[Federal Register Volume 64, Number 143 (Tuesday, July 27, 1999)]
[Proposed Rules]
[Pages 40528-40533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18985]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 5
Revised Procedures for Commission Review and Approval of
Applications for Contract Market Designation and of Related Contract
Terms and Conditions
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rulemaking.
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SUMMARY: In 1997, the Commodity Futures Trading Commission (Commission)
promulgated a new fast-track procedure for the review and approval of
applications for contract market designation in either ten or forty-
five days. In response to continued expressions of industry concern
that the ability to list new contracts for trading without delay is
vital to the exchanges' continued competitiveness, the Commission is
proposing a two-year pilot program to permit the listing of contracts
for trading prior to Commission approval.
The proposed procedure would preserve the public interest in
Commission review and approval of new contracts by providing that no
more than one year's trading months may be listed at any time prior to
approval. Any problems with a new contract could be rectified within
that initial listing period. As proposed, exchanges would retain the
choice to proceed under the current procedures for prior approval of
new contracts, including fast-track application review.
The proposed listing of new contracts prior to designation does not
affect the general requirement that proposed exchange rules and changes
to existing exchange rules must be reviewed and approved by the
Commission prior to implementation. Exchange rule changes, including
both changes to contract terms and conditions and to rules of broad
application that are not contract terms or conditions, can and do have
an impact on open positions. They may affect the economic utility of
contracts. Moreover, exchange rule changes may be the subject of
divergent interests or, potentially, conflicts of interest at an
exchange or raise broad public policy issues, all of which require that
exchange rule changes be addressed through the Commission's statutory
process of prior review and approval.
DATES: Comments must be received August 26, 1999.
ADDRESSES: Comments should be mailed to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. Office of the Secretariat; transmitted by facsimile at (202)
418-5521; or transmitted electronically at [secretary@cftc.gov].
FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel,
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581,
(202) 418-5260, or electronically, [PArchitzel@cftc.gov].
SUPPLEMENTARY INFORMATION:
I. Need for Additional Flexibility in Listing New Contracts
The Commission thoroughly analyzed the nature of global competition
in the futures industry in a major 1994 study mandated by Congress as
part of the 1992 amendments to the Act.\1\ That study analyzed the
growth of futures trading in non-U.S. markets and the relative decline
in the global market share of U.S. exchanges. Although much has changed
since 1994 in the global competitiveness of the futures industry,
including in particular the continued evolution and development of new
electronic trading platforms, many of the 1994 study's major
conclusions remain valid today. The 1994 study concluded that U.S.
exchanges remain leaders in innovation and generally have reached the
global market first with new products.\2\ Foreign exchanges, by and
large, have grown by developing products tailored to their home markets
and by trading those products at the same time of day as the underlying
foreign cash market.\3\ The study found no evidence that disparities in
the regulatory frameworks of various jurisdictions, including
particularly disparities in procedures for listing new contracts, were
a major factor explaining the success of various exchanges in the
global market.\4\
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\1\ A study of the Global Competitiveness of U.S. Futures
Markets, Commodity Futures Trading Commission, (April 1994)(``1994
study'').
\2\ The Commission has been supportive, in general, of
initiatives of U.S. exchanges to become more competitive both in
terms of new products and trading systems. For example, the
Commission has encouraged and supported industry-wide innovation and
modernization in trading systems, sponsoring a round-table on
October 16, 1996, to highlight issues relating to electronic order
routing and trading systems. It has also amended many rules to
respond to industry requests and on its own initiative to support
the competitiveness of U.S. exchanges. Specifically, the Commission
has promulgated rules to streamline applications for contract market
designation, 64 FR 29217 (June 1, 1999); to permit bunched orders
for sophisticated customers to be allocated after their execution,
63 FR 45699 (August 27, 1998); to permit futures-style margining of
commodity options, 63 FR 32726 (June 16, 1998); to eliminate the
requirement that futures commission merchants and introducing
brokers deliver the specified risk disclosure document when opening
accounts for sophisticated customers, 63 FR 8566 (February 20,
1998); to eliminate the short option value charge against a future
commission merchant's net capital, 63 FR 32725 (June 16, 1998); to
expand the use of acceptable electronic storage media for required
records, 64 FR 28735 (May 27, 1999); to permit the use of a two-part
disclosure document, 63 FR 58300 (October 30, 1998); to permit the
trading of ``exchange of futures for swaps'' on the New York
Mercantile Exchange, 63 FR 3708 (January 26, 1998); and to increase
speculative position limits, 64 FR 24038 (May 5, 1999).
Moreover, the Commission has been very supportive of industry
efforts over the years to introduce innovative futures and option
contracts. These include such innovative concepts as the
reintroduction of exchange-traded options, the introduction of
flexible options, the first cash-settled futures contracts, the
first futures contracts on stock indexes and the first futures and
option contracts on natural gas, electricity crop yields, pollution
permits, and bankruptcy rates.
\3\ For example, many foreign exchanges trade interest-rate
contracts based upon the sovereign debt of the nation in which they
are located.
\4\ Moreover, the trend among foreign authorities has been to
strengthen their regulatory regimes. The Commission has been a
world-leader in promoting the strengthening of regulatory oversigh
as futures trading becomes more global in nature. This process has
accelerated in light of developments in connection with the Barings,
Plc. and Sumitomo Corp. situations. See, Windsor Declaration issued
May 17, 1995, and London Communique on Supervision of Commodity
Futures Markets (November 26, 1996).
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The Commission also concluded in its study that, ``the U.S.
regulatory system must be responsive to changes in the marketplace if
U.S. markets are to remain competitively robust. Consistent
[[Page 40529]]
with that view * * * the CFTC has historically attempted to facilitate
U.S. exchange innovation and reduce the costs of regulation within its
mandate * * *'' \5\ One means taken by the Commission in recent years
to lower the cost of regulation has been to reduce significantly the
time normally required for Commission review and approval of new
contracts, particularly since implementing new fast-track procedures in
1997. Generally, the 10- or 45-day review periods provided under the
fast-track procedure are readily compatible with the normal gestation
period for new contracts.\6\
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\5\ 1994 study at p. 139.
\6\ U.S. exchanges' initial launch date for new contracts is
often well after designation, and many contracts are not listed
until months or even years later. In this regard, of the 201 new
contracts that were approved during the period 1996 through 1998,
about one-fourth (46) have not yet been listed for trading. The
average period after designation when the other 155 contracts were
listed was about three months (87 days). Only 29 contracts in all
were listed for trading within 10 days after Commission approval.
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The Commission is proposing a pilot program to provide U.S.
exchanges with substantial, additional flexibility in the listing of
new contracts. Representatives of U.S. exchanges have testified that
the ability to list contracts more quickly than currently possible is
necessary for them to meet competitive challenges by foreign
exchanges.\7\ The proposed rule would enable designated exchanges
generally to list for trading new contracts without any waiting period,
directly responding to the exchanges' stated need to be able to respond
immediately to competitive challenges.\8\
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\7\ During hearings before the Subcommittee on Risk Management
and Specialty Crops of the House Committee on Agriculture,
representatives of four U.S. futures exchanges testified that the
current regulatory structure is overly burdensome and that statutory
changes are necessary to achieve ``parity'' with foreign exchanges
and to better enable U.S. exchanges to compete in the growing global
marketplace. CTFC Reauthorization: Hearings Before the Subcommittee
on Risk Management and Specialty Crops of the House Committee on
Agriculture, 106th Cong., 1st Sess. (1999) See, statements of the
Chicago Board of Trade, the Board of Trade of the City of New York,
the Chicago Mercantile Exchange, and the New York Mercantile
Exchange.
In particular, the U.S. exchanges urged Congress to eliminate
the requirement that the Commission review and approve new contracts
before they begin trading and amendments to exchange rules before
they can be implemented. For example, Daniel Rappaport, Chairman of
the Board of Directors of NYMEX testified that, ``detailed CFTC
review and approval of the specific terms and conditions of the
contract has not been necessary, provides marginal, if any value,
and adds cost, uncertainty, and delay to the roll-out of new
contracts.''
\8\ However, contracts subject to the accord provision of
section 2(a)(1)(B) of the Act would not be eligible for this relief
consistent with the provisions of section 4(c) of the Act.
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The proposed rule would not, however, eliminate the requirement
that contracts be designated by the Commission. Rather, it would permit
the Commission's review of new contracts to proceed after a new
contract's initial listing. The Commission would continue to designate
such contracts after they have been listed upon finding that they meet
the requirements of the Commodity Exchange Act, 7 U.S.C. 1 et seq.
(Act), and the rules thereunder. This would preserve a speedy, sure and
efficient method for the Commission to review new contracts and the
public's opportunity to comment on them. The proposed pilot program
would not apply to changes to existing contracts. As discussed in more
detail below, changes to existing contracts frequently raise issues
relating to the value of existing positions and there is often
significant interest by the public in commenting on proposed changes to
such contracts.
The Commission is proposing this two-year pilot program under the
Act's section 4(c) exemptive provision which, together with the other
provisions of the Act, provides the Commission with far-ranging
regulatory flexibility. The pilot program will provide an opportunity
to identify any adverse consequences resulting from the predesignation
listing of new contracts. As proposed, the approval requirement will
continue to fulfill the important functions of providing a forum to
resolve questions relating to the legality of contracts, a means to
consider and respond to concerns raised by other regulators, a
mechanism for government-to-government coordination when appropriate
and the opportunity to subject contracts to impartial, expert scrutiny
and to correct various problems early on. Finally, as proposed,
exchanges will retain the option to seek prior Commission approval
before listing new contracts.
II. History and Purpose of Statutory Requirement that Contracts Be
Designated Before Trading and Exemptive Authority
Section 4(a) of the Act provides that, unless exempted by the
Commission, futures contracts legally can be traded only on or subject
to the rules of a contract market designated by the Commission.\9\
Section 4(c)(1) authorizes the Commission, by rule, regulation, or
order, to exempt any contract between ``appropriate persons'' from that
or any other of the Act's requirements, with the exception of the
accord provisions of section 2(a)(1)(B). Before granting such an
exemption, the Commission must determine that its action would be
consistent with the public interest and would not have a material
adverse effect on the ability of the Commission to discharge its
regulatory responsibilities or of any contract market to discharge its
self-regulatory responsibilities under the Act.\10\
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\9\ Section 4(a) of the Act provides that: ``Unless exempted by
the Commission pursuant to subsection (c), it shall be unlawful for
any person to offer to enter into, to enter into, to execute, to
confirm the execution of * * * a contract for the purchase or sale
of a commodity for future delivery * * * unless--
(1) such transaction is conducted on or subject to the rules of
a board of trade which has been designated by the Commission as a
``contract market'' for such commodity * * *'' 7 U.S.C. 6(a).
\10\ The Futures Trading Practice Act of 1992, P.L. No. 102-546,
added a new subsections (c) and (d) to section 4 of the Act.
Specifically, section 4(c), 7 U.S.C. 6(c), provides that:
(1) In order to promote responsible economic or financial
innovation and fair competition, the Commission by rule, regulation,
or order, after notice and opportunity for hearing, may (on its own
initiative or on application of any person, including any board of
trade designated as a contract market for transactions for future
delivery in any commodity under section 5 of this Act) exempt any
agreement, contract, or transaction (or class thereof) that is
otherwise subject to subsection (a) (including any person or class
of persons offering, entering into, rendering advice or rendering
other services with respect to, the agreement, contract, or
transaction), either unconditionally or on stated terms or
conditions or for stated periods and either retroactively or
prospectively, or both, from any of the requirements of subsection
(a), or from any other provision of this Act (except section
2(a)(1)(B)), if the Commission determines that the exemption would
be consistent with the public interest.
(2) The Commission shall not grant any exemption under paragraph
(1) from any of the requirements of subsection (a) unless the
Commission determines that--
(A) The requirement should not be applied to the agreement,
contract, or transaction for which the exemption is sought and that
the exemption would be consistent with the public interest and the
purposes of this Act; and
(B) the agreement, contract, or transaction--
(i) will be entered into solely between appropriate persons; and
(ii) will not have a material adverse effect on the ability of
the Commission or any contract market to discharge its regulatory or
self-regulatory duties under this Act.
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The requirement that boards of trade meet specified conditions in
order to be designated as contract markets has been a fundamental tool
of federal regulation of commodity futures exchanges for the past
seventy-five years.\11\ Prior to the 1974 amendments to the Act,
however, the statutory scheme did not require the
[[Page 40530]]
Commodity Exchange Authority, the Commission's predecessor agency, to
approve in advance the trading of all new futures contracts,\12\ nor
did it require agency approval of exchange rules before they became
effective. Rather, exchange rules amending the terms and conditions of
futures contracts were subject only to disapproval after becoming
effective.\13\ The 1974 amendments to the Act reversed that approach,
requiring that new contracts be approved prior to trading. As part of
Congress' overall intent to strengthen federal regulatory oversight of
the futures industry, the 1974 amendments provided for a meaningful
government review of all new futures contracts before trading could
begin and of proposed amendments to the terms of conditions of existing
contracts.\14\
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\11\ See, Futures Trading Act of 1921, Pub. L. No. 67-66, 42
Stat. 187 (1921). Designation as a contract market under the 1921
Act was contingent upon a board of trade's meeting specified
statutory criteria, including providing for the prevention of
manipulative activity. Although the constitutionality of this Act
was successfully challenged as an improper use of the Congressional
taxing power in Hill v. Wallace, 259 U.S. 44 (1922), all subsequent
legislation regulating the futures industry followed the template of
requiring exchanges to be designated as contract markets.
\12\ Prior to 1974, the Act defined ``commodity'' by specific
enumeration. Accordingly, new contracts that were not so enumerated
were unregulated. The definition of commodity periodically would be
updated to include additional commodities in which trading had
commenced on those exchanges which traded other regulated contracts.
For example, livestock and livestock products were added to the
Act's definition of ``commodity'' as part of the 1968 amendments to
the Act, after such contracts had already begun trading on the
Chicago Mercantile Exchange. Pub. L. No. 90-258 Sec. 1(a), 49 Stat.
1491 (1968). Other futures exchanges, including the Commodity
Exchange, Inc. and the former Coffee and Sugar, and the Cocoa
exchanges, operated wholly outside of the regulatory scheme.
\13\ See Pub. L. No. 90-258, Sec. 23, 82 Stat. 33 (1968).
\14\ See H.R. Rep. No. 93-975, 93d Cong., 2d Sess. at 78, 82
(1974).
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Subsequently, Congress enhanced the opportunity for public
participation in the Commission's review of proposed exchange rule
amendments.\15\ In offering this amendment, Representative AuCoin
reasoned that, although many rule changes may be technical,
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\15\ As part of the 1978 amendments to the Act, Congress added
the provision requiring a public comment period for proposed
exchange rules of major economic significance. That amendment to
section 5a(a)(12) of the Act was offered from the floor during
debate in the House of Representatives.
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there are a number of proposed rule changes that are controversial
because of their expected impact on the way a particular commodity
is traded or on the broader effects that a change may bring about in
the production and distribution of that commodity.
124 Cong. Rec. H7312 (July 26, 1978).
The Commission, recognizing the validity of Representative AuCoin's
observation that various submissions may require differing levels of
public scrutiny, has been flexible in implementing its regulatory
mandate to review and approve new contracts and amendments to existing
contracts. The fast-track review procedures, in particular, broke new
ground in how the Commission reviews and approves applications for
contract market designation, proposed exchange rules and changes to
existing exchange rules. Since promulgating the fast-track designation
procedures, the Commission has approved 36 contracts under the 10-day
procedures, and 34 contracts under the 45-day procedures. Fast-track
designation procedures have provided the exchanges with a time certain
for Commission review, easing their planning for new contract
introduction. Fast-track procedures also confirmed, however, that in
many instances exchanges may prefer review procedures. Specifically, 43
proposed contracts that were otherwise eligible for fast-track review
have been submitted under regular review procedures, which under the
Act permits the Commission to take up to one year to review an
application for contract market designation.
The Commission's past procedural flexibility has made its review
more efficient while at the same time preserving the public interest in
Commission approval of new contracts and of contract amendments. Review
and approval of new contracts helps assure that futures markets are not
readily susceptible to manipulation so that they better can serve their
risk transfer and price discovery functions. The Commission, based upon
its past experience, has found that appropriate contract design is the
best deterrent to market manipulation, price distortion or market
congestion, and that contract approval assures that contracts meet
these widely-accepted design criteria.\16\ Although market incentives,
enlightened business judgment and the desire to protect reputation are
strong motivations which can lead to a high degree of self-regulation,
experience demonstrates that there have been instances when government
oversight and action serve to address particular instances where
business judgments by the exchange membership did not appear to offer
sufficient guidance to inform fully an SRO's regulatory judgment.\17\
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\16\ See, e.g., Sec. 5a(a)(10) of the Act and the Commission's
proceeding to amend the delivery terms of the CBT corn and soybean
futures contracts, ``Notification to the CBT to Amend Delivery
Specifications.'' 61 FR 68175 (December 12, 1995). The view that
appropriate contract design is an important component of a market
surveillance program and deters manipulation, price distortion and
market congestion is widely accepted internationally, as well. See,
the Tokyo Communique on Supervision of Commodity Futures Markets
issued at the Tokyo Commodity Futures Markets Regulators' Conference
on October 31, 1997.
\17\ Often, the Commission receives few or no public comments on
contract market designations or on exchange rule changes. This is to
be expected. It may indicate that the exchange has indeed received
and considered input from interested outside sources in connection
with a proposal. However, there are more than a few designation
applications or proposed exchange rule changes every year that
elicit a significant number of comments, casting doubt upon the
exchange's theory that its business self-interest will reliably
inform all of its regulatory judgements.
In this regard, in response to a Commission advisory on
alternative execution or block trading procedures, 64 FR 31195 (June
10, 1999), the Chicago Board of Trade (CBT) by letter dated June 29,
1999, urged the Commission to:
[S]olicit the input of, and coordinate with, various interested
parties by publishing for public comment any proposals to permit
alternative execution procedures. The Commission will in that way,
be able to get the benefit of additional analysis of such proposals
by knowledgeable members of the futures industry. * * *
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Needed changes to contract designs are most easily made before
traders become accustomed to, or heavily reliant upon, a particular
term or condition. Although it is possible to make adjustments to
contract terms or conditions as needed, changing a term or condition of
a proposed contract prior to its listing does not have the market
impact of an after-the-fact rule change or of an emergency action. In
this regard, the terms or conditions for delivery of several contracts
for foreign currencies were changed while under Commission review.
Commission vetting of exchange rules and CFTC coordination with the
interested foreign governments resolved these delivery issues. Absent
prior Commission approval, these design flaws might very well have been
discovered through a default, a market emergency or similar
dislocation.
Review and approval of new contracts also gives the public an
opportunity to comment on proposed contracts and provides a forum for
resolving disputes. Often, an innovative contract may raise issues for
other government agencies. The Commission review process provides a
formal mechanism for those agencies to make their views known to the
Commission. Moreover, in cases where questions are raised about the
legality of a contract's terms, such as recent questions as to whether
the delivery terms of an electricity contract would violate certain
legal restrictions in effect at the delivery point, the Commission's
approval process provides a formal governmental decision on the issue,
short of a court challenge to the contract.
Although exchanges have a strong business incentive to list
contracts that will not be susceptible to manipulation, they may not
receive, and act upon, the breadth of opinion available to the
Commission. As discussed above, these views may come from foreign
regulators, other government agencies and
[[Page 40531]]
departments, futures intermediaries, commodity producers or users and
other nonmembers. For example, trade interviews by Commission staff
first revealed that the discounts for nonpar varieties and locations
for a proposed potato contract did not conform to cash market
practices. Subsequently, major producer groups opposed the proposed
contract's terms in public comments filed with the Commission, and the
exchange made extensive revisions. Accordingly, the Commission's review
and approval process, which expands participation in the process, may
bring to light information not previously considered by an exchange in
designing a proposed contract's terms.
Recognizing the potential benefit of receiving additional input
from a wider variety of sources, some exchanges, particularly the
smaller exchanges, have made positive use of the Commission's review
and approval process in developing new products. For example, one
exchange accepted Commission staff's suggestions on an appropriate
means of constructing an index with a large number of inactively traded
stocks. After these revisions, the contract obtained regulatory
approval from both the Commission and the Securities and Exchange
Commission.
The proposed pilot program for predesignation listing of new
contracts will permit exchanges to list new contracts quickly in
response to perceived competitive threats. However, it will also retain
current procedures, enabling exchanges to benefit from the comments
process included in the current procedures, from the Commission's
expertise in these issues and from its interaction with U.S. and
foreign regulators.
III. The Proposed Rule
Although the rule which the Commission is proposing permits
exchanges to list new contracts for a limited period prior to
designation, it conforms to the underlying legal requirement that all
contracts must be designated by the Commission in order legally to
trade. Moreover, the proposed listing rule is consistent with the
spirit of the Act's provision which contemplates that in certain
instances exchanges may make proposed rules effective pending
Commission action. Specifically, section 5a(a)(12) of the Act permits
exchanges to make proposed rules effective without Commission approval
if the Commission fails to act on the proposed rules within specified
time limits. Those exchange rules may remain in effect while Commission
action is pending. The Commission's rule on predesignation listing of
proposed contracts would apply the same concept in instances where an
exchange believes that competitive or other factors make immediate
listing of a proposed contract necessary.
Contracts listed under the proposed procedure, although not
designated, would be valid and enforceable pursuant to the Commission's
rule, which is being proposed under the exemptive authority of section
4(c) of the Act. The board of trade, pursuant to the Commission's rule
and section 5a(8)(iii) of the Act, would be required to enforce the
contract's terms and conditions, although not yet approved by the
Commission.\18\ In addition, the board of trade would be required to
fulfill all of a contract market's self-regulatory obligations during
the period the contract is listed for trading as though it were
designated. Upon designation, the Commission, as it does for all
contracts, would approve the contract's terms and conditions under
section 5a(a)(12) of the Act.
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\18\ Compare, 17 CFR 1.53.
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The Commission is proposing that predesignation listing be
available only when an exchange already is a designated contract market
for at least one nondormant contract. This is because the initial
designation of a board of trade as a contract market often entails a
more lengthy review which includes analysis of its trading and
clearance systems and its self-regulatory programs. Such start up
exchanges are not appropriate candidates for the proposed immediate
listing rule.
Moreover, the Commission is proposing that while a designation
application submitted under regular or fast track procedures is
pending, a second exchange may not list the same, or a substantially
similar, contract to trade using the pilot procedure. Such a result
would penalize the first exchange for submitting a proposed contract
market application for Commission review and preapproval, clearly and
unwarranted competitive use of the proposed rule. As proposed, the
second exchange would be required to wait until the day following
approval of the first application to notify the Commission that it
intends to list the same, or a substantially similar, contract to
trade. Thus, for example, an application for contract designation filed
for fast-track review, absent a regulatory problem, would be deemed
approved forty-five days after receipt. Not until the forty-sixth day
after the Commission has received the application could a second
exchange notify the Commission that it intended to list the same or a
substantially similar contract for trading prior to designation. The
second exchange could then list for trading the contract on the forty-
seventh day after receipt of the original application. In this way, the
rule would not permit a competing exchange to short-circuit the review
process and to disadvantage the exchange choosing to subject a proposed
contract to prior Commission review. Of course, where the first
contract was listed prior to designation, there would be no purpose
served by preventing a second exchange from also listing the contract
for trading prior to approval. In that case, both exchanges could list
contracts for trading the day after they notify the Commission.\19\
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\19\ Exchanges would not be able to use this proposed rule to
forestall a competitor from introducing a new contract by filing an
application in bad faith. Although a second exchange could not use
the predesignation listing procedure while a prior application was
pending, nothing would prevent the second exchange from filing an
application for review and approval by the Commission on its own
merits.
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In addition, the proposed prelisting procedure is not intended to
be a means of evading an adverse Commission proceeding involving the
same or a substantially similar contract. Accordingly, where the
Commission has initiated a proceeding to alter an exchange rule under
section 8a(7) of the Act, to disapprove a proposed or existing contract
term or condition under section 5a(a)(12) of the Act, to alter or
change delivery points or commodity or locational differentials under
section 5a(a)(10) of the Act or to disapprove an application for
designation or suspend a designation under section 6 of the Act, or any
similar adverse action, an exchange could not list a ``new'' contract
for trading and thereby frustrate the proceeding against, or evade
application of the Commission's process applicable to the original,
designated contract.\20\ In addition, predesignation listing would not
be available for stock indexes, commodities which are subject to the
specific approval procedures of the Johnson-Shad jurisdiction.\21\
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\20\ Similarly, the Commission is not proposing that the listing
provision be applicable for a futures contract that is based upon
the occurrence of a single event or that is intended to be listed
temporarily. For example, a futures contract in a fuel that was
being phased out of use, such as leaded gasoline, raises deliverable
supply issues. Such a contract should not be able to evade the
review and approval provisions of the Act by being listed during the
last few months when the commodity is available. Moreover, although
single event futures contracts have not yet been proposed, it would
be possible to construct such contracts. The proposed rule is not
intended to be used as a means to avoid addressing the designation
issues which may be raised by such contracts.
\21\ See section 2(a)(1)(B) of the Act.
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[[Page 40532]]
The Commission is proposing that exchanges be able to determine
whether and when to make use of the new listing procedure, and is not
restricting an exchange's use of the predesignation listing of
contracts to a defined set of circumstances. The exchanges have argued
that as a matter of business self-interest they will design contracts
that comply with the Act's designation requirements and that prior
Commission review is an unnecessary check on their role as self-
regulators. Based upon these representations, the Commission expects to
be able to designate new contracts listed under the proposed pilot
rules and to approve their terms and conditions as initially listed.
However, exchanges not infrequently have revised the terms and
conditions of pending contracts submitted to the Commission for prior
review. Changes to the terms or conditions of a contract listed under
the proposed procedure would be required to be approved by the
Commission under section 5a(a)(12) of the Act and Commission rules
thereunder before being made effective. The Commission generally would
approve such changes when designating the contract. Presumably, the
revisions would be minor, made in advance of the contract's first
expiration, made before a large open interest had been established, and
cause no disruption to traders or to the markets generally.
Some designation applications filed with the Commission, however,
have included serious flaws. If it becomes evident during the
Commission's review that a contract already listed for trading fails to
meet a designation requirement, the exchange would have to take
appropriate corrective measures. Depending upon the nature of the
problem, these steps might be exigent in nature, have to be applied to
trading months with open positions and require an exchange to act under
its emergency authority. Although this is not the preferred mechanism
for vetting new contracts, it may be an unavoidable consequence of
listing a contract with a deficiency prior to approval. Accordingly, as
with the Commission's fast-track designation procedures, an exchange's
choice to list contracts for trading prior to designation would most
appropriately be used for contracts which clearly raise no legal or
practical impediments to trading.
As proposed, exchanges choosing to list contracts prior to
Commission review and designation must notify the Commission of their
intent by filing the contract's terms and conditions with the
Commission's Office of the Secretariat and the Commission's regional
office having jurisdiction over the exchange by close of business on
the business day prior to listing the contracts for trading. As
proposed, exchanges may list no more than one full year's trading
months at any time prior to the contract's designation. An application
for designation would be required to be filed within forty-five days of
the initial listing, unless during this period the trading months have
been delisted. Finally, the exchange would be required to identify the
contract listed as pending Commission designation.
As discussed above, the Commission is proposing this rule under its
section 4(c) exemptive authority. That section provides that the
Commission may exempt from the Act's requirements contracts between
appropriate persons. Because the proposed rule applies to contracts
listed on designated exchanges subject to the self-regulatory
requirements of the Act, the Commission finds all traders are
``appropriate'' for application of this proposed exemptive rule.
Moreover, for the reasons explained above, the Commission believes that
the proposed rule would be consistent with the public interest and
would not have a material adverse effect on the ability of the
Commission to discharge its regulatory responsibilities or of any
contract market to discharge its self-regulatory responsibilities under
the Act. The Commission specifically requests comment on these
findings.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies, in promulgating rules, consider the impact of
these rules on small entities. The Commission has previously determined
that contract markets are not ``small entities'' for purposes of the
RFA, 5 U.S.C. 601 et seq. 47 FR 18618 (April 30, 1982). These
amendments propose a two-year pilot program to permit exchanges under
section 4(c) of the Act to list new contracts for trading prior to
designation as a contract market. Accordingly, the Acting Chairman, 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
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.
(Supp. I 1995)) imposes certain requirements on federal agencies
(including the Commission) in connection with their conducting or
sponsoring any collection of information as defined by the PRA.
The Office of Management and Budget (OMB) approved the collection
of information associated with this proposed rule (3038-0022, Rules
Pertaining to Contract Markets and their Members) on October 24, 1998.
While the proposed rule discussed herein has no burden, the group of
rules (3038-0022) of which it is a part has the following burden:
Average burden hours per response..... 3,609.89
Number of Respondents................. 15,893
Frequency of response................. On occasion.
Copies of the OMB-approved information collection submission are
available from the CFTC Clearance Officer, 1155 21st Street, NW,
Washington, DC 20581, (202) 418-5160.
List of Subjects in 17 CFR Part 5
Contract markets, Designation application.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections 4,
4c, 5, 5a, 6 and 8a thereof, 7 U.S.C. 6, 6c, 7, 7a, 8, and 12a, the
Commission proposes to amend chapter I of title 17 of the Code of
Federal Regulations as follows:
PART 5--CONTRACT MARKET COMPLIANCE
1. The authority citation for part 5 is revised to read as follows:
Authority: 7 U.S.C. 6(c), 6c, 7, 7a, 8 and 12a.
2. Part 5 is amended by adding a new Sec. 5.3 to read as follows:
Sec. 5.3 Predesignation listing of new contracts.
(a) Notwithstanding any contrary provision of the Act or Commission
rules, a board of trade seeking designation as a contract market under
sections 4c, 5 and 5a(a) of the Act may list for trading delivery
months or expirations prior to designation, if the board of trade:
(1) Is already designated as a contract market in at least one
other contract which is not dormant within the meaning of Sec. 5.2 of
this part;
(2) Complies with all other requirements of the Act and Commission
regulations thereunder applicable to designated contract markets during
the period the contract is listed for trading prior to its designation
as a contract market;
(3) Files with the Commission at its Washington, DC, headquarters
and the regional office having jurisdiction over
[[Page 40533]]
it a copy of the contract's terms and conditions no later than the
close of business of the day preceding listing; and
(4) Notifies the public on all public references to the contract or
its trading months that the contract is trading pending Commission
designation.
(b) The board of trade may not list for trading delivery months or
option expirations for more than one year at any time prior to the
contract's designation as a contract market under sections 4c, 5, 5a
and 6 of the Act and regulations thereunder, or under Sec. 5.1 of this
part.
(c) The board of trade must file with the Commission an application
for contract market designation which meets the requirements of
Appendix A of this part within forty-five days of initially listing for
trading a contract under this section, unless the contract is delisted
during this period.
(d) The board of trade must enforce each bylaw, rule, regulation
and resolution that relates to the terms or conditions of a contract
listed for trading under this section. Any proposed revisions to the
terms or conditions of the contract as initially listed for trading
under this section must be submitted for Commission review under
section 5a(a)(12) of the Act and Sec. 1.41 of this chapter.
(e) The provisions of this section for listing trading months prior
to contract market designation shall not apply to:
(1) A contract subject to the provisions of section 2(a)(1)(B) of
the Act;
(2) A contract that is the same or substantially the same as one
for which an application for contract market designation under sections
4c,5, 5a and 6 of the Act or Sec. 5.1 of this part was filed for
Commission approval prior to being listed for trading while the
application is pending before the Commission.
(3) A contract that is the same or substantially the same as one
which is the subject of a Commission proceeding to disapprove
designation under section 6 of the Act, to disapprove a term or
condition under section 5a(a)(12) of the Act, to alter or amend a term
or condition under section 8a(7) of the Act, to amend terms or
conditions under section 5a(a)(10) of the Act, to declare an emergency
under section 8a(9) of the Act, or to any other proceeding the effect
of which is to disapprove, alter, amend, or require a contract market
to adopt a specific term or condition, trading rule or procedure, or to
refrain from taking a specific action.
Issued in Washington, DC, this 20th day of July, 1999, by the
Commodity Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-18985 Filed 7-26-99; 8:45 am]
BILLING CODE 6351-01-M
