94-26726. Section 4(c) Contract Market Transactions; Swap Agreements  

  • [Federal Register Volume 59, Number 208 (Friday, October 28, 1994)]
    [Unknown Section]
    [Page ]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-26726]
    
    
    [Federal Register: October 28, 1994]
    
    
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    COMMODITY FUTURES TRADING COMMISSION
    
    17 CFR Parts 35 and 36
    
    
    Section 4(c) Contract Market Transactions; Swap Agreements
    
    AGENCY: Commodity Futures Trading Commission.
    
    ACTION: Proposed rules.
    
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    SUMMARY: On August 16, 1993, the Commodity Futures Trading Commission 
    (``Commission'') published a notice of petitions for exemptive relief 
    submitted by the Chicago Mercantile Exchange (``CME'') and the Board of 
    Trade of the City of Chicago (``CBOT'') and request for comment. The 
    petitions requested exemptions from most of the requirements of the 
    Commodity Exchange Act (``CEA'' or ``Act'') and Commission regulations 
    for certain exchange-traded futures and option contracts pursuant to 
    Section 4(c) of the Act, added October 28, 1992.
        The comment period closed December 15, 1993, and the Commission has 
    carefully considered the comments received. Based upon its review of 
    the comments and its own consideration of the exemption requests, the 
    Commission is proposing rules which will permit certain contract market 
    transactions (as defined herein) meeting specified criteria to trade 
    pursuant to exemption from certain requirements under the Act and 
    Commission regulations on a section 4(c) contract market. The 
    Commission is also seeking comment on whether Part 35 (exemption of 
    swap agreements) should be amended to include stand-alone prohibitions 
    on fraud and price manipulation.
    
    DATES: Written comments must be received by the Commission by the close 
    of business on December 12, 1994. Reference should be made to section 
    4(c) contract market transactions.
    
    ADDRESSES: Interested persons should submit their written views and 
    comments to Jean A. Webb, Secretary, Commodity Futures Trading 
    Commission, 2033 K Street, N.W., Washington, D.C. 20581.
    
    FOR FURTHER INFORMATION CONTACT: Pat G. Nicolette, Acting General 
    Counsel, David R. Merrill, Deputy General Counsel, or Ellyn S. Roth, 
    Attorney, Office of the General Counsel, Commodity Futures Trading 
    Commission, 2033 K Street, N.W., Washington, D.C. 20581. Telephone: 
    (202) 254-9880.
    
    SUPPLEMENTARY INFORMATION:
    
    I. Statutory Background
    
        Section 2(a)(1)(A) of the Act grants the Commission exclusive 
    jurisdiction over ``accounts, agreements (including any transaction 
    which is of the character of * * * an 'option' * * *), and transactions 
    involving contracts of sale of a commodity for future delivery traded 
    or executed on a contract market * * * or any other board of trade, 
    exchange, or market * * *'' 7 U.S.C. 2. The CEA and Commission 
    regulations require that transactions in commodity futures contracts 
    and commodity option contracts, with narrowly defined exceptions, occur 
    on or subject to the rules of contract markets designated by the 
    Commission.1
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        \1\Sections 4(a), 4c(b) and 4c(c) of the Act, 7 U.S.C. 6(a), 
    6c(b), and 6c(c). Section 4(a) of the CEA specifically provides, 
    inter alia, that it is unlawful to enter into a commodity futures 
    contract that is not made ``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). This prohibition does 
    not apply to futures contracts made on or subject to the rules of a 
    foreign board of trade, exchange or market. 7 U.S.C. 6(a).
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        On October 28, 1992, the Futures Trading Practices Act of 1992 
    (``1992 Act'') was signed into law. P.L. No. 102-546. This legislation 
    added new subsections (c) and (d) to Section 4 of the Act. New Section 
    4(c)(1) authorizes the Commission, by rule, regulation, or order, to 
    exempt any agreement, contract or transaction, or class thereof, from 
    the exchange-trading requirements of Section 4(a) or any other 
    requirement of the Act other than Section 2(a)(1)(B), 7 U.S.C. 2.2 
    New Section 4(c)(2) provides that the Commission may not grant an 
    exemption from the exchange-trading requirement of the Act unless, 
    inter alia, the agreement, contract or transaction being exempted will 
    be entered into solely between ``appropriate persons'' as defined in 
    new Section 4(c)(3)3 subject to such limitations as may be deemed 
    appropriate by the Commission, in the public interest.4 In 
    granting such an exemption, the Commission must also determine that the 
    agreement, contract or transaction in question 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 the Act and 
    that the exemption would be consistent with the public interest and the 
    purposes of the Act.5 In vesting the Commission with this new 
    exemptive authority, Congress recognized the need to create legal 
    certainty for instruments that may contain some features similar to 
    those of regulated exchange-traded products but that are sufficiently 
    different in their purpose, function or design, or other 
    characteristics such that traditional futures regulation may be 
    unnecessary.6
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        \2\Specifically, Section 4(c)(1), 7 U.S.C. 6(c)(1), provides:
        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.
        \3\Section 4(c)(3), 7 U.S.C. 6(c)(3), provides that the term 
    ``appropriate person'' shall be limited to the following persons or 
    classes thereof:
        (A) A bank or trust company (acting in an individual or 
    fiduciary capacity).
        (B) A savings association.
        (C) An insurance company.
        (D) An investment company subject to regulation under the 
    Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).
        (E) A commodity pool formed or operated by a person subject to 
    regulation under this Act.
        (F) A corporation, partnership, proprietorship, organization, 
    trust, or other business entity with a net worth exceeding 
    $1,000,000 or total assets exceeding $5,000,000, or the obligations 
    of which under the agreement, contract or transaction are guaranteed 
    or otherwise supported by a letter of credit or keepwell, support, 
    or other agreement by any such entity or by an entity referred to in 
    subparagraph (A), (B), (C), (H), (I), or (K) of this paragraph.
        (G) An employee benefit plan with assets exceeding $1,000,000, 
    or whose investment decisions are made by a bank, trust company, 
    insurance company, investment adviser registered under the 
    Investment Advisers Act of 1940 (15 U.S.C. 80a-1 et seq.), or a 
    commodity trading advisor subject to regulation under this Act.
        (H) Any governmental entity (including the United States, any 
    state, or any foreign government) or political subdivision thereof, 
    or any multinational or supranational entity or any instrumentality, 
    agency, or department of any of the foregoing.
        (I) A broker-dealer subject to regulation under the Securities 
    Exchange Act of 1934 (15 U.S.C. 78a et seq.) acting on its own 
    behalf or on behalf of another appropriate person.
        (J) A futures commission merchant, floor broker, or floor trader 
    subject to regulation under this Act acting on its own behalf or on 
    behalf of another appropriate person.
        (K) Such other persons that the Commission determines to be 
    appropriate in light of their financial or other qualifications, or 
    the applicability of appropriate regulatory protections.
        \4\See H.R. Rep. No. 978, 102d Cong., 2d Sess. 79 (1992).
        \5\Specifically, Section 4(c)(2), 7 U.S.C. 6(c)(2), states:
        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.
        \6\See H.R. Rep. No. 978, 102d Cong., 2d Sess. 80 (1992).
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    II. The Petitions for Exemptive Relief
    
        On August 16, 1993, the Commission published in the Federal 
    Register a notice of petitions for exemption submitted by the CME and 
    CBOT pursuant to Section 4(c) of the Act, 7 U.S.C. 6(c), and a request 
    for comment.7 In its petition, submitted on April 8, 1993 (and 
    supplemented June 18, 1993), the CME sought an exemption from most of 
    the provisions of the Act and Commission regulations with regard to the 
    purchase and sale of certain contracts denominated by the CME as 
    Rolling SpotTM futures and options contracts (``Rolling Spot 
    Contracts''). The CBOT's petition, submitted on June 30, 1993, 
    requested that the Commission establish a ``professional trading market 
    exemption'' from most of the provisions of the Act and regulations for 
    trading in any instrument of the CBOT and other boards of trade, 
    including those designated previously as contract markets by the 
    Commission. Under both petitions, trading in exempted instruments would 
    have been limited to certain participants, and trades would have been 
    cleared through an exchange clearing system approved by the Commission.
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        \7\58 FR 43414 (Aug. 16, 1993); 58 FR 44402 (Aug. 20, 1993) 
    (correction); 58 FR 52948 (Oct. 13, 1993) (extension of comment 
    period to Dec. 15, 1993).
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        In the Federal Register notice, the Commission requested comment 
    concerning the appropriate disposition, pursuant to Section 4(c) of the 
    Act, 7 U.S.C. 6(c), of the applications submitted by the CME and the 
    CBOT. Specifically, the Commission requested comment on approximately 
    100 issues under the following general headings, corresponding to the 
    determinations that the Commission must make in order to grant an 
    exemption under Section 4(c), 7 U.S.C. 6(c): (1) Whether the exemption 
    is consistent with the public interest and purposes of the Act; (2) 
    whether the contracts to be exempted will be entered into solely 
    between ``appropriate persons'' as defined in Section 4(c)(3) of the 
    Act, 7 U.S.C. 6(c)(3); and (3) whether the exemption will have a 
    material adverse effect on the ability of the Commission or any 
    contract market to discharge its regulatory or self-regulatory duties 
    under the Act.
    
    III. Comments Received
    
        The Commission received 36 comment letters on the proposal: seven 
    from futures exchanges;\8\ two from securities exchanges; one from the 
    National Futures Association; six from trade associations;\9\ three 
    from foreign regulatory bodies; two from university professors; four 
    from federal regulatory agencies; one from a member of Congress; one 
    from a publisher of a futures publication; five from futures traders; 
    one from a bar association; two from investment companies; and one from 
    a futures lawyer.\10\
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        \8\The seven comment letters consist of an interim letter signed 
    by the presidents of eight exchanges, a 134-page letter signed by 
    the presidents of seven exchanges, a letter from the New York 
    Mercantile Exchange (``NYMEX''), a letter from the CME responding to 
    a comment letter, and three joint letters from the CME and CBOT 
    supplementing the record and responding to other comment letters. In 
    addition, by letter dated September 20, 1994, the NYMEX sought to 
    join in the CBOT's petition.
        \9\The six include an extension of time request.
        \10\In addition, on November 23, 1993, the Commission held a 
    roundtable discussion, during which industry experts, including 
    representatives of end users and dealers in over-the-counter 
    (``OTC'') and exchange-traded derivatives, presented their views on 
    the exchange petitions. A number of concerns were expressed 
    regarding the way in which the exchanges' ``professional trading 
    market'' would operate.
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        There were three general sets of commenters: those who expressed 
    unqualified support in favor of the petitions; those who were generally 
    in favor of the petitions but who thought they should be modified 
    somewhat, either by limiting the scope of the exemptions and/or by 
    granting the exemptions on a trial basis; and those who were generally 
    against the petitions. The CME and the CBOT were joined by six other 
    exchanges in expressing their support for the proposals. The group in 
    favor of the exemptions also included certain futures professionals and 
    academics. The industry's views, however, were not uniform. Futures 
    trade associations as well as other futures professionals comprised the 
    group giving their qualified support to the CME and CBOT petitions. 
    Those opposing the petitions largely consisted of regulatory agencies, 
    both foreign and domestic. In addition, portions of the petitions were 
    criticized by some investment professionals.
        Those supporting the petitions generally believed that the 
    exchanges are operating at a handicap in competing with the OTC markets 
    because of what they characterized as burdensome, costly, and 
    unnecessary federal regulation. Removing such regulation would, 
    according to supporters, enhance the competitive posture of the U.S. 
    exchanges in the world marketplace. Supporters further asserted that 
    professional and institutional traders do not require the same level of 
    regulatory protection as the small retail speculator. They argued that 
    the Commission should treat transactions occurring in centralized 
    ``professional trading markets'' the same way that it did swaps, 
    hybrids, and certain energy transactions, all previously exempted from 
    most or all of the provisions of the Act and Commission regulations.
        Some supporters commented that the exemptions would allow flexible 
    product development, the hallmark of the OTC market, but in a far more 
    structured regulatory environment. According to these commenters, 
    exchange self-regulation over derivatives is preferable to no market 
    regulation, the present situation in connection with OTC transactions.
        Those giving the petitions qualified support generally also 
    endorsed permitting more flexible approaches than the current 
    designation process as well as enhancing the exchanges' ability to 
    respond to the needs of sophisticated and institutional market 
    participants and competitive demands of the international marketplace. 
    Nonetheless, commenters in this category expressed concerns with the 
    petitions, and highlighted the need to ensure the integrity of both the 
    non-exempt as well as the exempt markets, particularly with regard to 
    financial requirements, customer funds protections, trade practice 
    rules, market surveillance, exchange governance, and the integrity of 
    the clearing system. In addition, some of these commenters were not 
    thoroughly convinced that the rules for preventing fraud and 
    manipulation proposed by the CME and CBOT would be as effective as the 
    current procedures.\11\ The commenters further noted the importance of 
    maintaining public confidence in the integrity of the futures markets. 
    Some emphasized that public markets like the CME and CBOT imply a 
    comprehensive regulatory environment, including the imposition of 
    fitness standards for commodity professionals.
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        \11\In addition, two commenters suggested that the CBOT's 
    proposed antifraud rule might exceed the Commission's jurisdictional 
    scope.
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        Finally, some commenters giving the petitions qualified support 
    believed that the absence of defining criteria for the proposed 
    transactions made their evaluation of the potential consequences of the 
    exchanges' petitions difficult. Accordingly, commenters in this group 
    generally recommended caution--either by limiting the commodities which 
    could be traded on a ``professional trading market'' or by granting the 
    exemptions on a trial basis, or both.
        Commenters opposing the petitions, in particular other financial 
    regulatory agencies, essentially contended that the exemption proposals 
    were too broad and lack sufficient justification. Specifically, 
    according to some commenters, the exchanges failed to make their case 
    that approval of their proposals would be in the public interest. They 
    further argued that the exchanges have not presented evidence showing 
    that the existing regulatory structure is so harmful to competition 
    that such broad relief is necessary in order for exchanges to compete 
    effectively. Commenters against the petitions contended that granting 
    such broad exemptions may have unintended effects on market integrity, 
    in particular, unexpected consequences for the non-exempt markets and 
    the safety of the clearing system.\12\
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        \12\Some commenters stated that although the exchanges have 
    indicated that they do not intend to trade identical exempt and non-
    exempt contracts, the theoretical possibility of allowing such two-
    tier trading would raise a number of concerns, including the drain 
    of liquidity from the non-exempt market and the resulting 
    implications for price discovery, the potential for manipulation, 
    trading ahead, and other issues relating to the integrity of both 
    the exempt and non-exempt markets.
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        Some commenters further noted that Congress warned the Commission 
    to use its new exemptive authority sparingly, and not as a means of 
    effecting wholesale deregulation of the futures markets. Commenters 
    stated that, contrary to the exchanges' assertions, there are 
    distinctions between the OTC derivative markets (including the 
    instruments previously exempted by the Commission) and the contracts 
    traded on the CME, CBOT, and other exchange markets. Whereas swaps and 
    other OTC derivatives are primarily dispersed, non-fungible, privately-
    negotiated, principal-to-principal transactions in which individual 
    credit determinations have been made about disclosed counterparties, 
    exchange-traded futures contracts are traded among anonymous 
    counterparties and on an agency basis in a public market established by 
    a third party. Commenters in this category emphasized that an 
    appropriate level of federal regulatory oversight of exchange markets 
    is necessary to maintain market integrity, and, moreover, that the need 
    for such oversight is not diminished by the exclusion of certain market 
    participants since exchange regulation is designed to address the 
    characteristics of that market and many regulatory provisions are 
    designed to protect the market itself.
        Moreover, according to some commenters, the ultimate and the 
    appropriate regulatory structure for OTC derivatives is not settled; 
    rather, Congress and financial regulators are reviewing the need for 
    OTC derivatives regulation. Some commenters asserted that the entire 
    derivatives market requires more, not less, regulation.
    
    IV. The Proposed Rules
    
        In granting the Commission exemptive authority, Congress cautioned 
    the Commission to use its authority ``sparingly'' and not as a way of 
    prompting a ``wide-scale deregulation of markets falling within the 
    ambit of the Act.''\13\ In light of this admonition as well as the 
    advice of commenters, in particular that of other financial regulators, 
    the Commission believes that the scope of the exchanges' petitions, 
    which requested exemptive relief from most of the provisions of the Act 
    and regulations for all instruments traded by sophisticated 
    participants, is too broad. Notwithstanding the exchanges' assertions 
    to the contrary, the Commission's previous exemptions for swaps, 
    hybrids, and certain energy contracts, granted shortly after the 
    Commission was provided with exemptive authority,\14\ cannot be equated 
    with the exchanges' requests for exemptive relief. The previous 
    exemptions, which followed extensive periods of consideration of the 
    issues raised by such instruments,\15\ arose out of a need specifically 
    recognized by Congress to enhance the legal certainty as to the 
    regulatory status of those instruments. Each such exemption related to 
    types of transactions that the Commission had previously found to be 
    beyond the scope of the CEA or unsuitable for regulation thereunder 
    because of the nature of the transaction, the parties, the 
    applicability of other regulatory regimes or otherwise.\16\
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        \13\H.R. Rep. No. 978, 102d Cong., 2d Sess. 81 (1992).
        \14\The Commission exempted from most provisions of the Act and 
    regulations the following: (1) hybrid instruments that are not 
    predominantly composed of a commodity interest (17 CFR Part 34; 58 
    FR 5580 (Jan. 22, 1993)), (2) swap transactions meeting certain 
    criteria (17 CFR Part 35; 58 FR 5587 (Jan. 22, 1993)), and (3) 
    certain contracts between commercial participants for the deferred 
    purchase or sale of energy products (58 FR 21286 (April 20, 1993)).
        \15\Each of the Commission's exemptions for swaps, hybrids, and 
    energy products was a culmination of a deliberate and cautious 
    exercise by the Commission of its regulatory authority that spanned 
    several years. Specifically, the Commission's consideration of an 
    appropriate regulatory approach for swaps began in December 1987 
    with the publication of an Advanced Notice of Proposed Rulemaking 
    which addressed a number of types of off-exchange instruments and 
    which solicited public comments on a wide range of issues. 
    Subsequently, in July 1989, after a second notice-and-comment 
    period, the Commission issued a policy statement which established a 
    safe harbor for swap agreements meeting certain specified criteria. 
    This was the foundation upon which the Commission ultimately adopted 
    final rules in January 1993.
        The Commission's examination of a regulatory approach with 
    regard to hybrid instruments also began with the same December 1987 
    Advanced Notice of Proposed Rulemaking and request for comments. 
    Based upon the comments received and its subsequent experience, the 
    Commission in January 1989 proposed rules to exempt certain types of 
    hybrid instruments meeting specified criteria, and adopted a 
    statutory interpretation which recognized an exclusion from 
    regulation for other types of hybrids. Following an extensive 
    comment period on its proposed rules, the Commission adopted final 
    rules in July 1989. These rules and the statutory interpretation, 
    together with the experience gained by the Commission in 
    administering them, served as the basis for the proposal and 
    ultimate adoption by the Commission in January 1993, pursuant to its 
    new authority, of rules exempting certain hybrid instruments.
        Finally, with respect to commercial contracts involving energy 
    products, the Commission received inquiries concerning the 
    applicability of the Act to transactions of this type following the 
    issuance of the judicial decision in Transnor (Bermuda) Limited v. 
    BP North American Petroleum, et al., 738 F. Supp. 1472 (S.D.N.Y. 
    1990). In response, the Commission in September 1990 issued a 
    statutory interpretation taking the position that commercial 
    transactions of this type which met certain criteria were excluded 
    from regulation under the Act as ``cash forward'' contracts. 
    Following the enactment of the 1992 Act, the Commission in November 
    1992 received a petition for exemptive relief concerning similar 
    transactions. In response, the Commission published a proposed order 
    which would provide exemptive relief to certain persons engaged in 
    contracts involving energy products that meet certain criteria and, 
    following a public comment period, adopted a final order in this 
    regard in April 1993.
        \16\In granting exemptive authority to the Commission under new 
    Section 4(c), the Conferees on the 1992 Act recognized the need to 
    create legal certainty for a number of existing categories of 
    instruments which traded outside the forum of a designated contract 
    market. These instruments were noted to contain some features 
    similar to those of regulated exchange-traded products but are 
    sufficiently different in their purpose, function, design or other 
    characteristics that, as a matter of policy, traditional futures 
    regulation and the limitation of trading to the floor of an exchange 
    may be unnecessary to protect the public interest and may create an 
    inappropriate burden on commerce. H.R. Rep. No. 978, 102d Cong., 2d 
    Sess. 80 (1992).
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        Moreover, the Commission does not subscribe to the exchanges' 
    apparent view that there are no significant distinctions between 
    dispersed dealer and central auction markets that would be reflected in 
    assessing the appropriate level and manner of regulation of 
    transactions undertaken in either forum or that should cause the 
    Commission, in applying the exemptive criteria of the Act, to treat OTC 
    and central exchange products identically. This is true irrespective of 
    whether further regulation of the dealer market may be found, as a 
    result of ongoing inquiries, to be desirable. The federal regulation of 
    futures exchange markets dates from 1922. In 1974, Congress expressly 
    expanded coverage of the CEA to ``all services, rights and interests in 
    which contracts for future delivery are presently or in the future 
    dealt in,'' to assure that the prices generally quoted and disseminated 
    from those contracts could be used as a fair basis for determining 
    consumer and producer prices.\17\ To reflect the public interest in the 
    appropriate functioning of price discovery markets and to assure market 
    integrity and customer protection, a number of regulatory protections 
    are currently required. These requirements reflect the fact that 
    exchange transactions are conducted between anonymous counterparties 
    and support the financial integrity of such transactions with marking-
    to-market, daily or more frequent cash settlement, segregation of 
    customer funds, capital requirements, margin, recordkeeping and 
    inspection rules, and clearing guarantees.
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        \17\Sections 1a and 3 of the Act, 7 U.S.C. 1 and 5. In 1974, 
    Congress described a ``fundamental purpose'' of the Act as follows:
        ``* * * to insure fair practice and honest dealing on the 
    commodity exchanges and to provide a measure of control over those 
    forms of speculative activity which too often demoralize the markets 
    to the injury of producers and consumers and the exchanges 
    themselves.''
        Report of the Senate Committee on Agriculture and Forestry, S. 
    Rep. No. 1131, 93d Cong., 2d Sess. 14 (1974).
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        Thus, the fact that a centralized market is composed solely of 
    institutional or ``sophisticated'' participants does not obviate the 
    need to ensure market integrity, price dissemination, and adequate 
    protections against fraud, manipulation, and other trading abuses by 
    continued Commission regulation and oversight. In this regard, the term 
    ``institutional'' may encompass customers with a wide range of 
    financial experience, acumen and resources. The Commission believes, 
    moreover, that the Act and Commission regulations serve a vital 
    function, even where such a market includes only sophisticated 
    participants, in that the regulatory requirements substitute for 
    individualized credit determinations and permit increased access to the 
    markets by secondary participants and customers. Further, a premise of 
    the CEA for over 70 years has been that all traders require not only an 
    efficient, but also a fair marketplace in which to trade, which 
    Congress has previously determined to be best effectuated by a 
    regulatory framework in which federal regulation is paramount.
        Moreover, notwithstanding the exchanges' arguments to the contrary, 
    since the enactment of the CEA the exchanges have grown and thrived, 
    not despite, but at least in part, because of the regulatory scheme 
    under which they operate and the resulting public confidence in the 
    fairness of the markets. The Commission agrees with the commenters who 
    stated that regulatory safeguards promote public confidence in the 
    integrity of the markets, confidence likely to be eroded without 
    federal oversight. Accordingly, the Commission is not convinced that a 
    broad exemption of the kind requested by the exchanges is in the public 
    interest.
        Nevertheless, the Commission has in the past taken into account in 
    fashioning its regulations, granting exemptions, and establishing 
    policies, whether the general public is excluded from a market or 
    transaction or is permitted to participate. The Commission considers 
    the exclusion of non-sophisticated market participants as the single 
    most important rationale supporting the various forms of relief 
    proposed herein. The proposed relief from certain aspects of exchange 
    regulation should enhance the exchanges' ability to innovate and their 
    competitive posture. Indeed, the Commission is cognizant, as the 
    exchanges and other commenters noted, that its exemptive authority is 
    ``intended to promote responsible economic and financial innovation and 
    fair competition.''18 In issuing its study on U.S. market 
    competitiveness, the Commission stated that it was committed to keeping 
    its regulatory programs under continuous review to assure that 
    ``consistent with our responsibilities for market integrity and 
    customer protection, they: (1) keep pace with changes in the 
    marketplace; and (2) do not unnecessarily impede domestic exchanges 
    from evolving to remain competitive, especially with regard to the cost 
    of compliance relative to non-U.S. exchanges.''19
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        \1\8H.R. Rep. No. 978, 102d Cong., 2d Sess. 78 (1992).
        \1\9Commodity Futures Trading Commission, A Study of the Global 
    Competitiveness of U.S. Futures Markets 2 (April 1994).
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        To that end, the Commission recognizes that some regulatory 
    controls, such as certain procedures for Commission review and approval 
    of new instruments, could be streamlined in order to facilitate the 
    introduction of products and the on-exchange offering of more varied 
    contract designs. More flexibility to permit some customizing of 
    exchange-traded products also may attract certain institutional 
    participants for which the efficiency of exchange markets and other 
    protections they afford may be preferable to off-exchange transactions 
    where prices are often opaque and credit risk is a more profound issue. 
    The Commission also believes that exchange transactions traded by 
    professional traders may not require the full panoply of regulatory 
    requirements. In that regard, the Commission believes that a more 
    flexible approach to risk disclosure for products offered to 
    sophisticated market participants may be preferable to existing 
    requirements. In addition, the Commission preliminarily agrees with the 
    commenters who suggested that certain registration requirements could 
    be streamlined for professional traders licensed with other financial 
    regulators to facilitate new entrants to the exchange markets by 
    persons currently selling OTC products to sophisticated customers. 
    Finally, the Commission preliminarily believes that the long-standing 
    traditional requirements of open and competitive trading could be 
    relaxed for sophisticated, eligible participants in order to facilitate 
    the execution of large orders, as long as appropriate post-trade 
    transparency, customer, and other market protections from trading 
    abuses are maintained.
        For these reasons, after reviewing the exchanges' petitions and the 
    general comments, the Commission is proposing to test some ways of 
    giving the exchanges flexibility and greater latitude in order to 
    enhance their ability to devise innovative responses both to other 
    centralized and to less regulated, non-centralized markets. The 
    Commission believes that the exemptive relief that it is proposing 
    preserves regulatory safeguards but also acknowledges that non-
    centralized markets have a far lower regulatory burden and that several 
    comparable markets of other jurisdictions provide certain trading 
    mechanism concessions not currently afforded the U.S. futures markets. 
    In that regard, the Commission proposes a new Part 36, which exempts 
    contracts termed ``section 4(c) contract market transactions'' meeting 
    specified criteria from certain specific requirements and regulations 
    under the Act. There are four main proposed limitations on the 
    exemption: (1) The duration, (2) the scope, (3) the persons who are 
    eligible to enter into the transactions, and (4) the transactions which 
    may trade as section 4(c) contract market transactions. The Commission 
    believes that this proposal strikes the appropriate balance between the 
    need to detect and deter abuses and the need for an innovative central 
    market tailored to the needs of sophisticated and institutional market 
    participants. The Commission requests comments concerning the specifics 
    of the proposed criteria for the transactions as well as the proposed 
    provisions from which the transactions will be exempt.
    
    A. Duration and Scope of Exemption
    
        In Sec. 36.1(a), the Commission proposes to implement the exemption 
    under a three-year pilot program. The pilot program is designed to give 
    the exchanges and the Commission a trial period to test the operation 
    of the exemption. More importantly, it affords the Commission an 
    opportunity to determine the effect of section 4(c) contract market 
    transactions on the integrity of the marketplace as a whole and whether 
    continued trading under the exemption would be in the public interest. 
    The trial nature of the program reflects the Commission's belief that 
    the exemption constitutes a significant departure from the regulatory 
    scheme under which futures and option contracts have been trading for 
    over 70 years. The Commission believes that the pilot program will 
    enable the Commission to obtain sufficient data on which to base a 
    permanent program. In this regard, at the conclusion of the pilot 
    program, the Commission intends to evaluate section 4(c) contract 
    market transactions exempted by this Part in order to determine whether 
    to extend the exemptive relief granted herein, and whether it would be 
    appropriate to alter the requirements of this Part or expand the 
    exemptive relief provided to other transactions or markets. The 
    Commission requests comment specifically addressed to whether a pilot 
    program is feasible and appropriate.
        Proposed Sec. 36.1(b) sets forth the scope of the exemption. It 
    states that each board of trade on which section 4(c) contract market 
    transactions are traded is deemed to be a contract market and must 
    comply with all provisions of the Act and Commission regulations, 
    including the requirement of a clearing facility subject to Commission 
    oversight,20 except for those provisions which are ``specifically 
    inconsistent'' with Part 36. Moreover, new markets that seek to use 
    this exemption must submit all rules relative to governance, 
    disciplinary proceedings, financial requirements, et cetera, under the 
    current provisions of Section 5a(a)(12) of the Act, 7 U.S.C. 7a(12). 
    Therefore, the Commission intends that section 4(c) contract market 
    transactions trade pursuant to the following provisions: 36.3 (trading 
    rules), 36.4 (listing of transactions), 36.5 (reporting requirements), 
    36.6 (registration requirements), 36.7 (risk disclosure), and 36.9 
    (fraud and manipulation). Except where specifically indicated in Part 
    36, the provisions of Part 36 govern in lieu of the provisions of the 
    Act and Commission regulations that would otherwise apply to futures 
    and option transactions. Thus, these provisions of Part 36, explained 
    in detail below, constitute the scope of the exemption for section 4(c) 
    contract market transactions; all other provisions of the Act and 
    Commission rules, including, among other things, segregation, net 
    capital, supervision, bankruptcy, exchange emergency actions, 
    availability of reparations, and private rights of action, would 
    continue to apply. In any submission under proposed Part 36, a contract 
    market should specify those provisions of the Act and Commission rules 
    which the contract market deems to be specifically inconsistent with 
    the contract market rules being submitted. The Commission requests 
    comments concerning the scope of the exemption.
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        \2\01.41(a)(3), 17 CFR 1.41(a)(3) (1994). The term ``contract 
    market'' includes a clearing organization that clears trades for the 
    contract market. The Commission does not intend to alter this aspect 
    of the markets it regulates by virtue of this proposal.
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        In proposed Sec. 36.1(b), the Commission does not intend to limit 
    contract markets in section 4(c) contract market transactions to 
    current contract markets or exchanges. In order to qualify, such an 
    entity would be treated similarly to a board of trade seeking an 
    initial designation as a contract market. In addition, under the 
    structure of the Act, the Commission's regulations, and this exemption, 
    any entity wishing to offer a facility for trading section 4(c) 
    contract market transactions would be required to become a contract 
    market in these transactions.
    
    B. Appropriate Persons
    
        In considering the persons that may enter into section 4(c) 
    contract market transactions, that is, ``eligible participants,'' the 
    Commission is proposing to use a list of ``appropriate persons'' 
    modeled on the list set forth in Section 4(c)(3) (A) through (J) of the 
    Act, 7 U.S.C. 6(c)(3) (A) through (J), with revisions tailored to this 
    particular market and reflecting the Commission's experience in 
    applying similar concepts in other exemptions. In this regard, the 
    Commission is requesting comment whether these proposed requirements 
    should be applied to the Commission's previously-granted exemptions as 
    well.
        Of note is that under proposed Sec. 36.1(c)(1), all eligible 
    participants may enter into section 4(c) contract market transactions 
    for their own accounts; in addition, futures commission merchants 
    (``FCMs'') and floor brokers may trade section 4(c) contract market 
    transactions on behalf of other eligible participants. In addition, 
    under proposed Sec. 36.1(c)(2)(vii), the Commission is intending to 
    limit eligible employee benefit plans to those with total assets 
    exceeding $5 million and (rather than the ``or'' provided in Section 
    4(c)(3)(G) of the Act, 7 U.S.C. 6(c)(3)(G)) whose investment decisions 
    are made by a bank, trust company, insurance company, investment 
    adviser under the Investment Advisers Act of 1940, or a commodity 
    trading advisor under the CEA. In this regard, the Commission 
    specifically seeks comment concerning whether there is an asset level 
    for such employee benefit plans which should qualify them as an 
    eligible participant irrespective of whether their investment decisions 
    are made by a bank, trust company, insurance company, investment 
    adviser or commodity trading advisor. In addition, in the context of 
    proposed Sec. 36.1(c)(2)(viii), the Commission seeks comment on whether 
    municipalities should be included as ``eligible participants,'' and, if 
    so, what, if any, limitations would be appropriate in this context. 
    Finally, the Commission is interested in comments addressing whether 
    the list of appropriate persons as proposed would exclude any 
    individuals, entities, collective investment vehicles or others who 
    should be considered suitable to engage in section 4(c) contract market 
    transactions, and in particular whether Part 36 should be conformed to 
    Part 35 in this regard.
        Section 4(c)(3)(K) of the Act, 7 U.S.C. 6(c)(3)(K), also authorizes 
    the Commission to determine other persons to be ``appropriate persons'' 
    for section 4(c) contract market transactions in light of their 
    financial or other qualifications, or if appropriate regulatory 
    protections are applicable. The Commission is therefore proposing under 
    Sec. 36.1(c)(2)(xi) to permit persons, including natural persons, to 
    enter into section 4(c) contract market transactions provided their 
    total assets exceed $10 million. The Commission requests comments 
    specifically addressed to whether these thresholds are appropriate and 
    whether any additional or different financial criteria (such as net 
    worth standards) should be added to any other category of ``eligible 
    participants'' and, if so, whether part 36 should be conformed to part 
    35.
        The Commission is proposing, in Rule 36.1(c)(2)(x), to include 
    floor brokers and floor traders within the class of ``appropriate 
    persons'' that may participate in section 4(c) contract market 
    transactions. Furthermore, proposed Rule 36.1(c)(1) would permit floor 
    brokers to enter into section 4(c) contract market transactions on 
    behalf of other eligible participants. The Commission is not proposing 
    separate financial standards for eligible floor brokers and floor 
    traders at this time based upon its understanding that each such 
    participant would, by necessity, be a member in good standing of the 
    section 4(c) contract market whose transactions thereon would be 
    guaranteed by an exchange clearing member. The Commission seeks comment 
    on whether it should make a requirement of a clearing member guarantee 
    explicit in the rule and whether it should impose separate financial 
    requirements on floor brokers and floor traders.
    
    C. Transactions Eligible to Trade
    
        Proposed Sec. 36.2 establishes the breadth of the exemption, 
    delineating those transactions eligible to trade as section 4(c) 
    contract market transactions. In that sense, proposed Sec. 36.2 
    modifies the broad definition of section 4(c) contract market 
    transactions set forth in proposed Sec. 36.1(c)(1). Proposed 
    Sec. 36.2(a)(1) provides that except for a major foreign currency, the 
    transaction must be settled either in cash, at a price that meets the 
    existing Commission requirements for cash-settled contracts set forth 
    in Guideline No. 1, 17 CFR part 5, Appendix A, ``or by means other than 
    the transfer or receipt of any commodity.'' The phrase ``or by means 
    other than the transfer or receipt of any commodity'' would permit the 
    delivery of a subsequent contractual agreement, such as a subsequent 
    position in a swaps agreement.
        Proposed Sec. 36.2(a)(2) states that the transaction must be 
    cleared through a clearing organization subject to Commission 
    oversight, a provision originally part of the CME and CBOT's petition 
    for exemptive relief. The rules of clearing organizations subject to 
    Commission oversight as adjuncts to contract markets must be submitted 
    to the Commission pursuant to section 5a(a)(12) of the Act, 7 U.S.C. 
    7a(12).21 Additionally, as the result of section 4d(2) of the Act, 
    7 U.S.C. 6d(2), such organizations must settle accounts or positions 
    daily. The rules would require section 4(c) contract market 
    transactions to be separately identified on the books of the 
    participant in clearing records to facilitate surveillance of these 
    transactions.
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        \2\1See Board of Trade Clearing Corporation, et al. v. United 
    States of America, et al., [1977-1980 Transfer Binder] Comm. Fut. L. 
    Rep. (CCH)  20,534 (D.D.C. Jan. 11, 1978).
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        Proposed Sec. 36.2(a)(3) prohibits section 4(c) contract market 
    transactions on the agricultural commodities enumerated in section 1a 
    of the Act, except for contracts on a broad-based index thereof. In 
    this regard, the Commission notes that it did not provide specifically 
    for an exemption from Commission rules concerning speculative position 
    limits. Under Rule 150.2, 17 CFR 150.2 (1994), the Commission directly 
    administers position limits for futures contracts on those agricultural 
    commodities. Commission Rule 1.61, 17 CFR 1.61 (1994), requires 
    contract markets to adopt speculative position limits for futures and 
    option contracts which do not have Commission-set speculative limits. 
    While in theory Rule 1.61 would apply to section 4(c) contract market 
    transactions, the exemption from that requirement, 1.61(e), 17 CFR 
    1.61(e) (1994), has been interpreted flexibly to permit the exchanges 
    to substitute for speculative position limits various position 
    accountability rules for certain futures and option contracts.22 
    Therefore, the exchanges have already been afforded substantial 
    flexibility in this area. In addition, additional flexibility in this 
    regard would be afforded by proposed Rule 36.3 which should permit 
    exempt contract markets to implement trading rules more expeditiously 
    and without formal approval by the Commission. The Commission requests 
    comment on whether any further relief is appropriate for section 4(c) 
    contract market transactions.
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        \2\2See 57 FR 29064 (June 30, 1992).
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        In Sec. 36.2(a)(4), the Commission is proposing to limit section 
    4(c) contract market transactions to those transactions which can 
    ``reasonably be distinguished'' from futures or option contracts 
    designated by the Commission for trading on a traditional contract 
    market at the time of application to trade a section 4(c) contract 
    market transaction. The distinguishing factors are described in 
    relation to the contract's hedging function and/or pricing basis. The 
    Commission will base determinations as to whether section 4(c) contract 
    market transactions are ``reasonably distinguished'' from traditional 
    designated futures and option contracts on the same considerations that 
    it now applies in deciding whether proposed new futures and options 
    contracts shall be treated as separate designation applications. 
    Proposed Sec. 36.2(a)(4) is intended to address, among other things, 
    the concerns expressed by some commenters regarding the problems of a 
    two-tier marketplace. Although the CME and CBOT have indicated that 
    they do not intend to trade the same contract on both a section 4(c) 
    contract market and a traditional contract market, this provision would 
    prevent a section 4(c) contract market transaction from trading if a 
    traditional contract were already trading on any existing contract 
    market. A section 4(c) contract market transaction could potentially be 
    submitted for designation for traditional trading. If so, the full 
    5a(a)(12) process, including publication for comment, would be followed 
    and further attention directed to whether delisting as a section 4(c) 
    contract market transaction would be required. As a consequence, the 
    concern of side-by-side trading of identical contracts subject to 
    different trading regimes without further review is addressed by this 
    proposal. General disclosure obligations nonetheless would require 
    purveyors of section 4(c) contract market transactions to clarify that 
    different rules are applicable to those transactions than for 
    transactions traded pursuant to traditional requirements.
        Under proposed Sec. 36.2(a)(4), the Commission contemplates that a 
    broad array of contracts would be eligible for section 4(c) contract 
    market transactions. Thus, the following are examples of potentially 
    permissible section 4(c) contract market transactions in that they are 
    cash-settled and can reasonably be distinguished from currently 
    designated futures and options contracts: (1) Newly-issued 30-year U.S. 
    Treasury bonds, which are cash-settled based on either cash transaction 
    prices or firm quotes obtained from electronic information vendors; (2) 
    six-month London interbank offered rates (LIBOR), which are cash-
    settled based on a survey of British Bankers Association rates; and (3) 
    two-year interest rate swaps, which are cash-settled based on a survey 
    of swap dealers to obtain the rates they are willing to pay or to 
    receive for fixed-rate payments on generic two-year swaps, given a 
    specified notional amount.23
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        \2\3The Commission notes that while these specific, hypothetical 
    contracts can reasonably be distinguished from currently designated 
    futures and option contracts and therefore permitted to trade under 
    these proposed rules, that may not necessarily be true at the time a 
    board of trade applies to trade a specific section 4(c) contract 
    market transaction.
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        In addition, proposed Sec. 36.2(a)(4) provides for certain specific 
    contracts to be eligible section 4(c) contract market transactions. 
    First, flexible commodity options, which trade under contract market 
    option rules, but are not separately designated, may trade as section 
    4(c) contract market transactions.24 In addition, contracts in 
    foreign currency known as Rolling SpotTM Contracts, the subject of 
    the CME's petition for exemptive relief, as well as five- and ten-year 
    interest rate swaps contracts, and foreign currency forward futures 
    contracts and options thereon are specifically eligible to trade as 
    section 4(c) contract market transactions.25
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        \2\4Under the proposal, when such options become regular 
    options, they would no longer qualify to trade as section 4(c) 
    contract market transactions, and the full panoply of the 
    Commission's regulatory requirements would apply.
        \2\5Eligible swaps contracts include the contract markets of the 
    CBOT which the Commission designated in cash-settled three- and 
    five-year interest rate SWAP (IR-SWAP) futures contracts on January 
    29, 1991. Options based on those futures contracts were approved by 
    the Commission on February 26, 1991. On September 4, 1992, the 
    Commission approved amendments submitted by the CBOT to convert the 
    three-year IR-SWAP contracts to 10-year IR-SWAP contracts.
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        Finally, proposed Sec. 36.2(a)(5) provides that any transaction 
    subject to Section 2(a)(1)(B) of the Act, 7 U.S.C. 2, including stock 
    index futures contracts, is not within the scope of the exemptive 
    rules. Because of special considerations applicable to such 
    transactions, including the approval procedures of Section 2(a)(1)(B), 
    the Commission believes that such contracts may not be appropriate for 
    exemption under the proposed rules.
        The Commission requests comment on whether the proposed 
    restrictions on section 4(c) contract market transactions are 
    appropriate.
    
    D. Section 4(c) Contract Market Trading Rules
    
        Proposed Section 36.3, which permits a board of trade to submit for 
    Commission approval trading procedures for section 4(c) contract market 
    transactions, is intended to facilitate trading in section 4(c) 
    contract market transactions which do not comply in all respects with 
    certain Commission regulations setting forth trading standards and 
    related recordkeeping requirements for an open outcry double auction 
    trading environment. In general, Section 36.3 is intended to permit, 
    subject to certain conditions, section 4(c) contract market 
    transactions to trade pursuant to innovative trading strategies which 
    may not satisfy existing competitive trading requirements and other 
    trading standards relative to the exposure of orders and trades. In 
    proposing Sec. 36.3 the Commission intends to provide the flexibility 
    for transactions in a section 4(c) contract market to occur either on 
    the exchange floor, off the floor, or in both locales subject to 
    immediate post-trade reporting and clearing requirements. The 
    Commission regulations for which exchange alternatives could be 
    submitted include Regulations 1.35, 1.38(a), 1.39, 155.2, 155.3, and 
    155.4, 17 CFR 1.35, 1.38(a), 1.39, 155.2, 155.3 and 155.4 (1994).
        Proposed Section 36.3 represents a substantial change in the 
    assumptions underlying the method of trading futures and options 
    contracts. Section 4c(a) of the Act, 7 U.S.C. 6c(a), enumerates certain 
    trading practices which are prohibited, namely, wash sales, cross 
    trades, accommodation trades, and fictitious sales.26 The 
    Commission has viewed the ``common denominator'' of the abuses 
    prohibited by Section 4c(a) of the Act, 7 U.S.C. 6c(a), as the ``use of 
    trading techniques that give the appearance of submitting trades to the 
    open market'' while in reality ``negating the risk or price competition 
    incident to such a market.''27 Commission Regulation 1.38 
    explicitly requires open and competitive execution.28 The primary 
    purpose of Rule 1.38 was summarized as follows in a Senate Report 
    issued in connection with the Commodity Futures Trading Commission Act 
    of 1974:
    
        \2\6Section 4c(a) of the Act, 7 U.S.C. 6c(a), provides that:
        (a) It shall be unlawful for any person to offer to enter into, 
    enter into or confirm the execution of, any transaction involving 
    any commodity * * *
        (A) if such transaction is, is of the character of, or is 
    commonly known to the trade as, a ``wash sale'', ``cross trade'', or 
    ``accommodation trade'', or is a fictitious sale; or
        (B) if such transaction is used to cause any price to be 
    reported, registered, or recorded which is not a true and bona fide 
    price.
        \2\7In re Collins, [1986-1987 Transfer Binder] Comm. Fut. L. 
    Rep. (CCH) 22,982 at 31,902 (CFTC Apr. 4, 1986), reversed on other 
    grounds sub nom. Stoller v. Commodity Futures Trading Commission, 
    834 F.2d 262 (2d Cir. 1987). See also, e.g., In re Bear Stearns & 
    Co., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,994 
    (CFTC Jan. 25, 1991); In re Gimbel, [1987-1990 Transfer Binder] 
    Comm. Fut. L. Rep. (CCH) 24,213 (CFTC Apr. 14, 1988).
        \2\8Rule 1.38, 17 CFR 1.38 (1994), provides:
        All purchases and sales of any commodity for future delivery, 
    and of any commodity option, on or subject to the rules of a 
    contract market shall be executed openly and competitively by open 
    outcry or posting of bids and offers or by other equally open and 
    competitive methods, in the trading pit or ring or similar place 
    provided by the contract market, during the regular hours prescribed 
    by the contract market * * *
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        The purpose of this requirement [Regulation 1.38] is to ensure 
    that all trades are executed at competitive prices and that all 
    trades are focused into the centralized marketplace to participate 
    in the competitive determination of the price of futures contracts. 
    This system also provides reasonable access to the market for all 
    orders and results in a continuous flow of price information to the 
    public.29
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        \2\9Report of the Senate Committee on Agriculture and Forestry, 
    S. Rep. 93-1131, 93d Cong., 2d Sess. 16 (1974).
    
    Thus, a long-standing fundamental premise of the Commission's 
    regulatory scheme has been that trades must be executed competitively.
        The Commission has shown some flexibility in the methods it has 
    permitted to implement this competitive execution requirement. 
    Historically, execution of orders in the futures industry has been 
    conducted by open outcry on the floor of an exchange. The Commission 
    has indicated, however, that other methods are acceptable under the 
    Act. In this regard, in 1989, the Commission approved trading on 
    GLOBEX, an electronic computerized trading system for trading futures 
    and options contracts after regular hours. Under GLOBEX, trading is 
    generally conducted on computer terminals through a competitive auction 
    process pursuant to an algorithm, under which orders at the best prices 
    would be executed first. Each terminal provides an equal opportunity 
    for obtaining order execution.30 Despite the fact that trading in 
    GLOBEX is not conducted on the floor of the exchange, the Commission 
    has viewed this order execution procedure as competitive and consistent 
    with the Act and regulations.31
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        \3\0See, e.g., CME's Proposed Amendments Relating to the 
    Implementation of the GLOBEX System, 53 FR 25528 (July 7, 1988).
        \3\1See also, the rules applicable to the NYMEX ACCESS System, 
    and the CBOT's Project A, which have been approved by the 
    Commission.
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        Notwithstanding the fact that the Commission has afforded market 
    participants some flexibility in this area, until recently the 
    Commission has not permitted any procedures that provide for off-floor 
    discussion of trades.32 In 1991, however, the Commission amended 
    Rule 1.39 to permit large order execution (``LOX'') procedures and the 
    crossing of orders, procedures which contemplate some off-floor 
    discussion prior to executing the orders in the pit.33 In the 
    Federal Register release approving LOX, the Commission emphasized that 
    although off-floor discussions are permitted in LOX transactions, LOX 
    procedures nonetheless ultimately ``allow participation by the entire 
    pit'' when the trade is executed.34 The Commission further noted 
    that ``LOX transactions would be conducted only pursuant to exchange 
    rules approved by the CFTC, and enforced through a contract market 
    surveillance program, including measures specifically tailored to LOX 
    procedures, designed to ensure compliance with the Commodity Exchange 
    Act.''35 Accordingly, the Commission determined that LOX could be 
    consistent with the Act.36
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        \3\2Although prearranged trading is not expressly prohibited by 
    the CEA, the Commission has held it to be a form of anticompetitive 
    trading in violation of Regulation 1.38 as well as a form of 
    fictitious sale under Section 4c(a) of the Act. See Collins, 22,982 
    at 31,903; Gimbel, 24,213 at 35,003.
        \3\3See 56 FR 12336 (March 25, 1991).
        \3\456 FR at 12341. In contrast, the Commission has held illegal 
    trading activities which do not provide real opportunities for the 
    entire pit to participate in the trades. See, e.g., In re Murphy and 
    Rudman, [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22,798 
    (CFTC Sept. 25, 1985).
        \3\556 FR at 12341.
        \3\6The principal statutory basis for Regulation 1.39 is Section 
    4b(b) of the Act, 7 U.S.C. 6b (as amended 1992), which addresses 
    simultaneous buying and selling orders of different principals. The 
    provision states that such orders can be executed ``at the market 
    price,'' but requires that the orders be executed ``on the floor of 
    the exchange'' and ``at public outcry across the ring.'' The 
    Commission stated that the legislative history of this provision 
    indicates that its purpose was to ensure that one order was not 
    disadvantaged to the benefit of the other order or that both orders 
    were not disadvantaged to the benefit of the broker. According to 
    the Commission, since the statute did not prescribe the way in which 
    this was to be accomplished, the Commission had the discretion to 
    craft an appropriate method or methods ``to provide for the 
    protection of customers in this area,'' including the discretion to 
    amend Rule 1.39. 56 FR at 12338.
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        Proposed Sec. 36.3 goes beyond LOX in that it not only allows off-
    floor discussion prior to execution but also allows execution without 
    exposing the trades to the pit. In proposing a means of permitting 
    these procedures, it is the Commission's intention to provide a way for 
    exchanges to develop new trading procedures and standards intended to 
    address the needs of their increasingly institutional market 
    participants. The Commission did not attempt to describe whether there 
    should be other limits on the procedures as it had no specific 
    proposals to change pending methodologies before it and wanted to leave 
    the exchanges free to develop designs consistent with the parameters 
    set forth herein.37 This also reflects the Commission's 
    willingness to experiment through a pilot program with rules that 
    relax, for certain market participants, the traditional Commission 
    requirements for competitive trading. Specifically, the approach taken 
    affords those participants the opportunity to execute large 
    transactions with greater immediacy than might be available under 
    existing contract market trading procedures. The Commission 
    preliminarily believes that by permitting section 4(c) contract market 
    participants to trade in this manner, the futures exchanges' ability to 
    draw institutional participants to the more transparent exchange (as 
    opposed to OTC) markets will be enhanced.
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        \3\7Compare, however, New York Stock Exchange (``NYSE'') Rule 
    76, which governs block trading and requires that a member who has 
    set up a block trade and is bringing it to the floor to be crossed 
    must first announce the proposed bid, offer, and transaction size to 
    the floor. The member must then wait a reasonable amount of time to 
    allow the ``crowd'' (including specialists) to trade against either 
    side before completing the transaction. See also NYSE Rule 72, which 
    provides priority to an agency cross transaction where both orders 
    consist of 25,000 shares or more.
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        At the same time, however, the Commission is concerned with 
    maintaining essential market and appropriate customer protections. 
    Therefore, it is proposing regulatory safeguards with which the 
    exchanges must comply in formulating any innovative trading procedures. 
    Proposed Sec. 36.3(b) lists those requirements which must be satisfied 
    by a contract market seeking to establish such rules for section 4(c) 
    contract market transactions. In this connection, the Commission 
    requests comment as to whether additional or different requirements 
    should apply.
        First, transactions generally must satisfy Commission recordkeeping 
    and audit trail requirements. Proposed paragraph (b)(1) of Rule 36.3 
    requires the contract market to provide for record maintenance and 
    retention consistent with Regulation 1.31, 17 CFR 1.31 (1994). Under 
    proposed Sec. 36.3(b)(2), the audit trail for such transactions must 
    meet the trade register, trade timing, and contract market oversight 
    requirements in Regulations 1.35(e), (g), and (i), 17 CFR 1.35(e), (g), 
    and (i) (1994), respectively. In addition, the recordkeeping 
    requirements set forth in Regulation 1.38(b), 17 CFR 1.38(b) (1994), 
    for noncompetitive trades and the audit trail documentation required 
    under the other provisions of Regulation 1.35, 17 CFR 1.35 (1994), must 
    be satisfied to the extent they are applicable to the subject trading 
    procedures.38 A contract market must demonstrate in a clear and 
    convincing manner that these and any other regulations referenced in 
    paragraph (b) that it believes are inapplicable to its proposed trading 
    procedures are, in fact, inapplicable.
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        \3\8For example, Regulation 1.35, 17 CFR 1.35 (1994), provides 
    for two orders, an office order (1.35(a-1)(1)) and a floor order 
    (1.35(a-1)(2)(i)). A contract market's proposed procedures may 
    render the requirement for a floor order inapplicable.
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        Second, the Commission is proposing to maintain customer protection 
    standards. Commission Regulations 155.2, 155.3, and 155.4, 17 CFR 
    155.2, 155.3 and 155.4 (1994), set forth customer protection trading 
    standards for floor brokers, FCMs, and introducing brokers (``IBs'') 
    respectively. Under proposed Sec. 36.3(b)(3), the contract market's 
    proposed procedures must comply with these provisions to the extent 
    they are applicable.39
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        \3\9For example, Regulation 155.2, 17 CFR 155.2 (1994), sets 
    forth standards for floor brokers. If, however, under proposed 
    section 4(c) contract market trading rules, a function analogous to 
    that of a floor broker does not exist, that rule would not apply.
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        Third, the transactions must be transparent. The Commission is 
    proposing in paragraphs (b)(4) and (b)(5) of Rule 36.3 certain 
    requirements for the reporting and identifying of section 4(c) market 
    transactions after they are executed. Specifically, in addition to the 
    trade recordation requirements listed above, the transactions are to be 
    reported immediately to the floor of the exchange and are to be 
    disseminated immediately on the relevant market floor, trading screen, 
    and/or vendor services through the exchange's market quotation system. 
    Records must be maintained of the time of execution to this end.40 
    The information to be so reported must include, at a minimum, price, 
    quantity, and contract. To the extent that a proposal for section 4(c) 
    contract market transactions might provide for trading when the 
    exchange floor is closed, the Commission would still require the 
    immediate report and dissemination of that transaction information. 
    Brokers engaging in such transactions will need to have supervisory 
    procedures in place reasonably designed to achieve such post-trade 
    transparency. The Commission believes that these proposed requirements 
    to report and specifically identify section 4(c) contract market 
    transactions will provide the public with notice of the way in which 
    the prices in this market have been reached. As such, persons relying 
    on these prices for price basing purposes will have the opportunity to 
    take that information into account. The Commission requests comment on 
    these requirements.
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        \4\0To the extent applicable, all Regulation 1.35 audit trail 
    requirements will apply to the production of upstairs trading 
    records.
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        Fourth, the Commission is proposing requirements intended to ensure 
    the financial integrity of the transactions. Proposed paragraph (b)(5) 
    of Rule 36.3 requires section 4(c) contract market trading rules to 
    provide that section 4(c) contract market transactions be reported to 
    clearing and be cleared by the contract market on the same schedule as 
    required for trades subject to Regulations 1.38 and 1.39. Should there 
    be no such schedule, then the report to clearing must be immediate. The 
    Commission requests comment as to whether clearing procedures should be 
    further articulated in that case. In this connection, the Commission 
    notes that the clearing arrangements would be subject to Commission 
    oversight and that proposed clearing rules would require prior 
    Commission review under Section 5a(a)(12)(A) of the Act, 7 U.S.C. 
    7a(12), and Regulation 1.41, 17 CFR 1.41 (1994). The section 4(c) 
    contract market clearing organization would have an affirmative duty 
    under the Act and Commission regulations to enforce its rules, and 
    would be subject to recordkeeping, document retention, and other 
    applicable requirements.
        According to NYSE market surveillance staff, block trades are not 
    separately identified as such on the exchange's audit trail/time and 
    sales register. However, NYSE would be able to ascertain whether a 
    trade is a block trade by contacting the transacting members, each of 
    whom must keep a record reflecting which of its trades are blocks. 
    Interestingly, while not separately identifying block trades in its 
    audit trail, NYSE and its vendors do have a separate ``block trade'' 
    ticker which runs throughout the day reflecting size and price of block 
    trades alone. The Commission requests comment on whether to require the 
    dissemination of separate pricing information for block trades.
        Pursuant to proposed paragraph (c), any submission made hereunder 
    for proposed section 4(c) contract market transactions must describe 
    fully the contract market procedures and systems that will assure 
    compliance with Sections 4b and 4c(a) of the Act, 7 U.S.C. 6b and 
    6c(a), with respect to prohibitions on abuse of customer orders, 
    including frontrunning of such orders, misuse of information, and wash 
    sales and fictitious trades. This provision reflects, among other 
    things, the Commission's continuing concern that customer orders 
    receive appropriate priority and that trading between markets or 
    locations does not cause distortions in prices or provide advantages to 
    one class or user of the markets over others.
        In this connection, proposed paragraph (g) of Rule 36.3 states that 
    trades entered into in compliance with section 4(c) contract market 
    trading rules shall not be in violation of Sections 4b(a)(iv), 4b(b) or 
    4c(a) of the Act, 7 U.S.C. 6b(D), 6b or 6c(a), ``based solely on having 
    been executed noncompetitively.'' Failure to comply explicitly with 
    such contract market rules will render the conduct involved subject to 
    Commission action under Sections 4b and 4c(a) of the Act, 7 U.S.C. 6b 
    and 6c(a), and Regulations 1.38 and 1.39, 17 CFR 1.38 and 1.39 (1994), 
    in addition to any other applicable provisions of the Act and 
    Regulations.
        Pursuant to proposed paragraphs (d) and (e) of Rule 36.3, section 
    4(c) contract market trading rules must be submitted to the Commission 
    for review prior to being put into effect.41 Such submitted rules 
    may become effective ten days after receipt by the Commission unless 
    the Commission, within that ten-day period, notifies the submitter that 
    the proposal does not meet the conditions of this section. In the event 
    the trading rules are not permitted to go into effect, they shall be 
    subject to the usual rule approval procedures under Section 
    5a(a)(12)(A) of the Act, 7 U.S.C. 7a(12), and Regulation 1.41(b), 17 
    CFR 1.41(b) (1994). In accordance with paragraph (f) of Rule 36.3, any 
    subsequent proposed modifications of such rules shall be subject to the 
    same Commission review procedures.
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        \4\1Section 4(c) contract market trading rules may be submitted 
    prior to trading of section 4(c) contract market transactions or at 
    any time after the transactions begin trading under Commission 
    regulations.
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    E. Listing of Section 4(c) Contract Market Transactions
    
        Proposed Sec. 36.4 provides that a board of trade which meets other 
    requirements of the Act seeking an exemption for section 4(c) contract 
    market transactions shall furnish to the Commission the terms and 
    conditions of the transaction at least ten days prior to the proposed 
    effective date.42 Section 4(c) contract market transactions 
    meeting the requirements of Sec. 36.2 may be traded or executed ten 
    days after receipt of the submission unless, within the ten-day period, 
    the Commission notifies the board of trade in writing that the 
    submission does not meet the conditions of this section.43 In that 
    event, the terms and conditions of the transaction shall be subject to 
    the usual rule approval procedures under Section 5a(a)(12)(A) of the 
    Act, 7 U.S.C. 7a(12), and Regulation 1.41(b), 17 CFR 1.41(b) (1994). 
    The proposed rule further provides that any modification to the terms 
    and conditions of a section 4(c) contract market transaction shall be 
    submitted to the Commission. Such modification shall be subject to the 
    same procedures applicable to the initial listing of section 4(c) 
    contract market transactions.
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        \4\2As noted above, a board of trade which is not currently an 
    exchange must first get initial designation as a contract market 
    pursuant to Sections 5 and 5a of the Act (other than Section 
    5a(a)(12), which sets forth the procedures for Commission approval 
    of terms and conditions of contracts and contract market rules). An 
    initial designation generally requires the Commission to review and 
    approve the applicant's core rules regarding, among other things, 
    clearing, governance, and discipline.
        \4\3Section 2(a)(8)(B)(ii) of the Act, 7 U.S.C. 4a(g), allows 
    forty-five days for the Department of the Treasury and the Board of 
    Governors of the Federal Reserve System to comment on any 
    application by a board of trade for designation as a contract market 
    involving transactions for the future delivery of any security 
    issued or guaranteed by the United States or any agency thereof. In 
    light of the ten-day time frame for new filings and amendments, the 
    Commission intends to waive Section 2(a)(8)(B)(ii) for section 4(c) 
    contract market transactions. The Commission requests comment on 
    waiving this provision.
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        This limited, ten-day advance notice period for new filings and for 
    amendments to existing terms and conditions is designed to remove 
    potential impediments to the development of new products which are 
    eligible for the proposed section 4(c) contract market transactions. 
    The Commission believes that a streamlined approach will not only give 
    the exchanges flexibility but also will permit them to launch new 
    products rapidly to meet the competitive demands of the marketplace and 
    to take advantage of opportunities in a fast-changing market. This 
    procedure is limited to certain cash-settled contracts in order to 
    avoid issues related to delivery.
        Although the proposed ten-day notification requirement for section 
    4(c) contract market transactions does not contemplate the same level 
    of prior Commission review and approval of terms and conditions as is 
    required by Commission Rule 1.41(b), 17 CFR 1.41(b) (1994), for 
    contracts traded on traditional contract markets, the Commission has 
    continuing authority to ensure that section 4(c) contract market 
    transactions remain consistent with the public interest and the 
    purposes of the Act. In this regard, proposed Sec. 36.8 provides that 
    the Commission can suspend or revoke an exemption if it fails to meet 
    these requirements.44
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        \4\4Furthermore, under Rule 1.50, 17 CFR 1.50 (1994), at any 
    time the Commission can request from a contract market demonstration 
    of continued compliance with the requirements of contract market 
    designation. In addition, the Commission retains its authority under 
    Section 8a(7) of the Act, 7 U.S.C. 12a(7), to alter or supplement 
    contract market rules.
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        The Commission requests comment on the ten-day advance notification 
    period for the terms and conditions of section 4(c) contract market 
    transactions.
    
    F. Reporting Requirements
    
        The Commission is proposing that contract markets, FCMs, and large 
    traders who conduct section 4(c) contract market transactions comply 
    with certain reporting requirements similar to those currently in 
    effect for persons trading in non-exempt commodity futures and/or 
    options. These requirements are being proposed in lieu of the 
    requirements set forth in Parts 16, 17, 18, and 19 of the Commission 
    regulations, 17 CFR Parts 16, 17, 18, and 19 (1994).
    1. Reporting Requirements for Contract Markets
        The Commission is proposing in Secs. 36.5 (c)(1) and (e) that 
    contract markets operating pursuant to this section provide information 
    daily to the Commission and to the public concerning total open 
    interest, transactions, and prices for each commodity or type of 
    contract similar to that required under Rule 16.01 for non-exempt 
    futures and options. This information is intended to give the 
    Commission an overview of the size and development of these markets and 
    provide potential participants with important information concerning 
    the depth and breadth of the markets as well as the opportunity to 
    compare transaction prices against other markets trading the same 
    commodity. In addition, in Sec. 36.5(c)(2), the Commission is proposing 
    that contract markets provide open interest and transaction information 
    for each clearing member similar to that required under Rule 16.00, 17 
    CFR 16.00 (1994). This information is necessary for market 
    surveillance, providing needed input into the Commission's financial 
    monitoring system for clearing member FCMs.
        Last, in Sec. 36.5(c)(3), the Commission is proposing that contract 
    markets supply information concerning large traders conducting section 
    4(c) contract market transactions, but only on call by the Commission. 
    In order to ensure that the financial integrity protections currently 
    provided by using such reports are maintained, the Commission 
    anticipates that contract markets trading section 4(c) contract market 
    transactions will by rule require members to file daily reports 
    concerning accounts carried by large traders similar to the information 
    now provided by FCMs, clearing members, and foreign brokers under Rules 
    16.02, 17.00, and 17.02, 17 CFR 16.02, 17.00, and 17.02 (1994), for 
    large traders in non-exempt futures and options. The Commission will 
    rely on contract markets to define, subject to Commission approval, 
    position levels at which a trader is considered large. Under this 
    proposal, the Commission would monitor the development of the markets 
    to determine if and when it would require that the contract markets 
    submit large trader reports. If these exempt contract markets develop 
    rapidly, the Commission may require large trader reports on a daily 
    basis to augment the information it currently receives.
        The Commission is proposing that all information, with the 
    exception of account identification forms, be provided in machine-
    readable form using a format and coding structure approved in writing 
    by the Commission or its designee. Contract markets currently provide 
    option and futures data pursuant to similar requirements.
    2. Reporting Requirements for FCMs, Introducing Brokers and Traders
        The Commission is proposing to incorporate into Sec. 36.5 the 
    provisions of Commission Rules 15.05 and Part 21, 17 CFR 15.05 and Part 
    21 (1994). Section 15.05 states that any FCM who makes or causes to be 
    made any futures or option contract for the account of any foreign 
    broker or foreign trader, and any IB who introduces such an account to 
    an FCM is deemed to be the agent of the foreign broker or the foreign 
    trader for purposes of accepting delivery and service of any 
    communication issued by or on behalf of the Commission to the foreign 
    broker or the foreign trader with respect to any futures or option 
    contracts maintained in such accounts carried by the FCM.45 This 
    provision is used routinely for traditional futures and options, and 
    has proven to be effective in obtaining information from foreign 
    traders for market surveillance purposes.
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        \4\5The FCM or IB is considered an agent only if the foreign 
    broker or trader has not duly executed or does not maintain a 
    written agency agreement with a person domiciled in the United 
    States. 17 CFR 15.05(d) (1994).
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        The provisions of Part 21 provide that FCMs, IBs, foreign brokers, 
    and foreign traders must furnish on call by the Commission certain 
    information concerning their futures and options trading. Special calls 
    under Part 21 may be made to obtain market-wide summary information on 
    demographics and market uses of participants (Secs. 21.02 and 21.02a, 
    17 CFR 21.02 and 21.02a (1994)) or, in the case of special market 
    situations (Sec. 21.03, 17 CFR 21.03 (1994)), when information is 
    needed about all, rather than only reportable, traders in a market. The 
    Commission believes that it is important to retain this authority with 
    respect to participants operating under Part 36 so that the Commission 
    can make informed decisions and take appropriate action as special 
    situations warrant.
        The Commission is also proposing that eligible participants in 
    section 4(c) contract market transactions be subject to requirements 
    similar to those contained in Secs. 18.00, 18.04, and 18.05, 17 CFR 
    18.00, 18.04, and 18.05 (1994), for large futures and options traders 
    trading in the non-exempt market. The requirements proposed in 
    Sec. 36.5(f) paragraphs (2) (i) and (ii) would require large traders to 
    file, on call by the Commission, information concerning their positions 
    and transactions in the subject market as well as identifying and other 
    information contained on CFTC Form 40. Proposed Sec. 36.5(f)(1) would 
    require large traders to maintain books and records concerning section 
    4(c) contract market transactions and commercial activities that the 
    trader hedges in the commodity underlying such transactions. Reports 
    concerning these transactions and activities would have to be furnished 
    on request to the Commission or the U.S. Department of Justice.
    
    G. Special Temporary License, Registration or Principal Listing 
    Procedures
    
        The Commission is also proposing, in Sec. 36.6, to allow special 
    procedures that would be available to a person associated with an FCM 
    or IB who limits his or her activities to certain specified 
    instruments. If this rule were to be adopted, the Commission would 
    expect to set forth in an Appendix A to Part 36 those instruments to 
    which the special registration procedures would apply. An instrument 
    would be included in such an Appendix A only upon petition by a 
    contract market demonstrating that it is not contrary to the purpose of 
    the Act and the registration rules promulgated thereunder or to the 
    public interest to permit special temporary license, registration or 
    principal listing procedures for persons licensed with another federal 
    financial regulatory authority and involved only with that instrument. 
    Although to obtain a temporary license, such persons would have to 
    certify that they are not subject to statutory disqualification under 
    Section 8a(2) of the Act, 7 U.S.C. 12a(2), the National Futures 
    Association (``NFA'') could, for example, waive the fingerprint 
    requirement. Further, the Commission notes that although proficiency 
    testing requirements are governed by NFA Rules 401 and 402 and 
    interpretive notices related thereto, such a contract market petition 
    could also address whether alternative proficiency testing requirements 
    would be appropriate. Registration, of course, could continue to be 
    denied under Sections 8a(3) or 8a(4) of the Act, 7 U.S.C. 12a(3) or 
    12a(4). If the Commission were to approve the contract market petition, 
    NFA could then adopt and submit for Commission approval special 
    registration procedures to govern those persons involved only with the 
    particular instrument that is the subject of the petition. The 
    Commission, nonetheless, wishes to make clear that a contract market 
    seeking special registration procedures with respect to persons 
    limiting their activities to a particular new instrument may consult 
    with NFA and develop such procedures to be submitted in conjunction 
    with the contract market application for simultaneous consideration by 
    the Commission. Such NFA rules could vary depending upon the instrument 
    involved and would be considered by the Commission on a case-by-case 
    basis. The Commission would expect to include in Appendix A to Part 36 
    those instruments covered by the pending petitions of the CBOT and the 
    CME to which Part 36 applies. This authority would be comparable to 
    that already established under Part 3 of the Commission's regulations. 
    See Commission Rule 3.12(j), 17 CFR 3.12(j) (1994). The Commission 
    requests comment on these special registration procedures, in 
    particular their practicability.
    
    H. Risk Disclosure
    
        The Commission is proposing, in Sec. 36.7, to permit accounts to be 
    opened for section 4(c) contract market transactions without furnishing 
    an eligible participant with the basic risk disclosure statements 
    applicable generally to non-exempt futures and option contracts under 
    Commission Rules 1.55, 1.65, 33.7, and 190.10, 17 CFR 1.55, 1.65, 33.7, 
    and 190.10 (1994), or the Commission's newly-adopted generic risk 
    disclosure statement.46 These basic risk disclosure statements are 
    intended to provide a brief description of some of the risks attendant 
    to futures and options trading and are designed to be understood by all 
    customers. Since section 4(c) contract market transactions would be 
    entered into only by sophisticated or high net worth persons or those 
    engaged in the futures industry, and since the products themselves may 
    be different from traditional futures and option contracts, the 
    Commission believes that it may be appropriate to substitute for 
    standard disclosure statements such disclosure as may be appropriate to 
    the customer's expertise and financial capacity, tailored to the 
    particular product. Therefore, in lieu of requiring a specific 
    statement or format, the proviso to proposed Sec. 36.7(a) would require 
    an FCM or, in the case of an introduced account, an IB, to furnish an 
    eligible participant with disclosure appropriate to the particular 
    instrument and the eligible participant prior to the eligible 
    participant's entry into the first section 4(c) contract market 
    transaction involving a particular instrument.
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        \4\659 FR 34376 (July 5, 1994). This statement currently can be 
    used in the U.S., in the United Kingdom, in Ireland and in Belgium. 
    Several other jurisdictions are considering its adoption.
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        In this regard, the Commission notes that Rule 1.55(f), 17 CFR 
    1.55(f) (1994), currently states that furnishing the required 
    disclosure statement under that rule does not relieve an FCM or IB from 
    any other disclosure obligation it may have under applicable 
    law.47 The Commission further notes that exchanges with non-
    traditional trading systems have required, on their own initiative, 
    special risk disclosures applicable to such systems.48 The 
    Commission further notes that in order to qualify for the exemption of 
    swap agreements under Part 35 of its rules, an agreement must be 
    entered into by an eligible swap participant, the definition of which 
    is closely followed by proposed Rule 36.1(c)(2), and there are no 
    specific disclosure requirements under Part 35 of the Commission's 
    rules, 17 CFR Part 35 (1994).49 The Commission therefore 
    preliminarily believes that it is striking the appropriate balance in 
    proposed Rule 36.7 with respect to disclosure in light of the eligible 
    participants and products involved. The Commission requests comment 
    concerning the risk disclosure requirements for section 4(c) contract 
    market transactions.
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        \4\7The Commission notes that proposed Sec. 36.7(b), which 
    provides that ``[t]his section does not relieve a futures commission 
    merchant or introducing broker from any other disclosure obligations 
    it may have under applicable law,'' is included as a reminder that 
    Section 4b of the Act requires all material information to be 
    disclosed. The fact that other proposed sections of Part 36 do not 
    have a similar ``catch-all'' provision should not be interpreted to 
    mean that the Act or Commission regulations do not apply to those 
    sections.
        \4\8See CME Rule 577 and New York Mercantile Exchange Rule 6.22, 
    which address the risk disclosure requirements applicable to the 
    users of the GLOBEX and ACCESS electronic trading systems, 
    respectively. See also Commission Rules 4.7 and 4.8, 17 CFR 4.7 and 
    4.8 (1994), wherein the Commission has provided exemptions from 
    disclosure, reporting and recordkeeping requirements for CPOs 
    privately offering commodity pools to certain highly-accredited 
    investors and for CTAs providing commodity interest trading advice 
    to such persons.
        \4\9See also Part 34 of the Commission's rules, 17 CFR Part 34 
    (1994), regarding regulation of hybrid instruments.
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    I. Suspension or Revocation of Section 4(c) Contract Market Transaction 
    Exemption
    
        Proposed Sec. 36.8 mirrors the requirements for exemptive relief 
    under Section 4(c) of the Act, namely that any exemption must be 
    consistent with the public interest and the purposes of the Act. If the 
    Commission determines otherwise, Sec. 36.8 provides that, after notice 
    and opportunity for a hearing, the exemption may be suspended or 
    revoked.
    
    J. Fraud and Manipulation in Connection With Section 4(c) Market 
    Transactions
    
        Proposed Sec. 36.9 applies to section 4(c) contract market 
    transactions the antifraud proscriptions of Sections 4b(a) and 4o of 
    the Act, 7 U.S.C. 6b and 6o, those provisions of Sections 6(c), 6(d), 
    and 9(a) of the Act, 7 U.S.C. 9, 15, 13b and 13(a), that prohibit price 
    manipulation, and Commission Rules 33.9 and 33.10, 17 CFR 33.9 and 
    33.10 (1994), which prohibit fraudulent conduct and price manipulation 
    in connection with commodity option transactions.
        In its petition for exemption, the CBOT included a rule 
    specifically prohibiting fraud and manipulation relating to 
    professional market transactions. The CBOT petition explains:
    
        Fraud and manipulation are the core proscriptions of the 
    Commodity Exchange Act* * *. Rather than engage in a hyper-technical 
    legal effort to mesh certain exempt transactions with the 
    requirements of the CEA's existing fraud and manipulation 
    provisions, the proposal contains a special antifraud and 
    antimanipulation provision. That approach will make certain that any 
    party committing fraud or engaging in manipulative practices in 
    connection with an otherwise exempt transaction * * * would not be 
    able to wriggle out of liability under the CEA under some legal 
    technicality.
    
    58 FR 43414, 43433 (August 16, 1993). The CME did not suggest the 
    adoption of a specific fraud and manipulation rule; nonetheless, it did 
    not request an exemption from the antifraud and antimanipulation 
    provisions of the Act and Commission regulations.
        In its consideration of the petitions and the comments received 
    thereon, the Commission is also considering whether to adopt specific 
    stand-alone rules prohibiting fraud and manipulation to supplement 
    proposed Sec. 36.9. In this regard and as noted above, the exemption 
    being proposed would relieve the exchanges and their members from some 
    provisions of the Act and regulations that are intended to provide 
    prophylactic protection for customers. In the absence of these 
    protections, it may be appropriate to apply broader antifraud and 
    antimanipulation prohibitions to effectively control certain abusive 
    conduct, such as trading ahead of customer orders in any form and 
    failure to disclose material information. As a result, the Commission 
    is proposing, in Sec. 36.9(a), a free-standing antifraud rule for 
    section 4(c) contract market transactions modeled after Commission Rule 
    33.10, 17 CFR 33.10 (1994). The Commission specifically requests 
    comments concerning whether it should adopt such a rule.
        The Commission is also requesting comment concerning whether those 
    provisions of the Act and rules thereunder reserved in the manipulation 
    provision, Sec. 36.9(b), are adequate in this regard or whether the 
    Commission should also adopt an additional free-standing 
    antimanipulation rule. Should commenters believe that a free-standing 
    antimanipulation rule is warranted, comment is requested concerning 
    whether a rule prohibiting manipulation or attempted manipulation of 
    the price of any section 4(c) contract market transaction or of any 
    commodity in interstate commerce or any contract of sale of a commodity 
    for future delivery on or subject to the rules of any contract market, 
    would be appropriate.
        In a related matter, the Commission is also seeking comment on 
    whether Part 35 of its rules, 17 CFR Part 35 (1994), which provides an 
    exemption for certain swap transactions, should be amended to include 
    specific stand-alone prohibitions of fraud and price manipulation like 
    those discussed above.\50\ While Section 4b of the Act has provided an 
    adequate tool to address fraud in traditional futures contract trading, 
    and Section 4o (which is also reserved in Part 35) addresses the giving 
    of advice, questions have been raised about the efficacy of these 
    provisions as applied to certain of the transactions included in the 
    ambit of Part 35. An amendment to Part 35 in this regard would 
    eliminate any such questions and could also provide desirable 
    consistency in the legal standards applicable to both section 4(c) 
    contract market transactions and exempt swap transactions. Comment is 
    requested concerning the type of antifraud and antimanipulation rules 
    that the Commission should adopt if it determines to do so.
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        \50\Currently, Rule 35.2, 17 CFR 35.2 (1994), applies the 
    proscriptions of Sections 4b, 4o, 6(c), and 9(a)(2) of the Act, 7 
    U.S.C. 6b, 6o, 9, 15, and 13(a)(2), and Commission Rule 32.9, 17 CFR 
    32.9 (1994), to swap agreements.
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    V. Related Matters
    
    A. Regulatory Flexibility Act
    
        The Regulatory Flexibility Act (``RFA''), Public Law No. 96-354, 94 
    Stat. 1164 (1980), 5 U.S.C. 601 et seq., requires each federal agency 
    to consider, in the course of proposing substantive rules, the effect 
    of those rules on small entities. A small entity is defined to include, 
    inter alia, a ``small business'' and a ``small organization.'' 5 U.S.C. 
    601(6).\51\ The Commission previously has formulated its own standards 
    of what constitutes a small business with respect to the types of 
    entities regulated by it. The Commission has determined that contract 
    markets,\52\ futures commission merchants,\53\ registered commodity 
    pool operators,\54\ and large traders\55\ should not be considered 
    small entities for purposes of the RFA.
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        \5\1``Small organizations,'' as used in the RFA, means ``any 
    not-for-profit enterprise which is independently owned and operated 
    and is not dominant in its field * * *'' 5 U.S.C. 601(4). The RFA 
    does not incorporate the size standards of the Small Business 
    Administration (``SBA'') for small organizations. Agencies are 
    expressly authorized to establish their own definition of small 
    organization. Id.
        \5\247 FR 18618 (April 30, 1982).
        \5\3Id. at 18619.
        \5\4Id.
        \5\5Id. at 18620.
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        The Commission believes that to the extent that firms defined as 
    small businesses under section 3 of the Small Business Act could offer 
    or be offered section 4(c) contract market transactions, the proposed 
    rules would not add any legal, accounting, consulting or expert costs. 
    No one is required to trade section 4(c) contract market transactions. 
    The proposed rules would merely provide exemptive relief for those 
    trading such transactions. The determination of whether a section 4(c) 
    contract market transaction would qualify for the proposed exemption 
    requires minimal analysis of data that will be readily accessible to 
    the offeror.
        Accordingly, the Chairman, on behalf of the Commission, certifies 
    pursuant to section 3(a) of the RFA, 5 U.S.C. 605(b), that the proposed 
    rules will not have a significant economic impact on a substantial 
    number of small entities. Nonetheless, the Commission invites comment 
    from any firm which believes that these proposed rules would have a 
    significant economic impact on its operations.
    
    B. Paperwork Reduction Act
    
        The Paperwork Reduction Act of 1980, (``PRA'') 44 U.S.C. 3501 et 
    seq., 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. In compliance with the 
    PRA, the Commission has submitted these proposed rules and its 
    associated information collection requirements to the Office of 
    Management and Budget. The burden associated with these proposed rules, 
    is as follows:
    
    Average burden hours per response
    2.88
    Number of respondents
    300
    Frequency of response
    on occasion
    
        Persons wishing to comment on the information which would be 
    required by these proposed rules should contact Gary Waxman, Office of 
    Management and Budget, Room 3228, NEOB, Washington, D.C. 20503, (202) 
    395-7340. Copies of the information collection submission to OMB are 
    available from Joe F. Mink, CFTC Clearance Officer, 2033 K Street, 
    N.W., Washington, D.C. 20581, (202) 254-9735.
    
    List of Subjects in 17 CFR Part 36
    
        Commodity futures, Commodity options, Prohibited transactions.
    
        In consideration of the foregoing, and pursuant to the authority 
    contained in the Commodity Exchange Act, and in particular, Sections 2, 
    4, 4c, and 8a, 7 U.S.C. 2, 6, 6c, and 12a, as amended, the Commission 
    hereby proposes to add Part 36 to Chapter I of Title 17 of the Code of 
    Federal Regulations as follows:
    
    PART 36--EXEMPTION OF SECTION 4(c) CONTRACT MARKET TRANSACTIONS
    
    Sec.
    36.1  Exemption and definitions.
    36.2  Trading of section 4(c) contract market transactions.
    36.3 Section 4(c) contract market trading rules.
    36.4  Listing of section 4(c) contract market transactions.
    36.5  Reporting requirements.
    36.6  Special procedures relating to temporary licensing, 
    registration, and listing of principals.
    36.7  Risk disclosure.
    36.8  Suspension or revocation of section 4(c) contract market 
    transaction exemption.
    36.9  Fraud and manipulation in connection with section 4(c) 
    contract market transactions.
    
        Authority: 7 U.S.C. 2, 6, 6c, and 12a.
    
    
    Sec. 36.1  Exemption and definitions.
    
        (a) Duration of exemption. The provisions of this part apply to any 
    section 4(c) contract market transaction entered into on or after 
    [EFFECTIVE DATE OF FINAL RULES]. The provisions of this part expire, 
    and are no longer valid as to any such transaction entered into on or 
    after three years following the date the first contract trades pursuant 
    to this part.
        (b) Scope of exemption. Each board of trade on which section 4(c) 
    contract market transactions are permitted to be traded pursuant to 
    this part shall be deemed for such purposes to be a contract market 
    within the meaning of the Act and, with respect to section 4(c) 
    contract market transactions, shall comply with and be subject to all 
    of the provisions of the Act and the Commission's regulations 
    applicable to a contract market other than those provisions which are 
    specifically inconsistent with this part, in which case the provisions 
    of this part shall govern.
        (c) Definitions. As used in this part:
        (1) Section 4(c) contract market transaction means: Any agreement, 
    contract, or transaction (or class thereof) entered into on or subject 
    to the rules of a contract market in accordance with the provisions of 
    this part, and that is executed by a member of the section 4(c) 
    contract market that is an eligible participant for its own account, or 
    a futures commission merchant or floor broker for its own account or on 
    behalf of an eligible participant.
        (2) Eligible participant means:
        (i) A bank or trust company;
        (ii) A savings association or credit union;
        (iii) An insurance company;
        (iv) An investment company regulated under the Investment Company 
    Act of 1940 (15 U.S.C. 80a-1, et seq.) or an investment company 
    performing a similar role or function subject as such to foreign 
    regulation, provided that such investment company is not formed solely 
    for the purpose of constituting an eligible participant and has total 
    assets exceeding $5,000,000;
        (v) A commodity pool formed and operated by a person regulated 
    under the Act or a foreign person performing a similar role or function 
    subject as such to foreign regulation, provided that such commodity 
    pool or foreign person is not formed solely for the purpose of 
    constituting an eligible participant and has total assets exceeding 
    $5,000,000;
        (vi) A corporation, partnership, proprietorship, organization, 
    trust, or other entity, other than a commodity pool or other collective 
    investment vehicle, not formed solely for the purpose of constituting 
    an eligible participant (A) which has total assets exceeding 
    $10,000,000; or (B) which has a net worth of $1,000,000 and enters into 
    a section 4(c) contract market transaction in connection with the 
    conduct of its business; or (C) which has a net worth of $1,000,000 and 
    enters into a section 4(c) contract market transaction to manage the 
    risk of an asset or liability owned or incurred in the conduct of its 
    business or reasonably likely to be owned or incurred in the conduct of 
    its business;
        (vii) An employee benefit plan subject to the Employee Retirement 
    Income Security Act of 1974 or a foreign person performing a similar 
    role or function subject as such to foreign regulation with total 
    assets exceeding $5,000,000 and whose investment decisions are made by 
    a bank, trust company, insurance company, investment adviser subject to 
    regulation under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1, 
    et seq.), or a commodity trading advisor subject to regulation under 
    the Act;
        (viii) Any governmental entity (including the United States, any 
    state, or any foreign government) or political subdivision thereof, or 
    any multinational or supranational entity or any instrumentality, 
    agency, or department of any of the foregoing;
        (ix) A broker-dealer subject to regulation under the Securities 
    Exchange Act of 1934 (15 U.S.C. 78a, et seq.) or a foreign person 
    performing a similar role or function subject as such to foreign 
    regulation, acting on its own behalf: Provided, however, that if such 
    broker-dealer is a natural person or proprietorship, the broker-dealer 
    must also meet the requirements of paragraph (c)(2) (vi) or (xi) of 
    this section;
        (x) A futures commission merchant, floor broker, or floor trader 
    subject to regulation under the Act or a foreign person performing a 
    similar role or function subject as such to foreign regulation; or
        (xi) Any natural person with total assets exceeding at least 
    $10,000,000.
        (3) Section 4(c) contract market trading rules means:
        Contract market rules prescribing trading procedures applicable 
    only to section 4(c) contract market transactions.
        (4) Terms and conditions has the same meaning as in Sec. 1.41(a)(2) 
    of this chapter.
    
    
    Sec. 36.2  Trading of section 4(c) contract market transactions.
    
        A section 4(c) contract market transaction may be traded pursuant 
    to the provisions of this part provided the following conditions are 
    met:
        (a) The section 4(c) market transaction:
        (1) Provides that settlement or delivery shall be in cash (at a 
    cash settlement price that reflects the cash market for the underlying 
    commodity and is based on a price series that is reliable, publicly 
    available, and timely) or by means other than the transfer or receipt 
    of any commodity, except a major foreign currency; provided however, 
    that the terms and conditions of such transaction are in conformity 
    with the underlying cash market (or, in the absence of conformity, are 
    necessary or appropriate) and that trading is not readily susceptible 
    to price manipulation, nor to causing or being used in the manipulation 
    of the price of any underlying commodity;
        (2) Is cleared through a clearing organization subject to 
    Commission oversight;
        (3) Except with respect to a broad-based index, does not involve 
    any, or the price of any, wheat, cotton, rice, corn, oats, barley, rye, 
    flaxseed, grain sorghums, millfeed, butter, eggs, onions, solanum 
    tuberous (Irish potatoes), wool, wool tops, fats and oils (including 
    lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other 
    fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean 
    meal, livestock, livestock products, or frozen concentrated orange 
    juice;
        (4) Does not involve any commodity futures contract or commodity 
    option for which any board of trade has been designated by the 
    Commission as a contract market prior to its application to trade as a 
    section 4(c) contract market transaction, unless it can reasonably be 
    distinguished from any such futures contract or commodity option based 
    on its hedging function and/or pricing basis; provided however, that 
    (i) the five- and ten-year interest rate swaps futures contracts, the 
    Rolling Spot Contracts in foreign currency, and foreign currency 
    forward futures contracts and options thereon may be traded as section 
    4(c) contract market transactions, and (ii) a flexible commodity option 
    may be listed as a section 4(c) contract market transaction prior to 
    listing such option for trading otherwise; and
        (5) Does not involve any contracts of sale (or options on such 
    contracts) subject to the provisions of Section 2(a)(1)(B) of the Act, 
    including contracts for future delivery of a group or index of 
    securities (or any interest therein or based upon the value thereof).
        (b) The contract market on which the section 4(c) contract market 
    transaction is traded or executed complies with the provisions of this 
    part.
    
    
    Sec. 36.3  Section 4(c) contract market trading rules.
    
        (a) A board of trade may, subject to the terms and conditions 
    stated herein, submit for Commission approval, section 4(c) contract 
    market trading rules to permit an on-floor and/or off-floor trading 
    procedure for section 4(c) contract market transactions that do not 
    satisfy all of the requirements of Secs. 1.38(a), 1.39, 155.2, 155.3, 
    and 155.4 of this chapter.
        (b) Section 4(c) contract market trading rules submitted pursuant 
    to this section must provide for the following:
        (1) Record maintenance and retention in accordance with Sec. 1.31 
    of this chapter;
        (2) An audit trail that meets the requirements of Sec. 1.35(e), 
    (g), and (i) [trade register, trade timing, and contract market 
    oversight] and 1.38(b) of this chapter [identification of certain 
    transactions], and that otherwise complies with the provisions of 
    Sec. 1.35 of this chapter to the extent applicable;
        (3) Compliance with Secs. 155.2, 155.3, and 155.4 of this chapter 
    [trading standards for floor brokers, futures commission merchants, and 
    introducing brokers] to the extent applicable;
        (4) The immediate post-execution report of each purchase and each 
    sale transaction to and dissemination on the relevant market floor, 
    trading screen, and/or vendor service through the board of trade's 
    market quotation system of the price, quantity, and contract traded 
    pursuant to this section;
        (5) The report to clearing, and clearing, of transactions concluded 
    pursuant to this section on the same schedule as trades subject to 
    Secs. 1.38 and 1.39 of this chapter and, otherwise, the immediate 
    report to clearing; and
        (c) Any rules submitted pursuant to this section must describe the 
    manner in which such rules or contract market procedures and systems 
    will assure compliance with the provisions of Sections 4b and 4c(a) of 
    the Act prohibiting false reports, frontrunning, misuse of information, 
    fictitious sales, wash sales, and abuse of customer orders.
        (d) A board of trade seeking approval of a section 4(c) contract 
    market trading rule shall furnish one copy of the information set forth 
    in paragraph (b) of this section to the Commission at its Washington, 
    D.C. headquarters. One copy shall also be transmitted by the board of 
    trade to the regional office of the Commission having local 
    jurisdiction over the board of trade. Each submission shall be labeled 
    as being submitted pursuant to this section.
        (e) Rules submitted by a contract market pursuant to this section 
    shall become effective ten days after receipt of the submission (or 
    such earlier time as may be determined by the Commission or its 
    delegee) unless, within the ten-day period, the Commission or its 
    delegee notifies the board of trade in writing that the submission does 
    not meet the conditions of this section. Upon such notification by the 
    Commission or its delegee, the submission will be subject to the usual 
    procedures for rule approval under Section 5a(a)(12)(A) of the Act and 
    Sec. 1.41(b) of this chapter.
        (f) Once trading in a section 4(c) contract market transaction has 
    commenced, any modification to any approved section 4(c) contract 
    market trading rule must be submitted to the Commission for review 
    pursuant to the standards and procedures for section 4(c) contract 
    market trading rules set forth in this section.
        (g) Trades entered into in compliance with the section 4(c) 
    contract market trading rules in effect shall not be in violation of 
    Sections 4b(a)(iv), 4b(b) or 4c(a) of the Act based solely on having 
    been executed noncompetitively. Failure to comply with such contract 
    market rules shall render the conduct involved subject to Commission 
    action for noncompetitive trading under Sections 4b and 4c(a) of the 
    Act and Secs. 1.38, 1.39, and, if applicable, Secs. 155.2, 155.3, and 
    155.4 of this chapter in addition to any other applicable provisions of 
    the Act and rules of this chapter.
    
    
    Sec. 36.4  Listing of section 4(c) contract market transactions.
    
        (a) A board of trade which has been initially designated as a 
    contract market and has otherwise met the requirements of Sections 5 
    and 5a of the Act (other than Section 5a(a)(12)(A)) seeking to permit 
    trading in a section 4(c) contract market transaction shall furnish to 
    the Commission at least ten days prior to its proposed effective date, 
    the rules setting forth the terms and conditions of the proposed 
    section 4(c) contract market transaction.
        (b) The board of trade shall furnish one copy of the information 
    set forth in paragraph (a) of this section to the Commission at its 
    Washington, D.C. headquarters. One copy shall also be transmitted by 
    the board of trade to the regional office of the Commission having 
    local jurisdiction over the board of trade. Each submission shall be 
    labeled as being submitted pursuant to this Part.
        (c) A board of trade which has been initially designated as a 
    contract market and has otherwise met the requirements of Sections 5 
    and 5a of the Act (other than Section 5a(a)(12)(A)) and which meets the 
    requirements of Sec. 36.2 of this part shall be deemed to be designated 
    as a contract market in section 4(c) contract market transactions, the 
    rules submitted shall be deemed to be approved, and section 4(c) 
    contract market transactions may be traded or executed thereon ten days 
    after receipt of the submission pursuant to this section unless, within 
    the ten-day period, the Commission or its delegee notifies the board of 
    trade in writing that the proposed transactions do not meet the 
    requirements of Sec. 36.2 of this part. Upon such notification by the 
    Commission or its delegee, the submission will be subject to the usual 
    procedures for rule approval under Section 5a(a)(12)(A) of the Act and 
    Sec. 1.41(b) of this chapter.
        (d) Any modification to the rules setting forth the terms and 
    conditions of a section 4(c) contract market transaction shall be 
    submitted to the Commission pursuant to the procedure set forth in this 
    section.
    
    
    Sec. 36.5  Reporting requirements.
    
        (a) The reporting requirements set forth in this section shall 
    govern section 4(c) market transactions in lieu of the requirements of 
    parts 16, 17, 18, and 19 of this chapter.
        (b) The provisions of Sec. 15.05 and part 21 of this chapter shall 
    apply to section 4(c) contract market transactions as though they were 
    set forth herein and included specific references to eligible 
    participants.
        (c) Reports by contract markets to the Commission. Each contract 
    market shall submit to the Commission in accordance with paragraph (d) 
    of this section the following information with respect to section 4(c) 
    market transactions by commodity or type of contract as specified by 
    the Commission:
        (1) For each commodity or type of contract,
        (i) The total gross open contracts at the end of the day covered by 
    the report,
        (ii) Total transactions, by type of transaction, as specified by 
    the Commission, which occurred during the day covered by the report, 
    and
        (iii) Prices, as specified by the Commission.
        (2) For each clearing member by proprietary and customer account,
        (i) The total of all long open contracts and the total of all short 
    open contracts carried at the end of the day covered by the report, and
        (ii) The quantity of contracts transacted during the day covered by 
    the report, by type of transaction, as specified by the Commission.
        (3) Large trader reports.
        (i) Reportable positions. Reportable long and short positions of 
    traders as defined by contract market rules and approved by the 
    Commission, separately for each futures commission merchant or member 
    of the contract market.
        (ii) Identification information. For each reportable position, the 
    information specified in Sec. 17.01(b)(1) through (b)(8) of this 
    chapter.
        (d) Form and manner of reporting; time and place of filing reports. 
    Unless otherwise approved by the Commission or its designee, each 
    contract market operating pursuant to this part shall submit the 
    information required by paragraph (c) of this section as follows:
        (1) Using a format and coding structure approved in writing by the 
    Commission or its designee on compatible data processing media as 
    defined in part 15 of this chapter;
        (2) The information contained in paragraphs (c)(1) and (c)(2) of 
    this section must be filed daily when the data are first available, but 
    not later than 3:00 p.m. on the business day following the day to which 
    the information pertains. The information contained in paragraph (c)(3) 
    must be filed on call by the Commission or its designee, at such times 
    as specified in the call.
        (3) Except for dial-up transmissions, at the regional office of the 
    Commission having local jurisdiction with respect to such contract 
    market.
        (e) Reports by contract markets to the public. Each contract market 
    operating pursuant to this part shall publish for each business day the 
    following information for section 4(c) contract market transactions by 
    commodity or type of contract as specified by the Commission:
        (1) The total gross open contracts;
        (2) The total number of transactions by transaction type as 
    specified by the Commission; and
        (3) Prices, as specified by the Commission.
        (f) Reports and maintenance of books and records by traders. Every 
    trader who owns, holds, or controls, or has held, owned, or controlled 
    a reportable position, as defined by contract market rules, in 
    contracts traded as section 4(c) market transactions shall:
        (1) Keep books and records showing all details concerning all 
    positions and transactions with respect to section 4(c) market 
    transactions, all positions and transactions in any options traded 
    thereon, and all positions and transactions in the underlying 
    commodity, its products, and by-products and, in addition, commercial 
    activities that the trader hedges in the underlying commodity, and 
    shall upon request furnish to the Commission or the U.S. Department of 
    Justice any pertinent information concerning such positions, 
    transactions, or activities.
        (2) File within one business day after a special call upon such 
    trader by the Commission or its designee the following:
        (i) Reports showing positions and transactions on such contract 
    markets for the period of time that the trader held or controlled a 
    reportable position, and in a form and manner as instructed in the 
    call; and
        (ii) The information specified in Sec. 18.04 of this chapter as 
    though it pertains to section 4(c) market transactions.
    
    
    Sec. 36.6  Special procedures relating to temporary licensing, 
    registration, and listing of principals.
    
        Notwithstanding any other provision of law, any person associated 
    with a futures commission merchant or an introducing broker shall be 
    granted a temporary license to act in the capacity of an associated 
    person of such sponsor or listed as a principal of such futures 
    commission merchant or introducing broker if such person certifies that 
    he is licensed, or otherwise authorized to do business and in good 
    standing with another federal financial regulatory authority, or a 
    foreign financial regulatory authority with which the Commission has 
    comparability arrangements under part 30 of this chapter, is not 
    subject to a statutory disqualification from registration under Section 
    8a(2) of the Act and restricts his activities to section 4(c) market 
    transactions, and if such person and his sponsor comply with special 
    temporary license, registration, or principal listing procedures 
    applicable to persons involved solely with such transactions that have 
    been adopted by the National Futures Association and approved by the 
    Commission.
    
    
    Sec. 36.7  Risk disclosure.
    
        (a) A futures commission merchant or, in the case of an introduced 
    account, an introducing broker, may open an account for a customer with 
    respect to an instrument governed by this part without furnishing such 
    customer the disclosure statements required under Secs. 1.55, 1.65, 
    33.7, and 190.10 of this chapter: Provided, however, that the futures 
    commission merchant or, in the case of an introduced account, the 
    introducing broker, does furnish the customer, prior to the customer's 
    entry into the first section 4(c) contract market transaction with 
    respect to a particular instrument, with disclosure appropriate to the 
    particular instrument and the customer.
        (b) This section does not relieve a futures commission merchant or 
    introducing broker from any other disclosure obligation it may have 
    under applicable law.
    
    
    Sec. 36.8  Suspension or revocation of section 4(c) contract market 
    transaction exemption.
    
        The Commission may, after notice and opportunity for a hearing, 
    suspend or revoke the exemption of any section 4(c) contract market 
    transaction if the Commission determines that the exemption is no 
    longer consistent with the public interest and the purposes of the Act.
    
    
    Sec. 36.9  Fraud and manipulation in connection with section 4(c) 
    contract market transactions.
    
        (a) Fraud. The requirements of sections 4b(a) and 4o of the Act and 
    Sec. 33.10 of this chapter shall apply to section 4(c) contract market 
    transactions. In addition, it shall be unlawful for any person, 
    directly or indirectly, in or in connection with an offer to enter 
    into, the entry into, the confirmation of the execution of, or the 
    maintenance of any transaction entered into pursuant to this part--
        (1) To cheat or defraud or attempt to cheat or defraud any other 
    person;
        (2) To make or cause to be made to any other person any false 
    report or statement thereof or cause to be entered for any person any 
    false record thereof;
        (3) To deceive or attempt to deceive any other person by any means 
    whatsoever.
        (b) Manipulation. The requirements of sections 6(c), 6(d), and 9(a) 
    of the Act and Sec. 33.9(d) of this chapter shall apply to section 4(c) 
    contract market transactions.
    
        Issued in Washington, D.C. on October 24, 1994, by the 
    Commission.
    Jean A. Webb,
    Secretary of the Commission.
    [FR Doc. 94-26726 Filed 10-27-94; 8:45 am]
    BILLING CODE 6351-01-P
    
    
    

Document Information

Published:
10/28/1994
Department:
Commodity Futures Trading Commission
Entry Type:
Uncategorized Document
Action:
Proposed rules.
Document Number:
94-26726
Dates:
Written comments must be received by the Commission by the close of business on December 12, 1994. Reference should be made to section 4(c) contract market transactions.
Pages:
0-0 (None pages)
Docket Numbers:
Federal Register: October 28, 1994
CFR: (16)
17 CFR 36.2(a)(1)
17 CFR 1.41(b)
17 CFR 36.1(c)(2)(xi)
17 CFR 1.35
17 CFR 33.7
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