[Federal Register Volume 64, Number 104 (Tuesday, June 1, 1999)]
[Rules and Regulations]
[Pages 29217-29224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13780]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 5
Economic and Public Interest Requirements for Contract Market
Designation
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
revising its Guideline on Economic and Public Interest Requirements for
Contract Market Designation, 17 CFR Part 5, Appendix A (Guideline No.
1). Guideline No. 1 details the information that an application for
contract market designation should include in order to demonstrate that
the contract market meets the economic requirements for designation.
Previously, the Commission promulgated fast-track review procedures to
reduce its review time to review designation applications. To
streamline the application process further, the Commission is revising
Guidelines No. 1, reducing any unnecessary burdens associated with the
designation application itself.
Specifically, the Commission is organizing Guideline No. 1 into
several specific application forms, making use of a chart format for
applications for designation of futures and options contracts to the
extent possible. Moreover, the Commission is clarifying that a portion
of the application may make use of third-party generated materials. In
addition, the Commission is clarifying the review standards for several
of the designation requirements. The Commission also is adding a new
appendix Part 5 specifying the information that a foreign board of
trade should submit to the Commission when seeking no-action relief to
offer and to sell, to persons located in the United States, a futures
contract on a foreign securities index traded on that foreign board of
trade.
EFFECTIVE DATE: August 2, 1999.
FOR FURTHER INFORMATION CONTACT:
Paul M. Architzel, Chief Counsel, Richard H. Shilts, Director, Market
Analysis Section, or Kimberly A. Browning, Attorney/Advisor, Division
of Economic Analysis, Commodity Futures Trading Commission, Three
Lafayette Centre, 1125 21st Street, NW, Washington, DC 20581. Telephone
(202) 418-5260. E-mail: [PArchitzel@cftc.gov], [RShilts@cftc.gov] or
[KBrowning@cftc.gov].
SUPPLEMENTARY INFORMATION:
I. Background
The requirement that contract markets meet specified conditions has
been a fundamental tool of federal regulation of commodity futures
exchanges since the Futures Trading Act of 1921, Pub. L. No. 67-66, 42
Stat. 187 (1921 Act).\1\ Currently, the statutory requirements for
contract market designation are found in Sections 5 and 5a of the
Commodity Exchange Act (Act) and, additionally, for indexes of
securities, in Section 2(a)(1)(B) of the Act. Designated contract
markets must provide for the prevention of dissemination of false
information (Section 5(3) of the Act); must provide for the prevention
of price manipulation (Section 5(4) of the Act); must provide for
delivery periods which will prevent market congestion (Section 5a(a)(4)
of the Act); and must permit delivery on the contract of such grades,
at such points and at such quality and locational differentials as will
tend to prevent or to diminish market manipulation (Section 5a(a)(10)
of the Act).\2\ Included among these provisions is the general
requirement of Section 5(7) of the Act that trading in a proposed
contract not be contrary to the public interest. The contract market
must meet these requirements both initially and on a continuing
basis.\3\
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\1\ A more complete description of the contract market approval
process under the 1921 Act is provided in the proposed rulemaking,
63 FR 38537, n. 1 (July 17, 1998).
\2\ A further listing of contract market approval requirements
under the Act is provided in the proposed rulemaking, 63 FR 38537,
n. 2.
\3\ Generally, the burden of demonstrating compliance rests with
the contract market. Section 6 of the Act provides, in part, that:
Any board of trade desiring to be designated a ``contract
market'' shall make application to the Commission for such
designation and accompany the same with a showing that it complies
with the above conditions, and with a sufficient assurance that it
will continue to comply with the above requirements.
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The Commission, as an aid to the exchanges, has provided guidance
in meeting these statutory requirements. In 1975, the newly formed
Commission, in one of its earliest actions, issued its Guideline on
Economic and Public Interest Requirements for Contract Market
Designation, 40 FR 25849 (1975) (``Guideline No. 1'').
Subsequently, the Commission revised this Guideline, publishing it
as Appendix A to Part 5 of the Code of Federal Regulations. 47 FR 49832
(November 3, 1982). Guideline No. 1 was again revised in 1992. 57 FR
3518 (January 30, 1992). The 1992 revisions streamlined the designation
application for both futures and option contract markets. In addition,
the 1992 revisions introduced the use of a new checklist-style format
for applications for designation of option contracts.\4\
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\4\ For a more complete discussion of the revisions made to
Guideline No. 1 in 1982 and 1992, see 63 FR 38537-38538.
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In 1997, the Commission began a far-reaching program of regulatory
reform. Its first initiative was to establish fast-track procedures for
Commission review and approval of applications for contract market
designation. See, Commission Rule 5.1, 62 FR 10434 (March 7, 1997). The
fast-track procedure creates a streamlined and speedy alternative
review process for Commission consideration of designation
applications, reducing unnecessary regulatory burdens on exchanges
while also preserving the opportunity for public participation and
[[Page 29218]]
fulfillment of the Commission's oversight responsibilities.\5\
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\5\ Under the fast-track review procedures, applications for
designation of certain cash-settled futures and option contracts are
deemed to be approved in as few as ten days after receipt. Other
applications are deemed approved 45 days after receipt, absent
contrary notification. Since implementing the fast-track review rule
in April 1997, 59 contracts have been approved by the Commission
under this rule, 26 under the 10-day procedure and 33 under the 45-
day procedure. An additional 55 contracts were approved under non-
fast-track review procedures.
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The Commission, in addition to promulgating the fast-track review
rules, indicated its intent broadly to reexamine the form and content
requirements of Guideline No. 1, including consideration of the
possible applicability of an option-style checklist to applications for
designation of proposed futures contracts.\6\ The Commission has noted
that ``[i]mplementation of fast-track review and approval procedures,
separately and together with the planned revision of the format and
content requirements for designation applications, should result in
significantly streamlining the procedures and regulatory requirements
associated with the current contract designation process,'' 62 FR
10435, and that these initiatives should permit the exchanges greater
flexibility to compete with foreign exchange-traded products and with
both foreign and domestic over-the-counter transactions while
maintaining the basic protections embedded in the Act. 61 FR 59390
(November 22, 1996). In this regard, the Commission's approval process
for new contracts, as well as its designation application process, also
is in keeping with a 1998 International Organization of Securities
Commissions' (IOSCO) publication entitled ``Applicability of the
Surveillance Guidance to Other Exchange-Traded Derivatives Products.''
That IOSCO report makes general recommendations to market authorities
concerning what a market surveillance program should contain to monitor
effectively exchange derivatives markets without unnecessarily
affecting market innovation.
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\6\ Guideline No. 1 applies only to the economic requirements
that must be met in order to be designated as a contract market.
Additional requirements are found in the Commission's Guideline No.
2, 1 Comm. Fut. L. Rep (CCH) para. 6430. These relate to the
contract market's program for compliance with its self-regulatory
responsibilities. Generally, the review of these issues is most
significant in connection with the first application for contract
designation from a particular board of trade.
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A. Proposed Amendments
Based upon its experience in administering the current Guideline
and the fast track procedures, the Commission proposed to revise
Guideline No. 1 in several important respects. 63 FR 38537 (July 17,
1998). First, the Commission proposed to streamline the Guideline by
reorganizing its contents to present applications for designation of
futures contracts in a clearer, more focused format including the use
of charts. Specifically, the Commission proposed to reorganize the
contents of the Guideline to address applications for four different
types of contracts: (1) Physical delivery futures; (2) cash-settled
futures; (3) options on futures; and (4) options on physicals. Except
for options on physicals, each separate application was proposed to be
self-contained. Under the proposed amendments, information for option
contracts would continue to be provided by checklist. In addition, the
Commission proposed to clarify certain standards for review which have
evolved based upon administrative experience and to clarify that
exchanges may use information developed by third parties in the
application.
Finally, the Commission proposed that a new appendix be added to
Part 5 specifying the information that a foreign board of trade should
file with the Commission when seeking no-action relief to offer and to
sell in the United States a futures contract on a foreign securities
index traded on that foreign board of trade.
B. Comments
Two commenters, the Chicago Board of Trade (CBT) and the
Minneapolis Grain Exchange (MGE), responded to the notice of proposed
rulemaking. Both CBT and MGE favored strongly the Commission's proposed
revisions to streamline Guideline No. 1. However, although MGE
supported the proposed revisions clarifying the review standards for
several of the designation requirements, CBT opposed the proposed
clarification of the review standards. The MGE's and the CBT's comments
are discussed more fully below.
II. Final Revisions to the Guideline
Based upon thorough and careful consideration of the comments to
the proposed rulemaking and its experience in administering the current
Guideline as well as the fast-track procedures, the Commission has
determined to revise Guideline No. 1.
A. Final Changes to the Guideline's Format
1. Cash Market Overview
Currently, exchanges are required to include a cash market
description in their designation application. 17 CFR Part 5, Appendix A
(a)(1). To reduce the burden on the exchanges in satisfying the
Guideline's cash-market overview standards, the Commission is amending
Guideline No. 1, as proposed, to recognize explicitly the acceptability
of a variety of materials in fulfillment of this requirement. This
final revision permits exchanges to submit cash-market descriptions
based not only on material their staffs generate, but also on materials
obtained from other sources.\7\ An exchange may develop such material
through outside sources during a feasibility study of a proposed
contract, as part of the exchange's development and consideration of a
proposal or as part of its new product marketing effort. The two
commenters, CBT and MGE, both supported this proposed revision. In
particular, CBT was of the view that contracts markets using third
party materials in support of their designation applications will
experience financial and staff resource savings. Specifically, CBT
stated that:
\7\ In allowing the submission of such third party materials,
the Commission is not amending the requirement that each application
(except for options on futures) must include a cash-market overview.
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[T]hird-party material is often times readily available to
contract markets from sources such as trade groups and consultants
[and] can prove less expensive to obtain than having a contract
market's own staff, which may have limited resources, do the
research and compile the data [in support of the application].
Moreover, this data from third parties can prove beneficial in that
certain trade groups and consultants may possess a high level of
expertise and knowledge of the subject matter in question.\8\
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\8\ See, CBT's comment letter submitted to the Commission in
response to the proposed rulemaking dated September 15, 1998 at p.
2.
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2. Charts Relating to Individual Contract Terms and Conditions
Guideline No. 1 requires exchanges to explain how each major term
of a proposed contract, except for those identical to terms the
Commission already has approved, is consistent with cash market
practices or to justify the reason why the contract terms appropriately
are inconsistent with such practices. Under the former Guideline,
exchanges submitted this explanation or justification in narrative
form. Further to streamline the application process, the Commission is
clarifying, as proposed, that an exchange, in lieu of a
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narrative description, may complete a chart to provide the required
information.\9\ The revised chart format reduces the amount of verbiage
and the overall length of designation applications. Both of the
commenters agreed that the proposed chart format would benefit contract
markets by reducing the amount of paperwork, costs and time necessary
to satisfy designation application requirements.
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\9\ Exchanges still have the option of submitting the required
explanation or justification in narrative form if they perfer.
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As the Commission noted in the notice of proposed rulemaking, the
chart is a template enumerating the significant contract terms and
conditions typically contained in most contracts. That template may be
modified as necessary to reflect the nature of the particular
commodity, the economic characteristics of the commodity or the
contract's specific terms and conditions.\10\
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\10\ For example, if a contract provides for more than one
quality specification under commodity characteristics (e.g., a grade
standard as well as a weight specification), the board of trade may
add a separate line item to address each commodity characteristic
separately. For line items in the chart that are not applicable to
the proposed contract, the board of trade should simply indicate
``N.A.''
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The designation application includes a brief description of the
contract's major terms and conditions. Where the term is consistent
with prevailing cash market practices, column 4 may be completed by
providing a very brief statement as to how the term or condition
comports with cash practices. However, where the term or condition does
not comport with cash market practices, a more extensive discussion is
required showing why the provision is necessary or appropriate for the
hedging or pricing utility of the contract and the overall effect of
the provision on deliverable supplies. Consistent with current
requirements, no such justification of an individual term or condition
is required when that term or condition is the same as one the
Commission already approved. For such contract terms, the board of
trade should refer in column 2 of the chart to the rule number or other
description of the original approved provision.
In keeping with current requirements, the application also requires
an exchange to specify exchange speculative position limits. The
Commission on April 27, 1999, amended its speculative position limit
rules and recodified the provisions of rule 1.61 as rule 150.5. 64 FR
24038 (May 5, 1999). Guideline No. 1 has been amended to conform to the
requirements of new rule 150.5. The Guideline No. 1 application forms
set out the operative requirements for exchange speculative position
limits at the time of initial designation. Specifically, the spot-month
position limits for physical delivery contracts should be set in
relation to the contract's deliverable supply estimate \11\ and for
cash-settled contracts should be no greater than necessary to minimize
the potential for manipulation or distortion of the contract's or the
underlying commodity's price.
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\11\ However, it should be noted that spot-month speculative
position limits are not a substitute for inadequate deliverable
supplies. In this respect, the fact that an exchange may specify a
spot-month speculative position limit that equals or is less than
the ``rule-of-thumb'' standard of one-fourth of a low deliverable
supply estimate does not mean that deliverable supplies are at
adequate levels. The Commission has approved new futures contracts
or amended existing futures contracts with low deliverable supplies
only after an exchange has exhausted potential sources of
deliverable supplies and, if necessary, adopted low spot-month
speculative limits to give it the ability to limit potential
delivery demand. The preferred approach under the Act if deliverable
supplies are inadequate is for the exchange to modify the delivery
specifications to enhance deliverable supplies. See, section
5a(a)(10) of the Act.
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Guideline No. 1 incorporates the operative provisions of rule
150.5(a) and (b) that establish the requirements for speculative
position limits at the time of initial contract designation. Subsequent
amendments to exchange-set speculative position limits which are
permitted under other provisions of Commission rule 150.5 are not
included on the application form. For example, adjustments to the
initial speculative position limits are permitted under Commission rule
1505(c) as open interest in a contract grows, and various forms of
position accountability rules may be substituted for speculative
position limits under Commission rule 150.5(e). In addition, exchange
speculative position limits are not required for contracts on a ``major
foreign currency'' under Commission rule 1505(a), and applications for
designation of such a contract may simply leave that box of the
application blank.
To facilitate the submission of cash-market description data, the
Commission is providing, through its Division of Economic Analysis Web
Site (www.cftc.gov/dea/dea.html), the charts relating to individual
contract terms and conditions, as described above. The exchanges will
be able to download these charts onto their own computer systems for
completion. The Commission believes that using such electronic charts
will reduce the amount of paperwork generated during the designation
application process. In addition, the use of these charts will foster
more uniform exchange designation application submissions, aiding
Commission staff in performing expeditious application reviews.
B. Clarification of Review Standards
As explained in the proposed rulemaking, central to an application
for designation is an exchange's demonstration that the proposed
contract will not be susceptible to price manipulation or distortion.
For physical delivery contracts, this requires a demonstration that the
deliverable supplies provided under the contract's terms are adequate,
and for cash-settled contracts, this requires that the cash price
series to be used for settlement is reliable. In light of the
importance of these issues to a designation application, the Commission
is clarifying as proposed, these requirements in the Guideline.
The two commenters gave differing views concerning these proposed
clarifications. Specifically, MGE favored them and stated that
``clarifying the [designation application] information required [is a]
welcomed improvement to the application process.'' \12\ CBT, however,
opposed the proposed clarifications. In particular, CBT expressed the
view that adoption of the proposed revisions would inhibit necessary
flexibility during the designation application process.
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\12\ See MGE's comment letter to the proposed rulemaking dated
September 15, 1998.
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1. Adequacy of Deliverable Supply
Exchanges are required to demonstrate that proposed contracts
provide for deliverable supplies that will not be conducive to price
manipulation or distortion. The Commission is clarifying, as proposed,
the requirement that an exchange include in its designation application
an analysis of the adequacy of deliverable supply, including an
estimate of the deliverable supplies for the delivery months specified
in the proposed contract. Under the former Guideline, the requirement
of an estimate of deliverable supplies was implicit. This final
clarification explicitly requires that applications for designation of
a physical delivery futures contract include within a separate chart a
quantitative estimate of expected deliverable supplies and a
description of the methodology used to derive the estimate.
For commodities with seasonal supply or demand characteristics, the
deliverable supply analysis should be based on that period when
potential supplies typically are at their lowest
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levels. The estimate should be based on statistical data when
reasonably available covering a period of time that is representative
of actual patterns of production and consumption of the commodity. If
data are taken from publicly available sources, the board of trade
should reference the source material used. If the board of trade
independently derives the estimate based on information not readily
verifiable or on trade interviews, the Commission may request that the
board of trade provide the workpapers or other source materials used in
the analysis.
As mentioned above, CBT did not favor the proposed clarifications.
In particular, CBT argued that the Commission should provide a more
definitive description of deliverable supply for the relevant cash
market, as well as explain its ``rule-of-thumb'' formula for
determining spot month speculative limits.\13\ However, the Guideline
does provide such guidance on deriving an estimate of deliverable
supplies. The estimate of deliverable supplies should be made taking
into consideration the terms and conditions specified for the
deliverable product and the economic realities of the cash market
underlying the futures contract.\14\ Thus, for example, it should take
into account the deliverable supply which is available when quality and
price differentials are applied. For a physical-delivery futures
contract, this estimate represents product which is in store at the
delivery point(s) specified in the futures contract or economically can
be moved into or through such points consistent with the delivery
procedures set forth in the contract and which is available for sale on
a spot basis within the marketing channels that normally are tributary
to the delivery point(s). For contracts that utilize a shipping
certificate or similar delivery instrument, the estimate of deliverable
supply should reflect the fact that the underlying commodity may not
have to be moved into or through the delivery point(s) prior to
delivery of the shipping certificate in the futures market.
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\13\ In its comments to the proposed rulemaking, CBT reasserts
the arguments it made in a proceeding instituted by the Commission
under Section 5a(a)(10) of the Act concerning the delivery
specifications for CBT's corn and soybeans futures contracts. See,
62 FR 60831 (November 13, 1997) (Commission Order changing and
supplementing under Section 5a(a)(10) of the Act delivery terms of
the CBT's corn and soybeans futures contracts). The Commission's
determination in that proceeding was based on the application of the
standards of Guideline No. 1 and Section 5a(a)(10) of the Act to the
particular facts of those markets. The clarification of Guideline
No. 1 as proposed is independent of its specific determination in
that proceeding.
\14\ Only product meeting the specified quality standards (e.g.,
the grade, age, purity, weight, etc. for tangible commodities or the
issue, maturity, rating, etc. for financial instruments) is eligible
for delivery on a futures contract and should be considered as part
of the deliverable supply.
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For financial instrument contracts, deliverable supply consists of
available supplies of the instrument meeting the contract's delivery
standards that are available, at prevailing cash market values, to
traders wishing to make future delivery. For example, significant
quantities of off-the-run notes and bonds typically may be held by the
Federal Reserve and long-term investment portfolios (e.g., pension
funds) and would not be readily available for delivery on proposed
futures contracts on U.S. government debt instruments except at
distorted prices. Recognizing this and based on the opinions of
knowledgeable industry participants, Commission staff historically has
used a rule-of-thumb that only 50 percent of the on-the-run U.S.
Treasury bond and 10 percent of each of the next two off-the-run bonds
are economically available for delivery.
2. Justification of Cash Settlement Price
The adequacy of the procedures for determining the cash settlement
price is central to the Commission's review of proposed cash-settled
contracts. Applications for such proposed futures contracts continue to
be required to demonstrate that those procedures will result in a cash
settlement price which reflects the underlying cash market and is not
subject to manipulation or distortion. In order to provide additional
guidance to exchanges in meeting this requirement, the Commission is
clarifying, as proposed, two of the criteria, which it has identified
through past experience for meeting these requirements. In this regard,
any cash settlement price which an exchange determines through a survey
method to elicit price quotes should include a number of polled
entities which is representative of the underlying cash market. In no
event, however, may the polling sample include fewer than four
unrelated entities that do not take positions for their own account in
the futures, option or underlying cash markets. Where the entities to
be polled may trade in such markets for their own accounts, a minimum
of eight unrelated entities is required.
After thoroughly considering all the comments received and based
upon its own analysis, the Commission believes that the Guideline
strikes the appropriate balance of providing greater clarification and
specificity of the review standards without impeding the flexibility
necessary for an effective designation application review process.
C. Foreign Futures Markets
The offer or sale in the United States of futures contracts traded
on or subject to the rules of a foreign board of trade is subject to
the Commission's exclusive jurisdiction.\15\ Although Section
2(a)(1)(B)(ii) of the Act provides that the Commission shall not
designate a board of trade as a contract market in a futures on a
securities index unless the Commission finds that the board of trade
meets three enumerated criteria,\16\ Congress understood that a foreign
board of trade would not necessarily have to obtain contract
designation in order to offer futures contracts on stock indexes. Thus,
the House Committee on Agriculture suggested that a foreign board of
trade could apply for ``certification'' that its stock index contract
meets all applicable Commission requirements. H.R. Rep. No. 565, Part
1, 97th Cong., 2d Sess. 85 (1982). That Committee further explained
that a foreign board of trade seeking to offer and to sell, to persons
located in the United States, a futures contract based upon an index of
United States securities must demonstrate that the proposed futures
contract meets the requirements set forth in Section 2(a)(1)(B)(ii).
Id. With regard to a foreign exchange traded futures contract based on
`` foreign securities,'' the House Committee suggested that the
Commission use such criteria as it deems appropriate.
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\15\ Section 2(a)(1)(A), 7 U.S.C. 2 (1982); 120 Cong. Rec. 34497
(1974) (statement of Senator Talmadge) (the terms ``any other board
of trade, exchange, or market'' in Section 2(a)(1)(A) make clear the
Commission's exclusive jurisdiction includes futures contracts
executed on a foreign board of trade, exchange or market).
\16\ These three criteria in Section 2(a)(1)(B)(ii) are:
(1) The contract must provide for cash settlement;
(2) The proposed contract will not be readily susceptible to
manipulation or to being used to manipulate any underlying security;
and
(3) The index is predominately composed of the securities of
unaffiliated issuers and reflects the market for all publicly traded
securities or a substantial segment thereof.
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The Commission has not promulgated procedures for foreign boards of
trade filng requests to offer or to sell such contracts, but instead
its staff has issued ``no-action'' letters \17\ regarding foreign
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stock index contracts based on foreign securities using the criteria
set forth in Section 2(a)(1)(B)(ii) of the Act. As of March 16, 1999,
such action has been taken for 24 stock index contracts for offer or
sale to persons located in the U.S. submitted by 15 foreign boards of
trade.\18\
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\17\ A no-action letter is a written statement issued by the
staff of a specific division of the Commission or the Office of the
General Counsel that it will not recommend enforcement action to the
Commission if a proposed transaction is completed or a proposed
activity is conducted by the beneficiary. A no-action letter
represents the position only of the division that issued it, or the
Office of the General Counsel if issued thereby. A no-action letter
binds only the issuing division or the Office of the General
Counsel, as applicable, and not the Commission or other Commission
staff. Further, a no-action letter is only effective with respect to
the person or persons to whom it was issued. Commission Rule 140.99.
See, 63 FR 68175 (December 10, 1998).
\18\ These 15 foreign boards of trade include: (1) Osaka
Securities Exchange; (2) Tokyo Stock Exchange; (3) Hong Kong Futures
Exchange; (4) Singapore International Monetary Exchange, Ltd.; (5)
Toronto Futures Exchange; (6) International Futures Exchange
(Bermuda), Ltd.; (7) London International Financial Futures and
Options Exchange Limited; (8) Marche a Terme International de
France; (9) Sydney Futures Exchange Limited; (10) Meff Sociedad
Rectora de Productos Financieros Derivados de Renta Variable, S.A.
(Spain); (11) Deutsche Terminborse; (12) Italian Stock Exchange;
(13) The Amsterdam Exchanges; (14) OMLX, The London Securities and
Derivatives Exchange, Ltd.; and (15) OM Stockholm AB.
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As detailed in the notice of proposed rulemaking at 63 FR 38540,
the staff has analyzed such requests for a ``no-action'' opinion under
the requirements of Section 2(a)(1)(B)(ii) of the Act. Accordingly, the
staff has requested that the foreign board of trade file information
that the staff deems relevant to those criteria. To facilitate the
staff's review of such requests by foreign boards of trade, the
Commission is adding, as proposed, a separate appendix to Part 5
enumerating the information that foreign boards of trade should file
with the Commission to assist in the staff's analysis of such requests.
Some of the data which should be included are: the terms and conditions
of the contract and all other relevant rules of the exchange;
information on information sharing arrangements or any legal obstacles
to such sharing of information; and specific information related to the
composition and computation of the index. All information should be
submitted in English, including any supplemental material such as
explanatory notes, appended tables or charts. It should be noted that,
in particular instances, the Commission consults with the Securities
and Exchange Commission (SEC) regarding these contracts. When such
consultation occurs, the SEC may request additional information.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies consider the impact of those rules on small
entities. The Commission has previously determined that contract
markets are not ``small entities'' for purposes of the RFA, 5 U.S.C.
601 et seq. 47 FR 18618 (April 30, 1982). These final amendments
establish alternative streamlined procedures for Commission review and
approval of contract market designation applications and of amendments
to contract terms and conditions. Accordingly, the Chairperson, on
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.
605(b), that the action taken herein will not have a significant
economic impact on a substantial number of small entities.
B. Paperwork Reduction Act
When publishing final rules, the Paperwork Reduction Act (``PRA'')
of 1995 {Pub. L. 104-13 (May 13, 1995)} imposes certain requirements on
federal agencies (including the Commission) in connection with their
conducting or sponsoring any collection of information as the PRA
defines. In compliance with the Act, these final rules inform the
public of:
(1) The reason the information is planned to be and/or has been
collected; (2) the way such information is planned to be and/or has
been used to further the proper performance of the functions of the
agency; (3) an estimate, to the extent practicable, of the average
burden of the collection (together with a request that the public
direct to the agency any comments concerning the accuracy of this
burden estimate and any suggestions for reducing this burden); (4)
whether responses to the collection of information are voluntary,
required to obtain or retain a benefit or mandatory; (5) the nature and
extent of confidentiality to be provided, if any; and (6) the fact that
any agency may not conduct or sponsor, and a person is not required to
response to, a collection of information unless it displays a currently
valid OMB control number.
The Commission previously submitted this rule and its associated
information collection requirements to the Office of Management and
Budget. The Office of Management and Budget approved the collection of
information associated with this rule on October 24, 1998, and assigned
OMB control number 3038-0022 to the rule. The burden associated with
this entire collection (3038-0022) including this final rule, is as
follows:
Average burden hours per response: 3,609.
Number of Respondents: 15,693.
Frequency of response: on Occasion.
The burden associated with this specific rule is as follows:
Average burden hours per response: 58.
Number of Respondents: 11.
Frequency of response: on Occasion.
Person wishing to comment on the information this final rule
requires should contact the Desk Officer, CFTC, Office of Management
and Budget, Room 10202, NEOB, Washington, DC 20503, (202) 395-7340.
Copies of the information collection submission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC
20581, (202) 418-5160.
Copies of the OMB-approved information collection package
associated with this rulemaking may be obtained from Desk Officer,
Commodity Futures Trading Commission, Office of Management and Budget,
Room 10202, NEOB Washington, D.C. 20503, (202) 395-7340.
List of Subjects in 17 CFR Part 5
Commodity futures, Contract markets, Designation application,
Reporting and recordkeeping requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act, and particular sections 4c, 5,
5a, 6 and 8a, 7 U.S.C. 6c, 7, 7a, 8, and 12a, the Commission hereby
amends Chapter I of Title 17 of the Code of Federal Regulations by
amending Part 5 as follows:
PART 5--DESIGNATION OF AND CONTINUING COMPLIANCE BY CONTRACT
MARKETS
1. The authority citation for Part 5 continues to read as follows:
Authority: 7 U.S.C. 6c, 7, 7a, 8 and 12a.
2. In Part 5, Appendix A is revised to read as follows:
Appendix A to Part 5--Guideline No. 1; Interpretative Statement
Regarding Economic and Public Interest Requirements for Contract Market
Designation
(a) Application for Designation of Physical Delivery Futures
Contracts
A board of trade shall submit:
(1) The rules setting froth the terms and conditions of the
futures contract.
(2) A description of the cash market for the commodity on which
the contract is based.
(i) The description may include, in addition to or in lieu of
materials prepared by the board of trade, existing studies by
industry trade groups, academics, governmental bodies or other
entities, reports of consultants, or other materials which provide a
description of the underlying cash market.
(ii) Where the same, or a closely related commodity, is already
designated as a contract market which and is not dormant, the cash
market description can be confined to those aspects relevant to
particular term(s) or condition(s) which differ from such existing
contract.
[[Page 29222]]
(3) A demonstration that the terms and conditions, as a whole,
will result in a deliverable supply such that the contract will not
be conducive to price manipulation or distortion and that the
deliverable supply reasonably can be expected to be available to
short traders and salable by long traders at its market value in
normal cash marketing channels.
For purposes of this demonstration, provide the following
information in chart or narrative form.
Contract Terms and Conditions
----------------------------------------------------------------------------------------------------------------
Explanation as to
Rule number of consistency with,
Exchange identical or reason for
Term or condition proposal approved variance from
provision, if any cash market
\1\ practice
----------------------------------------------------------------------------------------------------------------
1. Commodity characteristics (e.g., grade, quality, ................. ................. .................
weight, class, growth, issuer, origin, maturity,
source, rating, etc.).................................
2. Any quality differentials for nonpar deliveries, or ................. ................. .................
lack thereof..........................................
3. Delivery points/region.............................. ................. ................. .................
4. Any locational differentials for nonpar deliveries, ................. ................. .................
or lack thereof.......................................
5. Delivery facilities (type, number, capacity, ................. ................. .................
ownership)............................................
6. Contract size and/or trading unit................... ................. ................. .................
7. Delivery pack or composition of delivery units...... ................. ................. .................
8. Delivery instrument (e.g., warehouse receipt, ................. ................. .................
shipping certificate, bill of lading).................
9. Transportation terms (e.g., FOB, CIF, prepay freight ................. ................. .................
to destination).......................................
10. Delivery procedures................................ ................. ................. .................
11. Delivery months.................................... ................. ................. .................
12. Delivery period and last trading day............... ................. ................. .................
13. Inspection/certification procedures (verification ................. ................. .................
of delivery eligibility, any discounts applied for
age)..................................................
14. Minimum price change (tick) equal to or less than ................. ................. .................
cash market minimum price increment...................
15. Daily price limit provisions (note relationship to ................. ................. .................
cash market price movements)..........................
----------------------------------------------------------------------------------------------------------------
DELIVERABLE SUPPLIES \2\--ESTIMATE OF DELIVERABLE SUPPLIES FOR TRADING MONTH(S) WITH LOWEST SUPPLIES
----------------------------------------------------------------------------------------------------------------
ESTIMATION METHODOLOGY................................. ................. ................. .................
----------------------------------------------------------------------------------------------------------------
\1\ If an identical provision has been approved for a nondormant contract in the same commodity, there is no
need to provide an explanation in the next column.
\2\ No estimate of deliverable supply is needed if a previously designated nondormant contract is trading. Also,
no justification of the spot month limit is needed if the limit is the same as that approved by the Commission
for an identical contract in that commodity (relative to the quantity or value of the identical contract).
Where more than one contract is based on the same underlying commodity or instrument, positions should be
combined for purposes of applying speculative limits.
Terms and Conditions Related to Speculative Limits
----------------------------------------------------------------------------------------------------------------
Level (exchange
Speculative limit Standard rule)
----------------------------------------------------------------------------------------------------------------
1. Spot month................................. No greater than one-fourth of estimated .................
deliverable supply.
2. Nonspot individual month or all months 5,000 contract............................... .................
combined (financial and energy contract).
3. Nonspot individual month or all months 1,000 contracts.............................. .................
combined (tangible commodity contracts).
4. Reporting level............................ Equal to or less than levels specified in .................
CFTC rule 15.03.
5. Aggregation rule........................... Same as CFTC rule 150.5(g) or previously .................
approved language.
----------------------------------------------------------------------------------------------------------------
(4) As specifically requested, such additional evidence,
information or data relating to whether the contract meets,
initially or on a continuing basis, any of the specific requirements
of the Act, including the public interest standard contained in
Section 5(7) of the Act, and whether the contract reasonably can be
expected to be, or has been, used for hedging and/or price basing on
more than an occasional basis, or any other requirement for
designation under the Act or Commission rules and policies.
(b) Application for Cash Settled Futures Contracts
A board of trade shall submit:
(1) The rules setting forth the terms and conditions of the
proposed futures contract.
(2) A description of the cash market for the commodity on which
the contract is based.
(i) The description may include, in addition to or in lieu of
materials prepared by the board of trade, existing studies by
industry trade groups, academics, governmental bodies or other
entities, reports of consultants, or other materials which provide a
description of the underlying cash market.
(ii) Where the same, or a closely related commodity, is already
designated as a contract market which is not dormant, the cash
market description can be confined to those aspects relevant to
particular term(s) or conditions(s) which differ from such existing
contract.
(3) A demonstration that cash settlement of the contract is at a
price reflecting the underlying cash market, will not be subject to
manipulation or distortion, and is based on a cash price series that
is reliable, acceptable, publicly available and timely.
For purposes of this demonstration, provide the following
information in chart or narrative form.
[[Page 29223]]
Contract Terms and Conditions
----------------------------------------------------------------------------------------------------------------
Explanation as to
Rule number of consistency with,
identical or reason for
Term or condition approved variance from,
provision, if cash market
any\1\ practice
----------------------------------------------------------------------------------------------------------------
1. Commodity characteristics (e.g., grade, quality, ................. ................. .................
weight, class, growth, issuer, maturity, source,
rating, etc.).........................................
2. Delivery months, noting any cyclical variations in ................. ................. .................
trading activity that may affect the potential for
manipulating the cash settlement price................
3. Last trading day.................................... ................. ................. .................
4. Contract size....................................... ................. ................. .................
5. Minimum price change (tick)......................... ................. ................. .................
6. Daily price limit provisions, relative to cash
market price movements................................
----------------------------------------------------------------------------------------------------------------
\1\ If an identical provision has been approved for a nondormant contract in the same commodity, there is not
need to provide an explanation in the next column.
Terms and Conditions Related to Cash Settlement Price Series
------------------------------------------------------------------------
Rule number of
identical Explanation or
Requirement approved justification
provision
------------------------------------------------------------------------
1. Where an independent third ................. .................
party calculate the cash
settlement price series, evidence
that the third party does not
object to its use and provides
safeguards against susceptibility
to manipulation..................
2. Where board of trade generates ................. .................
cash settlement rice series,
specifications of calculation
procedure and safeguards in cash
settlement process to protect
against susceptibility to
manipulation (e.g., if self-
generated survey, polling sample
representative of cash market,
but with a minimum of 4
nontrading entities or 8 entities
that trade for own account)......
3. Procedure for, and timeliness ................. .................
of, dissemination to public......
4. Evidence that price is reliable ................. .................
indicator of cash market values
and acceptable for hedging.......
------------------------------------------------------------------------
Terms and Conditions Related to Speculative Limits
----------------------------------------------------------------------------------------------------------------
Level (exchange
Speculative limit Standard rule)
----------------------------------------------------------------------------------------------------------------
1. Spot month................................. Must be no greater than necessary to minimize .................
the potential for manipulation or distortion
of the contract's or the underlying
commodity's price.
2. Nonspot individual month or all months 5,000 contracts.............................. .................
combined (financial and energy contracts).
3. Nonspot individual month or all months 1,000 contracts.............................. .................
combined (tangible commodity contracts).
4. Reporting level............................ Equal to or less than levels specified in .................
CFTC rule 15.03.
5. Aggregation rule........................... Same as CFTC rule 150.5(g) or previously .................
approved language.
----------------------------------------------------------------------------------------------------------------
(4) As specifically requested, such additional evidence,
information or data relating to whether the contract meets,
initially or on a continuing basis, any of the specific requirements
of the Act, including the public interest standard contained in
Section 5(7) of the Act, and whether the contract reasonably can be
expected to be, or has been, used for hedging and/or price basing on
more than an occasional basis, or any other requirement for
designation under the Act or Commission rules and policies.
(c) Application for Option Contracts
A board of trade shall submit:
(1) The rules setting forth the terms and conditions of the
proposed option contract.
(2)(i) For options on futures contracts, the terms and
conditions of the proposed or existing underlying futures contract.
(2)(ii) For options on physical commodities:
(A) A description of the cash market for the commodity on which
the contract is based.
(1) The description may include, in addition to or in lieu of
material prepared by the board of trade: existing studies by
industry trade groups, academics, governmental bodies or other
entities; promotional or marketing materials prepared by or for the
board of trade; reports of consultants; or other materials which
provide a description of the underlying cash market.
(2) Where the same, or a closely related commodity, is already
designated and is not dormant, the cash market description can be
confined to those aspects relevant to particular term(s) or
condition(s) which differ from such existing contract.
(B) Depending on the method of settling the option, the relevant
chart for either a physical delivery or cash settled futures
contract.
(3) The following completed chart.
[[Page 29224]]
Terms and Conditions
--------------------------------------------------------------------------------------------------------------------------------------------------------
Justification for
not meeting
Applicable CFTC Rule (17 Met by exchange standard, or rule
Criterion CFR) Standard rule number number of
identical
approved rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Speculative limits.................... 150.5...................... Combined net position in futures and ................. .................
options on a futures-equivalent basis at
the futures position levels, with inter-
month spread exemptions that are
consistent with those of the futures
contracts or consistent with Commission
Rule 150.5(e) for underlying future.
2. Aggregation rule...................... 150.4...................... Same as Rule 150.5(g) or previously ................. .................
approved language.
3. Reporting level....................... 15.00(b)(2)................ 50 contracts or fewer..................... ................. .................
4. Strike prices (number listed & 33.4(b)(1)................. Procedures for routine listing of strikes ................. .................
increments). are specified and automatic, provisions
for listing discretionary strikes are
specified.
5. Option expiration & last trading day.. 33.4(b)(2)................. Except for options on cash-settled futures ................. .................
contracts, expiration is not less than
one business day before the earlier of
the last trading day or the first notice
day of the underlying future.
6. Minimum tick.......................... 33.4(d).................... Equal to, or less than, the underlying ................. .................
futures tick.
7. Daily price limit, if specified....... 33.4(d).................... Equal to, or greater than, the underlying ................. .................
futures price limit.
--------------------------------------------------------------------------------------------------------------------------------------------------------
(4) As specifically requested, such additional evidence,
information or data relating to whether the contract meets,
initially or on a continuing basis, any of the specific requirements
of the Act, including the public interest standard contained in
Section 5(7) of the Act, or any other requirement for designation
under the Act or Commission rules and policies.
3. Part 5 is amended by adding new Appendix E to read as
follows:
Appendix E--Information That a Foreign Board of Trade Should Submit
When Seeking No-Action Relief to Offer and Sell, to Persons Located in
the United States, a Futures Contract on a Foreign Securities Index
Traded on That Foreign Board of Trade
A foreign board of trade seeking no-action relief to offer and
to sell, to persons located in the U.S., a futures contract on a
foreign securities index traded on that foreign board of trade
should submit the following in English:
(1) The terms and conditions of the contract and all other
relevant rules of the exchange and, if applicable, of the exchange
on which the underlying securities are traded, which have an effect
on the over-all trading of the contract, including circuit breakers,
price limits, position limits or other controls on trading;
(2) Surveillance agreements between the foreign board of trade
and the exchange(s) on which the underlying securities are traded;
(3) Information sharing agreements between the host regulator
and the Commission or assurances of ability and willingness to share
information with the Commission and assurances from the foreign
board of trade of its ability and willingness to share information
with the Commission, either directly or indirectly.
(4) When applicable, information regarding foreign blocking
statutes and their impact on the ability of United States government
agencies to obtain information concerning the trading of such
contracts; and
(5) Information and data denoted in U.S. dollars relating to:
(i) The method of computation, availability, and timeliness of
the index;
(ii) The total capitalization, number of stocks (including the
number of unaffiliated issuers if different from the number of
stocks), and weighting of the stocks by capitalization and, if
applicable, by price in the index;
(iii) Breakdown of the index by industry segment including the
capitalization and weight of each industry segment;
(iv) Procedures and criteria for selection of individual
securities for inclusion in, or removal from, the index, how often
the index is regularly reviewed, and any procedures for changes in
the index between regularly scheduled reviews;
(v) Method of calculation of the cash-settlement price and the
timing of its public release;
(vi) Average daily volume of trading by calendar month, measured
by share turnover and dollar value, in each of the underlying
securities for a six month period of time and, separately, the daily
volume in each underlying security for six expirations (cash-
settlement dates) or for the six days of that period on which cash-
settlement would have occurred had each month of the period been an
expiration month; and
(vii) If applicable, average daily futures trading volume.
Issued in Washington, D.C. this 25th day of May, 1999, by the
Commodity Futures Trading Commission.
Jean Webb,
Secretary of the Commission.
[FR Doc. 99-13780 Filed 5-28-99; 8:45 am]
BILLING CODE 6351-01-M
