[ad_1]
Federal Register, Volume 76 Issue 109 (Tuesday, June 7, 2011)[Federal Register Volume 76, Number 109 (Tuesday, June 7, 2011)]
[Proposed Rules]
[Pages 33066-33113]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12270]
[[Page 33065]]
Vol. 76
Tuesday,
No. 109
June 7, 2011
Part III
Commodity Futures Trading Commission
———————————————————————–
17 CFR Parts 1, 5, 7 et al.
Adaptation of Regulations to Incorporate Swaps; Proposed Rule
Federal Register / Vol. 76 , No. 109 / Tuesday, June 7, 2011 /
Proposed Rules
[[Page 33066]]
———————————————————————–
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 5, 7, 8, 15, 18, 21, 36, 41, 140, 145, 155, and 166
RIN Number 3038-AD53
Adaptation of Regulations to Incorporate Swaps
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
———————————————————————–
SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act” or “DFA”) established a comprehensive new
statutory framework for swaps and security-based swaps. The Dodd-Frank
Act repeals some sections of the Commodity Exchange Act (“CEA” or
“Act”), amends others, and adds a number of new provisions. The DFA
also requires the Commodity Futures Trading Commission (“CFTC” or
“Commission”) to promulgate a number of rules to implement the new
framework. The Commission has proposed numerous rules to satisfy its
obligations under the DFA. Because the Dodd-Frank Act makes so many
changes to the existing statutory and regulatory frameworks, the
proposed rules would make a number of conforming changes to the CFTC’s
regulations to integrate them more fully with the new statutory and
regulatory framework (“Proposal”).
DATES: Comments must be received on or before August 8, 2011.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD53,
by any of the following methods:
The agency’s Web site, at: http://comments.cftc.gov.
Follow the instructions for submitting comments through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in Sec. 145.9 of the Commission’s regulations.1
—————————————————————————
1 17 CFR 145.9. Commission regulations referred to herein are
found on the Commission’s website.
—————————————————————————
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Peter A. Kals, Attorney-Advisor, 202-
418-5466, [email protected], or Elizabeth Miller, Attorney-Advisor, 202-
418-5450, [email protected], Division of Clearing and Intermediary
Oversight; David E. Aron, Counsel, at 202-418-6621, [email protected],
Office of General Counsel; Nadia Zakir, Attorney-Advisor, 202-418-5720,
[email protected], Division of Market Oversight, Commodity Futures
Trading Commission, Three Lafayette Centre, 1151 21st Street, NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Proposed Regulations
A. Part 1
1. Regulation 1.3: Definitions
a. General Changes
b. Amended and New Definitions
c. Regulation 1.3(ll): Physical
d. Regulation 1.3(yy): Commodity Interest
2. Regulation 1.4: Use of Electronic Signatures
3. Regulation 1.31: Books and Records; Keeping and Inspection
4. Regulation 1.33: Monthly and Confirmation Statements
5. Regulation 1.35: Records of Cash Commodity, Futures and
Option Transactions
6. Regulation 1.37: Customer’s or Option Customer’s Name,
Address, and Occupation Recorded; Record of Guarantor or Controller
of Account
7. Regulation 1.39: Simultaneous Buying and Selling Orders of
Different Principals; Execution of, for and Between Principals
8. Regulation 1.40: Crop, Market Information Letters, Reports;
Copies Required
9. Regulation 1.59: Activities of Self-Regulatory Employees,
Governing Board Members, Committee Members and Consultants
10. Regulation 1.63: Service on Self-Regulatory Organization
Governing Boards or Committees by Persons With Disciplinary
Histories
11. Regulation 1.67: Notification of Final Disciplinary Action
Involving Financial Harm to a Customer
12. Regulation 1.68: Customer Election Not To Have Funds,
Carried by a Futures Commission Merchant for Trading on a Registered
Derivatives Trading Execution Facility, Separately Accounted for and
Segregated
13. Regulations 1.44, 1.53, and 1.62–Deletion of Regulations
Inapplicable to Designated Contract Markets
14. Appendix C to Part 1: Bunched Orders and Account
Identification
B. Part 7
C. Part 8
D. Parts 15, 18, 21, and 36
E. Parts 41, 140 and 145
F. Part 155
G. Other General Changes to CFTC Regulations
1. Removal of References to DTEFs
2. Other Conforming Changes
III. Request for Comment
IV. Administrative Compliance
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Cost-Benefit Analysis
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Act into
law.2 Title VII of the Dodd-Frank Act 3 (“Title VII”) amended the
CEA 4 to establish a comprehensive new regulatory framework for swaps
and security-based swaps. The legislation was enacted, among other
reasons, to reduce risk, increase transparency, and promote market
integrity within the financial system, including by: (1) Providing for
the registration and comprehensive regulation of swap dealers
(“SDs”), security-based swap dealers, major swap participants
(“MSPs”), and major security-based swap participants; (2) imposing
clearing and trade execution requirements on swaps and security-based
swaps, subject to certain exceptions; (3) creating rigorous
recordkeeping and real-time reporting regimes; and (4) enhancing the
rulemaking and enforcement authorities of the Commissions with respect
to, among others, all registered entities and intermediaries subject to
the Commission’s oversight.
—————————————————————————
2 See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
3 Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the “Wall Street Transparency and Accountability Act of
2010.”
4 7 U.S.C. 1 et seq. (2006).
—————————————————————————
[[Page 33067]]
Title VII added to the CEA two new categories of Commission
registrant (i.e., SDs 5 and MSPs 6) and provided a definition for
associated persons of the foregoing.7 Title VII also added to the CEA
compliance obligations for SDs and MSPs and revised the definitional
scope of each existing intermediary registrant category,8 with the
exception of retail foreign exchange dealers (“RFEDs”), to include
intermediation activity involving swaps.
—————————————————————————
5 DFA section 721(a)(21), adding CEA section 1a(49), codified
at 7 U.S.C. 1a(49).
6 DFA section 721(a)(16), adding CEA section 1a(33), codified
at 7 U.S.C. 1a(33).
7 DFA section 721(a)(15), adding CEA section 1a(4), codified
at 7 U.S.C. 1a(4).
8 Existing intermediary registrant categories include futures
commission merchants (“FCMs”), commodity pool operators
(“CPOs”), commodity trading advisors (“CTAs”), introducing
brokers (“IBs”), floor brokers (“FBs”) and floor traders
(“FTs”).
—————————————————————————
To apply its regulatory regime to the swap activity of
intermediaries, the Commission must make a number of changes to its
regulations to conform them to the Dodd-Frank Act. These changes
primarily affect part 1 of the Commission’s rules, but also affect
parts 5, 7, 8, 15, 18, 21, 36, 41, 140, 145, 155, and 166. To the
extent the DFA required the Commission to promulgate rules to address
certain specific DFA sections, the Commission has proposed or is in the
process of proposing such rules separately.
Today’s Proposal contains amendments of three different types:
ministerial, accommodating, and substantive. Many of the proposed
amendments are purely ministerial–for instance, several proposed
changes would update definitions to conform them to the CEA as amended
by the Dodd-Frank Act; add to the Commission’s regulations new terms
created by the Dodd-Frank Act; remove all regulations and references
pertaining to derivatives transaction execution facilities (“DTEFs”),
a category of exchange which was eliminated by the DFA; correct various
statutory cross-references to the CEA in the regulations; and remove
regulations in whole or in part that were rendered moot by the
Commodity Futures Modernization Act of 2000 (“CFMA”).
The proposed accommodating amendments are essential to the
implementation of the DFA in that they propose to add swaps, swap
markets, and swap entities to numerous definitions and regulations, but
are more than ministerial because they require some judgment in
drafting. Accommodating amendments would include, among other things,
amending numerous definitions in regulation 1.3 to reference or include
swaps; creating new definitions as necessary in regulation 1.3;
amending recordkeeping requirements to include information on swap
transactions; adding references to swaps, swap execution facilities
(“SEFs”) and derivatives clearing organizations (“DCOs”) to various
part 1 regulations; and amending parts 15, 18, 21, and 36 to implement
the DFA’s grandfathering and phase-out of exempt boards of trade and
exempt commercial markets.
The remaining proposed substantive amendments are changes that
would align requirements or procedures across futures and swap markets.
They consist of proposed amendments to regulations 1.31 and 1.35 that
would harmonize current part 1 recordkeeping requirements with those
applicable to SDs and MSPs under proposed part 23 regulations and
harmonize certain procedures applicable to swaps with those applicable
to futures.
To aid the public in understanding the numerous changes to
different parts of the CFTC’s regulations explained in the Proposal,
the Commission will also publish on its Web site a “redline” of the
affected regulations which will clearly reflect the proposed amendments
and deletions.9
—————————————————————————
9 Furthermore, while there are many outstanding Notices of
Proposed Rulemaking (“NPRMs”) published by the CFTC, today’s
Proposal does not reflect those separately proposed amendments, most
of which are not yet final. For example, the Proposal amends
regulation 1.3(z) (definition of “bona fide hedging transactions
and positions”) to remove certain cross-references, but the
Proposal does not also show other amendments to that definition
proposed earlier this year in a separate release. See Position
Limits for Derivatives, 76 FR 4752, Jan. 26, 2011. All NPRMs are
available on the Commission’s Web site for the public to review and
provide comment. For a list of all rulemaking proposals related to
the Dodd-Frank Act, please visit http://www.cftc.gov/LawRegulation/DoddFrankAct/Dodd-FrankProposedRules/index.htm.
—————————————————————————
II. Proposed Regulations
A. Part 1
1. Regulation 1.3: Definitions
a. General Changes
The Commission proposes to revise regulation 1.3 so that its
definitions, which are used throughout the regulations, incorporate
relevant provisions of the DFA. For instance, proposed regulation 1.3
updates current definitions to conform them to the Dodd-Frank Act’s
amendments of the same terms in the CEA’s definitions section,10 and
also includes definitions specifically added by the Dodd-Frank Act to
the CEA. This is the case for many of the definitions in proposed
regulation 1.3, including “associated person of a swap dealer or major
swap participant,” “commodity pool operator,” “commodity trading
advisor,” “futures commission merchant,” “floor broker,” “floor
trader,” “swap data repository,” and “swap execution facility.”
11 Additionally, the Commission is proposing to revise the definition
of “self-regulatory organization” (“SRO”) to include SEFs, a new
category of regulated markets under the DFA, and to make clear that
DCOs are SROs.12
—————————————————————————
10 CEA section 1a, 7 U.S.C. 1a.
11 The DFA amended the definition of “commodity pool
operator” in CEA section 1a to add swaps to those contracts for
which a CPO solicits investment. DFA section 721(a)(5). In addition
to amending the definition of “commodity pool operator” in
proposed regulation 1.3 to accommodate that revision, the Commission
proposes to add equivalent language to the definition of “commodity
trading advisor” in regulation 1.3.
12 Currently, some individual rules specifically include DCO
in the definition of SRO, but they are not included in the general
definition of SRO in regulation 1.3.
—————————————————————————
b. Amended and New Definitions
The Commission also proposes (1) to simplify or clarify certain
existing regulation 1.3 definitions, and (2) to add several new
definitions to regulation 1.3, pursuant to amendments to the CEA by the
Dodd-Frank Act, existing regulations, and other amendments in the
Proposal.13
—————————————————————————
13 The Commission realizes that several earlier published
releases have also proposed to add definitions to regulation 1.3,
and that these amendments may overlap, e.g., more than one
definition was proposed for regulation 1.3(zz). See Agricultural
Commodity Definition, 75 FR 65586, Oct. 26, 2010; Requirements for
Derivatives Clearing Organizations, Designated Contract Markets, and
Swap Execution Facilities Regarding the Mitigation of Conflicts of
Interest, 75 FR 63732, Oct. 18, 2010. However, as each rule proposal
is published as a final rulemaking, the Commission will ensure that
the lettering of paragraphs within regulation 1.3 for newly added
definitions is correct. Therefore, the Commission requests that the
public review the new definitions proposed today for their content
only and ignore any inconsistencies in lettering between the
Proposal and prior NPRMs.
—————————————————————————
The term “contract market,” for instance, is not defined under
the CEA, and is currently defined under regulation 1.3(h) as “a board
of trade designated by the Commission as a contract market under the
Commodity Exchange Act or in accordance with the provisions of part 33
of this chapter.” In certain provisions throughout the Commission’s
regulations, contract markets are also referred to as “designated
contract markets.” Because both terms are used interchangeably within
the regulations, the Commission is proposing to revise the definition
to mean contract market and designated contract market (“DCM”).
Proposed
[[Page 33068]]
regulation 1.3(h) will contain one definition identified by the title
“Contract market; designated contract market.” The current definition
also erroneously cross-references part 33 as the DCM provisions of the
Commission’s regulations. The proposed definition would change that
cross-reference to part 38 of the Commission’s regulations.
The Commission proposes a similar clarification regarding the
definition of “customer.” The Proposal simplifies the definition of
“customer” by combining two existing definitions, “Customer;
commodity customer” in regulation 1.3(k) and “Option customer” in
regulation 1.3(jj), and adding swaps.14 Therefore, the “customer”
definition proposed herein would include swap customers, commodity
customers, and option customers, and refer to them all with the single
term, “customer.” Furthermore, the Commission proposes to revise all
references to “commodity customer” and “option customer” throughout
the Commission’s regulations, but particularly in part 1, to simply
refer to “customer.” 15 These revisions have retained references to
requirements specific to certain contracts.16
—————————————————————————
14 The “General Regulations and Derivatives Clearing
Organizations” Federal Register release proposed to amend
regulation 1.3(k) by adding “swap customer,” but there is nothing
unique about that term requiring it to be separately defined.
General Regulations and Derivatives Clearing Organizations, 75 FR
77576, Dec. 13, 2010.
15 The Commission proposes to remove references to commodity
customers and option customers, replacing them with references to
simply “customer,” in the following regulations: 17 CFR 1.3, 1.20-
1.24, 1.26, 1.27, 1.30, 1.32-1.34, 1.35-1.37, 1.46, 1.57, 1.59,
155.3, 155.4, and 166.5.
16 For example, proposed regulation 1.33 (Monthly and
confirmation statements) requires an FCM to document a customer’s
positions in futures contracts differently from its option or swap
positions. Proposed regulation 1.33 preserves these distinctions,
even though it refers only to “customers” as opposed to
“commodity customers,” “option customers,” and “swap
customers.”
—————————————————————————
The Commission proposes to define the term “confirmation” to
reflect its differing use in various regulations depending on whether a
transaction is executed by an FCM, IB or CTA on the one hand, or by a
SD or MSP on the other hand. In the first case, the registrant is
acting as an agent. In the second it is acting as a principal.17
—————————————————————————
17 A single entity could be registered in more than one
capacity, for example, as both a SD and a CTA. Which rules were
applicable would depend on the capacity in which it was performing a
particular function.
—————————————————————————
The Commission also proposes to revise the “Member of a contract
market” definition currently found at regulation 1.3(q) and to add to
regulation 1.3 a definition of the term “Registered entity,”
currently provided in CEA section 1a(40), as revised by the Dodd-Frank
Act. The definition of “registered entity” proposed in regulation 1.3
is identical to its CEA counterpart and would include DCOs, DCMs, SEFs,
swap data repositories (“SDRs”) and certain electronic trading
facilities. To correspond with this new definition, the Commission also
proposes to replace the current “Member of a contract market”
definition with a new definition of “Member,” which would be nearly
identical to the “Member of a registered entity” definition provided
in CEA section 1a(34), also as revised by the Dodd-Frank Act.18
Therefore, the proposed “Member” definition would be broadened to
accommodate newly established SEFs, and it would include those “owning
or holding membership in, or admitted to membership representation on,
the registered entity; or having trading privileges on the registered
entity.”
—————————————————————————
18 In accordance with the removal of DTEF references from many
other Commission regulations, the proposed “Member” definition
would not include DTEF references currently in the definition of
“Member of a registered entity” found in CEA section 1a(34). See 7
U.S.C. 1a(34).
—————————————————————————
The Commission proposes to add a definition of the term “order.”
This term has not previously been defined, although it is used in
several of the regulations, e.g., 1.35, 155.3, and 155.4. In light of
this and with the addition of new categories of registrants (SDs and
MSPs) who act as principals rather than agents, clarification of this
term is appropriate. The definition would provide that an order is “an
instruction or authorization provided by a customer to a futures
commission merchant, introducing broker, or commodity trading advisor
regarding trading in a commodity interest on behalf of the customer.”
Because amendments to regulation 1.31 also proposed herein
incorporate the term “prudential regulator,” as added to the CEA by
the Dodd-Frank Act, the Commission proposes to add it to regulation
1.3.19 Pursuant to proposed regulation 1.31, records of swap
transactions must be presented, upon request, to “any applicable
prudential regulator as that term is defined in section 1a(39) of the
Act.” The proposed definition of “prudential regulator” in
regulation 1.3 is coextensive with the definition in section 1a(39) of
the Act and lists the various prudential regulators. Pursuant to the
definition in section 1a(39) of the Act, determining the “applicable”
prudential regulator depends upon what type of entity the SD or MSP is
and which regulator oversees that SD or MSP.20 For example, if a SD
is a national bank, it is overseen by the Office of the Comptroller of
the Currency, and that agency would be the “applicable prudential
regulator” for the purposes of proposed regulation 1.31.
—————————————————————————
19 See infra Part II.A.3.
20 7 U.S.C. 1a(39), as amended by DFA section 721(a)(17).
—————————————————————————
The Commission proposes to add the term “registrant” to
regulation 1.3 so that certain regulations in part 1 can refer to
various intermediaries (e.g., FCMs, IBs, CPOs), their employees
(associated persons), and other registrants (MSPs). As discussed above,
the Commission also has proposed to add the definition of “registered
entity” from CEA section 1a, which refers to DCOs, DCMs, SEFs, SDRs,
and other entities, to regulation 1.3. Because the DFA created a
definition of and several proposed part 1 regulations refer to
“associated persons of swap dealers or major swap participants,” the
Commission proposes to add that term to regulation 1.3 as well.
The Commission also proposes adding the term “retail forex
customer” to regulation 1.3 because it appears in several regulations
in part 1 and currently is only defined in part 5. The proposed
definition is identical in all material respects to the definition of
this term as it currently appears in regulation 5.1(k).21
—————————————————————————
21 17 CFR 5.1(k) currently defines “retail forex customer”
as “a person, other than an eligible contract participant as
defined in section 1a(12) of the Act, acting on its own behalf and
trading in any account, agreement, contract or transaction described
in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.” The Proposal would
amend this definition in part 5 only to reflect the renumbering of
section 1a of the Act by the DFA, and add an identically amended
definition to regulation 1.3. See infra Part II.G.2.
—————————————————————————
Proposed regulation 1.3 also changes certain definitions so that
the Commission’s regulations properly refer to both futures and swaps.
Additionally, for ease of reference, proposed regulation 1.3 would
simply adopt several terms defined under the CEA, including
“electronic trading facility,” “organized exchange,” and “trading
facility.”
c. Regulation 1.3(ll): Physical
Regulation 1.3(ll) defines the term “physical” as “any good,
article, service, right or interest upon which a commodity option may
be traded in accordance with the Act and these regulations,” 22
which is similar to the “commodity” definition in regulation
1.3(e).23 Regulation 1.3(e) defines the
[[Page 33069]]
term “commodity,” in relevant part, as “all * * * goods and articles
* * * and all services, rights and interests in which contracts for
future delivery are presently or in the future dealt in.” 24 The
word “physical” is used in 45 Commission regulations other than
regulation 1.3(ll).25 The introductory text of regulation 1.3 states
that “[t]he following terms, as used in the Commodity Exchange Act, or
in the rules and regulations in this chapter, shall have the meanings
hereby assigned to them, unless the context otherwise requires.” 26
—————————————————————————
22 17 CFR 1.3(ll).
23 17 CFR 1.3(e).
24 Regulation 1.3(e) tracks 7 U.S.C. 1a(9), as renumbered and
amended by Dodd-Frank Sections 721(a)(1) and (4), respectively.
25 See 17 CFR 1.3(z)(1), 1.3(kk), 1.17(c)(iii),
1.17(c)(5)(ii)(A), 1.17(c)(5)(xi), 1.17(j)(1), 1.31(b)(3)(iii)(B),
1.33(a)(2)(i), 1.33(a)(2)(ii), 1.33(b)(2)(iv), 1.33(b)(3), 1.34(b),
1.35(b)(2)(iii), 1.35(b)(3)(iii), 1.35(d)(1), 1.35(e), 1.39(a),
1.39(a)(3), 1.44, 1.44(b), 1.46(a)(iii), 1.46(a)(iv), 4.23(a)(1),
4.23(b)(1), 4.33(b)(1), 5.13(b)(3), 10.68(b)(1)(i), 15.00(p)(1)(ii),
16.00(a), 16.01(a), 16.01(b), 18.04(b)(3), 18.04(b)(3)(ii),
18.04(b)(6), 18.04(b)(6)(ii), 31.8(a)(1), 31.8(a)(2)(iii),
31.8(a)(2)(iv), 31.9(a), 31.9(a)(1), 32.12(a), 32.13(a),
32.13(e)(2), 33.4, 33.4(a)(4), 33.4(a)(5)(iv), 33.4(a)(5)(iv)(A),
33.4(a)(5)(iv)(B), 33.4(a)(5)(iv)(C), 33.4(a)(5)(iv),
33.4(b)(1)(iii), 33.4(d)(3), 33.7(b), 33.7(b)(1), 33.7(b)(2)(i),
33.7(b)(5), 33.7(b)(6), 33.7(b)(7)(ii), 33.7(b)(7)(iii),
33.7(b)(7)(iv), 33.7(b)(7)(v), and 33.7(b)(7)(x); 17 CFR pt. 36 app.
A (paragraph 3 under PRICE LINKAGE, (c)(3)(ii) under CORE PRINCIPLE
IV OF SECTION 2(h)(7)(C)–POSITION LIMITATIONS OR ACCOUNTABILITY,
(c) under TRADING PROCEDURES, (c) under FAIR AND EQUITABLE TRADING,
(b)(4) under POSITION LIMITATIONS OR ACCOUNTABILITY); 17 CFR
40.3(a)(4)(ii); 17 CFR pt. 40 app. A Guideline No. 1(a),(c)(2)(ii),
and (c)(2)(ii)(B); 17 CFR 41.25(c), 41.25(g)(6), 145.7(j),
147.3(b)(7)(vi), 149.103, 149.150(b)(2), 149.150(d)(1),
150.3(a)(4)(i)(A), 150.5(b)(1), 150.5(c)(1), and 160.30; 17 CFR pt.
160 app. B Sample Clause A-7; 17 CFR 190.01(x)(1), 190.01(x)(2),
190.01(kk)(3), 190.01(kk)(4), 190.01(kk)(5), 190.01(ll),
190.02(f)(1), 190.05(a)(1), 190.05(b)(1), 190.05(b)(1)(iii),
190.05(c)(3), 190.07(e)(2)(i), 190.07(e)(2)(ii),
190.07(e)(2)(ii)(A), and 190.07(e)(2)(ii)(B); 17 CFR pt. 190 app. A,
Form 1, paragraph 4 and Form 4 (Proof of Claim), paragraphs (c), (d)
and (e).
26 17 CFR 1.3 (emphasis added).
—————————————————————————
The “physical” definition was first added to regulation 1.3 in
1983 to enable trading, on DCMs, in options to buy or sell an
underlying commodity and has not been substantively amended.27 In the
Federal Register release proposing the addition of regulation 1.3(ll),
the Commission stated that “[t]he proposed definition is intended to
be coextensive with the Commission’s jurisdiction with respect to
commodity options.” 28 At the time of that proposal in 1982, cash-
settled futures on non-physical commodities had just been introduced in
the form of the Chicago Mercantile Exchange’s Eurodollar futures. In
that context, in proposing rules to permit exchange-traded options on
underlying commodities, it made sense to name such options based on
physical commodities, which constituted the vast majority of
commodities covered by then-existing futures contracts.
—————————————————————————
27 See Domestic Exchange-Traded Commodity Options; Expansion
of Pilot Program To Include Options on Physicals, 47 FR 56996, Dec.
22, 1982 and 48 FR 12519, Mar. 25, 1983.
28 Domestic Exchange-Traded Commodity Options; Expansion of
Pilot Program Provisions, 47 FR 28401, June 30, 1982.
—————————————————————————
At present, however, options may be traded on both physically
deliverable and non-physically deliverable commodities, such as
interest rates and temperatures. Using the term “physical” to refer
to an option on both physically deliverable commodities and non-
physically deliverable commodities may be confusing on its face.29
Also, the requirement in the forward exclusion from the “swap”
definition contained in CEA section 1a(47)(B)(ii), as amended by Dodd-
Frank section 721(a)(21), that a sale of a non-financial commodity or
security for deferred shipment or delivery “is intended to be
physically settled” would be meaningless if “physical” included non-
physical. As noted above, the introductory text of regulation 1.3
states that its defined terms have the meanings assigned to them in
regulation 1.3, unless the context otherwise requires.
—————————————————————————
29 Moreover, the Commission has recently proposed a rewrite of
its options regulations in parts 32 and 33. References to options on
a physical would be removed from part 33, which will apply only to
DCM-traded options on futures. Options on physicals would be
permitted to transact under revised part 32, which permits all
options that are swaps under the Dodd-Frank swap definition to
transact subject to the same rules applicable to any other swap. See
Commodity Options and Agricultural Swaps, 76 FR 6095, Feb. 3, 2011.
—————————————————————————
The Commission requests comment on whether any changes to the
“physical” definition are necessary or warranted. Should the
Commission revise the definition of “physical” to limit it to its
common sense meaning? Should the Commission remove it on the theory
that the meaning of “physical” is self-evident? Should the Commission
address such issues, if at all, in other rulemakings where they arise
more directly, such as with respect to emission-related commodities as
they relate to the forward exclusion from the swap definition? 30 If
so, should the Commission replace the term “physical” with some other
more suitable term in the relevant regulations referencing current
regulation 1.3(ll)? If so, what should the new term be? Should the
Commission take no action, in reliance on the ability of interested
parties to interpret the “unless the context otherwise requires”
language of regulation 1.3, or on some other basis? 31
—————————————————————————
30 The Commission received several comment letters regarding
environmental commodity issues in response to the advance notice of
proposed rulemaking regarding Definitions Contained in Title VII of
Dodd-Frank Wall Street Reform and Consumer Protection Act, 75 FR
51429, Aug. 20, 2010. See Letter from Kyle Danish, Van Ness Feldman,
P.C., Counsel to the Coalition for Emission Reduction Projects
(available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26164& SearchText=emission%20reduction); Letter
from Thomas Huetteman, Chairman, Jeffery C. Fort, Chair, Market
Oversight Committee, and Jeremy D. Weinstein, Member, Environmental
Markets Association (available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26166&SearchText=ema); Letter
from R. Michael Sweeney, Jr., Mark W. Menezes, and David T. McIndoe,
Hunton & Williams, LLP, on behalf of the Working Group of Commercial
Energy Firms (available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26219&SearchText=working%20group).
31 In a number of cases (e.g., the reference to “physical
safeguards” in Regulation 160.30 (Procedures to safeguard customer
records and information); and the reference to “provide physical
access to handicapped persons” in Regulation 149.150 (Program
accessibility: Existing facilities)), the context will make it
obvious that the term “physical” is meant to have its plain
meaning.
—————————————————————————
d. Regulation 1.3(yy): Commodity Interest
The Commission proposes to add swaps on all commodities within the
CFTC’s jurisdiction to the definition of “commodity interest” in
regulation 1.3(yy).32 Commodity interest currently is defined as:
“(1) Any contract for the purchase or sale of a commodity for future
delivery; (2) Any contract, agreement or transaction subject to
Commission regulation under section 4c or 19 of the Act; and (3) Any
contract, agreement or transaction subject to Commission jurisdiction
under section 2(c)(2) of the Act.” The term “commodity interest” is
cross-referenced by 33 other Commission regulations and appendices to
parts of Commission regulations.33 Generally, the term is meant to
encompass all agreements, contracts and transactions within the
Commission’s jurisdiction, though not all such agreements, contracts
and transactions are expressly set forth therein.34
—————————————————————————
32 17 CFR 1.3(yy).
33 See 17 CFR 1.12, 1.56, 1.59, 3.10, 3.12, 3.21, 4.6, 4.7,
4.10, 4.12- 4.14, 4.22-4.25, 4.30-4.34, 4.36, 4.41, 30.3, 160.3-
160.5, and 166.1-166.3; 17 CFR pt. 3 app. B, 17 CFR pt. 4 app. A,
and 17 CFR pt. 190 app. B.
34 For example, the term “contract for the purchase or sale
of a commodity for future delivery” in current regulation
1.3(yy)(1) encompasses options on futures and security futures
products. Similarly, the term “swaps” if added to proposed
regulation 1.3(yy) would include mixed swaps. Of course, the impact
of the scope of proposed regulation 1.3(yy) is only as extensive as
the other regulations referencing it.
—————————————————————————
[[Page 33070]]
The Dodd-Frank Act adds a definition of “swap” to the CEA.35
DFA section 712(d) requires the Commission to further define the term
“swap” jointly with the Securities and Exchange Commission.36 The
Commission is proposing to add “swap” to the “commodity interest”
definition so that the regulations cross-referencing it will apply to
swaps.
—————————————————————————
35 DFA section 721(a)(47); codified at 7 U.S.C. 1a(47).
36 The Commissions have not yet proposed a further definition
of the term “swap.”
—————————————————————————
2. Regulation 1.4: Use of Electronic Signatures
The Commission proposes to revise regulation 1.4 37 to extend the
benefit of electronic signatures and other electronic actions to SDs
and MSPs. Section 731 of the Dodd-Frank Act amends the CEA by adding
new sections 4s(i)(1), requiring SDs and MSPs to “conform with such
standards as may be prescribed by the Commission by rule or regulation
that relate to timely and accurate confirmation, processing, netting,
documentation, and valuation of all swaps,” 38 and 4s(i)(2),
requiring the Commission to adopt rules “governing documentation
standards for swap dealers and major swap participants.” 39
—————————————————————————
37 17 CFR 1.4.
38 7 U.S.C. 6s(i)(1).
39 7 U.S.C. 6s(i)(2).
—————————————————————————
Pursuant to the foregoing authority, the Commission previously
proposed new regulation 23.501(a)(1), which would require “[e]ach swap
dealer and major swap participant entering into a swap transaction with
a counterparty that is a swap dealer or major swap participant [to]
execute a confirmation for the swap transaction,” according to a
specified schedule.40 Also pursuant to the foregoing authority, the
Commission has proposed new regulation 23.501(a)(2), which would
require “[e]ach swap dealer and major swap participant entering into a
swap transaction with a counterparty that is not a swap dealer or a
major swap participant [to] send an acknowledgment of such swap
transaction,” according to a specified schedule.41 Proposed
regulation 23.500(a) would define such an “acknowledgment” as “a
written or electronic record of all of the terms of a swap signed and
sent by one counterparty to the other.” 42 In issuing the proposed
confirmation and acknowledgment rules cited above, the Commission
explained that “[w]hen one party acknowledges the terms of a swap and
its counterparty verifies it, the result is the issuance of a
confirmation.” 43
—————————————————————————
40 Confirmation, Portfolio Reconciliation, and Portfolio
Compression Requirements for Swap Dealers and Major Swap
Participants, 75 FR 81519, Dec. 28, 2010.
41 Id.
42 Id.
43 75 FR at 81522.
—————————————————————————
Regulation 1.4 currently provides that an FCM, IB, CPO and CTA
receiving an electronically signed document is in compliance with
Commission regulations requiring signed documents, provided that such
entity generally accepts electronic signatures.44 The rationale for
allowing the existing entities listed in regulation 1.4 to use
electronic signatures (i.e., “[a]s part of [the Commission’s] ongoing
efforts to facilitate the use of electronic technology and media”)
45 applies equally to SDs and MSPs. Therefore, the Commission
proposes to add SDs and MSPs to the list of entities covered by
regulation 1.4 and to amend its structure to account for the provisions
of the Commission’s proposed confirmation and acknowledgement
obligations discussed above.46
—————————————————————————
44 17 CFR 1.4. The regulation also requires that the
signatures in question comply with applicable Federal laws and
Commission regulations, and requires the relevant entity to employ
reasonable safeguards regarding the use of electronic signatures,
including safeguards against alteration of the record of the
electronic signature. Id.
45 Use of Electronic Signatures by Customers, Participants and
Clients of Registrants, 64 FR 47151, Aug. 30, 1999.
46 This includes proposing a change to the title of regulation
1.4 to reflect these changes. Proposed regulation 1.4 is entitled
“Use of electronic signatures, acknowledgments and verifications.”
—————————————————————————
3. Regulation 1.31: Books and Records; Keeping and Inspection
In recent years, the phrase “books and records” has evolved with
respect to the varying formats used to communicate and store
information.47 The Federal Rules of Civil Procedure have been revised
to reflect this evolution by requiring producing parties to produce
electronically stored information as specified in the request, but if
not so specified, then as they are kept in the normal course of
business or in a reasonably usable form.48 Similarly, the
Commission’s own data delivery standards, which accompany the
Commission’s requests for production, indicate a preference for
requested electronic information to be produced in native file format.
The Commission’s delivery standards provide technical instructions to
producers designed to enable the Commission to receive such information
in a machine-readable format that is compatible with the technology
used by the Commission.
—————————————————————————
47 U.S. Commodity Futures Trading Commission, Division of
Market Oversight, Advisory for Futures Commission Merchants,
Introducing Brokers, and Members of a Contract Market over
Compliance with Recordkeeping Requirements, Feb. 5, 2009 (http://www.cftc.gov/idc/groups/public/@industryoversight/documents/file/recordkeepingdmoadvisory0209.pdf) [hereinafter Recordkeeping
Advisory].
48 Fed. R. Civ. P. 34(b)(2)(E); Fed. R. Civ. P. 34, advisory
committee note, 2006 amendment (“Rule 34(b) provides that a party
must produce documents as they are kept in the usual course of
business or must organize and label them to correspond with the
categories in the discovery request. The production of
electronically stored information should be subject to comparable
requirements to protect against deliberate or inadvertent production
in ways that raise unnecessary obstacles for the requesting
party”).
—————————————————————————
Recognizing that storage formats vary across different types of
electronically stored information and to be consistent with current
Commission practice and the Federal Rules of Civil Procedure, the
proposed changes to regulations 1.31(a)(1), (a)(2), and (b) would
require that: (1) All books and records required to be kept by the Act
or by the Commission’s regulations be kept in their original (for paper
records) or native file format (for electronic records); and (2)
production of such records be made in a form specified by the
Commission. In addition, as provided in the existing regulation, books
and records may continue to be stored on electronic storage media,
provided, however, that for electronic records, the storage media must
preserve the native file format of the electronic records.
Keeping electronic records in their native file format and
producing them in a format designated by the Commission should not
create any unreasonable burdens on persons required to maintain records
under the Act and Commission regulations in light of Federal Rule of
Civil Procedure 34(b), which would apply to such persons–and all other
persons in possession of investigatory information–upon the filing of
an enforcement action in Federal district court. Rule 34(b) permits the
requesting party to designate the form or forms in which it wants
electronically stored information produced in order to facilitate its
usability. This is recognition that “the form of production is more
important to the exchange of electronically stored information than of
hard-copy materials.”49
—————————————————————————
49 Fed. R. Civ. P. 34, advisory committee note, 2006
amendment.
—————————————————————————
The Commission also proposes amendments to regulation 1.31 to
incorporate two books and records obligations that proposed regulation
23.203(b) applies to SDs and MSPs. Proposed regulation 23.203(b) would
require SDs and MSPs to (1) keep
[[Page 33071]]
records of swap or related cash or forward transactions until the
termination, maturity, expiration, transfer, assignment, or novation
date of the transaction and for a period of five years after such date;
and (2) make such records available for inspection not only by the
Commission and the United States Department of Justice, but also to any
applicable prudential regulator, as that term is defined in section
1a(39) of the Act, or, in connection with security-based swap
agreements described in section 1a(47)(A)(v) of the Act, the United
States Securities and Exchange Commission. By contrast, existing
regulation 1.31, which pertains to “all books and records required to
be kept by the Act,” requires that records be kept for five years and
that they be made available only to the Commission and the Department
of Justice.50 The Proposal would add to regulation 1.31 the special
requirements for swaps and cash related transactions in proposed
regulation 23.203(b).
—————————————————————————
50 17 CFR 1.31(a) (emphasis added).
—————————————————————————
The Commission solicits comments on the potential costs and effects
of the proposed new requirement that all books and records be
maintained in their original form (for paper) and their native file
format (for electronic records) as provided in the proposed rule.
Comment also is requested regarding whether the retention period for
any communication medium (e.g., oral communications) should be shorter
than the retention period applicable to other required records. In this
regard, the Commission requests that commenters specify what the
proposed retention period should be and why.
4. Regulation 1.33: Monthly and Confirmation Statements
Regulation 1.33 requires FCMs to maintain certain records and to
regularly furnish monthly and confirmation statements to customers
regarding commodity futures and option transactions they have entered
into on behalf of customers. The DFA amended the definition of FCM in
section 1a of the CEA to authorize an FCM to solicit or accept orders
for swaps in addition to commodity futures and option transactions.51
Therefore, the Commission proposes adding requirements for monthly and
confirmation statements applicable to swaps.
—————————————————————————
51 DFA section 721(a)(13).
—————————————————————————
Proposed regulation 1.33(a)(3) describes what information on swap
positions an FCM must provide in monthly statements to its customers.
Proposed regulation 1.33(b)(2) would extend the requirement that an FCM
furnish confirmation statements to customers to swaps executed on a
customer’s behalf and describes what information such a confirmation
statement must contain. In addition, the Commission proposes to amend
regulation 1.33 to reflect proposed changes to the definitions of the
terms “commodity interest,” “customer,” and “open contract” in
regulation 1.3.
5. Regulation 1.35: Records of Cash Commodity, Futures and Option
Transactions
The Commission proposes to amend regulation 1.35 in several
respects. First, the Commission proposes to revise paragraph (a) such
that this regulation’s recordkeeping obligations would extend to trades
executed by FCMs and IBs on SEFs. Those obligations currently apply
only to trades executed on DCMs. Similarly, the proposed amendments
would extend all of the regulation 1.35 recordkeeping obligations
currently applicable to members of DCMs to include “members,” as that
term is proposed to be defined in proposed regulation 1.3, of SEFs.
Second, the proposed revisions replace the terms “commodity
futures transactions,” “retail forex exchange transactions,” and
“commodity option transactions” with the term “commodity
interests.” According to the Commission’s proposed definition of
“commodity interest” in regulation 1.3, “commodity interest”
includes all of the aforementioned transactions as well as swaps. Thus,
the Commission proposes that regulation 1.35’s recordkeeping
obligations for transactions in futures, commodity options, and retail
forex exchange transactions also apply to swaps.52 Pursuant to the
Dodd-Frank Act, DCMs are permitted to list swaps, and FCMs and IBs are
permitted to execute swaps on behalf of customers.53
—————————————————————————
52 Accordingly, the Commission also proposes to amend the
title of regulation 1.35 to reflect such a change. Therefore,
proposed regulation 1.35 is entitled “Records of commodity interest
and cash commodity transactions.”
53 See 7 U.S.C. 1a(28) and 1a(31), as amended by DFA sections
721(a)(13) and (a)(15), respectively.
—————————————————————————
In relevant part, existing regulation 1.35 requires FCMs, IBs, and
DCM members to “keep full, complete, and systematic records, together
with all pertinent data and memoranda, of all transactions relating to
[their] business of dealing in commodity futures, commodity options and
cash commodities,” subject to the requirements of regulation 1.31.
Specifically included among the records to be retained under regulation
1.35 are “all orders (filled, unfilled, or canceled), trading cards,
signature cards, street books, journals, ledgers, canceled checks,
copies of confirmations, copies of statements of purchase and sale, and
all other records, data and memoranda” that have been prepared in the
course of an FCM’s, an IB’s, or a DCM member’s business of dealing in
commodity futures, commodity options, and cash commodities.
On February 5, 2009, the Commission’s Division of Market Oversight
(“DMO”) issued an advisory stating that “[t]he Commission’s
recordkeeping regulations, by their terms, do not distinguish between
whatever medium is used to record the information covered by the
regulations, including emails, instant messages, and any other form of
communication created or transmitted electronically.” 54 Thus, the
advisory made clear that the existing language of regulation 1.35
“appl[ies] to records that are created or retained in an electronic
format, including email, instant messages, and other forms of
communication created or transmitted electronically for all trading.”
55 Accordingly, under the Commission’s existing regulations, FCMs,
IBs, and DCM members are required to retain and produce for inspection
any such electronic records, subject to the retention and accessibility
requirements set forth in regulation 1.31.
—————————————————————————
54 See Recordkeeping Advisory, supra note 47, at 3.
55 Id. at 4.
—————————————————————————
Notwithstanding the DMO advisory relating to certain electronic
records, the Commission’s existing recordkeeping requirements, as they
relate to FCMs, IBs and DCM members, remain limited by a 1996
Commission decision, Gilbert v. Lind-Waldock & Co., wherein audio tapes
of telephone conversations with customers were found to be beyond the
definition of “records” covered by regulation 1.35.56
—————————————————————————
56 [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ]
26,720 at 43,992 n.23 (CFTC June 17, 1996).
—————————————————————————
Consequently, where Commission-regulated persons use oral
communications, the Commission has encountered greater difficulties in
effectively exercising its enforcement responsibilities, thereby
increasing the potential for market abuses. Such difficulties have been
particularly acute in cases where the Commission is required to
establish a threshold level of knowledge and/or intent on the part of
the actor, such as cases involving market manipulation and false
reporting. The Commission’s enforcement success in such cases often has
correlated directly with the
[[Page 33072]]
existence of high-quality recordings of voice communications between
the persons involved. Conversely, the Commission’s enforcement
capabilities have been limited in cases where such voice recordings
were not available.
Significant technological advancements in recent years,
particularly with respect to the cost of capturing and retaining copies
of electronic material, including telephone communications, have made
the prospect of enhancing the Commission’s recordkeeping requirements
for oral communications more economically feasible and systemically
prudent. Evidence of these trends was examined in March 2008 by the
United Kingdom’s Financial Services Authority (“FSA”), which studied
the issue of mandating the recording and retention of voice
conversations and electronic communications. The FSA issued a Policy
Statement detailing its findings and ultimately implemented rules
relating to the recording and retention of such communications,
including a rule requiring all financial service firms to record any
relevant communication by employees on their firm-issued or firm-
sanctioned cell phones that will take effect on November 14, 2011.57
Similar rules that mandate recording of certain voice and/or telephone
conversations have been promulgated by the Hong Kong Securities and
Futures Commission 58 and by the Autorit[eacute] des March[eacute]s
Financiers in France,59 and have been recommended by the
International Organization of Securities Commissions (“IOSCO”).60
—————————————————————————
57 Financial Services Authority, “Policy Statement: Telephone
Recording: recording of voice conversations and electronic
communications” (Mar. 2008); Financial Services Authority,
“Taping: Removing the mobile phone exemption,” (Mar. 2010);
Financial Services Authority, “Policy Statement: Taping of Mobile
Phones: Feedback on CP 10/7 and Final Rules,” (Nov. 2010).
58 Code of Conduct for Persons Licensed by or Registered with
the Securities and Futures Commission para. 3.9 (2010) (H.K.).
59 General Regulation of the Autorit[eacute] des
March[eacute]s Financiers art. 313-51 (2010) (Fr.).
60 Press Release, International Organization of Securities
Commissions, “IOSCO Publishes Recommendations to Enhance Commodity
Futures Markets Oversight,” (Mar. 5, 2009), http://www.iosco.org/news/pdf/IOSCONEWS137.pdf. The IOSCO members on the committee
formulating the recommendations included Brazil, Canada (Ontario and
Quebec), Dubai, France, Germany, Hong Kong, Italy, Japan, Norway,
Switzerland, the United Kingdom, and the United States.
—————————————————————————
Under the FSA rules, firms (identified generally as those entities
conducting any of the following activities: receiving, executing,
arranging for execution of customer orders or transactions carried out
on behalf of the firm) must take reasonable steps to record relevant
(relevant means conversations or communications between the firm and
the client or when the firm is acting on behalf of a client with
another person) telephone conversations (including mobile telephones)
and keep a copy of relevant electronic communications that enable the
referenced activities to be carried out. Firms are required to keep
recordings of certain telephone lines for a period of at least six
months in a medium that is readily accessible.
In promulgating this rule, the FSA issued guidance stating the
following benefits: “i) recorded communication may increase the
probability of successful enforcement; ii) this reduces the expected
value to be gained from committing market abuse; and iii) this, in
principle, leads to increased market confidence and greater price
efficiency.” In determining its policy, the FSA conducted a cost-
benefit analysis, including eight meetings with several trade
associations including the Securities Industry and Financial Markets
Association (“SIFMA”), the International Swaps and Derivatives
Association (“ISDA”), and the Futures and Options Association
(“FOA”). The FSA report estimated that 80% of telephone lines of its
firms that would need to be recorded were already being recorded at the
time of its study.61
—————————————————————————
61 See Financial Services Authority, “Policy Statement:
Telephone Recording: recording of voice conversations and electronic
communications” (Mar. 2008); Financial Services Authority,
“Taping: Removing the mobile phone exemption” (Mar. 2010);
Financial Services Authority, “Policy Statement: Taping of Mobile
Phones: Feedback on CP 10/7 and Final Rules” (Nov. 2010).
—————————————————————————
Indeed, the futures industry has imposed a requirement on certain
of its member firms to tape telephone conversations with customers
since 1997. Since then, the National Futures Association (“NFA”) has
required member firms with more than a certain percentage of APs who
have been disciplined to record all telephone conversations between the
member’s APs and both existing and potential customers for a period of
two years. Those recordings must be retained for a period of five years
from the date each tape is created, and the tapes shall be readily
accessible during the first two years of the five year period.62 A
similar rule exists in the securities industry.63
—————————————————————————
62 See Interpretative Notice to NFA Compliance Rule 2-9,
Supervision of Telemarketing Activity, 9021 (Feb. 18, 1997).
63 See NASD Rule 3010, Supervision (the procedures required by
this rule include tape-recording all telephone conversations between
the member’s registered persons and both existing and potential
customers. All tape recordings made pursuant to the requirements of
this paragraph shall be retained for a period of not less than three
years from the date the tape was created, the first two years in an
easily accessible place).
—————————————————————————
Consistent with these developments, the proposed change to
regulation 1.35(a) would explicitly require FCMs, RFEDs, IBs and
members of DCMs and SEFs to record all oral communications that lead to
the execution of transactions in a commodity interest or cash
commodity. In addition to increasing consistency across regulatory
regimes, this proposal would harmonize regulation 1.35 with the
recordkeeping requirements proposed for SDs and MSPs under the Dodd-
Frank Act.64 The proposed amendments to regulation 1.35 would require
that the recorded communications be identifiable by counterparty and
transaction. As noted above, one of the proposed revisions to
regulation 1.31 would require that each recorded communication be
maintained in its native file format and produced in a form specified
by any Commission representative. Records of these communications may
continue to be stored on electronic storage media, provided, however,
that for electronic records, the storage media must preserve the native
file format of the electronic records. Records must be maintained for a
period of five years and shall be readily accessible for the first two
years of that five-year period.
—————————————————————————
64 See Reporting, Recordkeeping, and Daily Trading Records
Requirements for Swap Dealers and Major Swap Participants, 75 FR
7666, Dec. 9, 2010 (Proposed regulation 23.202(a)(1) would require
“[e]ach swap dealer and major swap participant [to] make and keep
pre-execution trade information, including, at a minimum, records of
all oral and written communications provided or received concerning
quotes, solicitations, bids, offers, instructions, trading, and
prices, that lead to the execution of a swap, whether communicated
by telephone, voicemail, facsimile, instant messaging, chat rooms,
electronic mail, mobile device or other digital or electronic
media”).
—————————————————————————
The Commission solicits comments on the potential costs and
benefits of requiring registrants to record and maintain oral
communications as provided in the proposed rule.65
—————————————————————————
65 The Commission has received several comments on the costs
and benefits associated with its proposed regulation 23.202 Daily
Trading Records (Reporting, Recordkeeping, and Daily Trading Records
Requirements for Swap Dealers and Major Swap Participants, 75 FR
76666, Dec. 9, 2010) and will consider those comments in connection
with these proposed rules. The comments are available on the
Commission’s Web site at http://www.cftc.gov.
—————————————————————————
As part of the ministerial amendments proposed in this release, the
Commission is proposing to renumber portions of regulation 1.35 so that
paragraphs currently numbered 1.35(a-1) and 1.35(a-2) will be
renumbered 1.35(b) and 1.35(c), respectively. As a result, paragraphs
currently numbered 1.35(b), (c), (d) and (e) will be
[[Page 33073]]
renumbered 1.35(d), (e) (f) and (g), respectively.
Because proposed regulation 1.35 extends recordkeeping obligations
to swaps, the Commission has proposed special language for swaps, where
appropriate. In paragraph (b)(2) (proposed (d)(2)) (records of futures,
commodity options, and retail forex exchange transactions for each
account), the Commission has proposed adding provision (iv). Proposed
regulation 1.35(d)(2)(iv) would require FCMs, IBs, and any clearing
members clearing swaps executed on a DCM or SEF to maintain records
describing the date, price, quantity, market, commodity, and, if
cleared, DCO of each swap.
The Commission recognizes that money managers currently execute
bunched swap orders on behalf of clients and allocate the trades to
individual clients post-execution. The Commission believes that the
bunched order procedures currently applicable to futures can be adapted
for use in swap trading. Therefore, the Commission proposes to amend
subsection (a-1)(5) (proposed (b)(5)), which addresses post-execution
allocation of bunched orders. As discussed below, the Commission also
is proposing to delete appendix C to part 1, which predated regulation
1.35(a-1)(5) (proposed (b)(5)) and also addresses bunched orders.
In order to have a single standard for all intermediaries that
might have discretion over customer accounts, the Commission is
proposing to include FCMs and IBs as eligible account managers in
regulation 1.35(a-1)(5) (proposed (b)(5)). Unlike other account
managers, however, FCMs and IBs are prohibited from including
proprietary trades in a bunched order with customer trades.
Accordingly, the Commission is proposing to add a cross-reference in
regulation 1.35(a-1)(5) (proposed (b)(5)) to regulations 155.3 and
155.4, which impose that restriction on FCMs and IBs, respectively. The
Commission requests comment on whether the proposal to add FCMs and IBs
to the list of eligible account managers is appropriate.
The Commission further proposes to amend regulation 1.35(a-1)
(proposed (b)) to provide that specific customer account identifiers
need not be included in confirmations or acknowledgments provided
pursuant to proposed regulation 23.501(a), if the requirements of
regulation 1.35(a-1)(5) (proposed (b)(5)) are met. This would enable
account managers to bunch orders for trades executed bilaterally with
SDs or MSPs. The proposal would require that, similar to the current
procedure for futures, the allocation be completed by the end of the
day of execution and provided to the counterparty. The Commission
requests comment on whether the proposed procedures for handling
bunched swap orders would be effective. In particular, the Commission
requests comment on whether allocation can be conducted by the end of
the day of execution.
The Commission proposes deleting paragraphs (f)-(l) of regulation
1.35. Pursuant to the CFMA, regulation 38.2 required DCMs to comply
with an enumerated list of Commission regulations, and exempted them
from all remaining Commission regulations that were no longer
applicable post-CFMA.66 Paragraphs (f)-(l) of regulation 1.35 are not
among those enumerated regulations still applicable to DCMs and,
therefore, have been moot since regulation 38.2 took effect.
Regulations 1.35(f)-(l) required contract markets: To identify floor
brokers, floor traders, and clearing members in a certain manner; to
keep records indicating the time of trade executions in a certain
manner; to maintain records of changes in the price of transactions; to
demonstrate their effectiveness in complying with recordkeeping
obligations; and to create rules imposing certain recordkeeping
requirements on contract market members. The DCM Core Principles
proposal in December 2010 substantially revised part 38, but did not
revoke regulation 38.2.67
—————————————————————————
66 See 71 FR 1964, Jan. 12, 2006.
67 Core Principles and Other Requirements for Designated
Contract Markets, 75 FR 80572, Dec. 22, 2010.
—————————————————————————
As part of the ministerial amendments proposed in this release, the
Commission is proposing to eliminate from the Commission’s regulations
any provisions that have been inapplicable to DCMs since the passage of
the CFMA, and that remain inapplicable after the passage of the DFA.
Paragraphs (f)-(l) of regulation 1.35 are among those provisions.
Pursuant to the proposed removal of paragraph (j) of regulation 1.35,
the Commission also proposes copying most of that provision into
proposed subsection (d)(7)(i) (currently (b)(7)(i)).
Finally, the Commission proposes the following technical correction
to regulation 1.35(b)(3)(v) (proposed (d)(3)(v)): that the final
sentence reference “commodity futures, retail forex, commodity option,
or swap books and records” instead of “commodity retail forex or
commodity option books and records.”
6. Regulation 1.37: Customer’s or Option Customer’s Name, Address, and
Occupation Recorded; Record of Guarantor or Controller of Account
Dodd-Frank Act section 723(a)(3) added a new section 2(h)(8) to the
CEA to require, among other things, that swaps subject to the clearing
requirement of CEA section 2(h)(1) be executed either on a DCM or on a
SEF. The DFA established SEFs as a new category of regulated markets
for the purpose of trading and executing swaps.68 Because SEFs are
now regulated markets under the CEA, many of the Commission’s existing
regulatory provisions that currently are applicable to DCMs also will
become applicable to SEFs.
—————————————————————————
68 Section 723(a)(3) of the Dodd-Frank Act amends section 2(h)
of the CEA, providing that with respect to transactions involving a
swap subject to the clearing requirement of section 2(h)(1) of the
CEA, counterparties must execute the transaction on a DCM or a SEF.
—————————————————————————
Accordingly, the Commission proposes to amend paragraphs (c) and
(d) of regulation 1.37, pertaining to recording foreign traders’ and
guarantors’ names, addresses, and business information. Currently,
these provisions apply to DCMs and futures and options contracts
executed on those facilities. The proposed revision would amend the
provisions to also include SEFs and swap transactions. Additionally,
the Commission proposes to amend the title and remaining text of
regulation 1.37 to reflect the proposed removal of the term “option
customer.” 69
—————————————————————————
69 See supra note 15 and accompanying text.
—————————————————————————
7. Regulation 1.39: Simultaneous Buying and Selling Orders of Different
Principals; Execution of, for and Between Principals
Like regulation 1.37, the Commission is proposing to amend
regulation 1.39 to apply it to SEFs and swaps. Regulation 1.39, which
currently applies to members of contract markets, governs the
simultaneous execution of buy and sell orders of different principals
for the same commodity for future delivery by a member and permits the
execution of such orders between such principals on a contract market.
The Commission proposes to amend this provision to include eligible
contract participants (“ECPs”) on SEFs and registrants, and to
include swap transactions. The Commission is also amending paragraph
(c) to eliminate the reference to “cross trades” as they are no
longer defined under section 4c(a) of the Act, as amended by the DFA.
[[Page 33074]]
8. Regulation 1.40: Crop, Market Information Letters, Reports; Copies
Required
Regulation 1.40 requires FCMs, RFEDs, IBs and members of contract
markets to furnish to the Commission certain information they publish
or circulate concerning crop or market information affecting prices of
commodities. The Commission is proposing to apply regulation 1.40 to
ECPs trading on SEFs to the extent that such ECPs have trading
privileges on the SEF. ECPs that do not have trading privileges on a
SEF would not be subject to regulation 1.40. The amendments also update
the forms of communication covered by the regulation by replacing the
word “telegram” with “telecommunication.”
9. Regulation 1.59: Activities of Self-Regulatory Employees, Governing
Board Members, Committee Members and Consultants
The Commission proposes to amend regulation 1.59 to include SEFs
and swaps. The Commission is also proposing to amend regulation 1.59(b)
to correct certain cross-references to the Act and its regulations.
Paragraph (c) of proposed regulation 1.59 has been revised to apply
only to registered futures associations, as the prohibitions contained
therein applicable to the other SROs already are addressed in proposed
regulation 40.9.
10. Regulation 1.63: Service on Self-Regulatory Organization Governing
Boards or Committees by Persons With Disciplinary Histories
The Commission is proposing to amend regulation 1.63 to correct
certain cross-references to the Act and its regulations. The Commission
also is proposing to amend paragraph (d) to incorporate the posting of
notices required under that paragraph on each SRO’s Web site.
11. Regulation 1.67: Notification of Final Disciplinary Action
Involving Financial Harm to a Customer
Regulation 1.67 requires contract markets, upon taking any final
disciplinary action involving a member causing financial harm to a non-
member, to provide notice to the FCM that cleared the transaction. FCMs
and other registrants on SEFs should also be notified of any
disciplinary action involving transactions on a SEF they executed for
ECPs. Accordingly, the Commission is proposing to amend regulation 1.67
to include SEFs, registrants and ECPs on such facilities.
12. Regulation 1.68: Customer Election Not To Have Funds, Carried by a
Futures Commission Merchant for Trading on a Registered Derivatives
Transaction Execution Facility, Separately Accounted for and Segregated
The Commission proposes to remove regulation 1.68. Regulation 1.68
permits a customer of an FCM to allow the FCM to not separately account
for and segregate such customer’s funds if, among other things, such
funds are being carried by the FCM to trade on or through the
facilities of a DTEF, a category of trading organization added to the
CEA by section 111 of the CFMA.70 No DTEF has ever registered with
the Commission. Furthermore, section 734 of the Dodd-Frank Act repeals
the DTEF provisions in the CEA, effective July 15, 2011. Therefore,
because the statutory provisions underpinning regulation 1.68 will be
repealed, the Commission proposes to remove it from the Commission’s
regulations.71
—————————————————————————
70 Public Law 106-554, 114 Stat. 2763, app. E (2000) (codified
at CEA section 5a, 7 U.S.C. 7a).
71 The Commission is also proposing to delete all other
references to DTEFs, except those already removed by other
proposals, throughout its regulations. See infra Part II.G.
—————————————————————————
13. Regulations 1.44, 1.53, and 1.62–Deletion of Regulations
Inapplicable to Designated Contract Markets
The CFMA adopted core principles for DCMs.72 On August 10, 2001,
the Commission published final rules implementing provisions of the
CFMA, in which it concluded that the CFMA’s framework effectively
constituted a broad exemption from many of the existing regulations
applicable to DCMs.73 In implementing the provisions of the CFMA, the
final rule exempted DCMs from such regulations. Specifically, the final
rule codified regulation 38.2, which required DCMs to comply with an
enumerated list of Commission regulations, and exempted them from all
remaining Commission regulations no longer applicable post-CFMA. As
part of the ministerial amendments proposed in this release, the
Commission is proposing to eliminate from the Commission’s regulations
any provisions that have been inapplicable to DCMs since the CFMA was
enacted and that remain inapplicable after enactment of the DFA.
Accordingly, the Commission proposes to eliminate the following
regulations: Regulation 1.44 (Records and reports of warehouses,
depositories, and other similar entities; visitation of premises),
regulation 1.53 (Enforcement of contract market bylaws, rules,
regulations, and resolutions), and regulation 1.62 (Contract market
requirement for floor broker and floor trader registration).
—————————————————————————
72 Public Law 106-554, 114 Stat. 2763 (2000).
73 A New Regulatory Framework for Trading Facilities,
Intermediaries and Clearing Organizations, 66 FR 42256, Aug. 10,
2001.
—————————————————————————
14. Appendix C to Part 1: Bunched Orders and Account Identification
The Commission proposes to eliminate appendix C to part 1. Appendix
C consists of a Commission Interpretation regarding certain account
identification requirements pertaining to the practice of combining
orders for different accounts into a single order book, referred to as
bunched orders. The procedures for bunched orders are set forth in
regulation 1.35(a-1)(5). Accordingly, the procedures under appendix C
to part 1 are duplicative and no longer necessary.
B. Part 7
The Commission is proposing to rename part 7 of the Commission’s
regulations “Registered Entity Rules Altered or Supplemented by the
Commission,” thus reflecting the language in section 8a(7) of the Act,
as amended by the Dodd-Frank Act, which provides the basis for Part 7.
The Commission is also proposing to make a similar change in regulation
7.1, replacing contract market rules with registered entity rules.
Finally, the Commission is proposing to remove and reserve subparts B
(Chicago Mercantile Exchange Rules) and C (Board of Trade of the City
of Chicago Rules) and their associated sections.
C. Part 8
The Commission proposes to remove part 8 of its regulations.74 As
part of its implementation of the Dodd-Frank Act, on December 1, 2010,
the Commission issued a comprehensive NPRM for DCMs.75 In the NPRM,
the Commission proposed regulations in “Subpart N–Disciplinary
Procedures” of part 38 to amend the disciplinary procedure
requirements applicable to DCMs.76 Several of the proposed
regulations in
[[Page 33075]]
subpart N of part 38 are similar to the text of the disciplinary
procedures found in part 8 of the Commission’s regulations.77
Although the Commission noted in the DCM NPRM that the proposed
disciplinary procedures propose new disciplinary procedures for
inclusion in part 38, the Commission proposes to remove part 8 from its
regulations to avoid any confusion that could result from those
regulations containing two sets of exchange disciplinary
procedures.78 The effective date of any deletion of these part 8
regulations would be contemporaneous with the effective date of any
changes to the part 38 regulations.
—————————————————————————
74 Regulation 38.2 exempts designated contract markets from
all Commission rules not specifically reserved. 17 CFR 38.2. The
Part 8 rules were not reserved.
75 Core Principles and Other Requirements for Designated
Contract Markets, 75 FR 80572, Dec. 22, 2010.
76 75 FR at 80597. Section 735(a) of the Dodd-Frank Act
eliminates all DCM designation criteria, including Designation
Criterion 6 (Disciplinary Procedures). Section 735(b) of the Dodd-
Frank Act creates a new Core Principle 13 (Disciplinary Procedures)
that is devoted exclusively to exchange disciplinary proceedings,
and captures disciplinary concepts inherent in both Designation
Criterion 6 and in current DCM Core Principle 2.
77 Paragraph (b)(4) of the acceptable practices for former
Core Principle 2 referenced part 8 of the Commission’s regulations
as an example that DCMs could follow to comply with Core Principle
2. 17 CFR pt. 38, app. B, Acceptable Practices for Core Principle 2
at (b)(4). In its experience, the Commission has found that many
DCMs’ disciplinary programs do in fact model their disciplinary
structures and processes on part 8.
78 75 FR at 80597.
—————————————————————————
D. Parts 15, 18, 21, and 36
The Commission also proposes to incorporate changes into parts 15,
18, 21, and 36 of its regulations to account for (1) the DFA’s
elimination of two categories of exempt markets, exempt commercial
markets (“ECMs”) and electronic boards of trade (“EBOTs”); and (2)
the DFA’s grandfather relief provisions for such entities.
Section 723 of the DFA strikes CEA section 2(h), thus eliminating
the ECM category. Section 734 of the DFA strikes CEA section 5d, thus
eliminating the EBOT category. Section 734 also strikes CEA section 5a,
thus eliminating the DTEF category of regulated markets effective July
15, 2011, as discussed above.
Both sections 723 and 734 of the Dodd-Frank Act contain grandfather
provisions whereby ECMs and EBOTs may petition the Commission to
continue to operate as ECMs and EBOTs. Pursuant to the grandfather
provisions, in September 2010, the Commission issued orders regarding
the treatment of such grandfather petitions (the “Grandfather Relief
Orders”).79 Under the Grandfather Relief Orders, the Commission may,
subject to certain conditions, provide relief to ECMs and EBOTs for up
to one year.
—————————————————————————
79 75 FR 56513, Sept. 16, 2010.
—————————————————————————
Pursuant to the DFA and the Grandfather Relief Orders, the
Commission proposes to remove from parts 15, 18, 21 and 36 80
references to CEA sections 2(h) and 5d and to replace those references,
where appropriate, with references to the Grandfather Relief Orders as
the authority under which ECMs and EBOTs can continue to operate. The
Commission also proposes to remove from parts 15, 18, 21, and 36 of its
regulations references to CEA sections 2(d), 2(g), and 5a, as well as
references to DTEFs.
—————————————————————————
80 Part 36 provisions apply to ECMs and EBOTs. The Commission
is not proposing to delete part 36 in its entirety because part 36
provisions will continue to apply to ECMs and EBOTs that continue to
operate under the Grandfather Relief Orders.
—————————————————————————
E. Parts 41, 140, and 145
The Commission also proposes to incorporate changes into its
regulations to account for other new categories of registered entities
and to include new products now subject to Commission jurisdiction.
Section 733 of the Dodd-Frank Act added new section 5h to the CEA and
created SEFs. Section 728 of the Dodd-Frank Act added new section 21 to
the CEA and created SDRs. SEFs will allow for the trading and clearing
of swap transactions between ECPs, as that term is defined in CEA
section 1a(18).81 In addition to the amendments contained in proposed
part 37, the Commission is proposing additional amendments throughout
the regulations to include SEFs and SDRs where necessary. The
Commission also proposes to delete from part 41 references to DTEFs as
that term was deleted from CEA section 5b by the Dodd-Frank Act,
effective July 15, 2011.82
—————————————————————————
81 For a detailed discussion of the proposed rules as they
directly relate to SEFs, see 76 FR 1214, Jan. 7, 2011.
82 Section 5b of the CEA provided for the registration of
DTEFs. Although secondary references to DTEFs remain in the act,
none of those would enable an entity to commence operations as a
DTEF. The proposed deletions are in regulations 41.2, 41.12, 41.13,
41.21-41.25, 41.27, 41.43 and 41.49.
—————————————————————————
The proposed changes throughout parts 140 (Organization, Functions
and Procedures of the Commission) and 145 (Commission Records and
Information) reflect the need to incorporate SEFs and SDRs into the
Commission’s regulations dealing with the rights and obligations of
other registered entities. Proposed regulation 140.72 provides the
Commission with the authority to disclose confidential information to
SEFs and SDRs. This provision allows the Commission, or specifically
identified Commission personnel, to disclose information necessary to
effectuate the purposes of the CEA, including such matters as
transactions or market operations. Proposed regulation 140.96
authorizes the Commission to publish in the Federal Register
information pertaining to the applications for registration of DCMs,
SEFs and SDRs, as well as new rules and rule amendments which present
novel or complex issues that require additional time to analyze, an
inadequate explanation by the submitting registered entity, or a
potential inconsistency with the Act, or regulations under the Act.
Proposed regulation 140.99 also includes SEFs and SDRs in the category
of registered entities that may petition the Commission for exemptive
relief and no-action and interpretative letters.
Proposed regulation 140.735-3 adds SEFs and SDRs to the list of
entities from which Commission members and employees may not accept
employment or compensation. The Commission proposes adding swaps to
those agreements, contracts or transactions Commission staff may not
trade. The Commission would like to take this opportunity to also add
retail forex transactions, as that term is defined in regulation
5.1(m), to this list.
Finally, proposed regulation 145.9 expands the definition of
“submitter” by adding SEFs and SDRs to the list of registered
entities to which a person’s confidential information has been
submitted, and which, in turn, submit that information to the
Commission. This amendment allows individuals who have submitted
information to a SEF or SDR to request confidential treatment under
regulation 145.9.
F. Part 155
1. Regulation 155.2: Trading Standards for Floor Brokers
The Commission proposes removing the references to regulation 1.41
within regulation 155.2 because the Commission removed and reserved
regulation 1.41 in 2001 (66 FR 42256) pursuant to the CFMA. The
Commission also proposes removing the related reference to former
section 5a(a)(12)(A) of the Act.
G. Other General Changes to CFTC Regulations
1. Removal of References to DTEFs
The Commission proposes the removal of references to DTEFs and
regulations pertaining to DTEFs in parts 1, 5, 15, 36, 41, 140, and 155
because section 734 of the DFA abolished DTEFs, effective July 15,
2011.83
—————————————————————————
83 This proposed rulemaking is not deleting those DTEF
references that other NPRMs have already proposed deleting from the
Commission’s regulations (e.g., some references in part 3 and all
references in part 40).
—————————————————————————
2. Other Conforming Changes
The Commission also proposes in various parts of its regulations to
update
[[Page 33076]]
cross-references to CEA provisions, now renumbered after the passage of
the DFA. An example of one such change is proposed regulation 166.5, in
which the Commission proposes to update the statutory reference to
“eligible contract participant,” to reflect the Dodd-Frank Act’s
renumbering of CEA section 1a. Additionally, where typographical errors
or other minor inconsistencies were discovered while reviewing CFTC
regulations, the Proposal includes instructions and proposed
regulations to correct them.
III. Request for Comment
The Commission requests comment generally on all aspects of the
proposed rules. As discussed in more detail above, the Commission also
requests comment on: whether any changes to the “physical” definition
in regulation 1.3 are necessary or warranted; the potential costs and
effects of the proposed new requirements that all books and records be
maintained in their original form (for paper) and their native file
format (for electronic records); whether the retention period for any
communication medium (e.g., oral communications) should be shorter than
the retention period applicable to other required records; the
potential costs and effects of requiring registrants to record and
maintain oral communications; whether the proposal to add FCMs and IBs
to the list of eligible account managers is appropriate; and whether
the proposed procedures for handling bunched swap orders are feasible.
IV. Administrative Compliance
A. Paperwork Reduction Act
The Paperwork Reduction Act provides that an agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless it has been approved by the Office of Management and
Budget (“OMB”) and displays a currently valid control number.84
This proposed rulemaking contains new collections of information for
which the Commission must seek a valid control number. The Commission
therefore is submitting this proposal to OMB for its review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for
these new collections of information is “Books and Records
Requirements for Certain Registrants and Other Market Participants.”
Responses to these information collections would be mandatory.
—————————————————————————
84 44 U.S.C. 3501 et seq.
—————————————————————————
With respect to all of the Commission’s collections, the Commission
will protect proprietary information according to the Freedom of
Information Act and 17 CFR part 145, “Commission Records and
Information.” In addition, section 8(a)(1) of the Commodity Exchange
Act strictly prohibits the Commission, unless specifically authorized
by the Act, from making public “data and information that would
separately disclose the business transactions or market positions of
any person and trade secrets or names of customers.” The Commission
also is required to protect certain information contained in a
government system of records according to the Privacy Act of 1974, 5
U.S.C. 552a.
1. Information To Be Provided by Reporting Entities/Persons
a. Proposed Amendments to Regulation 1.31 (Books and Records; Keeping
and Inspection)
Regulation 1.31 describes the manner in which “all books and
records required to be kept by the Act” must be maintained. Most of
the requirements of regulation 1.31 are applicable to FCMs, IBs, RFEDs,
CTAs, CPOs, and members of DCMs and SEFs in conjunction with other part
1 regulations, and the PRA burdens either have been or will be covered
by the OMB control numbers associated with the other part 1
regulations. Examples of these other part 1 regulations are regulation
1.33, which requires certain registrants to produce monthly and
confirmation statements, and regulation 1.35, which requires the
maintenance of records of cash commodity, futures, and option
transactions. Regulation 1.31 would also be applicable to SDs and MSPs
in conjunction with proposed part 23 regulations.85
—————————————————————————
85 Reporting, Recordkeeping, and Daily Trading Records
Requirements for Swap Dealers and Major Swap Participants, 75 FR
76666, Dec. 9, 2010.
—————————————————————————
i. Obligation To Develop and Maintain Recordkeeping Policies and
Controls
Regulation 1.31 additionally contains discrete stand-alone
collections for which a control number must be sought. Subsection
(b)(3)(ii) requires persons keeping records using electronic storage
media to “develop and maintain written operational procedures and
controls (an `audit system’) designed to provide accountability over
[the entry of records into the electronic storage media].” This
provision is already applicable to FCMs, RFEDs, IBs, CTAs, CPOs, and
members of DCMs, and would be applicable to SDs and MSPs pursuant to
the proposed part 23 regulations. As members of SEFs will be newly
subject to the part 1 regulations, the Commission must estimate the
burden of subsection (b)(3)(ii) on these entities and seek OMB approval
for this new application of the subsection.
The Commission anticipates that members of SEFs may incur certain
one-time start-up costs in connection with establishing the audit
system. This will include drafting and adopting procedures and controls
and may include updates to existing recordkeeping systems. The
Commission estimates the burden hours associated with these one-time
start-up costs to be 100 hours.
As there will not be any SEFs operating until after the Dodd-Frank
Act becomes effective in July 2011, it is not possible for the
Commission to estimate with precision how many SEF members there will
be or how many of those SEF members will be FCMs, SDs, or MSPs that are
being covered by already pending existing information collections.
Nonetheless, the Commission has estimated that 35 SEFs will register
with it after the Dodd-Frank Act becomes effective, and now is
estimating that there may be on average 100 members of a SEF that will
not fall under one of the other collections. Accordingly, the aggregate
new burden of subsection (b)(3)(ii) is estimated to be 100 one-time
burden hours to approximately 3,500 SEF members.
The Commission expects that compliance and operations managers will
be employed in the establishment of the written procedures and controls
under subsection (b)(3)(ii). According to recent Bureau of Labor
Statistics, the mean hourly wage of an employee under occupation code
11-3031, “Financial Managers,” that is employed by the “Securities
and Commodity Contracts Intermediation and Brokerage” industry is
$74.41.86 Because members of SEFs may be large entities that may
engage employees with wages above the mean, the Commission has
conservatively chosen to use a mean hourly wage of $100 per hour.
Accordingly, the burden associated with developing written procedures
and controls will total approximately $10,000 for each applicable
member of a SEF on a one-time basis.
—————————————————————————
86 Occupational Employment Statistics, Occupation Employment
and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2009).
—————————————————————————
ii. Representation to the Commission
Members of SEFs will also have to comply with regulation 1.31(c),
which
[[Page 33077]]
requires persons employing an electronic storage system to provide a
representation to the Commission prior to the initial use of the
system.87 The Commission estimates the burden of drafting this
representation in accordance with regulation 1.31(c) and submitting it
to the Commission to be 1 hour.
—————————————————————————
87 As with subsection (b)(3)(ii), regulation 1.31(c) is
already applicable or will be made applicable by other actions to
FCMs, IBs, DCM members, as well as SDs or MSPs pursuant to proposed
part 23 regulations.
—————————————————————————
According to recent Bureau of Labor Statistics, the mean hourly
wage of an employee under occupation code 11-3031, “Financial
Managers,” (which includes operations managers) that is employed by
the “Securities and Commodity Contracts Intermediation and Brokerage”
industry is $74.41.88 Because members of SEFs may be large entities
that may engage employees with wages above the mean, the Commission has
conservatively chosen to use a mean hourly wage of $100 per hour.
Accordingly, the burden associated with drafting and submitting the
representation prior to using an electronic storage system would be
$100 per affected member of a SEF.
—————————————————————————
88 Occupational Employment Statistics, Occupation Employment
and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2009).
—————————————————————————
b. Proposed Amendments to Regulation 1.33 (Monthly and Confirmation
Statements)
The Commission proposes amending regulation 1.33 by requiring FCMs
to include in their monthly and confirmation statements sent to
customers certain specified information related to a customer’s swap
positions. The information required to be summarized in respect of swap
transactions would be analogous to information currently required to be
kept in respect of futures and commodity option transactions. The
Commission estimates the burden of complying with regulation 1.33 in
respect of swap transactions to be 1 hour for each swap confirmation
and 1 hour for each monthly statement.
According to recent Bureau of Labor Statistics, the mean hourly
wage of an employee under occupation code 11-3031, “Financial
Managers,” (which includes operations managers) that is employed by
the “Securities and Commodity Contracts Intermediation and Brokerage”
industry is $74.41.89 Accordingly the burden associated with
complying with 1.33 in respect of a swap confirmation and each monthly
statement to be $74.41 ($74.41 x 1 hour) for each swap transaction
entered into.
—————————————————————————
89 Occupational Employment Statistics, Occupation Employment
and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2009).
—————————————————————————
c. Proposed Amendments to Regulation 1.35 (Records of Commodity
Interest and Cash Commodity Transactions)
The proposed amendments would require members of SEFs to comply
with the regulation 1.35 recordkeeping requirements that are currently
followed by FCMs, IBs, RFEDs, and members of DCMs. The Commission
anticipates that members of SEFs will spend approximately eight hours
per trading day (or 2,016 hours per year based on 252 trading days)
compiling and maintaining transaction records.
According to recent Bureau of Labor Statistics, the mean hourly
wage of an employee under occupation code 11-3031, “Financial
Managers,” (which includes operations managers) that is employed by
the “Securities and Commodity Contracts Intermediation and Brokerage”
industry is $74.41.90 Because members of SEFs may be large entities
that may engage employees with wages above the mean, the Commission has
conservatively chosen to use a mean hourly wage of $100 per hour. Thus,
each SEF member will have a burden of $201,600 per year (2,016 hours x
$100/hour).
—————————————————————————
90 Occupational Employment Statistics, Occupation Employment
and Wages: 11-3031 Financial Managers, http://www.bls.gov/oes/current/oes113031.htm (May 2009).
—————————————————————————
The proposed amendments to regulation 1.35 would also require FCMs,
RFEDs, IBs, and members of DCMs to comply with the regulation 1.35
recordkeeping requirements for any swap transactions into which they
enter. Because the proposed recordkeeping requirements for swaps would
be equivalent to the recordkeeping requirements they must currently
follow in respect of futures and commodity option transactions, the
additional burden for any swap transaction would be the same for any
additional futures and commodity option transaction for which they keep
records pursuant to regulation 1.35 in its current form. The Commission
estimates that the recordkeeping burden associated with each swap
transaction would be 0.5 hours, for a total burden of $50 per
transaction.
The proposed amendments to regulation 1.35 would also require that
each FCM, IB, RFED and member of a DCM or SEF retain all oral and
written communications provided or received concerning quotes,
solicitations, bids, offers, instructions, trading, and prices, that
lead to the execution of transactions in a commodity interest or cash
commodity, whether communicated by telephone, voicemail, facsimile,
instant messaging, chat rooms, electronic mail, mobile device or other
digital or electronic media, with a further requirement that each
transaction record be maintained as a separate electronic file
identifiable by transaction and counterparty.
The Commission anticipates that the aforementioned registrants and
members of DCMs and SEFs may incur certain one-time start-up costs in
connection with establishing a system to retain oral communications.
The Commission estimates that the cost of procuring systems to record
these oral communications will be $55,000 for an average large entity
that does not already have such systems in place, and estimates
procurement costs of $10,000 for each small entity that does not
already have such systems in place.
The Commission estimates the burden hours associated with these
start-up costs to be 135 hours for any entity that does not already
have a system in place. According to the recent Bureau of Labor
Statistics, the mean hourly wage of computer programmers under
occupation code 15-1021 and computer software engineers under program
codes 15-1031 and 1032 are between $34.10 and $44.94.91 Because
members of SEFs may be large entities that may engage employees with
wages above the mean, the Commission has conservatively chosen to use a
mean hourly programming wage of $50 per hour for each of the categories
of persons who will have to establish the system for maintaining oral
records. Accordingly, the start-up burden associated with establishing
an audit system would be $6,750 ($50 x 135 hours) per affected FCM, IB,
RFED, member of a DCM, and member of a SEF.
—————————————————————————
91 Occupational Employment Statistics, Occupational Employment
and Wages: 15-1021, Computer Programmers, http://www.bls.gov/oes/current/oes151021.htm (May 2009); Occupational Employment
Statistics, Occupational Employment and Wages: 15-1031, Computer
Software Engineers, Applications, http://www.bls.gov/oes/current/oes151031.htm (May 2009); Occupational Employment Statistics,
Occupational Employment and Wages: 15-1032, Computer Software
Engineers, Systems Software, http://www.bls.gov/oes/current/oes151032.htm (May 2009).
—————————————————————————
The Commission also estimates that each of these persons will have
to devote one hour per trading day to ensure the operation of the
system to retain oral records. This would lead to $12,600 per year (1
hour per trading day x 252 trading days per year x $50/hour) per
affected FCM, IB, RFED, member of a DCM, and member of a SEF.
[[Page 33078]]
d. Amendments to Regulation 1.37 (Customer’s Name, Address, and
Occupation Recorded; Record of Guarantor or Controller of Account)
The Commission proposes amending regulation 1.37(a) by requiring
each FCM, IB, and member of a DCM to keep the same kind of record
(showing the customer’s name, address, occupation or business, and name
of any other person guaranteeing the account or exercising any trading
control over it) for any swap transactions it “carries or introduces”
for another person. The Commission estimates that it will take each of
these entities an average of 0.4 hours to gather the information and
file it or key it into the entity’s customer recordkeeping programs.
The Commission also proposes amending regulation 1.37(b) by
requiring each FCM carrying an omnibus account for another FCM, a
foreign broker, a member of a DCM or any other person to maintain a
daily record for such account of the total open long contracts and the
total open short contracts in each swap. FCMs presently have an
equivalent obligation with respect to futures and commodity option
transactions. These daily records typically are maintained in
electronic form. Therefore, once a position is entered into the
entity’s systems, the daily record will be automatically available. The
Commission estimates that entering the position into the system,
commencing with the placement of an order and ending with execution
will take each of these entities an average of 0.4 hours.
The Commission additionally proposes amending regulation 1.37(c) by
requiring SEFs to comply with a provision that DCMs must currently
follow: Keep a record showing the true name, address, and principal
occupation or business of any foreign trader executing transactions on
the facility or exchange. According to regulation 1.37(d), this
provision does not apply in respect of futures/options/swaps that
foreign traders execute through FCMs or IBs.
The Commission estimates that it would take a SEF a total of 0.4
hours to prepare each record in accordance with regulation 1.37(c).
According to the Bureau of Labor Statistics, the mean hourly wage of an
employee under occupation code 43-9021, “Data Entry Keyer,” that is
employed in “Office and Administrative Support” is $14.03.92
Because SEFs may be large entities employing persons at wages higher
than the average, the Commission conservatively estimates the mean
hourly wage to be $19.03 per hour. Thus, the burden associated with
preparing a record with regulation 1.37(c) would be $7.61 ($19.03/hour
x 0.4 hours).
—————————————————————————
92 Occupational Employment Statistics, National Industry-
Specific Occupational Employment and Wage Estimates, NAICS 523100–
Securities and Commodity Contracts Intermediation and Brokerage,
http://www.bls.gov/oes/current/naics4_523100.htm#43-0000 (May
2009).
—————————————————————————
e. Amendments to Regulation 1.39 (Simultaneous Buying and Selling
Orders of Different Principals; Execution of, for and Between
Principals)
The Commission proposes amending regulation 1.39, which currently
applies to DCMs, by enabling members of SEFs to execute simultaneous
buying and selling orders of different principals pursuant to rules of
the SEF if certain conditions are met. Among those conditions, a SEF
would have to record these transactions in a manner that “shows all
transaction details required to be captured by the Act, Commission
rule, or regulation.” The Commission anticipates that the data to be
captured would already exist in the SEF’s trading system. The
Commission estimates that it will take the SEF an average of 0.1 hours
to capture this data, and storage costs of less than $1 per record.
According to the recent Bureau of Labor Statistics, the mean hourly
wage of computer programmers under occupation code 15-1021 and computer
software engineers under program codes 15-1031 and 1032 are between
$34.10 and $44.94.93 Because SEFs may be large entities that may
engage employees with wages above the mean, the Commission has
conservatively chosen to use a mean hourly programming wage of $50 per
hour for each of the categories of persons who will have to establish
the system for maintaining oral records. Accordingly, the start-up
burden associated with the data capture requirements would be an
average of $5.
—————————————————————————
93 Occupational Employment Statistics, Occupational Employment
and Wages: 15-1021, Computer Programmers, http://www.bls.gov/oes/current/oes151021.htm (May 2009); Occupational Employment
Statistics, Occupational Employment and Wages: 15-1031, Computer
Software Engineers, Applications, http://www.bls.gov/oes/current/oes151031.htm (May 2009); Occupational Employment Statistics,
Occupational Employment and Wages: 15-1032, Computer Software
Engineers, Systems Software, http://www.bls.gov/oes/current/oes151032.htm (May 2009).
—————————————————————————
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (“RFA”) 94 requires that
agencies consider whether the rules they propose will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact. The rules proposed by the Commission are for the most part
technical amendments to conform the affected parts to provisions of the
Dodd-Frank Act and, as such, non-substantive. The Commission is also
amending its books and records regulations to require FCMs, IBs, RFEDs,
and members of DCMs to observe recordkeeping requirements for swaps
that they currently observe in respect of futures and commodity option
transactions. Additionally, the Commission is proposing to apply
certain of those books and records regulations to members of SEFs,
mirroring obligations that currently are met by members of DCMs. The
Commission is also proposing to add a substantive rule change to
regulation 1.35. The substantive rules would affect FCMs, IBs, RFEDs,
and members of DCMs and SEFs.
—————————————————————————
94 5 U.S.C. 601 et seq.
—————————————————————————
Except for the new regulations requiring FCMs, IBs, RFEDs, and
members of DCMs and SEFs to record all oral communications leading to
the execution of transactions in a commodity interest or cash
commodity, the Commission has determined that none of the proposed
rules will have a significant economic impact on any substantial number
of entities. Additionally, as presented below, the Commission
previously has determined or is now determining that all entities
except for certain IBs are not small entities for the purposes of the
RFA.
Therefore, according to 5 U.S.C. 605(b), the Chairman, on behalf of
the Commission, is hereby certifying that all rules except for the oral
communications recordkeeping rules will not have a significant economic
effect on a significant number of small entities. A regulatory
flexibility analysis addressing the impact of the oral communications
recordkeeping rules on certain IBs is provided herein.
1. FCMs, RFEDs, DCMs, ECPs, and Large Traders
The Commission has previously determined that registered FCMs,
RFEDs, DCMs, ECPs, and large traders are not small entities for
purposes of the RFA.95 Accordingly, the Chairman, on behalf of the
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the
proposed rules will not have a
[[Page 33079]]
significant economic impact on a substantial number of small entities
with respect to these entities.
—————————————————————————
95 See respectively and as indicated: 47 FR 18618, 18619, Apr.
30, 1982 (DCMs, FCMs, and large traders); 66 FR 20740, 20743, Apr.
25, 2001 (ECPs); and 75 FR 55410, 55416, Sept. 19, 2010 (RFEDs).
—————————————————————————
2. SEFs
SEFs are new categories of registrant under the Dodd-Frank Act.
Therefore, the Commission has not previously addressed the question of
whether SEFs are, in fact, “small entities” for purposes of the RFA.
For the reasons that follow, the Commission is hereby determining that
none of these entities would be small entities. Accordingly, the
Chairman, on behalf of the Commission, hereby certifies pursuant to 5
U.S.C. 605(b) that the proposed rules, with respect to SEFs, will not
have a significant impact on a substantial number of small entities.
The Dodd-Frank Act defines a SEF as a trading system or platform in
which multiple participants have the ability to accept bids and offers
made by multiple participants in the facility or system, through any
means of interstate commerce, including any trading facility that
facilitates the execution of swaps between persons and is not a DCM.
The Commission previously determined that a DCM is not a small entity
because, among other things, it may only be designated when it meets
specific criteria, including expenditure of sufficient resources to
establish and maintain adequate self-regulatory programs. Likewise, the
Commission will register an entity as a SEF only after it has met
specific criteria, including the expenditure of sufficient resources to
establish and maintain an adequate self-regulatory program. Moreover,
members of SEFs, to whom many of the proposed regulations would apply,
additionally are not small entities for the purposes of the RFA. As
noted above, the Commission previously determined that ECPs are not
small entities, and the Dodd-Frank Act provides that only ECPs can
enter into swaps on a SEF. Accordingly, as with DCMs, the Commission is
hereby determining that SEFs and members of SEFs are not “small
entities” for purposes of the RFA.
3. Regulatory Flexibility Analysis for Oral Communication Rules
Applicable to IBs
The Commission has not previously determined that IBs are not
“small entities” for the purposes of the RFA. Historically, the
Commission has evaluated within the context of a particular regulatory
proposal whether all or some affected IBs would be considered to be
small entities and, if so, the economic impact on them of the
particular regulation.
Accordingly, the Commission offers, pursuant to 5 U.S.C. 603, the
following initial regulatory flexibility analysis, which it shall
transmit to the Chief Counsel for Advocacy of the Small Business
Administration as 5 U.S.C. 603 requires:
a. A Description of the Reasons Why Action by the Agency Is Being
Considered
The Commission is considering the adoption of the proposed
amendments to regulation 1.35 requiring FCMs, RFEDs, IBs and DCM and
SEF members to keep records of all oral communications leading to the
execution of transactions in a commodity interest or cash commodity for
several reasons. To begin, such an amendment to regulation 1.35 would
protect customers from abusive sales practices, would protect
registrants from the risks associated with transactional disputes, and
would allow registrants to follow-up more effectively on customer
complaints of abuses by their associated persons. Additionally, the
amendment would make enforcement investigations more efficient by
preserving critical evidence that otherwise may be lost to lapsed and
inconsistent memories. This, in turn, is expected to increase the
success of enforcement actions, which benefits customers, regulated
entities, and the markets as a whole.96 Finally, it is being proposed
for regulatory parity, as it has been proposed recently for SDs and
MSPs as part of their recordkeeping and reporting obligations.97
—————————————————————————
96 In promulgating its own taping rule, the Financial Services
Authority issued guidance stating the following benefits: “(i)
Recorded communication may increase the probability of successful
enforcement; (ii) this reduces the expected value to be gained from
committing market abuse; and (iii) this, in principle, leads to
increased market confidence and greater price efficiency.” See
Financial Services Authority, “Policy Statement: Telephone
Recording: recording of voice conversations and electronic
communications” (Mar. 2008).
97 See Reporting, Recordkeeping, and Daily Trading Records
Requirements for Swap Dealers and Major Swap Participants, 75 FR
76666, Dec. 9, 2010.
—————————————————————————
b. A Succinct Statement of the Objectives of, and Legal Basis for, the
Proposed Rule
As stated above, the objective of the proposed amendment to
regulation 1.35 is to protect the market participants and the public,
as well as to increase market integrity. In terms of the legal basis
for this proposed rule, the Commission has been authorized by sections
4g and 8a(5) of the CEA to adopt regulations requiring registrants to
keep books and records pertaining to such transactions and positions in
a form and manner and for such period as may be required by the
Commission.98
—————————————————————————
98 7 U.S.C. 6g and 12a(5).
—————————————————————————
c. A Description of and, Where Feasible, an Estimate of the Number of
Small Entities To Which the Proposed Rule Will Apply
There are an estimated 1,500 IBs registered with the Commission at
any given time. Between 80 and 90% of these IBs are “guaranteed
introducing brokers,” many of which may be small entities. There are
an estimated 11,500 members of DCMs, some of which may be small
entities. The Commission believes, however, that it is likely that less
than 10% of the members of DCMs would be small entities given the
capital and other resources they would need to comply with DCM rules.
d. A Description of the Projected Reporting, Recordkeeping, and Other
Compliance Requirements of the Proposed Rule, Including an Estimate of
the Classes of Small Entities Which Will Be Subject to the Requirement
and the Type of Professional Skills Necessary for Preparation of the
Report or Record
Proposed regulation 1.35 would require all FCMs, RFEDs, IBs and
members of DCMs or SEFs to keep records of all oral communications that
lead to the execution of a commodity interest or cash commodity
transaction. All small IBs and small DCM or SEF members will be subject
to this requirement. The proposed regulation is primarily a
recordkeeping requirement, which will obligate those firms that do not
already do so to tape the telephone lines of their traders and sales
forces. Maintenance of these oral communications for five years will
require investments in hardware, software, and information technology
personnel, all of which will be scalable to the size of the enterprise.
There may be periodic reporting requirements, most frequently in
response to a subpoena from the Commission, any other federal agency
that has regulatory or civil enforcement authority over the firm, and
the markets in which it conducts business, as well as law enforcement.
e. Identification, to the Extent Practicable, of All Relevant Federal
Rules Which May Duplicate, Overlap or Conflict With the Proposed Rule
The Commission has not identified any Federal rules which may
duplicate, overlap, or conflict with the proposed rule. Certain firms
may be obligated to
[[Page 33080]]
retain oral communications by rule of a private SRO.
f. Description of Any Significant Alternatives to the Proposed Rule
Which Accomplish the Stated Objectives of Applicable Statutes and Which
Minimize Any Significant Economic Impact of the Proposed Rule on Small
Entities
The Commission has identified no significant alternatives that may
minimize any significant economic impact of the proposed rule amendment
on small entities. Clarification, consolidation, or simplification of
compliance and reporting requirements would leave a large portion of
the sales operations in the futures industry uncovered, and in
consequence, the customers that transact business with them. Moreover,
the benefits from the enforcement of the CEA by the Commission and by
the Department of Justice at the criminal level would be lost. Finally,
leaving a large portion of the sales operations uncovered by this rule
could create regulatory arbitrage, causing large entities subject to
this rule to move their sales operations into a series of small firms.
The same would apply for exemptions.
Given the foregoing, the Commission has determined to treat equally
all entities that engage in oral communications that lead to the
execution of commodity interest and cash commodity transactions.
To the extent that certain IBs and members of DCMs and SEFs are
impacted by the proposed amendments, the RFA analysis focuses on
whether the proposed amendments will have a significant economic impact
on a substantial number of small entities. At present, such entities
are subject to certain recordkeeping retention and reporting
requirements, based on the nature of their respective businesses; the
proposed amendments would augment the existing recordkeeping retention
and reporting requirements of these firms. The Commission understands
that recent advancements in technology, particularly with respect to
capturing records and storing such records, will enable all affected
entities, including small entities, to incorporate into their existing
recordkeeping programs the enhanced requirements set forth in the
proposed amendments, without encountering a significant economic
impact. The United Kingdom’s FSA, which recently adopted similar
recordkeeping requirements, discussed the declining costs of such
recordkeeping programs in a Policy Statement addressing these and other
issues.99
—————————————————————————
99 Financial Services Authority, “Policy Statement: Telephone
Recording: recording of voice conversations and electronic
communications” (Mar. 2008). In addition to the rules promulgated
by the Financial Services Authority, similar rules which mandate
recording of certain voice and/or telephone conversations have been
promulgated by the Comiss[atilde]o de Valores Mobili[aacute]rios in
Brazil and by the Autorit[eacute] des March[eacute]s Financiers in
France.
—————————————————————————
C. Cost-Benefit Analysis
Section 15(a) of the CEA 100 requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA. Section 15(a) specifies that the costs and benefits
shall be considered against five broad areas of market and public
concern: (1) Protection of market participants and the public; (2)
efficiency, competitiveness and financial integrity of futures markets;
(3) price discovery; (4) sound risk management practices; and (5) other
public interest considerations. The Commission may give greater weight
to one or more of the five enumerated considerations to determine, in
its discretion, that a particular rule is necessary or appropriate to
protect the public interest or to effectuate any of the provisions or
accomplish any of the purposes of the CEA.
—————————————————————————
100 7 U.S.C. 19(a).
—————————————————————————
1. Costs
a. Amendments to Regulation 1.31
With respect to costs, the Commission has determined that for FCMs,
IBs, CPOs, CTAs and members of DCMs, costs to institute recordkeeping
systems to retain swap records for the life of the swap (i.e., until
the termination, maturity, expiration, transfer, assignment, or
novation date of the transaction) and for five years after that date
would be far outweighed by the benefits to the financial system as a
whole. The Commission is not imposing any cost that a prudent FCM, IB,
CPO, CTA, and DCM member would not already incur in maintaining records
for swap transactions. A prudent registrant would retain a swap record
for the life of the swap to ensure that its rights under the contract
are protected and its obligations are fulfilled.
As to the proposed requirements that records be kept in their
original form (for paper records) and native file format (for
electronic records), that the method of storage maintains electronic
records in their native file format, and that the records be produced
to the Commission in a form specified by the Commission, the Commission
is not imposing significant new burdens on registrants and regulated
entities. The Commission understands that registrants and regulated
entities already retain electronic records in these forms. Moreover, to
the extent that a registrant’s transactional activity is retained on a
platform operated by or additionally is captured by a regulated entity,
trading mechanism, clearinghouse or another regulated entity (for
example, where an IB transacts through an FCM) that is required to
maintain these records in the same form, the registrant may rely on the
retention requirements of the other registrant in order to comply with
the proposed requirements of regulation 1.31.
b. Amendments to Regulation 1.33, 1.35, 1.37, and 1.39
The proposed regulations would require FCMs, IBs, RFEDs, DCMs and
members of DCMs to comply with the same recordkeeping functions for
swaps that they currently adhere to with respect to futures and
commodity option transactions. The Commission anticipates that in
complying with amended regulations 1.33, 1.35, 1.37 and 1.39, the
aforementioned persons will already have the framework for producing
and storing records and would only make adjustments as necessary to
provide the additional information regarding swaps. Because the
recordkeeping requirements in respect of swaps would be equivalent to
the existing recordkeeping requirements for futures and commodity
option transactions, the cost of complying with the proposed amendments
should not differ materially from the cost of recording additional
futures or commodity option transactions.
The Commission has also amended the aforementioned recordkeeping
regulations by applying them to SEFs and their members. These persons
will therefore need to factor in the costs in complying with these
regulations before commencing their operations.
c. Amendments to Regulation 1.35 (Records of Oral Communications).
To the extent FCMs, RFEDs, IBs, members of DCMs, and members of
SEFs enter into transactions in a commodity interest or cash commodity,
the newly proposed requirements under regulation 1.35 would require
them to record all oral communications that lead to the execution of
transactions in a commodity interest or cash commodity. As described
above, it is expected that any additional cost imposed by the
recordkeeping requirements of proposed amendments to regulation 1.35
would be minimal for the average large FCM,
[[Page 33081]]
RFED, IB, or DCM or SEF member because the information and data
required to be recorded is information and data a prudent FCM, RFED,
IB, or DCM or SEF member would already maintain during the ordinary
course of its business.101 Moreover, most FCMs, RFEDs, IBs, or
members of DCMs or SEFs have adequate existing resources, technology
systems, and recordkeeping structures that are capable of adjusting to
the new regulatory framework without material diversion of resources
away from commercial operations.
—————————————————————————
101 The Commission preliminarily has determined that any
additional cost imposed by the recordkeeping requirements of
proposed regulation 23.202(a)(1) (which has an analogous requirement
for SDs and MSPs relating to retention of oral and written
communications that lead to the execution of swaps) “would be
minimal because the information and data required to be recorded is
information and data a prudent swap dealer or major swap participant
would already maintain during the ordinary course of its business,”
and “[m]oreover, most swap dealers and major swap participants have
adequate, existing resources and recordkeeping structures that are
capable of adjusting to the new regulatory framework without
material diversion of resources away from commercial operations.”
See Reporting, Recordkeeping, and Daily Trading Records Requirements
for Swap Dealers and Major Swap Participants, 75 FR 76666, 76673,
Dec. 9, 2010.
—————————————————————————
The Commission also believes that such costs would be minimal for
the average small IB or member of a SEF who does not have digital
telephone systems in place and may not have robust or up-to-date
electronic data saving and storage capacity.
2. Benefits
a. Amendments to Regulation 1.31.
The Commission believes that the benefit of requiring FCMs, IBs,
CPOs, CTAs, and DCM and SEF members to maintain swap records for the
life of the swap (i.e., until the termination, maturity, expiration,
transfer, assignment, or novation date of the transaction) and for five
years after that date is significant, as is the requirement to maintain
records in their native format. Proposed regulation 23.203(b)(2) has
already proposed requiring SDs and MSPs to maintain swap records for
the life of the swap and for five years after termination, maturity,
expiration, transfer, assignment, or novation date of the
transaction.102 It would therefore be inconsistent not to require
other registrants, as well as DCM and SEF members to have the same
obligation for swap records that they keep. The five-year retention
period, which already applies to records for futures and commodity
option transactions, is meant to protect market participants, the
integrity of the market, and the public at large by ensuring that an
audit trail is maintained for routine compliance examinations, in the
event of counterparty complaints, or in case of other events that may
trigger an investigation by the Commission and other government
agencies.
—————————————————————————
102 75 FR 76666, Dec. 9, 2010.
—————————————————————————
b. Amendments to Regulations 1.33, 1.35, 1.37, and 1.39
The Commission believes that there are significant benefits in
requiring FCMs, IBs, RFEDs, DCMs and members of DCMs to comply with the
same recordkeeping functions for swaps that they currently adhere to
with respect to futures and commodity option transactions. The
Commission also believes that there are significant benefits in
requiring SEFs and members of SEFs to comply with certain of the
recordkeeping functions contained in regulations 1.33, 1.35, 1.37 and
1.39. First is the issue of regulatory parity: Because many swaps will
be executed on trading platforms, they should be subject to the same
recordkeeping requirements as futures and commodity options. Moreover,
these recordkeeping rules are fundamental to the Commission’s efforts
to maintain an orderly marketplace and to remain informed about market
positions.
c. Amendments to Regulation 1.35 (Records of Oral Communications)
The proposed amendments to regulation 1.35 would newly require
FCMs, RFEDs, IBs, and DCM and SEF members to comply with regulation
1.35 for any swap transactions into which they enter. The benefit of
this amendment is significant because it requires these registrants to
perform the same recordkeeping functions for swaps that they already
perform for futures transactions, which protect the integrity and
efficiency of the markets, market participants, and the public at large
by ensuring that these records are available in the event of customer
disputes, routine compliance examinations, and regulatory
investigations.
Notwithstanding the potential costs described above that could be
incurred by FCMs, RFEDs, IBs, and DCM and SEF members in complying with
the proposed amendments that would newly require them to record all
oral communications that lead to the execution of a transaction in a
commodity interest or cash commodity, the Commission believes the
benefits of the proposed amendments are significant and important.
First, the Commission believes that the proposed amendments will
enhance the protection of market participants and the public by
increasing the probability of timely successful enforcement of the CEA
and Commission regulations, particularly in cases involving suspected
fraud, market manipulation and/or false reporting, by deterring market
abuses, and additionally by reducing the expected value to be gained
from committing market abuse. The Commission believes that increasing
the quantity and quality of contemporaneous records that affected
persons must retain, as provided under the proposed amendments, will
protect market participants and the public from harm by wrongdoers.
Such increases in the quantity and quality of contemporaneous records
will enable the Commission to more fully and accurately establish the
knowledge and intent of wrongdoers at the time of their wrongful acts.
The Commission believes that the enhanced protection of market
participants and the public outweighs the costs that may be borne by
persons under the proposed amendments who do not already maintain oral
communications.
Second, the Commission anticipates that the proposed amendments
will lead to increased market confidence and greater price efficiency
by reducing the expected value to be gained from committing market
abuse, thereby deterring such inefficient acts. By requiring the
recording of oral communications, which could be evidence of anti-
competitive behavior, the proposed amendments will discourage anti-
competitive behavior, thereby enhancing competition.
Third, the Commission believes that the proposed amendments, by
increasing the probability of timely successful enforcement of the CEA
and Commission regulations, and by deterring market abuses, will
benefit the financial integrity of futures markets and lead to more
effective price discovery. The Commission anticipates that such
benefits will be achieved through the resultant enhanced investigative
capabilities in cases involving suspected fraud, market manipulation,
and/or false reporting.
Fourth, the Commission believes that the enhanced investigative and
enforcement capabilities made possible under the proposed amendments
ultimately will decrease the likelihood that incidents of wrongdoing,
particularly with respect to cases of fraud, market manipulation and/or
false reporting, will go undetected or unproven. The Commission
believes that the cumulative impact of the proposed amendments will
result in more successful prosecutions of wrongdoing under the CEA as
well as
[[Page 33082]]
fewer market abuses being committed, which will benefit both market
participants and the general public.
After considering these factors, the Commission has determined to
propose the amendments described above. The Commission invites public
comment on its application of the cost-benefit provision. Commenters
also are invited to submit, with their comment letters, any data that
quantifies the costs and benefits of the proposed amendments.
Other than the foregoing, these proposed rules do not impose any
substantive regulatory obligations on any person. Rather, the
Commission is adopting technical amendments to conform to the Dodd-
Frank Act. Accordingly, there are no quantifiable costs associated with
this rulemaking other than those discussed above. The sole qualitative
benefit associated with this rulemaking, other than as discussed above,
is accuracy.
List of Subjects
17 CFR Part 1
Agricultural commodity, Agriculture, Brokers, Committees, Commodity
futures, Conflicts of interest, Consumer protection, Definitions,
Designated contract markets, Directors, Major swap participants,
Minimum financial requirements for intermediaries, Reporting and
recordkeeping requirements, Swap dealers.
17 CFR Part 5
Bulk transfers, Commodity pool operators, Commodity trading
advisors, Consumer protection, Customer’s money, Securities and
property, Definitions, Foreign exchange, Minimum financial and
reporting requirements, Prohibited transactions in retail foreign
exchange, Recordkeeping requirements, Retail foreign exchange dealers,
Risk assessment, Special calls, Trading practices.
17 CFR Part 7
Commodity futures, Consumer protection, Registered entity.
17 CFR Part 8
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 15
Brokers, Commodity futures, Reporting and recordkeeping
requirements, Electronic trading facility.
17 CFR Part 18
Commodity futures, Reporting and recordkeeping requirements,
Grandfather relief order.
17 CFR Part 21
Brokers, Commodity futures, Reporting and recordkeeping
requirements, Grandfather relief order.
17 CFR Part 36
Commodity futures, Commodity Futures Trading Commission, Electronic
trading facility, Eligible commercial entities, Eligible contract
participants, Federal financial regulatory authority, Principal-to-
principal, Special calls, Systemic market event.
17 CFR Part 41
Brokers, Reporting and recordkeeping requirements, Security futures
products.
17 CFR Part 140
Authority delegations (Government agencies), Conflict of interests,
Organizations and functions (Government agencies).
17 CFR Part 145
Confidential business information, Freedom of information.
17 CFR Part 155
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements, Swaps.
17 CFR Part 166
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements, Swaps.
For the reasons stated in the preamble, under the authority of 7
U.S.C. 1 et seq., the Commodity Futures Trading Commission proposes to
amend Chapter I of Title 17 of the Code of Federal Regulations as set
forth below:
PART 1–GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3,
8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as
amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
2. Amend Sec. 1.3 by:
a. Revising paragraphs (a), (b), (c), (d), (e), (g), (h), (k), (n),
(p), (q), (r), (s), (t), (x), (y) introductory text, (y)(1), (y)(2)
introductory text, (y)(2)(iii)(B), (y)(2)(iii)(C), (y)(2)(v)(B),
(y)(2)(v)(C), (y)(2)(vii), (y)(2)(viii), (z)(1), (aa)(1)(i),
(aa)(2)(i), (aa)(5), (bb), (cc), (ee), (ff), (gg), (ii), (kk), (mm)(1),
(mm)(2) introductory text, (mm)(2)(i), (nn), (oo), (pp), (rr)(2), (ss),
(tt), (vv), (xx), and (yy);
b. Removing and reserving paragraphs (jj) and (uu); and
c. Adding paragraphs (zz), (aaa), (bbb), (ccc), (ddd), (eee),
(fff), (ggg), (hhh), (iii), (jjj), (kkk), and (lll), to read as
follows:
Sec. 1.3 Definitions.
(a) Board of Trade. This term means an organized exchange or other
trading facility.
(b) Business day. This term means any day other than a Sunday or
holiday. In all notices required by the Act or by the rules and
regulations in this chapter to be given in terms of business days the
rule for computing time shall be to exclude the day on which notice is
given and include the day on which shall take place the act of which
notice is given.
(c) Clearing member. This term means any person who is a member of,
or enjoys the privilege of clearing trades in his own name through, the
clearing organization of a designated contract market.
(d) Clearing organization. This term means the person or
organization which acts as a medium for clearing transactions in
commodities for future delivery or commodity option transactions, or
for effecting settlements of contracts for future delivery or commodity
option transactions, for and between members of any designated contract
market.
(e) Commodity. This term means and includes wheat, cotton, rice,
corn, oats, barley, rye, flaxseed, grain sorghums, millfeeds, butter,
eggs, Irish potatoes, wool, wool tops, fats and oils (including lard,
tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and
oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal,
livestock, livestock products, and frozen concentrated orange juice,
and all other goods and articles, except onions (as provided by the
first section of Pub. L. 85-839) and motion picture box office receipts
(or any index, measure, value or data related to such receipts), and
all services, rights and interests (except motion picture box office
receipts, or any index, measure, value or data related to such
receipts) in which contracts for future delivery are presently or in
the future dealt in.
* * * * *
(g) Institutional customer. This term has the same meaning as
“eligible contract participant” as defined in section 1a(18) of the
Act.
(h) Contract market; designated contract market. These terms mean a
board of trade designated by the Commission as a contract market under
[[Page 33083]]
the Act or in accordance with the provisions of part 38 of this
chapter.
* * * * *
(k) Customer. This term means any person who uses a futures
commission merchant, introducing broker, commodity trading advisor, or
commodity pool operator as an agent in connection with trading in any
commodity interest; Provided, however, an owner or holder of a
proprietary account as defined in paragraph (y) of this section shall
not be deemed to be a customer within the meaning of section 4d of the
Act, the regulations that implement sections 4d and 4f of the Act and
Sec. 1.35, and such an owner or holder of such a proprietary account
shall otherwise be deemed to be a customer within the meaning of the
Act and Sec. Sec. 1.37 and 1.46 and all other sections of these rules,
regulations, and orders which do not implement sections 4d and 4f of
the Act.
* * * * *
(n) Floor broker. This term means any person:
(1) Who, in or surrounding any pit, ring, post or other place
provided by a contract market for the meeting of persons similarly
engaged, shall purchase or sell for any other person–
(i) Any commodity for future delivery, security futures product, or
swap; or
(ii) Any commodity option authorized under section 4c of the Act;
or
(2) Who is registered with the Commission as a floor broker.
* * * * *
(p) Futures commission merchant. This term means:
(1) Any individual, association, partnership, corporation, or
trust–
(i) Who is engaged in soliciting or in accepting orders for the
purchase or sale of any commodity for future delivery; a security
futures product; a swap; any agreement, contract, or transaction
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act;
a commodity option authorized under section 4c of the Act; a leverage
transaction authorized under section 19 of the Act; or acting as a
counterparty in any agreement, contract or transaction described in
section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act and
(ii) Who, in connection with any of these activities accepts any
money, securities, or property (or extends credit in lieu thereof) to
margin, guarantee, or secure any trades or contracts that result or may
result therefrom; and
(2) Any person that is registered as a futures Commission merchant.
(q) Member. This term means:
(1) An individual, association, partnership, corporation, or
trust–
(i) Owning or holding membership in, or admitted to membership
representation on, a registered entity; or
(ii) Having trading privileges on a registered entity.
(2) A participant in an alternative trading system that is
designated as a contract market pursuant to section 5f of the Act is
deemed a member of the contract market for purposes of transactions in
security futures products through the contract market.
(r) Net equity. (1) For futures and commodity option positions,
this term means the credit balance which would be obtained by combining
the margin balance of any person with the net profit or loss, if any,
accruing on the open futures or commodity option positions of such
person.
(2) For swap positions other than commodity option positions, this
term means the credit balance which would be obtained by combining the
margin balance of any person with the net profit or loss, if any,
accruing on the open swap positions of such person.
(s) Net deficit. (1) For futures and commodity option positions,
this term means the debit balance which would be obtained by combining
the margin balance of any person with the net profit or loss, if any,
accruing on the open futures or commodity option positions of such
person.
(2) For swap positions other than commodity option positions, this
term means the debit balance which would be obtained by combining the
margin balance of any person with the net profit or loss, if any,
accruing on the open swap positions of such person.
(t) Open positions. This term means:
(1) Contracts of purchase or sale of any commodity made by or for
any person on or subject to the rules of a board of trade for future
delivery during a specified month or delivery period that have neither
been fulfilled by delivery nor been offset by other contracts of
purchase or sale in the same commodity and delivery month;
(2) Commodity option transactions that have not expired, been
exercised, or offset; and
(3) Swaps that have neither expired nor been terminated.
* * * * *
(x) Floor trader. This term means any person:
(1) Who, in or surrounding any pit, ring, post or other place
provided by a contract market for the meeting of persons similarly
engaged, purchases, or sells solely for such person’s own account –
(i) Any commodity for future delivery, security futures product, or
swap; or
(ii) Any commodity option authorized under section 4c of the Act;
or
(2) Who is registered with the Commission as a floor trader.
(y) Proprietary account. This term means a commodity futures,
commodity option, or swap trading account carried on the books and
records of an individual, a partnership, corporation or other type of
association:
(1) For one of the following persons, or
(2) Of which ten percent or more is owned by one of the following
persons, or an aggregate of ten percent or more of which is owned by
more than one of the following persons:
* * * * *
(iii) * * *
(B) The handling of the trades of customers or customer funds of
such partnership,
(C) The keeping of records pertaining to the trades of customers or
customer funds of such partnership, or
* * * * *
(v) * * *
(B) The handling of the trades of customers or customer funds of
such individual, partnership, corporation or association,
(C) The keeping of records pertaining to the trades of customers or
customer funds of such individual, partnership, corporation or
association, or
* * * * *
(vii) A business affiliate that directly or indirectly controls
such individual, partnership, corporation or association; or
(viii) A business affiliate that, directly or indirectly is
controlled by or is under common control with, such individual,
partnership, corporation or association. Provided, however, That an
account owned by any shareholder or member of a cooperative association
of producers, within the meaning of section 6a of the Act, which
association is registered as a futures commission merchant and carries
such account on its records, shall be deemed to be an account of a
customer and not a proprietary account of such association, unless the
shareholder or member is an officer, director or manager of the
association.
(z) Bona fide hedging transactions and positions–(1) General
definition. (i) Bona fide hedging transactions and positions shall mean
transactions or positions in a contract for future delivery on any
contract market, or in a commodity option, where such transactions or
positions normally represent a substitute for transactions to be made
or positions to be taken at a later time in a physical marketing
channel, and where they are
[[Page 33084]]
economically appropriate to the reduction of risks in the conduct and
management of a commercial enterprise, and where they arise from:
(A) The potential change in the value of assets which a person
owns, produces, manufactures, processes, or merchandises or anticipates
owning, producing, manufacturing, processing, or merchandising, or
(B) The potential change in the value of liabilities which a person
owns or anticipates incurring, or
(C) The potential change in the value of services which a person
provides, purchases, or anticipates providing or purchasing.
(ii) Notwithstanding the foregoing, no transactions or positions
shall be classified as bona fide hedging unless their purpose is to
offset price risks incidental to commercial cash or spot operations and
such positions are established and liquidated in an orderly manner in
accordance with sound commercial practices and, for transactions or
positions on contract markets subject to trading and position limits in
effect pursuant to section 4a of the Act, unless the provisions of
paragraph (z)(2) and (3) of this section have been satisfied.
* * * * *
(aa) * * *
(1) * * *
(i) The solicitation or acceptance of customers’ orders (other than
in a clerical capacity) or
* * * * *
(2) * * *
(i) The solicitation or acceptance of customers’ orders (other than
in a clerical capacity) or
* * * * *
(5) A leverage transaction merchant as a partner, officer,
employee, consultant, or agent (or any natural person occupying a
similar status or performing similar functions), in any capacity which
involves:
(i) The solicitation or acceptance of leverage customers’ orders
(other than in a clerical capacity) for leverage transactions as
defined in Sec. 31.4(x) of this chapter, or
(ii) The supervision of any person or persons so engaged.
(bb)(1) Commodity trading advisor. This term means any person who,
for compensation or profit, engages in the business of advising others,
either directly or through publications, writings or electronic media,
as to the value of or the advisability of trading in any contract of
sale of a commodity for future delivery, security futures product, or
swap; any agreement, contract or transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option
authorized under section 4c of the Act; any leverage transaction
authorized under section 19 of the Act; any person registered with the
Commission as a commodity trading advisor; or any person, who, for
compensation or profit, and as part of a regular business, issues or
promulgates analyses or reports concerning any of the foregoing. The
term does not include any bank or trust company or any person acting as
an employee thereof, any news reporter, news columnist, or news editor
of the print or electronic media or any lawyer, accountant, or teacher,
any floor broker or futures commission merchant, the publisher or
producer of any print or electronic data of general and regular
dissemination, including its employees, the named fiduciary, or
trustee, of any defined benefit plan which is subject to the provisions
of the Employee Retirement Income Security Act of 1974, or any
fiduciary whose sole business is to advise that plan, any contract
market, and such other persons not within the intent of this definition
as the Commission may specify by rule, regulation or order: Provided,
That the furnishing of such services by the foregoing persons is solely
incidental to the conduct of their business or profession: Provided
further, That the Commission, by rule or regulation, may include within
this definition, any person advising as to the value of commodities or
issuing reports or analyses concerning commodities, if the Commission
determines that such rule or regulation will effectuate the purposes of
this provision.
(2) Client. This term, as it relates to a commodity trading
advisor, means any person:
(i) To whom a commodity trading advisor provides advice, for
compensation or profit, either directly or through publications,
writings, or electronic media, as to the value of, or the advisability
of trading in, any contract of sale of a commodity for future delivery,
security futures product or swap; any agreement, contract or
transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i)
of the Act; any commodity option authorized under section 4c of the
Act; any leverage transaction authorized under section 19 of the Act;
or
(ii) To whom, for compensation or profit, and as part of a regular
business, the commodity trading advisor issues or promulgates analyses
or reports concerning any of the activities referred to in paragraph
(bb)(2)(i) of this section. The term “client” includes, without
limitation, any subscriber of a commodity trading advisor.
(cc) Commodity pool operator. This term means any person engaged in
a business which is of the nature of a commodity pool, investment
trust, syndicate, or similar form of enterprise, and who, in connection
therewith, solicits, accepts, or receives from others, funds,
securities, or property, either directly or through capital
contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in commodity interests, including
any commodity for future delivery, security futures product, or swap;
any agreement, contract or transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option
authorized under section 4c of the Act; any leverage transaction
authorized under section 19 of the Act; or any person who is registered
with the Commission as a commodity pool operator, but does not include
such persons not within the intent of this definition as the Commission
may specify by rule or regulation or by order.
* * * * *
(ee) Self-regulatory organization. This term means a contract
market (as defined in Sec. 1.3(h)), a swap execution facility (as
defined in Sec. 1.3(kkk)), a derivatives clearing organization (as
defined in section 1a(15) of the Act), or a registered futures
association under section 17 of the Act.
(ff) Designated self-regulatory organization. This term means:
(1) Self-regulatory organization of which a futures commission
merchant, an introducing broker, a leverage transaction merchant, a
retail foreign exchange dealer, a swap dealer, or a major swap
participant is a member; or
(2) If a Commission registrant other than a leverage transaction
merchant is a member of more than one self-regulatory organization and
such registrant is the subject of an approved plan under Sec. 1.52 of
this part, then a self-regulatory organization delegated the
responsibility by such a plan for monitoring and auditing such
registrant for compliance with the minimum financial and related
reporting requirements of the self-regulatory organizations of which
the registrant is a member, and for receiving the financial reports
necessitated by such minimum financial and related reporting
requirements from such registrant; or
(3) If a leverage transaction merchant is a member of more than one
self-regulatory organization and such leverage transaction merchant is
the
[[Page 33085]]
subject of an approved plan under Sec. 31.28 of this chapter, then a
self-regulatory organization delegated the responsibility by such a
plan for monitoring and auditing such leverage transaction merchant for
compliance with the minimum financial, cover, segregation and sales
practice, and related reporting requirements of the self-regulatory
organizations of which the leverage transaction merchant is a member,
and for receiving the reports necessitated by such minimum financial,
cover, segregation and sales practice, and related reporting
requirements from such leverage transaction merchant.
(gg) Customer funds. This term means all money, securities, and
property received by a futures commission merchant or by a clearing
organization from, for, or on behalf of, customers:
(1) To margin, guarantee, or secure contracts for future delivery
or swaps (other than commodity options) on or subject to the rules of a
contract market, swap execution facility, or derivatives clearing
organization, as the case may be, and all money accruing to such
customers as the result of such contracts; and
(2) In connection with a commodity option transaction on or subject
to the rules of a contract market, swap execution facility, or
derivatives clearing organization, as the case may be:
(i) To be used as a premium for the purchase of a commodity option
transaction for a customer;
(ii) As a premium payable to a customer;
(iii) To guarantee or secure performance of a commodity option by a
customer; or
(iv) Representing accruals (including, for purchasers of a
commodity option for which the full premium has been paid, the market
value of such commodity option) to a customer.
(3) Notwithstanding paragraphs (gg)(1) and (2) of this section, the
term customer funds shall exclude money, securities or property held to
margin, guarantee or secure security futures products held in a
securities account, and all money accruing as the result of such
security futures products.
* * * * *
(ii) Premium. This term means the amount agreed upon between the
purchaser and seller, or their agents, for the purchase or sale of a
commodity option.
(jj) [Reserved]
(kk) Strike price. This term means the price, per unit, at which a
person may purchase or sell the commodity, swap or contract of sale of
a commodity for future delivery that is the subject of a commodity
option: Provided, That for purposes of Sec. 1.17, the term strike
price means the total price at which a person may purchase or sell the
commodity, swap, or contract of sale of a commodity for future delivery
that is the subject of a commodity option (i.e., price per unit times
the number of units).
* * * * *
(mm) * * *
(1) Any person who, for compensation or profit, whether direct or
indirect,
(i) Is engaged in soliciting or in accepting orders (other than in
a clerical capacity) for the purchase or sale of any commodity for
future delivery, security futures product, or swap; any agreement,
contract or transaction described in section 2(c)(2)(C)(i) or section
2(c)(2)(D)(i) of the Act; any commodity option transaction authorized
under section 4c; or any leverage transaction authorized under section
19; or who is registered with the Commission as an introducing broker;
and
(ii) Does not accept any money, securities, or property (or extend
credit in lieu thereof) to margin, guarantee, or secure any trades or
contracts that result or may result therefrom.
(2) The term introducing broker shall not include:
(i) Any futures commission merchant, floor broker, associated
person, or associated person of a swap dealer or major swap participant
acting in its capacity as such, regardless of whether that futures
commission merchant, floor broker, or associated person is registered
or exempt from registration in such capacity;
* * * * *
(nn) Guarantee agreement. This term means an agreement of guarantee
in the form set forth in part B or C of Form 1-FR, executed by a
registered futures commission merchant or retail foreign exchange
dealer, as appropriate, and by an introducing broker or applicant for
registration as an introducing broker on behalf of an introducing
broker or applicant for registration as an introducing broker in
satisfaction of the alternative adjusted net capital requirement set
forth in Sec. 1.17(a)(1)(iii).
(oo) Leverage transaction merchant. This term means and includes
any individual, association, partnership, corporation, trust or other
person that is engaged in the business of offering to enter into,
entering into or confirming the execution of leverage contracts, or
soliciting or accepting orders for leverage contracts, and who accepts
leverage customer funds (or extends credit in lieu thereof) in
connection therewith.
(pp) Leverage customer funds. This term means all money, securities
and property received, directly or indirectly by a leverage transaction
merchant from, for, or on behalf of leverage customers to margin,
guarantee or secure leverage contracts and all money, securities and
property accruing to such customers as the result of such contracts, or
the customers’ leverage equity. In the case of a long leverage
transaction, profit or loss accruing to a leverage customer is the
difference between the leverage transaction merchant’s current bid
price for the leverage contract and the ask price of the leverage
contract when entered into. In the case of a short leverage
transaction, profit or loss accruing to a leverage customer is the
difference between the bid price of the leverage contract when entered
into and the leverage transaction merchant’s current ask price for the
leverage contract.
* * * * *
(rr) * * *
(2) In the case of foreign options customers in connection with
open foreign options transactions, money, securities and property
representing premiums paid or received, plus any other funds required
to guarantee or secure open transactions plus or minus any unrealized
gain or loss on such transactions.
(ss) Foreign board of trade. This term means any board of trade,
exchange or market located outside the United States, its territories
or possessions, whether incorporated or unincorporated, where foreign
futures, foreign options, or foreign swaps are entered into.
(tt) Electronic signature. This term means an electronic sound,
symbol, or process attached to or logically associated with a record
and executed or adopted by a person with the intent to sign the record.
(uu) [Reserved]
(vv) Futures account. This term means an account that is maintained
in accordance with the segregation requirements of section 4d(a) of the
Act and the rules thereunder.
* * * * *
(xx) Foreign broker. This term means any person located outside the
United States, its territories or possessions who is engaged in
soliciting or in accepting orders only from persons located outside the
United States, its territories or possessions for the purchase or sale
of any commodity interest transaction on or subject to the rules of any
designated contract market or swap
[[Page 33086]]
execution facility and that, in or in connection with such solicitation
or acceptance of orders, accepts any money, securities or property (or
extends credit in lieu thereof) to margin, guarantee, or secure any
trades or contracts that result or may result therefrom.
(yy) Commodity interest. This term means:
(1) Any contract for the purchase or sale of a commodity for future
delivery;
(2) Any contract, agreement or transaction subject to a Commission
regulation under section 4c or 19 of the Act;
(3) Any contract, agreement or transaction subject to Commission
jurisdiction under section 2(c)(2) of the Act; and
(4) Any swap as defined in the Act, the Commission’s regulations, a
Commission order or interpretation, or a joint interpretation or order
issued by the Commission and the Securities and Exchange Commission.
(zz) Associated person of a swap dealer or major swap participant.
This term means any person who is associated with a swap dealer or
major swap participant as a partner, officer, employee, or agent (or
any person occupying a similar status or performing similar functions),
in any capacity that involves the solicitation or acceptance of swaps,
or the supervision of any person or persons so engaged. Provided,
however, That the term does not include any person associated with a
swap dealer or major swap participant the functions of which are solely
clerical or ministerial.
(aaa) Confirmation. When used in reference to a futures commission
merchant, introducing broker, or commodity trading advisor, this term
means documentation (electronic or otherwise) that memorializes
specified terms of a transaction executed on behalf of a customer. When
used in reference to a swap dealer or major swap participant, this term
means documentation (electronic or otherwise) that memorializes
specified terms of a transaction executed opposite a counterparty.
(bbb) Electronic trading facility. This term means a trading
facility that–
(1) Operates by means of an electronic or telecommunications
network; and
(2) Maintains an automated audit trail of bids, offers, and the
matching of orders or the execution of transactions on the facility.
(ccc) Order. This term means an instruction or authorization
provided by a customer to a futures commission merchant, introducing
broker or commodity trading advisor regarding trading in a commodity
interest on behalf of the customer.
(ddd) Organized exchange. This term means a trading facility that–
(1) Permits trading–
(i) By or on behalf of a person that is not an eligible contract
participant; or
(ii) By persons other than on a principal-to-principal basis; or
(2) Has adopted (directly or through another nongovernmental
entity) rules that–
(i) Govern the conduct of participants, other than rules that
govern the submission of orders or execution of transactions on the
trading facility; and
(ii) Include disciplinary sanctions other than the exclusion of
participants from trading.
(eee) Prudential regulator. This term has the meaning given to the
term in section 1a(39) of the Commodity Exchange Act and includes the
Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the Farm Credit Administration, and the Federal Housing Finance Agency,
as applicable to the swap dealer or major swap participant. The term
also includes the Federal Deposit Insurance Corporation, with respect
to any financial company as defined in section 201 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act or any insured
depository institution under the Federal Deposit Insurance Act, and
with respect to each affiliate of any such company or institution.
(fff) Registered entity. This term means:
(1) A board of trade designated as a contract market under section
5 of the Act;
(2) A derivatives clearing organization registered under section 5b
of the Act;
(3) A board of trade designated as a contract market under section
5f of the Act;
(4) A swap execution facility registered under section 5h of the
Act;
(5) A swap data repository registered under section 21 of the Act;
and
(6) With respect to a contract that the Commission determines is a
significant price discovery contract, any electronic trading facility
on which the contract is executed or traded.
(ggg) Registrant. This term means a commodity pool operator;
commodity trading advisor; futures commission merchant; introducing
broker; leverage transaction merchant; floor broker; floor trader;
major swap participant; retail foreign exchange dealer; or swap dealer
that is subject to these regulations; or an associated person of any of
the foregoing other than an associated person of a swap dealer or major
swap participant.
(hhh) Retail forex customer. This term means a person, other than
an eligible contract participant as defined in section 1a(18) of the
Act, acting on its own behalf and trading in any account, agreement,
contract or transaction described in section 2(c)(2)(B) or 2(c)(2)(C)
of the Act.
(iii) Swap account. This term means an account that is maintained
in accordance with the segregation requirements of section 4d(f) of the
Act and the rules thereunder.
(jjj) Swap data repository. This term means any person that
collects and maintains information or records with respect to
transactions or positions in, or the terms and conditions of, swaps
entered into by third parties for the purpose of providing a
centralized recordkeeping facility for swaps.
(kkk) Swap execution facility. This term means a trading system or
platform in which multiple participants have the ability to execute or
trade swaps by accepting bids and offers made by multiple participants
in the facility or system, through any means of interstate commerce,
including any trading facility, that–
(1) Facilitates the execution of swaps between persons; and
(2) Is not a designated contract market.
(lll) Trading facility. This term has the meaning set forth in
section 1a(51) of the Act.
3. Revise Sec. 1.4 to read as follows:
Sec. 1.4 Use of electronic signatures, acknowledgments and
verifications.
For purposes of complying with any provision in the Commodity
Exchange Act or the rules or regulations in this Chapter I that
requires a swap transaction to be acknowledged by a swap dealer or
major swap participant or a document to be signed or verified by a
customer of a futures commission merchant or introducing broker, a
retail forex customer of a retail foreign exchange dealer or futures
commission merchant, a pool participant or a client of a commodity
trading advisor, or a counterparty of a swap dealer or major swap
participant, an electronic signature executed by the customer, retail
forex customer, participant, client, counterparty, swap dealer or major
swap participant will be sufficient, if the futures commission
merchant, retail foreign exchange dealer, introducing broker, commodity
pool operator, commodity trading advisor, swap dealer or major swap
participant elects generally to accept electronic signatures,
acknowledgments or verifications or another Commission rule permits the
use of electronic signatures for the
[[Page 33087]]
purposes listed above; Provided, however, That the electronic signature
must comply with applicable Federal laws and other Commission rules;
And, Provided further, That the futures commission merchant, retail
foreign exchange dealer, introducing broker, commodity pool operator,
commodity trading advisor, swap dealer or major swap participant must
adopt and use reasonable safeguards regarding the use of electronic
signatures, including at a minimum safeguards employed to prevent
alteration of the electronic record with which the electronic signature
is associated, after such record has been electronically signed.
4. Remove and reserve paragraph (a)(1)(ii) of Sec. 1.17 to read as
follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
(a)(1)(i) * * *
(ii) [Reserved]
* * * * *
5. Revise Sec. 1.20 to read as follows:
Sec. 1.20 Customer funds to be segregated and separately accounted
for.
(a) All customer funds shall be separately accounted for and
segregated as belonging to customers. Such customer funds when
deposited with any bank, trust company, clearing organization or
another futures commission merchant shall be deposited under an account
name which clearly identifies them as such and shows that they are
segregated as required by the Act and this part. Each registrant shall
obtain and retain in its files for the period provided in Sec. 1.31 a
written acknowledgment from such bank, trust company, clearing
organization, or futures commission merchant, that it was informed that
the customer funds deposited therein are those of customers and are
being held in accordance with the provisions of the Act and this part:
Provided however, that an acknowledgment need not be obtained from a
clearing organization that has adopted and submitted to the Commission
rules that provide for the segregation as customer funds, in accordance
with all relevant provisions of the Act and the rules and orders
promulgated thereunder, of all funds held on behalf of customers. Under
no circumstances shall any portion of customer funds be obligated to a
clearing organization, any member of a contract market, a futures
commission merchant, or any depository except to purchase, margin,
guarantee, secure, transfer, adjust or settle trades, contracts or
commodity option transactions of customers. No person, including any
clearing organization or any depository, that has received customer
funds for deposit in a segregated account, as provided in this section,
may hold, dispose of, or use any such funds as belonging to any person
other than the customers of the futures commission merchant which
deposited such funds.
(b) All customer funds received by a clearing organization from a
member of the clearing organization to purchase, margin, guarantee,
secure or settle the trades, contracts or commodity options of the
clearing member’s customers and all money accruing to such customers as
the result of trades, contracts or commodity options so carried shall
be separately accounted for and segregated as belonging to such
customers, and a clearing organization shall not hold, use or dispose
of such customer funds except as belonging to such customers. Such
customer funds when deposited in a bank or trust company shall be
deposited under an account name which clearly shows that they are the
customer funds of the customers of clearing members, segregated as
required by the Act and these regulations. The clearing organization
shall obtain and retain in its files for the period provided by Sec.
1.31 an acknowledgment from such bank or trust company that it was
informed that the customer funds deposited therein are those of
customers of its clearing members and are being held in accordance with
the provisions of the Act and these regulations.
(c) Each futures commission merchant shall treat and deal with the
customer funds of a customer as belonging to such customer. All
customer funds shall be separately accounted for, and shall not be
commingled with the money, securities or property of a futures
commission merchant or of any other person, or be used to secure or
guarantee the trades, contracts or commodity options, or to secure or
extend the credit, of any person other than the one for whom the same
are held: Provided, however, That customer funds treated as belonging
to the customers of a futures commission merchant may for convenience
be commingled and deposited in the same account or accounts with any
bank or trust company, with another person registered as a futures
commission merchant, or with a clearing organization, and that such
share thereof as in the normal course of business is necessary to
purchase, margin, guarantee, secure, transfer, adjust, or settle the
trades, contracts or commodity options of such customers or resulting
market positions, with the clearing organization or with any other
person registered as a futures commission merchant, may be withdrawn
and applied to such purposes, including the payment of premiums to
option grantors, commissions, brokerage, interest, taxes, storage and
other fees and charges, lawfully accruing in connection with such
trades, contracts or commodity options: Provided further, That customer
funds may be invested in instruments described in Sec. 1.25.
6. Revise Sec. 1.21 to read as follows:
Sec. 1.21 Care of money and equities accruing to customers.
All money received directly or indirectly by, and all money and
equities accruing to, a futures commission merchant from any clearing
organization or from any clearing member or from any member of a
contract market incident to or resulting from any trade, contract or
commodity option made by or through such futures commission merchant on
behalf of any customer shall be considered as accruing to such customer
within the meaning of the Act and these regulations. Such money and
equities shall be treated and dealt with as belonging to such customer
in accordance with the provisions of the Act and these regulations.
Money and equities accruing in connection with customers’ open trades,
contracts, or commodity options need not be separately credited to
individual accounts but may be treated and dealt with as belonging
undivided to all customers having open trades, contracts, or commodity
option positions which if closed would result in a credit to such
customers.
7. Revise Sec. 1.22 to read as follows:
Sec. 1.22 Use of customer funds restricted.
No futures commission merchant shall use, or permit the use of, the
customer funds of one customer to purchase, margin, or settle the
trades, contracts, or commodity options of, or to secure or extend the
credit of, any person other than such customer. Customer funds shall
not be used to carry trades or positions of the same customer other
than in commodities or commodity options traded through the facilities
of a contract market.
8. Revise Sec. 1.23 to read as follows:
Sec. 1.23 Interest of futures commission merchant in segregated
funds; additions and withdrawals.
The provision in section 4d(a)(2) of the Act and the provision in
Sec. 1.20(c), which prohibit the commingling of customer funds with
the funds of a futures commission merchant, shall not be construed to
prevent a futures
[[Page 33088]]
commission merchant from having a residual financial interest in the
customer funds, segregated as required by the Act and the rules in this
part and set apart for the benefit of customers; nor shall such
provisions be construed to prevent a futures commission merchant from
adding to such segregated customer funds such amount or amounts of
money, from its own funds or unencumbered securities from its own
inventory, of the type set forth in Sec. 1.25, as it may deem
necessary to ensure any and all customers’ accounts from becoming
undersegregated at any time. The books and records of a futures
commission merchant shall at all times accurately reflect its interest
in the segregated funds. A futures commission merchant may draw upon
such segregated funds to its own order, to the extent of its actual
interest therein, including the withdrawal of securities held in
segregated safekeeping accounts held by a bank, trust company, contract
market, clearing organization or other futures commission merchant.
Such withdrawal shall not result in the funds of one customer being
used to purchase, margin or carry the trades, contracts or commodity
options, or extend the credit of any other customer or other person.
9. Revise Sec. 1.24 to read as follows:
Sec. 1.24 Segregated funds; exclusions therefrom.
Money held in a segregated account by a futures commission merchant
shall not include: (a) Money invested in obligations or stocks of any
clearing organization or in memberships in or obligations of any
contract market; or
(b) Money held by any clearing organization which it may use for
any purpose other than to purchase, margin, guarantee, secure,
transfer, adjust, or settle the contracts, trades, or commodity options
of the customers of such futures commission merchant.
10. Revise Sec. 1.26 to read as follows:
Sec. 1.26 Deposit of instruments purchased with customer funds.
(a) Each futures commission merchant who invests customer funds in
instruments described in Sec. 1.25 shall separately account for such
instruments and segregate such instruments as belonging to such
customers. Such instruments, when deposited with a bank, trust company,
clearing organization or another futures commission merchant, shall be
deposited under an account name which clearly shows that they belong to
customers and are segregated as required by the Act and this part. Each
futures commission merchant upon opening such an account shall obtain
and retain in its files an acknowledgment from such bank, trust
company, clearing organization or other futures commission merchant
that it was informed that the instruments belong to customers and are
being held in accordance with the provisions of the Act and this part.
Provided, however, that an acknowledgment need not be obtained from a
clearing organization that has adopted and submitted to the Commission
rules that provide for the segregation as customer funds, in accordance
with all relevant provisions of the Act and the rules and orders
promulgated thereunder, of all funds held on behalf of customers and
all instruments purchased with customer funds. Such acknowledgment
shall be retained in accordance with Sec. 1.31. Such bank, trust
company, clearing organization or other futures commission merchant
shall allow inspection of such obligations at any reasonable time by
representatives of the Commission.
(b) Each clearing organization which invests money belonging or
accruing to customers of its clearing members in instruments described
in Sec. 1.25 shall separately account for such instruments and
segregate such instruments as belonging to such customers. Such
instruments, when deposited with a bank or trust company, shall be
deposited under an account name which will clearly show that they
belong to customers and are segregated as required by the Act and this
part. Each clearing organization upon opening such an account shall
obtain and retain in its files a written acknowledgment from such bank
or trust company that it was informed that the instruments belong to
customers of clearing members and are being held in accordance with the
provisions of the Act and this part. Such acknowledgment shall be
retained in accordance with Sec. 1.31. Such bank or trust company
shall allow inspection of such instruments at any reasonable time by
representatives of the Commission.
11. Revise the introductory text of paragraph (a) in Sec. 1.27 to
read as follows:
Sec. 1.27 Record of investments.
(a) Each futures commission merchant which invests customer funds,
and each derivatives clearing organization which invests customer funds
of its clearing members’ customers, shall keep a record showing the
following:
* * * * *
12. Revise Sec. 1.30 to read as follows:
Sec. 1.30 Loans by futures commission merchants; treatment of
proceeds.
Nothing in the regulations in this part shall prevent a futures
commission merchant from lending its own funds to customers on
securities and property pledged by such customers, or from repledging
or selling such securities and property pursuant to specific written
agreement with such customers. The proceeds of such loans used to
purchase, margin, guarantee, or secure the trades, contracts, or
commodity options of customers shall be treated and dealt with by a
futures commission merchant as belonging to such customers, in
accordance with and subject to the provisions of section 4d(a)(2) of
the Act and these regulations.
13. Amend Sec. 1.31 by revising paragraphs (a)(1), (a)(2), (b)
introductory text, (b)(1)(ii)(D), (b)(2)(i), (b)(2)(ii), (b)(2)(iii),
(b)(2)(v)(B), (b)(3)(i), (b)(3)(ii)(A), (b)(3)(ii)(C), (b)(3)(iii)(A),
and (b)(4)(i), to read as follows:
Sec. 1.31 Books and records; keeping and inspection.
(a)(1) All books and records required to be kept by the Act or by
these regulations shall be kept in their original form (for paper
records) or native file format (for electronic records) for a period of
five years from the date thereof and shall be readily accessible during
the first 2 years of the 5-year period; Provided, however, That records
of any swap or related cash or forward transaction shall be kept until
the termination, maturity, expiration, transfer, assignment, or
novation date of the transaction and for a period of five years after
such date. All such books and records shall be open to inspection by
any representative of the Commission, the United States Department of
Justice, any applicable prudential regulator as that term is defined in
section 1a(39) of the Act, or, in connection with those security-based
swap agreements described in section 1a(47)(A)(v) of the Act, the
United States Securities and Exchange Commission. For purposes of this
section, native file format means an electronic file that exists in the
format it was originally created.
(2) Persons required to keep books and records by the Act or by
these regulations shall produce such records in a form specified by any
representative of the Commission. Such production shall be made, at the
expense of the person required to keep the book or record, to a
Commission representative upon the representative’s request. Instead of
furnishing a copy, such person may provide the original book or record
for reproduction, which
[[Page 33089]]
the representative may temporarily remove from such person’s premises
for this purpose. All copies or originals shall be provided promptly.
Upon request, the Commission representative shall issue a receipt
provided by such person for any copy or original book or record
received. At the request of the Commission representative, such person
shall, upon the return thereof, issue a receipt for any copy or
original book or record returned by the representative.
(b) Except as provided in paragraph (d) of this section, books and
records required to be kept by the Act or by these regulations may be
stored on either “micrographic media” (as defined in paragraph
(b)(1)(i) of this section) or “electronic storage media” (as defined
in paragraph (b)(1)(ii) of this section) for the required time period
under the conditions set forth in this paragraph (b); Provided,
however, For electronic records, such storage media must preserve the
native file format of the electronic records as required by paragraph
(a)(1) of this section.
(1) * * *
(ii) * * *
(D) Permits the immediate downloading of indexes and records
preserved on the electronic storage media onto paper, microfilm,
microfiche or other medium acceptable under this paragraph (b) upon the
request of representatives of the Commission, the Department of
Justice, any applicable prudential regulator as that term is defined in
section 1a(39) of the Act, or the Securities and Exchange Commission
with respect to those security-based swap agreements described in
section 1a(47)(A)(5) of the Act.
(2) * * *
(i) Have available at all times, for examination by representatives
of the Commission, the Department of Justice, any applicable prudential
regulator as that term is defined in section 1a(39) of the Act, or the
Securities and Exchange Commission with respect to those security-based
swap agreements described in section 1a(47)(A)(5) of the Act,
facilities for immediate, easily readable projection or production of
micrographic media or electronic storage media images;
(ii) Be ready at all times to provide, and immediately provide at
the expense of the person required to keep such records, any easily
readable hard-copy image that representatives of the Commission, the
Department of Justice, any applicable prudential regulator as that term
is defined in section 1a(39) of the Act, or the Securities and Exchange
Commission with respect to those security-based swap agreements
described in section 1a(47)(A)(5) of the Act, may request;
(iii) Keep only Commission-required records on the individual
medium employed (e.g., a disk or sheets of microfiche);
* * * * *
(v) * * *
(B) The index is available at all times for immediate examination
by representatives of the Commission, the Department of Justice, any
applicable prudential regulator as that term is defined in section
1a(39) of the Act, or the Securities and Exchange Commission with
respect to those security-based swap agreements described in section
1a(47)(A)(5) of the Act;
* * * * *
(3) * * *
(i) Be ready at all times to provide, and immediately provide at
the expense of the person required to keep such records, copies of such
records on such approved compatible data processing media as defined in
Sec. 15.00(d) of this chapter which any representative of the
Commission, the Department of Justice, any applicable prudential
regulator as that term is defined in section 1a(39) of the Act, or the
Securities and Exchange Commission with respect to those security-based
swap agreements described in section 1a(47)(A)(5) of the Act, may
request. Records must use a format and coding structure specified in
the request.
(ii) * * *
(A) The results of such audit system are available at all times for
immediate examination by representatives of the Commission, the
Department of Justice, any applicable prudential regulator as that term
is defined in section 1a(39) of the Act, or the Securities and Exchange
Commission with respect to those security-based swap agreements
described in section 1a(47)(A)(5) of the Act;
* * * * *
(C) The written operational procedures and controls are available
at all times for immediate examination by representatives of the
Commission, the Department of Justice, any applicable prudential
regulator as that term is defined in section 1a(39) of the Act, or the
Securities and Exchange Commission with respect to those security-based
swap agreements described in section 1a(47)(A)(5) of the Act.
(iii) * * *
(A) Maintain, keep current, and make available at all times for
immediate examination by representatives of the Commission, the
Department of Justice, any applicable prudential regulator as that term
is defined in section 1a(39) of the Act, or the Securities and Exchange
Commission with respect to those security-based swap agreements
described in section 1a(47)(A)(5) of the Act, all information necessary
to access records and indexes maintained on the electronic storage
media; or
* * * * *
(4) * * *
(i) The Technical Consultant must file with the Commission an
undertaking in a form acceptable to the Commission, signed by the
Technical Consultant or a person duly authorized by the Technical
Consultant. An acceptable undertaking must include the following
provision with respect to the Electronic Recordkeeper:* * *
With respect to any books and records maintained or preserved on
behalf of the Electronic Recordkeeper, the undersigned hereby
undertakes to furnish promptly to any representative of the United
States Commodity Futures Trading Commission, the United States
Department of Justice, any applicable prudential regulator as that
term is defined in section 1a(39) of the Act, or the United States
Securities and Exchange Commission with respect to those security-
based swap agreements described in section 1a(47)(A)(5) of the Act
(the “Representative”), upon reasonable request, such information
as is deemed necessary by the Representative to download information
kept on the Electronic Recordkeeper’s electronic storage media to
any medium acceptable under 17 CFR 1.31. The undersigned also
undertakes to take reasonable steps to provide access to information
contained on the Electronic Recordkeeper’s electronic storage media,
including, as appropriate, arrangements for the downloading of any
record required to be maintained under the Commodity Exchange Act or
the rules, regulations, or orders of the United States Commodity
Futures Trading Commission, in a format acceptable to the
Representative. In the event the Electronic Recordkeeper fails to
download a record into a readable format and after reasonable notice
to the Electronic Recordkeeper, upon being provided with the
appropriate electronic storage medium, the undersigned will
undertake to do so, at no charge to the United States, as the
Representative may request.
* * * * *
14. Revise paragraphs (a)(1) and (a)(2) of Sec. 1.32 to read as
follows:
Sec. 1.32 Segregated account; daily computation and record.
(a) * * *
(1) The total amount of customer funds on deposit in segregated
accounts on behalf of customers;
(2) The amount of such customer funds required by the Act and these
regulations to be on deposit in segregated accounts on behalf of such
customers; and
* * * * *
[[Page 33090]]
15. Amend Sec. 1.33 by:
a. Revising paragraph (a) introductory text, (a)(1) introductory
text, (a)(1)(i), (a)(1)(ii), (a)(2) introductory text, and (a)(2)(v);
b. Adding paragraph (a)(3);
c. Revising paragraph (b) introductory text and paragraph (b)(1),
redesignating paragraphs (b)(2) through (b)(4) as paragraphs (b)(3)
through (b)(5), respectively, and adding paragraph (b)(2);
d. Revising redesignated paragraph (b)(3) introductory text, and
redesignated paragraphs (b)(3)(i), (b)(4), and (b)(5); and
e. Revising paragraph (d) introductory text to read as follows:
Sec. 1.33 Monthly and confirmation statements.
(a) Monthly statements. Each futures commission merchant must
promptly furnish in writing to each customer, and to each foreign
futures and foreign options customer, as of the close of the last
business day of each month or as of any regular monthly date selected,
except for accounts in which there are neither open positions at the
end of the statement period nor any changes to the account balance
since the prior statement period, but in any event not less frequently
than once every three months, a statement which clearly shows:
(1) For each commodity futures and foreign futures position–
(i) The open position with prices at which acquired;
(ii) The net unrealized profits or losses in all open positions
marked to the market;
* * * * *
(2) For each commodity option position and foreign option
position–
* * * * *
(v) A detailed accounting of all financial charges and credits to
such customer’s account(s) during the monthly reporting period,
including all customer funds and funds on deposit with respect to
foreign option transactions in accordance with Sec. 30.7 of this
chapter received from or disbursed to such customer, premiums charged
and received, and realized profits and losses.
(3) For each swap position–
(i) All swaps caused to be executed by the futures commission
merchant for the customer;
(ii) The net unrealized profits or losses in all swaps marked to
the market;
(iii) Any customer funds carried with the futures commission
merchant; and
(iv) A detailed accounting of all financial charges and credits to
such customer accounts during the monthly reporting period, including
all customer funds received from or disbursed to such customer and
realized profits and losses.
(b) Confirmation statement. Each futures commission merchant must,
not later than the next business day after any commodity interest or
commodity option transaction, including any foreign futures or foreign
options transactions, furnish to each customer:
(1) A written confirmation of each commodity futures transaction
caused to be executed by it for the customer.
(2) A written confirmation of each swap caused to be executed by it
for the customer, containing at least the following information:
(i) The unique swap identifier, as required by Sec. 45.4(a) of
this chapter, for each swap and date each swap was executed;
(ii) The product name of each swap;
(iii) The price at which the swap was executed;
(iv) The date of maturity for each swap; and
(v) If cleared, the derivatives clearing organization through which
it is cleared.
(3) A written confirmation of each commodity option transaction,
containing at least the following information:
(i) The customer’s account identification number;
* * * * *
(4) Upon the expiration or exercise of any commodity option, a
written confirmation statement thereof, which statement shall include
the date of such occurrence, a description of the option involved, and,
in the case of exercise, the details of the futures or physical
position which resulted therefrom including, if applicable, the final
trading date of the contract for future delivery underlying the option.
(5) Notwithstanding the provisions of paragraphs (b)(1) through
(b)(4) of this section, a commodity interest transaction that is caused
to be executed for a commodity pool need be confirmed only to the
operator of the commodity pool.
* * * * *
(d) Controlled accounts. With respect to any account controlled by
any person other than the customer for whom such account is carried,
each futures commission merchant shall:
* * * * *
16. Revise Sec. 1.34 to read as follows:
Sec. 1.34 Monthly record, “point balance”.
(a) With respect to commodity futures transactions, each futures
commission merchant shall prepare, and retain in accordance with the
requirements of Sec. 1.31, a statement commonly known as a “point
balance,” which accrues or brings to the official closing price, or
settlement price fixed by the clearing organization, all open positions
of customers as of the last business day of each month or of any
regular monthly date selected: Provided, however, That a futures
commission merchant who carries part or all of customers’ open
positions with other futures commission merchants on an “instruct
basis” will be deemed to have met the requirements of this section as
to open positions so carried if a monthly statement is prepared which
shows that the prices and amounts of such positions long and short in
the customers’ accounts are in balance with those in the carrying
futures commission merchants’ accounts, and such statements are
retained in accordance with the requirements of Sec. 1.31.
(b) With respect to commodity option transactions, each futures
commission merchant shall prepare, and retain in accordance with the
requirements of Sec. 1.31, a listing in which all open commodity
option positions carried for customers are marked to the market. Such
listing shall be prepared as of the last business day of each month, or
as of any regular monthly date selected, and shall be by put or by
call, by underlying contract for future delivery (by delivery month) or
underlying physical (by option expiration date), and by strike price.
17. Section 1.35 is revised to read as follows:
Sec. 1.35 Records of commodity interest and cash commodity
transactions.
(a) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of designated contract markets or swap
execution facilities. Each futures commission merchant, retail foreign
exchange dealer, introducing broker, and member of a designated
contract market or swap execution facility shall keep full, complete,
and systematic records, which include all pertinent data and memoranda,
of all transactions relating to its business of dealing in commodity
interests and cash commodities. Each futures commission merchant,
retail foreign exchange dealer, introducing broker, and member of a
designated contract market or swap execution facility shall retain the
required records in accordance with the requirements of Sec. 1.31, and
produce them for inspection and furnish true and correct information
and reports as to the contents or the meaning thereof, when and as
requested by an authorized
[[Page 33091]]
representative of the Commission or the United States Department of
Justice. Included among such records shall be all orders (filled,
unfilled, or canceled), trading cards, signature cards, street books,
journals, ledgers, canceled checks, copies of confirmations, copies of
statements of purchase and sale, and all other records, which have been
prepared in the course of its business of dealing in commodity
interests and cash commodities, and all oral and written communications
provided or received concerning quotes, solicitations, bids, offers,
instructions, trading, and prices, that lead to the execution of
transactions in a commodity interest or cash commodity, whether
communicated by telephone, voicemail, facsimile, instant messaging,
chat rooms, electronic mail, mobile device or other digital or
electronic media. Each transaction record shall be maintained as a
separate electronic file identifiable by transaction and counterparty.
Among such records each member of a designated contract market or swap
execution facility must retain and produce for inspection are all
documents on which trade information is originally recorded, whether or
not such documents must be prepared pursuant to the rules or
regulations of either the Commission, the designated contract market or
the swap execution facility. For purposes of this section, such
documents are referred to as “original source documents.”
(b) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of designated contract markets and
swap execution facilities: Recording of customers’ orders. (1) Each
futures commission merchant, each retail foreign exchange dealer, each
introducing broker, and each member of a designated contract market or
swap execution facility receiving a customer’s order that cannot
immediately be entered into a trade matching engine shall immediately
upon receipt thereof prepare a written record of the order including
the account identification, except as provided in paragraph (b)(5) of
this section, and order number, and shall record thereon, by time stamp
or other timing device, the date and time, to the nearest minute, the
order is received, and in addition, for commodity option orders, the
time, to the nearest minute, the order is transmitted for execution.
(2)(i) Each member of a designated contract market who on the floor
of such designated contract market receives a customer’s order which is
not in the form of a written record including the account
identification, order number, and the date and time, to the nearest
minute, the order was transmitted or received on the floor of such
designated contract market, shall immediately upon receipt thereof
prepare a written record of the order in nonerasable ink, including the
account identification, except as provided in paragraph (b)(5) of this
section, and order number and shall record thereon, by time stamp or
other timing device, the date and time, to the nearest minute, the
order is received.
(ii) Except as provided in paragraph (b)(3) of this section:
(A) Each member of a designated contract market who on the floor of
such designated contract market receives an order from another member
present on the floor which is not in the form of a written record
shall, immediately upon receipt of such order, prepare a written record
of the order or obtain from the member who placed the order a written
record of the order, in non-erasable ink, including the account
identification and order number and shall record thereon, by time stamp
or other timing device, the date and time, to the nearest minute, the
order is received; or
(B) When a member of a designated contract market present on the
floor places an order, which is not in the form of a written record,
for his own account or an account over which he has control, with
another member of such designated contract market for execution:
(1) The member placing such order immediately upon placement of the
order shall record the order and time of placement to the nearest
minute on a sequentially numbered trading card maintained in accordance
with the requirements of paragraph (f) of this section;
(2) The member receiving and executing such order immediately upon
execution of the order shall record the time of execution to the
nearest minute on a trading card or other record maintained pursuant to
the requirements of paragraph (f) of this section; and
(3) The member receiving and executing the order shall return such
trading card or other record to the member placing the order. The
member placing the order then must submit together both of the trading
cards or other records documenting such trade to designated contract
market personnel or the clearing member.
(3)(i) The requirements of paragraph (b)(2)(ii) of this section
will not apply if a designated contract market maintains in effect
rules which provide for an exemption where:
(A) A member of a designated contract market places with another
member of such designated contract market an order that is part of a
spread transaction;
(B) The member placing the order personally executes one or more
legs of the spread; and
(C) The member receiving and executing such order immediately upon
execution of the order records the time of execution to the nearest
minute on his trading card or other record maintained in accordance
with the requirements of paragraph (f) of this section.
(4) Each member of a designated contract market reporting the
execution from the floor of the designated contract market of a
customer’s order or the order of another member of the designated
contract market received in accordance with paragraphs (b)(2)(i) or
(b)(2)(ii)(A) of this section, shall record on a written record of the
order, including the account identification, except as provided in
paragraph (b)(5) of this section, and order number, by time stamp or
other timing device, the date and time to the nearest minute such
report of execution is made. Each member of a designated contract
market shall submit the written records of customer orders or orders
from other designated contract market members to designated contract
market personnel or to the clearing member responsible for the
collection of orders prepared pursuant to this paragraph. The execution
price and other information reported on the order tickets must be
written in nonerasable ink.
(5) Post-execution allocation of bunched orders. Specific customer
account identifiers for accounts included in bunched orders executed on
designated contract markets or swap execution facilities need not be
recorded at time of order placement or upon report of execution if the
requirements of paragraphs (b)(5)(i) through (v) of this section are
met. Specific customer account identifiers for accounts included in
bunched orders involving swaps need not be included in confirmations or
acknowledgments provided by swap dealers or major swap participants
pursuant to Sec. 23.501(a) of this chapter if the requirements of
paragraphs (b)(5)(i) through (v) of this section are met.
(i) Eligible account managers for orders executed on designated
contract markets or swap execution facilities. The person placing and
directing the allocation of an order eligible for post-execution
allocation must have been granted written investment discretion with
regard to participating customer accounts. The following persons shall
qualify as eligible account managers for
[[Page 33092]]
trades executed on designated contract markets or swap execution
facilities:
(A) A commodity trading advisor registered with the Commission
pursuant to the Act or excluded or exempt from registration under the
Act or the Commission’s rules, except for entities exempt under Sec.
4.14(a)(3) of this chapter;
(B) An investment adviser registered with the Securities and
Exchange Commission pursuant to the Investment Advisers Act of 1940 or
with a state pursuant to applicable state law or excluded or exempt
from registration under such Act or applicable state law or rule;
(C) A bank, insurance company, trust company, or savings and loan
association subject to federal or state regulation;
(D) A foreign adviser that exercises discretionary trading
authority solely over the accounts of non-U.S. persons, as defined in
Sec. 4.7(a)(1)(iv) of this chapter;
(E) A futures commission merchant registered with the Commission
pursuant to the Act; or
(F) An introducing broker registered with the Commission pursuant
to the Act.
(ii) Eligible account managers for orders executed bilaterally. The
person placing and directing the allocation of an order eligible for
post-execution allocation must have been granted written investment
discretion with regard to participating customer accounts. The
following persons shall qualify as eligible account managers for trades
executed bilaterally:
(A) A commodity trading advisor registered with the Commission
pursuant to the Act or excluded or exempt from registration under the
Act or the Commission’s rules, except for entities exempt under Sec.
4.14(a)(3) of this chapter;
(B) A futures commission merchant registered with the Commission
pursuant to the Act; or
(C) An introducing broker registered with the Commission pursuant
to the Act.
(iii) Information. Eligible account managers shall make the
following information available to customers upon request:
(A) The general nature of the allocation methodology the account
manager will use;
(B) Whether accounts in which the account manager may have any
interest may be included with customer accounts in bunched orders
eligible for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to
compare its results with those of other comparable customers and, if
applicable and consistent with Sec. 155.3(a)(1) and Sec. 155.4(a)(1)
of this chapter, any account in which the account manager has an
interest.
(iv) Allocation. Orders eligible for post-execution allocation must
be allocated by an eligible account manager in accordance with the
following:
(A) Allocations must be made as soon as practicable after the
entire transaction is executed, but in any event no later than the
following times: For cleared trades, account managers must provide
allocation information to futures commission merchants no later than a
time sufficiently before the end of the day the order is executed to
ensure that clearing records identify the ultimate customer for each
trade. For uncleared trades, account managers must provide allocation
information to the counterparty no later than the end of the calendar
day that the swap was executed.
(B) Allocations must be fair and equitable. No account or group of
accounts may receive consistently favorable or unfavorable treatment.
(C) The allocation methodology must be sufficiently objective and
specific to permit independent verification of the fairness of the
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
(v) Records. (A) Eligible account managers shall keep and must make
available upon request of any representative of the Commission, the
United States Department of Justice, or other appropriate regulatory
agency, the information specified in paragraph (b)(5)(iii) of this
section.
(B) Eligible account managers shall keep and must make available
upon request of any representative of the Commission, the United States
Department of Justice, or other appropriate regulatory agency, records
sufficient to demonstrate that all allocations meet the standards of
paragraph (b)(5)(iv) of this section and to permit the reconstruction
of the handling of the order from the time of placement by the account
manager to the allocation to individual accounts.
(C) Futures commission merchants, introducing brokers, or commodity
trading advisors that execute orders or that carry accounts eligible
for post-execution allocation, and members of designated contract
markets or swap execution facilities that execute such orders, must
maintain records that, as applicable, identify each order subject to
post-execution allocation and the accounts to which contracts executed
for such order are allocated.
(D) In addition to any other remedies that may be available under
the Act or otherwise, if the Commission has reason to believe that an
account manager has failed to provide information requested pursuant to
paragraph (b)(5)(v)(A) or (b)(5)(v)(B) of this section, the Commission
may inform in writing any designated contract market, swap execution
facility, swap dealer, or major swap participant, and that designated
contract market, swap execution facility, swap dealer, or major swap
participant shall prohibit the account manager from submitting orders
for execution except for liquidation of open positions and no futures
commission merchant shall accept orders for execution on any designated
contract market, swap execution facility, or bilaterally from the
account manager except for liquidation of open positions.
(E) Any account manager that believes he or she is or may be
adversely affected or aggrieved by action taken by the Commission under
paragraph (b)(5)(v)(D) of this section shall have the opportunity for a
prompt hearing in accordance with the provisions of Sec. 21.03(g) of
this chapter.
(c)(1) Futures commission merchants, introducing brokers, and
members of designated contract markets and swap execution facilities.
Upon request of the designated contract market or swap execution
facility, the Commission, or the United States Department of Justice,
each futures commission merchant, introducing broker, and member of a
designated contract market or swap execution facility shall request
from its customers and, upon receipt thereof, provide to the requesting
body documentation of cash transactions underlying exchanges of futures
or swaps for cash commodities or exchanges of futures or swaps in
connection with cash commodity transactions.
(2) Customers. Each customer of a futures commission merchant,
introducing broker, or member of a designated contract market or swap
execution facility shall create, retain, and produce upon request of
the designated contract market or swap execution facility, the
Commission, or the United States Department of Justice documentation of
cash transactions underlying exchanges of futures or swaps for cash
commodities or exchanges of futures or swaps in connection with cash
commodity transactions.
(3) Documentation. For the purposes of this paragraph,
documentation means those documents customarily generated
[[Page 33093]]
in accordance with cash market practices which demonstrate the
existence and nature of the underlying cash transactions, including,
but not limited to, contracts, confirmation statements, telex
printouts, invoices, and warehouse receipts or other documents of
title.
(d) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of derivatives clearing organizations
clearing trades executed on designated contract markets and swap
execution facilities. Each futures commission merchant, each retail
foreign exchange dealer, and each member of a derivatives clearing
organization clearing trades executed on a designated contract market
or swap execution facility and, for purposes of paragraph (d)(3) of
this section, each introducing broker, shall, as a minimum requirement,
prepare regularly and promptly, and keep systematically and in
permanent form, the following:
(1) A financial ledger record which will show separately for each
customer all charges against and credits to such customer’s account,
including but not limited to customer funds deposited, withdrawn, or
transferred, and charges or credits resulting from losses or gains on
closed transactions;
(2) A record of transactions which will show separately for each
account (including proprietary accounts):
(i) All commodity futures transactions executed for such account,
including the date, price, quantity, market, commodity and future;
(ii) All retail forex transactions executed for such account,
including the date, price, quantity, and currency;
(iii) All commodity option transactions executed for such account,
including the date, whether the transaction involved a put or call,
expiration date, quantity, underlying contract for future delivery or
underlying physical, strike price, and details of the purchase price of
the option, including premium, mark-up, commission and fees; and
(iv) All swap transactions executed for such account, including the
date, price, quantity, market, commodity, swap, and, if cleared, the
derivatives clearing organization; and
(3) A record or journal which will separately show for each
business day complete details of:
(i) All commodity futures transactions executed on that day,
including the date, price, quantity, market, commodity, future and the
person for whom such transaction was made;
(ii) All retail forex transactions executed on that day for such
account, including the date, price, quantity, currency and the person
who whom such transaction was made;
(iii) All commodity option transactions executed on that day,
including the date, whether the transaction involved a put or call, the
expiration date, quantity, underlying contract for future delivery or
underlying physical, strike price, details of the purchase price of the
option, including premium, mark-up, commission and fees, and the person
for whom the transaction was made;
(iv) All swap transactions executed on that day, including the
date, price, quantity, market, commodity, swap, the person for whom
such transaction was made, and, if cleared, the derivatives clearing
organization; and
(v) In the case of an introducing broker, the record or journal
required by this paragraph (d)(3) shall also include the futures
commission merchant or retail foreign exchange dealer carrying the
account for which each commodity futures, retail forex, commodity
option, and swap transaction was executed on that day. Provided,
however, that where reproductions on microfilm, microfiche or optical
disk are substituted for hard copy in accordance with the provisions of
Sec. 1.31(b) of this part, the requirements of paragraphs (d)(1) and
(d)(2) of this section will be considered met if the person required to
keep such records is ready at all times to provide, and immediately
provides in the same city as that in which such person’s commodity
futures, retail forex, commodity option, or swap books and records are
maintained, at the expense of such person, reproduced copies which show
the records as specified in paragraphs (b)(1) and (b)(2) of this
section, on request of any representatives of the Commission or the
U.S. Department of Justice.
(e) Members of derivatives clearing organizations clearing trades
executed on designated contract markets and swap execution facilities.
In the daily record or journal required to be kept under paragraph
(d)(3) of this section, each member of a derivatives clearing
organization clearing trades executed on a designated contract market
or swap execution facility shall also show the floor broker or floor
trader executing each transaction, the opposite floor broker or floor
trader, and the opposite clearing member with whom it was made.
(f) Members of designated contract markets. (1) Each member of a
designated contract market who, in the place provided by the designated
contract market for the meeting of persons similarly engaged, executes
purchases or sales of any commodity for future delivery, commodity
option, or swap on or subject to the rules of such designated contract
market, shall prepare regularly and promptly a trading card or other
record showing such purchases and sales. Such trading card or record
shall show the member’s name, the name of the clearing member,
transaction date, time, quantity, and, as applicable, underlying
commodity, contract for future delivery, swap or physical, price or
premium, delivery month or expiration date, whether the transaction
involved a put or a call, and strike price. Such trading card or other
record shall also clearly identify the opposite floor broker or floor
trader with whom the transaction was executed, and the opposite
clearing member (if such opposite clearing member is made known to the
member).
(2) Each member of a designated contract market recording purchases
and sales on trading cards must record such purchases and sales in
exact chronological order of execution on sequential lines of the
trading card without skipping lines between trades; Provided, however,
That if lines remain after the last execution recorded on a trading
card, the remaining lines must be marked through.
(3) Each member of a designated contract market must identify on
his or her trading cards the purchases and sales executed during the
opening and closing periods designated by the designated contract
market.
(4) Trading cards prepared by a member of a designated contract
market must contain:
(i) Pre-printed member identification or other unique identifying
information which would permit the trading cards of one member to be
distinguished from those of all other members;
(ii) Pre-printed sequence numbers to permit the intra-day
sequencing of the cards; and
(iii) Unique and pre-printed identifying information which would
distinguish each of the trading cards prepared by the member from other
such trading cards for no less than a one-week period.
(5) Trading cards prepared by a member of a designated contract
market and submitted pursuant to paragraph (f)(7)(i) of this section
must be time-stamped promptly to the nearest minute upon collection by
either the designated contract market or the relevant clearing member.
(6) Each member of a designated contract market shall be
accountable for all trading cards prepared in exact numerical sequence,
whether or not
[[Page 33094]]
such trading cards are relied on as original source documents.
(7) Trading records prepared by a member of a designated contract
market must:
(i) Be submitted to designated contract market personnel or the
clearing member within 15 minutes of designated intervals not to exceed
30 minutes, commencing with the beginning of each trading session. The
time period for submission of trading records after the close of
trading in each market shall not exceed 15 minutes from the close. Such
documents should nevertheless be submitted as often as is practicable
to the designated contract market or relevant clearing member; and
(ii) Be completed in non-erasable ink. A member may correct any
errors by crossing out erroneous information without obliterating or
otherwise making illegible any of the originally recorded information.
With regard to trading cards only, a member may correct erroneous
information by rewriting the trading card; Provided, however, that the
member must submit a ply of the trading card, or in the absence of
plies the original trading card, that is subsequently rewritten in
accordance with the collection schedule for trading cards and provided
further, that the member is accountable for any trading card that
subsequently is rewritten pursuant to paragraph (f)(6) of this section.
(8) Each member of a designated contract market must use a new
trading card at the beginning of each designated 30-minute interval (or
such lesser interval as may be determined appropriate) or as may be
required pursuant hereto.
(g) Members of derivatives clearing organizations clearing trades
executed on designated contract markets and swap execution facilities.
(1) Each member of a derivatives clearing organization clearing trades
executed on a designated contract market or swap execution facility
shall maintain a single record which shall show for each futures,
option or swap trade: the transaction date, time, quantity, and, as
applicable, underlying commodity, contract for future delivery, swap or
physical, price or premium, delivery month or expiration date, whether
the transaction involved a put or a call, strike price, floor broker or
floor trader buying, clearing member buying, floor broker or floor
trader selling, clearing member selling, and symbols indicating the
buying and selling customer types. The customer type indicator shall
show, with respect to each person executing the trade, whether such
person:
(i) Was trading for his or her own account, or an account for which
he or she has discretion;
(ii) Was trading for his or her clearing member’s house account;
(iii) Was trading for another member present on the exchange floor,
or an account controlled by such other member; or
(iv) Was trading for any other type of customer.
(2) The record required by this paragraph (g) shall also show, by
appropriate and uniform symbols, any transaction which is made non-
competitively in accordance with the provisions of subpart J of part 38
of this chapter, and trades cleared on dates other than the date of
execution. Except as otherwise approved by the Commission for good
cause shown, the record required by this paragraph (g) shall be
maintained in a format and coding structure approved by the
Commission–
(i) In hard copy or on microfilm as specified in Sec. 1.31, and
(ii) For 60 days in computer-readable form on compatible magnetic
tapes or discs.
18. Revise Sec. 1.36 to read as follows:
Sec. 1.36 Record of securities and property received from customers.
(a) Each futures commission merchant and each retail foreign
exchange dealer shall maintain, as provided in Sec. 1.31, a record of
all securities and property received from customers or retail forex
customers in lieu of money to margin, purchase, guarantee, or secure
the commodity interests of such customers or retail forex customers.
Such record shall show separately for each customer or retail forex
customer: A description of the securities or property received; the
name and address of such customer or retail forex customer; the dates
when the securities or property were received; the identity of the
depositories or other places where such securities or property are
segregated or held; the dates of deposits and withdrawals from such
depositories; and the dates of return of such securities or property to
such customer or retail forex customer, or other disposition thereof,
together with the facts and circumstances of such other disposition. In
the event any futures commission merchant deposits with a clearing
organization, directly or with a bank or trust company acting as
custodian for such clearing organization, securities and/or property
which belong to a particular customer, such futures commission merchant
shall obtain written acknowledgment from such clearing organization
that it was informed that such securities or property belong to
customers of the futures commission merchant making the deposit. Such
acknowledgment shall be retained as provided in Sec. 1.31.
(b) Each clearing organization which receives from members
securities or property belonging to particular customers of such
members in lieu of money to margin, purchase, guarantee, or secure the
commodity interests of such customers, or receives notice that any such
securities or property have been received by a bank or trust company
acting as custodian for such clearing organization, shall maintain, as
provided in Sec. 1.31, a record which will show separately for each
member, the dates when such securities or property were received, the
identity of the depositories or other places where such securities or
property are segregated, the dates such securities or property were
returned to the member, or otherwise disposed of, together with the
facts and circumstances of such other disposition including the
authorization therefor.
19. Revise Sec. 1.37 to read as follows:
Sec. 1.37 Customer’s name, address, and occupation recorded; record
of guarantor or controller of account.
(a) Each futures commission merchant, retail foreign exchange
dealer, introducing broker, and member of a contract market shall keep
a record in permanent form which shall show for each commodity interest
account carried or introduced by it the true name and address of the
person for whom such account is carried or introduced and the principal
occupation or business of such person as well as the name of any other
person guaranteeing such account or exercising any trading control with
respect to such account. For each such commodity option account, the
records kept by such futures commission merchant, introducing broker,
and member of a contract market must also show the name of the person
who has solicited and is responsible for each customer’s account or
assign account numbers in such a manner to identify that person.
(b) As of the close of the market each day, each futures commission
merchant which carries an account for another futures commission
merchant, foreign broker (as defined in Sec. 15.00 of this chapter),
member of a contract market, or other person, on an omnibus basis shall
maintain a daily record for each such omnibus account of the total open
long contracts and the total open short contracts in each future and in
each swap and, for commodity option transactions, the total open put
options purchased, the total open put options granted, the total open
call options
[[Page 33095]]
purchased, and the total open call options granted for each commodity
option expiration date.
(c) Each designated contract market and swap execution facility
shall keep a record in permanent form, which shall show the true name,
address, and principal occupation or business of any foreign trader
executing transactions on the facility or exchange. In addition, upon
request, a designated contract market or swap execution facility shall
provide to the Commission information regarding the name of any person
guaranteeing such transactions or exercising any control over the
trading of such foreign trader.
(d) Paragraph (c) of this section shall not apply to a designated
contract market or swap execution facility on which transactions in
futures, swaps or options (other than swaps) contracts of foreign
traders are executed through, or the resulting transactions are
maintained in, accounts carried by a registered futures commission
merchant or introduced by a registered introducing broker subject to
the provisions of paragraph (a) of this section.
20. Amend Sec. 1.39 by revising paragraph (a) introductory text,
(a)(1)(ii), (a)(2), (a)(3), (a)(4), (b) introductory text, (b)(2), and
(c), to read as follows:
Sec. 1.39 Simultaneous buying and selling orders of different
principals; execution of, for and between principals.
(a) Conditions and requirements. A member of a contract market or a
swap execution facility who shall have at the same time both buying and
selling orders of different principals for the same swap, commodity for
future delivery in the same delivery month or the same option (both
puts or both calls, with the same underlying contract for future
delivery or the same underlying physical, expiration date and strike
price) may execute such orders for and directly between such principals
at the market price, if in conformity with written rules of such
contract market or swap execution facility which have been approved by
or self-certified to the Commission, and:
(1) * * *
(ii) When in non-pit trading in swaps or contracts of sale for
future delivery, bids and offers are posted on a board, such member:
(A) Pursuant to such buying order posts a bid on the board and,
incident to the execution of such selling order, accepts such bid and
all other bids posted at prices equal to or higher than the bid posted
by him, or
(B) Pursuant to such selling order posts an offer on the board and,
incident to the execution of such buying order, accepts such offer and
all other offers posted at prices equal to or lower than the offer
posted by him;
(2) Such member executes such orders in the presence of an official
representative of such contract market designated to observe such
transactions or on a system or platform accessible by an official
representative of such swap execution facility and, by appropriate
descriptive words or symbol, clearly identifies all such transactions
on his trading card or other record, made at the time of execution, and
notes thereon the exact time of execution and promptly presents or
makes available said record to such official representative for
verification and initialing, as appropriate;
(3) Such swap execution facility or contract market keeps a record
in permanent form of each such transaction showing all transaction
details required to be captured by the Act, Commission rule or
regulation; and
(4) Neither the futures commission merchant, other registrant
receiving nor the member executing such orders has any interest
therein, directly or indirectly, except as a fiduciary.
(b) Large order execution procedures. A member of a contract market
or a swap execution facility may execute simultaneous buying and
selling orders of different principals directly between the principals
in compliance with Commission regulations and large order execution
procedures established by written rules of the contract market or swap
execution facility that have been approved by or self-certified to the
Commission: Provided, That, to the extent such large order execution
procedures do not meet the conditions and requirements of paragraph (a)
of this section, the contract market or swap execution facility has
petitioned the Commission for, and the Commission has granted, an
exemption from the conditions and requirements of paragraph (a) of this
section. Any such petition must be accompanied by proposed contract
market or swap execution facility rules to implement the large order
execution procedures. The petition shall include:
* * * * *
(2) A description of a special surveillance program that would be
followed by the contract market or swap execution facility in
monitoring the large order execution procedures.
* * * * *
(c) Not deemed filling orders by offset. The execution of orders in
compliance with the conditions herein set forth will not be deemed to
constitute the filling of orders by offset within the meaning of
section 4b(a) of the Act.
21. Revise Sec. 1.40 to read as follows:
Sec. 1.40 Crop, market information letters, reports; copies required.
Each futures commission merchant, each retail foreign exchange
dealer, each introducing broker, each member of a contract market and
each eligible contract participant with trading privileges on a swap
execution facility shall, upon request, furnish or cause to be
furnished to the Commission a true copy of any letter, circular,
telecommunication, or report published or given general circulation by
such futures commission merchant, retail foreign exchange dealer,
introducing broker, member or eligible contract participant which
concerns crop or market information or conditions that affect or tend
to affect the price of any commodity, including any exchange rate, and
the true source of or authority for the information contained therein.
Sec. 1.44 [Removed and Reserved]
22. Remove and reserve Sec. 1.44.
23. Amend Sec. 1.46 by revising paragraph (a)(1) introductory text
and paragraphs (a)(1)(iii), (a)(1)(iv), (a)(2)(iii), (a)(2)(iv), and
(b), to read as follows:
Sec. 1.46 Application and closing out of offsetting long and short
positions.
(a) Application of purchases and sales. (1) Except with respect to
purchases or sales which are for omnibus accounts, or where the
customer or account controller has instructed otherwise, any futures
commission merchant who, on or subject to the rules of a designated
contract market:
* * * * *
(iii) Purchases a put or call option for the account of any
customer when the account of such customer at the time of such purchase
has a short put or call option position with the same underlying
futures contract or same underlying physical, strike price, expiration
date and contract market as that purchased; or
(iv) Sells a put or call option for the account of any customer
when the account of such customer at the time of such sale has a long
put or call option position with the same underlying futures contract
or same underlying physical, strike price, expiration date and contract
market as that sold–shall on the same day apply such purchase or sale
against such previously held short or long futures or option position,
as the case may be, and shall, for futures transactions, promptly
furnish such
[[Page 33096]]
customer a statement showing the financial result of the transactions
involved and, if applicable, that the account was introduced to the
futures commission merchant by an introducing broker and the names of
the futures commission merchant and introducing broker.
(2) * * *
(iii) Purchases a put or call option involving foreign currency for
the account of any customer when the account of such customer at the
time of such purchase has a short put or call option position with the
same underlying currency, strike price, and expiration date as that
purchased; or
(iv) Sells a put or call option involving foreign currency for the
account of any customer when the account of such customer at the time
of such sale has a long put or call option position with the same
underlying currency, strike price, and expiration date as that sold–
shall immediately apply such purchase or sale against such previously
held opposite transaction, and shall promptly furnish such retail forex
customer a statement showing the financial result of the transactions
involved and, if applicable, that the account was introduced to the
futures commission merchant or retail foreign exchange dealer by an
introducing broker and the names of the futures commission merchant or
retail foreign exchange dealer, and the introducing broker.
(b) Close-out against oldest open position. In all instances
wherein the short or long futures, retail forex transaction or option
position in such customer’s or retail forex customer’s account
immediately prior to such offsetting purchase or sale is greater than
the quantity purchased or sold, the futures commission merchant or
retail foreign exchange dealer shall apply such offsetting purchase or
sale to the oldest portion of the previously held short or long
position: Provided, That upon specific instructions from the customer
the offsetting transaction shall be applied as specified by the
customer without regard to the date of acquisition of the previously
held position; and Provided, further, That a futures commission
merchant or retail foreign exchange dealer, if permitted by the rules
of a registered futures association, may offset, at the customer’s
request, retail forex transactions of the same size, even if the
customer holds other transactions of a different size, but in each case
must offset the transaction against the oldest transaction of the same
size. Such instructions may also be accepted from any person who, by
power of attorney or otherwise, actually directs trading in the
customer’s or retail forex customer’s account unless the person
directing the trading is the futures commission merchant or retail
foreign exchange dealer (including any partner thereof), or is an
officer, employee, or agent of the futures commission merchant or
retail foreign exchange dealer. With respect to every such offsetting
transaction that, in accordance with such specific instructions, is not
applied to the oldest portion of the previously held position, the
futures commission merchant or retail foreign exchange dealer shall
clearly show on the statement issued to the customer or retail forex
customer in connection with the transaction, that because of the
specific instructions given by or on behalf of the customer or retail
forex customer the transaction was not applied in the usual manner,
i.e., against the oldest portion of the previously held position.
However, no such showing need be made if the futures commission
merchant or retail foreign exchange dealer has received such specific
instructions in writing from the customer or retail forex customer for
whom such account is carried.
* * * * *
24. Revise paragraph (b)(1)(iii) of Sec. 1.49 to read as follows:
Sec. 1.49 Denomination of customer funds and location of
depositories.
* * * * *
(b) * * * (1) * * *
(iii) In a currency in which funds have accrued to the customer as
a result of trading conducted on a designated contract market, to the
extent of such accruals.
* * * * *
Sec. 1.53 [Removed and Reserved]
25. Remove and reserve Sec. 1.53.
26. Amend Sec. 1.57 by revising paragraph (a)(1), (a)(2)
introductory text, (a)(2)(ii), (c) introductory text, (c)(2),
(c)(4)(i), and (c)(4)(iv), to read as follows:
Sec. 1.57 Operations and activities of introducing brokers.
(a) * * *
(1) Open and carry each customer’s account with a carrying futures
commission merchant on a fully-disclosed basis: Provided, however, That
an introducing broker which has entered into a guarantee agreement with
a futures commission merchant in accordance with the provisions of
Sec. 1.10(j) of this part must open and carry such customer’s account
with such guarantor futures commission merchant on a fully-disclosed
basis; and
(2) Transmit promptly for execution all customer orders to:
* * * * *
(ii) A floor broker, if the introducing broker identifies its
carrying futures commission merchant and that carrying futures
commission merchant is also the clearing member with respect to the
customer’s order.
* * * * *
(c) An introducing broker may not accept any money, securities or
property (or extend credit in lieu thereof) to margin, guarantee or
secure any trades or contracts of customers, or any money, securities
or property accruing as a result of such trades or contracts:
Provided, however, That an introducing broker may deposit a check
in a qualifying account or forward a check drawn by a customer if:
* * * * *
(2) The check is payable to the futures commission merchant
carrying the customer’s account;
* * * * *
(4) * * *
(i) Which is maintained in an account name which clearly identifies
the funds therein as belonging to customers of the futures commission
merchant carrying the customer’s account;
* * * * *
(iv) For which the bank or trust company provides the futures
commission merchant carrying the customer’s account with a written
acknowledgment, which the futures commission merchant must retain in
its files in accordance with Sec. 1.31, that it was informed that the
funds deposited therein are those of customers and are being held in
accordance with the provisions of the Act and these regulations.
27. Amend Sec. 1.59 by revising paragraphs (a)(4)(i), (a)(5),
(a)(7), (a)(8), (a)(9) introductory text, (a)(10), (b)(1) introductory
text, (b)(1)(i)(A), (b)(1)(i)(C), and (c), to read as follows:
Sec. 1.59 Activities of self-regulatory organization employees,
governing board members, committee members and consultants.
(a) * * *
(4) * * *
(i) Any governing board member compensated by a self-regulatory
organization solely for governing board activities; or
* * * * *
(5) Material information means information which, if such
information were publicly known, would be considered important by a
reasonable person in deciding whether to trade a particular commodity
interest on a
[[Page 33097]]
contract market or a swap execution facility, or to clear a swap
contract through a derivatives clearing organization. As used in this
section, “material information” includes, but is not limited to,
information relating to present or anticipated cash positions,
commodity interests, trading strategies, the financial condition of
members of self-regulatory organizations or members of linked exchanges
or their customers, or the regulatory actions or proposed regulatory
actions of a self-regulatory organization or a linked exchange.
* * * * *
(7) Linked exchange means:
(i) Any board of trade, exchange or market outside the United
States, its territories or possessions, which has an agreement with a
contract market or swap execution facility in the United States that
permits positions in a commodity interest which have been established
on one of the two markets to be liquidated on the other market;
(ii) Any board of trade, exchange or market outside the United
States, its territories or possessions, the products of which are
listed on a United States contract market, swap execution facility, or
a trading facility thereof;
(iii) Any securities exchange, the products of which are held as
margin in a commodity account or cleared by a securities clearing
organization pursuant to a cross-margining arrangement with a futures
clearing organization; or
(iv) Any clearing organization which clears the products of any of
the foregoing markets.
(8) Commodity interest means any commodity futures, commodity
option or swap contract traded on or subject to the rules of a contract
market, a swap execution facility or linked exchange, or cleared by a
derivatives clearing organization, or cash commodities traded on or
subject to the rules of a board of trade which has been designated as a
contract market.
(9) Related commodity interest means any commodity interest which
is traded on or subject to the rules of a contract market, swap
execution facility, linked exchange, or other board of trade, exchange,
or market, or cleared by a derivatives clearing organization, other
than the self-regulatory organization by which a person is employed,
and with respect to which:
* * * * *
(10) Pooled investment vehicle means a trading vehicle organized
and operated as a commodity pool within the meaning of Sec. 4.10(d) of
this chapter, and whose units of participation have been registered
under the Securities Act of 1933, or a trading vehicle for which Sec.
4.5 of this chapter makes available relief from regulation as a
commodity pool operator, i.e., registered investment companies,
insurance company separate accounts, bank trust funds, and certain
pension plans.
(b) Employees of self-regulatory organizations; Self-regulatory
organization rules. (1) Each self-regulatory organization must maintain
in effect rules which have been submitted to the Commission pursuant to
section 5c(c) of the Act and part 40 of this chapter (or, pursuant to
section 17(j) of the Act in the case of a registered futures
association) that, at a minimum, prohibit:
(i) * * *
(A) Trading, directly or indirectly, in any commodity interest
traded on or cleared by the employing contract market, swap execution
facility, or clearing organization;
* * * * *
(C) Trading, directly or indirectly, in a commodity interest traded
on contract markets or swap execution facilities or cleared by
derivatives clearing organizations other than the employing self-
regulatory organization if the employee has access to material, non-
public information concerning such commodity interest;
* * * * *
(c) Governing board members, committee members, and consultants;
Registered futures association rules. Each registered futures
association must maintain in effect rules which have been submitted to
the Commission pursuant to section 17(j) of the Act which provide that
no governing board member, committee member, or consultant shall use or
disclose –for any purpose other than the performance of official
duties as a governing board member, committee member, or consultant–
material, non-public information obtained as a result of the
performance of such person’s official duties.
* * * * *
Sec. 1.62 [Removed and Reserved]
28. Remove and reserve Sec. 1.62.
29. Amend Sec. 1.63 by revising paragraph (a)(1), (b) introductory
text and (d) to read as follows:
Sec. 1.63 Service on self-regulatory organization governing boards or
committees by persons with disciplinary histories.
(a) * * *
(1) Self-regulatory organization means a “self-regulatory
organization” as defined in Sec. 1.3(ee) of this chapter, and
includes a “clearing organization” as defined in Sec. 1.3(d) of this
chapter, except as defined in paragraph (b)(6) of this section.
* * * * *
(b) Each self-regulatory organization must maintain in effect rules
which have been submitted to the Commission pursuant to section 5c(c)
of the Act and part 40 of this chapter or, in the case of a registered
futures association, pursuant to section 17(j) of the Act, that render
a person ineligible to serve on its disciplinary committees,
arbitration panels, oversight panels or governing board who:
* * * * *
(d) Each self-regulatory organization shall submit to the
Commission a schedule listing all those rule violations which
constitute disciplinary offenses as defined in paragraph (a)(6)(i) of
this section and to the extent necessary to reflect revisions shall
submit an amended schedule within thirty days of the end of each
calendar year. Each self-regulatory organization must maintain and keep
current the schedule required by this section, and post the schedule on
the self-regulatory organization’s website so that it is in a public
place designed to provide notice to members and otherwise ensure its
availability to the general public.
* * * * *
30. Revise paragraph (a)(1) and paragraph (b) of Sec. 1.67 to read
as follows:
Sec. 1.67 Notification of final disciplinary action involving
financial harm to a customer.
(a) * * *
(1) Final disciplinary action means any decision by or settlement
with a contract market or swap execution facility in a disciplinary
matter which cannot be further appealed at the contract market or swap
execution facility, is not subject to the stay of the Commission or a
court of competent jurisdiction, and has not been reversed by the
Commission or any court of competent jurisdiction.
* * * * *
(b) Upon any final disciplinary action in which a contract market
or swap execution facility finds that a member has committed a rule
violation that involved a transaction for a customer, whether executed
or not, and that resulted in financial harm to the customer:
(1)(i) The contract market or swap execution facility shall
promptly provide written notice of the disciplinary action to the
futures commission merchant or other registrant; and
[[Page 33098]]
(ii) A futures commission merchant or other registrant that
receives a notice, under paragraph (b)(1)(i) of this section shall
promptly provide written notice of the disciplinary action to the
customer as disclosed on its books and records. If the customer is
another futures commission merchant or other registrant, such futures
commission merchant or other registrant shall promptly provide notice
to the customer.
(2) A written notice required by paragraph (b)(1) of this section
must include the principal facts of the disciplinary action and a
statement that the contract market or swap execution facility has found
that the member has committed a rule violation that involved a
transaction for the customer, whether executed or not, and that
resulted in financial harm to the customer. For the purposes of this
paragraph, a notice which includes the information listed in Sec.
9.11(b) of this chapter shall be deemed to include the principal facts
of the disciplinary action thereof.
Sec. 1.68 [Removed and Reserved]
31. Remove and reserve Sec. 1.68.
32. Amend Appendix B to part 1 by revising paragraph (b) to read as
follows:
Appendix B to Part 1–Fees for Contract Market Rule Enforcement Reviews
and Financial Reviews
* * * * *
(b) The Commission determines fees charged to exchanges based
upon a formula that considers both actual costs and trading volume.
* * * * *
Appendix C to Part 1–[Removed and Reserved]
33. Remove and reserve Appendix C to part 1.
PART 5–OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS
34a. The authority citation for part 5 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19,
21, 23.
34b. Revise paragraphs (k) and (m) of Sec. 5.1 to read as follows:
Sec. 5.1 Definitions.
* * * * *
(k) Retail forex customer means a person, other than an eligible
contract participant as defined in section 1a(18) of the Act, acting on
its own behalf and trading in any account, agreement, contract or
transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.
* * * * *
(m) Retail forex transaction means any account, agreement, contract
or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the
Act. A retail forex transaction does not include an account, agreement,
contract or transaction in foreign currency that is a contract of sale
of a commodity for future delivery (or an option thereon) that is
executed, traded on or otherwise subject to the rules of a contract
market designated pursuant to section 5(a) of the Act.
PART 7–CONTRACT MARKET RULES ALTERED OR SUPPLEMENTED BY THE
COMMISSION
35. Revise part 7 to read as follows:
PART 7–REGISTERED ENTITY RULES ALTERED OR SUPPLEMENTED BY THE
COMMISSION
Authority: 7 U.S.C. 7a-2(c) and 12a(7), as amended by Title VII
of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010).
Subpart A–General Provisions
Sec. 7.1. Scope of rules.
This part sets forth registered entity rules altered or
supplemented by the Commission pursuant to section 8a(7) of the Act.
Subpart B–[Reserved]
Subpart C–[Reserved]
PART 8–[REMOVED AND RESERVED]
36. Remove and reserve part 8.
PART 15–REPORTS–GENERAL PROVISIONS
37a. The authority citation for part 15 is revised to read as
follows:
Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 9,
12a, 19, and 21, as amended by Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124
Stat. 1376 (2010).
37b. Revise paragraphs (a), (e), (f), (g) and (h) of Sec. 15.05 to
read as follows:
Sec. 15.05 Designation of agent for foreign persons.
(a) For purposes of this section, the term “futures contract”
means any contract for the purchase or sale of any commodity for future
delivery, or a contract identified under Sec. 36.3(c)(1)(i) traded on
an electronic trading facility operating in reliance on the exemption
set forth in Sec. 36.3 of this chapter, traded or executed on or
subject to the rules of any designated contract market, or for the
purposes of paragraph (i) of this section, a reporting market
(including all agreements, contracts and transactions that are treated
by a clearing organization as fungible with such contracts); the term
“option contract” means any contract for the purchase or sale of a
commodity option, or as applicable, any other instrument subject to the
Act, traded or executed on or subject to the rules of any designated
contract market, or for the purposes of paragraph (i) of this section,
a reporting market (including all agreements, contracts and
transactions that are treated by a clearing organization as fungible
with such contracts); the term “customer” means any person for whose
benefit a foreign broker makes or causes to be made any futures
contract or option contract; and the term “communication” means any
summons, complaint, order, subpoena, special call, request for
information, or notice, as well as any other written document or
correspondence.
* * * * *
(e) Any designated contract market that permits a foreign broker to
intermediate contracts, agreements or transactions, or permits a
foreign trader to effect contracts, agreements or transactions on the
facility or exchange, shall be deemed to be the agent of the foreign
broker and any of its customers for whom the transactions were
executed, or the foreign trader, for purposes of accepting delivery and
service of any communication issued by or on behalf of the Commission
to the foreign broker, any of its customers or the foreign trader with
respect to any contracts, agreements or transactions executed by the
foreign broker or the foreign trader on the designated contract market.
Service or delivery of any communication issued by or on behalf of the
Commission to a designated contract market shall constitute valid and
effective service upon the foreign broker, any of its customers or the
foreign trader. A designated contract market which has been served
with, or to which there has been delivered, a communication issued by
or on behalf of the Commission to a foreign broker, any of its
customers or a foreign trader shall transmit the communication promptly
and in a manner which is reasonable under the circumstances, or in a
manner specified by the Commission in the communication, to the foreign
broker, any of its customers or the foreign trader.
(f) It shall be unlawful for any designated contract market to
permit a foreign broker, any of its customers or a foreign trader to
effect contracts, agreements or transactions on the facility unless the
designated contract
[[Page 33099]]
market prior thereto informs the foreign broker, any of its customers
or the foreign trader, in any reasonable manner the facility deems to
be appropriate, of the requirements of this section.
(g) The requirements of paragraphs (e) and (f) of this section
shall not apply to any contracts, transactions or agreements traded on
any designated contract market if the foreign broker, any of its
customers or the foreign trader has duly executed and maintains in
effect a written agency agreement in compliance with this paragraph
with a person domiciled in the United States and has provided a copy of
the agreement to the designated contract market prior to effecting any
contract, agreement or transaction on the facility. This agreement must
authorize the person domiciled in the United States to serve as the
agent of the foreign broker, any of its customers or the foreign trader
for purposes of accepting delivery and service of all communications
issued by or on behalf of the Commission to the foreign broker, any of
its customers or the foreign trader and must provide an address in the
United States where the agent will accept delivery and service of
communications from the Commission. This agreement must be filed with
the Commission by the designated contract market prior to permitting
the foreign broker, any of its customers or the foreign trader to
effect any transactions in futures or option contracts. Unless
otherwise specified by the Commission, the agreements required to be
filed with the Commission shall be filed with the Secretary of the
Commission at Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581. A foreign broker, any of its customers or a
foreign trader shall notify the Commission immediately if the written
agency agreement is terminated, revoked, or is otherwise no longer in
effect. If the designated contract market knows or should know that the
agreement has expired, been terminated, or is no longer in effect, the
designated contract market shall notify the Secretary of the Commission
immediately. If the written agency agreement expires, terminates, or is
not in effect, the designated contract market and the foreign broker,
any of its customers or the foreign trader are subject to the
provisions of paragraphs (e) and (f) of this section.
(h) The provisions of paragraphs (e), (f) and (g) of this section
shall not apply to a designated contract market on which all
transactions of foreign brokers, their customers or foreign traders in
futures or option contracts are executed through, or the resulting
transactions are maintained in, accounts carried by a registered
futures commission merchant or introduced by a registered introducing
broker subject to the provisions of paragraphs (a), (b), (c) and (d) of
this section.
* * * * *
PART 18–REPORTS BY TRADERS
38a. The authority citation for part 18 is revised to read as
follows:
Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a
and 19, as amended by Title VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376
(2010); 5 U.S.C. 552 and 552(b), unless otherwise noted.
38b. Revise paragraphs (a)(2), (a)(3), and (a)(4) of Sec. 18.05 to
read as follows:
Sec. 18.05 Maintenance of books and records.
(a) * * *
(2) Executed over the counter or pursuant to part 35 of this
chapter;
(3) On exempt commercial markets operating under a Commission
grandfather relief order issued pursuant to Section 723(c)(2)(B) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-
203, 124 Stat. 1376 (2010));
(4) On exempt boards of trade operating under a Commission
grandfather relief order issued pursuant to Section 734(c)(2) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-
203, 124 Stat. 1376 (2010)); and
* * * * *
PART 21–SPECIAL CALLS
39a. The authority citation for part 21 is revised to read as
follows:
Authority: 7 U.S.C. 1a, 2, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7,
12a, 19 and 21, as amended by Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124
Stat. 1376 (2010); 5 U.S.C. 552 and 552(b), unless otherwise noted.
39b. Revise paragraph (b) of Sec. 21.03 to read as follows:
Sec. 21.03 Selected special calls–duties of foreign brokers,
domestic and foreign traders, futures commission merchants, clearing
members, introducing brokers, and reporting markets.
* * * * *
(b) It shall be unlawful for a futures commission merchant to open
a futures or options account or to effect transactions in futures or
options contracts for an existing account, or for an introducing broker
to introduce such an account, for any customer for whom the futures
commission merchant or introducing broker is required to provide the
explanation provided for in Sec. 15.05(c) of this chapter, or for a
reporting market that is a registered entity under section 1a(40)(F) of
the Act, to cause to open an account, or to cause transactions to be
effected, in a contract traded in reliance on a Commission grandfather
relief order issued pursuant to Section 723(c)(2)(B) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124
Stat. 1376 (2010)), for an existing account for any person that is a
foreign clearing member or foreign trader, until the futures commission
merchant, introducing broker, clearing member or reporting market has
explained fully to the customer, in any manner that such person deems
appropriate, the provisions of this section.
* * * * *
PART 36–EXEMPT MARKETS
40a. The authority citation for part 36 is revised to read as
follows:
Authority: 7 U.S.C. 2, 6, 6c and 12a, as amended by Title VII
of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010); Sections 723(c)(2)(B) and
734(c)(2), Pub. L. 111-203, 124 Stat. 1376 (2010).
40b. Section 36.1 is revised to read as follows:
Sec. 36.1 Scope.
The provisions of this part apply to any board of trade or
electronic trading facility that operates as:
(a) An exempt commercial market operating under a grandfather
relief order issued by the Commission pursuant to Section 723(c)(2)(B)
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.
L. 111-203, 124 Stat. 1376 (2010)), or
(b) An exempt board of trade operating under a grandfather relief
order issued by the Commission pursuant to Section 734(c)(2) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-
203, 124 Stat. 1376 (2010)).
41. Amend Sec. 36.2 by:
a. Revising paragraph (a) introductory text and (a)(2)(i);
b. Adding paragraph (a)(3); and
c. Revising paragraph (b) introductory text, (c)(1), (c)(2)(i)
introductory text, (c)(2)(ii) introductory text, (c)(2)(iii),
(c)(2)(iv)(A) introductory text, and (c)(3), to read as follows:
Sec. 36.2 Exempt boards of trade.
(a) Eligible commodities. Commodities eligible to be traded by an
exempt board of trade are:
* * * * *
(2) * * *
(i) The commodities defined in section 1a(19) of the Act as
“excluded commodities” (other than a security,
[[Page 33100]]
including any group or index thereof or any interest in, or based on
the value of, any security or group or index of securities); and
* * * * *
(3) Such contracts must be entered into only between persons that
are eligible contract participants, as defined in section 1a(18) of the
Act and as further defined by the Commission, at the time at which the
persons entered into the contract.
(b) Notification. Boards of trade operating as exempt boards of
trade shall maintain on file with the Secretary of the Commission at
the Commission’s Washington, DC headquarters, in electronic form, a
“Notification of Operation as an Exempt Board of Trade,” and it shall
include:
* * * * *
(c) Additional requirements–(1) Prohibited representation. A board
of trade that meets the criteria set forth in this section and operates
as an exempt board of trade shall not represent to any person that it
is registered with, designated, recognized, licensed or approved by the
Commission.
(2) Market data dissemination–(i) Criteria for price discovery
determination. An exempt board of trade performs a significant price
discovery function for transactions in the cash market for a commodity
underlying any agreement, contract or transaction executed or traded on
the facility when:
* * * * *
(ii) Notification. An exempt board of trade operating a market in
reliance on the criteria set forth in this section shall notify the
Commission when:
* * * * *
(iii) Price discovery determination. Following receipt of notice
under paragraph (c)(2)(ii) of this section, or on its own initiative,
the Commission may notify an exempt board of trade that the facility
appears to meet the criteria for performing a significant price
discovery function under paragraph (c)(2)(i)(A) or (B) of this section.
Before making a final price discovery determination under this
paragraph, the Commission shall provide the exempt board of trade with
an opportunity for a hearing through the submission of written data,
views and arguments. Any such written data, views and arguments shall
be filed with the Secretary of the Commission in the form and manner
and within the time specified by the Commission. After consideration of
all relevant matters, the Commission shall issue an order containing
its determination whether the facility performs a significant price
discovery function under the criteria of paragraph (c)(2)(i)(A) or (B)
of this section.
(iv) Price dissemination. (A) An exempt board of trade that the
Commission has determined performs a significant price discovery
function under paragraph (c)(2)(iii) of this section shall disseminate
publicly, and on a daily basis, all of the following information with
respect to transactions executed in reliance on the criteria set forth
in this section:
* * * * *
(3) Annual certification. A board of trade operating as an exempt
board of trade shall file with the Commission annually, no later than
the end of each calendar year, a notice that includes:
(i) A statement that it continues to operate under the exemption;
and
(ii) A certification that the information contained in the previous
Notification of Operation as an Exempt Board of Trade is still correct.
42. Section 36.3 is revised to read as follows:
Sec. 36.3 Exempt commercial markets.
(a) Eligible transactions. Agreements, contracts or transactions in
an exempt commodity eligible to be entered into on an exempt commercial
market must be:
(1) Entered into on a principal-to-principal basis solely between
persons that are eligible commercial entities, as that term is defined
in section 1a(17) of the Act, at the time the persons enter into the
agreement, contract or transaction; and
(2) Executed or traded on an electronic trading facility.
(b) Notification. An electronic trading facility relying upon the
exemption set forth in this section shall maintain on file with the
Secretary of the Commission at the Commission’s Washington, DC
headquarters, in electronic form, a “Notification of Operation as an
Exempt Commercial Market,” and it shall include the information and
certifications specified in this section.
(c) Required information–(1) All electronic trading facilities. A
facility operating in reliance on the exemption set forth in this
section on an on-going basis, must:
(i) Provide the Commission with the terms and conditions, as
defined in Sec. 40.1(i) of this chapter and product descriptions for
each agreement, contract or transaction listed by the facility in
reliance on the exemption set forth in this section, as well as trading
conventions, mechanisms and practices;
(ii) Provide the Commission with information explaining how the
facility meets the definition of “trading facility” contained in
section 1a(51) of the Act and provide the Commission with access to the
electronic trading facility’s trading protocols, in a format specified
by the Commission;
(iii) Demonstrate to the Commission that the facility requires, and
will require, with respect to all current and future agreements,
contracts and transactions, that each participant agrees to comply with
all applicable laws; that the authorized participants are “eligible
commercial entities” as defined in section 1a(17) of the Act; that all
agreements, contracts and transactions are and will be entered into
solely on a principal-to-principal basis; and that the facility has in
place a program to routinely monitor participants’ compliance with
these requirements;
(iv) At the request of the Commission, provide any other
information that the Commission, in its discretion, deems relevant to
its determination whether an agreement, contract, or transaction
performs a significant price discovery function; and
(v) File with the Commission annually, no later than the end of
each calendar year, a completed copy of CFTC Form 205–Exempt
Commercial Market Annual Certification. The information submitted in
Form 205 shall include:
(A) A statement indicating whether the electronic trading facility
continues to operate under the exemption; and
(B) A certification that affirms the accuracy of and/or updates the
information contained in the previous Notification of Operation as an
Exempt Commercial Market.
(2) Electronic trading facilities trading or executing agreements,
contracts or transactions other than significant price discovery
contracts. In addition to the requirements of paragraph (c)(1) of this
section, a facility operating in reliance on the exemption set forth in
this section, with respect to agreements, contracts or transactions
that have not been determined to perform significant price discovery
function, on an on-going basis must:
(i) Identify to the Commission those agreements, contracts and
transactions conducted on the electronic trading facility with respect
to which it intends, in good faith, to rely on the exemption set forth
in this section, and which averaged five trades per day or more over
the most recent calendar quarter; and, with respect to such agreements,
contracts and transactions, either:
(A) Submit to the Commission, in a form and manner acceptable to
the Commission, a report for each business day. Each such report shall
be electronically transmitted weekly,
[[Page 33101]]
within such time period as is acceptable to the Commission after the
end of the week to which the data applies, and shall show for each
agreement, contract or transaction executed the following information:
(1) The underlying commodity, the delivery or price-basing location
specified in the agreement, contract or transaction maturity date,
whether it is a financially settled or physically delivered instrument,
and the date of execution, time of execution, price, and quantity;
(2) Total daily volume and, if cleared, open interest;
(3) For an option instrument, in addition to the foregoing
information, the type of option (i.e., call or put) and strike prices;
and
(4) Such other information as the Commission may determine; or
(B) Provide to the Commission, in a form and manner acceptable to
the Commission, electronic access to those transactions conducted on
the electronic trading facility in reliance on the exemption set forth
in this section, and meeting the average five trades per day or more
threshold test of this section, which would allow the Commission to
compile the information set forth in paragraph (c)(2)(i)(A) of this
section and create a permanent record thereof.
(ii) Maintain a record of allegations or complaints received by the
electronic trading facility concerning instances of suspected fraud or
manipulation in trading activity conducted in reliance on the exemption
set forth in this section. The record shall contain the name of the
complainant, if provided, date of the complaint, market instrument,
substance of the allegations, and name of the person at the electronic
trading facility who received the complaint;
(iii) Provide to the Commission, in the form and manner prescribed
by the Commission, a copy of the record of each complaint received
pursuant to paragraph (c)(2)(ii) of this section that alleges, or
relates to, facts that would constitute a violation of the Act or
Commission regulations. Such copy shall be provided to the Commission
no later than 30 calendar days after the complaint is received;
Provided, however, that in the case of a complaint alleging, or
relating to, facts that would constitute an ongoing fraud or market
manipulation under the Act or Commission rules, such copy shall be
provided to the Commission within three business days after the
complaint is received; and
(iv) Provide to the Commission on a quarterly basis, within 15
calendar days of the close of each quarter, a list of each agreement,
contract or transaction executed on the electronic trading facility in
reliance on the exemption set forth in this section and indicate for
each such agreement, contract or transaction the contract terms and
conditions, the contract’s average daily trading volume, and the most
recent open interest figures.
(3) Electronic trading facilities trading or executing significant
price discovery contracts. In addition to the requirements of paragraph
(c)(1) of this section, if the Commission determines that a facility
operating in reliance on the exemption set forth in this section trades
or executes an agreement, contract or transaction that performs a
significant price discovery function, the facility must, with respect
to any significant price discovery contract, publish and provide to the
Commission the information required by Sec. 16.01 of this chapter.
(4) Delegation of authority. The Commission hereby delegates, until
the Commission orders otherwise, the authority to determine the form
and manner of submitting the required information under paragraphs
(c)(1) through (3) of this section, to the Director of the Division of
Market Oversight and such members of the Commission’s staff as the
Director may designate. The Director may submit to the Commission for
its consideration any matter that has been delegated by this paragraph.
Nothing in this paragraph prohibits the Commission, at its election,
from exercising the authority delegated in this paragraph (c)(4).
(5) Special calls. (i) All information required upon special call
of the Commission shall be transmitted at the same time and to the
office of the Commission as may be specified in the call.
(ii) Such information shall include information related to the
facility’s business as an exempt electronic trading facility in
reliance on the exemption set forth in this section, including
information relating to data entry and transaction details in respect
of transactions entered into in reliance on the exemption, as the
Commission may determine appropriate–
(A) To enforce the antifraud and anti-manipulation provisions of
the Act and Commission regulations, and
(B) To evaluate a systemic market event; or
(C) To obtain information requested by a Federal financial
regulatory authority in order to enable the regulator to fulfill its
regulatory or supervisory responsibilities.
(iii) The Commission hereby delegates, until the Commission orders
otherwise, the authority to make special calls to the Directors of the
Division of Market Oversight, the Division of Clearing and Intermediary
Oversight, and the Division of Enforcement to be exercised by each such
Director or by such other employee or employees as the Director may
designate. The Directors may submit to the Commission for its
consideration any matter that has been delegated in this paragraph
(c)(5). Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in this paragraph.
(6) Subpoenas to foreign persons. A foreign person whose access to
an electronic trading facility is limited or denied at the direction of
the Commission based on the Commission’s belief that the foreign person
has failed timely to comply with a subpoena shall have an opportunity
for a prompt hearing under the procedures provided in Sec. 21.03(b)
and (h) of this chapter.
(7) Prohibited representation. An electronic trading facility
relying upon the exemption set forth in this section, with respect to
agreements, contracts or transactions that are not significant price
discovery contracts, shall not represent to any person that it is
registered with, designated, recognized, licensed or approved by the
Commission.
(d) Significant price discovery contracts–(1) Criteria for
significant price discovery determination. The Commission may
determine, in its discretion, that an electronic trading facility
operating a market in reliance on the exemption set forth in this
section performs a significant price discovery function for
transactions in the cash market for a commodity underlying any
agreement, contract or transaction executed or traded on the facility.
In making such a determination, the Commission shall consider, as
appropriate:
(i) Price linkage. The extent to which the agreement, contract or
transaction uses or otherwise relies on a daily or final settlement
price, or other major price parameter, of a contract or contracts
listed for trading on or subject to the rules of a designated contract
market, or a significant price discovery contract traded on an
electronic trading facility, to value a position, transfer or convert a
position, cash or financially settle a position, or close out a
position;
(ii) Arbitrage. The extent to which the price for the agreement,
contract or transaction is sufficiently related to the price of a
contract or contracts listed for trading on or subject to the rules of
a
[[Page 33102]]
designated contract market, or a significant price discovery contract
or contracts trading on or subject to the rules of an electronic
trading facility, so as to permit market participants to effectively
arbitrage between the markets by simultaneously maintaining positions
or executing trades in the contracts on a frequent and recurring basis;
(iii) Material price reference. The extent to which, on a frequent
and recurring basis, bids, offers, or transactions in a commodity are
directly based on, or are determined by referencing, the prices
generated by agreements, contracts or transactions being traded or
executed on the electronic trading facility;
(iv) Material liquidity. The extent to which the volume of
agreements, contracts or transactions in the commodity being traded on
the electronic trading facility is sufficient to have a material effect
on other agreements, contracts or transactions listed for trading on or
subject to the rules of a designated contract market or an electronic
trading facility operating in reliance on the exemption set forth in
this section;
(v) Other material factors. [Reserved]
(2) Notification of possible significant price discovery contract
conditions. An electronic trading facility operating in reliance on the
exemption set forth in this section shall promptly notify the
Commission, and such notification shall be accompanied by supporting
information or data concerning any contract that:
(i) Averaged five trades per day or more over the most recent
calendar quarter; and
(ii)(A) For which the exchange sells its price information
regarding the contract to market participants or industry publications;
or
(B) Whose daily closing or settlement prices on 95 percent or more
of the days in the most recent quarter were within 2.5 percent of the
contemporaneously determined closing, settlement or other daily price
of another agreement, contract or transaction.
(3) Procedure for significant price discovery determination. Before
making a final price discovery determination under this paragraph, the
Commission shall publish notice in the Federal Register that it intends
to undertake a determination with respect to whether a particular
agreement, contract or transaction performs a significant price
discovery function and to receive written data, views and arguments
relevant to its determination from the electronic trading facility and
other interested persons. Any such written data, views and arguments
shall be filed with the Secretary of the Commission, in the form and
manner specified by the Commission, within 30 calendar days of
publication of notice in the Federal Register or within such other time
specified by the Commission. After prompt consideration of all relevant
information, the Commission shall, within a reasonable period of time
after the close of the comment period, issue an order explaining its
determination whether the agreement, contract or transaction executed
or traded by the electronic trading facility performs a significant
price discovery function under the criteria specified in paragraph
(d)(1)(i) through (v) of this section.
(4) Compliance with core principles. (i) Following the issuance of
an order by the Commission that the electronic trading facility
executes or trades an agreement, contract or transaction that performs
a significant price discovery function, the electronic trading facility
must demonstrate, with respect to that agreement, contract or
transaction, compliance with the Core Principles set forth in this
section and the applicable provisions of this part. If the Commission’s
order represents the first time it has determined that one of the
electronic trading facility’s agreements, contracts or transactions
performs a significant price discovery function, the facility must
submit a written demonstration of compliance with the Core Principles
within 90 calendar days of the date of the Commission’s order. For each
subsequent determination by the Commission that the electronic trading
facility has an additional agreement, contract or transaction that
performs a significant price discovery function, the facility must
submit a written demonstration of compliance with the Core Principles
within 30 calendar days of the date of the Commission’s order.
Attention is directed to Appendix B of this part for guidance on and
acceptable practices for complying with the Core Principles.
Submissions demonstrating how the electronic trading facility complies
with the Core Principles with respect to its significant price
discovery contract must be filed with the Secretary of the Commission
at its Washington, DC headquarters. Submissions must include the
following:
(A) A written certification that the significant price discovery
contract(s) complies with the Act and regulations thereunder;
(B) A copy of the electronic trading facility’s rules (as defined
in Sec. 40.1 of this chapter) and any technical manuals, other guides
or instructions for users of, or participants in, the market, including
minimum financial standards for members or market participants.
Subsequent rule changes must be certified by the electronic trading
facility pursuant to section 5c(c) of the Act and Sec. 40.6 of this
chapter. The electronic trading facility also may request Commission
approval of any rule changes pursuant to section 5c(c) of the Act and
Sec. 40.5 of this chapter;
(C) A description of the trading system, algorithm, security and
access limitation procedures with a timeline for an order from input
through settlement, and a copy of any system test procedures, tests
conducted, test results and contingency or disaster recovery plans;
(D) A copy of any documents pertaining to or describing the
electronic trading system’s legal status and governance structure,
including governance fitness information;
(E) An executed or executable copy of any agreements or contracts
entered into or to be entered into by the electronic trading facility,
including partnership or limited liability company, third-party
regulatory service, or member or user agreements, that enable or
empower the electronic trading facility to comply with a Core
Principle;
(F) A copy of any manual or other document describing, with
specificity, the manner in which the trading facility will conduct
trade practice, market and financial surveillance;
(G) To the extent that any of the items in paragraphs (d)(4)(ii)
through (vi) of this section raise issues that are novel, or for which
compliance with a Core Principle is not self-evident, an explanation of
how that item satisfies the applicable Core Principle or Principles.
(ii) The electronic trading facility must identify with
particularity information in the submission that will be subject to a
request for confidential treatment pursuant to Sec. 145.09 of this
chapter. The electronic trading facility must follow the procedures
specified in Sec. 40.8 of this chapter with respect to any information
in its submission for which confidential treatment is requested.
(5) Determination of compliance with core principles. The
Commission shall take into consideration differences between cleared
and uncleared significant price discovery contracts when reviewing the
implementation of the Core Principles by an electronic trading
facility. The electronic facility has reasonable discretion in
accounting for differences between cleared and uncleared significant
price discovery contracts when establishing the manner in which it
complies with the Core Principles.
[[Page 33103]]
(6) Information relating to compliance with core principles. Upon
request by the Commission, an electronic trading facility trading a
significant price discovery contract shall file with the Commission a
written demonstration, containing such supporting data, information and
documents, in the form and manner and within such time as the
Commission may specify, that the electronic trading facility is in
compliance with one or more Core Principles as specified in the
request, or that is otherwise requested by the Commission to enable the
Commission to satisfy its obligations under the Act.
(7) Enforceability. An agreement, contract or transaction entered
into on or pursuant to the rules of an electronic trading facility
trading or executing a significant price discovery contract shall not
be void, voidable, subject to rescission or otherwise invalidated or
rendered unenforceable as a result of:
(i) A violation by the electronic trading facility of the
provisions set forth in this section; or
(ii) Any Commission proceeding to alter or supplement a rule, term
or condition under section 8a(7) of the Act, to declare an emergency
under section 8a(9) of the Act, or any other proceeding the effect of
which is to alter, supplement or require an electronic trading facility
to adopt a specific term or condition, trading rule or procedure, or to
take or refrain from taking a specific action.
(8) Procedures for vacating a determination of a significant price
discovery function–(i) By the electronic trading facility. An
electronic trading facility that executes or trades an agreement,
contract or transaction that the Commission has determined performs a
significant price discovery function under paragraph (d)(3) of this
section may petition the Commission to vacate that determination. The
petition shall demonstrate that the agreement, contract or transaction
no longer performs a significant price discovery function under the
criteria specified in paragraph (d)(1), and has not done so for at
least the prior 12 months. An electronic trading facility shall not
petition for a vacation of a significant price discovery determination
more frequently than once every 12 months for any individual contract.
(ii) By the Commission. The Commission may, on its own initiative,
begin vacation proceedings if it believes that an agreement, contract
or transaction has not performed a significant price discovery function
for at least the prior 12 months.
(iii) Procedure. Before making a final determination whether an
agreement, contract or transaction has ceased to perform a significant
price discovery function, the Commission shall publish notice in the
Federal Register that it intends to undertake such a determination and
to receive written data, views and arguments relevant to its
determination from the electronic trading facility and other interested
persons. Written submissions shall be filed with the Secretary of the
Commission in the form and manner specified by the Commission, within
30 calendar days of publication of notice in the Federal Register, or
within such other time specified by the Commission. After consideration
of all relevant information, the Commission shall issue an order
explaining its determination whether the agreement, contract or
transaction has ceased to perform a significant price discovery
function and, if so, vacating its prior order. If such an order issues,
and the Commission subsequently determines, on its own initiative or
after notification by the electronic trading facility, that the
agreement, contract or transaction that was subject to the vacation
order again performs a significant price discovery function, the
electronic trading facility must comply with the Core Principles within
30 calendar days of the date of the Commission’s order.
(iv) Automatic vacation of significant price discovery
determination. Regardless of whether a proceeding to vacate has been
initiated, any significant price discovery contract that has no open
interest and in which no trading has occurred for a period of 12
complete and consecutive calendar months shall, without further
proceedings, no longer be considered to be a significant price
discovery contract.
(e) Commission Review. The Commission shall, at least annually,
evaluate as appropriate agreements, contracts or transactions conducted
on an electronic trading facility in reliance on the exemption set
forth in this section to determine whether they serve a significant
price discovery function as set forth in paragraph (d)(1) above.
43. Amend Appendix A to part 36 by revising introductory paragraph
1, the headings to paragraphs (A), (B), and (C), and paragraphs (D)2.
and (D)4., to read as follows:
Appendix A to Part 36–Guidance on Specific Price Discovery Contracts
1. There are four factors that the Commission must consider, as
appropriate, in making a determination that a contract is performing
a significant price discovery function. The four factors prescribed
by the statute are: Price Linkage; Arbitrage; Material Price
Reference; and Material Liquidity.
* * * * *
(A) MATERIAL LIQUIDITY–The extent to which the volume of
agreements, contracts or transactions in the commodity being traded
on the electronic trading facility is sufficient to have a material
effect on other agreements, contracts or transactions listed for
trading on or subject to the rules of a designated contract market,
or an electronic trading facility operating in reliance on the
exemption set forth in this section.
* * * * *
(B) PRICE LINKAGE–The extent to which the agreement, contract
or transaction uses or otherwise relies on a daily or final
settlement price, or other major price parameter, of a contract or
contracts listed for trading on or subject to the rules of a
designated contract market, or a significant price discovery
contract traded on an electronic trading facility, to value a
position, transfer or convert a position, cash or financially settle
a position, or close out a position.
* * * * *
(C) ARBITRAGE CONTRACTS–The extent to which the price for the
agreement, contract or transaction is sufficiently related to the
price of a contract or contracts listed for trading on or subject to
the rules of a designated contract market or a significant price
discovery contract or contracts trading on or subject to the rules
of an electronic trading facility, so as to permit market
participants to effectively arbitrage between the markets by
simultaneously maintaining positions or executing trades in the
contracts on a frequent and recurring basis.
* * * * *
(D) * * *
* * * * *
2. In evaluating a contract’s price discovery role as a directly
referenced price source, the Commission will perform an analysis to
determine whether cash market participants are quoting bid or offer
prices or entering into transactions at prices that are set either
explicitly or implicitly at a differential to prices established for
the contract. Cash market prices are set explicitly at a
differential to the contract being traded on the electronic trading
facility when, for instance, they are quoted in dollars and cents
above or below the reference contract’s price. Cash market prices
are set implicitly at a differential to a contract being traded on
the electronic trading facility when, for instance, they are arrived
at after adding to, or subtracting from the contract being traded on
the electronic trading facility, but then quoted or reported at a
flat price. The Commission will also consider whether cash market
entities are quoting cash prices based on a contract being traded on
the electronic trading facility on a frequent and recurring basis.
* * * * *
4. In applying this criterion, consideration will be given to
whether prices established by a contract being traded on the
electronic trading facility are reported in a widely distributed
industry publication. In making
[[Page 33104]]
this determination, the Commission will consider the reputation of
the publication within the industry, how frequently it is published,
and whether the information contained in the publication is
routinely consulted by industry participants in pricing cash market
transactions.
* * * * *
44. Revise Appendix B to Part 36 to read as follows:
Appendix B to Part 36–Guidance on, and Acceptable Practices in,
Compliance With Core Principles
1. This Appendix provides guidance on complying with the core
principles set forth in this part, both initially and on an ongoing
basis. The guidance is provided in paragraph (a) following each core
principle and can be used to demonstrate to the Commission core
principle compliance under Sec. 36.3(d)(4). The guidance for each
core principle is illustrative only of the types of matters an
electronic trading facility may address, as applicable, and is not
intended to be used as a mandatory checklist. Addressing the issues
and questions set forth in this guidance will help the Commission in
its consideration of whether the electronic trading facility is in
compliance with the core principles. A submission pursuant to Sec.
36.3(d)(4) should include an explanation or other form of
documentation demonstrating that the electronic trading facility
complies with the core principles.
2. Acceptable practices meeting selected requirements of the
core principles are set forth in paragraph (b) following each core
principle. Electronic trading facilities on which significant price
discovery contracts are traded or executed that follow the specific
practices outlined under paragraph (b) for any core principle in
this appendix will meet the selected requirements of the applicable
core principle. Paragraph (b) is for illustrative purposes only, and
does not state the exclusive means for satisfying a core principle.
CORE PRINCIPLE I–CONTRACTS NOT READILY SUSCEPTIBLE TO
MANIPULATION. The electronic trading facility shall list only
significant price discovery contracts that are not readily
susceptible to manipulation.
(a) Guidance. Upon determination by the Commission that a
contract listed for trading on an electronic trading facility is a
significant price discovery contract, the electronic trading
facility must self-certify the terms and conditions of the
significant price discovery contract under Sec. 36.3(d)(4) within
90 calendar days of the date of the Commission’s order if the
contract is the electronic trading facility’s first significant
price discovery contract; or 30 days from the date of the
Commission’s order if the contract is not the electronic trading
facility’s first significant price discovery contract. Once the
Commission determines that a contract performs a significant price
discovery function, subsequent rule changes must be self-certified
to the Commission by the electronic trading facility pursuant to
Sec. 40.6 or submitted to the Commission for review and approval
pursuant to Sec. 40.5.
(b) Acceptable practices. Guideline No.1, 17 CFR part 40,
Appendix A may be used as guidance in meeting this core principle
for significant price discovery contracts.
CORE PRINCIPLE II–MONITORING OF TRADING. The electronic trading
facility shall monitor trading in significant price discovery
contracts to prevent market manipulation, price distortion, and
disruptions of the delivery of cash-settlement process through
market surveillance, compliance and disciplinary practices and
procedures, including methods for conducting real-time monitoring of
trading and comprehensive and accurate trade reconstructions.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded or executed should,
with respect to those contracts, demonstrate a capacity to prevent
market manipulation and have trading and participation rules to
detect and deter abuses. The facility should seek to prevent market
manipulation and other trading abuses through a dedicated regulatory
department or by delegation of that function to an appropriate third
party. An electronic trading facility also should have the authority
to intervene as necessary to maintain an orderly market.
(b) Acceptable practices–(1) An acceptable trade monitoring
program. An acceptable trade monitoring program should facilitate,
on both a routine and non-routine basis, arrangements and resources
to detect and deter abuses through direct surveillance of each
significant price discovery contract. Direct surveillance of each
significant price discovery contract will generally involve the
collection of various market data, including information on
participants’ market activity. Those data should be evaluated on an
ongoing basis in order to make an appropriate regulatory response to
potential market disruptions or abusive practices. For contracts
with a substantial number of participants, an effective surveillance
program should employ a much more comprehensive large trader
reporting system.
(2) Authority to collect information and documents. The
electronic trading facility should have the authority to collect
information and documents in order to reconstruct trading for
appropriate market analysis. Appropriate market analysis should
enable the electronic trading facility to assess whether each
significant price discovery contract is responding to the forces of
supply and demand. Appropriate data usually include various
fundamental data about the underlying commodity, its supply, its
demand, and its movement through market channels. Especially
important are data related to the size and ownership of deliverable
supplies–the existing supply and the future or potential supply–
and to the pricing of the deliverable commodity relative to the
futures price and relative to the similar, but non-deliverable,
kinds of the commodity. For cash-settled contracts, it is more
appropriate to pay attention to the availability and pricing of the
commodity making up the index to which the contract will be settled,
as well as monitoring the continued suitability of the methodology
for deriving the index.
(3) Ability to assess participants’ market activity and power.
To assess participants’ activity and potential power in a market,
electronic trading facilities, with respect to significant price
discovery contracts, at a minimum should have routine access to the
positions and trading of its participants and, if applicable, should
provide for such access through its agreements with its third-party
provider of clearing services.
CORE PRINCIPLE III–ABILITY TO OBTAIN INFORMATION. The
electronic trading facility shall establish and enforce rules that
allow the electronic trading facility to obtain any necessary
information to perform any of the functions set forth in this
subparagraph, provide the information to the Commission upon
request, and have the capacity to carry out such international
information-sharing agreements as the Commission may require.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded or executed should,
with respect to those contracts, have the ability and authority to
collect information and documents on both a routine and non-routine
basis, including the examination of books and records kept by
participants. This includes having arrangements and resources for
recording full data entry and trade details and safely storing audit
trail data. An electronic trading facility should have systems
sufficient to enable it to use the information for purposes of
assisting in the prevention of participant and market abuses through
reconstruction of trading and providing evidence of any violations
of the electronic trading facility’s rules.
(b) Acceptable practices–(1) The goal of an audit trail is to
detect and deter market abuse. An effective contract audit trail
should capture and retain sufficient trade-related information to
permit electronic trading facility staff to detect trading abuses
and to reconstruct all transactions within a reasonable period of
time. An audit trail should include specialized electronic
surveillance programs that identify potentially abusive trades and
trade patterns. An acceptable audit trail must be able to track an
order from time of entry into the trading system through its fill.
The electronic trading facility must create and maintain an
electronic transaction history database that contains information
with respect to transactions executed on each significant price
discovery contract.
(2) An acceptable audit trail should include the following:
original source documents, transaction history, electronic analysis
capability, and safe storage capability. An acceptable audit trail
system would satisfy the following practices.
(i) Original source documents. Original source documents include
unalterable, sequentially identified records on which trade
execution information is originally recorded. For each order
(whether filled, unfilled or cancelled, each of which should be
retained or electronically captured), such records reflect the terms
of the order, an account identifier that relates back to the
account(s) owner(s), and the time of order entry.
[[Page 33105]]
(ii) Transaction history. A transaction history consists of an
electronic history of each transaction, including:
(A) All the data that are input into the trade entry or matching
system for the transaction to match and clear;
(B) Timing and sequencing data adequate to reconstruct trading;
and
(C) The identification of each account to which fills are
allocated.
(iii) Electronic analysis capability. An electronic analysis
capability permits sorting and presenting data included in the
transaction history so as to reconstruct trading and to identify
possible trading violations with respect to market abuse.
(iv) Safe storage capability. Safe storage capability provides
for a method of storing the data included in the transaction history
in a manner that protects the data from unauthorized alteration, as
well as from accidental erasure or other loss. Data should be
retained in the form and manner specified by the Commission or,
where no acceptable manner of retention is specified, in accordance
with the recordkeeping standards of Commission rule 1.31 (17 CFR
1.31).
(3) Arrangements and resources for the disclosure of the
obtained information and documents to the Commission upon request.
The electronic trading facility should maintain records of all
information and documents related to each significant price
discovery contract in a form and manner acceptable to the
Commission. Where no acceptable manner of maintenance is specified,
records should be maintained in accordance with the recordkeeping
standards of Commission rule 1.31 (17 CFR 1.31).
(4) The capacity to carry out appropriate information-sharing
agreements as the Commission may require. Appropriate information-
sharing agreements could be established with other markets or the
Commission can act in conjunction with the electronic trading
facility to carry out such information sharing.
CORE PRINCIPLE IV–POSITION LIMITATIONS OR ACCOUNTABILITY. The
electronic trading facility shall adopt, where necessary and
appropriate, position limitations or position accountability for
speculators in significant price discovery contracts, taking into
account positions in other agreements, contracts and transactions
that are treated by a derivatives clearing organization, whether
registered or not registered, as fungible with such significant
price discovery contracts to reduce the potential threat of market
manipulation or congestion, especially during trading in the
delivery month.
(a) Guidance. [Reserved]
(b) Acceptable practices for uncleared trades. [Reserved]
(c) Acceptable practices for cleared trades–(1) Introduction.
In order to diminish potential problems arising from excessively
large speculative positions, and to facilitate orderly liquidation
of expiring contracts, an electronic trading facility relying on the
exemption set forth in this section should adopt rules that set
position limits or accountability levels on traders’ cleared
positions in significant price discovery contracts. These position
limit rules specifically may exempt bona fide hedging; permit other
exemptions; or set limits differently by market, delivery month or
time period. For the purpose of evaluating a significant price
discovery contract’s speculative-limit program for cleared
positions, the Commission will consider the specified position
limits or accountability levels, aggregation policies, types of
exemptions allowed, methods for monitoring compliance with the
specified limits or levels, and procedures for dealing with
violations.
(2) Accounting for cleared trades–(i) Speculative-limit levels
typically should be set in terms of a trader’s combined position
involving cleared trades in a significant price discovery contract,
plus positions in agreements, contracts and transactions that are
treated by a derivatives clearing organization, whether registered
or not registered, as fungible with such significant price discovery
contract. (This circumstance typically exists where an exempt
commercial market lists a particular contract for trading but also
allows for positions in that contract to be cleared together with
positions established through bilateral or off-exchange
transactions, such as block trades, in the same contract.
Essentially, both the on-facility and off-facility transactions are
considered fungible with each other.) In this connection, the
electronic trading facility should make arrangements to ensure that
it is able to ascertain accurate position data for the market.
(ii) For significant price discovery contracts that are traded
on a cleared basis, the electronic trading facility should apply
position limits to cleared transactions in the contract.
(3) Limitations on spot-month positions. Spot-month limits
should be adopted for significant price discovery contracts to
minimize the susceptibility of the market to manipulation or price
distortions, including squeezes and corners or other abusive trading
practices.
(i) Contracts economically equivalent to an existing contract.
An electronic trading facility that lists a significant price
discovery contract that is economically-equivalent to another
significant price discovery contract or to a contract traded on a
designated contract market should set the spot-month limit for its
significant price discovery contract at the same level as that
specified for the economically-equivalent contract.
(ii) Contracts that are not economically equivalent to an
existing contract. There may not be an economically-equivalent
significant price discovery contract or economically-equivalent
contract traded on a designated contract market. In this case, the
spot-month speculative position limit should be established in the
following manner. The spot-month limit for a physical delivery
market should be based upon an analysis of deliverable supplies and
the history of spot-month liquidations. The spot-month limit for a
physical-delivery market is appropriately set at no more than 25
percent of the estimated deliverable supply. In the case where a
significant price discovery contract has a cash settlement
provision, the spot-month limit should be set at a level that
minimizes the potential for price manipulation or distortion in the
significant price discovery contract itself; in related futures and
options contracts traded on a designated contract market; in other
significant price discovery contracts; in other fungible agreements,
contracts and transactions; and in the underlying commodity.
(4) Position accountability for non-spot-month positions. The
electronic trading facility should establish for its significant
price discovery contracts non-spot individual month position
accountability levels and all-months-combined position
accountability levels. An electronic trading facility may establish
non-spot individual month position limits and all-months-combined
position limits for its significant price discovery contracts in
lieu of position accountability levels.
(i) Definition. Position accountability provisions provide a
means for an exchange to monitor traders’ positions that may
threaten orderly trading. An acceptable accountability provision
sets target accountability threshold levels that may be exceeded,
but once a trader breaches such accountability levels, the
electronic trading facility should initiate an inquiry to determine
whether the individual’s trading activity is justified and is not
intended to manipulate the market. As part of its investigation, the
electronic trading facility may inquire about the trader’s rationale
for holding a position in excess of the accountability levels. An
acceptable accountability provision should provide the electronic
trading facility with the authority to order the trader not to
further increase positions. If a trader fails to comply with a
request for information about positions held, provides information
that does not sufficiently justify the position, or continues to
increase contract positions after a request not to do so is issued
by the facility, then the accountability provision should enable the
electronic trading facility to require the trader to reduce
positions.
(ii) Contracts economically equivalent to an existing contract.
When an electronic trading facility lists a significant price
discovery contract that is economically equivalent to another
significant price discovery contract or to a contract traded on a
designated contract market, the electronic trading facility should
set the non-spot individual month position accountability level and
all-months-combined position accountability level for its
significant price discovery contract at the same levels, or lower,
as those specified for the economically-equivalent contract.
(iii) Contracts that are not economically equivalent to an
existing contract. For significant price discovery contracts that
are not economically equivalent to an existing contract, the trading
facility shall adopt non-spot individual month and all-months-
combined position accountability levels that are no greater than 10
percent of the average combined futures and delta-adjusted option
month-end open interest for the most recent calendar year. For
electronic trading facilities that choose to adopt non-spot
individual month and all-months-combined position
[[Page 33106]]
limits in lieu of position accountability levels for their
significant price discovery contracts, the limits should be set in
the same manner as the accountability levels.
(iv) Contracts economically equivalent to an existing contract
with position limits. If a significant price discovery contract is
economically equivalent to another significant price discovery
contract or to a contract traded on a designated contract market
that has adopted non-spot or all-months-combined position limits,
the electronic trading facility should set non-spot month position
limits and all-months-combined position limits for its significant
price discovery contract at the same (or lower) levels as those
specified for the economically-equivalent contract.
(5) Account aggregation. An electronic trading facility should
have aggregation rules for significant price discovery contracts
that apply to accounts under common control, those with common
ownership, i.e., where there is a ten percent or greater financial
interest, and those traded according to an express or implied
agreement. Such aggregation rules should apply to cleared
transactions with respect to applicable speculative position limits.
An electronic trading facility will be permitted to set more
stringent aggregation policies. An electronic trading facility may
grant exemptions to its price discovery contracts’ position limits
for bona fide hedging (as defined in Sec. 1.3(z) of this chapter)
and may grant exemptions for reduced risk positions, such as
spreads, straddles and arbitrage positions.
(6) Implementation deadlines. An electronic trading facility
with a significant price discovery contract is required to comply
with Core Principle IV within 90 calendar days of the date of the
Commission’s order determining that the contract performs a
significant price discovery function if such contract is the
electronic trading facility’s first significant price discovery
contract, or within 30 days of the date of the Commission’s order if
such contract is not the electronic trading facility’s first
significant price discovery contract. For the purpose of applying
limits on speculative positions in newly-determined significant
price discovery contracts, the Commission will permit a grace period
following issuance of its order for traders with cleared positions
in such contracts to become compliant with applicable position limit
rules. Traders who hold cleared positions on a net basis in the
electronic trading facility’s significant price discovery contract
must be at or below the specified position limit level no later than
90 calendar days from the date of the electronic trading facility’s
implementation of position limit rules, unless a hedge exemption is
granted by the electronic trading facility. This grace period
applies to both initial and subsequent price discovery contracts.
Electronic trading facilities should notify traders of this
requirement promptly upon implementation of such rules.
(7) Enforcement provisions. The electronic trading facility
should have appropriate procedures in place to monitor its position
limit and accountability provisions and to address violations.
(i) An electronic trading facility with significant price
discovery contracts should use an automated means of detecting
traders’ violations of speculative limits or exemptions,
particularly if the significant price discovery contracts have large
numbers of traders. An electronic trading facility should monitor
the continuing appropriateness of approved exemptions by
periodically reviewing each trader’s basis for exemption or
requiring a reapplication. An automated system also should be used
to determine whether a trader has exceeded applicable non-spot
individual month position accountability levels and all-months-
combined position accountability levels.
(ii) An electronic trading facility should establish a program
for effective enforcement of position limits for significant price
discovery contracts. Electronic trading facilities should use a
large trader reporting system to monitor and enforce daily
compliance with position limit rules. The Commission notes that an
electronic trading facility may allow traders to periodically apply
to the electronic trading facility for an exemption and, if
appropriate, be granted a position level higher than the applicable
speculative limit. The electronic trading facility should establish
a program to monitor approved exemptions from the limits. The
position levels granted under such hedge exemptions generally should
be based upon the trader’s commercial activity in related markets
including, but not limited to, positions held in related futures and
options contracts listed for trading on designated contract markets,
fungible agreements, contracts and transactions, as determined by a
derivatives clearing organization. Electronic trading facilities may
allow a brief grace period where a qualifying trader may exceed
speculative limits or an existing exemption level pending the
submission and approval of appropriate justification. An electronic
trading facility should consider whether it wants to restrict
exemptions during the last several days of trading in a delivery
month. Acceptable procedures for obtaining and granting exemptions
include a requirement that the electronic trading facility approve a
specific maximum higher level.
(iii) An acceptable speculative limit program should have
specific policies for taking regulatory action once a violation of a
position limit or exemption is detected. The electronic trading
facility policies should consider appropriate actions.
(8) Violation of Commission rules. A violation of position
limits for significant price discovery contracts that have been
self-certified by an electronic trading facility is also a violation
of section 4a(e) of the Act.
CORE PRINCIPLE V–EMERGENCY AUTHORITY. The electronic trading
facility shall adopt rules to provide for the exercise of emergency
authority, in consultation or cooperation with the Commission, where
necessary and appropriate, including the authority to liquidate open
positions in significant price discovery contracts and to suspend or
curtail trading in a significant price discovery contract.
(a) Guidance. An electronic trading facility on which
significant price discovery contracts are traded should have clear
procedures and guidelines for decision-making regarding emergency
intervention in the market, including procedures and guidelines to
avoid conflicts of interest while carrying out such decision-making.
An electronic trading facility on which significant price discovery
contracts are executed or traded should also have the authority to
intervene as necessary to maintain markets with fair and orderly
trading as well as procedures for carrying out the intervention.
Procedures and guidelines should include notifying the Commission of
the exercise of the electronic trading facility’s regulatory
emergency authority, explaining how conflicts of interest are
minimized, and documenting the electronic trading facility’s
decision-making process and the reasons for using its emergency
action authority. Information on steps taken under such procedures
should be included in a submission of a certified rule and any
related submissions for rule approval pursuant to part 40 of this
chapter, when carried out pursuant to an electronic trading
facility’s emergency authority. To address perceived market threats,
the electronic trading facility on which significant price discovery
contracts are executed or traded should, among other things, be able
to impose position limits in the delivery month, impose or modify
price limits, modify circuit breakers, call for additional margin
either from market participants or clearing members (for contracts
that are cleared through a clearinghouse), order the liquidation or
transfer of open positions, order the fixing of a settlement price,
order a reduction in positions, extend or shorten the expiration
date or the trading hours, suspend or curtail trading on the
electronic trading facility, order the transfer of contracts and the
margin for such contracts from one market participant to another, or
alter the delivery terms or conditions or, if applicable, should
provide for such actions through its agreements with its third-party
provider of clearing services.
(b) Acceptable practices. [Reserved]
CORE PRINCIPLE VI–DAILY PUBLICATION OF TRADING INFORMATION. The
electronic trading facility shall make public daily information on
price, trading volume, and other trading data to the extent
appropriate for significant price discovery contracts.
(a) Guidance. An electronic trading facility, with respect to
significant price discovery contracts, should provide to the public
information regarding settlement prices, price range, volume, open
interest, and other related market information for all applicable
contracts as determined by the Commission on a fair, equitable and
timely basis. Provision of information for any applicable contract
can be through such means as provision of the information to a
financial information service or by timely placement of the
information on the electronic trading facility’s public Web site.
(b) Acceptable practices. Compliance with Sec. 16.01 of this
chapter, which is mandatory, is an acceptable practice that
satisfies the requirements of Core Principle VI.
CORE PRINCIPLE VII–COMPLIANCE WITH RULES. The electronic
trading facility shall monitor and enforce compliance with
[[Page 33107]]
the rules of the electronic trading facility, including the terms
and conditions of any contracts to be traded and any limitations on
access to the electronic trading facility.
(a) Guidance–(1) An electronic trading facility on which
significant price discovery contracts are executed or traded should
have appropriate arrangements and resources for effective trade
practice surveillance programs, with the authority to collect
information and documents on both a routine and non-routine basis,
including the examination of books and records kept by its market
participants. The arrangements and resources should facilitate the
direct supervision of the market and the analysis of data collected.
Trade practice surveillance programs may be carried out by the
electronic trading facility itself or through delegation or
contracting-out to a third party. If the electronic trading facility
on which significant price discovery contracts are executed or
traded delegates or contracts-out the trade practice surveillance
responsibility to a third party, such third party should have the
capacity and authority to carry out such programs, and the
electronic trading facility should retain appropriate supervisory
authority over the third party.
(2) An electronic trading facility on which significant price
discovery contracts are executed or traded should have arrangements,
resources and authority for effective rule enforcement. The
Commission believes that this should include the authority and
ability to discipline and limit or suspend the activities of a
market participant as well as the authority and ability to terminate
the activities of a market participant pursuant to clear and fair
standards. The electronic trading facility can satisfy this
criterion for market participants by expelling or denying such
person’s future access upon a determination that such a person has
violated the electronic trading facility’s rules.
(b) Acceptable practices. An acceptable trade practice
surveillance program generally would include:
(1) Maintenance of data reflecting the details of each
transaction executed on the electronic trading facility;
(2) Electronic analysis of this data routinely to detect
potential trading violations;
(3) Appropriate and thorough investigative analysis of these and
other potential trading violations brought to the electronic trading
facility’s attention; and
(4) Prompt and effective disciplinary action for any violation
that is found to have been committed. The Commission believes that
the latter element should include the authority and ability to
discipline and limit or suspend the activities of a market
participant pursuant to clear and fair standards that are available
to market participants.
CORE PRINCIPLE VIII–CONFLICTS OF INTEREST. The electronic
trading facility on which significant price discovery contracts are
executed or traded shall establish and enforce rules to minimize
conflicts of interest in the decision-making process of the
electronic trading facility and establish a process for resolving
such conflicts of interest.
(a) Guidance. (1) The means to address conflicts of interest in
the decision-making of an electronic trading facility on which
significant price discovery contracts are executed or traded should
include methods to ascertain the presence of conflicts of interest
and to make decisions in the event of such a conflict. In addition,
the Commission believes that the electronic trading facility on
which significant price discovery contracts are executed or traded
should provide for appropriate limitations on the use or disclosure
of material non-public information gained through the performance of
official duties by board members, committee members and electronic
trading facility employees or gained through an ownership interest
in the electronic trading facility or its parent organization(s).
(2) All electronic trading facilities on which significant price
discovery contracts are traded bear special responsibility to
regulate effectively, impartially, and with due consideration of the
public interest, as provided in section 3 of the Act. Under Core
Principle VIII, they are also required to minimize conflicts of
interest in their decision-making processes. To comply with this
core principle, electronic trading facilities on which significant
price discovery contracts are traded should be particularly vigilant
for such conflicts between and among any of their self-regulatory
responsibilities, their commercial interests, and the several
interests of their management, members, owners, market participants,
other industry participants and other constituencies.
(b) Acceptable practices. [Reserved]
CORE PRINCIPLE IX–ANTITRUST CONSIDERATIONS. Unless necessary or
appropriate to achieve the purposes of this Act, the electronic
trading facility, with respect to any significant price discovery
contracts, shall endeavor to avoid adopting any rules or taking any
actions that result in any unreasonable restraints of trade or
imposing any material anticompetitive burden on trading on the
electronic trading facility.
(a) Guidance. An electronic trading facility, with respect to a
significant price discovery contract, may at any time request that
the Commission consider under the provisions of section 15(b) of the
Act any of the electronic trading facility’s rules, which may be
trading protocols or policies, operational rules, or terms or
conditions of any significant price discovery contract. The
Commission intends to apply section 15(b) of the Act to its
consideration of issues under this core principle in a manner
consistent with that previously applied to contract markets.
(b) Acceptable practices. [Reserved]
PART 41–SECURITY FUTURES PRODUCTS
45a. The authority citation for part 41 continues to read as
follows:
Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114
Stat. 2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
45b. Revise Sec. 41.2 to read as follows:
Sec. 41.2 Required records.
A designated contract market that trades a security index or
security futures product shall maintain in accordance with the
requirements of Sec. 1.31 of this chapter books and records of all
activities related to the trading of such products, including: Records
related to any determination under subpart B of this part whether or
not a futures contract on a security index is a narrow-based security
index or a broad-based security index.
46. Revise paragraph (a) introductory text of Sec. 41.12 to read
as follows:
Sec. 41.12 Indexes underlying futures contracts trading for fewer
than 30 days.
(a) An index on which a contract of sale for future delivery is
trading on a designated contract market or foreign board of trade is
not a narrow-based security index under section 1a(25) of the Act (7
U.S.C. 1a(25)) for the first 30 days of trading, if:
* * * * *
47. Revise Sec. 41.13 to read as follows:
Sec. 41.13 Futures contracts on security indexes trading on or
subject to the rules of a foreign board of trade.
When a contract of sale for future delivery on a security index is
traded on or subject to the rules of a foreign board of trade, such
index shall not be a narrow-based security index if it would not be a
narrow-based security index if a futures contract on such index were
traded on a designated contract market.
48. Revise paragraphs (a)(1), (a)(3) and (b)(4) of Sec. 41.21 to
read as follows:
Sec. 41.21 Requirements for underlying securities.
(a) * * *
(1) The underlying security is registered pursuant to section 12 of
the Securities Exchange Act of 1934;
* * * * *
(3) The underlying security conforms with the listing standards for
the security futures product that the designated contract market has
filed with the SEC under section 19(b) of the Securities Exchange Act
of 1934.
(b) * * *
(4) The index conforms with the listing standards for the security
futures product that the designated contract market has filed with the
SEC under section 19(b) of the Securities Exchange Act of 1934.
49. Revise the introductory text and paragraph (e) of Sec. 41.22
to read as follows:
Sec. 41.22 Required certifications.
It shall be unlawful for a designated contract market to list for
trading or
[[Page 33108]]
execution a security futures product unless the designated contract
market has provided the Commission with a certification that the
specific security futures product or products and the designated
contract market meet, as applicable, the following criteria:
* * * * *
(e) If the board of trade is a designated contract market pursuant
to section 5 of the Act, dual trading in these security futures
products is restricted in accordance with Sec. 41.27;
* * * * *
50. Revise paragraph (a) introductory text, paragraph (a)(5), and
paragraph (b) of Sec. 41.23 to read as follows:
Sec. 41.23 Listing of security futures products for trading.
(a) Initial listing of products for trading. To list new security
futures products for trading, a designated contract market shall submit
to the Commission at its Washington, DC headquarters, either in
electronic or hard-copy form, to be received by the Commission no later
than the day prior to the initiation of trading, a filing that:
* * * * *
(5) If the board of trade is a designated contract market pursuant
to section 5 of the Act, it includes a certification that the security
futures product complies with the Act and rules thereunder; and
* * * * *
(b) Voluntary submission of security futures products for
Commission approval. A designated contract market may request that the
Commission approve any security futures product under the procedures of
Sec. 40.5 of this chapter, provided however, that the registered
entity shall include the certification required by Sec. 41.22 with its
submission under Sec. 40.5 of this chapter. Notice designated contract
markets may not request Commission approval of security futures
products.
51. Amend Sec. 41.24 by removing paragraph (b), redesignating
paragraph (c) as paragraph (b), and revising redesignated paragraph
(b), to read as follows:
Sec. 41.24 Rule amendments to security futures products.
* * * * *
(b) Voluntary submission of rules for Commission review and
approval. A designated contract market or a registered derivatives
clearing organization clearing security futures products may request
that the Commission approve any rule or proposed rule or rule amendment
relating to a security futures product under the procedures of Sec.
40.5 of this chapter, provided however, that the registered entity
shall include the certifications required by Sec. 41.22 with its
submission under Sec. 40.5 of this chapter. Notice designated contract
markets may not request Commission approval of rules.
52. Revise paragraphs (a)(1), (a)(2) introductory text, (a)(3)
introductory text, (a)(3)(i)(A), (a)(3)(i)(B), (a)(3)(iv), and (d) of
Sec. 41.25 to read as follows:
Sec. 41.25 Additional conditions for trading for security futures
products.
(a) Common provisions–(1) Reporting of data. The designated
contract market shall comply with chapter 16 of this title requiring
the daily reporting of market data.
(2) Regulatory trading halts. The rules of a designated contract
market that lists or trades one or more security futures products must
include the following provisions:
* * * * *
(3) Speculative position limits. The designated contract market
shall have rules in place establishing position limits or position
accountability procedures for the expiring futures contract month. The
designated contract market shall:
(i) * * *
(A) For security futures products where the average daily trading
volume in the underlying security exceeds 20 million shares, or exceeds
15 million shares and there are more than 40 million shares of the
underlying security outstanding, the designated contract market may
adopt a net position limit no greater than 22,500 (100-share) contracts
applicable to positions held during the last five trading days of an
expiring contract month; or
(B) For security futures products where the average daily trading
volume in the underlying security exceeds 20 million shares and there
are more than 40 million shares of the underlying security outstanding,
the designated contract market may adopt a position accountability
rule. Upon request by the designated contract market, traders who hold
net positions greater than 22,500 (100-share) contracts, or such lower
level specified by exchange rules, must provide information to the
exchange and consent to halt increasing their positions when so ordered
by the exchange.
* * * * *
(iv) For purposes of this section, average daily trading volume
shall be calculated monthly, using data for the most recent six-month
period. If the data justify a higher or lower speculative limit for a
security future, the designated contract market may raise or lower the
position limit for that security future effective no earlier than the
day after it has provided notification to the Commission and to the
public under the submission requirements of Sec. 41.24. If the data
require imposition of a reduced position limit for a security future,
the designated contract market may permit any trader holding a position
in compliance with the previous position limit, but in excess of the
reduced limit, to maintain such position through the expiration of the
security futures contract; provided, that the designated contract
market does not find that the position poses a threat to the orderly
expiration of such contract.
* * * * *
(d) The Commission may exempt a designated contract market from the
provisions of paragraphs (a)(2) and (b) of this section, either
unconditionally or on specified terms and conditions, if the Commission
determines that such exemption is consistent with the public interest
and the protection of customers. An exemption granted pursuant to this
paragraph shall not operate as an exemption from any Securities and
Exchange Commission rules. Any exemption that may be required from such
rules must be obtained separately from the Securities and Exchange
Commission.
53. Amend Sec. 41.27 by:
a. Revising paragraphs (a)(1), (a)(3) introductory text, (a)(4)(v),
(a)(5), (b), (d) introductory text, (d)(1), (d)(4), and (f); and
b. Removing and reserving paragraphs (c)(2) and (e)(2), to read as
follows:
Sec. 41.27 Prohibition of dual trading in security futures products
by floor brokers.
(a) * * *
(1) Trading session means hours during which a designated contract
market is scheduled to trade continuously during a trading day, as set
forth in its rules, including any related post settlement trading
session. A designated contract market may have more than one trading
session during a trading day.
* * * * *
(3) Broker association includes two or more designated contract
market members with floor trading privileges of whom at least one is
acting as a floor broker who:
* * * * *
(4) * * *
(v) An account for another member present on the floor of a
designated contract market or an account controlled by such other
member.
(5) Dual trading means the execution of customer orders by a floor
broker
[[Page 33109]]
through open outcry during the same trading session in which the floor
broker executes directly or by initiating and passing to another
member, either through open outcry or through a trading system that
electronically matches bids and offers pursuant to a predetermined
algorithm, a transaction for the same security futures product on the
same designated contract market for an account described in paragraphs
(a)(4)(i) through (v) of this section.
(b) Dual trading prohibition. (1) No floor broker shall engage in
dual trading in a security futures product on a designated contract
market, except as otherwise provided under paragraphs (d), (e), and (f)
of this section.
(2) A designated contract market operating an electronic market or
electronic trading system that provides market participants with a time
or place advantage or the ability to override a predetermined algorithm
must submit an appropriate rule proposal to the Commission consistent
with the procedures set forth in Sec. 40.5. The proposed rule must
prohibit electronic market participants with a time or place advantage
or the ability to override a predetermined algorithm from trading a
security futures product for accounts in which these same participants
have any interest during the same trading session that they also trade
the same security futures product for other accounts. This paragraph,
however, is not applicable with respect to execution priorities or
quantity guarantees granted to market makers who perform that function,
or to market participants who receive execution priorities based on
price improvement activity, in accordance with the rules governing the
designated contract market.
(c) * * *
(2) [Reserved]
(d) Specific permitted exceptions. Notwithstanding the
applicability of a dual trading prohibition under paragraph (b) of this
section, dual trading may be permitted on a designated contract market
pursuant to one or more of the following specific exceptions:
(1) Correction of errors. To offset trading errors resulting from
the execution of customer orders, provided, that the floor broker must
liquidate the position in his or her personal error account resulting
from that error through open outcry or through a trading system that
electronically matches bids and offers as soon as practicable, but,
except as provided herein, not later than the close of business on the
business day following the discovery of error. In the event that a
floor broker is unable to offset the error trade because the daily
price fluctuation limit is reached, a trading halt is imposed by the
designated contract market, or an emergency is declared pursuant to the
rules of the designated contract market, the floor broker must
liquidate the position in his or her personal error account resulting
from that error as soon as practicable thereafter.
* * * * *
(4) Market emergencies. To address emergency market conditions
resulting in a temporary emergency action as determined by a designated
contract market.
(e) * * *
(2) [Reserved]
(f) Unique or special characteristics of agreements, contracts or
transactions, or of designated contract markets. Notwithstanding the
applicability of a dual trading prohibition under paragraph (b) of this
section, dual trading may be permitted on a designated contract market
to address unique or special characteristics of agreements, contracts,
or transactions, or of the designated contract market as provided
herein. Any rule of a designated contract market that would permit dual
trading when it would otherwise be prohibited, based on a unique or
special characteristic of agreements, contracts, or transactions, or of
the designated contract market must be submitted to the Commission for
prior approval under the procedures set forth in Sec. 40.5 of this
chapter. The rule submission must include a detailed demonstration of
why an exception is warranted.
54. Revise paragraph (a)(30) of Sec. 41.43 to read as follows:
Sec. 41.43 Definitions.
(a) * * *
(30) Self-regulatory authority means a national securities exchange
registered under section 6 of the Exchange Act, a national securities
association registered under section 15A of the Exchange Act, or a
contract market registered under section 5 of the Act or section 5f of
the Act.
* * * * *
55. Revise paragraph (b) introductory text of Sec. 41.49 to read
as follows:
Sec. 41.49 Filing proposed margin rule changes with the Commission.
* * * * *
(b) Filing requirements under the Act. Any self-regulatory
authority that is registered with the Commission as a designated
contract market under section 5 of the Act shall, when filing a
proposed rule change regarding customer margin for security futures
with the SEC for approval in accordance with section 19(b)(2) of the
Securities Exchange Act, submit such proposed rule change to the
Commission as follows:
* * * * *
PART 140–ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
56a. The authority citation for part 140 continues to read as
follows:
Authority: 7 U.S.C. 2 and 12a.
56b. Amend Sec. 140.72 by
a. Revising the heading; and
b. Revising paragraphs (a), (b), (d) and (f), to read as follows:
Sec. 140.72 Delegation of authority to disclose confidential
information to a contract market, swap execution facility, swap data
repository, registered futures association or self-regulatory
organization.
(a) Pursuant to the authority granted under sections 2(a)(11),
8a(5) and 8a(6) of the Act, the Commission hereby delegates, until such
time as the Commission orders otherwise, to the Executive Director, the
Deputy Executive Director, the Special Assistant to the Executive
Director, the Director of the Division of Clearing and Intermediary
Oversight, each Deputy Director of the Division of Clearing and
Intermediary Oversight, the Chief Accountant, the General Counsel, each
Deputy General Counsel, the Director of the Division of Market
Oversight, each Deputy Director of the Division of Market Oversight,
the Director of the Market Surveillance Section, the Director of the
Division of Enforcement, each Deputy Director of the Division of
Enforcement, each Associate Director of the Division of Enforcement,
the Chief Counsel of the Division of Enforcement, each Regional Counsel
of the Division of Enforcement, each of the Regional Administrators,
each of the Directors of the Market Surveillance Branches, the Chief
Economist of the Office of the Chief Economist, the Deputy Chief
Economist of the Office of the Chief Economist, the Director of the
Office of International Affairs, and the Deputy Director of the Office
of International Affairs, the authority to disclose to an official of
any contract market, swap execution facility, swap data repository,
registered futures association, or self-regulatory organization as
defined in section 3(a)(26) of the Securities Exchange Act of 1934, any
information necessary or appropriate to effectuate the purposes of the
Act, including, but not limited to, the full facts concerning any
transaction or market operation, including the names of the parties
[[Page 33110]]
thereto. This authority to disclose shall be based on a determination
that the transaction or market operation disrupts or tends to disrupt
any market or is otherwise harmful or against the best interests of
producers, consumers, or investors or that disclosure is necessary or
appropriate to effectuate the purposes of the Act. The authority to
make such a determination is also delegated by the Commission to the
Commission employees identified in this section. A Commission employee
delegated authority under this section may exercise that authority on
his or her own initiative or in response to a request by an official of
a contract market, swap execution facility, swap data repository,
registered futures association or self-regulatory organization.
(b) Disclosure under this section shall only be made to a contract
market, swap execution facility, swap data repository, registered
futures association or self-regulatory organization official who is
named in a list filed with the Commission by the chief executive
officer of the contract market, swap execution facility, swap data
repository, registered futures association or self-regulatory
organization, which sets forth the official’s name, business address
and telephone number. The chief executive officer shall thereafter
notify the Commission of any deletions or additions to the list of
officials authorized to receive disclosures under this section. The
original list and any supplemental list required by this paragraph
shall be filed with the Secretary of the Commission, and a copy thereof
shall also be filed with the Regional Coordinator for the region in
which the contract market, swap execution facility, or swap data
repository is located or in which the registered futures association or
self-regulatory organization has its principal office.
* * * * *
(d) For purposes of this section, the term “official” shall mean
any officer or member of a committee of a contract market, swap
execution facility, swap data repository, registered futures
association or self-regulatory organization who is specifically charged
with market surveillance or audit or investigative responsibilities, or
their duly authorized representative or agent, who is named on the list
filed pursuant to paragraph (b) of this section or any supplement
thereto.
* * * * *
(f) Any contract market, swap execution facility, swap data
repository, registered futures association or self-regulatory
organization receiving information from the Commission under these
provisions shall not disclose such information except that disclosure
may be made in any self-regulatory action or proceeding.
57. Amend Sec. 140.77 by:
a. Revising the heading; and
b. Revising paragraph (a) to read as follows:
Sec. 140.77 Delegation of authority to determine that applications
for contract market designation, swap execution facility registration,
or swap data repository registration are materially incomplete.
(a) The Commodity Futures Trading Commission hereby delegates,
until such time as the Commission orders otherwise, to the Director of
the Division of Market Oversight or the Director’s designees, the
authority to determine that an application for contract market
designation, swap execution facility registration, or swap data
repository registration is materially incomplete under section 6 of the
Commodity Exchange Act and to so notify the applicant.
* * * * *
58. Revise paragraphs (a) and (b) of Sec. 140.96 to read as
follows:
Sec. 140.96 Delegation of authority to publish in the Federal
Register.
(a) The Commodity Futures Trading Commission hereby delegates,
until such time as the Commission orders otherwise, to the Director of
the Division of Market Oversight or the Director’s designee, with the
concurrence of the General Counsel or the General Counsel’s designee,
the authority to publish in the Federal Register notice of the
availability for comment of the proposed terms and conditions of
applications for contract market designation, swap execution facility
and swap data repository registration, and to determine to publish, and
to publish, requests for public comment on proposed exchange, swap
execution facility, or swap data repository rules, and rule amendments,
when there exists novel or complex issues that require additional time
to analyze, an inadequate explanation by the submitting registered
entity, or a potential inconsistency with the Act, including
regulations under the Act.
(b) The Commodity Futures Trading Commission hereby delegates,
until such time as the Commission orders otherwise, to the Director of
the Division of Market Oversight or the Director’s designee, and to the
Director of the Division of Clearing and Intermediary Oversight or the
Director’s designee, with the concurrence of the General Counsel or the
General Counsel’s designee, the authority to determine to publish, and
to publish, in the Federal Register, requests for public comment on
proposed exchange and self-regulatory organization rule amendments when
publication of the proposed rule amendment is in the public interest
and will assist the Commission in considering the views of interested
persons.
* * * * *
59. Revise paragraph (d)(2) of Sec. 140.99 to read as follows:
Sec. 140.99 Requests for exemptive, no-action and interpretative
letters.
* * * * *
(d) * * *
(2) A request for a Letter relating to the provisions of the Act or
the Commission’s rules, regulations or orders governing designated
contract markets, registered swap execution facilities, registered swap
data repositories, exempt commercial markets, exempt boards of trade,
the nature of particular transactions and whether they are exempt or
excluded from being required to be traded on one of the foregoing
entities, foreign trading terminals, hedging exemptions, and the
reporting of market positions shall be filed with the Director,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. A
request for a Letter relating to all other provisions of the Act or
Commission rules shall be filed with the Director, Division of Clearing
and Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. The
request must be submitted electronically using the e-mail address
[email protected] (for requests filed with the Division of Market
Oversight), or [email protected] (for requests filed with the
Division of Clearing and Intermediary Oversight), as appropriate, and a
properly signed paper copy of the request must be provided to the
Division of Market Oversight or the Division of Clearing and
Intermediary Oversight, as appropriate, within ten days for purposes of
verification of the electronic submission.
* * * * *
60. Amend Sec. 140.735-2 by:
a. Redesignating paragraphs (b)(1)(i), (b)(1)(ii), and (b)(1)(iii)
as (b)(1)(ii), (b)(1)(iv), and (b)(1)(v), respectively;
b. Adding paragraphs (b)(1)(i) and (b)(1)(iii); and
c. Revising paragraphs (b)(2) and (c), to read as follows:
[[Page 33111]]
Sec. 140.735-2 Prohibited transactions.
* * * * *
(b) * * *
(1) * * *
(i) In swaps;
* * * * *
(iii) In retail forex transactions, as that term is defined in
Sec. 5.1(m);
* * * * *
(2) Effect any purchase or sale of a commodity option, futures
contract, or swap involving a security or group of securities;
* * * * *
(c) Exception for farming, ranching, and natural resource
operations. The prohibitions in paragraphs (b)(1)(i) and (ii) of this
section shall not apply to a transaction in connection with any
farming, ranching, oil and gas, mineral rights, or other natural
resource operation in which the member or employee has a financial
interest, if he or she is not involved in the decision to engage in,
and does not have prior knowledge of, the actual futures, commodity
option, or swap transaction and has previously notified the General
Counsel 2 in writing of the nature of the operation, the extent of
the member’s or employee’s interest, the types of transactions in which
the operation may engage, and the identity of the person or persons who
will make trading decisions for the operation; 3
—————————————————————————
2 As used in this subpart, “General Counsel” refers to the
General Counsel in his or her capacity as counselor for the
Commission and designated agency ethics official for the Commission,
and includes his or her designee and the alternate designated agency
ethics official appointed by the agency head pursuant to 5 CFR
2638.202.
3 Although not required, if they choose to do so, members or
employees may use powers of attorney or other arrangements in order
to meet the notice requirements of, and to assure that they have no
control or knowledge of, futures or options transactions permitted
under paragraph (c) of this section. A member or employee
considering such arrangements should consult with the Office of
General Counsel in advance for approval. Should a member or employee
gain knowledge of an actual futures, commodity option, or swap
transaction entered into by an operation described in paragraph (c)
of this section that has already taken place and the market position
represented by that transaction remains open, he or she should
promptly report that fact and all other details to the General
Counsel and seek advice as to what action, including recusal from
any particular matter that will have a direct and predictable effect
on the financial interest in question, may be appropriate.
—————————————————————————
* * * * *
61. Revise paragraph (b)(1) of Sec. 140.735-2a to read as follows:
Sec. 140.735-2a Prohibited Interests.
* * * * *
(b) * * *
(1) Have a financial interest, through ownership of securities or
otherwise, in any person 5 registered with the Commission (including
futures commission merchants, associated persons and agents of futures
commission merchants, floor brokers, commodity trading advisors and
commodity pool operators, and any other persons required to be
registered in a fashion similar to any of the above under the Commodity
Exchange Act or pursuant to any rule or regulation promulgated by the
Commission), or any contract market, swap execution facility, swap data
repository, board of trade, or other trading facility, or any clearing
organization subject to regulation or oversight by the Commission; 6
—————————————————————————
5 As defined in section 1a(38) of the Commodity Exchange Act
and 17 CFR 1.3(u) thereunder, a “person” includes an individual,
association, partnership, corporation and a trust.
6 Attention is directed to 18 U.S.C. 208.
—————————————————————————
* * * * *
62. Revise Sec. 140.735-3 to read as follows:
Sec. 140.735-3 Non-governmental employment and other outside
activity.
A Commission member or employee shall not accept employment or
compensation from any person, exchange, swap execution facility, swap
data repository or clearinghouse subject to regulation by the
Commission. For purposes of this section, a person subject to
regulation by the Commission includes but is not limited to a contract
market, swap execution facility, swap data repository or clearinghouse
or member thereof, a registered futures commission merchant, any person
associated with a futures commission merchant or with any agent of a
futures commission merchant, floor broker, commodity trading advisor,
commodity pool operator or any person required to be registered in a
fashion similar to any of the above or file reports under the Act or
pursuant to any rule or regulation promulgated by the Commission.11
—————————————————————————
11 Attention is directed to section 2(a)(8) of the Commodity
Exchange Act, which provides, among other things, that no Commission
member or employee shall accept employment or compensation from any
person, exchange or clearinghouse subject to regulation by the
Commission, or participate, directly or indirectly, in any contract
market operations or transactions of a character subject to
regulation by the Commission.
—————————————————————————
PART 145–COMMISSION RECORDS AND INFORMATION
63a. The authority citation for part 145 continues to read as
follows:
Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80
Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.
1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389
(5 U.S.C. 4a(j)); unless otherwise noted.
63b. Revise paragraph (c)(1), (d)(1) introductory text, and
(d)(1)(vi) of Sec. 145.9 to read as follows:
Sec. 145.9 Petition for confidential treatment of information
submitted to the Commission.
* * * * *
(c) * * *
(1) Submitter. A “submitter” is any person who submits any
information or material to the Commission or who permits any
information or material to be submitted to the Commission. For purposes
of paragraph (d)(1)(ii) of this section only, “submitter” includes
any person whose information has been submitted to a designated
contract market, derivatives clearing organization, swap execution
facility, swap data repository or registered futures association that
in turn has submitted the information to the Commission.
* * * * *
(d) Written request for confidential treatment. (1) Any submitter
may request in writing that the Commission afford confidential
treatment under the Freedom of Information Act to any information that
he or she submits to the Commission. Except as provided in paragraph
(d)(4) of this section, no oral requests for confidential treatment
will be accepted by the Commission. The submitter shall specify the
grounds on which confidential treatment is being requested but need not
provide a detailed written justification of the request unless required
to do so under paragraph (e) of this section. Confidential treatment
may be requested only on the grounds that disclosure:
* * * * *
(vi) Would reveal investigatory records compiled for law
enforcement purposes when disclosure would interfere with enforcement
proceedings or disclose investigative techniques and procedures,
provided, that the claim may be made only by a designated contract
market, derivatives clearing organization, swap execution facility,
swap data repository or registered futures association with regard to
its own investigatory records.
* * * * *
64. Revise paragraphs (a)(6), (a)(8), and (b)(13) of Appendix A to
part 145 to read as follows:
Appendix A To Part 145–Compilation of Commission Records Available to
the Public
* * * * *
(a) * * *
[[Page 33112]]
(6) Rule enforcement and financial reviews (public version).
* * * * *
(8) Commission rules and regulations, Federal Register notices,
interpretative letters.
* * * * *
(b) * * *
(13) Publicly available portions of applications to become a
registered entity including the transmittal letter, application
form, proposed rules, proposed bylaws, corporate documents, any
overview or similar summary provided by the applicant, any documents
pertaining to the applicant’s legal status and governance structure,
including governance fitness information, and any other part of the
application not covered by a request for confidential treatment.
* * * * *
PART 155–TRADING STANDARDS
65a. The authority citation for part 155 continues to read as
follows:
Authority: 7 U.S.C. 6b, 6c, 6g, 6j and 12a, unless otherwise
noted.
65b. Revise the introductory text of Sec. 155.2 to read as
follows:
Sec. 155.2 Trading standards for floor brokers.
Each contract market shall adopt rules which shall, at a minimum,
with respect to each member of the contract market acting as a floor
broker:
* * * * *
66. Revise paragraphs (a)(1), (b)(2)(ii), and (c)(1) of Sec. 155.3
to read as follows:
Sec. 155.3 Trading standards for futures commission merchants.
(a) * * *
(1) Insure, to the extent possible, that each order received from a
customer which is executable at or near the market price is transmitted
to the floor of the appropriate contract market before any order in any
future or in any commodity option in the same commodity for any
proprietary account, any other account in which an affiliated person
has an interest, or any account for which an affiliated person may
originate orders without the prior specific consent of the account
owner, if the affiliated person has gained knowledge of the customer’s
order prior to the transmission to the floor of the appropriate
contract market of the order for a proprietary account, an account in
which the affiliated person has an interest, or an account in which the
affiliated person may originate orders without the prior specific
consent of the account owner; and
* * * * *
(b) * * *
(2) * * *
(ii) In the case of a customer who does not qualify as an
“institutional customer” as defined in Sec. 1.3(g) of this chapter,
a futures commission merchant must obtain the customer’s prior consent
through a signed acknowledgment, which may be accomplished in
accordance with Sec. 1.55(d) of this chapter.
(c) * * *
(1) Receives written authorization from a person designated by such
other futures commission merchant or introducing broker with
responsibility for the surveillance over such account pursuant to
paragraph (a)(2) of this section or Sec. 155.4(a)(2), respectively;
* * * * *
67. Revise paragraphs (a)(1), (b)(2)(ii), and (c)(2) of Sec. 155.4
to read as follows:
Sec. 155.4 Trading standards for introducing brokers.
(a) * * *
(1) Insure, to the extent possible, that each order received from a
customer which is executable at or near the market price is transmitted
to the futures commission merchant carrying the account of the customer
before any order in any future or in any commodity option in the same
commodity for any proprietary account, any other account in which an
affiliated person has an interest, or any account for which an
affiliated person may originate orders without the prior specific
consent of the account owner, if the affiliated person has gained
knowledge of the customer’s order prior to the transmission to the
floor of the appropriate contract market of the order for a proprietary
account, an account in which the affiliated person has an interest, or
an account in which the affiliated person may originate orders without
the prior specific consent of the account owner; and
* * * * *
(b) * * *
(2) * * *
(ii) In the case of a customer who does not qualify as an
“institutional customer” as defined in Sec. 1.3(g) of this chapter,
an introducing broker must obtain the customer’s prior consent through
a signed acknowledgment, which may be accomplished in accordance with
Sec. 1.55(d) of this chapter.
* * * * *
(c) * * *
(2) Copies of all statements for such account and of all written
records prepared by such futures commission merchant upon receipt of
orders for such account pursuant to Sec. 155.3(c)(2) are transmitted
on a regular basis to the introducing broker with which such person is
affiliated.
Sec. 155.6 [Removed and Reserved]
68. Remove and reserve Sec. 155.6.
PART 166–CUSTOMER PROTECTION RULES
69a. The authority citation for part 155 is revised to read as
follows:
Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,
12a, 21, and 23, as amended by Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124
Stat. 1376 (2010).
69b. Revise paragraph (a) introductory text and paragraph (b) of
Sec. 166.2 to read as follows:
Sec. 166.2 Authorization to trade.
* * * * *
(a) With respect to a commodity interest as defined in any
paragraph of the commodity interest definition in Sec. 1.3(yy) of this
chapter, specifically authorized the futures commission merchant,
retail foreign exchange dealer, introducing broker or any of their
associated persons to effect the transaction (a transaction is
“specifically authorized” if the customer or person designated by the
customer to control the account specifies–
* * * * *
(b) With respect to a commodity interest as defined in paragraph
(1) or (2) of the commodity interest definition in Sec. 1.3(yy) of
this chapter, authorized in writing the futures commission merchant,
introducing broker or any of their associated persons to effect
transactions in commodity interests for the account without the
customer’s specific authorization; Provided, however, That if any such
futures commission merchant, introducing broker or any of their
associated persons is also authorized to effect transactions in foreign
futures or foreign options without the customer’s specific
authorization, such authorization must be expressly documented.
70. Revise paragraph (a)(2) of Sec. 166.5 to read as follows:
Sec. 166.5 Dispute settlement procedures.
(a) * * *
(2) The term customer as used in this section includes any person
for or on behalf of whom a member of a designated contract market, or a
participant transacting on or through such designated contract market,
effects a transaction on such contract market, except another member of
or participant in such designated contract market. Provided, however, a
person who is an “eligible contract participant” as defined in
section 1a(18) of the Act shall not be
[[Page 33113]]
deemed to be a customer within the meaning of this section.
* * * * *
Issued in Washington, DC on April 27, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Adaptation of Regulations To Incorporate Swaps–
Commission Voting Summary and Statements of Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1–Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Dunn, Chilton
and O’Malia voted in the affirmative; Commissioner Sommers voted in
the negative.
Appendix 2–Statement of Chairman Gary Gensler
I support the proposed rulemaking to adapt existing CFTC
regulations to the new requirements of the Dodd-Frank Act. The Act
expanded the scope of the Commodity Exchange Act to include swaps.
In addition to rulemakings implementing specific provisions of the
Act, conforming changes across the Commission’s existing regulations
are needed to incorporate that expanded scope. Specifically, this
proposed rulemaking would update the definitions of futures
commission merchant (FCM) and introducing broker (IB) to fulfill the
Dodd-Frank Act’s requirement to permit those entities to trade swaps
on behalf of their customers. The proposal also would add swap
execution facilities (SEFs) to the list of CFTC-regulated trading
venues. The proposal includes recordkeeping requirements for FCMs,
IBs and SEFs to ensure that similar records are kept for swaps as
are currently kept for futures, among other protections that already
exist in the futures markets. The rules for FCMs with regard to
allocations of bunched orders for swaps will be consistent with
those rules for futures.
[FR Doc. 2011-12270 Filed 6-6-11; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: June 7, 2011
[ad_2]
Source link
