02-19608. Reporting Levels for Large Trader Reports; TRAKRS

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Proposed rules.

SUMMARY:

The Commodity Futures Trading Commission (Commission or CFTC) is proposing to amend its regulations to establish a reporting level for TRAKRS futures contracts to be traded on the Chicago Mercantile Exchange (CME). The reporting level being proposed is 25,000 contracts.

DATES:

Comments must be received by September 4, 2002.

ADDRESSES:

Comments should be sent to the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, attention: Office of the Secretariat. Comments may be sent by facsimile transmission to [phone] or by e-mail to [e-mail]. Reference should be made to “Reporting Levels for TRAKRS.”

FOR FURTHER INFORMATION CONTACT:

Gary J. Martinaitis, Deputy Associate Director, Market Surveillance Section, Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: [phone]. E-mail: [[e-mail]].

SUPPLEMENTARY INFORMATION:

On December 21, 2000, the President signed into law the Commodity Futures Modernization Act of 2000 (CFMA), Pub. L. No. 106-544, which extensively revises the Commodity Exchange Act (Act). Among other things, the CFMA facilitated the introduction of new futures products by the exchanges. The CME intends to introduce a new product, called TRAKRS, which are low notional value futures contracts based on broad based indices of stocks, bonds, currencies, or other financial instruments. The value of the first TRAKRS futures contract, with is scheduled to begin regular trading sessions on August 1, 2002, will be less than $25 at the start of trading.^[1]

TRAKRS, like all other commodities traded on Commission-designated markets, will be subject to the Commission's large trader reporting rules. Those rules require futures commission merchants, members of contract markets and foreign brokers to report to the Commission position information of the largest futures and options traders and, upon special call by the Commission, require the traders themselves to file reports with the Commission. Reporting levels are set in the designated futures and option markets under the authority of sections 4i and 4c of the Act to ensure that the Commission receives adequate information to carry out its market surveillance programs. These market surveillance programs are designed to detect and to prevent market congestion and price manipulation and to enforce speculative position limits. They also provide information regarding the overall hedging and speculative use of, and foreign participation in, the futures markets and other matters of public interest.

Based upon its experience in administering a large trader reporting system that is designed to provide adequate market coverage in light of positions traded or expected to be traded, the Commission is proposing to establish a reporting level for TRAKRS of 25,000 contracts. The Commission intends to review this level over time to determine whether it provides adequate coverage. Furthermore, since the proposed reporting level is significantly influenced by the relatively low value of the initial TRAKRS contract (which will be less than $25), the Commission intends to reconsider this reporting level if new TRAKRS contracts are introduced at a substantially higher price or any TRAKRS contract begin to trade at a substantially higher price.

The Commission notes that the low value of TRAKRS contracts could result in very large positions being reported. Due to current limitations in the Commission's large trader record format,^[2] and similar limitations in the CME's own large trader reporting system, the Commission is proposing that TRAKRS positions be reported under Part 17 of its rules, 17 CFR Part 17, only after they have been rounded down to the nearest 1000 and then divided by 1000. For example, a position of 27, 955 contracts would be rounded down to 27,000, divided by 1000 and reported as 27.^[3]

Because, in the absence of this rule amendment, the Commission's default reporting level of 25 contracts would apply, the Commission hereby is granting no-action relief to futures commission merchants, members of contracts markets and foreign brokers that comply with the requirements on this proposed rule prior to its final adoption. Accordingly, the Commission will not bring any enforcement action against any futures commission merchant, member of a contract market or foreign broker who complies with the rule as proposed herein. Such futures commission merchants, members of contract markets and foreign brokers will, however, be required to bring their conduct into compliance with the final rule to the extent that the final rule differs from the proposed rule.

Cost Benefit Analysis

Section 15 of the Act requires the Commission to consider the costs and benefits of its action before issuing a new regulation under the Act. By its terms, section 15 does not require the Commission to quantify the costs and benefits of a new regulation or to determine whether the benefits of the proposed regulation outweigh its costs. Rather, section 15 simply requires the Commission to “consider the cost and benefits” of the subject rule.

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

The proposed rule imposes limited costs in terms of reporting requirements, particularly since most entities that trade on U.S. futures markets already file large trader reports with the Commission. Moreover, to reduce the cost of reporting, the Commission will periodically review the reporting level for TRAKRS, as it generally does for reporting levels for all commodities.^[4] The countervailing benefits of these costs are that the Commission will have the necessary information to perform its market surveillance function and thus carry out its mandate of assuring the continued existence of competitive and efficient markets, protecting their price discovery function and protecting market participants and the public interest therein.

After considering these factors, the Commission has determined to propose the revision to part 15 set forth below.

The Commission specifically invites public comment on its application of the criteria contained in the Act for consideration. Commenters are also invited to submit any quantifiable date that they may have concerning the costs and benefits of the proposed rule with their comment letters.

Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., requires that federal agencies, in proposing rules, consider the impact of those rules on small entities. The Commission has previously determined that large traders and FCMs are not “small entities” for purposes of the RFA.^[5] The proposed amendment to reporting requirements primarily impacts FCMs. Similarly, members of contract markets and foreign brokers report only if carrying or holding reportable, i.e., large positions. Therefore, the 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. The Commission invites comments from any firm believing that these rules would have a significant economic impact on its operation.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (PRA), which imposes certain requirements on federal agencies (including the Commission) in connection with their conducting or sponsoring any collection of information as fined by the PRA, does not apply to this rule. The Commission believes that the proposed rule amendment does not contain information requirements which require the approval of the Office of Management and Budget. The purpose of this rule is to establish a specific reporting level for TRAKRS.

List of Subjects in 17 CFR Part 15

• Brokers
• Reporting and recordkeeping requirements

In consideration of the foregoing, and pursuant to the authority contained in the Act, and in particular sections 4g, 4i, 5, 5a and 8a of the Act, 7 U.S.C. 6g, 6i, 7, 7a and 12a, as amended, the Commission hereby proposes to amend Part 15 of Chapter I of Title 17 of the Code of Federal Regulations as follows:

PART 15—REPORTS—GENERAL PROVISIONS

1. The authority section for part 15 continues to read as follows:

Authority: U.S.C. §§ 2, 5, 6a 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 9, 12a, 19, and 21, as amended by the Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (2000); 5 U.S.C. 552 and 552(b).

2. Section 15.03 is proposed to be amended by revising paragraph (b) to read as follows:

§ 15.03

Reporting levels.

* * * * *

(b) The quantities for the purpose of reports filed under parts 17 and 18 of this chapter are as follows:

Commodity	Number of contracts
Agricultural:
Wheat	100
Corn	150
Oats	60
Soybeans	100
Soybean Oil	200
Soybean Meal	200
Cotton	50
Frozen Concentrated Orange Juice	50
Rough Rice	50
Live Cattle	100
Feeder Cattle	50
Lean Hogs	100
Sugar No. 11	400
Sugar No. 14	100
Cocoa	100
Coffee	50
Natural Resources:
Copper	100
Gold	200
Silver Bullion	150
Platinum	50
No. 2 Heating Oil	250
Crude Oil, Sweet	350
Unleaded Gasoline	150
Natural Gas	175
Financial:
Municipal Bond Index	300
3-month (13-seek) U.S. Treasury Bills	150
30-Year U.S. Treasury Bonds	1,000
10-Year U.S. Treasury Notes	1,000
5-Year U.S. Treasury Notes	800
2-Year U.S. Treasury Notes	500
3-Month Eurodollar Time Deposit Rates	1,000
30-Day Fed Funds	300
1-month LIBOR Rates	300
3-month Euroyen	100
Major-Foreign Currencies	400
Other Foreign Currencies	100
U.S. Dollar Index	50
S&P 500 Stock Price Index	1,000
E-Mini S&P Stock Price Index	300
S&P 400 Midcap Stock Index	100
Dow Jones Industrial Average Index	100
New York Stock Exchange Composite Index	50
Amex Major Market Index, Maxi	100
NASDAQ 100 Stock Index	100
Russell 2000 Stock Index	100
Value Line Average Index	50
NIKKEI Stock Index	100
Goldman Sachs Commodity Index	100
Security Futures Products:
Individual Equity Security	1,000
Narrow-Based Index of Equity Securities	200
TRAKRS	1 25,000
All Other Commodities	25
1 For purposes of part 17, positions in TRAKRS should be reported by rounding down to the nearest 1000 and dividing by 1000.

Issued in Washington, DC this 30th day of July, 2002, by the Commission.

Catherine D. Dixon,

Assistant Secretary of the Commission.

Footnotes

1.  Securities broker-dealers and their registered representatives may offer and sell TRAKRS futures contract pursuant to a no-action letter issued by Commission staff on July 11, 2001. See CFTC Letter 02-22, Division of Trading and Markets, CFTC (July 11, 2001), available on the Commission website at http://www.cftc.gov.

2.  See 17 CFR 17.00(g)(1).

3.  Contract markets should continue to report under Part 16, 17 CFR Part 16, the actual TRAKRS position without regard to the reporting convention proposed to be applied for reports under part 17.

4.  See, e.g., 65 FR 14452 (Mar. 17, 2000).

5.  47 FR 18618-20 (Apr. 30, 1982).