Technical and Clarifying Amendments to Rules for Exempt Markets, Derivatives Transaction Execution Facilities and Designated Contract Markets, and Procedural Changes for Derivatives Clearing Organization Registration Applications

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rulemaking.

SUMMARY:

On August 10, 2001, the Commodity Futures Trading Commission (“Commission”) published final rules implementing the provisions of the Commodity Futures Modernization Act of 2000 (“CFMA”) relating to trading facilities. These amendments are intended to clarify and codify acceptable practices under the rules for trading facilities, based on the Commission's experience over the intervening four years in applying those rules, including the adoption of several amendments to the original rules over the same period. The amendments also include various technical corrections and conforming amendments to the rules.

In addition, these amendments revise the application and review process for registration as a derivatives clearing organization (“DCO”) by eliminating the presumption of automatic fast-track review of applications and replacing it with the presumption that all applications will be reviewed pursuant to the 180-day timeframe and procedures specified in Section 6(a) of the Commodity Exchange Act (“CEA” or “Act”). In lieu of the current 60-day automatic fast-track review, the Commission will permit applicants to request expedited review and to be registered as a DCO by affirmative Commission action not later than 90 days after the Commission receives the application.

DATES:

Effective Date: February 13, 2006.

FOR FURTHER INFORMATION CONTACT:

Donald Heitman, Senior Special Counsel (telephone 202-418-5041, e-mail dheitman@cftc.gov), Division of Market Oversight, or Lois Gregory, Special Counsel (telephone 202-418-5521, e-mail lgregory@cftc.gov), Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

The CFMA amended the Commodity Exchange Act to profoundly alter Federal regulation of commodity futures and option markets. The new statutory framework created by the CFMA established two categories of markets subject to Commission regulatory oversight, designated contract markets (“DCMs”) and registered derivatives transaction execution facilities (“DTEFs”), and two categories of exempt markets, exempt boards of trade (“EBOTs”) and exempt commercial markets (“ECMs”). The original rules applicable to these trading facilities established administrative procedures necessary to implement the CFMA, interpreted certain of the CFMA's provisions, and provided guidance on compliance with various of the CFMA's requirements. In addition, the Commission, under the general exemptive authority of Section 4(c) of the Act, in a limited number of instances provided relief from, or greater flexibility than, the CFMA's provisions.

In addition, over the four years during which these new rules for trading facilities have been in effect, they have been amended several times. These amendments are intended to clarify and codify acceptable practices under the Commission's rules for trading facilities, as amended, based on the Commission's experience in applying those rules over the last four years. The amendments also include a number of technical and clarifying corrections and conforming amendments to enhance the consistency and clarity of the rules.

It should also be noted that the Commission has provided information that may be helpful to those subject to the rules for trading facilities on its Web site at http://www.cftc.gov. In particular, the Web site includes charts setting out information that may be helpful in: (1) Complying with the registration criteria as a DTEF (see Appendix A to Part 37); (2) complying with the designation criteria as a DCM (see Appendix A to Part 38); and (3) complying with the requirements for designation of physical delivery futures contracts (see Appendix A to Part 40—Guideline No. 1). While these charts are not intended to be used as mandatory checklists, they may provide helpful guidance to those subject to the regulations governing trading facilities.

In addition, these amendments revise the application and review procedures for registration as a DCO. Specifically, the amendments eliminate the presumption of automatic fast-track review of applications and replace it with the presumption that all applications will be reviewed pursuant to the 180-day timeframe and procedures specified in Section 6(a) of the Act. In lieu of the automatic fast-track review (under which applicants were deemed to be registered as DCOs 60 days after receipt of an application), the amendments permit applicants to request expedited review and to be registered as a DCO by the Commission not later than 90 days after the date of receipt of the application. The amendments also provide that review under the expedited review procedures may be terminated if it appears that the application is materially incomplete, raises novel or complex issues that require additional time for review, or has undergone substantive amendment or supplementation during the review period. The amendments are based upon the Commission's experience in processing applications, including administrative practices that have been implemented since the rules were first adopted. These amendments establish procedures substantially similar, where appropriate, to those recently amended in Parts 37 and 38 for processing applications for registration of derivatives transaction execution facilities and contract market designation, respectively.

II. The Comments

The Commission received a total of five comments, all from entities that are designated contract markets and/or derivatives clearing organizations, including the U.S. Futures Exchange, L.L.C.—Eurex U.S. (“Eurex”), the Minneapolis Grain Exchange (“MGEX”), the Chicago Mercantile Exchange (“CME”), the New York Mercantile Exchange (“NYMEX”) and the Chicago Board of Trade (“CBOT”). All of the commenters supported the Commission's efforts to clarify and update the Part 36-40 rules. However, the comments included various questions and suggestions regarding the interpretation and application of certain of the proposed amendments. In view of the limited number of comments, as well as the overlapping nature of some of the comments, and for the convenience of the reader, all of the comments and the Commission's responses will be discussed below in this section of the preamble.

NYMEX expressed concern about the proposed amendment to rule 38.2 to make clear that the references therein to the reserved provisions of the regulations applicable to DCMs “also include related definitions and cross-referenced sections cited in those reserved provisions.” NYMEX suggests that the provision could “have the unintended effect of bringing back into force overly prescriptive regulations of the kind the CFMA was appropriately intended to eliminate.” In particular, NYMEX notes that applying the definitions in § 1.63(a) to reserved § 1.63(c) would include the definition of “disciplinary offense.” That definition specifies that violations of SRO reporting or recordkeeping rules that result in fines aggregating more than $5,000 in any calendar year will be included among the disciplinary offenses that would disqualify a person from service on SRO governing boards, disciplinary committees and arbitration or oversight panels. NYMEX points out that in January 2002, it submitted a self-certified rule, which the Commission did not disapprove, deleting a provision modeled after the $5,000 threshold approach set forth in § 1.63(a) and replacing it with a policy of reviewing potential disqualifications based on reporting/recordkeeping fines or settlements on a case-by-case basis. On July 12, 2005, NYMEX self-certified further amendments “codifying the procedure by which reporting and recordkeeping violations resulting in cumulative fines of over $5,000 in a calendar year would be considered with regard to Board and disciplinary committee service.”

NYMEX contends that its procedures satisfy Core Principle 14, which requires DCMs to establish and enforce appropriate fitness standards for directors and disciplinary committee members. NYMEX argues that reimposing the $5,000 limit would deprive DCMs of the self-regulatory flexibility intended by the CFMA, affect NYMEX (which has “greater representation from the floor community than some other DCMs” on its board) unequally, and have a chilling effect on DCMs setting sanction levels high enough to promote compliance for fear of triggering consequences that would disrupt exchange governance. If the Commission does reimpose the $5,000 standard, NYMEX asks that it be applied only prospectively.

The Commission believes that the $5,000 limit in § 1.63(a) continues appropriately to reflect conduct that “demonstrates a lack of respect for SRO rules sufficient to warrant [a] bar from service on SRO committees.” Therefore, the amendment to § 38.2 will be implemented as proposed. The Commission acknowledges, however, that it did not object to NYMEX's adoption of rules implementing a case-by-case review of reporting/recordkeeping disciplinary actions in lieu of the fine schedule in § 1.63(a). The Commission agrees that applying the § 1.63(a) fine schedule could be unfair to persons who, in agreeing to settle exchange disciplinary actions, acted in reliance on exchange rules that were at variance with that schedule. Therefore, the Commission will not bring action for violating § 1.63(a) against any NYMEX board, committee or arbitration panel member elected while a rule at variance with § 1.63(a) was in effect, in reliance on such rule, during the remainder of that person's current term of office, provided that the § 1.63(a) fine schedule will apply prospectively to all such individuals.

Two of the commenters expressed concern over proposed new § 38.5(c), which would delegate to staff the Commission's authority under revised § 38.5(b) to request additional information from a DCM demonstrating that it is in compliance with one or more designation criteria or core principles or that is requested by the Commission to satisfy its obligations under the Act. Eurex contends that regulation 38.5(b) and its permitting of compliance demonstration requests is patterned after former Commission regulation 1.50 and would be “anything but a routine request.” Eurex suggests that responding to such a request “is likely to place a very heavy (and costly) burden on an exchange.” Thus, this authority should be reserved to the Commission. MGEX expressed concern that the proposed amendment indicates that exchanges “can expect more frequent requests for information outside the routine [rule enforcement] review process,” which could become an “unnecessary regulatory burden.”

The amendments to §§ 38.5(b) and (c) are not intended to impose regulatory burdens on the exchanges, but rather to relieve administrative burdens on the Commission. The matters described in § 38.5(b) potentially cover a wide variety of possible written requests, from a routine request for details concerning a new exchange policy to a comprehensive inquiry regarding a potential exchange violation of designation criteria or core principles. In the case of the former, such routine requests are appropriately delegated to staff. In the case of the latter more significant requests, it should be noted that new § 38.5(c) both allows the Director of DMO to submit any matter delegated thereunder to the Commission and allows the Commission to exercise the authority directly. Accordingly, the Commission has determined to implement the amendments to §§ 38.5(b) and (c) as proposed.

In response to a comment by Eurex, the Commission wishes to make clear that in amending Appendix B to Part 38, Core Principle 2, to make clear that trade practice surveillance programs may be carried out by contracting-out to a third party (subject to appropriate supervision by the DCM), the Commission does not intend to preclude out-sourcing in other contexts, such as IT services, or even a trade matching platform. Of course, the DCM remains ultimately liable for compliance with the Act and Commission regulations. Thus, as noted above, it must retain appropriate supervisory authority in all such cases.

With respect to the proposed amendment to Appendix B, Part 38, Core Principle 7, regarding availability of general information to the public, CBOT states that it generally supports posting important information on its Web site promptly. However, CBOT expresses concern that the proposed requirement that the rulebook posted on the Web site must be current to within one day of implementation of a new or amended rule does not allow for staffing or system issues that could delay posting of a new rule. The CBOT suggests that, provided substantive rule changes are posted on the Web site within one day of implementation, through a press release, newsletter or notice, the Commission should allow five days for rule changes (including non-substantive, housekeeping changes) to be incorporated into the exchange's online rulebook. The Commission agrees with this point and has revised the relevant provision accordingly.

Three of the five commenters express opinions concerning the amendments to Part 39. CME and CBOT both support the revisions. CME states it believes the revisions will positively impact the futures markets by ensuring that the Commission and interested parties not only have access to all relevant information, but an ample opportunity to consider the implications of complex or novel issues. CBOT supports treating the time frames for review of DCO applications consistent with the time frames for review of DCM and DTEF applications.

Eurex expresses its concern that the amendments will result in unnecessary barriers to entry and adversely affect competition and innovation. Specifically, Eurex is concerned that a new entrant will lose flexibility if required to provide executed or executable contracts as part of its application. The language of the rule, which requires the submission of contracts entered or to be entered into, does not mean that contracts must be in force such that contract costs are being incurred before DCO registration or before the service for which the costs are incurred is supplied. Nevertheless, in light of this comment, the Commission has further clarified what is required in the language of the rule itself. The amended rule requires an applicant to submit agreements entered into or to be entered into between or among the applicant, its operator/service provider or its participants that identify the services that will be provided that will enable the applicant to comply or demonstrate the applicant's ability to comply with the core principles specified in Section 5b(c)(2) of the Act. When the arrangement submitted is not final and executed, the rule also requires evidence that provides reasonable assurance that the agreed upon services will be provided when the operations that require the services begin. This may include evidence that the service provider is prepared to provide the services when they are needed and, to the extent not otherwise obvious, that the applicant has the financial resources to pay the fees required under the agreement.

Eurex also contends that procedural fairness requires a mechanism to hold staff accountable for a decision to terminate expedited review. The Commission notes that the Act does not establish any timeframe for review of DCO applicants. However, under Part 39, the Commission voluntarily committed itself to the timeframe under Section 6(a) and pursuant to § 39.3(g)(3), the Commission retains supervisory authority over staff decisions in this area.

NYMEX suggests that the definition of “emergency” in § 40.1 should be amended to make clear that the authority to declare an emergency is vested not only in a DCM's governing board, but also in “a subcommittee or exchange official that is duly authorized under a DCM's rules to act with the governing board's authority in such circumstances.” While the existing language may possibly be read to permit such an interpretation, the Commission believes that such an amendment may have merit in avoiding uncertainty. However, because nothing in the original Part 36-40 notice of proposed rulemaking provided notice that such an amendment was contemplated, the public was not given the opportunity to comment on it. Therefore, it would not be appropriate to include such an amendment in these final rules. However, the Commission may consider including such an amendment in a future rulemaking proposal.

Several exchanges commented on §§ 40.2(b), 40.3(a)(9) and 40.6(a)(4), all of which would make clear that registered entities shall provide, if requested by Commission staff, additional evidence, information or data relating to whether new products, rules or rule amendments meet the requirements of the Act or Commission regulations or policies thereunder. The preamble to the proposed rules noted that such evidence may be beneficial to the Commission in conducting due diligence assessments of such products and rules.

Eurex suggests that requests to demonstrate compliance with the Act should be more formally treated, pursuant to Rule 38.5, than requests for information related to routine due diligence reviews. Eurex notes that, “the authority to request information, if misused, can constitute a significant burden on registered entities.” MGEX expresses concern that staff requests for additional evidence, information or data under §§ 40.2(b) or 40.6(a) might have a “chilling effect” on the self-certification process. However, rather than oppose the amendments, the exchange urges the Commission staff to use this authority “reasonably and judiciously.” CBOT likewise expresses concern that routine requests for “sometimes voluminous supporting data” regarding self-certified contracts could have a “chilling effect” on listing products immediately after certification because an exchange may be hesitant to begin trading until it knows the Commission has requested any additional data and completed its review. CBOT asks the Commission to make clear that any requests for additional information under §§ 40.2(b) or 40.6(a), and any due diligence assessment by the Commission, “is not intended implicitly or explicitly to operate as a stay” with respect to listing self-certified products or implementing self-certified rules.

All of these comments reflect the need to balance the flexibility the CFMA gives a DCM in being able to self-certify new products and rules quickly against the obligations of both the DCM and the Commission to assure themselves that the certification is accurate—i.e., that the product or rule does indeed comply with applicable designation criteria and core principles. It is certainly not the intention of the Commission or its staff to inject a chilling effect into the self-certification process or to conduct the required due diligence oversight of that process in anything less than a reasonable and judicious manner. Nor are such information requests intended to operate as a stay with regard to immediately listing new products or implementing new rules. The listing of a new product or implementation of a new rule may be stayed only during the pendency of a Commission proceeding for filing a false certification or to alter or supplement the contract terms or the rule under Section 8a(7) of the Act. Further, pursuant to §§ 40.2(c) and 40.6(b), respectively, the decision to impose such a stay rests with the Commission alone and cannot be delegated to the staff.

However, the fact remains that under the Act DCMs are responsible in the first instance, and the Commission is ultimately responsible in its oversight role, for assuring that DCM products and rules comply with applicable designation criteria and core principles. When a DCM self-certifies a product or rule it is, in effect, pledging that the product or rule does meet those standards. Assuming the DCM is acting in good faith, it must have some reasonable basis for making that pledge. Therefore, when reasonable questions arise, it should not be burdensome for the DCM to share information regarding the reasonable basis underlying the new product or rule with the Commission or its staff. Therefore, §§ 40.2(b), 40.3(a)(9) and 40.6(a)(4) will be implemented as proposed.

CBOT expressed concern about the proposed amendment to conform the review periods in § 40.3 (voluntary submission of new products for Commission review and approval) and § 40.5 (voluntary submission of rules for Commission review and approval). Both sections establish an initial review period of 45 days, with a possible additional extension. The proposed amendments provide for an extension of 45 days under § 40.5 (as opposed to the 30-day extension allowed under the current rules) to conform it to the 45-day extension period under § 40.3. CBOT points out that, when the proposed Part 40 rules were published in 2001, the Commission initially proposed a 45-day extension under § 40.5. In the final rules, however, the Commission lowered the period to the current 30 days after the CBOT commented that a 45-day extension period for rule reviews would have resulted in a potentially longer review process than that allowed under the pre-CFMA fast-track rule review procedure. CBOT argues that the reasons it expressed in favor of a 30-day extension period in 2001, and the reasons the Commission relied on in adopting such period, remain valid and recommends that the current 30-day extension period in § 40.5 should not be amended.

The Commission notes that new products generally include accompanying rule amendments. These new rules can raise questions just as complex, and requiring just as much additional review, as the new products to which they apply. Therefore, the review periods for both products and rules should be identical. It should also be noted that, based on actual experience, the effect of equalizing the review periods for products and rules should be negligible since the extended review period is rarely invoked (only six times since the regulations were adopted in 2001). Therefore, the Commission has determined to implement the amendment to § 40.5 as proposed.

III. The Amendments

A. Part 36—Exempt Markets

Sections 36.2(b) and 36.3(a) are amended by deleting the reference to “hard copy” in the provisions requiring trading facilities operating as EBOTs and ECMs, respectively, to notify the Commission. In order to simplify and modernize the notification process, the amended rules require that such notifications be filed electronically. Similar amendments are made in other sections requiring notifications or filings with the Commission, so that under the amended rules, all formal filings from ECMs, EBOTs, DTEFs, DCMs and DCOs must be filed electronically.

Section 36.2(c)(2), relating to market data dissemination for EBOTs, is revised to implement price discovery/price dissemination rules for EBOTs that closely parallel those currently applicable to ECMs. The wording of the Act's price discovery/price dissemination provision for EBOTs is substantially similar to the provision applicable to ECMs and both provisions are identical in their ultimate purpose. Also, parallel provisions will be easier for the industry to apply, since the price discovery/price dissemination rules will be essentially identical for both types of exempt markets.

The amendments also add new §§ 36.2(c)(3) and 36.3(c)(4) requiring EBOTs and ECMs, respectively, to annually file a notice with the Commission, no later than the end of each calendar year. The notice must include a statement that the entity continues to operate under the exemption and a certification that the information in its original notification of operation is still correct. Annual notification of operation by the facility will allow the Commission to track whether facilities that notified the Commission of their intent to operate actually commenced operations and will allow the Commission to eliminate inactive facilities from any listing of active EBOTs or ECMs maintained on its Web site.

B. Part 37—Derivatives Transaction Execution Facilities

Section 37.1(a) is amended to make clear that the provisions of Part 37 apply not only to boards of trade operating as registered DTEFs, but also to applicants for registration as DTEFs.

Section 37.2 is revised to identify certain reserved provisions of the Commission's regulations that specifically and comprehensively reference DTEFs separately from other reserved provisions that do not. The revisions also make clear that all the references in § 37.2 to reserved provisions of the regulations applicable to DTEFs also include related definitions and cross-referenced sections cited in those reserved provisions. Finally, § 1.60 is added to the list of reserved provisions of the regulations applicable to DTEFs under § 37.2 to make clear that DTEFs need to notify the Commission of any material legal proceeding to which the DTEF is a party or to which its property or assets are subject.

In § 37.3, subparagraph (a)(5) is renumbered as subparagraph (b) and the remaining subparagraphs are renumbered accordingly.

Section 37.6, Compliance with Core Principles, is revised to harmonize DTEF core principle compliance with the previously noted new application procedures for DCMs and DTEFs.

New § 37.6(c)(2) is added delegating to the Division of Market Oversight (the “Division”) the authority under § 37.6(c)(1) to request additional information in reviewing a DTEF's continued compliance with one or more core principles, or to enable the Commission to satisfy its obligations under the Act. The delegation provides that the Commission, at its election, may exercise the delegated authority directly. A similar delegation is made in new § 38.5(c) to allow the Division to request additional information in reviewing a DCM's continued compliance with designation criteria and core principles, or to enable the Commission to satisfy its obligations under the Act. The foregoing delegated authority also extends to other requests by Commission staff to DTEFs or DCMs for additional information: (1) Under new § 40.2(b), regarding compliance with respect to new products listed by certification; (2) under § 40.3(a)(9), regarding voluntary submission of new products for Commission review and approval; and (3) under new § 40.6(a)(4), regarding compliance with respect to self-certified rules. This delegated authority will aid the staff in reviewing DTEF and DCM compliance with the requirements of the Act or Commission regulations or policies thereunder without involving the Commission in day-to-day oversight of trading facilities.

In addition, the guidance in current § 37.6(d) is deleted as duplicative of “Appendix B to Part 37—Guidance on Compliance with Core Principles” and replaced with a reference to Appendix B.

Section 37.8(b), regarding special calls for information, is amended to make clear that the section applies not only to futures commission merchants, but to foreign brokers (as defined in § 15.00) as well.

The title of Appendix A to Part 37 is reworded to read, “Appendix A to Part 37—Guidance on Compliance with Registration Criteria,” to be consistent with the wording of the titles of the other appendices to Parts 37 and 38. The introductory paragraph of the appendix also is revised to make clear that registration criteria guidance applies both to new registrants that register by application and to DTEFs operated by DCMs, which do not need to file an application, but can become registered by notification/certification. The revised language also is consistent with the requirement that the registration criteria must be met initially and on an ongoing basis, rather than just upon application.

In Appendix B to Part 37, subsection 1 of the appendix is revised to make clear that the guidance therein applies to all registered DTEFs, whether they come in by notification under § 37.5(a) or by application. Subsection 3 of the appendix is revised to make clear that, consistent with § 37.6(b)(2), the guidance therein applies to applicants for registration, rather than registered DTEFs.

Core Principle 5 of Appendix B to Part 37, “Daily Publication of Trading Information,” is revised in a manner consistent with the price discovery/price dissemination provisions applicable to EBOTs and ECMs, which are not as comprehensive as those applicable to DCMs. This reflects the fact that DTEFs are subject to a different informational standard than DCMs. DCMs are subject to a blanket requirement, under Core Principle 8 of Appendix B to Part 38, to publish daily trading information for all actively traded contracts. DTEFs, however, are subject to Core Principle 5 (Section 5a(d)(5) of the Act), which includes language similar to that applicable to EBOTs and ECMs (under Sections 5d(d) and 2(h)(4)(D) of the Act, respectively) requiring DTEFs to make public certain daily trading information only if the Commission determines that contracts traded on the facility perform a significant price discovery function for transactions in the cash market for the commodity underlying the contracts. Thus, the revised core principle explanatory language applies to DTEFs the same standards that apply to EBOTs and ECMs (see §§ 36.2(b)(2) and 36.3(c)(2), respectively) whereby a DTEF performs a significant price discovery function if: (1) cash market bids, offers or transactions are directly based on, or quoted at a differential to, the prices generated on the market on a more than occasional basis; or (2) the market's prices are routinely disseminated in a widely distributed industry publication and are routinely consulted by industry participants in pricing cash market transactions. If the Commission has reason to believe that a DTEF may meet either of these standards, or if the facility holds itself out to the public as performing a price discovery function, the Commission will notify the DTEF and provide it with an opportunity for a hearing through the submission of written data, views and arguments. If, after considering all relevant matters, the Commission finds that the DTEF meets the price discovery standards, it will direct the DTEF to publish daily trading information in accordance with the core principle. The information could be published by providing it to a financial information service or by placing it on the facility's Web site. The information should be made available to the public without charge no later than the business day following the day to which the information pertains.

C. Part 38—Designated Contract Markets

In § 38.1, language is added to make clear that the provisions of Part 38 apply to applicants for designation as well as to already designated contract markets, and redundant and inapplicable references are deleted.

In § 38.2, language is added to make clear that the references therein to reserved provisions of the regulations applicable to DCMs also include related definitions and cross-referenced sections cited in those reserved provisions. Similar clarifying amendments, reserving the applicability of related definitions and cross-referenced sections, appear in other sections of these final rules. Also, § 1.60 is added to the list of reserved provisions of the regulations applicable to DCMs under § 38.2 to make clear that DCMs need to notify the Commission of any material legal proceeding to which the DCM is a party or to which its property or assets are subject.

In § 38.5, subparagraph (b) is amended to make clear that DCMs are required to comply with the designation criteria and the core principles both initially and on an ongoing basis, and to conform its language to § 37.6(c)(1). As noted in the discussion of new § 37.6(c)(2) above, new § 38.5(c) is added, delegating to the Division of Market Oversight the authority under § 38.5(b) to request additional information in reviewing a DCM's continued compliance with designation criteria or core principles, or to enable the Commission to satisfy its obligations under the Act.

The title of Appendix A to Part 38 is revised to refer to “Guidance on Compliance with Designation Criteria,” and the introductory paragraph of the appendix is revised in conformity with the revisions to the introductory paragraph of Appendix A to Part 37, to make clear that the obligation to comply with the designation criteria applies not just to applicants, but is ongoing.

Designation Criterion 7 under Appendix A to Part 38 is updated to provide, consistent with the wording of other provisions regarding designation criteria and core principles, that a DCM “should” (rather than “may”) provide information to the public by placing the information on its Web site.

In Appendix B to Part 38, language is added in subparagraph (1) to harmonize Part 38, Appendices A and B, with Part 37, Appendices A and B, consistent with the idea that the obligation to comply with the core principles applies both initially and on an ongoing basis. In subparagraph (2), a reference to “selected” requirements of the core principles is added to make clear that the enumerated acceptable practices under each core principle are neither the complete nor the exclusive requirements for meeting that core principle. With respect to the completeness issue, the selected requirements in the acceptable practices section of a particular core principle may not address all the requirements necessary for compliance with the core principle. With respect to the exclusivity issue, the acceptable practices that are listed for a particular core principle requirement are for illustrative purposes only and do not state the only means of satisfying the particular requirement they address. There may be other ways of complying with that requirement of the core principle that would also be acceptable.

Under Core Principle 2 of Appendix B to Part 38, a reference is added in subparagraph (a)(1) to clarify that a DCM may carry out trade practice surveillance programs through delegation or “contracting out.” A delegation confers upon the delegee/third party contractor the authority to act on behalf of the delegating authority. A third party contractor would not act in the DCM's name, but the DCM will be required to maintain sufficient control over the contractor because it remains the DCM's responsibility to assure that its obligations under the Act are met.

Under Core Principle 6 of Appendix B, “Emergency Authority,” the language now appearing under subparagraph (b), “Acceptable Practices,” is moved to subparagraph (a), “Application Guidance.” This amendment reflects that the language moved to subparagraph (a) more accurately describes guidance on establishing rules to exercise emergency authority in the first instance, rather than acceptable practices in implementing such rules.

Under Core Principle 7 of Appendix B, guidance is added in subparagraph (b) as to what constitutes “timely placement” of information on a DCM's Web site. In noting that the DCM's rulebook should be “available to the public,” the intent of the subparagraph is that the rulebook should be freely accessible to anyone who visits the Web site without the need to register, log in, provide a user name or obtain a password.

Core Principle 8 of Appendix B requires that a DCM shall make public daily information on settlement prices, volume, open interest, and opening and closing ranges for actively traded contracts. New language is added to subparagraph (b), Acceptable Practices, whereby compliance with § 16.01 of the Commission's regulations, which is mandatory since § 16.01 is one of the sections reserved under § 38.2, constitutes an acceptable practice under Core Principle 8. All currently designated DCMs are in compliance with § 16.01.

Under Core Principle 16 of Appendix B, paragraph (a) is revised to refer to a contract market's board (rather than the contract market as a whole) in conformity with the language of the core principle.

D. Part 39—Derivatives Clearing Organizations

The Commission adopted the application procedures specified in Commission Regulation 39.3 for entities applying to be registered as DCOs in 2001 when it first implemented the CFMA. The Commission is modifying the application procedures in a number of respects. Most of these modifications mirror changes recently made to Parts 37 and 38 regarding, among other things, the review and processing of applications for registration of DTEFs and DCMs. With respect to the review period for applications generally, it is establishing, as it has under Parts 37 and 38, the presumption that all applications are submitted for review under the 180-day timeframe specified in Section 6(a) of the Act for DCMs and DTEFs. An expedited 90-day review can be requested by the applicant, in which case the Commission will register the applicant as a DCO during or by the end of the 90-day period unless the Commission, or staff under delegated authority, terminates the expedited review for certain specifically identified reasons. In comparison to the former rules, the Commission is lengthening the expedited review period for DCO applications by 30 days. The Commission believes, based upon its experience in processing DCO applications and in light of certain administrative practices that have developed since these rules were first adopted, that this potentially longer review period is necessary to ensure a comprehensive review of applications and to meet other public policy objectives.

The Commission has reviewed nine DCO applications since passage of the CFMA. The applications were large and complex and contained technical documents describing operations and operational outsourcing agreements. The applications frequently generated a series of requests for information by Commission staff responsible for reviewing the applications. In addition, a new Commission policy to promote transparency in Commission operations, implemented in August of 2003, provides for the posting of all such applications on the Commission's Web site for a period of at least 15 days for public review and comment. This lengthens the review process. The 90-day review period is intended to provide the Commission with sufficient time to review these substantial applications, to consider any public comments, and to take informed action. The Commission notes that the new 90-day “fast-track” review period, while longer than the former fast-track review period, would continue to be substantially shorter than the 180-day review period set forth in Section 6(a) for DCMs and DTEFs.

The Commission also is modifying its internal processing procedures under which an applicant would be registered as a DCO. An applicant shall no longer be deemed to be registered based upon the passage of time. If an applicant requests expedited review, the Commission will take affirmative action to register or designate the applicant as a DCO, subject to conditions if appropriate, not later than 90 days after receipt of the application, unless the Commission (or staff under delegated authority) terminates the expedited review. Thus, registration as a DCO will involve affirmative action by the Commission, which will normally be in the form of issuance of a Commission order. It should be noted that it remains possible, under the procedures, for applicants who submit applications that are complete and not amended or supplemented during the review period to be designated as a DCO in less than 90 days.

The expedited review period will be terminated if: (1) The application is materially incomplete; (ii) the application's form or substance fails to meet the requirements of Part 39; or (iii) the application undergoes major amendment or supplementation. The Commission also is providing for termination of expedited review if an application raises novel or complex issues that require additional time for review. This is responsive to the public interest that the Commission has witnessed to date with respect to the DCO applications and is substantially the same as it now is for DCMs and DTEFs. Fast-track review also may be terminated upon written instruction of the applicant during the review period.

With respect to the additional information that would be required to be submitted as part of the application, the rule requires that applicants demonstrate how they are able to satisfy each of the core principles specified in Section 5b of the Act. As amended, the rule eliminates the proviso, “to the extent it is not self-evident from the applicant's rules.” Based upon experience in reviewing DCO applications, the Commission recognizes that this additional information is necessary for Commission review of the application when determining whether the applicant satisfies the core principles. The amended rule eliminates the requirement that the applicant support requests for confidential treatment of information included in the application with reasonable justification. The Commission believes that the procedures provided in Commission Regulation 145.9, “Petition for confidential treatment of information submitted to the Commission,” should be followed by all applicants.

The Commission continues to encourage applicants to consult with Commission staff prior to formally submitting an application for DCO registration to help ensure that an application, once submitted, will be able to be reviewed in a timely manner.

E. Part 40—Provisions Common to Contract Markets, Derivatives Transaction Execution Facilities and Derivatives Clearing Organizations

In § 40.1, the definitions therein are redesignated as numbered subparagraphs, beginning with subparagraph (a). In redesignated subparagraphs 40.1(b)-(e), the definitions of dormant contract/product, dormant contract market, dormant derivatives clearing organization and dormant derivatives transaction execution facility, respectively, the length of time during which no trading (or clearing) has occurred before dormancy can be declared is extended from six to twelve calendar months. Also, in § 40.1(b), in the proviso granting a 36-month grace period after initial certification or Commission approval before a contract/product can be considered dormant, language is added to make clear that, if the DCM or DTEF itself becomes dormant prior to the running of the 36-month period, the contract/product will likewise be considered dormant. Finally, language is added to § 40.1(b) to allow a board of trade to self-declare a contract/product to be dormant at any time after initial certification or Commission approval.

Under new § 40.1(f), a definition of “dormant rule” is added whereby a new rule or rule amendment that is not made effective and implemented within twelve months of initial certification or Commission approval will be considered dormant and will have to be resubmitted, either by certification or for approval, before it may be implemented.

Sections 40.2, 40.3, 40.5 and 40.6 are revised for internal consistency between sections. In addition, in § 40.2, relating to listing new products for trading by certification, new subparagraph 40.2(b) makes clear that a registered entity shall provide, if requested by Commission staff, additional evidence, information or data relating to whether the contract meets, initially or on a continuing basis, any of the requirements of the Act or Commission regulations or policies thereunder. Such evidence may be beneficial to the Commission in conducting a due diligence assessment of the product and the registered entity's compliance with these requirements, including the obligation that the registered entity must have reason to believe the certification is proper. This language is consistent with the Commission's obligation to assure that the Act and Commission regulations and policies thereunder are not being violated. Similar language is added in § 40.3(a)(9) with respect to voluntary submission of new products for approval, and in § 40.6(a)(4) with respect to self-certification of rules by DCMs and DTEFs. DCMs and DTEFs should be aware that, in conducting routine due diligence reviews of self-certified new product listings and new rules or rule amendments under § 40.2(b) and § 40.6(a)(4), respectively, the staff gives special consideration to particular requirements. For DTEFs, the key requirements are: § 5a(b)(2) of the Act (requirements for underlying commodities); Core Principle 3 (monitoring trading to assure an orderly market); and Core Principle 4 (disclosure of general information). For DCMs, the key requirements are: Core Principle 3 (listing contracts that are not readily susceptible to manipulation); Core Principle 4 (monitoring trading to prevent manipulation, price distortion or disruptions of the delivery or cash-settlement process); and Core Principle 5 (adopting position limits or position accountability rules to reduce the threat of market manipulation or distortion, especially in the delivery month). To the extent that a DCM or DTEF includes with its initial submission, data, research reports, trade interview reports, exchange or third party analyses, or other background information demonstrating compliance with these requirements, a DTEF or DCM can minimize the prospect of requests for additional information under § 40.2(b) or § 40.6(a)(4), respectively.

The revisions to § 40.3 set forth with greater particularity the information Commission staff needs to make a determination on whether to approve a new product voluntarily submitted for Commission review and approval.

Section 5c(c)(2)(B) of the Act and § 40.4 of the regulations require prior Commission approval of DCM rule amendments that, for a delivery month having open interest, would materially change a term or condition of a contract for future delivery of an enumerated agricultural commodity, or an option on such a contract or commodity. These amendments add new subsection 40.4(b)(8) to include fees or fee changes that are $1.00 or more per contract and are established by an independent third party or are unrelated to delivery, trading, clearing or dispute resolution to the types of rule changes for which a materiality determination is not required. The amendments also make clear that the non-material changes described in § 40.4(b), subparagraphs (1)-(8), fall within the provisions of revised § 40.6(c) and will be subject to the weekly notification procedures set out therein. Also, in § 40.4(b)(9) under subparagraph (i), the deadline for Commission review of “non-material agricultural rule changes” is changed from 10 calendar days to 10 business days to provide for a consistent review period for all submissions and to allow for more time for review. Under subparagraph (ii), the DCM will be required to provide an explanation of why the DCM believes the proposed rule change is non-material. Similarly, in § 40.5(c)(1), the review period for rules that are voluntarily submitted by DCMs or DTEFs for approval is extended from 30 days to 45 days, to be consistent with § 40.3.

Under § 40.6, current § 40.6(a) sets out the conditions under which a DCM or DCO may implement new rules by certifying them to the Commission. Subparagraph 40.6(a)(1) provides that the certification procedure does not apply to rules of a DCM that materially change a term or condition of a futures or option contract on an enumerated agricultural commodity in a delivery month with open interest. Subparagraphs 40.6(a)(2) and (3) set out the filing requirements for rule certifications and the information to be provided in such certifications. Section 40.6(c) establishes an exception to the rule certification requirements of §§ 40.6 (a)(2) and (3) whereby DCMs and DCOs may place certain rules and rule amendments into effect without certification, provided that certain conditions are met. The conditions are that: (1) The DCM or DCO provide to the Commission a weekly summary of rule changes made effective pursuant to this paragraph; and (2) the rule change governs such routine matters as nonmaterial revisions, changes to delivery standards made by third parties that do not affect deliverable supplies or the pricing basis for the product, changes in the composition of an index (other than a stock index) that do not affect the pricing basis of the index, routine changes to option contract terms, and certain fee changes established by independent third parties. These amendments add a reference to § 40.6(a)(1) to the exception established in § 40.6(c). The effect is to make clear that, while material rule changes involving contract months with open interest in enumerated agricultural commodities may not be certified to the Commission, the type of routine changes described in § 40.6(c)(2), as well as the partially overlapping list of non-material changes in §§ 40.4(b)(1)-(8), do not constitute material changes within the meaning of the Act or Commission regulations. Therefore, DCMs may inform the Commission of such rule changes on a weekly basis under the provisions of § 40.6(c). Also, new § 40.6(c)(2)(vi) adds to the list of items that may be reported weekly under § 40.6(c)(1), changes in survey lists of banks, brokers or dealers that provide market information to an independent third party and that are incorporated by reference as product terms. Finally, new § 40.6(c)(3)(ii)(F) adds minor changes to security indexes to the list of information the Commission does not require to be certified or reported weekly by a DCM or DCO.

Under § 40.7, Delegations, new § 40.7(a)(3) delegates to the Division, with the concurrence of the Office of the General Counsel, the authority to determine whether a rule change submitted by a DCM for a materiality determination under § 40.4(b)(9) is not material (in which case it may be reported pursuant to the provisions of § 40.6(c)), or is material and, therefore, must be submitted for Commission prior approval. Finally, new § 40.7(b)(3) will increase the Division of Market Oversight's delegated authority to allow it, with the concurrence of the Office of the General Counsel, to approve rules regarding speculative limits or position accountability.

IV. Cost-Benefit Analysis

Section 15(a) of the Act, as amended by Section 119 of the CFMA, requires the Commission to consider the costs and benefits of its action before issuing a new regulation or order under the Act. By its terms, § 15(a) does not require the Commission to quantify the costs and benefits of its action or to determine whether the benefits of the action outweigh its costs. Rather, § 15(a) simply requires the Commission to “consider the costs and benefits” of the subject rule or order.

Section 15(a) further specifies that the costs and benefits of the proposed rule or order shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission may, in its discretion, give greater weight to any one of the five enumerated areas of concern and may, in its discretion, determine that, notwithstanding its costs, a particular rule or order is necessary or appropriate to protect the public interest or to effectuate any of the provisions or to accomplish any of the purposes of the Act.

These amendments are intended to clarify and codify acceptable practices under the rules for trading facilities, based on the Commission's experience over the past four years in applying those rules, including the adoption of several amendments to the original rules over the same period. The amendments also make various technical corrections and conforming amendments to the rules.

In addition, the amendments revise the application and review process for registration as a DCO by eliminating the presumption of automatic fast-track review of applications and replacing it with the presumption that all applications will be reviewed pursuant to the 180-day timeframe and procedures specified in Section 6(a) of the Act. In lieu of the current 60-day automatic fast-track review, the amendments permit applicants to request expedited review and to be registered as a DCO not later than 90 days after the Commission receives the application.

The Commission's proposal contained an analysis of its consideration of theses costs and benefits and solicited public comment thereon. 70 FR at 39678. The Commission specifically invited commenters to submit any data that they had quantifying the costs and benefits of the proposed amendments with their comment letters. Id. The Commission has considered all the comment letters received, some of which contained narrative discussion of the costs and benefits of specific provisions of the proposed amendments, but none of which set forth any data that quantified such costs and benefits.

The Commission has considered the costs and benefits of these amendments in light of the specific areas of concern identified in § 15. The Commission has endeavored in these amendments to impose the minimum requirements necessary to enable the Commission to perform its oversight functions, to carry out its mandate of assuring the continued existence of competitive and efficient markets and to protect the public interest in markets free of fraud and abuse. After considering their costs and benefits, the Commission has decided to adopt these amendments as discussed above.

V. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., requires federal agencies, in promulgating rules, to consider the impact of those rules on small entities. The rule amendments adopted herein will affect exempt commercial markets, exempt boards of trade, derivatives transaction execution facilities, designated contract markets and designated clearing organizations. The Commission has previously determined that the foregoing entities are not small entities for purposes of the RFA. Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rule amendments will not have a significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act of 1995

This rulemaking contains information collection requirements. As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the Commission submitted a copy of this section to the Office of Management and Budget (OMB) for its review. No comments were received in response to the Commission's invitation in the notice of proposed rulemaking to comment on any potential paperwork burden associated with these rules.

List of Subjects

17 CFR Part 36

• Commodity futures
• Commodity Futures Trading Commission

• Commodity futures
• Commodity Futures Trading Commission

• Commodity futures
• Commodity Futures Trading Commission

• Commodity futures
• Consumer Protection

17 CFR Part 40

• Commodity futures
• Contract markets
• Designation application
• Reporting and recordkeeping requirements

In consideration of the foregoing, and pursuant to the authority in the Commodity Exchange Act and, in particular, Sections 1a, 2, 3, 4, 4c, 4i, 5, 5a, 5b, 5c, 5d, 6 and 8a of the Act, the Commission hereby amends Chapter I of Title 17 of the Code of Federal Regulations as follows:

PART 36—EXEMPT MARKETS

1. The authority citation for part 36 continues to read as follows:

Authority: 7 U.S.C. 2, 5, 6, 6c and 12a, as amended by the Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

2. Section 36.2 is amended by revising paragraphs (b) and (c) to read as follows:

3. Section 36.3 is amended by revising paragraph (a) revising paragraph (c)(2)(ii), and adding a new paragraph (c)(4) to read as follows:

PART 37—DERIVATIVES TRANSACTION EXECUTION FACILITIES

4. The authority citation for Part 37 continues to read as follows:

Authority: 7 U.S.C. 2, 5, 6, 6c, 6(c), 7a and 12a, as amended by Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

5. Section 37.1 is amended by revising paragraph (a) to read as follows:

6. Section 37.2 is revised to read as follows:

7. Section 37.3 is amended as follows:

a. By redesignating paragraphs (b) and (c) as paragraphs (d) and (e);

b. By redesignating paragraph (a)(5) as paragraph (b);

c. By redesignating paragraph (a)(6) introductory text as paragraph (c);

d. By redesignating paragraphs (a)(6)(i) and (ii) as paragraphs (c)(1) and (2); and

e. By redesignating paragraphs (a)(6)(ii)(A) through (H) as paragraphs (c)(2)(i) through (viii).

8. Section 37.6 is revised to read as follows:

9. Section 37.7 is amended by revising paragraph (b) to read as follows:

10. Section 37.8 is amended by revising paragraph (b) to read as follows:

11. Appendix A to Part 37 is amended by revising the heading of the appendix and the first paragraph of the appendix to read as follows:

Appendix A to Part 37—Guidance on Compliance With Registration Criteria

This appendix provides guidance on meeting the criteria for registration under Sections 5a(c) and 6 of the Act and this part, both initially and on an ongoing basis. The guidance following each registration criterion is illustrative only of the types of matters an applicant may address, as applicable, and is not intended to be used as a mandatory checklist. Addressing the issues and questions set forth in this appendix would help the Commission in its consideration of whether the application has met the criteria for registration. To the extent that compliance with, or satisfaction of, a criterion for registration is not self-explanatory from the face of the derivatives transaction execution facility's rules, (as defined in § 40.1 of this chapter), the application should include an explanation or other form of documentation demonstrating that the applicant meets the registration criteria of Section 5a(c) of the Act and § 37.5.

12. Appendix B to Part 37 is amended by revising paragraphs 1. and 3. of the appendix to read as follows:

Appendix B to Part 37—Guidance on Compliance With Core Principles

1. This appendix provides guidance on complying with the core principles in order to maintain registration under Section 5a(d) of the Act and this part. This guidance is illustrative only and is not intended to be used as a mandatory checklist.

3. Alternatively, if an applicant for registration or for reinstatement of registration under § 37.6(b)(2) chooses to provide the Commission with a demonstration of its compliance with core principles, addressing the issues set forth in this appendix would help the Commission in its consideration of such compliance. To the extent that compliance with, or satisfaction of, the core principles is not self-explanatory from the face of the derivatives transaction execution facility's rules, (as defined in § 40.1 of this chapter) a submission under § 37.6(b)(2) should include an explanation or other form of documentation demonstrating that the derivatives transaction execution facility complies with the core principles.

13. Appendix B to Part 37 is further amended by revising the second paragraph of Core Principle 5 to read as follows:

Appendix B to Part 37—Guidance on Compliance With Core Principles

Core Principle 5 of Section 5a(d)(5) of the Act: DAILY PUBLICATION OF TRADING INFORMATION * * *

A board of trade operating as a registered derivatives transaction execution facility should provide to the public information regarding settlement prices, price range, trading volume, open interest and other related market information for all applicable contracts, as determined by the Commission. In making such determination, the Commission will consider whether a contract performs a significant price discovery function for transactions in the cash market for the commodity underlying the contract. The Commission will apply the same standards applicable to exempt boards of trade and exempt commercial markets (see §§ 36.2(b)(2) and 36.3(c)(2), respectively) whereby a market performs a significant price discovery function for transactions in the cash market for an underlying commodity if: (1) Cash market bids, offers or transactions are directly based on, or quoted at a differential to, the prices generated on the market on a more than occasional basis; or (2) the market's prices are routinely disseminated in a widely distributed industry publication and are routinely consulted by industry participants in pricing cash market transactions. In the event the Commission has reason to believe that a derivatives transaction execution facility may meet either of the foregoing standards, or if the facility holds itself out to the public as performing a price discovery function for the cash market for the underlying commodity, the Commission shall notify the facility that it appears to meet the criteria for performing a significant price discovery function under Core Principle 5. Before making a final price discovery determination under this core principle, the Commission shall provide the facility with an opportunity for a hearing through the submission of written data, views and arguments. After consideration of all relevant matters, the Commission shall issue an order containing its determination whether the requirement of the core principle on publication of trading information under Section 5a(d)(5) of the Act applies to a particular contract traded on a facility. Provision of information for any applicable contract could be through such means as providing the information to a financial information service or by placing the information on a facility's Web site. Such information shall be made available to the public without charge no later than the business day following the day to which the information pertains.

PART 38—DESIGNATED CONTRACT MARKETS

14. The authority citation for Part 38 continues to read as follows:

Authority: 7 U.S.C. 2, 5, 6, 6c, 7 and 12a, as amended by Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

15. Section 38.1 is revised to read as follows:

16. Section 38.2 is revised to read as follows:

17. Section 38.5 is amended by revising paragraph (b), redesignating paragraph (c) as paragraph (d), and adding new paragraph (c) as follows:

18. Appendix A to Part 38 is amended by revising the heading of the appendix and the first paragraph of the appendix to read as follows:

Appendix A to Part 38—Guidance on Compliance With Designation Criteria

This appendix provides guidance on meeting the criteria for designation under Sections 5(b) and 6 of the Act and this part, both initially and on an ongoing basis. The guidance following each designation criterion is illustrative only of the types of matters an applicant may address, as applicable, and is not intended to be used as a mandatory checklist. Addressing the issues and questions set forth in this appendix would help the Commission in its consideration of whether the application has met the criteria for designation. To the extent that compliance with, or satisfaction of, a criterion for designation is not self-explanatory from the face of the contract market's rules (as defined in § 40.1 of this chapter), the application should include an explanation or other form of documentation demonstrating that the applicant meets the designation criteria of Section 5(b) of the Act.

19. Appendix A to Part 38 is further amended by revising the second paragraph of Designation Criterion 7 to read as follows:

Appendix A to Part 38—Guidance on Compliance with Designation Criteria

Designation Criterion 7 of Section 5(b) of the Act: PUBLIC ACCESS * * *

A designated contract market should provide information to the public by placing the information on its Web site.

20. Appendix B to Part 38 is amended by revising paragraphs 1. and 2. to read as follows:

Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance With Core Principles

1. This appendix provides guidance on complying with the core principles, both initially and on an ongoing basis, to maintain designation under Section 5(d) of the Act and this part. The guidance is provided in paragraph (a) following each core principle and it can be used to demonstrate to the Commission core principle compliance, under §§ 38.3(a) and 38.5. The guidance for each core principle is illustrative only of the types of matters a board of trade may address, as applicable, and is not intended to be used as a mandatory checklist. Addressing the issues and questions set forth in this appendix would help the Commission in its consideration of whether the board of trade is in compliance with the core principles. To the extent that compliance with, or satisfaction of, a core principle is not self-explanatory from the face of the board of trade's rules (as defined in § 40.1 of this chapter), an application pursuant to § 38.3, or a submission pursuant to § 38.5 should include an explanation or other form of documentation demonstrating that the board of trade 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. Boards of trade 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.

21. Appendix B to Part 38 is further amended by revising paragraph (a)(1) of Core Principle 2 to read as follows:

Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance With Core Principles

Core Principle 2 of Section 5(d) of the Act: COMPLIANCE WITH RULES * * *

(a) Application guidance. (1) A designated contract market should have 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 the contract market's members and by non-intermediated 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 contract market itself or through delegation or contracting-out to a third party. If the contract market 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 program, and the contract market should retain appropriate supervisory authority over the third party.

22. Appendix B to Part 38 is further amended by revising paragraphs (a) and (b) of Core Principle 6 to read as follows:

Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance With Core Principles

Core Principle 6 of Section 5(d) of the Act: EMERGENCY AUTHORITY * * *

(a) Application guidance. A designated contract market should have clear procedures and guidelines for contract market decision-making regarding emergency intervention in the market, including procedures and guidelines to avoid conflicts of interest while carrying out such decision-making. A contract market 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 a contract market's regulatory emergency authority, explaining how conflicts of interest are minimized, and documenting the contract market'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, when carried out pursuant to a contract market's emergency authority. To address perceived market threats, the contract market, among other things, should be able to impose position limits in the delivery month, impose or modify price limits, modify circuit breakers, call for additional margin either from customers or clearing members, 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 market, order the transfer of customer contracts and the margin for such contracts from one member including non-intermediated market participants of the contract market 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]

23. Appendix B to Part 38 is further amended by adding paragraph (b) of Core Principle 7 to read as follows:

Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance With Core Principles

Core Principle 7 of Section 5(d) of the Act: AVAILABILITY OF GENERAL INFORMATION * * *

(b) Acceptable practices. In making information available to market participants and the public, on its Web site, a designated contract market should place information on the Web site no later than the day a new product is listed, the day a new or amended rule is implemented or the day previously disclosed information is changed. For example, the timely provision of this information on a contract market's Web site could be done through press releases, newsletters or notices to members. Additionally, a contract market should ensure that the rulebook posted on its Web site is available to the public (i.e., can be accessed by visitors to the Web site without the need to register, log in, provide a user name or obtain a password) and is kept current. A rulebook will be considered current if: (1) Notice of any substantive new or amended rule is provided within one day of implementation, either by press release, newsletter, notice to members or actual posting of the change in the rulebook; and (2) all new rules, both substantive and non-substantive, are posted in the rulebook within five days of implementation.

24. Appendix B to Part 38 is further amended by adding paragraph (b) of Core Principle 8 to read as follows:

Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance With Core Principles

Core Principle 8 of Section 5(d) of the Act: DAILY PUBLICATION OF TRADING INFORMATION * * *

(b) Acceptable Practices. The mandatory compliance with Section 16.01, “Trading volume, open contracts, prices and critical dates,” required under the regulations, would constitute an acceptable practice under Core Principle 8.

25. Appendix B to Part 38 is further amended by revising paragraph (a) of Core Principle 16 to read as follows:

Appendix B to Part 38—Guidance on, and Acceptable Practices in, Compliance With Core Principles

Core Principle 16 of Section 5(d) of the Act: COMPOSITION OF BOARDS OF MUTUALLY OWNED CONTRACT MARKETS * * *

(a) Application guidance. The composition of a mutually-owned contract market's governing board should fairly represent the diversity of interests of the contract market's market participants.

PART 39—DERIVATIVES CLEARING ORGANIZATIONS

26. The authority citation for Part 39 continues to read as follows:

Authority: 7 U.S.C. 7b, as amended by Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

27. Section 39.3 is revised to read as follows:

PART 40—PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING ORGANIZATIONS

28. The authority citation for Part 40 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as amended by Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

29. Section 40.1 is revised to read as follows:

30. Section 40.2 is revised to read as follows:

31. Section 40.3 is amended by revising paragraphs (a), (c), and (e)(2) to read as follows:

32. Section 40.4 is revised to read as follows:

33. Section 40.5 is amended by revising paragraph (a), revising paragraph (c)(1) and revising paragraph (e)(2) to read as follows:

34. Section 40.6 is amended by revising paragraph (a) introductory text, paragraphs (a)(2) and (3), paragraph (c) introductory text, and paragraphs (c)(1), (c)(2)(iii) and (c)(2)(v), and by adding new paragraphs (a)(4), (c)(2)(vi) and (c)(3)(ii)(F) to read as follows:

35. Section 40.7 is amended by adding paragraphs (a)(3) and (b)(3) to read as follows:

36. Section 40.8 is amended by revising paragraph (b) to read as follows:

37. Appendix D to Part 40 is amended by revising the first paragraph to read as follows:

Appendix D to Part 40—Submission Cover Sheet and Instructions

A properly completed submission cover sheet must accompany all rule submissions submitted electronically by a designated contract market, registered derivatives transaction execution facility, or registered derivatives clearing organization to the Secretary of the Commodity Futures Trading Commission, at submissions@cftc.gov in a format specified by the Secretary of the Commission. Each submission should include the following: