Provisions Common to Registered Entities
| Citation | 88 FR 61432 |
| Published date | 06 September 2023 |
| Record Number | 2023-18694 |
| Court | Commodity Futures Trading Commission |
Federal Register, Volume 88 Issue 171 (Wednesday, September 6, 2023)
[Federal Register Volume 88, Number 171 (Wednesday, September 6, 2023)]
[Proposed Rules]
[Pages 61432-61461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-18694]
[[Page 61431]]
Vol. 88
Wednesday,
No. 171
September 6, 2023
Part IV Commodity Futures Trading Commission-----------------------------------------------------------------------17 CFR Parts 37, 38, and 40Provisions Common to Registered Entities; Proposed Rule
Federal Register / Vol. 88, No. 171 / Wednesday, September 6, 2023 /
Proposed Rules
[[Page 61432]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 37, 38, and 40
RIN 3038-AF28
Provisions Common to Registered Entities
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to amend the Commission's regulations under the Commodity
Exchange Act (``CEA'' or ``Act'') that govern how registered entities
submit self-certifications, and requests for approval, of their rules,
rule amendments, and new products for trading and clearing, as well as
the Commission's review and processing of such submissions. The
proposed amendments are intended to clarify, simplify and enhance the
utility of those regulations for market participants and the
Commission.
DATES: Comments must be received on or before November 6, 2023.
ADDRESSES: You may submit comments, identified by RIN 3038-AF28, by any
of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above. Please submit your comments using only one of these
methods. To avoid possible delays with mail or in-person deliveries,
submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that may be exempt from disclosure under the Freedom of
Information Act (``FOIA''),\1\ a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in Sec. 145.9 of the Commission's regulations.\2\
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\1\ 5 U.S.C. 552.
\2\ Regulation 145.9. Commission regulations referred to in this
release are found at 17 CFR chapter I (2021), and are accessible on
the Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse, or remove any or all of
your submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
FOIA.
FOR FURTHER INFORMATION CONTACT: Rachel Kaplan Reicher, Senior Special
Counsel, [email protected], 202-418-6233, Steven Benton, Industry
Economist, [email protected], 202-418-5617, and Nancy Markowitz, Deputy
Director, [email protected], 202-418-5453, Division of Market
Oversight, and Eileen Chotiner, [email protected], 202-418-5467,
Division of Clearing and Risk, Commodity Futures Trading Commission,
Three Lafayette Centre, 1151 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Proposed Regulations
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost Benefit Considerations
I. Background
Part 40 of the Commission's regulations implements section 5c(c) of
the CEA and sets forth provisions that are common to registered
entities, including designated contract markets (``DCMs''), derivatives
clearing organizations (``DCOs''), swap execution facilities (``SEFs'')
and swap data repositories (``SDRs'').\3\ Part 40 establishes
requirements and procedures for registered entities to submit their
rules and products to the Commission prior to implementing rules,
listing products for trading, or accepting products for clearing. Part
40 generally provides two means for registered entities to submit rules
and products to the Commission. Typically, a registered entity elects
to certify that their product or rule complies with the CEA and the
Commission regulations.\4\ This process is known as self-certification.
Alternatively, a registered entity may seek Commission approval of the
product or rule.\5\
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\3\ Section 1a(40) of the CEA defines the term registered entity
to include DCMs, DCOs, SEFs and SDRs.
\4\ See CEA section 5c(c)(1); 17 CFR 40.2 and 40.6. But see
Sec. 40.4 (requiring that a DCM submit for Commission approval any
rule that would materially change a term or condition of a contract
for future delivery in an agricultural commodity enumerated in CEA
section 1a(9) or of an option on such contract or commodity).
\5\ See CEA section 5c(c)(1); 17 CFR 40.3 and 40.5.
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The part 40 regulations also provide the Commission's procedures
for review (including approval or non-approval) of such product and
rule submissions. The part 40 regulations prescribe certain information
that must be made publicly available in connection with an application
to become a DCM, SEF, DCO or SDR and when registered entities file new
products, new rules and rule amendments.\6\ Additionally, the
regulations include special certification provisions for certain rules
submitted by systemically important DCOs (``SIDCOs'').\7\
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\6\ See Sec. 40.8. Regulation Sec. 40.8 is not the subject of
this rulemaking.
\7\ See Sec. 40.10.
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With two exceptions, the Commission last amended the part 40
regulations in 2011,\8\ in connection with implementing various
amendments the Dodd-Frank Wall Street Reform and Consumer Protection
Act (``Dodd-Frank Act'') made to the CEA. Based on the Commission's
experience applying the part 40 regulations over the ensuing years, the
Commission is proposing amendments that are intended to clarify,
simplify and enhance the utility of the part 40 regulations for
registered entities and the Commission.\9\
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\8\ Provisions Common to Registered Entities, 76 FR 44776 (July
27, 2011) (the ``2011 Final Rule''). In 2021, the Commission made
targeted, conforming amendments to Sec. 40.1(j)(1)(vii) and
(j)(2)(vii) (the portion of the definition of ``terms and
conditions'' that relates to position limits) to conform this text
to reflect the position limits amendments adopted by the Commission
at that time. See Position Limits for Derivatives, 86 FR 3236
(January 14, 2021). Additionally, in 2015, the Commission removed
from Sec. 40.8 and appendix D to part 40 all references to
electronic trading facilities on which significant price discovery
contracts are traded or executed to reflect the fact that the Dodd-
Frank Act eliminated these facilities from the CEA. See Repeal of
the Exempt Commercial Market and Exempt Board of Trade Exemptions,
80 FR 59575 (October 2, 2015).
\9\ As discussed below in note 10, the Commission also proposes
to make two conforming, non-substantive changes to update the
citations referencing the definition of emergency located in the
guidance section regarding Emergency Authority of appendix B for
each of parts 37 and 38. Regulation Sec. 40.11 relates to the
Commission's review of certain event contracts and is not the
subject of this rulemaking.
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[[Page 61433]]
II. Proposed Amendments
A. Section 40.1--Definitions
1. Formatting Change to Sec. 40.1
Currently, the defined terms in Sec. 40.1 are arranged in
alphabetical order, with lettered headers. The Commission proposes to
remove the lettered headers and instead arrange the defined terms in
Sec. 40.1 solely in alphabetical order,\10\ requiring the Commission
to make fewer conforming changes to Sec. 40.1 and other regulations
when adding or removing defined terms in the future.\11\
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\10\ The Commission also proposes to make two conforming changes
that are necessitated by this proposed change to Sec. 40.1.
Specifically, the Commission proposes to update the references to
the definition of emergency located in the guidance section
regarding Emergency Authority of appendix B for each of parts 37 and
38 such that they reference Sec. 40.1 rather than Sec. 40.1(h). No
substance is intended to be changed by these amendments.
\11\ The Office of the Federal Register prefers the solely
alphabetical approach to definitions sections. See Document Drafting
Handbook, Office of the Federal Register at 2-27 (Revision 1.4,
January 7, 2022).
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2. Non-Substantive Amendments to the Definition of ``Business Day''
The Commission proposes non-substantive changes to the definition
of the term ``Business day'' in Sec. 40.1(a). Currently, the
definition of the term ``Business day'' in Sec. 40.1(a) uses the term
``business hour'' and defines the term ``business hour'' to mean ``any
hour between 8:15 a.m. and 4:45 p.m.'' With the exception of Sec.
40.1(a), the term ``business hour'' is not used in part 40. To enhance
the readability of the definition of ``Business day,'' the Commission
proposes to delete the definition of the term ``business hour'' and all
references to the term ``business hour'' that currently appear in the
definition of ``Business day'' in Sec. 40.1(a). As amended, the term
``Business day'' would mean the intraday period of time starting at
8:15 a.m. and ending at 4:45 p.m. Eastern Standard Time or Eastern
Daylight Savings Time, whichever is currently in effect in Washington,
DC, on all days except Saturdays, Sundays, and Federal holidays in
Washington, DC.\12\
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\12\ The Commission is not proposing any substantive changes to
the definition of ``Business day.''
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3. Amendments to the Definitions of Dormant Entities
The Commission proposes to amend the definitions of the terms
``Dormant designated contract market,'' ``Dormant derivatives clearing
organization,'' ``Dormant swap data repository,'' and ``Dormant swap
execution facility'' in current Sec. 40.1(c) through (f). These
amendments relate to the duration of inactivity of a registered entity
that will result in the registered entity being deemed dormant, and are
intended to enhance the clarity and consistency of the relevant
regulatory text.
The current definitions in Sec. 40.1(c) and (f) generally provide
that a DCM and a SEF, respectively, will become dormant if there is no
trading on the entity for a period of approximately 12 months, provided
that the entity will not become dormant during the 36-month period
following the entity's initial and original designation or
registration, respectively. Similarly, the definition in current Sec.
40.1(d) generally provides that a DCO will become dormant if the entity
has not accepted an agreement, contract or transaction for clearing for
a period of 12 months, provided that the entity will not become dormant
during the 36-month period following the entity's initial and original
registration. The definition in current Sec. 40.1(e) generally
provides that an SDR will become dormant if no data has resided on the
entity for a period of approximately 12 months.\13\
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\13\ Unlike the definitions for a dormant DCM, dormant DCO and
dormant SEF in Sec. 40.1(c), (d), and (f), respectively, the
dormant SDR definition in Sec. 40.1(e) does not provide a 36-month
grace period after the entity's initial and original registration
before an SDR may become dormant.
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The definitions are inconsistent and, in some cases, unclear as to
how the applicable 12-month and 36-month periods are determined. In
particular, the definitions vary in their use of the terms
``consecutive'' vs ``complete'' calendar months. Additionally, staff
have observed that the phrases ``preceding the first day of the most
recent calendar month'' and ``preceding the most recent calendar
month'' have been a source of uncertainty when calculating whether an
entity has become dormant. The Commission has observed that the
definitions have been interpreted differently sometimes by registered
entities than was intended by the Commission and believes the proposed
changes will provide consistency.
To simplify the calculation of how long a registered entity has
been inactive and to reduce the potential that market participants may
interpret the regulatory language differently, the Commission proposes
to amend the regulations to consistently state the time periods in
days--i.e., 365 days instead of 12 months, and 1,095 days rather than
36 months.
4. Removal of the Terms ``Dormant Contract or Dormant Product'' and
``Dormant Rule,'' and Related Requirements
Regulation Sec. 40.1(b) defines the term ``Dormant contract or
dormant product,'' and Sec. 40.1(g) defines the term ``Dormant rule.''
If a contract or product of a DCM or SEF is dormant pursuant to Sec.
40.1(b), Sec. 40.2(a) prohibits the DCM or SEF from listing the
contract or product until the DCM or SEF either self certifies that the
contract or product to be listed complies with the CEA and Commission
regulations pursuant to Sec. 40.2(a) or obtains Commission approval of
the contract or product pursuant to Sec. 40.3. Likewise, under Sec.
40.6(a), a registered entity may not implement a rule that has become
dormant unless the registered entity either certifies that the rule
complies with the CEA and Commission regulations in accordance with
Sec. 40.6(a) or obtains Commission approval of the rule pursuant to
Sec. 40.5.
The Commission proposes to remove the terms ``Dormant contract or
dormant product'' and ``Dormant rule'' from Sec. 40.1, and the
requirements relating to dormant products and dormant rules from
Sec. Sec. 40.2 and 40.6. At the time the Commission adopted the
dormant contract definition and the applicable requirements, contract
markets were generally required to obtain Commission approval of any
new products prior to listing the products. The CEA no longer requires
approval of each contract or product listed by an exchange.\14\ Rather,
an exchange may list a product after self-certifying that the product
to be listed complies with the CEA and Commission regulations in
accordance with Sec. 40.2. Given this flexibility, exchanges now
typically delist a contract that has no open interest before the
contract can be considered dormant through self-certification pursuant
to Sec. 40.6(a).
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\14\ Section 113 of the Commodity Futures Modernization Act of
2000, Appendix E of Public Law 106-554, 114 Stat. 2763 added section
5c(c) to the CEA.
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In the Commission's experience, registrants have effectively
managed the removal of dormant products or rules as appropriate,
particularly since the adoption of the self-certification process.
Furthermore, while the removal of the term ``dormant product'' would
enable a contract that has not been traded for an extended period of
time to remain listed, the Commission believes any new trading may not
pose concerns regarding market integrity or safety given that a DCM or
SEF listing a contract has a continuing obligation to ensure that the
contract complies with
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the CEA and Commission's regulations thereunder. In addition, the
Commission is unaware of any instances in which the dormancy of a
product or rule for an extended period has caused any market or market
participant material harm. The Commission preliminarily believes that
deleting the definitions would result in little, if any, reduction in
market integrity or safety while potentially reducing compliance costs
for market participants and oversight costs for the Commission.
Accordingly, the Commission proposes to remove the definitions of
``dormant contract or dormant product'' and ``dormant rule,'' and all
references to ``dormant contract or dormant product'' and ``dormant
rule'' in the regulations. As discussed above, the Commission will
retain its definitions of dormant registered entities, and the rules of
a dormant DCM, dormant SEF, dormant DCO, or dormant SDR would need to
be approved in connection with the entity being reinstated as a DCM,
SEF, DCO or SDR, respectively.\15\ Also, products would need to be
approved or self-certified in order to be listed for trading by the DCM
or SEF offered for clearing by the DCO.\16\
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\15\ See, e.g., Sec. Sec. 38.4(a)(2), 37.4(d), and 49.8(b).
Similarly, in adopting changes to Sec. 39.4(a) in 2020, the
Commission stated that its issuance of an order of registration as a
DCO constitutes an approval of the applicant's rules that were
submitted as part of the application. 85 FR 4852, Jan. 27, 2020.
\16\ See, e.g., Sec. Sec. 38.4(b), 37.4(d), 40.2, and 40.3.
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5. Amendment to the Definitions of ``Rule'' and ``Terms and
Conditions''
The Commission proposes to add ``margin methodology'' to the
definition of ``Rule'' in Sec. 40.1. Prior to 2011, the definition
included a restriction on Commission review of rules relating to margin
levels, based on section 8a(7) of the Act.\17\ After section 736 of the
Dodd-Frank Act amended section 8a(7) of the Act to remove the
restriction on Commission review of rules relating to margin
levels,\18\ the Commission removed the restriction from the definition
of ``Rule.'' Although DCOs have been submitting margin-related rule
changes to the Commission since 2011, in order to provide clarity
regarding the requirement to submit changes to margin methodologies,
the Commission is proposing to revise the definition of ``Rule'' to
include an explicit reference to margin methodology.
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\17\ Prior to the enactment of the CFMA in 2000, section
5a(a)(12)(A) of the Act required that all changes to contract terms
and conditions be submitted to the Commission for approval ``except
those rules relating to the setting of levels of margin.'' In
section 113 of the CFMA, Congress removed section 5a(a)(12)(A) and
adopted new section 5c(c), allowing registered entities to amend
their rules by self-certification. The new provision did not retain
any reference to the exclusion of margin rules. However, section
8a(7) of the Act was not amended by the CFMA except to replace
``contract market'' with ``registered entity'', and retained the
provision that allowed the Commission to alter or supplement the
rules of a DCO, except for rules related to ``the setting of levels
of margin,'' thereby creating uncertainty as to whether registered
entities could adopt or change margin rules without certifying those
rules to the Commission. Because there was no indication that
Congress intended to alter the special status of rules relating to
the setting of margin levels, the Commission had resolved this
ambiguity by excluding the setting of margin levels, with limited
exceptions, from the definition of ``rule'' in Regulation Sec.
40.1(h), as in effect prior to the July 2011 amendments to part 40.
Section 8a(7)(D), as amended by the Dodd-Frank Act, now permits the
Commission to alter the rules of a DCO with respect to margin
requirements, provided, however, that the Commission may not set
specific margin amounts. The Commission eliminated the exclusion of
the setting of margin levels from the definition of ``rule'' in its
2011 Final Rule.
\18\ Specifically, section 8a(7) of the Act provides that the
Commission is authorized to alter or supplement rules of a DCO
including rules with respect to margin requirements, provided that
the rules shall be limited to protecting the financial integrity of
the DCO, be designed for risk management purposes to protect the
financial integrity of transactions, and not set specific margin
amounts.
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The Commission proposes to amend the definition ``Terms and
conditions'' by removing the following items from the scope of the
definition such that the items to be removed will no longer be treated
as terms and conditions. With respect to a contract for the purchase or
sale of a commodity for future delivery or an option on such a contract
or an option on a commodity (other than a swap), the Commission
proposes to remove ``Payment or collection of commodity option premiums
or margins'' from Sec. 40.1(j)(1)(xi). With respect to a swap, the
Commission proposes to remove ``Payment or collection of option
premiums or margins'' from Sec. 40.1(j)(2)(xi). Further, the
Commission is proposing to add these items to the categories of rules
that may be implemented without certification pursuant to Sec.
40.6(d)(2). The Commission preliminarily believes that registered
entities should be able to submit rules or rule amendments governing
the payment or collection of these premiums or margins through weekly
notices to the Commission pursuant to Sec. 40.6(d)(2) as this will
lower the burden for registered entities and still provide sufficient
notice to the Commission given the fact that these rules and rule
amendments governing the payment or collection of these premiums or
margins are general in substance.\19\
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\19\ The Commission notes for clarity that these rules and rule
amendments do not include details regarding the models used to
calculate the premiums or margins.
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The Commission requests comment on all aspects of its proposed
amendments to Sec. 40.1.
B. Section 40.2--Listing Products for Trading by Certification
1. Proposed Amendments to Sec. 40.2(a)(3)(i) and Appendix D
Regulation Sec. 40.2(a)(3)(i) requires a product certification
submission to include a copy of the submission cover sheet in
accordance with the instructions in appendix D to part 40. The same
requirement is in the part 40 regulations governing the submission of
rule certifications and product and rule approval requests. With the
development and evolution of the Commission's online portal for the
filing of rule and product submissions, the cover sheet information
required by appendix D is currently entered by registered entities via
the portal and processed and stored in the Commission's online systems,
making the cover sheet itself unnecessary.
Accordingly, the Commission proposes to revise Sec. 40.2(a)(3)(i),
the analogous provisions in Sec. Sec. 40.3, 40.5 and 40.6,\20\ and
appendix D to remove the cover sheet requirement and related
references. As proposed, appendix D will continue to specify the
information that must be entered by a registered entity as part of the
filing process, and the Commission will continue to use such
information as part of its processing and review of submissions.
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\20\ Specifically, the analogous provisions are Sec. Sec.
40.3(a)(2), 40.5(a)(2) and 40.6(a)(7)(i).
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Additionally, the Commission proposes to amend appendix D to
require a SEF or DCM when submitting a new product to indicate whether
the product is a ``referenced contract'' as such term is defined in
Sec. 150.1 and as is described in appendix C to part 150. By way of
background, the Commission's amendments to position limits that became
effective on March 15, 2021 introduced the term ``referenced contract''
and incorporated the term ``referenced contract'' into the regulatory
text that defines the term ``terms and conditions'' in part 40.\21\ As
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a result, before listing a new contract for trading, a DCM or SEF must
determine whether a new contract to be listed is a referenced
contract.\22\ To facilitate market participants' compliance with
position limits, Commission staff maintain a workbook of all the
referenced contracts that are listed on DCMs and SEFs. To better enable
Commission staff to consider whether new contracts to be listed should
be added to the workbook in a timely, efficient manner and to review
such submissions, the Commission is proposing to amend appendix D to
require a DCM or SEF to indicate as part of the filing process if a
contract to be listed is a referenced contract. The identification of
new products as referenced contracts as part of the filing process will
enable the Commission to more efficiently process and review such
submissions.
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\21\ See 86 FR 3236, 3307 (January 14, 2021) Position Limits for
Derivatives (adding the definition of ``referenced contract'' to
Sec. 150.1 and incorporating the term referenced contract into
Sec. 40.1(j)(1)(vii) and (j)(2)(vii). See also Appendix C to Part
150-Guidance Regarding the Definition of Referenced Contract.
Generally, the term ``referenced contract'' as used for purposes of
Federal position limits in part 150 and as defined in Sec. 150.1
means either a futures contract or an option on a futures contract
whose settlement price is determined by reference, directly or
indirectly, to the price of one of 25 physically-settled core
referenced futures contracts enumerated in Sec. 150.2, or a swap
that qualifies as an ``economically equivalent swap'' (as such term
is defined in Sec. 150.1) to any of the 25 physically-settled core
referenced futures contracts enumerated in Sec. 150.2.
\22\ See Sec. 40.1(j)(1)(vii) and (j)(2)(vii), and Sec. Sec.
40.2 and 40.3.
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Finally, as a related matter, the Commission is amending the filing
format and manner requirement in Sec. Sec. 40.2(a)(1), 40.3(a)(1),
40.5(a)(1) and 40.6(a)(1) to remove the reference to the ``Secretary
of'' the Commission. The Commission is also proposing to delegate the
Commission's authority to specify the format and manner of filing under
these regulations to the Directors of the Division of Market Oversight
and the Division of Clearing and Risk by adding proposed Sec. 40.7(e).
2. Proposed Amendments to Sec. 40.2(a)(3)(ii)
Currently, the text of Sec. Sec. 40.2(a)(3)(ii) and 40.3(a)(3)
both describe a requirement to submit as part of a self-certification
or a voluntary submission for Commission approval, respectively, the
rules that set forth a contract's terms and conditions. The two
provisions use similar, but slightly different, language.\23\ Given
that the two provisions use slightly different words, but are both
intended to require that the DCM or SEF include a copy of the rules
that set forth the contract's terms and conditions, the Commission
proposes to amend the text of Sec. 40.2(a)(3)(ii) to mirror the text
used in Sec. 40.3(a)(3) so that both provisions use the same language
for consistency and avoid any potential misreading that the differences
in language between the two provisions are intended to signify a
difference in substance.
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\23\ Regulation Sec. 40.2(a)(3)(ii) requires the self-
certification to include ``a copy of the product's rules including
all rules related to its terms and conditions.'' Regulation
40.3(a)(3) says substantively the same thing, but using different
words (requiring the voluntary submission for Commission approval of
a product to include ``a copy of the rules that set forth the
contract's terms and conditions'').
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3. Proposed Amendments to Sec. 40.2(a)(3)(v)
Regulation Sec. 40.2(a)(3)(v) requires a DCM or SEF that self-
certifies a product to submit a concise explanation and analysis of the
product and its compliance with applicable provisions of the Act,
including core principles, and the Commission's regulations thereunder.
Staff primarily bases its analysis of the product on the explanation
and analysis the DCM or SEF must provide regarding the product's
compliance with the Act and Commission regulations, including analysis
of the commodity underlying the product. Staff has observed a trend
that new product certifications tend not to include sufficient
information on the underlying commodity to enable the Commission to
complete its analysis, particularly for contracts on new commodities
(e.g., rare earth metals) for which staff may have less prior
experience. The Commission notes that a DCM or SEF that provides the
information described in appendix C to part 38 that applies to a
contract would be sufficient for the Commission to determine the
compliance of the contract's terms and conditions with the applicable
core principles.\24\
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\24\ Appendix C to part 38. Specifically, for the listing of
futures contracts, see paragraph (a) of appendix C to part 38. For
the listing of futures contracts settled by physical delivery, see
paragraph (b) of appendix C to part 38. For the listing of futures
contracts settled by cash delivery, see paragraph (c) of appendix C
to part 38. For the listing of options on futures contracts, see
paragraph (d) of appendix C to part 38. For the listing of security
futures products, see paragraph (e) of appendix C to part 38. For
the listing of non-price-based contracts, see paragraph (f) of
appendix C to part 38. For the listing of swap contracts, see
paragraph (g) of appendix C to part 38. See also Appendix B to part
37 (pointing SEFs to appendix C of part 38 for guidance on how to
demonstrate compliance with SEF Core Principle 3 for swaps that are
settled by physical delivery or cash settlement).
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To ensure staff receive adequate information regarding the product
and the commodity underlying the product in order to analyze the
compliance of self-certified products with the applicable core
principles, the Commission proposes the following changes to Sec.
40.2(a)(3)(v). The Commission proposes to amend the text to include
references to the ``terms and conditions'' of the product and to ``the
underlying commodity'' to clarify the Commission's intent that Sec.
40.2(a)(3)(v) requires an explanation and analysis of the product's
underlying commodity, as well as both the product's terms and
conditions, and the product's compliance with the applicable provisions
of the Act, including core principles, and the Commission's regulations
thereunder. The Commission also proposes to add the words ``that is
complete with respect to'' the product's terms and conditions, the
underlying commodity, and the product's compliance with applicable
provisions of the Act, including core principles, and the Commission's
regulations thereunder to ensure that, although the explanation be
concise, it nevertheless has to include an explanation of how and why
the contract's terms and conditions comply with the applicable core
principles and relate to the cash market of the underlying
commodity.\25\
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\25\ See Sec. 38.252 which provides, among other things, that
the DCM must demonstrate for physical delivery contracts that it
monitors a contract's terms and conditions as they relate to the
underlying commodity market and to the convergence between the
contract price and the price of the underlying commodity and show a
good-faith effort to resolve conditions that are interfering with
convergence.
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As noted above, the information described in appendix C to part 38
that applies to a contract would be sufficient for the Commission to
determine the compliance of a contract's terms and conditions with the
applicable core principles.\26\ Appendix C to part 38 provides guidance
on the quality standards that should be defined for the underlying
commodity in the contract's terms and conditions for a futures
contract.\27\ The quality standards used should reflect those used in
transactions in the commodity in normal cash marketing channels and
comply with those industry established standards.\28\ Accordingly, to
be complete, submissions pursuant to Sec. 40.2(a)(3)(v) should be
guided by portions of appendix C to part 38 that apply to the contract
being listed.\29\
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\26\ See note 24.
\27\ See Appendix C to part 38, paragraph (b)(2)(i)(A) for
physically-settled contracts and paragraph (c)(4)(i)(A) for cash-
settled contracts.
\28\ See id.
\29\ See note 24.
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To improve the understanding of the level of detail expected by the
Commission, the discussion below addresses two common categories of
contracts and provides two specific product examples that illustrate
the level of detail that would meet the ``concise'' and ``complete''
standard to enable the Commission to analyze the compliance of the
contract with the applicable core principles.
Generally, when listing a cash settled or physically settled
contract on a
[[Page 61436]]
commodity, the explanation and analysis the DCM or SEF submits
describing the characteristics of the contract's underlying commodity
pursuant to Sec. 40.2(a)(3)(v) should include characteristics such as
the deliverable commodity's grade, quality and deliverable supply, as
applicable, as well as the other applicable requirements described in
appendix C to part 38. Appendix C to part 38 provides guidance on the
quality standards that should be defined for the underlying commodity
in the contract's terms and conditions for a physically-settled futures
contract.\30\ The quality standards used should reflect those used in
transactions in the commodity in normal cash marketing channels and
comply with those industry established standards.\31\
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\30\ Appendix C to part 38, paragraph (b)(2)(i)(A).
\31\ See id. Appendix C also provides that regardless of the
type of commodity underlying the contract, the DCM or SEF's
explanation and analysis should describe the cash market for the
underlying commodity and how the contract's terms and conditions:
reflect the cash market transactions in the underlying commodity;
meet the risk management needs of prospective users; and promote
price discovery of the underlying commodity. Appendix C to part 38,
paragraph (a).
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As a specific example for a physically settled futures contract,
when listing a physically settled futures contract on copper, the DCM
should specify the acceptable standard of copper that is eligible for
delivery on the physically-settled futures contract.\32\ Today, an
acceptable quality standard for copper in the cash market is Grade 1
Electrolytic Copper Cathodes (full plate or cut) that conforms to the
latest chemical and physical specifications adopted by the American
Society for Testing and Materials for Grade 1 Electrolytic Copper
Cathode (B115-00 or its latest revision). If a DCM lists a physically
settled futures contract on Grade 1 Electrolytic Copper Cathodes, the
only quality of copper allowed for delivery at the settlement of the
futures contract would be copper of the quality that meets this
industry-set standard, and as a result, the price of the futures
contract would reflect the price of only this kind of copper.
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\32\ See Appendix C to part 38, paragraph (b)(2)(i)(A). When
listing a cash settled futures contract on copper, the DCM should
specify the acceptable standard of copper that underlies the cash
price series or the physically-settled futures referenced price used
for cash settlement purposes. See Appendix C to part 38, paragraph
(c)(4)(i)(A).
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Throughout the life of the futures contract up until the time of
expiration, copper located in a DCM-approved warehouse of the quality
specified in the contract would be eligible to be warranted by the
warehouse for delivery on the contract. The price of the physical
copper (Grade 1 Electrolytic Copper Cathode) to which the futures
contract settles and the price of the physically settled futures
contract on Grade 1 Electrolytic Copper Cathode should match--or
converge--at the expiration date. The convergence demonstrates that the
futures contract accurately reflects the cash price of the underlying
commodity and compliance with DCM Core Principle 3 (that the contract
is not readily susceptible to manipulation).
Similarly, when listing a cash-settled contract based on an
excluded commodity, the explanation and analysis the DCM or SEF submits
describing the characteristics of the contract's underlying commodity
should include characteristics such as the rate, index methodology, and
pricing source, as applicable, as well as other applicable
characteristics described in appendix C to part 38.\33\ Appendix C to
part 38 provides guidance on the cash settlement price calculation for
a cash-settled futures contract.\34\ Appendix C provides that the cash-
settlement price series used by a DCM or SEF to settle a cash settled
contract should be reflective of the underlying cash-market of the
commodity, publicly available, timely and reliable.\35\ The DCM or SEF
should include this information in its explanation of how the product
complies with the applicable provisions of the Act, including core
principles, and the Commission's regulations thereunder.
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\33\ See Appendix C to part 38, paragraphs (a) and (c).
\34\ For example, when listing a cash settled futures contract
on the S&P 500 Index, the DCM's contract specifications should
describe the index and its methodology.
\35\ See Appendix C to part 38, paragraphs (a) and (c).
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As a specific product example for a cash-settled excluded
commodity, when listing a cash-settled futures contract on a stock
index price series, such as the S&P 500 (a stock index of large
capitalization stocks listed on U.S. stock exchanges), the DCM should
specify how the cash settlement price based on the S&P 500 Index is
reflective of the underlying cash-market, reliable, publicly available
and timely.\36\ The DCM should describe how the S&P 500 Index price
series is reflective of the underlying cash market of domestic large
capitalization stocks by describing the methodology for constructing
and maintaining the S&P 500 Index. The DCM should describe how the S&P
500 Index is considered by industry as an accurate and reliable index
of large capitalization stocks by describing how the index is used as a
benchmark for measuring the movements of the U.S. stock exchanges. The
DCM should describe how frequently the index is calculated and where it
is disseminated to the market place to describe how the index is
publicly available and timely.
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\36\ Appendix C to part 38, paragraphs (c)(3)(iv) and (v).
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The Commission requests comment on all aspects of its proposed
amendments to Sec. 40.2.
C. Section 40.3--Voluntary Submission of New Products for Commission
Review and Approval
1. Proposed Amendments to Sec. 40.3(a)(4)
Regulation Sec. 40.3(a)(4) requires that when a DCM, SEF or DCO
voluntarily submits a new product for Commission review and approval
prior to its listing for trading or accepting the product for clearing,
the DCM, SEF or DCO must send the Commission an explanation and
analysis of the product and its compliance with applicable provisions
of the Act, including core principles, and the Commission's regulations
thereunder. Currently, staff relies primarily on the explanation and
analysis provided pursuant to this requirement to analyze the
compliance of a product submitted for review and approval by the
Commission, including the explanation and analysis of the commodity
underlying the product. The Commission proposes to amend Sec.
40.3(a)(4) to clarify that by ``product'', the regulation requires an
explanation and analysis ``that is complete with respect to'' the
product's terms and conditions, the underlying commodity and the
product's compliance with the applicable provisions of the Act and
Commission regulations thereunder.\37\ This amendment is intended to
ensure the Commission receives adequate information regarding the
product and the commodity underlying the product to analyze the
compliance of the product submitted for voluntary Commission review and
approval.
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\37\ While the Commission proposes to include the word
``complete,'' the Commission notes that the ``explanation and
analysis'' requirement in proposed Sec. 40.3(a)(4) does not include
the qualifier that the submission be ``concise'' for the same
reasons discussed below in note 47.
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2. Proposed Amendments to Sec. 40.3(a)(10)
Currently, Sec. 40.3(a)(10) provides that when a registered entity
voluntarily submits a contract for Commission approval, Commission
staff may request additional evidence, information or data to
demonstrate that the contract meets, initially or on a continuing
basis, the
[[Page 61437]]
requirements of the Act, or other requirement for designation or
registration under the Act, or the Commission's regulations or policies
thereunder. Upon such request, the registered entity must provide the
requested additional evidence, information or data by the open of
business two business days after the date staff made such request, or
at the conclusion of such extended period agreed to by Commission staff
after timely receipt of a written request from the registered entity.
The Commission proposes to remove the two business day deadline
from Sec. 40.3(a)(10) and replace it with ``the time specified by the
Commission staff'' to reflect the fact that the two business day
deadline is often not practical and that the amount of time the
registered entity needs to respond depends on the nature and scope of
the requested information.
3. Proposed Amendments to Sec. 40.3(c), (d) and (f)
The Commission proposes to reorganize paragraphs (c) and (d) of
Sec. 40.3, which address the Commission's review and determination
(i.e., approval or non-approval) of products submitted for Commission
approval. More specifically, to enhance the readability of Sec.
40.3(c), the Commission proposes to reorganize Sec. 40.3 so that all
of the provisions that may affect the length of the review period of a
product submitted for Commission approval pursuant to Sec. 40.3 appear
together in Sec. 40.3(c).\38\ The Commission proposes to reorganize
Sec. 40.3(d) to address the Commission's determination, including:
approval through the passage of the applicable review period; and non-
approval.
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\38\ The Commission proposes these changes to enhance
readability and address some confusion regarding the Sec. 40.3
process. The Commission also proposes changes to reorganize Sec.
40.5 to enhance readability and, in general, is proposing parallel
structural changes to Sec. Sec. 40.3 and 40.5 for consistency.
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Currently, Sec. 40.3(c) provides that all products submitted for
Commission approval under Sec. 40.3(c) shall be deemed approved by the
Commission 45 days after receipt by the Commission, or at the
conclusion of an extended period as provided under Sec. 40.3(d),
``unless notified otherwise within the applicable period;'' provided
that the conditions set forth in Sec. 40.3(c)(1) and (2) are
satisfied. The Commission proposes to amend the text of the
introductory paragraph in Sec. 40.3(c) (which the Commission proposes
to move to Sec. 40.3(d)(1)) to clarify that the phrase ``unless
notified otherwise within the applicable period'' (which provides a
vague reference to the notification involved) means unless the
Commission issues a notice of non-approval to the registered entity
under paragraph (d)(2) of Sec. 40.3 within the applicable review
period.
In addition, the Commission is proposing to amend the condition in
Sec. 40.3(c)(2) (which the Commission proposes to move to Sec.
40.3(c)(4)) that must be met for the deemed approval to be effective.
Regulation Sec. 40.3(c)(2) currently requires that the submitting
entity does not amend the terms or conditions of the product or
supplement the request for approval, except as requested by the
Commission or for correction of typographical errors, renumbering or
other non-substantive revisions, during that period. Any voluntary,
substantive amendment by the submitting entity will be treated as a new
submission under Sec. 40.3(c)(2). The Commission proposes to amend
this condition by removing the phrase, except as requested by the
Commission, and the reference to voluntary in the next sentence and by
adding text that states that an amendment or supplementation requested
by the Commission will be treated as a new submission under Sec. 40.3
and will restart the review period of the submission. As amended, any
substantive amendment to the terms or conditions of the product or
supplementation to the request for product approval, including any
substantive amendment requested by the Commission or any other
substantive amendment made voluntarily by the submitting entity, will
be treated as a new submission under Sec. 40.3 and will restart the
review period of the submission.\39\ The Commission believes these
proposed amendments are necessary to better ensure the Commission has
sufficient time to review substantive changes to requests for product
approval.
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\39\ One example of a substantive amendment would be changes in
the delivery grade or characteristics of the underlying commodity
for a physically settled contract that may affect estimated
deliverable supply and thus position limits for the contract.
Another example would be a change in the price reference series of a
new cash-settled contract that settles to a Price Reporting Agency
source (``PRA''). Most PRAs have various series on the same
commodity that differ from each other depending on characteristics
such as geographical location of commodity transaction or commodity
quality characteristics. PRA methodologies for the same commodity
can differ between PRAs. If an amendment changes a PRA as the
source, the underlying methodology for the price series would need
to be examined to determine if it is not readily susceptible to
manipulation.
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The Commission also proposes to amend Sec. 40.3(d)(1) (which the
Commission proposes to move to Sec. 40.3(c)(2)) to provide that the
Commission may extend the request for a product approval if the
submission is incomplete or the requestor does not respond completely
to Commission questions in a timely manner. The Commission has the
authority to extend their review of a rule approval request submission
under current Sec. 40.5(d)(1) if the submission is incomplete or the
requestor does not respond completely to Commission questions in a
timely manner \40\ and the Commission believes the same ability for
reviews of product approval request submissions under Sec. 40.3 would
better enable the Commission to review products when requested by
registered entities.
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\40\ Under current Sec. 40.5(d)(1), the timely manner standard
is dependent upon the facts and circumstances. The Commission
proposes the same timely manner standard for Sec. 40.3(d)(1).
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The Commission proposes to add Sec. 40.3(c)(5) to extend the
review period under proposed Sec. 40.3(c)(1) when the review period
would end on a day that is not a business day to instead end on the
next business day,\41\ and to revise current Sec. 40.3(d)(1), proposed
to be redesignated as Sec. 40.3(c)(2), to permit an additional
extension of up to 45 days. By way of background, Sec. 40.3(d)(1)
(which the Commission proposes moving to Sec. 40.3(c)(2)) provides
that the Commission may extend the review period for an additional 45
days if the product raises novel or complex issues that require
additional time for analysis. Under current Sec. 40.3(c) and (d)(1),
the initial 45-day review period and the 45-day extended review period
do not exceed the 90 days permitted by section 5c(c)(4)(C) of the
CEA,\42\ absent agreement by the requestor to a further extension.\43\
To ensure that the total review period will not extend beyond 90 days
after the request is submitted, the Commission proposes to change the
extended review period under Sec. 40.3(d)(1) from ``an additional 45
days'' to ``up to an additional 45 days'' in proposed Sec. 40.3(c)(2).
For example, if the end of the initial 45-day review period would fall
on a Saturday, and is
[[Page 61438]]
extended by proposed Sec. 40.3(c)(5) to Monday, the next business day,
for a total of 47 days, any additional extension under proposed Sec.
40.3(c)(2) could not exceed 43 days (47 + 43 = 90).
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\41\ The Commission proposes to revise the heading of Sec.
40.3(c) from ``Forty-five day review'' to ``Commission review'' to
reflect the fact that the review period may be extended beyond
forty-five days due to adjustments so that the review period ends on
a business day.
\42\ The relevant portions of section 5c(c)(4)(C) of the Act
provide that the Commission shall take final action on the request
not later than 90 days after submission of the request, unless the
person submitting the request agrees to an extension of the time
limitation established under paragraph (c)(4)(C).
\43\ Because an extension to which a registered entity may agree
under proposed Sec. 40.3(c)(3) is not required to be a specified
number of days, Commission staff can ensure that the extended period
ends on a business day.
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The Commission also proposes to make explicit in proposed Sec.
40.3(c)(3) that the Commission may at any time extend its review period
for any period of time, provided that it does so with the written
agreement of the registered entity.\44\
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\44\ Current Sec. 40.3(d)(2) provides the Commission with
authority to extend the review period with the written agreement of
the registered entity. The proposed amendment in Sec. 40.3(c)(3)
would ensure it is clear that the authority also applies during any
extended review period.
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Additionally, the Commission is proposing to amend Sec. 40.3(f)(1)
(which the Commission proposes to move to Sec. 40.3(e)(1)). Current
Sec. 40.3(f)(1) provides that notification to a registered entity
under paragraph (e) of Sec. 40.3 of the Commission's determination not
to approve a product does not prejudice the entity from subsequently
submitting a revised version of the product for Commission approval or
from submitting the product as initially proposed pursuant to a
supplemented submission. The Commission believes that amending the text
by replacing the word ``prejudice'' with ``prevent'', replacing the
words ``pursuant to'' with ``in'', adding the phrase ``the revised or
supplemented submission will be reviewed without prejudice'' at the
end, and inserting two commas will help avoid any confusion as to the
effect of the non-approval. Also, the changes to the paragraph would
improve consistency with Sec. Sec. 40.5(e)(1) and 40.6(c)(5)(i).
Finally, the Commission proposes to amend Sec. 40.3(f)(2) (which
the Commission proposes to move to Sec. 40.3(e)(2)). Currently, the
section provides that notification to a registered entity under
paragraph (e) of Sec. 40.3 of the Commission's refusal to approve a
product shall be presumptive evidence that the entity may not
truthfully certify under Sec. 40.2 that the same, or substantially the
same, product does not violate the Act or the Commission's regulations
thereunder. The Commission believes that amending the text by replacing
the words ``refusal'' with ``determination not''--as well as replacing
the words ``does not violate the Act'' with ``complies with the Act''--
will have the effect of increasing clarity and provide consistency with
Sec. Sec. 40.2(a)(3)(iv) and 40.5(f)(2) (which the Commission proposes
to be redesignated as Sec. 40.5(e)(2)).
The Commission requests comment on all aspects of its proposed
amendments to Sec. 40.3.
D. Section 40.4--Amendments to Terms or Conditions of Enumerated
Agricultural Products
1. Clarification Regarding Scope of Sec. 40.4(a) and Materiality Under
Sec. 40.4
Regulation Sec. 40.4(a) requires a DCM to submit rule changes that
would materially change a term or condition of a contract on an
agricultural product enumerated in section 1a(9) of the CEA with open
interest for Commission approval under the procedures of Sec. 40.5.
The Commission notes that Sec. 40.4(a) applies strictly to rules that
materially change a product's economic terms and conditions, and does
not apply to other rules. To ensure this is clear, the Commission
proposes to add the word ``product's'' to the text of Sec. 40.4(a) to
modify ``term or condition'' as used therein and to replace the words
``should not be submitted under this section'' with the words ``are not
required by this section to be submitted for Commission approval under
the procedures of Sec. 40.5.''
By way of background, when a registered entity submits a change to
any terms or conditions of a contract on an agricultural product
enumerated in section 1a(9) of the CEA with open interest, the DCM's
assessment of materiality affects whether the registered entity submits
the change for Commission approval under Sec. 40.5 (as is required for
material changes). A DCM may file a change that falls within any of the
four types of discrete changes that the Commission enumerates in Sec.
40.4(b)(1) through (4) through self-certification or notice filing, as
applicable.\45\ For any other rule that the DCM believes to be non-
material, Sec. 40.4(b)(5) sets forth a process for the DCM to
implement the change through self-certification pursuant to Sec.
40.6(a). In order for a DCM to self-certify the change, Sec.
40.4(b)(5) requires the DCM to make a non-materiality filing and
explain why it considers the rule change to be ``non-material.''
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\45\ Given that the Commission states specifically in Sec.
40.4(b)(1) through (4) that the changes covered therein are not
material, a DCM filing a change under Sec. 40.4(b)(1) through (4)
does not need to file a non-materiality explanation.
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To assist a DCM in assessing and explaining whether a change to the
terms and conditions of a contract on an agricultural product
enumerated in section 1a(9) of the CEA that has open interest is a
material change (and thus should be filed under Sec. 40.5 pursuant to
Sec. 40.4(a)) or is non-material (and thus can be implemented through
the Sec. 40.6(a) self-certification process in accordance with Sec.
40.4(b)(5)), the Commission proposes to add an appendix E to part 40
and to include therein the criteria that the Commission generally
considers as evidence that an enumerated agricultural product rule
change is non-material under Sec. 40.4(b)(5). Specifically, proposed
appendix E to part 40 provides that a non-material change: should not
affect a reasonable trader's decision to enter into, or maintain, a
position; should not affect a reasonable trader's decision to make or
take delivery on the contract or to exercise an option on the contract;
and should not have an effect on the value of existing positions,
including, but not limited to, a change affecting the price of the
contract due to a change in the commodity quality characteristics of
the existing contract, a change to the size of the existing contract,
or a change to a cost of effecting delivery for the existing contract.
2. Proposed Amendments to Sec. 40.4(b)
The Commission proposes amendments to Sec. 40.4(b)(1) through (5)
to enhance the readability, consistency and clarity of this regulatory
text. Specifically, the Commission proposes to clarify that the intent
of Sec. 40.4(b) is that the rules and rule amendments identified as
non-material need not be submitted for Commission approval under the
procedures of Sec. 40.5 by replacing the text stating that the rules
and rule amendments enumerated in Sec. 40.4(b) as not material
``should not be submitted under this section'' with text stating that
such rules and rule amendments ``are not required by this section to be
submitted for Commission approval under the procedures of Sec. 40.5.''
The Commission also proposes to replace the word ``changes'' in each of
Sec. 40.4(b)(1) through (4) with ``rules or rule amendments'' so that
the text of paragraphs (b)(1) through (4) use the same language as the
text used in the introductory paragraph of Sec. 40.4(b). Additionally,
the Commission proposes to replace the word ``if'' in each of Sec.
40.4(b)(1), (3) and (4) with the words ``provided that they are'' to
clarify (and address confusion) that the implementation specified in
the applicable paragraph (Sec. 40.4(b)(1), (3) and (4)) is a condition
that must be satisfied in order to rely upon Sec. 40.4(b)(1), (3) or
(4), as applicable. None of these amendments are intended to alter the
substance of Sec. 40.4.
The Commission proposes to remove the reference to ``changes in no
cancellation ranges'' in Sec. 40.4(b)(3). As discussed below in
section II.E.4, the
[[Page 61439]]
Commission proposes to amend Sec. 40.6(d) to allow a registered entity
to file rules and rule amendments governing changes in no cancellation
ranges pursuant to the notification procedures of Sec. 40.6(d). By
filing rules and rule amendments governing no cancellation ranges
pursuant to the notification procedures of Sec. 40.6(d), such rules
and rule amendments would be non-material pursuant to Sec. 40.4(b)(1),
making the current reference to ``changes in no cancellation ranges''
in Sec. 40.4(b)(3) redundant and unnecessary.
Additionally, to enhance readability of Sec. 40.4(b)(5), the
Commission proposes to move from Sec. 40.4(b)(5)(iii) to Sec.
40.4(b)(5)(i) the text requiring that a rule or rule amendment filed
under Sec. 40.4(b)(5) be submitted pursuant to the procedures of Sec.
40.6(a), and to delete redundant text in Sec. 40.4(b)(5)(iii). The
Commission proposes to add text to Sec. 40.4(b)(5)(ii) to provide that
when a DCM provides an explanation as to why it considers the rule
``non-material,'' the DCM shall, if applicable, include a previously
approved rule or rule amendment that is, in substance, the same as the
current non-material rule or rule amendment. The Commission believes
the copy of the previously approved rule or rule amendment would
provide market participants with context and background that would be
helpful information in understanding the current rule or rule amendment
and why it is non-material.
The Commission requests comment on all aspects of its proposed
amendments to Sec. 40.4.
E. Section 40.5--Voluntary Submission of Rules for Commission Review
and Approval
1. Reorganization and Clarification of Sec. 40.5
The Commission proposes to reorganize and clarify Sec. 40.5, which
addresses the submission by registered entities of requests for
Commission approval of new rules and rule amendments and the
Commission's review of such rules and rule amendments. Under the
proposed amendments, paragraphs (a) and (b) of Sec. 40.5 would remain
largely unchanged, with the exception of conforming amendments
previously discussed,\46\ as well as the following two changes.
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\46\ The amendments include the removal of references to a cover
sheet, dormant rules, and submission to the Secretary of the
Commission.
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The Commission proposes to clarify that Sec. 40.5(a)(5) requires
an explanation and analysis ``that is complete with respect to'' the
proposed rule changes for the same reasons the language regarding
completeness is being proposed in Sec. Sec. 40.2(a)(3)(v), 40.3(a)(4),
and 40.6(a)(7)(v).\47\
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\47\ While the Commission proposes to include the word
``complete,'' the Commission notes that the ``explanation and
analysis'' requirement in proposed Sec. 40.5(a)(5) does not include
the qualifier that the submission be ``concise.'' See the 2011 Final
Rule at 44782 (explaining that the ``explanation and analysis''
requirement in final Sec. 40.5(a)(5) does not include the qualifier
that the submission be ``concise.'' The Commission requires
registered entities to provide a more detailed explanation and
analysis of rules voluntarily submitted for Commission approval
under the provisions of Sec. 40.5.).
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Currently, Sec. 40.5(a)(6) provides that the registered entity
shall certify that it posted a notice of the ``pending rule with the
Commission.'' To clarify that the ``pending rule'' is intended to mean
the registered entity's request for approval, the Commission proposes
to amend the text of Sec. 40.5(a)(6) to replace the words ``pending
rule with the Commission'' with the words ``a notice of its request for
Commission approval of the new rule or rule amendment''. The proposed
language would also use language that is consistent with Sec.
40.3(a)(9).\48\
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\48\ The Commission also proposes to eliminate the word
``which'' from the second sentence of Sec. 40.5(a)(6) to improve
clarity and readability.
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The Commission proposes to reorganize paragraphs (c) and (d) of
Sec. 40.5, which address the Commission's review and determination
(i.e., approval or non-approval) of new rules and rule amendments. More
specifically, to enhance the readability of Sec. 40.5(c), the
Commission proposes to reorganize Sec. 40.5 so that all of the
provisions that may affect the length of the review period of a rule
submitted for Commission approval pursuant to Sec. 40.5 appear
together in Sec. 40.5(c)--with the exception of expedited approval
(which the Commission proposes to move to Sec. 40.5(d)(2)).\49\ The
Commission proposes to add Sec. 40.5(c)(6) to extend the review period
under proposed Sec. 40.5(c)(1) \50\ when the review period would end
on a day that is not a business day to instead end on the next business
day,\51\ and to revise current Sec. 40.5(d)(1), proposed to be
redesignated as Sec. 40.5(c)(2), to permit an additional extension of
up to 45 days.
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\49\ The Commission proposes these changes to enhance
readability and address some confusion regarding the Sec. 40.5
process. Changes to proposed Sec. 40.5(d)(2) are discussed below.
\50\ Because an extension to which a registered entity may agree
under Sec. 40.5(c)(3) is not required to be a specified number of
days, Commission staff can ensure that the extended period ends on a
business day.
\51\ The Commission proposes to revise the heading of Sec.
40.5(c) from ``Forty-five- day review'' to ``Commission review'' to
reflect the fact that the review period may be extended beyond
forty-five days due to adjustments so that the review period ends on
a business day.
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By way of background, Sec. 40.5(d)(1) (which the Commission
proposes moving to Sec. 40.5(c)(2)) provides that the Commission may
extend the review period for an additional 45 days if the proposed rule
raises novel or complex issues that require additional time for review
or is of major economic significance, the submission is incomplete or
the requestor does not respond completely to Commission questions in a
timely manner. Under current Sec. 40.5(c) and (d)(1), the initial 45-
day review period and the 45-day extended review period do not exceed
the 90 days permitted by section 5c(c)(4)(C) of the CEA, absent
agreement by the requestor to a further extension. To ensure that the
total review period will not extend beyond 90 days after the request is
submitted, the Commission proposes to change the extended review period
under Sec. 40.5(c)(2) from ``an additional 45 days'' to ``up to an
additional 45 days.'' For example, if the end of the initial 45-day
review period would fall on a Saturday, and is extended by proposed
Sec. 40.5(c)(6) to Monday, the next business day, for a total of 47
days, any additional extension under proposed Sec. 40.5(c)(2) could
not exceed 43 days (47 + 43 = 90).
The other changes to the regulatory text in proposed Sec. 40.5(c)
are non-substantive and are not intended to alter the length of time
the Commission will review a rule submitted for Commission approval
under Sec. 40.5(a).\52\ As part of these non-substantive amendments,
the Commission proposes to make explicit in proposed Sec. 40.5(c)(3)
that the Commission may at any time extend its review period for any
period of time, provided that it does so with the written agreement of
the registered entity.\53\
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\52\ The Commission proposes to add descriptive language into
Sec. 40.5(c)(5) to provide the reader with context to better
understand the interaction of the provisions in proposed Sec. Sec.
40.4(b)(5) and 40.5(c)(5). The descriptive language added to Sec.
40.5(c)(5) is consistent with current Sec. 40.5(c)(2). For a
discussion of the materiality determination under Sec. 40.4(b)(5),
see section II.D above.
\53\ Current Sec. 40.5(d)(2) provides the Commission authority
to extend the review period with the written agreement of the
registered entity. The proposed amendment in Sec. 40.5(c)(3) would
ensure it is clear that the authority also applies during any
extended review period.
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The Commission proposes to reorganize Sec. 40.5(d) to address the
Commission's determination, including: approval through the passage of
the applicable review period; expedited approval; and non-approval.
Current Sec. 40.5(g), which addresses expedited approval of a proposed
rule or rule amendment, would be redesignated as
[[Page 61440]]
Sec. 40.5(d)(2) and amended to remove the limitations that: expedited
approval may be used only for ``changes to'' a proposed rule or a rule
amendment; and the changes to the proposed rule or rule amendment may
only be approved through expedited approval if they are consistent with
``standards approved or established by the Commission.'' The Commission
believes that the quoted text that these amendments will remove is not
necessary or could be misconstrued in connection with the ability of
the Commission to approve proposed rules and rule amendments that are
consistent with the CEA and Commission regulations on an expedited
basis.\54\ Current Sec. 40.5(f), which addresses the impact of non-
approval, would be redesignated as Sec. 40.5(e).
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\54\ The Commission also proposes to replace the word ``under''
with ``in compliance with'' in Sec. 40.5(d)(1) to clarify that
consideration for approval is contingent upon complying with the
requirements of Sec. 40.5(a).
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The current text of Sec. 40.5(f)(1) (proposed to be redesignated
as Sec. 40.5(e)(1)) provides that notification to a registered entity
under paragraph (d)(3) of Sec. 40.5 does not prevent the registered
entity from subsequently submitting a revised version of a proposed
rule or rule amendment for Commission review and approval, or from
submitting the new rule or rule amendment as initially proposed in a
supplemented submission, and that the revised submission will be
reviewed without prejudice. To clarify that notification to a
registered entity under paragraph (d)(3) means a notification of non-
approval by the Commission, the Commission proposes to amend the text
of Sec. 40.5(f)(1) to include ``of the Commission's determination not
to approve a new rule or rule amendment''. The Commission also proposes
to add the words ``or supplemented'' to the text to clarify that
supplemented submissions are reviewed without prejudice.\55\ The
Commission believes this will help avoid any potential confusion and
make the section more consistent with Sec. 40.5(f)(2) (proposed to be
redesignated as Sec. 40.5(e)(2)).
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\55\ The Commission additionally proposes to non-substantively
revise Sec. 40.5(f)(1) to include two new commas. The Commission
believes this will improve readability and reduce the risk of
confusion.
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Current Sec. 40.5(f)(2) (proposed to be redesignated as Sec.
40.5(e)(2)) provides that notification to a registered entity under
paragraph (d)(3) of Sec. 40.5 of the Commission's determination not to
approve a proposed rule or rule amendment is presumptive evidence that
the entity may not truthfully certify the same, or substantially the
same, proposed rule or rule amendment under Sec. 40.6(a). To clarify
that certification under Sec. 40.6(a) is referring to the
certification that the rule or rule amendment complies with the CEA and
the Commission's regulations, the Commission proposes to amend the text
of Sec. 40.5(f)(2) to add ``complies with the Act and the Commission's
regulations thereunder'' and move the reference to Sec. 40.6(a) to
earlier in the text. The Commission believes these changes will enhance
clarity and improve context.\56\
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\56\ These changes also make this language consistent with the
corresponding language in Sec. Sec. 40.3 and 40.5.
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The Commission requests comment on all aspects of its proposed
amendments to Sec. 40.5.
F. Section 40.6--Self-Certification of Rules
1. Proposed Amendments to 40.6(a)
Regulation Sec. 40.6(a) sets forth the submission requirements for
rule certifications under CEA section 5c(c)(1). The Commission proposes
various non-substantive amendments to Sec. 40.6(a) to enhance its
clarity. The proposed non-substantive amendments include: revising the
introductory text of Sec. 40.6(a), including the heading, to better
reflect the content of the regulation; moving the requirements for
delisting of products with no open interest from the introductory text
to a new Sec. 40.6(a)(9); and revising the heading and ordering of
Sec. 40.6(a)(6) to better reflect its purposes.\57\ The Commission
also proposes to remove references to dormant rules, the submission
cover sheet, and the Secretary of the Commission, as previously
discussed, and to correct the reference to the statutory definition of
the term commodity in Sec. 40.6(a)(5) from ``section 1a(4) of the
Act'' to ``section 1a(9) of the Act.''
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\57\ The Commission also proposes to amend Sec. 40.6(a)(6)(ii)
by adding the words ``or may be submitted pursuant to Sec. 40.5''
to clarify that new rules or rule amendments that establish
standards for responding to an emergency may be either certified
pursuant to Sec. 40.6(a) or submitted for Commission approval
pursuant to Sec. 40.5.
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The Commission proposes to replace the word ``of'' in current Sec.
40.6(a)(7)(v) with the words ``that is complete with respect to.'' This
condition would then read as shown in the proposed revised text of
Sec. 40.6(a)(7)(v) presented in this Notice of Proposed Rulemaking.
The Commission has previously explained that like the explanation and
analysis required for new product submissions, the explanation and
analysis of certified rules or rule amendments should be a clear and
informative--but not necessarily lengthy--discussion of the submission,
the factors leading to the adoption of the rule or rule amendment, and
the expected impact of the rule or rule amendment on the public and
market participants.\58\ Similar to the discussion above in section
II.B.3 regarding the level of detail in the explanation and analysis
provided in new contract submissions, the Commission has found that
some new rule submissions, while being concise, have not provided
sufficient detail for staff to evaluate compliance of the proposed
rule. Adding the words ``that is complete with respect to'' to current
Sec. 40.6(a)(7)(v) is intended to add more direction to submitters
that, while the required explanation be concise, it must also be
sufficiently comprehensive to address the operation, purpose, and
effect of the proposed rule or rule amendment and its compliance with
applicable provisions of the Act, including core principles, and the
Commission's regulations.
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\58\ 2011 Final Rule at 44782-444783.
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As set forth in the current introductory text to Sec. 40.6(a), the
delisting or withdrawal of the certification of a product with no open
interest must comply with the submission and certification requirements
in Sec. 40.6(a)(1) and (2) and Sec. 40.6(a)(7). The Commission
proposes to move this provision from the introductory paragraph of
Sec. 40.6(a) to new Sec. 40.6(a)(9) to enhance the readability of
Sec. 40.6(a) and clarify the provision. Specifically, proposed new
Sec. 40.6(a)(9)would explicitly state that a new rule or a rule
amendment that delists, or withdraws the certification of, a product
with no open interest may become effective immediately upon the filing
of the submission, provided that the submission is made in compliance
with Sec. 40.6(a)(1) and (2) and Sec. 40.6(a)(7). The Commission
notes that while the current introductory text to Sec. 40.6(a) is
intended to enable a registered entity to delist, or withdraw a
certification of, a product with no open interest immediately upon a
submission,\59\ the current provision has not been well understood and
it would be useful to
[[Page 61441]]
clarify by adding an explicit statement into the regulatory text.
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\59\ Id. at 44783 (explaining that the Commission, in
consideration of comments from both CME and OCX, determined to amend
Sec. 40.6(a) to make rules delisting or withdrawing the
certification of products effective upon submission to the
Commission. The Commission agreed that such submissions should be
exempt from the 10-business-day review period in order to avoid
complicating the delisting of the product by providing market
participants an opportunity to enter into contracts between the time
period of submission and the effective date of the rule.).
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2. Proposed Amendments to Sec. 40.6(b)
Regulation Sec. 40.6(b) sets forth the Commission's review period
for a rule certification under Sec. 40.6(a). The regulation provides
the Commission with a 10-business day review period after which the
rule is deemed certified, unless the rule is stayed by the Commission
during the review period. The Commission proposes to amend Sec.
40.6(b) to provide that any substantive amendment or supplementation of
the rule submission will be deemed a new submission and restart the 10-
business day review period, unless the amendment or supplementation is
made for correction of typographical errors, renumbering or other non-
substantive revisions. The proposed amendments are intended to preserve
the Commission's 10-business day review period where a registered
entity makes a substantive change to a rule certification.
3. Proposed Amendments to Sec. 40.6(c)
Regulation Sec. 40.6(c) sets forth the Commission's authority and
procedures for staying a submission pursuant to Sec. 40.6(a). The
Commission proposes to add the phrase ``and can be implemented'' in
Sec. 40.6(c)(3) in order to make clear that upon the expiration of a
stay (without Commission objection), the registered entity may opt to
implement the rule at a later time.\60\
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\60\ The Commission also proposes to change the reference in
Sec. 40.6(c)(3) from ``proposed certification'' to
``certification.''
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The Commission proposes to amend Sec. 40.6 by adding a new Sec.
40.6(c)(5) to address the effect of a Commission objection to a rule
submitted pursuant to Sec. 40.6(a). The proposed provision is based on
the similar provision in current Sec. 40.5(f) (Effect of non-
approval). Proposed Sec. 40.6(c)(5)(ii) would provide that a
Commission objection to a rule certification pursuant to Sec.
40.6(c)(3) is presumptive evidence that the entity may not truthfully
certify that the same, or substantially the same, rule complies with
the Act and the Commission's regulations. Proposed Sec. 40.6(c)(5)(i)
would provide that a Commission objection does not, however, prevent
the registered entity from subsequently submitting a revised or
supplemented version of the proposed rule or rule amendment for review
and approval or for certification. As discussed above with respect to
current Sec. 40.5(f), the revisions must provide a substantive basis
to treat the revised rule differently from the previously submitted
rule.
4. Proposed Amendments to Sec. 40.6(d)
Regulation Sec. 40.6(d)(2) sets forth various categories of rules
that may be implemented by a registered entity without certification,
provided that the registered entity complies with the weekly
notification requirements in Sec. 40.6(d)(1). The Commission proposes
to add the following new categories of rules to Sec. 40.6(d)(2):
updates to email addresses or other contact information that market
participants use to submit block trades; amendments to existing trading
months; with respect to a contract for the purchase or sale of a
commodity for future delivery or an option on such a contract or an
option on a commodity (other than a swap), payment or collection of
commodity options premiums or margins and changes to no cancellation
ranges; and with respect to a swap, payment or collection of option
premiums or margins. The Commission believes updates to contact
information for the submission of block trades are not substantive for
compliance purposes and need not be subject to self-certification and
Commission review requirements of Sec. 40.6(a). As discussed above in
section II.A.5, the Commission preliminarily believes that registered
entities should be able to submit rules or rule amendments governing
the payment or collection of these premiums or margins (which are
currently within the definition of terms and conditions in Sec. 40.1)
through weekly notices to the Commission pursuant to Sec. 40.6(d)(2)
as this will lower the burden for registered entities and still provide
sufficient notice to the Commission. The Commission also preliminarily
believes that registered entities should be able to submit rules or
rule amendments that change no cancellation ranges or amend existing
trading months through weekly notices to the Commission pursuant to
Sec. 40.6(d)(2) as this will lower the burden for registered entities
to implement such changes and still provide sufficient notice to the
Commission.
Regulation Sec. 40.6(d)(3) currently sets forth various categories
of rules that may be implemented without certification or notice to the
Commission. The Commission proposes to amend current Sec.
40.6(d)(3)(ii)(E)(1) (which would become Sec. 40.6(e)(2)(v)(A)) to add
the words ``per contract'' to be consistent with the corresponding
provision in Sec. 40.6(d)(2)(v)(A). The Commission also proposes to
make a non-substantive amendment to redesignate Sec. 40.6(d)(3) as
Sec. 40.6(e) and make corresponding designation changes to the other
paragraphs of the section.\61\
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\61\ The Commission believes the current designations are
inconsistent with the introductory text of Sec. 40.6(d).
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The Commission requests comment on all aspects of its proposed
amendments to Sec. 40.6. In particular, the Commission requests
comment on its proposed new categories of rules that may be filed
pursuant to Sec. 40.6(d)(2). The Commission further requests comments
on the following questions: Are there other categories of rules,
including rules specific to DCOs, DCMs, SEFs, or SDRs, that should be
added to Sec. 40.6(d)(2)? If so, what is the rationale for the
addition? Are there categories of rules that should be added to current
Sec. 40.6(d)(3) (which is proposed to be moved to Sec. 40.6(e))? If
so, what is the rationale for the addition?
In addition, the Commission requests comment on whether the per-
contract fee change parameters in Sec. 40.6(d)(2)(v)(A) and
40.6(d)(3)(ii)(E)(1) (the latter of which would become Sec.
40.6(e)(2)(v)(A)) (i.e., above or below one dollar per contract) should
be increased given the passage of time since the adoption of the
current regulation.
G. Section 40.7--Delegations
1. Proposed Amendments to Sec. 40.7
Regulation Sec. 40.7 sets forth delegations of the Commission's
authority to take various actions under the provisions of part 40. The
Commission proposes to amend Sec. 40.7 to enhance the regulation's
utility and clarity and to add three new delegations.
The Commission proposes to amend Sec. 40.7(b)(3) by adding the
words ``or relate to'' to clarify that this delegation includes
authority to approve rules or rule amendments of a registered entity
that relate to, but do not establish or amend, speculative limits or
position accountability provisions.\62\
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\62\ The delegation is not intended to and does not affect any
substantive authority including, for example, the Commission's
authority to bring an enforcement action based on a person's
violation of a registered entity's position limit rules pursuant to
CEA Section 4a(e).
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The Commission proposes to delegate under proposed Sec.
40.7(a)(1)(iv) and (v) the authority in proposed Sec. Sec. 40.3(c)(3)
and 40.5(c)(3) to extend the applicable review period set forth in
Sec. Sec. 40.3(c) and 40.5(c), respectively, for the period of time
agreed to in writing by the registered entity. The Commission believes
these two delegations are appropriate given the agreement by the
registered entity to the extension.
[[Page 61442]]
With respect to proposed Sec. 40.7(a)(1)(iv) and (v), should the
Commission impose a maximum period of time that the staff, under
delegated authority, may extend the period agreed to in writing by the
registered entity? Why or why not? The Commission would still have the
authority to extend the time for review for the period agreed to in
writing by the registered entity, pursuant to proposed Sec. Sec.
40.3(c)(3) and 40.5(c)(3).
Also, the Commission proposes to amend the text of Sec.
40.7(a)(5), which delegates the Commission's authority to determine if
a proposed rule is material under Sec. 40.4(b)(5). The proposed
amendments streamline and simplify the text of the regulation by
eliminating text that is not relevant to the delegation as well as an
inconsistent reference to Sec. 40.6(d).\63\
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\63\ Current Sec. 40.7(a)(5) provides that if the Commission
determines that a rule submitted by a DCM pursuant to Sec.
40.4(b)(5) is not material, the rule may be reported pursuant to the
provisions of Sec. 40.6(d). However, Sec. 40.4(b)(5) itself
provides that if a rule is deemed not material pursuant to the
regulation, it may be filed pursuant to Sec. 40.6(a).
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Finally, as discussed above, the Commission is also proposing to
add Sec. 40.7(e) to delegate the Commission's authority to specify the
format and manner of filing under these regulations to the Directors of
the Division of Market Oversight and the Division of Clearing and Risk.
Given that technology is used for the Commission to receive submissions
from the registered entities under these regulations and the speed at
which technology evolves, the Commission believes it is useful for
staff to be able to specify the format and manner of filing under these
regulations to facilitate the regulations remaining current with
technological advances that registered entities and the Commission may
use in the future.
The Commission requests comment on all aspect of its proposed
amendments to Sec. 40.7.
H. Section 40.10--Special Certification Procedures for Submission of
Rules by SIDCOs
1. Definition of ``Materiality'' in Sec. 40.10
Regulation Sec. 40.10(a), which implements section 806(e) of the
Dodd-Frank Act, requires a SIDCO to provide notice to the Commission
not less than 60 days in advance of any proposed change to its rules,
procedures, or operations that could materially affect the nature or
level of risks presented by the SIDCO. When the Commission first
adopted this requirement in 2011, it further defined ``materially
affect the nature or level of risks presented'' in Sec. 40.10(b) as
matters as to which there is a reasonable possibility that the change
could affect the performance of essential clearing and settlement
functions or the overall nature or level of risk presented by the
SIDCO, and notes that such changes may include changes that materially
affect financial resources, participant and product eligibility, risk
management (including matters relating to margin and stress testing),
daily or intraday settlement procedures, default procedures, system
safeguards (business continuity and disaster recovery), and governance.
The Commission is proposing to revise this definition.
In the more than a decade since its adoption, the Commission has
found that the definition in Sec. 40.10(b) is so broad and vague that
it does not provide meaningful guidance to SIDCOs. Rather, the
determination as to whether a proposed change is subject to advance
notice under Sec. 40.10(a) is usually made through discussions between
the SIDCOs and Commission staff.
The Commission is therefore proposing to revise the definition in
Sec. 40.10(b) to specify that proposed changes that require advance
notice under Sec. 40.10 may include, but are not limited to, material
changes to the SIDCO's default management plan or default rules or
procedures under Sec. 39.16 or Sec. 39.35, program of risk analysis
and oversight required under Sec. 39.18, or recovery and wind down
plans required under Sec. 39.39; the adoption of a new or materially
revised margin methodology; the establishment of a cross-margining
program or similar arrangement with another clearing organization; and
material changes to its approach to the stress testing required under
Sec. 39.13(h)(3), Sec. 39.36(a), or Sec. 39.36(c).
The Commission notes that the ``may include, but are not limited
to'' language means that the examples listed in the definition are not
exhaustive and a proposed change that is not specifically mentioned
nevertheless may be subject to advance notice if it meets the standard
in Sec. 40.10(a), including proposed changes that may fall under the
broad categories listed in the current definition in Sec. 40.10(b).
The Commission requests comment on whether there are other examples of
changes that should be listed in the definition in Sec. 40.10(b), or
whether there are other ways the definition could be revised to provide
better guidance to SIDCOs as to when advance notice of a proposed
change is required under Sec. 40.10.
2. SIDCO Sbmission Under Sec. 40.10 of Rules Otherwise Required To Be
Submitted Under Sec. 40.5
The Commission is proposing to add new Sec. 40.10(i) to require
that where any provision of the Commission's regulations requires a DCO
to file rules for approval under Sec. 40.5, a SIDCO would be required
instead to file those rules under Sec. 40.10, if the rules could
materially affect the nature or level of risks presented by the SIDCO.
Without this change, a requirement for DCOs to file rules pursuant to
Sec. 40.5 could be misinterpreted as relieving a SIDCO from having to
file those same rules pursuant to Sec. 40.10, or as creating a
duplicative requirement for SIDCOs to submit rules under both Sec.
40.5 and Sec. 40.10. Current regulations that require a DCO to file
rules for approval include requests for transfer of open positions in
Sec. 39.3(g); holding securities in a futures account pursuant to a
portfolio margining program in Sec. 39.4(f); cross-margining programs
in Sec. 39.13(i); and commingling of customer positions and associated
funds in either a futures or cleared swaps customer account in Sec.
39.15(b).
3. Technical Corrections to Sec. 40.10
The Commission is proposing to revise the first sentence of Sec.
40.10(a), which references a registered DCO that has been designated by
the Financial Stability Oversight Council as a systemically important
DCO. After Sec. 40.10(a) was adopted, the Commission adopted a
definition of ``systemically important derivatives clearing
organization'' in Sec. 39.2. The Commission proposes to change the
reference to a systemically important DCO, ``as defined in Sec. 39.2
of this chapter.''
The Commission is also proposing to revise Sec. 40.10 to remove
references to ``the purposes of the Dodd-Frank Act.'' At the time Sec.
40.10 was adopted, the Commission was still in the process of
incorporating in its regulations changes necessary to reflect the
purposes of the Dodd-Frank Act. The Commission subsequently adopted
revisions to its DCO regulations that address the Dodd-Frank Act
requirements. Accordingly, the references in Sec. 40.10(d) and (h)(3)
to the purposes of the Dodd-Frank Act are no longer necessary.
The Commission requests comment on all aspects of its proposed
amendments to Sec. 40.10.
I. Technical Correction to Authority Section of Part 40
The Commission is proposing to remove the reference to section 7a
of the
[[Page 61443]]
CEA, which was repealed by the Dodd-Frank Act,\64\ from the authority
section for part 40.
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\64\ Public Law 111-203, title VII, sec. 734(a), July 21, 2010,
124 Stat. 1718 (2010).
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III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires agencies to
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis with respect to such
impact.\65\ The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its regulations on small entities in
accordance with the RFA.\66\ The proposed amendments to part 40 set
forth herein would impact DCMs, DCOs, SEFs and SDRs. The Commission has
previously determined that DCMs,\67\ DCOs,\68\ SEFs,\69\ and SDRs \70\
are not small entities for purposes of the RFA. Therefore, the
Chairman, on behalf of the Commission, pursuant to 5 U.S.C. 605(b),
hereby certifies that the proposed rules will not have a significant
economic impact on a substantial number of small entities.
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\65\ 5 U.S.C. 601 et seq.
\66\ See Policy Statement and Establishment of ``Small
Entities'' for purposes of the Regulatory Flexibility Act, 47 FR
18618 (Apr. 30, 1982).
\67\ 47 FR 18618, 18619 (April 30, 1982).
\68\ New Regulatory Framework for Clearing Organizations, 66 FR
45604, 45609 (Aug. 29, 2001).
\69\ Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR 33476, 33548 (June 4, 2013).
\70\ Swap Data Repositories, 75 FR 80898, 80926 (Dec. 23, 2010).
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B. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \71\ provides that Federal
agencies, including the Commission, may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid control number from the Office of Management
and Budget (``OMB''). This proposed rulemaking contains reporting and
recordkeeping requirements that are collections of information within
the meaning of the PRA. This section addresses the impact of the
proposal on existing information collection requirements associated
with part 40 of the Commission's regulations. Changes to the existing
information requirements as a result of this proposal are set forth
below. OMB has assigned Control No 3038-0093, ``Part 40, Provisions
Common to Registered Entities,'' to the information collections
associated with these regulations.\72\ The Commission is revising its
total burden estimates for this clearance to reflect the proposed
amendments.
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\71\ 44 U.S.C. 3501 et seq.
\72\ For the previously approved estimates, see ICR Reference
No. 202102-3038-001 (conclusion date Feb. 24, 2021), available at
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202102-3038-001.
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The proposed amendments will modify the existing information
collection entitled Part 40, Provisions Common to Registered Entities,
(``Part 40 Information Collection''), which is one of two Information
Collections under OMB control number 3038-0093.\73\ The Part 40
Information Collection encompasses the reporting burdens associated
with Sec. Sec. 40.2 and 40.3 (product submissions); Sec. Sec. 40.5
and 40.6 (rule submissions); and Sec. 40.10 (SIDCO submissions).
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\73\ OMB Control Number 3038-0093 has two Information
Collections: Part 40, Provisions Common to Registered Entities; and
Part 150, Position Limits. See https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202102-3038-001.
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1. Burden Estimates
The proposed amendments to Sec. Sec. 40.2(a)(3)(v), 40.3(a)(4),
and 40.6(a)(7)(v) would clarify that these regulations require
registered entities to provide sufficient detail for staff to evaluate
compliance of the products and rules registered entities are proposing
in their submissions. This additional detail (e.g., about the
underlying commodity in a derivatives contract) is necessary to allow
Commission staff to assess whether new products and amendments to
existing products terms and conditions comply with the CEA and
Commission regulations. The Commission anticipates that, if adopted,
these amendments are likely to increase reporting burden for registered
entities, although some registered entities are already providing this
information.\74\ Specifically, for rule submissions under Sec. 40.6,
these new requirements would add an additional average of 30 minutes
(for a new total of 2.5 hours). For product submissions under
Sec. Sec. 40.2 and 40.3, the proposed amendments would add an
additional average 1 hour of burden (for a new total of 22 hours).
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\74\ As discussed above in sections II.B.3, II.C.1, and II.F.1,
the proposed amendments clarify the Commission's expectations for
the content of submissions, which some registered entities had not
been meeting in their recent filings. Although the Commission views
the proposed amendments as clarifying filing requirements rather
than new requirements, they will increase the reporting burden
compared to some registered entities' current filing practices.
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The aggregate burden for the Part 40 Information Collection,
including the burden from the proposed amendments and the updates to
number of responses based on current Commission data, is estimated as
follows:
Product Submissions (Sec. Sec. 40.2 and 40.3)
For product submissions (Sec. Sec. 40.2 and 40.3), the number of
respondents remains 70. The Commission estimates that for product
submissions under Sec. Sec. 40.2 and 40.3, the proposed amendments to
Sec. Sec. 40.2(a)(3)(v) and 40.3(a)(4) would add an additional average
1 hour of burden (for a new total of 22 hours). Based on an updated
review of its annual reporting data for the past three years (2020-
2022), the Commission estimates that reporting entities are likely to
submit on average an aggregate of 848 reports annually.
Accordingly, the aggregate annual estimate for the reporting burden
associated with product submissions (Sec. Sec. 40.2 and 40.3), as
amended by the proposal, is as follows:
Estimated number of respondents: 70.
Estimated number of reports per respondent: 12.\75\
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\75\ The 3-year average of total responses for Sec. Sec. 40.2
and 40.3 submissions combined was 848 responses, calculated by
taking the annual total submissions received under Sec. Sec. 40.2
and 40.3 combined from all entities and averaging them for the years
of 2020, 2021 and 2022. The estimated number of reports per
respondent is calculated as 848 responses divided by 70 respondents
(848 responses/70 respondents = 12 responses per respondent).
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Average number of hours per report: 22.\76\
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\76\ The aggregate number of hours per report for Sec. Sec.
40.2 and 40.3 adds 1 hour to the existing burden estimate of 21
hours, for a total of 22.
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Estimated gross annual reporting burden (hours): 18,480.\77\
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\77\ The estimated gross annual reporting burden (hours) is
calculated by multiplying the estimated number of respondents times
the estimated number of reports per respondent times the average
number of hours per report (70 respondents x 12 reports per
respondent x 22 hours per report = 18,480 hours).
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Rule Submissions (Sec. Sec. 40.5 and 40.6)
For rule submissions (Sec. Sec. 40.5 and 40.6), the number of
respondents remains 70. Although the proposed amendments only increase
reporting burden for Sec. 40.6 submissions, the Commission averages
Sec. Sec. 40.5 and 40.6 for PRA purposes. Based on an updated review
of recent submission data from 2020-2022, the Commission estimates that
respondents submit on average 1,412 reports per year. Further, the
Commission estimates that, if the proposed amendments to Sec.
40.6(a)(7)(v) are adopted, each respondent would spend approximately
2.5 hours to prepare and submit the required reports. Accordingly, the
aggregate annual estimate for the reporting burden, as amended by the
proposal, is as follows:
[[Page 61444]]
Estimated number of respondents: 70.\78\
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\78\ The estimated number of 70 respondents includes 16 active
DCMs, 23 registered SEFs, 15 registered DCOs, 5 provisionally
registered SDRs, plus pending applications for those entities.
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Estimated number of reports per respondent: 20.\79\
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\79\ As noted above, the proposed amendment increases the burden
only for Sec. 40.6 filings (and not for Sec. 40.5 filings).
However, the Commission aggregates Sec. Sec. 40.5 and 40.6 for PRA
purposes. The 3-year average of total responses for Sec. Sec. 40.5
and 40.6 submissions combined was 1,412 responses, calculated by
taking the annual total submissions received under Sec. Sec. 40.5
and 40.6 combined from all entities and averaging them for the years
of 2020, 2021 and 2022. The estimated number of reports per
respondent is calculated as 1,412 responses divided by 70
respondents (1,412 responses/70 respondents = 20 responses per
respondent).
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Average number of hours per report: 2.5.\80\
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\80\ The aggregate number of hours per report for Sec. Sec.
40.5 and 40.6 adds 0.5 hours to the existing burden of 2 hours per
report, for a total of 2.5.
---------------------------------------------------------------------------
Estimated gross annual reporting burden (hours): 3,500.\81\
---------------------------------------------------------------------------
\81\ The estimated gross annual reporting burden (hours) is
calculated by multiplying the estimated number of respondents times
the estimated number of reports per respondent times the average
number of hours per report (70 respondents x 20 reports per
respondent x 2.5 hours per report = 3,500 hours).
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SIDCO Submissions (Sec. 40.10)
The burden for SIDCO submissions under Sec. 40.10 is unaffected by
the proposed amendments, but has been updated based on review of
existing data. Based on an updated review of recent submission data
from 2020-2022, the number of SIDCO respondents remains 2 and each
respondent typically submits 1 report annually. The Commission
estimates that each registered entity will continue to spend on average
50 hours to prepare and submit its report. The aggregate annual
estimate burden for Sec. 40.10 submissions is as follows:
Estimated number of respondents: 2.
Estimated number of reports per respondent: 1.\82\
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\82\ The 3-year average of total responses for Sec. 40.10
submissions was 2, calculated by taking the annual total submissions
received under Sec. 40.10 from all entities and averaging them for
the years of 2020, 2021 and 2022.
---------------------------------------------------------------------------
Average number of hours per report: 50.
Estimated gross annual reporting burden (hours): 100.\83\
---------------------------------------------------------------------------
\83\ The estimated gross annual reporting burden (hours) is
calculated by multiplying the estimated number of respondents times
the estimated number of reports per respondent times the average
number of hours per report (2 respondents x 1 reports per respondent
x 50 hours per report = 100 hours).
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The Commission believes that the other proposed changes to
reporting proposed in this NPRM will not increase the burden on the
registered entities, and in some cases, may reduce reporting burden.
The Commission anticipates that the following proposed changes will not
result in any increase in reporting burden:
Dormancy (Sec. 40.1(b) and (g)). If the proposed removal of the
definitions of ``dormant contract or dormant product'' and ``dormant
rule'' is adopted, registered entities would no longer be required to
make submissions to revive dormant rules or products under Sec. Sec.
40.2, 40.3, 40.5, or 40.6, other than when required to do so in
connection with reinstating a registered entity's registration or
designation from dormancy. Accordingly, the proposed changes would not
add any burden on registered entities but may reduce burdens.
Margin methodology rules (Sec. Sec. 40.1, 40.5, 40.6, 40.10). This
provision would add ``margin methodology'' to the definition of
``rule'' and thus require the corresponding rule submissions. However,
registered entities already have been submitting margin-related rule
changes under the current requirements. The proposed change only
clarifies existing filing requirements and would not add new reporting
burdens.
Terms and conditions; weekly notification (Sec. Sec. 40.1(j),
40.2, and 40.6(d)(2)). The proposed changes to the definition of
``terms and conditions'' remove certain categories of information, such
as payments and collections of certain margins and premiums that
registered entities must submit to the Commission as part of their rule
submissions under Sec. 40.6(a). Instead, the information would be
filed as rules under the less burdensome weekly notification
requirements of Sec. 40.6(d)(2). Contact information for block trades
and amendments to ``no cancellation ranges'' would also be added to the
less-burdensome weekly notification category under Sec. 40.6(d)(2).
Cover sheet (Sec. Sec. 40.2, 40.3, 40.5, 40.6 and Appendix D). The
proposal would remove the requirement for filers to submit a cover
sheet. The Commission's electronic portal now collects the required
information and generates a cover sheet automatically, allowing the
cover-sheet requirement to be removed and reducing burden to the
registered entities.
Time period for submitting additional materials for product
approvals (Sec. 40.3(a)(10)). The proposed rule would provide
Commission staff greater flexibility to set deadlines for submission of
any additional information requested by the Commission for voluntary
product approval by registered entities. Currently, the regulation
requires an initial two-business-day limit after the Commission
requests the information. The greater staff discretion to set more
flexible deadlines would reduce the need for registered entities to
submit extension requests, thereby reducing their burden.
Non-materiality criteria (Sec. 40.4(b)(5)). This provision would
provide guidance to registered entities about the non-materiality
determination required for certain products. It would not change the
submission requirements, but rather help registered entities understand
Commission requirements for their submissions. The Commission
anticipates that these clarifications are likely to reduce burden for
reporting entities by providing more specificity about submission
requirements.
Materiality; submission of related rules (Sec. 40.4(b)(5)(ii)). If
adopted, the proposed rules would require that non-materiality
submissions include any relevant previous rules or rule amendments that
support non-materiality. This could impose additional research,
information collection, and filing burdens. However, according to
Commission data, fewer than one non-materiality submission is made
annually. Accordingly, the Commission anticipates that this requirement
is unlikely to impose any material increase in reporting burden for
covered entities.
Resubmission (Sec. 40.6(c)(5)(ii)). This proposed provision
describes how an objection by the Commission to a registered entity's
certification of a proposed rule or rule amendment would affect any
future filings by the registered entity of the proposed rule or rule
amendment to which the Commission objected. Because objections are
infrequent, the Commission anticipates that the burden of this
provision is unlikely to result in increased burden for reporting
entities.
Materiality standard (Sec. 40.10(b)). Under the proposed
amendments, the definition ``materially affect the nature or level of
risks presented'' for SIDCO rule submissions would be revised to
provide more useful guidance to registered entities. This change would
not affect the reporting burden.
SIDCO submission under Sec. 40.10 of rules otherwise required to
be submitted under Sec. 40.5. This proposed amendment would clarify
filing requirements, but would not result in a substantive change to
filing obligations. The Commission also anticipates that this
clarification may reduce burden by eliminating mistaken duplicate
filings.
``Referenced contract'' data element (Appendix D). Submissions for
new products would include a new structured data element in the online
[[Page 61445]]
portal indicating whether the product is a ``referenced contract.''
This information would be the same as the ``reference contract''
determination set out in Sec. 150.1 and appendix C to part 150.
Accordingly, this is a non-substantive revision that will have de
minimis impact on reporting burden.
2. Request for Comment
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission will consider public comments on this proposed collection of
information in:
(a) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(b) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(c) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(d) Minimizing the burden of the proposed information collection
requirements on registered entities, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC
20581, (202) 418-5160 or from https://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that comments can be summarized and addressed in the final rulemaking,
and please refer to the ADDRESSES section of this rulemaking for
instructions on submitting comments to the Commission. OMB is required
to make a decision concerning the proposed information collection
requirements between 30 and 60 days after publication of this release
in the Federal Register. Therefore, a comment to OMB is best assured of
receiving full consideration if OMB receives it within 30 calendar days
of publication of this release. Nothing in the foregoing affects the
deadline enumerated above for public comment to the Commission on the
proposed rules.
C. Cost Benefit Considerations
1. CEA Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before issuing new regulations under
the CEA.\84\ By its terms, section 15(a) does not require the
Commission to quantify the costs and benefits of a new rule or to
determine whether the benefits of the adopted rule outweigh its costs.
Rather, section 15(a) requires the Commission to ``consider the costs
and benefits'' of a subject rule.
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\84\ 7 U.S.C. 19(a).
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Section 15(a) further specifies that the costs and benefits of the
proposed regulations shall be evaluated in light of five broad areas of
market and public concern: (1) protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. Collectively,
these five factors are referred to herein as section 15(a) factors and
they are addressed below. In conducting its analysis, the Commission
may, in its discretion, give greater weight to any one of the five
enumerated areas of concern and may determine that, notwithstanding its
costs, a particular rule is necessary or appropriate to protect the
public interest or to effectuate any of the provisions or to accomplish
any of the purposes of the Act.
The Commission recognizes that the proposed amendments may impose
costs. Some of the proposed amendments, however, are format,
organizational, and non-substantive changes, which will have no costs.
The Commission has endeavored to assess the expected costs and benefits
of the proposed amendments in quantitative terms, including PRA related
costs, where possible. In situations where the Commission is unable to
quantify the costs and benefits, the Commission identifies and
considers the costs and benefits of the applicable proposed amendments
in qualitative terms. The lack of data and information to estimate
those costs is attributable in part to the nature of the proposed
amendments. Additionally, any initial and recurring compliance costs
for any particular DCM, DCO, SDR, or SEF will depend on the size,
existing infrastructure, practices, and cost structure of the entity.
The Commission generally requests comment on all aspects of its
cost benefit considerations, including the identification and
assessment of any costs and benefits not discussed herein; data and any
other information to assist or otherwise inform the Commission's
ability to quantify or qualitatively describe the costs and benefits of
the proposed amendments; and substantiating data, statistics, and any
other information to support positions posited by commenters with
respect to the Commission's discussion. The Commission welcomes comment
on such costs.
2. Statutory and Regulatory Background
Part 40 of the Commission's regulations implements section 5c(c) of
the CEA and requirements and procedures for registered entities,
including DCMs, DCOs, SEFs, SDRs, and SIDCOs, to submit their rules and
products to the Commission prior to implementing rules, listing
products for trading, or accepting products for clearing. Part 40
generally provides two means for registered entities to submit rules
and products to the Commission. There is a self-certification process
and a Commission-approval process.\85\
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\85\ See Sec. Sec. 40.2, 40.3, 40.4, 40.5 and 40.6.
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With two exceptions, the Commission last amended the part 40
regulations in 2011.\86\ After years of experience with registered
entities following the processes set forth in the part 40 regulations,
the Commission is proposing amendments to clarify, simplify, and
enhance the utility of, the part 40 regulations for registered entities
and the Commission. Changes proposed include amendments to: Sec. 40.1
to simplify the determination of whether a registered entity is deemed
dormant and to remove the terms ``dormant rule'' and ``dormant contract
or dormant product''; Sec. Sec. 40.2, 40.3, 40.4, 40.5 and 40.6 and
appendix D to part 40 to reflect the development, evolution and use of
the Commission's online portal for the filing of rule and product
submissions; and Sec. Sec. 40.5, 40.6 and 40.7 to reorganize and
enhance the regulations' utility. The Commission also proposes to amend
[[Page 61446]]
Sec. 40.10 to provide meaningful guidance to SIDCOs regarding filing
instructions for rules that could materially affect the nature or level
of risks presented by the SIDCO.
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\86\ See 2011 Final Rule; Repeal of the Exempt Commercial Market
and Exempt Board of Trade Exemptions, 80 FR 59575 (October 2, 2015);
and Position Limits for Derivatives, 86 FR 3236 (January 14, 2021).
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3. Baseline
The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking is the existing statutory and
regulatory framework applicable to DCMs, DCOs, SDRs, and SEFs, in 17
CFR part 40. Current part 40 provides substantive and procedural
regulatory requirements for the submission of registered entities'
self-certifications, and requests for approval, of new products for
trading and clearing and new rules and rule amendments. Current part 40
also establishes guidelines for the Commission's review and processing
of registered entities' submissions. Current part 40 regulations
explain what information must be made publicly available in relation to
the application to become a DCM, DCO, SDR, or SEF, and when registered
entities file submissions for new products, new rules and rule
amendments. There are also special requirements for certain rules
submitted by SIDCOs.
The Commission notes that this cost-benefit consideration is based
on its understanding that the derivatives market regulated by the
Commission functions internationally with: (1) transactions that
involve U.S. entities occurring across different international
jurisdictions; (2) some entities organized outside of the United States
that are registered with the Commission; and (3) some entities that
typically operate both within and outside the United States and that
follow substantially similar business practices wherever located. Where
the Commission does not specifically refer to matters of location, the
discussion of costs and benefits below refers to the effects of the
proposed regulations on all relevant derivatives activity, whether
based on their actual occurrence in the United States or on their
connection with, or effect on U.S. commerce.\87\
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\87\ See, e.g., 7 U.S.C. 2(i).
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4. Proposed Amendments
a. Proposed Amendments to Sec. 40.1 Regarding Dormant Registered
Entities, Products, Contracts, and Rules
The Commission proposes to amend its regulations to simplify the
calculation of how long a registered entity is inactive and when a
registered DCM, DCO, SDR or SEF is deemed dormant. The proposed
amendments to Sec. 40.1(c) through (f) would conform the wording of
these sections across the different types of registered entity such
that any registered entity would be considered dormant if it is
inactive for a period of 365 days, provided that a DCM, DCO or SEF will
not become dormant during the 1,095 days following the entity's initial
and original order of designation or registration, as applicable. The
proposed amendments replace the current regulatory text that measures
time periods in months with language that measures the equivalent time
in days and the proposed amendments provide for consistent, clear start
and end dates for measuring inactivity in connection with dormancy
status.
In addition, the Commission proposes removing from Sec. 40.1(b)
and (g) the definitions and related requirements for the following
terms: ``dormant contract or dormant product,'' and ``dormant rule'',
respectively. As amended, the rules of a dormant DCM, dormant SEF,
dormant DCO, or dormant SDR would still need to be approved and the
products would still need to be self-certified or approved in
connection with the entity being reinstated as a DCM, SEF, DCO or SDR,
respectively, but a DCM, SEF, DCO or SDR that is not dormant would no
longer need to certify, or seek approval, of a particular rule or
product that was already approved or certified solely due to a lack of
implementation of the rule or inactivity of the particular product.
i. Benefits
The Commission believes that the proposed changes to the part 40
dormancy regulations will benefit registered entities by helping
registrants interpret dormancy period requirements consistently across
the relevant registration types and more readily identify when dormancy
applies. Additionally, the removal of the terms ``dormant contract or
dormant product,'' and ``dormant rule'' and the associated requirements
will remove the administrative and compliance burdens of tracking
whether a product or rule has become dormant and the potential costs of
recertifying (or obtaining approval of) a dormant contract, product, or
rule.
ii. Costs
The Commission expects that registered entities will not incur any
increased costs related to the proposed amendments to the current
dormancy regulations in part 40. The proposed amendments would
eliminate ambiguity regarding how registered entities calculate entity
dormancy periods and remove requirements for determining when a product
or rule is considered dormant and related submission requirements for
dormant products and rules. Furthermore, by removing the dormant rule
regulations in their entirety, the Commission believes that it has
generated a cost-savings because entities no longer need to monitor
whether rules are dormant. Regarding the potential for a cost in the
reduction of market oversight, based on experience with dormant
products and rules to date, the Commission preliminarily believes that
deleting the definitions would result in little, if any, cost to
regulatory oversight because the Commission has observed that
registrants typically manage products with no trading activity or
inactive rules and the Commission is not aware of any market
disruptions resulting from the inactivity of products or rules.
b. Proposed Amendments to Sec. 40.1(i) and (j) Regarding Definitions
of Rule and Terms and Conditions
The Commission proposes to amend Sec. 40.1(i)--the definition of
the term ``rule''--by including ``margin methodology'' in the list of
specific items that are considered a ``rule,'' thereby making explicit
what is already understood by current DCOs as implicitly included and
codifying the current practice of DCOs submitting margin methodologies
as rules to the Commission. The Commission also proposes to amend Sec.
40.1(j)--the definition of the term ``terms and conditions''--by
removing from the list of terms that are considered ``terms and
conditions'' payments or collections of certain premiums or margins
from Sec. 40.1(j)(1)(xi) and (j)(2)(xi). The Commission proposes to
add the payments or collections of such premiums or margins, as well as
changes to the no cancellation ranges, to the categories of rules that
may be submitted without certification pursuant to Sec. 40.6(d)(2).
i. Benefits
The proposed amendments to the definition of ``terms and
conditions'' will reduce compliance burdens for registered entities for
rule amendments that address payments or collections of certain
premiums or margins and changes to the no cancellation ranges as these
could be filed through a weekly notification pursuant to Sec.
40.6(d)(2), which is a less burdensome, less costly process than
through the current process under Sec. 40.6(a). The Sec. 40.6(d)
process permits a registered entity to implement a rule immediately and
without self-certification provided that the entity files a summary
notification
[[Page 61447]]
within a week of the rule amendment. The Commission believes that by
adding margin-related rule changes to the list of items considered a
rule, the Commission is making it clear what type of information is
considered a rule and codifying a current practice.
ii. Costs
The Commission believes that the proposed amendment to the
definition of ``rule'' to state explicitly that ``margin methodology''
is included in the definition will make the term consistent with the
current DCO practice and understanding of implicit requirements and
therefore will not place any additional cost or burden on registered
entities that submit rules to the Commission under part 40.
The Commission does not expect registered entities to incur any
additional costs or burdens related to the proposed changes to the
definition of ``terms and conditions'' because the proposed amendments
reduce the number of items of information registered entities must
submit to the Commission under Sec. 40.6(a). The proposed amendments
also allow rules relating to the new categories of information to be
implemented more quickly and efficiently by filing such rules in
accordance with the requirements of Sec. 40.6(d) (a process which
allows a registered entity to implement rules enumerated in Sec.
40.6(d) immediately and without self-certification, provided that the
registered entity provides the Commission with a required summary
notification of such actions within a week of making the rule
amendments).
c. Proposed Amendments to Sec. Sec. 40.2 and 40.3 Regarding
Instructions for Self-Certification and Approval of Products
The Commission is proposing changes to current Sec. Sec. 40.2 and
40.3 to update Commission processes and clarify filing instructions for
registered entities' submission of products to the Commission. Proposed
amendments to Sec. Sec. 40.2(a)(1) and 40.3(a)(1) remove references to
the Commission Secretary. To reflect the fact that registered entities
now file submissions through the Commission's portal and a cover sheet
is no longer necessary, proposed changes to Sec. Sec. 40.2(a)(3) and
40.3(a)(2) remove the references to a cover sheet and replace them with
a requirement directing registered entities to provide the information
required by appendix D to part 40.
Proposed changes to Sec. 40.2(a)(3) clarify that a registered
entity's concise explanation of a product must also be complete and
that the explanation include the product's terms and conditions, the
underlying commodity, and the product's compliance with the CEA and
associated regulations. Proposed changes to Sec. 40.3(a)(4) clarify
that a registered entity's explanation of a product must be complete
and that the explanation include the product's terms and conditions,
the underlying commodity, and the product's compliance with the CEA and
associated regulations.
The proposed amendments to Sec. 40.3(a)(10) eliminate the two-
business day deadline for registered entities to respond to Commission
staff requests for additional information with respect to product
approval requests under Sec. 40.3 and grant Commission staff authority
to set response deadlines.
Proposed amendments to Sec. 40.3(c) concern the length of the
review period. Proposed amendment to Sec. 40.3(c) make it clear that
there is a 45-day review period that the Commission may extend for an
additional 45-days, but not to exceed 90 days, if the product raises
novel or complex issues that require additional time for analysis. The
proposed amendments to Sec. 40.3(c) would also permit the Commission
to extend for an additional 45-days if the submission is ``incomplete''
or the entity doesn't respond completely to ``Commission questions in a
timely manner.'' The proposed amendments to Sec. 40.3(c) also state
that the Commission may extend the review period for any period of
time, provided there is written agreement by the registered entity, and
that any subsequent, substantive submission of information for a
product under a Sec. 40.3 review, whether requested by the Commission
or voluntarily provided by the submitting entity, restarts the 45-day
review period. The Commission also proposes an amendment to Sec.
40.3(c)(5) providing that if a review period ends on a non-business
day, such review is extended to the next business day.
i. Benefits
The Commission believes the removal of the reference to the
Secretary in the regulations is beneficial because the deletion
modernizes the regulation and makes it consistent with current
practices and technologies. For example, submitting entities no longer
send submissions to the Commission's Secretary because they upload
documents to the Commission's portal. The Commission believes that the
elimination of the cover sheet requirement under Sec. Sec. 40.2 and
40.3 removes redundancy because the online portal requires registered
entities to input the same information that is required on the
coversheet. The Commission believes that the proposed amendments will
benefit registered entities by clarifying the Commission's intent as to
the scope of the explanation and analysis required for the submission
of self-certified products pursuant to Sec. 40.2 or for requests for a
product approval pursuant to Sec. 40.3. In addition, the proposed
amendments will help achieve improved regulatory effectiveness of the
product self-certification and approval processes by clarifying the
level of detail in the information provided thereby enabling the
Commission to more effectively complete its analysis.
The Commission believes that amending Sec. 40.3(a)(10) to
eliminate the two business day deadline for responding to Commission
request for additional information and granting Commission staff the
authority to set a deadline based on the nature of the requested
information will provide more flexibility to registered entities and
better enable the Commission to manage its resources and conduct more
effective oversight over registered entities. The proposed changes to
Sec. 40.3(c)(4) also provide that any substantive amendment of a Sec.
40.3 submission would restart the 45-day review period provided in
Sec. 40.3(c) to ensure that the Commission has sufficient time to
analyze and consider the substantive changes. The restarting of the 45-
day review period provided in Sec. 40.3(c) upon a registered entity
making any substantive changes to their Sec. 40.3(c) filing would also
encourage registered entities to be precise and consult with Commission
staff regarding any questions when preparing Sec. 40.3 submissions.
ii. Costs
The Commission believes that there will not be new costs associated
with the proposed amendments Sec. Sec. 40.2 and 40.3 requiring
registered entities to provide complete explanations of their products
as this information is already required under the current regulations.
The current regulations instruct registered entities to submit
explanations and analyses about products (which are to be ``concise''
when self-certifying under Sec. 40.2). The amendment is intended to
clarify the Commission's original intent that the explanation and
analysis contain sufficient detail for the Commission to evaluate the
submissions for the purpose intended--to assess whether the new
products would comply with the CEA and associated regulations. In
general, the proposed amendments to Sec. Sec. 40.2 and 40.3 will
provide greater
[[Page 61448]]
specificity, leaving less room for regulatory ambiguity, improve the
quality of submissions, and reduce any administrative costs registered
entities might incur when determining what information must be
submitted to the Commission for a product self-certification or product
approval request. The proposed amendments eliminating the two-business
day deadline and regarding extending the 45-day review period as a
result of any substantive amendments to a Sec. 40.3 submission, the
submission being ``incomplete'' or the entity not responding completely
to ``Commission questions in a timely manner'' may cause registered
entities to incur costs related to the offering of products or
contracts, if the timelines affect product-launch dates.
d. Proposed Amendments to Sec. 40.4 and Appendix E Regarding Terms or
Conditions for Enumerated Agricultural Products
Current Sec. 40.4 applies to DCMs and identifies the rules or rule
amendments for enumerated agricultural products that are not material
and required to be submitted for approval by the Commission when the
products being changed have open interest. The Commission proposes to
add appendix E to part 40 to provide guidance to DCMs regarding
criteria that the Commission considers as evidence that an enumerated
agricultural product rule change is non-material. The Commission
proposes to add text to current Sec. 40.4(b)(5)(ii) to provide that
when a DCM explains why it considers a rule ``non-material'' pursuant
to Sec. 40.4(b)(5), the DCM will, if applicable, include a copy of a
previously approved rule or rule amendment that is, in substance, the
same as the non-material rule or rule amendment.
i. Benefits
The Commission believes that appendix E to part 40 will aid DCMs in
determining whether a proposed change to terms and conditions is
material. Specifically, the guidance offered in appendix E should
reduce uncertainties and enable DCMs to more efficiently determine
whether a proposed change would be material. Additionally, by directing
DCMs to include a copy of a previously approved rule or rule amendment
with submissions to the Commission pursuant to Sec. 40.4(b)(5)(ii),
the Commission believes this effort will provide market participants
with context and background that would help them understand the current
rule or rule amendment and why it is non-material. In other words, the
proposed amendments will improve transparency for market participants.
ii. Costs
The Commission anticipates appendix E to part 40 might cause DCMs
to incur a one-time compliance cost related to understanding appendix
E's guidance to assessing whether a rule is material. The Commission
believes that DCMs will incur costs related to researching and
collecting previously approved rules or rule amendments for submissions
to the Commission.
e. Proposed Amendments to Sec. Sec. 40.5, 40.6, and 40.10 Regarding
Filing Instructions for Rules
The Commission is proposing changes to update Commission processes
and clarify submission procedures for a registered entity to
voluntarily submit its rules for Commission approval and for a
registered entity to self-certify that its rules comply with the Act
and Commission regulations. Proposed amendments to Sec. Sec.
40.5(a)(1) and 40.6(a)(1) remove references to the Commission
Secretary. Proposed amendments to Sec. Sec. 40.5(a)(2) and
40.6(a)(7)(i) remove the references to the cover sheet and replace
these with references to the ``information required by Appendix D'' to
part 40.
The proposed amendments to the self-certification submission
requirements in Sec. 40.6(a)(7) clarify the Commission's intent as to
the scope of the explanation and analysis that registered entities must
submit by adding that the explanation and analysis needs to also be
``complete'' to ensure enough information is provided so that
Commission staff can effectively evaluate the rule submissions. The
Commission proposes to move certain language from the introductory
paragraph of Sec. 40.6(a) to become Sec. 40.6(a)(9) and to state more
clearly therein that a new rule or a rule amendment that delists, or
withdraws the certification of, a product with no open interest may
become effective immediately upon the filing of the submission,
provided that the submission is made in compliance with Sec.
40.6(a)(1) and (2) and (7). In addition, the proposed amendments in
Sec. 40.6(b)(2) provide that if a registered entity amends or
supplements its initial rule submission under Sec. 40.6(a), the
Commission will treat the amendment as a new submission and restart the
Commission's 10-day review period, unless the amendments or
supplementation is requested by the Commission or is for non-
substantive revisions.
The proposed amendments in Sec. 40.6(c)(5) make it clear that if
the Commission stays and ultimately objects to a rule certification,
the registered entity may re-submit a revised version with a
substantive basis for treating the revised rule differently.
Specifically, under the proposed amendment, a Commission objection to a
certification of a rule or rule amendment that is inconsistent with the
Act or the Commission's regulations does not prevent a registered
entity from submitting a revised proposed rule or rule amendment, or
from submitting the new rule or rule amendment as initially proposed,
in a supplemental submission, for certification or Commission review
and approval. In addition, the objection by the Commission will be
treated as presumptive evidence that the entity may not truthfully
certify that the same proposed rule or substantially the same rule
complies with CEA or the Commission's regulations.
The proposed amendments to Sec. 40.6(d)(2) expand the categories
of rules that may be implemented without a certification to include a
number of new categories of rules. The new categories include rule
amendments updating email addresses or contact information that market
participants use to submit block trades; rules amending existing
trading months; rules changing the price ranges within which a trade
will not be cancelled; and rules governing the payment or collection of
option premiums or margins.\88\ Registered entities may implement rules
within these categories by notifying the Commission of the rule changes
on a weekly basis pursuant to Sec. 40.6(d)(2). The proposed amendments
to Sec. 40.6(d)(2) align with the Commission's proposal to remove a
subset of the same categories of rules from the definition of ``terms
and conditions'' in Sec. 40.1.
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\88\ Proposed Sec. 40.6(d)(2)(xi) will allow registered
entities to submit rules to allow updates of email addresses and
contact information that market participants use to submit block
trades. Proposed Sec. 40.6(d)(2)(xii) will allow registered
entities to submit rules that make changes to no cancellation ranges
on contracts for the purchase or sale of a commodity for future
delivery or an option on such a contract or an option on a commodity
(other than a swap). Proposed Sec. 40.6(d)(2)(xiii) will allow
registered entities to submit rules that set or amend the payment or
collection of commodity options premiums or margins for the purchase
or sale of a commodity for future delivery or an option on such a
contract or an option on a commodity (other than a swap). Proposed
Sec. 40.6(d)(2)(xiii) will allow registered entities to submit
rules that set or amend the payments or collections of option
premiums or margins for a swap.
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For SIDCOs certifying rules that could materially affect the nature
or level of risks presented by the SIDCO, the
[[Page 61449]]
Commission proposes amendments to Sec. 40.10(b) to revise the
definition in Sec. 40.10(b) to specify that proposed changes that
require advance notice under Sec. 40.10 may include, but are not
limited to, material changes to the SIDCO's default management plan or
default rules or procedures under Sec. 39.16 or Sec. 39.35, program
of risk analysis and oversight required under Sec. 39.18, or recovery
and wind down plans required under Sec. 39.39; the adoption of a new
or materially revised margin methodology; the establishment of a cross-
margining program or similar arrangement with another clearing
organization; and material changes to its approach to the stress
testing required under Sec. Sec. 39.13(h)(3), 39.36(a), or 39.36(c).
Finally, the Commission proposes an amendment to Sec. 40.10 that
expressly states that where any provision of the Commission's
regulations requires a DCO to file rules for approval under Sec. 40.5,
a SIDCO would be required instead to file those rules under Sec.
40.10, if the rules could materially affect the nature or level of
risks presented by the SIDCO.
i. Benefits
The Commission believes the removal of the reference to the
Secretary modernizes the regulation and makes it consistent with
current practices and technologies. Submitting entities no longer send
submissions to the Secretary with a cover sheet because they instead
file submissions through uploading documents to, and entering
information into, the Commission's portal. The Commission also believes
that the elimination of the cover sheet requirement in the text of
Sec. Sec. 40.5 and 40.6 removes redundancy because the online portal
requires registered entities to input into the online portal the same
information that is required on the cover sheet.
The Commission believes the proposed amendments to Sec. 40.6(a)(7)
stating that registered entities must provide complete explanations and
analysis to the Commission for self-certifying rules clarifies the
Commission's intent as to the scope of the explanation and analysis
required by establishing the information and detail to be addressed.
This amendment will assist registrants with better understanding what
to include in the submissions and the information provided will enable
Commission staff to better assess whether the proposed rules comply
with the CEA and Commission regulations. Proposed amendment Sec.
40.6(a)(9) will benefit registered entities by providing certainty that
a registered entity may immediately delist, or withdraw a certification
of, a product with no open interest upon making a Sec. 40.6(a)
submission.
The proposed amendments to Sec. 40.6(b)(2) that state that new
information restarts the review period make it clear that the review
period will be extended and should encourage registered entities to be
thorough to ensure that their initial submissions are complete. The
proposed amendments to Sec. 40.6(c)(5) provide clarity regarding the
impact of an objection by the Commission to a registered entity's
certification of a proposed rule or rule amendment on the grounds that
the proposed rule or rule amendment is inconsistent with the Act or the
Commission's regulations. Specifically, under the proposed amendment,
if a registered entity wishes to resubmit through self-certification a
rule or rule amendment that the Commission objected to on the grounds
that the proposed rule or rule amendment is inconsistent with the Act
or the Commission's regulations, the registered entity must first
substantively change or supplement the proposed rule or rule amendment
to address the Commission's objection.
The proposed amendments to Sec. 40.6(d)(2) to add new categories
of rules that may be implemented through a weekly notification to the
Commission will enable registered entities to more quickly implement
rules that fall within these new categories as the registered entity
may implement these rules immediately and file a weekly notification of
any rule amendments within a week of making such amendments. The
process of drafting a weekly notification is less involved than the
process of submitting the rules pursuant to Sec. 40.6(a), including
self-certification that the rules comply with the Act and Commission
regulations. Registered entities will be able to redirect their time to
other compliance or operational activities. Proposed amendments to
Sec. 40.10(b) should aid SIDCOs in making determinations regarding the
type of rules that must be submitted to the Commission under Sec.
40.10. Proposed amendment Sec. 40.10(i) also should eliminate
potentially duplicative regulatory filings under current Sec. 40.5,
and, as a result, SIDCOs will benefit from the cost-savings of not
having to dedicate administrative efforts two times for the similar
submissions.
ii. Costs
The Commission believes that the proposed amendments to Sec. Sec.
40.5(a) and 40.6(a), (b)(2), and (c)(5), regarding filing instructions
for rules will not place any additional costs or burdens on registered
entities because the proposed amendments clarify the Commission's
expectations. The Commission does not believe that there are costs
associated with proposed amendments to Sec. 40.5(d). The proposed
amendments to Sec. 40.6(a)(7) inform registered entities of the
quality of explanations and analysis needed for rule submissions and
will lessen the likelihood that registered entities would need to amend
or supplement submissions. If the Commission requests additional
evidence, information or data pursuant to Sec. 40.6(a)(8), proposed
Sec. 40.6(b) may result in an extended review period (as a result of
the review period restarting) and the delay in implementation of a rule
may impose a cost on a registered entity, depending on the nature of
the rule. The Commission does not believe that there are costs
associated with proposed amendments to Sec. 40.6(c)(5). The Commission
believes that the proposed changes to Sec. 40.10 will not place
additional costs or burdens on SIDCOs because they clarify the types of
submissions that SIDCOs must file under Sec. 40.10 and eliminate
potential duplication in regulatory filings.
f. Proposed Amendments to Sec. 40.7 Regarding Delegation of Authority
The Commission proposes to amend Sec. 40.7 to enhance the utility
and clarity of the regulation and add three new delegations. Proposed
Sec. 40.7(a)(1)(iv) and (v) delegates the authority in proposed
Sec. Sec. 40.3(c)(3) and 40.5(c)(3) to extend the applicable review
period set forth in Sec. Sec. 40.3(c) and 40.5(c), respectively, for
the period of time agreed to in writing by the registered entity.
Finally, as discussed above, the Commission is also proposing to add
Sec. 40.7(e) to delegate the Commission's authority to specify the
format and manner of filing under these regulations to the Directors of
the Division of Market Oversight and the Division of Clearing and Risk.
i. Benefits
The proposed amendments to Sec. 40.7 will benefit regulated
entities and the public by improving the readability of this regulation
because the delegations are organized by the applicable section of part
40 from the which the delegated authorities originated. The Commission
believes that delegating the authority in proposed Sec. Sec.
40.3(c)(3) and 40.5(c)(3) to the Divisions to extend the applicable
review period set forth in Sec. Sec. 40.3(c) and 40.5(c),
respectively, for the period of time agreed to in writing by the
registered entity will enable the Commission to complete this process
more efficiently. The Commission also
[[Page 61450]]
believes that delegating authority to the Divisions to specify format
and manner of filing in proposed Sec. 40.7(e) also enhances
efficiency.
ii. Costs
The Commission expects that there will be no costs incurred by
registered entities by the proposed amendments clarifying and amending
the authorities delegated to Commission staff under part 40.
g. Proposed Amendments to Appendix D to Part 40
With the development and use of the Commission's online portal for
the filing of rule and product submissions, the Commission is proposing
amendments to appendix D to part 40 that reorganizes rule text and
clarify instructions to registered entities on what information shall
be uploaded to the portal. The Commission also is proposing a new
requirement that DCMs and SEFs indicate when listing a new product
whether the new product meets the definition of ``referenced contract''
as defined in Sec. 150.1 and described in appendix C to part 150 that
is titled ``Guidance Regarding the Definition of Reference Contract.''
Part 150 of the Commission's regulations outlines the requirements for
Federal and exchange-set position limits.\89\ Part 150, together with
Sec. Sec. 40.1(j)(1)(vii) and (j)(2)(vii), 40.2(a)(3)(ii) and
40.3(a)(3), require DCMs and SEFs to identify referenced contracts to
assess whether a contract is subject to Federal position limits.
---------------------------------------------------------------------------
\89\ 17 CFR part 150. The Commission's latest amendments to part
150 became effective on March 15, 2021. 86 FR 3236 (Jan. 14, 2021).
---------------------------------------------------------------------------
i. Benefits
The Commission believes that the proposed amendments to appendix D
to part 40 will provide several benefits. First, the proposed changes
clarify and modernize instructions. The current rule text is more
applicable to paper submissions. The proposed text is consistent with
the current technological practice where registered entities upload
product and rule submissions using the Commission's online portal.
Second, the proposed amendment to appendix D to part 40 would require
DCMs and SEFs to indicate as part of filing the submission whether a
new product to be listed meets the definition of a referenced contract,
thereby alerting Commission staff when contracts that may need to be
added to the Staff Workbook are being listed and enable the Commission
to process and review the submission more efficiently.
ii. Costs
The Commission expects that there will be negligible, if any, costs
incurred by registered entities with respect to the amendments proposed
to modernize appendix D as registered entities are already submitting
the covered rules and products using the portal. With regards to the
amendment proposing that DCMs and SEFs indicate whether a new product
to be listed meets the definition of referenced contract, the
Commission notes that DCMs and SEFs will incur costs to make these
indications. These costs, however, will be negligible because
registered entities are already making the analytical determinations as
to whether contracts are referenced contracts to meet their obligations
under Sec. Sec. 40.1(j)(1)(vii) and (j)(2)(vii), 40.2(a)(3)(ii),
40.3(a)(3) and part 150 of the Commission's regulations.
h. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits of the proposed amendments to 17 CFR part 40 in
light of the following five broad areas of market and public concern
identified in section 15(a) of the CEA: protection of market
participants and the public; efficiency, competitiveness, and financial
integrity of futures markets; price discovery; sound risk management
practices; and other public interest considerations.
Protection of market participants and the public: The Commission
believes that the proposed changes to Sec. Sec. 40.2, 40.3, 40.5 and
40.6, regarding the requirement for complete explanations and analysis
for product and rule submissions will help protect market participants
and the public by encouraging registered entities to submit
comprehensive and informative filings for product and rule changes
thereby providing the Commission with sufficient information to
evaluate whether the new products or rules comply with the CEA and
Commission rules. The Commission believes that the proposed changes to
Sec. Sec. 40.3 and 40.6, regarding restarting review periods under
specific circumstances, provide the Commission with the necessary time
to evaluate changes and consider risks, and ultimately protect the
interests of market participants and the public.
Efficiency, competitiveness, and financial integrity of futures
markets: The proposed improvements to the regulations providing for
``complete'' products and rules submissions sets forth in more detail
the Commission's original intention regarding the level of detail
thereby better ensuring that the Commission can provide adequate
oversight with minimal disruption to market efficiency. The Commission
has not identified any effect of the proposed regulations on innovation
and competition.
Price discovery: The Commission has not identified any effect of
the proposed regulations on price discovery.
Sound risk management practices: The Commission has not identified
any other effect of the proposed regulations on sound risk management
practices.
Other public interest considerations: The Commission has not
identified any effect of the proposed regulations on other public
interest considerations.
List of Subjects in Parts 37, 38, and 40
Commodity futures, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:
PART 37--SWAP EXECUTION FACILIITES
0
1. The authority citation for part 37 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3, and 12a, as
amended by Titles VII and VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.
Appendix B to Part 37 [Amended]
0
2. Amend appendix B to part 37, under the heading Core Principle 8 of
Section 5h of the Act--Emergency Authority, in the first sentence of
paragraph (a)(1), by removing the cross-reference ``Sec. 40.1(h)'' and
adding in its place ``Sec. 40.1''.
PART 38--DESIGNATED CONTRACT MARKETS
0
3. The authority citation for part 38 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as
amended by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376.
Appendix B to Part 38 [Amended]
0
4. Amend appendix B to part 38, under the heading Core Principle 6 of
section 5(d) of the Act: EMERGENCY AUTHORITY, in the third sentence of
paragraph (a), by removing the cross-reference ``Sec. 40.1(h)'' and
adding in its place ``Sec. 40.1''.
[[Page 61451]]
PART 40--PROVISIONS COMMON TO REGISTERED ENTITIES
0
5. The authority citation for part 40 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 7, 8 and 12, as amended by
Titles VII and VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
0
6. Revise Sec. 40.1 to read as follows:
Sec. 40.1 Definitions.
As used in this part:
Business day means the intraday period of time starting at 8:15
a.m. and ending at 4:45 p.m. Eastern Standard Time or Eastern Daylight
Savings Time, whichever is currently in effect in Washington, DC, on
all days except Saturdays, Sundays, and Federal holidays in Washington,
DC.
Dormant derivatives clearing organization means any derivatives
clearing organization registered pursuant to section 5b of the Act that
has not accepted for clearing any agreement, contract or transaction
that is required or permitted to be cleared by a derivatives clearing
organization under sections 5b(a) and 5b(b) of the Act, respectively,
for a period of 365 days; provided, however, no derivatives clearing
organization shall be considered dormant if its initial and original
Commission order of registration was issued within the preceding 1,095
days.
Dormant designated contract market means any designated contract
market on which no trading has occurred for a period of 365 days;
provided, however, no designated contract market shall be considered
dormant if its initial and original Commission order of designation was
issued within the preceding 1,095 days.
Dormant swap data repository means any registered swap data
repository on which no data has resided for a period of 365 days.
Dormant swap execution facility means any swap execution facility
on which no trading has occurred for a period of 365 days; provided,
however, no swap execution facility shall be considered dormant if its
initial and original Commission order of registration was issued within
the preceding 1,095 days.
Emergency means any occurrence or circumstance that, in the opinion
of the governing board of a registered entity, or a person or persons
duly authorized to issue such an opinion on behalf of the governing
board of a registered entity under circumstances and pursuant to
procedures that are specified by rule, requires immediate action and
threatens or may threaten such things as the fair and orderly trading
in, or the liquidation of or delivery pursuant to, any agreements,
contracts, swaps or transactions or the timely collection and payment
of funds in connection with clearing and settlement by a derivatives
clearing organization, including:
(1) Any manipulative or attempted manipulative activity;
(2) Any actual, attempted, or threatened corner, squeeze,
congestion, or undue concentration of positions;
(3) Any circumstances which may materially affect the performance
of agreements, contracts, swaps or transactions, including failure of
the payment system or the bankruptcy or insolvency of any participant;
(4) Any action taken by any governmental body, or any other
registered entity, board of trade, market or facility which may have a
direct impact on trading or clearing and settlement; and
(5) Any other circumstance which may have a severe, adverse effect
upon the functioning of a registered entity.
Rule means any constitutional provision, article of incorporation,
bylaw, rule, regulation, resolution, interpretation, stated policy,
advisory, terms and conditions, trading protocol, margin methodology,
agreement or instrument corresponding thereto, including those that
authorize a response or establish standards for responding to a
specific emergency, and any amendment or addition thereto or repeal
thereof, made or issued by a registered entity or by the governing
board thereof or any committee thereof, in whatever form adopted.
Terms and conditions means any definition of the trading unit or
the specific commodity underlying a contract for the future delivery of
a commodity or commodity option contract, description of the payments
to be exchanged under a swap, specification of cash settlement or
delivery standards and procedures, and establishment of buyers' and
sellers' rights and obligations under the swap or contract. Terms and
conditions include provisions relating to the following:
(1) For a contract for the purchase or sale of a commodity for
future delivery or an option on such a contract or an option on a
commodity (other than a swap):
(i) Quality and other standards that define the commodity or
instrument underlying the contract;
(ii) Quantity standards or other provisions related to contract
size;
(iii) Any applicable premiums or discounts for delivery of nonpar
products;
(iv) Trading hours, trading months and the listing of contracts;
(v) The pricing basis, minimum price fluctuations, and maximum
price fluctuations;
(vi) Any price limits, no cancellation ranges, trading halts, or
circuit breaker provisions, and procedures for the establishment of
daily settlement prices;
(vii) Speculative position limits, position accountability
standards, and position reporting requirements, including an indication
as to whether the contract meets the definition of a referenced
contract as defined in Sec. 150.1 of this chapter, and if so, the name
of either the core referenced futures contract or other referenced
contract upon which the new referenced contract submitted under this
part is based.
(viii) Delivery points and locational price differentials;
(ix) Delivery standards and procedures, including fees related to
delivery or the delivery process; alternatives to delivery and
applicable penalties or sanctions for failure to perform;
(x) If cash settled; the definition, composition, calculation and
revision of the cash settlement price or index;
(xi) [Reserved];
(xii) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(xiii) Threshold prices for an option contract, the existence of
which is contingent upon those prices; and
(xiv) Any restrictions or requirements for exercising an option;
and
(2) For a swap:
(i) Identification of the major group, category, type or class in
which the swap falls (such as an interest rate, commodity, credit or
equity swap) and of any further sub-group, category, type or class that
further describes the swap;
(ii) Notional amounts, quantity standards, or other unit size
characteristics;
(iii) Any applicable premiums or discounts for delivery of nonpar
products;
(iv) Trading hours and the listing of swaps;
(v) Pricing basis for establishing the payment obligations under,
and mark-to-market value of, the swap including, as applicable, the
accrual start dates, termination or maturity dates, and, for each leg
of the swap, the initial cash flow components, spreads, and points, and
the relevant indexes, prices, rates, coupons, or other price reference
measures;
(vi) Any price limits, trading halts, or circuit breaker
provisions, and procedures for the establishment of daily settlement
prices;
[[Page 61452]]
(vii) Speculative position limits, position accountability
standards, and position reporting requirements, including an indication
as to whether the contract meets the definition of economically
equivalent swap as defined in Sec. 150.1 of this chapter, and, if so,
the name of either the core referenced futures contract or referenced
contract, as applicable, to which the swap submitted under this part is
economically equivalent.
(viii) Payment and reset frequency, day count conventions, business
calendars, and accrual features;
(ix) If physical delivery applies, delivery standards and
procedures, including fees related to delivery or the delivery process,
alternatives to delivery and applicable penalties or sanctions for
failure to perform;
(x) If cash settled, the definition, composition, calculation and
revision of the cash settlement price, and the settlement currency;
(xi) [Reserved];
(xii) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(xiii) Threshold prices for an option, the existence of which is
contingent upon those prices;
(xiv) Any restrictions or requirements for exercising an option;
and
(xv) Life cycle events.
0
7. Amend Sec. 40.2 by revising the introductory text of paragraph (a)
and paragraphs (a)(1), (a)(3)(i), (ii), (v), and (vi), and (d) to read
as follows:
Sec. 40.2 Listing products for trading by certification.
(a) Submission requirements. A designated contract market or a swap
execution facility must comply with the submission requirements of this
section prior to listing a product for trading that has not been
approved under Sec. 40.3. A submission shall comply with the following
conditions:
(1) The designated contract market or the swap execution facility
has filed its submission electronically in a format and manner
specified by the Commission;
* * * * *
(3) * * *
(i) The information required by appendix D of this part;
(ii) A copy of the rules that set forth the contract's terms and
conditions;
* * * * *
(v) A concise explanation and analysis that is complete with
respect to the product's terms and conditions, the underlying
commodity, and the product's compliance with applicable provisions of
the Act, including core principles, and the Commission's regulations
thereunder. This explanation and analysis shall either be accompanied
by the documentation relied upon to establish the basis for compliance
with applicable law, or incorporate information contained in such
documentation, with appropriate citations to data sources;
(vi) A certification that the registered entity posted a notice of
a pending product certification with the Commission and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the registered entity's website. Information that the
registered entity seeks to keep confidential may be redacted from the
documents published on the registered entity's website but must be
republished consistent with any determination made pursuant to Sec.
40.8(c)(4); and
* * * * *
(d) Class certification of swaps. (1) A designated contract market
or swap execution facility may list or facilitate trading in any swap
or number of swaps based upon an ``excluded commodity,'' as defined in
section 1a(19)(i) of the Act, not including any security, security
index, and currency other than the United States Dollar and a ``major
foreign currency,'' as defined in Sec. 15.03(a) of this chapter, or an
``excluded commodity,'' as defined in section 1a(19)(ii)-(iv) of the
Act, provided the designated contract market or swap execution facility
certifies, under Sec. 40.2(a)(1) and (2) and (3)(i), (iv), and (vi),
the following:
(i) Each particular swap within the certified class of swaps is
based upon an excluded commodity specified in Sec. 40.2(d)(1);
(ii) Each particular swap within the certified class of swaps is
based upon an excluded commodity with an identical pricing source,
formula, procedure, and methodology for calculating reference prices
and payment obligations;
(iii) The pricing source, formula, procedure, and methodology for
calculating reference prices and payment obligations in each particular
swap within the certified class of swaps is identical to a pricing
source, formula, procedure, and methodology for calculating reference
prices and payment obligations in a product previously submitted to the
Commission and certified or approved pursuant to Sec. 40.2 or Sec.
40.3; and
(iv) Each particular swap within the certified class of swaps is
based upon an excluded commodity involving an identical currency or
identical currencies.
(2) The Commission may in its discretion require a registered
entity to withdraw its certification under Sec. 40.2(d)(1) and to
submit each individual swap or certain individual swaps within the
submission for Commission review pursuant to Sec. 40.2 or Sec. 40.3.
0
8. Amend Sec. 40.3 as follows:
0
a. Revise the introductory text of paragraph (a) and paragraphs (a)(1)
and (2), (4), (9) and (10), (c), and (d);
0
b. Remove paragraph (e); and
0
c. Redesignate paragraph (f) as paragraph (e) and revise newly
redesignated paragraph (e).
The revisions read as follows:
Sec. 40.3 Voluntary submission of new products for Commission review
and approval.
(a) Request for approval. Pursuant to section 5c(c) of the Act, a
designated contract market, a swap execution facility, or a derivatives
clearing organization may request that the Commission approve a new
product prior to listing the product for trading or accepting the
product for clearing, or if a product was initially submitted under
Sec. 40.2 or Sec. 39.5 of this chapter, subsequent to listing the
product for trading or accepting the product for clearing. A submission
requesting approval shall:
(1) Be filed electronically in a format and manner specified by the
Commission;
(2) Include the information required by appendix D of this part;
* * * * *
(4) Include an explanation and analysis that is complete with
respect to the product's terms and conditions, the underlying
commodity, and the product's compliance with applicable provisions of
the Act, including core principles, and the Commission's regulations
thereunder. This explanation and analysis shall either be accompanied
by the documentation relied upon to establish the basis for compliance
with the applicable law, or incorporate information contained in such
documentation, with appropriate citations to data sources;
* * * * *
(9) Certify that the registered entity posted a notice of its
request for Commission approval of the new product and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the registered entity's website. Information the
registered entity seeks to keep confidential may be redacted from the
documents published on the registered entity's website but must be
republished consistent with any determination made pursuant to Sec.
40.8(c)(4); and
[[Page 61453]]
(10) Include, if requested by Commission staff, additional
evidence, information or data demonstrating that the contract meets,
initially or on a continuing basis, the requirements of the Act, or
other requirement for designation or registration under the Act, or the
Commission's regulations or policies thereunder. The registered entity
shall submit the requested information by the time specified by
Commission staff, or at the conclusion of any extended period agreed to
by Commission staff after timely receipt of a written request from the
registered entity.
* * * * *
(c) Commission review. (1) All products submitted for Commission
approval pursuant to, and in compliance with the submission
requirements of, paragraph (a) of this section shall be subject to
review by the Commission for a period of 45 days after receipt by the
Commission.
(2) The Commission may extend the initial 45-day review period for
up to an additional 45 days if the product raises novel or complex
issues that require additional time to analyze, the submission is
incomplete or the requestor does not respond completely to Commission
questions in a timely manner, in which case the Commission shall notify
the submitting registered entity within the initial 45-day review
period and shall briefly describe the nature of the specific issues for
which additional time for review shall be required.
(3) At any time during its review of a proposed product under this
section, the Commission may extend the review period for any period of
time to which the registered entity agrees in writing.
(4) Any amendment or supplementation made by the registered entity
to the submission will be treated as the filing of a new submission
under this section and be subject to the initial 45-day review period
in accordance with paragraph (c)(1) of this section, unless the
amendment or supplementation is made for correction of typographical
errors, renumbering or other non-substantive revisions. Any substantive
amendment or supplementation by the submitting entity, including an
amendment or supplementation requested by the Commission, will be
treated as a new submission under this section.
(5) If the review period described in paragraph (c)(1) of this
section would end on a day that is not a business day, such review
period shall instead be extended to end on the next business day.
(d) Commission determination--(1) Approval. Any product submitted
for Commission approval in compliance with paragraph (a) of this
section shall be deemed approved by the Commission under section 5c(c)
of the Act at the conclusion of the applicable review period under
paragraph (c) of this section, unless the Commission issues a notice of
non-approval to the registered entity under paragraph (d)(2) of this
section within the applicable review period.
(2) Notice of non-approval. Any time during its review under this
section, the Commission may notify the registered entity that it will
not, or is unable to, approve the new product. This notification will
briefly specify the nature of the issues raised and the specific
provision of the Act or the Commission's regulations, including the
form or content requirements of this section, with which the new
product is inconsistent or appears to be inconsistent with the Act or
the Commission's regulations.
(e) Effect of non-approval. (1) Notification to a registered entity
under paragraph (d)(2) of this section of the Commission's
determination not to approve a product does not prevent the entity from
subsequently submitting a revised version of the product for Commission
approval, or from submitting the product as initially proposed, in a
supplemented submission; the revised or supplemented submission will be
reviewed without prejudice.
(2) Notification to a registered entity under paragraph (d)(2) of
this section of the Commission's determination not to approve a product
shall be presumptive evidence that the entity may not truthfully
certify under Sec. 40.2 that the same, or substantially the same,
product complies with the Act and the Commission's regulations
thereunder.
0
9. Revise Sec. 40.4 to read as follows:
Sec. 40.4 Amendments to terms or conditions of enumerated
agricultural products.
(a) Notwithstanding the provisions of this part, a designated
contract market must submit for Commission approval under the
procedures of Sec. 40.5, prior to its implementation, any rule that,
for a delivery month having open interest, would materially change a
product's term or condition, as defined in Sec. 40.1, of a contract
for future delivery in an agricultural commodity enumerated in section
1a(9) of the Act, or of an option on such a contract or commodity.
(b) The following rules or rule amendments are not material and are
not required by this section to be submitted for Commission approval
under the procedures of Sec. 40.5:
(1) Rules or rule amendments that are enumerated in Sec.
40.6(d)(2) may be implemented without prior approval or certification,
provided that they are implemented pursuant to the notification
procedures of Sec. 40.6(d);
(2) Rules or rule amendments that are enumerated in Sec.
40.6(e)(2) may be implemented without prior approval or certification
or notification as permitted pursuant to Sec. 40.6(e);
(3) Rules or rule amendments governing trading hours may be
implemented without prior approval, provided that they are implemented
pursuant to the procedures of Sec. 40.6(a);
(4) Rules or rule amendments that are required to comply with a
binding order of a court of competent jurisdiction, or a rule,
regulation or order of the Commission or of another Federal regulatory
authority, may be implemented without prior approval, provided that
they are implemented pursuant to the procedures of Sec. 40.6(a); or
(5) Any rule or rule amendment:
(i) The text of which has been submitted pursuant to the procedures
of Sec. Sec. 40.4(b)(5) and 40.6(a) at least ten business days prior
to its implementation and that has been labeled ``Non-Material
Agricultural Rule Change;''
(ii) For which the designated contract market has provided an
explanation as to why it considers the rule ``non-material,'' and any
other information that may be beneficial to the Commission in analyzing
the merits of the entity's claim of non-materiality including, if
applicable, a copy of a previously approved rule or rule amendment that
is, in substance, the same as the non-material rule or rule amendment;
and
(iii) With respect to which the Commission has not notified the
contract market during the review period that the rule appears to
require or does require prior approval under this section.
0
10. Amend Sec. 40.5 as follows:
0
a. Revise the introductory text of paragraph (a) and paragraphs (a)(1)
and (2), (5) and (6), and (9), the paragraph heading of paragraph (c),
and paragraph (c)(1);
0
b. Remove paragraph (c)(2);
0
c. Redesignate paragraph (d)(1) as paragraph (c)(2) and revise newly
redesignated paragraph (c)(2);
0
d. Redesignate paragraph (d)(2) as paragraph (c)(3) and revise newly
redesignated paragraph (c)(3);
0
e. Add paragraphs (c)(4) through (6);
[[Page 61454]]
0
f. Revise the paragraph heading of paragraph (d), remove paragraph (d)
introductory text, and add a new paragraph (d)(1);
0
g. Redesignate paragraph (g) as paragraph (d)(2) and revise newly
redesignated paragraph (d)(2);
0
h. Redesignate paragraph (e) as paragraph (d)(3) and revise newly
redesignated paragraph (d)(3); and
0
i. Redesignate paragraph (f) as paragraph (e) and revise newly
redesignated paragraph (e).
The revisions and additions read as follows:
Sec. 40.5 Voluntary submission of rules for Commission review and
approval.
(a) Request for approval of rules. Pursuant to section 5c(c) of the
Act, a registered entity may request that the Commission approve a new
rule or rule amendment prior to implementation of the rule, or if the
rule or rule amendment was initially submitted under Sec. 40.2 or
Sec. 40.6, subsequent to implementation of the rule. A request for
approval shall:
(1) Be filed electronically in a format and manner specified by the
Commission;
(2) Include the information required by appendix D of this part;
* * * * *
(5) Provide an explanation and analysis that is complete with
respect to the operation, purpose, and effect of the proposed rule or
rule amendment and its compliance with applicable provisions of the
Act, including core principles, and the Commission's regulations
thereunder, including, as applicable, a description of the anticipated
benefits to market participants or others, any potential
anticompetitive effects on market participants or others, and how the
rule fits into the registered entity's framework of self-regulation;
(6) Certify that the registered entity posted a notice of its
request for Commission approval of the new rule or rule amendment and a
copy of the submission, concurrent with the filing of a submission with
the Commission, on the registered entity's website. Information the
registered entity seeks to keep confidential may be redacted from the
documents published on the registered entity's website but must be
republished consistent with any determination made pursuant to Sec.
40.8(c)(4);
* * * * *
(9) Identify any Commission regulation that the Commission may need
to amend, or sections of the Act or the Commission's regulations that
the Commission may need to interpret, in order to approve the new rule
or rule amendment. To the extent that such an amendment or
interpretation is necessary to accommodate a new rule or rule
amendment, the submission should include a reasoned analysis supporting
the amendment to the Commission's regulation or the interpretation; and
* * * * *
(c) Commission review. (1) Any rule submitted for Commission
approval pursuant to, and in compliance with the submission
requirements of, paragraph (a) of this section shall be subject to
review by the Commission for a period of 45 days after receipt by the
Commission.
(2) The Commission may extend the initial 45-day review period for
up to an additional 45 days if the proposed rule raises novel or
complex issues that require additional time for review or is of major
economic significance, the submission is incomplete or the requestor
does not respond completely to Commission questions in a timely manner,
in which case the Commission shall notify the submitting registered
entity within the initial 45-day review period and shall briefly
describe the nature of the specific issues for which additional time
for review shall be required.
(3) At any time during its review of a proposed rule under this
section, the Commission may extend the review period for any period of
time to which the registered entity agrees in writing.
(4) Any amendment or supplementation made by the registered entity
to the submission will be treated as the filing of a new submission
under this section and be subject to the initial 45-day review period
in accordance with paragraph (c)(1) of this section, unless the
amendment or supplementation is requested by the Commission or is made
for correction of typographical errors, renumbering or other non-
substantive revisions.
(5) If a rule or rule amendment that is submitted for Commission
approval under paragraph (a) of this section is also submitted and
labeled as a ``Non-Material Agricultural Rule Change'' in accordance
with Sec. 40.4(b)(5), the Commission shall commence the 45-day review
period in paragraph (c)(1) of this section ten business days after
receiving the submission.
(6) If the review period described in paragraph (c)(1) of this
section would end on a day that is not a business day, such review
period shall instead be extended to end on the next business day.
(d) Commission determination--(1) Approval. Any rule submitted for
Commission approval in compliance with paragraph (a) of this section
shall be deemed approved by the Commission under section 5c(c) of the
Act at the conclusion of the applicable review period under paragraph
(c) of this section, unless the Commission issues a notice of non-
approval to the registered entity under paragraph (d)(3) of this
section within the applicable review period.
(2) Expedited approval. Notwithstanding the provisions of paragraph
(c) of this section, a proposed rule or rule amendment, including
changes to terms and conditions of a product that are consistent with
the Act and Commission regulations, may be approved by the Commission
at such time and under such conditions as the Commission shall specify
in a written notification.
(3) Notice of non-approval. Any time during its review under this
section, the Commission may notify the registered entity that it will
not, or is unable to, approve the new rule or rule amendment. This
notification will briefly specify the nature of the issues raised and
the specific provision of the Act or the Commission's regulations,
including the form or content requirements of this section, with which
the new rule or rule amendment is inconsistent or appears to be
inconsistent with the Act or the Commission's regulations.
(e) Effect of non-approval. (1) Notification to a registered entity
under paragraph (d)(3) of this section of the Commission's
determination not to approve a new rule or rule amendment does not
prevent the registered entity from subsequently submitting a revised
version of the proposed rule or rule amendment for Commission review
and approval, or from submitting the new rule or rule amendment as
initially proposed, in a supplemented submission; the revised or
supplemented submission will be reviewed without prejudice.
(2) Notification to a registered entity under paragraph (d)(3) of
this section of the Commission's determination not to approve a
proposed rule or rule amendment of a registered entity shall be
presumptive evidence that the entity may not truthfully certify under
Sec. 40.6 that the same, or substantially the same, proposed rule or
rule amendment complies with the Act and the Commission's regulations
thereunder.
0
11. Amend Sec. 40.6 as follows:
0
a. Revise the introductory text of paragraph (a) and paragraphs (a)(1)
and (2) and (5) through (8);
0
b. Add paragraph (a)(9);
[[Page 61455]]
0
c. Revise paragraphs (b) and (c)(2) and (3);
0
d. Add paragraph (c)(5);
0
e. Revise paragraphs (d)(1) and (d)(2)(iii), (iv), and (ix);
0
f. Add paragraphs (d)(2)(xi) through (xiii); and
0
g. Redesignate paragraph (d)(3) as paragraph (e) and revise newly
redesignated paragraph (e).
The revisions and additions read as follows:
Sec. 40.6 Self-certification of rules.
(a) Submission requirements. A registered entity shall comply with
the certification and submission requirements of this section prior to
implementing any rule that has not obtained Commission approval under
Sec. 40.5, or that is submitted under Sec. 40.10, except as otherwise
provided by Sec. 40.10(a). A submission shall comply with the
following conditions:
(1) The registered entity has filed its submission electronically
in a format and manner specified by the Commission.
(2) The registered entity has provided a certification that the
registered entity posted a notice of pending certification with the
Commission and a copy of the submission, concurrent with the filing of
a submission with the Commission, on the registered entity's website.
Information that the registered entity seeks to keep confidential may
be redacted from the documents published on the registered entity's
website but it must be republished consistent with any determination
made pursuant to Sec. 40.8(c)(4).
* * * * *
(5) The rule or rule amendment is not a rule or rule amendment of a
designated contract market that materially changes a term or condition
of a contract for future delivery of an agricultural commodity
enumerated in section 1a(9) of the Act or an option on such a contract
or commodity in a delivery month having open interest.
(6)(i) Rules or rule amendments implemented under procedures of the
governing board to respond to an emergency as defined in Sec. 40.1,
shall, if practicable, be filed with the Commission prior to the
implementation or, if not practicable, be filed with the Commission at
the earliest possible time after implementation, but in no event more
than twenty-four hours after implementation. Such rules shall be
subject to the review and stay provisions of paragraphs (b) and (c) of
this section.
(ii) New rules or rule amendments that establish standards for
responding to an emergency must be submitted pursuant to Sec. 40.6(a)
or may be submitted pursuant to Sec. 40.5.
(7) The rule submission shall include:
(i) The information required by appendix D of this part
(``Emergency Rule Certification'' should be noted in the Description
section in the case of a rule or rule amendment that responds to an
emergency);
(ii) The text of the rule (in the case of a rule amendment,
deletions and additions must be indicated);
(iii) The date of intended implementation;
(iv) A certification by the registered entity that the rule
complies with the Act and the Commission's regulations thereunder;
(v) A concise explanation and analysis that is complete with
respect to the operation, purpose, and effect of the proposed rule or
rule amendment and its compliance with applicable provisions of the
Act, including core principles, and the Commission's regulations
thereunder;
(vi) A brief explanation of any substantive opposing views
expressed to the registered entity by governing board or committee
members, members of the entity or market participants, that were not
incorporated into the rule, or a statement that no such opposing views
were expressed; and
(vii) As appropriate, a request for confidential treatment pursuant
to the procedures provided in Sec. 40.8;
(8) The registered entity shall provide, if requested by Commission
staff, additional evidence, information or data that may be beneficial
to the Commission in conducting a due diligence assessment of the
filing and the registered entity's compliance with any of the
requirements of the Act or the Commission's regulations or policies
thereunder; and
(9) Notwithstanding the 10 business day filing requirement of
paragraphs (a)(3) and (b)(1) of this section, a registered entity may
file a submission and certification of a new rule or a rule amendment
that delists, or withdraws the certification of, a product that has no
open interest and may make the delisting or withdrawal of the product
with no open interest effective immediately upon filing the submission,
provided that the submission is made in compliance with paragraphs
(a)(1) and (2) and (7) of this section.
(b) Review by the Commission. (1) The Commission shall have 10
business days to review the new rule or rule amendment before the new
rule or rule amendment is deemed certified and can be made effective,
unless the Commission notifies the registered entity during the 10-
business day review period that it intends to issue a stay of the
certification under paragraph (c) of this section.
(2) Any amendment or supplementation made by the registered entity
to the submission will be treated as the filing of a new submission
under this section and be subject to the initial 10-business day review
period in accordance with paragraph (b)(1) of this section, unless the
amendment or supplementation is made for correction of typographical
errors, renumbering or other non-substantive revisions.
(c) * * *
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission
website. Comments from the public shall be submitted as specified in
that notice.
(3) Expiration of a stay of certification of new rule or rule
amendment. A new rule or rule amendment subject to a stay pursuant to
this paragraph shall become effective and can be implemented, pursuant
to the certification, at the expiration of the 90-day review period
described in paragraph (c)(1) of this section unless the Commission
withdraws the stay prior to that time, or the Commission notifies the
registered entity during the 90-day time period that it objects to the
certification on the grounds that the proposed rule or rule amendment
is inconsistent with the Act or the Commission's regulations.
* * * * *
(5) Effect of objection. (i) Notification to a registered entity
under paragraph (c) of this section of the Commission's objection to a
certification by a registered entity on the grounds that the proposed
rule or rule amendment is inconsistent with the Act or the Commission's
regulations does not prevent the registered entity from subsequently
submitting a revised version of the proposed rule or rule amendment for
certification or Commission review and approval, or from submitting the
new rule or rule amendment as initially proposed, in a supplemented
submission; the revised or supplemented submission will be reviewed
without prejudice.
(ii) Notification to a registered entity under paragraph (c) of
this section of the Commission's objection to a certification by a
registered entity shall be presumptive evidence that the entity may not
truthfully certify under this section that the same, or substantially
the same, proposed rule or rule
[[Page 61456]]
amendment complies with the Act and the Commission's regulations
thereunder.
(d) * * *
(1) The registered entity provides to the Commission at least
weekly a summary notice of all rule amendments made effective pursuant
to this paragraph (d) during the preceding week. Such notice must be
labeled ``Weekly Notification of Rule Amendments'' and need not be
filed for weeks during which no such actions have been taken. One copy
of each such submission shall be furnished electronically in a format
and manner specified by the Commission; and
(2) * * *
(iii) Index products. Routine changes in the composition,
computation, or method of selection of component entities of an index
(other than routine changes to securities indexes to the extent that
such changes are not described in paragraph (e)(2)(vi) of this section)
referenced and defined in the product's terms, that do not affect the
pricing basis of the index, which are made by an independent third
party whose business relates to the collection or dissemination of
price information and which was not formed solely for the purpose of
compiling an index for use in connection with a futures or option
product;
(iv) Option contract terms. Changes to option contract rules, which
may qualify for implementation without notice pursuant to paragraph
(e)(2)(vii) of this section, relating to the strike price listing
procedures, strike price intervals, and the listing of strike prices on
a discretionary basis;
* * * * *
(ix) Trading months. The initial listing of trading months, or an
amendment to existing trading months, which may qualify for
implementation without notice pursuant to paragraph (e)(2)(viii) of
this section, within the currently established cycle of trading months;
* * * * *
(xi) Contact information. Updates of email addresses or other
contact information that market participants use to submit block
trades;
(xii) Changes to no cancellation ranges. For a contract for the
purchase or sale of a commodity for future delivery or an option on
such a contract or an option on a commodity (other than a swap),
changes to no cancellation ranges (which are the price ranges within
which a trade will not be cancelled); or
(xiii) Option premiums or margins. For a contract for the purchase
or sale of a commodity for future delivery or an option on such a
contract or an option on a commodity (other than a swap), payment or
collection of commodity options premiums or margins; or for a swap,
payment or collection of option premiums or margins.
(e) Notification of rule amendments not required. Notwithstanding
the rule certification requirements of section 5c(c)(1) of the Act and
paragraph (a) of this section, a registered entity may place the
following rules or rule amendments into effect without certification or
notice to the Commission if the following conditions are met:
(1) The registered entity maintains documentation regarding all
changes to rules; and
(2) The rule governs:
(i) Transfer of membership or ownership. Procedures and forms for
the purchase, sale or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership or dues or assessments;
(ii) Administrative procedures. The organization and administrative
procedures of a registered entity governing bodies such as a Board of
Directors, Officers and Committees, but not voting requirements, Board
of Directors or Committee composition requirements or procedures,
decision making procedures, use or disclosure of material non-public
information gained through the performance of official duties, or
requirements relating to conflicts of interest;
(iii) Administration. The routine, daily administration, direction
and control of employees, requirements relating to gratuity and similar
funds, but not guaranty, reserves, or similar funds; declaration of
holidays, and changes to facilities housing the market, trading floor
or trading area;
(iv) Standards of decorum. Standards of decorum or attire or
similar provisions relating to admission to the floor, badges, or
visitors, but not the establishment of penalties for violations of such
rules; and
(v) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(A) Are less than $1.00 per contract; or
(B) Relate to matters such as dues, badges, telecommunication
services, booth space, real time quotations, historical information,
publications, software licenses or other matters that are
administrative in nature.
(vi) Securities indexes. Routine changes to the composition,
computation or method of security selection of an index that is
referenced and defined in the product's rules, and which is made by an
independent third party.
(vii) Option contract terms. For registered entities that are in
compliance with the daily reporting requirements of Sec. 16.01 of this
chapter, changes to option contract rules relating to the strike price
listing procedures, strike price intervals, and the listing of strike
prices on a discretionary basis.
(viii) Trading months. For registered entities that are in
compliance with the daily reporting requirements of Sec. 16.01 of this
chapter, the initial listing of trading months which are within the
currently established cycle of trading months.
0
12. Amend Sec. 40.7 by adding paragraphs (a)(1)(iv) and (v), revising
paragraphs (a)(5) and (b)(3), and adding paragraph (e) to read as
follows:
Sec. 40.7 Delegations.
(a) * * *
(1) * * *
(iv) To extend, pursuant to Sec. 40.3(c)(3), the applicable review
period set forth in Sec. 40.3(c) for the period agreed to in writing
by the registered entity;
(v) To extend, pursuant to Sec. 40.5(c)(3), the applicable review
period set forth in Sec. 40.5(c) for the period agreed to in writing
by the registered entity.
* * * * *
(5) The Commission hereby delegates to the Director of the Division
of Market Oversight, to be exercised by the Director or by such
employees of the Commission that the Director may designate from time
to time, with the concurrence of the General Counsel or the General
Counsel's delegate, the authority to determine whether a rule or rule
amendment submitted by a designated contract market is material under
Sec. 40.4(b)(5), and to notify the designated contract market of such
determination.
(b) * * *
(3) Establish or amend or relate to speculative limits or position
accountability provisions that are in compliance with the requirements
of the Act and the Commission's regulations;
* * * * *
(e) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Clearing and Risk and, separately, to
the Director of the Division of Market Oversight, to be exercised by
either Director, as appropriate, or by such employees of
[[Page 61457]]
the Commission that either Director may designate from time to time,
the authority to specify the format and manner to be used by a
registered entity when filing a submission pursuant to this part.
0
13. Amend Sec. 40.10 by revising the introductory text of paragraph
(a), paragraph (b), the introductory text of paragraph (d), and
paragraph (h)(3), and adding paragraph (i) to read as follows:
Sec. 40.10 Special certification procedures for submission of rules
by systemically important derivatives clearing organizations.
(a) Advance notice. A systemically important derivatives clearing
organization, as defined in Sec. 39.2 of this chapter, shall provide
notice to the Commission not less than 60 days in advance of any
proposed change to its rules, procedures, or operations that could
materially affect the nature or level of risks presented by the
systemically important derivatives clearing organization. A notice
submitted under this section shall be subject to the filing
requirements of Sec. 40.6(a)(1) and the website publication
requirements of Sec. 40.6(a)(2).
* * * * *
(b) Changes requiring advance notice. Changes to a systemically
important derivatives clearing organization's rules, procedures, or
operations that could materially affect the nature or level of risks
presented by the systemically important derivatives clearing
organization may include, but are not limited to: material changes to
its default management plan or default rules or procedures required
under Sec. 39.16 or Sec. 39.35 of this chapter, program of risk
analysis and oversight required under Sec. 39.18 of this chapter, or
recovery and wind down plans required under Sec. 39.39 of this
chapter; the adoption of a new or materially revised margin
methodology; the establishment of a cross-margining program or similar
arrangement with another clearing organization; and material changes to
its approach to the stress testing required under Sec. 39.13(h)(3), or
Sec. 39.36(a) or (c) of this chapter. If a systemically important
derivatives clearing organization determines that a proposed change
could not materially affect the nature or level of risks it presents
and therefore does not file an advance notice, the Commission may
determine otherwise and require the systemically important derivatives
clearing organization to withdraw the proposed change and provide
notice pursuant to this section.
* * * * *
(d) Notice of objection. A systemically important derivatives
clearing organization shall not implement a change to which the
Commission has an objection on the grounds that the proposed change is
not consistent with the Act or the Commission's regulations, or any
applicable rules, orders, or standards prescribed under section 805(a)
of the Dodd-Frank Act. The Commission will notify the systemically
important derivatives clearing organization in writing of any objection
regarding the proposed change within 60 days from the later of:
* * * * *
(h) * * *
(3) The Commission may require modification or rescission of the
emergency change if it finds that the change is not consistent with the
Act or the Commission's regulations, or any applicable rules, orders,
or standards prescribed under section 805(a) of the Dodd-Frank Act.
(i) Where in Sec. Sec. 39.3(g), 39.4(f), 39.13(i), and 39.15(b)(2)
of this chapter a derivatives clearing organization is required to
submit rules for approval pursuant to Sec. 40.5, a systemically
important derivatives clearing organization instead shall submit such
rules pursuant to Sec. 40.10 if the rules could materially affect the
nature or level of risks presented by the systemically important
derivatives clearing organization.
0
14. Revise appendix D to part 40 to read as follows:
Appendix D to Part 40--Submission Instructions for Rules and Products
(a) Rule and product submissions shall be submitted
electronically to the Commission by a registered entity in a format
and manner specified by the Commission, and shall include all of the
following information:
1. Date--The date of the filing.
2. Organization--The name of the organization filing the
submission (e.g., CBOT).
3. Type of Registered Entity--An indication as to whether the
rule or product is being submitted by a designated contract market
(DCM), derivatives clearing organization (DCO), swap execution
facility (SEF), or swap data repository (SDR).
4. Type of Filing--An indication as to whether the filing is a
new rule, rule amendment or new product and the section of part 40
under which the filing is submitted. For a new product to be listed
by a DCM or a SEF, an indication whether the new product meets the
definition of referenced contract as such term is defined in Sec.
150.1 of this chapter and is described in Appendix C to Part 150 of
this chapter--Guidance Regarding the Definition of Referenced
Contract.
5. Rule Numbers--For rule filings, the rule number(s) being
adopted or modified in the case of rule amendment filings.
6. Description--For rule or rule amendment filings, a
description of the new rule or rule amendment, including a
discussion of its expected impact on the registered entity, market
participants, and the overall market. The narrative should describe
the substance of the submission with enough specificity to
characterize all material aspects of the filing.
7. Identifier Code (optional)--A registered entity Identifier
Code, if applicable. Such codes are commonly generated by registered
entities to provide an identifier that is unique to each filing
(e.g., NYMEX Submission 03-116).
(b) Other Requirements--A submission shall comply with all
applicable filing requirements for proposed rules, rule amendments,
or products. The entry of the information required by paragraph (a)
of this appendix does not obviate the registered entity's
responsibility to comply with applicable filing requirements (e.g.,
rules submitted for Commission approval under Sec. 40.5 must be
accompanied by an explanation of the purpose and effect of the
proposed rule along with a description of any substantive opposing
views).
(c) An indication of ``confidential treatment requested'' does
not obviate the submitter's responsibility to comply with all
applicable requirements for requesting confidential treatment in
Sec. 40.8 and, where appropriate, Sec. 145.9 of this chapter, and
will not substitute for notice or full compliance with such
requirements.
0
15. Add appendix E to part 40 to read as follows:
Appendix E to Part 40--Guidance on Compliance With the Materiality
Assessment in Sec. 40.4
(a) This appendix provides guidance on complying with the
requirement in Sec. 40.4(a) that a DCM must submit rule changes
that would materially change a term or condition of a contract on an
agricultural product enumerated in section 1a(9) of the CEA with
open interest for Commission approval under the procedures of Sec.
40.5. Section 40.4(a) applies strictly to rules that materially
change a product's economic terms and conditions, and does not apply
to other rules. Guidance is set forth in this appendix to assist a
DCM in assessing whether a change to the terms and conditions is
material pursuant to Sec. 40.4(a) and in explaining why it
considers a rule to be non-material when Sec. 40.4(b)(5) is
applicable. The guidance in this appendix can be used to demonstrate
to the Commission compliance with the requirement in Sec.
40.4(b)(5)(ii) that the DCM explain why it considers a rule to be
non-material when applicable.
Materiality of a Change of a Term or Condition
(b) Any change that is enumerated by the Commission in Sec.
40.4(b)(1) through (4) is not material for purposes of Sec. 40.4(a)
and may be submitted under the applicable Sec. 40.6 provision that
is specified in the applicable section of Sec. 40.4(b). For any
other rule that the DCM believes to be non-material, Sec.
40.4(b)(5) sets forth a process for the DCM
[[Page 61458]]
to implement the change through self-certification pursuant to Sec.
40.6(a).
(c) In order for a DCM to self-certify a change to a term or
condition of a contract on an agricultural product enumerated in CEA
section 1a(9) with open interest that the DCM believes to be non-
material, Sec. 40.4(b)(5) requires the DCM to make a non-
materiality filing and explain why it considers the rule change to
be ``non-material.'' To assist an exchange in assessing and
explaining whether a change to the terms and conditions is non-
material pursuant to Sec. 40.4(b)(5), the following paragraphs set
forth the criteria that the Commission generally considers as
evidence that an enumerated agricultural product rule change is non-
material under Sec. 40.4(a) pursuant to Sec. 40.4(b)(5). A DCM may
address these criteria in its assessment and explanation to
demonstrate compliance with Sec. 40.4(b)(5).
(d) The Commission considers a change to the terms and
conditions of a contract on an agricultural product enumerated in
CEA section 1a(9) that has open interest as a non-material change
if:
(1) The change should not affect a reasonable trader's decision
to enter into, or maintain, a position;
(2) The change should not affect a reasonable trader's decision
to make or take delivery on the contract or to exercise an option on
the contract; and
(3) The change should not have an effect on the value of
existing positions, including, but not limited to, a change
affecting the price of the contract due to a change in the commodity
quality characteristics of the existing contract, a change to the
size of the existing contract, or a change to a cost of effecting
delivery for the existing contract.
Issued in Washington, DC, on August 24, 2023, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Provisions Common to Registered Entities--Commission
Voting Summary, Chairman's Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam and Commissioners Goldsmith
Romero and Pham voted in the affirmative. Commissioners Johnson and
Mersinger concurred. No Commissioner voted in the negative.
Appendix 2--Statement of Support of Chairman Rostin Behnam
The Commission votes today [at the Commission Open Meeting held
on July 26, 2023] on a proposed rule to amend part 40 of the
Commission regulations. Part 40 sets forth provisions common to
registered entities, including designated contract markets (DCMs),
derivatives clearing organizations (DCOs), swap execution facilities
(SEFs), and swap data repositories (SDRs), and establishes
requirements and procedures for submitting rules and products,
listing products for trading, and accepting products for clearing.
Part 40 has not been amended comprehensively since 2011; the
proposal would amend part 40 based on the Commission's experience
applying the part 40 regulations since 2011, and is intended to
clarify and enhance the utility of part 40. I support this proposed
rule.
At a high level, the proposed amendments would: (1) simplify the
determination of whether a registered entity is deemed dormant; (2)
edit language to reflect the development and use of the Commission's
online portal for filing of rule and product submissions; (3)
reorganize and enhance the utility of rules regarding rule
submissions and delegations of authority; and (4) provide meaningful
guidance to SIDCOs regarding filing instructions for rules that
could materially affect the nature or level of risks presented by
the SIDCO.
Appendix 3--Statement of Support of Commissioner Kristin N. Johnson
I support the Commission's issuance for notice and comment of
proposed amendments to provisions common to registered entities as
set forth in part 40 of the Commission's regulations.\1\ These
regulations implement section 5c(c) of the Commodity Exchange Act
(CEA or Act),\2\ which prescribes the procedures for listing by
registered entities of new products, as well as for approval of new
rules or rule amendments, and also standards for review for and
approval of the same by the Commission.\3\ These provisions apply to
designated contract markets (DCMs), derivatives clearing
organizations (DCOs), Swap Execution Facilities (SEFs), and swap
data repositories (SDRs).
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\1\ 17 CFR part 40.
\2\ 7 U.S.C. 7a-2(c).
\3\ Compare 17 CFR 40.2, 40.6 (providing for self-certification
of products or rules), with 17 CFR 40.3, 40.5 (setting forth
procedures for seeking Commission review and approval of products or
rules).
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Part 40 has not been amended comprehensively for a decade. Over
the course of that same decade, a number of other notable market
events have transpired. For example, in 2008, an unidentified
person--or group of people--using the pseudonym Satoshi Nakamoto
published a white paper, innocently titled Bitcoin: A Peer-to-Peer
Electronic Cash System, that outlined a decentralized peer-to-peer
system for making and processing payments. In the decade since the
white paper's release, we have witnessed exponential growth in the
market for digital assets, including cryptocurrencies, as well as
the explosion of the digital asset ecosystem.
In addition to the developments regarding the creation and
proliferation of digital assets, we have witnessed remarkable growth
in the market for carbon credits. There is an indisputable and
urgent need for markets to focus on sustainability. This
Commission's Second Voluntary Carbon Markets Convening held in this
room last week highlighted this necessity. It also highlighted the
need for careful consideration of important questions such as the
potential for fraud or the veracity of claims regarding
additionality and concerns regarding greenwashing.
I am enthusiastic to support the Director of the Division of
Enforcement Ian McGinley as we stand up the Environmental Fraud Task
Force and continue the work of the Digital Asset Task Force. Yet, I
strongly believe that effectively addressing fraud and market
manipulation requires not only vigorous enforcement, but also
thoughtful and proactive regulation. The amendments proposed today
[at the Commission Open Meeting held on July 26, 2023] are a
significant step in empowering the Commission to better understand
new products and new rules in our markets in support of our
regulatory mission.
Turning to the rulemaking under consideration today [at the
Commission Open Meeting held on July 26, 2023], registered entities
generally have two options when submitting products and rules for
approval: they may self-certify that the product or rule complies
with the CEA and Commission regulations, or they may submit the
product or rule for Commission approval.\4\ The proposed amendments
are intended to build on the Commission's experience over the past
decade in applying the part 40 regulations to product and rule
submissions to clarify, simplify, and enhance the utility of the
part 40 regulations for both registered entities and the Commission.
Many of these revisions are technical in nature, and I appreciate
the wisdom of the staff in both the Division of Clearing and Risk
and the Division of Market Oversight in proposing them. I note that
there are additional revisions that update the regulations to
reflect technological developments in the ways that registered
entities communicate with the Commission--i.e., by using the
internet.
---------------------------------------------------------------------------
\4\ Id.
---------------------------------------------------------------------------
Consequently, the revisions to the requirements under
regulations Sec. Sec. 40.2(a)(3)(v) and 40.3(a)(4) merit additional
focus. These amendments require a registered entity to provide an
explanation of the nature of the new product self-certified or
submitted to the Commission for approval, ``that is complete with
respect to'' the product's terms and conditions as well as the
product's compliance with the applicable provisions of the Act,
including core principles, and the Commission's regulations.\5\
Staff have noted that, in their experience, registered entities have
not always included sufficient information about the underlying
commodity to a new product to allow the Commission to complete the
analysis of compliance required under the CEA and the part 40
regulations. The proposed amendments not only call for additional
information about the product's underlying commodity, including
characteristics such as the deliverable commodity's grade, quality
and deliverable supply, as applicable, but also specifically
reference the guidance provided in appendix C to part 38 \6\ as
providing the requisite level
[[Page 61459]]
of detail to comply with the newly proposed standard.
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\5\ 17 CFR 40.2(a)(3)(v), 40.3(a)(4).
\6\ 17 CFR part 38, appendix C.
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I support the proposed amendments to part 40 because I support
making our rules clearer and easier to administer. I look forward to
hearing from commenters as to whether these new requirements are fit
for purpose and will enable the Commission to effectively address
innovations regarding products, platforms, and technologies. I thank
staff in the Division of Clearing and Risk and the Division of
Market Oversight, including Rachel Kaplan Reicher, Steven Benton,
Nancy Markowitz, and Eileen Chotiner, for their efforts, and look
forward to receiving comments from registered entities and the
public that will assist the Commission in achieving the best outcome
with this rulemaking.
Appendix 4--Statement of Support of Commissioner Christy Goldsmith
Romero
Over the last few years, derivatives markets have had to react
quickly to new technologies, new government policies, and new
economic realities. Exchanges have added many new products for
futures in traditional commodity types. For example, in 2023,
exchanges listed new metals contracts for lithium and molybdenum to
meet growing demand in response to the historic investment in and
demand for electric vehicles and batteries. And we have also seen
entirely new product types proliferate. Exchanges have listed new
contracts that reference novel commodities, such as digital assets
and voluntary carbon market credits.
As sponsor of the CFTC's Technology Advisory Committee, I feel
comfortable saying that there is no shortage of participants with
new ideas seeking access to our regulated markets. Under the
Commodity Exchange Act, the Commission's role includes promoting
responsible innovation, while protecting customers and promoting the
market integrity and transparency that makes American capital
markets the deepest and most liquid in the world. New products may
improve access to financial markets, reduce costs, and help manage
novel risks. But novel derivative contracts and the commodity they
are based on may lack a meaningful history that shows that the
contract is not readily susceptible to manipulation. And for digital
assets, showing that the contract is derivative of commodities
rather than securities is important to prevent regulatory arbitrage.
Especially in novel cases, the Commission needs complete
information so it can conduct oversight over new products on our
markets. The Commission needs to be able to understand if an
exchange is fulfilling its core principles that govern its conduct,
to determine whether the new product complies with the law, and to
understand any increased risk the contract may pose to customers and
financial stability.
Under the Commodity Exchange Act, most exchanges are permitted
to self-certify that new products comply with the core principles,
including that they are not readily susceptible to manipulation.
That means a potentially complex or novel product may enter the
market even before the Commission's staff have been able to
understand fully whether it complies with the law, and the risks
that it could pose. To make this assessment quickly, our staff need
complete information about both the characteristics of the product
and of the market for the underlying commodity that determines its
pprice.
I support this proposal because it recognizes and helps address
a trend that Commission staff have experienced--submissions not
including sufficient information for the staff to fulfill the
Commission's regulatory responsibility. By requiring a ``complete''
explanation of a new product's terms and conditions and providing
context on what it means for an explanation to be ``complete,'' this
proposal would enable the Commission to fulfill its oversight
responsibility, including to determine the lawfulness of the product
and to assess risk.
Under the proposed changes, the Commission's ability to
understand how the product's terms and conditions comply with the
law is increased. This also allows the Commission to ensure that
when exchanges do add new products, their decisions follow the core
principles in the law, do not put market integrity at risk, and are
supported by the twin pillars of customer protection and financial
stability.
This proposal will help achieve the purposes of the Commission's
existing heightened review standard for digital assets.\1\ The heart
of this heightened review is ``extensive visibility and monitoring
of markets and for virtual currency derivatives and underlying
settlement reference rates.'' \2\ Complete information at the self-
certification phase will help staff better understand the risks
posed by products that may not have the extensive history that
allows manipulative trading patterns to be identified and that may
reference digital assets traded on unregulated or unregistered spot
exchanges. ``Complete'' information will enable a more comprehensive
Commission review of risks associated with these products and
underlying commodities, and any changes necessary for market
integrity or to protect customers and financial stability.
---------------------------------------------------------------------------
\1\ See CFTC, CFTC Backgrounder on Oversight of and Approach to
Virtual Currency Futures Markets, (Jan. 4, 2018), https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf.
\2\ Id.
---------------------------------------------------------------------------
This proposal would also help the Commission extend heightened
review to self-certified climate and environmental products listed
on exchanges, a recommendation I first made in March at ISDA's ESG
Conference.\3\ The Commission has recognized the challenges that
exist in the integrity of the spot market for carbon credits and
launched an Environmental Fraud Task Force, which I advocated for,
to combat fraud in this space that can impact derivatives carbon
products. Adopting a heightened review framework will allow the
Commission to work closely with exchanges to ensure that they are
fulfilling interest in these products in a responsible fashion. That
is aided by the Commission's access to complete information about
their terms and conditions and the underlying commodity at the
initial self-certification.
---------------------------------------------------------------------------
\3\ Commissioner Christy Goldsmith Romero, Remarks of
Commissioner Christy Goldsmith Romero at ISDA's ESG Forum on
Promoting Market Resilience: A Thoughtful Approach to the Daunting
Challenge of Climate Financial Risk, (Mar. 7, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero7.
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Even where contracts address more traditional markets, the
economic circumstances and customer needs are changing and the
Commission needs complete information to keep pace. Notably, the
Commission needs complete information on new contracts on lithium,
rare earth metals, and copper, products that are drawing increased
interest due to growing investment in EV's and batteries encouraged
by the ``triple whammy'' of new laws--the Inflation Reduction Act
(IRA), the Bipartisan Infrastructure Law (BIL) and the CHIPS and
Science Act. Users of these products may have sourcing and
production location requirements for taking advantage of the IRA's
tax credits. As I said before the Environmental and Energy Advisory
Market Committee, the CFTC should work with exchanges on listing
standards that address those needs.\4\ Complete information will be
an important tool in that effort.
---------------------------------------------------------------------------
\4\ Commissioner Christy Goldsmith Romero at the Energy and
Environmental Markets Advisory Committee, Statement of Commissioner
Christy Goldsmith Romero: The Role of Copper and Other Metals in the
Electrification of America, (Jul. 26, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement062723.
---------------------------------------------------------------------------
The addition of requiring ``complete'' information would also
apply to new rules that are self-certified by an exchange or
clearinghouse. The emergence of novel products and technologies has
also created interest in modifying long-standing rules about
traditional market structure. When the CFTC released its request for
comment on ``vertical integration,'' on novel market structures, I
said that this is an area that needs to be studied to determine any
increased risk or unintended consequences.\5\ As I said in my
statement, I am open to considering such changes to traditional
market structures, but only if they do not result in increased risk
to customers and financial stability.\6\ This is just as true for an
existing exchange or clearinghouse seeking to change its business
model as it is for a novel registrant coming before the CFTC for the
first time.
---------------------------------------------------------------------------
\5\ Commissioner Christy Goldsmith Romero, Statement of CFTC
Commissioner Christy Goldsmith Romero on Request for Comment on the
Impact of Affiliated Entities, (Jun. 28, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement062823.
\6\ See Id.
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The Commission has a brief window to delay implementation of
self-certified rule changes that it can use when they present novel
or complex issues. Complete information will help us understand when
to exercise that authority.
The power of markets is that, when they work well, they are an
unmatched tool for innovation. It is our responsibility as a
regulator to keep updating our rules in ways that both promote
responsible innovation
[[Page 61460]]
and impose appropriate guardrails that promote market integrity and
transparency. I am thankful to the staff for their hard work on
making an update in that spirit, and the Commission for considering
this requirement.
Finally, I support the proposal because it includes changes
designed to decrease systemic risk. The Commission proposes to
specify when systemically important clearing houses must notify the
Commission when changing rules, procedures or operations. The
Commission's experience has been that the current standard of
notification, which is rules, procedures or operations ``that
materially affect the nature or level of risks presented'' is too
broad or vague to be meaningful. I support the proposed notification
to the Commission on material changes such as to the default
management rule, programs related to risk analysis, recovery and
wind down plans, revised margin methodology, cross-margining
programs, or stress testing. Each of these have the potential to be
related to systemic risk. The proposed changes enable the Commission
to manage systemic risk, which is one of our key roles as a
financial regulator.
I appreciate all of the work of the staff, and I look forward to
public comment on the rule.
Appendix 5--Statement of Support of Commissioner Caroline D. Pham
I support the Notice of Proposed Rulemaking regarding Amendments
to Provisions Common to Registered Entities under part 40 of the
CFTC's Regulations (Part 40 Proposal) because it is important to
continuously improve our rules and do good housekeeping.\1\ I
appreciate that this Part 40 Proposal is ``intended to clarify,
simplify and enhance the utility of the part 40 regulations for
market participants and the Commission,'' as stated in the preamble.
I would like to thank Rachel Kaplan Reicher, Steven Benton, and
Nancy Markowitz of the Division of Market Oversight (DMO) and Eileen
Chotiner of the Division of Clearing and Risk (DCR), as well as
Jeannette Curtis and Phil Raimondi, for their work on the Part 40
Proposal. I appreciate the staff working with me to make revisions
and address my concerns.
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\1\ Statement of Commissioner Caroline D. Pham on Risk
Management Program for Swap Dealers and Futures Commission Merchants
Advance Notice of Proposed Rulemaking, U.S. Commodity Futures
Trading Commission (June 1, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement060123.
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The Product Review Branch and Market Review Branch of DMO, and
the Risk Surveillance Branch and Clearing Policy Branch of DCR,
together with support from the Chief Counsel's office of each
division, handle part 40 \2\ submissions. In fiscal year 2022, DMO
reviewed 1,145 product filings and 1,054 rule filings. DCR reviewed
320 rule filings. These reviews are foundational to the oversight of
our markets.
---------------------------------------------------------------------------
\2\ 17 CFR part 40.
---------------------------------------------------------------------------
Accordingly, the Part 40 Proposal is intended to improve
processes for review of product and rule submissions in order to use
CFTC staff resources more effectively, particularly in light of
increasing volumes of filings related to binary options. The
sizeable increase in listing of new binary option contracts is
unsustainable, and I encourage taking a serious look at how to
address this problem. Efforts could include a staff roundtable or
rulemaking on the listing and trading of binary options and
appropriate customer protections.
Effective Self-Regulation
The Part 40 Proposal provides a good opportunity to examine the
CFTC's regulatory framework and the role of self-regulation. Part 40
was established pursuant to the Commodity Futures Modernization Act
of 2000 and has been in place since 2001.\3\ Part 40 created a new
framework for the certification and approval of new products, rules,
and rule amendments that are submitted to the CFTC by registered
entities \4\ such as designated contract markets (DCMs), swap
execution facilities (SEFs), derivatives clearing organizations
(DCOs), and swap data repositories (SDRs). It was again amended in
2011 pursuant to the Dodd-Frank Act.\5\ The Part 40 Proposal
preamble states that part 40 ``govern[s] how registered entities
submit self-certifications, and requests for approval, of their
rules, rule amendments, and new products for trading and clearing,
as well as the CFTC's review and processing of such submissions.''
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\3\ A New Regulatory Framework for Trading Facilities,
Intermediaries and Clearing Organizations, 66 FR 42255 (Aug. 10,
2001).
\4\ 17 CFR 1.3.
\5\ Provisions Common to Registered Entities, 76 FR 44776 (July
27, 2011).
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As I have noted before, the Commodity Exchange Act \6\ (CEA or
Act) mandates that the Commission serve the public interest through
our oversight of ``a system of effective self-regulation of trading
facilities, clearing systems, market participants and market
professionals.'' \7\ Part 40 is the cornerstone of effective self-
regulation in our derivatives markets because it sets forth the
standards for listing new contracts and issuing or amending rules
for registered entities, including those that are self-regulatory
organizations (SROs) and have rulebooks that are enforceable against
SRO members. The penalties for violating SRO rules can be severe,
including fines, suspension, or revocation of membership.
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\6\ 7 U.S.C. 1 et seq.
\7\ See Concurring Statement of Commissioner Caroline D. Pham
Regarding the CFTC Request for Information on Climate-Related
Financial Risk, U.S. Commodity Futures Trading Commission (June 2,
2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement060222.
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Our system of self-regulation works because our SROs take their
role seriously in upholding the CFTC's regulatory framework and
ensuring market integrity.\8\ Self-regulation is effective when it
is cooperative. I commend DCMs, SEFs, DCOs, and SDRs that recognize
and support the efforts of our DMO and DCR staff, and I urge these
registered entities to do their best to assist staff and make the
review process as efficient as possible.
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\8\ See Statement of Commissioner Caroline D. Pham Regarding
Request for Comment on the Impact of Affiliations Between Certain
CFTC-Regulated Entities, U.S. Commodity Futures Trading Commission
(June 28, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement062823.
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Existing Checks and Balances on Self-Regulation
Notwithstanding the important role of SROs in the CFTC's
regulatory framework, the Commission must be able to exercise
oversight of registered entities' new products and new rules or rule
amendments. That is why our existing part 40 regulations include
checks and balances on self-certification and Commission approval or
non-approval for product and rule filings.
Stay of Self-Certification or Extension of Review Period
For example, regarding new products, under Rule 40.2 the
Commission can stay the self-certification of a new product in
circumstances involving a false certification, or a petition to
alter or amend the contract terms and conditions pursuant to Section
8a(7) \9\ of the CEA.\10\ Under Rule 40.3, new products can be
submitted to the Commission for review and approval, and the review
period can be extended if the product raises novel or complex
issues.\11\
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\9\ 7 U.S.C. 12a(7). This section authorizes the Commission, in
certain circumstances, ``to alter or supplement the rules of a
registered entity insofar as necessary or appropriate by rule or
regulation or by order.''
\10\ 17 CFR 40.2(c).
\11\ 17 CFR 40.3(d).
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Similarly, regarding new rules or rule amendments submitted
under Rule 40.5 for Commission review and approval, the Commission
can extend the review period for (1) novel or complex issues, (2)
major economic significance, (3) incomplete submissions, and (4) not
responding completely to CFTC questions in a timely manner.\12\ And
under Rule 40.6, the Commission can stay the self-certification of
new rule or rule amendment filings involving (1) novel or complex
issues, (2) inadequate explanation, or (3) potential inconsistency
with the CEA or CFTC regulations.\13\
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\12\ 17 CFR 40.5(d).
\13\ 17 CFR 40.6(c)(1).
---------------------------------------------------------------------------
These checks and balances are integral to the Commission's
oversight of SROs, and I support DMO and DCR staff's use of all
these provisions to extend or stay the review period if any of these
criteria have been met--especially if there are, as applicable,
incomplete submissions, inadequate explanation, or for not
responding completely to CFTC questions in a timely manner.
Registered entities must ensure that they dot their i's and cross
their t's, and show their work, when submitting product or rule
filings.
Non-Approval of New Products or New Rule or Rule Amendments
I want to emphasize that the existing part 40 regulations
provide for Commission non-approval of new products, or new rule or
rule amendments, submitted for review under Rule 40.3 or 40.5,
respectively.\14\ Obviously,
[[Page 61461]]
a product or rule will not be approved if it violates or is
inconsistent, respectively, with the CEA or CFTC regulations.\15\
The Commission can determine that ``it will not, or is unable to
approve'' the product or rule, including for form and content
requirements for submission, because the product ``violates, appears
to violate or potentially violates but which cannot be ascertained
from the submission,'' or the rule or rule amendment ``is
inconsistent or appears to be inconsistent'' with the CEA and CFTC
regulations.\16\
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\14\ 17 CFR 40.3(e) and 40.5(e).
\15\ 17 CFR 40.3(b), (e) and 40.5(b), (e).
\16\ Id.
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These standards and criteria grant the Commission and CFTC staff
considerable discretion in conducting reviews of product and rule
filings for approval or non-approval. Again, I support the
Commission issuing a notice of non-approval if any of these criteria
have been met.
Delegation of Authority
A hallmark of our American system of government is the
constitutional law doctrine of separation of powers among the
legislative, executive, and judicial branches of government.\17\
This doctrine ensures that each branch of government will provide
checks and balances upon another branch's exercise of power for
encroachment or aggrandizement. I believe that this approach of
checks and balances to defend against the over-concentration of
power is especially prudent in regards to administrative agencies,
who wield the authority to impose obligations on the public or
withdraw previously-granted entitlements. These regulatory agencies
must be fair and just in the exercise of the administrative power,
which is derived from both the legislative branch and the executive
branches of government.
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\17\ ``[T]he accumulation of all powers, legislative, executive,
and judiciary, in the same hands, whether of one, a few, or many,
and whether hereditary, self-appointed, or elective, may justly be
pronounced the very definition of tyranny.'' James Madison, The
Federalist No. 48 (Feb. 1, 1788), https://guides.loc.gov/federalist-papers/text-41-50#s-lg-box-wrapper-25493415.
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The self-regulatory framework set forth in the CEA and CFTC
regulations reflects the scales of justice in the balance between a
free, and safe, society. I caution against any attempt to put a
thumb on the scale which would upset this delicate balance,
including further delegations of authority by the Commission to the
staff.\18\
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\18\ See generally James Madison, The Federalist No. 51 (Feb. 8,
1788) (``But the great security against a gradual concentration of
the several powers in the same department, consists in giving to
those who administer each department the necessary constitutional
means and personal motives to resist encroachments of the
others.''), https://guides.loc.gov/federalist-papers/text-51-60.
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It is a truism that the heads of administrative agencies are a
step removed from the will of the people,\19\ because agency heads
are not directly elected, but are instead appointed by the President
with the advice and consent of the Senate. Therefore, this sentiment
rings even more true with respect to the delegation of authority by
the Commission to the staff, who though are dedicated public
servants, are even more attenuated from the will of the people. Like
liberty, both the public trust and delegations of authority by the
Commission, ``once lost, is lost forever.'' \20\
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\19\ Cf. The general will, or volont[eacute]
g[eacute]n[eacute]rale. Jean-Jacques Rousseau, Article VI,
Declaration of the Rights of Man and of the Citizen (1789).
\20\ The full quotation is: ``But a Constitution of Government
once changed from Freedom, can never be restored. Liberty once lost
is lost forever.'' ``John Adams to Abigail Adams, 7 July 1775,''
Founders Online, National Archives, https://founders.archives.gov/documents/Adams/04-01-02-0160.
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Other Part 40 Issues
Finally, good process produces good outcomes, and there are
other issues in part 40 that should be addressed.\21\ I hope that
the Commission does not wait another 12 years to fix them.
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\21\ See Walt Lukken, FIA CEO, Open letter to CFTC Chairman
Giancarlo regarding the listing of cryptocurrency derivatives (Dec.
7, 2017), https://www.fia.org/fia/articles/open-letter-cftc-chairman-giancarlo-regarding-listing-cryptocurrency-derivatives and
Dissenting Statement of Commissioner Caroline D. Pham Regarding the
Review and Stay of KalshiEX LLC's Political Event Contracts, U.S.
Commodity Futures Trading Commission (Aug. 26, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement082622.
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Derivatives Markets and the Real Economy
The CFTC is uniquely positioned at the intersection of the real
economy and financial markets. Derivatives are inextricably linked
to the underlying reference asset, and our derivatives markets span
the breadth of agricultural products and other goods and articles,
services, rights, and interests in the stream of commerce and
financial markets.\22\
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\22\ 7 U.S.C. 2(1). There are some important exceptions and
ongoing legal debate as to the outer limits of the definition of a
``commodity'' under the CEA. See CFTC v. My Big Coin Pay, Inc., 334
F. Supp. 3d 492, 498 (D. Mass. 2018) (citing CFTC v. McDonnell, 287
F. Supp. 3d 213, 228 (E.D.N.Y. 2018)).
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Because of the importance of derivatives markets to the real
economy--in order to facilitate risk management and price discovery
for farmers and ranchers, all the way to the largest Fortune 100
companies--the Commission is mandated to serve this ``national
public interest'' through our oversight of a system of effective
self-regulation.\23\
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\23\ 7 U.S.C. 5(a). See Concurring Statement of Commissioner
Caroline D. Pham Regarding the CFTC Request for Information on
Climate-Related Financial Risk, U.S. Commodity Futures Trading
Commission (June 2, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement060222.
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This statutory mandate is intentional, and coupled with the
mandate to promote responsible innovation and fair competition,\24\
the message is clear: Derivatives markets should enable growth and
progress for commercial enterprise and free markets through
providing a release valve for risk transfer as part of the engine of
the real economy.
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\24\ 7 U.S.C. 5(b). See Concurring Statement of Commissioner
Caroline D. Pham Regarding the CFTC Request for Information on
Climate-Related Financial Risk, U.S. Commodity Futures Trading
Commission (June 2, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement060222.
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Growth and progress is how the United States and the American
people have achieved the largest economy in the world, with the
deepest and most liquid capital markets. This is why America is the
land of opportunity--why I stand for growth, progress, and access to
markets--and why the Commission must preserve the balance in our
system of effective self-regulation in the derivatives markets.
I look forward to public comment on the Part 40 Proposal.
[FR Doc. 2023-18694 Filed 9-5-23; 8:45 am]
BILLING CODE 6351-01-P
