 U.S.C. 761(4)(F)). Moreover, to period of 12 months. Under proposed
achieve benefits of portfolio margining, a close out a position. Since the position is carried
at the clearing house, a trader may instead decide § 38.502(e)(3) petitions seeking an
designated contract market may still petition for an
order pursuant to section 4d(a)(2) of the CEA to to keep the position in the clearing house until exemption from the mandatory delisting
permit such swap transactions to be commingled in expiration. Traders with existing positions as of the requirement in § 38.502(c) must be
the segregated customer account for exchange effective date of the rules in this section will be submitted to the Commission within
traded transactions, or an order pursuant to CEA permitted to maintain these positions in the
section 4d(f)(3)(B) to permit related exchange traded respective margin account. thirty-five days of the 12 month
futures transactions to be commingled in the 104 See generally, section 2(h) of the CEA, as anniversary of the listing of such
segregated customer account for swaps. amended by the Dodd-Frank Act. contract, or for affected contracts

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80591

seeking an exemption because they have DCM’s determination of block sizes and common control with another party. As
been listed for less than 12 months, block pricing for futures contracts, as it noted in the 2008 Core Principle 9
thirty-five days after the effective date of is expected that the determination of Proposed Rulemaking, appropriate
this section. The filing of a petition shall block sizes and pricing will evolve as safeguards are important for block
toll the mandatory delisting requirement both the industry and the Commission trades between affiliated parties,
until such time that a decision is made. continue to gain experience in this area. because transactions between two
The Commission invites comments on Consistent with the requirements set closely related parties are more
all aspects of this proposed rule. forth in current § 1.38 and amended susceptible to abuse, such as setting
We specifically request comment on Core Principle 9, proposed § 38.503(a) unreasonable prices, artificially boosting
how the proposals related to the would require that a board of trade that volume, money passing, or wash
requirement that 85 percent or greater of permits block trade transactions on trading. This is because it is possible
volume of a contract must be traded on futures contracts must have rules that two related parties are not
the DCM’s centralized market will affect governing such transactions. As motivated by their own separate
the ability of market participants to take proposed in the 2008 Core Principle 9 interests, but by the interests of a person
advantage of efficiencies like portfolio Proposed Rulemaking, this regulation or entity that may control both of the
margining for swaps and futures will require that the rules limit block parties. Thus, under proposed
positions. We also request comment on trades to large transactions and impose § 38.502(d)(3), block trades can take
any negative consequences this proposal minimum size requirements. The place between affiliated parties under
may have on the trading of swaps and proposed rule also states that the block the following conditions: (i) The block
related transactions like exchange of trade size must be certified or approved trade prices must be based on a
futures for swaps? The Commission also by the Commission. competitive market price, either by
is requesting comments on whether any The Commission recognizes that the falling within the contemporaneous bid/
other exemptions should be considered minimum size thresholds for block ask spread on the centralized market or
for contracts that do not meet the trades in a contract may change over calculated based on a contemporaneous
minimum centralized market trading time due to changes in sizes of trades in market price in a related cash market;
percentage threshold of on-exchange the centralized market and the market’s (ii) each party must have a separate and
trading volume but nevertheless appear volume and liquidity. Accordingly, independent bona fide business purpose
to serve a price discovery function, and proposed § 38.503(b) proposes that for engaging in the trades; and (iii) each
what factors should be considered in block trade size must be reviewed on an party’s decision to enter into the block
making the exemption determination. annual basis. Any necessary trade must be made by a separate and
For example, would it be acceptable for adjustments must be made to new and independent decision-maker. As noted
a contract market to provide evidence of existing contracts. in the 2008 Core Principle 9 Proposed
Proposed § 38.503(c) codifies the 2008 Rulemaking, the Commission believes
the frequency to which cash market
Core Principle 9 Proposed Rulemaking that the proposed rules for block trades
bids, offers or transactions in a
proposal to limit block trade parties for between affiliated parties strike an
commodity are directly based on, or are
futures, options and swaps to eligible appropriate balance between allowing
determined by referencing the prices
contract participants (‘‘ECPs’’) as that such trades and ensuring that each party
generated by trading the subject contract
term is defined in Section 1a(18) of the is acting independently when it agrees
on the designated contract market?
CEA, as amended by the Dodd-Frank to enter into such a transaction.
Finally, the Commission also requests
Act. However, the rule makes clear that Proposed § 38.503(e) codifies the
comments, with supporting information,
commodity trading advisors acting in an practices proposed in the 2008 Core
on whether the Commission should
asset managerial capacity and Principle 9 Proposed Rulemaking
consider any other exemptions from
investment advisors that have over $25 relating to aggregation of orders. The
proposed § 38.502.
million in assets under management, proposed rule prohibits aggregation of
iii. Proposed § 38.503—Block Trades on including foreign persons performing orders for different trading accounts in
Futures Contracts equivalent roles, are allowed to carry order to satisfy the minimum block size
As noted above, in addition to out block trades for non-ECP customers. requirement, except if done by a
updates to § 1.38, the 2008 Core The proposed rule also prohibits any commodity trading advisor acting in an
Principle 9 Proposed Rulemaking 105 person from conducting a block trade on asset manager capacity or an investment
behalf of a customer, unless the person advisor who has $25 million in total
proposed revised guidance and
receives instruction or prior consent to assets under management.
acceptable practices relating to block Proposed § 38.503(f) and (g) set forth
transactions for futures and options. The do so from the customer.106
Proposed § 38.503(d) codifies the the requirements for recordkeeping and
Commission proposes to codify some of reporting of block trades for futures and
the provisions in the guidance and concepts in the 2008 Core Principle 9
Proposed Rulemaking with respect to options. As to recordkeeping, proposed
acceptable practices relating to block § 38.502(f) reflects the provisions
trading that are, to a large degree, affiliated parties for futures, options on
futures and options on commodities. contained in § 1.38(b) with certain
already current industry practice. The updates. Thus, as is the current
Commission believes that codifying The proposed rule defines an ‘‘affiliated
party,’’ for purposes of block trades on requirement, persons handling,
these block trading requirements will executing, clearing, or carrying
result in greater regulatory certainty and futures, as a party that directly or
srobinson on DSKHWCL6B1PROD with PROPOSALS2

indirectly through one or more persons, transactions off the centralized market
consistency for DCMs. As discussed must follow the rules of the DCM,
below, the Commission proposes, controls, is controlled by, or is under
including providing the appropriate
however, to maintain guidance and 106 All of these requirements mirror block trade identification of such transactions to the
acceptable practices with respect to a rules previously approved by the Commission. The DCM. In addition, the proposed rule
Commission approved block trade rules of the codifies the concept initially proposed
105 The Commission first proposed amendments Cantor Financial Futures Exchange, Inc. on
to section 1.38 and guidance with respect to Core February 11, 2000; the Commission also approved
in the 2008 Core Principle 9 Proposed
Principle 9 in July 2004. See 69 FR 39,880, Jul. 1, Chicago Mercantile Exchange block trade rules on Rulemaking that the DCM must have
2004. May 19, 2000. rules for keeping appropriate records.

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 80592 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

Proposed § 38.503(f) requires that will evolve as both the industry and the price concession. The Commission
parties to, and members facilitating, Commission continue to gain believes this is a more appropriate
block trades keep accurate block trade experience in this area. Accordingly, the threshold because in less liquid markets
records that comply with Core Commission is re-proposing, with some even a small number of trades could
Principles 10 and 18 and the associated changes, the acceptable practices that have a slight movement on price and
regulations.107 The proposed rule also were proposed in the 2008 Core would not present an accurate picture of
requires that block trade orders and Principle 9 Proposed Rulemaking the market.
records must be accessible to the DCM, regarding establishing an acceptable In the 2008 Core Principle 9 Proposed
the Commission or the Department of minimum block size. Rulemaking, the Commission also
Justice, upon request. The 2008 Core Principle 9 Proposed proposed, as part of the acceptable
Proposed § 38.503(g) reflects a revised Rulemaking proposed replacing an practice, certain factors that the DCM
approach from the 2008 Core Principle earlier-proposed numerical test with the could consider in determining the
9 Proposed Rulemaking pertaining to concept that, in establishing appropriate minimum block size. These
the reporting of block trades. While the requirements for minimum block size, it factors included the market’s volume,
2008 Core Principle 9 Proposed was more appropriate to utilize a liquidity and depth, a review of typical
Rulemaking proposed that block trades procedural approach that takes into trade sizes and/order sizes and any
be reported to the contract market consideration the purposes for allowing input it may receive from floor brokers,
within a reasonable time, proposed blocks and the trading in the particular floor traders and/or market users
§ 38.503(g) codifies the practice already contract. The 2008 Core Principle 9 regarding, for example, what size order
enforced by a great majority of DCMs by Proposed Rulemaking explained that is generally too large to fill without
requiring that DCMs have up to 5 108 one of the bases for permitting block major price concessions. The
minutes to report block trades.109 The trades to be transacted off the Commission believes that these factors
Commission believes that this is an centralized market is that prices are likely to lead to an appropriate block
appropriate amount of time for reporting attendant to the execution of large size and thus proposes them as
block trades and balances the goals of transactions on the centralized market acceptable practices in this release. In
providing transparency while enabling may diverge from prevailing market addition, the Commission is proposing
market participants involved in block prices that reflect supply and demand of that DCMs also take into account, as an
trades with time to hedge risks the commodity. This is because the additional factor, the block sizes on
associated with such trades. The centralized market may not provide comparable swap products. This
Commission seeks comments as to sufficient liquidity to execute large additional factor is necessary and
whether this is an appropriate time transactions without additional costs appropriate in light of the inclusion of
period or whether and why another time that may reflect the cost of executing the swap trading and execution on DCMs
period is more appropriate. trade. Consequently, reporting these and SEFs, and the corresponding swap
In addition, proposed § 38.503(g) prices as conventional market trades block rules discussed below.
requires DCMs to publicize the details would be misleading to the public. As The Commission proposes similar
on block trades immediately upon the explained in the 2008 Core Principle 9 acceptable practices for determining the
receipt of the transaction report, and to Proposed Rulemaking, another basis for acceptable minimum size for block
publicize daily the total quantity of the allowing block trades is that such trades trades in new futures contracts and
block trades that are included in the facilitate hedging by providing a means options. However, because a new
total volume of trading under the for commercial firms to transact large contract will not have any trading
procedures set forth in § 16.01. orders without the need for significant history, the Commission proposes that
Proposed § 38.503(h) refers applicants price concessions, and resulting price the acceptable minimum block trade
and DCMs to the guidance in Appendix uncertainty for parties to the transaction size in such contracts is the trade size
B to part 38 for purposes of determining that would occur if transacted on the that the DCM reasonably anticipates
block size and pricing determinations. centralized market. Finally, a will not be able to be filled in its
As noted above, the Commission is procedural approach is more entirety in the contract’s centralized
proposing amended guidance and appropriate because the size of a typical market, without major price
acceptable practices in Appendix B of trade varies between contracts, and is concessions. In determining an
part 38 pertaining to block size and dependent on the liquidity in the acceptable block size, the DCM should
block pricing. The Commission believes centralized market and other consider centralized market data in a
that a one-size fits all approach to commercial factors. related futures contract, the same
determining block size and pricing is Given these reasons, the Commission contract traded on another exchange, or
inappropriate for block trades as it is previously proposed a standard trading activity in the underlying cash
expected, as noted above, that the whereby the minimum block trade sizes market. For the reasons discussed
determination of block sizes and pricing should be larger than the size at which above, the DCM should also consider, as
a single buy or sell order is customarily an additional factor, the block sizes on
107 An acceptable practice under this regulation is
able to be filled in its entirety at a single comparable swap products.
set forth in proposed appendix B of part 38 and price in that contract’s centralized The Commission also re-proposes in
provides that records kept in accordance with the
requirements of FASB Statement No. 133 market, and exchanges should this release the acceptable practices
(‘‘Accounting for Derivative Instruments and determine a fixed minimum number of proposed in the 2008 Core Principle 9
srobinson on DSKHWCL6B1PROD with PROPOSALS2

Hedging Activities’’), as amended by FASB contracts needed to meet this threshold. Proposed Rulemaking relating to the
Statement No. 161 (‘‘Disclosures About Derivative pricing of blocks. The proposed
Instruments and Hedging Activities—An
The Commission is re-proposing this
amendment of FASB Statement No. 133’’) are acceptable practice with some acceptable practice requires that block
acceptable records. modifications. Specifically, the trades between non-affiliated parties
108 The Commission notes that for a few contracts
Commission proposes that block trade must be at a fair and reasonable price.
with lower liquidity, such as weather and housing, sizes should be a number larger than the The proposed acceptable practices set
CME allows for a 15 minute reporting time.
109 See 73 FR 54,097, at note 18, Sep. 18, 2008
size at which a single buy or sell order forth the factors that could be
(noting CBOT Rule 331.05(d), CMD Rule 526(F); is customarily able to be filled in its considered by DCMs in determining
NYMEX Rule 6.21C). entirety without incurring a substantial what is fair and reasonable, including:

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(1) The size of the block, (2) the price v. Proposed § 38.505—Exchange of transitory exchange of derivatives for a
and size of other block trades in any Derivatives for Related Position related position transaction involves
relevant markets at the applicable time, In the 2008 Core Principle 9 Proposed both an EDRP and an off-setting
and (3) the circumstances of the market Rulemaking, the Commission proposed transaction to one of the legs of that
or the parties to the block trade. The acceptable practices relating to transaction. As codified in § 38.504(b),
proposed acceptable practice states that exchange of futures for related position the proposed rule will permit parties to
relevant markets include the DCM itself, transactions. The acceptable practices an EDRP to engage in a separate
the underlying cash markets and/or proposed in that rulemaking were based transaction that offsets a leg of the EDRP
related futures or option markets. As on previous publications by the if the offsetting transaction results in an
noted in the proposed acceptable Commission, including the 1987 EFP actual transfer of ownership and
practices, if the contract market rule Report prepared by the Commission’s demonstrates other indicia of being a
requiring a fair and reasonable price then-Division of Trading and Markets bona fide transaction, and the offsetting
includes the circumstances of the and the Commission’s 1998 EFP transaction is able to stand on its own
parties or of the market, a block trade Concept Release.111 Proposed § 38.505 as a commercially appropriate
participant can execute a block codifies the practices that the transaction; that is, there must be no
transaction at a price that is away from Commission historically has required obligation on either party that the
from DCMs with respect to these types offsetting transaction will require the
the market provided that the participant
of transactions. execution of a related EDRP, or vice
retains documentation to demonstrate
As an initial matter, proposed versa.
that the price was indeed fair and
§ 38.505 (a) revises the nomenclature for Proposed § 38.505(c) prohibits DCMs
reasonable under the participant’s or
referring to transactions that have been from permitting a contingent exchange
market’s particular circumstances. In
referred to in the past as ‘‘exchange of of derivative for a related position
addition, the proposed acceptable
futures for commodities or derivatives transaction where the exchange of
practices note that block trades between derivative for the related position is
positions,’’ to refer to all such
affiliated parties are subject to the transactions under the umbrella term contingent upon an offsetting
pricing requirements in § 38.503(d). ‘‘exchange of derivatives for related transaction.
iv. Proposed § 38.504—Block Trades on position’’ (‘‘EDRP’’). The Commission In the 2008 Core Principle 9 Proposed
Swap Contracts believes that this is a more accurate and Rulemaking, the Commission proposed
descriptive term as it will include that EDRP transactions be reported to
The Dodd-Frank Act amended the transactions not limited to futures, such the DCM within a reasonable time.
CEA to expand the list of products that as swaps. Proposed § 38.505(a) codifies Given the continuous changes and
may be traded on a DCM to include the requirements and characteristics of advancements in electronic trading over
swaps, in addition to futures and a bona fide EDRP and is based on the years, the Commission believes that
options contracts. The Commission Commission standards that have such trades also should be reported in
recognizes that there exists certain developed over the years. Specifically, a five minute time period, as is
inherent differences between futures the proposed rule sets forth the proposed for block trades. Thus,
and options, on the one hand, and elements of a bona fide EDRP to include proposed § 38.505(d) requires that such
swaps on the other, which may separate but integrally related trades be reported to the market within
necessitate that DCMs apply different transactions, price correlation and five minutes of consummation. The
rules to these products. While the quantitative equivalence of the two legs, Commission invites comments on this
Commission generally believes that the an actual transfer of ownership of the proposal and, in particular, if and why
same block trade rules should apply to commodity or derivatives position and any other time period should be
futures, options and swaps listed and both legs transacted between the same allowed.
traded on the DCM, the Commission two parties. Proposed § 38.505(e) codifies the
As to pricing of these transactions, acceptable practice proposed in the
proposes that characteristics of swaps
proposed § 38.505 maintains the 2008 Core Principle 9 Proposed
do warrant a different approach for
methodology set forth in the acceptable Rulemaking requiring the DCM to
purposes of determining minimum
practices proposed in the 2008 Core follow procedures set forth in current
block size. In addition, the Dodd-Frank
Principle 9 Proposed Rulemaking.112 section 16.01 to publicize daily the total
Act provides specific statutory Accordingly, the proposed rule provides
requirements for reporting of swap quantity of exchange for derivatives for
that the price differential between the related position.
block transactions. The rules governing two legs should reflect commercial
each of these requirements are currently realities, and at least one leg of the vi. Proposed § 38.506—Office Trades
being addressed in a forthcoming transaction should be priced at the and Transfer Trades
Commission release titled ‘‘Real Time prevailing market price. In the 2008 Core Principle 9 Proposed
Reporting,’’ which is proposing rules Further, proposed § 38.505(b) codifies Rulemaking, the Commission noted that
that will be codified in part 43 of the the requirements applicable to bona fide transfer trades and office trades move
Commission’s regulations.110 transitory exchange of derivatives for existing positions between accounts and
Accordingly, DCMs must comply with related position transactions. A are bookkeeping in nature. Such
the provisions of proposed part 43 for
srobinson on DSKHWCL6B1PROD with PROPOSALS2

transactions, therefore, do not affect the

purposes of setting the minimum size of 111 See Division of Trading and Markets, Report
price discovery process of the
swap block trades, and for reporting on Exchanges of Futures for Physicals (1987) (the
‘‘1987 EFP Report’’); Regulation of Non-Competitive centralized market because they do not
swap block trades. Proposed § 38.504 Transactions Executed on or Subject to the Rules of establish or offset positions. The
provides that DCMs must have rules a Contract Market, 63 FR 3708, Jan. 26, 1998 (the Commission will not require these
that require compliance with these rules ‘‘1998 EFP Concept Release’’). transactions to follow the publication
112 The Commission is codifying the EDRP
for swaps traded on their markets. requirements under § 16.01 as required
pricing methodology based on its experience over
the past years in determining the reasonability of for blocks and EDRPs. Instead, proposed
110 See supra note 43. EDRP pricing. § 38.506 requires that records of such

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 80594 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

transactions be kept in accordance with they did not explicitly address i. Proposed § 38.551—Audit Trail
the recordkeeping regulation § 1.31. electronic trading.114 Required
10. Subpart K—Trade Information The proposed rules also draw on Proposed § 38.551 is based on the
recent RERs analyzing DCMs’ application guidance and acceptable
Section 5(d)(10) of the CEA, as practices for former Core Principle
compliance with former Core Principle
amended by the Dodd-Frank Act, 10.116 It establishes the overarching
requires DCMs to capture, verify, and 10. In the context of RERs, staff has
made a number of findings and requirements for DCMs’ audit trail
retain detailed trade information (i.e., programs to ensure that DCMs can
audit trail data) for all transactions in recommendations regarding DCMs’
audit trail enforcement programs, appropriately monitor and investigate
their markets. Amended Core Principle any potential customer and market
10—Trade Information is almost including recommendations regarding
more frequent audit trail reviews and abuse. Proposed § 38.551 provides that
identical to the requirements contained the audit trail data captured by DCMs
in the current Core Principle 10. Both larger sanctions for audit trail
must be sufficient to reconstruct all
the amended and current Core Principle violations. Staff also has directed DCMs transactions within a reasonable period
10 require DCMs to maintain rules and to develop audit trail programs for of time, and to provide evidence of any
procedures that provide for the electronic trading that are comparable in rule violations that may have occurred.
recording and safe storage of all rigor and scope to their audit trail The proposed rule also provides that
identifying trade information in a programs for open-outcry trading.115 audit trails must be sufficient to track
manner that enables the DCM to assist These findings and recommendations, customer orders from the time of receipt
in the prevention of customer and including those with respect to through fill, allocation, or other
market abuses and provide evidence of electronic trading audit trails, are disposition. Audit trail data must
any rule violations. Because the reflected in proposed § 38.553, also include both order and trade
amended core principle has almost summarized below. information. Proposed § 38.551 applies
identical statutory text, the Commission equally to open-outcry and electronic
Whether applicable to open-outcry or
interprets amended Core Principle 10 as trading.
imposing the same substantive content to electronic trading, the proposed rules
as its predecessor.113 in subpart K seek to ensure that DCMs ii. Proposed § 38.552—Elements of an
The application guidance and capture, verify, and retain sufficient Acceptable Audit Trail Program
acceptable practices for current Core order and trade-related information for Proposed § 38.552 prescribes the four
Principle 10 provide the basis of the DCM staff to detect possible trading elements of an acceptable audit trail
Commission’s proposed audit trail violations and other market and program. These elements are necessary
regulations in proposed subpart K, customer abuses. They also require to ensure that a DCM can capture and
particularly proposed §§ 38.551 (Audit DCMs to possess specific resources and retain sufficient trade-related
Trail Required) and 38.552 (Elements of capabilities with respect to their audit information, can reconstruct trading
an Acceptable Audit Trail Program), trails. These include the ability to promptly, and has the necessary tools to
summarized below. In addition, the promptly reconstruct all transactions detect and deter potential customer and
proposed rules update the guidance and and the ability to track customer orders market abuses through its audit trail.
acceptable practices in that the from the time of receipt through fill, First, proposed § 38.552(a) requires that
proposed regulations address audit trail allocation, or any other disposition. The a DCM’s audit trail include original
requirements for electronic trading. The proposed rules also require a DCM’s source documents, defined to include
Commission notes that the proposed audit trail program to collect original unalterable, sequentially-identified
rules for electronic trading audit trails source documents, to build a transaction records on which trade execution
are substantially similar to the long- history database, and to develop an information is originally recorded,
standing requirements for open-outcry whether manually or electronically. It
electronic analysis capability with
trading. However, because those also requires that customer order
respect to all trade information in that
requirements reflected a time when records demonstrate the terms of the
database. DCMs also must possess a safe order, the account identifier that relates
electronic trading accounted for less storage capability with respect to their
than 10 percent of U.S. futures volume, to the account owner, and the time of
audit trail data. Finally, they must the order entry. Finally, proposed
113 The Commission previously expressed the develop meaningful enforcement § 38.552(a) requires that, for open-outcry
regulatory requirements of former Core Principle 10 programs to ensure member and market trades, the time of report of order of
through its application guidance for that core participant compliance with all execution must also be captured in the
principle. See 17 CFR part 38, App. B, Application applicable audit trail requirements. In
Guidance and Acceptable Practices for Core
audit trail.
Principle 10. It also provided additional insight each respect, the Commission’s Second, proposed § 38.552(b) requires
regarding the core principle through detailed proposed rules are consistent with its that a DCM’s audit trail program must
acceptable practices that all DCMs could use to long-standing requirements and include a transaction history database.
demonstrate compliance with former Core Principle A transaction history database facilitates
10. The acceptable practices explained that ‘‘the expectations regarding reliable,
goal of an audit trail is to detect and deter customer complete, and effective audit trails. The rapid access and analysis of all original
and market abuse.’’ Id. at (b)(1). It also outlined the specific requirements of the proposed source documents, thereby aiding DCMs
elements of an effective audit trail. Those elements
rules implementing amended Core in monitoring for customer and market
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included original source documents, which help to abuses. Proposed § 38.552(b) also
establish the accuracy and authenticity of an audit Principle 10 are summarized below.
trail. They also included a transaction history specifies the trade information that must
database and electronic analysis capability, which 114 This figure is based on fiscal year 2000, as
be included in a transaction history
allow a DCM to more easily access and review audit
reported in the Commission’s FY 2009 Performance database. Mandatory information
trail data to identify possible trading abuses and includes a history of all orders and
rule violations. Finally, the acceptable practices and Accountability Report, p. 14.
pointed to a DCM’s safe storage capability,
115 See Rule Enforcement Review of the trades; all data input in the trade
emphasizing that audit trail data must be stored in Minneapolis Grain Exchange (August 27, 2009), and
a manner that protects it from unauthorized Rule Enforcement Review of ICE Futures U.S. (Feb. 116 17 CFR Part 38, App. B, Core Principle 10,

alteration, accidental erasure, or other loss. 2, 2010). Application Guidance and Acceptable Practices.

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80595

matching system for clearing; the DCMs: Review the processes used by existing application guidance for
categories of participants for which members and market participants to current Core Principle 11 and former
trades are executed (i.e., customer type assign and maintain exchange user Designation Criterion 5.118 However,
indicator or ‘‘CTI’’ codes); timing and identifications; review usage patterns of based upon its past experience, the
sequencing data sufficient to reconstruct the user identifications; and review Commission is proposing some new
trading; and identification of each account numbers and Customer Trading practices and requirements for DCMs in
account to which fills are allocated. Identification codes in trade records to implementing amended Core Principle
Third, proposed § 38.552(c) requires test for accuracy and improper usage. 11.
that a DCM’s audit trail program have The Commission notes that, compared
Proposed § 38.601 would require that
electronic analysis capability for all data to the corresponding requirements for
in its transaction history database. This all transactions executed on or through
open-outcry trading, audit trail and
requirement helps ensure effective use a DCM, other than transactions in
audit trail enforcement requirements for
of audit trail data by requiring security futures products, be cleared
electronic trading are still evolving, and
appropriate tools to use in conjunction that the Commission’s expectations in through a Commission-registered DCO.
with a DCM’s transaction history this area, pursuant to amended Core This proposed rule codifies current
database. Proposed § 38.552(c) also Principle 10, are likely to evolve as well. practice, as well as the requirements of
provides that a DCM’s electronic Second, proposed § 38.553(b) requires amended Core Principle 11 to mandate
analysis capability must allow it to DCMs to develop programs to ensure clearing. The Commission interprets the
reconstruct trades in order to identify effective enforcement of their audit trail mandatory clearing requirement in
possible rule violations. and recordkeeping requirements. It Section 723(a)(3) of the Dodd-Frank
Finally, proposed § 38.552(d) requires applies equally to both open-outcry and Act 119 to mean that a DCO must clear
that a DCM’s audit trail program include electronic trading. Proposed § 38.553(b) a swap for any DCM or SEF that
the ability to safely store all audit trail requires DCMs’ enforcement programs requests such clearing services, so long
data, and to retain it in accordance with to identify members and market as the DCO offers the swap for clearing.
the recordkeeping requirements of DCM participants that routinely fail to In addition, a DCO that is clearing
Core Principle 18 and the associated comply with the requirements of Core particular swaps must also clear the
regulations under part 38. Safe storage Principle 10. DCMs also must levy same swaps when listed on DCMs or
capability enables a DCM to properly meaningful sanctions when deficiencies SEFs, whether affiliated or unaffiliated,
preserve and protect the audit trail data are found. Sanctions may not include on a nondiscriminatory basis.
so that it is readily available for the more than one warning letter or other Proposed §§ 38.602 and 38.603
DCM to use in any future investigation non-financial penalty for the same provide that DCMs must adopt rules
or inquiry into possible violations of violation within a rolling twelve-month establishing minimum financial
DCM rules. Safe storage capability period. standards for both member FCMs and
requires a DCM to protect its audit trail IBs and non-intermediated market
data from unauthorized alteration, 11. Subpart L—Financial Integrity of
Transactions participants, as well as rules for the
accidental erasure or other loss. protection of customer funds, including
Core Principle 11, as amended by the
iii. Proposed § 38.553—Enforcement of the segregation of customer and
Dodd-Frank Act, retains the provisions
Audit Trail Requirements proprietary funds, the custody of
of current Core Principle 11.117 This
Proposed § 38.553 prescribes the customer funds, the investment
core principle requires that a DCM
elements of an effective audit trail standards for customer funds,
establish and enforce rules and
enforcement program. The proposed intermediary default procedures and
procedures for ensuring the financial
rule is organized in two parts. First, related recordkeeping. Proposed
integrity of transactions entered into, on
proposed § 38.553(a) requires a DCM to § 38.604 requires that a DCM must
or through the facilities of the contract
develop an effective audit trail routinely receive and promptly review
market, including the clearing and
enforcement program. An effective financial and related information from
settlement of the transactions with a
enforcement program must, at a its members and conduct ongoing
DCO. Amended Core Principle 11 also
minimum, review all members and financial surveillance of the risk created
requires that a DCM establish and
market participants annually to verify by the positions the customers of an
enforce rules to ensure: (i) The financial
their compliance with all applicable FCM take on the DCM. To meet this
integrity of any futures commission
audit trail requirements. requirement, the DCM must have rules
merchant (‘‘FCM’’) and introducing
Proposed § 38.553(a) is further pertaining to minimum financial
broker (‘‘IB’’); and (ii) the protection of
divided into two paragraphs. Paragraph standards of intermediaries that include,
customer funds. Because textually the
(a)(2) of proposed § 38.553 establishes among other things, rules prescribing
language is almost the same, the
minimum review criteria for open- minimum capital requirements for
Commission is interpreting the
outcry trading. It requires that DCMs provisions as it has in the past.
conduct annual reviews of all members Proposed §§ 38.600 through 38.607,
118 Former Designation Criterion 5 stated that ‘‘the

and market participants to verify their board of trade shall establish and enforce rules and
largely codify language found in the procedures for ensuring the financial integrity of
compliance with their trade timing, transactions entered into by or through the facilities
order ticket and trading card 117 There were no substantive changes to the of the contract market, including the clearance and
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requirements. Similarly, paragraph amended Core Principle 11 from the current one. settlement of the transactions with a derivatives
(a)(1) sets forth minimum review criteria The amended core principle reads as follows: The clearing organization.’’ 17 CFR part 38, App. A.
board of trade shall establish and enforce—(A) rules 119 Among other things, section 723(a)(3) of the
for an electronic trading audit trail. It and procedures for ensuring the financial integrity Dodd-Frank Act adds a new section 2(h)(1) to the
requires annual examinations by DCMs of transactions entered into on or through the CEA that provides that: (i) All swaps that are
of randomly selected samples of front- facilities of the contract market (including the required to be cleared be cleared by a Commission-
end audit trail data from order routing clearance and settlement of the transactions with a registered DCO; and (ii) a DCO must have open
derivatives clearing organization); and (B) rules to access rules, including rules providing for the non-
systems to ensure the presence and ensure: (i) The financial integrity of any (I) futures discriminatory clearing of a swap executed
accuracy of required audit trail data. In commission merchant, and (II) introducing broker; bilaterally on or through the rules of an unaffiliated
addition, paragraph (a)(1) requires that and (ii) the protection of customer funds. DCM or SEF.

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 80596 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

member FCMs and IBs.120 Rules or As noted above, amended Core the DCM establish and enforce rules to
procedures pertaining to protection of Principle 11 provides that a DCM must protect markets and market participants
customer funds must include, among establish and enforce rules to, among from abusive practices committed by
other things, that each DCM must other things, ensure both the financial any party, including abusive practices
continually survey the obligations of integrity of any FCM, and the protection committed by a party acting as an agent
each FCM created by the positions of its of customer funds. With an increasing for a participant, and promote fair and
customers, and, as appropriate, compare number of DCMs permitting the equitable trading on the contract market.
those obligations to the financial customers of an FCM to transmit orders The current guidance for this core
resources of the FCM. The DCM should directly to the DCM in real time, the principle 124 provides that a DCM
use this information to protect customer ability of an FCM to control and monitor should have methods and resources
funds by, for example, taking its level of risk may become appropriate to the nature of the trading
appropriate steps to verify that its compromised. In this automated trading system and the structure of the market
member FCMs have sufficient capital to environment, the only controls that to detect trade practice and market
continue to guarantee the positions of effectively can enforce limitations on abuses, and to prohibit, detect and
each customer. If the obligations of a risk are automated controls.122 Proposed discipline intermediary behavior that is
member FCM appear excessive as § 38.607 would require a DCM that abusive, fraudulent, noncompetitive or
compared to the capital of such FCM, a allows customers direct access to its unfair, in connection with the execution
DCM should take appropriate action, contract market to implement certain of trades.
including contacting the FCM or the direct access controls and procedures in The Commission believes that
FCM’s designated self-regulatory order to provide member FCMs with compliance with this core principle
organization. tools to manage their financial risk. The requires the DCM to implement trade
Proposed § 38.605 requires DCMs as proposed rule contemplates that an practice and market surveillance
self-regulatory organizations (‘‘SRO’’) to FCM would continue to have primary programs and provide a competitive,
comply with the standards of amended responsibility for overall risk open and efficient market and
§ 1.52 to ensure the financial integrity of management, but that the DCM would mechanism for executing transactions in
intermediaries by establishing and be required to establish an automated accordance with other core principles
carrying out an SRO program for the risk management system permitting an and the regulations thereunder. To
examination and financial supervision FCM to set appropriate risk limits for provide clarity and certainty of these
of intermediaries. Section 1.52, as each customer with direct access to the requirements, the Commission proposes
contract market. As an SRO, the DCM § 38.651 that specifically states
proposed to be amended in this release,
would be responsible for implementing compliance requirements, including the
sets forth the required elements of SRO
and enforcing rules requiring the FCM core principles that must be followed.
supervisory programs and permits one
to use the provided controls and Specifically, a trade practice
or more SROs to establish, subject to
procedures appropriately. The specific surveillance program should be
Commission approval, a joint audit plan
type of pre-trade controls implemented conducted in accordance with Core
to provide for the SRO supervision of
by a DCM shall be a matter for Principle 2 and the associated
members of more than one SRO.
determination by the DCM, its member regulations in subpart C of this part 38,
Proposed amendments to § 1.52 include
FCMs, and the DCM’s DCO. This which would require, among other
references to existing guidance to SROs
proposed rule requiring direct access things, that a DCM prohibit certain
contained in the Division of Trading enumerated abusive and disruptive
controls and procedures where direct
and Markets Financial and Segregation trading practices, have arrangements
access is permitted is consistent with
Interpretations 4–1 and 4–2, which and resources for effective rule
current international guidance.123 The
currently guide the practices of enforcement and enforce compliance
Commission requests comments on the
members of the Joint Audit Committee with its rules and have the capacity to
proposed rule, and specifically on the
operating a joint audit plan that has detect, investigate, and sanction
following questions:
been approved by the Commission.121 • Whether DCMs should provide violations.
Proposed § 38.606 would provide that additional controls to permit FCMs to A market surveillance program should
DCMs may satisfy their financial manage their risks? If so, what specific include monitoring the market to
surveillance responsibilities under direct access controls and procedures prevent manipulation, price distortion
proposed §§ 38.604 and 38.605 by should DCMs implement? and disruptions of daily trading and the
outsourcing such responsibilities to a • Should such controls be physical delivery or cash-settlement
registered futures association or other mandatory? process. A market surveillance program
regulated entity. Proposed § 38.606 should be conducted in accordance with
would provide that a DCM must ensure 12. Subpart M—Protection of Markets
Core Principle 4 and the associated
that the regulatory service provider has and Market Participants
regulations in subpart E of this part 38
the capacity and resources to conduct Section 735 of the Dodd-Frank Act that would require, among other things,
the necessary financial surveillance, and amends Core Principle 12. Current Core that the DCM demonstrate the capability
would further provide that the DCM Principle 12 states that the board of of conducting real-time monitoring of
remains responsible for compliance trade shall establish and enforce rules to trading and comprehensive and accurate
with its financial surveillance protect market participants from abusive
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obligations notwithstanding the use of a practices committed by any party acting 124 The current guidance for Core Principle 12

regulatory service provider. as an agent for the participants. The provides that ‘‘a designated contract market should
amended Core Principle 12 requires that have rules prohibiting conduct by intermediaries
that is fraudulent, noncompetitive, unfair, or an
120 An FCM that is a clearing member will also
abusive practice in connection with the execution
have additional obligations to the DCO as a result 122 International Organization of Security
of trades and a program to detect and discipline
of its clearing membership. Commissions [IOSCO], Final Report of the IOSCO such behavior. The contract market should have
121 See 73 FR 52832, Sept. 11, 2008 (requesting Technical Committee, Principles for Direct methods and resources appropriate to the nature of
comments prior to the Commission’s approval of Electronic Access to Markets, at 4, IOSCO Doc. the trading system and the structure of the market
the most recent Joint Audit Committee agreement, FR08/10 (August 12, 2010). to detect trade practice abuses.’’ 17 CFR part 38,
which approval was granted March 18, 2009). 123 Id. App. B.

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trade reconstructions and require that The proposed rules in subpart N are Core Principle 2—Compliance with
traders in their markets keep records, consistent with current disciplinary Rules.129
including their activity in the practices at most DCMs. They reflect Other proposed requirements in
underlying commodity and related disciplinary concepts formerly found in subpart N that are based on findings and
derivative markets. Effectively Designation Criterion 6 and the recommendations in recent RERs
monitoring the market would require guidance and acceptable practices for include a requirement that disciplinary
sufficient, well trained market former Core Principle 2. The proposed panels improve their written
surveillance staff and, where rules also are similar to the text of the documentation in disciplinary decisions
appropriate, automated tools to assist in disciplinary procedures in part 8 of the and settlements.130 These heightened
the monitoring of the market for, among Commission’s regulations.128 In general, documentation requirements appear in
other things, potential market the Commission’s proposed rules seek proposed § 38.703 (Review of
disruptions. Such automated tools to ensure a fair, prompt, and effective Investigation Report), proposed § 38.709
should be capable of providing disciplinary program. They require (Settlement Offers), and proposed
automated trading alerts to detect many meaningful sanctions against persons § 38.711 (Decisions), all of which
types of potential violations of exchange and entities that violate DCM rules. The require that the facts and analysis
or Commission rules. proposed rules also provide numerous supporting disciplinary settlements and
Finally, in order to promote fair and procedural safeguards to ensure fairness decisions be explained carefully and in
equitable trading, the DCM must for all respondents in disciplinary writing by the relevant disciplinary
establish and enforce trading rules with actions. Finally, they require full panel. The Commission believes that
adequate specificity to include, among customer restitution in any disciplinary improved written documentation, as
other things, providing to market matter where customer harm is required by the proposed rules, will
participants, on a fair, equitable and demonstrated. yield a number of significant benefits.
timely basis, information regarding In those cases where the proposed Disciplinary panels will be required to
prices, bids and offers. The DCM should rules place new requirements on DCMs focus their analysis more carefully in
provide a competitive, open and with respect to their disciplinary order to articulate the rationale for their
efficient market and mechanism for procedures, such requirements are decisions. DCM enforcement staff will
executing transactions in accordance derived from findings and gain a better understanding of the
with Core Principle 9 and the associated recommendations made by Commission evidentiary expectations to which
regulations in subpart J of this part 38 staff through its RERs. Proposed different disciplinary panels adhere.
that, among other things, recognizes that § 38.701 (Enforcement Staff), for DCM enforcement staff and respondents
trading in the centralized market example, requires a DCM to have will both have an improved record to
provides a price discovery function and sufficient staff and resources to base any appeals they may wish to file.
would specifically require that the effectively and promptly prosecute Finally, improved written
execution of transactions be in a manner possible violations of exchange rules. It documentation of the facts and analysis
that protects that price discovery also requires a DCM to monitor the size supporting settlements and disciplinary
process. and workload of its enforcement staff decisions will help facilitate subsequent
annually, and to increase its review of DCMs’ disciplinary programs
13. Subpart N—Disciplinary Procedures enforcement resources and staff as by the Commission.
Section 735 of the Dodd-Frank Act appropriate. The text of proposed rule Proposed § 38.714 (Disciplinary
amends the disciplinary procedure 38.701 mirrors that of proposed rule Sanctions), further provides that all
requirements applicable to DCMs in two 38.155, which requires DCMs to retain disciplinary penalties imposed by a
significant ways. First, Section 735(a) sufficient compliance staff and DCM or its disciplinary panels must be
resources to comply with new DCM commensurate with the violations
eliminates all DCM designation criteria,
committed, and be sufficient to deter
including Designation Criterion 6
parties. Paragraph (a)(2) of the application guidance recidivist activity. This proposed rule
(Disciplinary Procedures).125 Second, for former Core Principle 2 required DCMs to have reflects DMO staff’s concerns with
Section 735(b) creates a new Core the ‘‘arrangements, resources, and authority
respect to the adequacy of disciplinary
Principle 13 (Disciplinary Procedures) [necessary] for effective rule enforcement,’’ and the
‘‘authority and ability to discipline and limit, or sanctions in cases it has examined
that is devoted exclusively to exchange suspend the activities of a member or market through its RER process.131 Finally,
disciplinary proceedings, and that participant pursuant to clear and fair standards.’’ 17 proposed § 38.715 (Summary Fines for
captures disciplinary concepts inherent CFR part 38, App. B, Application Guidance for Core
Principle 2 at (a)(2). In addition, paragraph (b)(4) of Violations of Rules Regarding Timely
in both Designation Criterion 6 and in
the former core principle’s acceptable practices
current DCM Core Principle 2 required any DCM that wished to take advantage of 129 See Rule Enforcement Review of the
(Compliance with Rules).126 The rules the acceptable practice’s safe harbor to have Minneapolis Grain Exchange (Aug. 27, 2009), Rule
proposed under subpart N implement ‘‘prompt and effective disciplinary action for any Enforcement Review of ICE Futures U.S. (Feb. 2,
new Core Principle 13.127 violation * * * found to have been committed.’’ 17 2010), and Rule Enforcement Review of the Chicago
CFR part 38, App. B, Acceptable Practices for Core Board of Trade and the Chicago Mercantile
Principle 2 at (b)(4). Paragraph (b)(4) also referenced Exchange (Sep. 13, 2010) for findings and
125 See § 735(a) of the Dodd-Frank Act. part 8 of the Commission’s regulations as an recommendations pertaining to the adequate staff
126 Compare current CEA § 5(b)(6) and § 5(d)(2) example that DCMs could follow to comply with size of DCM compliance departments.
with CEA § 5(d)(13) as amended by the Dodd-Frank Core Principle 2. 17 CFR 8.01 et seq. In its 130 See Rule Enforcement Review of the New York
Act. experience, the Commission has found that many Mercantile Exchange (Sep. 16, 2004) and Rule
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127 Prior to the passage of the Dodd-Frank Act, the DCMs’ disciplinary programs do in fact model the Enforcement Review of the Chicago Board of Trade
standards for DCMs’ disciplinary practices were disciplinary structures and processes in part 8. and the Chicago Mercantile Exchange (Sep. 13,
found in Designation Criterion 6 and the statutory While the acceptable practices for former Core 2010). The structure of disciplinary panels is
language, guidance, and acceptable practices for Principle 2 offered the disciplinary procedures in discussed in the context of proposed § 38.702,
former Core Principle 2. Designation Criterion 6 part 8 as an example of appropriate disciplinary below.
required that a DCM establish and enforce procedures, DCMs were exempt from part 8 131 See Rule Enforcement Review of the New York

disciplinary procedures that authorized it to pursuant to § 38.2. The disciplinary procedures Mercantile Exchange (Sep. 16, 2004); Rule
discipline, suspend, or expel members or market proposed herein do not re-subject DCMs to part 8, Enforcement Review of the Kansas City Board of
participants that violated the rules of the DCM, or but rather propose new disciplinary procedures for Trade (June 16, 2006); and Rule Enforcement
similar methods for performing the same functions, inclusion in part 38. Review of the Minneapolis Grain Exchange (Aug.
including delegation of the functions to third 128 See supra note 47. 27, 2009).

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 80598 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

Submission of Records, Decorum, or proposed § 40.9(c)(3)(ii)132 and may not participants that violations of exchange
Other Similar Activities) makes clear include any members of the DCM’s rules will not be tolerated by the DCM.
that a DCM should issue no more than compliance staff, or any person After receipt of the investigation
one warning letter in a rolling 12-month involved in adjudicating any other stage report, if a Review Panel determines
period before sanctions are imposed, of the same proceeding. Paragraph (b) of that additional investigation or evidence
again reflecting DMO staff’s concerns the proposed rule provides that a is needed, it must promptly direct the
with respect to the adequacy of Review Panel must be responsible for compliance staff to conduct further
sanctions imposed. Proposed subpart N determining whether a reasonable basis investigation. In the alternative, if a
is divided into a total of 16 rules, each exists for finding a violation of contract Review Panel determines that no
of which is described in detail below. market rules, and for authorizing the reasonable basis exists for finding a
i. Proposed § 38.701—Enforcement Staff issuance of a notice of charges against violation, or that prosecution is
persons alleged to have violated unwarranted, it may direct that no
Proposed § 38.701 requires that a exchange rules. If a notice of charges is
DCM establish and maintain sufficient further action be taken. This
issued, then Paragraph (c) of the determination must include a written
enforcement staff and resources to proposed rule helps to ensure an
effectively and promptly prosecute statement setting forth the facts and
impartial hearing by requiring a separate
possible rule violations within the analysis supporting the decision.
Hearing Panel to adjudicate the matter
jurisdiction of the contract market. A Finally, if a Review Panel determines
and issue sanctions. The Commission
DCM must also monitor the size and that a reasonable basis exists for finding
notes that, while proposed § 38.702
workload of its enforcement staff a violation and adjudication is
requires DCMs to empanel distinct
annually and increase its resources and warranted, it must direct that the person
bodies to issue charges and to
staff as appropriate. The Commission or entity alleged to have committed the
adjudicate charges in a particular
recognizes that at some DCMs, violation be served with a notice of
matter, DCMs may determine for
compliance staff also serves as charges.
themselves whether their Review and
enforcement staff. That is, they both Hearing Panels are separate standing iv. Proposed § 38.704—Notice of
investigate cases and present them panels or ad hoc bodies whose members Charges
before disciplinary panels. These are chosen from a larger ‘‘disciplinary
proposed rules are not intended to committee’’ to serve in one capacity or Proposed § 38.704 describes the
prohibit that practice. the other for a particular disciplinary minimally acceptable contents of a
The Commission believes that notice of charges (‘‘notice’’) issued by a
matter.
adequate staff and resources are Review Panel. The notice must
essential to the effective performance of iii. Proposed § 38.703—Review of adequately state the acts, conduct, or
a DCM’s disciplinary program. As noted Investigation Report practices in which the respondent is
previously, this is reflected in DMO Proposed § 38.703 requires a Review alleged to have engaged; state the rule,
staff’s findings and recommendations in Panel to promptly review an or rules, alleged to have been violated;
recent RERs, in which DMO staff investigation report received pursuant and prescribe the period within which
recommended that DCMs increase their to proposed § 38.158(c). In addition, a a hearing on the charges may be
compliance staff levels and monitor the Review Panel must take action on any requested. Further, the notice must also
size of their staff and increase the investigation report received within 30 advise the respondent charged that he is
number of staff appropriately as trading days of such receipt. The Commission entitled, upon request, to a hearing on
volume increases, new responsibilities believes that prompt action by all the charges. Pursuant to paragraphs (a)
are assigned to compliance staff, or disciplinary panels is necessary for an and (b) of the proposed rule, the DCM
internal reviews demonstrate that work effective disciplinary program. Among may adopt rules providing that (1) the
is not completed in an effective or other considerations, prompt failure to request a hearing within the
timely manner. disciplinary action provides the best time prescribed in the notice, except for
Proposed § 38.701 also provides that a
opportunity for witnesses to recall good cause, may be deemed a waiver of
DCM’s enforcement staff may not
conversations, facts, and other the right to a hearing; and (2) the failure
include members of the exchange or
information relevant to the matter. In to answer or deny expressly a charge
persons whose interests conflict with
addition, prompt and effective may be deemed to be an admission of
their enforcement duties. Moreover, a
disciplinary action provides a clear such charge.
member of the enforcement staff may
signal to the market and to market
not operate under the direction or v. Proposed § 38.705—Right to
control of any person or persons with 132 Section 40.9(c)(3)(ii), as proposed in the
Representation
trading privileges at the contract market. separate release titled Requirements for Derivatives
These provisions seek to ensure the Clearing Organizations, Designated Contract
Proposed § 38.705 requires that, upon
independence of enforcement staff, and Markets, and Swap Execution Facilities Regarding being served with a notice of charges, a
help promote disciplinary procedures the Mitigation of Conflicts of Interest, provides that respondent must have the right to be
‘‘Each Disciplinary Panel shall include at least one represented by counsel or any other
that are free of potential conflicts of person who would not be disqualified from serving
interest. as a Public Director by § 1.3(ccc)(1)(i)–(vi) and (2)
representative of his choosing in all
of this chapter (a ‘‘Public Participant’’). Such Public succeeding stages of the disciplinary
ii. Proposed § 38.702—Disciplinary
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Participant shall chair each Disciplinary Panel. In process. Together with proposed
Panels addition, any registered entity specified in §§ 38.704 (requiring an adequate notice
paragraph (c)(3)(i) of this section shall adopt rules
Proposed § 38.702 requires a DCM to that would, at a minimum: (A) Further preclude any
of charges to the respondent), 38.708
establish one or more Review Panels group or class of participants from dominating or (conferring the right to hearing), and
and one or more Hearing Panels exercising disproportionate influence on a 38.710 (hearing procedures), 38.705 is
(together, ‘‘disciplinary panels’’) to fulfill Disciplinary Panel and (B) Prohibit any member of one of the primary proposed rules in
a Disciplinary Panel from participating in
its obligations under this section. The deliberations or voting on any matter in which the
subpart N that helps ensure basic
composition of both panels must meet member has a financial interest.’’ See 75 FR 63732, fairness for respondents in disciplinary
the composition requirements of Oct. 18, 2010. proceedings.

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80599

vi. Proposed § 38.706—Answer to ix. Proposed § 38.709—Settlement examine persons appearing as witnesses
Charges Offers at the hearing, and call witnesses and
Proposed § 38.709 provides the present evidence as may be relevant to
Proposed § 38.706 provides that a the charges; (5) the DCM must require
procedures a DCM must follow if it
respondent must be given a reasonable persons within its jurisdiction who are
permits the use of settlements to resolve
period of time to file an answer to a called as witnesses to participate in the
disciplinary cases. Section (a) of the
charge. In general, paragraphs (a) hearing and produce evidence; (6) a
proposed rule states that the rules of a
through (c) of the proposed rule provide DCM may permit a respondent to copy of the hearing must be made and
that the rules of the DCM may require submit a written offer of settlement any become a record of the proceeding if the
that: (1) The answer must be in writing respondent has requested a hearing; and
time after an investigation report is
and include a statement that the (7) the rules of the DCM may provide
completed. The disciplinary panel
respondent admits, denies or does not that the cost of transcribing the record
presiding over the matter may accept
have and is unable to obtain sufficient must be borne by a respondent who
the offer of settlement, but may not alter
information to admit or deny each requests a transcript. Additionally,
the terms of the offer unless the
allegation; (2) failure to file an answer proposed paragraph (b) specifies that
respondent agrees. In addition, Section
on a timely basis shall be deemed an the rules of the DCM may provide that
(b) of the proposed rule provides that
a sanction be summarily imposed upon
admission of all allegations in the notice the rules of the DCM may allow a
any person within its jurisdiction whose
of charges; and (3) failure in an answer disciplinary panel to permit the
actions impede the progress of a
to deny expressly a charge shall be respondent to accept a sanction without hearing.
deemed to be an admission of such admitting or denying the rule violations
charge. upon which the sanction is based. xi. Proposed § 38.711—Decisions
Section (c) of proposed § 38.709 states Proposed § 38.711 details the
vii. Proposed § 38.707—Admission or that a disciplinary panel accepting a procedures that a Hearing Panel must
Failure to Deny Charges settlement offer must issue a written follow in rendering disciplinary
Proposed § 38.707 provides that, if a decision specifying the rule violations it decisions. The proposed rule requires
has reason to believe were committed, that all decisions include: (1) A notice
respondent admits or fails to deny any
and any sanction imposed, including of charges or a summary of the charges;
of the violations alleged in a notice of
any order of restitution where customer (2) the answer, if any, or a summary of
charges, then a Hearing Panel may find
harm has been demonstrated. the answer; (3) a summary of the
that the violations admitted or not Importantly, Section (c) also provides
denied have in fact been committed. If evidence produced at the hearing or,
that if an offer of settlement is accepted where appropriate incorporation by
a DCM adopts a rule concerning the without the agreement of a DCM’s reference in the investigation report; (4)
admission or failure to deny charges, enforcement staff, the decision must a statement of findings and conclusions
then Sections (a) through (c) of the carefully explain the disciplinary with respect to each charge, and a
proposed rule provide that: (1) The panel’s acceptance of the settlement. careful explanation of the evidentiary
Hearing Panel must impose a sanction Finally, Section (d) of proposed § 38.709 and other basis for such findings and
for each violation found to have been allows a respondent to withdraw his or conclusions with respect to each charge;
committed; (2) the DCM must promptly her offer of settlement at any time before (5) an indication of each specific rule
notify the respondent in writing of any final acceptance by a disciplinary panel. with which the respondent was found to
sanction to be imposed and advise the If an offer is withdrawn after have violated; and (6) a declaration of
respondent that they may request a submission, or is rejected by a any penalty imposed against the
hearing on such sanction within the disciplinary panel, the respondent must respondent, including the basis for such
period of time stated in the notice; and not be deemed to have made any sanctions and the effective date of such
(3) the rules of the DCM may provide admissions by reason of the offer of sanctions.
that if the respondent fails to request a settlement and must not be otherwise
hearing within the period of time stated prejudiced by having submitted the xii. Proposed § 38.712—Right to Appeal
in the notice, then the respondent will offer of settlement. Proposed § 38.712 provides the
be deemed to have accepted the procedures that a DCM must follow in
x. Proposed § 38.710—Hearings the event that the DCM’s rules authorize
sanction.
Proposed § 38.710 requires a DCM to an appeal of adverse decisions in all or
viii. Proposed § 38.708—Denial of adopt rules that provide certain in certain classes of cases. Notably, the
Charges and Right to Hearing minimum requirements for any hearing proposed rule requires a DCM that
conducted pursuant to a notice of permits appeals by disciplinary
Proposed § 38.708 provides that in charges. In general, Sections (a)(1) respondents to also permit appeals by
every instance where a respondent has through (a)(7) of the proposed rule its enforcement staff. This provision
requested a hearing on a charge that he require the following requirements: reflects the Commission’s belief that
or she denies, or on a sanction set by the (1) A fair hearing; (2) authority for a DCM enforcement staff must have the
Hearing Panel pursuant to proposed respondent to examine evidence relied discretion to appeal disciplinary panel
§ 38.707, the respondent must be given on by enforcement staff in presenting decisions that, for example, do not
the opportunity for a hearing in
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the charges contained in the notice of adequately sanction a respondent’s

accordance with the requirements of charges; (3) the DCM’s enforcement and violative conduct.
proposed § 38.710. The DCM’s rules compliance staffs must be parties to the For DCMs that permit appeals, the
may provide that, except for good cause, hearing and the enforcement staff must language in paragraphs (a) through (d) of
the hearing must be concerned only present its case on those charges and proposed § 38.712 generally requires the
with those charges denied or sanctions sanctions that are the subject of the DCM to: (1) Establish an appellate panel
set by the Hearing Panel under proposed hearing; (4) the respondent must be that is authorized to hear appeals; (2)
§ 38.707 for which a hearing has been entitled to appear personally at the ensure that the appellate panel
requested. hearing, have the authority to cross- composition is consistent with

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 80600 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

§ 40.9(c)(iv) of the Commission’s xvi. Proposed § 38.716—Emergency codify the statutory text of the core
regulations and does not include any Disciplinary Actions principle in proposed § 38.800. The
members of the DCM’s compliance staff, Proposed § 38.716 provides that a applicable regulations implementing
or any person involved in adjudicating DCM may impose a sanction, including this core principle will be proposed in
any other stage of the same proceeding; a suspension, or take other summary a forthcoming rulemaking, expected to
(3) except for good cause shown, action against a person or entity subject be completed by the statutory deadline
conduct the appeal or review solely on to its jurisdiction upon a reasonable of July 15, 2011.135
the record before the Hearing Panel, the belief that such immediate action is 16. Subpart Q—Conflicts of Interest
written exceptions filed by the parties, necessary to protect the best interest of
and the oral or written arguments of the The Dodd-Frank Act redesignated
the marketplace. The proposed rule also
parties; and (4) issue a written decision current Core Principle 15 (Conflicts of
provides that any emergency action
of the board of appeals and provide a Interest) as Core Principle 16. However,
taken by the DCM must be in
copy to the respondent promptly in all other respects, Dodd-Frank did
accordance with certain procedural
following the appeal or review not substantively amend the core
safeguards that protect the respondent,
proceeding. principle. This release proposes to
including the right to be served with
codify the statutory text of the core
xiii. Proposed § 38.713—Final Decisions notice before the action is taken or
principle in proposed § 38.850. The
otherwise at the earliest possible
Proposed § 38.713 requires that each applicable regulations implementing
opportunity after action has been taken;
DCM establish rules setting forth when this core principle were proposed in a
the right to be represented by legal
a decision rendered under this subpart separate release titled ‘‘Requirements for
counsel in any proceeding subsequent
N will become the final decision of the Derivatives Clearing Organizations,
to the emergency disciplinary action;
DCM. Designated Contract Markets, and Swap
the right to a hearing as soon as
Execution Facilities Regarding the
xiv. Proposed § 38.714—Disciplinary reasonably practical; and the right to
Mitigation of Conflicts of Interest.’’ 136
Sanctions receive a written decision on the
summary action taken by the DCM. 17. Subpart R—Composition of
Proposed § 38.714 requires that every Governing Boards of Contract Markets
disciplinary sanction imposed by a 14. Subpart O—Dispute Resolution
The Dodd-Frank Act redesignated the
DCM must be commensurate with the Under the Dodd-Frank Act current
former Core Principle 16 (Composition
violations committed and must be Core Principle 13 is not substantively
of Governing Boards of Mutually Owned
clearly sufficient to deter recidivism or changed but it is renumbered as Core
Contract Markets) as Core Principle 17.
similar violations by other market Principle 14. This core principle
In addition, current Core Principle 16
participants. Additionally, the proposed governs the obligations of DCMs to
was amended by: (i) Changing the title
rule requires that, in the event of implement and enforce a dispute
of the core principle to ‘‘Composition of
demonstrated customer harm, any resolution program for their market
Governing Boards of Contract Markets’’;
disciplinary sanction must include full participants and market
and (ii) revising the scope of the core
customer restitution. In evaluating intermediaries.134 Currently,
principle such that it now requires the
appropriate sanctions, the proposed rule compliance with the core principle is
governance arrangements of all DCMs to
requires the DCM to take into account guided by application guidance and
be designed to permit the consideration
a respondent’s disciplinary history.133 acceptable practices in Appendix B of
of the views of market participants.137
part 38. Based upon the Commission’s
xv. Proposed § 38.715—Summary Fines This release proposes to codify the
experience over the last 10 years, this
for Violations of Rules Regarding statutory text of the core principle in
guidance has been successful in
Timely Submission of Records, proposed § 38.900. The applicable
enabling DCMs to structure the
Decorum, or Other Similar Activities regulations implementing this core
appropriate dispute resolution program
principle will be proposed in a
Proposed § 38.715 permits a DCM to for themselves. Accordingly, the
forthcoming rulemaking, which is
adopt a summary fine schedule for Commission proposes to maintain the
expected to be completed by the
violations of rules relating to timely guidance and acceptable practices,
statutory deadline of July 15, 2011.138
submission of accurate records required adding only clarifying changes that do
for clearing or verifying each day’s not revise the substantive obligations of 18. Subpart S—Recordkeeping
transactions, decorum, attire, or other DCMs with respect to this core The Dodd-Frank Act designated
similar activities. A DCM may authorize principle. current Core Principle 17
its compliance staff to summarily 15. Subpart P—Governance Fitness (Recordkeeping) as Core Principle 18. In
impose minor sanctions against persons Standards almost all respects, Dodd-Frank did not
within the DCM’s jurisdiction for substantively amend the Core Principle.
violating such rules. The proposed rule The Dodd-Frank Act redesignated
Under current Core Principle 17, DCMs
former current Core Principle 14 as Core
makes clear that a DCM should issue no
Principle 15. The language of this core
more than one warning letter in a rolling 135 See CFTC Web site for additional information
principle remains unchanged and on the ‘‘Governance Requirements for Derivatives
12-month period for the same violation
requires the DCM to establish and Clearing Organizations, Designated Contract
before sanctions are imposed. Markets, and Swap Execution Facilities, Additional
enforce appropriate fitness standards for
Additionally, the proposed rule
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Requirements Regarding the Mitigation of Conflicts

directors, members of any disciplinary
specifies that a summary fine schedule of Interest,’’ at [Link]
committee, members of the contract DoddFrankAct/Rulemakings/
must provide for progressively larger
market, and any other persons with DF_9_DCOGovernance/[Link] (last visited Dec.
fines for recurring violations. 14, 2010).
direct access to the facility (including
136 75 FR 63732, Oct. 18, 2010.
any parties affiliated with any of the 137 Former Core Principle 16, which applied only
133 Proposed § 38.158(c), which is being proposed
persons described in this core to mutually owned DCMs, required such DCMs to
as part of this release with respect to Core Principle
2, requires that a copy of a member or market principle). This release proposes to ensure that the composition of their governing
participant’s disciplinary history be included in the boards included market participants.
compliance staff’s investigation report. 134 17 CFR part 38, App. B. 138 See supra note 131.

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80601

are required to maintain records of all micrographic media, such as microfilm B to part 38 for purposes of
activities related to their business as or microfiche or any similar medium, or demonstrating to the Commission their
DCMs, in a form and manner acceptable electronic storage media as defined by compliance with the requirements of
to the Commission, ‘‘for a period of 5 § 1.31(b)(1)(ii).142 DCMs must, at all proposed § 38.1000.20.
years.’’ 139 The Commission adopted times, have the facilities to immediately
20. Subpart U—System Safeguards
acceptable practices for this core produce the micrographic media or
principle by stating that DCMs could electronic storage media images and be Proposed § 38.1051 establishes system
comply with the core principle by prepared to present legible hard-copy safeguards requirements for all DCMs,
complying with § 1.31 of the images of such records. Additionally, pursuant to new Core Principle 20
Commission’s regulations (‘‘§ 1.31’’). DCM’s must keep only Commission- added under the Dodd-Frank Act. Core
Section 1.31 establishes recordkeeping required records on the media, store a Principle 20, codified in § 38.1050
requirements for all books and records duplicate of the record at a separate requires DCMs to: (1) Establish and
required to be kept under the CEA, location, and organize and maintain an maintain a program of risk oversight to
whether by a DCM or otherwise and accurate index of all information identify and minimize sources of
requires that books and records be kept maintained on both the original and operational risk through the
‘‘for a period of 5 years.’’ 140 The duplicate storage media. DCMs that use development of appropriate controls
Commission proposes to maintain electronic storage media are also and procedures and the development of
compliance with § 1.31 as a primary required to develop and maintain an automated systems that are reliable,
component of compliance with this core audit system to track the initial entry of secure, and have adequate scalable
principle, and proposes to incorporate original or duplicate records and any capacity; (2) establish and maintain
the requirements in § 1.31 into proposed subsequent changes made thereafter. emergency procedures, backup
§ 38.951. Finally, proposed § 38.951 also facilities, and a plan for disaster
One notable change in the amended incorporates §§ 1.31(c) and 1.31(d). recovery that allow for the timely
core principle is that while current Core Section 1.31(c) of the Commission’s recovery and resumption of operations
Principle 17 requires that records be regulations requires record-keepers who and the fulfillment of the
retained for 5 years, the amended Core employ an electronic storage system to responsibilities and obligations of the
Principle (18) now requires that records certify with the Commission that the DCM; and (3) periodically conduct tests
be retained for ‘‘at least 5 years.’’ 141 system meets the requirements of an to verify that backup resources are
Accordingly, proposed § 38.951 permits electronic storage media as defined in sufficient to ensure continued order
the Commission to extend DCMs’ § 1.31(b)(1)(ii). Section 1.31(d) states processing and trade matching, price
recordkeeping requirements beyond the that trading cards, documents on which reporting, market surveillance, and
five years otherwise required of all trade information is originally recorded maintenance of a comprehensive and
entities by § 1.31, should it elect to do in writing, certain written orders, and accurate audit trail. The rules proposed
so. Thus, by its terms, the proposed rule paper copies of certain electronically under subpart U implement these
requires DCMs to ‘‘maintain records of filed forms and reports with original requirements.
all activities relating to the business of signatures must be retained in hard- Because automated systems play a
the contract market, in a form and copy for the requisite time period. The central and critical role in today’s
manner acceptable to the Commission, proposed rule also requires a DCM to electronic financial market
for a period of at least 5 years.’’ In comply with the requirements of environment, oversight of core principle
addition, DCMs must ‘‘maintain such proposed § 45.1—‘‘Swap Recordkeeping compliance by DCMs with respect to
records, including trade records and Requirements’’—if applicable to the automated systems is an essential part
investigatory and disciplinary files, in DCM. of effective oversight of both futures and
accordance with the requirements of 19. Subpart T—Antitrust Considerations swaps markets. Sophisticated computer
§ 1.31 [of the Commission’s systems are crucial to a DCM’s ability to
Current Core Principle 18 governs the meet its obligations and responsibilities.
regulations].’’ antitrust obligations of DCMs.143 The
By incorporating § 1.31, and more Safeguarding the reliability, security,
Dodd-Frank Act renumbered this core and capacity of such systems is also
specifically, by incorporating § 1.31(a), principle as Core Principle 19, but in all
proposed § 38.951 effectively requires essential to mitigation of systemic risk
other respects the statutory text of the for the nation’s financial sector as a
that DCMs’ books and records be readily core principle is the same. The
accessible for the first two years of the whole. This is particularly true in light
Commission believes that the existing of the fact that the over-the-counter
minimum five-year statutory period and guidance to this Core Principle remains
be open to inspection by any swaps market is estimated to have in
appropriate. Accordingly, other than to excess of $600 trillion in outstanding
representatives of the Commission or codify the statutory text of Core
the United States Department of Justice. contracts, roughly 40 times the gross
Principle 19 into the proposed domestic product of the United
The DCM, at its own expense, must § 38.1000, the Commission at this time
promptly provide either a copy or the States.144 The ability of DCMs to recover
is not proposing any amendments to the and resume trading promptly in the
original book or record upon request. relevant guidance under part 38.
Proposed § 38.951 also effectively event of a disruption of their operations
Proposed § 38.1001 refers applicants
incorporates current § 1.31(b)’s is highly important to the U.S. economy.
and DCMs to the guidance in Appendix
description of the permissible methods Ensuring the resilience of the automated
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of storing books and records. 142 Among other criteria, § 1.31(b)(1)(ii) defines systems of DCMs is a vitally important
Consequently, a DCM may store its electronic storage media as ‘‘any digital storage
medium or system that preserves the records 144 These figures derived from Bank for
books and records on either
exclusively in a non-rewritable, non-erasable format International Settlements, BIS Quarterly Review,
[and] verifies automatically the quality and June 2010, Page A121, Table 19 at http://
139 See7 U.S.C. 7(d)(17). accuracy of the storage media recording process [Link]/statistics/otcder/[Link].; see also,
140 17CFR 1.31(a)(1). * * *.’’ Bureau of Economic Analysis news release, BEA
141 Compare 7 USC 7(d)(17) with Section 5(d)(18) 143 Part 38 contains guidance governing 10–47, issued September 30, 2010 at http://
of the CEA as amended by the Dodd-Frank Act compliance with Core Principle 18. 17 CFR part 38, [Link]/newsreleases/national/gdp/
(emphasis added). App. B. [Link].

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 80602 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

part of the Commission’s mission, and plans of relevant telecommunications, least one year from any particular point
will be crucial to the robust and power, water, and other essential in time. The one year period is required
transparent systemic risk management service providers. under the amended core principle, and
framework established by the Dodd- the Commission considers one year an
21. Subpart V—Financial Resources
Frank Act. DCM compliance with appropriate timeframe given the
generally accepted standards and best The Dodd-Frank Act added new Core potential need to allow contracts to
practices with respect to the Principle 21. This core principle expire and to allow the DCM’s business
development, operation, reliability, requires that a DCM must have adequate to wind down in an orderly fashion. The
security and capacity of automated financial resources to discharge its Commission believes that this
systems can reduce the frequency and responsibilities. The new core principle requirement will provide a clear
severity of automated system security also requires that boards of trade must baseline for financial resources, thus
breaches or functional failures, thereby maintain financial resources sufficient enhancing the financial integrity of the
augmenting efforts to mitigate systemic to cover operating costs for a period of markets.146
risk. Notice to the Commission at least one year, calculated on a rolling The one-year period also is consistent
concerning systems malfunctions, basis. with established accounting standards,
systems security incidents, or any The Commission notes that a DCM is under which an entity’s ability to
events leading to the activation of a the first entity in the trading process to continue as a going concern comes into
DCM’s business continuity-disaster ensure that trading occurs in a liquid, question if there is evidence that the
recovery (‘‘BC–DR’’) plan will assist the fair, and financially secure trading entity may be unable to continue to
Commission’s oversight and its ability facility. For instance, a DCM must have, meet its obligations in the next 12
to assess systemic risk levels. It would among other things, adequate trade months without substantial disposition
practice and market surveillance, of assets outside the ordinary course of
present unacceptable risks to the U.S.
disciplinary, recordkeeping, and business, restructuring of debt,
financial system if futures and swaps
alternate dispute resolution programs in externally forced revisions of its
markets that comprise critical
place in order to comply with the operations, or similar actions.147
components of the world financial
relevant core principles. In order to
system were to become unavailable for ii. Proposed § 38. 1101(b)—Types of
fulfill these responsibilities, a DCM
an extended period of time for any Financial Resources
must have appropriate minimum
reason, and adequate system safeguards
financial resources on hand and on an Under proposed § 38.1101(b),
are crucial to mitigation of such risks.
ongoing basis to sustain operations for financial resources available to DCMs to
Based on the aforementioned, the a reasonable period of time. satisfy the applicable financial
rules proposed under § 38.1051 would Furthermore, DCMs must have requirements would include the DCM’s
require a DCM’s program of risk analysis sufficient resources at any given time to own capital (assets in excess of
and oversight to address five categories allow them, if necessary, to close out liabilities) and any other financial
of risk analysis and oversight, including trading in a manner not disruptive to resource deemed acceptable by the
information security; BC–DR planning the market. Commission. A DCM would be able to
and resources, capacity and Proposed § 38.1101 sets out financial request an informal interpretation from
performance planning; systems resource requirements for DCMs, to Commission staff on whether a
operations; systems development and implement new Core Principle 21. particular financial resource would be
quality assurance; and physical security Under proposed § 38.1101, DCMs that acceptable to the Commission. The
and environmental controls. The also operate as DCOs are also subject to Commission invites commenters to
proposed rules specifically would the financial resource requirements for recommend particular financial
require each DCM to maintain a BC–DR DCOs in proposed § 39.11.145 resources for inclusion in the final
plan and BC–DR resources sufficient to regulation.
enable resumption of trading and of all i. Proposed § 38.1101 (a)—General
Requirements iii. Proposed § 38.1101(c)—Computation
of the responsibilities and obligations of
the DCM during the next business day Proposed § 38.1100 recites the of Financial Resource Requirement
following any disruption of its language of Core Principle 21, as set Proposed § 38.1101(c) would require a
operations, either through sufficient forth in Section 5(d)(21) of the CEA, as DCM at the end of each fiscal quarter to
infrastructure and personnel resources amended by the Dodd-Frank Act. make a reasonable calculation of the
of its own or through sufficient Proposed § 38.1101(a)(1) and (3) would financial resources it needs to meet the
contractual arrangements with other require DCMs to maintain sufficient
DCMs or disaster recovery service financial resources to cover operating 146 Some foreign regulatory authorities already

providers. The proposed rules also costs for at least one year, calculated on have similar requirements for the equivalent
a rolling basis—i.e., at all times. The entities they regulate. For example, the UK
would require each DCM to notify Financial Services Authority’s (‘‘FSA’’) recognition
Commission staff of various system DCM must have sufficient financial requirements for UK recognized investment
security-related events; to provide resources to cover operating costs for at exchanges and UK recognized clearing houses
relevant documents to the Commission; (collectively, ‘‘UK recognized bodies’’) include the
145 Commission regulation § 39.11 establishes maintenance of financial resources sufficient to
and to conduct regular, periodic, ensure that the UK recognized body would be able
requirements that a DCO will have to meet in order
objective testing and review of its to comply with DCO Core Principle B (Financial to complete an orderly closure or transfer of its
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automated systems. Moreover, the Resources), as amended by the Dodd-Frank Act. business without being prevented from doing so by
proposed rules would require each Amended Core Principle B requires a DCO to insolvency or lack of available funds. Section 2.3.7
possess financial resources that, at a minimum, of the FSA Recognition Requirements calls for a UK
DCM, to the extent practicable, to exceed the total amount that would enable the DCO recognized body to have at all times liquid financial
coordinate its BC–DR plan with those of to meet its financial obligations to its clearing assets amounting to at least six months’ operating
the members and market participants members notwithstanding a default by the clearing costs and net capital of at least that amount.
member creating the largest financial exposure for 147 See American Institute of Certified Public
upon whom it depends to provide
the DCO in extreme but plausible conditions; and Accountants Auditing Standards Board Statement
liquidity, to initiate coordinated testing enable the DCO to cover its operating costs for a of Auditing Standards No. 59, The Auditor’s
of such plans, and to take into account period of 1 year, as calculated on a rolling basis. Consideration of an Entity’s Ability to Continue as
in its own BC–DR plan, the BC–DR See 75 FR 63113, Oct. 14, 2010. a Going Concern, as amended.

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80603

requirements of proposed § 38.1101(b). of credit or similar facility to meet the 23. Subpart X—Securities and Exchange
In the first instance, the DCM would liquidity requirements set forth in Commission
have reasonable discretion in proposed § 38.1101(e). The Dodd-Frank Act added new Core
determining a methodology it uses to Principle 23, requiring that DCMs keep
make the calculation. However, the vi. Proposed § 38.1101(f)—Reporting
Requirements any records relating to swaps defined in
Commission may review the CEA Section 1a(47)(A)(v), as amended
methodology and require changes as Under proposed § 38.1101(f), at the by the Dodd-Frank Act, open to
appropriate. end of each fiscal quarter, or at any time inspection and examination by the
iv. Proposed § 38.1101(d)—Valuation of upon Commission request, DCMs would Securities and Exchange Commission
Financial Resources be required to report to the Commission: (‘‘SEC’’).150 Consistent with the text of
(i) the amount of financial resources this core principle, the Commission
Proposed § 38.1101(d) would require proposes guidance under part 38 that
necessary to meet the requirements set
DCMs, no less frequently than at the end provides that each DCM should have
forth in the regulation; and (ii) the value
of each fiscal quarter, to calculate the arrangements and resources for
of each financial resource available to
current market value of each financial collecting and maintaining accurate
resource used to meet their obligations meet those requirements. A DCM would
also have to provide the Commission records pertaining to any swap
under these proposed rules. agreements defined in section
Additionally, the DCMs would be with a financial statement, including the
balance sheet, income statement, and 1a(47)(A)(v) of the amended CEA.
required to perform the valuation at Proposed § 38.1201 refers applicants
other times as appropriate. This statement of cash flows, of the DCM or
of its parent company (if the DCM does and DCMs to the guidance in Appendix
provision is designed to address the B to part 38 for purposes of
need to update valuations in not have an independent financial
statement and the parent company’s demonstrating to the Commission their
circumstances where there may have compliance with the requirements of
been material fluctuations in market financial statement is prepared on a
Proposed § 38.1200, which codifies the
value that could impact a DCM’s ability consolidated basis).
text of the core principle.
to meet its obligations on a rolling basis Proposed § 38.1101(f) requires a DCM
as required by proposed § 38.1101(a). to provide the Commission with III. Related Matters
When valuing a financial resource, a sufficient documentation that explains A. Regulatory Flexibility Act
DCM would be required to reduce the the methodology it used to calculate its
The Regulatory Flexibility Act
value, as appropriate, to reflect any financial requirements and the basis for (‘‘RFA’’) 151 requires Federal agencies, in
market or credit risk specific to that its determinations regarding valuation promulgating rules, to consider the
particular resource, i.e., apply a and liquidity. The DCM also must impact of those rules on small entities.
haircut.148 The Commission would provide copies of any agreements The rules adopted herein will affect
permit each DCM to exercise its establishing or amending a credit designated contract markets. The
discretion in determining the applicable facility, insurance coverage, or any Commission has previously established
haircuts. However, such haircuts are similar arrangement that evidences or certain definitions of ‘‘small entities’’ to
subject to Commission review and must otherwise supports its conclusions. The be used by the Commission in
be acceptable to the Commission. sufficiency of the documentation would evaluating the impact of its rules on
be determined by the Commission in its small entities in accordance with the
v. Proposed § 38.1101(e)—Liquidity of
sole discretion. The DCM would have RFA.152 The Commission previously
Financial Resources
17 business days 149 from the end of the determined that designated contract
Proposed § 38.1101(e) would require fiscal quarter to file the report, but markets are not small entities for the
DCMs to maintain unencumbered liquid would also be able to request an purpose of the RFA.153 Therefore, the
financial assets, such as cash or highly extension of time from the Commission. Chairman, on behalf of the Commission,
liquid securities, equal to at least six pursuant to 5 U.S.C. 605(b) certifies that
The Commission invites comments on
months’ operating costs. The the proposed rules will not have a
all these proposed rules relating to
Commission believes that having six significant economic impact on a
requirements for financial resources for
months’ worth of unencumbered liquid substantial number of small entities.
DCMs.
financial assets would give a DCM time
to liquidate the remaining financial 22. Subpart W—Diversity of Boards of B. Paperwork Reduction Act
assets it would need to continue Directors This proposed rulemaking contains
operating for the last six months of the information collection requirements.
required one-year period. If a DCM does The Dodd-Frank Act added new Core The Paperwork Reduction Act (PRA) 154
not have six months’ worth of Principle 22, requiring that publicly imposes certain requirements on
unencumbered liquid financial assets, it traded DCMs must endeavor to recruit Federal agencies in connection with
would be allowed to use a committed individuals to serve on their board of their conducting or sponsoring any
line of credit or similar facility to satisfy directors from among a broad and collection of information as defined by
this requirement. culturally diverse pool of qualified the PRA. An agency may not conduct or
The Commission notes that a candidates. This release proposes to sponsor, and a person is not required to
committed line of credit or similar codify the statutory text of the core respond to, a collection of information
srobinson on DSKHWCL6B1PROD with PROPOSALS2

facility is not listed in proposed principle in proposed § 38.1150. This unless it displays a currently valid
§ 38.1101(b) as a financial resource core principle will be addressed in a control number. The Commission is
available to a DCM to satisfy the forthcoming release that is expected to
requirements of proposed § 38.1101(a). be completed by the statutory deadline 150 7 U.S.C. 7; see also Section 5(d)(23) of the

A DCM may only use a committed line of July 15, 2011. CEA, as amended by the Dodd-Frank Act.
151 5 U.S.C. 601 et seq.

148 A ‘‘haircut’’ is a deduction taken from the 149 This filing deadline is consistent with the 152 47 FR 18618–21, Apr. 30, 1982.
153 Id.
value of an asset to reserve for potential future deadline imposed on FCMs for the filing of monthly
adverse price movements in such asset. financial reports. See 17 CFR 1.10(b). 154 44 U.S.C. 3501 et seq.

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 80604 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

proposing to amend Collection 3038– Futures Modernization Act of 2000,159 2. Information Collection Comments
0052 to allow for an increase in Commission staff believes that the Copies of the submission from the
response hours for the proposed response time for designation and Commission to OMB are available by
rulemaking amending part 38, which compliance would generally increase by visiting [Link]. The Commission
captures associated proposed 10% with the implementation of swaps will consider public comments on this
amendments to rules 1.52 and 16.01, as trading on designated contract markets proposed collection of information in:
required under the Dodd-Frank Act.155 pursuant to Section 723(a)(3) of the (1) Evaluating whether the proposed
The Commission therefore is submitting Dodd-Frank Act and the addition of new collection of information is necessary
this proposal to the Office of core principles with which designated for the proper performance of the
Management and Budget (OMB) for its contract markets must comply. functions of the Commission, including
review in accordance with 44 U.S.C. Commission staff estimates that it whether the information will have a
3507(d) and 5 CFR 1320.11. The title for would receive filings from 17 practical use;
this collection is ‘‘Part 38—Designated respondents.160 Accordingly, the (2) Evaluating the accuracy of the
Contract Markets’’ (OMB Control additional burden in terms of hours estimated burden of the proposed
number 3038–0052). Responses to this would be 30 additional hours per collection of information, including the
collection of information would be respondent and 510 additional hours degree to which the methodology and
mandatory. The Commission will annually for all respondents for the assumptions that the Commission
protect proprietary information designation and compliance. employed were valid;
according to the Freedom of Information In addition to the general increase (3) Enhancing the quality, utility, and
Act (FOIA) and 17 CFR part 145, noted above, pursuant to the proposed clarity of the information proposed to be
‘‘Commission Records and Information.’’ rulemaking, respondents are subject to collected; and
In addition, section 8(a)(1) of the CEA new Core Principle 21 (Financial (4) Minimizing the burden of the
strictly prohibits the Commission, Resources) that requires the respondent proposed information collection
unless specifically authorized by the to have adequate financial, operational requirements on designated clearing
Act, from making public ‘‘data and and managerial resources.161 In order to organizations, designated contract
information that would separately demonstrate compliance with Core markets, and swap execution facilities,
disclose the business transactions or Principle 21, each respondent will need including through the use of appropriate
market positions of any person and to file specific reports to the automated, electronic, mechanical, or
trade secrets or names of customers.’’ 156 Commission on a quarterly basis, which other technological information
The Commission is also required to would result in four quarterly responses collection techniques, e.g., permitting
protect certain information contained in per respondent per year. Commission electronic submission of responses.
a government system of records staff estimates that each respondent Organizations and individuals
according to the Privacy Act of 1974.157 would expend 10 hours to prepare each desiring to submit comments on the
1. Additional Information Provided by filing required under the proposed proposed information collection
Designated Contract Markets regulations. As noted above, requirements should contact the Office
Commission staff estimates that it of Information and Regulatory Affairs,
The proposed rules require each would receive filings from 17 Office of Management and Budget, by
respondent to file information with the respondents. Accordingly, the fax at (202) 395–6566 or by e-mail at
Commission. For instance, contract additional burden in terms of hours OIRAsubmission@[Link]. Please
markets must file applications and would be 40 additional hours annually provide the Commission with a copy of
supporting documents and information per respondent and 680 additional submitted comments so that they may
with the Commission for designation hours annually for all respondents to be summarized and addressed in the
pursuant to Commission rule 38.3. comply with Core Principle 21. final rulemaking. Refer to the Addresses
Designated contract markets must either Commission staff estimates that section of this notice of proposed
request approval or certify rules and respondents could expend up to an rulemaking for comment submission
products with the Commission pursuant additional $3,640 annually based on an instructions to the Commission.
to Commission rule 38.4. Designated hourly wage rate of $52 (30 hours + 40 OMB is required to make a decision
contract markets must disclose hours × $52) to comply with the concerning the proposed information
information related to prices, volume, proposed rules. This would result in an collection requirements between 30 and
open interest and certain trading aggregated additional cost of $61,880 60 days after publication of this Release
information pursuant to Core Principle per annum (17 respondents × $3,640). in the Federal Register. Therefore, a
8 (Daily Publication of Trading OMB Control Number 3038–005. comment to OMB is best assured of
Information).158
Estimated Number of Respondents: receiving full consideration if OMB
Commission staff previously
17. receives it within 30 days of publication
estimated 300 hours average response
Quarterly Responses by Each of this Release. Nothing in the foregoing
time from each respondent for this
Respondent: 4. affects the deadline enumerated above
collection of information for designation
Total Quarterly Responses by Each for public comment to the Commission
and compliance purposes pursuant to
Respondent: 68. on the proposed rules.
part 38. Based on its experience with
administering registered entities’ Estimated Additional Average Hours C. Cost Benefit Analysis
srobinson on DSKHWCL6B1PROD with PROPOSALS2

submission requirements since per Response: 70.

Aggregate Annual Hourly Reporting Section 15(a) of the CEA 162 requires
implementation of the Commodity that the Commission consider the costs
Burden: 1190.
155 Dodd Frank Wall Street Reform and Consumer
and benefits of its actions before issuing
Protection Act, Public Law 111–203, 124 Stat. 1376 159 Public
a regulation under the Act. By its terms,
Law 106–554, 114 Stat. 2763 (2000).
(2010). 160 The number of designated contract markets
Section 15(a) does not require the
156 7 U.S.C. 12.
increased from 13 to 17 since the last amendment Commission to quantify the costs and
157 5 U.S.C. 552a. to Collection 3038–0052.
158 See Section 735(b) of the Dodd-Frank Act. 161 See section 735(b) of the Dodd-Frank Act. 162 7 U.S.C. 19(a).

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80605

benefits of a new rule or determine of stability in the broader financial market participants with the ability to
whether the benefits of the rulemaking markets. The public would continue to trade standardized swaps openly and
outweigh its costs; rather, Section 15(a) be at risk to such financial instability if competitively additionally will provide
requires the Commission to ‘‘consider’’ certain derivatives were allowed to market participants with enhanced price
the costs and benefits of its actions. trade over the counter rather than on transparency resulting in greater
Section 15(a) of the CEA further regulated exchanges. Designated protection of market participants and
specifies that costs and benefits shall be contract markets that determine to list the public.
evaluated in light of five broad areas of swaps for trading will be subject to core
market and public concern: principles for trading of swaps just as The proposed regulations also require
(1) Protection of market participants and they are for futures contracts. If swaps DCMs that determine to list swaps for
the public; (2) efficiency, were allowed to continue to be trading will have to coordinate with
competitiveness, and financial integrity transacted bilaterally, rather than on the DCOs so that the swaps may be listed
of futures markets; (3) price discovery; centralized market of a DCM, price swaps for clearing. This will subject the
(4) sound risk management practices; discovery and transparency in the swaps to the DCO’s risk management
and (5) other public interest swaps markets would continue to be and margining procedures, which
considerations. Accordingly, the inhibited. addresses the consideration of sound
Commission could, in its discretion, Under the proposed rulemaking, risk management practices and will add
give greater weight to any one of the five designated contract markets will be to the financial integrity of the swaps
considerations and could, in its required to comply with five additional markets.
discretion, determine that, core principles for trading futures and
notwithstanding its costs, a particular option contracts. Moreover, designated The proposed regulations eliminate
rule was necessary or appropriate to contract markets that determine to list all of the existing eight designation
protect the public interest or to standardized swaps for trading will be criteria and incorporate those criteria
effectuate any of the provisions or to required to comply with the same core into various existing DCM core
accomplish any of the purposes of the principles as for trading futures principles. The proposed regulations
CEA. contracts. These procedures are additionally implement five new core
mandatory pursuant to the Dodd-Frank principles, specifically Core Principle
Summary of Proposed Requirements 13 (Disciplinary Procedures), Core
Act and any additional costs associated
The proposed rulemaking would with these procedures are required by Principle 20 (System Safeguards), Core
change the criteria applicants for the implementation of the Dodd-Frank Principle 21 (Financial Resources), Core
designation as a contract market must Act. The Commission is also proposing Principle 22 (Diversity of Boards of
meet by: (1) Eliminating all of the to replace guidance and acceptable Directors), and Core Principle 23
existing eight designation criteria and practices associated with certain core (Securities and Exchange Commission).
incorporating those criteria into various principles with regulations. While these The proposed rules also modify existing
DCM core principles; (2) revising, in new regulations generally codify core principles. For example, newly
some instances, the wording of the 18 existing industry practice, bringing their amended Core Principle 9 (Execution of
pre-existing DCM core principles; and procedures into full compliance with Transactions) requires the board of trade
(3) adding five additional DCM core these new regulations may impose some to provide a competitive, open and
principles. In addition to revising the costs on DCMs. efficient market and mechanism for
DCM core principles, the Dodd-Frank Regarding new applications for executing transactions that protects the
Act requires that the trading or designation as a contract market, the
price discovery process of trading in the
processing of clearable swaps must Commission is proposing several
centralized market. These changes will
occur only on a registered DCM or procedural changes, including the
benefit the public by further enhancing
SEF.163 This rulemaking will elimination of the expedited approval
implement, in part 38 of the procedures, such that the timing of such the transparency and integrity of futures
Commission’s regulations, these reviews would be governed only by the and options markets as well as swap
amended provisions of the Act relevant 180-day statutory review period. This markets on DCMs.
to DCMs. Specific provisions include a may impose costs on DCM applicants Further, the Commission proposes to
proposal to replace guidance and that may have to wait longer for replace guidance and acceptable
acceptable practices associated with designation than under current practices associated with certain core
certain core principles with regulations. procedures. However, in light of the principles with regulations. This will
The Commission also is proposing difficulties in submitting a complete have the benefit to DCMs and the public
several procedural changes for new application under the expedited of providing greater regulatory certainty.
applications for designation as a procedures, few DCMs have been Finally the changes to the procedures
contract market, including the eligible for designation under the for applying for contract market
elimination of the expedited approval expedited procedures, so these costs designation will benefit new applicants
procedures and the creation of a DCM should be limited. by improving the workability and
application form. Under the proposal, Benefits efficiency of the application process.
the timing of reviews of designation
applications would be governed only by The Commission believes that the Public Comment
srobinson on DSKHWCL6B1PROD with PROPOSALS2

the 180-day statutory review period. benefits of the rulemaking are

significant. The proposed regulations The Commission invites public
Costs provide for the transacting of swaps on comment on its cost-benefit
As highlighted by recent events in the DCMs. DCMs will compete with swap considerations. Commenters are also
global credit markets, transacting of execution facilities to list new invited to submit any data or other
swaps in unregulated, over-the-counter standardized swaps contracts, while information that they may have
markets does not contribute to the goal certain customized swaps will continue quantifying or qualifying the costs and
to transact bilaterally. This competition benefits of the Proposal with their
163 See section 723 of Dodd-Frank Act. will benefit the marketplace. Providing comment letters.

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 80606 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

IV. Text of Proposed Rules Securities Exchange Act of 1934, Part II, assess compliance with self-regulatory
Part IIA, or Part II CSE, in lieu of Form and Commission requirements.
List of Subjects
1–FR. The definition of adjusted net (4) On-site examinations. (i) A self-
17 CFR Part 1 capital must be the same as that regulatory organization must conduct
Commodity futures, Designated prescribed in § 1.17(c) of this chapter for routine periodic on-site examinations of
contract markets, Minimum financial futures commission merchants and member registrants. Member futures
requirements for intermediaries, introducing brokers, and § 5.7(b)(2) of commission merchants and retail
Reporting and recordkeeping this chapter for futures commission foreign exchange dealers must be
requirements. merchants offering or engaging in retail subject to on-site examinations no less
forex transactions and for retail foreign frequently than once every eighteen
17 CFR Part 16 exchange dealers. months. A self-regulatory organization
Commodity futures, Reporting and (b) Each self-regulatory organization may establish a risk-based method of
Recordkeeping requirements. must establish and operate a establishing the scope of each on-site
supervisory program for the purpose of examination, provided however, that the
17 CFR Part 38
assessing whether each member scope of each on-site examination of a
Block transaction, Commodity registrant is in compliance with the futures commission merchant or retail
futures, Designated contract markets, applicable self-regulatory organization foreign exchange dealer must include an
Reporting and Recordkeeping and Commission rules and regulations assessment of whether the registrant is
requirements, Transactions off the governing minimum net capital and in compliance with applicable
centralized market. related financial requirements, the Commission and self-regulatory
For the reasons stated in the obligation to segregate customer funds, organization minimum capital and
preamble, and under the authority of 7 financial reporting requirements, customer fund protection requirements,
U.S.C. 1, et seq., the Commodity Futures recordkeeping requirements, and sales recordkeeping, and reporting
Trading Commission proposes to amend practice and other compliance requirements.
17 CFR parts 1, 16 and 38 as follows: requirements. The supervisory program (ii) A self-regulatory organization
also must address the following must establish the frequency of on-site
PART 1—GENERAL REGULATIONS elements:
UNDER THE COMMODITY EXCHANGE examinations of member introducing
(1) Adequate levels and independence brokers that do not operate pursuant to
ACT of audit staff. A self-regulatory guarantee agreements with futures
1. Revise the authority citation for organization must maintain staff of an commission merchants or retail foreign
part 1 to read as follows: adequate size, training, and experience exchange dealers using a risk-based
to effectively implement a supervisory approach, provided however, that each
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f,, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, program. Staff of the self-regulatory introducing broker is subject to an on-
6p, 7, 7a–2, 7b, 8, 9, 12, 12a, 12c, 13a, organization, including officers, site examination no less frequently than
13a–1, 16, 19, 21, 23 and 24, as amended by directors and supervising committee once every three years.
Pub. L. No. 111–203, 124 Stat 1376. members, must maintain independent
(iii) A self-regulatory organization
judgment and its actions must not
§ 1.38 [Removed and Reserved] must conduct on-site examinations of
impair its independence nor appear to
2. Remove and reserve § 1.38. member registrants in accordance with
impair its independence in matters
3. Revise § 1.52 to read as follows: uniform audit programs and procedures
related to the supervisory program. The
that have been submitted to the
§ 1.52 Self-regulatory organization self-regulatory organization must
Commission.
adoption and surveillance of minimum provide annual ethics training to all
financial requirements. staff with responsibilities for the (5) Adequate documentation. A self-
(a) Each self-regulatory organization supervisory program. regulatory organization must adequately
must adopt rules prescribing minimum (2) Ongoing surveillance. A self- document all aspects of the operation of
financial and related reporting regulatory organization’s ongoing the supervisory program, including the
requirements for members who are surveillance of member registrants must conduct of risk-based scope setting and
registered futures commission include the review and analysis of the risk-based surveillance of high-risk
merchants, registered retail foreign financial reports and regulatory notices member registrants, and the imposition
exchange dealers, or registered filed by member registrants with the of remedial and punitive action(s) for
introducing brokers. The self-regulatory designated self-regulatory organization. material violations.
minimum financial and related (3) High-risk firms. A self-regulatory (c) Any two or more self-regulatory
reporting requirements must be the organization’s supervisory program organizations may file with the
same as, or more stringent than, the must include procedures for identifying Commission a plan for delegating to a
requirements contained in §§ 1.10 and member registrants that are determined designated self-regulatory organization,
1.17 of this chapter, for futures to pose a high degree of potential for any registered futures commission
commission merchants and introducing financial risk, including the potential merchant, retail foreign exchange
brokers, and §§ 5.7 and 5.12 of this risk of loss of customer funds. High-risk dealer, or introducing broker that is a
chapter for retail foreign exchange member registrants must include firms member of more than one such self-
regulatory organization, the
srobinson on DSKHWCL6B1PROD with PROPOSALS2

dealers; Provided, however, a self- experiencing financial or operational

regulatory organization may permit its difficulties, failing to meet segregation responsibility of:
member registrants that are registered or net capital requirements, failing to (1) Monitoring and auditing for
with the Securities and Exchange maintain current books and records, or compliance with the minimum financial
Commission as securities brokers or experiencing material inadequacies in and related reporting requirements
dealers to file (in accordance with internal controls. Enhanced monitoring adopted by such self-regulatory
§ 1.10(h) of this chapter) a copy of their for high risk firms should include, as organizations and the Commission in
Financial and Operational Combined appropriate, daily review of net capital, accordance with paragraphs (a) and (b)
Uniform Single Report under the segregation, and secured calculations, to of this section; and

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80607

(2) Receiving the financial reports § 1.52(g), a self-regulatory organization Authority: 7 U.S.C. 2, 6a, 6c, 6g, 6i, and
necessitated by such minimum financial relieved of responsibility must notify 7, and 7b–3, as amended by Pub. L. 111–203,
and related reporting requirements. each of its members that are subject to 124 Stat. 1376.
(d) Any plan filed under this section such a plan: 5. The heading for part 16 is revised
may contain provisions for the (1) Of the limited nature of its to read as set forth above.
allocation of expenses reasonably responsibility for such a member’s 6. Revise § 16.01 to read as follows:
incurred by the designated self- compliance with its minimum financial
regulatory organization among the self- and related reporting requirements; and § 16.01 Publication of market data on
regulatory organizations participating in (2) Of the identity of the designated futures, swaps and options thereon:
Trading volume, open contracts, prices, and
such a plan. self-regulatory organization that has critical dates.
(e) A plan’s designated self-regulatory been delegated responsibility for such a
organization must report to: member. (a) Trading volume and open
(1) That plan’s other self-regulatory (i) The Commission may at any time, contracts. (1) Each reporting market, as
organizations any violation of such after appropriate notice and opportunity defined in part 15 of this chapter, must
other self-regulatory organizations’ rules for hearing, withdraw its approval of record for each business day the
and regulations for which the any plan, or part thereof, established following information separately:
responsibility to monitor, audit or under this section, if such plan, or part (i) For futures, by commodity and by
examine has been delegated to such thereof, ceases to adequately effectuate futures expiration date;
designated self-regulatory organization the purposes of Section 4f(b) of the Act (ii) For options by underlying futures
under this section; and or of this section. contracts for options on futures
(2) The Commission any violation of (j) Whenever a registered futures contracts or by underlying physical for
a self-regulatory organization’s rules and commission merchant, a registered retail options on physicals, and by put, by
regulations or any violation of the foreign exchange dealer, or a registered call, by expiration date and by strike
Commission’s regulations for which the introducing broker holding membership price;
responsibility to monitor, audit or in a self-regulatory organization ceases (iii) For swaps or class of swaps, by
examine has been delegated to such to be a member in good standing of that product type and by term life of the
designated self-regulatory organization self-regulatory organization, such self- swap; and
under this section. (iv) For swaptions or class of
regulatory organization must, on the
(f) The self-regulatory organizations swaptions, by underlying swap
same day that event takes place, give
may, among themselves, establish contracts for options on swap contracts
electronic notice of that event to the
programs to provide access to any or by underlying physical for swaptions
Commission at its Washington, DC,
necessary financial or related on physicals, and by put, by call, by
headquarters and send a copy of that
information. expiration date and by strike price.
notification to such futures commission
(g) After appropriate notice and (2) Volume for swaps and swaptions
merchant, retail foreign exchange
opportunity for comment, the shall be reported in terms of contracts
dealer, or introducing broker.
Commission may, by written notice, for standard-sized contracts (i.e.,
(k) Nothing in this section shall
approve such a plan, or any part of the contracts with a set contract size for all
preclude the Commission from
plan, if it finds that the plan, or any part contracts) or in terms of notional value
examining any futures commission
of it: for non-standard-sized contracts (i.e.,
merchant, retail foreign exchange
(1) Is necessary or appropriate to serve contracts whose contract size is not set
dealer, or introducing broker for
the public interest; and can vary for each transaction):
compliance with the minimum financial
(2) Is for the protection and in the (i) The option delta, where a delta
and related reporting requirements to
interest of customers or option system is used;
which such futures commission
customers; (ii) The total gross open contracts for
merchant, retail foreign exchange
(3) Reduces multiple monitoring and futures, excluding those contracts
dealer, or introducing broker is subject.
multiple auditing for compliance with against which delivery notices have
(l) In the event a plan is not filed and/
the minimum financial rules of the self- been stopped;
or approved for each registered futures
regulatory organizations submitting the (iii) For futures products that specify
commission merchant, retail foreign
plan of any futures commission delivery, open contracts against which
exchange dealer, or introducing broker
merchant, retail foreign exchange delivery notices have been issued on
that is a member of more than one self-
dealer, or introducing broker that is a that business day;
regulatory organization, the Commission
member of more than one self-regulatory (iv) The total volume of trading,
may design and, after notice and
organization; excluding transfer trades or office
opportunity for comment, approve a
(4) Reduces multiple reporting of the trades;
plan for those futures commission
financial information necessitated by (v) The total volume of futures/
merchants, retail foreign exchange
such minimum financial and related options/swaps/swaptions exchanged for
dealers, or introducing brokers that are
reporting requirements by any futures commodities or for derivatives positions
not the subject of an approved plan
commission merchant, retail foreign that are included in the total volume of
(under paragraph (g) of this section),
exchange dealer, or introducing broker trading; and
delegating to a designated self-
that is a member of more than one self- (vi) The total volume of block trades
regulatory organization the
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regulatory organization; included in the total volume of trading.

responsibilities described in paragraph (b) Prices. (1) Each reporting market
(5) Fosters cooperation and
(c) of this section. must record the following information
coordination among the self-regulatory
organizations; and PART 16—REPORTS BY CONTRACT separately:
(6) Does not hinder the development MARKETS AND SWAP EXECUTION (i) For futures, by commodity and by
of a registered futures association under FACILITIES futures expiration,
Section 17 of the Act. (ii) For options, by underlying futures
(h) After the Commission has 4. The authority citation for part 16 is contracts for options on futures
approved a plan, or part thereof, under revised to read as follows: contracts or by underlying physical for

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 80608 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

options on physicals, and by put, by (c) Critical dates. Each reporting PART 38—DESIGNATED CONTRACT
call, by expiration date and by strike market must report to the Commission, MARKETS
price, for each futures contract, the first notice
(iii) For swaps, by product type and date and the last trading date, and for 7. Revise the authority citation for
contract month or term life of the swap, each option contract, the expiration date part 38 to read as follows:
and in accordance with paragraph (d) of this Authority: 7 U.S.C. 2, 4c,. 6, 6a, 6d, 6e,
(iv) For swaptions or class of section. 6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b–
swaptions, by underlying swap 1, 7b–3, 8, 9, 15, and 21 as amended by Pub.
(d) Form, manner and time of filing L. 111–203, 124 Stat. 1376.
contracts for options on swap contracts reports. Unless otherwise approved by
or by underlying physical for swaptions the Commission or its designee, 8. Designate existing §§ 38.1 through
on physicals, and by put, by call, by reporting markets must submit to the 38.6 as subpart A under the following
expiration date and by strike price. Commission the information specified subpart heading:
(2) Each reporting market must record in paragraphs (a)(2), (b), and (c) of this Subpart A—General Provisions
for the trading session and for the section as follows:
opening and closing periods of trading (1) Using the format, coding structure * * * * *
as determined by each reporting market: and electronic data transmission
(i) The opening and closing prices of § 38.1 [Amended]
procedures approved in writing by the
each futures, option, swap or swaption. 9. Amend § 38.1 by removing the
Commission or its designee; provided
(ii) The price that is used for reference ‘‘Parts 36 or 37 of this chapter’’
however, that the information must be
settlement purposes, if different from and adding in its place the reference
made available to the Commission or its
the closing price. ‘‘parts 37 or 49 of this chapter’’.
designee in hard copy upon request;
(iii) The lowest price of a sale or offer, 10. Revise § 38.2 to read as follows:
(2) When each such form of the data
whichever is lower, and the highest § 38.2 Applicable provisions.
is first available, but not later than 7
price of a sale or bid, whichever is
a.m. on the business day following the A designated contract market, the
higher, that the reporting market
day to which the information pertains contract market’s operator and
reasonably determines accurately
for the delta factor and settlement price transactions traded on or through a
reflects market conditions. Bids and
and not later than 12 p.m. for the designated contract market under
offers vacated or withdrawn shall not be
remainder of the information. Unless Section 5 of the Act shall comply with
used in making this determination. A
otherwise specified by the Commission the requirements of this part 38, §§ 1.3,
bid is vacated if followed by a higher
or its designee, the stated time is U.S. 1.12(e), 1.31, 1.37(c)–(d), 1.52, 1.59(d),
bid or price and an offer is vacated if
eastern standard time for information 1.60, 1.63(c), 1.67, 33.10, part 9, parts 15
followed by a lower offer or price.
concerning markets located in that time through 21, part 40, part 41, part 43,
(3) If there are no transactions, bids, part 45, part 46, part 49, part 151, and
zone, and U.S. central time for
or offers during the opening or closing part 190 of this chapter, including any
information concerning all other
periods, the reporting market may related definitions and cross-referenced
markets; and
record as appropriate: sections.
(i) The first price (in lieu of opening (3) For information on reports to the
Commission for swap or swaption 11. Revise § 38.3 to read as follows:
price data) or the last price (in lieu of
closing price data) occurring during the contracts, refer to part 20 of this chapter. § 38.3 Procedures for designation.
trading session, clearly indicating that (e) Publication of recorded (a) Application procedures. (1) A
such prices are the first and last prices; information. (1) Reporting markets must board of trade seeking designation as a
or make the information in paragraph (a) of contract market must file electronically
(ii) Nominal opening or nominal this section readily available to the Application Form DCM provided in
closing prices that the reporting market news media and the general public Appendix A of this part, with the
reasonably determines to accurately without charge, in a format that readily Secretary of the Commission at its
reflect market conditions, clearly enables the consideration of such data, Washington, DC headquarters at
indicating that such prices are nominal. no later than the business day following submissions@[Link] and the Division
(4) Additional information. Each the day to which the information of Market Oversight at
reporting market must record the pertains. The information in paragraphs DMOSubmissions@[Link]. The
following information with respect to (a)(2)(iv) through (vi) of this section Commission will review the application
transactions in commodity futures, shall be made readily available in a for designation as a contract market
commodity options, swaps or swaptions format that presents the information pursuant to the 180-day timeframe and
on that reporting market: together. procedures specified in Section 6(a) of
(i) The method used by the reporting (2) Reporting markets must make the the Act. The Commission shall approve
market in determining nominal prices information in paragraphs (b)(2) and (3) or deny the application or, if deemed
and settlement prices; and of this section readily available to the appropriate, designate the applicant as a
(ii) If discretion is used by the news media and the general public, and contract market subject to conditions.
reporting market in determining the the information in paragraph (b)(4)(ii) of (2) The application must include
opening and/or closing ranges or the this section readily available to the information sufficient to demonstrate
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settlement prices, an explanation that general public, in a format that readily compliance with the core principles
certain discretion may be employed by enables the consideration of such data, specified in Section 5(d) of the Act.
the reporting market and a description no later than the business day following Application Form DCM consists of
of the manner in which that discretion the day to which the information instructions, general questions and a list
may be employed. Discretionary pertains. Information in paragraph of Exhibits (documents, information and
authority must be noted explicitly in (b)(4)(i) of this section must be made evidence) required by the Commission
each case in which it is applied (for available in the registered entity’s in order to determine whether an
example, by use of an asterisk or rulebook, which is publicly accessible applicant is able to comply with the
footnote). on its Web site. core principles. An application will not

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80609

be considered to be materially complete from its current legal entity to a new including part 38 and Appendices
unless the applicant has submitted, at a legal entity, as a result of a corporate thereto;
minimum, the Exhibits as required in reorganization or otherwise, must file a (C) Will assume, maintain and enforce
Application Form DCM. If the request with the Commission for all rules implementing and complying
application is not materially complete, approval to transfer the designation, with these core principles, including the
the Commission shall notify the listed contracts and positions adoption of the transferor’s rulebook, as
applicant that the application will not comprising all associated open interest. amended in the request, and that any
be deemed to have been submitted for Such request must be filed such amendments will be submitted to
purposes of the 180-day review period electronically with the Secretary of the the Commission pursuant to Section
set forth in paragraph (a)(1) of this Commission at its Washington, DC 5c(c) of the Act and part 40 of the
section. headquarters at submissions@[Link] Commission’s regulations; and
(3) The applicant must identify with and the Division of Market Oversight at (D) Will comply with all self-
particularity any information in the DMOSubmissions@[Link]. regulatory responsibilities except if
application that will be subject to a (2) Timing of submission. The request otherwise indicated in the request, and
request for confidential treatment must be filed no later than three months will maintain and enforce all self-
pursuant to § 145.9 of this chapter. prior to the anticipated corporate regulatory programs.
(4) Section 40.8 of this chapter sets change; provided that the designated (viii) A representation by the
forth those sections of the application contract market may file a request with transferee that upon the transfer:
that will be made publicly available, the Commission later than three months (A) All open interest in all contracts
notwithstanding a request for prior to the anticipated change if the listed on the transferor will be
confidential treatment pursuant to designated contract market does not transferred to and represent equivalent
§ 145.9 of this chapter. know and reasonably could not have open interest in all such contracts listed
(5) If any information contained in the known of the anticipated change three on the transferee;
application or in any Exhibit is or months prior to the anticipated change. (B) It will assume responsibility for
becomes inaccurate for any reason, an In such event, the designated contract and maintain compliance with product
amendment to the application or a market shall be required to immediately core principles for all contracts
submission filed under part 40 of this file the request with the Commission as previously listed for trading through the
chapter must be filed promptly soon as it knows of such change with an transferor, whether by certification or
correcting such information. explanation as to the timing of the approval; and
(b) Reinstatement of dormant (C) That none of the proposed rule
request.
designation. Before listing or relisting (3) Required information. The request changes will affect the rights and
products for trading, a dormant shall include the following: obligations of any participant with open
designated contract market as defined in (i) The underlying agreement that positions transferred to it and that the
§ 40.1 of this chapter must reinstate its governs the corporate change. proposed rule changes do not modify
designation under the procedures of (ii) A narrative description of the the manner in which such contracts are
paragraphs (a)(1) and (a)(2) of this corporate change, including the reason settled or cleared.
section; provided, however, that an for the change and its impact on the (ix) A representation by the transferee
application for reinstatement may rely designated contract market, including that market participants will be notified
upon previously submitted materials its governance, and operations, and its of all changes to the transferor’s
that still pertain to, and accurately impact on the rights and obligations of rulebook prior to the transfer and will
describe, current conditions. market participants holding the open be further notified of the concurrent
(c) Delegation of authority. (1) The interest positions. transfer of the contract market
Commission hereby delegates, until it (iii) A discussion of the transferee’s designation and the related transfer of
orders otherwise, to the Director of the ability to comply with the Act, all listed contracts and all associated
Division of Market Oversight or such including the core principles applicable open interest, to the transferee upon
other employee or employees as the to designated contract markets, and the Commission approval and issuance of
Director may designate from time to Commission’s regulations thereunder. an order permitting this transfer.
time, upon consultation with the (iv) The governing documents of the (4) Commission determination. The
General Counsel or the General transferee including, but not limited to, Commission will review a request as
Counsel’s delegate, authority to notify articles of incorporation and bylaws. soon as practicable and such request
the applicant seeking designation under (v) The transferee’s rules marked to will be approved or denied pursuant to
Section 6(a) of the Act that the show changes from the current rules of a Commission order and based on the
application is materially incomplete and the designated contract market. Commission’s determination as to the
the running of the 180-day period is (vi) A list of contracts, agreements, transferee’s ability to continue to
stayed. transactions or swaps for which the operate the designated contract market
(2) The Director may submit to the designated contract market requests in compliance with the Act and the
Commission for its consideration any transfer of open interest. Commission’s regulations thereunder.
matter that has been delegated in this (vii) A representation by the (e) Request for withdrawal of
paragraph. transferee that it: application for designation. An
(3) Nothing in this paragraph (A) Will be the surviving corporation applicant for designation may withdraw
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prohibits the Commission, at its and successor-in-interest to the its application submitted pursuant to
election, from exercising the authority transferor designated contract market paragraphs (a)(1) and (a)(2) of this
delegated in paragraph (c)(1) of this and will retain and assume, without section by filing such a request with the
section. limitation, all the assets and liabilities Commission at its Washington, DC
(d) Request for transfer of designation. of the transferor; headquarters. Withdrawal of an
(1) Request for transfer of designation, (B) Will assume responsibility for application for designation shall not
listed contracts and open interest. A complying with all applicable affect any action taken or to be taken by
designated contract market that wants to provisions of the Act and the the Commission based upon actions,
request the transfer of its designation Commission’s regulations thereunder, activities or events occurring during the

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 80610 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

time that the application for designation the foregoing is pending, will be headquarters at submissions@[Link]
was pending with the Commission. deemed approved by the Commission and the Division of Market Oversight at
(f) Request for vacation of no earlier than when the facility is DMOSubmissions@[Link], no later
designation. A designated contract deemed to be designated or reinstated. than the business day, as defined in
market may vacate its designation under (b) Self-certification of rules and § 40.1 of this chapter, following the date
Section 7 of the Act by filing products. Rules of a designated contract on which the designated contract
electronically such a request with the market and subsequent amendments market enters into a firm obligation to
Commission at its Washington, DC thereto, including both operational rules transfer the equity interest.
headquarters. Vacation of designation and the terms or conditions of futures, (2) Required information. (i) The
shall not affect any action taken or to be swaps and option products listed for notification must include and be
taken by the Commission based upon trading on the facility, not voluntarily accompanied by:
actions, activities or events occurring submitted for prior Commission (A) Any relevant agreement(s),
during the time that the facility was approval pursuant to paragraph (a) of including any preliminary agreements;
designated by the Commission. this section must be submitted to the (B) Any associated changes to relevant
(g) Requirements for existing Commission with a certification that the corporate documents;
designated contract markets. A board of rule, rule amendment or futures, swap (C) A chart outlining any new
trade that is designated as a contract or options product complies with the ownership or corporate or
market as of [EFFECTIVE DATE OF Act or rules thereunder pursuant to the organizational structure;
FINAL RULE], will be considered to be procedures of § 40.6 of this chapter, as (D) A brief description of the purpose
a designated contract market under this applicable. Provided, however, any rule and any impact of the equity interest
section, provided that such existing or rule amendment that would, for a transfer; and
designated contract market certifies to delivery month having open interest, (E) A representation from the
the Commission in writing that it is in materially change a term or condition of designated contract market that it meets
compliance with each of the designated a swap or a contract for future delivery all of the requirements of Section 5(d)
contract market core principles and in an agricultural commodity of the Act and Commission regulations
associated regulations in this part, enumerated in Section 1a(9) of the Act, adopted thereunder.
or of an option on such contract or (ii) The designated contract market
within 60 days of [EFFECTIVE DATE
commodity, must be submitted to the must keep the Commission apprised of
OF FINAL RULE].
12. In § 38.4, revise paragraphs (a) and Commission prior to its implementation the projected date that the transaction
(b) to read as follows: for review and approval under § 40.4 of resulting in the equity interest transfer
this chapter. will be consummated, and must provide
§ 38.4 Procedures for listing products and to the Commission any new agreements
* * * * *
implementing designated contract market
13. Revise § 38.5 to read as follows: or modifications to the original
rules. agreement(s) filed pursuant to this
(a) Request for Commission approval § 38.5 Information relating to contract section. The designated contract market
of rules and products. (1) An applicant market compliance. must notify the Commission of the
for designation, or a designated contract (a) Requests for information. Upon consummation of the transaction on the
market, may request that the request by the Commission, a day in which it occurs.
Commission approve under Section designated contract market must file (3) Certification. (i) Upon a transfer of
5c(c) of the Act, any or all of its rules with the Commission such information an equity interest of ten percent or more
and contract terms and conditions, and related to its business as a designated in a designated contract market, the
subsequent amendments thereto, prior contract market, including information designated contract market must file
to their implementation or, relating to data entry and trade details, with the Secretary of the Commission at
notwithstanding the provisions of in the form and manner, and within the its Washington, DC headquarters, at
Section 5c(c)(2) of the Act, at anytime time specified by the Commission in its submissions@[Link], and the Division
thereafter, under the procedures of request. of Market Oversight, at
§§ 40.3 or 40.5 of this chapter, as (b) Demonstration of compliance. DMOSubmissions@[Link], a
applicable. A designated contract Upon request by the Commission, a certification that the designated contract
market may label a future, swap or designated contract market must file market meets all of the requirements of
options product in its rules as ‘‘Listed with the Commission a written Section 5(d) of the Act and Commission
for trading pursuant to Commission demonstration, containing such regulations adopted thereunder, no later
approval,’’ if the future, swap or options supporting data, information and than two business days, as defined in
product and its terms or conditions have documents, in the form and manner and § 40.1 of this chapter, following the date
been approved by the Commission, and within such time as the Commission on which the equity interest transfer of
it may label as ‘‘Approved by the may specify, that the designated ten percent or more was consummated.
Commission’’ only those rules that have contract market is in compliance with Such certification must state whether
been so approved. one or more core principles as specified changes to any aspects of the designated
(2) Notwithstanding the timeline in the request, or that is requested by contract market’s operations were made
under §§ 40.3(c) and 40.5(c) of this the Commission to satisfy its obligations as a result of such change in ownership,
chapter, the operating rules and terms under the Act. and include a description of any such
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and conditions of futures, swaps and (c) Equity interest transfers. (1) Equity change(s).
option products that have been transfer notification. Upon entering into (ii) The certification required under
submitted for Commission approval at any agreement(s) that could result in an this paragraph may rely on and be
the same time as an application for equity interest transfer of ten percent or supported by reference to an application
contract market designation or an more in the contract market, the for designation or prior filings made
application under § 38.3(b) of this part designated contract market must file a pursuant to a product or rule
to reinstate the designation of a dormant notification of the equity interest submission requirement, along with any
designated contract market, as defined transfer with the Secretary of the necessary new filings, including new
in § 40.1 of this chapter, or while one of Commission at its Washington, DC filings that provide any and all material

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80611

updates of prior submissions. The DCM intends to also operate a swap execution Subpart F—Position Limitations or
shall also amend any information that is facility must separately register, Accountability
no longer accurate on Form DCM pursuant to the swap execution facility 38.300 Core Principle 5.
consistent with the procedures set forth registration requirements set forth in 38.301 Position limitations and
in § 38.3 of this part. part 37 of this chapter, and on an accountability.
(d) Delegation of authority. The ongoing basis, comply with the core Subpart G—Emergency Authority
Commission hereby delegates, until it principles under Section 5h of the Act, 38.350 Core Principle 6.
orders otherwise, the authority set forth and the swap execution facility rules 38.351 Additional sources for compliance.
in paragraph (b) of this section to the under part 37 of this chapter.
Director of the Division of Market (b) A board of trade that operates both Subpart H—Availability of General
Oversight or such other employee or Information
a designated contract market and a swap
employees as the Director may designate execution facility, and that uses the 38.400 Core Principle 7.
from time to time. The Director may same electronic trade execution system 38.401 General requirements.
submit to the Commission for its for executing and trading swaps that it Subpart I—Daily Publication of Trading
consideration any matter that has been uses in its capacity as a designated Information
delegated in this paragraph. Nothing in contract market must clearly identify to 38.450 Core Principle 8.
this paragraph prohibits the market participants for each swap 38.451 Reporting of trade information.
Commission, at its election, from whether the execution or trading of such Subpart J—Execution of Transactions
exercising the authority delegated in swap is taking place on the designated
this paragraph. 38.500 Core Principle 9.
contract market or on the swap
14. Add § 38.7 to subpart A to read as 38.501 General requirements.
execution facility. 38.502 Minimum centralized trading
follows: 17. Add § 38.10 to subpart A to read requirement.
§ 38.7 Prohibited use of data collected for as follows: 38.503 Blocks trades on futures contracts.
regulatory purposes. 38.504 Block trades on swap contracts.
§ 38.10 Reporting of swaps traded on a 38.505 Exchange of derivatives for related
A designated contract market may not designated contract market. position.
use for business or marketing purposes With respect to swaps traded on or 38.506 Office trades and transfer trades.
any proprietary data or personal through a designated contract market,
information it collects or receives, from Subpart K—Trade Information
each designated contract market must
or on behalf of any person, for the report specified swap data as provided 38.550 Core Principle 10.
purpose of fulfilling its regulatory 38.551 Audit trail required.
under parts 43 and 45 of this chapter. 38.552 Elements of an acceptable audit trail
obligations; provided however, that a 18. Add subparts B through X to read program.
designated contract market, where as follows: 38.553 Enforcement of audit trail
necessary, may share such information requirements.
with one or more designated contract Subpart B—Designation as Contract Market
markets, or swap execution facilities Sec. Subpart L—Financial Integrity of
registered with the Commission, for 38.100 Core Principle 1. Transactions
regulatory purposes. Subpart C—Compliance With Rules 38.600 Core Principle 11.
15. Add § 38.8 to subpart A to read as 38.601 Mandatory clearing.
38.150 Core Principle 2. 38.602 General financial integrity.
follows: 38.151 Access requirements. 38.603 Protection of customer funds.
§ 38.8 Listing of swaps on a designated 38.152 Abusive trading practices 38.604 Financial surveillance.
contract market. prohibited. 38.605 Requirements for financial
38.153 Capacity to detect and investigate surveillance program.
(a) A designated contract market that rule violations. 38.606 Financial regulatory services
lists for the first time a swap contract for 38.154 Regulatory services provided by a provided by a third party.
trading on its contract market must, third party. 38.607 Direct access.
either prior to or at the time of such 38.155 Compliance staff and resources.
listing, file with the Commission a 38.156 Automated trade surveillance Subpart M—Protection of Markets and
written demonstration detailing how the system. Market Participants
designated contract market is addressing 38.157 Real-time market monitoring. 38.650 Core Principle 12.
its self-regulatory obligations and is 38.158 Investigations and investigation 38.651 Additional sources for compliance.
reports.
fulfilling its statutory and regulatory 38.159 Ability to obtain information. Subpart N—Disciplinary Procedures
obligations with respect to swap 38.160 Additional rules required. 38.700 Core Principle 13.
transactions. 38.701 Enforcement staff.
(b) Prior to listing swaps for trading Subpart D—Contracts Not Readily 38.702 Disciplinary panels.
on or through a designated contract Susceptible to Manipulation 38.703 Review of investigation report.
market, each designated contract market 38.200 Core Principle 3. 38.704 Notice of charges.
must request from the Commission a 38.201 Additional sources for compliance. 38.705 Right to representation.
unique, extensible, alphanumeric code 38.706 Answer to charges.
Subpart E—Prevention of Market Disruption 38.707 Admission or failure to deny
for the purpose of identifying the 38.250 Core Principle 4. charges.
designated contract market pursuant to
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38.251 General requirements. 38.708 Denial of charges and right to

part 45 of this chapter. 38.252 Additional requirements for hearing.
16. Add § 38.9 to subpart A to read as physical delivery markets. 38.709 Settlement offers.
follows: 38.253 Additional requirements for cash- 38.710 Hearings.
settled markets. 38.711 Decisions.
§ 38.9 Boards of trade operating both a 38.254 Ability to obtain information. 38.712 Right to appeal.
designated contract market and a swap 38.255 Risk controls for trading. 38.713 Final decisions.
execution facility. 38.256 Trade reconstruction. 38.714 Disciplinary sanctions.
(a) A board of trade that operates a 38.257 Regulatory service provider. 38.715 Summary fines for violations of
designated contract market and that 38.258 Additional rules required. rules regarding timely submission of

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 80612 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

records, decorum, or other similar (2) The terms and conditions of any arranged trading, fraudulent trading,
activities. contracts to be traded on the contract money passes, and any other trading
38.716 Emergency disciplinary actions. market; and practices that a designated contract
Subpart O—Dispute Resolution (3) Rules prohibiting abusive trade market deems to be abusive. In addition,
38.750 Core Principle 14. practices on the contract market. a designated contract market also must
38.751 Additional sources for compliance. (b) Capacity of contract market. The prohibit any other manipulative or
board of trade shall have the capacity to disruptive trading practices prohibited
Subpart P—Governance Fitness Standards detect, investigate, and apply by the Act or by the Commission
38.800 Core Principle 15. appropriate sanctions to any person that pursuant to Commission regulation.
Subpart Q—Conflicts of Interest violates any rule of the contract market.
(c) Requirement of rules. The rules of § 38.153 Capacity to detect and investigate
38.850 Core Principle 16. rule violations.
the contract market shall provide the
Subpart R—Composition of Governing board of trade with the ability and A designated contract market must
Boards of Contract Markets authority to obtain any necessary have arrangements and resources for
38.900 Core Principle 17. information to perform any function effective enforcement of its rules. Such
described in this section, including the arrangements must include the
Subpart S—Recordkeeping authority to collect information and
capacity to carry out such international
38.950 Core Principle 18. information-sharing agreements, as the documents on both a routine and non-
38.951 Additional sources for compliance. routine basis, including the authority to
Commission may require.
Subpart T—Antitrust Considerations examine books and records kept by the
§ 38.151 Access requirements. designated contract market’s members
38.1000 Core Principle 19.
38.1001 Additional sources for compliance. (a) Jurisdiction. Prior to granting any and by market participants. A
member or market participant access to designated contract market’s
Subpart U—System Safeguards its markets, a designated contract arrangements and resources must also
38.1050 Core Principle 20. market must require that the member or facilitate the direct supervision of the
38.1051 General requirements. market participant consent to its market and the analysis of data
Subpart V—Financial Resources jurisdiction. collected to determine whether a rule
38.1100 Core Principle 21. (b) Impartial access by members, violation occurred.
38.1101 General requirements. market participants and independent
software vendors. A designated contract § 38.154 Regulatory services provided by
Subpart W—Diversity of Boards of a third party.
market must provide its members,
Directors
market participants and independent (a) Use of third-party provider
38.1150 Core Principle 22. software vendors with impartial access permitted. A designated contract market
to its markets and services, including: may choose to contract with a registered
Subpart X—Securities and Exchange
Commission (1) Access criteria that are impartial, futures association or another registered
transparent, and applied in a non- entity, as such terms are defined under
38.1200 Core Principle 23. the CEA, (collectively, ‘‘regulatory
38.1201 Additional sources for compliance. discriminatory manner; and
(2) Comparable fee structures for service provider’’), for the provision of
Subpart B—Designation as Contract Market members, market participants and services to assist in complying with the
independent software vendors receiving core principles, as approved by the
§ 38.100 Core Principle 1.
equal access to, or services from, the Commission. Any designated contract
(a) In general. To be designated, and market that chooses to contract with a
designated contract market.
maintain a designation, as a contract (c) Limitations on access. A regulatory service provider must ensure
market, a board of trade shall comply designated contract market must that its regulatory service provider has
with: establish and impartially enforce rules the capacity and resources necessary to
(1) Any core principle described in governing denials, suspensions, and provide timely and effective regulatory
Section 5(d) of the Act, and revocations of a member’s and market services, including adequate staff and
(2) Any requirement that the participant’s access privileges to the automated surveillance systems. A
Commission may impose by rule or designated contract market, including designated contract market will at all
regulation pursuant to Section 8a(5) of when such actions are part of a times remain responsible for the
the Act. disciplinary or emergency action by the performance of any regulatory services
(b) Reasonable discretion of the designated contract market. received, for compliance with the
contract market. Unless otherwise designated contract market’s obligations
determined by the Commission by rule § 38.152 Abusive trading practices under the CEA and Commission
or regulation, a board of trade described prohibited. regulations, and for the regulatory
in paragraph (a) of this section shall A designated contract market must service provider’s performance on its
have reasonable discretion in prohibit abusive trading practices on its behalf.
establishing the manner in which the markets by members and market (b) Duty to supervise third party. A
board of trade complies with the core participants. Designated contract designated contract market that elects to
principles described in this subsection. markets that permit intermediation must utilize a regulatory service provider
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prohibit customer-related abuses must retain sufficient compliance staff

Subpart C—Compliance With Rules including, but not limited to, trading to supervise the quality and
ahead of customer orders, trading effectiveness of the services provided on
§ 38.150 Core Principle 2. against customer orders, its behalf. Compliance staff of the
(a) In general. The board of trade shall accommodation trading, and improper designated contract market must hold
establish, monitor, and enforce cross trading. Specific trading practices regular meetings with the regulatory
compliance with the rules of the that must be prohibited by all service provider to discuss ongoing
contract market, including: designated contract markets include investigations, trading patterns, market
(1) Access requirements; front-running, wash trading, pre- participants, and any other matters of

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regulatory concern. A designated other factors suggesting the need for (b) Timeliness. Each compliance staff
contract market also must conduct increased resources and staff. investigation must be completed in a
periodic reviews of the adequacy and timely manner. Absent mitigating
effectiveness of services provided on its § 38.156 Automated trade surveillance factors, a timely manner is no later than
system.
behalf. Such reviews must be 12 months after the date that an
documented carefully and made A designated contract market must investigation is opened. Mitigating
available to the Commission upon maintain an automated trade factors that may reasonably justify an
request. surveillance system capable of detecting investigation taking longer than 12
(c) Regulatory decisions required from and investigating potential trade months to complete include the
the designated contract market. A practice violations. Such system must complexity of the investigation, the
designated contract market that elects to maintain all data reflecting the details of number of firms or individuals involved
utilize a regulatory service provider each order entered into the trading as potential wrongdoers, the number of
must retain exclusive authority in system, including all order potential violations to be investigated,
decisions involving the cancellation of modifications and cancellations and and the volume of documents and data
trades, the issuance of disciplinary maintain all data reflecting transactions to be examined and analyzed by
charges against members or market executed on the designated contract compliance staff.
participants, and denials of access to the market. The automated system must (c) Investigation reports when a
trading platform for disciplinary load and process daily orders and trades reasonable basis exists for finding a
reasons. A designated contract market no later than 24 hours after the violation. Compliance staff must submit
may also retain exclusive authority in completion of the trading day. In a written investigation report for
other areas of its choosing; provided addition, the automated trade disciplinary action in every instance in
however, that the decision to open an surveillance system must have the which compliance staff determines from
investigation into a possible rule capability to detect and flag specific surveillance or from an investigation
violation must always reside exclusively trade execution patterns and trade that a reasonable basis exists for finding
with the regulatory service provider. A anomalies; compute, retain, and a rule violation. The investigation report
designated contract market must compare trading statistics; compute must include the reason the
document any instances where its trade gains, losses, and futures- investigation was initiated; a summary
actions differ from those recommended equivalent positions; reconstruct the of the complaint, if any; the relevant
by its regulatory service provider, sequence of market activity; perform facts; compliance staff’s analysis and
including the reasons for the course of market analyses; and support system conclusions; and a recommendation as
action recommended by the regulatory users to perform in-depth analyses and to whether disciplinary action should be
service provider and the reasons why ad hoc queries of trade-related data. pursued. The report must also include
the designated contract market chose a the member or market participant’s
different course of action. § 38.157 Real-time market monitoring. disciplinary history at the designated
contract market.
§ 38.155 Compliance staff and resources. A designated contract market must (d) Investigation reports when no
(a) Sufficient compliance staff. A conduct real-time market monitoring of reasonable basis exists for finding a
designated contract market must all trading activity on its electronic violation. If after conducting an
establish and maintain sufficient trading platform(s) to ensure orderly investigation, compliance staff
compliance department resources and trading and identify any market or determines that no reasonable basis
staff to ensure that it can conduct system anomalies. A designated contract exists for finding a violation, it must
effective audit trail reviews, trade market must have the authority to adjust prepare a written report including the
practice surveillance, market trade prices or cancel trades when reason the investigation was initiated; a
surveillance, and real-time market necessary to mitigate market disrupting summary of the complaint, if any; the
monitoring. The designated contract events caused by malfunctions in its relevant facts; compliance staff’s
market’s compliance staff must also be electronic trading platform(s) or errors analysis and conclusions; and if
sufficient to address unusual market or in orders submitted by members and applicable, any recommendation that a
trading events as they arise, and to market participants. Any trade price disciplinary committee issue a warning
conduct and complete investigations in adjustments or trade cancellations must letter in accordance with paragraph (e)
a timely manner, as set forth in be transparent to the market and subject of this section. If compliance staff
§ 38.158(b) of this part. to standards that are clear, fair, and recommends that a warning letter be
(b) Ongoing monitoring of compliance publicly available. issued to a member or market
staff resources. A designated contract participant pursuant to paragraph (e) of
§ 38.158 Investigations and investigation
market must monitor the size and this section, the investigation report
reports.
workload of its compliance staff must include a copy of the letter as well
annually, and ensure that its (a) Procedures. A designated contract as the member or market participant’s
compliance resources and staff are at market must establish and maintain disciplinary history at the designated
appropriate levels. In determining the procedures that require its compliance contract market.
appropriate level of compliance staff to conduct investigations of (e) Warning letters. In addition to the
resources and staff, the designated possible rule violations. An action required to be taken under
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contract market should consider investigation must be commenced upon paragraphs (c) and (d) of this section,
projected trading volume increases, the the receipt of a request from the rules of a designated contract market
number of new products or contracts Commission staff or upon the discovery may authorize compliance staff to issue
projected to be listed for trading, any or receipt of information by the a warning letter to a person or entity
new responsibilities expected to be designated contract market that, in the under investigation or to recommend
assigned to compliance staff, the results judgment of its compliance staff, that a disciplinary committee take such
of any internal review demonstrating indicates a possible basis for finding an action. A warning letter issued in
that work is not completed in an that a violation has occurred or will accordance with this section is not a
effective or timely manner, and any occur. penalty or an indication that a finding

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 80614 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

of a violation has been made. A copy of ongoing basis in order to detect and Designated contract markets must
a warning letter issued by compliance prevent manipulation, price distortions promptly amend any methodologies that
staff must be included in the and, where possible, disruptions of the result, or are likely to result, in
investigation report required by delivery or cash-settlement process; manipulation, price distortions, or
paragraphs (c) and (d) of this section. No (b) Monitor and evaluate general market disruptions, or must impose new
more than one warning letter for the market data in order to detect and methodologies to resolve the threat of
same potential violation may be issued prevent manipulative activity that disruptions or distortions.
to the same person or entity during a would result in the failure of the market (b) If a contract listed on a designated
rolling 12-month period. price to reflect the normal forces of contract market is settled by reference to
supply and demand; the price of a contract or commodity
§ 38.159 Ability to obtain information. (c) Have the capacity to conduct real- traded in another venue, including a
A designated contract market must time monitoring of trading and price or index derived from prices on
have the ability and authority to obtain comprehensive and accurate trade another designated contract market, the
any necessary information to perform reconstructions. The monitoring of designated contract market must have
any function required under this intraday trading must include the rules that require traders on the DCM
subpart C of the Commission’s capacity to detect abnormal price market to provide the DCM with their
regulations, including the capacity to movements, unusual trading volumes, positions in the reference markets as the
carry out international information- impairments to market liquidity, and traders’ contracts approach settlement.
sharing agreements as the Commission position-limit violations; and In the alternative, the DCM may have an
may require. Appropriate information- (d) Have either manual processes or information sharing agreement with the
sharing agreements can be established automated alerts that are effective in other venue or designated contract
with other designated contract markets detecting and preventing trading abuses. market.
and swap execution facilities, or the
Commission can act in conjunction with § 38.252 Additional requirements for § 38.254 Ability to obtain information.
the designated contract market to carry physical delivery contracts. (a) The designated contract market
out such information sharing. (a) For physical delivery contracts, the must have rules that require traders in
designated contract market must: its contracts to keep records of their
§ 38.160 Additional rules required. (1) Monitor a contract’s terms and trading, including records of their
A designated contract market must conditions as to whether there is activity in the underlying commodity
adopt and enforce any additional rules convergence between the contract price and related derivatives markets and
that it believes are necessary to comply and the price of the underlying make such records available, upon
with the requirements of this subpart C. commodity; request, to the designated contract
(2) Monitor that the deliverable market.
Subpart D—Contracts Not Readily supply is adequate so that the contract (b) A designated contract market with
Subject to Manipulation will not be susceptible to price customers trading through
§ 38.200 Core Principle 3. manipulation or distortion; intermediaries must either use a
(3) Assess whether the deliverable comprehensive large-trader reporting
The board of trade shall list on the commodity reasonably can be expected system (LTRS) or be able to demonstrate
contract market only contracts that are to be available to short traders and that it can obtain position data from
not readily susceptible to manipulation. salable by long traders at its market other sources in order to conduct an
§ 38.201 Additional sources for value in normal cash marketing effective surveillance program.
compliance. channels; and
(4) When available, monitor data § 38.255 Risk controls for trading.
Applicants and designated contract
markets may refer to the guidance in related to the size and ownership of The designated contract market must
appendix C of this part to demonstrate deliverable supplies. establish and maintain risk control
to the Commission compliance with the (b) The designated contract market mechanisms to reduce the potential risk
requirements of § 38.200 of this part. must continually monitor the of market disruptions, including but not
appropriateness of the contract’s terms limited to market restrictions that pause
Subpart E—Prevention of Market and conditions, including the delivery or halt trading in market conditions
Disruption instrument, the delivery locations and prescribed by the designated contract
location differentials, and the market. If a contract is linked to, or a
§ 38.250 Core Principle 4. commodity characteristics and related substitute for, other contracts on the
The board of trade shall have the differentials. The designated contract designated contract market or on other
capacity and responsibility to prevent market must address conditions that are trading venues, such risk controls must,
manipulation, price distortion, and interfering with convergence or causing to the extent practicable, be coordinated
disruptions of the delivery or cash- price distortions or market disruptions, with any similar controls placed on
settlement process through market including, when appropriate, changes to those other contracts. If a contract is
surveillance, compliance, and contract terms. based on the price of an equity security
enforcement practices and procedures, or the level of an equity index, such risk
including: § 38.253 Additional requirements for cash- controls must, to the extent practicable,
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(a) Methods for conducting real-time settled contracts.

be coordinated with any similar controls
monitoring of trading; and (a) For cash-settled contracts, the placed on national security exchanges.
(b) Comprehensive and accurate trade designated contract market must
reconstructions. monitor: § 38.256 Trade reconstruction.
(1) The availability and pricing of the The designated contract market must
§ 38.251 General requirements. commodity making up the index to have the ability to comprehensively and
A designated contract market must: which the contract will be settled; and accurately reconstruct all trading on its
(a) Collect and evaluate data on (2) The continued appropriateness of trading facility. All audit-trail data and
individual traders’ market activity on an the methodology for deriving the index. reconstructions must be made available

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80615

to the Commission in a form, manner, and/or acceptable practices in Appendix other changes to previously-disclosed
and time as determined by the B of this part to demonstrate to the information, must place such
Commission. Commission compliance with the information on its Web site
requirements of § 38.350. simultaneous with the filing of such
§ 38.257 Regulatory service provider.
information with the Secretary of the
A designated contract market must Subpart H—Availability of General Commission. Satisfaction of the
comply with the regulations in this Information requirements of this paragraph (c) shall
subpart through a dedicated regulatory be in addition to the requirements of
department, or by delegation of that § 38.400 Core Principle 7.
paragraph (d) of this section.
function to a registered futures The board of trade shall make (2) To the extent that a designated
association or a registered entity available to market authorities, market contract market requests confidential
(collectively, ‘‘regulatory service participants, and the public accurate treatment of any information filed with
provider’’), as such terms are defined information concerning: the Secretary of the Commission, the
under the Act and over which the (a) The terms and conditions of the designated contract market must post on
designated contract market has contracts of the contract market; and its Web site the public version of such
supervisory authority. (b)(1) The rules, regulations and filing or submission.
mechanisms for executing transactions (d) Rulebook. A designated contract
§ 38.258 Additional rules required. on or through the facilities of the
A designated contract market must market must ensure that the rulebook
contract market, and posted on its Web site is accurate,
adopt and enforce any additional rules (2) The rules and specifications
that it believes are necessary to comply complete, current and readily accessible
describing the operation of the contract to the public. A designated contract
with the requirements of subpart E of market’s:
this part. market must publish or post in its
(i) Electronic matching platform, or rulebook all new or amended rules, both
(ii) Trade execution facility. substantive and non-substantive, on the
Subpart F—Position Limitations or
Accountability § 38.401 General requirements. date of implementation of such new or
(a) General. (1) A designated contract amended rule, the day a new product is
§ 38.300 Core Principle 5. listed, or the day any changes to
market must have procedures,
To reduce the potential threat of previously disclosed information take
arrangements and resources for
market manipulation or congestion effect. Satisfaction of the requirements
disclosing to the Commission, market
(especially during trading in the of this paragraph (d) is in addition to the
participants and the public accurate
delivery month), the board of trade shall requirements of paragraph (c) of this
information pertaining to:
adopt for each contract of the board of section.
(i) Contract terms and conditions;
trade, as is necessary and appropriate,
(ii) Rules and regulations pertaining Subpart I—Daily Publication of Trading
position limitations or position
to the trading mechanisms; and Information
accountability for speculators. For any
(iii) Rules and specifications
contract that is subject to a position
pertaining to operation of the electronic § 38.450 Core Principle 8.
limitation established by the
matching platform or trade execution The board of trade shall make public
Commission pursuant to Section 4a(a),
facility. daily information on settlement prices,
the board of trade shall set the position
(2) Through such procedures, volume, open interest, and opening and
limitation of the board of trade at a level
arrangements and resources, the closing ranges for actively traded
not higher than the position limitation
designated contract market must ensure contracts on the contract market.
established by the Commission.
public dissemination of information
§ 38.301 Position limitations and pertaining to new product listings, new § 38.451 Reporting of trade information.
accountability. rules, rule amendments or other changes A designated contract market must
A designated contract market must to previously disclosed information, in meet the reporting requirements set
meet the requirements of part 151 of this accordance with the timeline provided forth in part 16 of this chapter.
chapter. in paragraph (c) of this section.
(3) A designated contract market shall Subpart J—Execution of Transactions
Subpart G—Emergency Authority meet the requirements of this paragraph § 38.500 Core Principle 9.
(a), by placing the information on the The board of trade shall provide a
§ 38.350 Core Principle 6.
designated contract market’s Web site competitive, open, and efficient market
The board of trade, in consultation or within the time prescribed in paragraph
cooperation with the Commission, shall and mechanism for executing
(c) of this section. transactions that protects the price
adopt rules to provide for the exercise (b) Accuracy Requirement. A
of emergency authority, as is necessary discovery process of trading in the
designated contract market must centralized market of the board of trade.
and appropriate, including the provide accurate and complete
authority: The rules of the board of trade may
information and not omit material authorize, for bona fide business
(a) To liquidate or transfer open information with respect to any
positions in any contract; purposes:
communication with the Commission, (a) Transfer trades or office trades;
(b) To suspend or curtail trading in
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and any information required to be (b) An exchange of:

any contract; and
(c) To require market participants in transmitted or made available to market (1) Futures in connection with a cash
any contract to meet special margin participants and the public, including commodity transaction;
requirements. on its Web site or otherwise. (2) Futures for cash commodities; or
(c) Notice of Regulatory Submissions. (3) Futures for swaps; or
§ 38.351 Additional sources for (1) A designated contract market, in (c) A futures commission merchant,
compliance. making available on its Web site acting as principal or agent, to enter into
Applicants and designated contract information pertaining to new product or confirm the execution of a contract
markets may refer to the guidance listings, new rules, rule amendments or for the purchase or sale of a commodity

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 80616 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

for future delivery if the contract is combined, that is attributable to (b) of this section, may continue to be
reported, recorded, or cleared in centralized market trading for a 12 listed on the designated contract market
accordance with the rules of the month period commencing one year until all open positions in such
contract market or a derivatives clearing following the date of the contract’s contracts and contract months are
organization. initial listing on the designated contract liquidated. Trading in such contracts is
market, and on each 12 month allowed for liquidation purposes only.
§ 38.501 General requirements. anniversary of the contract’s listing (e) Exemptions upon petition. (1) A
(a) Transactions on the centralized thereafter. The designated contract designated contract market may petition
market; requirements. All purchases market must calculate the centralized the Commission to exempt a contract
and sales of any commodity for future market trading percentage for each from the requirements of paragraphs (c)
delivery, and any commodity option or listed contract within thirty days or (d) of this section, for a maximum
swap, on or subject to the rules of a following the conclusion of the 12 period of 12 months, or such other time
designated contract market, must be month anniversary of each contract’s as determined by the Commission.
executed openly and competitively by listing. (2) The designated contract market
open outcry, posting of bids and offers, (2) Contracts listed as of the effective must demonstrate in its petition that:
or other equally open and competitive date of this section. For contracts and (i) (A) Such contract achieved an
methods, in a place or through an contract months listed as of the effective average of at least 50% trading volume
electronic system provided by the date of § 38.502, the designated contract on the centralized market over the
designated contract market, during the market initially must complete the preceding 12 month period, and
hours prescribed by the designated centralized market trading percentage (B) The contract is likely to attain the
contract market for trading in such calculation in each such contract within minimum centralized market trading
commodity, commodity option or swap. thirty days of the effective date of this percentage requirement within the
(b) Transactions off the centralized § 38.502 (‘‘Initial Calculation’’). following 12 month period; or
market; requirements. Notwithstanding (3) Initial Calculation. The Initial (ii) As of the effective date of this
paragraph (a) of this section, Calculation for each such existing section, such contract has been listed for
transactions may be executed off of a contract must be based on: less than 12 months.
designated contract market’s centralized (i) The trading volume in such (3) Petitions seeking an exemption
market, including transfer trades, office contract during the 12 month period from the mandatory delisting
trades, block trades, or trades involving immediately preceding the effective requirement must be submitted to the
the exchange of derivatives for related date of this section; or Commission within thirty-five days of
positions, if transacted in accordance (ii) If contract has been listed less the 12 month anniversary of the listing
with the written rules of the designated than 12 months, the trading volume in of such contract, or for contracts listed
contract market that provide for such contract during the time period in less than 12 months, thirty-five days
execution of transactions off the which the contract was initially listed after the effective date of this section, as
centralized market and that have been on the designated contract market. applicable.
certified to or approved by the (4) Anniversary Calculation. (4) The filing of a petition for a
Commission. Every person handling, Thereafter, the designated contract mandatory delisting exemption shall
executing, clearing, or carrying the market must calculate and file with the toll the mandatory delisting requirement
trades, transactions or positions Commission the centralized market set forth in paragraph (c) of this section
described in this paragraph shall trading percentage in each such contract until such time that a decision is made
comply with the rules of the appropriate within thirty days of the 12 month on the petition.
designated contract market, including to anniversary of the Initial Calculation.
(c) Mandatory delisting. Except as § 38.503 Block trades on futures contracts.
identify and mark by appropriate
symbol or designation all such otherwise provided in paragraph (d) of (a) Block trade rules. A designated
transactions or contracts and all orders, this section, as to any contract that does contract market that permits block trade
records and memoranda pertaining not meet the minimum centralized transactions on futures contracts must
thereto. market trading percentage requirement have rules that limit such block trades
of paragraph (a) of this section, within to large transactions, and impose
§ 38.502 Minimum centralized market ninety days of the centralized market minimum size requirements on such
trading requirement. trading percentage calculation, the transactions that are appropriate for
(a) Minimum centralized market designated contract market must: each listed contract subject to a block
trading percentage requirement. No (1) Delist the contract from the trading provision. The block trade size
designated contract market may designated contract market and transfer for each listed contract must be certified
continue to list a contract for trading open positions in the contract to a SEF to or approved by the Commission.
unless an average of 85% or greater of that it operates; (b) Block size review. A designated
the total volume of such contract is (2) Delist the contract from the contract market must review the
traded on the designated contract designated contract market and transfer minimum size thresholds for all block
market’s centralized market, as all open positions in the contract to trades on futures contracts on an annual
calculated over a 12 month period as another SEF that will accept the basis to ensure that the minimum size
specified in paragraph (b) of this contract; or remains appropriate for each contract,
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section. (3) Liquidate the contract. and in accordance with the provisions
(b) Centralized market trading (d) Treatment of contracts listed as of of this section 38.503.
percentage calculation. (1) Contracts the effective date of this section. (c) Eligible block trade participants.
listed after the effective date of this Contracts and contract months that are Block trading must be limited to Eligible
section. For each new contract listed listed on a designated contract market as Contract Participants, as that term is
after the effective date of § 38.502, the of the effective date of § 38.502 and that defined in Section 1a(18) of the Act,
designated contract market must do not meet the requirements of except that the designated contract
determine the percentage of the total paragraph (a) of this section, as market may allow a commodity trading
volume, in all contract months calculated in accordance with paragraph advisor acting in an asset managerial

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80617

capacity and registered pursuant to order was received and the time the commercial realities, and at least one leg
Section 4n of the Act, or a principal order was reported to the designated of the transaction should be priced at
thereof, including any investment contract market, and must indicate if the the prevailing market price.
advisor who satisfies the criteria of block trades are between affiliated (b) A designated contract market may
§ 4.7(a)(2)(v) of this chapter, or a foreign parties. When requested by the permit parties to an exchange of
person performing a similar role or designated contract market, the derivatives for related position
function and subject as such to foreign Commission or the Department of transaction to engage in a separate
regulation, to transact block trades for Justice, parties to, and members transaction that offsets a leg of the
customers who are not Eligible Contract facilitating, a block trade must provide exchange of derivatives for a related
Participants, if such commodity trading records to document that the block trade position if:
advisor, investment advisor or foreign is executed in conformance with the (1) The offsetting transaction results
person has more than $25,000,000 in board of trade’s rules. in an actual transfer of ownership and
total assets under management. A (g) Reporting. (1) Each block trade demonstrates other indicia of being a
person may transact a block trade on must be reported to the designated bona fide transaction as set forth in
behalf of a customer only when such contract market within five minutes paragraph (a) of this section; and
person has received an instruction or after its execution. (2) The offsetting transaction must be
prior consent to do so from the (2) The designated contract market able to stand on its own as a
customer. must publicize the details of each block commercially appropriate transaction,
(d) Affiliated parties. (1) Block trades trade immediately upon receipt of the with no obligation on either party that
between affiliated parties are permitted transaction report, and must publicize the offsetting transaction be dependent
under the circumstances provided in daily the total quantity of block trades upon the execution of the exchange of
paragraph (d)(3) of this section. that are included in the total volume of derivatives for related position
(2) For purposes of block trades, an trading under the procedures set forth in transaction, or that the exchange of
affiliated party is a party that directly or § 16.01 of this chapter. derivatives for a related position
indirectly through one or more persons, (h) Block size determinations; pricing transaction be dependent upon the
controls, is controlled by, or is under of block trades. Applicants and execution of the offsetting transaction.
common control with another party. designated contract markets may refer to (c) An exchange of derivatives for a
(3) Block trades between affiliated the guidance and acceptable practices in related position transaction must be
parties are permitted if: appendix B of this part to demonstrate bona fide such that the exchange of
(i) Priced on a competitive market to the Commission compliance with the derivatives for the related position is not
price, either by falling within the requirements for block size contingent upon an offsetting
contemporaneous bid-ask spread on the determinations and pricing of block transaction.
centralized market or calculated based trades. (d) An exchange of derivatives for a
on a contemporaneous market price in
related position transaction must be
a related cash market; § 38.504 Block trades on swap contracts.
(ii) Each party has a separate and reported to the designated contract
A designated contract market must market within five minutes after its
independent legal bona fide business have rules requiring that block trades
purpose for engaging in the trades; and execution.
involving swaps comply with the (e) A designated contract market must
(iii) Each party’s decision to enter into requirements set forth in part 43 of this
the block trade is made by a separate make public, on a daily basis, the total
chapter. quantity of exchanges of derivatives for
and independent decision-maker.
(e) Aggregation. Except as otherwise § 38.505 Exchange of derivatives for a related position transactions that are
stated in this paragraph (e), the related position. included in the total volume of trading
aggregation of orders for different (a) (1) A designated contract market under the procedures set forth in § 16.01
accounts in order to satisfy the may permit bona fide exchange of of this chapter.
minimum block size requirement is derivatives for related positions § 38.506 Office trades and transfer trades.
prohibited. Aggregation is permissible if transactions.
A designated contract market must
done by a commodity trading advisor (2) (i) A bona fide exchange of
keep records of office trades and transfer
acting in an asset managerial capacity derivatives for related positions
trades under the procedures set forth in
and registered pursuant to Section 4n of transaction must include:
§ 1.31 of this chapter.
the Act, or a principal thereof, including (A) Separate but integrally related
any investment advisor who satisfies the transactions involving the same or a Subpart K—Trade Information
criteria of § 4.7(a)(2)(v) of this chapter, related commodity;
or a foreign person performing a similar (B) Price correlation and quantitative § 38.550 Core Principle 10.
role or function and subject as such to equivalence of the derivative and The board of trade shall maintain
foreign regulation, if such commodity related position legs; and rules and procedures to provide for the
trading advisor, investment advisor or (C) A buyer of a derivative who is the recording and safe storage of all
foreign person has more than seller of the corresponding related identifying trade information in a
$25,000,000 in total assets under position, and a seller of a derivative manner that enables the contract market
management. who is the buyer of the corresponding to use the information:
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(f) Recordkeeping. Parties to, and related position. (a) To assist in the prevention of
members facilitating, a block trade must (ii) The transaction must result in an customer and market abuses; and
keep accurate block trade records that actual transfer of ownership of the (b) To provide evidence of any
comply with Sections 5(d)(10) and related position and occur between violations of the rules of the contract
5(d)(18) of the Act and the associated parties with different beneficial owners market.
Commission regulations in subparts K or under separate control.
and S of this part. Block trade orders (iii) The price differential between the § 38.551 Audit trail required.
must be recorded by the member and futures leg and the commodities leg or A designated contract market must
time-stamped with both the time the derivatives position should reflect capture and retain all audit trail data

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necessary to detect, investigate, and trading violations with respect to both Subpart L—Financial Integrity of
prevent customer and market abuses. customer and market abuse. Transactions
Such data must be sufficient to (d) Safe storage capability. A
reconstruct all transactions within a § 38.600 Core Principle 11.
designated contract market’s audit trail
reasonable period of time and to provide program must include the capability to The board of trade shall establish and
evidence of any violations of the rules safely store all audit trail data retained enforce:
of the designated contract market. An in its transaction history database. Such (a) Rules and procedures for ensuring
acceptable audit trail must also permit safe storage capability must include the the financial integrity of transactions
the designated contract market to track capability to store all data in the entered into on or through the facilities
a customer order from the time of database in a manner that protects it of the contract market (including the
receipt through fill, allocation, or other from unauthorized alteration, as well as clearance and settlement of the
disposition, and must include both from accidental erasure or other loss. transactions with a derivatives clearing
order and trade data. Data must be retained in accordance organization); and
with the recordkeeping requirements of (b) Rules to ensure:
§ 38.552 Elements of an acceptable audit (1) The financial integrity of any:
trail program.
Core Principle 18 and the associated (i) Futures commission merchant, and
regulations in subpart S of this part. (ii) Introducing broker; and
(a) Original source documents. A
(2) The protection of customer funds.
designated contract market’s audit trail § 38.553 Enforcement of audit trail
must include original source requirements. § 38.601 Mandatory clearing.
documents. Original source documents (a) Annual audit trail and Transactions executed on or through
include unalterable, sequentially recordkeeping reviews. A designated the designated contract market, other
identified records on which trade contract market must enforce its audit than transactions in security futures
execution information is originally trail and recordkeeping requirements products, must be cleared through a
recorded, whether recorded manually or through at least annual reviews of all Commission-registered derivatives
electronically. Records for customer members and market participants to clearing organization, in accordance
orders (whether filled, unfilled or verify their compliance with the with the provisions of part 39 of this
cancelled, each of which shall be contract market’s audit trail and chapter.
retained or electronically captured) recordkeeping requirements. Such
must reflect the terms of the order, an reviews must include, but are not § 38.602 General financial integrity.
account identifier that relates back to limited to, the following: A designated contract market must
the account(s) owner(s), and the time of (1) For electronic trading, audit trail provide for the financial integrity of its
order entry. For open-outcry trades, the and recordkeeping reviews must transactions by establishing and
time of report of execution of the order include reviews of randomly selected maintaining appropriate minimum
shall also be captured. samples of front-end audit trail data for financial standards for its members and
(b) Transaction history database. A order routing systems; a review of the non-intermediated market participants.
designated contract market’s audit trail process by which user identifications § 38.603 Protection of customer funds.
program must include an electronic are assigned and user identification
transaction history database. An A designated contract market must
records are maintained; a review of
adequate transaction history database have rules concerning the protection of
usage patterns associated with user
includes a history of all orders and customer funds. These rules shall
identifications to monitor for violations
trades, and also includes: address appropriate minimum financial
of user identification rules; and reviews
(1) All data that are input into the standards for intermediaries, the
of account numbers and customer type
trade entry or matching system for the segregation of customer and proprietary
indicator codes in trade records to test
transaction to match and clear; funds, the custody of customer funds,
for accuracy and improper use.
the investment standards for customer
(2) The categories of participants for (2) For open outcry trading, audit trail funds, intermediary default procedures
which such trades are executed, and recordkeeping reviews must and related recordkeeping. A designated
including whether the person executing include reviews of members’ and market contract market must review the default
a trade was executing it for his/her own participants’ compliance with the rules and procedures of the derivatives
account or an account for which he/she designated contract market’s trade clearing organization that clears for such
has discretion, his/her clearing timing, order ticket, and trading card designated contract market to wind
member’s house account, the account of requirements. down operations, transfer customers, or
another member, including market (b) Enforcement program required. A otherwise protect customers in the event
participants present on the floor, or the designated contract market must of a default of a clearing member or the
account of any other customer; establish a program for effective derivatives clearing organization.
(3) Timing and sequencing data enforcement of its audit trail and
adequate to reconstruct trading; and recordkeeping requirements for both § 38.604 Financial surveillance.
(4) Identification of each account to electronic and open-outcry trading, as A designated contract market must
which fills are allocated. applicable. An effective program must monitor members’ compliance with the
(c) Electronic analysis capability. A identify members and market designated contract market’s minimum
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designated contract market’s audit trail participants that have failed to maintain financial standards and, therefore, must
program must include electronic high levels of compliance with such routinely receive and promptly review
analysis capability with respect to all requirements, and levy meaningful financial and related information from
audit trail data in the transaction history sanctions when deficiencies are found. its members, as well as continuously
database. An adequate electronic Sanctions must be sufficient to deter monitor the positions of members and
analysis capability must permit the recidivist behavior, and may not include their customers. A designated contract
sorting and presentation of data in the more than one warning letter for the market must have rules that prescribe
transaction history database so as to same violation within a rolling twelve minimum capital requirements for
reconstruct trading and identify possible month period. member futures commission merchants

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and introducing brokers. A designated merchants to implement appropriate enforcement resources and staff are at
contract market must: financial risk limits. A designated appropriate levels. The enforcement
(a) Continually survey the obligations contract market must implement and staff may not include either members of
of each futures commission merchant enforce rules requiring the member the designated contract market or
created by the positions of its futures commission merchants to use persons whose interests conflict with
customers; the provided systems and controls. their enforcement duties. A member of
(b) As appropriate, compare those the enforcement staff may not operate
obligations to the financial resources of Subpart M—Protection of Markets and under the direction or control of any
the futures commission merchant; and Market Participants person or persons with trading
(c) Take appropriate steps to use this § 38.650 Core Principle 12. privileges at the contract market. A
information to protect customer funds. designated contract market’s
The board of trade shall establish and
enforcement staff may operate as part of
§ 38.605 Requirements for financial enforce rules:
(a) To protect markets and market the designated contract market’s
surveillance program.
participants from abusive practices compliance department.
A designated contract market’s
financial surveillance program for committed by any party, including § 38.702 Disciplinary panels.
futures commission merchants, retail abusive practices committed by a party (a) Disciplinary panels required. A
foreign exchange dealers, and acting as an agent for a participant; and designated contract market must
introducing brokers must comply with (b) To promote fair and equitable establish one or more Review Panels
the requirements of § 1.52 of this trading on the contract market. and one or more Hearing Panels
chapter to assess the compliance of such § 38.651 Additional sources for (collectively, ‘‘disciplinary panels’’) that
entities with applicable contract market compliance. are authorized to fulfill their obligations
rules and Commission regulations. A designated contract market must under the rules of this subpart.
have and enforce rules that are designed Disciplinary panels must meet the
§ 38.606 Financial regulatory services
to promote fair and equitable trading composition requirements of
provided by a third party.
and to protect the market and market § 40.9(c)(3)(ii) of this chapter, and must
A designated contract market may not include any members of the
comply with the requirements of participants from abusive practices
including fraudulent, noncompetitive or designated contract market’s
§ 38.604 (Financial Surveillance) and compliance staff, or any person
§ 38.605 (Requirements for Financial unfair actions, committed by any party.
The designated contract market must involved in adjudicating any other stage
Surveillance Program) of this part of the same proceeding.
through the regulatory services of a have methods and resources appropriate
to the nature of the trading system and (b) Review panels. A designated
registered futures association or a contract market’s Review Panel(s) must
registered entity (collectively, the structure of the market to detect
trade practice and market abuses and to be responsible for determining whether
‘‘regulatory service provider’’), as such a reasonable basis exists for finding a
terms are defined under the Act. A discipline such behavior, in accordance
with Core Principles 2 and 4, and the violation of contract market rules, and
designated contract market must ensure for authorizing the issuance of notices of
that its regulatory service provider has associated regulations in subparts C and
E of this part, respectively. The charges against persons alleged to have
the capacity and resources necessary to committed violations if the Review
provide timely and effective regulatory designated contract market also must
provide a competitive, open and Panel believes that the matter should be
services, including adequate staff and adjudicated.
appropriate surveillance systems. A efficient market and mechanism for
executing transactions in accordance (c) Hearing Panels. A designated
designated contract market will at all contract market’s Hearing Panel(s) must
times remain responsible for with Core Principle 9 and the associated
regulations under subpart J of this part. be responsible for adjudicating
compliance with its obligations under disciplinary cases pursuant to a notice
the Act and Commission regulations, Subpart N—Disciplinary Procedures of charges authorized by a Review
and for the regulatory service provider’s Panel, and must also be responsible for
performance on its behalf. Regulatory § 38.700 Core Principle 13. such other duties as are specified in this
services must be provided under a The board of trade shall establish and subpart.
written agreement with a regulatory enforce disciplinary procedures that
services provider that shall specifically authorize the board of trade to § 38.703 Review of investigation report.
document the services to be performed discipline, suspend, or expel members Promptly after receiving a completed
as well as the capacity and resources of or market participants that violate the investigation report pursuant to
the regulatory service provider with rules of the board of trade, or similar § 38.158(c) of this part, a Review Panel
respect to the services to be performed. methods for performing the same must promptly review the report and,
functions, including delegation of the within 30 days of such receipt, must
§ 38.607 Direct access. take one of the following actions:
functions to third parties.
A designated contract market that (a) If the Review Panel determines
permits direct electronic access by § 38.701 Enforcement staff. that additional investigation or evidence
customers (i.e., allowing customers of A designated contract market must is needed, it must promptly direct the
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futures commission merchants to enter establish and maintain sufficient compliance staff to conduct further
orders directly into a designated enforcement staff and resources to investigation.
contract market’s trade matching system effectively and promptly prosecute (b) If the Review Panel determines
for execution) must have in place possible rule violations within the that no reasonable basis exists for
effective systems and controls disciplinary jurisdiction of the contract finding a violation or that prosecution is
reasonably designed to enable the market. A designated contract market otherwise unwarranted, it may direct
FCM’s management of financial risk, must also monitor the size and that no further action be taken. Such
such as automated pre-trade controls workload of its enforcement staff determination must be in writing, and
that enable member futures commission annually, and ensure that its must include a written statement setting

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 80620 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

forth the facts and analysis supporting charges for which the respondent agreement of the enforcement staff, the
the decision. admitted or failed to deny any of the decision must adequately support the
(c) If the Review Panel determines charges have been committed. If the Hearing Panel’s acceptance of the
that a reasonable basis exists for finding designated contract market’s rules so settlement. Where applicable, the
a violation and adjudication is provide, then: decision must also include a statement
warranted, it must direct that the person (a) The Hearing Panel must impose a that the respondent has accepted the
or entity alleged to have committed the sanction for each violation found to sanctions imposed without either
violation be served with a notice of have been committed; admitting or denying the rule violations.
charges and must proceed in accordance (b) The Hearing Panel must promptly (d) The respondent may withdraw his
with the rules of this section. notify the respondent in writing of any or her offer of settlement at any time
sanction to be imposed pursuant to before final acceptance by a panel. If an
§ 38.704 Notice of charges.
paragraph (a) of this section and shall offer is withdrawn after submission, or
A notice of charges must adequately advise the respondent that it may is rejected by a disciplinary panel, the
state the acts, conduct, or practices in request a hearing on such sanction respondent must not be deemed to have
which the respondent is alleged to have within the period of time, which shall made any admissions by reason of the
engaged; state the rule, or rules, alleged be stated in the notice; offer of settlement and must not be
to have been violated (or about to be (c) The rules of a designated contract otherwise prejudiced by having
violated); and prescribe the period market may provide that if a respondent submitted the offer of settlement.
within which a hearing on the charges fails to request a hearing within the
may be requested. The notice must also period of time stated in the notice, the § 38.710 Hearings.
advise the respondent charged that he is respondent will be deemed to have (a) A designated contract market must
entitled, upon request, to a hearing on accepted the sanction. adopt rules that provide for the
the charges; and if the rules of the following minimum requirements for
designated contract market so provide: § 38.708 Denial of charges and right to any hearing conducted pursuant to a
(a) That failure to request a hearing hearing. notice of charges:
within the period prescribed in the In every instance where a respondent (1) The hearing must be fair, must be
notice, except for good cause, may be has requested a hearing on a charge that conducted before members of the
deemed a waiver of the right to a is denied, or on a sanction set by the Hearing Panel, and must be promptly
hearing; and Hearing Panel pursuant to § 38.707 of convened after reasonable notice to the
(b) That failure to answer or to deny this part, the respondent must be given respondent. The formal rules of
expressly a charge may be deemed to be an opportunity for a hearing in evidence need not apply; nevertheless,
an admission of such charge. accordance with the requirements of the procedures for the hearing may not
§ 38.710 of this part. The designated be so informal as to deny a fair hearing.
§ 38.705 Right to representation.
contract market’s rules may provide No member of the Hearing Panel for the
Upon being served with a notice of that, except for good cause, the hearing matter may have a financial, personal,
charges, a respondent must have the must be concerned only with those or other direct interest in the matter
right to be represented by legal counsel charges denied and/or sanctions set by under consideration.
or any other representative of its the Hearing Panel under § 38.707 of this (2) In advance of the hearing, the
choosing in all succeeding stages of the part for which a hearing has been respondent must be entitled to examine
disciplinary process. requested. all books, documents, or other evidence
§ 38.706 Answer to charges. in the possession or under the control
§ 38.709 Settlement offers. of the designated contract market that
A respondent must be given a (a) The rules of a designated contract
reasonable period of time to file an are to be relied upon by the enforcement
market may permit a respondent to staff in presenting the charges contained
answer to a notice of charges. The rules submit a written offer of settlement at
of a designated contract market may in the notice of charges or which are
any time after the investigation report is relevant to those charges.
require that: completed. The disciplinary panel
(a) The answer must be in writing and (3) The designated contract market’s
presiding over the matter may accept enforcement and compliance staffs must
include a statement that the respondent
the offer of settlement, but may not alter be parties to the hearing, and the
admits, denies, or does not have and is
the terms of a settlement offer unless the enforcement staff must present their
unable to obtain sufficient information
respondent agrees. case on those charges and sanctions that
to admit or deny each allegation. A
(b) The rules of a designated contract are the subject of the hearing.
statement of a lack of sufficient
market may provide that, in its (4) The respondent must be entitled to
information shall have the effect of a
discretion, a disciplinary panel may appear personally at the hearing, must
denial of an allegation;
(b) Failure to file an answer on a permit the respondent to accept a be entitled to cross-examine any persons
timely basis shall be deemed an sanction without either admitting or appearing as witnesses at the hearing,
admission of all allegations contained in denying the rule violations upon which and must be entitled to call witnesses
the notice of charges; and the sanction is based. and to present such evidence as may be
(c) Failure in an answer to deny (c) If an offer of settlement is relevant to the charges.
expressly a charge shall be deemed to be accepted, the panel accepting the offer (5) The designated contract market
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an admission of such charge. must issue a written decision specifying must require persons within its
the rule violations it has reason to jurisdiction who are called as witnesses
§ 38.707 Admission or failure to deny believe were committed, including the to participate in the hearing and to
charges. basis or reasons for the panel’s produce evidence. It must make
The rules of a designated contract conclusions, and any sanction to be reasonable efforts to secure the presence
market may provide that if a respondent imposed, which must include full of all other persons called as witnesses
admits or fails to deny any of the customer restitution where customer whose testimony would be relevant.
charges a Hearing Panel may find that harm is demonstrated. If an offer of (6) If the respondent has requested a
the violations alleged in the notice of settlement is accepted without the hearing, a copy of the hearing must be

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made and must become a part of the appeal to be in writing and to specify § 38.715 Summary fines for violations of
record of the proceeding. The record the findings, conclusions, or sanctions rules regarding timely submission of
must be one that is capable of being to which objection are taken. If the rules records, decorum, or other similar
accurately transcribed; however, it need of a designated contract market permit activities.
not be transcribed unless the transcript appeals, then both the respondent and A designated contract market may
is requested by Commission staff or the the enforcement staff must have the adopt a summary fine schedule for
respondent, the decision is appealed opportunity to appeal and the violations of rules relating to the timely
pursuant to § 38.712 of this part, or is designated contract must provide for the submission of accurate records required
reviewed by the Commission pursuant following: for clearing or verifying each day’s
to Section 8c of the Act or part 9 of this (a) The designated contract market transactions, decorum, attire, or other
chapter. In all other instances a must establish an appellate panel that similar activities. A designated contract
summary record of a hearing is must be authorized to hear appeals of market may permit its compliance staff,
permitted. respondents. In addition, the rules of a or a designated panel of contract market
(7) The rules of a designated contract designated contract market may provide officials, to summarily impose minor
market may provide that the cost of that the appellate panel may, on its own sanctions against persons within the
transcribing the record of the hearing initiative, order review of a decision by designated contract market’s
must be borne by a respondent who the Hearing Panel within a reasonable jurisdiction for violating such rules. A
requests the transcript, appeals the period of time after the decision has designated contract market’s summary
decision pursuant to § 38.712 of this been rendered. fine schedule may allow for warning
part, or whose application for letters to be issued for first-time
(b) The composition of the appellate
Commission review of the disciplinary violations or violators, provided that no
panel must be consistent with
action has been granted. In all other more than one warning letter may be
§ 40.9(c)(iv) of this chapter, and must
instances, the cost of transcribing the issued per rolling 12-month period for
not include any members of the
record must be borne by the designated the same violation. If adopted, a
designated contract market’s
contract market. summary fine schedule must provide for
compliance staff, or any person
(b) The rules of a designated contract progressively larger fines for recurring
involved in adjudicating any other stage
market may provide that a sanction may violations.
of the same proceeding. The rules of a
be summarily imposed upon any person designated contract market must § 38.716 Emergency disciplinary actions.
within its jurisdiction whose actions provide for the appeal proceeding to be (a) A designated contract market may
impede the progress of a hearing. conducted before all of the members of impose a sanction, including
§ 38.711 Decisions. the board of appeals or a panel thereof. suspension, or take other summary
Promptly following a hearing (c) Except for good cause shown, the action against a person or entity subject
conducted in accordance with § 38.710 appeal or review must be conducted to its jurisdiction upon a reasonable
of this part, the Hearing Panel must solely on the record before the Hearing belief that such immediate action is
render a written decision based upon Panel, the written exceptions filed by necessary to protect the best interest of
the weight of the evidence contained in the parties, and the oral or written the marketplace.
the record of the proceeding and must arguments of the parties. (b) Any emergency disciplinary action
provide a copy to the respondent. (d) Promptly following the appeal or must be taken in accordance with a
The decision must include: review proceeding, the board of appeals designated contract market’s procedures
(a) The notice of charges or a must issue a written decision and must that provide for the following:
summary of the charges; provide a copy to the respondent. The (1) If practicable, a respondent must
(b) The answer, if any, or a summary decision issued by the board of appeal be served with a notice before the action
of the answer; must adhere to all the requirements of is taken, or otherwise at the earliest
(c) A summary of the evidence § 38.711 of this part, to the extent that possible opportunity. The notice must
produced at the hearing or, where a different conclusion is reached from state the action, briefly state the reasons
appropriate, incorporation by reference that issued by the Hearing Panel. for the action, and state the effective
of the investigation report; time and date, and the duration of the
§ 38.713 Final decisions. action.
(d) A statement of findings and
conclusions with respect to each charge, Each designated contract market must (2) The respondent must have the
and a complete explanation of the establish rules setting forth when a right to be represented by legal counsel
evidentiary and other basis for such decision rendered pursuant to this or any other representative of its
findings and conclusions with respect to section will become the final decision of choosing in all proceedings subsequent
each charge; such designated contract market. to the emergency action taken. The
(e) An indication of each specific rule respondent must be given the
§ 38.714 Disciplinary sanctions. opportunity for a hearing as soon as
that the respondent was found to have
violated; and All disciplinary sanctions imposed by reasonably practicable and the hearing
(f) A declaration of all sanctions a designated contract market or its must be conducted before the Hearing
imposed against the respondent, disciplinary panels must be Panel pursuant to the requirements of
including the basis for such sanctions commensurate with the violations § 38.710 of this part.
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and the effective date of such sanctions. committed and must be clearly (3) Promptly following the hearing
sufficient to deter recidivism or similar provided for in this rule, the designated
§ 38.712 Right to appeal. violations by other market participants. contract market must render a written
The rules of a designated contract All disciplinary sanctions must take decision based upon the weight of the
market may permit the parties to a into account the respondent’s evidence contained in the record of the
proceeding to appeal promptly an disciplinary history. In the event of proceeding and must provide a copy to
adverse decision of the Hearing Panel in demonstrated customer harm, any the respondent. The decision must
all or in certain classes of cases. Such disciplinary sanction must also include include a description of the summary
rules may require a party’s notice of full customer restitution. action taken; the reasons for the

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summary action; a summary of the (b) For a period of at least 5 years. (1) Information security;
evidence produced at the hearing; a (2) Business continuity-disaster
statement of findings and conclusions; a § 38.951 Additional sources for recovery planning and resources;
compliance. (3) Capacity and performance
determination that the summary action
should be affirmed, modified, or A designated contract market must planning;
reversed; and a declaration of any action maintain such records, including trade (4) Systems operations;
to be taken pursuant to the records and investigatory and (5) Systems development and quality
determination, and the effective date disciplinary files, in accordance with assurance; and
and duration of such action. the requirements of § 1.31 of this (6) Physical security and
chapter, and in accordance with § 45.1 environmental controls.
Subpart O—Dispute Resolution of this chapter, if applicable. (b) In addressing the categories of risk
analysis and oversight required under
§ 38.750 Core Principle 14. Subpart T—Antitrust Considerations paragraph (a) of this section, a
The board of trade shall establish and designated contract market should
§ 38.1000 Core Principle 19.
enforce rules regarding, and provide follow generally accepted standards and
facilities for alternative dispute Unless necessary or appropriate to best practices with respect to the
resolution as appropriate for, market achieve the purposes of this Act, the development, operation, reliability,
participants and any market board of trade shall not: security, and capacity of automated
intermediaries. (a) Adopt any rule or taking any systems.
action that results in any unreasonable (c) A designated contract market must
§ 38.751 Additional sources for restraint of trade; or maintain a business continuity-disaster
compliance. (b) Impose any material recovery plan and business continuity-
Applicants and designated contract anticompetitive burden on trading on disaster recovery resources, emergency
markets may refer to the guidance and the contract market. procedures, and backup facilities
acceptable practices in Appendix B of sufficient to enable timely recovery and
this part to demonstrate to the § 38.1001 Additional sources for
compliance. resumption of its operations and
Commission compliance with the resumption of its ongoing fulfillment of
requirements of § 38.750 of this part. Applicants and designated contract
its responsibilities and obligations as a
markets may refer to the guidance and
designated contract market following
Subpart P—Governance Fitness acceptable practices in appendix B of
any disruption of its operations. Such
Standards this part to demonstrate to the
responsibilities and obligations include,
Commission compliance with the
§ 38.800 Core Principle 15. without limitation, order processing and
requirements of § 38.1000 of this part.
The board of trade shall establish and trade matching; transmission of
enforce appropriate fitness standards for Subpart U—System Safeguards matched orders to a designated clearing
directors, members of any disciplinary organization for clearing; price
§ 38.1050 Core Principle 20. reporting; market surveillance; and
committee, members of the contract
market, and any other person with Each designated contract market shall: maintenance of a comprehensive audit
direct access to the facility (including (a) Establish and maintain a program trail. The designated contract market’s
any party affiliated with any person of risk analysis and oversight to identify business continuity-disaster recovery
described in this paragraph). and minimize sources of operational plan and resources generally should
risk, through the development of enable resumption of trading and
Subpart Q—Conflicts of Interest appropriate controls and procedures, clearing of the designated contract
and the development of automated market’s products during the next
§ 38.850 Core Principle 16. systems, that are reliable, secure, and business day following the disruption.
The board of trade shall establish and have adequate scalable capacity; Designated contract markets determined
enforce rules: (b) Establish and maintain emergency by the Commission to be critical
(a) To minimize conflicts of interest in procedures, backup facilities, and a plan financial markets are subject to more
the decision-making process of the for disaster recovery that allow for the stringent requirements in this regard, set
contract market; and timely recovery and resumption of forth in § 40.9 of this chapter. Electronic
(b) To establish a process for resolving operations and the fulfillment of the trading is an acceptable backup for open
conflicts of interest described in responsibilities and obligations of the outcry trading in the event of a
paragraph (a) of this section. board of trade; and disruption.
(c) Periodically conduct tests to verify (d) A designated contract market that
Subpart R—Composition of Governing is not determined by the Commission to
that backup resources are sufficient to
Boards of Contract Markets be a critical financial market satisfies
ensure continued order processing and
§ 38.900 Core Principle 17. trade matching, transmission of the requirement to be able to resume
The governance arrangements of the matched orders to a designated clearing trading and clearing during the next
board of trade shall be designed to organization for clearing, price business day following a disruption by
permit consideration of the views of reporting, market surveillance, and maintaining either:
market participants. maintenance of a comprehensive and (1) Infrastructure and personnel
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accurate audit trail. resources of its own that are sufficient

Subpart S—Recordkeeping to ensure timely recovery and
§ 38.1051 General requirements. resumption of its operations and
§ 38.950 Core Principle 18. (a) A designated contract market’s resumption of its ongoing fulfillment of
The board of trade shall maintain program of risk analysis and oversight its responsibilities and obligations as a
records of all activities relating to the with respect to its operations and designated contract market following
business of the contract market: automated systems must address each of any disruption of its operations; or
(a) In a form and manner that is the following categories of risk analysis (2) Contractual arrangements with
acceptable to the Commission; and and oversight: other designated contract markets or

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disaster recovery service providers, as (i) To the extent practicable, a least equal to a total amount that would
appropriate, that are sufficient to ensure designated contract market should: enable the designated contract market,
continued trading and clearing of the (1) Coordinate its business continuity- or applicant for designation as such, to
designated contract market’s products, disaster recovery plan with those of the cover its operating costs for a period of
and ongoing fulfillment of all of the members and other market participants at least one year, calculated on a rolling
designated contract market’s upon whom it depends to provide basis.
responsibilities and obligations with liquidity, in a manner adequate to (b) Types of financial resources.
respect to those products, in the event enable effective resumption of activity Financial resources available to satisfy
that a disruption renders the designated in its markets following a disruption the requirements of paragraph (a) of this
contract market temporarily or causing activation of the designated section may include:
permanently unable to satisfy this contract market’s business continuity- (1) The designated contract market’s
requirement on its own behalf. disaster recovery plan; own capital; and
(e) A designated contract market must (2) Initiate and coordinate periodic, (2) Any other financial resource
notify Commission staff promptly of all: synchronized testing of its business deemed acceptable by the Commission.
(1) Electronic trading halts and continuity-disaster recovery plan and (c) Computation of financial resource
systems malfunctions; the business continuity-disaster requirement. A designated contract
(2) Cyber security incidents or recovery plans of the members and market must, on a quarterly basis, based
targeted threats that actually or other market participants upon whom it upon its fiscal year, make a reasonable
potentially jeopardize automated system depends to provide liquidity; and calculation of its projected operating
(3) Ensure that its business costs over a 12-month period in order to
operation, reliability, security, or
continuity-disaster recovery plan takes determine the amount needed to meet
capacity; and
into account the business continuity- the requirements of paragraph (a) of this
(3) Any activation of the designated
disaster recovery plans of its section. The designated contract market
contract market’s business continuity-
telecommunications, power, water, and shall have reasonable discretion in
disaster recovery plan. other essential service providers.
(f) A designated contract market must determining the methodology used to
(j) Part 46 of this chapter governs the compute such projected operating costs.
give Commission staff timely advance obligations of those registered entities
notice of all: The Commission may review the
that the Commission has determined to methodology and require changes as
(1) Planned changes to automated be critical financial markets, with appropriate.
systems that may impact the reliability, respect to maintenance and geographic (d) Valuation of financial resources.
security, or adequate scalable capacity dispersal of disaster recovery resources At appropriate intervals, but not less
of such systems; and sufficient to meet a same-day recovery than quarterly, a designated contract
(2) Planned changes to the designated time objective in the event of a wide- market must compute the current
contract market’s program of risk scale disruption. Section 40.9 of this market value of each financial resource
analysis and oversight. chapter establishes the requirements for used to meet its obligations under
(g) A designated contract market must core principle compliance in that paragraph (a) of this section. Reductions
provide to the Commission upon respect. in value to reflect market and credit risk
request current copies of its business (‘‘haircuts’’) must be applied as
continuity-disaster recovery plan and Subpart V—Financial Resources
appropriate.
other emergency procedures, its (e) Liquidity of financial resources.
§ 38.1100 Core Principle 21.
assessments of its operational risks, and The financial resources allocated by the
other documents requested by (a) In General. The board of trade
shall have adequate financial, designated contract market to meet the
Commission staff for the purpose of requirements of paragraph (a) of this
maintaining a current profile of the operational, and managerial resources to
discharge each responsibility of the section must include unencumbered,
designated contract market’s automated liquid financial assets (i.e., cash and/or
systems. board of trade.
(b) Determination of Adequacy. The highly liquid securities) equal to at least
(h) A designated contract market must six months’ operating costs. If any
financial resources of the board of trade
conduct regular, periodic, objective portion of such financial resources is
shall be considered to be adequate if the
testing and review of its automated not sufficiently liquid, the designated
value of the financial resources exceeds
systems to ensure that they are reliable, contract market may take into account a
the total amount that would enable the
secure, and have adequate scalable committed line of credit or similar
contract market to cover the operating
capacity. It must also conduct regular, facility for the purpose of meeting this
costs of the contract market for a 1-year
periodic testing and review of its requirement.
period, as calculated on a rolling basis.
business continuity-disaster recovery (f) Reporting requirements. (1) Each
capabilities. Both types of testing should § 38.1101 General requirements. fiscal quarter, or at any time upon
be conducted by qualified, independent (a) General rule. (1) A designated Commission request, a designated
professionals. Such qualified contract market must maintain financial contract market must:
independent professionals may be resources sufficient to enable it to (i) Report to the Commission:
independent contractors or employees perform its functions in compliance (A) The amount of financial resources
of the designated contract market, but with the core principles set forth in necessary to meet the requirements of
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should not be persons responsible for Section 5 of the Act and regulations paragraph (a) of this section; and
development or operation of the systems thereunder. (B) The value of each financial
or capabilities being tested. Pursuant to (2) An entity that operates as both a resource available, computed in
Core Principle 18 (Recordkeeping) and designated contract market and a accordance with the requirements of
§§ 38.950 and 38.951 of this part, the derivatives clearing organization also paragraph (d) of this section; and
designated contract market must keep shall comply with the financial resource (ii) Provide the Commission with a
records of all such tests, and make all requirements of § 39.11 of this chapter. financial statement, including the
test results available to the Commission (3) Financial resources shall be balance sheet, income statement, and
upon request. considered sufficient if their value is at statement of cash flows of the

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designated contract market or of its Appendix A—Form DCM 5. For the purposes of this Form DCM, the
parent company. lit] term ‘‘Applicant’’ shall include any applicant
(2) The calculations required by this for designation as a contract market or any
COMMODITY FUTURES TRADING designated contract market that is amending
paragraph shall be made as of the last COMMISSION Form DCM.
business day of the designated contract 6. Under Section 5 of the CEA and the
market’s fiscal quarter. FORM DCM
Commission’s regulations thereunder, the
(3) The designated contract market CONTRACT MARKET Commission is authorized to solicit the
must provide the Commission with: APPLICATION OR AMENDMENT TO information required to be supplied by this
(i) Sufficient documentation APPLICATION FOR DESIGNATION Form DCM from Applicants seeking
explaining the methodology used to designation as a contract market and from a
DESIGNATION INSTRUCTIONS designated contract market. Disclosure of the
compute its financial requirements
under paragraph (a) of this section, Intentional misstatements or material information specified on this Form DCM is
omissions of fact may constitute Federal mandatory prior to the start of processing of
(ii) Sufficient documentation criminal violations (7 U.S.C. 13 and 18 U.S.C. an application for designation as a contract
explaining the basis for its 1001) or grounds for disqualification from market. The information provided with this
determinations regarding the valuation designation. Form DCM will be used for the principal
and liquidity requirements set forth in purpose of determining whether the
DEFINITIONS
paragraphs (d) and (e) of this section, Commission should grant or deny
and Unless the context requires otherwise, all
designation to an Applicant. The
terms used in the Form DCM have the same
(iii) Copies of any agreements meaning as in the Commodity Exchange Act,
Commission further may determine that
establishing or amending a credit as amended (‘‘CEA’’ or ‘‘Act’’), and in the other and additional information is required
facility, insurance coverage, or other General Rules and Regulations of the from the Applicant in order to process its
arrangement evidencing or otherwise Commodity Futures Trading Commission application. Except in cases where
supporting the designated contract (‘‘Commission’’) thereunder. confidential treatment is requested by the
Applicant and granted by the Commission,
market’s conclusions. GENERAL INSTRUCTIONS pursuant to the Freedom of Information Act
(4) The report shall be filed not later 1. Application Form DCM and Exhibits and the rules of the Commission thereunder,
than 17 business days after the end of thereto are to be filed with the Commission information supplied on this Form DCM will
the designated contract market’s fiscal by applicants for designation as a contract be included routinely in the public files of
quarter, or at such later time as the market, or by a designated contract market the Commission and will be available for
Commission may permit, in its amending such designation, pursuant to inspection by any interested person. A Form
discretion, upon request by the Section 5 of the CEA and the Commission’s DCM which is not prepared and executed in
designated contract market. regulations thereunder. Applicants may compliance with applicable requirements
prepare their own Form DCM but must and instructions may be returned as not
Subpart W—Diversity of Board of follow the format prescribed herein. Upon acceptable for filing. Acceptance of this Form
the filing of an application for designation in DCM, however, shall not constitute a finding
Directors accordance with the instructions provided that the Form DCM has been filed as required
§ 38.1150 Core Principle 22. herein, the Commission will publish notice or that the information submitted is true,
of the filing and afford interested persons an
The board of trade, if a publicly current or complete.
opportunity to submit written data, views
traded company, shall endeavor to and arguments concerning such application. UPDATING INFORMATION ON THE FORM
recruit individuals to serve on the board No application for designation shall be DCM
of directors and the other decision- effective unless the Commission, by order,
1. Part 38 of the Commission’s regulations
making bodies (as determined by the grants such designation.
requires that if any information contained in
Commission) of the board of trade from 2. Individuals’ names, except the executing
signature in Item 10, shall be given in full this application, or any supplement or
among, and to have the composition of (Last Name, First Name, and Middle Name). amendment thereto, is or becomes inaccurate
the bodies reflect, a broad and culturally 3. Signatures on all copies of the Form for any reason, an amendment to Form DCM,
diverse pool of qualified candidates. DCM filed with the Commission can be or a submission under part 40 of the
executed electronically. If the Form DCM is Commission’s regulations, in either case
Subpart X—Securities and Exchange filed by a limited liability company, it must correcting such information must be filed
Commission be signed in the name of the limited liability promptly with the Commission.
company by a member duly authorized to 2. Designated Contract Markets filing Form
§ 38.1200 Core Principle 23. sign on the limited liability company’s DCM as an amendment need file only the
The board of trade shall keep any behalf; if filed by a partnership, it shall be facing page, the signature page (Item 10), and
such records relating to swaps defined signed in the name of the partnership by a any pages on which an answer is being
general partner duly authorized; if filed by an amended, together with any exhibits that are
in Section 1a(47)(A)(v) of the Act open unincorporated organization or association being amended. The submission of an
to inspection and examination by the which is not a partnership, it shall be signed amendment represents that the remaining
Securities and Exchange Commission. in the name of such organization or items and exhibits remain true, current and
association by the managing agent—i.e., a complete as previously filed.
§ 38.1201 Additional sources for duly authorized person who directs or
compliance. manages or who participates in the directing WHERE TO FILE
Applicants and designated contract or managing of its affairs; if filed by a The Application Form DCM and
markets may refer to the guidance and/ corporation, it shall be signed in the name of appropriate exhibits must be filed
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or acceptable practices in Appendix B of the corporation by a principal officer duly electronically with the Secretary of the
authorized. Commission at its Washington DC
this part to demonstrate to the
4. If Form DCM is being filed as an headquarters at submissions@[Link] and
Commission compliance with the application for designation, all applicable
requirements of § 38.1200 of this part. the Division of Market Oversight at
items must be answered in full. If any item DMOSubmissions@[Link].
19. Revise appendix A to part 38 to is not applicable, indicate by ‘‘none,’’ ‘‘not
read as follows: applicable,’’ or ‘‘N/A’’ as appropriate. BILLING CODE 6351–01–P

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 80626 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules
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BILLING CODE 6351–01–C b. Title by a division, subdivision, or other separate

EXHIBITS INSTRUCTIONS c. Dates of commencement and termination entity within the Applicant, corporation or
of present term of office or position organization, describe the relationship of
The following exhibits must be filed with d. Length of time each present officer, such entity within the overall organizational
the Commission by Applicants seeking director, or governor has held the same office structure and attach as Exhibit D a
designation as a contract market, or by a or position description only as it applies to the division,
designated contract market amending its e. Brief account of the business experience
designation, pursuant to Section 5 of the CEA subdivision or separate entity, as applicable.
of each officer and director over the last five Additionally, provide any relevant
and the Commission’s regulations (5) years
thereunder. The exhibits should be labeled jurisdictional information, including any and
f. Any other business affiliations in the all jurisdictions in which you or any
according to the items specified in this Form derivatives and securities industry
DCM. If any exhibit is not applicable, please affiliated entity are doing business, and
g. For directors, list any committees on registration status, including pending
specify the exhibit letter and indicate by which they serve and any compensation
‘‘none,’’ ‘‘not applicable,’’ or ‘‘N/A’’ as applications (e.g., country, regulator,
received by virtue of their directorship registration category, date of registration).
appropriate.
h. A description of:
Provide the address for legal service of
EXHIBITS—BUSINESS ORGANIZATION (1) Any order of the Commission with
process for each jurisdiction, which cannot
1. Attach as Exhibit A, the name of any respect to such person pursuant to Section 5e
be a post office box.
person(s) who owns ten percent (10%) or of the CEA;
(2) Any conviction or injunction against 5. Attach as Exhibit E, a description of the
more of the Applicant’s stock or who, either personnel qualifications for each category of
directly or indirectly, through agreement or such person within the past ten (10) years;
(3) Any disciplinary actions with respect to professional employees employed by the
otherwise, in any other manner, may control Applicant or the division, subdivision, or
or direct the management or policies of such person within the last five (5) years;
(4) Any disqualification under Sections 8b other separate entity within the Applicant as
Applicant. described in Item 4.
Provide as part of Exhibit A the full name and 8d of the CEA;
(5) Any disciplinary action under Section 6. Attach as Exhibit F, an analysis of
and address of each such person and attach
8c of the CEA; and staffing requirements necessary to carry out
a copy of the agreement or, if there is none
(6) Any violation pursuant to Section 9 of operations of the Applicant as a designated
written, describe the agreement or basis upon
which such person exercises or may exercise the CEA. contract market and the name and
such control or direction. 3. Attach as Exhibit C, a narrative that sets qualifications of each key staff person.
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2. Attach as Exhibit B, a list of the present forth the fitness standards for the Board of 7. Attach as Exhibit G, a copy of the
officers, directors, governors (and, in the case Directors and its composition including the constitution, articles of incorporation,
of an Applicant that is not a corporation, the number and percentage of public directors. formation or association with all
members of all standing committees grouped 4. Attach as Exhibit D, a narrative or amendments thereto, partnership or limited
by committee), or persons performing graphic description of the organizational liability agreements, and existing by-laws,
functions similar to any of the foregoing, of structure of the Applicant. Include a list of operating agreement, rules or instruments
the designated contract market or of any all affiliates of the Applicant and indicate the corresponding thereto, of the Applicant.
entity that performs the regulatory activities general nature of the affiliation. Note: If the Include any additional governance fitness
of the Applicant, indicating for each: designated contract market activities of the information not included in Exhibit C.
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a. Name Applicant are or will be conducted primarily Provide a certificate of good standing dated

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within one week of the date of the Form each differential. In addition, identify and 19. Attach as Exhibit S, a discussion of
DCM. describe any differences in the cost of how trading data will be maintained by the
8. Attach as Exhibit H, a brief description providing such services, and any other designated contract market.
of any pending legal proceeding(s), other factors, that account for such differentiations. 20. Attach as Exhibit T, a list of the name
than ordinary and routine litigation of the clearing organization(s) that will be
incidental to the business, to which the EXHIBITS—COMPLIANCE clearing the Applicant’s trades, and a
Applicant or any of its affiliates is a party or 12. Attach as Exhibit L, a narrative and representation that clearing members of that
to which any of its or their property is the supporting documents that may be provided organization will be guaranteeing such
subject. Include the name of the court or under other Exhibits herein, that describe the trades.
agency where the proceeding(s) are pending, manner in which the Applicant is able to 21. Attach as Exhibit U, any information
the date(s) instituted, the principal parties comply with each core principle. The (described with particularity) included in the
involved, a description of the factual basis Applicant should include an explanation, application that will be subject to a request
alleged to underlie the proceeding(s), and the and any other forms of documentation the for confidential treatment pursuant to § 145.9
relief sought. Include similar information as Applicant thinks will be helpful to its of the Commission’s regulations.
to any proceeding(s) known to be explanation, demonstrating how the
designated contract market will be able to EXHIBITS—OPERATIONAL CAPABILITY
contemplated by the governmental agencies.
comply with each core principle. To the 22. Attach as Exhibit V, information
EXHIBITS—FINANCIAL INFORMATION extent that the application raises issues that responsive to the Technology Questionnaire
9. Attach as Exhibit I: are novel, or for which compliance with a (hyperlink to Web site). This questionnaire
a. (i) Balance sheet, (ii) Statement of core principle is not self-evident, include an focuses on information pertaining to the
income and expenses, (iii) Statement of cash explanation of how that item and the Applicant’s program of risk analysis and
flows, and (iv) Statement of sources and application satisfy the core principles. oversight. Main topic areas include:
application of revenues and all notes or 13. Attach as Exhibit M, a copy of the information security; business continuity-
schedules thereto, as of the most recent fiscal Applicant’s rules (as defined in § 40.1 of the disaster recovery (‘‘BC–DR’’) planning and
year of the Applicant, or of its parent Commission’s regulations) and any technical resources; capacity and performance
company, if applicable. If a balance sheet and manuals, other guides or instructions for planning; systems operations; systems
any statements certified by an independent users of, or participants in, the market, development and quality assurance; and
public accountant are available, such balance including minimum financial standards for physical security and environmental
sheet and statement(s) should be submitted members or market participants. Include controls.
as Exhibit I. rules citing applicable Federal position limits 20. Revise Appendix B to part 38 to
b. Provide a narrative of how the value of and aggregation standards in part 151 of the read as follows:
the financial resources of the Applicant is at Commission’s regulations and any exchange
least equal to a total amount that would set position limit rules. Include rules on Appendix B to Part 38—Guidance on,
enable the Applicant to cover its operating publication of daily trading information with and Acceptable Practices in,
costs for a period of at least one year, regards to the requirements of part 16 of the Compliance With Core Principles
calculated on a rolling basis, and whether Commission’s regulations. The Applicant
such financial resources include should include an explanation, and other 1. This appendix provides guidance on
unencumbered, liquid financial assets (i.e. forms of documentation the Applicant thinks complying with core principles, both initially
cash and/or highly liquid securities) equal to will be helpful to its explanation, and on an ongoing basis, to obtain and
at least six months’ operating costs. demonstrating how the designated contract maintain designation under Section 5(d) of
c. Attach copies of any agreements market will be able to comply with each core the Act and this part 38. Where provided,
establishing or amending a credit facility, principle and how its rules, technical guidance is set forth in paragraph (a)
insurance coverage, or other arrangement manuals, other guides or instructions for following the relevant heading and can be
evidencing or otherwise supporting the users of, or participants in, the market, or used to demonstrate to the Commission
Applicant’s conclusions regarding the minimum financial standards for members of compliance with the selected requirements of
liquidity of its financial assets. market participants as provided in this a core principle, under §§ 38.3 and 38.5 of
d. Representations regarding sources and Exhibit M help support the designated this part. The guidance for the core principle
estimates for future ongoing operational contract market’s compliance with the core is illustrative only of the types of matters a
resources. principles. designated contract market may address, as
10. Attach as Exhibit J, a balance sheet and 14. Attach as Exhibit N, executed or applicable, and is not intended to be used as
an income and expense statement for each executable copies of any agreements or a mandatory checklist. Addressing the issues
affiliate of the designated contract market contracts entered into or to be entered into set forth in this appendix would help the
that also engages in designated contract by the Applicant, including third party Commission in its consideration of whether
market activities as of the end of the most regulatory service provider or member or the designated contract market is in
recent fiscal year of each such affiliate, and user agreements that enable or empower the compliance with the selected requirements of
each affiliate of the designated contract Applicant to comply with applicable core a core principle; provided however, that the
market that engages in swap execution principles. Identify: (1) The services that will guidance is not intended to diminish or
facility activities. be provided; and (2) The core principles replace, in any event, the obligations and
11. Attach as Exhibit K, the following: addressed by such agreement. requirements of applicants and designated
a. A complete list of all dues, fees and 15. Attach as Exhibit O, a copy of any contract markets to comply with the
other charges imposed, or to be imposed, by compliance manual and any other documents regulations provided under this part.
or on behalf of Applicant for its designated that describe with specificity, the manner in 2. Where provided, acceptable practices
contract market services that are provided on which the Applicant will conduct trade meeting selected requirements of core
an exclusive basis and identify the service or practice, market and financial surveillance. principles are set forth in paragraph (b)
services provided for each such due, fee, or 16. Attach as Exhibit P, a description of the following guidance. Designated contract
other charge. Applicant’s disciplinary and enforcement markets that follow specific practices
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b. A description of the basis and methods protocols, tools, and procedures and the outlined in the acceptable practices for a core
used in determining the level and structure arrangements for alternative dispute principle in this appendix will meet the
of the dues, fees and other charges listed in resolution. selected requirements of the applicable core
paragraph (a.) of this item. 17. Attach as Exhibit Q, a description of principle; provided however, that the
c. If the Applicant differentiates, or the Applicant’s trade matching algorithm and acceptable practice is not intended to
proposes to differentiate, among its examples of how that algorithm works in diminish or replace, in any event, the
customers, or classes of customers in the various trading scenarios involving various obligations and requirements of applicants
amount of any dues, fees, or other charges types of orders. and designated contract markets to comply
imposed for the same or similar exclusive 18. Attach as Exhibit R, a list of rules with the regulations provided under this part
services, so state and indicate the amount of prohibiting specific trade practice violations. 38. The acceptable practices are for

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illustrative purposes only and do not state (B) comprehensive and accurate trade agreed to, by the Commission or the
the exclusive means for satisfying a core reconstructions. Commission’s staff. The Commission should
principle. (a) Guidance. [Reserved.] be notified promptly of the DCM’s exercise
Core Principle 1 of section 5(d) of the Act: (b) Acceptable Practices. [Reserved.] of emergency action, explaining how
DESIGNATION AS CONTRACT MARKET.— Core Principle 5 of section 5(d) of the Act: conflicts of interest were minimized,
(A) IN GENERAL—To be designated, and POSITION LIMITATIONS OR including the extent to which the DCM
maintain a designation, as a contract market, ACCOUNTABILITY—(A) IN GENERAL.—To considered the effect of its emergency action
a board of trade shall comply with— reduce the potential threat of market on the underlying markets and on markets
(i) any core principle described in this manipulation or congestion (especially that are linked or referenced to the contract
subsection; and during trading in the delivery month), the market and similar markets on other trading
(ii) any requirement that the Commission board of trade shall adopt for each contract venues. Information on all regulatory actions
may impose by rule or regulation pursuant to of the board of trade, as is necessary and carried out pursuant to a DCM’s emergency
section 8a(5). appropriate, position limitations or position authority should be included in a timely
(B) REASONABLE DISCRETION OF accountability for speculators. submission of a certified rule pursuant to
CONTRACT MARKET—Unless otherwise (B) MAXIMUM ALLOWABLE POSITION part 40 of this chapter.
determined by the Commission by rule or LIMITATION.—For any contract that is (b) Acceptable Practices. A designated
regulation, a board of trade described in subject to a position limitation established by contract market must have procedures and
subparagraph (A) shall have reasonable the Commission pursuant to section 4a(a), guidelines for decision-making and
discretion in establishing the manner in the board of trade shall set the position implementation of emergency intervention in
which the board of trade complies with the limitation of the board of trade at a level not the market. At a minimum, the DCM must
core principles described in this subsection. higher than the position limitation have the authority to liquidate or transfer
(a) Guidance. [Reserved.] established by the Commission. open positions in the market, suspend or
(b) Acceptable Practices. [Reserved.] (a) Guidance. [Reserved.] curtail trading in any contract, and require
Core Principle 2 of section 5(d) of the Act: (b) Acceptable Practices. [Reserved.] market participants in any contract to meet
COMPLIANCE WITH RULES—(A) IN Core Principle 6 of section 5(d) of the Act: special margin requirements. In situations
GENERAL.—The board of trade shall EMERGENCY AUTHORITY—The board of where a swap is traded on more than one
establish, monitor, and enforce compliance trade, in consultation or cooperation with the platform, emergency action to liquidate or
with the rules of the contract market, Commission, shall adopt rules to provide for transfer open interest must be directed, or
including— the exercise of emergency authority, as is agreed to, by the Commission or the
(i) access requirements; necessary and appropriate, including the Commission’s staff. The DCM must promptly
(ii) the terms and conditions of any authority— notify the Commission of the exercise of its
contracts to be traded on the contract market; (A) to liquidate or transfer open positions emergency authority, documenting its
and in any contract; decision-making process, including how
(iii) rules prohibiting abusive trade (B) to suspend or curtail trading in any conflicts of interest were minimized, and the
practices on the contract market. contract; and reasons for using its emergency authority.
(B) CAPACITY OF CONTRACT (C) to require market participants in any The DCM must also have rules that allow it
MARKET.—The board of trade shall have the contract to meet special margin requirements. to take such market actions as may be
capacity to detect, investigate, and apply (a) Guidance. In consultation and directed by the Commission.
appropriate sanctions to any person that cooperation with the Commission, a Core Principle 7 of section 5(d) of the Act:
violates any rule of the contract market. designated contract market should have the AVAILABILITY OF GENERAL
(C) REQUIREMENT OF RULES.—The rules authority to intervene as necessary to INFORMATION.—The board of trade shall
of the contract market shall provide the board maintain markets with fair and orderly make available to market authorities, market
of trade with the ability and authority to trading and to prevent or address participants, and the public accurate
obtain any necessary information to perform manipulation or disruptive trading practices, information concerning—
any function described in this subsection, whether the need for intervention arises (A) the terms and conditions of the
including the capacity to carry out such exclusively from the DCM’s market or as part contracts of the contract market; and
international information-sharing agreements of a coordinated, cross-market intervention. (B)(i) the rules, regulations, and
as the Commission may require. DCM rules should include procedures and mechanisms for executing transactions on or
(a) Guidance. [Reserved.] guidelines to avoid conflicts of interest in through the facilities of the contract market;
(b) Acceptable Practices. [Reserved.] accordance with the provisions of § 40.9 of and
Core Principle 3 of section 5(d) of the Act: this chapter, and include alternate lines of (ii) the rules and specifications describing
CONTRACTS NOT READILY SUBJECT TO communication and approval procedures to the operation of the contract market’s—
MANIPULATION—The board of trade shall address emergencies associated with real (I) electronic matching platform; or
list on the contract market only contracts that time events. To address perceived market (II) trade execution facility.
are not readily susceptible to manipulation. threats, the designated contract market (a) Guidance. [Reserved.]
(a) Guidance. (1) Designated contract should have rules that allow it to take certain (b) Acceptable Practices. [Reserved.]
markets may list new products for trading by actions in the event of an emergency, as Core Principle 8 of section 5(d) of the Act:
self-certification under § 40.2 of this chapter defined in § 40.1(h) of this chapter, DAILY PUBLICATION OF TRADING
or may submit products for Commission including: imposing or modifying position INFORMATION.—The board of trade shall
approval under § 40.3 of this chapter. limits, price limits, and intraday market make public daily information on settlement
(2) Guidance in appendix C to this part restrictions; imposing special margin prices, volume, open interest, and opening
may be used as guidance in meeting this core requirements; ordering the liquidation or and closing ranges for actively traded
principle for both new products listings and transfer of open positions in any contract; contracts on the contract market.
existing listed contracts. ordering the fixing of a settlement price; (a) Guidance. [Reserved.]
(b) Acceptable Practices. [Reserved.] extending or shortening the expiration date (b) Acceptable Practices. [Reserved.]
Core Principle 4 of section 5(d) of the Act: or the trading hours; suspending or curtailing Core Principle 9 of section 5(d) of the Act:
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PREVENTION OF MARKET DISRUPTION.— trading in any contract; transferring customer EXECUTION OF TRANSACTIONS.—‘‘(A) IN
The board of trade shall have the capacity contracts and the margin or altering any GENERAL.—The board of trade shall provide
and responsibility to prevent manipulation, contract’s settlement terms or conditions; a competitive, open, and efficient market and
price distortion, and disruptions of the and, where applicable, providing for the mechanism for executing transactions that
delivery or cash-settlement process through carrying out of such actions through its protects the price discovery process of
market surveillance, compliance, and agreements with its third-party provider of trading in the centralized market of the board
enforcement practices and procedures, clearing or regulatory services. In situations of trade.
including— where a swap is traded on more than one (B) RULES.—The rules of the board of
(A) methods for conducting real-time platform, emergency action to liquidate or trade may authorize, for bona fide business
monitoring of trading; and transfer open interest must be as directed, or purposes—

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(i) transfer trades or office trades; Activities’’), as amended by FASB Statement dispute resolution procedures that are fair
(ii) an exchange of— No. 161 (‘‘Disclosures about Derivative and equitable. An acceptable customer
(I) futures in connection with a cash Instruments and Hedging Activities—an dispute resolution mechanism would:
commodity transaction; amendment of FASB Statement No. 133’’) are (i) Provide the customer with an
(II) futures for cash commodities; or acceptable records. opportunity to have his or her claim decided
(III) futures for swaps; or Core Principle 10 of section 5(d) of the Act: by an objective and impartial decision-maker;
(iii) a futures commission merchant, acting TRADE INFORMATION.—The board of trade (ii) Provide each party with the right to be
as principal or agent, to enter into or confirm shall maintain rules and procedures to represented by counsel at the commencement
the execution of a contract for the purchase provide for the recording and safe storage of of the procedure, at the party’s own expense;
or sale of a commodity for future delivery if all identifying trade information in a manner (iii) Provide each party with adequate
the contract is reported, recorded, or cleared that enables the contract market to use the notice of the claims presented against such
in accordance with the rules of the contract information— party, an opportunity to be heard on all
market or a derivatives clearing organization. (A) to assist in the prevention of customer claims, defenses and permitted
(a) Guidance. [Reserved.] and market abuses; and counterclaims, and an opportunity for a
(b) Acceptable Practices. (1) Block size (B) to provide evidence of any violations of prompt hearing;
determination for existing contracts. For any the rules of the contract market. (iv) Authorize prompt, written, final
futures contract that has been trading for one (a) Guidance. [Reserved.] settlement awards that are not subject to
calendar quarter or longer, the acceptable (b) Acceptable Practices. [Reserved.] appeal within the designated contract
minimum block trade size should be a Core Principle 11 of section 5(d) of the Act: market; and
number larger than the size at which a single FINANCIAL INTEGRITY OF (v) Notify the parties of the fees and costs
buy or sell order is customarily able to be TRANSACTIONS.—The board of trade shall that may be assessed.
filled in its entirety in that product’s establish and enforce— (2) Voluntary Procedures. The use of
centralized market without incurring a (A) rules and procedures for ensuring the dispute settlement procedures shall be
substantial price concession. In specifying financial integrity of transactions entered voluntary for customers other than eligible
the minimum block, the designated contract into on or through the facilities of the contract participants as defined in section
market should consider, and the Commission contract market (including the clearance and 1a(18) of the Act, and may permit
will review, data related to factors including: settlement of the transactions with a counterclaims as provided in § 166.5 of this
the trading volume, open interest, liquidity derivatives clearing organization); and chapter.
and depth of the order book, typical trade (B) rules to ensure— (3) Member-to-Member Procedures. If the
and order sizes in the market, any input the (i) the financial integrity of any— designated contract market also provides
designated contract market receives from (I) futures commission merchant; and
procedures for the resolution of disputes that
(II) introducing broker; and
brokers, floor traders and/or market users do not involve customers (i.e., member-to-
(ii) the protection of customer funds.
related to these factors, and the block sizes member disputes), the procedures for
(a) Guidance. [Reserved.]
on comparable swap products. resolving such disputes must be independent
(b) Acceptable Practices. [Reserved.]
(2) Block size determination for new of and shall not interfere with or delay the
Core Principle 12 of section 5(d) of the Act:
contracts. For any futures contract that has PROTECTION OF MARKETS AND MARKET resolution of customers’ claims or grievances.
been listed for trading for less than one PARTICIPANTS— The board of trade shall (4) Delegation. A designated contract
calendar quarter, an acceptable minimum establish and enforce rules— market may delegate to another self-
block trade size should be a number equal to (A) to protect markets and market regulatory organization or to a registered
the size of a trade that the exchange participants from abusive practices futures association its responsibility to
reasonably anticipates will not be able to be committed by any party, including abusive provide for customer dispute resolution
filled in its entirety in that product’s practices committed by a party acting as an mechanisms, provided, however, that in the
centralized market without incurring a agent for a participant; and event of such delegation, the designated
substantial price concession. In reviewing the (B) to promote fair and equitable trading on contract market shall in all respects treat any
block size for these products, the designated the contract market. decision issued by such other organization or
contract market should consider, and the (a) Guidance. [Reserved.] association with respect to such dispute as if
Commission will review: centralized market (b) Acceptable Practices. [Reserved.] the decision were its own, including
data in a related futures contract, the same Core Principle 13 of section 5(d) of the Act: providing for the appropriate enforcement of
contract traded on another exchange, trading DISCIPLINARY PROCEDURES.—The board any award issued against a delinquent
activity in the underlying cash market, and of trade shall establish and enforce member.
the block sizes on comparable swap disciplinary procedures that authorize the Core Principle 15 of section 5(d) of the Act:
products. For both existing and new board of trade to discipline, suspend, or GOVERNANCE FITNESS STANDARDS.—
contracts, the designated contract market expel members or market participants that The board of trade shall establish and enforce
may consider other relevant factors, but must violate the rules of the board of trade, or appropriate fitness standards for directors,
present those factors to the Commission similar methods for performing the same members of any disciplinary committee,
when it certifies or seeks approval of the functions, including delegation of the members of the contract market, and any
block trade size. functions to third parties. other person with direct access to the facility
(3) Pricing of block trades. (i) Block trades (a) Guidance. [Reserved.] (including any party affiliated with any
must be at a price that is fair and reasonable. (b) Acceptable Practices. [Reserved.] person described in this paragraph).
In determining whether a block trade price is Core Principle 14 of section 5(d) of the Act: (a) Guidance. [Reserved.]
fair and reasonable, the DCM should DISPUTE RESOLUTION.—The board of trade (b) Applicable Practices. [Reserved.]
consider: (A) the size of the block; (B) the shall establish and enforce rules regarding, Core Principle 16 of section 5(d) of the Act:
price and size of other block trades in any and provide facilities for alternative dispute CONFLICTS OF INTEREST.—The board of
relevant markets at the applicable time; and/ resolution as appropriate for, market trade shall establish and enforce rules—
or (C) the circumstance of the market or the participants and any market intermediaries. (A) to minimize conflicts of interest in the
parties to the block trade. Relevant markets (a) Guidance. A designated contract market decision making process of the contract
srobinson on DSKHWCL6B1PROD with PROPOSALS2

include the designated contract market itself, should provide customer dispute resolution market; and
the underlying cash markets, and/or related procedures that are: appropriate to the nature (B) to establish a process for resolving
futures or options markets. (ii) Block trades of the market; fair and equitable; and conflicts of interest described in
between affiliated parties are subject to the available on a voluntary basis, either directly subparagraph (A).
pricing requirements set forth in § 38.503(d) or through another self-regulatory (a) Guidance. [Reserved.]
of this part. organization, to customers that are non- (b) Acceptable Practices. [Reserved.]
(4) Recordkeeping for block trades. Records eligible contract participants. Core Principle 17 of section 5(d) of the Act:
kept in accordance with the requirements of (b) Acceptable Practices. COMPOSITION OF GOVERNING BOARDS
FASB Statement No. 133 (‘‘Accounting for (1) Fair and equitable procedure. Every OF CONTRACT MARKETS.—The
Derivative Instruments and Hedging contract market shall provide customer governance arrangements of the board of

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80631

trade shall be designed to permit (a) Guidance. [Reserved.] those cash market variables must be fully
consideration of the views of market (b) Acceptable Practices. [Reserved.] defined and the data sources must be fully
participants. Core Principle 22 of section 5(d) of the Act: specified and documented to permit
(a) Guidance. [Reserved.] DIVERSITY OF BOARD OF DIRECTORS.— Commission staff to replicate the estimates of
(b) Acceptable Practices. [Reserved.] The board of trade, if a publicly traded deliverable supply (defined in paragraph
Core Principle 18 of section 5(d) of the Act: company, shall endeavor to recruit (b)(1)(A) of this appendix C). Whenever
RECORDKEEPING.—The board of trade shall individuals to serve on the board of directors possible, the Commission requests that
maintain records of all activities relating to and the other decision-making bodies (as monthly or daily prices (depending on the
the business of the contract market— determined by the Commission) of the board contract) underlying the cash settlement
(A) in a form and manner that is acceptable of trade from among, and to have the index be submitted for the most recent five
to the Commission; and composition of the bodies reflect, a broad and full calendar years and for as many of the
(B) for a period of at least 5 years. culturally diverse pool of qualified current year’s months for which data are
(a) Guidance. [Reserved.] candidates. available. For contracts that are cash settled
(b) Acceptable Practices. [Reserved.] (a) Guidance. [Reserved.] to an index, the index’s methodology must be
Core Principle 19 of section 5(d) of the Act: (b) Acceptable Practices. [Reserved.] provided along with supporting information
ANTITRUST CONSIDERATIONS.—Unless Core Principle 23 of section 5(d) of the Act: showing how the index is reflective of the
necessary or appropriate to achieve the SECURITIES AND EXCHANGE underlying cash market, is not readily subject
purposes of this Act, the board of trade shall COMMISSION.—The board of trade shall to manipulation or distortion, and is based
not— keep any such records relating to swaps on a cash price series that is reliable,
(A) adopt any rule or taking any action that defined in section 1a(47)(A)(v) open to acceptable, publicly available and timely
results in any unreasonable restraint of trade; inspection and examination by the Securities (defined in paragraphs (c)(2) and (c)(3) of this
or and Exchange Commission. appendix C). The Commission recognizes
(B) impose any material anticompetitive (a) Guidance. A designated contract market that the data necessary for accurate and
burden on trading on the contract market. should have arrangements and resources for cogent cash market analyses for an
(a) Guidance. An entity seeking collecting and maintaining accurate records underlying commodity vary with the nature
designation as a contract market may request pertaining to any swaps agreements defined of the underlying commodity. The
that the Commission consider under the in section 1a(47)(A)(v) of the Act. Commission may require that the designated
provisions of section 15(b) of the Act, any of (b) Acceptable Practices. [Reserved.] contract market submit a detailed report on
the entity’s rules, including trading protocols commodity definitions and uses.
21. Add appendix C to part 38 to read
or policies, and including both operational (b) Futures Contracts Settled by Physical
rules and the terms or conditions of products as follows: Delivery. (1) For listed contracts that are
listed for trading, at the time of designation Appendix C—Demonstration of settled by physical delivery, the terms and
or thereafter. The Commission intends to Compliance That a Contract is not conditions of the contract should conform to
apply section 15(b) of the Act to its the most common commercial practices and
Readily Susceptible to Manipulation
consideration of issues under this core conditions in the cash market for the
principle in a manner consistent with that (a) Futures Contracts—General commodity underlying the futures contract.
previously applied to contract markets. Information. When a designated contract The terms and conditions should be designed
(b) Acceptable Practices. [Reserved.] market certifies or submits for approval to avoid any impediments to the delivery of
Core Principle 20 of section 5(d) of the Act: contract terms and conditions for a new the commodity so as to promote convergence
SYSTEM SAFEGUARDS.—The board of futures contract, that submission must between the price of the futures contract and
trade shall— include the following information: the cash market value of the commodity at
(A) establish and maintain a program of (1) A narrative describing the contract, the expiration of a futures contract.
risk analysis and oversight to identify and including data and information to support (i) Estimating Deliverable Supplies.
minimize sources of operational risk, through the contract’s terms and conditions, as set by (A) General definition. The specified terms
the development of appropriate controls and the designated contract market. When and conditions, considered as a whole, must
procedures, and the development of designing a futures contract, the designated result in a ‘‘deliverable supply’’ that is
automated systems, that are reliable, secure, contract market should conduct market sufficient to ensure that the contract is not
and have adequate scalable capacity; research so that the contract design meets the susceptible to price manipulation or
(B) establish and maintain emergency risk management needs of prospective users distortion. In general, the term ‘‘deliverable
procedures, backup facilities, and a plan for and promotes price discovery of the supply’’ means the quantity of the commodity
disaster recovery that allow for the timely underlying commodity. The designated meeting the contract’s delivery specifications
recovery and resumption of operations and contract market should consult with market that reasonably can be expected to be readily
the fulfillment of the responsibilities and users to obtain their views and opinions available to short traders and salable by long
obligations of the board of trade; and during the contract design process to ensure traders at its market value in normal cash
(C) periodically conduct tests to verify that the contract’s term and conditions reflect the marketing channels at the contract’s delivery
backup resources are sufficient to ensure underlying cash market and that the futures points during the specified delivery period,
continued order processing and trade contract will perform the intended risk barring abnormal movement in interstate
matching, price reporting, market management and/or price discovery commerce. Typically, deliverable supply
surveillance, and maintenance of a functions. A designated contract market reflects the quantity of the commodity that
comprehensive and accurate audit trail. should provide a statement indicating that it potentially could be made available for sale
(a) Guidance. [Reserved.] took such steps to ensure the usefulness of on a spot basis at current prices at the
(b) Acceptable Practices. [Reserved.] the submitted contract. contract’s delivery points. For a non-financial
Core Principle 21 of section 5(d) of the Act: (2) A detailed cash market description for physical-delivery commodity contract, this
FINANCIAL RESOURCES.— physical and cash-settled contracts should be estimate might represent product which is in
(A) IN GENERAL.—The board of trade included. Such descriptions must be based storage at the delivery point(s) specified in
shall have adequate financial, operational, on government and/or other publically- the futures contract or can be moved
srobinson on DSKHWCL6B1PROD with PROPOSALS2

and managerial resources to discharge each available data whenever possible and be economically into or through such points
responsibility of the board of trade. formulated for both the national and consistent with the delivery procedures set
(B) DETERMINATION OF ADEQUACY.— regional/local market relevant to the forth in the contract and which is available
The financial resources of the board of trade underlying commodity. For tangible for sale on a spot basis within the marketing
shall be considered to be adequate if the commodities, the cash market descriptions channels that normally are tributary to the
value of the financial resources exceeds the for the relevant market (i.e., national and delivery point(s). Furthermore, an
total amount that would enable the contract regional/local) must incorporate at least five appropriate estimate of deliverable supply
market to cover the operating costs of the full years of data that may include, among excludes commodity supplies that are
contract market for a 1-year period, as other factors, production, consumption, committed to some commercial use. The size
calculated on a rolling basis. stocks, imports, exports, and prices. Each of of commodity supplies that are committed to

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 80632 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

some commercial use may be estimated by available data resources. Deliverable supply for delivery facilities also should consider
consulting with market participants. An estimates should also exclude the amount of the extent to which ownership of such
adequate measure of deliverable supply the commodity that would not be otherwise facilities is concentrated and whether the
would be an amount of the commodity that deliverable on the futures contract. For level of concentration would be susceptible
would meet the normal or expected range of example, deliverable supplies should to manipulation of the futures contract’s
delivery demand without causing futures exclude quantities that at current price levels prices. Commodity contracts also should
prices to become distorted relative to cash are not economically obtainable or specify appropriately detailed delivery
market prices. Given the availability of deliverable or were previously dedicated procedures that describe the responsibilities
acceptable data, deliverable supply should be under contract for commercial use. of deliverers, receivers and any required
estimated on a monthly basis for at least the (2) Contract Terms and Conditions third parties in carrying out the delivery
most recent five years for which data are Requirements for Futures Contracts Settled process. Such responsibilities could include
available. To the extent possible and that by Physical Delivery. allocation between buyer and seller of all
data resources permit, deliverable supply (i) For physical delivery contracts, an associated costs such as load-out, document
estimates should be constructed such that the acceptable specification of terms and preparation, sampling, grading, weighing,
data reflect, as close as possible, the market conditions would include, but may not be storage, taxes, duties, fees, drayage,
defined by the contract’s terms and limited to, rules that address, as appropriate, stevedoring, demurrage, dispatch, etc.
conditions, and should be formulated, the following criteria and comply with the Required accreditation for third-parties also
whenever possible, with government or associated standards: should be detailed. These procedures should
publically available data. All deliverable (A) Quality Standards: The terms and seek to minimize or eliminate any
supply estimates must be fully defined, have conditions of a commodity contract should impediments to making or taking delivery by
all underlying assumptions explicitly stated, describe or define all of the economically both deliverers and takers of delivery to help
and have documentation of all data/ significant characteristics or attributes of the ensure convergence of cash and futures at the
information sources in order to permit commodity underlying the contract. In expiration of a futures delivery month.
estimate replication by Commission staff. particular, the quality standards should be (C) Delivery Period and Last Trading Day:
(B) Accounting for variations in deliverable described or defined so that such standards An acceptable specification of the delivery
supplies. To assure the availability of reflect those used in transactions in the period would allow for sufficient time for
adequate deliverable supplies and acceptable commodity in normal cash marketing deliverers to acquire the deliverable
levels of commercial risk management utility, channels. Documentation establishing that commodity and make it available for
contract terms and conditions should the quality standards of the contract’s delivery, considering any restrictions or
account for variations in the patterns of underlying commodity comply with those requirements imposed by the designated
production, consumption and supply over a accepted/established by the industry, by contract market. Specification of the last
period of years of sufficient length to assess Government regulations, and/or by relevant trading day for expiring contracts should
adequately the potential range of deliverable laws should also be submitted. For any consider whether adequate time remains after
supplies. This assessment also should particular commodity contract, the specific the last trading day to allow for delivery on
consider seasonality, growth, and market attributes that must be enumerated depend the contract.
concentration in the production/ upon the individual characteristics of the (D) Contract Size and Trading Unit: An
consumption of the underlying cash underlying commodity. These may include, acceptable specification of the delivery unit
commodity. Deliverable supply implications for example, the following items: grade, and/or trading unit would be a contract size
of seasonal effects are more straightforwardly quality, purity, weight, class, origin, growth, that is consistent with customary
delineated when deliverable supply issuer, originator, maturity window, coupon transactions, transportation or storage
estimates are calculated on a monthly basis rate, source, hours of trading, etc. If the terms amounts in the cash market (e.g., the contract
and when such monthly estimates are of the contract provide for the delivery of size may be reflective of the amount of the
provided for at least the most recent five multiple qualities of a specific attribute of the commodity that represents a pipeline,
years for which data resources permit. In commodity having different cash market truckload or railcar shipment). For purposes
addition, consideration should be given to values, then a ‘‘par’’ quality should be of increasing market liquidity, a designated
the relative roles of producers, merchants, specified with price differentials applicable contract market may elect to specify a
and consumers in the production, to the ‘‘non-par’’ qualities that reflect contract size that is smaller than the typical
distribution, and consumption of the cash discounts or premiums commonly observed commercial transaction size, storage unit or
commodity and whether the underlying or expected to occur in the cash market for transportation size. In such cases, the
commodity exhibits a domestic or that commodity. commodity contract should include
international export focus. Careful (B) Delivery Points and Facilities: Delivery procedures that allow futures traders to
consideration also should be given to the point/area specifications should provide for easily take or make delivery on such a
quality of the cash commodity and to the futures delivery at a single location or at contract with a smaller size, or, alternatively,
movement or flow of the cash commodity in multiple locations where the underlying cash the designated contract market may adopt
normal commercial channels and whether commodity is normally transacted or stored special provisions requiring that delivery be
there exist external factors or regulatory and where there exists a viable cash made only in multiple contracts to
controls that could affect the price or supply market(s). If multiple delivery points are accommodate reselling the commodity in the
of the cash commodity. specified and the value of the commodity cash market. If the latter provision is
(C) Calculation of deliverable supplies. differs between these locations, contract adopted, contract terms should be adopted to
Designated contract markets should derive a terms should include price differentials that minimize the potential for default in the
quantitative estimate of the deliverable reflect usual differences in value between the delivery process by ensuring that all
supplies for the delivery period specified in different delivery locations. If the price contracts remaining open at the close of
the proposed contract. For commodities with relationships among the delivery points are trading in expiring delivery months can be
seasonal supply or demand characteristics, unstable and a designated contract market combined to meet the required delivery unit
the deliverable supply analysis should chooses to adopt fixed locational price size. Generally, contract sizes and trading
include that period when potential supplies differentials, such differentials should fall units must be determined after a careful
srobinson on DSKHWCL6B1PROD with PROPOSALS2

typically are at their lowest levels. The within the range of commonly observed or analysis of relevant cash market trading
estimate should be based on statistical data, expected commercial price differences. In practices, conditions and deliverable supply
when reasonably available, covering a period this regard, any price differentials must be estimates, so as to ensure that the underlying
of time that is representative of the supported with cash price data for the market commodity market and available
underlying commodity’s actual patterns of delivery location(s). The terms and supply sources are able to support the
production, patterns of consumption, and conditions of the contracts also should contract sizes and trading units at all times.
patterns of seasonal effects (if relevant). specify, as appropriate, any conditions the (E) Delivery Pack: The term ‘‘delivery pack’’
Often, such a relevant time period should delivery facilities and/or delivery facility refers to the packaging standards (e.g.,
include at least five years of monthly operators must meet in order to be eligible for product may be delivered in burlap or
deliverable supply estimates permitted by delivery. Specification of any requirements polyethylene bags stacked on wooden

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80633

pallets) or non-quality related standards futures market participants to respond to commonly used as a reference index by
regarding the composition of commodity bona fide changes in market supply and industry/market agents should be provided.
within a delivery unit (e.g., product must all demand fundamentals that would lead to Such documentation may take on various
be imported from the same country or origin). large cash and futures price changes. If price forms, including carefully documented
An acceptable specification of the delivery limit provisions are adopted, the limits interview results with knowledgeable agents.
pack or composition of a contract’s delivery should be set at levels that are not overly (3) Where an independent, private-sector
unit should reflect, to the extent possible, restrictive in relation to price movements in third party calculates the cash settlement
specifications commonly applied to the the cash market for the commodity price series, a designated contract market
commodity traded or transacted in the cash underlying the futures contract. must consider the need for a licensing
market. (K) Speculative Limits: Specific agreement that will ensure the designated
(F) Delivery Instrument: An acceptable information regarding the establishment of contract market’s rights to the use of the price
specification of the delivery instrument (e.g., speculative position limits are set forth in series to settle the listed contract.
warehouse receipt, depository certificate or part 151 of the Commission’s regulations. (i) Where an independent, private-sector
receipt, shipping certificate, bill of lading, in- (L) Reportable Levels: Refer to § 15.03 of third party calculates the cash settlement
line transfer, book transfer of securities, etc.) the Commission’s regulations. price series, the designated contract market
would provide for its conversion into the (M) Trading Hours: Should be set by the should verify that the third party utilizes
cash commodity at a commercially- designated contract market to delineate each business practices that minimize the
reasonable cost. Transportation terms (e.g., trading day. opportunity or incentive to manipulate the
FOB, CIF, freight prepaid to destination) as (c) Futures Contracts Settled by Cash cash-settlement price series. Such safeguards
well as any limits on storage or certificate Settlement. (1) Cash settlement is a method may include lock-downs, prohibitions
daily premium fees should be specified. of settling certain futures or option contracts against derivatives trading by employees, or
These terms should reflect cash market whereby, at contract expiration, the contract public dissemination of the names of sources
practices and the customary provision for is settled by cash payment in lieu of physical and the price quotes they provide. Because
allocating delivery costs between buyer and delivery of the commodity or instrument a cash-settled contract may create an
seller. underlying the contract. An acceptable incentive to manipulate or artificially
(G) Inspection Provisions: Any inspection/ specification of the cash settlement price for influence the underlying market from which
certification procedures for verifying commodity futures and option contracts the cash-settlement price is derived or to
compliance with quality requirements or any would include rules that fully describe the exert undue influence on the cash-settlement
other related delivery requirements (e.g., essential economic characteristics of the computation in order to profit on a futures
discounts relating to the age of the underlying commodity (e.g., grade, quality, position in that commodity, a designated
commodity, etc.) should be specified in the weight, class, growth, issuer, maturity, contract market should, whenever
contract rules. An acceptable specification of source, rating, description of the underlying practicable, enter into an information-sharing
inspection procedures would include the index and index’s calculation methodology, agreement with the third-party provider
establishment of formal procedures that are etc.), as well as how the final settlement price which would enable the designated contract
consistent with procedures used in the cash is calculated. In addition, the rules should market to better detect and prevent
market. To the extent that formal inspection clearly specify the trading months and hours manipulative behavior.
procedures are not used in the cash market, of trading, the last trading day, contract size, (ii) Where a designated contract market
an acceptable specification would contain minimum price change (tick size) and any itself generates the cash settlement price
provisions that assure accuracy in assessing limitations on price movements (e.g., price series, the designated contract market should
the commodity, that are available at a low limits or trading halts). establish calculation procedures that
cost, that do not pose an obstacle to delivery (2) Cash settled contracts may be safeguard against potential attempts to
on the contract and that are performed by a susceptible to manipulation or price artificially influence the price. For example,
reputable, disinterested third party or by distortion. In evaluating the susceptibility of if the cash settlement price is derived by the
qualified designated contract market a cash-settled contract to manipulation, a designated contract market based on a survey
employees. Inspection terms also should designated contract market must consider the of cash market sources, the designated
detail which party pays for the service, size and liquidity of the cash market that contract market should maintain a list of
particularly in light of the possibility of underlies the listed contract. In particular, such entities which all should be reputable
varying inspection results. situations susceptible to manipulation sources with knowledge of the cash market.
(H) Delivery (Trading) Months: Delivery include those in which the volume of cash In addition, the sample of sources polled
months should be established based on the market transactions and/or the number of should be representative of the cash market,
risk management needs of commercial participants contacted in determining the and the poll should be conducted at a time
entities as well as the availability of cash-settlement price are very low. Cash- when trading in the cash market is active.
deliverable supplies in the specified months. settled contracts may create an incentive to The cash-settlement survey should include a
(I) Minimum Price Fluctuation (Minimum manipulate or artificially influence the data minimum of four independent entities if
Tick): The minimum price increment (tick) from which the cash-settlement price is such sources do not take positions in the
should be set at a level that is equal to, or derived or to exert undue influence on the commodity (e.g., if the survey list is
less than, the minimum price increment cash-settlement price’s computation in order comprised exclusively of brokers) or at least
commonly observed in cash market to profit on a futures position in that eight independent entities if such sources
transactions for the underlying commodity. commodity. The utility of a cash-settled trade for their own accounts (e.g., if the
Specifying a futures’ minimum tick that is contract for risk management and price survey list is comprised of dealers or
greater than the minimum price increment in discovery would be significantly impaired if merchants).
the cash market can undermine the risk the cash settlement price is not a reliable or (iii) The cash-settlement calculation should
management utility of the futures contract by robust indicator of the value of the involve computational procedures that
preventing hedgers from efficiently underlying commodity or instrument. eliminate or reduce the impact of potentially
establishing and liquidating futures positions Accordingly, careful consideration should be unrepresentative data.
that are used to hedge anticipated cash given to the potential for manipulation or (iv) The cash settlement price should be an
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market transactions or cash market positions. distortion of the cash settlement price, as accurate and reliable indicator of prices in
(J) Maximum Price Fluctuation Limits: well as the reliability of that price as an the underlying cash market. The cash
Designated contract markets may adopt price indicator of cash market values. Appropriate settlement price also should be acceptable to
limits to: (1) Reduce or constrain price consideration also should be given to the commercial users of the commodity contract.
movements in a trading day that may not be commercial acceptability, public availability, The registered entity should fully document
reflective of true market conditions but might and timeliness of the price series that is used that the settlement price is accurate, reliable,
be caused by traders overreacting to news; (2) to calculate the cash settlement price. highly regarded by industry/market agents,
Allow additional time for the collection of Documentation demonstrating that the and fully reflects the economic and
margins in times of large price movements; settlement price index is a reliable indicator commercial conditions of the relevant
and (3) Provide a ‘‘cooling-off’’ period for of market values and conditions and is designated contract market.

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 80634 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

(v) To the extent possible, the cash large cash and futures price changes. If price- Æ Option minimum tick should be equal to
settlement price should be based on cash limit provisions are adopted, the limits or smaller than that of the underlying futures
price series that are publicly available and should be set at levels that are not overly contract.
available on a timely basis for purposes of restrictive in relation to price movements in (2) Option Expiration & Last Trading Day.
calculating the cash settlement price at the the cash market for the commodity For options on futures contracts,
expiration of a commodity contract. A underlying the futures contract. For broad- specification of expiration dates should
designated contract market should make the based stock index futures contracts, rules consider the relationship of the option
final cash settlement price and any other should be adopted that coordinate with New expiration date to the delivery period for the
supporting information that is appropriate for York Stock Exchange (‘‘NYSE’’) declared underlying futures contract. In particular, an
release to the public, available to the public Circuit Breaker Trading Halts and would assessment should be made of liquidity in
when cash settlement is accomplished by the recommence trading in the futures contract the underlying futures market to assure that
derivatives clearing organization. If the cash only after trading in the majority of the stocks any futures contracts acquired through
settlement price is based on cash prices that underlying the index has recommenced. exercise can be liquidated without adversely
are obtained from non-public sources (e.g., (F) Last Trading Day: Specification of the affecting the orderly liquidation of futures
cash market surveys conducted by the last trading day for expiring contracts should positions or increasing the underlying futures
designated contract market or by third parties be established such that it occurs before contract’s susceptibility to manipulation.
on behalf of the designated contract market), publication of the underlying third-party When the underlying futures contract
a designated contract market should make price index or determination of the final exhibits a very low trading activity during an
available to the public as soon as possible settlement price. If the designated contract expiring delivery month’s final trading days
after a contract month’s expiration the final market chooses to allow trading to occur or has a greater risk of price manipulation
cash settlement price as well as any other through the determination of the final than other contracts, the last trading day and
supporting information that is appropriate or settlement price, then the designated contract expiration day of the option should occur
feasible to make available to the public. market should show that futures trading prior to the delivery period or the settlement
(4) Contract Terms and Conditions would not distort the final settlement price date of the underlying future. For example,
Requirements for Futures Contracts Settled calculation. the last trading day and option expiration
by Cash Settlement (G) Trading Months: Trading months day might appropriately be established prior
(i) An acceptable specification of the terms should be established based on the risk to first delivery notice day for option
and conditions of a cash-settled commodity management needs of commercial entities as contracts with underlying futures contracts
contract will also set forth the trading well as the availability of price and other that have very limited deliverable supplies.
months, last trading day, contract size, data needed to calculate the cash settlement Similarly, if the futures contract underlying
price in the specified months. Specification an option contract is cash settled using cash
minimum price change (tick size) and daily
prices from a very limited number of
price limits, if any. of the last trading day should take into
underlying cash market transactions, the last
(A) Commodity Characteristics: The terms consideration whether the volume of
trading and option expiration days for the
and conditions of a commodity contract transactions underlying the cash settlement
option contract might appropriately be
should describe the commodity underlying price would be unduly limited by occurrence
established prior to the last trading day for
the contract. of holidays or traditional holiday periods in the futures contract.
(B) Contract Size and Trading Unit: An the cash market. Moreover, a contract should (3) Speculative Limits. In cases where the
acceptable specification of the trading unit not be listed past the date for which the terms of an underlying futures contract
would be a contract size that is consistent designated contract market has access to use specify a spot-month speculative position
with customary transactions in the cash a proprietary price index for cash settlement. limit and the option contract expires during,
market. A designated contract market may (H) Speculative Limits: Specific rules and or at the close of, the futures contract’s
opt to set the contract size smaller than that policies for speculative position limits are set delivery period, the option contract should
of standard cash market transactions. forth in the part 151 of the Commission’s include a spot-month speculative position
(C) Cash Settlement Procedure: The cash regulations. limit provision that requires traders to
settlement price should be reliable, (I) Reportable Levels: Refer to § 15.03 of the combine their futures and option position
acceptable, publicly available, and reported Commission’s regulations. and be subject to the limit established for the
in a timely manner as described in (J) Trading Hours: Should be set by the futures contract. Specific rules and policies
paragraphs (c)(3)(iv) and (c)(3)(v) of this designated contract market to delineate each for speculative position limits are set forth in
appendix C. trading day. part 151 of the Commission’s regulations.
(D) Pricing Basis and Minimum Price (d) Options on a Futures Contract. (1) The (4) Options on Physicals Contracts.
Fluctuation (Minimum Tick): The minimum Commission’s experience with the oversight (i) Under the Commission’s regulations, the
price increment (tick) should be set a level of trading in futures option contracts term ‘‘option on physicals’’ refers to option
that is equal to, or less than, the minimum indicates that most of the terms and contracts that do not provide for exercise into
price increment commonly observed in cash conditions associated with such trading do an underlying futures contract. Upon
market transactions for the underlying not raise any regulatory concerns or issues. exercise, options on physicals can be settled
commodity. Specifying a futures’ minimum The Commission has found that the via physical delivery of the underlying
tick that is greater than the minimum price following terms do not affect an option commodity or by a cash payment. Thus,
increment in the cash market can undermine contract’s susceptible to manipulation or its options on physicals raise many of the same
the risk management utility of the futures utility for risk management. Thus, the issues associated with trading in futures
contract by preventing hedgers from Commission believes that, in most cases, any contracts regarding adequacy of deliverable
efficiently establishing and liquidating specification of the following terms would be supplies or acceptability of the cash
futures positions that are used to hedge acceptable; the only requirement is that such settlement price series. In this regard, an
anticipated cash market transactions or cash terms be specified in an automatic and option that is cash settled based on the
market positions. objective manner in the option contract’s settlement price of a futures contract would
(E) Maximum Price Fluctuation Limits: rules: be considered an ‘‘option on physicals’’ and
Designated contract markets may adopt price Æ Exercise method; the futures settlement price would be
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limits to: (1) Reduce or constrain price Æ Exercise procedure (if positions in the considered the cash price series.
movements in a trading day that may not be underlying futures contract are established (ii) In view of the above, acceptable
reflective of true market conditions but might via book entry); practices for the terms and conditions of
be caused by traders overreacting to news; (2) Æ Strike price listing provisions, including options on physicals contracts include, as
Allow additional time for the collection of provisions for listing strike prices on a appropriate, those practices set forth above
margins in times of large price movements; discretionary basis; for physical-delivery or cash-settled futures
and (3) Provide a ‘‘cooling-off’’ period for Æ Strike price intervals; contracts plus the practices set forth for
futures market participants to respond to Æ Automatic exercise provisions; options on futures contracts.
bona fide changes in market supply and Æ Contract size (unless not set equal to the (e) Security Futures Products. (1) The
demand fundamentals that would lead to size of the underlying futures contract); and listing of security futures products are

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 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules 80635

governed by the special requirements of part computation in order to profit on a futures Dated: December 1, 2010.
41 of the Commission’s regulations. A position in that commodity, a designated David A. Stawick,
designated contract market should follow the contract market should, whenever Secretary.
appropriate guidance regarding physically practicable, enter into an information-sharing
delivered security futures products that are agreement with the third-party provider Appendices to Core Principles and
settled through physical delivery or cash which would enable the designated contract Other Requirements for Designated
settlement. market to better detect and prevent
(f) Non-Price Based Futures Contracts. (1)
Contract Markets—Commission Voting
manipulative behavior. Summary and Statements of
Non-price based contracts are typically (ii) Where a designated contract market
construed as binary options, but also may be Commissioners
itself generates the cash settlement price
designed to function similar to traditional series, the designated contract market should
futures or option contracts. Note: The following appendices will not
establish calculation procedures that appear in the Code of Federal Regulations
(2) Where the contract is settled to a third
safeguard against potential attempts to
party cash-settlement series, the designated
contract market should consider the nature artificially influence the price. For example, Appendix 1—Commission Voting
and sources of the data comprising the cash- if the cash settlement price is derived by the Summary
settlement calculation, the computational designated contract market based on a survey
of cash market sources, the designated On this matter, Chairman Gensler and
procedures, and the mechanisms in place to Commissioners Dunn and Chilton voted in
ensure the accuracy and reliability of the contract market should maintain a list of
such entities which all should be reputable the affirmative; Commissioners Sommers and
index value. The evaluation also considers
sources with knowledge of the cash market. O’Malia voted in the negative.
the extent to which the third party has, or
will adopt, safeguards against unauthorized In addition, the sample of sources polled Appendix 2—Statements of
or premature release of the index value itself should be representative of the cash market, Commissioners
or any key data used in deriving the index and the poll should be conducted at a time
value. when trading in the cash market is active. Statement of Chairman Gary Gensler
(3) The designated contract market should The cash-settlement survey should include a I support the proposed rulemaking to
follow the guidance in paragraph (c)(4) minimum of four independent entities if update our rules and guidance with regard to
(Contract Terms and Conditions such sources do not take positions in the designated contract markets (DCMs). The
Requirements for Futures Contracts Settled commodity (e.g., if the survey list is Dodd-Frank Act updated the statutory
by Cash Settlement) of this appendix C to comprised exclusively of brokers) or eight language for core principles for contract
meet compliance. independent entities if such sources trade for markets, increasing the number to 23 and
(g) Swap Contracts. (1) In general, swap their own accounts (e.g., if the survey list is modifying existing core principles. Thus, it is
contracts are an agreement to exchange a comprised of dealers or merchants). important to update our rules and guidance
series of cash flows over a period of time (iii) The cash-settlement calculation should to reflect those changes. Further, the Dodd-
based on reference price indices. When
involve appropriate computational Frank Act allows DCMs to—for the first
listing a swap for trading, a swap execution
procedures that eliminate or reduce the time—offer swaps in addition to futures and
facility or designated contract market must
impact of potentially unrepresentative data. commodity options, and this proposal
determine that the reference price indices
used for its contracts are not readily (2) Speculative Limits: Specific rules and addresses that broader scope. I believe it is
susceptible to manipulation. Accordingly, policies for speculative position limits are set also important to update the rules and
careful consideration should be given to the forth in part 151 of the Commission’s guidance for DCMs in light of the fact that
potential for manipulation or distortion of regulations. we will be promulgating rules and guidance
the cash settlement price, as well as the (3) Intraday Market Restrictions: for swap execution facilities, and many of the
reliability of that price as an indicator of cash Designated contract markets or swap core principles are similar. This rule will
market values. Appropriate consideration execution facilities must have in place help to promote transparency and market
also should be given to the commercial intraday market restrictions that pause or halt integrity.
acceptability, public availability, and trading in the event of extraordinary price
Dissent of Commissioner Jill E. Sommers and
timeliness of the price series that is used to moves that may result in distorted prices.
Commissioner Scott D. O’Malia
calculate the cash settlement price. Such restrictions need to be coordinated with
Documentation demonstrating that the other markets that may be a proxy or a We respectfully dissent from the action
settlement price index is a reliable indicator substitute for the contracts traded on their taken today by the Commission to issue
of market values and conditions and is highly facility. For example, coordination with proposed regulations relating to ‘‘Core
regarded by industry/market agents should NYSE rule 80.B Circuit Breaker Trading Principle and Other Requirements for
be provided. Such documentation may take Halts. The designated contract market or Designated Contract Markets’’ (DCMs). While
on various forms, including carefully swap execution facility must adopt rules to we each dissent for a number of reasons, we
documented interviews with principal specifically address who is authorized to join in writing to express our disagreement
market trading agents, pricing experts, declare an emergency; how the designated with the Commission’s narrow interpretation
marketing agents, etc. Appropriate contract market or swap execution facility of Core Principle 9—Execution of
consideration also should be given to the will notify the Commission of its decision Transactions, and request comment on the
commercial acceptability, public availability, that an emergency exists; how it will address implications of such a narrow interpretation
and timeliness of the price series that is used conflicts of interest in the exercise of of Core Principle 9 for markets and market
to calculate the cash flows of the swap. emergency authority; and how it will participants.
(i) Where an independent, private-sector coordinate trading halts with markets that In relevant part, Core Principle 9 states:
third party calculates the referenced price trade the underlying price reference index or ‘‘The board of trade shall provide a
index, the designated contract market should product. competitive, open, and efficient market and
verify that the third party utilizes business (4) Settlement Method. The designated mechanism for executing transactions that
practices that minimize the opportunity or contract market or swap execution facility protects the price discovery process of
incentive to manipulate the cash-settlement should follow the guidance in paragraph trading in the centralized market of the board
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price series. Such safeguards may include (c)(4) (Contract Terms and Conditions of trade.’’ Core Principle 9 does not say that
lock-downs, prohibitions against derivatives every contract listed for trading on the board
Requirements for Futures Contracts Settled
trading by employees, or public of trade must trade in the centralized market.
by Cash Settlement) of this appendix C to
dissemination of the names of sources and Nor does it require that every contract listed
meet compliance, or paragraph (b)(2)
the price quotes they provide. Because a for trading serve a price discovery function.
(Contract Terms and Conditions
cash-settled contract may create an incentive Rather, it requires a mechanism for
Requirements for Futures Contracts Settled
to manipulate or artificially influence the protecting the price discovery function for
by Physical Delivery) of this appendix C, as
underlying market from which the cash- those contracts that do trade in the
appropriate.
settlement price is derived or to exert undue centralized market. With these proposed
influence on the cash-settlement By the Commission. regulations, the Commission is interpreting

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 80636 Federal Register / Vol. 75, No. 245 / Wednesday, December 22, 2010 / Proposed Rules

Core Principle 9 in a way that does not intended to outlaw this activity it could have and cleared likely will no longer enjoy that
comport with the plain language of the done so by explicitly requiring all DCM status. The assumption appears to be that
statute. contracts to trade in the centralized market. these contracts will simply be listed for
Over the past decade, a long list of non- It did not do so. In fact, Core Principle 9 trading on a swap execution facility (SEF)
standardized, illiquid contracts in the energy explicitly allows boards of trade to authorize and cleared, without any disruption to
sphere have been executed off-exchange and certain types of contracts that have
cleared on-exchange through the exchange of traditionally been traded off the centralized markets or market participants. We are not
futures for swaps (EFS) mechanism. The market, including EFS. willing to make such a bold assumption,
availability of clearing for these contracts Finally, the full ramifications of the especially when the Commission has not yet
added a level of safety, soundness and Commission’s overly-restrictive reading of proposed regulations relating to listing and
transparency to the marketplace that did not Core Principle 9 are not yet known, but are trading requirements for SEFs.
exist before. If the Commission had not likely to be of great consequence to many We would have preferred that the proposed
permitted these contracts to be listed for market participants. Clearing helps mitigate regulations preserve the functioning of this
clearing through the EFS process it is highly risk, and the movement of illiquid contracts specialized marketplace; a marketplace that
doubtful that the level of clearing that exists into a cleared environment was a positive
has not adversely affected price discovery for
today for these contracts would have been development for our markets and market
achieved, and highly likely that this activity participants. Clearing contracts listed on a any contract currently traded in the
would have remained opaque to market DCM also permits market participants to take centralized market.
participants and regulators. Congress was advantage of certain efficiencies, like [FR Doc. 2010–31458 Filed 12–21–10; 8:45 am]
aware of this specialized marketplace when portfolio margining. Now, hundreds of BILLING CODE 6351–01–P
it amended Core Principle 9. If Congress had contracts that are listed for trading on DCMs
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